TPN INVESTMENT ADVISER AFFILIATE COMPLIANCE GUIDE. December 2006

Transcription

1 TPN INVESTMENT ADVISER AFFILIATE COMPLIANCE GUIDE December 2006

2 TABLE OF CONTENTS I. Introduction 4 II. IAA Registration Requirements 4 III. IV. Documents Provided by TPN A. TPN Code of Ethics Manual B. TPN Form ADV Part II C. Advisory Affiliate Disclosure Brochure D. TPN Investment Advisory Agreement E. TPN New Account Form F. TPN New Account Checklist G. TPN Privacy Policy H. Approved TPAM List IAA Responsibilities and Obligations A. Complaints, Lawsuits and Administrative Proceedings B. Bankruptcy, Liens and Judgments C. Personal Brokerage Accounts D. Code of Ethics E. Annual Compliance Meetings V. Rules of Conduct A. Determining and Adhering to Client Objectives B. Advisor Managed Account Time Horizon C. Form ADV Part II and Advisory Affiliate Disclosure Brochure D. New Account Forms E. Investment Advisory Agreement F. Fee Disclosures G. Fiduciary Duty H. Special ERISA Considerations I. Advertisements J. Payment for Client Solicitations K. Client Billings L. Custody: Acting as Trustee, Power of Attorney or Executor M. TPN Double Dipping Policy N. Client Privacy O. Conflicts of Interest P. SEC Rule 3a-4 Q. Quarterly Performance or Summary Reports VI. VII. General Limitations Relating to IAA Activities A. Other Investment Adviser Affiliations B. Approved Products and Third Party Asset Managers Prohibited Business Practices A. Third Party Instructions B. Excessive and Unauthorized Transactions C. Interest in Client Accounts D. Borrowing or Lending Money or Securities E. Principal Transactions with Advisory Clients

3 F. Agency Cross Transactions with Advisory Clients G. Preparation of Documents H. Insider Trading I. Cash Transactions J. Sharing in Profits or Losses K. Fraudulent Conduct L. Dual Compensation M. Performance Fees N. Prohibited Products and Transactions O. Proxy Voting P. Market Timing Q. Inactive Accounts R. Margin Accounts S. Front Running T. Concentration U. Private Securities Transactions V. Quarterly Personal Securities Transactions VIII. TPN Advisor Managed Accounts A. Guidelines B. Account Opening Procedures C. Termination of Accounts IX. Third Party Asset Managers A. Suitability B. Guidelines C. Account Opening Procedures For Sub-Advised Programs D. Account Opening Procedures For Solicitor Programs E. Termination of Accounts F. Death of a TPAM Client X. Financial Planning and Consulting A. Guidelines B. Engagement Procedures XI. Books and Records Requirements A. Client Files B. Trade Records C. Additional Branch Records D. Electronic Storage of Records by Investment Advisers Addendum: Reg {Books and Records maintained by Investment Advisers} 27 2

4 I. Introduction The Planners Network ( TPN ) is an Investment Adviser* registered with the Securities and Exchange Commission ( SEC ) under the Investment Advisers Act of 1940, as amended, ( Advisers Act ). * The Advisers Act defines "Investment adviser" as any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities. This TPN Investment Adviser Affiliate ( IAA ) Compliance Guide ( IAA Compliance Guide ) provides information necessary to comply with the requirements of the SEC, including the requirements of the Advisers Act, the states and TPN. The TPN Compliance function is performed jointly by the TPN Chief Compliance Officer ( CCO ), the TPN home office and the outside compliance provider, National Planning Corporation ( NPC ). This IAA Compliance Guide is distributed to all TPN IAAs and TPN employees. IAAs are required to read and be familiar with the contents of this IAA Compliance Guide, and must sign-off on this IAA Compliance Guide. In addition, IAAs are responsible for reading all updates to this material that may be issued throughout the year. Such updates may be communicated by , newsletter article, meetings or other such methods as TPN s CCO may determine is appropriate. IAAs and employees must direct any questions regarding this material to the CCO. In no case shall an IAA proceed with insufficient knowledge. TPN policy prohibits anyone from acting or holding themselves out as a TPN IAA unless they are registered with TPN as an IAA. TPN s advisory programs and services are designed for use by TPN IAAs who intend to provide their clients with any of the following: (a) Continuous portfolio management services for an asset-based fee; (b) Recommendations of Third Party Asset Managers ( TPAMs ) who will manage client assets, with TPN acting as an investment adviser or as a cash solicitor; or (c) A written financial plan or investment advice through consulting services for an hourly or flat fee. All advisory services provided by IAAs must be based on a detailed analysis of each client's specific financial needs, investment objectives, risk tolerance and time horizon. II. IAA Registration Requirements TPN policy requires an IAA to be registered as an investment adviser representative in each state in which the IAA maintains a place of business. It is important to note that some states may consider a place of business to exist if the IAA meets with current or prospective clients on more than an occasional basis. A TPN IAA may not solicit or transact TPN advisory business in any state unless: (i) TPN has approved the IAA in that state and (ii) TPN has notified the IAA as to the effectiveness of the approval as an IAA in that state. To register as an IAA of TPN, an individual must: (a) Submit applicable documents to the TPN Home Office including the New Advisor Questionnaire. The required documents will depend whether the prospective IAA is joining TPN or is an existing TPN representative seeking to become registered as an IAA. The required documents may be obtained from the TPN home office or on the TPN website. (b) Have had a background check completed by TPN or NPC; 3

