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amendments to ERISA's prudent man rule, specifically recognizing the purpose of ESOPs as an owership-sharing technique, is the only way to force DOL to respond properly. It is our position, however, that Congressional intent regarding ESOPs under ERISA has been made clear and that it is merely the hositle attitude of the agencies, and the repeated disregard of Congressional intent, that has caused DOL to omit protective language for ESOPs from its prudence regulations. ASPR Guidelines

For several years the ASPR Committee of the Department of Defense has been studying ESOPs for the purpose of developing guidelines for ESOP contributions as an allowable cost under government contracts. Proposed guidelines have been circulated which include unreasonable restrictions on reimbursement for ESOP contributions. In addition, several defense contractors have faced serious problems in obtaining allowances for ESOP contributions which appear to satisfy existing ASPR rules.

The ESOP Council has submitted comments to the ASPR Committee objecting to the restictive rules proposed for ESOPs. We believe that the present rules applicable to qualified pension and profit sharing plans adequately cover allowances for ESOP contributions and that no special restrictions are needed for ESOPs. Hopefully, final guidelines will reflect a more realistic position by the Department of Defense and will not result in the denial of ownership-sharing opportunities for employees of defense contractors. Problems under State "Blue SkyLaws

Section 514 of ERISA generally supersedes all State laws relating to employee benefit plans. The purpose of this "preemption" provision was to allow ERISA to be the controlling law applicable to such employee plans. However, ERISA's preemption provision specifically does not supersede State securities laws, and this has created problems for ESOPs in several states.

In California, there has existed for many years an exemption from the requireinent for "qualifying” company stock to be issued to an employee plan. Last May, the Department of Corporations proposed the deletion of this exemption, based upon the “problems" caused by the increased use of ESOPs. Such action would have a disastrous effect on existing ESOPs in California, would pose a serious impediment to the adoption of new ESOPs in California, and would deny many California workers the opportunity for ownership-sharing. If the change in the California Corporation Securities Rules is made, ESOP companies in California may be forced to provide an "offering circular" to employees as a condition of reeciving a “permit” from the Department of Corporation and may face additional expenses and delays in receiving clearance to issue stock to an ESOP. Further, it is possible that the Department of Corporations will require that voting rights on company stock be passed-through to ESOP participants and that the Department will make its own determination of "fair market value” for ESOP purposes. Many ESOPs will be unable or unwilling to comply with such requirements.

In New York State, the Attorney General announced in the Spring of 1977 that ESOPs in New York must register as a “broker-dealer" or must formally request an exemption from such registration requirement. This policy has resulted in additional expense to New York companies (and companies with New York employees) in establishing an ESOP.

The ESOP Council believes that these developments under state blue sky laws have created unwarranted additional burdens and expenses on ESOP companies which provide no additional protection to ESOP participants. ERISA was designed by Congress to provide for protection of employee rights under employee benefit plans, and it was not intended that the states would continue to regulate such plans through state securities laws. We request that Congress take some action to alleviate this problem.

S. 3017, the ERISA Improvement Act of 1978, includes a provision to supersede the effect of the antifraud provisions of Federal and State securities laws as they may relate to employee benefit plans. The ESOP Council has engaged in discussions with the staff of the Human Resources Committee to expand the provisions of S. 3017 to alleviate certain problems for ESOPs. We suggest that ERISA be amended to make it clear that state securities laws cannot be applied to regulate the operation of employee benefit plans, such as ESOPs, which are designed to invest in employer securities. We believe that the intent of Congress was to leave such regulation as a matter exclusively provided for under ERISA and that no valid purpose is served by allowing regulation of ESOPs under state securities laws.



The Employee Stock Ownership Council of America (ESOP Council) is a nonprofit trade association with a current potential membership of over 1,000 companies ranging from industrial giants to firms with fewer than 50 employees who either have ESOPs or some variation of an ESOP. Associate Memberships are also available to individuals or employers not qualifying for full membership in the Council.

Founded in 1976, and incorporated in 1977, the Council is based on the principle that the promotion of employee stock ownership is an important means of fortifying the American system of free enterprise.

Its principal functions are fivefold :

1. To provide a forum for the exchange of ideas among companies which have ESOPs (or some variation of an ESOP) and practitioners involved with ESOPs, so as to provide a better understanding to all concerned. The Council expects that a better understanding of ESOPs by all concerned will also engender a better understanding of the ESOP concept by the Congress and regulatory officials and will promote a more effective use of ESOPs by U.S. industry.

2. To furnish members a well-rounded selection of communications materials. It is the Council's intent to provide film strips, posters, payroll stuffers, house organ copy, and other useful material. The Council also hopes to publish a highly readable periodic magazine or newsletter to keep management up to date on current developments in employee stock ownership.

3. To serve its membership as the voice in Washington for employee stock ownership plans. Members of the Council have already been successful in combating poorly conceived legislative and regulatory proposals. The Council expects that a large majority of its members will rely on the Council as the best means of getting their views across to the Congress.

4. To provide its members with technical "know-how.” Members will receive information on current practices; a “how to do it” manual, when it is designed, at a nominal price; recommended administrative procedures; counseling information on distributions; and general knowledge distilled from the accumulated experience of its membership. It will annually poll members, expert consultants, attorneys, banks, and others active in the field in order to keep current. Knowledge thus acquired is then made available to the Council's membership, either through its regular communications channels or in response to member inquiries.

