Fiduciary Powers; Community Reinvestment Act

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 545, 550, 563e, and 571

[No. 97-129]

RIN 1550-AB09

Fiduciary Powers; Community Reinvestment Act

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Final rule.

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SUMMARY: The Office of Thrift Supervision (``OTS'') is issuing a final

rule revising its fiduciary powers regulation. The final rule updates,

clarifies, and streamlines OTS regulations, incorporates significant

interpretive guidance, and eliminates unnecessary regulatory burden.

The final rule consolidates all regulations on the fiduciary powers of

Federal savings associations into a single part. Additionally, this

part has been revised to incorporate the OTS current policy statement

on the fiduciary activities of State-chartered savings associations.

The OTS is also amending its Community Reinvestment Act (``CRA'')

regulations. The change conforms the scope of the OTS's CRA regulations

to the regulations of the other Federal banking agencies. It exempts

certain savings associations that do not perform commercial or retail

banking services by

[[Page 67697]]

granting credit to the public in the ordinary course of business.

EFFECTIVE DATE: January 1, 1998.

FOR FURTHER INFORMATION CONTACT: Larry Clark, Senior Manager,

Compliance and Trust Programs, Compliance Policy, (202) 906-5628;

Timothy Leary, Counsel (Banking and Finance), (202) 906-7170, or Karen

Osterloh, Assistant Chief Counsel, (202) 906-6639, Regulations and

Legislation Division, Chief Counsel's Office, Office of Thrift

Supervision, 1700 G Street, N.W., Washington, D.C. 20552.

SUPPLEMENTARY INFORMATION:

I. Background

On July 23, 1997, the OTS published a notice of proposed rulemaking

seeking comment on its regulations governing the fiduciary operations

of Federal savings associations. 62 FR 39477. The proposal was the

first comprehensive revision of the fiduciary powers regulations at 12

CFR part 550 since 1980.

The proposed rule was intended to update, streamline, and clarify

these regulations. It also reflected the changes that Federal savings

associations and their fiduciary operations have undergone since 1980,

and incorporated significant interpretive opinions. Overall, the

purpose of the proposed rule was to facilitate the continued

development of fiduciary business consistent with safe and sound

practices. Consistent with section 303 of the Community Development and

Regulatory Improvement Act of 1994 (``CDRIA''), the proposed rule

conformed OTS's fiduciary powers rules more closely to rules of the

other agencies, specifically the rules issued by the Office of the

Comptroller of the Currency at 12 CFR part 9, as revised at 61 FR 68543

(December 30, 1996).

The OTS also sought comment on exemptions from the OTS's

regulations implementing the Community Reinvestment Act (``CRA'').

Specifically, the OTS proposed to conform its CRA regulations to the

other Federal banking agencies by exempting certain special purpose

savings associations. Special purpose savings associations were

exempted if they do not perform commercial or retail banking services

by granting credit to the public in the ordinary course of business,

other than as incident to their specialized operations.

II. Comments Received

Four commenters responded to the proposal: Two Federal savings

associations, one State regulatory agency, and one community

reinvestment organization. Generally, the two Federal savings

associations supported the proposal, but suggested specific changes.

The State regulatory agency did not support or oppose the proposal, but

also made suggestions. The community reinvestment organization opposed

the proposed CRA exemption for special purpose savings associations.

III. Discussion

A. Fiduciary Powers

1. Structure of Revised Part 550

The proposed fiduciary powers rule was written in a traditional

regulation format. The final fiduciary powers rule issued today uses

the plain language drafting techniques promoted by the Vice President's

National Performance Review Initiative and new guidance in the Federal

Register Document Drafting Handbook (January 1997 edition). The primary

goal of plain language drafting is to make regulations easier to

understand. Plain language drafting emphasizes informative headings

(often written as a question), non-technical language (including the

use of ``you''), and sentences in the active voice.

Although commenters did not have an opportunity to comment on the

plain language format prior to this final rule, the OTS believes that

the benefits of the plain language format justify its use. Even though

the OTS has substantially reorganized the rule, the substance of the

proposed regulation did not change as a result of the format. The OTS

welcomes comments on the format and suggestions on how to improve it.

2. Section-by-Section Discussion

A discussion of the comments follows. This discussion generally

does not address provisions on which the OTS received no comments or

only supporting comments. Unless specifically discussed below, the

proposed rules are adopted with only plain language format changes.

Section 550.10 What regulations govern the fiduciary operations of

savings associations?

Proposed Sec. 550.1 stated that part 550 is issued pursuant to 12

U.S.C. 1464(n) (section 5(n) of the Home Owners' Loan Act (``HOLA'')).

Proposed Sec. 550.1 also stated that part 550 sets forth the standards

that apply to the fiduciary activities of Federal savings associations.

This section has been incorporated into final Sec. 550.10(a), which

states that a Federal savings association is required to conduct its

fiduciary operations in accordance with 12 U.S.C. 1464(n) and the

provisions of part 550.

The final rule at Sec. 550.10(b) includes a new paragraph that was

not included in the proposed rule. This provision incorporates, without

substantive change, language from the existing policy statement

regarding the fiduciary activities of State-chartered savings

associations at 12 CFR 571.15. Final Sec. 550.10(b) states that a

State-chartered savings association must conduct its fiduciary

operations in accordance with State law. The rule, however, also

recognizes the OTS's interest in those operations. As such, the final

rule requires State-chartered savings associations to exercise

fiduciary powers in a safe and sound manner, and clarifies that these

associations and their subsidiaries should follow the standards for the

exercise of fiduciary powers set out in part 550.1 The final

rule also states that the OTS will monitor the fiduciary operations of

State-chartered savings associations and their subsidiaries, and may

restrict or prohibit activities that threaten the safety and soundness

of the association.

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\1\ State-chartered savings associations are particularly

advised to adhere to Sec. 550.140, which contains the standards for

the exercise of fiduciary powers. In exercising their fiduciary

powers, State-chartered savings associations should also observe the

procedures and policies required by Part 550 in the areas of

fiduciary personnel and facilities, custody and control of assets,

investing funds of a fiduciary account, deposit of funds awaiting

investment or distribution, restrictions on self-dealing, and audit

requirements.

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Section 550.20 What are fiduciary powers?

The proposed rule at Sec. 550.2 defined fiduciary powers as the

authority the OTS permits a Federal savings association to exercise

pursuant to 12 U.S.C. 1464(n). The definition also stated that the

scope of a Federal savings association's fiduciary powers depends on

the powers that the State grants to competing fiduciaries in the State

in which the Federal savings association is located.

One commenter argued that the OTS should explicitly state that if

an activity does not fall into the OTS's definition of fiduciary

activity, but is an otherwise permissible activity for a Federal

savings association or its operating subsidiaries, the association or

subsidiary should be permitted to engage in that activity. The

commenter maintained that it is irrelevant whether State competitors

are allowed to engage in that activity and whether that activity is

considered a fiduciary activity by the State.

The final rule adopts the language of the proposed rule. By the

terms of the

[[Page 67698]]

statute, the scope of a Federal savings association's fiduciary powers

is determined by the authority a particular State grants to competing

fiduciaries in the State in which the Federal savings association is

located. The reference in Sec. 550.20 to State law is, thus, compelled

by the statutory language.

We decline to adopt a blanket statement in this regulation about

the applicability of particular State laws to activities that are

otherwise permissible for a Federal savings association. Federal

savings associations interested in conducting such activities should

consult the statutory basis for that activity and the regulations that

govern its exercise before engaging in the activity. The applicability

of particular State law to the activity would depend on an analysis of

each situation as it arises.

Section 550.30 What fiduciary capacities does this regulation cover?

Under the proposed rule, fiduciary capacity included specified

fiduciary positions such as acting as a trustee, executor,

administrator, registrar of stocks and bonds, transfer agent, guardian,

assignee, receiver, custodian under a uniform gifts to minors act, any

capacity in which the Federal savings association possesses investment

discretion on behalf of another, or any other similar capacity that the

OTS authorizes under 12 U.S.C. 1464(n).2 The proposed

definition also included acting as an investment adviser, if the

Federal savings association receives a fee for its investment advice.

In interpreting this provision, the OTS stated that it intended to

follow a proposed OCC interpretive ruling on the meaning of investment

advisor for a fee.3 Under the OCC interpretation, the term

investment advisor generally means that the institution provides advice

or recommendations concerning the purchase or sale of specific

securities, such as an institution engaged in portfolio advisory and

management activities. The term generally excludes those activities in

which the investment advice is merely incidental to other services.

