Advisor Select Program Wrap Fee Brochure

Transcription

1 Advisor Select Program Wrap Fee Brochure Wealth Management Services Advisor Select Program Wrap Fee Brochure December 1, 2015 This wrap fee program brochure provides information about the qualifications and business practices of MetLife Securities, Inc. If you have any questions about the contents of this brochure, please contact us at The information in this brochure has not been approved or verified by the United States Securities and Exchange Commission ( SEC ) or by any state securities authority. Additional information about MetLife Securities, Inc. is also available on the SEC s website at MetLife Securities, Inc. is a registered investment adviser and securities broker-dealer. Please note that registration does not imply a certain level of skill or training. MetLife Securities, Inc Avenue of the Americas New York, NY (800)

2 ITEM 2. MATERIAL CHANGES Pursuant to SEC rules, this Item summarizes the specific material changes, if any, that have been made to this MetLife Securities, Inc. ( MSI, the Firm, we, our, or us ) Form ADV disclosure brochure ( Firm Brochure ) since the last annual update of the Firm s Brochure on December 22, When required or appropriate, we will also provide clients interim summary updates of material changes to this Firm Brochure. Clients may ask for a copy of our current Firm Brochure, which includes all material changes since the previous Firm Brochure, or a summary of material changes to the previous Firm Brochure at any time, without charge by contacting *************************************************************************************************** The following is a summary of material changes to this Firm Brochure since the last annual update of the Firm's Brochure on December 22, December 1, 2015 Update: Item 4. Services, Fees and Compensation Additional language has been added to this section to inform clients that as of January 1, 2016, the AdvisoryPlus fee option will be discontinued and the AdvisoryOne fee option will apply to all customers. Item 9. Disciplinary Information Additional language has been added to this section to inform clients that in October 2015 MSI, in its capacity as a brokerdealer, reached a settlement with FINRA on allegations relating to the failure to apply sales charge discounts to certain customers eligible purchases of unit investment trusts. This settlement does not relate to the advisory services provided under the Program. October 9, 2015 Update: This Firm Brochure has been amended to reflect the impending conversion, as of October 14, 2015, from Pershing, LLC ( Pershing ) to National Financial Services LLC ( NFS ) as the designated clearing firm for the Advisor Select Program (the Program ). As described below, the Firm Brochure has been revised to reflect this new relationship and any corresponding structural changes to the Program. The Firm Brochure has also been revised to implement various immaterial, clarifying changes throughout. The following is a summary of the material changes made to the Brochure: All references to Pershing have been changed to NFS. Item 4 has been revised to reflect the conversion to NFS, the corresponding structural changes to the Program, the elimination of the AdvisoryPlus fee option for new clients, and the elimination of the Sub-Advisor Managed Account option. This section has also been revised to update information about the fees and compensation applicable to the Program, including the administrative fee charged to the IAR, and to reflect that clients may receive fee refunds in connection with partial withdrawals. In addition, this section has been revised to reflect that check-writing or debit charges in excess of the balance of an Account will not be honored. Item 5 has been revised to reflect the elimination of the Sub-Advisor Managed Account option. This section has also been revised to reflect that for additional contributions to the Program, payment of the Program Fee will be made in the month (rather than the quarter) following any such contribution. Item 6 has been revised to reflect the elimination of the Sub-Advisor Managed Account option, and the addition of a description of the risks associated with different types of securities available under the Program. Item 7 has been revised to reflect the elimination of the Sub-Advisor Managed Account option. Item 8 has been revised to reflect the elimination of the Sub-Advisor Managed Account option. Item 9 has been revised to reflect additional disclosure regarding MSI s entitlement to receive rebates and service 2

3 credits from the Custodian based on the number of accounts and the amount of assets held with the Custodian, and MSI s entitlement to receive asset-based compensation for those clients that select a Money Fund affiliated with Custodian as the cash sweep vehicle. Additional changes include the treatment of administrative fees and trade errors under the Program. January 2, 2015 Update: Item 9. Disciplinary Information Additional language has been added to this section to inform clients of disciplinary events pertaining to New England Securities ("NES"). MSI and NES merged on January 1,

4 ITEM 3 TABLE OF CONTENTS Item # Page 1. COVER MATERIAL CHANGES TABLE OF CONTENTS SERVICES, FEES AND COMPENSATION ACCOUNT REQUIREMENTS AND TYPE OF CLIENTS PORTFOLIO MANAGER SELECTION AND EVALUATION CLIENT INFORMATION PROVIDED TO PORTFOLIO MANAGERS CLIENT CONTACT WITH PORTFOLIO MANAGERS ADDITIONAL INFORMATION

5 ITEM 4. SERVICES, FEES AND COMPENSATION a. Overview of the Advisory Services Offered by the Firm This Firm Brochure provides you with information about the Advisor Select Program (the Program ), a proprietary investment advisory program available through the Firm. The Firm offers a variety of proprietary and non-proprietary advisory programs, in addition to the Program. If you wish to learn about other investment advisory programs and services that the Firm offers, you may contact the Firm or your Investment Adviser Representative ( IAR ) to receive a similar disclosure brochure for those programs and services. b. Advisor Select Program Overview The Program is an advisory program that provides clients personalized investment advice and management services, on either a discretionary or non-discretionary basis, regarding investments in a wide variety of securities, including mutual funds, ETFs, individual equity securities and bonds, among others (please see discussion of Eligible Program Securities below for a complete list of all security types available under the Program). Advisor Select enables clients to receive custom investment advice and management services that are tailored to their particular financial circumstances. Under the Program, clients may elect to have their accounts (each, a Program Account ) managed on either a discretionary or nondiscretionary basis by the Firm, through its IARs. MSI, in its capacity as a registered broker-dealer, also acts as introducing broker for all transactions in Program Accounts. In order to effectuate trades under the Program, clients need to establish a brokerage account through the Firm with National Financial Services LLC ( NFS or Custodian ), which will act as clearing firm and custodian for clients assets under the Program. Accordingly, it is expected that trading activity in connection with the Program will be effected through MSI and cleared by NFS. Client understands that if trades are not executed by the Custodian, which may occur if MSI reasonably believes in good faith, and consistent with applicable fiduciary standards, that another broker or dealer will provide better execution considering all factors including but not limited to net price, client may be subject to fees and charges that are in addition to the Program Fee (as defined herein). NFS will act in its capacity as a clearing firm and perform centralized clearance, settlement and execution functions. NFS will handle the delivery and receipt of securities purchased or sold in clients' brokerage accounts, receive and distribute dividends and other distributions, and process exchange offers, rights offerings, warrants, tender offers and redemptions. NFS will send client statements of all activity in client's brokerage account on no less than a quarterly basis, and written confirmations of trades executed through clients brokerage accounts. c. Advisory Services under the Program If a client wishes to participate in the Program, the IAR will assist the client in determining whether the Program is suitable and appropriate for the client. The IAR will also provide the client Program Account opening documents, disclosures and other documents necessary for the client to make an informed decision about participation in the Program, as well as the different management options available under the Program. This Program may be appropriate for those clients seeking ongoing investment advice from an IAR. This Program may not be appropriate for clients who prefer to manage their investment portfolio on their own, without the assistance of a financial professional, or who are not looking for ongoing or comprehensive investment advice. Clients should understand that where MSI expressly agrees to act as an adviser the IAR s primary role is to provide advice. When MSI serves in an advisory capacity, it acts as a fiduciary, which means it is bound to act in the client s best interest and to disclose conflicts of interest. Where MSI acts solely as a broker, its primary role is to execute trades based on client instruction. MSI s obligations are different when it acts as adviser and when it acts as broker. In brokerage relationships, MSI s interests may not always be aligned with the client s and any advice that is provided is incidental to its brokerage services. Clients should further discuss with their IARs the differences between advisory and brokerage relationships so that the clients can make an informed decision as to what type of relationship is most appropriate for their needs. If the client determines that the Program is appropriate given the client s needs, the IAR will collect information from the client about the client s present investment objectives, risk tolerance and time horizon and input such information into the Investment Questionnaire ( Questionnaire ) which will determine a risk profile classification (an Investment Objective ) for client s Program Account and generate an investment proposal ( Proposal ) and a Statement of Investment Selection ( SIS ). The Proposal and SIS indicate which investment strategy matches the Investment Objective for client s Program Account. The Proposal also contains a target asset class and investment style allocation mix. The recommendations are 5

