DOL/ERISA Issues

1. DOL/ERISA Issues anInvestment Advisory Perspective David C. Franceski, Jr., EsquireStradley Ronon Stevens & Young, LLP William P. Simon, Jr.Managing Director, Retirement Plan Services Brinker Capital, Inc.

2. DOL’s • Changing Expectations David C. Franceski, Jr., EsquireStradleyRonon Stevens & Young, LLP

3. Who is an ERISA Fiduciary? • ERISA § 3(21) Definition of a Fiduciary: Any person who • exercises any discretionary authority or control respecting management of a plan or disposition of plan assets • renders investment advice for a fee or other compensation, direct or indirect, or has authority to do so • has any discretionary authority or responsibility in the administration of such plan • ERISA § 3(38) Definition of Investment Manager: Any fiduciary who • has the power to manage, acquire or dispose of plan assets • is registered as an investment advisor under federal or state law, a bank, or an insurance company qualified to manage etc.; and • has acknowledged in writing that he is a fiduciary with respect to the plan

4. DOL Gloss on Definition of Fiduciary 29 C.F.R. 2510.3-21(c) • Current Five Part Test – since 1975 • renders advice as to purchase, sale or value • on a regular basis • pursuant to a mutual agreement, arrangement or understanding, written or otherwise • which serves as a primary basis for investment decisions; and • which is individualized based on the needs of the plan • Investment Advisors Act, Section 202(a)(11): Definition of Investment Advisor • specifically excludes “any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and receives no special compensation therefore.” • But seeNagy v. DeWese, 771 F.Supp.2d 502 (E.D. Pa. 2011); 2011 WL 2565200 (E.D. Pa.)

5. 2011 Proposed Changes to DOL Regs • Changes Proposed: October 2010 • would have removed “regular basis” test • would have removed “primary basis” test • would have adopted a “more flexible” test geared to the actual conduct at issue • would include anyone holding him/herself out as a fiduciary, unless adverse and not impartial • would not include as fiduciary conduct the provision of: • educational and information materials • marketing a platform for services • general financial information and data • Changes Withdrawn: October 2011

6. Other Considerations • Impact of Dodd-Frank and proposed uniform fiduciary standard • Liability for Breach of Co-fiduciary: ERISA Section 1105 • knowing participation in, or concealment of, co-fiduciary’s breach • enabling co-fiduciary to breach by failing in one’s responsibilities • failure to remedy co-fiduciary’s breach with knowledge of the breach • liability may not be limited to actions or inactions within fiduciary role • possible repercussions: damages, attorneys’ fees, separate DOL action for penalties

7. Management Liability Under Federal and State Securities Laws • Possible Claims • direct violation: controlling person liability under § 20(e) of the Securities Exchange Act of 1934 • aiding and abetting: § 203(e)(6) of Investment Advisors Act of 1940 • companion state securities statutes • common law failure to supervise • Two Recent Examples • In the Matter of Theodore W. Urban – General Counsel Liabilitythough ultimately exonerated of failure to supervise changes, general counsel found by ALJ in SEC civil proceeding to have supervisory responsibility for sales personnel in case of abusive sales practices • In the Matter of Wunderlich Securities – CEO and CCO liabilityCEO and CCO agreed to civil penalties totaling $95,000 in SEC action for overcharging fees and failing to disclose principal transactions in fee-based brokerage accounts • “Tone at the Top”

8. Key Fiduciary Concepts • All actions must be in the Client’s Best Interest • Be aware of actual or potential Conflicts of Interest; which are waivable and which are not • The paramount importance of Disclosure • Absolute ban on Prohibited Transactions • Costs and compensation – both direct and indirect • The impact of Dodd-FrankWhistleblowerprovisions

9. The Impact of New Section 404(a)(5) • Unlike § 408(b)(2) disclosures to plan sponsors, § 404(a)(5) disclosures are directly to plan participants • Effective Date: May 31, 2012 • DOL compliance cost estimates: • $2 billion in compliance costs • $14.9 billion in lower participant fees and expenses • on top of $135 million in Year 1 § 408(b)(2) compliance costs • Who will provide the resources and information: Plan Sponsor v. other Plan Fiduciaries

10. Competitive Impact of New Regulations • Downward pressure on plan fees and expenses • Cost-saving measures, with advantage to providers with low cost solutions • New and different pricing options • Limitations on plan types and plan options • Revise or institute plan minimums • Increased use of “brokerage windows”

11. Legal Takeaways • Review and update firm policies and procedures • Review registrations – Series 6/7 v. IAR v. Solicitor • Review disclosure documents • fee disclosure • direct and indirect cost disclosure • principal transactions disclosure • Solicitor disclosure • Form B/D • Form ADV • Review institutional roles – CEO v. COO v. General Counsel • Training and continuing education • Know your co-fiduciaries: due diligence

12. So What is the Big Deal About • Fiduciary Responsibility? William P. Simon, Jr.Managing Director, Retirement Plan Services Brinker Capital, Inc.

