Elements of an Effective
Fiduciary Program
Elizabeth Meier
Senior Examiner
Federal Reserve Bank of New York
(elizabeth.meier@ny.frb.org)
Disclaimer
 These recommendations are not exhaustive.
They represent my views as opposed to
those of the Federal Reserve Bank of New
York.
 Transfer agent, custody, fund accounting
and participant record-keeping services are
not covered in this presentation.
Overview
Financial institutions should assess their
legal, reputational and operational risks.
– These determine controls, including automation
and MIS reporting, and governance
infrastructures.
Overview
Examiners are looking for:
– Strong independent and management controls
appropriate to the institution’s size, products,
and services including:
 Automation
 Comprehensive MIS reporting
– Strong governance framework
Strong Independent Controls: Compliance
Monitoring
 Suitable investments
 Adherence to chosen strategies and
guidelines
 Compliance with ERISA
 Compliance with rules and regulations in
placing proprietary products and securities
underwritten by affiliates in fiduciary
accounts
Strong Independent Controls: Compliance
Monitoring
 Compliance with Code of Conduct
 Trading operations including:
– Best execution/ broker selection
– Use of soft dollars
– Trading with affiliates
– Allocation of trades
– Market timing and late trading
 Proxy voting process
Strong Independent Controls: Risk Control
Self Assessments
 Periodic identification and rating of inherent
business process risks, and controls to
mitigate them
 Specification of action plans to remedy
control gaps, and timeframes for
implementation
 Appointment of action plan owners.
Strong Independent Controls: Audit Framework
 Risk assessment of business processes to
determine frequency and scope of reviews
– Clear plan that specifies schedule of reviews consistent
with risk
– Comprehensive audit programs that address all relevant
business risk
 Candid audit reporting that accurately reflects the
condition of audited area
 Rating of findings
Strong Independent Controls: Audit Reviews
 Segregation of duties:
– Ordering, executing and reconciling trades
– Check and electronic disbursements
– System access rights
 Accuracy and reasonableness of fees
– Proper controls over fee concessions
 Validation of risk control self assessments
 Timeliness of initial, post acceptance, and annual
account reviews
– Timely remediation of exception items.
Strong Independent Controls: Audit Reviews
Investment management for:
– Quality of research in choosing investment
vehicles, particularly proprietary products
– Performance monitoring and reporting
– Use of quantitative tools in analyzing financial
risk
– Adequate procedures for purchasing,
retaining and valuing miscellaneous/unique
assets
– Investment diversity and prudence
Strong Independent Controls: Audit Reviews
Operational processes for:
– Adequate and timely reconciliations
– Security over blank checks and wire payment
devices
– Check signing authorities and limits
– Sufficient vault controls
– Timely administration of overdrafts and
suspense accounts
Strong Independent Controls: Audit Reviews
 Account agreement disclosures
– e.g. fees, commissions, the use of proprietary
products, bank’s investment authority, proxy
voting, etc.
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Complaint procedures
Vendor Management
Disaster recovery programs
Physical and logical system security
measures
Strong Independent Controls: Reporting and
Issue Escalation
 Timely and transparent reporting of
independent control exceptions and findings
 Escalation of all significant exceptions and
findings to appropriate stakeholders
including senior management
Strong Independent Controls: Timely and
Adequate Remediation
 Remediation of exceptions and findings
within established frameworks.
 Appropriate management and independent
control sign-off on adequate remediation.
Strong Management Controls: Governance
Framework
 Control and management committees comprising
business heads and independent control
representatives.
– Facilitates information sharing and the integration of risk
and compliance management in decision making.
 Clear, well-understood escalation process for
reporting control breaches, audit findings,
compliance monitoring exceptions, results of risk
self assessments, litigation, complaints, MIS etc.
Strong Management Controls:
Governance Framework
 New product approval process
– Including assessment of reputational, legal, and
compliance risk as well as institutional capacity.
 Legal expertise, particularly with ERISA and asset
management activities.
 Training
– Including code of conduct and fiduciary responsibility.
 Code of Ethics
 Compensation practices
– Should not compromise fiduciary duties
Strong Management Controls:
Comprehensive Policies and Procedures
 Responsibilities under ERISA
 Fiduciary duties under the Prudent Investor Act
including:
– Placement of proprietary products in fiduciary accounts
– Proxy voting guidelines
 Compliance with all pertinent rules and
regulations
Strong Management Controls: Account
Opening Process
That determines:
– Whether client requirements are consistent with
bank practices and capacity
– Client risk tolerance
– Client investment goals and restrictions
– Client identity
Strong Management Controls: Timely Pre-,
Post- and Annual Account Reviews
Ensuring compliance with governing
instruments, investment goals/ restrictions,
and risk tolerance.
