Actuarial Ethical Dilemmas

1. Actuarial Ethical Dilemmas ASPPA Advanced Actuarial Conference June 8, 2009 Curtis Huntington, Chairperson, Actuarial Board for Counseling and Discipline Mary Downs, General Counsel and Director of Professionalism, American Academy of Actuaries Disclaimer: The opinions expressed are solely those of the presenters and are not approved positions of the American Academy of Actuaries or the Actuarial Board for Counseling and Discipline.

2. Introduction - Overview • Overview of the Code of Professional Conduct • Ethics and Liability • Ethics and Negligence/Malpractice • Ethics and Actuaries as Fiduciaries • State Law • ERISA • Case Studies in Actuarial Ethics

3. The Actuary’s Ethical Obligations • An actuary has many ethical obligations: • Many are set forth in the Code of Professional Conduct, Actuarial Standards of Practice (ASOPs), and the Qualifications Standards. • Law may also impose obligations upon an actuary as it does upon other professionals. • You are responsible for complying with all of these requirements. • The Code requires you to be familiar with legal and ethical obligations in the jurisdictions in which you practice. • Failure to meet legal and ethical requirements may subject you to legal liability and/or discipline by your actuarial organization.

4. Code of Professional Conduct

5. The Code of Professional Conduct: An Overview • Professional and Ethical Standards for Academy Members. • Adopted by the Academy, SOA, ASPPA, CAS, and the CCA. • Code sets forth mandatory standards: • Precepts are standards; annotations assist with interpretation; ASOPs relate to and inform standards in the Code. • Follow applicable standards wherever you practice (even abroad!). • When Code and law conflict  follow the law.

6. Code of Professional Conduct Professional Integrity • Precept 1: Act honestly, with integrity and competence, and in a manner that fulfills the actuarial profession’s responsibility to the public and upholds the profession’s reputation.

7. Code of Professional Conduct Qualification Standards • Precept 2: Perform professional services only when qualified to do so andin compliance with Qualification Standards.

8. Code of Professional Conduct Standards of Practice • Precept 3: Make sure that actuarial services performed by you or under your direction satisfy applicable standards of practice.

9. Code of Professional Conduct Communications and Disclosure • Precept 4: Take reasonable steps to make sure that your actuarial communications are clearly appropriate to the circumstances and their intended audience and satisfy applicable standards of practice. • Precept 5: If appropriate, identify the principal for whom the findings are made and make clear the scope of the assignment, including any limitations or constraints.

10. Code of Professional Conduct Conflicts of Interest • Precept 6: Make appropriate and timely disclosure to principal of the sources of all direct and indirect compensation that you/your firm receives from another party that relates to any assignment from that principal. • Precept 7: Do not knowingly provide professional services involving a real or potential conflict of interest unless:

11. Code of Professional Conduct Control of Work Product • Precept 8: Take reasonable steps to ensure that your services will not be used to mislead other parties.

12. Code of Professional Conduct Confidentiality • Precept 9: Do not disclose confidential information to another party unless such disclosure has been authorized by the Principal or is required by law.

13. Code of Professional Conduct Courtesy and Cooperation • Precept 10: Perform services with courtesy and professional respect; cooperate with others in the Principal’s interest.

14. Code of Professional Conduct Advertising • Precept 11: Do not engage in advertising or business solicitation, in any medium, that is false or misleading.

15. Code of Professional Conduct Titles and Designations • Precept 12: Use membership titles and designations only as authorized by your organizations.

16. Code of Professional Conduct Violations of the Code • Precept 13: Actuary who knows of apparent, unresolved, material breach by another actuary should consider discussing the matter to obtain a resolution. • If there is no discussion or the discussion is unsuccessful, the concerned actuary should disclose the violation to the ABCD, unless disclosure is prohibited by law or would reveal confidential information.

17. Code of Professional Conduct Cooperation in Investigations • Precept 14: Respond promptly, truthfully, and fully in writing to ABCD requests for information. • Cooperate fully with ABCD investigations, subject to applicable restrictions on confidential information or other restrictions imposed by law.

