Table of Contents
This section contains an overview of
Federal regulations and other matters related to fiduciary activities.
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A.
Trust Powers
Trust powers are granted
to state-chartered banks under state
law, which is usually administered through a bank's
chartering authority. It
is state law, therefore, which defines activities
constituting fiduciary or trust powers. The FDIC always defers to state law in these
matters.
State statutes and Corporation regulations
do not always uniformly identify what functions constitute "fiduciary"
activities requiring trust powers. Some state statutes define "trust
activity" as serving in a (state's) legally defined capacities of trustee,
executor or administrator of estates, or guardian of the estate of a minor or
incompetent. However, the term "trust activity" is not as clear when a
bank is performing an agency function which may, or may not, require trust
powers. Some banks administer "managed agency accounts" wherein there is
no "trust" relationship, yet the bank often assumes full control of cash and
assets, including investment discretion. In these cases, the bank's
responsibilities exceed those exercised in passive, or directed personal trust
accounts, or in court directed estates and guardianships. While a bank
may claim it is not acting in a "trust" capacity for such accounts, its
activities may require trust powers under state law.
The term "fiduciary capacity" is neither
universally defined, nor does it have identical meaning among the states in
setting their requirements for trust powers. The term "fiduciary" is
broadly defined. It can be almost any party performing a financial or other
service for another party. For example, some banks operate corporate
trust departments in which they do not serve as "trustee" for any account, but
perform extensive financial services which require trust powers. Some
states distinguish between "court" and "private" accounts, and require such
things as a faithful performance bond or uninvested cash pledge for designated
court accounts. Furthermore, the term "trustee" per se, is not always a
determinative, since banks have been authorized to serve as "trustee" over
certain types of accounts (IRA's) without having been granted trust powers.
It is also necessary to clarify the types
of "agency functions" which are considered "trust activities" requiring state
authorization. Many commercial banks are permitted to provide escrow,
safekeeping, custodian, or similar directed-agency services, without having a
trust department or regulatory authorization to perform trust powers.
This may include physical custody of assets, record keeping, collecting and
remitting income, performing some administrative actions (as in escrow
services), or similar activities. Whether any such activities are
permitted without "trust powers" is wholly dependent upon state
law.
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B. FDIC Consent to exercise trust powers
In 1958, the Corporation articulated its
basis for requiring consent to exercise trust powers (refer to Appendix C,
FDIC Memorandums Regarding Consent to Exercise Trust Powers, dated
June 30, 1958), and established conditions for grandfathering consent. Banks
granted trust powers by State statute or charter prior to December 1, 1950,
regardless of whether or not such powers have ever been exercised, are not
required to file an application with the Corporation for consent to exercise
trust powers. Such consent is grandfathered with the approval for
Federal deposit insurance. Banks approved for Federal deposit
insurance after December 1, 1950, are required to file an application to
exercise trust powers, unless such filing was made simultaneously with the
application for Federal deposit insurance.
B.1.
FDIC Part 333 Consent Requirement
The Corporation does not grant trust
powers, but only gives its consent to exercise such powers as granted by state
authorities. Section 333.2 of the FDIC Rules and Regulations prohibits an
insured state nonmember bank from changing the general character of its
business without the Corporation's prior written consent. The test to
determine when a change in character of business has occurred is left to the
discretion of the Corporation. For trust powers, this normally occurs
when a fiduciary relationship is created under the laws of the governing state
authority. Therefore, it is general policy that unless a bank is exempted
through the circumstances described in the background section above, it must
file a formal application with the Corporation to obtain prior written consent
before it may exercise trust powers.
It should also be noted that the statute
applies only to banks. Separately chartered and capitalized uninsured
trust company subsidiaries of banks need not apply for FDIC consent to exercise
trust powers. Also, state nonmember institutions that acquire or start
registered investment adviser subsidiaries do not have to apply for FDIC
consent to exercise trust powers under Section 24 of the FDI Act or Part 362 of
the FDIC Rules and Regulations.
B.2.
