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 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


DOL Gloss on Definition of Fiduciary
29 C.F.R. 2510.3-21(c)
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.)


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”


Legal Takeaways
 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


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


Suitability

vs.
The Client’s Best Interest



Agenda
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


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

Source: FINRA

Breach of Fiduciary Duty

3,162

Omission of Facts

1,941

Unsuitability

1,974

Misrepresentation

1,795


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