Examination of Fiduciary Activities

FRB: Supervisory Letter SR 01-5 (SUP) on examination of fiduciary activities -- February 27, 2001

BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D. C.  20551

DIVISION OF BANKING

SUPERVISION AND REGULATION

SR 01-5 (SUP)

February 27, 2001

TO THE

OFFICER IN CHARGE OF SUPERVISION AT EACH FEDERAL RESERVE BANK AND DOMESTIC AND FOREIGN BANKING ORGANIZATIONS SUPERVISED BY THE FEDERAL RESERVE

SUBJECT:

Examination of Fiduciary Activities

In order to better integrate the supervisory assessment of banking organizations' fiduciary activities into the overall safety and soundness supervision process and to focus Federal Reserve System supervisory resources on areas of greatest potential risk, the Federal Reserve is integrating the examination frequency mandates for trust and transfer agency examinations with safety and soundness examinations.  Going forward, the frequency and scope of examination coverage of fiduciary activities at banking organizations supervised by the Federal Reserve should be based on the guidelines provided below.  Supervisory risk profiles, risk assessments, and supervisory plans should also reflect fiduciary activities.  Fiduciary activities and other related services generally include traditional trust services such as personal trust, corporate trust, and transfer agent services and employee benefit account products and services, as well as custody and securities lending services, clearing and settlement, asset management, and investment advisory activities.

Previously, frequency mandates for most "specialty" examinations were established by SR letter 86-39.  The frequency of trust examinations was based primarily on the size of the institution's fiduciary operations and its latest Uniform Interagency Trust Rating System (UITRS) rating.  Transfer agent examination mandates were based on the number of securities serviced and the latest transfer agent examination rating.  This letter revokes the trust and transfer agent examination frequency requirements of SR letter 86-39

ust examinations was based primarily on the size of the institution's fiduciary operations and its latest Uniform Interagency Trust Rating System (UITRS) rating.  Transfer agent examination mandates were based on the number of securities serviced and the latest transfer agent examination rating.  This letter revokes the trust and transfer agent examination frequency requirements of SR letter 86-39.

Complex Fiduciary Organizations

Complex fiduciary organizations are considered to be those banking organizations that conduct significant or complex fiduciary activities.  This includes large complex banking organizations (LCBOs), other large or regional institutions for which fiduciary activities represent a significant portion of their business, as well as clearing agencies registered with the Securities and Exchange Commission for which the Federal Reserve is the primary supervisor.  Fiduciary examination frequency should be determined based on the impact of fiduciary activities on the organization's risk profile.  At a minimum, all material fiduciary business lines should be subject to examination over a two-year period or examination cycle as part of the continuous supervision process, with higher risk areas generally reviewed annually.  Reviews of fiduciary activities for financial holding companies should be conducted in accordance with the guidelines provided in

SR

letter 00-13

.

Composite UITRS and transfer agent ratings reflecting the overall condition of the fiduciary function at each institution, and any component ratings considered relevant, should be assigned or updated in a timely manner based on the results of examinations, targeted reviews, or other assessments of fiduciary activities.  UITRS ratings do not need to be assigned for each targeted business line review

omposite UITRS and transfer agent ratings reflecting the overall condition of the fiduciary function at each institution, and any component ratings considered relevant, should be assigned or updated in a timely manner based on the results of examinations, targeted reviews, or other assessments of fiduciary activities.  UITRS ratings do not need to be assigned for each targeted business line review.  However, at a minimum, composite UITRS and transfer agent ratings should be updated annually and any material findings related to these areas should be included in the annual summary supervisory report and any significant concerns should be reflected in the safety and soundness examination ratings.  Fiduciary risks and fiduciary risk management assessments should also be reflected in the relevant risk assessment and risk management ratings for the banking organization, as necessary.

Other Institutions Offering Fiduciary and Transfer Agent Services

The frequency of fiduciary and transfer agent examinations for other institutions, generally smaller state chartered Federal Reserve member banks and trust companies with non-complex operations, should be determined based on the significance of fiduciary and transfer agent activities and an assessment of the level of risk the activities present to the institution.  This applies also to initial examinations of new institutions and those subject to Federal Reserve supervision as a result of charter conversion.

