Global Franchise Risk Policy

For Internal Use Only

Title Effective Date Owner Approver Contact Information Intranet Location

Global Franchise Risk Policy April 2011 Director of Company and FHC Compliance Morgan Stanley Board of Directors Compliance_bulletin@morganstanley.com Global Franchise Risk Policy

For Internal Use Only

Table of Contents
1 1.1 1.2 2 3 3.1 3.2 4 4.1 4.2 4.3 5 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 6 6.1 6.2 6.3 6.4 7 8 8.1 Executive Summary .............................................................................................................................1 Rationale.......................................................................................................................................1 Scope ...........................................................................................................................................1 Policy Statements ................................................................................................................................1 Standard: Franchise Risk Management Framework Escalation ......................................................2 Other Internal Control Processes..................................................................................................2 Franchise Committee Proposal Review Process .......................................................................2 Standard: Suitability, Conflicts of Interest and CSFTs .....................................................................2 Suitability ......................................................................................................................................2 Conflicts of Interest .......................................................................................................................3 Complex Structured Finance Transactions ...................................................................................3 Standard: Potential Red Flags ............................................................................................................3 Misleading Financial or Regulatory Reporting ..............................................................................4 No Economic Substance or Irrational Economics .........................................................................4 Certain Principal Investment Activities ..........................................................................................5 Money Laundering/Economic Sanctions/Anti-Corruption/Antiboycott ...........................................5 Disproportionate Profitability .........................................................................................................6 Human Rights or Environmental, Health, Safety and Social Responsibility Concerns..................6 Unusual Client Behavior or Request .............................................................................................6 Client Integrity...............................................................................................................................7 Policy Assurance Methods..................................................................................................................7 Procedures ...................................................................................................................................7 Awareness Methods .....................................................................................................................8 Update Requirements ...................................................................................................................8 Consequences of Violating the Policy...........................................................................................8 Governance ..........................................................................................................................................8 Reference Information .........................................................................................................................8 Regulations, External Standards, Other Firm Policies ..................................................................8

For Internal Use Only

Executive Summary

Executive Summary
This Global Franchise Risk Policy (the Policy) sets forth a risk management framework for addressing potential risks to Morgan Stanleys franchise. Franchise risk describes potential risks to the way in which Morgan Stanley is perceived by external parties; that is, the general estimation in which we are held by our shareholders, clients, regulators and the public. Such risk may be triggered by either the nature of a transaction or business practice (e.g., a transaction without economic substance or business purpose) or by the identity or reputation of the client or counterparty (e.g., a client linked to alleged corruption or other improper activities). When considering whether a particular transaction, business practice, client or counterparty poses franchise risk, you should ask yourself whether Morgan Stanleys reputation would be compromised if its involvement with the transaction, practice, client or counterparty were to be reported in the media. If the answer is yes or possibly, then you must promptly escalate your concerns to your manager, divisional management and/or the Legal and Compliance Division (LCD).

1.1

Rationale
Morgan Stanleys reputation for integrity and excellence is essential to our success. We must not compromise that reputation. It is important that you understand your professional and personal responsibility to consider the potential impact of your actions on the Firms franchise, and exercise sound judgment before executing or approving a transaction or business practice to ensure that it will not jeopardize your or Morgan Stanleys reputation. One irresponsible employee or one ill-advised or inappropriate transaction can compromise the Firms reputation.

1.2

Scope
This Policy applies to all employees of Morgan Stanley and its consolidated subsidiaries.

Policy Statements
1.
Franchise Risk Management Framework Escalation. You must escalate promptly any

situation that you believe raises potential franchise risk to your manager, divisional management and/or LCD in the first instance. In the event that management determines that a matter poses potentially significant franchise risk, it must be submitted to the relevant regional Franchise Risk Coordinator and escalated to the appropriate regional Franchise Committee (FC) or equivalent for review prior to executing or approving the business (only after senior divisional management determines to support proceeding with the transaction notwithstanding the potential franchise risk). See Standard: Franchise Risk Management Framework Escalation for more information. 2.
Suitability, Conflicts of Interest and Complex Structured Finance Transactions (CSFTs).

