Status of Legislative Safe Harbor for Valuation of Employer Stock

[rocknrolls2]

In the past 1 1/2 months, both Houses of Congress passed a bill intended to provide a safe harbor if an outside expert did a valuation of the stock. I have not seen anything further about it. Did the President sign or veto the billl? If neither, doesn't the Constitution treat it as enacted if the President fails to take action (i.e., sign or veto) the bill?

[ESOP Guy]

I know the House just passed like 2 weeks ago by a wide margin the Retire Though Ownership Act.  I haven't heard if it was signed but leading up to it all the noise was the POTUS was favorable to the act. 

You best best is to see if the ESOP Association's legislative updates along with ESCA, which is the S Corp ESOP, group.   They are both very active on the legislative front. 

[Peter Gulia]

Today, Congress.gov shows seven House of Representatives actions on September 16.

https://www.congress.gov/bill/119th-congress/senate-bill/2403/all-actions

And shows an enrolled bill.

https://www.congress.gov/119/bills/s2403/BILLS-119s2403enr.pdf

But does not yet show anything for “became law” or even “to President”.

The parchment might not have been delivered to the President.

I express no view about whether the legislation or some part of it might be contrary to the Constitution of the United States of America.

[Lois Baker]

Retire through Ownership Act was presented to the President on October 5, 2026:

https://www.congress.gov/bill/119th-congress/senate-bill/2403/all-actions

https://www.congress.gov/bill/119th-congress/house-bill/5169/related-bills

[Peter Gulia]

Lois Baker, thank you for your refresh, which shows an action not yet displayed when I looked.

So, Article I § 7’s “ten days (Sundays excepted)” began.

Unless the 119th Congress adjourns, the legislation seems likely to become a law.

“The amendments [of ERISA § 3(18)] “shall apply with respect to determinations described in [ERISA §] 3(18)(B) [as amended] “made on or after the date of enactment of this Act.”

[Lois Baker]

@Peter Gulia FWIW, actions generally don't appear on Congress.gov until the day after they occur -- so even though that update is dated yesterday, it would not have been there until this morning.

[Artie M]

So, counting 10 days from October 5 and excluding Sunday, the apparent deadline is October 16, subject to the constitutional rule concerning an adjournment that prevents return of the bill.

[Peter Gulia]

ERISA § 3(18)(B)(i), as this legislation would add it, states:

“For purposes of clause (ii) of subparagraph (A) [determining the fair market value of a security for which there is no generally recognized market], a fiduciary of an employee stock ownership plan (as defined in section 407(d)(6)) may make a good faith reliance on a valuation provided by an independent valuation expert or business appraiser that has relied upon the principles and methodologies set forth in Internal Revenue Service Revenue Ruling 59–60 (as amplified and modified by the Internal Revenue Service from time to time) in determining the fair market value of an asset described in such clause.”

I’m curious: What does this legislation do to lessen a fiduciary’s responsibility in determining the fair market value of an untraded security?

[Artie M]

To me, the Act does not modify a fiduciary's obligations under ERISA Section 404, including the duties of prudence and loyalty.  An ESOP trustee could not simply obtain an appraisal and consider the fiduciary inquiry complete. The trustee would still need a sound process for evaluating the transaction and the supporting valuation, including projections, assumptions, financing terms and other relevant information.  The Act purports to protect good-faith reliance on an independent valuation—not blind reliance on one.

[Peter Gulia]

Perhaps the legislation puts Congress’s imprimatur on identifying the IRS’s Revenue Ruling as a plausible method for estimating the hypothetical fair market value of an asset that has no “generally recognized” market.

But the method is vulnerable to the information assumed.

Does “good faith” require only exclusive-purpose loyalty?

Or does that loyalty require that the fiduciary act with ERISA § 404(a)(1)(B) prudence?

[Artie M]

I think it includes both.  In the enrolled text, the phrase 'good faith reliance' appears in the adequate consideration definition:  an ESOP fiduciary may rely in good faith on an independent expert’s valuation using RR 59-60 principles.  The next clause expressly states that this rule does “[not] modify any fiduciary obligation under ERISA 404."  So, on its face, the law is intended to preserve both the exclusive-purpose duty in 404(a)(1)(A) and the prudence duty in 404(a)(1)(B). 

I think "plausible method" perhaps understates what the text is trying to do (I don't profess to know what Congress is trying to do).  Here, an ESOP fiduciary will be able to rely in good faith on an independent appraiser’s valuation when the appraiser uses 59-60 principles and methodologies. That's more than saying 59-60 is one acceptable reference--but it addresses the fiduciary’s reliance on the resulting valuation.  I don't think it deems every valuation produced under the 59-60 "framework" to be adequate consideration, as it expressly preserves 404 duties.  Also, you hit the central limitation of the bill on its head because, said another way, even a sound framework cannot cure unsound inputs.

I think the law, if enacted, would authorize good-faith reliance on an independent valuation prepared under 59-60, but the fiduciary must still have a prudent basis for relying on that particular valuation, which includes its material information and assumptions (its "inputs").  It wouldn't make the appraisal self-validating.

[Peter Gulia]

Thank you for sharing a further reasoning.

Among other issues, whether a complaint plausibly asserts a claim on which relief could be granted might turn on whether the complaint alleges facts from which a judge could find that the valuation expert was not independent regarding the person who might have engaged in a prohibited transaction.

It might be disloyal or imprudent for a valuation-reviewing fiduciary if that fiduciary knows or, in the exercise of prudent diligence, would know that the valuation expert is not independent.