DOL Proposes to Define ESOP Appraisers as Fiduciaries

The Department of Labor's Employee Benefits Security Administration (EBSA) has proposed to define ESOP appraisers as fiduciaries (see "Definition of the Term 'Fiduciary,'" 29 CFR Part 2510 RIN 1210-AB32, reproduced here on the EBSA's Web site). The proposal is part of a broader redefinition of fiduciaries that would include investment advisors under specified circumstances as plan fiduciaries. It would also define ESOP appraisers as investment advisors for this purpose for retirement plans. The change would apply both to valuations and fairness opinions.

Under existing regulations, investment advisors (including appraisers) are not considered fiduciaries unless "they have discretionary authority or control, whether or not pursuant to agreement, arrangement or understanding, with respect to purchasing or selling securities or other property for the plan."

The proposal for ESOPs grows out of the EBSA's national ESOP enforcement project. In the explanation of the change, the EBSA says the project has focused "on identifying and correcting violations of ERISA in connection with ESOPs, which are designed to invest primarily in employer securities. A common violation found in the ESOP national enforcement project arises in cases where plan fiduciaries have reasonably relied on faulty valuations of securities prepared by professional appraisers."

The EBSA's concern here is that ESOP fiduciaries (as currently defined) may simply rely on an appraiser's opinion to make a decision, effectively ceding the decision to the appraiser. If the appraiser is providing bad advice, plan participants have to sue the trustee, who would then have to sue the appraiser for malpractice, something that has happened only a few times over the last 20 years, based on our recent ESOP litigation review.

The difficulty, however, is that making appraisers fiduciaries will potentially dramatically increase the cost of these services, perhaps by a factor of two or three (assuming they can find insurance), according to people we talked to. That, in turn, could discourage some companies from creating ESOPs or continuing them, thus punishing a potentially large number of ESOPs that no one would question to try to resolve the relatively small number of clearly poor ESOP appraisals. Complicating the matter is the fact that the DOL has never issued final regulations on how ESOP appraisals should be done, leaving many unresolved issues.

The NCEO will be submitting comments on the proposal, the EBSA welcomes comments from all interested persons. Comments can also be made directly to the EBSA to [email protected] or via the comment portal at http://www.regulations.gov/. Comments must be submitted by January 20, 2011.