Fiduciary Activities of National Banks; Rules of Practice and Procedure
Federal RegisterDec 30, 1996
Ask Donna
What actually matters in this document.
Text
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Parts 9 and 19
[Docket No. 96-30]
RIN 1557-AB12
Fiduciary Activities of National Banks; Rules of Practice and
Procedure
AGENCY: Office of the Comptroller of the Currency, Treasury.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Office of the Comptroller of the Currency (OCC) is
revising its rules that govern the fiduciary activities of national
banks. The OCC also is relocating provisions concerning disciplinary
sanctions imposed by clearing agencies to its rules of practice and
procedure. This final rule is another component of the OCC's Regulation
Review Program, which is intended to update and streamline OCC
regulations and to reduce unnecessary regulatory costs and other
burdens.
EFFECTIVE DATE: January 29, 1997.
FOR FURTHER INFORMATION CONTACT: Andrew T. Gutierrez, Attorney,
[[Page 68544]]
Legislative and Regulatory Activities Division, (202) 874-5090; Donald
N. Lamson, Assistant Director, Securities and Corporate Practices
Division, (202) 874-5210; Lisa Lintecum, Director, Fiduciary
Activities, (202) 874-5419; Dean Miller, Senior Advisor, Fiduciary
Activities, (202) 874-4852; Aida M. Plaza, Director for Compliance,
Multinational Banking, (202) 874-4610, Office of the Comptroller of the
Currency, 250 E Street, SW, Washington, DC 20219.
SUPPLEMENTARY INFORMATION:
Background
The OCC is revising 12 CFR part 9, which governs the fiduciary
activities of national banks, based on its authority under 12 U.S.C.
92a. This action is a component of its Regulation Review Program. One
goal of the Regulation Review Program is to review all of the OCC's
rules with a view toward eliminating provisions that do not contribute
significantly to maintaining the safety and soundness of national banks
or to accomplishing the OCC's other statutory responsibilities,
including oversight of national banks' fiduciary activities. Another
goal of the Program is to improve the clarity of the OCC's regulations.
This final rule is the OCC's first comprehensive revision of part 9
since 1963.1 Much about national banks' fiduciary business has
changed since that time, including the nature and scope of the
fiduciary services that banks offer and the structures and operational
methods that banks use to deliver those services. The OCC's primary
goal in revising part 9 is to accommodate those changes by removing
unnecessary regulatory burden and facilitating the continued
development of national banks' fiduciary business consistent with safe
and sound banking practices and national banks' fiduciary obligations.
---------------------------------------------------------------------------
1 National banks have been authorized to exercise
fiduciary powers since 1913. In 1962, the oversight responsibility
for national banks' fiduciary activities was transferred from the
Board of Governors of the Federal Reserve System to the OCC. See 12
U.S.C. 92a. Following the transfer of oversight responsibility, the
OCC promulgated part 9 on October 3, 1962 (27 FR 9764), and revised
it soon thereafter on April 5, 1963 (28 FR 3309).
---------------------------------------------------------------------------
On December 21, 1995, the OCC published a notice of proposed
rulemaking to revise part 9 (60 FR 66163) (proposal). The proposal
reflected three principal themes. First, bank organizational
structures--particularly with respect to the geographic structure of
banking organizations--have changed significantly since Congress
created the basic framework for national banks' fiduciary operations.
The OCC proposed to adjust part 9 to make the requirements of the rule
more workable for both large, multistate fiduciary banking
organizations and small banks that conduct fiduciary activities
primarily on a local basis. Second, national banks' fiduciary
activities are subject to state law in many respects, though the OCC
often can establish uniform Federal standards. In the proposal, the OCC
attempted to strike an appropriate balance between Federal and state
law. Third, over the years, the OCC has applied part 9 to a wide
variety of investment advisory activities and related services, not all
of which involve the bank's exercise of investment discretion. In some
cases, national banks engaged in these activities operate under
different standards than other financial services providers that
conduct the same type of business.
Moreover, the proposal reflected an effort to update, clarify, and
streamline part 9, to incorporate significant interpretive positions,
and to eliminate unnecessary regulatory burden wherever possible to
promote more efficient operation and supervision of national banks'
fiduciary activities. The proposal added headings for ease of
reference, but, for the most part, retained the numbering system used
in the former regulation.
The OCC received 57 comments regarding the proposal, including
letters from banks, bank trade groups, state bank supervisors, law
firms, consultants, auditors, and a member of Congress. With the
exception of certain aspects of the rule that concerned state bank
supervisors, the commenters generally supported the proposal. However,
the commenters recommended numerous modifications to the proposal. The
OCC carefully considered these recommendations and incorporates many of
them into this final rule.
Section-by-Section Discussion
Authority, Purpose, and Scope (Sec. 9.1)
The proposal added a new provision explicitly setting forth the
statutory authority for, and the purpose and scope of, part 9. One
commenter recommended that the OCC clarify that part 9 applies to
national banks and their operating subsidiaries, but not to other
subsidiaries or affiliates. The OCC notes that 12 CFR 5.34(d)(3), as
recently revised at 61 FR 60342 (November 27, 1996), already clarifies
that the OCC's regulations, including part 9, apply to national banks'
operating subsidiaries unless otherwise provided by statute or
regulation. Moreover, the OCC recognizes that its regulations generally
do not apply to other subsidiaries or affiliates of national banks, and
believes that it is unnecessary to enumerate those or other entities
excluded from the coverage of its regulations. However, the OCC is
amending this section to clarify that part 9 applies to Federal
branches of foreign banks, which, unlike Federal agencies, may receive
fiduciary powers.
Definitions (Sec. 9.2)
The proposal modified or removed some of the former regulation's
definitions, and added new definitions. Moreover, the proposal
relocated the definitions from former Sec. 9.1 to proposed Sec. 9.2.
For the most part, the OCC is adopting the definitions contained in the
proposal. The following discussion highlights the definitions that the
OCC has modified significantly.
Applicable law (Sec. 9.2(b)). The former regulation used the term
``local law,'' as defined at Sec. 9.1(g), to refer to the laws of the
state or other jurisdiction governing a fiduciary relationship. The
proposal replaced the term ``local law'' with ``applicable law'' in
order to streamline some of the operative provisions of the regulation
and to clarify that the law that governs a national bank's fiduciary
relationships may include Federal law,2 state law governing a
national bank's fiduciary relationships (that is, fiduciary duties and
responsibilities), the terms of the instrument governing a fiduciary
relationship, and any court order pertaining to the relationship.
---------------------------------------------------------------------------
2 The Federal law relevant to a national bank's fiduciary
activities includes, for example, provisions of the Federal banking
laws (12 U.S.C. 1 et seq.), the Employee Retirement Income Security
Act of 1974 (29 U.S.C. 1001 et seq.) (ERISA), the Securities Act of
1933 (15 U.S.C. 77a et seq.), the Securities Exchange Act of 1934
(15 U.S.C. 78a et seq.), the Investment Company Act of 1940 (15
U.S.C. 80a-1 et seq.), the Investment Advisers Act of 1940 (15
U.S.C. 80b-1 et seq.) (Advisers Act), the Trust Indenture Act of
1939 (15 U.S.C. 77aaa et seq.) (Trust Indenture Act), the Internal
Revenue Code of 1986 (26 U.S.C. 1 et seq.) (Internal Revenue Code),
and the rules issued pursuant to those acts.
---------------------------------------------------------------------------
Some commenters supported the proposed language without
reservation. Others requested that the OCC clarify what type of law
takes precedence. Some believed that Federal law should override state
law, while others believed that state law should override Federal law.
The OCC recognizes that the proposed definition does not provide a
priority among the various bodies of authority. Thus, the definition
does not resolve situations in which the terms of a trust instrument,
for example, conflicts with
[[Page 68545]]
a state statute or a Federal regulation. Conflicts of law issues in the
fiduciary area are highly fact specific and, thus, cannot be resolved
by reference to a general rule of priority. The OCC does not intend the
term ``applicable law'' to resolve conflicts of law; rather, the OCC
merely intends to identify concisely the various bodies of authority
that may govern national banks' fiduciary activities.
Some commenters were concerned that the OCC intended this term to
effectuate a wholesale Federal preemption of conflicting state law, or
otherwise to change the status quo regarding conflicts of laws. This is
not the case. To clarify the OCC's intention, the OCC is modifying the
definition's reference to Federal law to read ``any applicable Federal
law'' governing a national bank's fiduciary relationships. This allows
the OCC to use the concise ``applicable law'' term, but the definition
does not presume that Federal law necessarily will apply in any
particular context. Rather, Federal law is merely one of many sources
of law that may govern a fiduciary relationship.
Additionally, a few commenters noted that the proposed definition
of ``applicable law'' did not mention foreign law, and asked the OCC to
clarify the extent to which foreign law governs a national bank's
fiduciary activities in foreign branches. Recognizing that the law of
other jurisdictions, including foreign countries, may apply to a
national bank's fiduciary activities, the OCC is modifying the
definition to include the law of the state or other jurisdiction
governing a national bank's fiduciary relationships. However, as with
other conflicts of law, the extent to which foreign law applies to a
national bank's fiduciary activities in foreign branches is a complex
issue and depends on the specific factual situation. Thus, the OCC is
not addressing that issue in the regulation.
Fiduciary capacity (Sec. 9.2(e)). In the proposal, the OCC
attempted to establish a clearer and more objective boundary for the
coverage of part 9. The proposal retained the statutory list of
fiduciary capacities, but, unlike the former rule, it limited the
definition of other fiduciary activities to: (1) any other capacity
involving investment discretion on behalf of another; and (2) any other
similar capacity that the OCC authorizes pursuant to 12 U.S.C. 92a.
Thus, the proposal defined fiduciary capacity to exclude relationships
(other than those listed in the statute) in which the bank does not
have investment discretion. Under this approach, an investment advisory
activity for which the bank does not have investment discretion
generally is not a fiduciary activity subject to part 9.
The proposal also solicited comment on an alternative approach
under which part 9 would apply to investment advisory and other
activities if, when the same or similar activity is conducted by a
competing state bank or corporation, the state regulates the activity
as a fiduciary activity.
A majority of commenters who addressed this issue supported the
proposed definition, which utilizes investment discretion as a test,
and opposed the alternative approach on the grounds that it would lead
to inconsistent treatment of accounts in a bank with multistate
operations, and increase risk by creating undue complexity in fiduciary
compliance. A few commenters voiced concerns with the proposed
definition, and recommended that the OCC define ``fiduciary capacity''
to include any capacity that is fiduciary under state law.
The OCC believes that ``fiduciary capacity'' should be defined in a
manner that fosters consistent application of part 9 throughout the
national banking system. Thus, the OCC is not defining ``fiduciary
capacity'' exclusively with reference to state law. Rather, the final
rule retains the proposal's approach and defines ``fiduciary capacity''
by using investment discretion as a test for determining whether part 9
applies to certain activities.
With respect to non-discretionary investment advisory activities,
commenters differed widely as to whether and the extent to which the
OCC should treat those activities as fiduciary. After carefully
considering the comment letters, the OCC has concluded that when a
customer pays a national bank a fee in return for providing investment
advice (whether or not the customer follows that advice), the customer
has a reasonable expectation of receiving advice that is free of
conflicts of interest. Additionally, other Federal statutes provide
heightened fiduciary-type protection to customers of certain investment
advisers who receive a fee.3 By contrast, when a national bank
does not receive a fee for investment advice (e.g., directed custodian
accounts), it has no contractual or other obligation to provide
investment advice. Therefore, the bank should not incur fiduciary
liability for any incidental advice it offers.4 Thus, the OCC is
adding ``investment adviser, if the bank receives a fee for its
investment advice'' to the list of fiduciary capacities. The OCC
believes that this distinction between paid and unpaid investment
advisers reflects the reasonable expectations of national bank
customers.
