United States: Proposed DOL Regulation Would Impose Fiduciary Status On Valuation Firms: Regulation Comment Period Closes January 20, 2011

Last Updated: January 10 2011
Article by Jonathan J. Boyles, Ashley McCarthy and Jeffrey Rothschild

To read "Inside M&A - November/December 2010" in full, please click here.

The U.S. Department of Labor (DOL) recently issued a proposed regulation that would substantially expand the definition of 'fiduciary' under the Employee Retirement Income Security Act (ERISA). Under the new definition, valuation firms would, for the first time since ERISA's passage, be subject to its stringent fiduciary duties and their attendant liability. Many predict that an unintended consequence of this expanded definition could be a concerted exit from the valuation market by firms that have traditionally performed valuation services. Valuation firms will want to take action now to submit their comments on the proposed regulation before the comment period closes on January 20, 2011.

Background

Under the existing regulation, which the DOL published in 1975 shortly after the passage of ERISA itself, a firm or entity engaged to advise employers sponsoring benefit plans is only considered a fiduciary for ERISA purposes if it renders advice (1) on a regular basis, (2) pursuant to a mutual agreement and (3) if such advice serves as a primary basis for investment decisions. If a firm or entity does not satisfy all criteria, it is not considered a fiduciary for ERISA purposes and is shielded from the substantial liability that fiduciary status imposes under that law. One year after publishing this regulation, the DOL issued an advisory opinion confirming that a firm could provide a valuation of closely-held employer securities that an employee stock ownership plan (ESOP) could rely on in purchasing those securities without triggering fiduciary status. If the recently proposed regulation is adopted, it will effectively overturn this opinion and subject firms that provide such valuations to the liability exposure that attends fiduciary status under ERISA.

The Proposed Regulation and the Meaning of "Fiduciary Status" Under

ERISA

Under the new regulation, a valuation firm would be considered a fiduciary if it provides (1) advice or an appraisal or fairness opinion concerning the value of securities or other property, (2) recommendations as to investing in, buying or selling securities or other property or (3) advice or recommendations as to the management of securities or other property to a plan, a plan fiduciary, or a plan participant or beneficiary. Essentially, the new regulation incorporates valuation firms into the definition of fiduciary by eliminating the requirement that advice be rendered "on a regular basis" before its provider qualifies as a fiduciary. Fiduciaries are subject to the "prudent man" rule of ERISA Section 404. The prudent man rule states that fiduciaries must act prudently and with undivided loyalty to the plan participants and their beneficiaries, subject always to the terms of the plan. The prudent person standard until trust law is a higher standard than the reasonable person standard required by many states' corporate laws. Further, ERISA fiduciaries may be held personally liable for their breach of these duties, although similarly to Delaware corporate law, they may be exculpated from liability that results from a breach of their fiduciary duty to act prudently.

The Potential Implications of the Proposed Change

The potential implications of this change should not be underestimated. Because ERISA imposes stringent duties and potentially costly liability upon fiduciaries, persons who trigger fiduciary status typically purchase fiduciary liability insurance to protect themselves. Because valuation firms that provide fairness opinions to ESOPs have never been considered fiduciaries under ERISA, they have not had to invest in fiduciary liability insurance. If the proposed regulation passes, however, that will change. Because it will essentially require firms that provide fairness opinions to ESOPs to purchase fiduciary liability insurance and to contemplate litigation in the event they are accused of breaching a fiduciary duty, the proposed regulation could have the unintended consequence of driving experienced firms out of the ESOP valuation market. Such a concerted exit from the ESOP valuation market by firms that have long provided valuation services would likely dampen competitiveness in that market and diminish the quality of those services.

What You Can Do Now

Written comments on the proposed regulation must be submitted to the Employee Benefits Security Administration (EBSA) of DOL on or before January 20, 2011. Persons who want to submit electronic comments may send an e-mail to e-ORI@dol.gov (enter into subject line: "Definition of Fiduciary Proposed Rule") or use the Federal eRulemaking portal at http://www.regulations.gov. Persons who want to submit paper comments may send or deliver their comments to:

The Office of Regulations and Interpretations, Employee Benefits Security Administration
Attn: Definition of Fiduciary Proposed Rule Room N-5655, U.S. Department of Labor
200 Constitution Avenue, N.W.
Washington, D.C., 20210

All comments will be available to the public at http://www.regulations.gov and http://www.dol.gov/ebsa

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions