Navigating your Investment Fiduciary Role Kristina Fausti Fiduciary

Navigating your Investment Fiduciary Role Kristina Fausti Fiduciary 360 kristina@fi 360. com COPYRIGHT 2010 fi 360 ALL RIGHTS RESERVED

fi 360 COPYRIGHT 2010 fi 360 ALL RIGHTS RESERVED

Topics • What are you on the hook for as a fiduciary? • New legislation and regulations that will impact you and your financial service providers • Forces shaping the future of fiduciaries COPYRIGHT 2010 fi 360 ALL RIGHTS RESERVED

Definitions Investment Fiduciary – Someone who is managing the assets of another person and stands in a special relationship of trust, confidence, and/or legal responsibility. COPYRIGHT 2010 fi 360 ALL RIGHTS RESERVED

How do you become a fiduciary? • Named • Provide comprehensive and continuous advice • Exercise discretion • Can name someone else as a fiduciary COPYRIGHT 2010 fi 360 ALL RIGHTS RESERVED

Investment fiduciaries Stewards – Manage the investment decision making process (trustees, investment committee members, plan sponsors) Advisors – Provide comprehensive and continuous investment advice (wealth managers, financial advisors, trust officers, financial consultants, investment consultants, financial planners) Managers – Make investment decisions; select individual securities to implement a specific investment mandate (e. g. large cap growth) COPYRIGHT 2010 fi 360 ALL RIGHTS RESERVED

Responsibility vs. liability • Fiduciary responsibilities are the highest known to the law — they can be shared but not abdicated. • Liability exposures exist where there are unfulfilled responsibilities. Fiduciaries can reduce liability by identifying and filling gaps in their practices. COPYRIGHT 2010 fi 360 ALL RIGHTS RESERVED

U. S. legislation. . • ERISA – Employee Retirement Income Security Act (Qualified retirement plans) • UPIA – Uniform Prudent Investor Act (Private trusts, the default standard if nothing else “fits”) • UPMIFA – Uniform Prudent Management of Institutional Funds Act (Foundations, endowments, and government sponsored charitable institutions) • MPERS – Uniform Management of Public Employees Retirement Systems Act (State, county, and municipal retirement plans) COPYRIGHT 2010 fi 360 ALL RIGHTS RESERVED

Global Fiduciary Precepts 1. Know standards, laws, and trust provisions. 2. Diversify assets to specific risk/return profile of client. 3. Prepare investment policy statement. 4. Use “prudent experts” and document due diligence. 5. Control and account for investment expenses. 6. Monitor the activities of “prudent experts. ” 7. Avoid conflicts of interest and prohibited transactions. COPYRIGHT 2010 fi 360 ALL RIGHTS RESERVED

From Precepts to Practices • Precepts are principles founded in law. • Practices are applications of the precepts, founded in law and research. • A Standard of Practices constitutes a body of knowledge as to what is required for a person or organization to meet recognized expectations. COPYRIGHT 2010 fi 360 ALL RIGHTS RESERVED

Practices for stewards www. fi 360. com/main/resources_download. jsp COPYRIGHT 2010 fi 360 ALL RIGHTS RESERVED

Snapshot of the Practices Practice S-1. 1 Investments are managed in accordance with all applicable laws, trust documents, and written investment policy statements. • 1. 1. 1 Investments are managed in accordance with all applicable laws. • 1. 1. 2 Investments held in trust are managed in accordance with trust documents. • 1. 1. 3 Investments are managed in accordance with the written IPS. • 1. 1. 4 Documents pertaining to the investment management process are filed in a centralized location. COPYRIGHT 2010 fi 360 ALL RIGHTS RESERVED

Snapshot of the Practices Practice S-1. 2 The roles and responsibilities of all involved parties (fiduciaries and non-fiduciaries) are defined, documented, and acknowledged. • 1. 2. 1 The roles and responsibilities of all parties are documented in the IPS. • 1. 2. 2 All parties demonstrate an awareness of their duties and responsibilities. • 1. 2. 3 All parties have acknowledged their status in writing. • 1. 2. 4 Investment committees have and follow a defined set of by-laws. COPYRIGHT 2010 fi 360 ALL RIGHTS RESERVED

Snapshot of the Practices Practice S-2. 4 Selected asset classes are consistent with the risk, return, and time horizon. • 2. 4. 1 Assets are efficiently diversified to conform to the specified time horizon and risk/return profile. • 2. 4. 2 For participant directed plans, selected asset classes provide each participant the ability to diversify their portfolio appropriately given their time horizon and risk/return profile. • 2. 4. 3 The methodology and tools used to establish appropriate portfolio diversification are effective and consistently applied. COPYRIGHT 2010 fi 360 ALL RIGHTS RESERVED