5 (c) Qualify by examination, or satisfy specific state exemptions to the examination requirements of a specific state, which may include one or more professional designations; and (d) Pay applicable initial and renewal registration fees. IAAs with questions regarding the registration requirements of states should contact the TPN CCO or home office. III. Documents Provided by TPN In addition to this IAA Compliance Guide, TPN makes available the following documents within the TPN Website, except where noted: A. TPN Code of Ethics Manual. This document is designed to provide TPN IAAs and employees with a detailed description of fiduciary obligations and procedures relative to TPN advisory activities. B. TPN Form ADV Part II. The Advisers Act requires that every TPN advisory client receive TPN s current Form ADV Part II, including Schedule F, prior to or concurrent with the execution of an advisory agreement. In addition, the Advisers Act requires that the Form ADV Part II be offered to clients on an annual basis thereafter if the adviser provides regular and continuous advisory services to the client. IAAs are required to satisfy the initial delivery requirement and the annual offer requirement. At no time may an IAA provide an outdated version of the TPN ADV Part II to an advisory client or solicited advisory client. C. Advisory Affiliate Disclosure Brochure. This document supplements the Schedule F section of the Form ADV Part II and as such is subject to all the Form ADV Part II requirements described above. It is used to describe the specific investment advisory practices at each TPN advisory location. All updates to this location-specific Schedule F must be coordinated with the TPN CCO. The Advisory Affiliate Disclosure Brochure must be maintained at each location and is not available within the TPN Website. D. TPN Investment Advisory Agreement. IAAs are required to use the TPN Investment Advisory Agreement with every advisor managed account, sub-advised Third Party Asset Manager ( TPAM ) account and consulting/financial planning relationship. Please note the Agreement includes an Addendum to correspond with each investment advisory service offered. E. TPN New Account Form. A TPN New Account Form ( NAF ) must be completed for each new advisor managed account, sub-advised TPAM account and consulting/financial planning engagement. With respect to advisor managed accounts maintained at Pershing LLC through NPC, the NPC NAF is to be used in lieu of the TPN NAF as these accounts are supervised by NPC as broker-dealer. All NAFs must be completed in full prior to being signed by the client. The client must initial any material changes made to the NAF after the client has signed. In addition, IAAs must ensure TPN NAFs are updated every thirty-six months or sooner if the IAA becomes aware of a material change in the client s previously disclosed information. While NPC NAFs used for Pershing LLC accounts must also be updated at any time the IAA becomes aware of a material change in the client s previously disclosed information, NPC will be responsible for complying with the thirty-six month update requirement for accounts established at Pershing LLC. F. TPN New Account Checklist. All IAAs must complete the TPN New Account Checklist for every new advisor managed account, Third Party Asset Manager account and consulting services/financial planning engagement. The Checklist is intended to document regulatory requirements and to document forms required for submission to the TPN home office. G. TPN Privacy Policy. IAAs must provide a copy of TPN s Privacy Policy to every new TPN client prior to, or upon the establishment of, a client relationship. In addition, IAAs must also deliver a copy of TPN s Privacy Notice to clients on an annual basis. 4

6 H. Approved TPAM List. TPN publishes a list of approved TPAMs on the TPN Website. A TPAM is not permitted for use by IAAs unless it is approved by TPN. IV. IAA Responsibilities and Obligations The following policies and procedures apply to all IAAs and are designed to ensure compliance with, and prevent violations of, federal and state laws governing investment advisers. A. Complaints, Lawsuits and Administrative Proceedings Any complaint naming the IAA and/or TPN in an investment-related complaint, or which names the IAA and/or TPN as defendants in any civil or criminal proceeding or in any administrative or disciplinary proceeding by any public or private regulatory agency, must immediately be reported to the TPN CCO. B. Bankruptcy, Liens and Judgments Any IAA who files for bankruptcy, or who receives notice of a lien or judgment impacting the IAA, must immediately provide a written report regarding this event to the TPN home office. C. Personal Brokerage Accounts NPC policy requires that all TPN IAAs licensed as NPC registered representatives, associated persons of NPC, and their immediate family members (if such IAR or employee has control or financial interest over the account), are not permitted to open or maintain a brokerage account at any firm other than NPC unless the account is approved in advance by the NPC Compliance Department. All personal brokerage accounts must be disclosed in writing to NPC. Notwithstanding the above, IAAs must always ensure that their personal securities transactions do not, in any way, conflict with the interests of the IAA s clients, and must refrain from placing personal orders ahead of client orders when placing trades in the same securities and on the same day as the IAA s clients. D. Code of Ethics IAAs and employees of TPN are subject to the TPN Code of Ethics and Insider Trading Policies and Procedures. TPN has a fiduciary duty to its investment advisory clients. All employees, IAAs and officers, must avoid activities, interests and relationships that run contrary (or appear to run contrary) to the best interest of TPN investment advisory clients. See the Code of Ethics manual, located on the TPN Website. E. Annual Client Meetings On at least an annual basis, IAAs are required to meet with each TPN advisory client for whom the IAA provides continuous and regular advisory services. This requirement applies to all advisory clients subject to the TPN Investment Advisory Agreement with the exception of those clients subject to consulting/financial planning engagements. The annual reviews should be conducted for the purpose of reviewing client information, including, but not limited to, a client s: financial circumstances, investment objectives, investment restrictions, asset allocation and account performance. At the conclusion of such meetings, IAAs must document the meeting and topics discussed in the respective client files or on some form of client contact management software. To assist IAAs with this requirement, TPN has created an Annual Review Form, which is posted in the RIA Resource Library section of the TPN Website. This form will help evidence that the client meeting was conducted in a timely and acceptable fashion. V. Rules of Conduct A. Determining and Adhering to Client Objectives In general, IAAs should learn and become familiar with each client s financial situation, including income, net worth, financial obligations, age, health, investment experience and any other investments that may be held outside of a managed account. When opening managed accounts, IAAs are required to assist their clients in determining appropriate investment objectives, time horizon and risk tolerance. In recommending and selecting investments or TPAMs, IAAs should refer to TPN s approved products 5