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\2\ The proposed rule sought comment on whether the final rule

should rely on State law to determine the dividing line between

fiduciary and non-fiduciary activities. One commenter opposed this

alternative. The OTS believes that the definition of fiduciary

capacity should foster consistent application of part 550 for all

Federal savings associations. Accordingly, the OTS will not rely

exclusively on State law in determining whether a particular

activity amounts to acting in a fiduciary capacity. We note that the

OCC also rejected a State law approach in its final rule on

fiduciary activities of national banks.

\3\ 62 FR 36746 (July 9, 1997).

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One commenter argued that fiduciary capacity should not include a

trustee under a deed of trust, a receiver or assignee under one's own

security instrument in a default situation, a custodian under a uniform

gift to minors act account, or a trustee under real estate or land

trust. While the commenter generally supported the adoption of the OCC

proposed interpretive ruling on investment advisors receiving a fee, it

suggested that investment advisory and related activities that do not

involve investment discretion should not be subject to part 550, even

if performed for a fee.

The final rule at Sec. 550.30 addresses the fiduciary capacities

that are covered by part 550. The final rule continues to cite the

specific fiduciary capacities in the proposed rule. Some of the

specific capacities are enumerated under 12 U.S.C. 1464(n)(1). Others,

such as custodian under a uniform gift to minors act, have long been

cited under the OTS and OCC fiduciary powers regulations. The final

rule also includes any capacity in which the association possesses

investment discretion on behalf of another, and acting as an investment

advisor for a fee.

The OTS has not adopted the commenter's proposal to exclude certain

fiduciary capacities. Initially, we note that the applicability of part

550 to some of the specifically-listed fiduciary positions will depend

on what the fiduciary in the relationship actually does. For example,

``trustee'' is a specifically-listed fiduciary capacity at

Sec. 550.30(a). The final rule at Sec. 550.580(c), however, excepts a

Federal savings association from part 550 if the association acts as

the trustee of a fiduciary account that involves no active fiduciary

duties and applicable law permits the association to act in that

capacity. Similarly, an investment adviser that receives a fee for

advice is a specifically-listed fiduciary capacity at Sec. 550.30(j).

The OTS, however, has indicated that it will follow the OCC's proposed

interpretive ruling on investment advisers, which provides numerous

examples of activities that do not constitute the provision of

investment advice.4 Finally, we note that the final rule

generally excludes relationships'--other than those specifically

listed'--where the Federal savings association does not have investment

discretion.

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\4\ These include financial advice and counseling, including

strategic planning of a financial nature, merger and acquisition

advisory services, advisory and structuring services related to

project finance transactions, and providing market economic

information to customers in general; client-directed investment

activities where the fee does not depend on the provision of

investment advice; investment advice incidental to acting as a

municipal securities dealer; real estate asset management; real

estate consulting; advice concerning bridge loans; services for

homeowners' associations; tax planning and structuring advice; and

investment advice authorized by the OCC under 12 U.S.C. 24 (Seventh)

as an incidental power necessary to carry on the business of

banking.

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As noted, one commenter argues that a Federal savings association

that gives investment advice for a fee should not be deemed to be

acting in a fiduciary capacity if it is not making the investment

decision.

The OTS disagrees. When a customer pays a Federal savings

association a fee in return for providing investment advice--whether or

not that customer follows the advice--the customer has a reasonable

expectation of receiving advice that is free of conflicts of interest.

Such an approach is also consistent with other Federal statutes that

provide enhanced protection to customers of certain investment advisers

who receive a fee.5 Consistent with the OCC's rules at part

9, the OTS believes that the distinction between paid and unpaid

investment advice reflects the reasonable expectation of Federal

savings association customers.

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\5\ See, e.g., 29 U.S.C. 1002(21)(A) (fiduciaries of ERISA

accounts); 15 U.S.C. 80b-2(a)(11) (Investment Advisers Act, which

generally applies to any person who, for compensation, engages in

the business of advising others. Although banks are exempt from the

Investment Advisers Act, Federal savings associations are not, and

investment advisers employed by Federal savings associations must

therefore register with the SEC).

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Even under this approach, the OTS maintains some flexibility in

determining what is investment advice. As noted, the OCC has issued a

proposed interpretive ruling on the meaning of this phrase, and the OTS

intends to follow that interpretation. Such guidance, in combination

with the exemption in final Sec. 550.580(c), should suffice to ensure

proper application of the concept of acting in a fiduciary capacity.

Finally, the preamble to the proposed rule noted that bank

employees who engage in certain securities transactions for customers

are subject to various recordkeeping and confirmation requirements

under the rules of the other Federal banking agencies.6 The

proposal sought comment on whether the OTS should issue a separate

proposed rulemaking adopting those rules for employees of Federal

savings associations.

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\6\ 12 CFR part 12 (OCC); 12 CFR 208.8(k) (FRB); 12 CFR part 344

(FDIC).

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Two commenters noted that the other banking agencies are currently

revising their rules. The commenters urged the

[[Page 67699]]

OTS to wait and see what revisions are made before engaging in formal

rulemaking. The OTS agrees and has deferred consideration of this

issue.

Section 550.60 What other definitions apply to this part?

The proposed rule at Sec. 550.2 defined applicable law as ``the law

of a State or other jurisdiction governing a Federal savings

association'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.'' One commenter urged the OTS to specify that State law

does not apply to the fiduciary activities of Federal savings

association except to the extent specifically required by section 5(n)

of the HOLA.

The final rule does not adopt the commenter's suggestion. Both the

OTS's Trust Activities Handbook and prior OTS precedent recognize that

State law may apply to the fiduciary activities of a Federal savings

association.7 However, by defining applicable law to include

``the law of a State * * * governing a fiduciary relationship,'' the

OTS does not intend to affect its precedent in the area of Federal

preemption. The fiduciary operations of Federal savings associations

are subject to a complex interplay between Federal and State law.

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\7\ OTS Trust Activities Handbook, Sec. 130 at 75 (1992); OTS

Op. Chief Counsel (March 28, 1996) at 9. The example noted in both

of these authorities is State probate law, which prescribes the

standards of conduct of an institution acting as an executor.

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The OTS has noted that although State law may apply, in certain

circumstances, to the fiduciary operations of a Federal savings

association, Federal law grants the OTS the plenary authority to

regulate all aspects of the operations of Federal savings associations,

including fiduciary operations.8 Consistent with this role,

the OTS has promulgated these detailed regulations to govern the

fiduciary operations of Federal savings associations. Any State law

that conflicts with any of these regulations or section 5(n) of the

HOLA is preempted.9

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\8\ 12 U.S.C.A. 1464(a) (West Supp. 1995); OTS Op. Chief Counsel

(March 28, 1996) at 8.

\9\ OTS Op. Chief Counsel (March 28, 1996) at 8; OTS Trust

Activities Handbook, Sec. 130 at 75 (1992).

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Moreover, even though State law applies in limited circumstances,

the next question is: ``Which State's laws apply?'' A Federal savings

association is subject only to the laws of the State (or States) in

which it is located. The OTS has found that a Federal savings

association is located, for fiduciary purposes, in each State in which

it operates a fiduciary office.10 The OTS has further found

that an association is not located in a State in which it only markets

its fiduciary services 11 or performs certain activities

incidental to serving as a testamentary trustee or a trustee holding

real estate.12

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\10\ 62 FR 39479; OTS Op. Chief Counsel (March 28, 1996).

\11\ OTS Op. Chief Counsel (June 21, 1996).

\12\ OTS Op. Chief Counsel (August 8, 1996).

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The definition of applicable law is not intended to set an order of

priority among the various authorities. Rather, the intent of the

definition is to identify the various authorities that may govern a

Federal savings association's fiduciary activities. Preemption and

conflicts of law issues in the fiduciary area are highly fact-specific

and cannot be resolved by reference to a general blanket rule of

priority. The OTS believes the better practice is to continue to handle

specific questions about the applicability of particular State laws on

a case-by-case basis. Accordingly, the final rule adopts the proposed

definition of applicable law.

Section 550.130 What fiduciary powers may a Federal savings

association exercise?

