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Trust Examination Manual

Section 1 - Management

 

Table of Contents

This section of the Manual is organized into the following parts:

A.  Introduction

B.  Statement of principles of trust department management

C.  Duties and responsibilities of directors

     1.  Supervisory Responsibilities

         a.  Acceptance of New Accounts

         b.  Approval of Closed Accounts

         c.  Discretionary Distributions, Extraordinary Expenditures, and Other Matters

         d.  Supervision of Investments

         e.  Account Reviews

         f.  Audit and Regulatory Reporting

         g.  Retention of Legal Counsel

         h.  Adequacy of Insurance Coverage

     2.  Organizational Structure

     3.  Committee Structure

         a.  Trust Committee

         b.  Management Committees

D.  Management appraisal

     1.  Trust Officer Duties and Management Skills

     2.  Assessment Factors

     3.  Personnel, Staffing Levels, and Authority Lines

     4.  Personnel Policy

     5.  Management Succession

E.  Risk management

F.  Watch lists

G.  Account review program

     1.  New Account Reviews

     2.  Scope of Annual Account Reviews

     3.  Frequency and Authority Level of Account Reviews

     4.  Content of Account Reviews

     5.  Records of Account Reviews

         a.  Reviewing Authority Level

         b.  Account Level

H.  Trust policies

     1.  Other Trust Policies 

     2. Compliance with USA PATRIOT Act

I.   Fee Concessions to insiders

J.   Meeting with department management

K. Meeting with directors and committees

     1.  Disclosure of Ratings

     2.   Departments Assigned or Likely to be Assigned a Composite "1" or "2" Rating

     3.  Departments Assigned or Likely to be Assigned a Composite "3" Rating

     4.  Departments Assigned or Likely to be Assigned a Composite "4" or "5" Rating
 

A.  Introduction

As a fiduciary, the bank's primary duty is the management and care of property for others. This responsibility requires the duty of loyalty, the duty to keep clear and accurate accounts, the duty to preserve and make productive trust property, as well as a myriad of other responsibilities. Refer to Section 4, Common Law duties. With these responsibilities comes risk, and management's ability to monitor and control these risks is of paramount importance. The Board of Directors and senior management must be able to identify, measure, monitor and control the risks inherent in fiduciary activities, and respond appropriately to changing business conditions. Increasingly, management is faced with operating or transaction, strategic, legal, compliance, credit, settlement, market, liquidity, and reputation risks. Appropriate internal policies, practices and controls should address these risks. The size and complexity of the trust department will dictate the depth of such policies.

Increasing competition from non-bank entities and the enactment of the Gramm-Leach-Bliley Act (GLBA) and USA PATRIOT Act will continue to bring changes to the fiduciary business. New affiliations with the mutual fund and insurance industries will increase business opportunities, but will also increase risk and potential conflicts of interest if not properly managed. The duty of loyalty must remain foremost in management's quest for new activities and affiliations.  

B.  Statement of Principles of Trust Department Management

The FDIC, in recognition of the necessity of establishing guidelines for the sound operation of a trust department, has issued a Statement of Principles of Trust Department Management (Statement) as revised and set forth below. Banks applying for the FDIC's consent to exercise trust powers must adopt the Statement before approval will be granted. In situations where a bank or trust department was not required to adopt the Statement pursuant to Part 303 of the FDIC Rules and Regulations, examiners should strongly recommend that the Board of Directors do so. Periodic or routine re-adoption of the Statement is not required. Examiners should make certain that trust management is operating the department in a manner consistent with the Statement, even when the Board has not adopted the Statement. Examiners must use judgment in ascertaining the conformance with these minimum standards.  The Statement is general in scope and permits flexibility in implementation. However, examiners must determine whether the bank conforms to the spirit of the principles. Where deficiencies are noted, trust management should be informed of the areas needing correction. Management's willingness to take corrective action should be reflected in the Report of Examination.  

B.1. Statement
The minimum requirements to provide for sound banking practices in the operation of a trust department and to provide safeguards for the protection of depositors, fiduciary beneficiaries, creditors, stockholders, and the public, should include:

  • Involvement by the Board of Directors in providing for the establishment and continuing operation of a trust department;

  • Operation of the trust department separate and apart from every other department of the bank, with trust assets separated from other assets owned by the bank, and the assets of each trust account separated from the assets of every other trust account; and

  • Maintenance of separate books and records for the trust department in sufficient detail to properly reflect all trust department activities.

The Board of Directors may act as the trust committee, and/or appoint additional committees and officers to administer the operations of the trust department. When delegating duties to subcommittees and/or officers, the Board and the trust committee continue to be responsible for the oversight of all trust activities. Sufficient reporting and monitoring procedures should be established to fulfill this responsibility.

The Board of Directors, by proper resolution included in its minutes, should:

  1. Designate an officer, qualified and competent, to be responsible for and administer the activities of the trust department. In addition, the Board should define the officer's duties.

  1. Name a trust committee consisting of at least three directors to be responsible for and supervise the activities of the trust department. The committee should include, where possible, one or more directors who are not active officers of the bank.

The trust committee should:

  1. Meet at least quarterly, and more frequently if necessary and prudent to fulfill its supervisory responsibilities;

  1. Approve and document the opening of all new trust department accounts; all purchases and sales of, and changes in, trust assets; and the closing of trust accounts;

  1. Provide for a comprehensive review of all new accounts for which the bank has investment responsibility promptly following acceptance;

  1. Provide for a review of each trust department account, including collective investment funds, at least once during each calendar year. Written policies should address the scope, frequency, and level of review (trust committee, subcommittee, or disinterested account officer) considering the department's fiduciary responsibilities, type and size of account, and other relevant factors.

Generally, discretionary account reviews should cover administration of the account and suitability of the account's investments, and non-discretionary account reviews should address account administration;

  1. Keep comprehensive minutes of meetings held and actions taken; and

  1. Make periodic reports to the Board of its actions.

  1. Provide comprehensive written policies which address all important areas of trust department activities.

  1. Provide competent legal counsel to advise trust officers and the trust committee on legal matters pertaining to fiduciary activities.

  1. Provide for adequate internal controls including appropriate controls over trust assets.

  1. Provide for an adequate audit (by internal or external auditors or a combination thereof) of all fiduciary activities, annually. Trust committee minutes should record the findings of the audit, including actions taken as a result of the audit.