7 and approved TPAMs lists, which are available on the TPN Website. IAAs should regularly review the investments and performance of a client s managed account for consistency with the client s stated investment objectives, and should document this review in notes to the client s file or on some form of client contact manager software. B. Advisor Managed Account Time Horizon TPN advisor managed accounts are designed for clients who wish to invest assets in accordance with long-term investment objectives. The fee structure and transaction costs associated with purchasing and selling securities in managed accounts is not meant to encourage short-term trading. IAAs and their clients should be aware that if TPN detects an excessive level of trading in a client s managed account, IAAs will be asked to explain the trading activity. Excessive trading activity may result in termination of a client s managed account. C. Form ADV Part II and Advisory Affiliate Disclosure Brochure IAAs must furnish each advisory client or prospective advisory client with a current version of TPN s Form ADV Part II (available on the TPN Website) including the Advisory Affiliate Disclosure Brochure, as specified below: 1. Initial Delivery to Clients or Prospective Clients. IAAs must deliver TPN s current Form ADV Part II and Advisory Affiliate Disclosure Brochure to clients prior to or concurrent with the client s execution of the Investment Advisory Agreement. All clients will retain the right to terminate the Agreement without penalty within five (5) business days after its execution. 2. Annual Offer to Deliver to Clients. TPN IAAs must offer in writing to every existing advisory client a current version of its Form ADV Part II including the Advisory Affiliate Disclosure Brochure on an annual basis. Any client responding to the written offer will be mailed, free of charge, a current copy of the documents within seven (7) calendar days of receipt of the client's written request. Please refer to the Books and Records section of this IAA Compliance Guide for Annual ADV Part II Offer file maintenance requirements. D. New Account Forms One of the most important elements in any financial firm is maintaining complete and accurate records. A TPN NAF, or NPC NAF in the case of Pershing LLC accounts opened through NPC, must be completed in its entirety for every advisor managed account, TPAM account and consulting or financial planning engagement. Every NAF is to be completed, signed and dated by the IAA. The NAF must be completed at the start of the advisory relationship. Clients who refuse to provide required information will not be permitted to open an account with TPN. As previously stated, IAAs must obtain an updated NAF in the event there are any material changes in the client s previously disclosed information. Absent any material changes in the client s previously disclosed information, IAAs must ensure NAFs are updated at least every thirty-six months. NPC will be responsible for updating NPC NAFs used for Pershing LLC accounts. E. Investment Advisory Agreement IAAs are required to use the TPN Investment Advisory Agreement when providing advisor managed, TPAM managed or consulting/financial planning services to TPN clients. Other account forms and documents in addition to the Investment Advisory Agreement will be required. Please refer to the appropriate program sections in this IAA Compliance Guide for more information. Fee-based investment advice may not be provided without a signed Investment Advisory Agreement. Each advisory client must be provided with the TPN Form ADV Part II, including the Advisory Affiliate Disclosure Brochure, prior to or concurrent with the execution of the Investment Advisory Agreement. F. Fee Disclosures 6