FDIC Part 303 Applications for Consent
Part
303 of the FDIC Rules and Regulations governs the administrative
handling of applications for consent to exercise
trust powers. Application
procedures are set forth in Part 303, the Manual
of Examination Policies (Manual), and the Case Managers Procedures
Manual (CM Manual). Banks eligible for expedited processing under
Part 303 (as defined therein) may file an abbreviated application. Application
forms for both expedited and non-expedited processing
can be downloaded or requested from an FDIC Regional Office .
Applications are reviewed in
the context of the financial institution's ability to satisfactorily
perform trust activities. In reviewing any such application, the statutory
factors set forth in Section 6 of the Federal Deposit Insurance Act
are considered along with the factors discussed in the Manual of Examination
Policies and CM Manual applications sections.
B.3. Unauthorized Trust
Activities
Commercial banks may be found performing
fiduciary services without having obtained full or limited trust powers,
or the Corporation's consent to exercise such powers. In these
cases, the examiner should determine what services are being performed,
and review all written customer agreements. If a bank is acting
in any capacity requiring trust powers, the examiner should:
- Cite an apparent violation
of state law for performing fiduciary services
without trust powers (if applicable);
- Cite an apparent violation
of FDIC Section 333.2 for changing the character
of its business without the Corporation's prior
written consent; and,
- Advise management of the
following:
- that it must discontinue
accepting any additional appointments;
- that it should
(upon advice of counsel) discontinue performing
fiduciary services, if it can do so without
jeopardizing its accounts or incurring additional
liability upon itself;
- that it must apply
to its state authority for trust powers (if
applicable); and
- that it must also
apply to the Corporation for consent to exercise
the powers.
Refer to the applications
section of the Manual of Examination Policies for further information.
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C.
Mergers, acquisitions, and transfers
of fiduciary business
Purchases,
sales, or transfers of fiduciary business between banks and other
entities can involve complex legal
issues. Several statutes may govern such transactions, depending on
individual case-specific circumstances. Mergers, acquisitions, and
transfers are predominantly a safety and soundness issue and inquiries from
bank management and examiners on this subject should generally be referred to
the applicable FDIC Regional Office. The five items discussed below are
intended to provide an appreciation of the regulations and risk management
process that management should follow in mergers, acquisitions, or transfers of
a "fiduciary book of business".
C.1.
Federal Deposit Insurance Act Section 18(c)(1)
Section 18(c)(1) of the Federal Deposit
Insurance Act is sometimes referred to as the
Bank Merger Act (BMA). In general, the BMA is applicable whenever
insured deposits are involved in a "merger" transaction. However, in
instances where a trust department, or fiduciary "book of business", is
"purchased" outright and is not involved in a "merger" transaction, it is not
clear whether the Act is applicable. A critical determinant may be
whether "deposits," as defined in Section 3 of the FDI Act, are part of an
assumption or merger transaction. The Corporation's
"Statement of Policy; Bank Merger Transactions" should be
reviewed in determining BMA applicability. Where applicable, the BMA
requires the prior written approval of the FDIC for any merger, consolidation,
or purchase and assumption transaction. Refer to the
Manual, Applications for Mergers, for further discussion of the
application process.
C.2.
Affiliates - Federal Reserve Act Sections 23A and 23B
Sections 23A and 23B of the Federal Reserve
Act are made applicable to the activities of insured state nonmember banks by
Section 18(j) of the FDI Act. These statutes are primarily directed
toward the prevention of abusive relationships between banks and their
affiliates in the area of commercial banking. These sections do, however, have
applicability to purchases and sales of trust departments between affiliated
entities .
Careful review of the definition of
"affiliate" in each section, and the differences in the definition between the
two sections, is necessary when reviewing trust related transactions. Section
23B specifically excludes banks from its definition of affiliates.
The term "bank" is defined in both sections 23A and 23B to include trust
companies. Thus, bank-to-bank transactions and bank-to-trust company
transactions are outside the scope of Section 23B.