---------------------------------------------------------------------------
\3\ For example, under ERISA, a person is a fiduciary with
respect to a plan, to the extent he renders investment advice for a
fee or other compensation. 29 U.S.C. 1002(21)(A). As another
example, the Advisers Act generally applies to any person who, for
compensation, engages in the business of advising others (although
banks are exempt). 15 U.S.C. 80b-2(a)(11).
4 The OCC does not treat non-discretionary custodial
activities as fiduciary, and the final rule continues that approach.
Those activities are authorized under 12 U.S.C. 24 (Seventh).
---------------------------------------------------------------------------
Fiduciary records (proposed Sec. 9.2(g)). The proposal defined
``fiduciary records'' and used that term in the record retention and
separation requirement of Sec. 9.8. The final rule, however, does not
use the term. Thus, the definition is eliminated in the final rule.
Fiduciary powers (Sec. 9.2(g)). The proposal provided that
``fiduciary powers'' means the authority the OCC permits a national
bank to exercise pursuant to 12 U.S.C. 92a. Moreover, in the proposal's
preamble, the OCC discussed and invited comment on the legal framework
set forth in the OCC's Interpretive Letter No. 695 (December 8, 1995),
in which the OCC analyzed the authority of a national bank to exercise
fiduciary powers on an interstate basis under 12 U.S.C. 92a. Some
commenters questioned the analysis contained in this letter. However,
as stated in the letter, the effect of 12 U.S.C. 92a is that in any
specific state, the extent of fiduciary powers is the same for out-of-
state national banks as for in-state national banks, and that extent
depends upon what powers the state grants to the fiduciaries in the
state with which national banks compete. The OCC has considered the
comments, but continues to believe that the legal analysis contained in
Interpretive Letter No. 695 reflects a correct interpretation of the
basic fiduciary powers of national banks under 12 U.S.C. 92a. The
definition of fiduciary powers summarizes this basic principle. The OCC
notes that neither Interpretive Letter No. 695 nor the definition of
national banks' fiduciary powers in Sec. 9.2(g) addresses the
applicability of particular state laws to national banks' exercise of
their fiduciary powers.5
---------------------------------------------------------------------------
\5\ To the extent they arise, the OCC intends to handle specific
questions about the applicability of particular state laws on a
case-by-case basis, which in many cases will involve preemption
opinions developed with the aid of a public notice and comment
process.
---------------------------------------------------------------------------
[[Page 68546]]
Investment discretion (Sec. 9.2(i)). As mentioned previously, the
proposal defined the term ``fiduciary capacity'' to include any
capacity where the bank possesses investment discretion on behalf of
another, and the final rule retains this approach. The proposed term
``investment discretion'' includes any account for which a national
bank has the authority to determine what securities or other assets to
purchase or sell on behalf of the account.
Some commenters recommended that the OCC clarify that a bank has
investment discretion with respect to an account whether or not the
bank exercises that discretion. Others recommended that the OCC clarify
whether a bank has investment discretion with respect to an account in
which the customer or another fiduciary also has investment discretion.
In response to these commenters, the OCC is modifying the proposed
definition to clarify that the term does not depend on whether or not
the bank exercises its authority over investments, or whether or not
its authority over investments is sole or shared. Moreover, the OCC is
clarifying that a bank is deemed to have investment discretion even
when it delegates its authority over investments, as well as when
another fiduciary delegates its authority over investments to the bank.
Several commenters asked whether the OCC considers a national bank
to have investment discretion when it administers asset allocation
accounts or sweep accounts. Asset allocation programs differ widely in
the extent of the administering bank's discretion. In some asset
allocation programs, the bank has discretion to invest initially the
customer's assets among several mutual funds, and to reallocate the
assets as it deems appropriate based on the customer's investment
profile and the prevailing market conditions. In these programs, and in
any other program in which the bank may purchase or sell an investment
without the customer's approval, the OCC considers the bank to have
investment discretion. In sweep programs, on the other hand, a bank
typically has no investment discretion. Rather, the bank is
automatically sweeping excess cash into investments pre-selected by the
customer (e.g., money market funds).
Approval Requirements (Sec. 9.3)
Consistent with Sec. 9.2 of the former regulation, the proposal
directed an applicant for fiduciary powers (whether the applicant is a
national bank seeking approval to exercise fiduciary powers, or a
person seeking approval to organize a special-purpose national bank
limited to fiduciary powers) to appropriate provisions in 12 CFR part
5, which contains rules, policies, and procedures for corporate
activities. This is designed as a useful reader aid. The OCC received
no specific comments on this section and adopts this section as
proposed.
Administration of Fiduciary Powers (Sec. 9.4)
Consistent with Sec. 9.7 of the former rule, the proposal permitted
a national bank's board of directors to assign functions related to the
exercise of fiduciary powers to bank directors, officers, employees,
and committees thereof. The proposal also retained the requirement that
all fiduciary officers and employees must be bonded adequately.
Moreover, the proposal permitted a national bank to use personnel and
facilities of the bank to perform services related to the exercise of
its fiduciary powers, and permitted any department of the bank to use
fiduciary officers and employees and facilities to perform services
unrelated to the exercise of fiduciary powers, to the extent not
prohibited by applicable law. Additionally, the proposal added a new
provision to the section clarifying that a national bank may enter into
an agency agreement with another entity to purchase or sell services
related to the exercise of fiduciary powers.
Some commenters recommended that the OCC allow a national bank to
use personnel and facilities of its affiliates (and not just other
departments of the bank) to perform services related to its fiduciary
activities, and allow affiliates to use fiduciary officers and
employees and facilities to perform services unrelated to the bank's
fiduciary activities, to the extent not prohibited by applicable law.
The OCC believes that utilizing affiliates in this manner enhances
efficiency and is consistent with safety and soundness. Moreover, this
recommendation reflects the realities of modern bank organizational
structures. Thus, the OCC is modifying the provision accordingly.
Policies and Procedures (Sec. 9.5)
The proposal required a national bank to establish written policies
and procedures to ensure that its fiduciary practices comply with
applicable law, and also provided a list of particular fiduciary
practices that a bank's policies and procedures should cover. Several
items on the list were derived from requirements in the former
regulation, including brokerage placement practices (former Sec. 9.5);
methods for ensuring that fiduciary officers and employees do not use
material inside information in connection with any decision or
recommendation to purchase or sell any security (former Sec. 9.7(d));
selection and retention of legal counsel readily available to advise
the bank and its fiduciary officers and employees on fiduciary matters
(former Sec. 9.7(c)); and investment of funds held as fiduciary,
including short-term investments and the treatment of fiduciary funds
awaiting investment or distribution (former Sec. 9.10(a)).
Other items on the proposed list were not based on requirements in
the former regulation, including methods for preventing self-dealing
and conflicts of interest, allocation to fiduciary accounts of any
financial incentives the bank may receive for investing fiduciary funds
in a particular investment, and disclosure to beneficiaries and other
interested parties of fees and expenses charged to fiduciary accounts.
Many commenters were concerned that specific items on the list,
particularly the items addressing the allocation of financial
incentives and disclosures to interested parties, could be construed
overbroadly (e.g., to prohibit otherwise permissible fee arrangements,
or to require disclosures to creditors of settlors of revocable
trusts). Some commenters suggested that the OCC not provide a list of
required policies and procedures, but rather provide guidance through
less formal means.
The OCC is retaining the proposal's general requirement that a
national bank adopt and follow written policies and procedures adequate
to maintain its fiduciary activities in compliance with applicable law.
The OCC is not attempting to assemble an exhaustive list of required
policies and procedures. However, the OCC believes that the regulation
should provide examples of areas that a bank's policies and procedures
should address. Thus, the OCC is adopting an abbreviated list of areas
that a bank's policies and procedures should address. The list includes
brokerage placement practices, the prevention of misuse of material
inside information, the prevention of self-dealing and conflicts of
interest, the selection and retention of legal counsel, and the
investment of funds (including funds awaiting investment or
distribution).
Review of Assets of Fiduciary Accounts (Sec. 9.6)
The proposal, like the former rule, required national banks to
perform reviews with respect to fiduciary accounts at least once during
each calendar year, and within 15 months of the last review. Moreover,
the proposal required two distinct types of annual
[[Page 68547]]
written reviews: individual account reviews and reviews of assets by
issuer. To contrast the two types of review, a review of assets by
issuer determines what investments (e.g., common stock of Corporation
X) are appropriate investments for the bank's fiduciary accounts in
general. In some banks, the review of assets by issuer results in a
list of permissible fiduciary investments for the bank's fiduciary
accounts, and the person or committee in charge of investing for a
particular fiduciary account chooses investments from this list. Under
an individual account review, on the other hand, the person or
committee in charge of a particular account's investments determines
whether the current investments are appropriate, individually and
collectively, given the objectives of the account.
Several commenters indicated that the requirement for an annual
review of assets by issuer is burdensome, redundant, and may conflict
with the modern portfolio theory embraced by the prudent investor
rule.6 The OCC agrees with these commenters and, thus, is
eliminating the requirement for an annual review of assets by issuer.
---------------------------------------------------------------------------
\6\ Modern portfolio theory, which underlies modern asset
management practices, focuses on the reduction of specific risk
through portfolio diversification. This theory, along with
corresponding practice, demonstrated that ``arbitrary restrictions
on trust investments are unwarranted and often counterproductive.''
Rest. 3rd, Trusts (Prudent Investor Rule), Introduction (1992), at
4. The prudent investor rule states that the standard of prudent
investment ``is to be applied to investments not in isolation but in
the context of the trust portfolio and as a part of an overall
investment strategy, which should incorporate risk and return
objectives reasonably suited to the trust.'' Rest. 3rd, Trusts
(Prudent Investor Rule), sec. 227(a) (1992).
---------------------------------------------------------------------------
Some commenters recommended that the OCC make the requirement for a
``written'' review more flexible by allowing other forms of evidence of
a review (e.g., an automated screening process that screens out routine
and non-complex assets and accounts), in order to allow bank personnel
to conduct their reviews more efficiently. In response to this
recommendation, the OCC is eliminating the requirement that the review
be ``written.'' However, if a bank adopts a review system in which
reviews are not documented individually, the bank must be able to
demonstrate that its review system is designed to perform all required
reviews.
One commenter recommended that the OCC eliminate the requirement to
perform a review within 15 months after the last review, and instead
rely on the requirement to perform a review at least once during each
calendar year. The OCC has determined that the 15-month requirement is
somewhat rigid, raises timing issues (e.g., whether to measure the
period from the start date to start date or end date to start date),
and does not contribute significantly to safety and soundness.
Consequently, the OCC is eliminating it in favor of a requirement that
a national bank perform a review at least once during each calendar
year.
Recordkeeping (Sec. 9.8)
Section 9.8(a) of the proposal required a national bank to document
the establishment and termination of fiduciary accounts and to maintain
adequate records for all fiduciary accounts. Section 9.8(b) of the
proposal required a national bank to retain all ``fiduciary records''
for a specified period. Section 9.2(g) of the proposal defined
``fiduciary records'' to include all written or otherwise recorded
information that a national bank creates or receives relating to a
fiduciary account or the fiduciary activities of the bank.
Some commenters asserted that the proposed definition of
``fiduciary records'' is overly broad, and recommended that the OCC
limit the record retention requirement of Sec. 9.8(b) to the records
described in Sec. 9.8(a). The OCC agrees that the proposed definition
of fiduciary records is overly broad and has limited the record
retention requirement accordingly.
