BMO presention RBC CEO conference

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(No Transcript)
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Agenda

• Purpose and design of board and management
  committees
• Expectations of regulators
• Committee structure example
• Advantages/disadvantages to different structures
• Key accountabilities, members, and
  responsibilities of committee
• Useful tools/protocols
• Balancing needs of separate legal entities
  governed by different regulatory agencies

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Governance and Trust Committee Structures

• Strong management and board oversight is a key
  element to a strong internal control and risk
  management structure.
• A strong governance and trust committee structure
  both at the management and the board level allows
  for effective oversight and is indicative of a
  commitment to risk management and internal
  control.
• The Fed, the OCC, and the OTS expect institutions
  with trust powers to have active executive
  management and board involvement. The SEC expects
  a strong culture of compliance.
• For complex organizations, I believe this is
  managed most effectively through a committee
  structure. This should be customized at each
  institution in terms design and activities, lines
  of businesses and legal entities.

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Expectation of Primary Regulator - OCC

• Board and Senior Management have key
  responsibilities
• Must recognize their responsibility to provide
  proper oversight of asset management activities,
  and the official records of the board should
  clearly reflect the proper discharge of that
  responsibility.
• Must understand the asset management business,
  how asset management activities affect the banks
  position and reputation, the banks regulatory
  environment, and other external market factors.
• Establish the strategic direction, risk tolerance
  standards, and ethical culture for asset
  management activities.
• Adopt and implement an adequate and effective
  risk management system.
• Monitor the implementation of asset management
  risk-taking strategies and the adequacy and
  effectiveness of the risk management system in
  achieving the companys strategic goals and
  financial objectives.
• Senior Management responsibility for effective
  risk management systems
• Ensure the development and implementation of an
  adequate and effective risk management system
  composed of risk assessment, control, and
  monitoring processes.
• Board of Directors and Senior Management
  Commitment
• Establish and guide the strategic direction for
  asset management activities by approving
  strategic and financial operating plans.
• Create a risk management culture that promotes
  strong ethics and an environment of
  responsibility and accountability that is fully
  accepted within the banking organization.
• (Asset Management Comptrollers Handbook December
  2000)

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Expectation of Primary Regulator - FED

• Board of Directors key responsibilities
• Approve overall fiduciary business strategies and
  policies including those related to identifying,
  measuring, monitoring and controlling fiduciary
  risks.
• Understand the nature of the risks significant to
  their organization and ensure that management is
  taking the steps necessary to manage these risks.
• Senior Management key responsibilities
• Implement approved strategies in a way that will
  limit fiduciary risks and ensure compliance with
  laws and regulations
• Fully involved in the fiduciary activities of
  their institution
• Have sufficient knowledge of all fiduciary
  business lines to ensure that necessary policies,
  controls and risk monitoring systems are in place
  and that accountability and lines of authority
  are clearly set forth
• Ensure that its lines of fiduciary business are
  managed and staffed by persons with knowledge,
  experience, and expertise consistent with the
  nature and scope of the organization's fiduciary
  activities
• Before offering new services or introducing new
  products, identify fiduciary risks associated
  with them and ensures that internal controls are
  in place to manage the service or product and the
  accompanying risk
• Approve appropriate policies, procedures,
  recordkeeping systems and reporting systems to
  support the fiduciary activities and to help
  measure and monitor risks
• Establish procedures to keep informed about
  changes in fiduciary activities and the
  associated risks
• (SR 96-10 (SPE) April 24, 1996 - Risk-Focused
  Fiduciary Examinations )

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Expectation of Primary Regulator - OTS

• Responsibilities of the Board of Directors and
  Management
• hiring and retaining competent personnel
• ensuring that adequate management is in place to
  control risks
• instituting adequate policies, processes and
  controls that consider the size and complexity of
  the savings associations trust and asset
  management activities
• establishing effective risk monitoring and
  management information systems
• Directors are responsible for retaining and
  performing general supervision over the exercise
  of trust powers
• Directors must be sufficiently independent of
  corporate affiliates and personal conflicts of
  interest to properly serve the interests of the
  savings association
• Directors are responsible for the prudent
  investment and disposition of property held in a
  fiduciary capacity
• ensuring that an annual audit is conducted
• ensuring that a record of pending litigation is
  kept
• The board should ensure that the trust
  departments management information and data
  processing systems are adequate to provide the
  type and quantity of reports necessary to assess
  and monitor the trust departments performance
• The board should ensure that corrective action is
  effectively implemented when deficiencies are
  reported
• (OTS Trust and Asset Management Handbook)

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Expectation of Primary Regulator - SEC

• The Advisers Act incorporates an adviser's
  fiduciary duty under Section 206, and envisions
  that, in whatever factual scenario, the adviser
  will act in the best interests of his clients.
  As a fiduciary, an adviser is held to the highest
  standards of conduct and must act in the best
  interests of its clients.
• Compliance Program rule, Rule 38a-1, requires
  board approval of the fund's policies and
  procedures and those of each investment adviser,
  principal underwriter, administrator, and
  transfer agent of the fund, and requires an
  annual report by the Chief Compliance Officer to
  the board.
• Recent Investment Advisor request letter suggest
  that active management and Board involvement is
  an inherent expectation
• Registrants overall process for and commitment
  to establishing and maintaining an effective
  compliance culture (its tone at the top).
• A copy of the minutes of any risk committee
  meetings that were held during the inspection
  period. Please note that advisors are not
  required to have a risk committee.
• Copy of risk management reports that
  show/illustrate the measures used to manage risks
  in client accounts, such as leverage, beta,
  concentration, and performance attribution
  analysis.
• Copy of investment management committee
  minutes.