If a bank adopts a continuous audit process instead of an annual audit process, the audit may be performed on an activity-by-activity basis, at intervals commensurate with the level of risk associated with that activity. Audit intervals must be supported and reassessed regularly to ensure appropriateness, given the current risk and volume of the activity.

  1. Receive reports from the trust committee and record actions taken in its minutes.

  1. Review the examination reports of the trust department by supervisory agencies and record actions taken in its minutes.

C.  Duties and Responsibilities of Directors

The Board of Directors has the overall authority and responsibility for operating the trust department and administering fiduciary accounts. This administrative responsibility begins with the acceptance of an account and continues until the closing of the account. In discharging its authority, the Board of Directors may delegate duties and responsibilities to such committee(s), director(s), officer(s), employee(s), or legal counsel as it deems appropriate. However, the Board retains ultimate responsibility for delegated matters and must maintain the proper degree of control and supervision.

Only through its written records can the Board demonstrate that it has satisfactorily exercised its authority and responsibility. Consequently, the minutes of the Board should reflect discussions and decisions reached regarding significant trust related matters. Although the Board should review information regarding significant trust department activities, summaries of such information are acceptable. However, detailed reports or committee minutes should be available to the Board upon request.

The examiner may encounter instances where records of Board actions or information received are deficient or even completely lacking. In such situations, the examiner should inform the directors of the importance of correcting these deficiencies. The Report of Examination should outline the weaknesses and indicate management's response and planned corrective measures.

C.1. Supervisory Responsibilities
The Board of Directors is responsible for supervising and administering the activities of the trust department. The following are certain administrative responsibilities charged to the Board of Directors which may be delegated to duly appointed committees.

C.1.a. Acceptance of New Accounts
Formal acknowledgment of new accounts should be noted in Board or committee minutes. The Board has the authority to delegate approval of accounts to a junior committee. However, this practice should be used judiciously as the Board continues to remain responsible for all accounts accepted.

Management should delineate standards for the acceptance of new business to control potential risks. The standards should define criteria for accepting or declining new business, given management's administrative capabilities. The ability of the trust institution's staff, systems, and facilities to handle the proposed duties must be considered, when accepting new accounts. Other areas for consideration include, but are not limited to:

  • Purpose of the account,

  • Identity of principals and beneficiaries,

  • Existence of, or potential for, conflicts of interest,

  • Complexity of provisions,

  • Composition and nature of assets,

  • Existence of administrative problems, and

  • Profitability.

Examiners should note that the acceptance of an unprofitable account should not be necessarily viewed as unfavorable. Unprofitable accounts may be accepted for a number of reasons including, but not limited to: other related accounts which, when viewed as a whole, are profitable; major commercial bank relationships; pro-bono appointments for charitable or other worthy causes, etc. Fee concessions for director, officer, and employee accounts may be acceptable, if offered on a non-discriminatory basis and under well-defined policies.

C.1.b. Approval of Closed Accounts
Closed accounts should be reviewed to determine if the responsibilities under the instrument have been properly discharged and account administration was in accordance with the department's policies and procedures. The improper administration of an account can potentially expose the bank to reputation risk and financial liability.  A significant increase in the number of closed accounts may be indicative of other underlying operational or administrative issues.  Formal acknowledgement of closed accounts should be noted in the Board or committee minutes, along with the reason the account was closed.  Furthermore, trust department records must contain receipt for assets transferred from the successor trustee, administrator or beneficiaries.

C.1.c. Discretionary Distributions, Reallocation of Principal and Income, Extraordinary Expenditures, and Other Matters
The authority to grant discretionary distributions or reallocate principal and income (depending upon state law) is one of the most important powers vested in a fiduciary. The exercise of the power should be vested in the Board of Directors or a duly appointed committee (i.e., the trust committee or a subcommittee thereof) and approval or ratification of significant discretionary or reallocation actions should be noted in Board or committee minutes. Documentation of the approval of discretionary distributions or principal and income reallocations and denials should be retained in the individual account file to support ongoing administrative responsibilities.  In the same manner, extraordinary expenditures should be approved by the Board or a delegated committee.  The reasons for the expenditures and any communication with interested parties should be documented in the trust files.

The Uniform Principal and Income Act (UPIA) was most recently revised in 1997 to be consistent with the Prudent Investor Act, which looks to total return, rather than just interest or dividend income.  As a result, investments may be made in products that do not provide a current income stream, but have considerable capital appreciation.  Under the UPIA, specific assets and the uniform allocation is detailed.  A copy of the UPIA is included in Appendix C and a listing of the more common assets and their related allocations between principal and income are included in Chapter 2. 

The authority to grant discretionary distributions or reallocate principal and income are two of the most important powers vested in a fiduciary.  The exercise of power should be vested in the Board of Directors or a duly appointed committee and approval or ratification of significant discretionary or reallocation actions should be noted in the Board or committee minutes.  Documentation of the approval of discretionary distributions or principal and income reallocations, and denials should be retained in the individual account file to support on-going administrative responsibilities.  In the same manner, extraordinary expenditures should be approved by the Board or a committee that reports directly to the Board.  The reasons for the expenditures and any communication with interested parties should be documented in the trust files.

C.1.d. Supervision of Investments
<To the extent the bank has investment discretion, management has several important responsibilities, including:

  • Conservation of the value of the assets entrusted to its care of trust corpus;

  • Optimization of income or growth in value consistent with prudent practices, the terms of the agreement, and the needs of the beneficiaries; and

The Board of Directors or its trust committee is responsible for the approval of all purchases and sales of assets, and for the retention or disposition of investments. However, in larger departments, senior management or the trust investment committee often reviews purchases and sales. The frequency (weekly or monthly) and method of review will vary depending upon management preferences, the volume of trades, and the trust accounting system utilized. Some departments may use an exception-based review process. Each review method provides management the opportunity to monitor compliance with internal policies and/or approved investment lists. Regardless of the method chosen, the review of purchases and sales is essential for a strong risk management program. Additional information on investments can be found in the Asset Management section. The suitability of assets held by each individual account should be incorporated into the account's annual investment review. Refer to the Account Review program for items to consider in an investment review.