Audit of Fiduciary Activities (Sec. 9.9)
The proposal required a national bank to perform, through its
fiduciary audit committee, suitable audits of its fiduciary activities
annually and to report the results of the audit, including all actions
taken as a result of the audit, in the minutes of the board of
directors. The proposal also clarified that if a bank adopts a
continuous audit system in lieu of performing annual audits, the bank
may perform discrete audits of each fiduciary activity, on an activity-
by-activity basis, at intervals appropriate for that activity. For
example, a bank may determine that it is appropriate to audit certain
low-risk fiduciary activities every 18 months. Moreover, the proposal
permitted a national bank to use an affiliate's audit committee as the
bank's fiduciary audit committee.
Most commenters strongly supported allowing a continuous audit
system and allowing an affiliate's audit committee to serve as a bank's
fiduciary audit committee. The OCC is adopting these elements. A few
commenters recommended that the OCC clarify whether a bank may use
external auditors in performing the required audits. In response, the
OCC is adding parentheticals to clarify that a bank may use internal or
external auditors. A few commenters expressed concern that the
requirement to note in the board's minutes ``all'' actions taken as a
result of the audit could be interpreted to require a board to note
excessive detail. To alleviate this concern, the OCC is modifying the
provision to require the board to note ``significant actions'' instead
of ``all actions.''
One commenter also noted that the proposal required a suitable
audit of ``all'' fiduciary activities (or, for continuous audits, a
discrete audit of ``each'' fiduciary activity), and pointed out that
certain fiduciary activities at certain banks may be de minimis (e.g.,
a bank may have only one small account under a particular fiduciary
activity, as an incidental service for a particular customer). They
asserted that these de minimis fiduciary activities may not merit a
full-scope audit. To provide a measure of flexibility with respect to
de minimis activities, the OCC is modifying the regulation to require a
suitable audit of ``all significant'' fiduciary activities (or, for
continuous audits, a discrete audit of ``each significant'' fiduciary
activity). The OCC intends for this standard to exclude only de minimis
fiduciary activities conducted by a bank.
Moreover, as with annual reviews under Sec. 9.6, the OCC is
eliminating the requirement that a national bank that performs audits
annually (rather than using a continuous audit system) perform an audit
not later than 15 months after the last audit. The 15-month requirement
is somewhat rigid, raises timing issues, and does not contribute
significantly to safety and soundness. The OCC is retaining the
requirement that a national bank perform an audit at least once during
each calendar year.
The proposal required that a national bank's fiduciary audit
committee must not include directors who are members of a fiduciary
committee of the bank. Several commenters noted that some banks would
experience difficulties in complying with this restriction due to their
fiduciary committee structure. To provide those banks with a reasonable
degree of flexibility, the OCC is modifying this restriction to require
that a national bank's fiduciary audit committee must consist of a
majority of members who are not also members of any committee to which
the board of directors has delegated power to manage and control the
fiduciary activities of the bank. The OCC believes that this
modification will not impair the safety and soundness of those banks.
[[Page 68548]]
Fiduciary Funds Awaiting Investment or Distribution (Sec. 9.10)
The proposal retained the former regulation's general prohibition
against allowing fiduciary funds to remain uninvested and undistributed
any longer than reasonable for proper account management. One commenter
pointed out that directing the treatment of fiduciary funds is
appropriate only if the bank has investment discretion with respect to
those funds. The OCC agrees that the duty to invest funds applies only
to accounts for which a bank has investment discretion. However, the
duty to distribute uninvested funds within a reasonable time may apply
even in the absence of investment discretion. Thus, the OCC is limiting
this prohibition to fiduciary accounts for which a bank has investment
discretion or discretion over distributions.
The proposal eliminated the requirement that a bank obtain the
``maximum'' rate of return for fiduciary funds awaiting investment or
distribution. One commenter asserted that the OCC should have some
policy with respect to the rate of return for fiduciary funds awaiting
investment or distribution. The OCC agrees, and is adopting a
requirement that a bank obtain for such funds a rate of return
consistent with applicable law. Thus, in states that require their
corporate fiduciaries to obtain a market rate of return for fiduciary
funds awaiting investment or distribution, a national bank must do the
same. In other states, national banks are placed on a level playing
field with competing corporate fiduciaries.
The proposal permitted a national bank to set aside, as collateral
for self-deposits of fiduciary funds awaiting investment or
distribution, any assets (including surety bonds) that qualify under
state law as appropriate security. Several commenters recommended that
the OCC allow a bank to collateralize self-deposits with surety bonds
without regard to state law. Other commenters recommended that the OCC
allow a bank to collateralize self-deposits with surety bonds only if
state law permits that practice. The OCC has determined that it is
consistent with national banks' fiduciary powers for banks to use
surety bonds as collateral for self-deposits unless prohibited by
applicable law. This standard grants national banks the ability to
collateralize self-deposits with surety bonds, yet preserves for each
state the ability to prohibit this practice for all fiduciaries
operating in the state.
The proposal also permitted a national bank to deposit fiduciary
funds awaiting investment or distribution with an affiliate and to
secure a deposit of idle fiduciary funds by or with an affiliate ``if
consistent with applicable law''. Several commenters recommended that
the OCC modify the applicable law standard, though the commenters
suggested various alternatives ranging from ``without regard to state
law'' to ``only if permitted by applicable law''. After considering the
various standards, the OCC is adopting ``unless prohibited by
applicable law'' as the standard. This standard allows national banks
to secure deposits of idle fiduciary funds by or with an affiliate, yet
permits a state to preclude this practice for all fiduciaries operating
in the state, if the state so chooses.
Investment of Fiduciary Funds (Sec. 9.11)
The proposal directed a national bank to invest fiduciary funds in
a manner consistent with applicable law. One commenter pointed out that
directing a bank how to invest fiduciary funds is appropriate only if
the bank has investment discretion. This commenter's point is generally
true. However, situations may arise in which a bank trustee without
investment discretion receives a direction from a party with investment
discretion to make an investment that violates applicable law (e.g.,
ERISA or the trust instrument). The bank, in these situations, should
comply with applicable law notwithstanding its lack of investment
discretion. Thus, the OCC is adopting the provision generally as
proposed.
Self-Dealing and Conflicts of Interest (Sec. 9.12)
The proposal clarified that a bank may not lend to any of its
directors, officers, or employees any funds it holds as trustee, except
with respect to bank's own employee benefit plans in accordance with
section 408(b)(1) of ERISA, which specifically authorizes loans to
participants and beneficiaries of such plans under certain
circumstances. One commenter noted that section 408(b)(1) covers plans
that the bank administers for other employers, as well as the bank's
own plans. The OCC agrees, and is extending the proposed exception to
plans that the bank administers for other employers. Moreover, the OCC
is broadening the regulation's reference to ERISA by citing to section
408 rather than section 408(b)(1), because section 408 contains several
exemptions from ERISA's prohibited transaction provisions, and not just
the exemption found in 408(b)(1).
The proposal authorized a national bank to make a loan between any
of its fiduciary accounts if the transaction is authorized by the
instrument creating the account from which the loan is made and is not
prohibited by applicable law. One commenter recommended that the OCC
change this standard to ``if the transaction is fair to both accounts
and is not prohibited by applicable law,'' in order to be consistent
with the standard for loans to fiduciary accounts and for sales between
fiduciary accounts. The OCC agrees that there is no compelling reason
to have different standards for these transactions and, thus, is
modifying the standard accordingly.
Finally, one commenter pointed out that these self-dealing and
conflicts of interest provisions are appropriate only if the bank has
investment discretion. The OCC agrees, and is limiting this provision
to fiduciary accounts for which a bank has investment discretion.
Custody of Fiduciary Assets (Sec. 9.13)
The proposal allowed a national bank to maintain fiduciary assets
off-premises if the bank maintains adequate safeguards and controls.
However, some off-premise locations may not be appropriate for the
safekeeping of fiduciary assets, depending on applicable law.
Consequently, the OCC is modifying the provision to allow a bank to
maintain fiduciary investments off-premises only if consistent with
applicable law.
Deposit of Securities With State Authorities (Sec. 9.14)
The proposal allowed a national bank with fiduciary assets in more
than one state to meet its deposit requirement in each state based on
the amount of trust assets administered from offices located in that
state. The OCC intended this provision to avoid duplicative securities
deposits for the same trust asset.
Some commenters requested that the OCC clarify that the deposit
requirement for a multistate bank depends on the amount of trust assets
that the bank administers ``primarily'' or ``principally'' from offices
in that state. These commenters were concerned that the proposed
language still could be interpreted in a manner that results in
duplicative securities deposits for the same trust asset. To ensure
that the requirement is not interpreted in a manner that results in
duplicative securities deposits, the OCC is clarifying that the
required deposit for each state is based on the amount of trust assets
that the bank administers ``primarily'' from offices located in that
state.
[[Page 68549]]
Fiduciary Compensation (Sec. 9.15)
The proposal retained the substance of former Sec. 9.15, which
addressed fiduciary compensation. The proposal authorized a national
bank to charge a reasonable fee for its fiduciary services if the
amount is not set or governed by applicable law. Moreover, the proposal
prohibited an officer or an employee of a national bank from retaining
any compensation for acting as a co-fiduciary with the bank in the
administration of a fiduciary account, except with the specific
approval of its board of directors.
One commenter requested that the OCC provide guidance on what
constitutes a reasonable fee, and that the OCC allow a bank to rely on
their regularly published fee schedules to satisfy the reasonableness
test. However, because reasonableness of fiduciary compensation depends
heavily upon the facts of each situation, the OCC does not believe that
it is possible to establish specific rules on what is and what is not
reasonable. Thus, the OCC is adopting this section as proposed. The OCC
points out, however, that the amount of fiduciary compensation is
typically set or governed by applicable law (e.g., by the terms of the
governing instrument, state fee schedules, a probate court, etc.), in
which case the general reasonableness standard does not apply.
Receivership or Voluntary Liquidation of Bank (Sec. 9.16)
The proposal directed a receiver or liquidating agent for a
national bank to close promptly all fiduciary accounts to the extent
practicable (in accordance with OCC instructions and the orders of the
court having jurisdiction) and to transfer all remaining fiduciary
accounts to substitute fiduciaries. Some commenters recommended that
the OCC modify this provision to reflect that a national bank's
receiver or liquidating agent generally transfers fiduciary accounts to
substitute fiduciaries, noting that the FDIC's usual practice is to
sell a failed bank's fiduciary business. The OCC agrees that a national
bank should have the option to transfer fiduciary accounts to
substitute fiduciaries, regardless of whether it can practicably close
those accounts. Thus, the OCC is modifying the provision accordingly.
Additionally, the OCC is clarifying that this provision does not
apply to the receiver of insured national banks, which, under 12 U.S.C.
191, is the Federal Deposit Insurance Corporation.
Surrender or Revocation of Fiduciary Powers (Sec. 9.17)
The proposal retained the substance of former Sec. 9.17, which
addresses surrender and revocation of fiduciary powers. The proposal
set forth the standards and procedures that apply when a national bank
seeks to surrender its fiduciary powers. The proposal also described
the standards that apply when the OCC seeks to revoke a bank's
fiduciary powers. This section provides useful guidance to banks
surrendering or revoking their fiduciary powers. The OCC did not
receive any comments that warranted changes to this section and, thus,
the OCC is adopting it as proposed.
