By Jason Bramwell
Under current law, trustees of private ESOPs are already liable as fiduciaries. Extending this liability to appraisers would, in the best-case scenario, drive up costs for ESOP plans and have the net effect of moving stock gains away from the workers who earned them, according to Kentucky Congressman Brett Guthrie, who introduced the House bill with Iowa Congressman Dave Loebsack on May 17. Guthrie said in the worst-case scenario, the regulation would drive appraisers out of the market entirely or discourage companies from establishing an ESOP profit-sharing program.
The DOL proposal would also be in conflict with current law that requires appraisers of ESOP stock be independent, according to Guthrie. An appraiser cannot be independent and a fiduciary at the same time.
"ESOPs are an important retirement savings tool for many Americans and allow employees to own stock and build savings in a way that is rewarding for all parties involved," Loebsack said in a written statement
. "Classifying appraisers of ESOPs as fiduciaries would be unnecessarily burdensome and would reduce the level of retirement savings."
The AICPA has repeatedly argued that rather than expand the definition as proposed by the DOL, rules should be implemented to ensure that only qualified individuals prepare valuations for benefit plans and that individuals follow recognized valuation standards.
In the AICPA's letter, President and CEO Barry Melancon, CPA, CGMA, encouraged members of Congress – including Iowa Senator Tom Harkin, chairman of the Senate Committee on Health, Education, Labor, and Pensions; Tennessee Senator Lamar Alexander, ranking member of the Senate Committee on Health, Education, Labor, and Pensions; Minnesota Congressman John Kline, chairman of the House Committee on Education and the Workforce; and California Congressman George Miller, ranking member of the House Committee on Education and the Workforce – to cosponsor the Senate and House bills.
The following is Melancon's letter to Congress:
"Many CPAs perform business valuation services for ESOPs by providing an independent, third-party objective appraisal of the stock of employer companies that sponsor ESOPs. Many of these appraisals are also used for other purposes, including satisfying the IRS requirements related to the ESOP's tax-exempt status. The Internal Revenue Code (IRC) requires that ESOP valuations be obtained from an independent appraiser at least annually. If the DOL were to redefine an ERISA fiduciary to include ESOP appraisers, an inherent conflict would arise between the DOL and IRS requirements for ESOP appraisers. An ERISA fiduciary must act solely in the interest of plan participants and their beneficiaries and, therefore, cannot provide an independent, third-party objective perspective.
"The DOL has not demonstrated a need for such a broad and far-reaching change from more than thirty-five years of established policy. The DOL proposal is a draconian response to a very small number of deficient ESOP appraisals. In testimony before Congress and responses to congressional inquiries and private requests from the AICPA, the DOL has provided only a few cases of deficient appraisals over the past twenty years out of tens of thousands of ESOP appraisals performed annually. Further, our analysis of the DOL cases involving CPAs found that in the vast majority of these cases, the courts found the appraisers' work to be satisfactory but that the plan trustee improperly used the work of the appraiser.
"The DOL has announced plans to reissue its previous 2010 proposal later this year. The AICPA is concerned that the new proposal will essentially mirror the previous proposal and, if finalized, will unnecessarily subject all ESOP appraisers to an increased legal liability and require them to purchase expensive fiduciary liability insurance. This would, in turn, increase the costs to all ESOP plans and reduce the amount available for participants and beneficiaries.
"The DOL's concerns with the quality of ESOP appraisals could be addressed with a far more targeted solution. Unlike other federal agencies, including the IRS and Small Business Administration (SBA), the DOL does not have any minimum requirements or standards for appraisers. The AICPA and other stakeholders have suggested in comment letters and testimony that the DOL implement rules to ensure that only properly qualified individuals perform ESOP valuations and those individuals follow recognized valuation standards. Requiring ESOP appraisers to have specialized training, credentials, and to adhere to professional standards would protect participants and beneficiaries in a cost-effective manner. This approach would be consistent with the IRS and SBA rules for appraisals and, thus, avoid the potential for conflicting requirements across federal agencies.
"The AICPA fully supports the goal of protecting the interests of plan participants and beneficiaries of employee benefit plans. Ensuring the quality of sponsor company valuations is critical to making prudent decisions regarding plan investments.
"Thank you for considering cosponsorship of SB 273/HR 2041."