Manager Select Wrap Fee Brochure

Transcription

1 Manager Select Wrap Manager Fee Select Brochure Wrap Fee Brochure Wealth Management Services Manager Select Wrap Fee Brochure December 1, 2015 This 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 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, 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 Brochure on December 22, When required or appropriate, we will also provide clients interim summary updates of material changes to our 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 this Firm Brochure on December 22, December 1, 2015 Update: Item 4 and Item 9 have been amended to reflect that as of January 1, 2016, the structure of the Program Fee will change. As of January 1, 2016, the Program Fee will be separate into different components. One component of the Program Fee will be the Platform Fee, which is a bundled fee consisting of fees for the brokerage and advisory services provided by the Firm and the investment adviser representative (IAR), the advisory and technology related services provided by Envestnet as co-advisor, the brokerage services involved in purchasing and selling the securities underlying the Program, and the custodial and clearing services provided by NFS. The Platform Fee is negotiable between each client and the IAR, subject to the maximum Program Fee. The second component of the Program Fee will be the fee payable to the selected Investment Manager(s) for providing investment advisory services under the Program. The fee that will be paid to each Investment Manager varies, and is set by each Investment Manager. Such fees are not negotiable and the Firm does not share in any portion of such fees. The overall Program Fee will not exceed 3.00%. Although accounts established prior to January 1, 2016 will have their Program Fee calculated in accordance with the new structure, the total Program Fee in place for such accounts will not change as a result of this new fee structure. However, if any client changes Investment Managers after January 1, 2016, the fee payable to the Investment Manager will go up or down depending on the set fee for the new Investment Manager selected. The total Program Fee will either increase or decrease in accordance with this change, subject to the IAR s discretion to negotiate the Platform Fee to account for the difference. Any change that results in a fee increase will require the client to approve and sign a new SIS. 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 Manager Select Program. October 9, 2015 Update: General Description of Program Changes 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 or Program Custodian ) as the designated clearing firm for the Manager Select Program (the Program ), and from Lockwood Advisors, Inc. ( Lockwood ) to Envestnet Asset Management, Inc. ( Envestnet ) as the co-advisor and co-sponsor of the Program. As described below, the Firm Brochure has been revised to reflect these new relationships 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 Firm Brochure: 2

3 All references to Lockwood have been changed to Envestnet; All references to Pershing have been changed to NFS; Item 4, as well as related discussions throughout the Firm Brochure, have been amended to include the addition of Envestnet and other third-party Investment Managers selected by Envestnet as asset allocation options under the Programs; Item 4 has been amended to incorporate Envestnet s rebalancing of client accounts; Item 4 has been amended to update information regarding the fees and compensation applicable to the Program and to reflect that clients may receive fee refunds in connection with partial withdrawals; Item 6 has been revised to discuss Envestnet s due diligence process with respect to third-party Investment Managers available under the Program; and Item 9 has been amended to reflect additional disclosure regarding MSI s entitlement to receive rebates and service credits from the Program Custodian, and sales-based referral compensation for MSI sales associates. This Item has also been amended to clarify that solicitor s fees and expenses are not directly charged to an advisory client, and that MSI is entitled to receive asset-based compensation for those clients that select a Money Fund affiliated with Program Custodian as the cash sweep vehicle. Additional changes include a description of 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 The Firm makes available to you a number of proprietary and nonproprietary investment advisory programs and services. This Firm Brochure provides you with information about the Manager Select Program (the "Program") available through the Firm. If you wish to learn about other investment advisory programs and services that the Firm offers, you may contact the Firm or an investment adviser representative of the Firm ("IAR") to receive a similar disclosure brochure for those programs and services. b. Manager Select Program The Program is one of the Firm's proprietary investment advisory programs. In addition to this Firm Brochure, you will receive from your IAR a disclosure brochure ( Investment Manager Brochure ) for the Investment Managers selected, as defined below, and a disclosure brochure ("Envestnet Brochure") for Envestnet Asset Management, Inc. ("Envestnet") which is the co-adviser and co-sponsor of the Program. You should carefully review this Firm Brochure, each Investment Manager Brochure for the Investment Managers selected, and the Envestnet Brochure, since they outline important information about the Firm s, each Investment Manager s and Envestnet s roles and responsibilities under the Program. MSI is the introducing broker under the Program and National Financial Services LLC ( NFS or Program Custodian ) serves as the clearing firm and custodian under the Program.. c. Program Overview The Program provides clients with access to a variety of portfolios managed by institutional investment managers who manage several different asset classes and investment styles ("Investment Managers"). The program is co-sponsored by Envestnet and the Firm. The Program is a separately managed account program under which a client receives various services, including the following: Review of client s investment objectives, risk tolerance, time horizon and other financial information provided by the client; Recommendation of Investment Managers pre-screened by Envestnet; Asset allocation recommendations based on the client s financial circumstances; Professional investment advice as to which Investment Managers may meet the client's financial needs; Purchase and sale execution and custody of assets in client s investment advisory account ( Program Account ); Ongoing portfolio monitoring; Account statements, at least on a quarterly basis and quarterly performance reports; and Periodic review of client s Program Account. d. Roles of the Firm and Envestnet 1. Firm Services If a client wishes to invest in the Program, the first thing the IAR will do is assist the client in determining if the Program is appropriate for the client. 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 generate an investment proposal ( Proposal ) and Statement of Investment Selection ("SIS"). The Questionnaire is designed and provided by Envestnet, to help clients define their investment objectives and overall investment strategies based on certain information supplied by the clients. The information provided by the client will be relied on by MSI to create the Proposal and SIS and to provide services under the Program. The IAR will assist the client with completing any other required account opening documents. The Proposal and SIS contain (i) a risk profile classification (an Investment Objective ) for client s Program Account, (ii) a recommended asset allocation model ( Suggested Allocation ) that corresponds to client s Investment Objective, and (iii) recommended Investment Manager(s) that may be appropriate for the client. The IAR will then recommend how to allocate client s assets among the Investment Managers within the Suggested Allocation. The IAR will then review the information in the SIS and Proposal with the client. The client is ultimately responsible for determining whether to participate in the Program, accept or reject the Suggested Allocation and recommended Investment Manager(s), and accept and sign, or reject, the Proposal and SIS. Client must approve a Proposal and SIS prior to implementation. 5