18. Ethics and Legal Liability

19. Ethics and Legal Liability: An Overview Actuaries must consider… • Professional standards of conduct, qualification, and practice. Actuaries should consider… • Common law standards of due care. • Claims against actuaries are typically for malpractice. • Applicable laws and regulations govern some areas in which actuaries provide advice. • Specific laws, such as ERISA, provide specific duties and liabilities for service providers.

20. Actuarial Malpractice and Negligence

21. Malpractice and Negligence • What is Actuarial Malpractice? • There is no explicit law of actuarial malpractice. Instead, malpractice claims against actuaries typically allege negligence – typically a state tort law claim. • You may be liable for negligence if you fail to exercise due care and thereby cause injury to the organization for whom you are working. • When an actuary advises his employer or principal, a duty to exercise due care arises – the actuary must use reasonable care and competence. You need not guarantee correct judgment or analysis, but you must exercise reasonable skill and competence in good faith, without fraud, for the benefit of your employer/principal.

22. Malpractice and Negligence • Always think about what a reasonable actuary would do in your shoes the standard for analyzing potentially negligent conduct is reasonableness. • An act may be negligent if it is done without the competence which a reasonable person in the position of the actor would recognize as necessary to prevent the creation of an unreasonable risk of harm. • Translation: an actuary must perform his or her duties with the competence and care which a reasonable actuary would use in that particular situation.

23. Malpractice and Negligence • Your ethical obligations as an actuary directly relate to how negligence may be found and to your legal liability. • Professional standards – the Code of Professional Conduct, ASOPs, and Qualification Standards – are strong evidence of appropriate practice and can be used to show what a reasonable actuary should and would do. • Failure to comply materially with the Code, ASOPs, and Qualification Standards can result in a disciplinary proceeding before the ABCD, or leave you open to a lawsuit for negligence/actuarial malpractice.

24. Malpractice and Negligence • What can you do? • Be aware of all Code precepts and ASOPs • Ensure your work conforms to these standards. • If you deviate or work in absence of an ASOP, be prepared to explain your deviation and judgment. • Document!

25. Code of Professional Conduct Professional Integrity • Ethics + Legal Liability: • Many of the requirements of Precept 1, dealing with professional integrity, correspond to situations in which legal liability could arise for an actuary.

26. Code of Professional Conduct Qualification Standards • Ethics + Legal Liability: • Precept 2 instructs actuaries to perform services only when qualified to do so and when qualification standards have been met. • This relates directly to an Actuary’s competence to provide services – providing services when you are not competent to do so may leave you liable for negligence and malpractice as an actuary.

27. Code of Professional Conduct Standards of Practice • Ethics + Legal Liability: • Precept 3 is important guidance for acting ethically under the Code and avoiding legal liability as an actuary.

28. Code of Professional Conduct Communications and Disclosure • Ethics + Legal Liability: • Precepts 6 and 7 are important in guiding the actuary and precluding legal liability for negligence, based on conflicts of interest.

29. Code of Professional Conduct Control of Work Product • Ethics + Legal Liability: • Precept 8 cautions you to consider possible misuse and take steps to prevent it. • Staying true to Precept 8 helps protect the actuary and others.

30. Code of Professional Conduct Improper Disclosure • Ethics + Legal Liability • Precept 9 cautions you to prevent improper disclosure of confidential information. • Such improper disclosure could result in liability for negligence.

31. Actuarial Malpractice and Negligence Other Ethical Concerns? • The Code provides general guidance; the ASOPs provide standards of practice in given fields or situations. But the Code and the ASOPs cannot provide all guidance necessary for an actuary in every situation, faced with tough questions and tricky situations. • What should you do if faced with a hard situation or question which the Code and ASOPs do not address sufficiently? • Always think about what a reasonable actuary would do in your shoes the standard for analyzing potentially negligent conduct is reasonableness. • Ask for Guidance

32. Fiduciary Liability for Actuaries

33. Fiduciary Liability - Overview • Actuaries are typically advisors for their clients, providing services that produce information upon which principals rely. • In this capacity, as we have seen, Actuaries, owe a duty of care to their principals – they must act as would a reasonable actuary in the same position. This is not a fiduciary relationship. • However, actuaries can cross the line from advisory to something more than an advisor – a fiduciary.

