1. Breakfast Presentation by the Investment Company Institute October 24, 2013 Cincinnati, Ohio Karrie McMillan, ICI General Counsel Rochelle Antoniewicz, ICI Senior Economist Michelle Mesack, ICI Financial Services Policy Director Annette Capretta, Deputy Managing Director of Independent Directors Council

2. Overview What is ICI? What is IDC? State of the Industry Key Policy Initiatives Congressional Update 1

3. What is ICI: Mission Advance the interests of investment companies, their shareholders, directors and advisers Encourage adherence to high ethical standards by all industry participants Promote public understanding of investment companies 2

4. Who is ICI: Our Role ICI Staff Legal and Regulatory  Government Affairs  Research Public Communications  Operations 3 MEMBER PRIORITIES — INVESTOR FOCUS POLICYMAKERS  MEDIA  FINANCIAL INTERMEDIARIES

5. What is ICI: Advocacy for Funds and their Shareholders Goal: Preserve the integrity and efficacy of investment companies as a vehicle to deliver investment services Policy making bodies – U.S. and foreign, federal and state, legislative and regulatory, SROs, standards setting bodies, etc. Subjects – securities regulation, tax, pension, commodities Other constituencies – trade groups, think tanks, academics, commentariat 4

6. What is ICI: Advocacy for Funds and their Shareholders WHAT WE BRING Research and data Presence in Washington – and beyond One industry voice Clear focus, comprehensive approach 5 WHAT WE SEEK Sound regulation serving funds and investors Tax policies promoting savings and investment Policies building retirement security

7. What is IDC: Mission Advance director education; Encourage director engagement and interaction; Assist in the formulation of public policy positions; and Promote public understanding of the role and responsibilities of directors and the operation of fund boards 6

8. IDC Offerings Conferences  Annual Fund Directors Conference in Chicago (October/November)  Spring Workshop in Washington, DC (with ICI’s General Membership Meeting) (May) Webinars (free for independent directors) Regional chapter meetings Board Update, monthly electronic publication Memos on regulatory, legislative and other developments 7

9. Recent Trends in the Fund Industry Moderate outflows from bond funds because of rising rates.  Little impact on the bond market.  Demographics indicate long-run demand for fixed- income funds. Stories about a “great rotation” from bonds to domestic stocks are overblown.  Actively managed domestic equity mutual funds have substantially smaller outflows.  Inflows to stock funds remain concentrated in ETFs, index, international, and balanced funds. 8

10. Bond Fund Flows, the Bond Market, and Underlying Long-Run Demand

11. Net Flows to Bond Mutual Funds Related to Bond Returns 10 1990–2013* Percentage of total net assets Percentage points *Data are through September 2013. 1 Net new cash flow to bond funds plotted as a 3-month moving average of the share of NNCF in previous month assets. The data exclude flows to high-yield bond funds. 2 Year-over-year change in the Citigroup Broad Investment Grade Bond Index. Sources: Investment Company Institute and Citigroup 2013* Net new cash flow 1 Total return on bonds 2

12. Until Recently Had Strong Demand for Bond Mutual Funds and ETFs 11 Cumulative flows and net share issuance of bond mutual funds and ETFs Billions of dollars, 2007–2013* *Data are through September 2013. Bond mutual fund flows include net new cash flow and reinvested dividends. Sources: Investment Company Institute and IndexUniverse Bond mutual funds Bond ETFs

13. 12 As Interest Rates Rose, Demand for Bond Funds Dropped Billions of dollars, 2013 Sources: Investment Company Institute and IndexUniverse

14. Bond Funds Had Inflows in May Despite Rise in Rates May 2013  Yield on the 10-year Treasury rose 47 bps in May following Fed officials’ tapering remarks.  Bond fund flows remained positive in May. 13 1 1 Cummulative change in the 10-year Treasury note from May 1, 2013

15. Bond Fund Outflows in June Followed Rise in Rates June 2013  Outflows from bond funds began in early June.  Yield on 10-year Treasury was little changed until Bernanke’s press conference on June 19, then rose 32 bps to end of week (June 21).  Bond fund outflows were concentrated in the week following that jump in rates. 14 1 1 Cummulative change in the 10-year Treasury note from May 1, 2013

