Composite rating definition list

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Composite Rating Definition List

Rating One (1) Two (2) Three (3) Four (4)

Five (5)

COMPLIANCE EXAMINATION COMPOSITE RATINGS

Rating Definition

An institution in this category maintains a strong CMS and takes action to prevent violations of law and consumer harm.

An institution in this category maintains a CMS that is satisfactory at managing consumer compliance risk in the institution's products and services and at substantially limiting violations of law and consumer harm.

An institution in this category reflects a CMS deficient at managing consumer compliance risk in the institution's products and services and at limiting violations of law and consumer harm.

An institution in this category reflects a CMS seriously deficient at managing consumer compliance risk in the institution's products and services and/or at preventing violations of law and consumer harm. "Seriously deficient" indicates fundamental and persistent weaknesses in crucial CMS elements and severe inadequacies in core compliance areas necessary to operate within the scope of statutory and regulatory consumer protection requirements and to prevent consumer harm

An institution in this category reflects a CMS critically deficient at managing consumer compliance risk in the institution's products and services and/or at preventing violations of law and consumer harm. "Critically deficient" indicates an absence of crucial CMS elements and a demonstrated lack of willingness or capability to take the appropriate steps necessary to operate within the scope of statutory and regulatory consumer protection.

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Composite Ratings Definition List (Page 2)

Ratings Definitions

COMMUNITY REINVESTMENT ACTION (CRA) EVALUATION COMPOSITE RATINGS

Outstanding (O)

An institution in this group has an outstanding record of helping to meet the credit needs of its assessment area, including low- and moderate income neighborhoods, in a manner consistent with its resources and capabilities.

Satisfactory (S)

An institution in this group has a satisfactory record of helping to meet the credit needs of its assessment area, including low- and moderate income neighborhoods, in a manner consistent with its resources and capabilities.

Needs to Improve

(N)

An institution in this group needs to improve its overall record of helping to meet the credit needs of its assessment area, including low and moderateincome neighborhoods, in a manner consistent with its resources and capabilities.

Substantial Noncompliance

(SN)

An institution in this group has a substantially deficient record of helping to meet the credit needs of its assessment area, including low- and moderateincome neighborhoods, in a manner consistent with its resources and capabilities.

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Composite Ratings Definition List (Page 3)

Ratings Definitions

GOVERNMENT AND MUNICIPAL SECURITIES DEALER (GSD & MSD) EXAMINATION COMPOSITE RATINGS

One (1) Two (2) Three (3) Four (4) Five (5)

A rating of "1" is indicative of management that is fully effective with respect to almost all factors and exhibits a responsiveness and ability to cope successfully with existing and foreseeable problems that may arise in the conduct of the dealer's affairs.

A rating of "2" reflects some deficiencies but generally indicates a satisfactory record of performance in light of the dealer's particular circumstances.

A rating of "3" reflects performance that is lacking in some measure of competence desirable to meet responsibilities of the situation in which management is found. Either it is characterized by modest talent when aboveaverage abilities are called for, or is distinctly below average for the type and size of activity operated. Thus, its responsiveness or ability to correct less than satisfactory conditions may be lacking.

A rating of "4" is indicative of management that is generally inferior in ability compared to the responsibilities with which it is charged.

A rating of "5" is applicable in those instances where incompetence has been demonstrated. In these cases, problems resulting from management weakness are of such severity that management must be strengthened or replaced before sound conditions can be brought about.

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Composite Ratings Definition List (Page 4)

Ratings Definitions

One (1) Two (2) Three (3)

INFORMATION TECHNOLOGY (IT) EXAMINATION COMPOSITE RATINGS

Financial institutions and service providers rated composite ``1'' exhibit strong performance in every respect and generally have components rated 1 or 2. Weaknesses in IT are minor in nature and are easily corrected during the normal course of business. Risk management processes provide a comprehensive program to identify and monitor risk relative to the size, complexity and risk profile of the entity. Strategic plans are well defined and fully integrated throughout the organization. This allows management to quickly adapt to changing market, business and technology needs of the entity. Management identifies weaknesses promptly and takes appropriate corrective action to resolve audit and regulatory concerns. The financial condition of the service provider is strong and overall performance shows no cause for supervisory concern.