C.1.e. Account Reviews
As discussed in the Statement, the trust committee should review each trust account initially upon acceptance and at least annually thereafter. Frequently, large trust departments delegate this responsibility to another committee or a disinterested trust officer. The annual review should incorporate an administrative review, and a review of investments, when the department exercises investment discretion. The scope of the annual review should be addressed in appropriate written policies which give consideration to the department's fiduciary responsibilities, the type and size of accounts, and other relevant factors. Refer to Account Review Program in this section.

C.1.f. Audit and Regulatory Reporting
The Board must ensure that appropriate internal and/or external audits of fiduciary activities are conducted. The adoption of a thorough audit program allows the Board to identify practices that contravene policies or violate fiduciary laws and regulations. It is essential for the Board or its designee to review the findings of the audit(s) and document the actions taken to respond to the findings. Additionally, the Board should review all examination reports by supervisory agencies and note corrective actions taken in the minutes. Refer to audits and accounting issues

C.1.g. Retention of Legal Counsel
Management must effectively identify, measure, monitor, and control the legal risks inherent in the trust business. Therefore, informal or formal policies should be developed to assist management in the selection and retention of competent legal counsel, either in-house or external. Accounts considered for acceptance that involve pending or threatened litigation, complex or unusual documentation, or ambiguous language should be reviewed by counsel.

C.1.h. Adequacy of Insurance Coverage
An effective risk management program includes adequate insurance coverage. The Board has a responsibility to maintain sufficient coverage for the risks inherent in the fiduciary business.  Furthermore, management must periodically review the policies for continued suitability. However, the Board and management should not rely on insurance coverage to compensate for poor operational controls or the absence of proper oversight.

C.2. Organizational Structure
A Board resolution or the bank's bylaws should prescribe the structure and function of the trust department.  Any workable system of organization of the trust department is acceptable, as long as it enables the directors, management and staff of the trust department to fulfill their respective responsibilities.

The Board of Directors may fulfill its fiduciary responsibilities by adopting an organizational plan that effectively accommodates the volume and type of fiduciary services offered, the competitive environment and future growth. The organizational plan should include effective communication processes that facilitate the exchange of all information necessary to inform all levels of trust department personnel of the institution's policies and directives, and allow senior management to verify that the trust department's operations comply with such policies and directives.   

C.3. Committee Structure
Although the Board may elect to attend to all fiduciary matters, the handling of routine administrative and operational details is usually delegated to others. If the Board chooses to assign functions to a committee(s), all committee actions pertaining to the oversight of fiduciary functions should be recorded in minutes or similar records. Trust department committees should be structured to be flexible and workable. Functions and objectives should be clearly defined and effectively executed. Regular attendance and active participation by committee members are essential for effective oversight. Utilization of the committee process does not relieve the Board of its responsibilities for the actions taken by those groups.  

C.3.a. Trust Committee
Normally, the Board of Directors does not directly supervise trust department activities. Depending on the size of the institution, the Board may establish a trust committee. In such cases, the committee should include at least three directors of the Board, and in institutions with outside directors, the committee should include at least one director who is not a bank officer. If the bank has no outside directors, the committee should not include any officers who participate significantly in the administration of the bank's fiduciary responsibilities. Examiners should assess trust committee independence and make recommendations where appropriate.

According to the Statement, the trust committee should meet at least quarterly. The trust committee should meet more frequently when necessary and prudent to fulfill its responsibilities.  

C.3.b. Management Committees
Although not required, it is common practice to have management committees in both large and small departments. These committees typically review items requiring immediate attention or routine department activities.  The two most frequently encountered committees are the trust administration committee and the trust investment committee. Larger departments may employ additional sub-committees (proxy, fee deviation, etc.) of the management committees. Management committees should maintain adequate minutes of meetings held and actions taken, which subsequently should be reviewed by the trust committee or its designee.  

D.  Management Appraisal

Examiners must assess management's ability to serve those fiduciary accounts presently under administration and those to which the bank has made a commitment. Although a primary measure of management's ability is the condition of the trust department and the quality of fiduciary services rendered, its potential to handle anticipated business is also significant, and therefore, examiners must evaluate the level of strategic planning by executive officers. 

D.1. Trust Officer Duties and Management Skills
The Board of Directors should designate a qualified and competent officer to administer the activities of the trust department. In assessing competence, the qualifications of management should be evaluated in relation to the duties assigned.  Administrative duties of the trust officer include at a minimum, the following:

  • Represent the institution in all fiduciary matters;

  • Oversee administration of trust department accounts;

  • Report all matters requiring its attention to the trust committee;

  • Execute policies and instructions of the directors and the trust committee;

  • Maintain adequate records such as entries, settlement sheets, and follow-up systems;

  • Maintain adequate documentation to ensure all assets are properly safeguarded.

The senior trust officer/trust department manager may have limited knowledge of fiduciary matters, yet possess the managerial skills necessary to effectively guide the affairs of a particular trust department. In such cases, the examiner should emphasize the need for fiduciary expertise at middle management levels. The managerial skills of the senior trust officer/trust department manager should be evaluated in consideration of the following areas:

  • Planning - A trust officer should establish a predetermined course of action. This includes setting both short-term and long-term objectives and establishing policies, procedures, and programs to reach these objectives.

  • Organizing - A manager, along with the directorate, should establish an organizational structure designed to achieve the department's goals. The grouping of these activities, delegating of authority to perform these activities, and providing for coordination of relationships in the organizational structure should be analyzed.

  • Staffing - Management should employ a sufficient number of qualified employees. This involves effectively recruiting, training, and retaining employees.

  • Directing - Management should provide ongoing guidance and supervision of trust personnel to achieve the trust department's stated objectives.

  • Controlling - Management should review, evaluate, and regulate the work in progress to ensure the activities meet established plans.

The examiner should analyze the type and depth of training offered to all trust personnel and evaluate the adequacy of the training program. Training may include in-house development programs, on-the-job training, correspondence courses, banking schools and seminars, training facilities of larger banks, and tuition aid programs.

The examiner should consider expertise available from sources outside the bank. Management may compensate for "in-house" weaknesses in such areas as investments, tax law, or accounting by employing outside professional services if permitted under state law. The examiner should determine whether management understands and can effectively evaluate the information and recommendations made by these services. Management should be able to use such services effectively. Before contracting with an outside servicer, a due diligence review of the counterparty and the contract should be performed. Refer to outside contracting for fiduciary services for additional information on due diligence reviews.