6 The client has the opportunity to impose reasonable investment restrictions applicable to client s assets in the program by identifying them on the SIS. The Firm will forward any investment restrictions requested by the client to the Investment Managers, through Envestnet, for review. Investment restrictions must be reasonable, as solely determined by Envestnet and the Investment Managers, and must be complete and consistent with applicable law. Investment Managers observe the investment restrictions that a client provides in the SIS, if deemed reasonable; provided that Envestnet and the Investment Managers reserve the right to seek further direction from the client through the Firm before any such investment restrictions are observed. Clients may impose new, or modify any existing, investment restrictions on the investments in their Account at any time by contacting their IAR. In order to effectuate trades under the Program, the client will establish an account for each Investment Manager selected (each, a Separate Account ), and a separate brokerage account used solely for funding the Separate Account(s) ("Funding Account") with the Firm. Trading activity for securities in connection with the Program will generally be cleared through the Separate Account(s) with the Program Custodian and the client's Program assets will be held in the Separate Account(s). The Program Account consists of the Funding Account and each Separate Account. The Firm will communicate with clients about the accounts that they need to open in connection with the Program. IARs will assist clients in completing the account opening paperwork, accept inquiries about the Program, coordinate the provision of responses to clients and provide all account opening documents, disclosures and other necessary documents. Each client s Funding Account will have a portion of their portfolio maintained in cash in order to, among other things, pay the client s fees. The Firm, in its capacity as broker-dealer, selects the cash investment vehicles for the cash investment style portion of client s portfolio. 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 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. 2. Envestnet Services Envestnet is responsible for creating and maintaining the system that generates, among other things, the Questionnaire and the Proposal and SIS used by the Firm and IARs to advise clients. Envestnet is also provided with discretionary investment authority needed to create and implement clients' investment strategies for the Program, such as the selection or removal of Investment Managers in the Program. Additionally, Envestnet will generate reports concerning the performance of the Separate Account(s) on at least a quarterly basis. Envestnet will provide such reports to clients and the Firm. Envestnet also performs qualitative and quantitative diligence on the Investment Managers. The diligence process is discussed in further detail in the Envestnet Brochure. Envestnet is also among the Investment Mangers available in the Program, whom clients may select to manage their assets. As explained further in the Envestnet Brochure, Envestnet does not employ the same quantitative and qualitative diligence procedures in making the determination to act as Investment Manager under the Program. Further, Envestnet has a financial incentive to include itself as an Investment Manager under the Program, as it will receive additional compensation in the form of advisory fees if it is selected as an Investment Manager. Such fees are included in the client s Program Fee. Please refer to the Envestnet Brochure for additional information. For certain of the third-party Investment Managers, Envestnet is responsible for performing administrative and/or trading duties at the direction of the Investment Manager via a licensing agreement between Envestnet and each such third-party Investment Manager. Please refer to the Envestnet Brochure for additional information. 3. Investment Managers' Services Investment Managers are responsible for managing client assets in the Program. Each Investment Manager will manage the assets allocated to it in accordance with the investment style set out in the Proposal and SIS. Investment Managers will also observe any reasonable investment restrictions requested by the client, provided such restrictions are deemed reasonable by MSI and the Investment Manager. Clients generally do not receive reports directly from, or communicate with, Investment Managers, but clients may make inquiries of them directly through the Firm who will forward such inquiries to the 6