Snapshot of the Practices Practice S-2. 5 Selected asset classes are consistent with implementation and monitoring constraints. • 2. 5. 1 Individuals responsible for implementing and monitoring investment decisions have the time, inclination, and knowledge to do so effectively. • 2. 5. 2 The process and tools used to implement and monitor investments in the selected assets classes are effective. • 2. 5. 3 The ability to access suitable investment products within all selected asset classes has been considered. COPYRIGHT 2010 fi 360 ALL RIGHTS RESERVED

Snapshot of the Practices Practice S-2. 6 There is an IPS which contains the detail to define, implement, and monitor the client’s investment strategy. • 2. 6. 1 The IPS defines the duties and responsibilities of all parties involved. • 2. 6. 2 The IPS defines diversification and rebalancing guidelines consistent with specified risk, return, time horizon, and cash flow parameters. • 2. 6. 3 The IPS defines due diligence criteria for selecting investment options. • 2. 6. 4 The IPS defines monitoring criteria for investment options and service vendors. • 2. 6. 5 The IPS defines procedures for controlling and accounting for investment expenses. COPYRIGHT 2010 fi 360 ALL RIGHTS RESERVED

New legislation: Dodd-Frank Act • Theme of accountability and transparency • Six month SEC study of the differences between regulation of brokers and advisers • SEC given the authority to extend fiduciary status to all advice-givers • New disclosure requirements COPYRIGHT 2010 fi 360 ALL RIGHTS RESERVED

Fiduciary versus fair dealing standards – harmonization? Fiduciary Fair Dealing • Principles and relationship based • Rules and transactional based • Singular duty of loyalty • Divided loyalty • Due care of prudent expert, utmost good faith • Deal fairly consistent with standards of industry, suitability • Avoid or manage conflicts and disclose unavoidable conflicts • Disclose certain material facts, but conflicts may exist unmanaged and undisclosed COPYRIGHT 2010 fi 360 ALL RIGHTS RESERVED

New regulations • SEC will place increasing attention on disclosures and conflicts • Fees and compensation [e. g. , 12 b-1 fees] • Proprietary products and principal trading • Department of Labor (ERISA plans) • “Reasonable contract” rules [408(b)(2)] • Plan and Participant Disclosures • Definition of fiduciary COPYRIGHT 2010 fi 360 ALL RIGHTS RESERVED

What new legislation and regulations mean for you • More information about costs and conflicts – you must use this information in due diligence • Don’t wait for the SEC study – ask advisors to sign a “fiduciary pledge” • Press the SEC to extend fiduciary obligations beyond “retail investors” • Advocate for the undiluted fiduciary standard, not a “harmonized” one COPYRIGHT 2010 fi 360 ALL RIGHTS RESERVED

Forces that will shape the fiduciary future • Regulators (SEC, FINRA, DOL, States) • Lobbyists for financial services firms • Professional organizations (CFP Board, CFA Institute, fi 360, etc. ) • Stewards, like you • Evolution of “Generally Accepted Investment Principles” • The Committee for the Fiduciary Standard (www. thefiduciarystandard. org) COPYRIGHT 2010 fi 360 ALL RIGHTS RESERVED

Call to action • Increase fiduciary knowledge and awareness. • Assess your fiduciary strengths and weaknesses (use the SAFE) • Prioritize areas of vulnerability to be addressed by process improvements • Select investments and service providers through rigorous due diligence procedures • Promote a culture of fiduciary responsibility through your conduct and advocacy COPYRIGHT 2010 fi 360 ALL RIGHTS RESERVED

Kristina Fausti kristina@fi 360. com Kristina is the Director of Legal and Regulatory Affairs for fi 360. Her primary role is to research, write, speak and otherwise represent fi 360 on legislative and regulatory developments impacting investment fiduciaries. She also provides subject matter expertise to the fiduciary professional designation courses and software tools developed by fi 360 and acts as legal liaison to outside counsel. Prior to joining fi 360, Kristina served for over four years as a Special Counsel in the Office of Chief Counsel of the Division of Trading and Markets at the U. S. Securities and Exchange Commission and specialized in broker-dealer regulation. Prior to that, she was an associate with Troutman Sanders LLP in its Washington, D. C. office for two years and specialized in federal energy regulation. Kristina earned her J. D. , cum laude, at Georgetown University Law Center, her MBA at Georgetown University's Mc. Donough School of Business, and her B. S. B. A. in Accounting, magna cum laude, at Robert Morris University. COPYRIGHT 2010 fi 360 ALL RIGHTS RESERVED