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The USPAP ethical requirements also specifically address and prohibit fee conflicts.
Under USPAP, appraisers are prohibited from receiving compensation contingent on:

e The reporting of a predetermined result, (e.g., opinion of value);
e A direction in assignment results that favors the cause of the client;
e The amount of a value opinion;

e The attainment of a stipulated result (e.g., that the loan closes, or taxes are reduced);
or

e The occurrence of a subsequent event directly related to the appraiser's opinions and
specific to the assignment's purpose.’

The goal of USPAP is to provide a single, uniform set of standards. These standards are
used in licensing and registering appraisers in all 50 states.'° In addition, to promote uniformity
in enforcement, the Appraisal Foundation issues guidance to assist state appraiser regulatory
agencies in enforcing compliance with USPAP.'!

The Coalition believes that given the strength of the USPAP standards, the fact that the
Appraisal Foundation is subject to oversight by federal regulators, and the fact that compliance
with the standards is enforced in a uniform manner across the United States, the Department
cannot reasonably determine that imposing ERISA fiduciary standards would add a meaningful
level of protection for ERISA plans investing in real estate. As discussed below, imposing
fiduciary standards on real estate appraisers is not only unnecessary, it would also disrupt the
process by which financial institutions, including those acting on behalf of ERISA plans, select,
evaluate and monitor real estate appraisers.

“Td,
0 http://netforum.avectra.com/eweb/StartPage.aspx?Site=TAF,

"The Appraisal Foundation, Voluntary Disciplinary Action Matrix (August 26, 2010),

https://www.asc.gov/documents/misc/2010,08.26%20cetf%20matrix%20final%20rev%2012101
O.pdf.


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the recommendation provided by the Advisory Council, specifically, that the Department provide
guidance to fiduciaries on investing in these types of funds. od

D. To the extent that the Department's final regulation relates to real estate
appraisal activities, the Department should revise the "limitations" to provide a
workable framework within which real estate appraisal services can be provided to
plans.

As discussed above, the Coalition does not believe that a real estate appraiser undertaking
traditional appraisal activities should be deemed to be an ERISA "fiduciary" by reason of
providing investment advice. However, to the extent that the Department's final regulation could
impose fiduciary status on such appraisers, the Coalition recommends that the Department
include a specific limitation such that real estate appraisers who are providing an appraisal
subject to USPAP standards will not be treated as providing "investment advice" within the
meaning of 3(21)(A)(ii) of ERISA.

Incorporating the USPAP standards would be consistent with other federal regulations,
and would provide appraisers, financial institutions and plans with a clear understanding of the
activities and standards under which appraisers may act while still maintaining a non-fiduciary
role. This approach would also provide significant protections for plans against appraiser
misconduct and conflicts of interest.

Ii. Conclusion

The Real Estate Appraisal Coalition appreciates the opportunity to provide comments to
the Department and looks forward to further discussions about these matters.

leg

ifer E. Eller

Sincerely,

8 2008 GAO Report, Defined Benefit Pension Plans - Guidance Needed to Better Inform Plans
of the Challenges and Risks of Investing in Hedge Funds and Private Equity,
http://www.gao.gov/new.items/d08692.pdf.


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On December 10, 2010, the FRB, the FDIC, the NCUA, the OCC and the OTS'® issued
final "Interagency Appraisal and Evaluation Guidelines" (the "Guidelines") intended to "provide
further clarification of the Agencies' appraisal regulations and supervisory guidance to
institutions and examiners about prudent appraisal and evaluation programs."'” Essentially, the
Guidelines are intended to convey to federally-regulated financial institutions, the standards the
institution should use in its own program of obtaining and evaluating appraisals.

The Guidelines incorporate the minimum standards established by the Agencies for the
preparation of an appraisal. The first of these standards is that the appraisal must, "Conform to
generally accepted appraisal standards as evidenced by the USPAP promulgated by the Appraisal
Standards Board of the Appraisal Foundation unless principles of safe and sound banking require
compliance with stricter standards."'®

If the Proposed Regulations are adopted as drafted, financial institutions hiring appraisers
with respect to real estate assets held by ERISA plans would face very difficult legal questions in
determining which set of legal requirements to follow or how to harmonize multiple applicable
legal requirements imposed with respect to appraisals. At the very least, a financial institution
would be required to determine: (a) whether the principles of safe and sound banking would
include compliance with ERISA; and (b) if so, whether ERISA’s fiduciary conduct rules and
prohibited transaction provisions constituted a "stricter" standard than USPAP, and if so, in what
ways.