7 Investment Manager through Envestnet. Please refer to the Envestnet Brochure and each Investment Manager Brochure for additional information on Envestnet and each Investment Manager. Securities Invested by the Investment Managers Depending on the client's investment strategies and the Investment Manager(s) selected, eligible securities that can be purchased in client's Program Account may include, but are not limited to, equity securities, fixed income securities, cash or cash equivalent, short-term investment vehicles, money market funds, mutual funds, exchange-traded funds, and other financial instruments, as described in the Investment Manager Brochure for each Investment Manager selected by the client. Subject to client's SIS and any investment restrictions imposed by the client, each Investment Manager will have complete and unlimited discretionary trading authorization with respect to client's assets in the applicable Separate Account. Generally, all trades will be executed through the Firm and cleared with the Program Custodian by Envestnet and Investment Managers. Except for the selection of the cash investment vehicles described above in its capacity as broker-dealer, the Firm (including the IARs) will not make any individual security recommendations on behalf of clients. e. Fees and Charges 1. Overview As of January 1, 2016, the structure of the Program Fee will change. Although accounts established prior to January 1, 2016 will have their Program Fee calculated in accordance with the new structure, the total Program Fee in place for such accounts will not change as a result of the new fee structure. However, if any client changes Investment Managers after January 1, 2016, the fee payable to the Investment Manager will go up or down depending on the set fee for the new Investment Manager selected. The total Program Fee will either increase or decrease in accordance with this change, subject to the IAR s discretion to negotiate the Platform Fee to account for the difference. Any change that results in a fee increase will require the client to approve and sign a new SIS. The Program Fee Prior to January 1, 2016 Client will pay one fee ("Program Fee") for the advisory services of Envestnet, Investment Manager(s) and the Firm, the brokerage-related services of the Firm and the custody and clearing services of the Program Custodian. The Program Fee is based on an annualized percentage of assets that client invests in the Separate Account(s), including any portion of the assets maintained in cash or other short-term investments, and can range from 0.50% to 3.00%. The Program Fee is negotiable at the discretion of each IAR. Each client s Program Fee rate is identified in the SIS. Each client pays the Program Fee in advance on a quarterly basis. 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. Fees charged for similar services may vary by office and by IAR, and some IARs may charge higher fees than other IARs for similar services. The Program Fee includes fees payable to the selected Investment Manager(s) (which may include Envestnet) for providing investment advisory services under the Program. Each Investment Manager s fee typically represents a percentage of the total value of the assets in the Separate Account established for such Investment Manager. The fees for the Investment Managers range from 0.20% to 0.75%. Please see the Investment Manager Brochure for each selected Investment Manager for additional information. The Program Fee also includes a fee to the IAR for providing investment advisory services. 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 Envestnet, for providing investment advisory and technology related services under the Program, and to the Program Custodian, for providing custody and clearing services. Envestnet s fee typically represents a percentage of the total value of the assets in all of client s Separate Accounts. Please see the Envestnet Brochure for additional information about Envestnet s fee. Please see Item 9 of this Firm Brochure for additional information about the administrative fee. The portion of the Program Fee paid to an Investment Manager may vary among Investment Managers. The portion of the Program Fee that MSI shares with the IAR will be decreased by the amount paid to an Investment Manager, and such 7

8 amount may vary depending on the Investment Manager(s) selected. Therefore, an IAR may have a financial incentive to recommend certain Investment Managers, and/or be less inclined to negotiate a lower Program Fee with client. Actual fees charged to a specific client or Program Account will vary, and will be disclosed in the SIS signed by the client. Fees will not be charged on the basis of a share of capital gains or capital appreciation of a client s funds or any portion of a client s funds. The Program Fee As of January 1, 2016 Clients will continue to pay one total fee, the Program Fee, for the services provided under the Program. The Program Fee will continue to be paid in advance, on a quarterly basis. However, as of January 1, 2016, the Program Fee is separated into different components. One component of the Program Fee is the Platform Fee, a bundled fee consisting of fees for the advisory and technology related services of Envestnet (except for advisory services provided by Envestnet in its capacity as an Investment Manager), the Investment Manager(s), and the Firm, the brokerage-related services of the Firm and the custody and clearing services of the Program Custodian. The Program Fee is based on an annualized percentage of assets that client invests in the Separate Account(s), including any portion of the assets maintained in cash or other short-term investments. The Platform Fee is negotiable at the discretion of each IAR, subject to the maximum Program Fee. The overall Program Fee will not exceed 3.00%. The Platform Fee includes a fee to the IAR for providing investment advisory services. The IAR s portion of the Platform Fee is decreased by the administrative fee charged by the Firm. A portion of the administrative fee is used to pay fees to Envestnet for providing investment advisory and technology related services under the Program (except for advisory services provided by Envestnet in its capacity as an Investment Manager), and to the Program Custodian, for providing custody and clearing services. Envestnet s fee for providing investment advisory and technology related services represents a percentage of the total value of the Assets in client s Account. Please see the Envestnet Brochure for additional information about Envestnet s fee. Please see Item 9.g. of this Firm Brochure for additional information about the administrative fee. The second component of the Program Fee is the fee payable to the selected Investment Manager(s) (which may include Envestnet) for providing investment advisory services under the Program. Each Investment Manager s fee represents a percentage of the total value of the assets in the Separate Account established for such Investment Manager. The fees for the Investment Managers range from 0.20% to 0.75% and are set by each Model Provider. Such fees are not negotiable and the Firm does not share in any portion of such fees. Please see each Investment Manager Brochure for additional information. An IAR will receive a higher fee when a higher Platform Fee is negotiated. Therefore, an IAR may have a financial incentive to recommend certain Investment Managers over others if the IAR believes the fee paid to the Investment Manager will influence the negotiated Platform Fee. Additionally, the Firm reserves the right at its discretion to reduce the Platform 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. Fees charged for similar services may vary by office and by IAR, and some IARs may charge higher fees than other IARs for similar services. The Program Fee - Before and as of January 1, 2016 The Program Fee charged to a specific client will be disclosed in the SIS signed by the client. The Program Fee will be calculated in accordance with the Program Agreement. The Program Custodian is responsible for deducting the Program Fee from client s Account in accordance with the Program Agreement. It may be less expensive for clients to invest in these securities outside of this Program. If clients chose to invest in securities outside of this Program, they would not receive the services and the investment advice provided under this Program. In addition, 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 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 the Firm. 8