16. Continued Outflows from Bond Funds over Summer July, Aug. & Sept. 2013  Moderate outflows in bond funds in July and September.  Nearly $24 billion in outflows in second half of August.  Last week of Aug., interest rate on 10-year Treasury fell 9 bp despite $10 billion outflow from bond funds. 15 1 Cummulative change in the 10-year Treasury note from May 1, 2013 1

17. Monthly Mutual Fund Gross Purchases and Sales of Fixed Income Securities Are Small Share of Primary Dealer Transactions 16 Percentage, January 2012–August 2013 *U.S. Government primary dealer transactions consist of U.S. Government, federal agency, and mortgage-backed securities transactions with others outside the inter-dealer market. Sources: Investment Company Institute and the Federal Reserve Bank of New York *

18. Percentage of households owning mutual funds and households’ mutual fund assets, 2013 Mutual Fund Assets Are Concentrated Among Individuals 45 or Older 17 Age of head of household 66% 81% Source: 2013 ICI Annual Mutual Fund Shareholder Tracking Survey

19. Average Allocation to Equity in 401(k) Accounts Declines With Age 18 Percentage of 401(k) account balances allocated to stocks by age, 2011 Age Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project; see Holden, VanDerhei, Alonso, and Bass “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2011,” ICI Research Perspective and EBRI Issue Brief (December 2012)

20. Stock Fund Flows and the “Great Rotation”

21. Net Flows to Equity Mutual Funds Related to Stock Price Performance 20 1990–2013* *Data are through September 2013. 1 Net new cash flow to equity funds is plotted as a six-month moving average. 2 The return on equities is measured as the year-over-year change in the MSCI All Country World Total Return Index. Sources: Investment Company Institute and Morgan Stanley Capital International 2013* Billions of dollars Percentage points Net new cash flow 1 Total return on equities 2

22. Pressures on Actively Managed Domestic Equity Mutual Funds 21 Net new cash flow, billions of dollars, yearly, 2000–2013* *Data are through August 2013. Source: Investment Company Institute

23. Mutual Fund Investors Concentrate Their Assets in Lower-Cost Funds 22 Percent, 1998–2012 1 The industry average expense ratio is measured as an asset-weighted average. Note: Figures exclude mutual funds available as investment choices in variable annuities and tax-exempt mutual funds. Sources: Investment Company Institute and Lipper 1

24. Some of the Outflows from Domestic Equity Mutual Funds Have Gone to ETFs 23 Cumulative flows and net share issuance of domestic equity mutual funds and ETFs Billions of dollars, 2007–2013* *Data are through August 2013. Equity mutual fund flows include net new cash flow and reinvested dividends. Source: Investment Company Institute Aug-13 Domestic equity ETFs Actively managed domestic equity mutual funds Index domestic equity mutual funds

25. Investors Have Diversified Internationally 24 Cumulative flows and net share issuance of world equity mutual funds and ETFs Billions of dollars, 2007–2013* *Data are through September 2013. World equity mutual fund flows include net new cash flow and reinvested dividends. Sources: Investment Company Institute and IndexUniverse World equity mutual funds World equity ETFs

26. Investors Gravitating to Balanced Funds 25 Cumulative flows of balanced mutual funds Billions of dollars, 2007–2013* *Data are through September, 2013. Balanced mutual fund flows include net new cash flow and reinvested dividends. Source: Investment Company Institute

27. 401(k) Participants Pared Back Equity Exposure, Not Fled Equity Market 26 Note: Equities include equity funds, company stock, and the equity portion of balanced funds. “Funds” include mutual funds, bank collective trusts, life insurance separate accounts, and any pooled investment product primarily invested in the security indicated. Components may not add to 100 percent because of rounding. Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project; see Holden, VanDerhei, Alonso, and Bass “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2011,” ICI Research Perspective and EBRI Issue Brief (December 2012) Percentage of 401(k) participants by age, year-end 20s30s40s50s60sAge Year Percentage of account balance invested in equities

28. Summary of Demand for Funds in 2013 27 Mutual fund net new cash flow and ETF net share issuance Billions of dollars, monthly, 2013* *Data are through September 2013. Components may not add to total due to rounding. Sources: Investment Company Institute and IndexUniverse

29. Key Policy Initiatives Money Market Funds  Stable NAV messaging  Research-based analysis of alternative reform ideas  Advocacy reached SEC, Federal Reserve, Treasury and all other FSOC members  Strong media response and Hill outreach Exchange-Traded Funds  Rapid responses to concerns about product’s operations  Maturing product; no longer “darling of the press”  SEC rule? 28

