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

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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.


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


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.

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