9 MSI, in its capacity as a registered broker-dealer, also acts as introducing broker for all transactions in the Program Account. In order to effectuate trades under the Program, clients need to establish a brokerage account through the Firm with Program Custodian, which will act as clearing firm and custodian for clients assets under the Program. Accordingly, it is expected that Envestnet and each applicable Investment Manager will place transactions for the purchase and/or sale of securities and other investments for client's Program Account through MSI which will be cleared by the Program Custodian. However, if Envestnet or an Investment Manager, as applicable, reasonably believes in good faith, and consistent with applicable fiduciary standards, that another broker or dealer will provide better execution considering all factors including the net price, then it may trade through firms other than the Program Custodian. Client understands that if trades are not executed through the Program Custodian, the client may be subject to transaction costs and fees that are in addition to the Program Fee. Please see the Envestnet Brochure and the Investment Manager Brochure for each selected Investment Manager for information on how trades are sent or directed to the Program Custodian or other broker-dealers. 2. Fee Forgiveness To the extent that assets used for investment in the Program come from the redemption of mutual 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 its portion of the Program Fee to take into account the sales charges clients may have incurred in connection with the liquidation of mutual 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) ( IAAA ) and provide documentation, including completing a Fee Forgiveness Form, 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 will not receive Fee Forgiveness. Additional details regarding Fee Forgiveness can be found in the Program Agreement. 3. Payment of Fees and Expenses 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 of $100,000 (or any higher minimum requirement of an Investment Manager), unless waived by MSI (or the applicable Investment Manager), 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 Separate Account(s). The first Program Fee payment will be based on the opening value of the assets in the Separate Account(s), and prorated to cover the period from the date that an Investment Manager begins investing assets in a Separate Account through the end of the current calendar quarter. Thereafter, the quarterly Program Fee is paid 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 each Separate Account (which includes any assets in the cash investment style) on the last business day of the preceding calendar quarter as calculated in accordance with the Program Agreement. 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. 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 investment style. Withdrawals may have tax consequences such as capital gains or other applicable taxes. If the amount maintained in the cash investment style is not enough to meet a withdrawal request, the remaining amount of the withdrawal request will be satisfied by redeeming securities in the client's Program Account at Envestnet s discretion. 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 9

10 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. Payment of such refund will be made in the month following any such contribution 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 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. Clients pay the Program Fee and other fees and charges under the selected Program by instructing NFS through the Program Agreement to automatically debit the Program Fee, and applicable Expenses from their Program Account. Expenses are other costs that may be charged to the client that are not part of the Program Fee, including retirement account maintenance fees, retirement account termination fees, fees for portfolio transactions executed away from Program Custodian, dealer mark-ups, electronic fund and wire transfers, spreads paid to market makers, exchange fees, and other fees and charges customary to securities brokerage accounts. The amount debited to pay the Expenses under the Program will appear on quarterly statements clients receive from NFS. The Expenses are first deducted by NFS from assets a client has in the cash investment style (i.e., the Money Fund or a Deposit Account, as applicable). Envestnet will automatically rebalance a client's Program Account if payment of the Expenses under the Program causes the client's cash investment style to fall below the percentage threshold (and if the dollar threshold is met) and/or to cover any Account debit balances. If this occurs, Envestnet will cause the remaining amount of the Expenses and/or Program Account debit balances that cannot be covered by assets in the cash investment style to be paid by redeeming shares of securities in the client's Program Account. In such cases, the client may face a taxable event, to which capital gains (or other) taxes may apply. The money debited from the Separate Account(s) for the Program Fee will be sent by NFS to the Firm. The Firm also serves as the broker-dealer for client Program Accounts under the Program. If available, the Firm, as a broker-dealer, receives asset-based distribution or servicing fees (in the form of so-called 12b-1 fees or otherwise) from certain mutual funds for providing distribution and/or administrative services to such mutual funds. Further information regarding these fees and other charges assessed by mutual funds may be found in the appropriate prospectus or annual report. This compensation to the Firm from such mutual 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 mutual funds that pay 12b-1 fees. When available, the Firm seeks to offer institutional share classes of mutual 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 client program Accounts in order to offset the Program Fee paid under the Program. For some investment strategies, Envestnet will purchase mutual funds that participate in Program Custodian s designated no transaction fee ( NTF ) program. At times, these NTF mutual funds may elect to cease participation in Program Custodian s NTF program. When that occurs a client may be charged a transaction fee with the liquidation of that particular mutual 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 prospectus. Neither MSI, Program Custodian, nor Envestnet determine or receive any portion of the short term redemption fee imposed by a mutual fund in such instances. 4. Additional Client Fees All Accounts are subject to the following additional fees and expenses: ACH Return Check Fee - $20 Returned Check Fee - $20 Wired Funds - $15 per wire Overnight Charges - $15 Weekday/$20 Sunday Retirement Account Annual Maintenance Fee - $35 The above fees and expenses are deducted by NFS from a client s cash investment style (initially, before other Program Account assets) at the time they are incurred. The Program Fee does not include these fees or expenses. 10