34. Fiduciary Liability - Overview • What is a Fiduciary? • A fiduciary obligation exists whenever the relationship with the client involves a special trust, confidence, and reliance on the fiduciary to exercise his discretion or expertisein acting for the client. • Am I a Fiduciary? • It’s possible. . . . It all depends on the nature of the relationship in question. • Whether an actuary has become a fiduciary is a factual, case-by-case determination.

35. Actuaries as Fiduciaries • How does this affect actuaries? • Fiduciaries have a much, much higher standard of care. Where a fiduciary relationship exists under Common Law, certain standards are imposed: • Duty of loyalty – putting the principal’s interests ahead of one’s own. • Duty to act honestly and prudently. • Duty to not delegate decision-making power. • Duty to not profit. • Fiduciaries may also be subject to other obligations by law – as in ERISA. • These are typically more demanding obligations than under Common Law, with more encompassing standards, and greater liability.

36. ERISA Actuaries as Fiduciaries • ERISA also established obligations for professional service providers that act as fiduciaries. • Service providers taking part in one of four types of conduct will be considered ERISA fiduciaries: • Exercising any discretionary authority or control respecting management of the plan; or • Exercising any discretionary authority or control over management or disposition of the assets of the plan; or • Rendering investment advice, regarding money and property of the plan, for a fee or other compensation; or • Having any discretionary authority or discretionary responsibility in the administration of such a plan.

37. ERISA Actuaries as Fiduciaries • Liability for Fiduciary under ERISA: • A Fiduciary, under ERISA, is held to an extremely high standard of care (as under the Common Law). • A fiduciary must discharge duties with respect to a plan solely in the interest of the participants and beneficiaries: • For exclusive purpose of (1) providing benefits to participants/beneficiaries; and (2) defraying reasonable expenses of administering the plan. • With care, skill, prudence, and diligence under the circumstances that a prudent man, acting in a like capacity and familiar with such matters, would use in such a situation with a like character and similar aims.

38. ERISA Actuaries as Fiduciaries • Liability for Co-fiduciary under ERISA: • A fiduciary may also be liable for the actions of his co-fiduciary: • If he participates knowingly in or knowingly conceals the actions of a co-fiduciary. • If he has knowledge of a breach by another fiduciary, unless he makes reasonable efforts to remedy the co-fiduciary’s breach.

39. ERISA Actuaries as Fiduciaries Translation – How Could ERISA Apply to Actuaries? • Under ERISA, a provider of professional services (like an actuary) may be considered a fiduciary of the plan if the person exercises sufficient functional authority, control, or responsibility with respect to the plan or its assets. • ERISA’s definition of a fiduciary is tied to function and performance, not position or title. Simply saying “I’m an actuary!” or being hired as an actuary will not shield you from all liability or subject you to liability. • The Plan documents need not expressly delegate fiduciary duties or the title of fiduciary – other service providers become liable when they assume fiduciary duties over the plan, even if such duties are not written into the controlling documents.

40. ERISA Actuaries as Fiduciaries Who decides if an actuary is a fiduciary? • In a case of potential liability under ERISA, a judge or jury would decide if an actuary’s conduct met the definition of fiduciary set forth in ERISA. • The Department of Labor also sets forth guidelines and interpretations regarding the definition of a fiduciary that may be helpful for an actuary: • The DOL has an ERISA-specific compliance assistance page that links to these interpretations, further Q&A’s, and methods of contacting the DOL with any questions related to ERISA. • http://www.dol.gov/compliance/laws/comp-erisa.htm

41. ERISA Actuaries as Fiduciaries Safe Bets under ERISA? • Safe Bets – Actions of non-fiduciaries  actuaries will not be held liable as fiduciaries for “usual professional services,” even if done negligently: • Calculating benefits owed to a particular ERISA plan participant. • Preparation of reports concerning participants’ benefits. • Advising participants of their rights and options under the plan. • Making recommendations to others for decisions with respect to plan administration (but not exercising final control or discretion to choose and implement). • Miscalculation and other errors with respect to benefit calculations. • Poor recordkeeping. • Failing to disclose actuarial methods and assumptions.