-
Applicability to Purchases and Sales of Trust
Departments between a Bank and its Affiliates
In transactions where
assets are purchased from an affiliate, Section 23A(a)(4) applies.
It requires the transaction to be on terms and conditions consistent with safe
and sound banking practices. Such provisions are designed to ensure
inter-affiliate transactions occur on a commercially reasonable basis; and that
compensation between the parties, where warranted, is reasonable.
In transactions where assets are sold to an
affiliate, Section 23B applies in some cases. This Section requires the
transaction to occur on terms, and under circumstances, such as those
prevailing for non-affiliated entities. As previously noted, bank-to-bank
and bank-to-trust company transactions are not covered by Section 23B.
It is important to note that, in
transactions where a trust department or fiduciary business is purchased or
sold, the "asset" involved is an intangible expected future flow of fee income
arising from the underlying trust accounts. Incidental assets, such as
premises and equipment used to conduct business, may also be involved in such
transactions.
The following chart illustrates the
applicability of Federal Reserve Act Section 23B to several types of
transactions involving purchases or sales of fiduciary activities:
|
Application of FRB Section 23B [Re: Compensation]
on the Purchase (or sale) of a trust department to (or From)
Another Institution:
|
|
FROM:
|
TO:
|
|
N/A
|
No
|
No
|
YES
|
No
|
No
|
|
No
|
No
|
No
|
YES
|
No
|
No
|
|
YES
|
YES
|
YES
|
No
|
No
|
No
|
|
No
|
No
|
No
|
No
|
No
|
No
|
Expanded discussions of Federal Reserve Act Sections
23A and 23B are provided in Section
8.E.4 Conflicts of Interest and
Section 4.3 of the Manual of Examination Policies.
C.3.
Applicable State Law
State nonmember banks, and other companies,
must obtain authority to exercise trust powers from the applicable state in
which they operate. Applicable state law may also address certain types
of transactions involving consolidations of trust business. These
provisions, if any, will ordinarily be found under a state's organization and
merger statutes. State law will also typically address transfers, or
substitutions, of fiduciaries. In some jurisdictions, and with some types
of accounts, court approval may be required. Provisions related to this
will usually be found in state statutes dealing with trusts. Where
questions arise, the Regional Office or appropriate state authority should be
contacted for guidance.
C.4.
FDIC Consent
As discussed at the beginning
of this section, if the acquiring or resulting entity
is a state nonmember bank,
application to the Corporation for consent
to exercise trust powers may be necessary in merger
or other acquisition transactions. FDIC consent is
nontransferable. Therefore, the act of purchasing a trust department from
a bank which has such consent does not convey that consent to the
purchaser. Consent must be applied for unless the acquiring bank
already has such consent. In all instances where the acquiring entity
is a state
nonmember bank, examiners should ensure the
transaction was in compliance with FDIC Parts 303 and 333.
C.5.
Nonstatutory Considerations
In addition to adherence to various
Federal and state statutes, a host of other concerns attend the
purchase, sale, or
transfer of trust activities or accounts from
one fiduciary to another.
While several of these issues are discussed in depth elsewhere in this manual,
they are listed here to facilitate a review of transactions involving
institutional transfers of trust business. These issues necessarily
emphasize the impact such transactions have
on the safety and soundness of the institutions involved:
-
Compensation
The valuation
of trust departments for purposes of a sale is not a well-defined process. Conventional
business valuation methods may employ the use of average gross income generated
by the activity, times some multiple, to arrive at a price or value.
Present value analysis of expected cash flows from fees may also be used. In
analyzing either a purchase or sale, the examiner should request and
evaluate documentation of the basis for
the sales price and terms. In some instances, no compensation may be
warranted. In other instances, the lack of adequate compensation could
be a Federal Reserve Act 23A or
23B issue (for non-exempt parties) or a general safety and soundness concern.
