1. Federal Reserve Fiduciary Risk FIRMA March 2010 J. Douglas Pollitt Trust Risk Specialist Team Leader Federal Reserve Bank of Chicago John.D.Pollitt@frb.chi.org 1

2. Federal Reserve Fiduciary Risk FIRMA March 2010 b Disclaimer b Views expressed are those of presenter and they are not necessarily those of the Federal Reserve and do not otherwise constitute policy and/or position statements of the Federal Reserve. 2

3. Federal Reserve Fiduciary Risk FIRMA March 2010 b Federal Reserve System Structure b Process For Determining Trust Risk Supervisory Themes Annual Spring System Determination/VettingAnnual Spring System Determination/Vetting b How Trust Risk Themes Are Incorporated Into Supervisory Process State Member banks Trust related examinations & targetsState Member banks Trust related examinations & targets Annual CPC/Dedicated teams Risk Assessment/Sup PlanningAnnual CPC/Dedicated teams Risk Assessment/Sup Planning 3

4. Federal Reserve Fiduciary Risk FIRMA March 2010 b Enterprise Wide Fiduciary Risk Assessment Role of the Federal Reserve/Consolidated Regulation, post GLBA & functional regulated entitiesRole of the Federal Reserve/Consolidated Regulation, post GLBA & functional regulated entities CPC/Dedicated team responsibilitiesCPC/Dedicated team responsibilities Base & Updated Risk Profiles of Fiduciary Activities (RIAs, Brokerage, Service Providers, Family Offices, etc) reflected in legal/reputational and operational risk categoriesBase & Updated Risk Profiles of Fiduciary Activities (RIAs, Brokerage, Service Providers, Family Offices, etc) reflected in legal/reputational and operational risk categories Enterprise Wide Risk and Compliance Management assessing whether & how all fiduciary risk captured at holding company level, determining threat to BHC earnings, liquidity, & capitalEnterprise Wide Risk and Compliance Management assessing whether & how all fiduciary risk captured at holding company level, determining threat to BHC earnings, liquidity, & capital Factor into BHC ratings of RFI with I component =Impact on BHC of stress within and risks posed by non-bank RIA affiliates and sponsored fundsFactor into BHC ratings of RFI with I component =Impact on BHC of stress within and risks posed by non-bank RIA affiliates and sponsored funds 4

5. Federal Reserve Fiduciary Risk FIRMA March 2010 b Fiduciary Themes, Priorities Firms support for stressed funds (not just 2a7 funds) Firms support for stressed funds (not just 2a7 funds) Meeting Client Objectives and Adhering to Fiduciary Standards Meeting Client Objectives and Adhering to Fiduciary Standards Strategic & Earnings Pressure Strategic & Earnings Pressure E.g. rising interest rate impact on RIAs and 2a7 funds Increased Litigation Risk Increased Litigation Risk Regulation R & GLB Push Out Rules Regulation R & GLB Push Out Rules Operational Risks – Staffing Turnover, Fraud & Outsourcing Operational Risks – Staffing Turnover, Fraud & Outsourcing 5