Elements of an Effective Fiduciary Program

1
Elements of an Effective Fiduciary Program

• Elizabeth Meier
• Senior Examiner
• Federal Reserve Bank of New York
• (elizabeth.meier_at_ny.frb.org)

2
Disclaimer

• These recommendations are not exhaustive. They
  represent my views as opposed to those of the
  Federal Reserve Bank of New York.
• Transfer agent, custody, fund accounting and
  participant record-keeping services are not
  covered in this presentation.

3
Overview

• Financial institutions should assess their
  legal, reputational and operational risks.
• These determine controls, including automation
  and MIS reporting, and governance
  infrastructures.

4
Overview

• Examiners are looking for
• Strong independent and management controls
  appropriate to the institutions size, products,
  and services including
• Automation
• Comprehensive MIS reporting
• Strong governance framework

5
Strong Independent Controls Compliance
Monitoring

• Suitable investments
• Adherence to chosen strategies and guidelines
• Compliance with ERISA
• Compliance with rules and regulations in placing
  proprietary products and securities underwritten
  by affiliates in fiduciary accounts

6
Strong Independent Controls Compliance
Monitoring

• Compliance with Code of Conduct
• Trading operations including
• Best execution/ broker selection
• Use of soft dollars
• Trading with affiliates
• Allocation of trades
• Market timing and late trading
• Proxy voting process

7
Strong Independent Controls Risk Control Self
Assessments

• Periodic identification and rating of inherent
  business process risks, and controls to mitigate
  them
• Specification of action plans to remedy control
  gaps, and timeframes for implementation
• Appointment of action plan owners.

8
Strong Independent Controls Audit Framework

• Risk assessment of business processes to
  determine frequency and scope of reviews
• Clear plan that specifies schedule of reviews
  consistent with risk
• Comprehensive audit programs that address all
  relevant business risk
• Candid audit reporting that accurately reflects
  the condition of audited area
• Rating of findings

9
Strong Independent Controls Audit Reviews

• Segregation of duties
• Ordering, executing and reconciling trades
• Check and electronic disbursements
• System access rights
• Accuracy and reasonableness of fees
• Proper controls over fee concessions
• Validation of risk control self assessments
• Timeliness of initial, post acceptance, and
  annual account reviews
• Timely remediation of exception items.

10
Strong Independent Controls Audit Reviews

• Investment management for
• Quality of research in choosing investment
  vehicles, particularly proprietary products
• Performance monitoring and reporting
• Use of quantitative tools in analyzing financial
  risk
• Adequate procedures for purchasing, retaining and
  valuing miscellaneous/unique assets
• Investment diversity and prudence

11
Strong Independent Controls Audit Reviews

• Operational processes for
• Adequate and timely reconciliations
• Security over blank checks and wire payment
  devices
• Check signing authorities and limits
• Sufficient vault controls
• Timely administration of overdrafts and suspense
  accounts

12
Strong Independent Controls Audit Reviews

• Account agreement disclosures
• e.g. fees, commissions, the use of proprietary
  products, banks investment authority, proxy
  voting, etc.
• Complaint procedures
• Vendor Management
• Disaster recovery programs
• Physical and logical system security measures

13
Strong Independent Controls Reporting and Issue
Escalation

• Timely and transparent reporting of independent
  control exceptions and findings
• Escalation of all significant exceptions and
  findings to appropriate stakeholders including
  senior management

14
Strong Independent Controls Timely and Adequate
Remediation

• Remediation of exceptions and findings within
  established frameworks.
• Appropriate management and independent control
  sign-off on adequate remediation.

15
Strong Management Controls Governance Framework

• Control and management committees comprising
  business heads and independent control
  representatives.
• Facilitates information sharing and the
  integration of risk and compliance management in
  decision making.
• Clear, well-understood escalation process for
  reporting control breaches, audit findings,
  compliance monitoring exceptions, results of risk
  self assessments, litigation, complaints, MIS
  etc.

16
Strong Management Controls Governance Framework

• New product approval process
• Including assessment of reputational, legal, and
  compliance risk as well as institutional
  capacity.
• Legal expertise, particularly with ERISA and
  asset management activities.
• Training
• Including code of conduct and fiduciary
  responsibility.
• Code of Ethics
• Compensation practices
• Should not compromise fiduciary duties

17
Strong Management Controls Comprehensive
Policies and Procedures

• Responsibilities under ERISA
• Fiduciary duties under the Prudent Investor Act
  including
• Placement of proprietary products in fiduciary
  accounts
• Proxy voting guidelines
• Compliance with all pertinent rules and
  regulations

18
Strong Management Controls Account Opening
Process

• That determines
• Whether client requirements are consistent with
  bank practices and capacity
• Client risk tolerance
• Client investment goals and restrictions
• Client identity

19
Strong Management Controls Timely Pre-, Post-
and Annual Account Reviews

• Ensuring compliance with governing instruments,
  investment goals/ restrictions, and risk
  tolerance.
• Well Documented Files

20
Strong Management Controls Robust Customer
Disclosures

• Including fees, commission practices, use of
  affiliate services/ products, investment vehicle
  risks, proxy voting rights, investment authority
  etc.

