Insourcing vs. Outsourcing

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

2. 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”)

3. 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

4. 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 • 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

5. 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

6. 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

7. 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.”

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

9. 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

10. 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

11. 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

12. 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

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