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.


  • 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.

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