1100 Abernathy Road | 500 Northpark | Suite 400 | Atlanta, GA 30328-5646 

404 266 0663 | 800 749 0752 | www.reliance-trust.com 

February 2, 2011 

Office of Regulations and Interpretations 

Employee Benefits Security Administration 

Attn: Definition of Fiduciary Proposed Rule 

Room N-5655 

U.S. Department of Labor 

200 Constitution Avenue, NW 

Washington, DC 20210 

Re: Definition of the term “Fiduciary” under the Employee Retirement Income 

Security Act of 1974, as amended, Proposed Rule 

Ladies and Gentlemen: 

Reliance Trust Company (Reliance) is one of the largest independent trust companies in 

the United States and is a leading provider of trustee and independent fiduciary services 

to qualified retirement plans including Employee Stock Ownership Plans (ESOPs). 

Reliance’s comment is in response to the recently proposed regulation issued by the 

Employee Benefits Security Administration of the U.S. Department of Labor (EBSA) 

regarding the definition of “fiduciary” (Proposed Regulation) under the Employee 

Retirement Income Security Act of 1974, as amended (ERISA). This comment relates 

solely to those provisions of the Proposed Regulation that relate to ESOPs. 

Reliance has issued this comment because we believe the Proposed Regulation will have 

a significant detrimental impact on the number and classes of vendors that will provide 

fiduciary services to ESOPs in the future. For the reasons stated below, Reliance is of the 

opinion that the Proposed Regulation will not only drive some excellent valuation firms 

out of the ESOP marketplace, but also, in the long term, has the potential to eliminate 

professional independent fiduciaries — both institutional trustees and registered 

investment advisers — (Independent Fiduciaries) from the ESOP service-provider 

landscape. In other words, two very plausible unintended consequences of the Proposed 

Regulation would be both to reduce the number of quality valuation firms servicing 

ESOPs and to leave only valuation firms and internal trustees as the last groups willing or 

able to serve as fiduciaries to ESOPs. 

Reliance strongly recommends that the Proposed Regulation eliminate any language that 

would apply specifically to ESOPs. Alternatively, Reliance proposes that the Proposed 

Regulation be limited in certain respects to allow EBSA to ensure that an Independent 

Fiduciary is responsible for the accuracy of the ESOP valuation (and further the EBSA’s 

enforcement efforts in this area) while reducing, if not eliminating, possible negative 

unintended consequences the Proposed Regulation might have on the ESOP service 

provider marketplace. 
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2

The Current State of Affairs 

Reliance agrees that out of a population of over 10,000 ESOPs, a certain percentage of 

the valuations performed would be deemed inadequate by any objective observer. We 

believe that the reasons for these inadequate valuations include: 

 Valuations that are performed by casual appraisers not well versed in ESOP 

valuations. 

 Conflicted internal trustees and/or valuation firms that may have loyalties that are 

divided between the ESOP and the company sponsoring the ESOP. 

 Inexperienced internal trustees who are not well versed in valuation theory in 

general or ESOP valuation methodology specifically. 

Likewise, Reliance understands EBSA’s frustration in attempting to enforce the current 

five-part test during investigations of 401(k) advisers who hold themselves out as 

providers of objective advice only to claim that they are not ERSIA fiduciaries when the 

timing proves convenient. The Proposed Regulation goes to great lengths to describe this 

frustration and the potential negative impact this has on EBSA’s enforcement efforts. 

However, it should be noted that no such confusion is present in the ESOP marketplace. 

ERISA section 3(18)(B) and practically every ESOP trust agreement provide that it is the 

responsibility of the ESOP trustee to make investment decisions for the ESOP and 

specifically that for a closely held corporation, fair market value (for adequate 

consideration purposes) is as determined in good faith by the plan fiduciaries, i.e., the 

ESOP trustees. In addition, numerous federal courts that have considered the issue have 

concluded that it is the ESOP trustee's responsibility to evaluate an appraisal and the 

ESOP trustee is not to rely blindly on an appraisal report without inquiry. See e.g. 

Donovan v. Hairell, 716 F.2d 1455 (5th Cir. 1983); Keach v. U.S. Trust Company, 313 F. 

Supp.2d 818 (DC CD Illinois 2004); Eyler v. Commissioner of Internal Revenue, 88F.3d 

445 (7th Cir. 1996). 