6 summarized in the Proposal and SIS, a copy of which will be provided to the client. The IAR will review the information in the Proposal and SIS with the client. Client must approve a Proposal and SIS prior to implementation by MSI. An unrelated third party is responsible for providing MSI with proprietary software and the Questionnaire that generates each client s Proposal and SIS. Advisor Select includes a number of model portfolios containing different allocations of asset classes based on particular risk tolerances and investment objectives. The portfolio client selects (the Portfolio ) will serve as the starting point in how client s funds are allocated among the asset classes comprising the Portfolio. Eligible Program Securities The Program is designed to provide clients access to a wide array of security types. The types of securities eligible to be held in a Program Account ( Eligible Program Securities ) include: No-Load Mutual Funds available through National Financial Services LLC that the Firm has approved for sale; Load-Waived Mutual Funds available through National Financial Services LLC that the Firm has approved for sale; Exchange (NYSE, AMEX) Listed Stocks; Exchange Traded Funds (ETFs) (Inverses and Leveraged ETFs are generally deemed ineligible); Closed-End Funds (Secondary Market); American Depository Receipts (ADRs); NASDAQ Listed Securities; U.S. Government Bonds; Mortgage-backed Bonds; Corporate Bonds; Municipal Bonds; Unit Investment Trusts; Structured Products; Exchange Traded REITs/Limited Partnerships; and Brokerage Certificates of Deposit. Eligible Program Securities include all mutual funds available through NFS that the Firm has approved for sale. Clients should understand that mutual funds generally offer multiple share classes depending on certain eligibility and purchase requirements. For instance, in addition to the more commonly offered retail share classes (typically, Class A, B and C shares), mutual funds may also offer institutional shares classes and other share classes that are specifically designed for accounts that participate in fee-based investment advisory programs. Institutional share classes or classes of shares designed for purchase in an investment advisory program usually have a lower expense ratio than other shares classes. Clients should not assume that they will be invested in the share class with the lowest possible expense ratio or that a particular mutual fund company will allow all share classes to be available in this Program. The IAR s assessment of the appropriate share class is based on a range of different considerations, including but not limited to: the asset-based advisory fee that is charged to clients at the Program level; operational considerations associated with accessing or offering particular share classes (including the presence of selling agreements with the mutual fund sponsors and the ability to access particular, or all, share classes through the Custodian); and share class eligibility requirements. Clients that are invested in retail share classes will receive Rule 12b-1 or other fee credits designed to minimize the impact of being invested in a more expensive share class. Clients should contact their IAR for more information about share class eligibility. 6

7 As an accommodation to clients, a client s existing mutual fund positions (including B and C-share mutual funds) may be transferred into and held in a Program Account; however additional B and C-shares may not be purchased in the Program Account. Such transferred positions will be included in the calculation of Fees applicable to the Program Account so long as such assets remain in the Program Account. As with all other types of assets, and as further discussed below, in instances where the Firm receives distribution fees associated with a Program Account, the Firm credits client Program Accounts an amount equal to any such distribution fees the Firm receives on such assets held in a Program Account in order to offset Program Fees paid under the Program. Clients should consider all relevant factors before contributing Fund shares to the Program, including the fact that clients may have paid a front-end sales charge and any applicable contingent deferred sales charges or redemption fees will remain the client s responsibility and will be in addition to the Program Fee (as defined herein). If a client contributes or holds mutual fund shares in its Program Account, the client should consider the following information. Certain mutual funds may offer only one class of shares, while other mutual funds may offer multiple share classes which are available for investment based upon certain eligibility and/or purchase requirements. Mutual funds often permit the conversion of shares from one class to another, subject to certain conditions as determined by the mutual fund. If clients contribute or hold mutual fund shares that the Firm deems to be ineligible for the Program, such shares will be converted into a class of shares of the same mutual fund the Firm deems to be eligible, and will be subject to the Program Fee; depending on a client s circumstances, the client could be subject to higher expenses overall once the shares convert to a class the Firm deems to be eligible. The Firm may not elect to convert particular share classes of a mutual fund if, for example, there is no equivalent class eligible for the Program or other circumstances as the Firm may determine. Prior to contributing any mutual fund shares to a client s Program Account, the client should discuss the impact of a conversion of these shares with an IAR. If the client does not want mutual fund shares converted, the client should discuss transferring such holdings to another account with an IAR. The securities products available for purchase under the Program are limited to Eligible Program Securities (described above) and to those that the IAR is licensed to purchase or sell as a registered representative of the Firm in its capacity as a broker-dealer. The Firm reserves the right to modify the types of securities deemed to be Eligible Program Securities at any time. Any products, securities, or holdings not identified as being Eligible Program Securities are ineligible and may not be purchased in a Program Account, and typically will not be able to be held within a Program Account. If a client transfers an ineligible position into a Program Account, such position may be liquidated or moved to a standard brokerage account at the Firm s discretion. Any ineligible assets held in a Program Account will be included in calculating the applicable Program Fee for a given period. Cash Asset Class A money market Fund ("Money Fund") or an FDIC-insured bank deposit sweep arrangement ( Deposit Account ) comprises the cash investment style portion of client s Portfolio, and client assets in such cash investment style portion are used to pay the client s advisory fee for participating in the Program ( Program Fee ) and other fees and expenses assessed under the Program. Please review the Investment Management Agreement ( Program Agreement ), as well as the other account opening documents provided, for information about the cash investment style portion of client s Portfolio, and the Deposit Account. Discretionary and Non-Discretionary Management Options Clients participating in the Program can either provide the Firm, through its IARs, with discretionary trading authority or require that all securities orders receive the client s pre-approval before they are placed, except as otherwise indicated in this Firm Brochure. The Firm, through the IAR, will monitor client s Program Account and, if appropriate (e.g., if market or economic conditions change), will either recommend or initiate changes to the client s Program Account consistent with the Investment Objective for client s Program Account, depending upon whether discretionary trading authority is being exercised over the Program Account. Under both the discretionary and non-discretionary management options, the purchase or sale of securities in a client s Program Account may cause the Program Account to vary from the client s target 7

