More On Legal & Compliancefrom The Advisor's Professional Library
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
- Regulatory Oversight of Investment Advisors Although the regulatory environment is in a state of flux, it is imperative that RIAs adhere to their compliance obligations. To ensure compliance, RIAs and IARs must fully understand what those obligations are.
Efforts to stop the Department of Labor from reproposing its fiduciary rule continue. The American Institute of Certified Public Accountants (AICPA) is pressuring members of Congress to ensure that DOL’s fiduciary reproposal does not define independent appraisers of Employee Stock Ownership Plans (ESOP) as fiduciaries.
AICPA president and CEO Barry Melancon sent a June 10 letter to Sen. Tom Harkin, D-Iowa, chairman of the Health Education Labor and Pensions (HELP) Committee—which has jurisdiction over DOL and the Employee Retirement Income Security Act (ERISA)—and other committee members urging them to co-sponsor two bills, H.R 2014 and S. 273.
The House bill, introduced in February, and the Senate bill, introduced in May, both support AICPA’s effort to block inclusion of appraisers to ESOP plans in DOL's fiduciary rule.
The DOL’s Employee Benefits Security Administration’s Semiannual Regulatory Agenda, released July 3, states that a reproposal to amend the definition of fiduciary under the Employee Retirement Income Security Act (ERISA) will come in October. Industry watchers say that the DOL’s fiduciary “train has left the station,” and that the reproposal should be at the Office of Management and Budget in a matter of weeks.
H.R. 2041, which currently has 16 co-sponsors, was introduced by Reps. Brett Guthrie and David Loebsack, who are members of the committee of jurisdiction on the House side, the House Education and Workforce Committee.
In a May “dear colleague” letter to members of their subcommittee asking them to sign onto their bill, Guthrie and Loebsack argue that DOL’s proposal to designate ESOP appraisers as fiduciaries “is a costly and unnecessary new layer of regulation.” Under current law, the two write, “the trustees of private ESOPs are already liable as fiduciaries. Extending this liability to appraisers would, in the best case scenario, drive up costs of ESOP plans and have the net effect of moving stock gains away from the workers who earn them.”
In the worst-case scenario, they continued, “this new and costly regulation would drive appraisers out of the market entirely or discourage companies from participating in an ESOP profit-sharing program entirely.”
Sen. Kelly Ayotte, a member of the Armed Services, Budget, Commerce, Homeland Security and Special Aging Committee, who introduced S. 273 (which has seven co-sponsors), argued in a June 27 dear colleague letter that if the DOL’s proposal moves ahead, “would result in compliance and regulatory costs for the 11,000 ESOPs around the country (including the 10 million participating employees) and could jeopardize their availability in the future.”
Further, Ayotte argued, designating appraisers as fiduciaries would “force appraisers to purchase expensive fiduciary insurance, employ specialized ERISA counsel and expose them to unnecessary litigation.”
In his June 10 letter to Harkin, Barry Melancon, AICPA president and CEO, said that 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.”
Many CPAs, Melancon wrote, “perform business valuation services for ESOPs by providing an independent, third-party objective appraisal of the stock of employer companies that sponsor ESOPs. 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, he continued, “that ESOP valuations be obtained from an independent appraiser at least annually.”
Therefore, he said, redefining an ERISA fiduciary to include ESOP appraisers would create an inherent conflict between the DOL and IRS requirements for ESOP appraisers.
An ERISA fiduciary, Melancon wrote, “must act solely in the interest of plan participants and their beneficiaries and therefore cannot provide an independent, third-party objective perspective.”
The DOL’s proposal, Melancon continued, “is a draconian response to a very small number of deficient ESOP appraisals.”
Melancon told lawmakers that DOL’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, he said, “does not have any minimum requirements or standards for appraisers.”
Requiring ESOP appraisers “to have specialized training, credentials, and to adhere to professional standards would protect participants and beneficiaries in a cost effective manner,” he wrote, “would be consistent with the IRS and SBA rules for appraisals and thus avoid the potential for conflicting requirements across federal agencies.”