11 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 proceeds at termination. The Program Fee does not include these fees. Other Fees and Charges The Program Fee does not include any fees imposed by the Securities and Exchange Commission ("SEC"), wire transfer fees, fees or commissions for securities or dealer mark-ups or markdowns traded through any broker-dealer other than NFS, costs associated with temporary investment of client funds in a money market account or special requests by client. If client's assets are invested in any mutual funds or pooled investment vehicles, in addition to the Program Fee, the client will incur the internal management and operating fees and expenses, which may include 12b-1fees, mutual fund management fees, early termination fees (which include fees on whole or partial liquidations of client account(s)) 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. Such fees are not included in the Program Fee. The Program Fee also does not include charges for any special services that the client may request from time to time from the Firm, Envestnet, Investment Managers, or the Program Custodian such as IRA maintenance fees. Further information regarding other charges and fees assessed may be found in the appropriate prospectus, or offering document of the investment vehicle, if applicable, the Envestnet Brochure, the Program Agreement and the SIS. Clients may be able to pay lower expenses by investing directly in those investment vehicles. The mutual funds in the Program are no load or load waived mutual funds, meaning the sales charges typically associated with mutual funds will not be charged to client. f. Program Termination The Program Agreement will continue in effect until terminated by either the client, the Firm, or Envestnet in accordance with the termination provisions of the Program Agreement. Notwithstanding the foregoing, the Firm 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. Termination of the Program Agreement will not affect any liabilities or obligations that are incurred or that arise from transactions before such termination. If the Program Agreement is terminated for any reason, Envestnet will refund to client a pro-rata portion of any pre-paid, but unearned Program Fee for the current quarter. The amount refunded to the client will be based on the number of days remaining in the quarter after the date of termination. ITEM 5. ACCOUNT REQUIREMENTS AND TYPE OF CLIENTS The Firm, under this Program, provides investment advisory services for affluent clients such as institutions, endowments and high net worth individuals seeking an institutional asset management approach to having their assets managed. The Firm generally requires a client to execute an 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 be required to submit additional documentation in order to participate in the Program. The Brokerage Agreement governs the brokerage services provided by MSI in connection with a client s participation in the Program. The minimum initial investment to participate in the Program is $100,000, subject to any additional minimums that may be imposed by the Investment Managers. The minimum subsequent investment in the Program is $100 if payment is made via ACH or Fedwire Funds Service, and $25 if payment is made by check. Clients may contribute additional investments at any time. Please be advised, however, that Investment Managers may have their own investment minimums. Clients should refer to the Investment Manager Brochure for each selected Investment Manager for more information. Clients should also be aware that assets held in the Funding Account with the Program Custodian will not be part of the Program until the client has met the Program's participation requirement and each Investment Manager's minimum requirement, and such assets have been transferred to the client's Separate Account(s). 11