Proposed Sec. 550.4(a) stated that a Federal savings association

may exercise only those fiduciary powers stated in the OTS's approval

of a fiduciary application. Moreover, unless otherwise provided in the

OTS's approval, a Federal savings association may exercise fiduciary

powers only in those offices listed in the application.

One commenter argued that the office limitation is restrictive, and

that there is no valid legal or policy reason for requiring a Federal

savings association to file a new application when it opens a new

branch or office. The commenter argued that appropriate information

about such expanded operations could be provided through a notice or

approval process.

The final rule adopts the proposed rule without substantive change.

Like the proposed rule, Sec. 550.130 states that the location

restriction only applies ``unless otherwise provided in the approval.''

This language gives the OTS the legal authority to specify at the time

that it approves a fiduciary powers application that the applicant may

expand the offices out of which it exercises approved fiduciary powers

by simply filing a notice with the OTS. The willingness of the OTS to

grant an initial approval that authorizes subsequent expansion through

such a process will depend on a number of factors, including an

institution's financial and managerial resources, history of regulatory

compliance, level of fiduciary expertise, and so forth.

Thus, a decision whether the OTS will authorize an expanded network

under a notice process cannot be made until the initial fiduciary

powers application is submitted and reviewed.13 Since the

proposed rule would permit the addition of new offices using notice

process where appropriate, the commenter's revision has not been

incorporated in the final rule. The proposed language is sufficient to

alleviate the commenter's concern.

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\13\ See OTS Op. Chief Counsel (December 24, 1992).

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Section 550.140 Must a Federal savings association adopt and follow

written policies and procedures in exercising fiduciary powers?

Proposed Sec. 550.6 set out the general standards that a Federal

association must follow in exercising its fiduciary powers. The

proposed rule specifically provided that a Federal savings association

must exercise its fiduciary powers prudently and in compliance with

applicable law.

The proposed rule further provided that a Federal savings

association must use standards in exercising its fiduciary powers that

are consistent with safety and soundness, promote sound fiduciary

administration, and enable the Federal savings association to

adequately monitor the condition of its fiduciary operations. Unlike

the OCC's fiduciary powers regulation, the proposed rule did not

require a Federal savings association to maintain written policies and

procedures governing the exercise of fiduciary powers. Compare 12 CFR

9.5.

Two commenters addressed proposed Sec. 550.6. One, a Federal

savings association, supported the proposal. The other, a State

regulatory agency, argued that the OTS should require Federal savings

associations to develop, maintain, and follow procedures, especially in

the areas of self-dealing and conflicts of interest. This commenter

argued that written policies and procedures are necessary to properly

manage risks in these areas.

Upon further consideration, the OTS has determined that requiring

written policies and procedures in this area is appropriate. Since

1989, the OTS Trust Activities Handbook has ``strongly encouraged''

associations to adopt written policies and procedures covering all

major aspects of their

[[Page 67700]]

fiduciary business, to communicate such policies to all interested

personnel, to monitor compliance with the policies, and to periodically

review and update the policies to ensure their current application.

Comprehensive, well-developed policies and procedures on fiduciary

activities, if followed, monitored, and enforced, are an effective

method of preventing exposure to liability, operating loss and the loss

of public confidence in the association. Such policies and procedures

promote high-quality fiduciary administration, facilitate compliance

with applicable laws and regulations, and increase operating

efficiencies.

Accordingly, consistent with the OCC's 12 CFR 9.5, the final rule

adopts the requirement for written policies and procedures.

Specifically, the OTS final rule requires Federal savings associations

to adopt and follow written policies and procedures adequate to

maintain its fiduciary activities in compliance with applicable law.

The final rule also provides examples of areas that the policies and

procedures should address, where appropriate. 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).14 The OTS does not intend the list to be

exhaustive.

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\14\ We note that two of the listed areas are derived from

requirements in current part 550. They are the use of material

inside information in connection with any decision or recommendation

to purchase or sell any security (current Sec. 550.5(c)) and the

selection and retention of available legal counsel (current

Sec. 550.5(d)).

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Section 550.260 How may a Federal savings association invest funds of

a fiduciary account?

Proposed Sec. 550.12(a) provided that, where consistent with

applicable law, a Federal savings association may invest fiduciary

assets in certain described collective investment funds. One commenter

expressed concerns about the scope of this provision, specifically

whether it authorized fiduciary assets to be invested in collective

investment funds established under other authority, such as the OCC's

collective investment funds regulation, 12 CFR 9.18.

Upon review, the OTS has determined to significantly revise this

section. A collective investment fund can be exempt from taxation if it

is administered in accordance with applicable provisions of the

Internal Revenue Code. Section 584 of the Internal Revenue Code exempts

certain funds from taxation if they are administered in accordance with

OCC regulations. This IRC section applies to funds established by

savings associations as well as banks. As a result, the OTS fiduciary

powers regulation has always incorporated the requirements of 12 CFR

9.18 by reference. The OTS proposed rule included some of the OCC

requirements applicable to collective investment funds and incorporated

others by reference. By revising the final rule to incorporate all of

the requirements by reference, the OTS believes it will reduce the

confusion about the regulation's scope and applicability.

New Sec. 550.260(b) authorizes a Federal savings association to

invest fiduciary funds in a collective investment fund and to establish

and administer such a fund. All such activities must be done in

accordance with the OCC's detailed regulations governing this area. As

a Federal savings association must already comply with those

requirements in order to maintain the tax-exempt status of its

collective investment fund, this change will help to reduce regulatory

duplication and overlap, consistent with the objective of section 303

of CDRIA.

The final rule eliminates the language in Sec. 550.12(a), which

caused the commenter's concern that the proposed rule would have

prohibited a savings association from investing in an otherwise

permissible collective investment fund maintained by an affiliated or

unaffiliated State bank or trust company. Under Sec. 550.260(a), which

replaces Sec. 550.11, a savings association is authorized to invest

funds of a fiduciary account in a manner consistent with applicable

law.15

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\15\ Moreover, Sec. 9.18(a), which is intended to clarify that

traditional common law prohibitions against commingling fiduciary

assets do not affect a national bank's ability to invest in a

collective investment fund maintained by the bank or an affiliated

bank, addresses investments in collective investment funds

maintained by an affiliated State chartered trust company. This

provision permits a national bank to invest assets that it holds as

fiduciary in a collective investment fund maintained by one or more

affiliated ``banks'' exclusively for the collective investment and

reinvestment of money contributed to the fund by the bank, or by one

or more affiliated banks. Section 581 of the Internal Revenue Code,

which the OCC regulation implements, defines ``bank'' to include ``a

trust company incorporated and doing business under the laws of * *

* any State, a substantial part of the business of which consists of

* * * exercising fiduciary powers similar to those permitted to

national banks under the authority of the [OCC], and which is

subject by law to supervision and examination by State * * *

authority having supervision over banking institutions.'' Under this

definition, we believe that ``bank'' as used in the OCC regulation

includes an affiliated State chartered trust company.

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Sections 550.290-550.320 Funds Awaiting Investment or Distribution

Proposed Sec. 550.10(b)(1) and (c) stated that a Federal savings

association with investment discretion or discretion over distributions

may deposit funds awaiting investment or distribution in the

commercial, savings, or other department of the association, or with an

affiliated insured depository institution, unless the deposit is

prohibited by applicable law. To the extent that the funds are not

insured by the FDIC, the association is required to set aside

acceptable collateral as security. See proposed Sec. 550.10(b)(2). The

proposed provisions are adopted without substantive change at

Secs. 550.290 through 550.320.

Under the proposed rule, acceptable collateral includes surety

bonds, to the extent that such bonds provide adequate security and are

not prohibited by applicable law. See proposed Sec. 550.10(b)(2)(iv).

One commenter urged the OTS to adopt a national standard allowing

Federal savings associations to use security bonds, without regard to

State prohibitions.

Section 550.320(d) of the final rule continues to provide that

surety bonds may be used to collateralize self-deposits unless

prohibited by applicable law. This approach grants Federal savings

associations the ability to collateralize self-deposits with surety

bonds, while preserving for each State the ability to prohibit this

practice for all fiduciaries operating in the State.

Sections 550.440-550.480 Audit Requirements

Proposed Sec. 550.9 prescribed the audit requirements for fiduciary

activities. The proposed rule required Federal savings associations to

conduct an annual audit of significant fiduciary activities.

