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DOL/ERISA Issues an
Investment Advisory Perspective
David C. Franceski, Jr., EsquireStradley Ronon Stevens & Young, LLP
William P. Simon, Jr.Managing Director, Retirement Plan Services
Brinker Capital, Inc.
ERISA § 3(21) Definition of a Fiduciary: Any person whoexercises any discretionary authority or control respecting management of a plan or disposition of plan assets
renders investment advice for a fee or other compensation, direct or indirect, or has authority to do so
has any discretionary authority or responsibility in the administration of such plan
ERISA § 3(38) Definition of Investment Manager: Any fiduciary who
1. has the power to manage, acquire or dispose of plan assets
2. is registered as an investment advisor under federal or state law, a bank, or an insurance company qualified to manage etc.; and
3. has acknowledged in writing that he is a fiduciary with respect to the plan
Who is an ERISA Fiduciary?
Current Five Part Test – since 1975
1. renders advice as to purchase, sale or value
2. on a regular basis
3. pursuant to a mutual agreement, arrangement or understanding, written or otherwise
4. which serves as a primary basis for investment decisions; and
5. which is individualized based on the needs of the plan
Investment Advisors Act, Section 202(a)(11): Definition of Investment Advisor
specifically excludes “any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and receives no special compensation therefore.”
But see Nagy v. DeWese, 771 F.Supp.2d 502 (E.D. Pa. 2011); 2011 WL 2565200 (E.D. Pa.)
DOL Gloss on Definition of Fiduciary29 C.F.R. 2510.3-21(c)
Possible Claims
direct violation: controlling person liability under § 20(e) of the Securities Exchange Act of 1934
aiding and abetting: § 203(e)(6) of Investment Advisors Act of 1940
companion state securities statutes
common law failure to supervise
Two Recent Examples
In the Matter of Theodore W. Urban – General Counsel Liabilitythough ultimately exonerated of failure to supervise changes, general counsel found by ALJ in SEC civil proceeding to have supervisory responsibility for sales personnel in case of abusive sales practices
In the Matter of Wunderlich Securities – CEO and CCO liabilityCEO and CCO agreed to civil penalties totaling $95,000 in SEC action for overcharging fees and failing to disclose principal transactions in fee-based brokerage accounts
“Tone at the Top”
Management Liability Under Federal and State Securities Laws
All actions must be in the Client’s Best Interest
Be aware of actual or potential Conflicts of Interest; which are waivable and which are not
The paramount importance of Disclosure
Absolute ban on Prohibited Transactions
Costs and compensation – both direct and indirect
The impact of Dodd-Frank Whistleblower provisions
Key Fiduciary Concepts
Downward pressure on plan fees and expenses
Cost-saving measures, with advantage to providers with low cost solutions
New and different pricing options
Limitations on plan types and plan options
Revise or institute plan minimums
Increased use of “brokerage windows”
Competitive Impact of New Regulations
Review and update firm policies and procedures
Review registrations – Series 6/7 v. IAR v. Solicitor
Review disclosure documents
fee disclosure
direct and indirect cost disclosure
principal transactions disclosure
Solicitor disclosure
Form B/D
Form ADV
Review institutional roles – CEO v. COO v. General Counsel
Training and continuing education
Know your co-fiduciaries: due diligence
Legal Takeaways
So What is the Big Deal About
Fiduciary Responsibility?
William P. Simon, Jr.Managing Director, Retirement Plan Services
Brinker Capital, Inc.
It Depends on Who You Ask
Plan-sponsors ranked Fiduciary support 12th in importance for reasons to select a provider.