The competence of management should be questioned, if serious shortcomings or criticisms exist. When deficiencies are of short duration, middle management may often be responsible. However, senior management must be held responsible for any long-standing or widespread deficiencies. The examiner-in-charge must describe management deficiencies and make appropriate recommendations to correct them.

D.2. Assessment Factors
Examiners should look at the following factors when evaluating the competence and expertise of management, such as:

  • Experience - What is the experience level of trust department management and does this experience correspond to the individual duties and responsibilities assigned?

  • Training - What kind of professional training, such as schools and seminars, is provided to management personnel, and has it been effective?

  • Education - What is the level of academic achievement within the department and the relationship to managerial positions?

  • Character - Are the personality, disposition, and reputation of trust department management consistent with the requirements imposed by their individual duties and responsibilities? Are there any other influences or factors that could cause a person's integrity, reliability, or ethics to be suspect?

In small trust departments, management must generally be well versed in all facets of the fiduciary services offered by the department. In moderate or larger departments, middle-level personnel may specialize (i.e., investment officers, account administrators, operations officers, taxation specialists, or new business development officers). Each should have a level of competence commensurate with the size and complexity of the department's activity.

D.3. Personnel, Staffing Levels, and Authority Lines
A plan of personnel organization should provide for continuity and include procedures for recruiting, training, and evaluating personnel. The staff should be adequate to handle the volume of work. Lines of authority, duties, and responsibilities should be clearly defined and effectively communicated to all personnel in order to promote the efficient, productive, and orderly execution of the department's functions. The lines of authority can be structured on a legal entity, business line, or functional basis. Reviewing lines of authority allows the examiner to assess the department's ability to identify, communicate and manage risks. An organizational chart is helpful as a starting point. The functional organizational structure should be designed to promote an orderly flow of the trust department's daily work and be sufficiently flexible to accommodate peak workloads without sacrificing efficiency or accuracy.  

D.4. Personnel Policy
A personnel policy should cover the size of the trust department staff, qualifications of personnel, organizational structure, employee ethics, salary administration, and employee benefits. A code of ethical standards should deal with such matters as: acceptance of gratuities, gifts, favors, and bequests; acceptance of loans from fiduciaries, beneficiaries, customers, or agents; disposition of fees earned by employees for personal services rendered in the performance of fiduciary duties; employees accepting benefits for serving as co-fiduciary with the bank; employees exerting influence on fiduciary customers for personal gain; and employees maintaining confidentiality of the bank's fiduciary relationships.  

D.5. Management Succession
The retention of qualified employees is essential in discharging the bank's fiduciary obligations. Undue reliance on one individual or several key individuals should be avoided where possible. The Board and management must ensure, through appropriate planning, that minimal disruption will occur should there be an unexpected departure of a key individual(s).

E.  Risk Management

A formal risk management program should be established to identify and control fiduciary risk. An effective risk management program guards against liability that can result from lawsuits or poor administrative practices, and identifies those areas where there is potential for exposure. Strong internal controls, sound policies and practices, and appropriate management information systems provide the basis for an effective risk management program. The sophistication of the department's risk management program should be developed according to the complexity of its business products and services. Risk tolerance levels should be clearly set and monitored by both senior management and the Board of Directors. The program should be reviewed continuously and revised to capture current and anticipated business risks. At a minimum, an effective risk management program should:

  • Establish the level of risk that management is willing to assume. Examiner emphasis should be placed on reviewing the planning process, policies related to the process, and underwriting standards of accounts and new products.  

  • Identify the various risks associated with the institution's key products and services, as well as its operating environment. This includes an analysis of methods employed in determining fiduciary insurance coverage, loss reserves, and the impact of fiduciary risk on capital adequacy. Litigation concerns should also be analyzed.

  • Implement adequate controls and monitoring systems. This includes establishing a system of checks and balances, reviewing audit coverage, the compliance management system, and the overall scope and reliability of existing management information systems.

  • Supervise operations and the implementation of procedures when new accounts are obtained. Guidelines should provide information as to day-to-day management of  fiduciary activities, operating systems, and internal controls.

Trust activities expose the bank to many of the same risks encountered in bank operations. Operating or transaction, strategic, legal, compliance, credit, settlement, market, liquidity, and reputational risks are found in varying degrees within many departments. While some risks may directly affect the department and the bank, others may be inherent in the products purchased or held in client accounts. Ultimately, if management is unable to identify and/or properly manage these risks, the bank's reputation may be damaged. 

F.  Watch Lists

A written watch list of accounts and assets meriting special attention provides a measure of control that can assist the department in limiting contingent liability and mitigating loss. To be effective, the watch list should be comprehensive, well documented, and periodically reviewed by the trust committee. Management actions, including decisions made, contacts with interested parties, and legal discussions should also be noted and documented in writing. The level of detail provided by the watch list and the depth of the follow-up procedures will vary with the size and complexity of the trust department.  However, at a minimum, the watch list should:

  • Identify trust accounts, groups of trust accounts, or assets that warrant the special attention of management; and

  • Provide a summary of each account or asset identified, indicating the reason(s) why the particular account or asset merits special attention, and to the extent feasible, quantify the amount of risk.

Accounts or assets that involve pending or threatened litigation, customer complaints, waived fees, criticisms by regulatory authorities at prior examinations, large overdrafts, default or bankruptcy, or other situations may warrant inclusion on the department's watch list.

Finally, watch lists also serve as a valuable reference point for examiners, who can compare the findings of their own account review with the accounts identified by management as warranting special attention. This should assist examiners in assessing the adequacy of the risk management program. Finally, reliable watch lists can be used by examiners to determine the scope of account review.  

G.  Account Review Program

G.1. New Account Reviews
The initial review of new accounts for which the bank has investment responsibility should be conducted promptly following acceptance. Industry practice is to complete the review within 60-90 days of opening. The initial review should establish an investment program consistent with the needs and objectives of the account, and ensure that the synoptic record is complete and accurate.  

