Proposed Fiduciary Rule Cited in Win for ESOP Adviser

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By Jacklyn Wille

Feb. 29 — Financial services firm Strategic Equity Group can't be liable as an ERISA fiduciary for its role in advising an employee stock ownership plan during a stock redemption transaction, a federal judge ruled.

In reaching this conclusion, the judge cited the Department of Labor's proposed rule expanding the universe of entities subject to ERISA's fiduciary standards. This controversial rule, which has drawn criticism from the financial industry and congressional leaders, is currently being reviewed by the Office of Management and Budget and is expected to be finalized in the coming weeks or months .

ERISA Claims Dismissed

According to the judge, Strategic Equity's role in providing a fairness opinion and stock valuation to the ESOP didn't cause it to become a fiduciary under the Employee Retirement Income Security Act. That's because the firm didn't control whether the ESOP ultimately agreed to sell stock back to the plan sponsor, the judge said.

Similarly, the judge said that Strategic Equity couldn't be liable as an “investment adviser” under a provision of ERISA extending fiduciary status to those that regularly charge plan participants for individualized investment advice.

On that point, the judge said that fairness opinions issued to ESOPs in connection with redemption agreements don't qualify as “investment advice” under ERISA. In support of this conclusion, the judge cited the DOL's recent statement that the proposed fiduciary rule doesn't change the department's longstanding position that valuations of employer securities in connection with ESOPs “are not considered investment advice.”

When the DOL originally proposed the rule in 2010, it came under fire for sweeping ESOP appraisers into those that would become ERISA fiduciaries. That proposed rule was later withdrawn and replaced by the current proposal, which provides a carve-out for ESOP appraisers from the definition of fiduciary, as well as appraisals and fairness opinions provided to investment funds and to plans and individual retirement accounts. But in comment letters, a number of groups have cautioned that the DOL's proposed rule doesn't go far enough to carve out an exemption for ESOP appraisers .

Lawsuit Not Dead

Although the judge dismissed the ESOP participants' ERISA-based claims with prejudice, he allowed them to replead their state law claims for fiduciary breach after finding them to be ERISA-preempted.

Further, the judge found that the participants' state law negligence claim wasn't preempted and could move forward. In particular, the judge said the participants sought tort damages under a service agreement between Strategic Equity and the ESOP and not pursuant to an ERISA-governed plan.

The decision was issued Feb. 22 by Judge James V. Selna of the U.S. District Court for the Central District of California.

The participants were represented by Trujillo & Winnick LLP. Strategic Equity was represented by Jampol Zimet LLP.

To contact the reporter on this story: Jacklyn Wille in Washington at

To contact the editor responsible for this story: Jo-el J. Meyer at

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