The current definition of “fiduciary”, found at Labor Regulation section 2510.3-21 

(Current Regulation), through DOL Advisory Opinion 76-65, specifically excludes ESOP 

valuation firms: 

“The advice is limited to a valuation of the employer securities to assist in 

determining, inter alia, the ‘adequate consideration’ for such securities. 

Investment in employer securities is an inherent element of an ESOP and 

the decision to invest in employer securities is an integral part of the 

process by which an ESOP is established. Under these circumstances, the 

advice...would not involve an opinion as to the relative merits of 

purchasing the particular employer securities in question as opposed to 

other securities. If so limited...advice to the sponsor of an...ESOP or to 

the ESOP itself would not sever as a ‘primary basis for investment 

decisions with respect to plan assets,’ nor would it constitute advice as to 
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3

the ‘value of securities’ within the meaning of “ERISA section 3(21).” 

DOL Ad. Op. 76-65. 

Additionally, the Internal Revenue Code of 1986, as amended (Code) requires that all 

valuations of securities that are not readily tradable on an established securities market be 

issued by an appraiser that is independent from both the company sponsoring the ESOP 

and the ESOP itself. Code section 401(a)(28)(c). Further, through its cross-reference to 

Code section 1701

, Code section 401(a)(28) provides a readily accessible solution. 

Rather than converting ESOP valuators to ERISA fiduciaries, EBSA could work with the 

Treasury Department to further delineate the requirements that must be met to serve as an 

ESOP valuator. Finally, ESOP valuation firms in almost every instance specifically 

disclaim (which the engaging fiduciary specifically agrees to) any fiduciary status in their 

engagement letters with the fiduciary engaging their services. 

The consequence of this confluence of statutes and regulations, at least as is generally the 

case where an Independent Fiduciary serves as the ESOP trustee or named fiduciary, is a 

system of checks and balances where the ultimate decision-maker as to the valuation is 

the Independent Fiduciary. The resulting interplay among the company, the valuation 

firm and the Independent Fiduciary creates an effective procedural structure for analyzing 

valuation reports. 

Potential Negative Consequences of the Proposed Regulation 

Reliance believes that the Proposed Regulation will result in several unintended (and 

possibly negative) consequences for the ESOP marketplace as set forth below and 

 

1

 Code section 170(E) Qualified appraisal and appraiser 

For purposes of this paragraph— 

(i) Qualified appraisal The term “qualified appraisal” means, with respect to any property, an appraisal 

of such property which— 

(I) is treated for purposes of this paragraph as a qualified appraisal under regulations or other 

guidance prescribed by the Secretary, and 

(II) is conducted by a qualified appraiser in accordance with generally accepted appraisal 

standards and any regulations or other guidance prescribed under subclause (I). 

(ii) Qualified appraiser Except as provided in clause (iii), the term “qualified appraiser” means an 

individual who— 

(I) has earned an appraisal designation from a recognized professional appraiser organization or 

has otherwise met minimum education and experience requirements set forth in regulations 

prescribed by the Secretary, 

(II) regularly performs appraisals for which the individual receives compensation, and 

(III) meets such other requirements as may be prescribed by the Secretary in regulations or other 

guidance. 

(iii) Specific appraisals An individual shall not be treated as a qualified appraiser with respect to any 

specific appraisal unless— 

(I) the individual demonstrates verifiable education and experience in valuing the type of property 

subject to the appraisal, and 

(II) the individual has not been prohibited from practicing before the Internal Revenue Service by 

the Secretary under section 330 (c) of title 31, United States Code, at any time during the 3-year 

period ending on the date of the appraisal. 
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4

strongly urges EBSA’s careful analysis of these consequences prior to taking any action 

with respect to the Proposed Regulation. 

 Fewer qualified ESOP valuators and less competition for their services. 

o The Proposed Regulation will almost certainly result in increased 

insurance costs and increased litigation exposure for ESOP valuation firms 

due to their status as an ERISA fiduciary. Heightened risk and greater 

costs will result in many of the most qualified valuation firms exiting the 

ESOP marketplace. The loss of these independent and qualified 

appraisers to the ESOP community will only further exacerbate the 

identified problem EBSA is attempting to remedy: an unacceptable 

incidence of incorrect valuations in the ESOP context. 