It is the view of the Coalition, that, for example, a national bank administering a
collective investment trust investing in real estate would be required to administer the collective
fund in accordance with the "principles of safe and sound banking" and in accordance with
ERISA. We believe this view is shared by the Department and the occ.'® Thus, if real estate
appraisers are deemed fiduciaries under ERISA by reason of providing investment advice when
delivering appraisal services, a financial institution hiring an appraiser could be forced to
determine whether and how to incorporate the fiduciary and prohibited transaction provisions of
ERISA into the standards applied to appraisals.

'© As far as we are aware, the newly-created Agencies (i.e., Bureau of Consumer Financial
Protection and the Federal Housing Finance Agency) have not yet established the required
guidelines.

'7 75 Fed. Reg. 77450 (Dec. 10, 2010).
'§ 75 Fed. Reg. 77450, 77459 (Dec. 10, 2010).

'° Section 514 of ERISA is not intended to supersede other federal law, including federal
banking law, nor to preempt state banking law. See also, Comptroller's Handbook, Collective
Investment Funds, October 2005 (describing federal laws applicable bank-maintained collective
investment funds, including federal securities law, ERISA and tax laws, as well as OCC
regulations), http://www.occ. gov/static/publications/handbook/CIFfinal.pdf.


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B. The Uniform Standards of Professional Appraisal Practice are thoroughly
incorporated into the standards that financial institutions use in selecting,
evaluating and monitoring real estate appraisers. Imposing ERISA standards on
real estate appraisers would be disruptive and contrary to the practice of other
federal regulatory agencies.

Over the last twenty-five years, the goal of uniformity in appraisal standards has been
achieved as USPAP has been incorporated into federal and state regulation of real estate
appraisers and the financial institutions that hire them. The Proposed Regulation would disrupt
this uniformity and expose appraisers and financial institutions to conflicting requirements. The
USPAP standards are subject to oversight by federal regulators and as a result, are heavily relied
upon by financial institutions. Because of this, financial institutions hiring real estate appraisers
could be forced to choose between requiring appraisers to comply with federal guidelines
governing appraisals and requiring appraisers to comply with ERISA's fiduciary standards.

1. Federal Law Incorporation of USPAP Standards

In 1989, as part of FIRREA, Congress established the ASC as part of the FFIEC
specifically to address the lack of regulation in connection with appraisals performed for
federally regulated institutions.'? In 2010, as part of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the "Dodd-Frank Act") Congress updated FIRREA to address real
estate appraisal reform in light of the recent financial crisis.

As updated by the Dodd-Frank Act, the ASC is empowered by law to monitor the
requirements established by the States for the certification and licensing of individual appraisers
and registration and supervision of appraisal management companies, to monitor the
requirements for appraisal standards for transactions involving federally regulated financial
institutions and maintaining a national registry of State certified and licensed appraisers eligible
to conduct appraisals for federally regulated financial institutions, and to report to Congress with
respect to ASC's oversight function.'

All of the FFIEC member agencies must establish rules relating to appraisal standards
and appraiser qualifications for every real estate-related financial transaction engaged in by any
entity regulated by the Agencies.'*

0 https://www.asc.gov/About-the-ASC/ASCHistory.aspx.

8 Dodd-Frank Act §§ 1101-1126.

'§ Dodd-Frank Act § 1103.

'S 12 U.S.C. §§ 3339 and 3341, as amended by the Dodd-Frank Act.


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diversification of the plan's portfolio, the liquidity characteristics of the investment and the
projected return relative to the funding objectives of the plan.”°

In testimony before the ERISA Advisory Council in 2008, witnesses from the
Department emphasized that a prudent investment process for hard to value assets should include
“how the investment fits in the plan’s investment policy; the role of the investment in the plan’s
portfolio; and the plan’s potential exposure for losses, for example, is the investment subject to
extreme price fluctuations and a high degree of leveraging."*° With respect to valuation, the
testimony noted that the analysis should include, "a review of the methodology for valuing the
investment."

