Investment Management “Hot” Topics What would I expect to find in the way of Best Practices?

Best Practices for Investment Managers  STEWARDS  COMMITTEE MEMBERS  TRUSTEES  BOARDS  MONITORING  CHOOSING  MANAGERS  SELECTING  BUYING  SELLING  MANAGING

EVOLUTION OF THE CONCEPT OF PRUDENCE  Harvard v. Amory (1830)  Prudent Man Rule Common Law  ERISA (1974)  Prudent Expert Rule Federal Law  Uniform Prudent Investor Act (1994)  Private Trusts State Law  Uniform Management of Institutional Funds Act (2002)  Charitable Trusts State Law

Definition of Prudence  The fundamental principle for professional money management, stated by Judge Samuel Putnum in 1830  "Those with responsibility to invest money for others should act with prudence, discretion, intelligence, and regard for the safety of capital as well as income."

INDUSTRY BEST PRACTICE   Trade Management Guidelines  Soft Dollar Standards  Research Objectivity Standards  Global Investment Performance Standards  Asset Manager Code of Conduct   UPIA (1994)  UMIFA (2002)

INDUSTRY BEST PRACTICES   Compensation Practices  Firm Management  Internal Firm Policies  Relationships with Regulators  Role of Compliance Professionals  Investor Confirmations  Registered Rep Supervision  Investor Complaints  Soft Dollars  Sales Supervision

Best Practices for Investment Managers  Key decision-makers demonstrate expertise in their field, and there is a clear succession plan in place.  Qualitative Evaluation of Expertise  Formal Succession Plan  Compensation Practices  Firm Management

Best Practices for Investment Managers  There are clear lines of authority and accountability, and the mission, operations, and resources operate in a coherent manner.  Strategic Plan  Tactical Plan  IT Plan  Firm Management

Best Practices for Investment Managers  There are effective and appropriate external management controls.  Audits  Examinations  Compliance Program  Board & Committee Oversight

Best Practices for Investment Managers  Mutual Funds, Hedge Funds & Annuities associated with the organization have suitable board governance.  Performance  Suitability  Expenses  Standards for Selection & Retention  Conflict & Self-Dealing Addressed

Best Practices for Investment Managers  Remuneration of the Investment Manager/s and compensation of key decision-makers are aligned with client interests.  Performance Based  Long-term Focus  Fully-disclosed  Compensation Practices

Best Practices for Investment Managers  The working atmosphere is conducive to attract, retain, and motivate key employees.  Turnover  Decision-making Process  Creativity  Opportunity  Compensation Practices  Formal Evaluation Process  Internal Firm Policies

Best Practices for Investment Managers  There is a formal structure which supports effective compliance.  Corporate Culture/Attitude  Compliance Program  Compliance Officer  Control Self-assessments  Role of Compliance Professionals

Best Practices for Investment Managers  The organization provides financial transparency that demonstrates there is capital and profitability to sustain operations and adequate disclosures are made.  Financials  Form ADV  Fee Schedules  Agreements  Disclosure Documents Proxy Voting, Soft-dollar, Pricing & Best Execution

Best Practices for Investment Managers  The organization is committed to firm- wide innovation and has established a competitive position of strength.  Creativity  Decision-making  Best Practices  Systems  Personnel Development

Best Practices for Investment Managers  There is an effective process for allocating and managing both internal and external resources and vendors.  Soft-dollar  Trade Allocations  Research Objectivity

Best Practices for Investment Managers  The organization has a diverse client base, and the capacity to service the same.  Concentrations by:  Fees  Asset Class  Security  Client  Product

Best Practices for Investment Managers  The organization is properly managing the growth/decline of assets under management.  Growth/Decline Rates: Fees Assets Accounts

Best Practices for Investment Managers  The investment system is clearly defined and consistently adds value.  Investment Story  Process  Policies, Procedures & Controls  Exception Identification, Tracking & Resolution

Best Practices for Investment Managers  The investment research process is defined, focused, and documented.  Soft-dollar Budget  Benefit Derived  Off-list Securities  Research Objectivity

Best Practices for Investment Managers  The portfolio management process for each distinct strategy is clearly defined, focused, and documented.  Benchmarks  Asset Allocation  Deviations from Policy  Periodic Reviews  Risk & Return Differentiation