G.2. Scope of Annual Account Reviews
The scope of the account review primarily depends on the department's fiduciary responsibilities and the type of account under review. An account review should generally cover the administration of the account (administrative review) and the suitability of the account's assets (investment review). Refer to Content of Account Reviews in this section for additional information on administrative and investment reviews. Departments that provide services to third parties, or who obtain services from third parties, should ensure that all affected accounts are reviewed by the appropriate party as outlined in the written agreements. The scope of an account review is dependent upon the nature of fiduciary responsibilities and types of account, as outlined below.

  • Collective Investment Funds - The review of collective investment funds should include both an administrative and an investment review. The administrative review should ensure that the operation of each collective investment fund complies with applicable laws, and regulations (e.g. OCC Regulation 9, SEC regulations, ERISA and DOL regulations, the Internal Revenue Code and IRS regulations, etc.) and standard industry practice. The investment review should ensure that investments are consistent with the stated investment purpose of each fund. Fund performance for each collective investment fund should also be included in the annual review.

  • Discretionary Personal and Employee Benefit Accounts - In personal and employee benefit accounts where the institution has investment discretion, an account review generally should consist of both an administrative and investment review. The administrative review will differ according to the type and purpose of a given account.

  • Nondiscretionary Personal Accounts - The account review should primarily focus on the appropriateness of account administration, which will differ according to the type and purpose of a given account. There may be no requirement or responsibility to review investments, but as in all nondiscretionary accounts, a corporate fiduciary may be held accountable for the actions of a co-fiduciary, due to bank's professional corporate trust status. 

  • Nondiscretionary ERISA Employee Benefit Accounts - Review of self-directed employee benefit accounts is normally limited to coverage of administrative matters. These will differ according to the type of responsibilities (such as participant record keeping, participant loan programs, etc.) administered by the bank. In these accounts, a cursory review of the investments is also in order to avoid flagrant violation of the insider and prohibited transaction provisions of ERISA. Trustees directed by named fiduciaries have liability to determine whether directions are proper, meaning that they are in accordance with the plan, and not contrary to ERISA and/or applicable regulations.  See ERISA Section 403(a)(1). A corporate fiduciary is held to a higher standard because of its purported knowledge and expertise in fiduciary matters.

  • Nondiscretionary non-ERISA Employee Benefit Accounts - These accounts are generally sponsored by church organizations or state, county, or municipal governments and their agencies. Only the administrative reviews, as covered above for nondiscretionary ERISA employee benefit accounts, need to be performed.

  • Self-Directed IRAs and Keoghs - Self-directed IRA and Keogh accounts are considered trust accounts under Internal Revenue Code Section 408(h).  Therefore, examiners should ensure that an administrative review is performed and that proper controls are in place to limit liability. For a discussion of the proper controls, refer to the Operations, Internal Controls and Auditing section regarding Self-Directed IRAs and Keoghs.

  • Custodial Accounts - Although custodial accounts are not always considered fiduciary accounts (the classification depends on state law), administrative reviews should be performed on all custodial accounts. This also applies to custodial accounts for ERISA employee benefit plans. Management has the responsibility of ensuring that custodial relationships are being administered in accordance with signed agreements.

  • Discretionary Corporate Bond Trusteeships - Bond indentures for corporate and municipal debt issues (bonds, debentures, notes, etc.) usually delineate how available funds are to be invested. Nonetheless, the bank may have discretion in selecting the actual investments. In such cases, the investments held for the account should be reviewed, as well as the administration of the account.

  • Nondiscretionary Corporate Bond Trusteeships and Agencies - These accounts generally involve corporate and municipal debt issues, securities transfer agencies, paying agencies, etc. Since there are either no assets on hand or the bank has no discretion over their investment, only administrative reviews need to be conducted.

G.3. Frequency and Authority Level of Account Reviews
The Statement of Principles of Trust Department Management requires that all trust accounts be reviewed during each calendar year.  The Board of Directors is responsible for conducting account reviews and outlining the frequency and authority level of account reviews in a departmental policy. The Board can establish an organizational structure of its choice, including the delegation of account reviews to subcommittees or disinterested account officers. 

Certain accounts may warrant a more frequent review or a review at a higher level in the organization than other accounts. For example, those accounts where the bank has investment discretion may require a more frequent review than accounts where no investment discretion is exercised. The reviews should be conducted by a committee in order to obtain group experience and knowledge. In addition, accounts which should receive more frequent and senior-level reviews include accounts that: possess unique or unusual characteristics or circumstances, involve substantive complaints from grantors or beneficiaries, involve substantive or repeated criticism by regulatory authorities, involve pending litigation, or invest in complex and/or high risk investments. 

In turn, certain accounts may be of a size or complexity that they can be, at the judgment of the Board, collectively reviewed. Collective review procedures would normally be performed on the smallest and least complex of trust department accounts. However, collective reviews may also include some larger, self-directed IRA or 401(k) employee benefit plans. In addition, de minimus accounts may qualify for "non-review" if Board approved procedures establish criteria for including or excluding these accounts from the non-review category. The examiner should ensure that collective and de minimus review procedures are reasonable. 

Accounts where the bank does not have investment discretion, other than those discussed previously as deserving of a higher level of review, may, at the discretion of the Board, be reviewed by a disinterested account officer, that is, an officer who is not responsible for the account's administration. 

Examiners should strongly encourage management to adopt account review procedures and should criticize failure to review accounts in accordance with the Statement of Principles of Trust Department Management or departmental policies in the Report of Examination.  

G.4. Content of Account Reviews
A comprehensive account review includes both an administrative and an investment review. Management may choose to address both aspects in one review or perform two separate and distinct reviews. Both methods are acceptable as long as each review, by itself, is complete in nature. Whether performed separately or together, the reviewing authority (trust committee, subcommittee, or disinterested account officer) should perform the review in light of the governing instruments, applicable laws and regulations,  fiduciary responsibilities, and needs of the beneficiaries.

No listing can appropriately denote every item which should be considered in an account review since the reviews vary based on the department's fiduciary responsibilities, type of account, assets held, and other circumstances. Nonetheless, the general areas noted below are illustrative of the areas that should receive coverage in either an administrative or investment account review.