ERISA clearly assigns fiduciary responsibility with respect to valuation to the plan's
administrator and to the plan's named fiduciary for investments (or to a properly appointed
investment manager). Moreover, nothing in the Department's recent pronouncements on
valuation issues has indicated that the Department is concerned that the fiduciary duty of valuing
plan assets is not properly assigned under the statute. Given this, the Coalition does not believe
that there is any basis for the Department to impose fiduciary status on appraisal professionals
who are in the business of providing impartial information (including value opinions), and not
recommendations, to plan fiduciaries that may be used in carrying out the fiduciaries’ valuation
responsibilities.

The Coalition believes that if the Department is concerned about valuation of real estate
and other assets that may be considered "hard to value" it should provide guidance to plan
administrators and investment fiduciaries on their duties in connection with the valuation
process. The Coalition is not alone in making this recommendation. In a report released in 2009,
the 2008 ERISA Advisory Council Working Group on Hard to Value Assets (the "Advisory
Council Report") specifically recommended as follows:

"The Department of Labor should issue guidance which addresses the complex nature
and distinct characteristics of Hard to Value Assets. This guidance should define Hard To
Value assets and describe the ERISA obligations when selecting, valuing, accounting for,
monitoring and disclosing/reporting these assets."

Similarly in August 2008, the U.S. General Accounting Office ("GAO") issued a report
addressing investment by defined benefit pension plans in private equity funds and hedge funds.
While the report did not address real estate investments, the recommendation was very similar to

1d.

76 9008 Advisory Council Report, Report on Hard to Value Assets,
http://www.dol.gov/ebsa/publications/2008ACreport1.html.

714,


GRGDM LAW GROUP

Jennifer B. Eller
(202) 861-6604
jec@groom.com

February 3, 2011

By Electronic Mail to e-ORI@dol.gov

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, N.W.
Washington, D.C. 20210

Re: Definition of Fiduciary Proposed Rule

Ladies and Gentlemen:

Groom Law Group represents a coalition of firms engaged in the management of real
estate assets and the business of valuing and appraising real estate (the "Real Estate Appraisal
Coalition" or "Coalition"), On an annual basis, Real Estate Appraisal Coalition members are
responsible for providing valuation services with respect to over $500 billion in real estate assets
belonging to thousands of employee benefit plans subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA").

The Department has proposed to amend its regulation interpreting when a person is
deemed to be a "fiduciary" by reason of providing investment advice for purposes of section
3(21)(A)(ii) of ERISA.' The proposed regulation (the "Proposed Regulation") would amend
DOL's existing interpretation of fiduciary status which has been in place for more than 35 years
and would have a dramatic and negative effect on plan real estate investments. In addition to our
written comments, provided below, the Coalition requests the opportunity to testify at the
hearings scheduled to take place on March 1 and, if necessary, March 2, 2011.7 In addition to
submitting this comment letter, the Coalition will also submit to the Department a separate
outline of the Coalition’s proposed hearing testimony.

"75 Fed. Reg. 65263 (Oct. 22, 2010).

? 76 Fed. Reg. 2142 (Jan. 12, 2011).
Groom Law Group, CHARTERED
1701 Pennsylvania Ave., N.W. + Washington, D.C. 20006-5811
202-857-0620 « Fax: 202-659-4503 « www.groom.com


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As an example, a financial institution would be in the position of comparing ERISA
section 406(b)(1), which prohibits a fiduciary from using its fiduciary authority to cause itself to
receive an addition fee, with the USPAP ethical requirements, which prohibit, for instance, an
appraiser receiving compensation based on the value of an opinion. A similar exercise would
have to be undertaken with respect to ERISA's fiduciary duty provisions and all of the USPAP
ethical conduct standards. ERISA requires a fiduciary to act with an "eye single" to the interests
of the plan.”° In short, ERISA fiduciaries are expected to focus solely on the interests of
participants and beneficiaries. Conversely, USPAP requires objectivity and neutrality.
Currently, it is unclear whether these requirements can be harmonized. In any event, the
Coalition submits, that the Department has not adequately investigated the burden the Proposed
Regulation would place on financial institutions or on appraisers themselves, and therefore that
any changes to the Proposed Regulation should take into account the extent to which federal and
state law already rely on and incorporate the USPAP standards.