 Fewer qualified Independent Fiduciaries and less competition for their services. 

o As noted above, current law already places responsibility for accuracy of 

the ESOP valuation squarely at the feet of the named fiduciary, who, in 

almost all instances in the ESOP context, will be the ESOP trustee. As 

more fully set forth below, increased co-fiduciary liability will almost 

certainly be a by-product of the Proposed Regulation. The increased risk 

posed by greater co-fiduciary liability could result in institutional trustees 

leaving the business. At a minimum, if the Proposed Regulation does 

establish that ESOP valuation firms will be ERISA fiduciaries alongside 

the ESOP trustee, it should be expected that insurance carriers issuing 

policies to Independent Fiduciaries will raise their premiums charged for 

ERISA fiduciary liability coverage. 

 ESOP sponsors might react to increased costs by no longer retaining Independent 

Fiduciaries for their company’s ESOPs. 

o Like ESOP valuators and Independent Fiduciaries, it is likely that 

premiums for fiduciary liability insurance coverage will increase for 

ESOP sponsors. These additional costs, along with the new costs 

associated with securing ERISA liability coverage at the ESOP valuation 

firm and Independent Fiduciary level, will be passed along to the ESOP 

sponsor. A likely consequence of these combined cost increases will be 

that the ESOP sponsor decides to retain either the valuation firm or the 

Independent Fiduciary but not both as a cost saving measure — with the 

likely choice being the valuation firm. 

 Unmanageable ERISA section 405 co-fiduciary liability. 

o Almost every ESOP trust agreement we encounter as a professional trustee 

contains language that prohibits co-trustees from being engaged on the 

same ESOP. This prohibition recognizes the significant liability presented 
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5

by ERISA section 405. As previously noted, under current law an ESOP 

valuation must be determined by the trustee or other named fiduciary. The 

Proposed Regulation will result in at least two fiduciaries for each ESOP. 

Because valuations are the life blood of ESOPs, internal disputes over the 

most accurate valuation of the ESOP will likely arise. In that case who 

would have the superior claim, the third-party valuation firm that routinely 

performs valuation reports or the internal trustee who knows the company 

inside and out? Under the Proposed Regulation, neither party would truly 

have control, although they would both have significant risk. 

 Creation of a Conflict between the Preamble for the Proposed Regulation and the 

Code. 

o In the Proposed Regulation preamble the DOL sets forth its expectation as 

to a fiduciary appraiser’s determination of value and specifically states 

that the DOL “expects...[it] to be unbiased, fair and objective, and to be 

made in good faith and based on a prudent investigation under the 

prevailing circumstances known to the appraiser.” Taking this statement 

in two parts, first, there is no way for the fiduciary appraiser to be 

“unbiased, fair and objective” as ERISA requires that a fiduciary 

“discharge his duties with respect to a plan...solely in the interests of the 

participants and beneficiaries...for the exclusive purpose of providing 

benefits to participants and their beneficiaries.” This fiduciary duty 

negates the ability of the fiduciary appraiser to be unbiased, fair and 

objective. Given these duties, the EBSA’s stated objective does not 

appear to be achievable through the conversion of ESOP valuators to 

ERISA fiduciaries. Additionally, the Proposed Regulation, as discussed 

above, conflicts with the Code’s requirement that ESOP valuators be 

independent from both the ESOP and the ESOP sponsor. Secondly, the 

requirement that the ESOP valuation be made in good faith and based 

upon a prudent investigation under the prevailing circumstances is already 

required of the named fiduciary charged with the duty of making the 

adequate consideration determination, i.e., the ESOP trustee. 

The outcomes listed above would likely constitute a significant detriment to both the 

implementation of new ESOPs and the maintenance of existing ESOPs. On a macro 

level, the long-term result of the Proposed Regulation could very well be fewer qualified 

valuators and the elimination of a current class of professional fiduciaries (i.e., 

Independent Fiduciaries) without a corresponding gain in the quality of valuation reports. 

As a result, Reliance respectfully urges EBSA not to alter the definition of fiduciary 

under ERISA as it relates to ESOPs and other non publicly traded qualified plan assets. 

Reliance feels that continued examination and enforcement methods employed by EBSA 

under the Current Regulation, along with actively partnering with the professionals 

serving the ESOP community will, in the long term, result in an improvement in the 
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6

quality of valuation reports issued on behalf of ESOPs without the need for the Proposed 

Regulation. 