Alternatively, the proposed rule permitted a continuous audit, which

allows a Federal savings association to arrange for a discrete audit of

each significant fiduciary activity at an interval commensurate with

the nature and risk of the activity.16 Under the proposed

rule, all audits are conducted under the direction of the fiduciary

audit committee. This committee may consist of a committee of the

association's

[[Page 67701]]

directors or an audit committee of an affiliate of the association.

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\16\ While recognizing that the frequency of discrete audits for

Federal savings associations that use a continuous audit system will

vary depending on the nature and risk of the activity being audited,

the OTS does not intend to allow an association using a continuous

audit system to avoid discrete audits indefinitely. Although the

final rule does not specify how often such discrete audits must be

conducted, they must occur at reasonable time frames.

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One commenter supported the proposal to allow an audit committee of

a savings and loan holding company to audit the fiduciary activities of

its subsidiary Federal savings association. The commenter argued that

the same option should be available to bank holding companies that own

Federal savings associations.

Although the preamble to the proposed rule addressed the audit

committee of a savings and loan holding company, the language of the

proposed rule permitted an audit committee of an affiliate to direct

the audit. Affiliate, as defined in the rule, could include a savings

and loan holding company and a bank holding company, provided that

specified ownership, control or other criteria are met.17

Accordingly, the proposed rule would permit these arrangements. The

final rule at Sec. 550.470 is unchanged on this point.

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\17\ See 12 U.S.C.A. 221a(b)(4) (West 1989).

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In the preamble to the proposed rule, the OTS invited commenters to

address the relationship between the audit requirement and the OTS's

fiduciary examination process. In particular, the OTS sought comment on

the extent to which examiners should rely on an association's internal

or external fiduciary audits.

One commenter, a Federal savings bank, supported an audit report-

based fiduciary examination policy. The commenter suggested that the

OTS should first review an association's internal or external audit

reports, and commence an on-site fiduciary examination only when those

reports and any additional information indicated a basis for further

examination. The commenter asserted that this approach would provide

administrative savings and would not compromise safety and soundness or

consumer protection. The OTS believes that the relationship between the

audit and examination processes are properly addressed in OTS

instructions to examiners and in the Handbook, rather than the rule.

The OTS will consider these comments if it revises the Handbook or its

examination instructions.

Sections 550.580-550.620 Activities Exempt From This Part

Proposed Sec. 550.3 identified certain fiduciary activities that

are not covered by part 550. This section incorporated current

Sec. 545.102, which permits a Federal savings association to act as a

trustee or custodian of an Individual Retirement Account or a Keogh

account, including self-directed accounts. A Federal savings

association may also act as a trustee with no active fiduciary duties

so long as authorized by applicable law.

Under proposed Sec. 550.3(b), however, a Federal savings

association may invest the funds of the accounts in limited

investments. The proposed rule also set forth existing requirements

governing the administration of accounts and compensation. See proposed

Sec. 550.3(c) and (d). These provisions are adopted in the final rule

at subpart E, with one clarification. Final Sec. 550.600 has been

revised to clarify that the limitations on investments apply only to

Federal savings associations acting in the fiduciary capacities

described under Sec. 550.580.

The proposed rule at Sec. 550.3(e) required Federal savings

associations to make certain disclosures where fiduciary accounts are

not limited to FDIC-insured deposits. One commenter urged the OTS to

eliminate this requirement as duplicative and unnecessary. The

commenter noted that similar disclosures are required under the

Interagency Statement on Retail Sales of Nondeposit Investment

Products.

The OTS disagrees. The Interagency Statement ``generally do[es] not

apply to the sale of nondeposit investment products to non-retail

customers, such as sales to fiduciary accounts administered by an

institution.'' 18 To ensure that adequate disclosures are

made to non-retail customers holding fiduciary accounts with Federal

savings associations, the final rule adopts the proposed disclosure

requirement. Final Sec. 550.610 has been slightly revised to clarify

that the disclosure requirement only applies to Federal savings

associations acting in the fiduciary capacities described under

Sec. 550.580.

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\18\ Interagency Statement on Retail Sales of Nondeposit

Investment Products at 3.

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B. CRA Exemption

The OTS also proposed to revise its regulations prescribing the

scope of the CRA regulations to make the CRA's application to savings

associations consistent with its application to banks. Under the

current rule at Sec. 563e.11(c), the CRA regulations apply to all

savings associations. By contrast, the CRA regulations of the other

banking agencies exempt certain special purpose institutions, including

fiduciaries, that do not perform commercial or retail banking services

by extending credit to the public in the ordinary course of business,

other than incident to their specialized operations.

This regulatory exemption reflects the banking agencies' long-

standing policy in this area. The OTS's scope provisions differed from

the other banking agencies' scope provisions because, at the time that

the current rule at Sec. 563e.11(c) was promulgated, the OTS did not

regulate any savings associations that could be considered special

purpose institutions. This is no longer the case. Thus, the proposed

amendment to the CRA regulations was intended to recognize the

existence of special purpose savings associations and to provide the

same regulatory treatment for such institutions as would be afforded

them if they were regulated by one of the other banking agencies.

One commenter, a community reinvestment organization, opposed any

exemption to the CRA regulations. Instead, the commenter argued that

the CRA should be expanded to include non-bank entities that provide

bank-like services. The commenter argued that the OTS should refrain

from adopting the exemption and that all the other agencies should

eliminate it.

By contrast, a Federal savings association argued that the proposed

CRA exemption does not go far enough. It notes that the OCC recently

approved a bank charter for a company that would provide bill payment

services, checking, or other deposit accounts. The OCC approved the

institution's request for designation as a wholesale or limited purpose

bank.19 The commenter argued that all such companies should

be added to the list of examples in the proposed rule, even if the

checking or other deposit accounts are linked to overdraft lines of

credit or similar products.

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\19\ OCC Conditional Approval # 253 (August 20, 1997), 1997 OCC

Ltr. LEXIS 98.

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The OTS has adopted the special purpose savings association

exemption without change. The OTS believes that the other Federal

banking agencies' exemption for similar institutions argues strongly

for a parallel thrift exemption. Some thrifts now meet the definition

of a special purpose institution. The OTS has, by interpretation,

exempted these institutions from coverage under the CRA regulations in

a manner identical to the way in which they would be treated if they

operated with a bank charter and were regulated by one of the bank

regulators. The amendment to the CRA regulations merely formalizes the

OTS's interpretation of the CRA regulations' application to such

charters. If any special purpose savings association takes deposits or

extends credit to the public in the ordinary

[[Page 67702]]

course of business other than as incident to its specialized

operations, so that it no longer falls within the regulatory

definition, then it immediately becomes subject to CRA regulation and

examination by the OTS. The OTS will monitor such savings associations'

activities through its safety and soundness, compliance, and trust

examinations.

The OTS believes that any expansion of coverage of the CRA to

include non-bank entities, as one of the commenters suggested, is a

legislative issue. The OTS is not today expressing a view on whether

such expansion would be appropriate or, if so, how it should be

structured or implemented. The possibility that the CRA may be applied

more broadly in the future does not convince the OTS that it should

treat thrifts differently from banks in the interim.

We also do not believe that the exemption should be unilaterally

extended to entities that only provide bill payment services and

checking or other deposit accounts, as one commenter suggested. We note

that the OCC did not exempt such institutions from the CRA regulations.

Rather, the OCC granted a request for a limited purpose designation,

which means that a separate provision of the CRA regulations

applies.20 A limited purpose designation subjects the

institution to the Community Development Test, which is specially

tailored to measure the performance of wholesale or limited purpose

institutions. A limited purpose designation, however, is not an

exemption from the CRA regulations. The OCC's approval of such a

limited purpose designation does not affect whether the same

institution is subject to the banking agencies' current, and the OTS's

new, exemption for special purpose institutions.

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\20\ 12 CFR 25.21(a)(2) and 25.25. The parallel OTS citations

are 12 CFR 563e.21(a)(2) and 563e.25.

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IV. Derivation Chart for Revised Part 550

The following chart gives of an overview of the changes made to

part 550.

----------------------------------------------------------------------------------------------------------------

Revised provision Former provision Comments

----------------------------------------------------------------------------------------------------------------

Sec. 550.10(a)..................... ...................... Added.

Sec. 550.10(b)..................... Sec. 571.15.......... Modified and added.

Sec. 550.20........................ Sec. 550.1(k)........ Modified.

Sec. 550.30........................ Sec. 550.1(c) and (h) Significantly modified.

