2013 Annual Compliance Meeting & AML Training

1. 2013 Annual Compliance Meeting & AML Training

2. 2013 Annual Compliance Meeting • USA Patriot Act & AML Policy • Communications with the Public • Investment Advisory Business • Suitability Determination & Document Completion • Dealing with clients who may have diminished mental capacity or elder abuse • Social Media • Compliance Reminders

3. USA PATRIOT Act and Anti-Money Laundering 3

4. Definition of Money Laundering • Money Laundering is the process of concealing the existence, illegal source, or application of income derived from criminal activity, and the subsequent disguising of the source of that income to make it appear legitimate. • Three Stages: • Placement – Introducing money into the financial system • Layering – Conversion of funds into another form • Integration – Placing funds back into the economy as clean dollars

5. Increased AML Issues • Questions: • Is AML still an issue? • Yes! • Are you seeing any new trends? • Penny stocks, insider trading, identity theft • Why do we still have to take AML Training? • Regulatory and firm requirement to receive AML training at least annually.

6. Vital to our AML program: KYC & CIP • Know Your Customer (KYC) • As Representatives meet with customers they are required to know the customers financial and suitability needs as well as where the assets come from to fund an account. • Customer Identification Program (CIP) • Obtain customer identifying information PRIOR to opening an account, verify this information, then document the information.

7. Customer Identification Program (CIP) • How well do you know your clients? • Do you compare the data provided on the NAF? • Do you physically view the ID?

8. Verification of Identity - Identity must be verified on all NEW customers • What constitutes a NEW customer? • Customer does not have an “existing” account with ProEquities • Even if you have personally known this person for several years, if there is no existing ProEquities account then they are NEW to ProEquities • Even if customer was with you at a previous firm, they are NEW to ProEquities and require ID verification • Identity must be obtained and verified prior to the opening of the account • Record information on the New Account Form

9. Verification of Identity – Identification Concerns • Customer Refuses to Provide Identification Documents or Documents Look Unusual • Customer Exhibits an Unusually or Excessively Nervous Demeanor • Customer Expresses Concern or Unusual Questions About Compliance Procedures with Government Reporting or AML Policies • Customer’s Address is Outside Your Normal Geographic Area of Coverage • Waterfront / Border States Call Your OSJ or AML Compliance Officer Immediately If You Become Suspicious of a Prospective Customer!

10. Suspicious Activities & Red Flags • YOU are responsible for detecting and reporting suspicious activities and red flags. • KYC very crucial! • To detect suspicion you must know your customer, their needs and what are normal transactions for them. • If activities fall outside of the normal transaction type this is a red flag. • Examples: • Refusal to provide an acceptable ID • Frequent trading in penny stocks • Withdrawing deposited funds as soon as they are deposited • Funds in/out of the account do not match the stated income levels for the client

11. Penny Stock Transactions • Increased AML Issues: • Shares deposited or ACAT received • Sell shares in large blocks or limit shares traded daily • Client is often an insider for the stock • What are our risks? • Insider Trading, Theft, Market Manipulation

12. Penny Stock Red Flags • Client deposits large volumes of penny stocks via stock certificates • Client provides a legal opinion to remove restrictive legends. • Client has received shares from consulting work performed. • There is no verifiable or legitimate physical place of business. • There are multiple press releases on the company in one day. • There is a history of company name changes, symbol changes, or reverse splits. • The company’s employees are immediately dumping the stock received via a compensation program. • Company changes their business’ products entirely. • There are NO recent Edgar filings with the SEC. • The stock has more than 4 characters in the ticker symbol. If the 5th letter is an “E”, it is not registered with the SEC and if it is a “Q”, the company is in bankruptcy.

13. New AML Trends Observed • Identity Theft and Phishing Emails • ProEquities has had an influx of fraudulent emails sent from a client’s email address to the registered rep. • The emails request account information, balances, and subsequently request that securities be liquidated and wired to a 3rd party or foreign bank account.

14. Identity Theft (Continued) • Tips • Be wary of emails requesting account balance, wire instructions, or account information. • Be cautious about an email from a client that would not normally contact you via email. • Be on alert if you receive an email requesting this type of information when the client is elderly or retirement age.

15. Identity Theft (Continued) • If you receive this type of email: • DO NOT provide account information • DO NOT provide account balances. • Respond requesting that he or she contact you directly to conduct the transaction • CONTACT the client to verify accuracy and/or instruct the client to change their email passwords immediately. • Contact the AML Compliance Officer or a member of Compliance immediately!!!

16. Other Helpful Tips • Always know the purpose of third party checks and third party wires. • Pay careful attention to any clients referred to you by clients. Develop an understanding of the referred client’s relationship with the existing client, especially if the existing client is relatively new. • Be wary of a client telling you at account opening or soon after account opening that they want to “dump” or “liquidate” stock and close the account.

