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Recent DOL Settlement Agreements Provide Fiduciary Guidance on Valuation Advisors

Posted by Corey F. Schechter | Jul 20, 2018

Although settlement agreements are not legal precedent, they do provide guidance on the Department of Labor's (DOL's) position and its interpretation of applicable laws, and can thus help fiduciaries make changes now to avoid potential liability in the future. A number of recent settlement agreements between the DOL and Employee Stock Ownership Plan (ESOP) trustees demonstrate how valuation problems can expose the trustees to liability.

An ESOP is a qualified retirement plan that invests primarily in employer securities (employer-company stock). Eligible employees are provided stock ownership as a benefit of working for the company and allow employees to take an ownership interest in the company.

When companies move from private ownership to an ESOP, the ESOP sets up a trust to purchase shares of the company stock. For private companies, the ESOP share price must be valued at least on an annual basis based on the fair market value. This value is generally determined by a third-party valuation advisor (VA), often referred to as a "qualified independent appraiser."

Although a third-party VA comes up with the fair market value of the stock, the ESOP trustee has a fiduciary duty to the plan participants to make sure the VA is accurate. An ESOP trustee cannot just select a random VA and rely on their valuation. ESOP fiduciaries may be liable for overvalued stock and could face liability from plan participants for an ESOP's purchase of company shares at a price which exceeds its fair market value.

In order to reduce the risk of liability for fiduciary breaches, an ESOP trustee must be actively involved in the selection and review of any ESOP VAs. Based on a number of DOL settlement agreements, including the recent $5.45 million repayment agreement with the Lubbock National Bank, ESOP trustees can take this time to review their current valuation practices and procedures.

ESOP Trustee Oversight of Valuation Advisors

ESOP trustees need to properly investigate valuation advisors before choosing a VA to value the company shares. This includes reviewing their experience and qualifications and making sure the VA is familiar with DOL and ESOP regulations.

Even if the trustee is close to someone who they know to be a qualified financial advisor or appraiser, the trustee should avoid the appearance of a conflict of interest; hence, the use of the term "qualified independent appraiser" when referring to such individuals performing the valuation of the shares.

Trustees should also be active in overseeing the VA's valuation process. This includes making sure the VA has all the relevant valuation inputs and is relying on accurate information. Some trustees do not want to get in the way of the VA's appraisal; however, the trustee may ultimately be responsible for an overvaluation if the trustee did not demonstrate prudence in selecting and reviewing the VA.

Finally, the trustee should conduct a proper review of the valuation report. This includes making sure the VA provided accurate and up-to-date information, used reasonable projections based on correct information, and document the trustee's analysis of the valuation report.

San Diego ESOP Litigation Attorneys

If you have any questions about ESOP valuation and fiduciary liability, the law firm of Butterfield Schechter LLP is here to help. We are San Diego County's largest law firm with a focus on employee benefits law. Contact our office today with any questions on how we can help you and your company succeed.

About the Author

Corey F. Schechter

Corey Schechter practices in the areas of Employee Benefits, Employee Stock Ownership Plans, Pension and Profit Sharing Plans, ERISA, ERISA Litigation, Business Law, Qualified Domestic Relations Orders (QDROs), and Employment and Labor Law.


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