WHY COMPLY? The Growing Importance of Compliance in the Financial Services Industry

1. WHY COMPLY?The Growing Importance of Compliance in the Financial Services Industry 2005 SPIAS Compliance Training Session October 2005 Robert Harris Chief Compliance Officer

2. “GOOD COMPLIANCE IS GOOD BUSINESS” •  ……SOUNDS GOOD, BUT WHAT DOES IT REALLY MEAN? • COMPLIANCE ISSUES MAY LURK EVERYWHERE • SOME EXAMPLES: • ·PRE- OR POST-DATING DOCUMENTS TO SHIFT REVENUE/EXPENSE ACCRUAL FROM ONE PERIOD TO ANOTHER • ·YOU’VE INSTALLED AN E-MAIL RETENTION SYSTEM, • BUT DOES IT WORK? • · A GOOD CLIENT OFFERS YOU AN ALL- EXPENSES PAID TRIP TO THE SUPER BOWL

3. COMPLIANCE BOOT CAMP • What’s all this “registered investment adviser” stuff? • Regulation by the SEC: • ·Investment Advisers Act of 1940 ·Investment Company Act of 1940 ·Securities Act of 1933 ·Securities Exchange Act of 1934

4. COMPLIANCE BOOT CAMP (cont’d) • PLUS… • ·Privacy rules under Gramm-Leach-Bliley Act • ·Sarbanes-Oxley • ·USA PATRIOT Act • ·Foreign Corrupt Practices Act

5. INVESTMENT ADVISERS ARE FIDUCIARIES • nDuty of utmost good faith to act solely in the best interests of the client • No conflicts of interest, or at least disclosure when conflicts • are possible • Don’t trade securities ahead of your client • Don’t unfairly advantage one client over another • Outside employment or activities must not conflict with duties • at S&P

6. COMPLIANCE THEN… • 1990s and before… • ·Compliance was important, but… • The turning of the century and the tide: • · The bubble bursts • · Enron, Wordlcom, Parmalat • · Mutual funds lose their “squeaky clean” image • Market timing, late trading, breakpoint abuses, • shelf space shenanigans • · SEC upstaged by NY Attorney General Spitzer

7. …AND NOW • SEC puts a spotlight on compliance • · Investment Company Act Rule 38a-1 • · Investment Advisers Act Rule 206(4)-7 • · Investment Advisers Act Rule 204A-1 • The rise of the Chief Compliance Officer • Compliance becomes more proactive than reactive

8. BAD COMPLIANCE IS BAD BUSINESS • · Executive at Fred Alger pleads guilty and pays a $400,000 fine to • settle charges that some investors were permitted to market time • in exchange for keeping a certain level of assets in Alger funds • · Alliance settles charges it allowed some investors to market time • in certain funds in exchange for investment in others for $250 • million in disgorgement and penalties, plus an agreement to • reduce fund advisory fees by $350 million over five years • · MFS pays $225 million in fines and disgorgement, and reduces • fees by $125 million over five years in connection with market • timing violations; certain executives are fined $250,000 each.

9. COMPLIANCE AT SPIAS • McGraw-Hill Code of Business Ethics • · Compliance with the law • · Avoidance of conflicts of interest • · Outside Employment • · Ownership interests in other firms • Up to 1% in public companies OK except where it would • compromise objectivity of reporting and evaluation services • · Discriminatory Conduct

10. COMPLIANCE AT SPIAS (cont’d) • · Political Activities • Can in some instances present a conflict of interest • · Improper payments to others • Foreign Corrupt Practices Act • SPIAS Code of Ethics • · Use of material non-public information • · Personal securities trading

11. COMPLIANCE AT SPIAS (cont’d) • Other Areas of Importance: • · Protection of Privacy • · Proper use of e-mail • · Gifts and entertainment • · Accuracy of information

12. PROTECTION OF PRIVACY • · McGraw-Hill Code of Business Ethics • · Contractual confidentiality provisions • · Regulation S-P

13. E-MAIL, IS IT A BLESSING OR CURSE? • It can be a great tool if used properly, but it has also ruined careers and • subjected individuals and companies to reputational harm and liability • when used improperly • Proper use: • To communicate in a professional manner – use proper language, • stick to appropriate topics • setting up meetings • circulate public documents •  transmit information clearly of a business nature in a manner • consistent with standards of appropriate business conduct

14. E-MAIL (cont’d) • Improper use: • To transmit illegal or objectionable material, comment about • individuals or express anger, sarcasm or subtle humor. • To discuss highly sensitive or confidential information • To serve as a forum for resolving differences of opinion • Observe “The Wall Street Journal Rule” • The Electronic Golden Rule: • Treat e-mail the same as you would any other formal written • correspondence.