Well Documented Files
Strong Management Controls: Robust
Customer Disclosures
Including fees, commission practices, use of
affiliate services/ products, investment
vehicle risks, proxy voting rights, investment
authority etc.
Strong Management Controls: MIS Reporting
Should include:
– Portfolio performance by account
– Account concentrations
– Excessive securities’ sales
– Excessive cash
– Securities not on approved list
– Restricted or controlled securities
– Asset allocation ranges by account
– Volume/age of failed trades, asset breaks, and
unconfirmed/un-affirmed trades
Strong Management Controls: MIS Reporting
– Aged reconciliations
– Aged audit items, compliance exceptions and
control risk self assessment action plans.
– Pending litigation
– Volume/age of complaints
– Code of Ethics violations
– Best execution metrics
– Broker usage reports
– Market timing and late trading metrics
Strong Management Controls: Automation
 Trade order management systems
 Pre- and post- trade compliance monitoring
software
 Security movement and control tracking
 Account investment monitoring
 Operational loss database
 Reconciliations
Conclusion
 Examiners want to help you comply with
rules, regulations, and best practices
 Management must commit to a strong
control environment and the tools required
to monitor compliance with policies and
procedures/ rules and regulations
Resources
 http://www.fdic.gov/regulations/trust/index.html
– FDIC Trust Examination Manual
 http://www.federalreserve.gov/boarddocs/supman
ual/
– Commercial Bank Examination Manual
 Please refer to the fiduciary supervision section 4200
– Bank Holding Company Supervision Manual
 Section 3120 Trust Services
 Section 3900 FHC Supervision
Resources
 http://www.ffiec.gov/bsa_aml_infobase/page
s_manual/manual_online.htm
– FFIEC Bank Secrecy Act Anti-Money Laundering
Examination Manual.
 Please refer to sections on Trust and Asset
Management, Private Banking, Nondeposit
Investment Products
 http://www.federalreserve.gov/regulations/de
fault.htm
– Code of Federal Regulations
Resources (cont.)
http://www.federalreserve.gov/boarddocs/srletters/
Supervision and Regulation Letters Pertaining to Fiduciary Operations
 SR 05-9
– Frequently Asked Questions Relating to Customer Identification Program
Rules
 SR 04-18
– Bank Holding Company Rating System
 SR 04-01
– Interagency Policy on Banks/Thrifts Providing Financial Support to Funds
Advised by the Banking Organization
 SR 01-05
– Examination of Fiduciary Activities
 SR 00- 4
– Vendor Management
 SR 99-7
– Supervisory Guidance Regarding the Investment of Fiduciary Assets in
Mutual Funds and Potential Conflicts of Interest
Resources (cont.)
Supervision and Regulation Letters Pertaining to Fiduciary Operations
(continued)
 SR 98-37
– Uniform Interagency Trust Rating System (UITRS)
 SR 97-3
– Conversion of Common Trust Funds to Mutual Funds
 SR 96-10
– Risk-Focused Fiduciary Examinations
 SR 95-46
– Interpretation of Interagency Statement on Retail Sales of Nondeposit
Investment Products
 SR 94-53
– Investment Adviser Activities
 SR 93-13
– Violations of Federal Reserve Margin Regulations in Custodial Agency
Accounts Resulting From "Free-Riding" Schemes
About the Speaker
 Elizabeth Meier has worked as an analyst and bank
examiner in the Bank Supervision Function of the Federal
Reserve Bank of New York for 10 years. As an analyst she
worked in the Foreign Bank and Banking Applications
divisions. As an examiner she worked in the Legal and
Compliance Division and is currently on the Payments,
Settlements, and Fiduciary Team in the Operational Risk
Division of the bank. She has performed compliance and
fiduciary examinations, including conflict of interest
reviews in large complex, regional, and community banks
in New York, Charlotte, Chicago, South Bend, and
Hartford.
 Ms. Meier is a commissioned examiner, holds an MBA from
Columbia Business School, and a BS in Economics from
Boston University. She is originally from Revere,
Massachusetts and currently resides in Brooklyn, New
York.