Risk to Morgan Stanleys franchise may arise in many different contexts. You should be particularly alert to the franchise implications of situations that may raise suitability or conflicts of interest concerns, and to the potential franchise issues that can arise in CSFTs. See Standard: Suitability, Conflicts of Interest and CSFTs for more information. 3.
Potential Red Flags. The presence of one or more red flags may be indicative of potential franchise risk with respect to a transaction, business practice, client or counterparty that is required to be escalated in accordance with the process set forth below. This Policy contains an illustrative list of red flags but cannot address all potential franchise risks that may arise in the course of Morgan Stanleys businesses. Employees in business units, independent risk and control functions and infrastructure areas are therefore each responsible for being alert to potential franchise risks, exercising sound judgment in these and similar situations and escalating them promptly as appropriate to their managers, divisional management and/or LCD. See Standard: Potential Red Flags for more information.

For Internal Use Only

Standard: Franchise Risk Management Framework Escalation

Standard: Franchise Risk Management Framework Escalation

An employees failure to properly recognize and manage franchise risk could subject Morgan Stanley to negative publicity, regulatory scrutiny, loss of revenue and/or costly litigation. You must escalate promptly any situation that you believe raises potential franchise risk to your manager, divisional management and/or LCD in the first instance. Managers (in consultation with LCD as appropriate) must evaluate the matter to determine if it presents potentially significant franchise risk requiring further escalation. Matters determined to pose potentially significant franchise risk are required to be escalated and ultimately presented to the appropriate regional FC or equivalent for review prior to execution. Matters must be escalated to the appropriate regional FC or its equivalent only after senior divisional management determines to support proceeding with the transaction notwithstanding the potential franchise risks. If an employee of an infrastructure or control function disagrees with a divisional management determination regarding the level of franchise risk posed by a matter, such employee must raise their concerns with LCD.

3.1

Other Internal Control Processes

This Policy is not a substitute for and does not relieve employees of their responsibilities to obtain any necessary approvals from other control or infrastructure functions (e.g., LCD, Tax, Credit, Market Risk, Finance, Operational Risk). You should be familiar with the Firms New Product Approval Process and understand when an initiative, product or transaction must be submitted to that process for review. In addition, you must be familiar with the Firms policy on Suspicious Activity/Transaction Reporting (SARs), which requires notifying the Anti-Money Laundering Group in the Compliance Department of any suspicious transactions relevant to a possible violation of law or regulation. The Integrity Hotline provides an additional option for reporting potential misconduct (reports may be made anonymously and will be treated confidentially, as appropriate).

3.2

Franchise Committee Proposal Review Process

The FC has designated Franchise Risk Coordinators for each region and created a dedicated web tool to help facilitate the submission and review of matters escalated to the FC. See Policy Assurance Methods, below.

4
4.1

Standard: Suitability, Conflicts of Interest and CSFTs

Suitability
Suitability in the context of this Policy (which is subject to various local regulatory definitions) generally refers to whether a recommendation made by the Firm for a given transaction or product is appropriate for a particular counterparty or client. In assessing whether there is suitability risk, it is essential that you know your client. Knowing your client means being able to assess whether the client or client representative has the capacity and authority to engage in the proposed transaction, including whether the client representative has the authority to bind his or her principal, and the ability to understand and accept the risks involved. In evaluating suitability in the context of this Policy, you should also consider whether the clients disclosures (or their unwillingness to disclose certain information) or other information linking them to alleged corruption or other improper activities, gives rise to concerns about conducting business with this particular client. Protecting Morgan Stanleys franchise may require us to choose not to associate with a client after conducting an independent inquiry into the clients background, ownership structure or source of funds. If you believe a particular client or transaction poses suitability or franchise risk, escalate your concerns promptly to your manager, divisional management and/or LCD.

For Internal Use Only

Standard: Potential Red Flags

4.2

Conflicts of Interest
Conflicts of interest can arise when there is a divergence of interests between the Firm and its clients, among the Firms clients, or between employees on the one hand, and the Firm or its clients on the other. You must be sensitive to potential conflicts of interest and escalate concerns to your manager, Conflicts Management Officer or LCD as they arise. Many potential conflicts of interest, when promptly raised, can be managed and resolved through, among other things, appropriate and timely disclosure. Please refer to the Global Policy on Conflicts of Interest for illustrative examples of conflicts and for the process for escalating conflicts that are not resolved by the normal course operation of existing policies and procedures or that are potentially significant with respect to an individual business area, across divisions or to Morgan Stanley enterprise-wide. This Policy supplements and does not replace existing policies and processes by which the Firm identifies and manages conflicts, including but not limited to the Firm Notification and Conflict Clearance Policy and Information Barriers policies and procedures.

