The Department of Labor has been focusing on employee stock ownership plan appraisals in its enforcement program, because they have become “a chronic problem,” so much so that the agency can't address all of them that will come up each year, a DOL official said.
The DOL has been dealing with two categories of ESOP appraisal abuses, said Timothy D. Hauser, deputy assistant secretary for program operations in the department's Employee Benefits Security Administration: valuations of closely-held-stock ESOPs, and cases in which the company owns the stock.

In valuations, “there's an element of art,” and there are numerous factors that make an appaiser's job difficult, Hauser said Feb. 26 at a Baltimore conference.

Lack of compliance with fiduciary responsibility requirements is the overriding problem with closely held companies, Hauser said. The issue that the DOL sees “over and over again” is that the person who selects the appraiser—a fiduciary function—is the company owner—that is, the seller. And the seller is “the guy from the exact opposite side from the plan,” he said.

Sellers have picked the appraiser and then “taken them out for a test drive” to make sure they are comfortable with what the valuation will be, Hauser said. Appraisers, meanwhile, often rely on the owner's assessments of what the company's future prospects may be without conducting proper analysis to determine whether those assessments are accurate, he said.

Hauser offered one tip for determining a company's future prospects: It's safe to assume that if there's no reason to think that a company will do better than any other one in its industry, then it probably won't. Not all valuation factors are difficult, because sometimes are that is needed is “common sense,” he said.

Another problem, Hauser said, is that the appraiser, “maybe, thinks his real client is not the plan, it's the seller. It's the guy on the other side of the deal. This just creates problems.”

DOL Outreach

To deal with the chronic problem of bad appraisals, the DOL has reached out to appraisal groups to find out what kind of guidance the agency can provide, he said.

Although the DOL hasn't put out regulations dealing with appraisals, its settlement in Perez v. GreatBanc Trust Co., C.D. Cal., No. 5:12-cv-01648-R-DTB, settlement agreement 6/2/14, provides useful guidance, Hauser said.

In that case, GreatBanc Trust Co. agreed to pay $5.25 million to settle claims by the DOL that it relied on a flawed appraisal report in directing Sierra Aluminum Co.'s employee stock ownership plan to purchase 3.4 million shares of company stock for $53 million.

“We tried to create a detailed consent decree on how one goes about doing appraisals, hiring appraisers, considering appraisals,” Hauser said. “I'd like people to follow that. But I think if we work together, we just improve what's happening in appraisals, and we can stop bringing these lawsuits.”

Excerpted from a story that ran in Pension & Benefits Daily (02/27/2015).

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