It is not uncommon for some investment fiduciaries to be unaware of their status and liability when working with investment portfolios, or for gaps to exist where certain essential functions are not being performed for the portfolio. This is particularly true among investment stewards, who will ultimately be held responsible for ensuring all duties are being fulfilled. Ignorance, however, is not a viable excuse when it results in a fiduciary breach. For this reason, the second Practice in a prudent investment process is to identify every party involved, fiduciary and non-fiduciary alike, document their respective roles and have those who are acting in a fiduciary capacity acknowledge so in writing.
Let's take a look at the Practice and associated Criteria:
As we touched on in Practice 1.1, the investment policy statement (IPS) is the de facto business plan for an investment portfolio and must contain the details for the management of the investment plan. As such, it is here that you should define the roles and responsibilities of everyone involved in the investment process. Some of the specific roles that should be spelled out in the IPS are those of the investment committee, the investment advisor, the custodian, and money managers. Those are the primary involved parties, but may not be exhaustive of all the roles involved in a particular portfolio. Also, roles may be identified by title in the IPS, rather than name, for the sake of continuity when turnover occurs. Names can be attached to titles in service provider agreements and fiduciary acknowledgment letters.
Defining the roles in the IPS should prevent confusion as to an individual's function and duties and avoid functional gaps in the investment process. Each party should review the definition of their position in the IPS and acknowledge their understanding of the role immediately. Any questions that arise should be settled at the outset and reflected in the IPS, before that person begins to perform duties. Included in the definition of roles should be a clear identification of fiduciary status. For those deemed to be acting in a fiduciary capacity, a written acknowledgment is of particular importance. For guidance on determining fiduciary status, refer back to our previous blog post on identifying the fiduciaries and to the additional resources identified below.
The final criterion in this Practice advises that investment committees have and follow a defined set of by-laws. As explained in our previous post on investment stewards, committee members, trustees and other non-investment professionals often are the least experienced and knowledgeable about the investment process. For this reason, defined by-laws facilitate more effective and cohesive governance and provide clear operative and procedural guidelines. An example set of investment committee by-laws can be accessed below.
As mentioned at the outset, it is the steward who is ultimately responsible for the general management of the investments. Prudent management includes delegation to co-fiduciaries and investment professionals, a subject we'll cover more specifically in Practice 1.4, but even with delegation, the steward will always be responsible for certain core duties and for oversight of the service providers. It is the facilitation of the management role that makes this Practice and the identification of all roles and the respective responsible parties essential.
Additional resources for identifying and documenting fiduciary roles:
- Complete text of Practice 1.2 from the Prudent Practices for Investment Stewards handbook
- Legal substantiation to Practice 1.2
- fi360's sample investment committee by-laws
- fi360's sample fiduciary acknowldgement letter
- fi360's investment policy statement generator
- Reish article: If you're not a fiduciary, say so
- Reish article: Traditional role as service provider does not bar fiduciary liability
- Reish article: Proposed 408(b)(2) regulation would require fiduciary acknowledgement
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The Spotlight on Practices series highlights one of the Prudent Practices for Investment Fiduciaries in order each month. To learn more about the Practices, click "Spotlight on Practices" link in the categories list or visit the Practices page on fi360.com. If you have any questions or comments, leave them in the comments section below each post, or email us at blog@fi360.com.
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