4.3

Complex Structured Finance Transactions 1

CSFTs in which the Firm is involved may give rise to heightened legal or reputational risks. Complexity is not in and of itself a red flag and transactions do not have to be complex or highly structured to raise franchise risks. However, CSFTs warrant increased scrutiny and sensitivity because such transactions may be used to disguise inappropriate or questionable activities. For example, the complexity of a CSFT could mask the intent of a counterparty to use a transaction to misrepresent its financial condition. Where a CSFT or the manner in which it is negotiated or entered into materially deviates from standard market practices, or where the CSFT otherwise raises potential accounting, tax, legal, compliance or regulatory issues, it may present an elevated risk. Such elevated risk CSFTs warrant additional scrutiny and are required to be escalated in accordance with the escalation framework set forth above in Standard: Risk Management Framework Escalation.

Standard: Potential Red Flags

We must comply with numerous laws and regulations governing our business activities and a failure to do so can expose us to regulatory scrutiny and potential sanctions. Morgan Stanley's businesses - especially its banking subsidiaries - are subject to restrictions relating to the permissibility of products that can be offered, how those products can be offered as well as how transactions between Morgan Stanley's banks and its affiliates must be conducted. When acting on behalf of the Firm, compliance with applicable laws and regulations is therefore a necessary starting point; however, you must also be alert to, and escalate, the wide range of potential red flags that may be indicative of significant franchise risk, including the following categories:

Misleading financial or regulatory reporting No economic substance or irrational economics

The term Complex Structured Finance Transaction was used in the Interagency Statement on Sound Practices Concerning Elevated Risk Complex Structured Finance Activities, a policy statement issued by five U.S. regulatory agencies that became effective in January 2007. The Interagency Statement does not precisely define CSFTs; it recognizes that structured finance transactions encompass a broad array of products with varying degrees of complexity, and that standard structured finance transactions familiar to market participants with well established track records would not typically be considered CSFTs. Examples of factors that could result in a transaction being characterized as a CSFT include: the use of multiple special purpose vehicles; simultaneous funds flows and complex contractual relationships among multiple entities; highly customized or non-standard commercial terms; and a structure designed specifically to create a particular tax or accounting treatment for one or more of the parties.

For Internal Use Only

Standard: Potential Red Flags

Certain principal investment activities Money laundering/economic sanctions/anti-corruption/antiboycott Disproportionate profitability Human rights, environmental, health and safety and social responsibility concerns Unusual client behavior or request Client integrity

5.1

Misleading Financial or Regulatory Reporting

You should be alert to situations where a client may report or disclose all or part of a transaction in public filings or financial statements in a manner that is materially misleading or inconsistent with the substance of the transaction or applicable regulatory or accounting requirements. For example:

A transaction where the purpose is to smooth earnings or disguise or avoid taking losses.

A transaction that appears to be designed or used primarily for questionable accounting, regulatory or tax objectives particularly when the transactions are executed at year-end or at the end of a reporting period for the client.

A transaction where the structure would not seem to support the desired accounting or tax treatment.

A client requests that the Firm structure and participate in a transaction in a certain way because the client indicates that it would then achieve off-balance sheet treatment, though the Firm believes the structure would not lead to that accounting result.

5.2

No Economic Substance or Irrational Economics

You should be sensitive to transaction terms or pricing that may suggest an inappropriate rationale on the part of a client or counterparty. For example:

A transaction that includes oral or undocumented agreements to repurchase securities or assets or to unwind transactions. A transaction involving no transfer of economic risk or circular transfers of risk (either between the Firm and the client or between the client and other related parties) that lack economic substance or business purpose.

A client promises to repurchase an asset sold to the Firm, but doesnt want to record that promise or wants to maintain a synthetic long position while verbally agreeing to buy the Firms hedge at expiry. A client attempts to effect a year-end sale of securities to lock-in the gain with a contemporaneous commitment to buy the securities back at an agreed price. A client requests that the Firm enter into equal and offsetting transactions with two different managed accounts.

A transaction is structured in a way that does not appear to be in the economic best interests of the client.

A client insists on investing in a Firm fund through a share class that charges higher fees than other classes available to the client.

A transaction that has material economic terms that are inconsistent with market norms (e.g., off-market pricing).

For Internal Use Only

Standard: Potential Red Flags

5.3

Certain Principal Investment Activities

Employees involved in making principal investments on behalf of the Firm or funds managed by the Firm must be alert to possible franchise risks posed by the nature of their investments. For example:

The Firm seeks to make a principal investment that poses heightened reputational risks or is controversial with respect to the:

relevant location or jurisdiction identity of the partner or counterparty involved nature of the industry involved precedent-setting nature of the transaction or investment social or political effects of the transaction or investment

A transaction that is likely to result in the Firm acquiring, controlling or taking a security interest in assets that are highly regulated or controversial (e.g., an asset with potential environmental or product liability risk). A trading desk undertakes an exceptionally large directional risk position while aware that the Firm is conducting offerings of securities that place investors in a directly inverse economic position.

