AICPA Opposes Expansion of Fiduciary Definition to Include ESOP Appraisers

The American Institute of CPAs has written a letter to members of Congress to support legislation that would block the U.S. Department of Labor’s 2010 proposal to change its definition of fiduciary under the Employee Retirement Income Security Act of 1974 to include appraisers of employee stock ownership plans.

The AICPA has repeatedly argued that, rather than expand the definition, as proposed by the Labor Department, rules should be implemented to ensure that only qualified individuals prepare valuations for benefit plans and that they follow recognized valuation standards.

In last week’s letter, AICPA president and CEO Barry Melancon urged Senate Health Education Labor and Pensions Committee chairman Tom Harkin, D-Iowa, and ranking Republican member Lamar Alexander, R-Tenn., along with House Education and Workforce Committee chairman John Kline, R-Minn., and ranking Democrat George Miller, D-Calif., and other members of their committees, to co-sponsor a bill, S. 273/H.R. 2041, which would prohibit the Labor Department from moving forward on its re-proposal to expand the definition of a fiduciary under ERISA to include independent appraisers of ESOPs (see Congress Introduces Bill to Modify Definition of “Fiduciary” for ESOP Appraisers).

“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,” Melancon wrote. “Many of these appraisals are also used for other purposes including satisfying the Internal Revenue Service (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.”

Melancon argued that the Labor Department has not demonstrated a need for such a far-reaching change from more than 35 years of established policy. 

“The DOL proposal is a draconian response to a very small number of deficient ESOP appraisals,” he contended. “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 20 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.”

Melancon noted that the Labor Department has announced plans to re-issue 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,” Melancon added. “This would, in turn, increase the costs to all ESOP plans and reduce the amount available for participants and beneficiaries.”

He argued that the Labor Department’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,” said Melancon. “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.”

Melancon said 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,” he added.

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