Insourcing vs. Outsourcing “Our Take” LIVE November 1, 2012

Compliance Rule (206(4)-7) Adopt written policies and procedures reasonably designed to prevent violations of the securities laws; Annually review the policies and procedures; and Designate a Chief Compliance Officer (a “CCO”) 2

Regulatory Requirements Registration/Disclosure Fiduciary responsibility and suitability Solicitors Advertising Privacy Client Agreement Proxy Voting Anti-Money Laundering Proxy Voting Fees Custody Trading Insider Trading Supervision and licensing Code of Ethics Inspections and Enforcement Section 13 filings Recordkeeping Compliance 3

What is Compliance? Appoint a CCO Implement/Maintain compliance manual Ongoing testing of policies and procedures Annual review and report of findings Risk Assessment Monitor operations Training Compliance committee/management review Compliance calendar Certifications and notices Licensing Investigate misconduct Manage regulatory inquiries and exams Code of Ethics and preclearance ADV updates Review marketing materials SEC filings Respond to Clients/Boards Due diligence service providers 4

Risks of Noncompliance Public sanction –reputation and client risk –competitiveness Civil sanctions: bans from industry Civil monetary penalties –Rescission –disgorgement Criminal prosecution Increased examination and regulatory focus 5

Compliance Programs: Enforcement Lessons Actions against firms for weak compliance programs (In re Asset Advisors et. al.; In re Wunderlich; In re JSK Associates; In re Alpine Woods) Template or incomplete compliance manuals (BD WSPs) Inadequate testing and annual reviews No training Inexperienced or absent CCO No implementing procedures Failure to properly resource Ignoring Code of Ethics 6

Delaying Canned compliance manual Adopt P/P but no implementation Add CCO responsibilities to CFO, COO, Administrator Hiring under-qualified Allocate minimal time/resources “We do the right thing.” 7

Insourcing vs. Outsourcing Regulatory Knowledge Depth Business Knowledge Management Control Leverage Independence Cost Liability Regulators 8

Knowledge & Depth Power of numbers –Compare and benefit from combined experience –Sharing information –Industry best practices –Institutional knowledge lives after turnover Unique person –Firm-specific knowledge 9

Management, Control, Independence Hiring a firm ensures accountability and independence –24/7/365 availability –Accountability –Easier to change firms than fire a person In-house CCO reports directly to management –Control vs. loss of independent perspective –Career pathing 10

Cost and Leverage Buying a service vs. a person –Tailor costs to firm size and needs Ability to leverage in-house CCO for other functions –Paying compliance dollars for non- compliance functions 11

Liability and Regulators Agreement offers direct recourse In-house CCO can only be fired Regulators want best practices compliance programs Firm needs to adequately resource and empower In-house CCO does not shield firms from enforcement actions 12

What to do? Outsourcing: Best practices, depth, independence, accountability, sharing liability, management Insourcing: leverage, control compliance output 13