5.4

Money Laundering/Economic Sanctions/Anti-Corruption/Antiboycott

In addition to Morgan Stanleys established anti-money laundering, Office of Foreign Assets Controls (OFAC), anti-corruption and antiboycott requirements, you should have heightened sensitivity to clients, counterparties, intermediaries or transactions that may raise reputational risks for the Firm. For example:

A client or transaction that is the subject of, has ties to, or is affiliated with the subject of material adverse news or press reports relating to allegedly illicit or otherwise improper activities, or is engaged in business in jurisdictions viewed as posing money laundering 2 or reputational concerns.

A client attempts to deposit funds of unknown or questionable origin, or is reluctant to provide complete information about the nature and purpose of its business, anticipated account activity or business location. A client seeks to engage in a transaction, or the Firm seeks to make a principal investment in a company, that relates to or involves a person or entity on the OFAC list, or in a country that is the target of an OFAC sanctions program (including governmental agencies, businesses or individuals in that targeted country). Unusual requests by a client, such as sudden, anomalous account activity that lack a rational business purpose.

A transaction that may involve corruption.

The Firm retains or provides something of value to a business partner (including a consultant or other intermediary) who is a relative or close business associate of a senior government official in order to assist the Firm in gaining an improper economic advantage, including procuring business from a government entity or obtaining government approvals. The Firm enters into a joint venture or similar arrangement with a state-owned enterprise that appears to be structured to provide a financial benefit to certain government officials. The client is a senior political figure, or an immediate family member or close associate of such a figure, in a country in which corruption and the illicit use of public office to obtain personal wealth may be widespread.

Please see the Anti-Money Laundering, Economic Sanctions - OFAC and Anti-Corruption and FCPA InfoPages for more information.

For Internal Use Only

Standard: Potential Red Flags

Participation, including a request that others participate, in a boycott unless authorized by the U.S. government.

The Firm is asked to take discriminatory actions or furnish information in furtherance of or in response to a non-U.S. boycott request.

5.5

Disproportionate Profitability
Be alert to a transaction where the profitability to the Firm is disproportionate to the risk taken or services provided.

5.6

Human Rights or Environmental, Health, Safety and Social Responsibility Concerns

Business activities or operations in countries or locations experiencing civil unrest or human rights abuses, or that raise significant environmental, health, safety and social responsibility concerns require heightened sensitivity and review. For example: A client has disregarded environmental, health, safety and social responsibility issues or has caused significant adverse effects on natural resources through its operations. A client generally has resisted improving its environmental, health and safety risk management approach or may have been less than forthcoming, inaccurate or unreliable in sharing information needed to assess its procedures. A project is likely to have a direct adverse effect on protected or scarce resources or may have an adverse impact on indigenous peoples. A client may be engaged in activities explicitly prohibited by or requiring additional risk assessment and scrutiny in accordance with the Global Environmental Risk Policy. A client is a high risk due to its industry, activities, materials used or produced or countries in which it operates. The Firm has direct ownership (partial or whole) of assets that may present high environmental risks.

5.7

Unusual Client Behavior or Request

Any client behavior that appears suspicious or unusual should be considered for possible franchise risk. For example:

A client repeatedly and inexplicably resists requests to discuss a potential transaction with the clients senior management or independent risk oversight managers.

The Firm raises a potential concern regarding the appropriateness of a transaction for the client with the clients trader and the trader refuses to allow a call with his or her manager, controllers or legal/compliance department.

A client proposes a transaction that appears unusual or otherwise significantly deviates from standard market practices. A client seeks to engage in a cross-trade with a closely related party, such as a spouse. Two clients approach the Firm to stand between them in offsetting transactions where the potential benefit to the Firm appears inconsistent with the purported risk. A transaction involving an unusual request for an equity capital commitment by the Firm or the creation of a non-standard, inexplicable, special purpose vehicle.

The Firm is asked by a client to commit equity to an entity taking part in a transaction but the client is unwilling to provide any information regarding the other equity investors in the entity.

A client of Investment Banking requests an unusual fee arrangement that might create conflicts of interest between the Firm and other clients.