12 Client will not receive any investment advice on the assets held in the Funding Account, and such assets will not be managed by the Firm, Envestnet or any Investment Manager. Any cash balance held in the Funding Account will be invested in accordance with the money market sweep provision noted in the IAAA and the Program Agreement. Client assets will not be transferred from the Funding Account to the Separate Account(s) and allocated to each Investment Manager in accordance with client's Proposal and SIS until the Required Account Opening Amount has been met. The Firm will monitor the client's Funding Account to determine whether the Required Account Opening Amount has been reached. Program Accounts cannot be aggregated, even if they are beneficially owned by the same person or entity, for the purpose of meeting the minimum requirements. Additional contributions under the Program are allocated initially to the Funding Account and will remain there until a client's Program Account is rebalanced. Accordingly, additional contributions under the Program will remain in the cash investment style until a rebalance is triggered as determined by Envestnet. If the Program Account falls below the account minimum requirements, at any time and for any reason, the Firm may, in its discretion, terminate the Program Agreement with the client, 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 charged by the Firm on its brokerage accounts. Clients who transfer securities into the Program should be aware that some, and possibly all, transferred securities may be liquidated ("Liquidation Trades") by the Firm through the Program Custodian for the Program Account. Liquidation Trades are effected to make client's securities holdings portfolio consistent with the relevant investment criteria set by the selected Investment Managers and the allocations consistent with client's Proposal and SIS. The Firm will allocate and forward assets to be invested in the Program on the client's behalf to each Investment Manager selected by the client. However, clients should understand that the Firm does not have discretion over how client's assets are allocated or how much to allocate to each Investment Manager. Clients should be aware that a reasonable amount of time is necessary for the Firm to execute Liquidation Trades and to allocate assets to the Investment Managers in accordance with the asset allocation strategy accepted by clients. Clients may incur adverse tax consequences as well as additional transaction costs in connection with Liquidation Trades. Clients should consult their tax advisor on these issues prior to transferring any securities into the Program. ITEM 6. PORTFOLIO MANAGER SELECTION AND EVALUATION Envestnet, and not the Firm, is responsible for performing both initial and ongoing due diligence on, and the screening of, Investment Managers for inclusion in the Program. Clients provide Envestnet through the Program Agreement with discretionary authority to select and/or remove third party Investment Managers on their behalf. Envestnet may terminate or change Investment Managers available under the Program in accordance with Envestnet's process as described in the Envestnet Brochure. The IAR assigned to the client s Program Account will assist the client in selecting Investment Managers made available by Envestnet for the client's portfolio. The IAR may discuss with the client various factors, including but not limited to client preferences, fees charged by the Investment Managers, information on Investment Managers, including their performance, forwarded by Envestnet, and the account minimum requirements of Investment Managers when making a recommendation. MSI does not prepare, review, or verify the performance information provided by Envestnet. Further, Envestnet does not prepare or verify the performance information forwarded to MSI that is provided by third-party Investment Managers. The client is ultimately responsible for deciding which Investment Manager(s) to choose. When appropriate, IAR may also assist the client in determining whether existing Investment Manager(s) should be replaced. IAR may discuss some or all of the foregoing factors with the client in order to assist the client in making an appropriate decision. Please review the Envestnet Brochure for additional information on its Investment Manager due diligence review and screening and replacement process. Clients should also be aware that Envestnet is an Investment Manager available for the client to select under this Program. Please review the Envestnet Brochure for Envestnet's disclosure for any conflicts of interest that may apply. 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 12

13 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. Provided that Envestnet timely receives voluntary corporate action notices, Envestnet will determine on behalf of the client whether the client's Program Account will participate in particular voluntary corporate actions. Envestnet will make such determinations in its full discretion, consistent with its policies and procedures. Client should refer to the Envestnet Brochure for additional details on its policies and procedures in this regard. 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 a series of prerequisites including, but not limited to completing on-line training courses, meeting certain Firm defined 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 Program Account will be assigned by the Firm to another qualified IAR, who will service client s Program Account on the Firm s behalf. The Firm has contracted with an independent third party to provide various levels of due diligence on Envestnet. As part of this process, Envestnet is subject to an annual due diligence review that includes and is not limited to: Review of Envestnet s Form ADV and marketing materials On-site visits Reference checks on key personnel Neither the Firm nor the independent third party retained by the Firm to perform due diligence calculates Envestnet s investment performance, or reviews its performance information in order to determine or verify i) its accuracy or compliance with any presentation standards, or ii) if such information is calculated on a uniform or consistent basis. Furthermore, the Firm does not advertise or publish any information about its own investment performance. 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 under the Program due to market fluctuation. There is no guarantee that a client's investment objectives will be achieved by participating in the Program. The investment returns on a client s 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. ITEM 7. CLIENT INFORMATION PROVIDED TO PORTFOLIO MANAGERS As described in Item 4, the information that client supplies in the Investment Questionnaire, IAAA, SIS and any other documentation provided by client is used by the Firm and its IARs to provide client with investment advisory services under the Program. The Firm also makes available such information to Envestnet so that Envestnet may fulfill its obligations under the Program as described in Item 4 of this Firm Brochure and in the Envestnet Brochure. 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 and client's participation in the Program. Any updated information that client provides is also shared with Envestnet. Please review the Envestnet Brochure for additional information on how client information is shared by Envestnet with Investment Managers. ITEM 8. CLIENT CONTACT WITH PORTFOLIO MANAGERS Clients generally do not receive reports directly from, or communicate with, Investment Managers, but clients may make inquiries of them directly through the Firm who will forward such inquiries to the Investment Managers through Envestnet. 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 13

14 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 the 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, b. Other Financial Industry Activities and Affiliations The Firm is registered with the SEC as an investment adviser and a broker-dealer and 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 products available through the Firm include products issued by our 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 this 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. Clients should 14

