DOL-ERISA Issues from an Investment Advisory Perspective

Managing Director, Retirement Plan Services Brinker Capital, Inc... ERISA § 321 Definition of a Fiduciary: Any person who  exercises any discretionary authority or control respecting ma

DOL/ERISA Issues

an Investment Advisory Perspective

David C Franceski, Jr., Esquire

Stradley Ronon Stevens & Young, LLP

William P Simon, Jr.

Managing Director, Retirement Plan Services

Brinker Capital, Inc

DOL’s

David C Franceski, Jr., Esquire

Stradley Ronon Stevens & Young, LLP

ERISA § 3(21)

Definition of a Fiduciary: Any person who

 exercises 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 Fiduciary

29 C.F.R 2510.3-21(c)

2011 Proposed Changes to DOL Regs

Other Considerations

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 Liability

though 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 liability

CEO 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

The Impact of New Section 404(a)(5)

 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

William P Simon, Jr.

Managing Director, Retirement Plan Services

Brinker Capital, Inc

It Depends on Who You Ask

in importance for reasons to select a

provider

Wal-Mart, and Merrill Lynch agreed to

fiduciary lawsuit

Source: Cogent Research, Financial Advisor Magazine

Suitability

vs.

The Client’s Best Interest

1 How today’s markets impact fiduciary risk

2 Fiduciary solutions: know the options

3 Building the right structure

The Last 3 to 4 Years

Managing Returns to…

Managing Risk

Summary of S&P 500

Rolling 10-Year Periods 1926-2010

Source: Zephyr StyleADVISOR, PPB Advisors, LLC

10-Year Period Annual Return

Fiduciary Solutions:

Know the Options

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

FINRA – Dispute Resolution Cases

About 6,000 Cases per Year

Source: FINRA

Arbitration Cases Served by Controversy 2010

Breach of Fiduciary Duty 3,162

Source: FINRA

Where Do You Fit In?

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?

Other Options?

Fiduciary Warranty

or

Fiduciary Guarantee

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

Building the

Control What You Can

Plan sponsor

(You)

ERISA 3(38) Fiduciary

Fiduciary Responsibility

Selecting the right investment line up

31

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

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

Case Studies

David C Franceski, Jr., Esquire

Stradley Ronon Stevens & Young, LLP