8 asset allocation. In addition, any securities transaction in a client s Program Account may constitute a taxable event to which capital gains or other taxes apply. Each client should therefore consult with his/her tax adviser. Discretionary Management The grant of discretionary authority to the Firm is provided through the SIS. If client grants the Firm discretionary trading authority on client s Program Account, the IAR assigned to the Program Account will effect trades in Eligible Program Securities on a discretionary basis for client s Program Account in accordance with the Investment Objective for client s Program Account. For Program Accounts managed on a discretionary basis, the IAR will have the ability to modify the client s suggested target asset allocation within certain ranges, in its sole discretion. The IAR will not be able to modify the Investment Objective for the client s Program Account identified in the client s Proposal and SIS without the client s approval. For instance, if the client s Proposal and SIS indicated that the client s Program Account should be in a conservative Investment Objective, the IAR will be unable to change the suggested target asset allocation such that the strategy implemented in the Program Account is more aggressive. Once the client s asset allocation is established, the IAR will buy and sell Eligible Program Securities for the client s Program Account in such manner as the Firm deems advisable in the Firm s sole discretion subject to the Investment Objective for client s Program Account and any reasonable restrictions pertaining to the Program Account. For Program Accounts where a client has granted the Firm investment discretion, the client has the opportunity to impose reasonable investment restrictions on the Firm, regarding the management of the client s Program Account by identifying such restrictions on the SIS or at any subsequent point in time provided such a request is provided in writing. Investment restrictions must be reasonable, as solely determined by the Firm, and must be complete and consistent with applicable law. The Firm will observe the investment restrictions that the client provides, if deemed reasonable. However, the Firm may seek further information from the client before deciding whether an investment restriction is reasonable. Clients may modify existing restrictions or impose additional restrictions on their Program Account at any time. Non-Discretionary Management Clients in the Program may opt for MSI to manage its account on a non-discretionary basis. Under the non-discretionary option, the IAR will provide ongoing management services to the Program Account and provide the client recommendations regarding purchases and sales in Eligible Program Securities for its Program Account, but the IAR will not have discretionary authority to implement such securities transactions without client approval. Fees and Expenses 1. Program Accounts Prior to October 9, 2015, the Program offered clients both a bundled and unbundled fee option for their Program Account: AdvisoryOne or AdvisoryPlus, respectively (each fee option is referred to herein as the Program Fee ). As of October 9, 2015, the AdvisoryPlus fee option is no longer available to new client accounts. AdvisoryOne Under AdvisoryOne, clients pay a single bundled fee for the Firm s advisory services, the operational, maintenance and administrative services provided by the Firm, and the custodial and brokerage services provided by NFS. This fee is known as a wrap fee since it wraps together both advisory and brokerage services under a single fee. The AdvisoryOne fee option is negotiable and ranges from 0.50% to 2.50% (including transaction fees and charges), as determined by the Firm, through the IAR and the client. The fee that client pays under this option is reflected in the client s SIS. Fees charged for similar services may vary by office and by IAR. Certain IARs may provide comparable services for fees that are different from those charged by other IARs, and some IARs may charge higher fees than other IARs for similar services. AdvisoryPlus Under AdvisoryPlus, clients pay a fee for the Firm s advisory services as well as the operational, maintenance and administrative services provided by the Firm. The Program Fee that client pays under this option is reflected in the SIS. Additionally, clients pay separate transaction charges for the brokerage services provided by NFS. Under AdvisoryPlus, transaction fees are not included in the Program Fee shown in the SIS. Accounts subject to the Employee Retirement 8

9 Income Security Act of 1974, as amended ( ERISA ) (e.g., SEP-IRA, SIMPLE IRA, Profit Sharing, Defined Benefit/Pension) may not elect the AdvisoryPlus fee option. Clients who have selected for their Program Account to be managed on a discretionary basis cannot select the AdvisoryPlus fee option. The AdvisoryPlus MSI Fee is negotiable and ranges from 0.50% to 2.50% (excluding transaction charges), as determined by the Firm, through the IAR, and the client. Transaction fees and charges for AdvisoryPlus are subject to change at any time and are currently as follows: Load Mutual Fund at NAV - $15 Mutual Fund Exchange - $4 Systematic Purchase/Sale - $2.50 Listed Equities (1-4,999 shares) - $12 Listed Equities (5,000+ shares) - $18 Bonds - $32 UITs - $32 Stock/Bond/UIT Confirmation - $4 Since it also acts as a broker-dealer with respect to transactions under the Program, the Firm retains a portion of the transaction fees and charges under the AdvisoryPlus option. In addition, IARs may receive higher non-transaction-based compensation where a client selects the AdvisoryPlus fee option. Accordingly, the IAR may have an incentive for the client to use this option even though the IAR does not receive any portion of the transaction fees or charges. In addition, under AdvisoryPlus the client pays ticket charges on security transactions in the Program in addition to the Program Fee. Although the IAR does not receive compensation from any ticket charges collected from the client, the Firm may receive a portion of these charges. Therefore, the Firm may earn more compensation if more trades are placed in a client s Program Account. The Firm waives mutual fund ticket charges associated with mutual fund purchases of $10,000 or more (regardless of the fund family) under the AdvisoryPlus option. As of January 1, 2016, the AdvisoryPlus fee option will be discontinued and the AdvisoryOne fee option will apply to all customers. Other Disclosures Regarding Program Fees Clients may purchase the same or similar securities without paying the Program Fee or may pay less than the Program Fee under the Program if such securities were purchased outside of the Program. Thus, in some cases, it may be more cost efficient for clients to purchase securities outside of the Program. However, clients will not receive the services provided under the Program if they choose to do so. The Program Fee a client pays may be higher than those charged by the Firm for other advisory programs offered through the Firm, or higher than those charged by other sponsors of comparable programs. The IAR assigned to a client s Program Account receives compensation (a portion of the Program Fee) as a result of the client s participation in the Program. This compensation may be more than what the IAR would receive if the client participated in other programs made available by the Firm or purchased the services provided under the Program separately. The client s IAR therefore may have a financial incentive to recommend the Program over other programs or services available through MSI. The Firm reserves the right to reduce the Program Fee for employees, associated persons, agents, or independent contractors of the Firm or its affiliates and their immediate family members or for any other reason at its discretion. The IAR s portion of the Program Fee is decreased by the administrative fee charged by the Firm. A portion of the administrative fee is used to pay fees payable to the Custodian, for providing custody and clearing services. 9

10 For a client that has chosen the AdvisoryOne payment option, the compensation paid to the IAR may be more than what the IAR would receive if the client paid separately for investment advice, brokerage and other services. Factors that bear upon the cost of AdvisoryOne in relation to the cost of the same services purchased separately include, among other things, the type and size of the Program Account, the historical and/or expected size and number of trades for the Program Account, the number and range of supplementary advisory and client related services provided to the Program Account, and Program Account balance. Since the fee under the AdvisoryOne option received by the Firm and the portion thereof retained by the IAR may be greater than would have been the case if the client paid separately for investment advice and brokerage and other services or participated in another advisory program, the IAR may have an incentive to recommend Advisor Select over alternative programs or over the purchase of such services separately. Similarly, for a client that has chosen the AdvisoryPlus payment option, the compensation paid to the IAR may be more than what the IAR would receive if the client paid a single wrap fee for investment advice, brokerage and other services. The same factors listed in the prior paragraph will bear upon the cost of AdvisoryPlus in relation to the cost of the same services purchased under a single wrap fee. IARs are charged a minimum annual administrative fee for each Program Account they open. A part of the Program Fee will be used to pay the administrative fee. If the Program Fee does not meet this minimum, IARs will be assessed the difference. While clients do not directly pay the annual administrative fee, it is paid out of the Program Fee. Therefore, IARs may have a financial incentive to charge clients a higher Program Fee or be less inclined to negotiate a lower Program Fee with clients in order to meet this minimum. The minimum annual administrative fee for this Program is higher than the minimum annual administrative fee for other advisory programs sponsored by MSI. Therefore, if the minimum annual administrative fee would apply to a client s Program Account, IARs may have a financial incentive to charge clients a higher Program Fee or be less inclined to negotiate a lower Program Fee with clients or to recommend another program. The administrative fee for this Program is less than the administrative fee for other advisory programs sponsored by MSI. Accordingly, client s IAR may have an incentive to recommend the Program over other advisory programs sponsored by MSI and to recommend that the client transfer assets currently invested in other advisory programs sponsored by MSI to the Program. The amount of the IAR s administrative fee for each Program Account is based on the amount of assets held by an IAR s clients in advisory programs sponsored by MSI. Beginning 2016, the IAR s administrative fee will decrease as the amount of assets held by an IAR s clients in advisory programs sponsored by MSI increases. This reduction in administrative fee applies to all advisory programs sponsored by MSI but does not apply to other advisory programs available through MSI. As a result, client s IAR may have a financial incentive to recommend the Program (and other advisory programs sponsored by MSI) over other advisory programs available through MSI and to recommend that client transfer assets currently invested in other programs available through MSI (other than advisory programs sponsored by MSI) to the Program. From time to time, MSI may provide its IARs with an administrative reimbursement to reimburse IARs for their administrative activities related to establishing Program Accounts for existing clients of MSI. The reimbursement is usually based on a percentage of the assets transferred by an existing client of MSI into the Program at the time the Program Account is opened. This administrative reimbursement has no impact on the amount of the Program Fee, or other fees and charges paid by client under the Program, and is paid by MSI out of the revenues it receives under the Program. However, not all advisory programs available to client through MSI offer such an administrative reimbursement to client s IAR. Accordingly, client s IAR may have an incentive to recommend that client transfer assets currently invested in other advisory programs available through MSI to the Program (over other advisory programs available through MSI). 2. Other Fees and Expenses All Program Accounts will be subject to the following additional fees and charges to the extent a client elects to participate in the ancillary services relating to each, which are in addition to the Program Fee applicable to the Program Account: ACH Return Check Fee - $20 Returned Check Fee - $20 10

