Compliance January 19, 2011

Fiduciary Expansion Proposal Could Hurt ESOPs

Two groups commenting on the proposal to expand the definition of fiduciary have urged regulators not to require those appraising employee stock ownership plan (ESOP) assets to be fiduciaries.
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Corey Rosen, Executive Director of the National Center for Employee Ownership and U.S. Representative Maurice D. Hinchey (D-New York) contended in comment letters posted to the Department of Labor (DoL) Web site that such a rule change would hurt ESOP plans and those who provide them. Rosen said the proposal would diminish the number of ESOPs being started because of additional costs arising from the new need for fiduciary insurance and would ultimately lead to fewer qualified appraisers because some would drop out of the business.  

“Fiduciaries can be held liable for their yearly valuation of ESOP stock and, as a result, services by fiduciaries would add considerable additional costs to these businesses,” said Hinchey, in his letter. “Subjecting businesses with ESOPs to an additional financial burden will likely result in fewer businesses opting into employee stock ownership plans in the future and may even result in businesses shedding their current employee stock ownership plan.”

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Rather than add fiduciary status to ESOP appraisers, Rosen suggested the DoL issue regulations governing ESOP valuations, better define the current requirement that appraisers be “independent,” and mandate the appraisers be credentialed by a professional appraiser organization.

“Impose new regulations on all ESOPs needlessly hurts the good actor and reduces the corresponding retirement of its employees,” Hinchey declared. “I strongly urge the Department of Labor to allow the good actors to maintain the current requirements regarding ESOP stock valuation. For the last 34 years, this program has successfully provided retirement benefits for millions of Americans and should be free to do so into the future.”

The Rosen letter is at http://www.dol.gov/ebsa/pdf/1210-AB32-013.pdf.

The Hinchey letter is at http://www.dol.gov/ebsa/pdf/1210-AB32-026.pdf.

Compliance January 19, 2011

New Definition of Fiduciary, a Litigation Nightmare?

In comments to the Department of Labor (DoL) regarding the proposed change to the definition of fiduciary, Liberty Capital Investment Corporation said the rule “would be a litigation nightmare.”
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In the letter, Kenneth Margraf, Vice President at Liberty Capital, said making brokers and registered investment advisers (RIAs) fiduciaries to retirement account clients “adds nothing positive to the protection of clients.” Margraf contends that the new definition would take away from investment choices brokers would have in making asset recommendations to meet stated client objectives, and would discourage them from making any aggressive recommendations, even if appropriate, for fear of litigation.  

Margraf argues that the terms “fiduciary” and “prudent man rule” are very broad and subject to interpretation based on different situations.  If the DoL is to hold the brokers and (registered investment advisers) RIAs to a fiduciary standard, additional clarification from FINRA (Financial Industry Regulatory Authority) would be necessary.

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The U.S. Chamber of Commerce also feels more clarification will be needed.  In its comments to the DoL, it asked for a 60-day extension of the comment period on the definition change  to consider results of a study required by the Securities and Exchange Commission by the Dodd-Frank Act.  

According to the Chamber’s letter, one day after the comment period ends for the DOL proposed rule, the SEC is required to complete a study on the standard of care under the securities laws for broker-dealers and investment advisers. The study is required pursuant to section 913 of the Dodd-Frank Act instructing the SEC to study the standard of care applicable to broker-dealers and to study the effects of extending the fiduciary standard of care applicable to investment advisers under the Investment Advisers Act of 1940 to broker-dealers.   

“We anticipate that this study will significantly overlap with issues contained in the DOL’s proposed rule,” the Chamber said.  

Comments received by the DoL’s Employee Benefits Security Administration can be viewed at http://www.dol.gov/ebsa/regs/cmt-1210-AB32.html.

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