8 TPN advisor managed platforms charge clients an annual asset management fee, typically billed quarterly, which is calculated based on the value of the assets in the managed account. TPN s Investment Advisory Agreement contains TPN s maximum fee schedules. IAAs may negotiate fees within established TPN guidelines, but negotiated fees may not exceed the maximum fees stated in TPN s fee schedules. Fees are debited from the client s account or as agreed upon by the client and TPN. With respect to advisor managed and TPAM accounts, IAAs must take extra care to clearly explain fees and charges to the client and ensure that each client fully understands the nature of the ongoing management fees, commissions (if charged), transaction charges, portfolio set-up and termination fees, including any other third-party fees and charges, that may exist in an TPN advisory account. In addition to the transaction charges and management fees, some mutual funds within TPN advisory accounts charge the client mutual fund 12b-1 fees and purchase and redemption fees. IAAs should be sure to explain the existence of these fees to their clients prior to effecting a securities transaction in such funds. Although the annual management fees, transaction charges and third-party fees and charges are clearly disclosed in both the Investment Advisory Agreement and Form ADV Part II, IAAs should ensure that clients fully understand the nature of these fees and charges prior to signing the Agreement. When consulting or financial planning services are to be provided in exchange for a flat or hourly fee, IAAs must clearly disclose the fees to be charged within both the Investment Advisory Agreement and TPN Billing Statement. G. Fiduciary Duty The Advisers Act, state regulations and common law impose a strict fiduciary duty on investment advisers, their employees and agents to act only in the best interests of the adviser s clients. Under federal and state law, investment advisers are fiduciaries that owe a duty of undivided loyalty to their advisory clients. An adviser s breach of its fiduciary duty is prohibited by federal and state law and constitutes a violation of the anti-fraud provisions of the Advisers Act, potentially leading to serious administrative, civil or criminal liability. An investment adviser s fiduciary duty to its clients requires, among other things, that the adviser provide clients with disinterested and impartial advice. The best interests of the client must be the foremost consideration when recommending to an advisory client the purchase or sale of securities or other products. Advisers must have a reasonable and independent basis for rendering investment advice. An IAA s desire to earn compensation or other fees must never be given priority over the best interests of the client when making recommendations to the client. When an IAA receives fees for providing investment advice, the IAA is held to a higher standard of conduct and fiduciary duty with respect to the client relationship than if the IAA was acting solely as a securities salesperson. Therefore, the degree of care an IAA exercises, as a fiduciary must be raised accordingly. IAAs must have reasonable grounds for believing that the IAA s recommendations of securities are suitable for the adviser s clients, based upon all relevant facts and circumstances provided by the client. Determination of importance should be placed on the client s age, annual income, liquid net worth, risk tolerance, time horizon and investment objectives, and investment restrictions or instructions. The IAA s determination of suitability should be clearly documented and accompanied by full disclosure to the client of all relevant facts and potential conflicts of interest regarding the investment recommendations made to the IAA s clients. As part of their fiduciary obligations, IAAs must consider the following responsibilities in the normal course of business: 1. Ensure that investment advice rendered to any client is sound, reasonable and appropriate for the client in light of all relevant circumstances, without regard to any benefit the adviser may receive from providing such advice. 2. Ensure that investment advice is suitable to each client based on the client s age, experience, financial position, investment objectives, risk tolerance, special needs and circumstances. 7

9 3. Ensure that personal securities transactions do not, in any way, conflict with the interests of the IAA s clients, and refrain from placing personal orders ahead of client orders when clients are trading in the same securities on the same day as the IAA. 4. Ensure that the IAA remains loyal to clients and does not take unfair advantage of a client s trust. H. Special ERISA Considerations IAAs who offer or plan to offer advisory services to qualified retirement plans should be familiar with special rules applicable under the Employee Retirement Income Security Act, as amended ( ERISA ). ERISA, a federal statute, protects the interests of employee benefit plan participants and their beneficiaries by imposing certain duties and standards of conduct for any person providing services to the Plan. Under ERISA, certain service providers including those responsible for investing Plan assets are defined as fiduciaries. Plan fiduciaries have a high degree of responsibility, with personal liability for damages and the possibility of civil or criminal penalties. Prior to opening a managed account for a qualified plan, the IAA should obtain a fully completed and executed plan documentation or acceptable trustee certification form. The IAA must also obtain the section of the Plan Trust Agreement, which deals with the responsibility of voting proxies, usually found within the Trustee Powers section of the Trust Agreement. IAAs should be aware that neither TPN nor the IAA may vote proxies for any client. To the extent the Plan requires an Investment Adviser or Manager provided with discretionary authority to vote proxies for the Plan, it will be necessary for the Trustees or the employer to either (1) amend the Trust Agreement to eliminate such a requirement; or (2) revise the language within the TPN Investment Advisory Agreement. Fiduciaries to ERISA accounts are subject to the following statutory fiduciary duties: 1. The duty to act solely in the interest of the Plan participants and their beneficiaries; 2. The duty to act with the same degree of skill, care, prudence and diligence that a prudent person in a like capacity and familiar with such matters would use. (This duty is judged by the process utilized to select investments rather than the investments overall performance, and the process used to provide liquidity to permit distributions.); 3. The duty to diversify Plan investments in order to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to diversify. (Circumstances to consider include, but are not limited to, the Plan s purpose, the Plan s total assets, prevailing financial and industry conditions, types of investments held by the Plan and distribution among industries.); and 4. The duty to follow the documents and instruments governing the Plan to the extent that such documents and instruments are consistent with ERISA requirements. I. Advertisements Investment Adviser advertising is regulated by the SEC pursuant to Section 206 of the Advisers Act, which generally prohibits an adviser from engaging in fraudulent, deceptive or manipulative activities. SEC Rule 206(4)-1 defines certain advertising practices to be a violation of Section 206(4) of the Advisers Act. Rule 206(4)-1 recognizes that an adviser s fiduciary duties mandate that the standard of conduct for adviser advertisements should be stricter than for vendors of products or services, due to the differences in the relationship and trust between the Adviser and the client. Rule 206(4)-1(b) defines "advertisement" to include any notice, circular, letter or other written communication addressed to more than one person, or any notice or other announcement in any publication or by radio or television, which offers (1) any analysis, report, or publication concerning securities, or which is to be used in making any determination as to when to buy or sell any security, or which security to buy or sell, or (2) any graph, chart, formula or other device to be used in making any determination as to when to buy or sell any security, or which security to buy or sell, or (3) any other investment advisory service with regard to securities. 8