C. Rather than imposing ERISA fiduciary standards on real estate appraisers, the
Department should provide guidance to plan fiduciaries to whom the law already
assigns fiduciary responsibilities with respect to valuation of plan assets.

ERISA imposes fiduciary duties with respect to valuation of plan assets, including real
estate investments, upon a plan's "administrator." Specifically, the administrator of an ERISA
plan is required to report "current value" of the plan's assets on the Form 5500.7" In letters to
ERISA plan fiduciaries, the DOL's regional office in Boston has stated that "It is incumbent upon
the Plan Administrator to establish a process to evaluate the fair market value" of plan assets,
including "hard-to-value" assets.”” The Department has also alleged that failure to have such a
documented process (including a process for evaluating values received from other sources) is a
violation of fiduciary duty.”?

The Department has published guidance to investment fiduciaries regarding the duty of
prudence, requiring, among other things, that a fiduciary give "appropriate consideration" to
relevant facts and circumstances, including the role the investment plays in the part of the plan's
investment portfolio.* For investment fiduciaries, "appropriate consideration" includes factors
such as the investment's risk and return characteristics, the impact of the investment on

*° Donovan vy. Bierwirth, 680 F.2d 263, 271 (2d Cir. 1982), cert denied, 459 US
1069 (1982) (Describing the duties imposed on fiduciaries under ERISA section 404(a)(1)).

7! See, e.g., ERISA §§ 103(a)(3)(A) and (b)(3).

?? 2008 Advisory Council Report, Report on Hard to Value Assets,
http://www.dol.gov/ebsa/publications/2008ACreportl .html.

2d,
499 C.F.R. § 2509.08-1 (2010).


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appraisers under USPAP include specific requirements addressing the areas of conduct,
management, confidentiality and recordkeeping. These requirements provide that each
appraiser, "must perform assignments with impartiality, objectivity, and independence, and
without accommodation of personal interests."’ These principles are supported by specific
prohibitions, including that an appraiser:

e Must not perform an assignment with bias;
e Must not advocate the cause or interest of any party or issue;

e Must not accept an assignment that includes the reporting of predetermined opinions
and conclusions;

e Must not misrepresent his or her role when providing valuation services that are
outside of appraisal practice;

e Must not communicate assignment results with the intent to mislead or to defraud;

e Must not use or communicate a report that is known by the appraiser to be misleading
or fraudulent;

e Must not knowingly permit an employee or other person to communicate a
misleading or fraudulent report;

¢ Must not use or rely on unsupported conclusions relating to characteristics such as
race, color, religion, national origin, gender, marital status, familial status, age,
receipt of public assistance income, handicap, or unsupported conclusion that
homogeneity of such characteristics is necessary to maximize value; and

e Must not engage in criminal conduct; and must not perform an assignment in a
grossly negligent manner.

T Appraisal Standards Board, Uniform Standards of Professional Appraisal Practice (2010-2011),
http://www.uspap.org/2010USPAP/USPAP/frwrd/ETHICS_RULE.htm.

® Tn addition to the ethical rule's prohibition on gross negligence on performing an assignment
which would be a violation of the conduct section of the ethics rule, USPAP's development
standards address the requirement that "an appraiser must not render appraisal services in a
careless or negligent manner." Appraisal Standards Board, Uniform Standards of Professional
Appraisal Practice (2010-2011),
http://www.uspap.org/2010USPAP/USPAP/frwrd/ETHICS_RULE.htm.


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valuation as an enforcement priority. The Real Estate Appraisal Coalition submits that the
comprehensive uniform standards under which appraisers operate is one of the reasons the real
estate appraisal process has generally not been identified as a problem in connection with
valuation of ERISA plan real estate assets.

1. Overview of USPAP Standards and Enforcement*

The Appraisal Foundation is a private, not-for-profit corporation overseen by the
Appraisal Subcommittee ("ASC") of the Federal Financial Institutions Examination Council
("FFIEC"). All of the following Federal Agencies (the "Agencies") are part of the FFIEC: the
Board of Governors of the Federal Reserve System ("FRB"), the Federal Deposit Insurance
Corporation ("FDIC"), the National Credit Union Administration ("NCUA"), the Office of the
Comptroller of the Currency ("OCC"), the Office of Thrift Supervision ("OTS"), the Bureau of
Consumer Financial Protection and the Federal Housing Finance Agency. The mission of the
ASC is to oversee state appraiser regulatory programs, monitor appraisal standards of federal
financial institutions, maintain a registry of state certified and licensed appraisers, and monitor
and review the operations of the Appraisal Foundation.

