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
Changes Proposed: October 2010
 would have removed “regular basis” test
 would have removed “primary basis” test
 would have adopted a “more flexible” test geared to the
actual conduct at issue
 would include anyone holding him/herself out as a
fiduciary, unless adverse and not impartial
 would not include as fiduciary conduct the provision of:
 educational and information materials
 marketing a platform for services
 general financial information and data
Changes Withdrawn: October 2011
Other Considerations
 Impact of Dodd-Frank and proposed uniform fiduciary standard
 Liability for Breach of Co-fiduciary: ERISA Section 1105
 knowing participation in, or concealment of, co-fiduciary’s breach
 enabling co-fiduciary to breach by failing in one’s responsibilities
 failure to remedy co-fiduciary’s breach with knowledge of the breach
 liability may not be limited to actions or inactions within
fiduciary role
 possible repercussions: damages, attorneys’ fees,
separate DOL action for penalties
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)
 Unlike § 408(b)(2) disclosures to plan sponsors, § 404(a)(5)
disclosures are directly to plan participants
 Effective Date: May 31, 2012
 DOL compliance cost estimates:
 $2 billion in compliance costs
 $14.9 billion in lower participant fees and expenses
 on top of $135 million in Year 1 § 408(b)(2) compliance costs
 Who will provide the resources and information:
Plan Sponsor v. other Plan Fiduciaries
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
10-Year Period Annual Return 10-Year Period
1926-1935
5.86%
1941-1950
1927-1936
7.81%
1942-1951
1928-1937
0.02%
1943-1952
1929-1938
-0.89%
1944-1953
1930-1939
-0.05%
1945-1954
1931-1940
1.80%
1946-1955
1932-1941
6.43%
1947-1956
1933-1942
9.35%
1948-1957
1934-1943
7.17%
1949-1958
1935-1944
9.28%
1950-1959
1936-1945
8.42%
1951-1960
1937-1946
4.41%
1952-1961
1938-1947
9.62%
1953-1962
1939-1948
7.26%
1954-1963
1940-1949
9.17%
1955-1964
1956-1965
1957-1966
1958-1967
1959-1968
Period Annual
10-Year Annual
10-Year Period
ReturnReturn
1926-19351941-19505.86% 13.38%
17.28%
1942-1951
1927-1936
7.81%
17.09%
1943-1952
Annual Return 10-Year Period Annual
Return 10-Year Period
Annual Return
1928-1937 7.81% 0.02%
13.38%
1960-1969
1974-1983
10.61%
14.31%
1944-1953
17.28%
1961-1970
8.18%
1975-1984
14.76%
1929-19381945-1954
-0.89%
17.09%
1962-1971
7.06%
1976-198517.12%
14.33%
14.31%
1963-1972
9.93%
1977-1986
13.82%
1930-19391946-1955-0.05% 16.69%
17.12%
1964-1973
6.01%
1978-1987
15.26%
1931-19401947-1956
1.80%
16.69%
1965-1974
1.24%
1979-198818.43%
16.33%
18.43%
1966-1975
3.27%
1980-198916.44%
17.55%
1932-19411948-1957
6.43%
16.44%
1967-1976
6.63%
1981-1990
13.93%
20.06%
1933-19421949-1958
9.35%
20.06%
1968-1977
3.59%
1982-1991
17.59%
19.35%
1969-1978
3.16%
1983-199219.35%
16.19%
1934-19431950-1959
7.17%
16.16%
1970-1979
5.86%
1984-1993
14.94%
16.16%
1951-1960
16.43%
1971-1980
8.44%
1985-1994
14.40%
1935-1944
9.28%
16.43%
1952-1961
13.44%
1972-1981
6.47%
1986-1995
14.84%
1936-1945 6.68% 8.42%
15.91%
1973-1982
1987-1996
15.28%
13.44%
1953-1962
12.82%
1988-1997
18.05%
1937-19461954-19634.41% 15.91%
11.06%
1989-1998
19.18%
1938-19471955-19649.62%
9.20%
1990-199912.82%
18.20%
12.85%
1991-2000
17.46%
1939-1948
7.26%
11.06%
1956-1965
10.01%
1992-2001
12.93%
1993-2002 9.20%
9.33%
1940-19491957-19669.17%
1958-1967
1959-1968
Source: Zephyr StyleADVISOR, PPB Advisors, LLC
1994-2003
11.06%
12.85%
1995-2004
12.07%
10.01%
10-Year Period Annual Return
1996-2005
9.08%
1997-2006
8.42%
1998-2007
5.91%
1999-2008
-1.38%
2000-2009
-0.95%
2001-2010
1.41%
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
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
Investments
Plan
Expense
Plan
Administration
and Operation
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
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
215.564.8120
DFranceski@STRADLEY.COM
William P. Simon, Jr.
Brinker Capital, Inc.
800.333.4573
bsimon@brinkercapital.com