10 Advertisement Approval Procedures. All advertisements, prepared by the IAA or modified by the IAA, must be approved in writing by either the NPC Home Office or TPN's CCO prior to use. Advertising materials relating to TPN advisory services that also describe, offer or involve services offered through NPC must be submitted to NPC. Materials relating to TPN advisory services that do not describe, offer or involve services offered through NPC must be forwarded to the TPN CCO prior to approval. An example of this is a letter to be sent to clients that maintain advisor managed accounts held away from NPC (this includes Pershing LLC and mutual fund accounts listing NPC as the broker/dealer). An IAA may not publish, circulate, distribute or otherwise use any advertisement that is fraudulent, deceptive, manipulative, or is otherwise false or misleading. Please refer to the Books & Records section of this IAA Compliance Guide for TPN Advisory Advertising File maintenance requirements. In addition, please refer to NPC registered representative Compliance Guide for information related to NASD advertising requirements. Guidelines and Restrictions. The following guidelines and restrictions apply to all TPN advisory advertising: 1. Testimonials A testimonial is generally understood to include any statement by a former or present advisory client, which in any way endorses the adviser or refers to the client s favorable experience with the adviser. Testimonials are likely to create a deceptive or mistaken inference that all, or substantially all, of the adviser s clients typically experience the same favorable results. In addition, testimonials tend to emphasize comments that are favorable to the adviser and ignore those which are not so favorable. As a result, Rule 206(4)-1 of the Advisers Act prohibits an adviser from circulating or distributing advertisements that refer directly or indirectly to a testimonial of any kind with regard to its advice 2. Past Recommendations Rule 206(4)-1 prohibits advertisements which refer directly or indirectly to past, specific, profitable recommendations unless the advertisement also provides a list of all recommendations made by the adviser, whether profitable or not, within at least the prior one-year period. This prohibition also applies to advertisements that quote third party articles referring to past specific recommendations. 3. Graphs, Charts and Formulas Rule 206(4)-1 also prohibits an adviser from representing that a graph, chart, formula or other device being offered can, by itself, guide the investor as to what securities should be bought or sold or when to buy or sell them. Further, if the advertisement implies that the chart, graph or formula can assist the person in making their own investment decisions, it must clearly disclose all limitations and difficulties of its use. 4. Offers for Free Services or Consultations If an advertisement offers a free service, product or consultation, the service, product or consultation must in fact be entirely free. It would be considered false or misleading if the free offer was contingent on some condition or obligation in order to receive the free service. 5. Titles and Holding Out An appropriately registered TPN IAA may refer to himself or herself as an Investment Adviser Affiliate in TPN-approved sales literature or advertising. TPN IAAs are prohibited from using the acronyms IAA or RIA in any advertising or sales literature. The acronyms IAA and RIA are specifically prohibited from being held out as professional designations, and may never immediately follow the name of the IAA (e.g. John Doe, IAA), as IAA and RIA are not professional designations. An IAA may not represent himself or herself as a Registered Investment Adviser or RIA in his or her capacity as an IAA with TPN. All advertising, sales literature and correspondence with the public including, but not limited to, use of business cards and letterhead in which the products or services are offered through the IAA s affiliation with TPN must clearly identify TPN as the Registered Investment Adviser or service provider. 9