21
Strong Management Controls MIS Reporting

• Should include
• Portfolio performance by account
• Account concentrations
• Excessive securities sales
• Excessive cash
• Securities not on approved list
• Restricted or controlled securities
• Asset allocation ranges by account
• Volume/age of failed trades, asset breaks, and
  unconfirmed/un-affirmed trades

22
Strong Management Controls MIS Reporting

• Aged reconciliations
• Aged audit items, compliance exceptions and
  control risk self assessment action plans.
• Pending litigation
• Volume/age of complaints
• Code of Ethics violations
• Best execution metrics
• Broker usage reports
• Market timing and late trading metrics

23
Strong Management Controls Automation

• Trade order management systems
• Pre- and post- trade compliance monitoring
  software
• Security movement and control tracking
• Account investment monitoring
• Operational loss database
• Reconciliations

24
Conclusion

• Examiners want to help you comply with rules,
  regulations, and best practices
• Management must commit to a strong control
  environment and the tools required to monitor
  compliance with policies and procedures/ rules
  and regulations

25
Resources

• http//www.fdic.gov/regulations/trust/index.html
• FDIC Trust Examination Manual
• http//www.federalreserve.gov/boarddocs/supmanual/
  
• Commercial Bank Examination Manual
• Please refer to the fiduciary supervision
  section 4200
• Bank Holding Company Supervision Manual
• Section 3120 Trust Services
• Section 3900 FHC Supervision

26
Resources

• http//www.ffiec.gov/bsa_aml_infobase/pages_manual
  /manual_online.htm
• FFIEC Bank Secrecy Act Anti-Money Laundering
  Examination Manual.
• Please refer to sections on Trust and Asset
  Management, Private Banking, Nondeposit
  Investment Products
• http//www.federalreserve.gov/regulations/default.
  htm
• Code of Federal Regulations

27
Resources (cont.)

• http//www.federalreserve.gov/boarddocs/srletters/
  
• Supervision and Regulation Letters Pertaining to
  Fiduciary Operations
• SR 05-9
• Frequently Asked Questions Relating to Customer
  Identification Program Rules
• SR 04-18
• Bank Holding Company Rating System
• SR 04-01
• Interagency Policy on Banks/Thrifts Providing
  Financial Support to Funds Advised by the Banking
  Organization
• SR 01-05
• Examination of Fiduciary Activities
• SR 00- 4
• Vendor Management
• SR 99-7
• Supervisory Guidance Regarding the Investment of
  Fiduciary Assets in Mutual Funds and Potential
  Conflicts of Interest

28
Resources (cont.)

• Supervision and Regulation Letters
  Pertaining to Fiduciary Operations (continued)
• SR 98-37
• Uniform Interagency Trust Rating System (UITRS)
• SR 97-3
• Conversion of Common Trust Funds to Mutual Funds
• SR 96-10
• Risk-Focused Fiduciary Examinations
• SR 95-46
• Interpretation of Interagency Statement on Retail
  Sales of Nondeposit Investment Products
• SR 94-53
• Investment Adviser Activities
• SR 93-13
• Violations of Federal Reserve Margin Regulations
  in Custodial Agency Accounts Resulting From
  "Free-Riding" Schemes

29
About the Speaker

• Elizabeth Meier has worked as an analyst and bank
  examiner in the Bank Supervision Function of the
  Federal Reserve Bank of New York for 10 years.
  As an analyst she worked in the Foreign Bank and
  Banking Applications divisions. As an examiner
  she worked in the Legal and Compliance Division
  and is currently on the Payments, Settlements,
  and Fiduciary Team in the Operational Risk
  Division of the bank. She has performed
  compliance and fiduciary examinations, including
  conflict of interest reviews in large complex,
  regional, and community banks in New York,
  Charlotte, Chicago, South Bend, and Hartford.
• Ms. Meier is a commissioned examiner, holds an
  MBA from Columbia Business School, and a BS in
  Economics from Boston University. She is
  originally from Revere, Massachusetts and
  currently resides in Brooklyn, New York.