The Department of Labor (DOL), through the Employee Benefits Security Administration (EBSA) is proposing an expansion of certain regulatory definitions under the Employee Retirement Income Security Act (ERISA). One of the proposed changes calls for business appraisers who provide annual appraisal and other appraisal services regarding Employee Stock Ownership Plans (ESOPs) to become fiduciaries of those plans. Hundreds of individuals and organizations have already contributed comments. Comments and the DOL/EBSA responses can be found here.
The consensus of valuation professionals and other stakeholders to the ESOP valuation process realize that the role of a qualified and independent appraiser is incompatible with the role of fiduciary to an ESOP, which role is to act for the exclusive benefit of employee beneficiaries of that ESOP.
By way of an example, consider one circumstance among a seemingly endless array of conundrums an appraiser faces with the added role of a fiduciary: should he/she provide a valuation for the exclusive benefit of departing plan participants in a given year (who would naturally desire a higher valuation)? Or should that valuation be provided for the exclusive benefit of remaining plan participants (who would naturally benefit from a lower valuation for exiting participants)?
The Appraisal Foundation Responds
The American Society of Appraisers sent the following item out on June 17, 2011: TAF, ASB Send Letters to EBSA Urging Them Not to Treat Appraisers as Fiduciaries.
TAF is The Appraisal Foundation and ASB is the Appraisal Standards Board. Collectively, these organizations are the genesis of the Uniform Standards of Professional Appraisal Practice (USPAP). USPAP provides valuation standards for business appraisers, real property appraisers, machinery and equipment appraisers and personal property appraisers, as well as for appraisal review.
TAF and the ASB addressed the “major problem” in letters released recently. If you are in the valuation community and work with ESOPs, you should take note. If you do not work with ESOPs, you should also take note, because legislation like this could be passed that would adversely affect business valuation practice and client service.
The Appraisal Foundation’s letter is here. It concludes (against the proposed change) with this recommendation:
Accordingly, we strongly urge the Department of Labor not to include appraisers as fiduciaries in the regulations as currently proposed. As the Employee Benefits Security Administration moves forward to ensure that competent, professional appraisers are producing independent and credible appraisals, we hope that you will view The Appraisal Foundation and the Appraisal Standards Board as a resource in your efforts. (emphasis added)
The Appraisal Standards Board’s letter is here. It concludes with a strong recommendation against the proposed change:
One of the primary tenets in achieving public trust has been fostered in the principle that an appraiser must be a disinterested third party in the transaction. In fact, the ETHICS RULE in USPAP prohibits an appraiser from performing with bias or advocating for “the cause or interest of any party or issue.” Black’s definition appears to require that a fiduciary perform as an advocate. The role of a fiduciary is clearly inconsistent with the recognized and accepted independent role of an appraiser.
It is the belief of the ASB that an individual cannot act “for the benefit of another person” and remain “independent, impartial, and objective” at the same time. As a result, if the proposed regulations are adopted, appraisers would be put in a position where they are conflicted between the Department of Labor regulations and USPAP (which state licensed and certified real estate appraisers are required by law to comply with).
As a result, the ASB strongly urges the Department of Labor not to include appraisers as fiduciaries in the regulations as currently proposed. (emphasis added)
Senator Kelly Ayotte Introduces Pro-ESOP Bill, S. 1232
On June 21, 2011, Senator Kelly Ayotte (R-NH) introduced S. 1232, a bill to modify the definition of fiduciary under the ERISA to exclude appraisers of employee stock ownership plans.
Co-sponsors of the bill are Senators Olympia Snowe (R-ME), Susan Collins (R-ME), Scott Brown (R-MA), and Mary Landrieu (D-LA).
Some believe that the die is already cast and that appraisers will be named fiduciaries. However, in the best interest of ESOP participants, plan Trustees, sponsor companies and plan service providers, I recommend voicing your agreement with the recommendation of no change made by The Appraisal Foundation, the Appraisal Standards Board, the American Society of Appraisers, and many business appraisers, among others. If you agree with this recommendation, you can take action by urging your senator(s) to co-sponsor S. 1232 (the ESOP Association offers a letter template for this purpose). No matter your opinion, you can contribute to the conversation by sending a letter to the EBSA (information here) as the Appraisal Foundation did.