15 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 clients. Broker Dealers, Other Investment Advisers and Investment Companies In addition to the advisory business relationship between Envestnet and the Firm as described in Item 4 above, Envestnet and, if applicable, its affiliates and subsidiaries from time to time pay fees to attend Firm sponsored sales and/or training conferences. Representatives from Envestnet and, if applicable, its affiliates and subsidiaries, generally network with and provide training to IARs and the Firm s personnel at these conferences. The fees received by the Firm are generally used to offset expenses associated with hosting conferences and other expenses, and are not paid directly to IARs. While IARs do not receive a portion of these fees, IARs maybe more likely to recommend the Program, other Envestnet advisory programs, or products offered through Envestnet s affiliates or subsidiaries that are accessible through the Firm, to prospective clients because of the education and the exposures that IARs receive on such services and products. If available the Firm, as a broker-dealer, receives 12b-1 fees from certain mutual funds for providing distribution and/or administrative services to such mutual funds. Please see Item 4 of this Firm Brochure for additional information about 12b- 1 fees. The Firm may receive rebates or service credits on certain charges from Program Custodian based on the number of client accounts in the Program and the amount of assets in client accounts. This is in addition to the advisory and other fees the Firm receives under the Programs. As a result, the Firm has an incentive for clients to participate in the Program. Clients 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, the 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, the Firm 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 and transactions, including those of certain family (household) members, and periodically certify that they understand their obligations under the Code and the Firm's Investment Adviser Compliance Manual. Some personnel who are authorized to provide specific advisory services 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 the Firm 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 the Firm. 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") and 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' Program Account(s). 15

16 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(s) 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. d. Review of Accounts 1. Services Provided by the Firm The Firm, through the IARs, will be available during business hours to answer any questions that the client may have regarding their Program Account and/or to provide client services related to client's Program Account. The Firm will notify clients in writing at least quarterly to contact the Firm if there have been any changes in their financial situation, whether they wish to add, or modify any existing, investment restrictions imposed on Envestnet, or whether there have been any changes in their investment objectives that might affect the manner in which their Program assets should be managed. The Firm will also contact clients at least annually to review each client s Program Account. At the annual meeting, the IAR assigned to the Program Account will inquire whether anything has changed in client's financial circumstances or investment objectives that might affect the manner in which client's Program assets should be managed. This annual consultation is designed to determine whether the Program and client's existing allocation are still appropriate and consistent with the client's current financial circumstances and investment objectives. In addition, the client has the ability to add or modify any previously accepted investment restrictions imposed on Envestnet. The IAR is available on an ongoing basis to discuss the client's participation in the Program or the client's investments in general. The Firm will forward any updated information it receives from client to Envestnet for review and assist the client in making any appropriate changes to the client's Program Account, if necessary. 2. Services provided by Envestnet and Program Custodian On a quarterly basis, clients will receive a performance report from Envestnet. MSI does not prepare, review or verify the performance information provided by Envestnet. Please see the Envestnet Brochure for further details on Envestnet's services. The Program Custodian will send client a Program Account statement at least quarterly which summarizes all account transactions, including any fees and charges deducted, and holdings for the statement period. Unless client elects confirm suppression, Program Custodian will also send client written confirmations of all trades executed through client's Program Account. Clients should carefully review their brokerage account statements and confirmations issued by NFS and contact the Firm or their IAR immediately upon discovery of any errors, discrepancies or irregularities. Client's IAR is available to answer general questions that client may have about Envestnet's performance report or the Program Custodian's account statements. When appropriate, IAR will forward questions on behalf of client to the Program Custodian, Envestnet or the Investment Manager(s). 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 registered representatives, which may include client s IAR, of the Firm ( 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, as clients will ultimately decide which product they should purchase or invest based on their own considerations of their financial needs, review of applicable product disclosures and discussions with their Sales Professional, 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. 16