Sec. 550.40........................ Sec. 550.1(f)........ Modified.

Sec. 550.50........................ Sec. 550.1(a)........ Modified.

Sec. 550.60........................ Secs. 550.1(g) and Significantly modified.

(j).

Secs. 550.70-120................... Secs. 550.2(a)-(c)... Modified.

Sec. 550.130....................... Sec. 550.2(d)........ Modified.

Sec. 550.140....................... Sec. 550.5(c) and (d) Modified and new provisions added.

Secs. 550.150-190.................. Secs. 550.5(a)(1), Significantly modified.

(b) and (e).

Secs. 550.200-220.................. Sec. 550.5(a)(2)..... Significantly modified.

Secs. 550.230-250.................. Sec. 550.11.......... Modified.

Sec. 550.260....................... Secs. 550.9 and Significantly modified.

550.13.

Secs. 550.290-320.................. Sec. 550.8........... Significantly modified.

Secs. 550.330-370.................. Sec. 550.10.......... Modified.

Secs. 550.380-400.................. Sec. 550.12.......... Modified.

Secs. 550.410-430.................. Secs. 550.5(a)(2) and Significantly modified.

550.6(a).

Secs. 550.440-480.................. Sec. 550.7........... Significantly modified.

Secs. 550.490-510.................. Sec. 550.4........... Significantly modified.

Sec. 550.520....................... Sec. 550.15.......... Modified.

Secs. 550.530-550.................. Sec. 550.14.......... Modified.

Secs. 550.560-570.................. Sec. 550.16.......... Modified.

Secs. 550.580-620.................. Sec. 545.102......... Modified and added.

----------------------------------------------------------------------------------------------------------------

The following provisions from the former part 550 have been removed

in the final rule: Sec. 550.1(b); Sec. 550.1(d); Sec. 550.1(e);

Sec. 550.1(h); Sec. 550.1(i); Sec. 550.3; Sec. 550.5(d); and

Sec. 550.6(b).

V. Effective Date

Section 553(d) of the Administrative Procedure Act (``APA'')

requires an agency to publish a substantive rule at least 30 days

before its effective date. Section 553(d)(1) of the APA, however,

exempts substantive rules that relieve a restriction from the 30-day

delayed effective date requirement.

The final rule relieves regulatory restrictions. For example, the

final rule eliminates certain requirements of the old regulations, such

as former Sec. 550.3 (Consolidation or merger of two or more Federal

savings associations), former Sec. 550.5(d) (Retention of legal

counsel), and former Sec. 550.6(b) (Record of pending litigation).

Moreover, the final rule clarifies some existing responsibilities. This

final rule is therefore exempt from the 30-day delayed effective date

requirement.

VI. Executive Order 12866

The Director of OTS has determined that this final rule does not

constitute a ``significant regulatory action'' for the purposes of

Executive Order 12866.

VII. Unfunded Mandates Reform Act of 1995

Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law

104-4 (Unfunded Mandates Act), requires that an agency prepare a

budgetary impact statement before promulgating a rule includes a

Federal mandate that may result in expenditure by State, local, and

tribal governments, in the aggregate, or by the private sector, of $100

million or more in any one year. If a budgetary impact statement is

required, Section 205 of the Unfunded Mandates Act also requires an

agency to identify and consider a reasonable number of regulatory

alternatives before promulgating a rule. OTS has determined that the

final rule will not result in expenditures by State, local, or tribal

governments or by the private sector of $100 million or more.

Accordingly, a budgetary impact statement is not required under section

202 of the Unfunded Mandates Act of 1995.

[[Page 67703]]

VIII. Regulatory Flexibility Act Analysis

Pursuant to section 605(b) of the Regulatory Flexibility Act, OTS

certifies that this final rule will not have a significant economic

impact on a substantial number of small entities. The final rule

liberalizes requirements and reduces burdens for Federal savings

associations that exercise fiduciary powers, regardless of size.

Accordingly, a regulatory flexibility analysis is not required.

IX. Reporting and Recordkeeping Requirements

The collection of information requirements contained in this final

rule have been submitted to and approved by the Office of Management

and Budget in accordance with the Paperwork Reduction Act of 1995 (44

U.S.C. 3507(d)) under OMB control number 1550-0037. Comments on the

collections of information should be sent to the Office of Management

and Budget, Paperwork Reduction Project (1550-0037), Washington, D.C.

20503, with copies to the Office of Thrift Supervision, 1700 G Street,

N.W., Washington, D.C. 20552.

The collection of information requirements in this final rule are

found in 12 CFR 550.70-550.120, 550.260, 550.410-550.430, 550.440-

550.480, and 550.530-550.550. The OTS requires this information for the

proper supervision of Federal savings associations' fiduciary

activities. The likely respondents/recordkeepers are Federal savings

associations.

Under the Paperwork Reduction Act of 1995, no persons are required

to respond to a collection of information unless it displays a valid

OMB control number. The valid OMB control number assigned to the

collection of information in this final rule is displayed at 12 CFR

506.1(b).

List of Subjects

12 CFR Part 545

Accounting, Consumer protection, Credit, Electronic funds

transfers, Investments, Reporting and recordkeeping requirements,

Savings associations.

12 CFR Part 550

Accounting, Reporting and recordkeeping requirements, Savings

associations, Trusts and trustees.

12 CFR Part 563e

Community development, Credit, Investments, Reporting and

recordkeeping requirements, Savings associations.

12 CFR Part 571

Accounting, Conflict of interests, Investments, Reporting and

Recordkeeping requirements, Savings associations.

Authority and Issuance

Accordingly, the Office of Thrift Supervision amends Title 12,

Chapter V, of the Code of Federal Regulations as set forth below:

PART 545--OPERATIONS

1. The authority citation for part 545 continues to read as

follows:

Authority: 12 U.S.C. 1462a, 1463, 1464, 1828.

Sec. 545.102 [Removed]

2. Section 545.102 is removed.

3. Part 550 is revised to read as follows:

PART 550--FIDUCIARY POWERS OF SAVINGS ASSOCIATIONS

Sec.

550.10 What regulations govern the fiduciary operations of savings

associations?

550.20 What are fiduciary powers?

550.30 What fiduciary capacities does this part cover?

550.40 When do I have investment discretion?

550.50 What is a fiduciary account?

550.60 What other definitions apply to this part?

Subpart A--Obtaining Fiduciary Powers

550.70 Must I obtain OTS approval before exercising fiduciary

powers?

550.80 How do I obtain OTS approval?

550.90 What information must I include in my application?

550.100 What factors may the OTS consider in its review of my

application?

550.110 Who will act on my application?

550.120 What action will the OTS take on my application?

Subpart B--Exercising Fiduciary Powers

550.130 What fiduciary powers may I exercise?

550.140 Must I adopt and follow written policies and procedures in

exercising fiduciary powers?

Fiduciary Personnel and Facilities

550.150 Who is responsible for the exercise of fiduciary powers?

550.160 What personnel and facilities may I use to perform

fiduciary services?

550.170 May my other departments or affiliates use fiduciary

personnel and facilities to perform other services?

550.180 May I perform fiduciary services for, or purchase fiduciary

services from, another association or entity?

550.190 Must fiduciary officers and employees be bonded?

Review of a Fiduciary Account

550.200 Must I review a prospective account before I accept it?

550.210 Must I conduct another review of an account after I accept

it?

550.220 Are any other account reviews required?

Custody and Control of Assets

550.230 Who must maintain custody or control of assets in a

fiduciary account?

550.240 May I hold investments of a fiduciary account off-premises?

550.250 Must I keep fiduciary assets separate from other assets?

Investing Funds of a Fiduciary Account

550.260 How may I invest funds of a fiduciary account?

Funds Awaiting Investment or Distribution

550.290 What must I do with fiduciary funds awaiting investment or

distribution?

550.300 Where may I deposit fiduciary funds awaiting investment or

distribution?

550.310 What if the FDIC does not insure the deposits?

550.320 What is acceptable collateral for uninsured deposits?

Restrictions on Self Dealing

550.330 Are there investments in which I may not invest funds of a

fiduciary account?

550.340 May I exercise rights to purchase additional stock or

fractional shares of my stock or obligations or the stock or

obligations of my affiliates?

550.350 May I lend, sell, or transfer assets of a fiduciary account

if I have an interest in the transaction?

550.360 May I make a loan to a fiduciary account that is secured by

an interest in the assets in the account?