-
Written Agreement
Trust transfers and sales should
be subject to a written agreement. The agreements should address:
-
the effective date of the transaction;
-
indemnification between the parties relevant to
fiduciary actions, and in the event of future contingencies;
-
provision allowing a due diligence process;
-
division of fees between buyer and seller during
transition;
-
compensation, or a sales price, as discussed above;
-
specific identification of accounts to be transferred;
-
duties and responsibilities of each party in effecting
the transfer of accounts and records;
-
duties and responsibilities of each party in effecting
the transfer of underlying assets;
-
termination and modification provisions; and
-
escape clauses, as necessary, to address such
contingencies as failure to obtain regulatory approval.
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Capabilities of the Fiduciary
The entity acquiring the trust business
should be legally qualified to do so. State authority and FDIC consent to
exercise the types of powers associated with the acquired business should be in
place. Moreover, management should possess the skills necessary to
administer the new accounts. Management should have evaluated the need
for additional trust personnel, data processing capabilities, bank premises,
and other facilities to accommodate the new business well in advance of the
acquisition.
-
Resultant Earnings
Depending on the circumstances, pro forma
projections of earnings may be requested as part of the FDIC application
process. Regardless, management is expected to have evaluated the impact
of such transfers on the bank's earnings. Economies of scale are often
cited as a reason for acquiring or selling trust departments. While this
is a legitimate factor, such economies are not guaranteed and may not
materialize in every consolidation. Moreover, they do not always
translate into improved bank earnings.
-
Capital Adequacy and Accounting
Considerations
Engaging in fiduciary activities subjects
an institution's capital to additional risk. Capital adequacy can be
adversely affected by the acquisition of significant new accounts or new
business lines if not properly managed. Related deposit growth from the
acquisition may also place strains on capital.
Trust activities may be referred to as "off
balance sheet" activities, in as much as there typically is no book value
assigned to the business. In instances where a bank purchases or sells a
group of trust accounts from another entity for some value, the bank will need
to properly account for the transaction on its books. Where the bank
purchases only fiduciary activities, the purchase price should normally be
recorded on its statement of condition as "goodwill" or "trust department
intangibles." This value: (1) should be amortized in accordance with
generally accepted accounting principles, but (2) it should not be included in
Tier 1 capital computations. In some instances, the purchase may also
involve tangibles, such as fixed assets in which trust activities are
conducted. Those assets should be accounted for in the usual
fashion. In all cases, underlying trust account assets continue to be the
property of the respective trusts. As such, they are not subject to
purchase or sale between the buying and selling institutions. Where a
bank sells its trust business, it will typically not have a basis, or book
value, for the business. Consequently, the entire price it receives
should be reported on its income statement as a nonrecurring income item and
under "other operating income" on the Call Report.
-
Notification to Account Parties
Written notification to the respective
account parties on each account transferred is mandatory from a prudence
standpoint. In some states, state law may require such notification or
otherwise address this issue.
-
Successor Fiduciary Issues
To the extent that the purchasing entity
becomes a successor fiduciary of the acquired trust accounts, several
well-recognized duties accrue. These are discussed both in
Compliance - Personal and Charitable Accounts, and
Compliance - Employee Benefit Accounts, Fiduciary Responsibilities.
In addition to ensuring the prompt and
orderly transfer of assets held in trust between fiduciaries, and ensuring the
uninterrupted administration of the accounts, successors are obliged under
general common law tenets to scrutinize the acts of their predecessors.
Successor fiduciaries should seek redress for any wrongs committed by previous
fiduciaries. This is considered an essential due diligence
procedure. In doing so, successor fiduciaries should: (1) obtain and
review an accounting from the previous fiduciary for each account acquired, and
(2) request an indemnification from the prior fiduciary for all actions taken
during its administration of an account.
-
Fidelity and Indemnity Coverage
Purchasing entities should alert their
carriers early to the acquisition of new business. Bank management should
ensure that coverage is afforded, including coverage for acts of all prior
fiduciaries "discovered" following their acquisition of an account.