5. To serve as the authoritative national source of employee stock ownership information for news media. The Council will conduct an ongoing campaign to promote the idea of employee stock ownership as a means of increasing profitability and productivity. This major public relations service demonstrates that employee stock ownership (1) allows workers to achieve maximum personal satisfaction, (2) develops a sense of partnership in business, and (3) provides greater rewards for all concerned.

We are confident you will discover the Council provides its members, free of charge, many materials and services, the value of which far exceeds the modest membership dues.

While the members of the Council have been highly effective on behalf of the employee stock ownership concept in the past, experience has shown that an enlarged membership will enable it to widen the scope of its services and to be even more influential for the business community. It is therefore actively seeking new members and Associate Members. If you feel that its functions and services can fit into your corporate benefit structure in a beneficial way, please use the enclosed membership application, or write or call the ESOP Council of America at its national headquarters at 11661 San Vicente Boulevard, Suite 901, Los Angeles, California 90049, (213) 826–1584.

The CHAIRMAN. Our next witness is Mr. Louis (). Kelso. He was in the room a few moments ago; we will come back to him.

We will call Mr. Jeffrey R. Gates, of Hewitt Associates.

STATEMENT OF JEFFREY R. GATES, HEWITT ASSOCIATES Mr. GATES, Mr. Chairman and Senator Gravel, I am with Hewitt Associates, an independent consulting firm. For the past 2 years, our research department has conducted a TRASOP survey. We surveyed the Fortune 1,000 as well as the 50 largest Fortune-listed commercial banking, life insurance, diversified financial, retailing, transportation, and utility companies.

The purpose of the survey was to determine the prevalence of TRASOP's and to get some sense of the characteristics of those plans which have been adopted.

In the chocolate brown testimony that you have, there are a few charts that might be helpful if you would follow along with me.

We found in 1977 that, of the 493 companies that responded to our survey, 12.6 percent of them had TRASOP's, or soon would have. In this past year's survey, that increased to 28.7 percent or a total of 152 TRASOP companies at this point.

I think it is safe to predict that should the new legislation be adopted, that increase over 1 year would be even more dramatic in the following year.

We also found that of the utilities responding, approximately 85 percent of the large utilities in the United States now have TRASOP's. In the fuel industry, 77 percent now have TRASOP's, and in the

paper, fiber, and wood industry, 63 percent of our respondents now have TRASOP's.

We are also finding strong TRASOP prevalence in certain capitalintensive industries, including transportation, chemicals, steel or metals and mining, food processing, and beverages, and some retail industries.

And, not surprisingly, TRASOP prevalence is largely a function of company size, as we chart for you by annual sales, with over 40 percent of surveyed TRASOP's being in companies with sales over $1 billion. That drops to under 15 percent when you get down to companies with sales of under $500 million.

You might notice that the most dramatic increase over the past 2 years has been in companies with sales under $500 million. There is an increase of about 400 percent over last year's survey. Again, it is safe to predict that the prevalence, will increase dramatically should the new legislation be adopted.

One of the most interesting things that we have found is in the people who are eligible to participate in the TRASOP. As you know, there is a $100,000 covered compensation limit. We found in 1977 that 15 percent of the plans were using a lower compensation ceiling in order to give larger benefits to the lower paid.

In 1978, that increased to 30 percent of the plans. So there seems to be a tendency to favor the lesser paid employee with TRASOP contributions.

Another way to get a similar result is to exclude certain highly paid people in your definition of eligibility. We found that several of the plans are now excluding officers or directors or members of certain other stock option plans.


We also found it of interest that the average annual per-employee benefit seems to run to less than $200—roughly 63 percent of surveyed companies expect less than $200, and about 10 percent expect more than $500. That would be for the 1977 benefit.

The last finding that I extracted concerns the matching TRASOP, the contributory TRASOP. All the corporations have complained about the fact that the final TRASOP regulations have not been issued governing the matching feature. And still we have no idea when they will be coming out. In 1977, only 2.5 percent of the plans, which was, at that time one plan, had a contributory TRASOP. That has now increased to roughly 16 percent of the plans, but that is still only 23 plans having the matching feature, and 8 of those are, predictably, utilities where the benefit is substantial.

That really summarizes our findings. There is more detail in the larger report which you have before you.

The CHAIRMAN. Well, thank you very much. I was hoping someone would do a study of this sort. What you have done indicates that the greatest interest and the greatest activity has been in the areas where the companies were capital intensive.

So in view of the fact that this tax reform ESOP had to do with the investment tax credit, it stands to reason that that is where you would find the most interest. Frankly, I am pleased to see that in those very capital-intensive areas that they have a high degree of participation.

Mr. GATES. They have found in capital-intensive industries that they cannot really afford not to do it.

The CHAIRMAN. Well, I would hope that if we are able to extend this to those, in a reasonably beneficial fashion, to those that are labor intensive, as we propose in this legislation, that we would see similar participation in the labor-intensive areas.

Mr. Gates. We put out a notification in the form of a special report to our clients on your pending bill. We got substantial feedback as to great interest among labor-intensive corporations that they were following this very closely and they were quite interested.

The CHAIRMAN. Thank you very much.
Senator Gravel?
Senator GRAVEL. I have no questions.
The CHAIRMAN. Thank you very much, Mr. Gates.
[The prepared statement of Mr. Gates follows:]




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