fi360 Blog

It's a good time to review your gift policy.

With the holidays upon us, we've reached the time of year when most gift giving takes place.  Fiduciaries are often the recipients of gifts and they need to be careful as they consider whether to accept them. I addressed this question several years ago and thought it worth revisiting and updating our previous post for those of you who will face this question soon.

DOL's Employee Benefits Security Administration (EBSA) provides guidance to investigators or auditors (See No. 12) evaluating if a fiduciary violation has occurred, stating that the investigator should determine if "the receipt of gifts, gratuities, or other consideration were for the fiduciary's personal account and received in connection with a transaction or transactions involving the assets of the plan."  They go on to say that the "Investigator/Auditor should also determine whether the fiduciary of the plan maintained a reasonable written policy or plan provision governing the receipt of items or services from parties dealing with the plan and whether the fiduciary adhered to that policy." 

When considering whether or not to accept a gift, a fiduciary should always ask his or herself whether they believe it will impair their ability to carry out their duties objectively.  Of course, the policy could be that no gifts of any type or amount can be accepted, period; although this simplifies things, it may not be practical.  Most policies allow gifts of a nature that could not reasonably be interpreted as influencing decisions as a result.   EBSA's guidance (referenced above) sets a threshold of $250 as "... insubstantial, and not an apparent violation of ERISA Sec. 406(b)(3) ..." assuming receipt does not violate any plan policy or provision.  So, in general, think fruit baskets, rather than Stanley Cup Final tickets.  

EBSA's guidance is instructive for all fiduciaries, not just plan sponsors.  The first step is to have a gift policy that provides guidance regarding their acceptance.  A typical policy would set parameters under which gifts can be accepted and may include:

• the maximum monetary value allowed ($250 would match EBSA's guidance)
• prohibition from certain types of gifts, such as high profile sports events (Super Bowl, World Series, etc.)
• a requirement to keep a record of all gifts received (this would not normally include things like an occasional lunch)

Be sure to consult legal counsel when drafting policies on gifts to ensure they are in compliance with ERISA and all relevant laws.

So enjoy the holidays and graciously accept those gifts that are allowed.  Just make sure make that you record their receipt and they meet the the parameters of your gift policy.

Fiduciary Links: The problem with trust

>>>>While trusting others isn’t always easy, it’s both necessary and a reality we face every day. From the social reliance we place on those around us to follow traffic laws to the intimate relationships we form with doctors to guide our physical health, a tremendous amount of our overall well-being is tied to the conduct of other individuals. But while we can try to mitigate our day-to-day vulnerability by steering clear of people and situations that appear risky, our interactions with professionals are much more complicated. Professionals such as doctors, lawyers and financial advisors are supposed to help guide us through some of the most important and sophisticated decisions we face in life. Violations of that trust can be particularly devastating and it is particularly exasperating when that trust is directly exploited.

With this in mind, Blaine’s newest Fiduciary Corner column comes to a few conclusions based on recent headline-grabbing financial scandals:

1. Financial advisors hold sway over our financial health in the same manner that doctors hold sway over our physical health, and therefore require similar scrutiny.
2. Actions and perception should determine whether someone is or is not a fiduciary, not how that person chooses to classify him or herself. If the advisor is dispensing advice that the client perceives to be founded on a basis of trust, then there should be no confusion as to whether or not a fiduciary standard of care is at play.
3. Until humans become infallible and incorruptible, good governance is something we must continue to improve upon, through law, regulation, compliance, professional associations, and personal ethics.

To read Blaine’s complete article, visit InvestmentNews.com.

>>>>Blaine’s article was part of a fiduciary four pack from InvestmentNews this weekend, as three other articles also looked at different aspects of the ongoing fiduciary debate:

• An IN editorial feels that Georgetown professor James Angel’s report on a system of outside auditors for oversight of RIAs is worth further consideration.
• In an interview, NAIFA president Robert Miller continues to advocate against any fiduciary regulation that would hamper the existing business model of his constituents. 
• A guest columnist argues against the AUM business model by pointing out more than a few non-transaction-based opportunities for conflict, as well as advocating a flat retainer as the preferred fiduciary model.