11 Wired Funds - $15 per wire Overnight Charges Weekday $15, Saturday $20 The above fees and charges are deducted by NFS from a client s cash asset class (initially, before other Program Account assets) at the time they are incurred. The Program Fee does not include these fees or charges. In addition, client Program Accounts are subject to the following brokerage termination fees (the Termination Fees ): Retirement Accounts - $95 All Other Accounts - $75 Termination Fees are deducted by NFS from the Program Account at termination. The Termination Fees are in addition to the Program Fee. Clients who intend to fund the Program with securities that are not Eligible Program Securities, will generally need to liquidate those securities before transferring them into the Program. If the Firm receives securities that cannot be accepted into the Program, the Firm may liquidate those securities holdings upon direction from the client. Clients should consider the cost, if any, of sales charges previously paid or to be paid upon such redemption, which are in addition to the Program Fee paid under the Program. Clients should be aware that such redemptions might have tax consequences that should be discussed with an independent tax advisor before making any redemptions. The Program Fee does not include certain other fees and charges such as any fees imposed by the SEC, wire transfer fees, fees resulting from any special requests client may have, retirement account maintenance fees, fees or commissions for securities transactions (including without limitation dealer mark-ups or mark-downs) that are not executed through MSI and cleared through the Custodian, electronic fund and wire transfers, spreads paid to market makers, exchange fees, other fees and charges customary to securities brokerage accounts, or costs associated with temporary investment of client funds in a money market account. In addition to the Program Fee, NFS may charge clients additional miscellaneous fees (e.g., ACAT fees, IRA maintenance fees). Fees will not be charged on the basis of a share of capital gains or capital appreciation of any portion of a client s funds. The Program Fee also does not include the internal management, operating or distribution fees or expenses imposed or incurred by a mutual fund ( Fund ) or ETF held in a client s Program Account. If client assets are invested in any ETFs, Funds or Unit Investment Trusts ( UITs ), in addition to the Program Fee, client will incur the internal management and operating fees and expenses, which may include 12b-1 fees (discussed below), Fund management fees, early termination fees (which include fees on whole or partial liquidations of client assets) and other fees and expenses that may be assessed by the investment vehicle s sponsor, custodian, transfer agent, adviser, shareholder service provider or other service providers. These expenses may include administration, distribution, transfer agent, custodial, legal, audit and other fees and expenses. Further information regarding charges and fees assessed may be found in the appropriate prospectus, offering document, annual report and/or custodial agreement applicable to the corresponding investment vehicle. Clients should note, however, that the Funds are no load or load waived mutual funds, meaning the sales charges typically associated with mutual funds will not be charged to client. As indicated above, the Firm also serves as the broker-dealer for client accounts under the Program. Where a Program Account invests in mutual funds, if available, the Firm receives asset-based distribution or servicing fees (12b-1 fees or otherwise) from certain Funds (or their related persons) for providing distribution and/or administrative services to the Funds. Further information regarding these fees and other charges assessed by Funds may be found in the applicable Fund prospectus. This compensation to the Firm from such Funds is in addition to the advisory and other fees the Firm receives under the Program. The Firm has an incentive for clients to invest in Funds that pay 12b-1 fees. When available, the Firm seeks to offer institutional share classes of Funds through the Program, which do not have 12b-1 fees. In instances where the Firm receives 12b-1 fees, the Firm credits client Program Accounts an amount equal to any such 12b-1 fees the Firm receives on such assets held in a Program Account in order to offset Program Fees paid under the Program. For some investment strategies, Envestnet will purchase mutual funds that participate in Custodian s designated no transaction fee ( NTF ) program. At times, these NTF mutual funds may elect to cease participation in Custodian s NTF program. When that occurs a client may be charged a transaction fee with the liquidation of that particular fund. Some mutual funds and custodians may impose a short-term redemption fee upon liquidation of a mutual fund position if that particular position was not held for a sufficient amount of time as described and outlined in the individual mutual fund s 11

12 prospectus. Neither MSI nor Custodian determine or receive any portion of the short term redemption fee imposed by a mutual fund in such instances. Under the AdvisoryPlus fee option, NFS may charge certain fees in addition to the fees and charges shown above. Trustees may also charge ERISA Accounts additional fees. 3. Fee Forgiveness To the extent that assets used for investment in the Program come from the redemption of Funds, clients should consider the cost of any sales charges previously paid or to be paid upon redemption. In this respect, the Firm may reduce the Program Fee to take into account the sales charges clients may have incurred in connection with the liquidation of Fund shares ( Fee Forgiveness ). Fee Forgiveness is not automatic. Instead, clients must apply for Fee Forgiveness through the Investment Account Application and Agreement (or equivalent document for certain retirement accounts) (the IAAA ) and provide documentation supporting the Fee Forgiveness claim. Fee Forgiveness is available only while a client's Program Account is opened. If the Program Account is terminated for any reason, any remaining fees scheduled to be forgiven will not be forgiven. In addition, if a client does not provide documentation demonstrating eligibility for Fee Forgiveness, the client may not qualify to receive Fee Forgiveness. Additional details regarding Fee Forgiveness can be found in the Program Agreement. 4. Payment of Fees and Charges Upon acceptance of the IAAA and the Program Account being funded at the Required Account Opening Amount, which is the greater of (i) an amount at or above the Program minimum, $25,000, unless waived by the Firm, or (ii) an amount at or near the investment amount identified in the Proposal which was agreed upon between the client and the IAR, clients pay an initial Program Fee that is based on the initial market value of the Program Account. The first payment is prorated to cover the period from the date the Program Account is opened through the end of the then current calendar quarter. Thereafter, the quarterly Program Fee is paid in advance at the beginning of each calendar quarter for such quarter. The quarterly Program Fee is based on the fair market value of the assets in the Program Account (which includes any assets in the cash asset class) on the last business day of the preceding calendar quarter as calculated by NFS (or other third party determined by MSI). Clients also are subject to a Program Fee for any additional lump sum contribution(s) in a calendar quarter equal to or greater than $10,000. Clients will pay for that portion of the ongoing quarterly Program Fee that relates to the number of days remaining in the calendar quarter on the date of an additional contribution equal to or greater than $10,000. Payment of the Program Fee will be made in the month following any such contribution and will be based on the amount of the contribution. Each client s Portfolio is designed to maintain approximately 3% in the cash asset class to pay for fees and charges under the Program. IAR will assist clients to ensure that their Program Account maintains sufficient cash to pay for Program fees and charges. The Program Fee and other expenses under the Program are deducted from Program Account assets clients have in the cash asset class (initially, before other Program Account assets), as outlined in greater detail in the Program Agreement. By executing the IAAA, clients authorize the Custodian to pay the Program Fee and all other fees and charges that are due and payable in a given calendar quarter under the Program from Program Account assets client has in the cash asset class. If a client s Program Account does not have enough cash to pay for the Program Fee, account debit balances or other charges, the Firm will, in accordance with the Program Agreement, sell any Program Account assets it deems appropriate to make such cash available. In such cases, clients may face a taxable event, to which capital gains (or other) taxes may apply. This aspect of the Program applies regardless of whether client selects the discretionary or non-discretionary management option. Clients may withdraw assets from their Program Account at any time, subject to the usual and customary settlement procedures. All withdrawals are first funded from the amount in the client's cash asset class. If the cash available in the client s Program Account is not sufficient to cover the withdrawal request, investments in the Program Account will be liquidated by the Firm in its discretion in order to meet the withdrawal request. Withdrawals may have tax consequences 12

