Elements of an Effective Fiduciary Program Elizabeth Meier Senior Examiner Federal Reserve Bank of New York Federal Reserve Bank of New York([email protected])

Elements of an Effective Elements of an Effective Fiduciary Program Fiduciary Program

Elizabeth Meier Elizabeth Meier Senior ExaminerSenior Examiner

Federal Reserve Bank of New York Federal Reserve Bank of New York ([email protected])([email protected])

DisclaimerDisclaimer

These recommendations are not exhaustive. These recommendations are not exhaustive. They represent my views as opposed to They represent my views as opposed to those of the Federal Reserve Bank of New those of the Federal Reserve Bank of New York.York.

Transfer agent, custody, fund accounting Transfer agent, custody, fund accounting and participant record-keeping services are and participant record-keeping services are not covered in this presentation.not covered in this presentation.

OverviewOverview

Financial institutions should assess their Financial institutions should assess their legal, reputational and operational risks.legal, reputational and operational risks.– These determine controls, including automation These determine controls, including automation

and MIS reporting, and governance and MIS reporting, and governance infrastructures.infrastructures.

OverviewOverview

Examiners are looking for:Examiners are looking for:– Strong independent and management controls Strong independent and management controls

appropriate to the institution’s size, products, appropriate to the institution’s size, products, and services including:and services including: AutomationAutomation Comprehensive MIS reportingComprehensive MIS reporting

– Strong governance frameworkStrong governance framework

Strong Independent Controls: Compliance Strong Independent Controls: Compliance MonitoringMonitoring

Suitable investments Suitable investments Adherence to chosen strategies and Adherence to chosen strategies and

guidelinesguidelines Compliance with ERISA Compliance with ERISA Compliance with rules and regulations in Compliance with rules and regulations in

placing proprietary products and securities placing proprietary products and securities underwritten by affiliates in fiduciary underwritten by affiliates in fiduciary accounts accounts

Strong Independent Controls: Compliance Strong Independent Controls: Compliance Monitoring Monitoring

Compliance with Code of Conduct Compliance with Code of Conduct Trading operations including:Trading operations including:

– Best execution/ broker selectionBest execution/ broker selection– Use of soft dollarsUse of soft dollars– Trading with affiliatesTrading with affiliates– Allocation of tradesAllocation of trades– Market timing and late tradingMarket timing and late trading

Proxy voting processProxy voting process

Strong Independent Controls: Risk Control Strong Independent Controls: Risk Control Self AssessmentsSelf Assessments

Periodic identification and rating of inherent Periodic identification and rating of inherent business process risks, and controls to business process risks, and controls to mitigate themmitigate them

Specification of action plans to remedy Specification of action plans to remedy control gaps, and timeframes for control gaps, and timeframes for implementation implementation

Appointment of action plan owners.Appointment of action plan owners.

Strong Independent Controls: Audit FrameworkStrong Independent Controls: Audit Framework

Risk assessment of business processes to Risk assessment of business processes to determine frequency and scope of reviews determine frequency and scope of reviews – Clear plan that specifies schedule of reviews consistent Clear plan that specifies schedule of reviews consistent

with riskwith risk– Comprehensive audit programs that address all relevant Comprehensive audit programs that address all relevant

business riskbusiness risk Candid audit reporting that accurately reflects the Candid audit reporting that accurately reflects the

condition of audited area condition of audited area Rating of findingsRating of findings

Strong Independent Controls: Audit ReviewsStrong Independent Controls: Audit Reviews

Segregation of duties:Segregation of duties:– Ordering, executing and reconciling tradesOrdering, executing and reconciling trades– Check and electronic disbursementsCheck and electronic disbursements– System access rightsSystem access rights

Accuracy and reasonableness of fees Accuracy and reasonableness of fees – Proper controls over fee concessionsProper controls over fee concessions

Validation of risk control self assessmentsValidation of risk control self assessments Timeliness of initial, post acceptance, and annual Timeliness of initial, post acceptance, and annual

account reviewsaccount reviews– Timely remediation of exception items.Timely remediation of exception items.