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Board and Management Committee Structure Example
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Board Committee Structure Example

• Directors Trust Committee responsibility
• The DTC is responsible for performing duties to
  enable the Boards of Directors to fulfill their
  oversight responsibilities in relation to
  oversight, including proper risk management and
  control, of the operation of fiduciary activities
  of subsidiaries, and oversight, including proper
  risk management and control of the operation of
  non-fiduciary investment related activities of
  the subsidiaries. In addition, certain fiduciary
  and non-fiduciary activities of subsidiaries are
  organized and managed in a manner that is closely
  intertwined with the activities otherwise within
  the purview of the Committee. This Committee
  shall oversee such activities to the extent of
  such interrelationship. The DTC is granted the
  authority to define the general scope, content,
  and direction of fiduciary and non-fiduciary
  investment-related products and services for the
  organization.
• Key reporting items
• Material Risks
• Emerging Risks
• Significant Events
• Near misses

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Management Committee Structure Example

• Fiduciary and Investment Related Activities Risk
  Management Committee (FRMC)
• The Fiduciary and Investment Related Activities
  Risk Management Committee is established to serve
  as a forum to review, inform, consult, discuss,
  and approve significant risk issues and action
  plans addressing current and emerging risks that
  arise in the course of executing the
  organizations strategy in trust, probate,
  guardianship, conservatorship, and certain
  investment management, investment advisory,
  securities and custody activities. It is
  established to ensure major risks arising from
  these activities are understood, quantified,
  documented, mitigated where appropriate, and
  constrained by policy and directives as necessary
  in order to balance risk and return in such
  activities and businesses.
• Key reporting items
• Material Risks
• Emerging Risks
• Significant Events
• Near misses

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Management Committee Structure

• Committees can be structured by department, by
  legal entity, or by holding company.
• By Department or Legal entity
• Advantages
• Allows for focused discussions on key topics
• Allows for open communication
• More control over committee dynamics
• Disadvantages
• Lack of independent view or assessment of issues
• Limited ability to escalate issues
• Lack of tie to board of directors

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Management Committee Structure (contd)

• By holding company - Advantages
• Particularly in light of Enterprise-wide Risk
  Management, a committee that crosses legal
  entities and department boundaries becomes a
  useful tool
• The risks of one line of business could affect
  another open discussion allows for more
  complete analysis and assessment
• What may be an acceptable risk at one level may
  be unacceptable when aggregated at a higher level
• Exam experiences can be shared across entities
• Can be used as a precursor to the holding company
  board meeting
• Disadvantages
• Additional examiner scrutiny and potential scope
  creep
• Management may not be comfortable holding open
  and frank discussions in presence of other LOBs
  or legal entities
• Meeting dynamics may become difficult to manage

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Key Committee Accountabilities and
Responsibilities

• Provide oversight
• Governance
• Approve policies, directives, standards
• Approve new and modified products, initiatives,
  services, and distribution channels
• Review of assessments used to determine adherence
  to policies, operating procedures, and strategic
  initiatives
• Review management reports on operational and
  performance results
• Cross-enterprise view of topics
• Key elements to be discussed/considered by
  committee
• Significant risk issues and management
  strategies
• Significant changes in strategies, products,
  services, and distribution channels
• Significant changes in organization, policies,
  controls, and information systems and
• External factors that are affecting services.

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Key Committee Accountabilities and
Responsibilities (contd)

• Escalate issues
• Review of material risks, emerging risks,
  significant events, and near misses
• Committee used as a forum to facilitate the
  resolution of risk issues. Issues arise from
• Risk and Control Self Assessments (RCSAs)
• Audits, exams, compliance reviews
• new or modified product recommendations
• changes in laws or regulations
• Code of Ethics
• Conflicts of Interest or
• Litigation
• Issues may not be significant at lower level
  subsidiary or department, but when viewed in
  aggregate, trends may emerge or issue becomes
  more prominent
• Committee assesses the responsiveness to
  deficiencies and the effectiveness of corrective
  action and follow-up activities
• The Committee then escalates to Board, Executive
  Management, CEO

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Key Committee Accountabilities and
Responsibilities (contd)

• Fix accountabilities
• Each issue raised is assigned an accountable
  executive. Ensures resolution of significant
  items
• Issues are tracked through to resolution
• Report activities that will be escalated to the
  board committees
• Allows forum to review Board materials to ensure
  they are appropriate, complete, accurate

