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February 3, 2011 

TO: Employee Benefits Security Administration 

The Institute of Business Appraisers is pleased to comment on the Proposed Rule relating to the 

Definition of the Term “Fiduciary” that was released by the Employee Benefits Security 

Administration (EBSA) of the Department of Labor and published in the Federal Resister on 

October 22, 2010 (the “Proposed Rule”). 

The Proposed Rule would more broadly define who is included under the definition of fiduciary 

by reason of providing investment advice to an employee benefit plan or a plan’s participants. 

In explaining the rationale for the issuance of the Proposed Rule, the EBSA stated the following: 

The financial marketplace also has changed significantly, and the types and complexity of investment 

products and services available to plans have increased. With the resulting changes in plan investment 

practices, and relationships between advisers and their plan clients, the Department believes there is a need 

to re-examine the types of advisory relationships that should give rise to fiduciary duties on the part of 

those providing advisory services. In this regard, we note that recent Department enforcement initiatives 

indicate there are a variety of circumstances, outside those described in the current regulation, under which 

plan fiduciaries seek out impartial assistance and expertise of persons such as consultants, advisers and 

appraisers to advise them on investment-related matters. These persons significantly influence the decisions 

of plan fiduciaries, and have a considerable impact on plan investments. However, if these advisers are not 

fiduciaries under ERISA, they may operate with conflicts of interest that they need not disclose to the plan 

fiduciaries who expect impartiality and often must rely on their expertise, and have limited liability under 

ERISA for the advice they provide (Emphasis added). Recent testimony by the Government Accountability 

Office noted an association between pension consultants with undisclosed conflicts of interest and lower 

returns for their client plans. 

In the new conference announcing the Proposed Rule, the EBSA stated in response to the 

question of who would be affected by the Proposed Rule: 

In 1976, the Department issued guidance that said that appraisers that were providing valuations for ESOPs 

were not fiduciaries under ERISA, this regulation would change that and the reason is that the appraisers 

who give a valuation for an ESOP transaction are clearly providing advice that they know everyone is 

going to rely on, that’s why they are hired, and there have been many, many examples of abusive 

transactions in this regard where the appraisal is faulty, where they overvalue the employer’s stock. 

With respect to the Proposed Rule as it applies to appraisers who prepare a valuation for ESOP 

purposes, the problems have been well documented in the public comments submitted by the 

National Center for Employee Ownership on December 8, 2010, the American Institute of 
IBA Response to DOL Proposed Rule on Definition of the Term Fiduciary Page 2 of 3 

February 3, 2011 

Certified Public Accountants on January 19, 2011, and the ESOP Association on February 2, 

2011. The Institute of Business Appraisers has reviewed these comments and supports them. 

While the Institute of Business Appraisers applauds and supports the EBSA’s efforts to curb the 

perceived abuses in ESOP valuations, there are less draconian measures that the EBSA can 

undertake that would better address the issue of abuses in ESOP valuations. 

With respect to the perceived abuses in ESOP valuations, we believe that the EBSA should 

consider establishing a task force consisting of representatives of the Department of Labor, the 

Internal Revenue Service, the valuation accreditation organizations, and the ESOP community. 

The Task Force could consider alternatives such as the following: 

 Establish rules with respect to the qualifications of an ESOP trustee. Raising the 

qualifications of the ESOP trustee would enable them to be better able to properly review the 

valuation report, which would eliminate or reduce the number of transactions in which the 

ESOP trustee is not qualified to exercise his/her fiduciary obligation with respect to the 

advice provided by the ESOP appraiser; 

 Establish rules with respect to the definition of a qualified appraisal and a qualified appraiser

for ESOP purposes similar to the rules established by the Internal Revenue Service with 

respect to these items in its regulations under Internal Revenue Code §170. This would raise 

the quality of the appraisers preparing valuations for ESOP purposes; 

 Finalize the proposed Regulation Related to the Definition of Adequate Consideration and 

consider issuing additional guidance on valuations for ESOP purposes or, alternatively, 

establishing a task force/committee of interested parties to do so. This would provide 

authoritative guidance on ESOP valuation issues; 

 Require the review of valuation reports prepared by an ESOP appraiser by an independent 

review organization composed of qualified appraisers on a periodic basis or as deemed 

appropriate by the Trustee or named fiduciary. In effect, this peer review process, similar to 

that which applies to Certified Public Accountants performing attestation engagements, 

would provide a mechanism where the Trustee or named fiduciary could have the report 

reviewed by an independent review appraiser and would help eliminate or curb perceived 

abuses in ESOP valuations. Alternatively, require that the ESOP valuation firm undergo a 

peer review of its processes, procedures, and reports by an independent review organization 

on a periodic basis; and/or 

 Require that appraisers who prepare valuations for ESOP purposes cannot provide other 

services, such as analysis of the feasibility of an ESOP and the structuring and execution of 

the transaction, to the company, the selling stockholder(s), or employees. Many of the 
IBA Response to DOL Proposed Rule on Definition of the Term Fiduciary Page 3 of 3 

February 3, 2011 

conflicts of interest that arise in the marketplace today result when the appraiser provides 

services other than the preparation of ESOP valuations. Additionally, require the full 

disclosure of any relationships and/or conflict of interests between ESOP valuation firms and 

other parties/advisers to the transactions. 

Each of the four organizations which offer certifications in business valuation 

currently requires the completion of a certification to accompany each valuation. 

These certifications address issues of potential pre-disposition or bias. We would not 

object to a broadening, for purposes of ESOP engagements, of the form of that 

certification to mandate a specific disclosure of all prior relationships between the 

appraiser and the parties to the ESOP transaction. 

These are just some of the alternatives that we believe the DOL should investigate and consider. 

We believe that if the Department of Labor, the Internal Revenue Service, the professional 

valuation community, and the ESOP community work together to address the perceived abuses 

in ESOP valuations, the result would be preferable to that of the Proposed Rule and would have 

fewer undesirable consequences. 

Finally, any revised regulation must reflect the fact that valuation is an inexact practice. Honest 

and thoughtful appraisers considering identical securities can have material differences of 

opinion. In order to ensure that qualified appraisers continue to provide services to ESOPs and 

their sponsoring companies, the regulations must clearly distinguish between legitimate 

differences of opinion and gross negligence indicative of a true breach of fiduciary 

responsibility. 

Respectfully submitted, 

Howard Lewis, Executive Director 

The Institute of Business Appraisers 

The Institute of Business Appraisers is the oldest professional society devoted solely to the appraisal of closely-held businesses. 

Established in 1978, the Institute is the pioneer in business appraisal education and professional accreditation.