550.370 May I sell assets or lend money between fiduciary accounts?

Compensation, Gifts, and Bequests

550.380 May I earn compensation for acting in a fiduciary capacity?

550.390 May my officer or employee retain compensation for acting

as a co-fiduciary?

550.400 May my fiduciary officer or employee accept a gift or

bequest?

Recordkeeping Requirements

550.410 What records must I keep?

550.420 How long must I keep these records?

550.430 Must I keep fiduciary records separate and distinct from

other records?

Audit Requirements

550.440 When do I have to audit my fiduciary activities?

550.450 What standards govern the conduct of the audit?

550.460 Who may conduct an audit?

550.470 Who directs the conduct of the audit?

550.480 How do I report the results of the audit?

[[Page 67704]]

Subpart C--Depositing Securities With State Authorities

550.490 When must I deposit securities with State authorities?

550.500 How much must I deposit if I administer fiduciary assets in

more than one State?

550.510 What must I do if State authorities refuse my deposit?

Subpart D--Terminating Fiduciary Activities

Receivership or Liquidation

550.520 What happens if I am placed in receivership or voluntary

liquidation?

Surrender of Fiduciary Powers

550.530 How do I surrender fiduciary powers?

550.540 When will the OTS terminate my fiduciary powers?

550.550 May I recover my deposit from State authorities?

Revocation of Fiduciary Powers

550.560 When may the OTS revoke my fiduciary powers?

550.570 What procedures govern the revocation?

Subpart E--Activities Exempt From This Part

550.580 When may I act in a fiduciary capacity without obtaining

OTS approval?

550.590 What standards must I observe when acting in exempt

fiduciary capacities?

550.600 How may I invest funds when acting in exempt fiduciary

capacities?

550.610 What disclosures must I make when acting in exempt

fiduciary capacities?

550.620 May I receive compensation for acting in exempt fiduciary

capacities?

Authority: 12 U.S.C. 1462a, 1463, 1464.

Sec. 550.10 What regulations govern the fiduciary operations of

savings associations?

(a) Federal savings associations. A Federal savings association

(``you'') must conduct its fiduciary operations in accordance with 12

U.S.C. 1464(n) and this part.

(b) State-chartered savings associations. (1) A State-chartered

savings association must conduct its fiduciary operations in accordance

with applicable State law, and must exercise its fiduciary powers in a

safe and sound manner. To ensure safe and sound operations, State-

chartered savings associations and their subsidiaries should follow the

standards for the exercise of fiduciary powers in this part.

(2) The OTS will monitor the fiduciary operations of State-

chartered savings associations and their subsidiaries to ensure that

those operations are conducted in a safe and sound manner. The OTS may

object to practices that deviate materially from the practices

described in this part, and may restrict or prohibit activities that

threaten the safety and soundness of a State-chartered savings

association.

Sec. 550.20 What are fiduciary powers?

Fiduciary powers are the authority that the OTS permits you to

exercise under 12 U.S.C. 1464(n). The scope of permissible fiduciary

powers depends on the powers that the State in which you are located

grants to competing fiduciaries in that State.

Sec. 550.30 What fiduciary capacities does this part cover?

You are subject to this part if you act in a fiduciary capacity,

except as described in subpart E of this part. You act in a fiduciary

capacity when you act in any of the following capacities:

(a) Trustee.

(b) Executor.

(c) Administrator.

(d) Registrar of stocks and bonds.

(e) Transfer agent.

(f) Assignee.

(g) Receiver.

(h) Guardian or conservator 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) A fiduciary in a relationship established under a State law

that is substantially similar to the Uniform Gifts to Minors Act or the

Uniform Transfers to Minors Act as published by the American Law

Institute.

(j) Investment adviser, if you receive a fee for your investment

advice.

(k) Any capacity in which you have investment discretion on behalf

of another.

(l) Any other similar capacity that the OTS may authorize under 12

U.S.C. 1464(n).

Sec. 550.40 When do I have investment discretion?

(a) General. You have investment discretion when you have, with

respect to a fiduciary account, the sole or shared authority to

determine what securities or other assets to purchase or sell on behalf

of that account. It does not matter whether you have exercised this

authority.

(b) Delegations. You retain investment discretion if you delegate

investment discretion to another. You also have investment discretion

if you receive delegated authority to exercise investment discretion

from another.

Sec. 550.50 What is a fiduciary account?

A fiduciary account is an account that you administer acting in a

fiduciary capacity.

Sec. 550.60 What other definitions apply to this part?

Affiliate has the same meaning as in 12 U.S.C. 221a(b). For

purposes of this part, substitute the term ``Federal savings

association'' for the term ``member bank'' whenever it appears in 12

U.S.C. 221a(b).

Applicable law means the law of a State or other jurisdiction

governing your fiduciary relationships, any Federal law governing those

relationships, the terms of the instrument governing a fiduciary

relationship, and any court order pertaining to the relationship.

Fiduciary officers and employees means the officers and employees

of a Federal savings association to whom the board of directors or its

designee has assigned functions involving the exercise of the

association's fiduciary powers.

Subpart A--Obtaining Fiduciary Powers

Sec. 550.70 Must I obtain OTS approval before exercising fiduciary

powers?

Unless you are covered by subpart E of this part, you must obtain

prior approval from the OTS before exercising fiduciary powers.

Sec. 550.80 How do I obtain OTS approval?

You must file an application under Sec. 516.1(c) of this chapter.

Sec. 550.90 What information must I include in my application?

You must describe the fiduciary powers that you or your affiliate

will exercise. You must also include information necessary to enable

the OTS to make the determinations described in Sec. 550.100.

Sec. 550.100 What factors may the OTS consider in its review of my

application?

The OTS may consider the following factors when reviewing your

application:

(a) Your financial condition.

(b) Your capital and whether that capital is sufficient under the

circumstances.

(c) Your overall performance.

(d) The fiduciary powers you propose to exercise.

(e) Your proposed supervision of those powers.

(f) The availability of legal counsel.

(g) The needs of the community to be served.

(h) Any other facts or circumstances that the OTS considers proper.

Sec. 550.110 Who will act on my application?

The Director of OTS may act on any application. The Regional

Director may

[[Page 67705]]

act on an application if it does not raise any significant issues of

law or policy on which the OTS has not taken a formal position.

Sec. 550.120 What action will the OTS take on my application?

The OTS may approve or deny your application. If your application

is approved, the OTS may impose conditions to ensure that the

requirements of this part are met.

Subpart B--Exercising Fiduciary Powers

Sec. 550.130 What fiduciary powers may I exercise?

You may exercise only those fiduciary powers specified in the OTS

approval under Sec. 550.120. Unless otherwise provided in the approval,

you may exercise fiduciary powers only from those offices listed in the

application.

Sec. 550.140 Must I adopt and follow written policies and procedures

in exercising fiduciary powers?

You must adopt and follow written policies and procedures adequate

to maintain your fiduciary activities in compliance with applicable

law. Among other relevant matters, the policies and procedures should

address, where appropriate, the following areas:

(a) Your brokerage placement practices.

(b) Your methods for ensuring that your fiduciary officers and

employees do not use material inside information in connection with any

decision or recommendation to purchase or sell any security.

(c) Your methods for preventing self-dealing and conflicts of

interest.

(d) Your selection and retention of legal counsel who is ready and

available to advise you and your fiduciary officers and employees on

fiduciary matters.

(e) Your investment of funds held as fiduciary, including short-

term investments and the treatment of fiduciary funds awaiting

investment or distribution.

Fiduciary Personnel and Facilities

Sec. 550.150 Who is responsible for the exercise of fiduciary powers?

The exercise of your fiduciary powers must be managed by or under

the direction of your 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 of directors, officers, or employees.

Sec. 550.160 What personnel and facilities may I use to perform

fiduciary services?

You may use your qualified personnel and facilities or an

affiliate's qualified personnel and facilities to perform services

related to the exercise of fiduciary powers.

Sec. 550.170 May my other departments or affiliates use fiduciary

personnel and facilities to perform other services?

Your other departments or 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.

Sec. 550.180 May I perform fiduciary services for, or purchase

fiduciary services from, another association or entity?

You may perform services related to the exercise of fiduciary

powers for another association or other entity under a written

agreement. You may also purchase services related to the exercise of

fiduciary powers from another association or other entity under a

written agreement.