42. ERISA Actuaries as Fiduciaries Translation – How Could ERISA Apply to Actuaries? • Crossing Over – Moving from Actuary to Fiduciary • Accepting day-to-day management responsibilities over the plan. • Accepting discretion over the control of management of the plan or of management or disposition of assets. • Exerting an usual degree of influence over the trustees of the plan – causing them to relinquish independent discretion to instead follow the course prescribed by the actuary. • Merely advising trustees that rely heavily upon your expertise as a fiduciary is not sufficient – a fiduciary must exercise discretion or control or must have so heavily influenced the trustee so as to exercise sufficient control over the trustee’s discretion/decision-making.

43. Case Studies in Actuarial Ethics

44. Case Studies in Actuarial Ethics Case Study #1 • Actuarial Firm (AF) has a long-term relationship with M, a management company. AF had many duties at M: completing schedules to be submitted to PBGC and the IRS; calculating pension expenses; drafting correspondence related to the plan; and advising M regarding compliance issues. • M wanted to offer its employees an Early Retirement Plan (ERP). AF prepared estimates of the cost of establishing an ERP (including 8 different ERP designs) and prepared the final draft resolution adopted by the Board to amend the retirement plan to include the ERP.

45. Case Studies in Actuarial Ethics Case Study #1 • The Board adopted the amended retirement plan to include the ERP. The ERP provided alternative methods of payment through a single life annuity or a social security leveling option, at the discretion of the employee. AF prepared benefit plan information for each eligible employee, including calculation of benefits under the regular plan and the ERP, with both options.

46. Case Studies in Actuarial Ethics Case Study #1 • Four employees retired pursuant to the ERP and began to receive their benefits pursuant to the social security leveling option. AF discovered, a year later, that it had miscalculated the social security leveling payment option for the ERP. AF informed M and instructed it to correct its overpayment. M notified the retired employees by phone and through a letter drafted under AF’s supervision. AF agreed to pay the retirement fund for the payments made in excess, caused by its miscalculations. Retirees were not required to return the overpayments. And affected retirees were allow to again choose between the two payment options.

47. Case Studies in Actuarial Ethics Case Study #1 • Is AF liable for the mistakes it made regarding the social security leveling option payouts? • Is AF a fiduciary under ERISA? What roles, duties, or actions point to a fiduciary status?

48. Case Studies in Actuarial Ethics Case Study #2 • Equity Corporation (EC) was a small financial services institution. Over the course of an eight year period, it grew into a powerful corporation managing over a billion dollars in assets. Yet the growth was based on all fraudulent activities and EC was actually insolvent, filing for bankruptcy soon after litigation regarding the fraud began.

49. Case Studies in Actuarial Ethics Case Study #2 • Actuarial Firm (AF) did work for a subsidiary of EC, EC Life Insurance Corporation. AF calculated reserves and premiums for the life insurance policies. AF issues reports and opinions indicating that the subsidiaries premiums and reserves were in order. • In reality, more than ½ of the subsidiary’s recorded life insurance policies were fictitious.

50. Case Studies in Actuarial Ethics Case Study #2 • Should AF and its employees working on the plan have known the policies were fictitious? • What if AF employees discovered one fictitious policy? Should they have investigated the rest? • What if AF employees discovered fictitious policies after submitting a report referenced in a prospectus? • What if AF genuinely had no knowledge of the fictitious policies? Were there ethical violations? Is there potential legal liability?