Collective Investment Funds (Sec. 9.18)
The proposal retained the general structure of Sec. 9.18. Paragraph
(a) authorized national banks to invest fiduciary assets in two types
of collective investment funds (called (a)(1) funds and (a)(2) funds,
in reference to the paragraphs of Sec. 9.18 that authorize them).
Paragraph (b) set forth the requirements applicable to funds authorized
under paragraph (a). Paragraph (c) described other types of collective
investments available to national bank fiduciaries. The OCC is adopting
much of proposed Sec. 9.18, but with several significant modifications.
In General (Sec. 9.18(a))
The proposal removed a provision from former Sec. 9.18(b)(3) that
specifically provided that a bank may look at a collective investment
fund's portfolio in the aggregate in determining whether it may invest
fiduciary assets in the collective investment fund. This treatment is
consistent with the prudent investor rule.7 One commenter noted
that not all states have adopted the prudent investor rule, and
recommended that the OCC retain the provision. The OCC agrees, and is
retaining the provision as a footnote to Sec. 9.18(a).
---------------------------------------------------------------------------
7 See Rest. 3rd, Trusts (Prudent Investor Rule), sec.
227(a) (1992).
---------------------------------------------------------------------------
Written Plan (Sec. 9.18(b)(1))
The former regulation required the full board of directors of a
national bank to approve a new collective investment fund plan. The
proposal provided additional management flexibility by allowing a
committee of the board of directors to perform this function. Some
commenters recommended that the OCC modify this requirement further by
allowing a committee authorized by the board to approve a new plan.
Because this modification provides banks with some flexibility in
approving new plans and presents no supervisory concerns, the OCC is
adopting it as recommended.
Frequency of Valuation (Sec. 9.18(b)(4)(i))
The proposal allowed a bank to value an illiquid collective
investment fund (i.e., one invested primarily in real estate or other
assets that are not readily marketable) at least annually rather than
at least quarterly, in an effort to be consistent with the one-year
prior notice allowance for withdrawals from illiquid collective
investment funds found at former Sec. 9.18(b)(4). Because the prior
notice allowance is limited to (a)(2) funds, it is appropriate to limit
the valuation exception to (a)(2) funds. The OCC is modifying the
proposed valuation exception to include this limitation.
Short-term Investment Funds (Sec. 9.18(b)(4)(ii)(B))
The proposal retained the former regulation's restrictions on
short-term investment funds. Several commenters noted, however, that
these restrictions are more stringent than the Securities and Exchange
Commission's Rule 2a-7 (17 CFR 270.2a-7), which governs money market
funds. The commenters recommended that the OCC revise the restrictions
to make them more consistent with Rule 2a-7. The OCC agrees that its
restrictions regarding short-term investment funds should be more
consistent with Rule 2a-7. Consequently, the OCC is removing (1) the
requirement that a bank invest at least 80 percent of the fund's assets
in instruments payable on demand or that have a maturity date not
exceeding 91 days from the date of purchase, and (2) the requirement
that at least 20 percent of the fund's assets must be cash, demand
obligations, or assets that will mature on the fund's next business
day. In their place, the OCC is adding a requirement that a bank
maintain a dollar-weighted average portfolio maturity of 90 days or
less, consistent with Rule 2a-7.
Method of Distributions (Sec. 9.18(b)(5)(iv))
The proposal revised substantially the former regulation's standard
for distributions to an account withdrawing from a collective
investment fund. Former Sec. 9.18(b)(6) required a bank to make
distributions in cash, ratably in kind (i.e., a proportional share in
each of the assets held by the collective investment fund), or a
combination of the two. The proposal allowed a bank to make any
distributions consistent with applicable law. The proposal reflected an
effort to provide banks with sufficient flexibility to address complex
distribution problems that may arise (particularly with respect to
collective investment funds that invest primarily
[[Page 68550]]
in illiquid assets), while maintaining the basic protections of state
fiduciary law. In the proposal's preamble, the OCC invited comment on
whether to adopt this applicable law approach in lieu of the former
regulation's distribution options.
Many commenters supported replacing the former regulation's
distribution options with the proposed approach. Several commenters
supported the proposed approach, but only as a supplement to the former
regulation's distribution options. Some commenters noted that relying
wholly on applicable law, as proposed, could be unworkable for a bank
whose collective investment fund includes accounts from different
states.
The OCC has determined to retain the former regulation's
distribution options (i.e., cash, ratably in kind, or a combination of
the two) and to add, as a fourth option, ``any other manner consistent
with applicable law in the state in which the bank maintains the
fund.'' The OCC believes that this approach provides ample flexibility
while maintaining the basic protections of state fiduciary law.
Moreover, it resolves the proposal's potential problems regarding a
fund with accounts from different states by clarifying that the only
state whose law applies to the fourth distribution option is the state
in which the bank maintains the fund (though other forms of
``applicable law,'' such as Federal law, may apply).
Audits and Financial Reports (Sec. 9.18(b)(6))
Consistent with OCC precedent, the proposal clarified that a
national bank must disclose in a collective investment fund's annual
financial report the fees and expenses charged to the fund. One
commenter recommended that the OCC further clarify that the regulation
does not require per se that a national bank disclose fees and expenses
on a line-item basis, or as a specific dollar amount (as opposed to a
percentage of assets). The OCC affirms that the regulation does not
require per se a particular form of disclosure. However, if state law
(or other applicable law) governing the collective investment fund
requires a particular form of disclosure, then national banks must
comply with that requirement.8 To clarify this issue, the OCC is
modifying the provision to clarify that disclosures of fees and
expenses are required in a manner consistent with applicable law in the
state in which the bank maintains the fund.
---------------------------------------------------------------------------
8 See Trust Interpretive Letter #242 (January 1990).
---------------------------------------------------------------------------
Advertising Restriction (Sec. 9.18(b)(7))
The proposal retained and clarified the former regulation's
restriction on advertising (a)(1) funds. In particular, the proposal
prohibited a bank from advertising a common trust fund except in
connection with the advertisement of the general fiduciary services of
the bank.
Many commenters recommended that the OCC eliminate or at least
relax the restriction on advertising past performance. Other
commenters, apparently in support of the restriction, warned that if a
bank markets its common trust fund to the general public, then that
fund will be subject to registration and regulation under the
securities laws.
The views of commenters opposed to the advertising restriction may
have some merit. The OCC has carefully considered their views but has
decided that, on balance, it is not appropriate to remove the
advertising restriction. Therefore, the OCC is adopting the provision
as proposed.
Self-Dealing and Conflicts of Interest (Sec. 9.18(b)(8))
The proposal retained the substance of former Sec. 9.18(b)(8),
which addressed self-dealing and conflicts of interest specific to
collective investment funds. The OCC noted in the preamble that a
national bank administering a collective investment fund must comply
with not only these provisions, but also the general self-dealing and
conflicts of interest provisions found in Sec. 9.12. One commenter
recommended that the OCC clarify this position in the regulatory text.
The OCC agrees, and is amending the provision accordingly.
Elimination of Mortgage Reserve Account Provision
The proposal retained the substance of former Sec. 9.18(b)(11),
which allowed a bank administering a collective investment fund to
establish a mortgage reserve account for overdue interest payments on
mortgages in the fund. Suspecting that this provision was outdated, the
OCC invited comment on the extent to which banks use mortgage reserve
accounts. The only commenter on this provision recommended that the OCC
eliminate it, stating that national banks no longer maintain mortgage
reserve accounts because they are unnecessary and may not be
appropriate under generally accepted accounting principles.
Accordingly, the OCC is eliminating this provision.
Management Fees (Sec. 9.18(b)(9))
The proposal retained the quantitative management fee limitation,
found at former Sec. 9.18(b)(12), but invited comment on whether the
OCC should defer to state law instead of retaining the fee limitation.
Under this limitation, a bank administering a collective investment
fund may charge a fund management fee only if the total fees charged to
a participating account (including the fund management fee) does not
exceed the total fees that the bank would have charged had it not
invested assets of the fiduciary account in the fund.
Many commenters supported eliminating the management fee limitation
altogether in favor of a ``reasonableness'' standard or a state law
based approach, arguing that these alternatives would reflect modern
fiduciary law standards in this area. However, some commenters
supported retaining the limitation. Other commenters were concerned
that a state law approach could be unworkable for a collective
investment fund with participants from different states whose fee
standards differ.
The OCC recognizes the desirability of providing updated operating
standards for national bank fiduciary activities, but is concerned that
a general ``reasonableness'' standard, or even a state law standard,
alone, may not provide sufficient protections for banks' fiduciary
customers. Accordingly, the final rule provides that a national bank
may charge a fund management fee only if: (1) the fee is reasonable;
(2) the fee is permitted under applicable law (and complies with fee
disclosure requirements, if any) in the state in which the bank
maintains the fund; and (3) the amount of the fee does not exceed an
amount commensurate with the value of legitimate services of tangible
benefit to the participating fiduciary accounts that would not have
been provided to the accounts were they not invested in the fund.
This modification safeguards the interests of customers in several
ways. First, a fund management fee is subject to an overall
reasonableness standard. Second, in order to charge a fund management
fee, applicable law must allow the type of fee charged. Third, the bank
must justify the amount of a fund management fee based on particular
services that provide a tangible benefit to participating fiduciary
accounts that would not have been provided to the accounts were they
not invested in the fund. Fourth, a bank that charges a fee under this
approach also must comply with applicable fee disclosure
[[Page 68551]]
requirements. Finally, a separate provision in the final rule requires
a bank to disclose a management fee, along with other fees and expenses
charged to the fund, in the annual financial report in a manner
consistent with applicable law in the state in which the bank maintains
the fund.9
---------------------------------------------------------------------------
\9\ See Sec. 9.18(b)(6)(ii).
---------------------------------------------------------------------------
Additionally, this modification eliminates the possibility that
multiple conflicting states' laws could apply to the same fund, and
thus is responsive to commenters' concerns about administering a
collective investment fund with participants from different states.
Expenses (Sec. 9.18(b)(10))
The proposal retained the requirement that the bank absorb
establishment and reorganization expenses, but eliminated other
provisions that specifically permitted or prohibited a bank to charge
certain expenses to the fund. Rather than mandating the treatment of
specific expenses (other than establishment and reorganization
expenses), the proposal deferred to state law, in effect, by allowing a
bank to charge reasonable expenses incurred in administering the fund
to the extent not prohibited by applicable law.
Many commenters supported this approach. However, some commenters
were concerned that a state law approach to permissible expenses could
be unworkable for funds with participants from different states.
The OCC continues to believe that, when expenses of a fund are
reasonable and permissible under state law, and are fully disclosed in
appropriate documentation,\10\ a bank should be allowed to charge them
directly to the fund. Thus, the final rule retains the proposal's
approach of allowing a bank to charge any reasonable expenses (except
expenses incurred in establishing or reorganizing a collective
investment fund) not prohibited by applicable law, and clarifies that
the applicable law in the state in which the bank maintains the fund--
including Federal law where appropriate, and excluding the law of
states other than the state in which the bank maintains the fund--
determines whether particular expenses are prohibited. This standard
addresses commenters' concerns about funds with participants from
different states.
---------------------------------------------------------------------------
\10\ See Sec. 9.18(b)(1)(iii) (disclosure of anticipated fees
and expenses in the written plan) and Sec. 9.18(b)(6)(ii)
(disclosure of fees and expenses in the annual financial report).
---------------------------------------------------------------------------
Prohibition Against Certificates (Sec. 9.18(b)(11))
The proposal prohibited a national bank from issuing certificates
of interest in a collective investment fund. One commenter recommended
that the OCC provide an exception allowing a bank to issue a
certificate of participation in a segregated investment to a customer
withdrawing from a fund, consistent with OCC fiduciary precedents. The
OCC agrees. The exception for segregated investments should not raise
any of the securities-related concerns underlying the prohibition
against certificates. Consequently, the OCC is adopting the exception.