Best Practices for Investment Managers  The trade and execution process is defined, focused, and documented.  Soft-dollars  Best Execution  Trade Allocation

Best Practices for Investment Managers  The organization has responsible and ethical marketing and sales practices.  AIMR/CFA Compliant (Best Practices) Performance Reporting (GIPS) oReturn oRisk oBenchmarks oTime-frame oClassification Trade Management Research Objectivity Proxy Voting

Best Practices for Investment Managers  There is a defined process for the attribution and reporting of costs, performance, and risk.  Performance Measurement Risk Return Benchmark  Performance Attribution Classifications Cause & Effect  Fees & Expenses Disclosed

Best Practices for Investment Managers  The investment system and portfolio management processes are monitored and are consistent with assigned mandates.  Performance Dispersion  Off-list Securities  Concentrations  Exceptions to Min/Max Allocations

Best Practices for Investment Managers  There is an effective risk-management process to evaluate both the organization’s business and investment risk.  Control Self-assessments  Risk Management Plan  Role of Compliance Professionals

Best Practices for Investment Managers  Control procedures are in place to periodically review policies for  Best Execution,  Soft Dollars,  Pricing, and  Proxy Voting.

Best Practices for Investment Managers  There is an effective process for identifying, managing, and disclosing conflicts of interest.  Broker/Dealer  Investment Managers  Mutual Funds  Insider Trading  Front-running  Pricing  Asset Manager Code of Conduct

Best Practices for Investment Managers  There is a process to periodically review the organization’s effectiveness in meeting its fiduciary responsibilities.  Annual Reviews  Investment Policy Statements  Investment Objectives  Risk & Return Levels  Vendor Selection & Usage

BEST PRACTICES FOR INVESTMENT MANAGERS 27 Practices

ANALYZE  Practice No. 1.1 Investments are managed in accordance with applicable laws, trust documents, and written investment policy statements  Practice No. 1.2 Fiduciaries are aware of their duties and responsibilities  Practice No. 1.3 Fiduciaries and parties in interest are not involved in self-dealing  Practice No. 1.4 Service agreements and contracts are in writing, and do not contain provisions that conflict with fiduciary standards of care  Practice No. 1.5 There is documentation to show timing and distribution of cash flows, and the payment of liabilities  Practice No. 1.6 Assets are within the jurisdiction of U.S. courts, and are protected from theft and embezzlement

DIVERSIFY  Practice No. 2.1 A risk level has been identified  Practice No. 2.2 An expected, modeled return to meet investment objectives has been identified  Practice No. 2.3 An investment time horizon has been identified  Practice No. 2.4 Selected asset classes are consistent with the identified risk, return, and time horizon  Practice No. 2.5 The number of asset classes is consistent with portfolio size

FORMALIZE  Practice No. 3.1 There is detail to implement a specific investment strategy  Practice No. 3.2 The investment policy statement defines the duties and responsibilities of all parties involved  Practice No. 3.3 The investment policy statement defines diversification and rebalancing guidelines  Practice No. 3.4 The investment policy statement defines due diligence criteria for selecting investment options

FORMALIZE (continued)  Practice No. 3.5 The investment policy statement defines monitoring criteria for investment options and service vendors  Practice No. 3.6 Investment policy statement defines procedures for controlling and accounting for investment expenses  Practice No. 3.7 Investment policy statement defines appropriately structured, socially responsible investment strategies

IMPLEMENT  Practice No. 4.1 The investment strategy is implemented in compliance with the required level of prudence  Practice No. 4.2 Fiduciary is following applicable “Safe Harbor” provisions (when elected)  Practice No. 4.3 Investment vehicles are appropriate for the portfolio size  Practice No. 4.4 A due diligence process is followed in selecting service providers, including the custodian

MONITOR  Practice No. 5.1 Periodic performance reports compare the performance of money managers against appropriate index, peer group, and IPS objectives  Practice No. 5.2 Periodic reviews are made of qualitative and/or organizational changes to money managers  Practice No. 5.3 Control procedures are in place to periodically review a money manager’s policies for best execution, soft dollars, and proxy voting  Practice No. 5.4 Fees for investment management are consistent with agreements and with the law  Practice No. 5.5 “Finders fees,” 12b-1 fees, or other forms of compensation that have been paid for asset placement are appropriately applied, utilized, and documented