Fiduciary Key Risk Indicators FIDUCIARY INVESTMENT RISK MANAGEMENT ASSOCIATION NATIONAL CONFERENCE April 25-29, 2009 New Orleans Presented by Rebecca Bugaj Zak, Counsel, ReedSmith LLP Deborah Austin, Vice President, Director Personal Fiduciary Risk Mgmt and Compliance, Union Bank

KEY RISK INDICATORS What are they? Key Risk Indicator (“KRI”): Indicator of a possibility of a future adverse impact. Indicator: Warning signals Possibility: May or may not actually occur Future: Trying to understand the future, not criticize past actions Different than a Key Performance Indicator (“KPI”): Measures how well something is being done.

FIDUCIARY KEY RISK INDICATORS What is their place of importance? Enterprise Fiduciary Risk Management Program Identifies, Monitors, Manages, and Reports Fiduciary Risks Part Legal, Part Compliance, Part Operational Fiduciary KRI’s are Integral to “Identification”

FIDUCIARY KEY RISK INDICATORS Why are they important? They promote a culture of compliance with fiduciary principals and adherence to laws and regulations, which ultimately will… Mitigate losses, legal expenses, and/or regulatory sanctions/penalties; and Become a tool to promote business efficiencies and effectiveness as a driver of resources (people, technology, capital)

FIDUCIARY KEY RISK INDICATORS Choosing Key Risk Indicators Include Senior Management, Business Units (Fiduciary and Affiliates), Risk, Finance, Technology, Compliance, Legal, Ethics Office, Fraud/Investigative Units, and Internal Audit Focus on critical areas for your institution Your Business Model and Strategic Plans Current Product Offerings New Products/Acquisitions/Divestitures Support risk monitoring Support business decision making

FIDUCIARY KEY RISK INDICATORS Build the framework Not as easy as it sounds: Realistic implementation timeframes Clear definition/hypothesis: What is being measured? Why? Is it meaningful? Define categories, factors, sources, detail Types of indicators: risk, performance, leading, lagging, control Meaningful triggers for your institution Management Responses to Triggers Dynamic and evolving

FIDUCIARY KEY RISK INDICATORS High-Level Indicator Categories People Indicators Client/Business Indicators Fiduciary Oversight/Administration Indicators Compliance Indicators Legal Indicators Asset Management/Portfolio Indicators Audit/Regulatory Indicators Operational/Technology Indicators Affiliate and Third Party Provider Indicators

FIDUCIARY KEY RISK INDICATORS More Detailed Indicators Audit/Exam Issues Open, Past Due, High Risk Compliance Issues Open, Past Due, High Risk Pending and Open Litigation, Legal Expenses Employee Turnover Code of Ethics Violations New Product Initiatives Acquisitions/Divestiture Initiatives Client Complaints Accounts Closing (service, fee, performance issues) Reliance on third parties and completed monitoring

FIDUCIARY KEY RISK INDICATORS More Detailed Indicators (continued) Fiduciary Oversight and Administration Account Acceptance Exceptions Fee Exceptions Volume of “accommodation business” Volume of accounts with shared fiduciary responsibility Estates open greater than 1 year Account closings/distributions open longer than “x” months

FIDUCIARY KEY RISK INDICATORS More Detailed Indicators (continued) Asset Management/Portfolio Indicators Account reviews not completed Investment Style Appropriateness Proprietary Product Performance Portfolio guideline exceptions Completion of Investment Security Analysis Brokerage Placement exceptions Conflict Transactions (own bank securities, proprietary mutual funds) Client Proxies outside of parameters Counterparty Exposure

FIDUCIARY KEY RISK INDICATORS More Detailed Indicators (continued) - Operational Indicators Overdrafts/Uninvested Cash Reciept/Disbursement Volumes Unpriced Assets or Pricing/Valuation Outside of Standard Pricing Systems Trade Errors Open/Aged Reconciling Items Fraud Instances Missing Account Data Other dollar losses

FIDUCIARY KEY RISK INDICATORS More Detailed Indicators (continued) Compliance/Legal Indicators Disclosure Practices: failure to provide form ADV Failure to get approval for marketing/advertising/communications for sale of fiduciary products Number and amount of high risk country wire transactions Percentage of clients in business activities/locations rated high risk for AML Number of non-standard client contracts

FIDUCIARY KEY RISK INDICATORS Trust Company Example Frequency of review (Monthly/Quarterly) Categories Leading, Lagging and Concurrent Established and agreed upon thresholds Green, Yellow, Red indicator system Change in risk (up, down, same) Identify factors that contribute to the indicator and any change Outlook Who Tracks and Provides the Information?