Elimination of Participation, Investment, and Liquidity Requirements
The proposal eliminated the 10 percent participation limitation,
the 10 percent investment limitation, and the liquidity requirement
applicable to common trust funds under former Sec. 9.18(b)(9). The OCC
received many comment letters on this issue. All who commented
supported the proposal. These restrictions have at times interfered
with optimal management of common trust funds. Moreover, the OCC
believes that the protections found in state fiduciary law adequately
address the concerns underlying these restrictions. Consequently, the
OCC is eliminating the participation, investment, and liquidity
requirements.
Other Collective Investments (Sec. 9.18(c))
In addition to (a)(1) and (a)(2) funds, the proposal authorized
other means by which a national bank may invest fiduciary assets
collectively: (1) bank fiduciary funds, (2) single loans or
obligations, (3) mini-funds (i.e., funds established for the collective
investment of cash balances), (4) trust funds of corporations and
closely-related settlors, and (5) special exemption funds. These other
collective investments are not subject to the requirements of
Sec. 9.18(b).
While the OCC did not receive any comments on the provision
authorizing bank fiduciary funds, the OCC believes that banks no longer
maintain this type of fund. Thus, the OCC is eliminating the provision.
With respect to single loans or obligations, the proposal
eliminated the restriction that a bank invest in a variable-amount note
on a short-term basis only. Those who commented on this change
supported it. The change will bring that provision in conformity with
Sec. 9.18(b)(4)(ii)(B), which allows a bank to invest fiduciary assets
collectively in short-term investment fund composed of short-term
vehicles, including variable-amount notes, but places no limitation on
renewals of those investments. For this reason, the OCC is adopting the
provision as proposed.
With respect to mini-funds, the proposal eliminated the requirement
that no participating account's interest in the fund may exceed
$10,000. Moreover, the proposal increased the total amount of assets
permitted in a mini-fund to $1,000,000. Those who commented on these
changes supported them. These changes remove outdated limitations on
mini-funds. Consequently, the OCC is adopting the provision as
proposed.
One commenter recommended that the OCC add a provision that permits
a bank to use any collective investment authorized by applicable law
(e.g., pre-need funeral statutes). The OCC agrees that a bank should be
permitted to use any collective investment authorized by applicable
law, and is adding a provision to this effect.
With respect to special exemption funds, the proposal provided an
expedited procedure for their review. While most commenters supported
the expedited review procedure, a few commenters strongly opposed it.
Those who opposed it objected that the provision does not require
notice and comment, does not distinguish between routine and novel
applications, and, because approval is automatic if the OCC does not
act in 30 days, could lead to inadvertent approvals of common trust
funds that are exempt from the regulation's management fee and common
trust fund advertising provisions. After carefully considering these
concerns, the OCC has decided that it may not be appropriate to adopt
the proposed expedited review procedure. Thus, the OCC is modifying the
provision to eliminate the expedited review procedure.
Finally, one commenter recommended that the OCC extend the right to
seek special exemptions from the OCC to state banks and other corporate
fiduciaries that must comply with the OCC's collective investment fund
regulation in order to receive favorable tax treatment under the
Internal Revenue Code (26 U.S.C. 584). The OCC agrees that those
corporate fiduciaries should have the same opportunity to establish
special exemption funds as national banks. Consequently, the OCC is
modifying the proposal to reflect this recommendation.
Transfer Agents (Sec. 9.20)
The proposal incorporated by means of cross-reference the
Securities and Exchange Commission (SEC) rules
[[Page 68552]]
prescribing procedures for registration of transfer agents for which
the SEC is the appropriate regulatory agency (17 CFR 240.17Ac2-1). The
proposal also clarified that a national bank transfer agent must comply
with rules adopted by the SEC pursuant to section 17A of the Securities
Exchange Act (15 U.S.C. 78q-1), which sets forth operational and
reporting requirements that apply to all transfer agents (17 CFR
240.17Ac2-2, and 240.17Ad-1 through 16).
Several commenters noted that the SEC's rules regarding transfer
agents do not apply to activities in foreign countries. The OCC
acknowledges that the SEC's rules regarding transfer agents apply only
to domestic activities. Consequently, the OCC is clarifying this point
in the regulatory text.
Waiver of Regulatory Requirements
In the preamble to the proposal, the OCC invited comment on whether
the OCC should add a reservation of authority to part 9 for the purpose
of setting forth standards and procedures under which a national bank
may obtain a waiver from a specific provision. All but one of those who
commented on this issue supported the addition of waiver standards and
procedures. Upon reconsideration, the OCC has concluded that it is
preferable to continue its current practice of considering any request
to modify the application of any provision in part 9, and granting a
request if the OCC deems it consistent with the bank's fiduciary duties
and with safe and sound banking practices. The OCC expects that the
additional flexibility it has incorporated into many of part 9's
provisions will reduce the need for waivers and modifications.
Moreover, the requests that banks are likely to file will vary
significantly in subject matter and complexity, reducing the usefulness
of generalized standards. Therefore, the OCC has decided not to include
a specific waiver provision in part 9.
Acting as Indenture Trustee and Creditor (Sec. 9.100)
In the proposal's preamble, the OCC indicated that it was inclined
to modify its restrictions on allowing an indenture trustee to act as
creditor to the same debt securities issuance. In particular, the OCC
suggested allowing a national bank to act both as creditor and
indenture trustee until 90 days after default, consistent with the
Trust Indenture Act, with the added condition that the bank maintains
adequate controls to manage any potential conflicts of interest.
Additionally, the OCC indicated that it would apply this policy
consistently to all debt securities issuances, including issuances
exempt from the Trust Indenture Act. The OCC invited comment on how
banks are managing these conflicts, and on the need to address this
issue in part 9.
Commenters supported a revision of the OCC's position, and
indicated that bank policies and procedures effectively manage
potential conflicts of interest. However, most who commented
recommended that the OCC not add specific requirements to the
regulation on this issue, though most of these commenters also
supported less formal guidance.
Based on its experience in this area, the OCC believes that banks
generally have established adequate controls to manage those conflicts.
Moreover, the OCC believes that it is important to clarify to all
national banks the revised position on this issue. Consequently, the
OCC is adding a short interpretive ruling to part 9 explaining that a
national bank may act as creditor and indenture trustee to any debt
securities issuance (whether or not covered by the Trust Indenture Act)
until 90 days after default with the added condition that the bank
maintains adequate controls to manage the potential conflicts of
interest.
Disciplinary Sanctions Imposed by Clearing Agencies (Sec. 19.135)
The proposal eliminated much of the detail of former Secs. 9.21 and
9.22, which concern applications by national banks for stays or reviews
of disciplinary sanctions imposed by registered clearing agencies.
Instead, the proposal cross-referenced the SEC's rules in this area,
which are virtually identical to former Secs. 9.21 and 9.22. The
proposal also relocated the provision to 12 CFR part 19, the OCC's
rules of practice and procedure, where readers are more likely to find
it.
The OCC received no comments on this provision and, thus, is
adopting it as proposed.
Investment Adviser to an Investment Company
Part 9 has never contained conditions applicable to national bank
operating subsidiaries engaged in investment advisory activities.
Instead, appropriate conditions for particular operating subsidiary
activities have been dealt with by the OCC as part of the application
process. However, one of the issues related to the treatment of
investment advisory activities under part 9 that was raised in the
proposal was whether to impose certain conditions in all situations
where a national bank or its operating subsidiary acts as investment
adviser to an investment company, and, if so, whether to include them
in part 9.
Most who commented on this issue expressed concerns that the
conditions could impose unnecessary restrictions on certain activities.
After carefully considering the comments, the OCC has decided to
continue its current approach of dealing with conditions imposed on
national bank operating subsidiaries as part of the corporate
application process. Recent amendments to 12 CFR part 5 (61 FR 60342,
November 27, 1996) also provide a specific new mechanism for conditions
and policies to be developed that will be applicable to operating
subsidiaries engaged in particular types of activities. One of these
types of activities is serving as an investment adviser to an
investment company (see Sec. 5.34(e)(3)(ii)(D)). Accordingly, the OCC
has concluded that it is not appropriate to deal with conditions
imposed on operating subsidiaries engaged in such activities as an
aspect of part 9.
Derivation Table for 12 CFR Part 9
This table directs readers to the provisions of the former 12 CFR
part 9 on which the revised 12 CFR part 9 and the amended 12 CFR part
19 are based.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Revised provision Former provision Comments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sec. 9.1.......................... ......................................................................... Added.
Sec. 9.2(a)....................... ......................................................................... Added.
(b)............................ Sec. 9.1(g)............................................................. Significantly modified.
(c)............................ Sec. 9.1(l)............................................................. Modified.
(d)............................ Sec. 9.1(a)............................................................. Modified.
(e)............................ Sec. 9.1(b) and (h)..................................................... Significantly modified.
(f)............................ Sec. 9.1(j)............................................................. Modified.
(g)............................ Sec. 9.1(c)............................................................. Significantly modified.
(h)............................ Sec. 9.1(e)............................................................. Modified.
[[Page 68553]]
(i)............................ ......................................................................... Added.
Sec. 9.3.......................... Sec. 9.2................................................................ Modified.
Sec. 9.4.......................... Sec. 9.7(a)(1), (b), and (d)............................................ Significantly modified.
Sec. 9.5.......................... Secs. 9.5, 9.7(c), 9.7(d), and 9.10(a).................................. Significantly modified.
Sec. 9.6.......................... Sec. 9.7(a)(2).......................................................... Significantly modified.
Sec. 9.8.......................... Secs. 9.7(a)(2) and 9.8................................................. Modified.
Sec. 9.9.......................... Sec. 9.9................................................................ Significantly modified.
Sec. 9.10......................... Sec. 9.10............................................................... Significantly modified.
Sec. 9.11......................... Sec. 9.11............................................................... Significantly modified.
Sec. 9.12......................... Sec. 9.12............................................................... Modified.
Sec. 9.13......................... Sec. 9.13............................................................... Modified.
Sec. 9.14......................... Sec. 9.14............................................................... Significantly modified.
Sec. 9.15......................... Sec. 9.15............................................................... Modified.
Sec. 9.16......................... Sec. 9.16............................................................... Modified.
Sec. 9.17......................... Sec. 9.17............................................................... Modified.
Sec. 9.18(a)...................... Sec. 9.18(a), (b)(2), and (b)(3)........................................ Modified.
(b)(1)......................... (b)(1)................................................................. Significantly modified.
(b)(2)......................... (b)(12)................................................................ Significantly modified.
(b)(3)......................... (b)(3)................................................................. Modified.
(b)(4)......................... (b)(1), (4), and (15).................................................. Significantly modified.
(b)(5)......................... (b)(4), (6), and (7)................................................... Significantly modified.
(b)(6)......................... (b)(5)(i)-(iv)......................................................... Significantly modified.
(b)(7)......................... (b)(5)(iv) and (v)..................................................... Significantly modified.
(b)(8)......................... (b)(8)................................................................. Modified.
(b)(9)......................... (b)(12)................................................................ Significantly modified.
(b)(10)........................ (b)(5)(i) and (iv), (b)(10) and (b)(12)................................ Significantly modified.
(b)(11)........................ (b)(13)................................................................ Modified.
(b)(12)........................ (b)(14)................................................................ Modified.
(c)(1)......................... (c)(2)................................................................. Modified.