11 6. Performance Advertising IAAs are prohibited from preparing advertising materials that illustrate performance of TPN advisory accounts. Neither TPN nor its IAAs shall advertise performance with respect to TPN advisory accounts. 7. Cold Calling Restrictions IAAs using the telephone as a method to solicit new clients must comply with strict federal and state legislation regarding business solicitations to residential telephone subscribers. The IAA must access the following Do Not Call Lists prior to conducting any cold calling activities: state specific Do Not Call Lists, Federal Do Not Call Registry, and the NPC Do Not Call List (for IAAs affiliated with NPC). In general most state lists may be accessed from the state s Website. A link to the Federal and NPC lists may be found on the NPC Website under the Compliance section. IAAs are required to enter the information of any person not wishing to be contacted on the NPC website. J. Payment for Client Solicitations IAAs may not receive or pay any form of compensation from or to another Investment Adviser or individual with respect to TPN advisory activities unless the arrangement has been approved in writing and in advance by TPN. Only TPN-approved TPAM programs may be used by IAAs to receive referral fees in accordance with SEC Rule 206(4)-3 of the Advisers Act. IAAs may not pay a fee, directly or indirectly, to any person referring clients to TPN unless prior consent of the TPN has been obtained and the payments are made by TPN in full compliance with SEC Rule 206(4)-3. K. Client Billings TPN IAAs are responsible for billing and collecting client investment advisory fees for advisor managed accounts and consulting or financial planning services. In addition, IAAs must also process fees on behalf of TPN by depositing client checks and fees debited from client accounts into the TPN corporate account. The affiliate will forward copies of client invoices and fee calculation details to the home office at the time of billing. As deposits are made to the TPN account, copies of checks received and the copy of the deposit slip will be forwarded to the home office. L. Custody: Acting as Trustee, Power of Attorney or Executor IAAs are not permitted to take custody or control of any client funds or securities. As such, TPN IAAs are prohibited from acting as Trustee, Power of Attorney, Executor, Guardian or any similar function, which by its nature gives the IAA custody or control over the assets of the individual or the organization. Such activities are beyond the scope of the IAA s affiliation with TPN and are not covered by TPN s or NPC s Errors & Omissions Insurance. Custody, as defined in Rule 206(4)-2 of the Advisers Act, occurs where an adviser holds, directly or indirectly, client funds or securities or has any authority to obtain possession of them. Violations of this policy will result in disciplinary action up to, and including, termination from TPN. Exceptions to this policy may be made in cases of immediate family members of the IAA and with prior written approval from the TPN home office. M. TPN Double Dipping Policy It is general TPN policy to discourage IAAs from receiving commissions from front loaded products and AUM fees on the same assets. The receipt of commissions, including trail commissions, and advisory fees for the same assets may be considered a conflict of interest. When commissions on managed products are received, the IAA is encouraged to employ a fee offset strategy aimed to reduce the asset management fees paid by the client. As a general fee offset guideline, the total compensation received by the IAA, whether by commissions or fees, should be limited to the amount the annual asset management fee the client would have paid. The Client Fee/Commission Disclosure Form, available on the TPN website, should be signed by clients subject to both sales charges resulting in commissions and asset management fees. IAAs that may be compensated on managed assets through commissions and asset management fees are expected to describe this matter along with any fee offset or similar strategy on the Advisory Affiliate Disclosure Brochure (IAA s Schedule F). Any exceptions to the general TPN policy would need to be approved by the CCO. 10

12 N. Privacy Policy The Gramm-Leach-Bliley Act ( GLB ), signed into law in 1999, and the corresponding regulations adopted by various state and federal regulatory agencies pursuant to GLB, imposes restrictions on the sharing of a client s non-public personal information. TPN has adopted its Privacy Policy in response to GLB and the various state and federal regulations. IAAs must provide a copy of TPN s Privacy Policy to every new TPN client prior to, or upon the establishment of, a client relationship. In addition, IAAs must also deliver a copy of TPN s Privacy Notice to clients on an annual basis. When complying with TPN s Privacy Policy, it is important to keep in mind the following points: 1. IAAs have a duty to keep a client s nonpublic personal information confidential. 2. Nonpublic personal information includes, but is not limited to, a client s financial information, Social Security Number, account investments, account balances and any beneficiary designations. 3. The IAA should not share a client s nonpublic personal information if there are concerns that sharing the information with other parties, including the client s family members may violate the client s confidentiality. Oftentimes, family members or other parties will ask for information regarding a client and his/her accounts. IAAs may not share a client s personal nonpublic information with another party unless that client provides signed written authorization. For additional information regarding your client s right to privacy, please consult the TPN Privacy Policy available within the TPN Website. O. Conflicts of Interest Acting in the capacity of an IAA, certain dealings with clients, their family members, other related parties and other clients may present a conflict of interest issue for the IAA as a result of the IAA s fiduciary obligation to a client and the IAA s responsibility to keep a client s information confidential. Conflicts of interest generally arise when an IAA has clients engaged in estate planning, divorce proceedings or receiving an inheritance. To identify potential conflicts of interest, it may be helpful for IAAs to ask themselves the following questions: 1. Who am I representing in the transaction? 2. By representing certain related and/or affiliated parties, could I be placed in a situation where I may have to share a client s personal nonpublic information with another party and, thereby, violate my client s confidentiality? 3. By representing certain related and/or affiliated clients, could I be placed in a situation where, by necessity, I favor one client over another and violate my fiduciary obligation to my client? 4. Can I neutrally and fairly represent both clients, and if not, would it be better to not represent a client? As a reminder, if you have confidentiality concerns, or cannot adequately represent a client, you should not represent or serve him/her in a fiduciary capacity. There may be situations when it is possible to neutrally and fairly represent clients with a potential conflict of interest. If this is the case, then it is important that you disclose your fiduciary role and the potential conflict of interest to both parties prior to representing either party. If an IAA has any questions regarding client privacy and the disclosure of related conflicts of interest, the IAA should contact the CCO. P. SEC Rule 3a-4 It is the policy of TPN that all clients in TPN advisory accounts receive personalized investment advice. While it is certainly acceptable for IAAs to make use of model portfolios or other research tools as a 11