Now on to the rest of the best links from the past week:

Fiduciary Links: Thanksgiving edition!

It must be time for the holidays, because it was a slow week for links. Nonetheless, we want to highlight a couple of articles in particular to show how thankful we are this week for the good work of some of our designees:

• AIF Designee Andy Rice wrote a piece for AdvisorOne that looks at the problems with "advisors" who wear two hats or otherwise make it difficult for the consumer to spot a true fiduciary. Andy is a former winner of our article competition and has continued writing on fiduciary matters since then. If you are an AIF or AIFA designee who is interested in entering your work into the 2012 competition, please contact us for more information.
• RIABiz ran a conversation between Steven Winks and AIF designee Mike DiCenso on whether or not retirement assets require a fiduciary standard of care all the time. Mike has spoken at multiple fi360 Conferences in the past. If you are interested in speaking at our 2012 conference, you've already missed the official deadline, but we continue to entertain all submissions until all agenda slots are filled, so go ahead and submit your ideas.

Of course, we're always interested in learning more about what our members are up to. So if you've got an article, blog, recognition or anything else you think we'd like to know about, make sure you let us know.

Now on to the rest of the best links from the past week:

Judicial endorsement of the Moench presumption expands

Last month, the list of federal Circuits endorsing the so-called “Moench presumption” expanded to include the U.S. Court of Appeals for the Second Circuit.  The Second Circuit now joins the Third, Fifth, Sixth, Seventh, and Ninth Circuits in endorsing a presumption of prudence in cases involving fiduciary conduct related to 401(k) plans, and more specifically employee stock ownership plans (ESOPs) and eligible individual account plans (EIAPs). 

Several law firms have provided good summaries of the In re Citigroup ERISA Litigation and Gearren v. McGraw-Hill Cos., Inc. cases, which were argued in tandem and decided separately based on the same line of reasoning.  See e.g., summaries and analysis from Morgan Lewis and Alston & Bird.  The quick re-cap is that both cases involved a drop in the value of the employer’s company stock during the 2008 financial crisis.  And in both cases, the court found that investment committees and other employer fiduciaries were entitled to a presumption of prudence related to decisions to invest in the employer’s stock.  The court found the presumption to be workable because it “provides the best accommodation between the competing ERISA values of protecting retirement assets and encouraging investment in employer stocks.”  This presumption can be rebutted where participants can prove that the fiduciary abused its discretion in continuing to offer employer stock as an investment option.  Thus, if fiduciaries have less discretion under plan documents that require investment in the employer’s stock, they are more likely to prevail in court under the presumption.  In fact, the court found that only circumstances placing the employer (and the value of its stock) in a “dire situation” that was unforeseeable when plan documents were created would require a plan fiduciary to override the requirement to invest in the employer’s stock.  The fiduciaries prevailed in these cases before the Second Circuit because the court found that a mere drop in stock value could not have been viewed at the time as a dire situation requiring the fiduciaries to act.  

While the Second Circuit’s decisions further advances the trend that has been building in this area in favor of protecting employers and providing a roadmap for drafting  plan documents, participants and their attorneys may not be as likely to go away quietly as some commenters have predicted.  The reason being that a dissenting opinion in the cases may leave room open to argue that the Moench presumption is not necessarily justified.  In particular, Judge Straub dissented in the cases and criticized the majority’s ruling that established the “dire situation” standard because it seems to draw an arbitrary line that is not clearly defined or articulated.  This lack of clarity in Judge Straub’s view would leave participants unprotected in any situation that falls “just shy of dire.”  In addition, Judge Straub found flaw with a presumption that would displace the prudent man standard of conduct to which fiduciaries are normally held and would deny participants meaningful judicial review. 