13 such as capital gains taxes. In addition, the sale of securities or other assets in the cash asset class may trigger taxable event, to which capital gains (or other) taxes apply. For Program Accounts with check writing and/or debit cards, if the amount of a check or a debit card charge is greater than the amount maintained in the cash asset class, the check or the debit card charge will not be honored. MSI will adjust or refund Program Fees paid by client that are attributable to partial withdrawals equal to or greater than $10,000 that client made during any calendar quarter. MSI will refund client for that portion of the ongoing quarterly Program Fee that relates to the number of days remaining in the calendar quarter on the date of a partial withdrawal equal to or greater than $10,000. The refund of such fee will be made in the month following any such withdrawal and will be based on the amount of the withdrawal. If a Program Account is terminated, NFS will refund to clients a pro rata portion of any pre-paid, but unearned Program Fee for the current quarter. The amount refunded to clients will be based on the number of days remaining in the quarter after the date of termination. If client, as part of the Program Account s investment strategy, wishes to maintain up to two eligible Program securities (including cash or cash equivalent positions) in the Program Account at a concentration level that would cause the Program Account to deviate from the Portfolio s asset allocation mix identified in the Proposal, client may request to have such eligible Program securities (each, an Excluded Asset ) excluded from the Portfolio s targeted asset allocation mix by completing an Excluded Assets Administration Form ( EAA Form ). Excluding or including one or more Excluded Assets in the manner described above may cause the asset allocation mix for client s Program Account to vary from the Portfolio s initial asset allocation mix. As such, Excluded Assets are not taken into account by MSI or the IAR in assessing client s asset class and investment style allocation, which may result in additional purchases and/or sales of securities, including cash investment style positions, in client s Program Account in order to align client s non-excluded Asset holdings in the Program Account with the Portfolio s asset allocation mix. If client has a discretionary account, the IAR will maintain discretion over the Excluded Assets, and the IAR may, in its sole discretion, decide whether and when to incorporate one or more Excluded Assets back into the asset allocation mix for the Portfolio, or sell all or part of an Excluded Asset. MSI has sole discretion to accept or reject client s request to maintain Excluded Assets in client s Program Account. Client understands and agrees that such requests are not automatically granted. If approved, the Excluded Assets will not be included in determining client s Program Account balance (for purposes of assessing whether Client s Account meets the Program minimum requirements), and will be excluded from the calculation of client s Program Fee beginning in the calendar quarter following approval of the request. Once a non-excluded Asset has been designated as an Excluded Asset, all of client s holdings in that particular security or cash investment style position will be designated as an Excluded Asset. The Program Account will be required to maintain approximately 3% of client s Program Account holdings in the cash investment style to pay for fees and expenses under the Program, regardless of whether an Excluded Asset involves cash investment style positions. d. Program Termination The Program Agreement will continue in effect until terminated by either the client or the Firm in accordance with the termination provisions of the Program Agreement. Notwithstanding the foregoing, NFS may retain amounts in a client's Program Account sufficient to effect any open and unsettled transactions. In this respect, clients are responsible to pay for services rendered, and for transactions effected. Any termination will therefore not affect any liabilities or obligations that are incurred or that arise from transactions before such termination. ITEM 5. ACCOUNT REQUIREMENTS AND TYPE OF CLIENTS The Firm provides investment advisory services through the Program to individuals, high net worth individuals, various types of business organizations, pension and profit-sharing plans, charitable institutions, foundations, endowments, and trusts. The Firm generally requires a client to execute the IAAA, a SIS and other application forms and documents, and enter into a Program Agreement and a brokerage account agreement (or equivalent document for certain retirement accounts) ( Brokerage Agreement ) in order to participate in the Program. Some clients (e.g., a trust or a corporate pension plan) may 13

14 be required to submit additional documentation in order to open a Program Account. The Brokerage Agreement governs the brokerage services provided by MSI in connection with a client s participation in the Program. The minimum initial contribution to open a Program Account is $25,000, unless waived by the Firm. The minimum subsequent contribution amount is $100 if payment is made by either: automated check handling, ACH, fund transfer process, or fed fund wires, and $25 if payment is made by check. Clients may make additional contributions to their Program Account at any time subject to the above minimums. Additional funds deposited into a Program Account will be invested in accordance with the Program Agreement as soon as such funds are free and clear for deposit. Accounts cannot be aggregated, even if they are beneficially owned by the same person or entity, for the purpose of meeting the minimum thresholds. Initial asset value less than the Required Account Opening Amount will not be managed under the Program but will be placed in a Money Fund or a Deposit Account until the asset value reaches the Required Account Opening Amount. Once the Required Account Opening Amount is reached, client assets will then be invested in accordance with client s selected Portfolio. Additional contributions under the Program are allocated initially to the cash asset class and may remain in the cash asset class until client or the IAR (where the Firm has discretionary trading authority) decides to invest the contribution. The Firm may aggregate orders for Program Accounts, and other Firm accounts not in the Program, if applicable, including those in which the Firm, its affiliates, and/or their personnel have a beneficial interest, if the Firm believes that such aggregation is in the clients interests and feasible under current market conditions (e.g., it would permit a better rate or execution). All of the accounts that participate in such trade order aggregation will receive the average share price of the transaction. If a Program Account falls below the account minimum requirement at any time and for any reason, the Firm may, in its discretion, close the Program Account and transfer the assets therein to a standard brokerage account. Once in a standard brokerage account, such assets will not be managed and will be subject to the fees and charges normally assessed by the Firm on its brokerage accounts. ITEM 6. PORTFOLIO MANAGER SELECTION AND EVALUATION The Firm, through its IARs, provides clients with the advisory services described in Item 4 of this Firm Brochure. The Firm and its IARs responsibility under the Program does not include taking any action or rendering any advice with respect to proxies, consents, waivers or other documents regarding any securities held in client s Program Account. Except with respect to voluntary corporate action notices, the client has the responsibility for responding to proxies, consents, waivers and other documents with respect to any securities held in a client s Program Account. Such notices may be received from NFS or the issuer s corporate communications service provider. In order to become an IAR of the Firm and provide services to clients under the Program on behalf of the Firm, the IAR must fulfill certain requirements including, but not limited to completing on-line training courses, meeting certain Firmdefined compliance and business conduct standards, and adhering to the Firm s Code of Ethics, which is described in Item 9 of this Firm Brochure. Once an IAR has been approved to provide advisory services under the Program, the IAR must annually certify that the IAR continues to comply with the Firm s policies and procedures. If an IAR is unable to continue servicing a client s Program Account for any reason, client s account will be assigned by the Firm to another qualified IAR, who will service client s account on the Firm s behalf. Each IAR manages, on the Firm s behalf, client assets in a Program Account by employing his or her own investment strategy and methods of analysis, which may or may not include one or a combination of the following techniques: review of third party research reports, use of model investment portfolios, use of qualitative and quantitative analysis to review securities, etc. IARs are available to answer any questions that a client may have with respect to how client s Program Account is managed. As described in Item 4 of this Firm Brochure, the Firm and the IAR assigned to client s Program Account receive a portion of the Program Fee that client pays to participate in the Program. The Firm does not charge clients any performance-based fees (fees based on a share of capital gains on or capital appreciation of the assets of a client). Because the Firm offers a 14

