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.
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.
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
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;
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
The Board of Directors, by proper
resolution included in its minutes, should:
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
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:
Meet at least quarterly, and
more frequently if necessary and prudent to fulfill its supervisory
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;
Provide for a comprehensive
review of all new accounts for which the
bank has investment responsibility promptly following acceptance;
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.
account reviews should cover administration of the account and
suitability of the account's investments, and non-discretionary account
reviews should address account administration;
Keep comprehensive minutes of
meetings held and actions taken; and
Make periodic reports to the
Board of its actions.
Provide comprehensive written
policies which address all important areas of trust department activities.
Provide competent legal counsel
to advise trust officers and the trust committee on legal matters
pertaining to fiduciary activities.
Provide for adequate internal
controls including appropriate controls over trust assets.
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.
Receive reports from the trust
committee and record actions taken in its minutes.
Review the examination reports of
the trust department by supervisory agencies and record actions taken in
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.
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
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
Existence of, or potential for,
conflicts of interest,
Complexity of provisions,
Composition and nature of assets,
Existence of administrative
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
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
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
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
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.
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.
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
Program in this section.
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
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
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
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.
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
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
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
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
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
Oversee administration of trust department
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
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.
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.
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
Education - What is the level of
academic achievement within the department and the relationship to
- 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
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.
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
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).
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
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
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.
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
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.
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.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
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.
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
Discretionary Personal and Employee Benefit
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.
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.
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.
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.
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.
- 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.
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.
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.
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.
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
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
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.
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.
review may include, but is not limited to, the following items:
instrument (trust, will, plan, indenture, etc.) - Is a copy on
Synoptic record -
Is the record complete, accurate, current, and reliable?
Tickler system -
Is the system up-to-date and accurate?
- 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
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.
affiliate obligations - Are purchases properly authorized?
statements - Are they accurate and timely?
fees - Are they accurate, consistent with the established fee
schedule, and being collected?
approvals/denials - Are approvals/denials documented?
approvals/denials - Are approvals/denials documented?
and procedures - Is the account in compliance?
Complaints - Are
complaints by grantors, beneficiaries, plan administrators, etc.
being reviewed? Have previous complaints been resolved?
Criticisms - Is
corrective action being taken with regard to criticisms noted by
internal and/or external auditors and regulatory
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
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:
authorized by the trust instrument and/or governing law,
objective of the account (income, growth, etc.),
account assets, reflecting cost and market values,
on individual assets,
of the overall account, and
principal and income cash on hand.
review may include, but is not limited to, the following items:
objectives - Are they consistent with the objectives of the trust?
Are assets held consistent with the chosen investment objectives
and/or asset allocation models?
Are there any undue concentrations, either within a type of
security, industry, or specific obligation?
affiliate obligations - Is the purchase appropriate, yield
adequate, and authorization documented?
companies related to, or loans made to, bank insiders - Are there
any conflict of interest or self-dealing concerns?
buy, and sell lists - Is the account in compliance?
assets - Are there excess funds invested in short-term (lower
yielding) investments? Is there adequate liquidity?
- Are assets including real estate, limited partnerships, closely
held businesses, real estate syndications, and derivatives valued
coverage - Is it adequate?
risk factors - Are there any environmental risk concerns?
Complaints - Are
complaints by grantors, beneficiaries, plan administrators, etc.
being reviewed? Have previous complaints been resolved?
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
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
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.
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
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
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
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
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.
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
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
identity of persons seeking to open an account.
of information used to establish the identities of
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
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
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
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
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
Reliance on Other Financial
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
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.
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.
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.
The USA PATRIOT Act
also requires mutual fund management to adopt formal anti-money
laundering programs which include at a minimum:
of internal policies, procedures and controls;
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
consistent with the marketing and profitability objectives;
department will operate at a profit after the fee concessions are
concessions are awarded under a uniform and nondiscriminatory
policy to all directors, officers, and employees of the bank; and
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
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.
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:
New products and
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.
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
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
Departments Assigned or Likely to be Assigned a Composite "3"
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.
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