D. Methods used to deliver fiduciary services
The trust department, as a separate and
visibly distinct department of the bank, remains the most prevalent method for
banks to deliver fiduciary services. However, the recent trend toward
consolidation within the financial services sector has led to diverse
restructuring and merger activity. In some instances, banks previously
lacking trust product lines may have acquired them through mergers. In
other cases, the "trust" line of business may have been purchased or sold by a
bank. In some cases, trust services being provided by several individual
banks owned by the same holding company may have been consolidated within one
bank, or within a separately chartered trust company. In still other
instances, a bank may have contracted with an unrelated outside party, to
provide such services on-premises. Conversely, the bank under examination
may provide such services to other banks. To effectively assess the risk
such relationships pose to the institution, the examiner may find it helpful to
understand the organization, the legal structure of the delivery system, the
reasonableness of the relationship, and the reasonableness of the compensation
to the bank.
D.1.
Trust Branches and Trust Service Offices
In some instances banks may wish to
establish "branch" offices of their trust departments. Where the trust
branch is to be located within an existing intrastate branch of the
bank, there are usually no legal barriers and no further legal hurdles.
When a trust branch office is proposed at a location where the institution does
not have an existing branch , the procedure is more complex.
If a trust branch (or "trust service
office"), in the course of conducting its business, is an office where
"deposits are received, or checks paid, or money lent" - (1) such office is
considered by the FDIC as a "domestic branch" under Section 3 of the FDI Act,
and (2) the bank must apply to the FDIC (and state) for permission to establish
and operate a new branch.
This is due largely to the statutory
definition of the term "deposit". Section 3(l) of the FDI Act defines the
term deposit to include trust funds, whether held in the trust
department, or held or deposited in any other department of the bank or savings
association. The broad inclusion (within the statutory term "deposit") of
virtually all trust monies which may be on hand anywhere in the bank, in any
form, has implications. It will generally mean that the conduct of trust
activities which involve accepting funds will also be considered to be branch
banking or accepting deposits. This necessitates that banks either
conduct trust activities in existing branches, or that they apply for a branch,
if they intend to accept funds (other than non-cash assets) at the "trust
branch" or "trust service office."
D.2. Interstate Trust Branch Offices
State nonmember banks, and other companies,
must obtain authority to exercise trust powers from the applicable state in
which they operate. States may limit the authority of out-of-state
entities to engage in fiduciary activities within their borders.
Therefore, banks or other state-chartered entities which legally offer trust
services in one state, typically need to obtain separate approval from another
state before conducting trust business there.
In contrast with the foregoing, both the
OCC and OTS have issued similar opinions effectively permitting national banks
and federal savings associations to operate trust businesses on an interstate
basis. A national bank with trust powers (under 12 USC 92a) may engage in
trust activities to the same extent that state banks, trust companies, or other
corporations in competition with national banks, are permitted to engage
in. If a state permits the foregoing state licensed entities to compete
with national banks in trust activities, but prohibits out-of-state companies
from doing so, Section 92a may be used to preempt state law. This
effectively permits national banks to engage in trust activities in any state
in which its branches are located.
In 1996, the Conference of State Bank
Supervisors (CSBS), the FDIC, and the Federal Reserve Board signed an
interstate banking and branching agreement for state-chartered banks.
This agreement, revised in December 1997, allows states to adopt laws
permitting interstate operation of trust businesses. This permits state
chartered entities to be competitive, and complement the interstate activities
in the commercial banking arena.
CSBS assisted in the drafting of the
"Nationwide Cooperative Agreement for Supervision and Examination of
Multi-State Trust Institutions" that was executed in June 1999. To date,
42 states have signed the agreement, which lays out the framework for the
supervision and regulation of multi-state trust institutions. The
agreement is on CSBS's web site at
http://www.csbs.org/government/agreements/agreements.asp .
D.3. Trust Companies
Trust Companies
The term "trust company" can be misleading. In
some states, a bank must have trust powers in order to have "trust" in its
name. In other instances, banks have incorporated the term into their name,
even when the bank does not have trust powers. Thus, the term may simply
denote an insured bank.