For Internal Use Only

Policy Assurance Methods

A client seeks an undisclosed IPO incentive fee linked to the aftermarket performance of the shares.

A transaction raises concerns about disparate treatment among Firm clients.

A client investing in a pooled investment vehicle requests portfolio information in a timeframe not available to other similarly situated investors, or wishes to engage in frequent trading which could disadvantage other investors in the vehicle.

5.8

Client Integrity
Similarly, any suspicions about the integrity or legality of a clients or counterpartys business or personal activities even if separate from the particular transaction at issue should be considered as potential franchise risks. For example:

A transaction in which there are concerns about the legality of the clients or its principals activities.

Press reports that a clients board member or senior manager has been involved in allegedly illicit activities.

A transaction in which a representative of a client has an undisclosed personal conflict with the interests of the client.

The CFO of a company asks the Firm for assistance with a transaction that is not supported by the companys board.

6
6.1

Policy Assurance Methods

Procedures
The FC has created a dedicated web tool to help facilitate the process of submitting, reviewing and determining whether or not to approve matters escalated for FC review (the proposals). The web tool maintains control of the proposals, tracks their status, and guides the proposers through the review process. The web tool may be accessed through the following link: http://aspnet.ms.com/FRC or through MS Today by typing FRC into your web browser. For each region, the Franchise Risk Coordinator oversees the FC review process. They ensure that each proposal contains the necessary information, has been properly endorsed by the division, and is submitted to the FC. Matters presented to the regional Franchise Committees are expected to be escalated to the Global Franchise Committee in certain circumstances set forth in the Franchise Committee Charter (e.g., matters of Firm-level materiality). Once the relevant FC makes a determination, the decision is recorded on the web tool by the Franchise Risk Coordinator, along with any conditions imposed by the FC. It is the responsibility of the relevant proposing division to ensure that any conditions imposed in connection with approvals are met. Franchise Risk Coordinators are listed on the Franchise Risk InfoPage on the LCD Portal. Viewing access to specific content of FC proposals is restricted. Only individuals involved with the proposal and members of the FC are permitted viewing rights. You are reminded that:

To the extent the Firm, your business unit or division have escalation procedures that supplement this Policy and the Firms risk management framework, you must understand and follow those procedures. If in doubt, stop, ask questions, exercise sound judgment and escalate. Raising an issue will not necessarily result in the rejection of a transaction -- often transactions will be considered acceptable once appropriate due diligence has been performed and/or other conditions have been satisfied.

For Internal Use Only

Governance

Escalate promptly any situation that raises potential franchise risk to your manager, divisional management and/or LCD in the first instance. Divisional management is expected to be apprised of material issues that are not readily resolved after discussion with clients and other managers. Resources are available to assist you. You should consult with Morgan Stanleys independent control functions, as necessary, such as the LCD, Tax, Finance, Credit, Market Risk, Operational Risk and Accounting Policy groups.

6.2

Awareness Methods
This Policy is posted on the LCD Portal and published to the Firm through the Monthly Compliance Bulletin.

6.3

Update Requirements
At least annually the Global Compliance Committee reviews this Policy and recommends it to the Audit Committee of the Board of Directors, which reviews and recommends it to the Board of Directors for approval.

6.4

Consequences of Violating the Policy

Your failure to comply with this Policy could compromise Morgan Stanleys reputation for integrity and excellence. Accordingly, your failure to comply with this Policy may subject you to a range of disciplinary actions, up to and including termination of your employment. Following the standards set forth in this Policy will help ensure that you protect Morgan Stanleys franchise and that you do not compromise your or the Firms reputation.

Governance
Morgan Stanley Board of Directors

Approves this Policy.

Audit Committee of the Board of Directors and Global Compliance Committee

Review and recommend for approval by the Morgan Stanley Board of Directors.

Global and Regional Franchise Committees

Review potentially significant franchise risk matters.

Franchise Risk Coordinators

Manage the Franchise Committee review process.

Legal and Compliance Division, Managers and Divisional Management

Serve as escalation points for potentially significant franchise risk matters.

8
8.1

Reference Information
Regulations, External Standards, Other Firm Policies

Anti-Corruption and FCPA InfoPage Anti-Money Laundering InfoPage Economic Sanctions - OFAC InfoPage

For Internal Use Only

Reference Information

Firm Notification and Conflict Clearance Policy Franchise Risk InfoPage Global New Product Approval Policy Global Policy on Conflicts of Interest Global Environmental Risk Policy Information Barriers policies and procedures