15 variety of investment advisory programs, the Program Fee that the client pays under the Program may be more or less than other advisory programs offered by the Firm or by unaffiliated investment advisers. An IAR may have an economic interest in recommending this Program over other investment advisory programs because he/she may earn more compensation. Investing in securities involves risk of loss that clients should be prepared to bear. Clients may experience loss in the value of their Program Account due to market fluctuation. There is no guarantee that a client's investment objectives will be achieved by participating in the Program. Clients should read carefully a copy of the current prospectus, or other disclosure documents, associated with securities prior to investing. Those disclosure documents contain information regarding any fees, expenses, investment objectives, investment techniques and risks associated with the securities. The investment returns on a Program Account will vary and there is no guarantee of positive results or protection against loss. No warranties or representations are made by the Firm concerning the benefits of participating in the Program. The Firm and its IARs do not provide legal or tax advice. Clients with tax or legal questions should seek a qualified independent expert. All strategies implemented by MSI involve a risk of loss that clients should be prepared to bear. Given the wide range of investments in which a client s Program Account may be invested, there is similarly a very wide range of risks to which a client s assets may be exposed. This Firm Brochure does not include every potential risk associated with an investment strategy, or all of the risks applicable to a particular Program Account. Rather, it is a general description of the nature and the risks of the strategies and securities and other financial instruments in which Program Accounts may invest. The client should refer to the prospectus or other offering materials that it receives in conjunction with certain investments made in their Program Account for a complete list of risks associated with that investment. Set forth below are certain material risks to which a client might be exposed in connection with the Program: Alternative Mutual Funds Risk Alternative mutual funds have many of the same protections as other registered investment companies, but accomplish investment objectives through non-traditional investments and trading strategies. Alternative mutual funds may present risks including but not limited to those associated with the use of derivative instruments for hedging or leverage, liquidity and volatility risks associated with distressed investments, liquidity risks associated with restrictions on securities purchased in an initial public offering or from privately held issuers, currency risk due to investments in or exposure to foreign assets or instruments, and risks associated with short selling of securities. Asset Allocation Risk The risk that an investment adviser s decisions regarding a Portfolio s allocation to asset classes or underlying funds will not anticipate market trends successfully. Convertible and Preferred Securities Convertible and preferred securities have many of the same characteristics as stocks, including many of the same risks. In addition, convertible securities may be more sensitive to changes in interest rates than stocks. Convertible securities may also have credit ratings below investment grade, meaning that they carry a higher risk of failure by the issuer to pay principal and/or interest when due. Corporate Fixed Income Securities Risk Corporate fixed income securities respond to economic developments, especially changes in interest rates, as well as to perceptions of the creditworthiness and business prospects of individual issuers. Credit Risk The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable to honor a financial obligation. Depositary Receipts Depositary receipts, such as ADRs, are certificates evidencing ownership of shares of a foreign issuer that are issued by depositary banks and generally trade on an established market. Depositary receipts are subject to many of the risks associated with investing directly in foreign securities, including among other things, political, social and economic developments abroad, currency movements, and different legal, regulatory and tax environments. Duration Risk Longer-term securities in which a Portfolio may invest tend to be more volatile than short term securities. A Portfolio with a longer average portfolio duration is more sensitive to changes in interest rates than a portfolio with a shorter average portfolio duration. Equity Market Risk The risk that stock prices will fall over short or extended periods of time. Exchange-Traded Funds (ETFs) Risk The risks of owning shares of an ETF generally reflect the risks of owning the underlying securities the ETF is designed to track, although lack of liquidity in an ETF could result in its value being more volatile than the underlying Portfolio securities. 15

16 Fixed Income Market Risk The prices of fixed income securities respond to economic developments, particularly interest rate changes, as well as to perceptions about the creditworthiness of individual issuers, including governments and their agencies. Generally, fixed income securities will decrease in value if interest rates rise and vice versa. Declines in dealer market-making capacity as a result of structural or regulatory changes could decrease liquidity and/or increase volatility in the fixed income markets. In the case of foreign securities, price fluctuations will reflect international economic and political events, as well as changes in currency valuations relative to the U.S. dollar. In response to these events, a Portfolio s value may fluctuate and its liquidity may be impacted. Additionally, a mutual fund may experience increased redemptions from shareholders, which may impact the mutual fund s liquidity or force the mutual fund to sell securities into a declining or illiquid market. Investment Company Risk When a Portfolio invests in an investment company, including mutual funds, closed-end funds, UITs and ETFs, in addition to directly bearing the expenses associated with its own operations, it will bear a pro rata portion of the investment company s expenses. Further, while the risks of owning shares of an investment company generally reflect the risks of owning the underlying investments of the investment company, the Portfolio may be subject to additional or different risks than if the Portfolio had invested directly in the underlying investments. For example, the lack of liquidity in an ETF could result in its value being more volatile than that of the underlying Portfolio securities. Closedend investment companies issue a fixed number of shares that trade on a stock exchange or over-the-counter at a premium or a discount to their net asset value. As a result, a closed-end fund s share price fluctuates based on what another investor is willing to pay rather than on the market value of the securities in the fund. Investment Style Risk The risk that the Portfolio s strategy may underperform other segments of the markets or the markets as a whole. Market Risk The risk that the market value of a security may move up and down, sometimes rapidly and unpredictably. Market risk may affect a single issuer, an industry, a sector or the equity or bond market as a whole. Money Market Funds With respect to an investment in money market funds, an investment in the money market fund is not a bank deposit nor is it insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the money market fund seeks to maintain a constant price per share of $1.00, client may lose money by investing in the money market fund. The money market fund may experience periods of heavy redemptions that could cause the money market fund to liquidate its assets at inopportune times or at a loss or depressed value, particularly during periods of declining or illiquid markets. This could have a significant adverse effect on the money market fund s ability to maintain a stable $1.00 share price, and, in extreme circumstances, could cause the money market fund to suspend redemptions and liquidate completely. Portfolio Turnover Risk To the extent that a Portfolio buys and sells securities frequently, such activity may result in increased brokerage or other higher transaction costs and additional capital gains tax liabilities. These costs affect the Portfolio s performance. To the extent that a Portfolio invests in an underlying fund, the Portfolio will have no control over the turnover of the underlying fund. In addition, the withdrawal of a Portfolio from an underlying fund could involve expenses, such as redemption fees, to the Portfolio under the terms of the Portfolio s investment. REITs Risk - REITs are trusts that invest primarily in commercial real estate or real estate-related loans. Investments in REITs are subject to the risks associated with the direct ownership of real estate, including fluctuations in the value of underlying properties, defaults by borrowers or tenants, changes in interest rates and risks related to general or local economic conditions. Some REITs may have limited diversification and may be subject to risks inherent in financing a limited number of properties. U.S. Government Securities Risk Although U.S. Government securities are considered to be among the safest investments, they are not guaranteed against price movements due to changing interest rates. Obligations issued by some U.S. Government agencies are backed by the U.S. Treasury, while others are backed solely by the ability of the agency to borrow from the U.S. Treasury or by the agency's own resources. ITEM 7. CLIENT INFORMATION PROVIDED TO PORTFOLIO MANAGERS As described in Item 4, any information supplied by the client to the Firm, including client s financial information disclosed in the IAAA and SIS may be used by the Firm and its IARs to provide client with investment advisory services under the Program. Client has the obligation to inform the IAR of any change in client s financial and personal circumstances that may have a material impact on the management of client's Program Account. 16