Administrative Review

An administrative review may include, but is not limited to, the following items:

  1. Governing instrument (trust, will, plan, indenture, etc.) - Is a copy on file?

  1. Synoptic record - Is the record complete, accurate, current, and reliable?

  1. Tickler system - Is the system up-to-date and accurate?

  1. Cash transactions - Are remittances, disbursements, and overdrafts posted correctly to income and principal? Is there any evidence of unusual cash flow activity, such as free riding? Is there any suspicion of money laundering? If so, has management filed, or considered filing, a Suspicious Activity Report (SAR) as per FDIC Part 353.

  1. Securities transactions - Were appropriate approvals and authorizations obtained for non-discretionary and discretionary transactions? As applicable, were confirmations sent within the prescribed time frames? Did the confirmations or account statements contain the appropriate disclosure documentation? Refer to the full text of Part 344 of the FDIC Rules and Regulations for specifics.

  1. Own-bank and affiliate obligations - Are purchases properly authorized?

  1. Accountings and statements - Are they accurate and timely?

  1. Commissions and fees - Are they accurate, consistent with the established fee schedule, and being collected?

  1. Co-fiduciary approvals/denials - Are approvals/denials documented?

  1. Committee approvals/denials - Are approvals/denials documented?

  1. Internal policies and procedures - Is the account in compliance?

  1. Complaints - Are complaints by grantors, beneficiaries, plan administrators, etc. being reviewed? Have previous complaints been resolved?

  1. Criticisms - Is corrective action being taken with regard to criticisms noted by internal and/or external auditors and regulatory authorities?

Note: Examiners should be flexible in assessing the adequacy of the administrative review process. An evaluation of an institution's administrative review process should focus on the effectiveness of the process, rather than the manner in which the review process is conducted. While a formal review session approach (one in which those performing the administrative review meet formally at specific intervals to review the administration of some or all accounts) may work well in small and medium size trust departments, such an approach may be both impractical and inefficient in large departments that administer thousands of accounts. Such institutions may adopt administrative review methods that employ a "due diligence" approach to account review. In lieu of a "sit down and checklist" methodology, the "due diligence" approach uses a combination of internal audits, tickler systems, checks and balances and other procedures to verify that, over the course of the year, all accounts are properly administered. Examiners should not automatically criticize the absence of formal account review sessions, but instead should evaluate the effectiveness of the "due diligence" process in providing assurance that all accounts are administered properly. The "due diligence" process should promptly identify administrative deficiencies and promote the timely correction of identified weaknesses. The results of the administrative review process should be periodically reported to the Board, or a Board committee thereof, and senior management.

Investment Review

If the bank has discretion over the account's assets, sufficient information should be provided to the reviewing authority to enable it to make informed and intelligent decisions. At a minimum, information considered necessary to perform an investment review includes:

  • Investment powers authorized by the trust instrument and/or governing law,

  • Investment objective of the account (income, growth, etc.),

  • Listing of account assets, reflecting cost and market values,

  • Projected yields on individual assets,

  • Projected income of the overall account, and

  • Amount of principal and income cash on hand.

An investment review may include, but is not limited to, the following items:

  1. Investment objectives - Are they consistent with the objectives of the trust? Are assets held consistent with the chosen investment objectives and/or asset allocation models?

  1. Diversification of discretionary investments - Is the account properly diversified consistent with either the Prudent Investor Act or Prudent Man Rule, as applicable?

  1. Concentrations - Are there any undue concentrations, either within a type of security, industry, or specific obligation?

  1. Own-bank or affiliate obligations - Is the purchase appropriate, yield adequate, and authorization documented?

  1. Investments in companies related to, or loans made to, bank insiders - Are there any conflict of interest or self-dealing concerns?

  1. Approved hold, buy, and sell lists - Is the account in compliance?

  1. Maturity of assets - Are there excess funds invested in short-term (lower yielding) investments? Is there adequate liquidity?

  1. Asset valuations - Are assets including real estate, limited partnerships, closely held businesses, real estate syndications, and derivatives valued accurately?

  1. Insurance coverage - Is it adequate?

  1. Environmental risk factors - Are there any environmental risk concerns?

  1. Complaints - Are complaints by grantors, beneficiaries, plan administrators, etc. being reviewed? Have previous complaints been resolved?

  1. Criticisms - Is corrective action being taken in regards to criticisms noted by internal and external auditors and regulatory authorities?

All of the items listed above will not necessarily be included in every trust department's account review program. Therefore, examiners must exercise discretion in assessing the adequacy of account reviews. An assessment should be made after giving consideration to the department's overall account review program, fiduciary responsibilities, committee minutes, file documentation, account officer expertise, and account sampling. Some trust departments may believe that completion of an investment review satisfies the account review requirement for discretionary accounts. Examiners should remind management that fulfilling account administrative duties (i.e., timely mailing of customer statements, income distributions, fee calculations, etc.) is also a fiduciary responsibility that should be reviewed to reduce exposure to liability.

If the account review program is materially deficient, the Report of Examination should contain criticisms of management .  The examiner-in-charge should obtain management's response and plan for corrective action.  

G.5. Records of Account Reviews
The bank should be able to satisfactorily demonstrate that account reviews are accomplished according to the standard set by the Statement of Principles of Trust Department Management and departmental policy. Normally, two types of records of account reviews are maintained: one at the reviewing authority level (i.e., trust committee, subcommittee, or disinterested account officer), and the other at the trust account level.  

G.5.a Reviewing Authority Level
The purpose of a record at this level is to document the fact that the institution has accorded proper reviews of its trust department accounts. An appropriate record should be maintained at the reviewing authority level (committee or disinterested account officer) substantiating that a review was conducted. The record should list individual accounts reviewed and provide details of any decisions made concerning the accounts. Examiners should review management's methodology for conducting reviews and determine if adequate exception reporting has been implemented and is being monitored.

A summary report of these reviews should be submitted to the next highest committee (or subcommittee) level for ratification. Copies of the actual review documents or material(s) on which the review was conducted do not need to be routinely provided to the next highest committee, however, such documentation should be made available for review if requested.  

