Elements of an Effective Fiduciary Program Elizabeth Meier Senior Examiner Federal Reserve Bank of New York Federal Reserve Bank of New

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.

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

Overview Examiners are looking for: –Strong independent and management controls appropriate to the institution’s size, products, and services including:  Automation  Comprehensive MIS reporting –Strong governance framework

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

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

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.

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

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.

Strong Independent Controls: Audit Reviews Investment management for: 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

Strong Independent Controls: Audit Reviews Operational processes for: 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

Strong Independent Controls: Audit Reviews  Account agreement disclosures –e.g. fees, commissions, the use of proprietary products, bank’s investment authority, proxy voting, etc.  Complaint procedures  Vendor Management  Disaster recovery programs  Physical and logical system security measures

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

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.

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.

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

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

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

Strong Management Controls: Timely Pre-, Post- and Annual Account Reviews Ensuring compliance with governing instruments, investment goals/ restrictions, and risk tolerance. Well Documented Files Well Documented Files

Strong Management Controls: Robust Customer Disclosures Including fees, commission practices, use of affiliate services/ products, investment vehicle risks, proxy voting rights, investment authority etc.

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

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

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

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

Resources  –FDIC Trust Examination Manual  ual/ ual/ ual/ –Commercial Bank Examination Manual Commercial Bank Examination ManualCommercial Bank Examination Manual  Please refer to the fiduciary supervision section 4200 –Bank Holding Company Supervision Manual Bank Holding Company Supervision ManualBank Holding Company Supervision Manual  Section 3120 Trust Services  Section 3900 FHC Supervision

Resources  s_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  efault.htm efault.htm efault.htm –Code of Federal Regulations

Resources (cont.) Supervision and Regulation Letters Pertaining to Fiduciary Operations  SR 05-9 SR 05-9 SR 05-9 –Frequently Asked Questions Relating to Customer Identification Program Rules  SR SR SR –Bank Holding Company Rating System  SR SR –Interagency Policy on Banks/Thrifts Providing Financial Support to Funds Advised by the Banking Organization  SR SR –Examination of Fiduciary Activities  SR – –Vendor Management  SR 99-7 SR 99-7 –Supervisory Guidance Regarding the Investment of Fiduciary Assets in Mutual Funds and Potential Conflicts of Interest

Resources (cont.) Supervision and Regulation Letters Pertaining to Fiduciary Operations (continued) Supervision and Regulation Letters Pertaining to Fiduciary Operations (continued)  SR SR –Uniform Interagency Trust Rating System (UITRS)  SR 97-3 SR 97-3 –Conversion of Common Trust Funds to Mutual Funds  SR SR –Risk-Focused Fiduciary Examinations  SR SR –Interpretation of Interagency Statement on Retail Sales of Nondeposit Investment Products  SR SR –Investment Adviser Activities  SR SR –Violations of Federal Reserve Margin Regulations in Custodial Agency Accounts Resulting From "Free-Riding" Schemes

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.