13 guide for selecting investments for advisor managed accounts, it is important that steps be taken to avoid inadvertently creating an unregistered Investment Company in violation of Rule 3a-4 of the Investment Company Act of 1940, as amended. SEC Rule 3a-4 is a non-exclusive safe harbor from the definition of an Investment Company for programs that provide discretionary investment advisory services to clients. Under the Rule, an investment adviser and its IAAs providing discretionary advisory services to clients will not be deemed to be an Investment Company if the following conditions are satisfied: Individualized Advice. Each account must be managed on the basis of each client's financial situation, investment objectives, and instructions. IAAs are required to obtain separate suitability information from each advisory client on a NAF and tailor investment recommendations to clients consistent with each client's financial situation, investment objectives, and instructions. At the option of each IAA, investment policy statements or client questionnaires may be used to supplement the NAF. Client Contact. The IAA must take the necessary steps to: 1. Obtain information from the client regarding the client's financial situation and investment objectives and give the client the opportunity to impose reasonable restrictions on the management of the account. 2. Contact the client at least annually to determine whether there have been any changes in the client's financial situation or investment objectives, and whether the client wishes to impose any reasonable restrictions on the management of the account or reasonably modify existing restrictions. IAAs may document these meetings using the TPN Annual Review Form, which is available on the TPN Website, or, by using some form of client contact management software. 3. Ensure that the IAA is reasonably available to the client for consultation. The IAA should also provide the client with a means through which such contact may be made. To meet this requirement, quarterly performance reports should instruct clients to notify the IAA if there have been any changes in the client s financial situation, investment objectives or restrictions. Account Restrictions. Each client must be able to impose reasonable restrictions on the management of his/her account, including designation of particular securities or types of securities which should not be purchased for the account, or which should be sold or held in the account. Clients must be given the ability to notify the IAA of any reasonable restrictions to be imposed on the management of the client s account on an ongoing basis. Account Statements. Clients must be provided with a statement, at least quarterly, containing a description of all activity in the client's account during the preceding period, including all transactions made on behalf of the account, all contributions and withdrawals made by the client, all fees and expenses charged to the account, and the value of the account at the beginning and end of the period. This requirement is met through the delivery of statements from the applicable custodian. In addition, clients receive quarterly performance reports from IAAs including account holdings, beginning and ending values, fees charged, and any commission offsets. Indications of Ownership. With respect to all securities and funds in the account, and to the same extent as if the client held the securities and funds outside the program, each client retains the right to: 1. Withdraw securities or cash; 2. Vote securities or delegate the authority to vote securities to another person; 3. Receive, in a timely manner, a written confirmation or other notification of each securities transaction in addition to any other documents required by law to be provided to security holders; and 4. Proceed directly as a security holder against the issuer of a security in the client's account and not be obligated to join any person involved in the operation of the program, or any other client of the program, as a condition precedent to initiating a proceeding. 12

14 TPN client accounts are registered in the name of the client. Accordingly, various custodians of client accounts provide TPN clients with all notices and communications relating to their accounts and holdings, and clients maintain all the rights and indication of ownership thereto. Q. Quarterly Performance or Summary Reports IAAs are required to provide clients with performance or summary reports for advisor managed accounts no less than quarterly. Under no circumstances may IAAs produce any statement or report designed to replace or otherwise act as a substitute for any statements or reports sent to TPN clients directly by the custodian of the assets. At minimum, quarterly performance or summary reports must include the following: Identification of TPN as the RIA; Beginning and ending period account value; Management fee; A statement similar to the following: Please contact your investment advisor affiliate (or similar title) if there are any changes to your financial situation, investment objectives or reasonable restrictions on the management of your account. VI. General Limitations Relating to IAA Activities A. Other Investment Adviser Affiliations An IAA of TPN may not solicit or transact business on behalf of any other investment adviser, or be separately registered or affiliated with another investment adviser, without prior notification to the TPN CCO. B. Approved Products and Third Party Asset Managers IAAs may only effect purchases and sales of securities approved in advance by TPN. A listing of TPN s approved TPAMs is available on the TPN Website. For a list of prohibited products and transactions with respect to IAA managed accounts, please refer to the Prohibited Products and Transactions section within this IAA Compliance Guide. In addition, only Third Party Asset Managers ( TPAM ) approved in advance by TPN may be used. TPN s approved TPAM list is available on the TPN Website. VII. Prohibited Business Practices A. Third-Party Instructions IAAs may not accept verbal or written third party instructions, including but not limited to, placing orders to purchase or sell securities for the account of a client, upon instruction of a third party, without first obtaining a written third party trading authorization from the client. B. Excessive and Unauthorized Transactions IAAs may not effect or induce trading in a client's account, which is excessive in size or frequency in view of the financial resources and character of the account. C. Interest in Client Accounts IAAs may not accept gifts by will or trust, money or property from, or become a beneficiary on, any client or account, annuity or insurance policy, under a will, trust or otherwise, without the advance written consent of the CCO. Exceptions to this policy may be provided in cases of immediate family members. D. Borrowing or Lending Money or Securities IAAs may not borrow money or securities from, or lend money or securities to, a client. Exceptions to this policy may be provided in cases of immediate family members of the IAA and with prior written approval from the CCO. E. Principal Transactions with Advisory Clients 13