Sec. 550.190 Must fiduciary officers and employees be bonded?

You must obtain an adequate bond for all fiduciary officers and

employees.

Review of a Fiduciary Account

Sec. 550.200 Must I review a prospective account before I accept it?

Before accepting a prospective fiduciary account, you must review

it to determine whether you can properly administer the account.

Sec. 550.210 Must I conduct another review of an account after I

accept it?

After you accept a fiduciary account for which you have investment

discretion, you must conduct a prompt review of all assets of the

account to evaluate whether they are appropriate, individually and

collectively, for the account.

Sec. 550.220 Are any other account reviews required?

At least once every calendar year, you must conduct a review of all

assets of each fiduciary account for which you have investment

discretion. In this review, you must evaluate whether the assets are

appropriate, individually and collectively, for the account.

Custody and Control of Assets

Sec. 550.230 Who must maintain custody or control of assets in a

fiduciary account?

You must place assets of fiduciary accounts in the joint custody or

control of not fewer than two fiduciary officers or employees

designated for that purpose by the board of directors.

Sec. 550.240 May I hold investments of a fiduciary account off-

premises?

You may hold the investments of a fiduciary account off-premises,

if this practice is consistent with applicable law, and you maintain

adequate safeguards and controls.

Sec. 550.250 Must I keep fiduciary assets separate from other assets?

You must keep the assets of fiduciary accounts separate from your

other assets. You must also keep the assets of each fiduciary account

separate from all other accounts, or you must identify the investments

as the property of a particular account, except as provided in

Secs. 550.260.

Investing Funds of a Fiduciary Account

Sec. 550.260 How may I invest funds of a fiduciary account?

(a) General. You must invest funds of a fiduciary account in a

manner consistent with applicable law.

(b) Collective investment funds. (1) You may invest funds of a

fiduciary account in a collective investment fund, including a

collective investment fund that you have established. In establishing

and administering such funds, you must comply with 12 CFR 9.18.

(2) If you must file a document with the Comptroller of the

Currency under 12 CFR 9.18, you must also file that document with OTS

under Sec. 516.1(c) of this chapter. The OTS may review such documents

for compliance with this part and other laws and regulations.

(3) ``Bank'' and ``national bank'' as used in 12 CFR 9.18 shall be

deemed to include a Federal savings association.

Funds Awaiting Investment or Distribution

Sec. 550.290 What must I do with fiduciary funds awaiting investment

or distribution?

If you have investment discretion or discretion over distributions

for a fiduciary account which contains funds awaiting investment or

distribution, you must ensure that those funds do not remain uninvested

and undistributed any longer than is reasonable for the proper

management of the account and consistent with applicable law. You also

must obtain a rate of return for those funds that is consistent with

applicable law.

Sec. 550.300 Where may I deposit fiduciary funds awaiting investment

or distribution?

(a) Self deposits. You may deposit funds of a fiduciary account

that are awaiting investment or distribution in

[[Page 67706]]

your other departments, unless prohibited by applicable law.

(b) Affiliate deposits. You may also deposit funds of a fiduciary

account that are awaiting investment or distribution with an affiliated

insured depository institution, unless prohibited by applicable law.

Sec. 550.310 What if the FDIC does not insure the deposits?

If the FDIC does not insure the entire amount of a self deposit or

an affiliate deposit, you must set aside collateral as security. The

market value of the collateral must at all times equal or exceed the

amount of the uninsured fiduciary funds. You must place the collateral

under the control of appropriate fiduciary officers and employees.

Sec. 550.320 What is acceptable collateral for uninsured deposits?

Any of the following is acceptable collateral for self deposits or

affiliate deposits under Sec. 550.310:

(a) Direct obligations of the United States, or other obligations

fully guaranteed by the United States as to principal and interest.

(b) Readily marketable securities of the classes in which State-

chartered corporate fiduciaries are permitted to invest fiduciary funds

under applicable State law.

(c) Other readily marketable securities as the OTS may determine.

(d) Surety bonds, to the extent they provide adequate security,

unless prohibited by applicable law.

(e) Any other assets that qualify under applicable State law as

appropriate security for deposits of fiduciary funds.

Restrictions on Self Dealing

Sec. 550.330 Are there investments in which I may not invest funds of

a fiduciary account?

You may not invest funds of a fiduciary account for which you have

investment discretion in the following assets, unless authorized by

applicable law:

(a) The stock or obligations of, or assets acquired from, you or

any of your directors, officers, or employees.

(b) The stock or obligations of, or assets acquired from, your

affiliates or any of their directors, officers, or employees.

(c) The stock or obligations of, or assets acquired from, other

individuals or organizations if you have an interest in the individual

or organization that might affect the exercise of your best judgment.

Sec. 550.340 May I exercise rights to purchase additional stock or

fractional shares of my stock or obligations or the stock or

obligations of my affiliates?

If the retention of investments in your stock or obligations or the

stock or obligations of an affiliate in fiduciary accounts is

consistent with applicable law, you may do either of the following:

(a) Exercise rights to purchase additional stock (or securities

convertible into additional stock) when these rights are offered pro

rata to stockholders.

(b) Purchase fractional shares to complement fractional shares

acquired through the exercise of rights or through the receipt of a

stock dividend resulting in fractional share holdings.

Sec. 550.350 May I lend, sell, or transfer assets of a fiduciary

account if I have an interest in the transaction?

(a) General restriction. Except as provided in paragraph (b) of

this section, you may not lend, sell, or otherwise transfer assets of a

fiduciary account for which you have investment discretion to yourself

or any of your directors, officers, or employees; to your affiliates or

any of their directors, officers, or employees; or to other individuals

or organizations with whom you have an interest that might affect the

exercise of your best judgment.

(b) Exceptions.--(1) Funds for which you have investment

discretion. You may lend, sell or otherwise transfer assets of a

fiduciary account for which you have investment discretion to yourself

or any of your directors, officers, or employees; to your affiliates or

any of their directors, officers, or employees; or to other individuals

or organizations with whom you have an interest that might affect the

exercise of your best judgment, if you meet one of the following

conditions:

(i) The transaction is authorized by applicable law.

(ii) Legal counsel advises you in writing that you have incurred,

in your fiduciary capacity, a contingent or potential liability. Upon

the sale or transfer of assets, you must reimburse the fiduciary

account in cash in an amount equal to the greater of book or market

value of the assets.

(iii) The transaction is permitted under 12 CFR 9.18(b)(8)(iii) for

defaulted fixed-income investments.

(iv) The OTS requires you to do so.

(2) Funds held as trustee. You may make loans of funds held in

trust to any of your directors, officers, or employees if the funds are

held in an employee benefit plan and the loan is made in accordance

with the exemptions found at section 408 of the Employee Retirement

Income Security Act of 1974 (29 U.S.C. 1108).

Sec. 550.360 May I make a loan to a fiduciary account that is secured

by an interest in the assets of the account?

You may make a loan to a fiduciary account that is secured by an

interest in the assets of the account, if the transaction is fair to

the account and is not prohibited by applicable law.

Sec. 550.370 May I sell assets or lend money between fiduciary

accounts?

You may sell assets or lend money between fiduciary accounts, if

the transaction is fair to both accounts and is not prohibited by

applicable law.

Compensation, Gifts, and Bequests

Sec. 550.380 May I earn compensation for acting in a fiduciary

capacity?

If the amount of your compensation for acting in a fiduciary

capacity is not set or governed by applicable law, you may charge a

reasonable fee for your services.

Sec. 550.390 May my officer or employee retain compensation for acting

as a co-fiduciary?

You may not permit your officers or employees to retain any

compensation for acting as a co-fiduciary with you in the

administration of a fiduciary account, except with the specific

approval of your board of directors.

Sec. 550.400 May my fiduciary officer or employee accept a gift or

bequest?

You may not permit any fiduciary officer or employee to accept a

bequest or gift of fiduciary assets, unless the bequest or gift is

directed or made by a relative of the officer or employee or is

specifically approved by your board of directors.

Recordkeeping Requirements

Sec. 550.410 What records must I keep?

You must keep adequate records for all fiduciary accounts. For

example, you must keep documents on the establishment and termination

of each fiduciary account.

Sec. 550.420 How long must I keep these records?

You must keep fiduciary records for three years after the

termination of the account or the termination of any litigation

relating to the account, whichever is later.

Sec. 550.430 Must I keep fiduciary records separate and distinct from

other records?