Strong Independent Controls: Audit ReviewsStrong Independent Controls: Audit Reviews

Investment management for: Investment management for: – Quality of research in choosing investment Quality of research in choosing investment

vehicles, particularly proprietary products vehicles, particularly proprietary products – Performance monitoring and reportingPerformance monitoring and reporting– Use of quantitative tools in analyzing financial Use of quantitative tools in analyzing financial

riskrisk– Adequate procedures for purchasing, Adequate procedures for purchasing,

retaining and valuing miscellaneous/unique retaining and valuing miscellaneous/unique assets assets

– Investment diversity and prudenceInvestment diversity and prudence

Strong Independent Controls: Audit ReviewsStrong Independent Controls: Audit Reviews

Operational processes for:Operational processes for:– Adequate and timely reconciliationsAdequate and timely reconciliations– Security over blank checks and wire payment Security over blank checks and wire payment

devicesdevices– Check signing authorities and limitsCheck signing authorities and limits– Sufficient vault controlsSufficient vault controls– Timely administration of overdrafts and Timely administration of overdrafts and

suspense accountssuspense accounts

Strong Independent Controls: Audit ReviewsStrong Independent Controls: Audit Reviews Account agreement disclosures Account agreement disclosures

– e.g. fees, commissions, the use of proprietary e.g. fees, commissions, the use of proprietary products, bank’s investment authority, proxy products, bank’s investment authority, proxy voting, etc. voting, etc.

Complaint procedures Complaint procedures Vendor ManagementVendor Management Disaster recovery programsDisaster recovery programs Physical and logical system security Physical and logical system security

measuresmeasures

Strong Independent Controls: Reporting and Strong Independent Controls: Reporting and Issue Escalation Issue Escalation

Timely and transparent reporting of Timely and transparent reporting of independent control exceptions and findingsindependent control exceptions and findings

Escalation of all significant exceptions and Escalation of all significant exceptions and findings to appropriate stakeholders findings to appropriate stakeholders including senior managementincluding senior management

Strong Independent Controls: Timely and Strong Independent Controls: Timely and Adequate RemediationAdequate Remediation

Remediation of exceptions and findings Remediation of exceptions and findings within established frameworks.within established frameworks.

Appropriate management and independent Appropriate management and independent control sign-off on adequate remediation.control sign-off on adequate remediation.

Strong Management Controls: Governance Strong Management Controls: Governance FrameworkFramework

Control and management committees comprising Control and management committees comprising business heads and independent control business heads and independent control representatives.representatives.– Facilitates information sharing and the integration of risk Facilitates information sharing and the integration of risk

and compliance management in decision making.and compliance management in decision making.

Clear, well-understood escalation process for Clear, well-understood escalation process for reporting control breaches, audit findings, reporting control breaches, audit findings, compliance monitoring exceptions, results of risk compliance monitoring exceptions, results of risk self assessments, litigation, complaints, MIS etc. self assessments, litigation, complaints, MIS etc.

Strong Management Controls: Strong Management Controls:

Governance FrameworkGovernance Framework

New product approval process New product approval process – Including assessment of reputational, legal, and Including assessment of reputational, legal, and

compliance risk as well as institutional capacity.compliance risk as well as institutional capacity. Legal expertise, particularly with ERISA and asset Legal expertise, particularly with ERISA and asset

management activities.management activities. Training Training

– Including code of conduct and fiduciary responsibility.Including code of conduct and fiduciary responsibility. Code of EthicsCode of Ethics Compensation practices Compensation practices

– Should not compromise fiduciary dutiesShould not compromise fiduciary duties

Strong Management Controls: Strong Management Controls:

Comprehensive Policies and ProceduresComprehensive Policies and Procedures Responsibilities under ERISAResponsibilities under ERISA Fiduciary duties under the Prudent Investor Act Fiduciary duties under the Prudent Investor Act

including:including:– Placement of proprietary products in fiduciary accountsPlacement of proprietary products in fiduciary accounts– Proxy voting guidelinesProxy voting guidelines

