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January 28, 2011

Mr. Fred Wong
Office of Regulations and Interpretations
Employee Benefit Security Administration
US. Department of Labor
Room N-5655
200 Constitution Avenue
Washington, DC 20210
R.E.: Definition of Fiduciary Proposed Rule

This letter is in response to the U.S. Department of Labor ("DOL") proposed rule (the "Proposed
Rule") issued on October 21, 2010, as to the definition of a fiduciary under Section 3(21)(A) of the
Employee Retirement Income Security Act ("ERISA"). The Proposed Rule, if it becomes final,
would expand the meaning of "investment advice" for a fee to include “advice, or an appraisal or
fairness opinion, concerning the value of securities” with respect to an ERISA plan. This letter will
be limited to the effect of the Proposed Rule upon employee stock ownership plans ("ESOPs") as
defined in Section 4975(e)(7) of the Internal Revenue Code (the "Code").

1. Legal issues. We note a number of apparent problems with the Proposed Rule under current
statutory law, regulations and case law, including the following:

.a, Code Section 401(a)(28)(C) which requires employer securities in an ESOP to be valued by an
independent appraiser which could be precluded to the extent that the appraiser and the trustee of the
ESOP are co-fiduciaries.

.b. Impairment of or inconsistency with the “prudent expert” standard of fiduciary duty imposed upon
ESOP trustees relating to the valuation of and transactions involving sponsor employer securities
under Reich y. Valley National Bank of Arizona, 837 F.Supp 1259 (NY, 1993). (aka, the "Kroy" case).

.c. A certain 1976 DOL advisory opinion stating that “investment advice” does not include a
valuation of stock that an ESOP would rely on to the purchase stock.

2. Existing DOL Remedies. We note, from personal experience, that DOL has neither been diligent
nor consistent in utilizing existing remedies with respect to the "faulty valuations" cited in the
Proposed Rule with respect to ESOP appraisals and opinions.


KEGLER BROWN
ILL & RITTER

~ A LEGAL PROFESSIONAL ASSOCIATION
U.S. Department of Labor

January 28, 2011

Page 2 of 3

.a. Two leveraged ESOP transactions involving the same company wherein DOL, after correctly
concluding upon audit that both were prohibited transactions involving millions of dollars,
nevertheless declined to recover any of the ill-gotten gains from the seller/trustee. Both transactions
were based upon valuations prepared by a major ESOP valuation firm.

.b. Two non-leveraged ESOP transactions involving the same company wherein DOL, after correctly
concluding upon audit that both were prohibited transactions, declined to hold the former trustee
accountable because the former trustee refused to sign a tolling agreement.

.c. Upon audit by DOL, no comment as to the valuation of an ESOP company valued in the multi-
millions of dollars using industry rule-of-thumb methods with a statement in valuation that the DOL
proposed valuation regulations were not used because a copy "was not provided" to the valuator.

.d. Upon audit by DOL, no comment as to the valuation of an $ corporation ESOP company for a
leveraged transaction wherein the valuator stated that federal income tax normalization (i.c., imputing
federal income taxes) was not appropriate for an ESOP valuation.

.e. Upon audit by DOL, no comment as to the valuation of a leveraged ESOP company wherein the
valuator included in equity value the ESOP loan tax shield (i.e, tax savings for deduction of
contributions applied to ESOP loan principal) for the entire 10 year term of the ESOP loan.

3. Recommendations. We acknowledge, from personal experience and case law, that problems
exist with respect to ESOP appraisals and opinions. Rather than impair existing statutory law,
existing regulation and existing case law, as would be likely under the Proposed Rule, we suggest the
following:

.a. Finalize the DOL regulation for ESOP valuations issued in 1987 as Proposed Regulation 2510.3-
18(b). Revise the Regulation to affirm the prudent expert duty of ESOP trustees under the Kray case
with respect to appraisals and transactions involving employer securities and to address the major
issues associated with the "faulty valuations" cited in the Proposed Rule.

.b. Include within final Regulation 2510.3-18(b), a provision relating to the professional standards
and certifications that must apply to persons providing appraisals and opinions with respect to an
ESOP in general and to leveraged ESOPs in particular.

.c. Revise the Proposed Rule by replacing its existing language with a requirement that any
leveraged ESOP transaction must be approved by an independent outside fiduciary and that any
ESOP with majority ownership of the sponsor company must have independent outside fiduciary.
Such fiduciary could be the trustee, the named fiduciary or, for the purpose of a leveraged
transaction, a special fiduciary. De minimis and hardship exemptions could also be included.

.d. Further revise the Proposed Rule by including guidance for a "safe harbor" ESOP that
incorporates the issues of major importance to DOL including, but not limited to, valuations,

Capitol Square » Suite 1800 * 65 East State Street « Columbus, Ohio 43215-4294
Telephone: (614) 462-5400 © Facsimile (614) 464-2634 * www.keglerbrown.com


KEGLER BROWN
ILL & RITTER

A LEGAL PROFESSIONAL ASSOCIATION
U.S, Department of Labor

January 28, 2011

Page 3 of 3

qualification of ESOP fiduciaries, indemnification of ESOP fiduciaries, corporate governance and
ESOP investment policy.

.e. Improve the level of training of DOL auditors involved in the audit of ESOPs and, in particular,
with respect to valuations and leveraged ESOP transactions.

f£. Revise enforcement policy so that more rigorous efforts are made to recover ill-gotten gains
from the actual wrong-doers in prohibited transactions.

Please feel free to contact us for clarifications and for additional suggestions.

Sincerely,
<

Tim Jochifn, Chair
Business Succession/ESOP Group

Capitol Square » Suite 1800 * 65 East State Street » Columbus, Ohio 43215-4294
Telephone: (614) 462-5400 » Facsimile (614) 464-2634 ¢ www.keglerbrown.com