17 ITEM 8. CLIENT CONTACT WITH PORTFOLIO MANAGERS Clients have regular access to their IAR for information on their Program Account during business hours. ITEM 9. ADDITIONAL INFORMATION a. Disciplinary Information MSI and New England Securities Corporation ( NES ) merged on January 1, In March 2003, NES self-reported to the Securities and Exchange Commission (SEC) that the Company, from 1995 to 2002, had failed to rebalance Investment Manager accounts as represented to a large number of its clients. In 2006, the SEC censured NES and issued an order in which NES agreed to hire an independent consultant to conduct an audit, and provided restitution of $2,614,865 to its clients. In June 2006, MSI reached a settlement with the Office of the Mississippi Secretary of State (Business, Regulations and Enforcement Division) regarding information provided to the Division and supervision of its registered representatives. Pursuant to the settlement, MSI agreed to conduct training on certain products to all registered representatives located in Mississippi. MSI also agreed to pay an administrative penalty of $50,000. It was alleged that MSI furnished incorrect information to the Division and failed to adequately supervise its registered representatives. In September 2006, MSI and certain of its affiliates reached a settlement with the National Association of Securities Dealers (NASD) relating to allegations that MSI and its affiliates: executed late trades; submitted inaccurate responses to NASD regulatory inquiries; failed to establish and maintain adequate supervisory systems and written procedures to prevent and detect late trading; failed to capture the time of customer mutual fund orders; failed to produce responsive s in a timely fashion; and, failed to retain s for the required time period. MSI and affiliates agreed that within 30 days an officer of MSI and its affiliates certified to the NASD that the firms (I) reviewed their procedures related to retention, recording the time of mutual fund orders, and the productions of in response to regulatory requests and late trading, and (II) established procedures designed to achieve compliance with laws, regulations and rules concerning these matters. MSI and its affiliates also agreed to pay a fine of $5,000,000. In November 2006, MSI reached a settlement with NASD relating to the sale of 529 plans. Under the terms of the settlement, MSI agreed to pay a fine of $500,000 and agreed to pay $376,000 in remediation. In March 2009, NES reached a settlement with the Financial Industry Regulatory Authority (FINRA) on allegations of breakpoint violations, anti-money laundering violations, reporting, supervisory and record keeping allegations. NES paid a fine of $500,000. In November 2009, MSI and its affiliates reached a settlement with FINRA regarding the supervision of correspondence, and the supervision of associated persons in outside business activities and private securities transactions. MSI paid a fine of $552,000. NES paid a fine of $264,000. In March 2010, NES reached an agreement with the State of Massachusetts Securities Division that the Company did not have adequate supervisory policies and procedures to detect and deter selling away by four registered representatives. NES agreed to issue written offers of rescission to investors and paid a fine of $500,000. In November 2011, MSI reached a settlement with FINRA regarding the maintenance and destruction of confidential client documents. Under the terms of the agreement, MSI agreed to pay a fine of $35,000. In October 2015, MSI reached a settlement with FINRA on allegations of failure to apply sales charge discounts to certain customers' eligible purchases of unit investment trusts ("UITs"), and for failure to establish, maintain and enforce a supervisory system and written supervisory procedures reasonably designed to ensure that customers received sales charge discounts on all eligible UIT purchases. Under the terms of the agreement, MSI revised its procedures to ensure that customers receive the appropriate sales charge discounts and agreed to pay a fine of $300,000 and restitution of $349,

18 b. Other Financial Industry Activities and Affiliations The Firm is registered with the SEC as an investment adviser and a broker-dealer and certain of its principal officers are registered as IARs and/or registered representatives ( RRs ) of the Firm. In its capacity as a broker-dealer, the Firm sells variable insurance products and general securities, including, but not limited to, stocks, bonds, municipal and government securities, mutual funds, and registered limited partnerships, to the public. The insurance products available through the Firm include products issued by affiliated insurance companies as well as those issued by unaffiliated issuers. As part of this business, the Firm, through its RRs who may also be IARs, provides a broad range of securities brokerage services which may include clients who participate in the Program. The Firm, as a broker-dealer, effects securities transactions for these brokerage customers for compensation and may recommend that customers buy or sell securities or investment products in which the Firm or its officers, directors, employees or RRs have a financial interest or may themselves purchase or sell. For example, MetLife, Inc. (NYSE: MET) is the parent company of the Firm and its shares are publicly traded. The Firm, through its RRs and/or IARs, may recommend customers to purchase, sell or hold, and/ or effect transactions for clients in, MetLife, Inc. stock. Clients should be aware that compensation earned by the Firm and its RRs vary by product and by issuer. Therefore, the Firm and its RRs may receive more compensation for selling certain products issued by a Firm affiliate than for selling certain products issued by companies that are not affiliated with the Firm. The following describes the relationship or arrangement that the Firm has with its affiliates and other nonaffiliated firms that may be material either to the advisory business of the Firm or to its clients. Broker Dealers, Other Investment Advisers and Investment Companies As indicated in Item 4, the Firm also serves as the broker-dealer for the client accounts under the Program. If available, the Firm, as a broker-dealer, receives 12b-1 fees from certain mutual funds for providing distribution and/or administrative services to mutual funds. Further information regarding these fees and other charges assessed by mutual funds may be found in the appropriate prospectus or annual report and in the discussion of Other Fees and Charges in Item 4 above. The Firm attempts to effect transactions correctly and resolve any trade errors promptly and fairly. Should a trade error occur as a result of the Firm s handling of transactions for the Program Account, and the error/correction results in a gain, the gain will be kept by the Firm. Gains that are captured due to trade errors are placed in the Firm s general account and used at the Firm s discretion, including to cover losses incurred by other clients for trade errors to the extent permitted by applicable law. If gains are not used to cover an expense within a fiscal year, such gains will be considered a profit and used for the benefit of the Firm. If the error correction results in a loss, the loss will not be charged to the client. In addition, clients will not bear any costs associated with the correction of an error. The Firm may receive rebates or service credits on certain charges from NFS based on the number of Program Accounts in the Program and the amount of assets in Program Accounts. This is in addition to the advisory and other fees the Firm receives under the Program. As a result, the Firm has an incentive for clients to participate in the Program. Client should understand that these rebates are paid directly to the Firm and are not shared with the IAR or IAR s branch manager. Certain IARs of the Firm may also be affiliated with and provide investment advisory services through an investment adviser that is not affiliated with the Firm ( Third Party Adviser ). In that respect, such IARs may offer investment advisory programs through both the Firm and the Third Party Adviser. The compensation that they receive from the Third Party Adviser for offering investment advisory services may be more or less than the compensation that they receive from the Firm. While the investment advisory programs made available by the Third Party Adviser may differ materially from the programs made available by the Firm, IARs may potentially recommend an investment advisory program that offers them the greatest compensation potential. c. Code of Ethics, Participation or Interest in Client Transactions and Personal Trading To help manage conflicts of interest, MSI has adopted a code of ethics (the Code ) pursuant to requirements of the Investment Advisers Act of As a general summary, the Code, among other things, requires certain persons to observe guidelines regarding fiduciary responsibilities, and observe restrictions in the giving and receipt of gifts. The Code also requires certain persons of the Firm to periodically report certain personal securities holdings, accounts and transactions, including those of certain family (household) members, and periodically certify that they understand their 18