Compliance with all pertinent rules and Compliance with all pertinent rules and regulationsregulations

Strong Management Controls: Account Strong Management Controls: Account Opening ProcessOpening Process

That determines:That determines:– Whether client requirements are consistent with Whether client requirements are consistent with

bank practices and capacity bank practices and capacity – Client risk tolerance Client risk tolerance – Client investment goals and restrictionsClient investment goals and restrictions– Client identityClient identity

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

Ensuring compliance with governing Ensuring compliance with governing instruments, investment goals/ restrictions, instruments, investment goals/ restrictions, and risk tolerance.and risk tolerance.

Well Documented FilesWell Documented Files

Strong Management Controls: Robust Strong Management Controls: Robust Customer DisclosuresCustomer Disclosures

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

Strong Management Controls: MIS ReportingStrong Management Controls: MIS Reporting

Should include:Should include:– Portfolio performance by accountPortfolio performance by account– Account concentrationsAccount concentrations– Excessive securities’ salesExcessive securities’ sales– Excessive cashExcessive cash– Securities not on approved listSecurities not on approved list– Restricted or controlled securitiesRestricted or controlled securities– Asset allocation ranges by accountAsset allocation ranges by account– Volume/age of failed trades, asset breaks, and Volume/age of failed trades, asset breaks, and

unconfirmed/un-affirmed trades unconfirmed/un-affirmed trades

Strong Management Controls: MIS ReportingStrong Management Controls: MIS Reporting

– Aged reconciliations Aged reconciliations – Aged audit items, compliance exceptions and Aged audit items, compliance exceptions and

control risk self assessment action plans.control risk self assessment action plans.– Pending litigationPending litigation– Volume/age of complaints Volume/age of complaints – Code of Ethics violationsCode of Ethics violations– Best execution metricsBest execution metrics– Broker usage reportsBroker usage reports– Market timing and late trading metricsMarket timing and late trading metrics

Strong Management Controls: AutomationStrong Management Controls: Automation

Trade order management systemsTrade order management systems Pre- and post- trade compliance monitoring Pre- and post- trade compliance monitoring

softwaresoftware Security movement and control trackingSecurity movement and control tracking Account investment monitoringAccount investment monitoring Operational loss databaseOperational loss database ReconciliationsReconciliations

Conclusion Conclusion

Examiners want to help you comply with Examiners want to help you comply with rules, regulations, and best practicesrules, regulations, and best practices

Management must commit to a strong Management must commit to a strong control environment and the tools required control environment and the tools required to monitor compliance with policies and to monitor compliance with policies and procedures/ rules and regulationsprocedures/ rules and regulations

ResourcesResources

http://www.fdic.gov/regulations/trust/index.htmlhttp://www.fdic.gov/regulations/trust/index.html– FDIC Trust Examination ManualFDIC Trust Examination Manual

http://www.federalreserve.gov/boarddocs/supmanhttp://www.federalreserve.gov/boarddocs/supmanual/ual/– Commercial Bank Examination ManualCommercial Bank Examination Manual

Please refer to the fiduciary supervision section 4200Please refer to the fiduciary supervision section 4200

– Bank Holding Company Supervision Manual Bank Holding Company Supervision Manual Section 3120 Trust Services Section 3120 Trust Services Section 3900 FHC SupervisionSection 3900 FHC Supervision

ResourcesResources

http://www.ffiec.gov/bsa_aml_infobase/http://www.ffiec.gov/bsa_aml_infobase/pages_manual/manual_online.htmpages_manual/manual_online.htm– FFIEC Bank Secrecy Act Anti-Money Laundering FFIEC Bank Secrecy Act Anti-Money Laundering

Examination Manual.Examination Manual. Please refer to sections on Trust and Asset Please refer to sections on Trust and Asset

Management, Private Banking, Nondeposit Management, Private Banking, Nondeposit Investment ProductsInvestment Products

http://www.federalreserve.gov/regulations/http://www.federalreserve.gov/regulations/default.htmdefault.htm– Code of Federal RegulationsCode of Federal Regulations