The Appraisal Foundation sponsors two independent boards: the Appraiser Qualifications
Board ("AQB") and the Appraisal Standards Board ("ASB"). The AQB establishes minimum
education and experience requirements for appraisers. The ASB issues USPAP, which provides
industry standards for conducting real estate appraisals. The USPAP standards comprehensively
address all aspects of the appraisal process. According to the USPAP preamble, the purpose of
USPAP, "is to promote and maintain a high level of public trust in appraisal practice by
establishing requirements for appraisers."

USPAP includes specific rules governing the substantive knowledge and experience
required of each appraiser, specific standards relating to the performance of appraisals, appraisal
reviews, client communications and appraisers’ ethical obligations.° The ethical obligations of

* 2008 Advisory Council Report, Report on Hard to Value Assets,
http://www.dol.gov/ebsa/publications/2008ACreportl .html.

* While a complete discussion of USPAP and enforcement of USPAP standards is beyond the
scope of this comment letter, the Coalition is prepared to meet with the Department to provide an
in-depth discussion of USPAP, including its substantive requirements and enforcement.

> Appraisal Standards Board, Preamble to the Uniform Standards of Professional Appraisal
Practice (2010-2011), http://www.uspap.org/2010USPAP/USPAP/frwrd/PREAMBLE.htm.

° USPAP also contains a jurisdictional rule intended to preserve the balance of USPAP to the
extent that a federal law or regulation precludes compliance with USPAP standards. As
discussed below, however, we think it questionable, as a matter of policy and as a matter of
Congressional intent, that ERISA's fiduciary conduct rules should "preempt" USPAP's ethical
standards requiring complete objectivity on the part of an appraiser.


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I. Executive Summary

The Proposed Regulation fails to recognize the existence of a comprehensive set of
standards governing all aspects of the real estate appraisal process. These standards, known as
the Uniform Standards of Professional Appraisal Process ("USPAP") are important for a number
of reasons. First, the strength and quality of the USPAP standards and the fact that these
standards are subject to oversight by federal banking regulators means that the USPAP standards
act as a safeguard against appraiser misconduct. In addition, the USPAP standards are explicitly
incorporated into federal law. Because of this, it would be extremely difficult for appraisers and
financial institutions who engage them (including when those institutions are acting on behalf of
ERISA plans) to depart from the USPAP standards.

The Coalition recognizes that the Department may be concerned about proper valuation
of hard-to-value assets, including real estate. If this is the case, the Coalition urges the
Department to address this problem head-on, as recommended by both the ERISA Advisory
Council and the General Accounting Office, and provide additional guidance to plan fiduciarics
who are, by law, responsible for valuing plan assets. The Coalition strongly believes that
increasing the number of persons who are subject to ERISA’s fiduciary duties is a poor substitute
for providing guidance to those who are properly characterized as ERISA fiduciaries.

Finally, if the Department insists on imposing fiduciary status on real estate appraisers,
the Coalition recommends that the Department capitalize on the USPAP standards to limit the
disruption the regulation will cause to employee benefit plans, financial institutions and real
estate appraisers who follow USPAP standards.

I. Comments

A. It is not necessary for the Department to impose fiduciary status on real estate
appraisers. The Uniform Standards of Professional Appraisal Practice, overseen by
federal regulators, protect plans against appraiser misconduct, including fee
conflicts,

Real estate appraisers are subject to a uniform set of standards governing all aspects of
the appraisal process. These standards are designed to protect the interests of those receiving
appraisals, including ERISA covered plans. For this reason, there is simply no need to impose
ERISA's fiduciary standards on real estate appraisers. The Department does not appear to
believe otherwise. In the Proposed Regulation, the Department failed to identify a single
instance of harm to an employee benefit plan because of the actions of a real estate appraiser. In
testimony before the ERISA Advisory Council in 2008 regarding enforcement activities related
to hard-to-value assets, Virginia Smith, Director of Enforcement for EBSA did not identify any
cases, initiatives or enforcement activities related to real estate valuation, or identify real estate