Presenting a live 90-minute webinar with interactive Q&A ERISA Benefit Plan Investment Management Agreements: Selecting 3(38) Investment Managers, Structuring the IMA Documenting the Relationship to Minimize Risks for Plan Sponsors and Investment Advisers TUESDAY, APRIL 18, 2017 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Sharon M. Goodman, Principal, Slevin & Hart , Washington, D.C. David A. Russell, CFA, Senior Investment Strategist, Senior Consultant, Investment Performance Services , Newtown, Pa. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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ERISA Benefit Plan Investment Management Arrangements Presented by: Sharon Goodman, Esq. David A. Russell, CFA Principal Senior Investment Strategist Slevin & Hart, P.C. Investment Performance Services, LLC Washington, D.C. Newtown, PA (202) 797-8700 (215) 867-2330 sgoodman@slevinhart.com drussell@ips-net.com www.slevinhart.com www.ips-net.com April 18, 2017 The opinions expressed in this presentation are those of the speaker. The International Foundation disclaims responsibility for views expressed and statements made by the program speakers.
Presentation Overview I. Due Diligence and Selection of ERISA 3(38) Investment Manager Fiduciaries – David Russell II. Negotiating and Contracting With ERISA Section 3(38) Discretionary Investment Managers – Sharon Goodman Monitoring ERISA Section 3(38) Discretionary Managers – III. David Russell IV. Questions
Part I Due Diligence and Selection of ERISA 3(38) Investment Manager Fiduciaries David Russell 7
What is a Section 3(21) vs. Section 3(38) Fiduciary? ERISA Section 3(21) provides that any party giving investment advice for a fee is a plan fiduciary. Investment Consultants traditionally fall into this category and their contractual duties are to advise, report, monitor and recommend, but they have no discretion or authority to make decisions or implement changes to the plan. ERISA Section 3(28) defines “ investment managers ” who are also plan fiduciaries, but they are specifically delegated the discretion, authority and responsibility for making and implementing investment decisions. Traditionally, investment manager discretion has been contractually limited to selecting, buying, holding and selling specific types of securities and are subject to specific limitations and guidelines as specified in a written Investment Policy Statement. The main difference between ERISA Section 3(21) and ERISA Section 3(38) is discretion 8
What is a Section 3(21) vs. Section 3(38) Fiduciary ? Delegation of fiduciary control from Trustees to investment manager only occurs if manager is ERISA Section 3(38) fiduciary . Plan sponsors are increasingly considering delegating much or all of the investment decision making to consultants and/or investment managers. This concept has been referred to by several terms, including: • Discretionary Consulting • Discretionary Management • Outsourced Chief Investment Officer (OCIO) Regardless of the term used, or the type of organization providing the service, they are plan fiduciaries that have discretion over plan assets and have the authority to make decisions. They therefore fall under ERISA Section 3(38) definition of an “investment manager.” That also means they have legal responsibility and liability for their decisions. 9
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Selecting ERISA 3(38) Fiduciaries Potential Vendors: ERISA Section 3(38) Investment Manager Fiduciaries providing OCIO or Discretionary services can be: • Investment Managers • Investment Consultants • Financial Planners • Banks • Insurance Companies • Mutual Fund Companies • Other Financial Institutions Due Diligence Process: • Trustees should document their due diligence process in selecting a 3(38) fiduciary. • The process should be comprehensive and thorough - Trust but verify! • Trustees still have a duty to monitor the fiduciary! 11
The Due Diligence Process Using a written Request For Proposal (RFP) process is typical: • Provides written documentation of the process; • Comprehensive information is obtained; • Questions cover all relevant services and standards of performance; • Structures information in a common format, which makes it easier to rate and rank vendors; • Provides competitive market data for services and fees. 12
The Due Diligence Process 1. Firm Data 2. Legal and Regulatory 3. Business Continuity, Disaster Recovery, Data Integrity 4. Operations and Trading 5. Investment Philosophy and Strategy 6. Track Record 7. Fees 13
The Due Diligence Process Request For Proposal (RFP) questions typically cover: 1) Firm Data: • Location, legal structure, ownership, history, revenue, assets managed, management, organizational structure, number of employees, staff turnover. • Range and number of firm-wide products and services offered, • Types and longevity of clients. • Experience and staffing of 3(38) Discretionary/OCIO services: • Number, nature, longevity and size of current 3(38) clients; • Number, background, experience and history of staff; • References • Personnel Policies and Practices: Diversity, non-discrimination, compensation structure and incentives. 14
The Due Diligence Process Request For Proposal (RFP) questions typically cover: 2) Legal and Regulatory: • SEC, FINRA or other registrations (Form ADV Parts I and II) • Regulatory investigations, complaints or disciplinary actions (Edgar.com) • Qualified Professional Asset Manager (QPAM) status • Date and outcome of any regulatory reviews • Litigation history • Insurance Coverage: Professional Liability, E&O, D&O, ERISA Fiduciary Liability and Bonding • Code of Ethics • Personnel Compliance – Policies, staffing, monitoring process, reporting exceptions 15
The Due Diligence Process Request For Proposal (RFP) questions typically cover: 3) Business Continuity, Disaster Recovery, Data Integrity • Information technology and software systems used • Data back up plan and testing • Remote site for operations, trading and data access • Firewalls, breach protection, denial of service protection • Natural disaster and pandemic plans and testing. 16
The Due Diligence Process Request For Proposal (RFP) questions typically cover: 4) Operations and Trading: • Account setup (onboarding) process • Compliance with Investment Policy and Guidelines • Account monitoring and exception reporting process • Compliance software and staff training • Trading policies and practices • Trading systems and custodian/counter-party reconciliation process. • Derivatives practices, counter-party exposures, collateral/cash management (ISDA terms) • Process for measuring and monitoring trading costs and “best execution” • Soft dollar practices, services and budget • Flow of transactions from investment team – traders – middle office- back office – compliance – accounting • Independent audits of fund and firms • Proxy voting policy and reporting 17
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