Resources (cont.)Resources (cont.)http://www.federalreserve.gov/boarddocs/srletters/http://www.federalreserve.gov/boarddocs/srletters/Supervision and Regulation Letters Pertaining to Fiduciary OperationsSupervision and Regulation Letters Pertaining to Fiduciary Operations SR 05-9SR 05-9

– Frequently Asked Questions Relating to Customer Identification Program Frequently Asked Questions Relating to Customer Identification Program Rules Rules

SR 04-18SR 04-18 – Bank Holding Company Rating System Bank Holding Company Rating System

SR 04-01SR 04-01 – Interagency Policy on Banks/Thrifts Providing Financial Support to Funds Interagency Policy on Banks/Thrifts Providing Financial Support to Funds

Advised by the Banking Organization Advised by the Banking Organization SR 01-05SR 01-05

– Examination of Fiduciary Activities Examination of Fiduciary Activities SR 00- 4SR 00- 4

– Vendor Management SR 99-7 SR 99-7

– Supervisory Guidance Regarding the Investment of Fiduciary Assets in Supervisory Guidance Regarding the Investment of Fiduciary Assets in Mutual Funds and Potential Conflicts of InterestMutual Funds and Potential Conflicts of Interest

Resources (cont.)Resources (cont.) Supervision and Regulation Letters Pertaining to Fiduciary Operations Supervision and Regulation Letters Pertaining to Fiduciary Operations

(continued)(continued)

SR 98-37 SR 98-37 – Uniform Interagency Trust Rating System (UITRS) Uniform Interagency Trust Rating System (UITRS)

SR 97-3 SR 97-3 – Conversion of Common Trust Funds to Mutual Funds Conversion of Common Trust Funds to Mutual Funds

SR 96-10 SR 96-10 – Risk-Focused Fiduciary Examinations Risk-Focused Fiduciary Examinations

SR 95-46 SR 95-46 – Interpretation of Interagency Statement on Retail Sales of Nondeposit Interpretation of Interagency Statement on Retail Sales of Nondeposit

Investment Products Investment Products SR 94-53 SR 94-53

– Investment Adviser Activities Investment Adviser Activities SR 93-13 SR 93-13

– Violations of Federal Reserve Margin Regulations in Custodial Agency Violations of Federal Reserve Margin Regulations in Custodial Agency Accounts Resulting From "Free-Riding" Schemes Accounts Resulting From "Free-Riding" Schemes

About the SpeakerAbout the Speaker Elizabeth Meier has worked as an analyst and bank Elizabeth Meier has worked as an analyst and bank

examiner in the Bank Supervision Function of the Federal examiner in the Bank Supervision Function of the Federal Reserve Bank of New York for 10 years. As an analyst she Reserve Bank of New York for 10 years. As an analyst she worked in the Foreign Bank and Banking Applications worked in the Foreign Bank and Banking Applications divisions. As an examiner she worked in the Legal and divisions. As an examiner she worked in the Legal and Compliance Division and is currently on the Payments, Compliance Division and is currently on the Payments, Settlements, and Fiduciary Team in the Operational Risk Settlements, and Fiduciary Team in the Operational Risk Division of the bank. She has performed compliance and Division of the bank. She has performed compliance and fiduciary examinations, including conflict of interest fiduciary examinations, including conflict of interest reviews in large complex, regional, and community banks reviews in large complex, regional, and community banks in New York, Charlotte, Chicago, South Bend, and in New York, Charlotte, Chicago, South Bend, and Hartford.Hartford.

Ms. Meier is a commissioned examiner, holds an MBA Ms. Meier is a commissioned examiner, holds an MBA from Columbia Business School, and a BS in Economics from Columbia Business School, and a BS in Economics from Boston University. She is originally from Revere, from Boston University. She is originally from Revere, Massachusetts and currently resides in Brooklyn, New Massachusetts and currently resides in Brooklyn, New York.York.