G.5.b. Account Level
The purpose of a record at this level is to document the fact that the individual trust account received an appropriate review. A record of the review should appear in the individual account file, as it is management's duty to keep clear and accurate accounts. The actual review documents or materials on which the review was based should be kept at this level. Any noted exceptions to the governing instrument or department policies should be retained in the file along with sufficient documentation outlining corrective action. Objections, complaints, and lawsuits over trust accounts often occur years after a transaction occurs. The information provided in this record can be an important defense  in explaining the rationale for actions taken in prior years. Account review information should be more easily assembled from this source than from information recorded in committee minutes

H.  Trust Policies

Directors need not be actively involved in day-to-day operations; however, they must provide clear guidance regarding acceptable risk exposure levels and ensure that appropriate policies, procedures, and practices have been established. Senior management is responsible for developing and implementing policies, procedures, and practices that translate the Board's goals, objectives, and risk limits into prudent operating standards. Compliance with internally developed policies and procedures is a fundamental element in a sound risk management program. When properly monitored and enforced by directors, well-developed policies, procedures, and controls promote operating efficiency, compliance with laws and fiduciary principles, and minimize losses.

In smaller banks, policies may be brief, yet adequately serve the needs of the department given the services offered and nature of accounts administered. In larger departments, however, or in those administering more complex accounts, policies will likely be more detailed. Nonetheless, the FDIC recommends that all policies be written. The Board should periodically review and revise the policies to ensure that they remain adequate for the bank's fiduciary activities. Depending upon the complexity of fiduciary operations, trust department policies typically, address the areas listed below. 

Trust Department Policies

In addition to trust specific policies, many banks incorporate fiduciary activities within broader bank policies. As appropriate, examiners should review bank policies that are applicable to the trust function or cover trust employees. Detailed below are some of the more common bank policies that may cover fiduciary activities.

Bank Policies

  • Ethics/Code of Conduct including a Bribery Policy

  • Personnel

  • Bank Secrecy Act

  • Customer Due Diligence

  • Electronic Banking

  • Privacy

  • Electronic Funds Transfer

H.1. Other Trust Policies
Other trust policies may include, but are not necessarily limited to, brokerage placement policies; acceptance of accounts; acceptance of co-fiduciary appointments and division of compensation with co-fiduciaries; operations and administration; scope, frequency, and level of account reviews; loans to trust accounts; and proxy voting.  

H.2. Compliance with USA PATRIOT Act
In October, 2001, Congress passed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act, known as USA PATRIOT Act.  The purpose of the Act is "To deter and punish terrorist acts in the United States and around the world, to enhance law enforcement investigatory tools, and for other purposes."  The Act is far-reaching, and places numerous requirements on banks, including their trust departments.  Banks must develop policies and procedures to ensure trust departments comply with provisions of the USA PATRIOT Act and other anti-money laundering (AML) regulations. 

New provisions of the Bank Secrecy Act are intended to facilitate the prevention, detection, and prosecution of money laundering and the financing of terrorism. Financial institutions are required to implement a Customer Identification Program (CIP) and establish reasonable procedures to:

  • Verify the identity of persons seeking to open an account.

  • Maintain records of information used to establish the identities of customers.

  • Determine whether any persons seeking to open an account appear on lists of known or suspected terrorists or terrorist organizations.  As of the date of the most recent Trust Manual revision, there is no officially approved list of known or suspected terrorists or terrorist organizations.

Note: for purposes of the law, a customer includes all persons that open accounts.  It does not include existing customers if bank management is satisfied of the identification of the account holder.  Furthermore, a person includes a trust, but does not include the beneficiary of the trust.

The definition of an account specifically includes asset accounts, and accounts established to provide cash management, custodian,  or trust services.  However, the definition does not include accounts opened for the purpose of participating in employee benefit plans established under ERISA.

This is the minimum required identification information for the CIP when opening an account:

  • Name

  • TIN (tax identification number or social security number).  There is a TIN exception for a business that has recently applied for, but has not received a TIN.  The bank can open the account without the TIN for a reasonable time period; however, the bank must follow up to obtain the TIN.

  • for individual - date of birth

  • for individual - residence, if different, mailing address; or

  • for corporations, partnerships, and trusts - principal place of business and, if different, mailing address.

In order to verify the identity of a person other than an individual opening an account, various documents could be used to show the existence of the entity, including articles of incorporation, government-issued business licenses, partnership agreements, or trust instruments.

Reliance on Other Financial Institutions

The CIP may include procedures specifying when a bank will rely on the performance by another financial institution, including an affiliate, of CIP procedures for customers with or opening accounts at the other institution.  The PATRIOT Act states, "In order for a bank to rely on the other financial institution, such reliance must be reasonable under the circumstances, and the other financial institution must be subject to a rule implementing the anti-money laundering compliance program of 31 USC 5318(h) and be regulated by a Federal functional regulator.  The other financial institution must enter into a contract requiring it to certify annually to the bank that it has implemented its anti-money laundering program and that it will perform (or its agent will perform) the specified requirements of the bank's CIP.  The contract will provide a standard means for a bank to demonstrate the extent to which it is relying on another institution to perform its CIP, and that the institution has in fact agreed to perform those functions.  If it is not clear from these documents, a bank must be able to otherwise demonstrate when it is relying on another institution to perform its CIP with respect to a particular customer."

Foreign Correspondent Accounts

Section 312 of the PATRIOT Act requires that "Each financial institution that establishes, maintains, administers, or manages a private banking account or a correspondent account in the United States for a non-United States person, including a foreign individual visiting the United States, or a representative of a non-United States person shall establish appropriate, specific, and, where necessary, enhanced, due diligence policies, procedures, and controls that are reasonably designed to detect and report instances of money laundering through these accounts."  Additionally, enhanced due diligence procedures are required for correspondent accounts with foreign banks operating:

  • under an offshore banking license; or

  • under a banking license issued by a foreign country that has been designated as non-cooperative with international anti-money laundering principles by an intergovernmental group or organization of which the United States is a member, with which designation the United States representative to the group or organization concurs; or designated by the Secretary of the Treasury as warranting special measures due to money laundering concerns.

The enhanced procedures include identifying the owners of any foreign bank not publicly traded and the nature and extent of the ownership interest of each owner, conducting enhanced scrutiny of such account to guard against money laundering and report any suspicious activity, and ascertaining whether the foreign banks provide correspondent accounts to other foreign banks, and, if so, the identity of those foreign banks and appropriate due diligence.