17 Furthermore, not all Sales Professionals will use associates for sales support or for support on products available through the Firm. The Firm enters into certain agreements with various organizations and associations pursuant to which such entities endorse financial products and services offered by or through the Firm and its affiliates. Typically, such entities provide access to their members in exchange for a flat fee or other negotiated compensation arrangement permitted by applicable law. The Firm may enter into marketing arrangements with third parties (Solicitors") who will receive compensation from the Firm for referring prospective investment advisory clients to the Firm. Where required by federal or state law, each marketing arrangement will be governed by a written agreement between the Firm and the Solicitor that complies with SEC rules. In particular, clients will be provided with copies of Part 2A of the Firm's Form ADV, a separate solicitor disclosure statement that describes the nature of the marketing or referral arrangement (including compensation features) applicable to the client being referred, and any other document required to be provided under applicable law. The fees and expenses that the Firm pays to a Solicitor under these referral arrangements are not directly charged to referred clients, but depending on the circumstances, the existence of such marketing or referral arrangements may affect the client's Program Fee or the Firm s or IAR's willingness to negotiate a lower Program Fee with the client in particular instances. Under these marketing arrangements, a Solicitor may introduce prospective clients to the Firm or an IAR to further discuss whether the Firm's investment advisory services, including the Program, may be appropriate for the prospective clients. The Solicitor's sole responsibility under the marketing arrangement is to refer prospective clients to the Firm or an IAR; and the Solicitor may not provide investment advice to prospective clients or the Firm's clients on behalf of the Firm or the IARs. Additional information about this arrangement, including the relationship between the Solicitor and the Firm, the role of the Solicitor and any compensation that the Firm pays to the Solicitor for introducing prospective clients, is outlined in a separate solicitor disclosure statement, which the Solicitor will provide to prospective clients before they are introduced to the Firm or an IAR. The Firm and certain banks and credit unions (collectively "Financial Institutions") have entered into alliance arrangements where employees of Financial Institutions may refer individuals who may be interested in learning more about the Firm's advisory services to IARs. The Firm will share a portion of the fees earned by the Firm with Financial Institutions for referring individuals who eventually obtain advisory services from the Firm. Employees of the Financial Institutions are not authorized to provide investment advice, or discuss the features of, or qualify individuals for, advisory services on behalf of the Firm. Employees of Financial Institutions may receive nominal compensation for referring individuals to IARs regardless of whether such individuals obtain advisory services from the Firm. To the extent that a referred client participates in the Program, the compensation paid to Financial Institutions or their employees as described herein may increase or otherwise affect the fees a customer pays for obtaining advisory services from the Firm. The fees and expenses that the Firm pays to a Financial Institution under these arrangements are not directly charged to referred clients, but depending on the circumstances, the existence of such marketing or referral arrangements may affect client s Fee or the Firm s or the IAR s willingness to negotiate fee reductions in particular instances. IARs are compensated by the Firm and its affiliated companies for the sale, renewal and servicing of proprietary and certain authorized non-proprietary products. Proprietary products are products or programs that are sponsored or issued by the Firm or its affiliates, and the Program is a proprietary product. An IAR s overall compensation includes base commissions and other forms of compensation that may vary from product to product and/or by the amount of the purchase payment made by client. Client should be aware that the amount of an IAR s compensation may increase in part based upon the relative amount of proprietary and certain non-proprietary products that he or she sells during a set period. Client s IAR also is eligible for additional cash compensation (such as medical, retirement and/or other benefits) and non-cash compensation (such as conferences and sales support services) based on his or her sales of proprietary products, certain authorized non-proprietary products, and/or overall sales and productivity, as applicable. This Program is considered a proprietary product, and therefore, client s IAR may have an incentive to favor this Program over non-proprietary programs in order to receive certain cash and/ or noncash compensation that client s IAR may be eligible to receive under the applicable compensation plans or to meet certain production requirements, if applicable. IARs must meet minimum overall sales requirements, which include a minimum proprietary product sales requirement, in order to continue their affiliation with the Firm and its affiliates and/or to continue to qualify for certain compensation arrangements described above. Additionally, an IAR s manager is compensated by the Firm and/or its affiliates generally based on overall sales goals, including those that include proprietary product sales, achieved by the IARs whom they supervise and may qualify for 17

18 additional compensation based on non-sales related factors as set by the Firm and/or its affiliates from time to time. Generally, the manager s compensation is aligned with that of client s IAR, as noted above. MSI earns fees on the amount of money in the Deposit Account, including client s assets. MSI may earn a higher fee if client assets are swept into a Deposit Account than if client invests in a Money Fund. The Program Custodian and the financial institutions that participate in the bank sweep arrangement ( Program Banks ) may also earn a fee in connection with offering and/or administering the arrangement and the Deposit Accounts. Please refer to the disclosure document for the Deposit Account for full details. MSI is not affiliated with Program Custodian or any of the Program Banks. MSI and its affiliates may offer products and services to Program Custodian, Program Banks and each of their employees, officers, directors, agents and independent contractors in MSI s normal course of business. MSI is entitled to receive compensation for assets invested in a Money Fund affiliated with Program Custodian that it would not receive if a client were invested in another money market sweep option. f. Making an Informed Decision The Firm wants its clients to make an informed decision when they purchase products or receive services from the Firm's RR or IAR. Therefore, the Firm is disclosing material arrangements and any potential conflicts of interest that clients may find informative when making their decisions. In addition to providing disclosures to its clients, the Firm, on an ongoing basis, communicates, trains and/or supervises its RRs and IARs on its policies and procedures regarding conflicts of interest. Furthermore, when an RR or an IAR makes a product or program recommendation to a client, the Firm reviews whether the recommendation is suitable for client against any financial information provided by the client, such as the client's risk tolerance, time horizon and investment objective. Nevertheless, clients should always carefully and independently review all product or program features and risks, along with any applicable disclosures before making any investment decisions. g. Other Disclosures 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 may 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 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. As of January 1, 2016, references to Program Fee in the previous two paragraphs should be references to Platform Fee. Until January 1, 2016, the administrative fee for this Program is less than the administrative fee for other advisory programs sponsored by MSI. Accordingly, prior to January 1, 2016, 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 in 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 18

19 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 through MSI offer such an administrative reimbursement. Accordingly, IARs may have an incentive to recommend that clients transfer assets currently invested in other advisory programs available through MSI to the Program (over other advisory programs available through MSI). We attempt to effect transactions correctly and resolve any trade errors promptly and fairly. Should a trade error occur as a result of our 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 may be 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. h. Financial Information The Firm does not require clients who participate in the Program to prepay its fees six months or more in advance. Additionally, the Firm does not have any material financial conditions that would impair its ability to meet its contractual commitments to clients. Clients should review the Envestnet Brochure for any disclosures that Envestnet may be required to make under this Item. 19