United States: DOL Announces in Final Fiduciary Rule That Additional ESOP Guidance Is Forthcoming

Christopher K. Buch is an Associate, Greg Brownis a Partner and David G. O'Leary is senior counsel all in Holland & Knight's Chicago office.

HIGHLIGHTS:

  • When the U.S. Department of Labor (DOL) released regulations defining investment advice, it announced that additional employee stock ownership plan (ESOP) rules would be addressed separately.
  • After a number of ESOP related items received comments to its second proposal of the Final Rule in April 2015, the DOL concluded that ESOP valuations present a number of special issues that should be the focus of a separate project.
  • The DOL stated that a number of the issues that apply to ESOP appraisers also will apply to other appraisers, so it will address issues that may be applicable to all appraisers in this separate project.

When the U.S. Department of Labor (DOL) released its long-awaited final rule describing investment advice (the Final Rule) on April 6, 2016, it delivered a special note to many in the employee stock ownership plan (ESOP) world. The DOL intends to broadly address appraisal issues in a separate project so that it can ensure consistent treatment of appraisers under the fiduciary provisions of the Employee Retirement Income Security Act of 1974, as amended (ERISA) and the Internal Revenue Code of 1986, as amended (the Code). Please note that this client alert only describes issues related to ESOPs in the Final Rule. A more general discussion of the Final Rule's general applicability is addressed in a separate Holland & Knight alert (see " DOL Releases Final Fiduciary Investment Adviser Regulations," April 8, 2016).

DOL's Treatment of ESOP Valuations and Appraisals in 2015 Proposal

While the Final Rule comes almost seven years after the DOL first began its initiative to update the rules related to conflicts of interest in investment advice, a number of ESOP-related items received comments when the DOL issued its second proposal of the Final Rule in April 2015 (the 2015 Proposal). At that time, the DOL proposed that the provision of an appraisal, fairness opinion or other statement of value to an ESOP regarding employer securities would not constitute investment advice, and would therefore not cause the person giving such advice to be a fiduciary. The DOL stated in the 2015 Proposal that, while it remained concerned about valuation advice concerning an ESOP's purchase of employer stock and an ESOP's reliance on such advice, the concerns about valuations of closely held stock in ESOP transactions raised a number of issues that could be more appropriately addressed in a separate regulatory initiative.

The DOL received a number of comments regarding its treatment of ESOP valuations and appraisals under the 2015 Proposal. After reviewing these comments, the DOL stated that it continued to believe that "a proper appraisal of hard to value assets is the single most important factor in determining the prudence of a transaction." The DOL also stated that there could be a benefit from the imposition of fiduciary standards on appraisers valuing assets in connection with investment transactions. The DOL stated that this would be particularly true in the context of employer security valuations, as the DOL has seen a number of cases of extreme abuse.

Also in response to these comments, the DOL noted that ESOP trustees: a) often will rely on professional appraisers and advisers to value stock, b) often do not proceed with a transaction without an appraisal and c) sometimes do not engage in any price negotiation. Therefore, the DOL stated that in these instances, an appraiser is often the one who will determine the price that an ESOP will pay (using plan assets) for employer stock. The DOL concluded that when investigating ESOPs and pursuing enforcement actions against ESOPs, it has seen many instances of improper appraisals that result in hundreds of millions of dollars in losses to ESOP participants.

Special Project to Provide Additional Guidance on Appraisal Issues

After reviewing the comments and the results of its own investigations and enforcement actions, the DOL concluded in the preamble to the Final Rule that ESOP valuations present a number of special issues that should be the focus of a separate project. The DOL also stated that a number of the issues that apply to ESOP appraisers also will apply to other appraisers, so the DOL will address issues that may be applicable to all appraisers in this separate project so that it can ensure consistent treatment for all appraisers under the fiduciary provisions of ERISA. It is unclear at this time when the DOL may begin the special project to provide additional guidance with respect to appraisal issues.

As a final comment, a good start to the additional guidance would include the DOL finalizing the "adequate consideration" proposed regulations that were published in 1988; taking into account the many comments that the DOL has received with respect to that proposal and subsequent court decisions and settlement agreements; and recognizing that the statutory definition of adequate consideration provides that the value is to be determined in good faith by a trustee or other named fiduciary and not an appraiser.

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 Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.