17. Clients Circumvent Reps • Increase of Clients avoiding the Rep • Customer Service and Trading has received an increase in calls from clients wanting to reopen closed accounts and/or deposit stock and liquidate • How do we prevent this? • When closing an account request a ‘BLOCK’ on the account so it may not be reopened.

18. Accepting Customer Funds • Cashiering responsibilities play a vital part in the deterrence of money laundering. When accepting funds from customers ensure you follow the firm’s policies. • Checks must be made payable to ProEquities or Pershing. You may not accept checks made payable to you or your DBA/company name • Do not accept cash, money orders, or travelers checks • Do not accept third party checks (double endorsements) • Do not accept bank starter checks or counter checks • Do not accept cashier or official checks for any amount less than $10,000 in non-qualified accounts

19. Willful Blindness • We all have a responsibility for recognizing and reporting suspicious activities. • Failure to report a red flag can be viewed as “willful blindness”. • Willful blindness subjects the firm and YOU to significant civil liability and possible criminal penalties. • Willful blindness is one of the most significant aspects of AML laws.

20. Type of Suspicious Activitiessource: FinCEN Suspicious Activity Report Form

21. What should you do? • Suspicious activities should be directed to Compliance immediately. • If you have notified Compliance of suspicious activities you should NOT inform the OSJ, Representative, or Client. • Let Compliance handle it!

22. Civil and Criminal Penalties • USA Patriot Act • Fines up to $500,000 or twice the value of the property involved and 20 years in prison • Money Laundering Abatement Act • Fines up to $1,000,000 or twice the value of the property involved • Bank Secrecy Act • Fines up to $500,000 and/or 10 years in prison

23. Training and Audits • All Registered Reps, Investment Advisor Reps, OSJ’s, and Home Office Employees Must Receive Training on the Act • ProEquities Will Be Audited For Compliance With the Act • ALERT - Some Insurance Companies Have Started Requiring that Agents/Reps, Licensed with Them, Complete Their Company Specific Training • Insurance Company(s) AML Training Does not Provide Exemption from ProEquities Required Training • ProEquities Required AML Training May not Provide Exemption from Insurance Companies Requirement

24. Communications With The Public 24

25. Communications With The Public FINRA Regulatory Notice 12-29 • Communication categories have been reduced from six to three. -The new categories are: 1. Institutional Communications 2. Retail Communications 3. Correspondence

26. Communications With The Public • Institutional communication includes any written communications that are distributed or made available only to institutional investors • Retail communications include any written communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period. “Retail Investor” includes any person other than an institutional investor, regardless of whether the person has an account with the firm. Retail communications must be PRE-APPROVED by compliance prior to being sent. • Correspondence includes any written communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar day period.

27. Communications With The Public Content Standards under NASD rule 2210 have not been affected by this new rule. NASD rule 2210 states communications must: • Not be misleading or untrue • Not lack material facts • Not contain exaggerated, unwarranted, or unfounded information • Not contain predictions or promises • Take into consideration the audience it is directed toward • Be balanced – showing risk as well as reward • Must be approved by principal and Home Office

28. Retail Communications • All retail communications must obtain PRIOR approval from Compliance • Submit all retail communications via AdTrax • FINRA review does not equal Pre-Approval by Compliance • Emerald and Forefield materials are not Pre-Approved • Appropriate disclosures are required • Retail Communications may include: • Newspaper/Magazine ads • Billboards • TV/Radio commercials/interviews • Websites

29. Investment Advisory Business 29

30. Third Party Money Managers • Suitability of selected portfolio – initially and ongoing • Appropriateness of IAR fees • Required paperwork • New Account Form (non-brokerage) fully completed • Investment Advisory Agreement • All paperwork from the third party manager or required to open the TPAM account

31. Wrap Fee Accounts • Wrap Fee Accounts are: • Targeted to a more affluent investor • Charge monthly fees vs. “per investment” commissions • Provides a variety of services including: • Investment advice; • Investment research; and • Brokerage services • Advisors must: • Provide continuous, hands-on management • Be acutely aware of clients’ assets, trading habits and any other financial services to be provided • Advisory business is NOT like traditional commission/brokerage business • Advisory business is NOT merely an alternate means of compensation

32. Wrap Fee Account Suitability • You must have a reasonable basis to believe the recommendation of a wrap fee account is appropriate based on these and other factors: • Financial status; • Investment objectives; • Trading history; • Size of portfolio; • Nature of securities held • Account Diversification

33. Wrap Fee Account Suitability • Once the client’s investment profile is established, you must determine: • The projected cost to the customer; • Alternative fee structures; and • The client’s fee structure preferences • You must disclose all material components of the program including the fee structure, services provided, and that the program may cost more than purchasing the investments separately or through a traditional brokerage/commission arrangement

34. Wrap Fee Accounts • When “not” to use: • Client wants to “buy and hold” investments • Client does not understand the fee structure • No intent to provide continual service • No servicing, no advisory services provided • Low assets and no anticipation to add further assets for management • Transfer assets, liquidate, then invest in commissioned products (VA’s, REITs, etc.)