30. Key Policy Initiatives, continued SEC Agenda  Valuation guidance  OCIE/distribution  Enforcement CFTC and Rule 4.5  Background on rule and lawsuit  Implementation of harmonization rules 29

31. Key Policy Initiatives, continued Dodd-Frank Act Implementation  Over 150 rules or studies potentially affecting industry  Swaps and new clearing mechanisms  SIFI designation; OFR Report Tax Treatment of Funds  Retirement savings initiatives  FATCA  RIC modernization 30

32. Congressional Update I.Fiscal Issues: A) Budget Conference B) Continuing Resolution to Jan 15 C) Debt Ceiling Raised to Feb 7 II.Tax Reform OCTOBER 201331

33. Fiscal Issues: Definitions Continuing Resolution – funds discretionary government spending at prior fiscal year levels unless “anomalies” are included that alter spending. Can also serve as vehicle for other legislative initiatives Debt Ceiling – the amount of money the federal government can borrow OCTOBER 201332

34. Shutdown and Debt Ceiling Government shutdown for 16 days Congress reached a deal the day before Treasury Secretary Lew said the US would hit debt ceiling. OCTOBER 201333

35. October 16 th Agreement Continuing Resolution – funds government through Jan. 15 th at 2013 funding levels Debt Ceiling – raised through Feb. 7 th Budget Conference Committee – Dec. 13 th agreed upon date for a budget deal (non- binding) OCTOBER 201334

36. Budget Conference Committee - Members Co-Chairs:  Rep. Paul Ryan (R-WI) – Budget Cmmte Chair  Sen. Patty Murray (D-WA) – Budget Cmmte Chair 29 Members - includes party leaders, veteran negotiators and experts on the budget, taxes and appropriations OCTOBER 201335

37. Budget History First conference committee in 4 years House Budget - $967B (sequestration level)  Deep spending cuts  Balances budget in 10 years Senate Bill - $1.058T  Includes tax revenue increases  Reduced deficits, but does not balance budget OCTOBER 201336

38. Conference Committee – Key Issues Overall Spending Levels/Deficit Reduction Tax Revenue Increases vs. Spending Cuts Grand Bargain? Affordable Care Act (aka ObamaCare)? OCTOBER 201337

39. Fiscal Issues: Key Facts Sequester cuts are $1.2 trillion over 10 years – $80 billion in FY13 (due to ATRA) and $109 billion in the current CR The debt has risen $7.9 trillion since October 1, 2007 (FY08) Cumulative debt represents 105% of GDP – the greatest amount since the height of WWII The FY13 budget deficit is $836 billion – down from 4 straight years of $trillion plus deficits OCTOBER 201338

40. Fiscal Issues: Key Facts 2013 Federal Revenue: $2.8 trillion – most in history – $2.45 trillion in 2012 Entitlement spending driving deficits / debt: 1)Over the next 10 years mandatory outlays (primarily healthcare and social security) will represent 61% of federal spending 2)Debt servicing will represent 11% 3)Discretionary spending just 27% – portion of budget subject to Congressional Appropriations OCTOBER 201339

41. CR & Debt Ceiling – Recent ICI Activity 9/25 – Briefed Senate Democratic Steering Committee about the consequences of fiscal uncertainty and failing to raise the debt ceiling 9/27 – Signed multi industry coalition letter to Congress supporting timely action on CR and the debt ceiling while expressing need to contain spending and reform entitlements 10/9 – Invited to brief House Republican Conference about consequences of fiscal uncertainty 10/10 – Testified in front of Senate Banking Committee OCTOBER 201340

42. Fundamental Tax Reform Bipartisan, Bicameral interest in moving forward, Chairman Baucus (D-MT) & Chairman Camp (R-MI) “Simpler Taxes for America Tour” House Ways & Means working groups Senate Finance “blank slate” submissions OCTOBER 201341

43. Fundamental Tax Reform: Issues Lower the Rates, Expand the Base Revenue Neutral vs. Revenue Increase “Revenue Raisers” are Politically Sensitive Issues – Mortgage tax deduction, retirement savings incentives, charitable deductions OCTOBER 201342

44. Fundamental Tax Reform: Issues Retirement Savings Incentives Municipal Bond Tax Treatment Roth Treatment Rumors OCTOBER 201343