In other instances, trust activities may be conducted
from a separate corporate entity, or "trust company". In many cases,
trust companies are subsidiaries of bank holding companies, but there are a few
that are direct subsidiaries of insured banks. In other cases, the trust
company may be owned by the parent company or it may be a truly independent
"stand alone" trust company and have no parent organization.
FDIC-Insured Trust Companies
Trust companies may be an insured bank which does almost
all of its business as a trust institution. They qualify for deposit
insurance under 12 C.F.R. §
303.14, which states that a single non-trust deposit of at least
$500,000 would meet the statutory standard of Section 3(a)(2)(A) of the
Federal Deposit Insurance Act. An institution with a single
non-trust deposit of at least $500,000 will be considered "... in the
business of receiving deposits, other than trust funds ..." and, thus,
qualifies for Federal deposit insurance. These institutions may receive a
bank charter from the state or the OCC, or a federal savings bank charter from
the OTS. These insured trust banks are examined the same as other insured
banks.
Non-FDIC-Insured Trust Companies
Most trust companies are not insured by the FDIC.
These companies are chartered and regulated by the state or by the OCC.
Trust companies which are owned by a bank holding company are also subject to
supervision by the Federal Reserve Board. Trust companies that are owned
by banks are subject to examination and supervision by the parent bank's
primary regulator.
A trust company that is a direct subsidiary of an
FDIC-supervised bank is viewed as a separately-chartered and
separately-capitalized entity. As such, its trust powers are granted
solely by the chartering agency, and the trust company is not required to seek
the FDIC's consent to exercise trust powers. In like manner, the trust
company's parent bank is not required to have the FDIC's consent to exercise
trust powers if all of its trust activities are conducted by the
separately-chartered subsidiary trust company.
Instructions for Call Report Schedule RC-T states that
the schedule should be completed on a fully consolidated basis, i.e., including
any trust company subsidiary (or subsidiaries) of the reporting
institution.
As noted under Section E.
Examination Authority, trust companies that are direct
subsidiaries of FDIC-supervised banks may be examined by the FDIC.
However, such examinations are not required under GM-1 requirements.
However, they may be examined if the supervisory Regional Office determines
that their activities have a material and substantive impact on the parent
bank. Also, refer to coverage of the Gramm-Leach-Bliley
Act (GLBA) concerning examinations of affiliates. Examination
reports furnished by the trust company's primary regulatory agency may also be
reviewed for normal monitoring of the trust company's
activities.
If an examination of a trust company that is a
direct subsidiary of an FDIC-supervised bank is performed, examiners should
determine that its activities are generally consistent with the Statement of
Principles of Trust Department Management. If examiners suspect that the
uninsured trust company is being utilized to generate deposits for the parent
bank in an unauthorized fashion, the activity should be investigated and
compared with the
Section 3(o) of the FDI Act definition of a domestic branch and
applicable State Law. Consult with the respective Regional Office, if
corrective action is needed.
D.4. Trust Referral Arrangements
Some institutions ("host banks") have
entered into third-party agreements with unaffiliated trust institutions
and registered investment advisers for the offering of fiduciary services to
"host bank" customers. The "host bank" does not need trust powers because
the fiduciary relationship is between the client and the third party and
typically receives a one time or annual referral fee based on the assets of the
referred clients. While the "host bank" does not have any investment or
fiduciary powers, it may retain administrative responsibilities and
receive administration fees in addition to the referral fee. All trust
referral arrangements, regardless of whether the bank retains any
administrative duties, should be governed by a written agreement that outlines
the responsibilities of all parties.
Additionally, the client should be
sufficiently informed of the general terms of this relationship with reasonable
and meaningful disclosures. For example, disclosures should be given upon
the establishment of an account and periodically (but not less frequently than
annually) thereafter. The disclosures should be sufficient to identify to
the client the party that is administering the client's account. If the
third-party is responsible for making such disclosures, the host bank should
ensure that the disclosures are provided, and, if appropriate disclosures have
not been made, should take the necessary actions to provide the disclosures.
Some banks have entered into arrangements
whereby customers are referred to third-parties who are not located on bank
premises. Such arrangements can include referr