Wal-Mart, and Merrill Lynch agreed to pay $13.5 Million to settle 401(k) fiduciary lawsuit
Source: Cogent Research, Financial Advisor Magazine
Agenda
1. How today’s markets impact fiduciary risk
2. Fiduciary solutions: know the options
3. Building the right structure
Summary of S&P 500 Rolling 10-Year Periods 1926-2010
Source: Zephyr StyleADVISOR, PPB Advisors, LLC
10-Year Period Annual Return1926-1935 5.86%1927-1936 7.81%1928-1937 0.02%1929-1938 -0.89%1930-1939 -0.05%1931-1940 1.80%1932-1941 6.43%1933-1942 9.35%1934-1943 7.17%1935-1944 9.28%1936-1945 8.42%1937-1946 4.41%1938-1947 9.62%1939-1948 7.26%1940-1949 9.17%
10-Year Period Annual Return1941-1950 13.38%1942-1951 17.28%1943-1952 17.09%1944-1953 14.31%1945-1954 17.12%1946-1955 16.69%1947-1956 18.43%1948-1957 16.44%1949-1958 20.06%1950-1959 19.35%1951-1960 16.16%1952-1961 16.43%1953-1962 13.44%1954-1963 15.91%1955-1964 12.82%1956-1965 11.06%1957-1966 9.20%1958-1967 12.85%1959-1968 10.01%
10-Year Period Annual Return 10-Year Period Annual Return 10-Year Period Annual Return 10-Year Period Annual Return 10-Year Period Annual Return1926-1935 5.86% 1941-1950 13.38% 1960-1969 7.81% 1974-1983 10.61% 1996-2005 9.08%1927-1936 7.81% 1942-1951 17.28% 1961-1970 8.18% 1975-1984 14.76% 1997-2006 8.42%1928-1937 0.02% 1943-1952 17.09% 1962-1971 7.06% 1976-1985 14.33% 1998-2007 5.91%1929-1938 -0.89% 1944-1953 14.31% 1963-1972 9.93% 1977-1986 13.82% 1999-2008 -1.38%1930-1939 -0.05% 1945-1954 17.12% 1964-1973 6.01% 1978-1987 15.26% 2000-2009 -0.95%1931-1940 1.80% 1946-1955 16.69% 1965-1974 1.24% 1979-1988 16.33% 2001-2010 1.41%1932-1941 6.43% 1947-1956 18.43% 1966-1975 3.27% 1980-1989 17.55%
1933-1942 9.35% 1948-1957 16.44% 1967-1976 6.63% 1981-1990 13.93%
1934-1943 7.17% 1949-1958 20.06% 1968-1977 3.59% 1982-1991 17.59%
1935-1944 9.28% 1950-1959 19.35% 1969-1978 3.16% 1983-1992 16.19%
1936-1945 8.42% 1951-1960 16.16% 1970-1979 5.86% 1984-1993 14.94%
1937-1946 4.41% 1952-1961 16.43% 1971-1980 8.44% 1985-1994 14.40%
1938-1947 9.62% 1953-1962 13.44% 1972-1981 6.47% 1986-1995 14.84%
1939-1948 7.26% 1954-1963 15.91% 1973-1982 6.68% 1987-1996 15.28%
1940-1949 9.17% 1955-1964 12.82% 1988-1997 18.05%
1956-1965 11.06% 1989-1998 19.18%
1957-1966 9.20% 1990-1999 18.20%
1958-1967 12.85% 1991-2000 17.46%
1959-1968 10.01% 1992-2001 12.93%1993-2002 9.33%1994-2003 11.06%1995-2004 12.07%
Many Firms, Many Voices
The Five Largest, Independent Broker Dealers have 28,201 Financial Advisors
How do you manage their interaction with multiple plan-sponsors, and reduce your liability?
Source: Investment Advisor Magazine
Arbitration Cases Served by Controversy 2010
Breach of Fiduciary Duty 3,162
Omission of Facts 1,941
Unsuitability 1,974
Misrepresentation 1,795
Source: FINRA
Solicitor vs. Advisor
A Solicitor regularly refers clients to an Investment Advisor and who receives compensation for those referrals.
An Advisor provides advice or analysis on securities either by making direct or indirect recommendations to clients or by providing research or opinions on securities or securities markets. An adviser with fiduciary responsibilities is held to a higher ethical standard and should have the knowledge to provide sophisticated wealth management services and advice.
Where Do You Fit In?
3(21) Limited ScopeHas no discretion. Advice may, or may not be acted upon
3(21) Full ScopeIs a Named Fiduciary, and has discretion to hire, or change a manager
3(38) Investment ManagerBy definition they have discretion, and act as a fiduciary
Read the Small Print!
The Fiduciary Warranty does not “extend to claims that any expenses paid directly or indirectly by the Plan are reasonable.”
"...This Warranty and Indemnification does not, and is not intended to, impose or imply any fiduciary status or responsibility with respect to the Plan or any other person.”
Source: Mark D. Mensack AIFA, Piedmont Independent Fiduciaries
32
Performance – Average Investor
Source: J.P. Morgan Asset Management, 2009
The indexes are used as follows: REITS: NAREIT Equity REIT Index, EAFE: MSCI EAFE, Oil: WTI Index, Bonds: Barclays Capital U.S. Aggregate Index, Homes: median sales price of existing single-family homes, Gold: USD/troy oz, Inflation: CPI. Average asset allocation investor return is based on an analysis by Dalbar Inc. which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. All returns are annualized (and total return where applicable) and represent the 20-year period ending 12/31/09 to match Dalbar’s most recent analysis.
401(k) Investors Who Use Professional Help Outperform Those Without It
33
Investors who relied on professional help in the form of target-date funds, managed accounts and advice earned nearly three percentage points more than those that did not.
The plans covered 400,000 participants with $25 billion in assets.
Source: Aon Hewitt and Financial Engines-Money Management Executive September 26, 2011
History and Responsibility
Brinker Capital is an ERISA 3(38) Investment Manager
Brinker Capital introduced risk-based, model portfolios 17 years ago
Brinker Capital was one of the first Investment Managers to introduce lower-cost, ETF based models for 401k’s
Brinker Capital assumes fiduciary responsibility for our Managed Accounts and Plus Funds
Summary
1. Do you expect risk to decline?
2. What is your role with regard to the plan?
3. Partner with a 3(38) fiduciary, and provide diversified models
David C. Franceski, Jr., EsquireStradley Ronon Stevens & Young, [email protected]
William P. Simon, Jr.Brinker Capital, Inc. [email protected]