15. E-MAIL (cont’d) • Some important things to remember: • ·E-mail sent over your office computer or through the • company’s e-mail systems is the company’s property, not • yours – it is neither personal nor private. • ·E-mail is discoverable – it can be obtained by regulators • and opposing parties in lawsuits • ·E-mail is permanent – even if you delete it from your computer, • copies of it are retained • ·You are responsible for whatever is sent through your e-mail • address • ·The addressees of your e-mail may forward it to others; don’t • assume the only people who will see your e-mail are those • to whom you send it

16. E-MAIL (cont’d) • Alternatives to e-mail:

17. GIFTS AND ENTERTAINMENT • An area rife with the possibility for conflicts of interest • Also recently the focus of a number of regulatory inquiries • McGraw-Hill Code of Business Ethics: • No gifts of more than nomimal value, and no loans, from any person • or firm having current or prospective dealings with the Corporation

18. GIFTS & ENTERTAINMENT (cont’d) • S&P Policy: • In line with McGraw-Hill COBE, and also addresses entertainment • · Speakers or panelists at industry conferences can have • reasonable transportation, lodging and meals paid for by • conference sponsors • · OK to attend typical conference events, such as golf, tennis, • local tours, theater, or routine sporting events where costs • are paid for by conference sponsor • · Not OK to attend extraordinary events such as premier sporting • events, play-off games, big-name concerts unless paid for by the • S&P employee (or if deemed appropriate business expense by • senior management and billed directly to S&P)

19. GIFTS & ENTERTAINMENT (cont’d) • · S&P employees should attend events, whether typical or • extraordinary, only if other conference participants have • also been invited to attend • Special rules for single-issuer conferences: • Must be sensitive to: • · Potential for appearance of impropriety or conflict of interest • · Maintaining S&P’s reputation for independence and • objectivity • · S&P’s unwillingness to endorse a particular issuer or selling • effort

20. GIFTS & ENTERTAINMENT (cont’d) • Approval of attendance at single issuer conferences requires a higher • standard in determining business needs than for an industry-wide • conference. • Transportation, meals and lodging of S&P speakers at single • issuer conference can only be paid by conference sponsor if • approved by S&P senior management. • Honorariums: • Could be interpreted as an inappropriate gift, particularly • where conference sponsor is also paying travel, meals and • lodging for S&P employee. Generally to be declined. If • senior management approves, may be accepted on behalf of • corporation, not the individual.

21. GIFTS & ENTERTAINMENT (cont’d) Spouse and guest costs: not permitted to be paid by sponsor whether industry-wide or single issuer conference. Meals paid for by clients: OK if not too frequent or lavish Closing dinners: attendance could create the appearance of impropriety. OK only if others outside the selling group will be in attendance and if approved by senior management. What about entertainment of clients by S&P? Standards are being developed

22. ACCURACY OF INFORMATION Accuracy of books and records: The Advisers Act requires that we keep certain records, and that they be accurate. These include: · All written agreements entered into by SPIAS · Copies of all client complaints received by SPIAS · Copies of all advice given to clients, and the research materials forming the basis for the advice

23. ACCURACY OF INFORMATION (cont’d) • Accuracy of disclosures: Marketing Material: · Includes all written materials addressed to more than one person offering any kind of investment advisory services · Should fairly present the services offered and disclose any material facts concerning the information that is necessary to avoid any misleading implications. No exaggerated or unwarranted claims. · Testimonials not allowed. Partial list of clients OK if objective criteria are used to select clients, the criteria are disclosed, and the material states that SPIAS doesn’t know if the clients listed are satisfied or dissatisfied with the services they have received. · Marketing materials must be approved by Global Regulatory Affairs

24. ACCURACY OF INFORMATION (cont’d) • Form ADV: • · Among other things, describes the services offered by SPIAS • and the fees charged for them • · Please advise Global Regulatory Affairs of any new services, • significant changes to existing services or fee schedules • promptly

25. Reasons for Personal Securities Trading Policy Compliance with SEC regulations Protect McGraw-Hill’s worldwide reputation for integrity and honesty Clearly establish rules to avoid appearance of conflicts of interest and impropriety Does not supersede McGraw-Hill Code of Business Ethics and S&P’s Guild Code of Business Ethics e

26. Investment Adviser - Definition • Generally includes any person (including a natural person or entity) who: • For compensation • Is engaged in the business • Of providing advice to others or issuing reports or analyses regarding securities

27. Inside Information • Material information • Important in making investment decisions • Affects the market price of the securities if disclosed • Non-Public information • Has not been effectively communicated to the marketplace

28. Applicability – To Whom • Access Persons • Officers and Directors • Employees with access to non-public information • STARS recommendations • Portfolio recommendations For example: Arizona, Samsung, Jackson National Life, MAPs, asset allocation and mutual fund recommendations

29. Applicability – To Whom • Members of Family • Spouse and minor children Adults living in same household Trusts in which employee is trustee or has beneficial interest Power to act as attorney or guardian for another Possess legal right to make independent decisions regarding another person’s property or investments

30. Applicability – Beneficial Interest Employee obtains benefits substantially equivalent to ownership of securities Employee can cause transfer of legal ownership immediately or at some future time

31. Applicability – Required Pre-clearance • Securitiess: • Common and preferred stock • Options and other derivatives • Convertible Securities • Closed-end mutual funds

32. Applicability – Required Pre-clearance Securities • Open-end mutual funds (mutual fund portfolio analysts) • ETFs • Bonds • Municipal Securities • ADR, Foreign Issuers