15 IAAs may not effect principal securities transactions in TPN advisory accounts. Section 206 of the Advisers Act places significant, prohibitive restrictions on such transactions. Therefore, TPN policy and TPN s Form ADV Part II prohibits such transactions in all TPN advisory accounts. A principal transaction occurs when an investment adviser (TPN) is acting as principal for its own account and knowingly buys securities from, or sells securities to, a client through the firm s account. F. Agency Cross Transactions with Advisory Clients IAAs may not effect agency cross transactions in TPN advisory accounts. Section 206 of the Advisers Act places significant, prohibitive restrictions on such transactions. Therefore, TPN policy and TPN s Form ADV Part II prohibit such transactions in all TPN advisory accounts. An example of a cross transaction occurs when Client A wishes to effect a purchase in a certain security which Client B wishes to sell. A cross transaction occurs when Client A purchases the security directly from Client B. G. Preparation of Documents IAAs may not falsify or intentionally omit any information on firm or client records. H. Insider Trading IAAs may not purchase or sell any security (for a personal account or a client account) while in possession of material information, which has not been made available to the general public, or communicate non-public material information about a security to a client or other third party. Please refer to Code of Ethics" section of this IAA Compliance Guide for additional information. I. Cash Transactions IAAs may not accept or receive cash, foreign currency, money orders or traveler s checks from any client for any purpose. J. Sharing in Profits or Losses IAAs may not share in profits or losses with a client or agree to reimburse a client for losses for any reason. K. Fraudulent Conduct IAAs may not employ any device, scheme or artifice to defraud a client, or engage in any act, practice or course of business that operates or would operate as a fraud or deceit upon a client. Examples include, but are not limited to, falsifying documents and/or signatures, embezzling or misappropriating assets, and collecting management fees without actively managing or providing continuous and regular supervisory services to client accounts. L. Dual Compensation IAAs may not receive both commissions and asset-based fees on the same transaction from an advisory client except as permitted in accordance with TPN s Double Dipping policy described in the TPN Double-Dipping Policy section of this IAA Compliance Guide. M. Performance Fees In accordance with Section 205(a)(1) of the Act, IAAs may not receive compensation based on a share of the capital gains or capital appreciation of a client s account However, in accordance with SEC Rule 205-3, IAAs may utilize Dunham and Associates, an approved TPAM, in which Dunham will bill management fees under a performance-based arrangement using a Highwater Mark. Among other things, the Dunham program is available only to qualified clients who meet the following minimum criteria as defined in Rule 205-3: 1) Natural persons or companies that have at least $750,000 under management with Dunham immediately after entering into the advisory contract; or 14

16 2) Natural persons or companies that the adviser reasonably believes either have a net worth of more than $1,500,000 at the time at which the contract is entered into, or are qualified purchasers as defined under section 2(a)(51)(A) of the Investment Company Act (i.e. natural persons or familyowned business owning at least $5 million in investments; trusts managed solely by such qualified persons ; or persons owning and investing on a discretionary basis for their own accounts, or the accounts of other qualified persons, at least $25 million in investments). Under all other circumstances, the receipt of performance-based fees is prohibited. N. Prohibited Products and Transactions 1. Prohibited Products and Ineligible Transactions In general, TPN will not accept the purchase by, or transfer of assets into advisor managed accounts, where those securities cannot be held or priced by the custodian. Any exception the following must be pre-approved by the CCO. a. Prohibited Securities The following securities may not be purchased within TPN advisor managed accounts: Load mutual funds; Regular Load Unit Investment Trusts (Adviser series UITs may be permitted subject to CCO approval); Unlisted Direct Participation Programs/Limited Partnerships and Unlisted REITs for which the IAA receives a commission; Fixed annuities; Variable annuities; Penny stocks 1 ; Promissory notes; Private placements, restricted ( Rule 144 ) securities, and other illiquid assets; Commercial paper; Naked or uncovered options; Commodities, coins and precious metals; Mutual fund Class B shares; Mutual fund Class C shares and equivalent share classes such as D, M, T and II shares (unless a fee offset or similar strategy is used per TPN s Double Dipping policy) 2 ; New issues of the following securities: o Closed-end mutual funds; o Corporate bonds; o Collateralized Mortgage Obligations (CMOs); o Foreign issues; o Municipal bonds; o Mortgage-backed securities; o Stocks; and o Certificates of Deposit b. Prohibited Transactions In addition, the following transactions are prohibited from being effected in TPN advisor managed accounts: Margin transactions 3 ; Short sales; Agency cross transactions; and Principal transactions 15