(c)(2)......................... (c)(3)................................................................. Significantly modified.
(c)(3)......................... (c)(4)................................................................. Modified.
(c)(4)......................... ......................................................................... Added.
(c)(5)......................... (c)(5)................................................................. Significantly modified.
Sec. 9.20......................... Sec. 9.20............................................................... Modified.
Sec. 9.100........................ ......................................................................... Added.
Sec. 19.135....................... Secs. 9.21 and 9.22..................................................... Modified.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act, the
OCC certifies that this final rule will not have a significant economic
impact on a substantial number of small entities in accord with the
spirit and purposes of the Regulatory Flexibility Act (5 U.S.C. 601 et
seq.). Accordingly, a regulatory flexibility analysis is not required.
The final rule's requirements, for the most part, are not new to the
regulation. The final rule eases requirements and reduces burden for
all national banks that exercise fiduciary powers, regardless of size.
Executive Order 12866
The Office of Management and Budget has concurred with the OCC's
determination that this final rule is not a significant regulatory
action under Executive Order 12866.
Paperwork Reduction Act of 1995
The OCC invites comment on:
(1) Whether the information collection contained in this final rule
is necessary for the proper performance of the OCC's functions,
including whether the information has practical utility;
(2) The accuracy of the OCC's estimate of the burden of the
information collection;
(3) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(4) Ways to minimize the burden of the information collection on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
(5) Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
The OCC asked similar questions in the proposed rule, but received
no comments.
Respondents/recordkeepers are not required to respond to this
collection of information unless it displays a currently valid OMB
control number.
The collection of information requirements contained in this final
rule have been approved by the Office of Management and Budget under
Control No. 1557-0140 in accordance with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507(d)). Comments on the collection of information
requirements should be sent to the Office of Management and Budget,
Paperwork Reduction Project (1557-0140), Washington, DC 20503, with
copies to the Legislative and Regulatory Activities Division (1557-
0140), Office of the Comptroller of the Currency, 250 E Street, SW,
Washington, DC 20219.
The collection of information requirements in this final rule are
found in 12 CFR 9.8, 9.9, 9.17, and 9.18. The OCC requires this
information for the proper supervision of national banks'' fiduciary
activities. The likely respondents/recordkeepers are national banks.
Estimated average annual burden hours per respondent/recordkeeper:
15 hours.
Estimated number of respondents and/or recordkeepers: 1,000.
Estimated total annual reporting and recordkeeping burden: 15,010
hours.
Start-up costs to respondents: None.
Unfunded Mandates Reform Act of 1995
The OCC has determined that this final rule will not result in
expenditures by state, local, and tribal governments, or by the private
sector, of $100 million or more in any one year. Accordingly, a
budgetary impact statement is not
[[Page 68554]]
required under section 202 of the Unfunded Mandates Reform Act of 1995.
The final rule's requirements, for the most part, are not new to the
regulation. The final rule eases requirements and reduces burden for
all national banks that exercise fiduciary powers, regardless of size.
List of Subjects
12 CFR Part 9
Estates, Investments, National banks, Reporting and recordkeeping
requirements, Trusts and trustees.
12 CFR Part 19
Administrative practice and procedure, Crime, Investigations,
National banks, Penalties, Securities.
Authority and Issuance
For the reasons set out in the preamble, chapter I of title 12 of
the Code of Federal Regulations is amended as follows:
1. Part 9 is revised to read as follows:
PART 9--FIDUCIARY ACTIVITIES OF NATIONAL BANKS
Regulations
Sec.
9.1 Authority, purpose, and scope.
9.2 Definitions.
9.3 Approval requirements.
9.4 Administration of fiduciary powers.
9.5 Policies and procedures.
9.6 Review of fiduciary accounts.
9.8 Recordkeeping.
9.9 Audit of fiduciary activities.
9.10 Fiduciary funds awaiting investment or distribution.
9.11 Investment of fiduciary funds.
9.12 Self-dealing and conflicts of interest.
9.13 Custody of fiduciary assets.
9.14 Deposit of securities with state authorities.
9.15 Fiduciary compensation.
9.16 Receivership or voluntary liquidation of bank.
9.17 Surrender or revocation of fiduciary powers.
9.18 Collective investment funds.
9.20 Transfer agents.
Interpretations
9.100 Acting as indenture trustee and creditor.
Authority: 12 U.S.C. 24 (Seventh), 92a, and 93a; 15 U.S.C. 78q,
78q-1, and 78w.
Regulations
Sec. 9.1 Authority, purpose, and scope.
(a) Authority. The Office of the Comptroller of the Currency (OCC)
issues this part pursuant to its authority under 12 U.S.C. 24
(Seventh), 92a, and 93a, and 15 U.S.C. 78q, 78q-1, and 78w.
(b) Purpose. The purpose of this part is to set forth the standards
that apply to the fiduciary activities of national banks.
(c) Scope. This part applies to all national banks that act in a
fiduciary capacity, as defined in Sec. 9.2(e). This part also applies
to all Federal branches of foreign banks to the same extent as it
applies to national banks.
Sec. 9.2 Definitions.
For the purposes of this part, the following definitions apply:
(a) Affiliate has the same meaning as in 12 U.S.C. 221a(b).
(b) Applicable law means the law of a state or other jurisdiction
governing a national bank's fiduciary relationships, any applicable
Federal law governing those relationships, the terms of the instrument
governing a fiduciary relationship, or any court order pertaining to
the relationship.
(c) Custodian under a uniform gifts to minors act means a fiduciary
relationship established pursuant to a state law substantially similar
to the Uniform Gifts to Minors Act or the Uniform Transfers to Minors
Act as published by the American Law Institute.
(d) Fiduciary account means an account administered by a national
bank acting in a fiduciary capacity.
(e) Fiduciary capacity means: trustee, executor, administrator,
registrar of stocks and bonds, transfer agent, guardian, assignee,
receiver, or custodian under a uniform gifts to minors act; investment
adviser, if the bank receives a fee for its investment advice; any
capacity in which the bank possesses investment discretion on behalf of
another; or any other similar capacity that the OCC authorizes pursuant
to 12 U.S.C. 92a.
(f) Fiduciary officers and employees means all officers and
employees of a national bank to whom the board of directors or its
designee has assigned functions involving the exercise of the bank's
fiduciary powers.
(g) Fiduciary powers means the authority the OCC permits a national
bank to exercise pursuant to 12 U.S.C. 92a. The extent of fiduciary
powers is the same for out-of-state national banks as for in-state
national banks, and that extent depends upon what powers the state
grants to the fiduciaries in the state with which national banks
compete.
(h) Guardian means the guardian or conservator, by whatever name
used by state law, of the estate of a minor, an incompetent person, an
absent person, or a person over whose estate a court has taken
jurisdiction, other than under bankruptcy or insolvency laws.
(i) Investment discretion means, with respect to an account, the
sole or shared authority (whether or not that authority is exercised)
to determine what securities or other assets to purchase or sell on
behalf of the account. A bank that delegates its authority over
investments and a bank that receives delegated authority over
investments are both deemed to have investment discretion.
Sec. 9.3 Approval requirements.
(a) A national bank may not exercise fiduciary powers unless it
obtains prior approval from the OCC to the extent required under 12 CFR
5.26.
(b) A person seeking approval to organize a special-purpose
national bank limited to fiduciary powers shall file an application
with the OCC pursuant to 12 CFR 5.20.
Sec. 9.4 Administration of fiduciary powers.
(a) Responsibilities of the board of directors. A national bank's
fiduciary activities shall be managed by or under the direction of its
board of directors. In discharging its responsibilities, the board may
assign any function related to the exercise of fiduciary powers to any
director, officer, employee, or committee thereof.
(b) Use of other personnel. The national bank may use any qualified
personnel and facilities of the bank or its affiliates to perform
services related to the exercise of its fiduciary powers, and any
department of the bank or its affiliates may use fiduciary officers,
employees, and facilities to perform services unrelated to the exercise
of fiduciary powers, to the extent not prohibited by applicable law.
(c) Agency agreements. Pursuant to a written agreement, a national
bank exercising fiduciary powers may perform services related to the
exercise of fiduciary powers for another bank or other entity, and may
purchase services related to the exercise of fiduciary powers from
another bank or other entity.
(d) Bond requirement. A national bank shall ensure that all
fiduciary officers and employees are adequately bonded.
Sec. 9.5 Policies and procedures.
A national bank exercising fiduciary powers shall adopt and follow
written policies and procedures adequate to maintain its fiduciary
activities in compliance with applicable law. Among other relevant
matters, the policies and procedures should address, where appropriate,
the bank's:
(a) Brokerage placement practices;
(b) Methods for ensuring that fiduciary officers and employees do
not use material inside information in connection with any decision or
recommendation to purchase or sell any security;
[[Page 68555]]
(c) Methods for preventing self-dealing and conflicts of interest;
(d) Selection and retention of legal counsel who is readily
available to advise the bank and its fiduciary officers and employees
on fiduciary matters; and
(e) Investment of funds held as fiduciary, including short-term
investments and the treatment of fiduciary funds awaiting investment or
distribution.
Sec. 9.6 Review of fiduciary accounts.
(a) Pre-acceptance review. Before accepting a fiduciary account, a
national bank shall review the prospective account to determine whether
it can properly administer the account.
(b) Initial post-acceptance review. Upon the acceptance of a
fiduciary account for which a national bank has investment discretion,
the bank shall conduct a prompt review of all assets of the account to
evaluate whether they are appropriate for the account.
(c) Annual review. At least once during every calendar year, a bank
shall conduct a review of all assets of each fiduciary account for
which the bank has investment discretion to evaluate whether they are
appropriate, individually and collectively, for the account.
Sec. 9.8 Recordkeeping.
(a) Documentation of accounts. A national bank shall adequately
document the establishment and termination of each fiduciary account
and shall maintain adequate records for all fiduciary accounts.
(b) Retention of records. A national bank shall retain records
described in paragraph (a) of this section for a period of three years
from the later of the termination of the account or the termination of
any litigation relating to the account.
(c) Separation of records. A national bank shall ensure that
records described in paragraph (a) of this section are separate and
distinct from other records of the bank.
Sec. 9.9 Audit of fiduciary activities.
(a) Annual audit. At least once during each calendar year, a
national bank shall arrange for a suitable audit (by internal or
external auditors) of all significant fiduciary activities, under the
direction of its fiduciary audit committee, unless the bank adopts a
continuous audit system in accordance with paragraph (b) of this
section. The bank shall note the results of the audit (including
significant actions taken as a result of the audit) in the minutes of
the board of directors.
(b) Continuous audit. In lieu of performing annual audits under
paragraph (a) of this section, a national bank may adopt a continuous
audit system under which the bank arranges for a discrete audit (by
internal or external auditors) of each significant fiduciary activity
(i.e., on an activity-by-activity basis), under the direction of its
fiduciary audit committee, at an interval commensurate with the nature
and risk of that activity. Thus, certain fiduciary activities may
receive audits at intervals greater or less than one year, as
appropriate. A bank that adopts a continuous audit system shall note
the results of all discrete audits performed since the last audit
report (including significant actions taken as a result of the audits)
in the minutes of the board of directors at least once during each
calendar year .
(c) Fiduciary audit committee. A national bank's fiduciary audit
committee must consist of a committee of the bank's directors or an
audit committee of an affiliate of the bank. However, in either case,
the committee:
(1) Must not include any officers of the bank or an affiliate who
participate significantly in the administration of the bank's fiduciary
activities; and
(2) Must consist of a majority of members who are not also members
of any committee to which the board of directors has delegated power to
manage and control the fiduciary activities of the bank.