13. It Depends on Who You Ask • Plan-sponsors ranked Fiduciary support 12th in importance for reasons to select a provider. • Wal-Mart, and Merrill Lynch agreed to pay $13.5 Million to settle 401(k) fiduciary lawsuit Source: Cogent Research, Financial Advisor Magazine

14. Suitability • vs. • The Client’s Best Interest

16. Agenda • How today’s markets impact fiduciary risk • Fiduciary solutions: know the options • Building the right structure

17. The Last 3 to 4 Years • Managing Returns to… • Managing Risk

18. Summary of S&P 500 Rolling 10-Year Periods 1926-2010 Source: Zephyr StyleADVISOR, PPB Advisors, LLC

19. Fiduciary Solutions: • Know the Options

20. Many Firms, Many Voices • The Five Largest, Independent Broker Dealers have 28,201 Financial Advisors • How do you manage their interaction with multiple plan-sponsors, and reduce your liability? Source: Investment Advisor Magazine

21. FINRA – Dispute Resolution CasesAbout 6,000 Cases per Year Source: FINRA

22. Arbitration Cases Served by Controversy 2010 Source: FINRA

23. Where Do You Fit In? Investment Advisor? Full Scope? • Limited Scope? 3(38)? Solicitor? 3(21)?

24. Solicitor vs. Advisor • A Solicitor regularly refers clients to an Investment Advisor and who receives compensation for those referrals. • An Advisor provides advice or analysis on securities either by making direct or indirect recommendations to clients or by providing research or opinions on securities or securities markets. An adviser with fiduciary responsibilities is held to a higher ethical standard and should have the knowledge to provide sophisticated wealth management services and advice.

25. Where Do You Fit In? • 3(21) Limited Scope • Has no discretion. Advice may, or may not be acted upon • 3(21) Full Scope • Is a Named Fiduciary, and has discretion to hire, or change a manager • 3(38) Investment Manager • By definition they have discretion, and act as a fiduciary

26. Other Options? • Fiduciary Warranty • or • Fiduciary Guarantee

27. Read the Small Print! • The Fiduciary Warranty does not“extend to claims that any expenses paid directly or indirectly by the Plan are reasonable.” • "...This Warranty and Indemnification does not, and is not intended to, impose or imply any fiduciary status or responsibility with respect to the Plan or any other person.” Source: Mark D. Mensack AIFA, Piedmont Independent Fiduciaries

28. Building the Right Solution

29. Control What You Can • Plan sponsor • (You) • ERISA 3(38) Fiduciary

30. Fiduciary Responsibility

31. Selecting the right investment line up • Menu-list of funds • Advice • Model portfolios

32. Performance – Average Investor Source: J.P. Morgan Asset Management, 2009 The indexes are used as follows: REITS: NAREIT Equity REIT Index, EAFE: MSCI EAFE, Oil: WTI Index, Bonds: Barclays Capital U.S. Aggregate Index, Homes: median sales price of existing single-family homes, Gold: USD/troy oz, Inflation: CPI. Average asset allocation investor return is based on an analysis by Dalbar Inc. which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. All returns are annualized (and total return where applicable) and represent the 20-year period ending 12/31/09 to match Dalbar’s most recent analysis.

33. 401(k) Investors Who Use Professional Help Outperform Those Without It • Investors who relied on professional help in the form of target-date funds, managed accounts and advice earned nearly three percentage points more than those that did not. • The plans covered 400,000 participants with $25 billion in assets. Source: Aon Hewitt and Financial Engines-Money Management Executive September 26, 2011 33

34. History and Responsibility • Brinker Capital is an ERISA 3(38) Investment Manager • Brinker Capital introduced risk-based, model portfolios 17 years ago • Brinker Capital was one of the first Investment Managers to introduce lower-cost, ETF based models for 401k’s • Brinker Capital assumes fiduciary responsibility for our Managed Accounts and Plus Funds

35. Summary • Do you expect risk to decline? • What is your role with regard to the plan? • Partner with a 3(38) fiduciary, and provide diversified models

36. Case Studies

37. David C. Franceski, Jr., EsquireStradley Ronon Stevens & Young, LLP 215.564.8120 DFranceski@STRADLEY.COM William P. Simon, Jr.Brinker Capital, Inc. 800.333.4573 bsimon@brinkercapital.com