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Key Members

• Who your key members are is determined by the
  scope of the committee some examples
• Management of areas with fiduciary risk or asset
  management responsibilities
• Institutional Trust
• Custody
• Land Trust
• Personal Trust
• Employee Benefit Plan area
• Insurance
• Safekeeping
• Retail broker/dealer
• Investment advisor
• Proprietary mutual funds
• Operations
• Management of Corporate Support Areas
• Fiduciary Risk Management

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Useful Tools/Protocols

• Timing of meetings Useful to be 1-2 weeks prior
  to Holding Company board and committee meetings
• Materials provided to members no less than 3 days
  prior to meeting to allow for review
• Open items list
• Reports to be presented to provide status on
  outstanding items
• Outstanding audit, RCSA, exam, compliance issues
• Calendar/Standing agenda including, at a minimum
  periodic reports from
• Corporate Audit
• Corporate Compliance
• Legal
• Risk Management
• Operations operational risk issues
• Line of Business performance issues/status
• Attendance list, reports of attendance
• Minutes

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Open Items List Example
Date of Meeting Individual Responsible for Item Original Date Due Revised Due Date Source of Item (Audit, Exam, Compliance monitor, RCSA, other (specify)) Action Item Status of Item
02/15/07 J. Smith, Fiduciary Counsel 05/17/07 n/a Regulatory Development Assess impact of Regulation R Broker Push Out Rules and assign responsibility for each unit impacted Meetings have begun. Update to be provided
11/15/06 F. Jones, COO XYZ Subsidiary 02/15/07 5/17/07 Exam Issue (SEC Exam of XYZ subsidiary dated 10/31/06) Ability to readily retrieve emails of employees criticized. Automated solution to be implemented. Implementation more time consuming than anticipated. Extension to 05/17/07 requested.
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Annual Calendar Example
FRMC -- 2007 PLANNER FRMC -- 2007 PLANNER FRMC -- 2007 PLANNER FRMC -- 2007 PLANNER FRMC -- 2007 PLANNER
AGENDA ITEMS 15-Feb-07 17-May-07 16-Aug-07 15-Nov-07
         
REVIEW OF MINUTES REVIEW OF MINUTES REVIEW OF MINUTES REVIEW OF MINUTES REVIEW OF MINUTES
Approval of Minutes X X X X
Review of sub-Committee minutes X X X X
STANDARD AGENDA ITEMS STANDARD AGENDA ITEMS STANDARD AGENDA ITEMS STANDARD AGENDA ITEMS STANDARD AGENDA ITEMS
Emerging Issues (as required) X X X X
Report of Chief Auditor X X X X
Report of General Counsel X X X X
Report of Chief Compliance Officer X X X X
Report of Chief Risk Officer X X X X
Review of 90 Day Write-Off and Recovery Report X X X X
Quarterly Differences and Losses X X X X
AGENDA ITEMS UNIQUE TO A PARTICULAR MEETING(S) AGENDA ITEMS UNIQUE TO A PARTICULAR MEETING(S) AGENDA ITEMS UNIQUE TO A PARTICULAR MEETING(S) AGENDA ITEMS UNIQUE TO A PARTICULAR MEETING(S) AGENDA ITEMS UNIQUE TO A PARTICULAR MEETING(S)
Business Unit Report of Activities        
- Personal Trust X      
- Investment Advisor Subsidiary   X    
- Broker/Dealer sub     X  
Policies and Procedures Update       X
Assessment of New Products and/or Services As Needed As Needed As Needed As Needed
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Sample Report Report of Chief Compliance
Officer

• Chief Compliance Officer utilizes this as a
  precursor to reporting to the Audit Committee.
  Information is provided in slightly more detail,
  discussions are more detailed, and focus for this
  committee is fiduciary activity only.
• Top 3 issues identified or being monitored
• Results of compliance monitor activities
• Information on Compliance training
• Legislative and Regulatory Developments
• Communication with Regulators Exam activities
• Summary of Corporate Audit and RCSA reports
  impacting Compliance

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Balancing needs of separate legal entities
governed by different regulatory agencies

• In large complex banking organizations, it is not
  uncommon to have subsidiaries governed by the
  OCC, Fed, SEC, NYSE, NASD, and potentially
  others.
• Can be managed through dual reporting structures
  one line to the corporate group, one line to
  the legal entity executive
• Assess issues and risks at the entity level, then
  secondarily assess their impact on the line of
  business and organization as a whole
• Utilize knowledge gained from exams and audits in
  one subsidiary to perform an assessment of other
  subsidiaries prior to their own exam or audit.
• Ensure there is strong communication and
  reporting between the entities and the corporate
  area consolidating the information impress upon
  the subsidiary the usefulness of being part of a
  larger organization
• Be cautious/wary of subsidiaries that wish to
  operate autonomously, who are not forthcoming,
  who do not recognize that they are part of a
  larger organization