Sec. 9.10 Fiduciary funds awaiting investment or distribution.
(a) In general. With respect to a fiduciary account for which a
national bank has investment discretion or discretion over
distributions, the bank may not allow funds awaiting investment or
distribution to remain uninvested and undistributed any longer than is
reasonable for the proper management of the account and consistent with
applicable law. With respect to a fiduciary account for which a
national bank has investment discretion, the bank shall obtain for
funds awaiting investment or distribution a rate of return that is
consistent with applicable law.
(b) Self-deposits--(1) In general. A national bank may deposit
funds of a fiduciary account that are awaiting investment or
distribution in the commercial, savings, or another department of the
bank, unless prohibited by applicable law. To the extent that the funds
are not insured by the Federal Deposit Insurance Corporation, the bank
shall set aside collateral as security, under the control of
appropriate fiduciary officers and employees, in accordance with
paragraph (b)(2) of this section. The market value of the collateral
set aside must at all times equal or exceed the amount of the uninsured
fiduciary funds.
(2) Acceptable collateral. A national bank may satisfy the
collateral requirement of paragraph (b)(1) of this section with any of
the following:
(i) Direct obligations of the United States, or other obligations
fully guaranteed by the United States as to principal and interest;
(ii) Securities that qualify as eligible for investment by national
banks pursuant to 12 CFR part 1;
(iii) Readily marketable securities of the classes in which state
banks, trust companies, or other corporations exercising fiduciary
powers are permitted to invest fiduciary funds under applicable state
law;
(iv) Surety bonds, to the extent they provide adequate security,
unless prohibited by applicable law; and
(v) Any other assets that qualify under applicable state law as
appropriate security for deposits of fiduciary funds.
(c) Affiliate deposits. A national bank, acting in its fiduciary
capacity, may deposit funds of a fiduciary account that are awaiting
investment or distribution with an affiliated insured depository
institution, unless prohibited by applicable law. A national bank may
set aside collateral as security for a deposit by or with an affiliate
of fiduciary funds awaiting investment or distribution, unless
prohibited by applicable law.
Sec. 9.11 Investment of fiduciary funds.
A national bank shall invest funds of a fiduciary account in a
manner consistent with applicable law.
Sec. 9.12 Self-dealing and conflicts of interest.
(a) Investments for fiduciary accounts--(1) In general. Unless
authorized by applicable law, a national bank may not invest funds of a
fiduciary account for which a national bank has investment discretion
in the stock or obligations of, or in assets acquired from: the bank or
any of its directors, officers, or employees; affiliates of the bank or
any of their directors, officers, or employees; or individuals or
organizations with whom there exists an interest that might affect the
exercise of the best judgment of the bank.
(2) Additional securities investments. If retention of stock or
obligations of the bank or its affiliates in a fiduciary account is
consistent with applicable law, the bank may:
(i) Exercise rights to purchase additional stock (or securities
[[Page 68556]]
convertible into additional stock) when offered pro rata to
stockholders; and
(ii) Purchase fractional shares to complement fractional shares
acquired through the exercise of rights or the receipt of a stock
dividend resulting in fractional share holdings.
(b) Loans, sales, or other transfers from fiduciary accounts--(1)
In general. A national bank may not lend, sell, or otherwise transfer
assets of a fiduciary account for which a national bank has investment
discretion to the bank or any of its directors, officers, or employees,
or to affiliates of the bank or any of their directors, officers, or
employees, or to individuals or organizations with whom there exists an
interest that might affect the exercise of the best judgment of the
bank, unless:
(i) The transaction is authorized by applicable law;
(ii) Legal counsel advises the bank in writing that the bank has
incurred, in its fiduciary capacity, a contingent or potential
liability, in which case the bank, upon the sale or transfer of assets,
shall reimburse the fiduciary account in cash at the greater of book or
market value of the assets;
(iii) As provided in Sec. 9.18(b)(8)(iii) for defaulted
investments; or
(iv) Required in writing by the OCC.
(2) Loans of funds held as trustee. Notwithstanding paragraph
(b)(1) of this section, a national bank may not lend to any of its
directors, officers, or employees any funds held in trust, except with
respect to employee benefit plans in accordance with the exemptions
found in section 408 of the Employee Retirement Income Security Act of
1974 (29 U.S.C. 1108).
(c) Loans to fiduciary accounts. A national bank may make a loan to
a fiduciary account and may hold a security interest in assets of the
account if the transaction is fair to the account and is not prohibited
by applicable law.
(d) Sales between fiduciary accounts. A national bank may sell
assets between any of its fiduciary accounts if the transaction is fair
to both accounts and is not prohibited by applicable law.
(e) Loans between fiduciary accounts. A national bank may make a
loan between any of its fiduciary accounts if the transaction is fair
to both accounts and is not prohibited by applicable law.
Sec. 9.13 Custody of fiduciary assets.
(a) Control of fiduciary assets. A national bank shall place assets
of fiduciary accounts in the joint custody or control of not fewer than
two of the fiduciary officers or employees designated for that purpose
by the board of directors. A national bank may maintain the investments
of a fiduciary account off-premises, if consistent with applicable law
and if the bank maintains adequate safeguards and controls.
(b) Separation of fiduciary assets. A national bank shall keep the
assets of fiduciary accounts separate from the assets of the bank. A
national bank shall keep the assets of each fiduciary account separate
from all other accounts or shall identify the investments as the
property of a particular account, except as provided in Sec. 9.18.
Sec. 9.14 Deposit of securities with state authorities.
(a) In general. If state law requires corporations acting in a
fiduciary capacity to deposit securities with state authorities for the
protection of private or court trusts, then before a national bank acts
as a private or court-appointed trustee in that state, it shall make a
similar deposit with state authorities. If the state authorities refuse
to accept the deposit, the bank shall deposit the securities with the
Federal Reserve Bank of the district in which the national bank is
located, to be held for the protection of private or court trusts to
the same extent as if the securities had been deposited with state
authorities.
(b) Assets held in more than one state. If a national bank
administers trust assets in more than one state, the bank may compute
the amount of deposit required for each state on the basis of trust
assets that the bank administers primarily from offices located in that
state.
Sec. 9.15 Fiduciary compensation.
(a) Compensation of bank. If the amount of a national bank's
compensation for acting in a fiduciary capacity is not set or governed
by applicable law, the bank may charge a reasonable fee for its
services.
(b) Compensation of co-fiduciary officers and employees. A national
bank may not permit any officer or employee to retain any compensation
for acting as a co-fiduciary with the bank in the administration of a
fiduciary account, except with the specific approval of the bank's
board of directors.
Sec. 9.16 Receivership or voluntary liquidation of bank.
If the OCC appoints a receiver for an uninsured national bank, or
if a national bank places itself in voluntary liquidation, the receiver
or liquidating agent shall promptly close or transfer to a substitute
fiduciary all fiduciary accounts, in accordance with OCC instructions
and the orders of the court having jurisdiction.
Sec. 9.17 Surrender or revocation of fiduciary powers.
(a) Surrender. In accordance with 12 U.S.C. 92a(j), a national bank
seeking to surrender its fiduciary powers shall file with the OCC a
certified copy of the resolution of its board of directors evidencing
that intent. If, after appropriate investigation, the OCC is satisfied
that the bank has been discharged from all fiduciary duties, the OCC
will provide written notice that the bank is no longer authorized to
exercise fiduciary powers.
(b) Revocation. If the OCC determines that a national bank has
unlawfully or unsoundly exercised, or has failed for a period of five
consecutive years to exercise its fiduciary powers, the Comptroller
may, in accordance with the provisions of 12 U.S.C. 92a(k), revoke the
bank's fiduciary powers.
Sec. 9.18 Collective investment funds.
(a) In general. Where consistent with applicable law, a national
bank may invest assets that it holds as fiduciary in the following
collective investment funds: 1
---------------------------------------------------------------------------
1 In determining whether investing fiduciary assets in a
collective investment fund is proper, the bank may consider the fund
as a whole and, for example, shall not be prohibited from making
that investment because any particular asset is nonincome producing.
---------------------------------------------------------------------------
(1) A fund maintained by the bank, or by one or more affiliated
banks,2 exclusively for the collective investment and reinvestment
of money contributed to the fund by the bank, or by one or more
affiliated banks, in its capacity as trustee, executor, administrator,
guardian, or custodian under a uniform gifts to minors act.
---------------------------------------------------------------------------
2 A fund established pursuant to this paragraph (a)(1)
that includes money contributed by entities that are affiliates
under 12 U.S.C. 221a(b), but are not members of the same affiliated
group, as defined at 26 U.S.C. 1504, may fail to qualify for tax-
exempt status under the Internal Revenue Code. See 26 U.S.C. 584.
---------------------------------------------------------------------------
(2) A fund consisting solely of assets of retirement, pension,
profit sharing, stock bonus or other trusts that are exempt from
Federal income tax.
(i) A national bank may invest assets of retirement, pension,
profit sharing, stock bonus, or other trusts exempt from Federal income
tax and that the bank holds in its capacity as trustee in a collective
investment fund established under paragraph (a)(1) or (a)(2) of this
section.
(ii) A national bank may invest assets of retirement, pension,
profit sharing, stock bonus, or other employee benefit trusts exempt
from Federal income tax and that the bank holds in any capacity
(including agent), in a collective investment fund established under
this
[[Page 68557]]
paragraph (a)(2) if the fund itself qualifies for exemption from
Federal income tax.
(b) Requirements. A national bank administering a collective
investment fund authorized under paragraph (a) of this section shall
comply with the following requirements:
(1) Written plan. The bank shall establish and maintain each
collective investment fund in accordance with a written plan (Plan)
approved by a resolution of the bank's board of directors or by a
committee authorized by the board. The bank shall make a copy of the
Plan available for public inspection at its main office during all
banking hours, and shall provide a copy of the Plan to any person who
requests it. The Plan must contain appropriate provisions, not
inconsistent with this part, regarding the manner in which the bank
will operate the fund, including provisions relating to:
(i) Investment powers and policies with respect to the fund;
(ii) Allocation of income, profits, and losses;
(iii) Fees and expenses that will be charged to the fund and to
participating accounts;
(iv) Terms and conditions governing the admission and withdrawal of
participating accounts;
(v) Audits of participating accounts;
(vi) Basis and method of valuing assets in the fund;
(vii) Expected frequency for income distribution to participating
accounts;
(viii) Minimum frequency for valuation of fund assets;
(ix) Amount of time following a valuation date during which the
valuation must be made;
(x) Bases upon which the bank may terminate the fund; and
(xi) Any other matters necessary to define clearly the rights of
participating accounts.
(2) Fund management. A bank administering a collective investment
fund shall have exclusive management thereof, except as a prudent
person might delegate responsibilities to others.3
---------------------------------------------------------------------------
3 If a fund, the assets of which consist solely of Individual
Retirement Accounts, Keogh Accounts, or other employee benefit
accounts that are exempt from taxation, is registered under the
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.), the fund
will not be deemed in violation of this paragraph (b)(2) as a result
of its compliance with section 10(c) of the Investment Company Act
of 1940 (15 U.S.C. 80a-10(c)).
---------------------------------------------------------------------------
(3) Proportionate interests. Each participating account in a
collective investment fund must have a proportionate interest in all
the fund's assets.
(4) Valuation--(i) Frequency of valuation. A bank administering a
collective investment fund shall determine the value of the fund's
assets at least once every three months. However, in the case of a fund
described in paragraph (a)(2) of this section that is invested
primarily in real estate or other assets that are not readily
marketable, the bank shall determine the value of the fund's assets at
least once each year.