Because so many Circuits have adopted the Moench presumption, Judge Straub’s views may simply be drowned out by a strong majority.  However, there may be room for future plaintiffs and their attorneys to argue for stronger and clearer guidance from the courts on how the Moench  presumption should be applied and to better define situations in which participants can overcome the presumption and prove that fiduciaries failed to fulfill their obligation of prudence.  

Fiduciary Links: A call to action on adviser SRO legislation

>>>>The House Financial Services Committee is expected to vote in the near future on a legislative proposal that would give FINRA the authority to establish a self-regulatory organization to regulate registered investment advisers. Fi360 believes that an SRO for investment advisers would likely dilute the current robust fiduciary standard under the Investment Advisers Act of 1940 and similar state laws, and raise the cost of doing business.

Fi360 opposes the bill and calls on others to contact members of the Committee, requesting them to vote 'no' on the bill.

For more information, instructions on how to lend your voice to the issue, and a list of Financial Services Committee members, read the legislative alert we sent to our members last week.

>>>>One more reminder that proposals to speak at the 2012 fi360 Conference, April 25-27 in Chicago, are due this week. The official deadline is Tuesday, but all proposals submitted this week will be considered.

>>>>The Boston ERISA Law Blog, with a nod to the Reuters article that posed the question, says that any more than a little employer stock is too much for a DC plan participant, especially given the recent endorsement of the Moench presumption that limits fiduciary risk for declines in company stock value.

>>>>Finally, our social media buddy Roger Wohlner was quoted in Registered Rep last week on how target date funds might leave a lot to be desired, but they aren't all bad. In the end, as with all investment options, context and careful consideration are necessary to decide if a TDF is right for the investor.

Now on to the rest of the best links from the past week:

Practice 4.2: Monitor changes of investment advisors and managers

In Practice 4.1, we looked at the evaluation of an investment option by quantitative measures, namely, performance. While the impact of performance objectives are certainly the most easily understood, decisions can't be made on performance alone. Our next practice looks at qualitative factors that may have an impact on how well an investment option fits a portfolio.

Let's take a look at the actual Practice and Criteria. You can click on the image to view a larger version:

The Practice and Criteria call upon the fiduciary to first consider qualitative factors that may impact investment managers and advisors and, second, to act appropriately to the circumstances. We recommend that a qualitative review include at least the following six factors:

• Staff turnover: Has there been significant turnover and, if so, does the current staff instill the same confidence?
• Organizational structure: Has there been any changes to the organizational structure, such as through mergers and acquisitions, and what are the ramifications?
• Level of service provided: Is the level of service commensurate to the level of fees? What is the quality of online access to information?
• Quality of reports: Are reports timely, comprehensive and useful?
• Quality of responses to RFIs: Are requests for information responded to completely and in a timely manner?
• Investment education: Is there adequate explanation of the investment decisions made? Is there support for investor education?

If a look into any of these areas turns up an adverse response, the next steps are to evaluate the severity of the issue and whether or not it undermines that organization's ability to perform in the future. You would want to consider how the organization dealt with concerns as well as decide whether or not it looks like an isolated issue or a systemic problem.

Finally, a decision needs to be made as to whether or not to continue with a manager. Be sure to document actions taken or considered and the factors behind the decisions made. Precedent is important and this record can help assure that actions taken in one situation are consistent with actions taken in similar situations over time.

 For more information, consult the following resources:

•  Complete text of Practice 4.2 from the Prudent Practices for Investment Stewards handbook
• Legal substantiation to Practice 4.2 from ERISA, UPIA, UPMIFA, MPERS, and relevant regulation and case law.
• The Prudent Practices for Investment Managers handbook. Familiarizing yourself with the fiduciary duties of investment managers will help a fiduciary better understand the qualitative and organizational issues that may impact their effectiveness.