33. Applicability – Pre-clearance not required • Exemptions • Direct Obligations of the U.S. Government • Mutual Funds (other than mutual fund analysts) • Transactions in mutual funds are exempt from reporting, unless any unit of S&P or McGraw-Hill serves as investment adviser or sub-adviser to the fund (applies to Jackson National Life) , unless any unit of S&P or McGraw-Hill serves as investment adviser or sub-adviser to the fund (applies to Jackson National Life)

34. Reporting Holdings & Transactions • Holding Statements • Employees must report holdings by requesting duplicate statements from broker, dealer or bank be sent to Compliance • For securities held outside a broker, dealer or bank, submit a manual reporting form • New SPIAS employees shall submit a securities holding statement to the CCO or his designee within 10 days of becoming subject to the Code, current within 45 days of becoming subject to the Code holding statement to the CCO or his designee within 10 days of becoming subject to the Code, current within 45 days of becoming subject to the Code

35. Reporting Holdings & Transactions • Transaction Statements • Employees must request trade confirmations be sent to SPIAS Compliance from broker, dealer or bank • For transactions outside of broker, dealer or bank, submit a manual reporting form no later than 30 days after the end of the quarter in which the transaction occurred

36. Ownership Restrictions • STARS and non-STARS securities within industry/Group coverage (Equity Analysts) • Owning securities in companies in which the analyst covers one or more companies within that GICS sub-industry • Group Heads are restricted from owning securities in companies under his/her industry coverage as well as industries tagged to the sectors under his/her oversight • Indirect investment (cross-ownership holdings) • Investments in private investment funds

37. Required Divestiture • Divest (Equity Analysts)(Equity Analysts) • STARS and non-STARS within industry coverage • Indirect investments • Investments in private investment funds • Applies to securities received by reason of gift, inheritance, or any other involuntary action

38. Required Divestiture • Situations (Equity Analysts) Currently own security in covered industry • Change Industry • New hire assigned an industry • Appointed Group Head • Divest STARS and non-STARS securities within twenty-five full trading days • Divest within twenty-five full trading days

39. Embargo Periods • Controlled through restricted list which is comprised of: • Possible STARS additions • STARS changes • GICS Changes • Portfolio Recommendations (Arizona, Samsung, Cominvest, Stock Baskets)

40. Embargo Periods • Addition to STARS • Twenty-five full trading days prior to and five full trading days after dissemination • STARS change and deletion • One full trading day after dissemination Portfolio Advisor Stock Basket Alerts • Two full trading days after dissemination

41. Embargo Periods • Former Industry Coverage (Equity Analysts) • From notification to five full trading days after coverage ceases Portfolios and Publications (Portfolio Analysts and Editors) • Twenty-five full trading days preceding date security is recommended and five full trading days after dissemination

42. Pre-clearance • Expires at the end of the trading day • Limited to securities intended to trade the day of request • Use pre-clearance form • Analysts required to complete GICS sub industry name and number

43. Approvals • Equity Research Compliance • MarketScope James Holloway • Outlook Joseph Lisanti • Portfolio Advisors David Braverman • Phil Edwards • Tom Gizicki • Industry Surveys Group Katherine Abreu

44. Media Appearances • Obtain Manager and Compliance Officer approval to mention securities traded within twenty-five full trading days preceding the interview • Do not trade in a mentioned security for five full trading days • Disclose ownership of securities during the presentation or interview

45. Media Appearances • Opinions expressed can’t differ from the published STARS ranking. • Don’t intimate that a STARS change may be imminent. • Disclose any other known actual, material conflict of interest

46. Books and Records • An investment adviser is required to “make and keep true, accurate, and current books and records relating to its investment advisory business” • Generally, maintain files for a period of six years from the end of the fiscal year in which it was created; most recent two years on site • Includes accounting records, communications with the public and clients, backup for recommendations, Code of Ethics, and Form ADV • Electronic records should be safeguarded to prevent loss, alteration, destruction, or unauthorized access (e.g., password files)

47. File Content With Respect to Advice • Guidance issued September 2004 • Sample documents include: • Copies of notes taken from meetings or conference calls • Documents used in preparing recommendations • Electronic files (Word, Excel) supporting recommendations • Documents supporting performance • S&P Portfolio Advisor platform – versions of the platform, alerts, commentaries, risk profiles, asset allocations and investment recommendations • Advisers and sub-advisers to mutual funds must follow rules in the Investment Company Act of 1940

48. Brochure Rule • Form ADV Part II (Brochure) is a disclosure document • Clients receive Form ADV Part II at least annually • Form ADV Part II is included in all contracts • Form ADV Part II Discloses: • How SPIAS conducts its advice business • Services provided • Fees • Conflicts of interest

49. Advertising • The business unit maintains advertising files • Advertisement includes notice, circular, letter or other written communication to more than one person that offers: • Analysis, report, or publication concerning securities • Device used to make determination on trades of securities • Any other investment advisory service with regard to securities

50. Advertising • Final copies sent to Compliance • Advertising approved by • Originating Department • Portfolio Advisors Analytical Staff • President, SPIAS LLC • Compliance