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Recent DOL Settlement Agreements with ESOP Trustees

On Behalf of | Jun 19, 2018 |

The spate of recent settlements between the U.S. Department of Labor (“DOL”) and trustees of employee stock ownership plans (“ESOP”) is a signal that trustees and other fiduciaries should reassess their fiduciary obligations. While these settlement agreements do not have the force of law, they signal the DOL’s current position with respect to the duties of ESOP trustees and fiduciaries in certain transactions. Thus, they provide a checklist for plan fiduciaries to self-audit their current practices and procedures and identify areas of improvement or worthy of further study.

There are five recent settlement agreements: (i) GreatBank Trust Company (“GBTC Agreement”), 2014; (ii) First Bankers Trust Services Inc. (“FBTS Agreement”), 2017; (iii) James F. Joyner, III (“Joyner Agreement”), 2017; (Iv) Alpha Consulting Group LLC (“Alpha Agreement”), 2017; and (v) Lubbock National Bank (“LNB Agreement”), 2018. For the most part, each of the agreements was borne out of allegations that the ESOP trustee caused the ESOP to purchase employer securities for more than fair market value.

When viewed in its entirety, the GBTC Agreement emerges as the most relevant guidance for ESOP trustees by laying the groundwork for subsequent settlement agreements. While there are differences and departures, subsequent agreements such as those for FBTS, Joyner, and Alpha largely follow the principles laid out in the GBTC Agreement. The LNB Agreement, the most recent settlement reached in May of 2018, is notable in that it is identical to the GBTC Agreement.

Together, the agreements are instructive about the selection and oversight of an ESOP’s valuation advisor (“VA”). In general, the policies and procedures established by the agreements address: (i) general principles in the selection and use of the VA; (ii) conflicts of interests in the selection of the VA; (iii) the process of selecting the VA; (iv) the required analysis when overseeing the VA; (v) financial statements to be provided to the VA; (vi) documentation of the valuation analysis; (vii) documentation of reliance on the valuation report; and (viii) creation and preservation of notes and records that document any transaction completed by the trustee.

All five agreement are consistent in requiring certain processes and procedures including, but not limited to, the following. The ESOP trustee must:

  • Prudently investigate the VA’s qualifications;
  • Take reasonable steps to ensure VA received complete, accurate and current information necessary to value employer securities;
  • Prudently determine that its reliance on the VA’s advice is reasonable prior to entering into any transaction in reliance on the advice;
  • Not use the VA if there is a conflict of interest – that is, where the VA has previously performed work (including but not limited to a “preliminary valuation”) for or on behalf the ESOP sponsor (as distinguished from the ESOP), any counterparty to the ESOP, or any entity that is structuring the transaction (such as an investment bank) for any party other than the ESOP or its trustee, or for any transaction that has a familial or corporate relationship (such as a parent-subsidiary relationship) to any of the aforementioned parties or entities. The trustee must obtain a written confirmation from the selected VA that none of the above-referenced relationships exist;
  • In selecting a VA for a transaction, the trustee must prepare a written analysis addressing the following topics: the reasons for selecting the VA, a list of all the VAs the trustee considered, a discussion of the qualifications of the VA the trustee selected, a list of references checked and a discussion of the references’ views on the VA, whether the VA was the subject of prior criminal or civil proceeding, and, a full explanation of the bases for concluding that the trustee’s selection of the VA was prudent;
  • Document in writing an opinion as to the reasonableness of any projections considered in connection with the transaction and explain why and to what extent the projections are or are not reasonable;
  • Request that the ESOP sponsor provide the trustee and its VA with audited financial statements prepared by a CPA for the preceding five fiscal years, unless such financial statements are unavailable (in which case, the trustee will request audited unqualified financial statements extending as far back as possible);
  • Take reasonable steps necessary to determine the prudence of relying on the ESOP sponsor’s financial statements provided to the VA; and
  • Document in writing its analysis of any final valuation report relating to a transaction, which will specifically address enumerated topics, and will include the trustee’s conclusions regarding the final valuation report’s treatment of each topic and explain in writing the bases for its conclusions.

Note that the Joyner Agreement is distinct from the others in that it involves an individual trustee rather than an institutional trustee. It also requires a trustee to obtain fiduciary insurance for the proposed transaction and, if s/he is not able to obtain such coverage, to be named as an insured under the ESOP sponsor’s fiduciary liability policy, a requirement that did not appear in the other four settlement agreements.


It is important to remember that the agreements do not modify or change existing laws or legal requirements to which an ESOP trustee is subject. However, the agreements do provide a clear signal to trustees or other fiduciaries to an ESOP: the opportunity to review the five agreements with a critical eye towards self-evaluation and the evaluation of whether current processes and procedures need to be modified.

Please contact Stephen Wilkes if you have any questions.