Financial institutions and service providers rated composite ``2'' exhibit safe and sound performance but may demonstrate modest weaknesses in operating performance, monitoring, management processes or system development. Generally, senior management corrects weaknesses in the normal course of business. Risk management processes adequately identify and monitor risk relative to the size, complexity and risk profile of the entity. Strategic plans are defined but may require clarification, better coordination or improved communication throughout the organization. As a result, management anticipates, but responds less quickly to changes in market, business, and technological needs of the entity. Management normally identifies weaknesses and takes appropriate corrective action. However, greater reliance is placed on audit and regulatory intervention to identify and resolve concerns. The financial condition of the service provider is acceptable and while internal control weaknesses may exist, there are no significant supervisory concerns. As a result, supervisory action is informal and limited.

Financial institutions and service providers rated composite ``3'' exhibit some degree of supervisory concern due to a combination of weaknesses that may range from moderate to severe. If weaknesses persist, further deterioration in the condition and performance of the institution or service provider is likely. Risk management processes may not effectively identify risks and may not be appropriate for the size, complexity, or risk profile of the entity. Strategic plans are vaguely defined and may not provide adequate direction for IT initiatives. As a result, management often has difficulty responding to changes in business, market, and technological needs of the entity. Self-assessment practices are weak and are generally reactive to audit and regulatory exceptions. Repeat concerns may exist, indicating that management may lack the ability or willingness to resolve concerns. The financial condition of the service provider may be weak and/or negative trends may be evident. While

Ratings Four (4) Five (5)

Composite Ratings Definition List (Page 5)

Ratings Definitions

financial or operational failure is unlikely, increased supervision is necessary. Formal or informal supervisory action may be necessary to secure corrective action.

Financial institutions and service providers rated composite ``4'' operate in an unsafe and unsound environment that may impair the future viability of the entity. Operating weaknesses are indicative of serious managerial deficiencies. Risk management processes inadequately identify and monitor risk, and practices are not appropriate given the size, complexity, and risk profile of the entity. Strategic plans are poorly defined and not coordinated or communicated throughout the organization. As a result, management and the board are not committed to, or may be incapable of ensuring that technological needs are met. Management does not perform selfassessments and demonstrates an inability or unwillingness to correct audit and regulatory concerns. The financial condition of the service provider is severely impaired and/or deteriorating. Failure of the financial institution or service provider may be likely unless IT problems are remedied. Close supervisory attention is necessary and, in most cases, formal enforcement action is warranted.

Financial institutions and service providers rated composite ``5'' exhibit critically deficient operating performance and are in need of immediate remedial action. Operational problems and serious weaknesses may exist throughout the organization. Risk management processes are severely deficient and provide management little or no perception of risk relative to the size, complexity, and risk profile of the entity. Strategic plans do not exist or are ineffective, and management and the board provide little or no direction for IT initiatives. As a result, management is unaware of, or inattentive to technological needs of the entity. Management is unwilling or incapable of correcting audit and regulatory concerns. The financial condition of the service provider is poor and failure is highly probable due to poor operating performance or financial instability. Ongoing supervisory attention is necessary.

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Composite Ratings Definition List (Page 6)

Ratings Definitions

REGISTERED TRANSFER AGENT (RTA) EXAMINATION COMPOSITE RATINGS

One (1) Two (2) Three (3) Four (4)

Five (5)

Transfer agent activities in this group are sound in all important respects. If deficiencies are noted, they are of a minor nature and can be handled in a routine manner without further supervisory involvement.

Transfer agent activities accorded this rating are fundamentally satisfactory, but may reflect modest weaknesses. Deficiencies are generally correctable in the normal course of business. The need for supervisory response is usually limited.

Transfer agents with this rating are experiencing a combination of factors which require prompt corrective action. Weaknesses of some significance exist in several areas, or serious deficiencies exist in one or two areas. Considering the volume and type of business, a significant adverse impact does not exist now; but if left unchecked, the bank's ability to properly carry out its responsibilities could be endangered. More than ordinary supervisory concern exists, and additional monitoring may be necessary.

Unsatisfactory and unacceptable conditions exist in transfer agents with this rating. Significant weaknesses exist in a number of areas, such as prolonged and repeated violations, deficient or missing controls and audits, or critically deficient policies and procedures. Service to clients and security holders is, or is likely to become, inadequate, with clearly excessive delays or frequent errors. These problems are not adequately being resolved. Affirmative action and supervision by regulatory authorities is warranted.

A combination of critical deficiencies and adverse trends exist in transfer agents with this rating. The likelihood of ultimate continuation of transfer agent services is in serious question. Major and prolonged operational problems and serious repeated violations exist. Numerous out of proof conditions are unresolved, turnaround standards are not being met, and numerous unresolved security holder complaints exist. Depending on the volume and nature of transfer services, losses may pose a threat to capital. Immediate corrective action and continuous supervision, as required by the regulator, are necessary.

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