19 obligations under the Code and the firm s Investment Adviser Compliance Manual. IARs who offer Program Accounts are required to move their and/or their family (household) members personal securities accounts and other accounts under their control or beneficial ownership to a brokerage account at MSI or one of its affiliates, and to observe blackout restrictions and other limitations with respect to those accounts. A copy of the Code will be made available to all clients and prospective clients upon request to MSI. The Firm (including the IAR), and/or its affiliates, may have investment responsibilities, render investment advice to, and perform other investment advisory services for, other individuals and entities ("Other Accounts"). Clients should be aware that the Firm and its affiliates, and their respective partners, directors, trustees, officers, agents, IARs and employees may buy, sell or trade in any securities for their respective accounts ("Affiliated Accounts") or Other Accounts. The Firm (including IARs), and its affiliates, may give advice or exercise investment responsibility and take such other actions with respect to Other Accounts and Affiliated Accounts which may be similar to, differ from, or contradict, the advice given or the timing or nature of action taken with respect to clients' Account(s). Additionally, Other Accounts and Affiliated Accounts may at any time, hold, acquire, increase, decrease, dispose of or otherwise deal with positions in investments in which client's Program Account may have an interest from time to time, whether in transactions which involve client's Program Account or otherwise. The Firm shall have no obligation to purchase for client's Program Account a position in any investment which Other Accounts or Affiliated Accounts may acquire, and that the client shall have no first refusal, co-investment or other rights in respect of any such investment. MSI does not effect any principal or agency cross securities transactions for client accounts. The Firm will also not cross trades between client accounts. Principal transactions are generally defined as transactions where an adviser, acting as principal for its own account or the account of an affiliated broker-dealer, buys securities from or sells any security to any advisory client. An agency cross transaction is defined as a transaction where a person acts as an investment adviser in relation to a transaction in which the investment adviser, or any person controlling, controlled by or under common control with the investment adviser, acts as broker for both the advisory client and for another person on the other side of the transaction. Agency cross transactions may arise where an adviser is dually registered as a broker-dealer or has an affiliated broker-dealer. d. Review of Accounts The Firm, through its IARs, is responsible for managing a client s Program Account. The IAR will consult with the client at least annually on a client's Program Account. At the annual meetings or on a more frequent basis, the client s IAR will review the client s Portfolio. This review is designed to determine that the selected Portfolio and the client s positions thereunder are still appropriate and consistent with the client s financial circumstances. In addition, as noted above the client has the ability to add or modify any reasonable investment restrictions, if applicable. Additionally, the Firm monitors the activities of Program Accounts on an ongoing basis. The Firm will notify the IAR and/ or the IAR s supervisor regarding a Program Account, or to take any corrective actions as required by the Firm s policy, where appropriate. The Firm s review of Program Accounts is generally limited to monitoring: The Program Accounts' asset allocation versus its target asset allocation as accepted by the client; and The Program Accounts' holdings to insure that such accounts are adequately diversified. Performance Reports and Account Statements Clients will receive a copy of a quarterly Account Performance Report from the Firm. Additionally, clients have the ability at any time to request their IAR provide an Account report. The quarterly Account Performance Report and the Account report are two separate and distinct reports that the Firm makes available to clients. These reports generally include the beginning and ending account value, net contribution and withdrawals, and a rate of return for a specific time period. Clients should be aware that these reports are not official Account statements from NFS about the assets held in, and the transactions effected in, a client s Program Account. They should be used only for informational purposes and should not be relied upon for making investment decisions or tax purposes. Clients should promptly notify the Firm or IAR upon discovery of any errors, discrepancies or irregularities in these reports. 19

20 At least quarterly, clients will receive an account statement covering, among other things: All transactions made in the Program Account during the quarter; All contributions and withdrawals made to and from the Program Account; All fees and expenses charged to the Program Account; The value of the Program Account at both the beginning and end of the quarter; and The performance of the client s Program Account. These account statements also include a reminder to clients that they should inform their IARs of any changes in their financial situation or investment objectives or of any desire to impose or modify, if applicable, any restrictions on their Account. NFS will also send written confirmations of all trades executed through clients brokerage accounts established under the Program. Clients should carefully review their account statements and confirmations issued by NFS and contact the Firm or their IAR immediately upon discovery of any errors, discrepancies or irregularities. Clients should also compare such statements against reports received from the Firm and promptly notify the Firm or his/her IAR upon discovery of any errors, discrepancies or irregularities. IARs are available to discuss the Account Performance Reports and account statements, the asset allocation of and securities underlying the client s Program Account and any other issues relating to the Program. e. Client Referrals and Other Compensation Additional Compensation Related to Advisory Activities and Referral Arrangements Certain associates of the Firm receive a bonus from the Firm to provide sales support to certain RRs of the Firm, which may include client s IAR ( Sales Professionals ). The bonus may be based on one or a combination of the following, as set by the Firm from time to time: the total number of, total new sales of, total new dollar invested in or other criteria related to the sales of, proprietary and/ or nonproprietary securities, insurance and/or advisory products (which may include the Program) offered through the Firm (collectively Bonus Eligible Products ) sold by the Sales Professional whom they support, within a defined period of time. While these associates do not sell products or provide product recommendations directly to clients, clients should be aware that such associates may favor the presentation of Bonus Eligible Products over non-bonus Eligible Products to Sales Professionals for their review as potential products to discuss with their clients. Clients should also be aware that the bonus received by associates is not shared with Sales Professionals or their sales manager. Furthermore, not all Sales Professionals will use associates for sales support or for support on products available through the Firm. In its role as a broker-dealer, the Firm focuses on a select group of mutual funds. These fund families (also called Strategic Partners and Conference Partners) receive a variety of benefits that are described in the Firm's Disclosure Booklet in the section Mutual Fund, Alternative Investment and Variable Life and Annuity Product Marketing and Compensation Arrangements" ( Partners Disclosure ), which clients will receive during the account opening process. The distributor, investment adviser or another entity related to the Strategic Partner and Conference Partner fund family makes cash payments to the Firm to participate in the Strategic Partners and Conference Partners programs. A list of the participating Strategic and Conference Partners can be found in the Partners Disclosure. Clients should understand that none of the cash payments described therein are made directly to the Firm s branch managers, RRs or IARs who sell or recommend these products. Furthermore, branch managers, RRs and IARs do not receive greater or lesser compensation for which the Firm receives cash payments. Clients should also be aware that marketing or educational activities paid for with these payments may lead to greater exposure of these companies' products with the Firm s RRs and IARs. Therefore, payments made by Strategic and Conference Partners may create an incentive, or lead to a greater likelihood, for the Firm or its IARs to recommend the Program over other advisory programs that do not include mutual funds issued by Strategic and Conference Partners. Since a client's Program Account may contain Strategic Partners and Conference Partners mutual funds, payments made by Strategic Partners and Conference Partners funds may create an incentive for the Firm and the IAR to recommend such a fund or purchase it on a client s behalf (if the IAR has discretionary trading authority) over other mutual funds available in the Program. These payments are in addition to the fees received by the Firm under the Program and any distribution or servicing fees described above. 20