For Independent Fiduciaries, EBSA examinations are just one of the many areas of 

regulation that we face as part of our chosen profession and we welcome the 

opportunities afforded by EBSA’s audit activity to review and evaluate our processes and 

procedures and to continually improve our processes and procedures through this 

regulatory oversight. We believe this regulatory oversight coupled with the efforts of the 

nonprofit organizations serving the ESOP community, e.g., the ESOP Association, the 

National Center of Employee Ownership and Employee Owned S Corporations of 

America, to educate and establish best practices within the ESOP community, will create 

an efficient structure of self-regulation. 

Even so, neither continued enforcement activities under the Current Regulation nor the 

Proposed Regulation itself would have as much of a direct impact on the quality of ESOP 

valuations as would clearly articulated standards for determining fair market value issued 

by EBSA as a final regulation. To that end, Reliance respectfully requests that EBSA 

consider issuing such a regulation. 

The DOL’s proposed regulation setting forth the definition of “adequate security” 

(Proposed Labor Regulation section 2510.3-18 is the only authority the ESOP community 

has that evidences the DOL’s opinion as to how shares of a closely held corporation 

should be valued. It should be noted, however, that as a proposed regulation (versus a 

final regulation) the opinions set forth therein are not binding but rather merely good 

evidence of the DOL’s position in this regard. Further, this proposed regulation has not 

been updated in twenty-three years and fails to provide exhaustive guidance on this issue 

or reflect the current state and organizational complexity of today’s closely held 

corporations. Accordingly, the DOL’s issuance of final binding regulations in this area 

should be a prerequisite to the implementation of the Proposed Regulation. This appears 

to us the most direct, efficient and predictable means of addressing the DOL’s expressed 

concern with respect to inaccurate valuations. 

The Independent Fiduciary Limitation 

Reliance asks that EBSA, in the event it moves forward with implementation of the 

Proposed Regulation, add a limitation to those found at Labor Regulation section 2510.3-

21(c)(2) of the Proposed Regulation that exempts any person from the definition of those 

persons described in Labor Regulation section 2510.3-21(c)(1) if the qualified retirement 

plan that contains assets that require valuation services has retained an Independent 

Fiduciary to serve as a fiduciary for those same assets. For example, a valuation firm, 

and its employees providing valuation services to an ESOP, would not be a fiduciary 

under ERISA to that ESOP if an Independent Fiduciary (that has agreed to determine the 

value of ESOP shares pursuant to ERISA section 3(18)) has also been appointed to serve 

as a trustee to that ESOP. 
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7

The definition of “Independent Fiduciary” could be the same as that employed under 

other EBSA proposed and final regulations — such as “Investment Manager” under 

ERISA section 3(38), for example. 

This alternate approach has several advantages: 

 ESOP valuation firms, in an effort to avoid fiduciary status, would likely insist 

that their clients retain an Independent Fiduciary for their ESOP. 

 The current system, where an experienced Independent Fiduciary determines 

adequate consideration for an ESOP with input from a knowledgeable valuation 

firm that is independent from all parties, would be preserved. 

 ESOP valuation firms, Independent Fiduciaries and ESOP sponsors would not 

experience higher insurance premiums as valuation firms would not serve as 

fiduciaries for any of their accounts where an Independent Fiduciary served in the 

role of ESOP trustee. 

 Large, reputable valuation firms would continue to perform ESOP valuations, 

thus eliminating the concern over an overall decline in the accuracy of ESOP 

valuations. 

 There would be no co-fiduciary liability created between the ESOP trustee and the 

ESOP valuator, which would avoid significant confusion that could lead to the 

contrary result of only further hampering the DOL’s enforcement efforts in this 

area. 

 The DOL would have a party to hold responsible (utilizing currently existing 

law), in either the ESOP valuation firm or the Independent Fiduciary, for the 

accuracy of the ESOP valuation and against which to pursue legal remedy should 

there be a problem with the ESOP valuation. 

We certainly hope that this alternate approach is considered by EBSA. Please do not 

hesitate to contact me should you have any questions regarding this comment. 

Respectfully submitted, 

Anthony A. Guthrie 

President & Managing Principal, Reliance Trust Company 

Lance T. Studdard 

Vice President, Reliance Trust Company