You must keep fiduciary records separate and distinct from your

other records.

[[Page 67707]]

Audit Requirements

Sec. 550.440 When do I have to audit my fiduciary activities?

(a) Annual Audit. If you do not use a continuous audit system

described in paragraph (b) of this section, then you must arrange for a

suitable audit of all significant fiduciary activities at least once

during each calendar year.

(b) Continuous audit. Instead of an annual audit, you may adopt a

continuous audit system. Under a continuous audit system, you must

arrange for a discrete audit of each significant fiduciary activity

(i.e., on an activity-by-activity basis) at an interval commensurate

with the nature and risk of that activity. Some fiduciary activities

may receive audits at intervals greater or less than one year, as

appropriate.

Sec. 550.450 What standards govern the conduct of the audit?

Auditors must follow generally accepted standards for attestation

engagements and other standards established by the OTS. An audit must

ascertain whether your internal control policies and procedures provide

reasonable assurance of three things:

(a) You are administering fiduciary activities in accordance with

applicable law.

(b) You are properly safeguarding fiduciary assets.

(c) You are accurately recording transactions in appropriate

accounts in a timely manner.

Sec. 550.460 Who may conduct an audit?

Internal auditors, external auditors, or other qualified persons

who are responsible only to the board of directors, may conduct an

audit.

Sec. 550.470 Who directs the conduct of the audit?

Your fiduciary audit committee directs the conduct of the audit.

Your fiduciary audit committee may consist of a committee of your

directors or an audit committee of an affiliate. There are two

restrictions on who may serve on the committee:

(a) Your officers and officers of an affiliate who participate

significantly in administering your fiduciary activities may not serve

on the audit committee.

(b) A majority of the members of the audit committee may not serve

on any committee to which the board of directors has delegated power to

manage and control your fiduciary activities.

Sec. 550.480 How do I report the results of the audit?

(a) Annual audit. If you conduct an annual audit, you must 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. If you adopt a continuous audit system, you

must note the results of all discrete audits conducted 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.

Subpart C--Depositing Securities With State Authorities

Sec. 550.490 When must I deposit securities with State authorities?

You must deposit securities with a State's authorities or, if

applicable, a Federal Home Loan Bank under Sec. 550.510, if you meet

all of the following:

(a) You are located in the State.

(b) You act as a private or court-appointed trustee.

(c) The law of the State requires corporations acting in a

fiduciary capacity to deposit securities with State authorities for the

protection of private or court trusts.

Sec. 550.500 How much must I deposit if I administer fiduciary assets

in more than one State?

If you administer fiduciary assets in more than one State, you must

compute the amount of deposit required for each State on the basis of

fiduciary assets that you administer primarily from offices located in

that State.

Sec. 550.510 What must I do if State authorities refuse my deposit?

If State authorities refuse to accept your deposit under

Sec. 550.490, you must deposit the securities with the Federal Home

Loan Bank of which you are a member. The Federal Home Loan Bank will

hold the securities for the protection of private or court trusts to

the same extent as if the securities had been deposited with State

authorities.

Subpart D--Terminating Fiduciary Activities

Receivership or Liquidation

Sec. 550.520 What happens if I am placed in receivership or voluntary

liquidation?

If the OTS appoints a conservator or receiver for you under part

558 of this chapter, or if you place yourself in voluntary liquidation,

the receiver, conservator, or liquidating agent must promptly close or

transfer all fiduciary accounts to a substitute fiduciary, in

accordance with OTS instructions and the orders of the court having

jurisdiction.

Surrender of Fiduciary Powers

Sec. 550.530 How do I surrender fiduciary powers?

If you want to surrender your fiduciary powers, you must file a

certified copy of a resolution of your board of directors evidencing

that intent. You must file the resolution with the OTS under Sec. 516.1

of this chapter.

Sec. 550.540 When will the OTS terminate my fiduciary powers?

If, after appropriate investigation, the Regional Director is

satisfied that you have been discharged from all fiduciary duties, the

Regional Director will issue a written notice indicating that you are

no longer authorized to exercise fiduciary powers.

Sec. 550.550 May I recover my deposit from State authorities?

Upon issuance of the OTS written notice under Sec. 550.540, you may

recover any securities deposited with State authorities, or a Federal

Home Loan Bank, under subpart C of this part.

Revocation of Fiduciary Powers

Sec. 550.560 When may the OTS revoke my fiduciary powers?

The OTS may revoke your fiduciary powers if it determines that you

have done any of the following:

(a) Exercised those fiduciary powers unlawfully or unsoundly.

(b) Failed to exercise those fiduciary powers for five consecutive

years.

(c) Otherwise failed to follow the requirements of this part.

Sec. 550.570 What procedures govern the revocation?

The procedures for revocation of fiduciary powers are set forth in

12 U.S.C. 1464(n)(10). The OTS will conduct the hearing required under

12 U.S.C. 1464(n)(10)(B) under part 509 of this chapter.

Subpart E--Activities Exempt From This Part

Sec. 550.580 When may I act in a fiduciary capacity without obtaining

OTS approval?

You do not need OTS approval under subpart B if you act in one of

the following fiduciary capacities:

(a) Trustee of a trust created or organized in the United States

and forming part of a stock bonus, pension, or profit-sharing plan

qualifying for specific tax treatment under section 401(d) of the

Internal Revenue Code of 1954 (26 U.S.C. 401(d)).

(b) Trustee or custodian of a Individual Retirement Account within

the meaning of section 408(a) of the Internal Revenue Code of 1954 (26

U.S.C. 408(a)).

[[Page 67708]]

(c) Trustee of a fiduciary account that involves no active

fiduciary duties provided that the applicable law authorizes the

savings association to act in this capacity.

Sec. 550.590 What standards must I observe when acting in exempt

fiduciary capacities?

You must observe principles of sound fiduciary administration,

including those related to recordkeeping and segregation of assets.

Sec. 550.600 How may I invest funds when acting in exempt fiduciary

capacities?

If you act in an exempt fiduciary capacity under Sec. 550.580, you

may invest the funds of the fiduciary account in only the following:

(a) Your accounts, deposits, obligations, or securities.

(b) Other assets as the customer may direct, provided you do not

exercise any investment discretion and do not directly or indirectly

provide any investment advice for the fiduciary account.

Sec. 550.610 What disclosures must I make when acting in exempt

fiduciary capacities?

If you act in an exempt fiduciary capacity under Sec. 550.580 and

fiduciary investments are not limited to accounts or deposits insured

by the FDIC, you must include the following language in bold type on

the first page of any contract documents:

Funds invested pursuant to this agreement are not insured by the

Federal Deposit Insurance Corporation (``FDIC'') merely because the

trustee or custodian is a Federal savings association the accounts

of which are covered by such insurance. Only investments in the

accounts of a Federal savings association are insured by the FDIC,

subject to its rules and regulations.

Sec. 550.620 May I receive compensation for acting in exempt fiduciary

capacities?

You may receive reasonable compensation.

PART 563e--COMMUNITY REINVESTMENT

4. The authority citation for part 563e continues to read as

follows:

Authority: 12 U.S.C. 1462a, 1463, 1464, 1467a, 1814, 1816,

1828(c) and 2901 through 2907.

5. Section 563e.11 is amended by revising paragraph (c) to read as

follows:

Sec. 563e.11 Authority, purposes, and scope.

* * * * *

(c) Scope--(1) General. This part applies to all savings

associations except as provided in paragraph (c)(2) of this section.

(2) Certain special purpose savings associations. This part does

not apply to special purpose savings associations that do not perform

commercial or retail banking services by granting credit to the public

in the ordinary course of business, other than as incident to their

specialized operations. These associations include banker's banks, as

defined in 12 U.S.C. 24 (Seventh), and associations that engage only in

one or more of the following activities: providing cash management

controlled disbursement services or serving as correspondent

associations, trust companies, or clearing agents.

PART 571--STATEMENTS OF POLICY

6. The authority citation for part 571 continues to read as

follows:

Authority: 5 U.S.C. 552, 559; 12 U.S.C. 1462a, 1463, 1464.

Sec. 571.15 [Removed]

7. Section 571.15 is removed.

Dated: December 19, 1997.

By the Office of Thrift Supervision.

Ellen Seidman,

Director.

[FR Doc. 97-33726 Filed 12-29-97; 8:45 am]

BILLING CODE 6720-01-P