DOL/ERISA Issues an

Investment Advisory Perspective

David C. Franceski, Jr., EsquireStradley Ronon Stevens & Young, LLP

William P. Simon, Jr.Managing Director, Retirement Plan Services

Brinker Capital, Inc.

DOL’s Changing Expectations

David C. Franceski, Jr., EsquireStradley Ronon Stevens & Young, LLP

ERISA § 3(21) Definition of a Fiduciary: Any person whoexercises 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

Who is an ERISA Fiduciary?

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.)

DOL Gloss on Definition of Fiduciary29 C.F.R. 2510.3-21(c)

2011 Proposed Changes to DOL Regs

Other Considerations

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 Liabilitythough 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 liabilityCEO and CCO agreed to civil penalties totaling $95,000 in SEC action for overcharging fees and failing to disclose principal transactions in fee-based brokerage accounts

“Tone at the Top”

Management Liability Under Federal and State Securities Laws

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

Key Fiduciary Concepts

The Impact of New Section 404(a)(5)

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”

Competitive Impact of New Regulations

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

Legal Takeaways

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

Source: Zephyr StyleADVISOR, PPB Advisors, LLC

10-Year Period Annual Return1926-1935 5.86%1927-1936 7.81%1928-1937 0.02%1929-1938 -0.89%1930-1939 -0.05%1931-1940 1.80%1932-1941 6.43%1933-1942 9.35%1934-1943 7.17%1935-1944 9.28%1936-1945 8.42%1937-1946 4.41%1938-1947 9.62%1939-1948 7.26%1940-1949 9.17%

10-Year Period Annual Return1941-1950 13.38%1942-1951 17.28%1943-1952 17.09%1944-1953 14.31%1945-1954 17.12%1946-1955 16.69%1947-1956 18.43%1948-1957 16.44%1949-1958 20.06%1950-1959 19.35%1951-1960 16.16%1952-1961 16.43%1953-1962 13.44%1954-1963 15.91%1955-1964 12.82%1956-1965 11.06%1957-1966 9.20%1958-1967 12.85%1959-1968 10.01%

10-Year Period Annual Return 10-Year Period Annual Return 10-Year Period Annual Return 10-Year Period Annual Return 10-Year Period Annual Return1926-1935 5.86% 1941-1950 13.38% 1960-1969 7.81% 1974-1983 10.61% 1996-2005 9.08%1927-1936 7.81% 1942-1951 17.28% 1961-1970 8.18% 1975-1984 14.76% 1997-2006 8.42%1928-1937 0.02% 1943-1952 17.09% 1962-1971 7.06% 1976-1985 14.33% 1998-2007 5.91%1929-1938 -0.89% 1944-1953 14.31% 1963-1972 9.93% 1977-1986 13.82% 1999-2008 -1.38%1930-1939 -0.05% 1945-1954 17.12% 1964-1973 6.01% 1978-1987 15.26% 2000-2009 -0.95%1931-1940 1.80% 1946-1955 16.69% 1965-1974 1.24% 1979-1988 16.33% 2001-2010 1.41%1932-1941 6.43% 1947-1956 18.43% 1966-1975 3.27% 1980-1989 17.55%

1933-1942 9.35% 1948-1957 16.44% 1967-1976 6.63% 1981-1990 13.93%

1934-1943 7.17% 1949-1958 20.06% 1968-1977 3.59% 1982-1991 17.59%

1935-1944 9.28% 1950-1959 19.35% 1969-1978 3.16% 1983-1992 16.19%

1936-1945 8.42% 1951-1960 16.16% 1970-1979 5.86% 1984-1993 14.94%

1937-1946 4.41% 1952-1961 16.43% 1971-1980 8.44% 1985-1994 14.40%

1938-1947 9.62% 1953-1962 13.44% 1972-1981 6.47% 1986-1995 14.84%

1939-1948 7.26% 1954-1963 15.91% 1973-1982 6.68% 1987-1996 15.28%

1940-1949 9.17% 1955-1964 12.82% 1988-1997 18.05%

1956-1965 11.06% 1989-1998 19.18%

1957-1966 9.20% 1990-1999 18.20%

1958-1967 12.85% 1991-2000 17.46%

1959-1968 10.01% 1992-2001 12.93%1993-2002 9.33%1994-2003 11.06%1995-2004 12.07%

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 CasesAbout 6,000 Cases per Year

Source: FINRA

Arbitration Cases Served by Controversy 2010

Breach of Fiduciary Duty 3,162

Omission of Facts 1,941

Unsuitability 1,974

Misrepresentation 1,795

Source: FINRA

Where Do You Fit In?

Limited Scope?

Investment Advisor?

3(21)? Solicitor?

Full Scope?

3(38)?

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 ScopeHas no discretion. Advice may, or may not be acted upon

3(21) Full ScopeIs a Named Fiduciary, and has discretion to hire, or change a manager

3(38) Investment ManagerBy 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

Selecting the right investment line up Menu-list of funds

Advice

Model portfolios

31

32

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.

401(k) Investors Who Use Professional Help Outperform Those Without It

33

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

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., EsquireStradley Ronon Stevens & Young, LLP215.564.8120DFranceski@STRADLEY.COM

William P. Simon, Jr.Brinker Capital, Inc. 800.333.4573bsimon@brinkercapital.com