Marilyn Smith Head U.S. Risk Policy & Governance BMO Financial Group/ Harris Bank

1. Bank Broker-Dealers / What You Should Know Marilyn Smith Head U.S. Risk Policy & GovernanceBMO Financial Group/ Harris Bank • April 18  2011

2. Disclaimer ANY PART OF THIS PRESENTATION OR DISCUSSION REPRESENTS VIEWS AND OPINIONS THAT ARE SOLEY MINE AND NOT OF MY COMPANY OR ANY COMPANY YOU MAY PRESUME THAT I REPRESENT. THESE VIEWS ARE SUBJECT TO CHANGE WITHOUT NOTICE.

3. Bank Broker-Dealers/What You Should Know • What is a Broker-Dealer – Quick Review • General standards for Broker-Dealers • General standards for Bank-Owned Broker-Dealers • Dodd-Frank Implications • Broker Dealers as Fiduciaries

4. Common Functions of Broker-Dealers • Order execution • Transaction clearing • Custody • Research • Recommendations • Valuations • Underwriting • Wealth Management

5. Types of Brokers

6. Some General Standards For Broker-Dealers

7. Some General Standards For Bank-Owned B-Ds

8. Advantages to Bank-Owned BDs Provides customers : • ‘One Stop Shopping’ for Financial Services • Retention of certain securities positions • Access other products and services • Different levels of discretion over their assets Provides the BD: • Access to less costly funding • More sales opportunity • Retention of assets

9. Additional Standards For Bank-Owned B-Ds Heightened Potential Conflicts of Interest

10. Dodd-Frank Act , 7/21/2011 Applies to financial institutions Defines ‘financial institution” • a depository institution or depository institution holding company, • a broker-dealer registered under section 15 of the ‘34 Act • a credit union, • an investment adviser under the ’40 Act • the mortgage agencies (FNMA, FHLM), or • any other financial institution that the appropriate Federal regulators, jointly, by rule, determine should be treated as a covered financial institution for these purposes. And for purposes of defining “large” or “significant” it includes the “consolidated” holdings of a financial holding company

11. Dodd-Frank Act Implications for Broker-Dealers 7/21/2010 • Accredited Investor • Compensation • Derivatives/Swaps • Fiduciary Standards [913] • Transactions with Affiliates

12. Definition of Accredited Investor [413] • Definition of Accredited Investor changes to EXCLUDE the value of the primary residence: (i) individual net worth (or joint net worth with his or her spouse) in excess of $1 million or (ii) annual income in excess of $200,000 (or joint annual income with his or her spouse in excess of $300,000) for the past two years and (iii) the reasonable expectation of meeting the same level of income in the current year. • Defines “Qualified Purchasers” for participation in certain products or transactions - private placements ( Reg D) - private equity funds - hedge funds

13. Compensation [956] • For publicly traded companies • Executive Compensation • Say-on-Pay • shareholder approval • clawback policies following a restatement (3 yr period) • Elimination of broker-dealer voting of proxies re exec comp • For financial institutions with assets > $1Bil Financial Institution • Prohibits ‘incentive-based’ compensation, fees, or benefits that encourages inappropriate risk or that could lead to losses • Directs Bank regulators to prohibit it ,and • Allows Bank regulators to impose higher capital charges • For financial institutions > $50Bil • Deferrals of compensation of executives Policy and procedure and disclosures requirements as well

14. Derivatives/Swaps [Title VII] Definition of a swap dealer and major participant Requires registration by swap dealers and major swap participants with CFTC Defines a major participant as anyone who is not a swap dealer and maintains substantial positions excluding hedging positions for commercial or employee benefit plan risk Defines “significant position” as whatever the CFTC determines to be effective Requires introducing broker to implement conflict-of-interest procedures to ensure independence between research and analysis and trading and clearing. Establish robust procedures for day to day management Allows CFTC to impose limits on amount of positions held of any one person

15. Affiliate Transaction Restrictions [Title VI] Title VI (amends 23A & 23B) Applies to Banks… eliminates the exception for affiliated transactions in credit exposed derivatives, repos, reverse repos, securities lending and borrowing transactions, and additional categories of ‘covered’ transactions considered to be extensions of credit factored into the Bank’s legal lending limits prohibits use as collateral of low-quality issues of an affiliate

16. Fiduciary Standard for Broker-Dealers Section 913 SEC study concluded January 2011 regarding proposal … Recommends that the Commission “promulgate a rule that the standard of conduct for all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers (and such other customers as the Commission may by rule provide), shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice”. aka “…the uniform fiduciary standard

17. Fiduciary “Standards” For Broker-Dealers * $100mil a/o 7/1/2011

18. Recommendations for Approaching Implementation • Make sure your business assessments/maps are up-to-date • Affiliations • Dual employees • Establish internal ‘rules’ for your business/activity/product scenarios • What can happen • How will we know when it happens • What can we do when it does happen • Document, document, document • “standards” are presumptive; remember that they will be applied after the fact

19. Samples • Sample Brokerage Applications with Investment Objectives • Form BD

20. QUESTIONS