35. Wrap Fee Accounts • Meet with the client at least annually to review investments, performance, investment goals, time horizon, and fees • Best Practice: Quarterly reviews/contacts, with one of those in person • Document calls and/or meetings with clients • Document account reviews (statement, performance reports, etc.) • CRM systems with auto date/time stamp • Makes notes of the advice given during discussions, including specific “no change” advice

36. Wrap Fee Accounts • Best practices (continued) • Documentation • Make notes of other services provided such as mortgage review, cash flow analysis, budget preparation, estate planning, etc. that are part of the overall advisory services provided and which are covered by the wrap fee • Follow-up letter or email to client regarding items covered in review/meeting

37. Wrap Fee Accounts • Sample follow-up letter/email Dear John, It was a pleasure meeting with you and Susan yesterday. I hope little Johnny does well in lacrosse this season. As we discussed in our meeting, your portfolio seems to be on target; therefore I do not recommend making changes at this time. In addition to reviewing your securities accounts, we also looked at your estate plan. I will review this and call you in the next two weeks to discuss or schedule an appointment. As always, I appreciate the trust you have placed in <DBA Investments>. Please do not hesitate to contact me or my staff if we can assist you in any way.

38. Wrap Fee Accounts • Examples of “best practice” documentation • Detailed notes regarding calls, meetings, etc. with the client • Especially those calls/discussions of other financial matters where the IAR was not specifically compensated for the services, but are covered under the wrap fee • Discussions regarding power bills, mortgage, estate planning, private business, etc.

39. Wrap Fee Accounts • Documentation not adequate • Meeting held in 2008, but no further meetings, calls, etc. noted in file, even if they occurred • No documentation in file • Computer/CRM system not backed up, therefore data lost

40. Frequently Noted Exceptions • Frequently-noted exceptions in advisory paperwork • New account form incomplete • Fee schedule not complete • Client and/or IAR did not sign agreement • Lack of NAF or IA agreement • Arbitration agreement or other terms altered in NAF/IA agreement

41. Rep-Managed Wrap Accounts • CAM/ProTrade accounts • State licensing requirements • You are executing transactions, which requires the appropriate state securities licensing • For incoming transfers - what holdings are being transferred in? • What are the plans for mutual fund holdings? • Did the rep sell/earn a commission on those funds?

42. Allowable Assets CAM/ProTrade • Policy regarding share classes • No-load and load waived mutual funds • A shares • Allowed to be transferred in where not sold by the rep within previous 2 years or where sold at NAV • Allowed to be purchased in wrap fee accounts at load waived/NAV at any time

43. Allowable Assets (continued) • Policies… • B shares • Allowed to be transferred in where not sold by the rep within previous 2 years (whether at ProEquities or prior broker/dealer) • Allowed as concession to customer to avoid “forced” surrender charge or taxable event • Where liquidated (not in-family exchange), subsequent purchase must be made in no-load fund, load-waived A share or other non-commissionable product

44. Allowable Assets – (Continued) • Policies… • C shares • Allowed to be transferred in as concession to customer to avoid “forced” taxable event to customer • Once liquidated, MUST purchase no-load or load-waived A share, or other non-commissionable product • Only allowed to be transferred in where not sold by rep in previous 2 years, whether at ProEquities or prior broker/dealer

45. Allowable Assets – (Continued) • Money market funds • Accounts invested mostly or solely in money market only for an extended period of time • Potentially brings into question active management • No penny stocks • Firm policy requires that penny stocks be conducted on unsolicited basis only

46. Allowable Assets - CAM/ProTrade • Variable annuities • Only those intended for advisory arrangements, i.e., no load or low load • Must be processed through Pershing “Subscribe” system to be included on CAM/ProTrade statement

47. Allowable Assets - CAM/ProTrade • Options • Must meet suitability requirements established by ProEquities and be approved for options trading by Home Office Registered Options Principal • Strategies must be suitable for the client • Client must have the capability to understand the strategy, on at least a basic level

48. Financial Planning/Advice • Agreements • Financial Planning Agreement • Financial Advice Agreement • IAR and/or customer revisions to agreement language not acceptable, unless specifically approved in advance by RIA and/or BD CCO • Allowable fees • If over $5,000, requires IA compliance pre-approval

49. Disclosure Brochures • Deliver to all new advisory clients • Wrap Fee Program Brochures for Private Access, Defined Solutions, or CAM/ProTrade/5PR accounts • Part 2A (TPAM accounts, Financial Planning or Financial Advice agreements • Ensure that the required brochure is being provided to ALL NEW advisory clients • ProEquities will provide the annual update or material event update to all advisory clients

50. Form ADV Part 2B • Required effective 7/31/2011 for all IARs who are providing investment advice to clients • Personal brochure regarding the IAR • Provide to all new clients • Update as needed and send to clients • Disclosures (complaints, financial, etc.) • Outside business activities • IAR is responsible for mailing to customers for updates.