2009 COORDINATED INVESTMENT ADVISER EXAMS

1. 2009 COORDINATED INVESTMENT ADVISER EXAMS North American Securities Administrators Association

2. Who Was Examined? 458 State-level advisers, of which... 100 advisers (21.8%) were affiliated with a BD 76 advisers (16.6%) used or acted as solicitors 42 advisers (9.2%) managed pooled investments Who Conducted the Exams? Securities examiners from 35 jurisdictions including British Columbia, Ontario, Nova Scotia, Quebec, andSaskatchewan, Canada What Was Found? 1887 total deficiencies in 13 categories

3. Books and Records Financials Registration ADV, U4, Firm, IARs, ADV Delivery Fees Advertising Ads, Websites, Business Cards, Seminars, Privacy Supervisory/Compliance Supervisory Procedures, Compliance Procedures, Policies Investment Activities Adherence to Investment Policy, Fairness, Conflicts Performance Reporting Custody Solicitors Pooled Investment Vehicles (Hedge Fund) Unethical Business Practices 21 from NASAA Model Rule 120(a)(4)-1 Unsuitable Recommendations Contracts Unauthorized trades Excessive Fees Borrowing from client Etc... The Categories

4. Averages do not include advisers which had “0” Accounts and “0” Assets Under Management because they were: Financial Planners Only Solicitors Only New Advisers Averages do not include Canadian Provinces due to no maximum Assets Under Management

7. Comparison of Independent IA and BD Affiliated Advisers Exams with at least One Deficiency in the Category

8. Comparing Advisers with 1 IAR to Those with More than 1 IAR Exams with at least One Deficiency in the Category

9. Comparing Hedge Fund Advisers to Non-Hedge Fund Advisers Exams with at least One Deficiency in the Category

10. 60% of all advisers had at least one deficiency. Inconsistency between Parts I and II Updates to ADV not made timely

11. 41.7% of all advisers had at least one deficiency. Safeguarding Records and Data Backup Data Checks Forwarded Log

12. 37.8% of all advisers had at least one deficiency. Other Conflict with ADV Not Updated

13. Advisory Contracts 153 exams (33.4%) noted at least one contract deficiency* 214 (73.5%) of the 291 UBP deficiencies Other Unethical Practices 60 exams (13.1%) noted at least one non-contract unethical practice deficiency* 77 (26.5%) of the 291 UBP deficiencies Unethical Business Practices291 Deficiencies 173 exams (37.8%) noted at least one unethical business practice deficiency Two Types * Some advisers had both contract and other unethical practice deficiencies

14. Unethical Business Practices291 Total Deficiencies 214 Contract Deficiencies 37.8% of all advisers had at least one unethical business practice deficiency No/Missing Contract: 26% Hedge Clause: 17.8% Other: 15.9% (info, not updated) Not Executed: 7.5% Pre-Paid Refund: 6.5% Rescission: 5.6% (48hr lang.) Non-Assignment: 5.1% Fee Formula: 4.2% Discretion: 3.3% Term: 2.8% 77 “Other” Deficiencies Qualifications/Services: 23.4% NPI Policy: 19.5% Other: 14.3% Conflicts: 11.7% Excessive Fee: 5.2%

15. 27.7% of all advisers had at least one deficiency. Personal Trades Remote Location Supervision Business Continuity

16. 18.6% of all advisers had at least one deficiency. Not GAAP CPA Independence Commingling Accts.

17. 16.8% of all advisers had at least one deficiency.

18. 16.6% of all advisers had at least one deficiency. Services Designations Indexes Regulator “Gratuities”

19. 15.9% of all advisers had at least one deficiency. Undisclosed Fees

20. 12.2% of all advisers had at least one deficiency. >$500, >6 months fees Annual Audit of PIV Notice to Administrator PIN to Client Account

21. 3.9% of all advisers had at least one deficiency. Cross-Trades Aggregate Orders Proxy Voting

22. 20 of 76 advisers (26.3%) who used solicitors or acted as solicitors had at least one deficiency. Undisclosed Solicitors

23. Comparing Hedge Fund Advisers Exams with at least One Deficiency in the Category 10 of 25 (41.6%) of hedge fund advisers who also had a regular IA practice had at least one deficiency in this category. 1 of 17 (5.9%) of hedge fund advisers who had no other clients had at least one deficiency in this category.

24. 10 of 25 (41.6%) of hedge fund advisers who also had a regular IA practice had at least one deficiency in this category. 1 of 17 (5.9%) of hedge fund advisers who had no other clients had at least one deficiency in this category. Back-testing Order Tickets

26. Best Practices for Investment Advisers • Review and revise Form ADV and disclosure brochure annually to reflect current and accurate information. • Review and update all contracts. • Prepare and maintain all required records, including financial records. Back-up electronic data and protect records. • Prepare and maintain client profiles. • Prepare a written compliance and supervisory procedures manual relevant to the type of business. • Prepare and distribute a privacy policy initially and annually. • Keep accurate financials. File timely with the jurisdiction. Maintain surety bond if required • Calculate and document fees correctly in accordance with contracts and ADV. • Review all advertisements, including website and performance advertising, for accuracy. • Implement appropriate custody safeguards, if applicable. • Review solicitor agreements, disclosure, and delivery procedures.