(ii) Method of valuation--(A) In general. Except as provided in
paragraph (b)(4)(ii)(B) of this section, a bank shall value each fund
asset at market value as of the date set for valuation, unless the bank
cannot readily ascertain market value, in which case the bank shall use
a fair value determined in good faith.
(B) Short-term investment funds. A bank may value a fund's assets
on a cost, rather than market value, basis for purposes of admissions
and withdrawals, if the Plan requires the bank to:
(1) Maintain a dollar-weighted average portfolio maturity of 90
days or less;
(2) Accrue on a straight-line basis the difference between the cost
and anticipated principal receipt on maturity; and
(3) Hold the fund's assets until maturity under usual
circumstances.
(5) Admission and withdrawal of accounts--(i) In general. A bank
administering a collective investment fund shall admit an account to or
withdraw an account from the fund only on the basis of the valuation
described in paragraph (b)(4) of this section.
(ii) Prior request or notice. A bank administering a collective
investment fund may admit an account to or withdraw an account from a
collective investment fund only if the bank has approved a request for
or a notice of intention of taking that action on or before the
valuation date on which the admission or withdrawal is based. No
requests or notices may be canceled or countermanded after the
valuation date.
(iii) Prior notice period for withdrawals from funds with assets
not readily marketable. A bank administering a collective investment
fund described in paragraph (a)(2) of this section that is invested
primarily in real estate or other assets that are not readily
marketable, may require a prior notice period, not to exceed one year,
for withdrawals.
(iv) Method of distributions. A bank administering a collective
investment fund shall make distributions to accounts withdrawing from
the fund in cash, ratably in kind, a combination of cash and ratably in
kind, or in any other manner consistent with applicable law in the
state in which the bank maintains the fund.
(v) Segregation of investments. If an investment is withdrawn in
kind from a collective investment fund for the benefit of all
participants in the fund at the time of the withdrawal but the
investment is not distributed ratably in kind, the bank shall segregate
and administer it for the benefit ratably of all participants in the
collective investment fund at the time of withdrawal.
(6) Audits and financial reports--(i) Annual audit. At least once
during each 12-month period, a bank administering a collective
investment fund shall arrange for an audit of the collective investment
fund by auditors responsible only to the board of directors of the
bank.4
---------------------------------------------------------------------------
4 If a fund, the assets of which consist solely of Individual
Retirement Accounts, Keogh Accounts, or other employee benefit
accounts that are exempt from taxation, is registered under the
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.), the fund
will not be deemed in violation of this paragraph (b)(6)(i) as a
result of its compliance with section 10(c) of the Investment
Company Act of 1940 (15 U.S.C. 80a-10(c)), if the bank has access to
the audit reports of the fund.
---------------------------------------------------------------------------
(ii) Financial report. At least once during each 12-month period, a
bank administering a collective investment fund shall prepare a
financial report of the fund based on the audit required by paragraph
(b)(6)(i) of this section. The report must disclose the fund's fees and
expenses in a manner consistent with applicable law in the state in
which the bank maintains the fund. This report must contain a list of
investments in the fund showing the cost and current market value of
each investment, and a statement covering the period after the previous
report showing the following (organized by type of investment):
(A) A summary of purchases (with costs);
(B) A summary of sales (with profit or loss and any other
investment changes);
(C) Income and disbursements; and
(D) An appropriate notation of any investments in default.
(iii) Limitation on representations. A bank may include in the
financial report a description of the fund's value on previous dates,
as well as its income and disbursements during previous accounting
periods. A bank may not publish in the financial report any predictions
or representations as to future performance. In addition, with respect
to funds described in paragraph (a)(1) of this section, a bank may not
publish the performance of individual funds other than those
administered by the bank or its affiliates.
(iv) Availability of the report. A bank administering a collective
investment
[[Page 68558]]
fund shall provide a copy of the financial report, or shall provide
notice that a copy of the report is available upon request without
charge, to each person who ordinarily would receive a regular periodic
accounting with respect to each participating account. The bank may
provide a copy of the financial report to prospective customers. In
addition, the bank shall provide a copy of the report upon request to
any person for a reasonable charge.
(7) Advertising restriction. A bank may not advertise or publicize
any fund authorized under paragraph (a)(1) of this section, except in
connection with the advertisement of the general fiduciary services of
the bank.
(8) Self-dealing and conflicts of interest. A national bank
administering a collective investment fund must comply with the
following (in addition to Sec. 9.12):
(i) Bank interests. A bank administering a collective investment
fund may not have an interest in that fund other than in its fiduciary
capacity. If, because of a creditor relationship or otherwise, the bank
acquires an interest in a participating account, the participating
account must be withdrawn on the next withdrawal date. However, a bank
may invest assets that it holds as fiduciary for its own employees in a
collective investment fund.
(ii) Loans to participating accounts. A bank administering a
collective investment fund may not make any loan on the security of a
participant's interest in the fund. An unsecured advance to a fiduciary
account participating in the fund until the time of the next valuation
date does not constitute the acquisition of an interest in a
participating account by the bank.
(iii) Purchase of defaulted investments. A bank administering a
collective investment fund may purchase for its own account any
defaulted investment held by the fund (in lieu of segregating the
investment in accordance with paragraph (b)(5)(v) of this section) if,
in the judgment of the bank, the cost of segregating the investment is
excessive in light of the market value of the investment. If a bank
elects to purchase a defaulted investment, it shall do so at the
greater of market value or the sum of cost and accrued unpaid interest.
(9) Management fees. A bank administering a collective investment
fund may charge a reasonable fund management fee only if:
(i) The fee is permitted under applicable law (and complies with
fee disclosure requirements, if any) in the state in which the bank
maintains the fund; and
(ii) The amount of the fee does not exceed an amount commensurate
with the value of legitimate services of tangible benefit to the
participating fiduciary accounts that would not have been provided to
the accounts were they not invested in the fund.
(10) Expenses. A bank administering a collective investment fund
may charge reasonable expenses incurred in operating the collective
investment fund, to the extent not prohibited by applicable law in the
state in which the bank maintains the fund. However, a bank shall
absorb the expenses of establishing or reorganizing a collective
investment fund.
(11) Prohibition against certificates. A bank administering a
collective investment fund may not issue any certificate or other
document representing a direct or indirect interest in the fund, except
to provide a withdrawing account with an interest in a segregated
investment.
(12) Good faith mistakes. The OCC will not deem a bank's mistake
made in good faith and in the exercise of due care in connection with
the administration of a collective investment fund to be a violation of
this part if, promptly after the discovery of the mistake, the bank
takes whatever action is practicable under the circumstances to remedy
the mistake.
(c) Other collective investments. In addition to the collective
investment funds authorized under paragraph (a) of this section, a
national bank may collectively invest assets that it holds as
fiduciary, to the extent not prohibited by applicable law, as follows:
(1) Single loans or obligations. In the following loans or
obligations, if the bank's only interest in the loans or obligations is
its capacity as fiduciary:
(i) A single real estate loan, a direct obligation of the United
States, or an obligation fully guaranteed by the United States, or a
single fixed amount security, obligation, or other property, either
real, personal, or mixed, of a single issuer; or
(ii) A variable amount note of a borrower of prime credit, if the
bank uses the note solely for investment of funds held in its fiduciary
accounts.
(2) Mini-funds. In a fund maintained by the bank for the collective
investment of cash balances received or held by a bank in its capacity
as trustee, executor, administrator, guardian, or custodian under a
uniform gifts to minors act, that the bank considers too small to be
invested separately to advantage. The total assets in the fund must not
exceed $1,000,000 and the number of participating accounts must not
exceed 100.
(3) Trust funds of corporations and closely-related settlors. In
any investment specifically authorized by the instrument creating the
fiduciary account or a court order, in the case of trusts created by a
corporation, including its affiliates and subsidiaries, or by several
individual settlors who are closely related.
(4) Other authorized funds. In any collective investment authorized
by applicable law, such as investments pursuant to a state pre-need
funeral statute.
(5) Special exemption funds. In any other manner described by the
bank in a written plan approved by the OCC.5 In order to obtain a
special exemption, a bank shall submit to the OCC a written plan that
sets forth:
---------------------------------------------------------------------------
5 Any institution that must comply with this section in
order to receive favorable tax treatment under 26 U.S.C. 584
(namely, any corporate fiduciary) may seek OCC approval of special
exemption funds in accordance with this paragraph (c)(5).
---------------------------------------------------------------------------
(i) The reason that the proposed fund requires a special exemption;
(ii) The provisions of the proposed fund that are inconsistent with
paragraphs (a) and (b) of this section;
(iii) The provisions of paragraph (b) of this section for which the
bank seeks an exemption; and
(iv) The manner in which the proposed fund addresses the rights and
interests of participating accounts.
Sec. 9.20 Transfer agents.
(a) The rules adopted by the Securities and Exchange Commission
(SEC) pursuant to section 17A of the Securities Exchange Act of 1934
(15 U.S.C. 78q-1) prescribing procedures for registration of transfer
agents for which the SEC is the appropriate regulatory agency (17 CFR
240.17Ac2-1) apply to the domestic activities of national bank transfer
agents. References to the ``Commission'' are deemed to refer to the
``OCC.''
(b) The rules adopted by the SEC pursuant to section 17A of the
Securities Exchange Act of 1934 prescribing operational and reporting
requirements for transfer agents (17 CFR 240.17Ac2-2, and 240.17Ad-1
through 240.17Ad-16) apply to the domestic activities of national bank
transfer agents.
Interpretations
Sec. 9.100 Acting as indenture trustee and creditor.
With respect to a debt securities issuance, a national bank may act
both as indenture trustee and as creditor
[[Page 68559]]
until 90 days after default, if the bank maintains adequate controls to
manage the potential conflicts of interest.
PART 19--RULES OF PRACTICE AND PROCEDURE
2. The authority citation for part 19 is revised to read as
follows:
Authority: 5 U.S.C. 504, 554-557; 12 U.S.C. 93(b), 164, 505,
1817, 1818, 1820, 1831o, 1972, 3102, 3108(a), 3909 and 4717; 15
U.S.C. 78(h) and (i), 78o-4(c), 78o-5, 78q-1, 78s, 78u, 78u-2, 78u-
3, and 78w; 28 U.S.C. 2461 note; 31 U.S.C. 330 and 5321; and 42
U.S.C. 4012a.
3. A new Sec. 19.135 is added to subpart E of part 19 to read as
follows:
Sec. 19.135 Applications for stay or review of disciplinary actions
imposed by registered clearing agencies.
(a) Stays. The rules adopted by the Securities and Exchange
Commission (SEC) pursuant to section 19 of the Securities Exchange Act
of 1934 (15 U.S.C. 78s) regarding applications by persons for whom the
SEC is the appropriate regulatory agency for stays of disciplinary
sanctions or summary suspensions imposed by registered clearing
agencies (17 CFR 240.19d-2) apply to applications by national banks.
References to the ``Commission'' are deemed to refer to the ``OCC.''
(b) Reviews. The regulations adopted by the SEC pursuant to section
19 of the Securities Exchange Act of 1934 (15 U.S.C. 78s) regarding
applications by persons for whom the SEC is the appropriate regulatory
agency for reviews of final disciplinary sanctions, denials of
participation, or prohibitions or limitations of access to services
imposed by registered clearing agencies (17 CFR 240.19d-3(a)-(f)) apply
to applications by national banks. References to the ``Commission'' are
deemed to refer to the ``OCC.''
Dated: December 23, 1996.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 96-32943 Filed 12-27-96; 8:45 am]
BILLING CODE 4810-33-P
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.