DOL-ERISA Issues from an Investment Advisory Perspective

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 Changing Expectations David C Franceski, Jr., Esquire Stradley Ronon Stevens & Young, LLP Who is an ERISA Fiduciary? 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 so  has any discretionary authority or responsibility in the administration of such plan ERISA § 3(38) Definition of Investment Manager: Any fiduciary who has the power to manage, acquire or dispose of plan assets is registered as an investment advisor under federal or state law, a bank, or an insurance company qualified to manage etc.; and has acknowledged in writing that he is a fiduciary with respect to the plan DOL Gloss on Definition of Fiduciary 29 C.F.R 2510.3-21(c) Current Five Part Test – since 1975 renders advice as to purchase, sale or value on a regular basis pursuant to a mutual agreement, arrangement or understanding, written or otherwise which serves as a primary basis for investment decisions; and 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.) 2011 Proposed Changes to DOL Regs Other Considerations Management Liability Under Federal and State Securities Laws 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 feebased brokerage accounts “Tone at the Top” Key Fiduciary Concepts  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 The Impact of New Section 404(a)(5) Competitive Impact of New Regulations  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” Where Do You Fit In? Investment Advisor? Limited Scope? Full Scope? 3(38)? 3(21)? Solicitor? 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 Scope Has no discretion Advice may, or may not be acted upon 3(21) Full Scope Is a Named Fiduciary, and has discretion to hire, or change a manager 3(38) Investment Manager By definition they have discretion, and act as a fiduciary 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 Right Solution Control What You Can Plan sponsor (You) ERISA 3(38) Fiduciary Fiduciary Responsibility Selecting the right investment line up  Menu-list of funds  Advice  Model portfolios 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 32 401(k) Investors Who Use Professional Help Outperform Those Without It  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 33 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 Do you expect risk to decline? What is your role with regard to the plan? Partner with a 3(38) fiduciary, and provide diversified models Case Studies David C Franceski, Jr., Esquire Stradley Ronon Stevens & Young, LLP 215.564.8120 DFranceski@STRADLEY.COM William P Simon, Jr Brinker Capital, Inc 800.333.4573 bsimon@brinkercapital.com ... administration of such plan ERISA § 3(38) Definition of Investment Manager: Any fiduciary who has the power to manage, acquire or dispose of plan assets is registered as an investment advisor under... Fiduciary, and has discretion to hire, or change a manager 3(38) Investment Manager By definition they have discretion, and act as a fiduciary Other Options? Fiduciary Warranty or Fiduciary Guarantee... 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