Private Banking

Enhanced procedures for private banking accounts include ascertaining the identity of the nominal and beneficial owners of, and the source of funds deposited into the account, and reporting any suspicious activity in the account.  Additionally, an account maintained by, or on behalf of, a senior foreign political figure, his/her immediate family, or close associate must receive enhanced scrutiny to detect and report foreign transactions that may involve the proceeds of foreign corruption.  Private banking accounts include those with assets exceeding $1 million which are assigned to an individual acting as an employee or agent of a financial institution and as a liaison between the financial institution and the direct or beneficial owner of the account.

Mutual Funds

The USA PATRIOT Act also requires mutual fund management to adopt formal anti-money laundering programs which include at a minimum:

  • The development of internal policies, procedures and controls;

  • The designation of a compliance officer;

  • An ongoing employee development program; and

  • An independent audit function to test programs.

I.  Fee Concessions to Insiders

It is a common fiduciary practice for management to grant fee discounts to fiduciary clients. Such discounts are usually offered as either fee concessions or compensating balance arrangements. The trust department's policy should clearly describe to whom and for what purpose discounts will be allowed, the types of services which may be involved, and the method by which the trust department may be compensated by the bank for such discounts. 

If the practice is to charge reduced fees to directors, officers, employees, shareholders, or their interests, that practice should be in writing and approved by the Board. Fee concessions are acceptable provided:

  • They are consistent with the marketing and profitability objectives;

  • The trust department will operate at a profit after the fee concessions are granted;

  • The fee concessions are awarded under a uniform and nondiscriminatory policy to all directors, officers, and employees of the bank; and

  • The fee concession policy is approved by the Board of Directors.

Affiliate Accounts and Fees

ERISA establishes limitations on fees that may be assessed by the trust department against affiliated employee benefit accounts.  Pursuant to ERISA, trust departments may be reimbursed only for specific costs associated with the employee benefit accounts and are limited to the extent that direct costs vary and are passed-through to the account in the form of fees. 

Section 23B of the Federal Reserve Act prohibits the preferential waiver of fees for the benefit of an affiliate (and to the detriment of the bank/trust department). Section 23B targets fees that are negotiated or based on a fee schedule since such fees generate income or profit for the trust department. When these scheduled fees are reduced or waived for affiliated accounts, employee benefit or otherwise, an apparent violation of Section 23B may occur. 

Note that ERISA establishes limits that trust departments may charge employee benefit accounts while Section 23B limits preferential treatment to affiliates.  If a given trust department is assessing employee benefits accounts fees in accordance with the ERISA schedule, Section 23B will likely not apply as there is no preferential treatment to the employee benefit account, even if affiliated, since the trust department is only following proscribed law.  However, when fees assessed are actually less than direct costs associated with the servicing of an affiliated employee benefit account, an apparent violation of Section 23B may exist. 

J.  Meeting With Department Management

Ongoing communication between the examination staff and trust department management is critical for effective supervision. Open communication ensures that examination requests are met and that disruptions to the department's normal business are minimized. Informal meetings should be held before and throughout the examination to discuss any significant changes since the last examination or any planned changes. Some of the items to discuss with management include:

  • Policies

  • Organizational structure

  • Operations

  • Marketing strategies

  • New products and services

At the conclusion of the examination, the examiner-in-charge should meet with the trust department manager and another senior level bank manager to discuss the examination findings. In addition to presenting the findings and recommendations, the examiner-in-charge should obtain management's response. No significant recommendations or criticisms should be presented in the report of examination that have not first been presented to management.

K.  Meeting With Directors and Committees

Although review of trust committee minutes and supplemental reports should indicate the degree of involvement and interest of committee members in their assigned duties and responsibilities, it may not provide sufficient basis for analyzing committee effectiveness. Therefore, examiners may consider attending committee meetings held during the examination, not only to observe, but also to share examination findings and offer recommendations to the committee. The examiner may use this opportunity to discuss committee members' collective views on the department, its direction and potential. 

At or near the conclusion of the examination a meeting with the Board of Directors, trust committee or other Board committee should be held. When it is concluded that a meeting with a Board committee rather than the full Board is appropriate, selection of the committee must be based on the group's actual responsibilities and functions rather than its title. In all cases, the committee chosen should include an acceptable representation of Board members who are not full time officers. Additionally, the committee chosen should be influential as to policy, meet regularly, and report to the entire Board. 

The purpose of such Board or committee meetings is to acquaint directors and/or committee members with the condition of the trust department, present recommendations for correcting deficiencies or weaknesses, and seek the institution's commitment to correct the deficiencies. The examiner should note in the Report of Examination with whom the findings of the examination were discussed and the corrective commitments and/or reactions.  

K.1.Disclosure of Ratings
At the conclusion of the examination, it is appropriate for the examiner to disclose to senior management and/or the Board of Directors the Uniform Interagency Trust Rating System (UITRS) component and composite ratings. Disclosure of the component and composite ratings encourages a more complete and open discussion of examination findings and recommendations, and therefore provides management with useful information to assist in making risk management procedures more effective. Examiners should clearly explain that the ratings are tentative and subject to final approval by the Regional Director.

K.2. Departments Assigned or Likely to be Assigned a Composite "1" or "2" Rating
I
f the trust department is assigned or likely to be assigned a composite "1" or "2" rating under the UITRS, a meeting with the Board or a Board committee is not required.

K.3. Departments Assigned or Likely to be Assigned a Composite "3" Rating
If the trust department is assigned or likely to be assigned a composite "3" rating under the UITRS, the examiner-in-charge should meet with the Board of Directors or an appropriate committee during or subsequent to the examination. Regional Office representation is at the discretion of the Regional Director. Additional meetings or other contacts with the Board of Directors or appropriate Board committee may be scheduled at the discretion of the Regional Director or designee.

K.4. Departments Assigned or Likely to be Assigned a Composite "4" or "5" Rating
If the trust department is assigned or likely to be assigned a composite "4" or "5" rating under the UITRS, the examiner-in-charge should meet with the Board of Directors. In such instances, the Regional Office should be informed so that the Regional Director or a designee of the Regional Director can attend the meeting if necessary. Consultation with the Regional Office can take place during or subsequent to the examination. If the trust and commercial departments of the bank are examined concurrently, the meetings may be held jointly. There should be close coordination between the examiners-in-charge of the commercial and trust examinations.

 

    Last Updated 05/10/2005

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