Fiduciary Links: Managing fees a big concern for service providers

>>>>In his October Fiduciary Corner column, Blaine looked at how upcoming 408(b)(2) disclosure requirements combined with the increased enforcement efforts related to the DOL Consultant/Adviser Project are creating increased urgency for service providers to consider the potential consequences of decisions related to the structure, amount and distribution of fees associated with their products and services.

There is >evidence that DOL is stepping up their enforcement under this program and the 408(b)(2) disclosures will only make examinations more efficient. Being found in violation of the law carries with it more than just the consequences of DOL punishment, but of litigation, negative PR, and disruption to the organization, not only for the service providers themselves, but potentially for ERISA plan clients as well.

You can read Blaine’s full article at InvestmentNews.com. In addition, here are links to sources mentioned in the article, as well as some additional resources for further reading:

• The Drinker Biddle newsletter
• DOL description of the Consultant/Adviser Project (located about halfway down the page)
• About upcoming 408(b)(2) disclosure regulations
• A recent webinar on 408(b)(2) we hosted with Drinker Biddle ERISA attorney Fred Reish>>>

>>>>We would also like to remind everyone that the deadline to submit a speaker proposal form for the fi360 2012 Conference is November 15. We are currently in the process of building the 2012 Conference agenda, and a portion of our agenda is gathered using an open proposal process. If you are interested in speaking at the 2012 Conference please fill out our speaker proposal form.

You can visit our 2012 Conference page for additional information about the conference, including registration, hotel information, the agenda, and more. Also, please don't hesitate to send us any additonal questions you might have. Early-bird registration is open now until November 30, so register today to save $100.  

Now on to the rest of the best links from the past week:

Do you always read what you sign?

Each year, our AIF and AIFA designees are required to renew their designation by completing continuing education requirements, attesting to the Code of Ethics, and paying their designation dues.  Often times, they have questions about the process that are addressed via email or over the phone by our staff.  One such exchange turned into a prolonged dialogue via email and eventually a conference call to discuss our differences of opinion.  Ultimately, the designee renewed his designation, although it was not a given that would be the end result.

The primary point of contention was the first bullet in our designee Code of Ethics, which reads:

"I will employ and provide the client information on the Prudent Practices when serving as an investment fiduciary and/or advising other investment fiduciaries."

The designee did not feel comfortable attesting to this statement because he did not provide information on the Practices to all of his clients and, for various reasons, did not intend to do so; at least not in the short term. 

We often refer to our Prudent Practices (Practices) as a checklist that defines a fiduciary standard of care.  With the exception of CEFEX-certified firms, we are not aware of any firm that is aligned with all of them.  We explained to this designee that although we deemed the Code of Ethics very important and expected that it would be followed, we did not expect perfection.  We described how the Practices are based on ISO 9000, which defines a quality management system that is based on continuous improvement.  We explained how we routinely tell departing students that their new found fiduciary knowledge should be disseminated in bite size pieces so as not to overwhelm their co-workers, peers, or clients.  Improvements or changes to the investment management process should be made systematically over time so as not to be too disruptive to the ongoing operations.

If this designee was ignoring the Practices, that was a problem.  But if it was simply that it would take some time before he could be completely aligned with the Practices for all of his clients, we did not see why he could not attest to the Code at stated above.  He eventually agreed, attested to the Code of Ethics, and renewed his designation.

Admittedly, at times we felt that this designee was being a real pain; splitting hairs.  We joked with him that as an attorney, isn't being a pain a large part of what he is trained to do.  But upon reflection, we couldn't help but be impressed and will consider some of suggestions upon our next review of our Code.  Most all professional designations have a Code of Ethics and all of them have a percentage of designees that do not take the Code seriously or, worse, intentionally violate it.  Many could not tell you what it says.  It's those type of designees that keep us awake at night.  If only all were this deliberate before they attested to the fact that they would comply.

Do you read and fully intend to abide by what you sign?