Internal Control Questionnaires and Verification Procedures

Securities Underwriting Trading Policies

1. Has the board of directors, consistent with its duties and responsibilities, adopted written securities underwriting/trading policies that:

   1. Outline objectives?

   2. Establish limits and/or guidelines for:

      • Price mark-ups?

      • Quality of issues?

      • Maturity of issues?

      • Inventory positions (including WI positions)?

      • Amounts of unrealized loss on inventory positions?

      • Length of time an issue will be carried in inventory?

      • Amounts of individual trades or underwriter interests?

      • Acceptability of brokers and syndicate partners?

   3. Recognize possible conflicts of interest and establish appropriate procedures regarding:

      • Deposit and service relationships with municipalities whose issues have underwriting links to the trading department?

      • Deposit relationships with securities firms handling significant volumes of agency transactions or syndicate participations?

      • Transfers made between trading account inventory and investment portfolio(s)?

      • The bank’s trust department acting as trustee, paying agent, and transfer agent for issues which have an underwriting relationship with the trading department?

   4. State procedures for periodic or monthly valuation of trading inventories to market value

   5. State procedures for periodic independent verification of valuations of the trading inventories?

   6. Outline methods of internal review and reporting by department supervisors, compliance managers, and internal auditors to insure compliance with established policy?

   7. Identify permissible types of securities?

   8. Ensure compliance with the rules of fair practice that:

      • Prohibit any deceptive, dishonest, or unfair practice?

      • Adopt formal suitability checklists?

      • Monitor gifts and gratuities?

      • Prohibit materially false or misleading advertisements?

      • Provide for the disclosures and consents necessary to avoid conflicts of interest when the bank assumes the role of both underwriter and financial advisor to the issuer?

      • Adopt a system to determine the existence of possible control relationships?

      • Prohibit the use of confidential, nonpublic information without written approval of the affected parties?

      • Prohibit improper use of funds held on another’s behalf?

      • Designate specific principals to supervise personnel and business conduct in general?

      • Adopt written securities price mark-up guidelines?

      • Allocate responsibility for transactions with own employees and employees of other dealers?

      • Require the maintenance of the MSRB manual at each office where there are representatives?

      • Require disclosure on all new issues?

   9. Provide for exceptions to standard policy?

2. Does the board review the underwriting/trading policies at least quarterly to determine their adequacy in light of changing conditions?

3. Is there a periodic review by the board to assure that the underwriting/trading department complies with its policies?

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