At a minimum, fiduciary activities should be reviewed no less frequently than during every other routine safety and soundness examination.  Examinations governed by alternating examination programs with state banking authorities may continue to be performed in accordance with those arrangements or as necessary to incorporate the provisions of this SR letter

ision as a result of charter conversion.

At a minimum, fiduciary activities should be reviewed no less frequently than during every other routine safety and soundness examination.  Examinations governed by alternating examination programs with state banking authorities may continue to be performed in accordance with those arrangements or as necessary to incorporate the provisions of this SR letter.  Examinations of fiduciary activities at non-complex limited-purpose trust companies and other fiduciary institutions subject to supervision by the Federal Reserve that do not receive routine safety and soundness examination should be conducted no less frequently than every two years.

Composite UITRS and transfer agent examination ratings reflecting the overall condition of the function, and any component ratings considered relevant, should be assigned or updated at the completion of the examination or assessment.  Material examination findings should be integrated into the overall examination report for the institution, which should clearly indicate the significance of any findings to the safety and soundness of the institution and the impact on any relevant risk assessments and risk management ratings.

Organizations With Supervisory Concerns

Organizations for which supervisory concerns have been raised regarding fiduciary activities should be subject to an additional level of supervisory attention based on the severity of the supervisory concerns.  Generally, this would include those with a composite UITRS rating of 3, 4 or 5, a transfer agent rating of B or C, or significant deficiencies in one or more component rating categories.  In the case of an institution assigned a UITRS rating of 4 or 5 or a transfer agent rating of C, supervisory action should be initiated promptly and continued until the problems or deficiencies have been appropriately addressed

would include those with a composite UITRS rating of 3, 4 or 5, a transfer agent rating of B or C, or significant deficiencies in one or more component rating categories.  In the case of an institution assigned a UITRS rating of 4 or 5 or a transfer agent rating of C, supervisory action should be initiated promptly and continued until the problems or deficiencies have been appropriately addressed.

Under the Securities and Exchange Act of 1934, the Federal Reserve continues to be responsible for examining transfer agents and clearing agencies for which it is the primary supervisor, including reviewing compliance with Securities and Exchange Commission rules.  Any material violations of transfer agent or clearing agency rules must be promptly reported to Board staff to facilitate coordination with the Securities and Exchange Commission.

Risk Profiles

Regular supervisory assessments of the risk of fiduciary activities supports the revised examination requirements discussed above.  Risk profiles for LCBOs are updated quarterly in accordance with the provisions of

SR letter 99-15

.  These risk profiles should include explicit consideration of the risks of fiduciary activities.  For other complex fiduciary organizations, risk profiles reflecting fiduciary activities should be prepared and updated as needed, but no less frequently than annually.  For these organizations, supervisory plans should detail the fiduciary specialist's recommended examination coverage of fiduciary activities.  For banking organizations supervised by the Federal Reserve with smaller, non-complex fiduciary operations, formal risk profiles may not be necessary, but fiduciary risk information should normally be updated at each examination or inspection and incorporated into supervisory plans.

Risk profiles should include an assessment of the inherent risk in the organization's fiduciary activities, as well as a consideration of the effectiveness of its management of these risks

, non-complex fiduciary operations, formal risk profiles may not be necessary, but fiduciary risk information should normally be updated at each examination or inspection and incorporated into supervisory plans.

Risk profiles should include an assessment of the inherent risk in the organization's fiduciary activities, as well as a consideration of the effectiveness of its management of these risks.  Risk assessments would normally include such factors as:

The size and number of fiduciary accounts and assets administered.

The nature and complexity of fiduciary products and services offered.

Significant changes to management or staffing for fiduciary services.

Significant changes to data processing systems supporting fiduciary services.

New affiliations, partnerships, or outsourcing arrangements.

Changes in strategic direction affecting fiduciary services or exposure to emerging risks.

Significant litigation, settlements or charge-offs.

The length of time since the last on-site examination in which fiduciary activities were reviewed, and the scope of that examination.

The significance of prior examination findings.

The effectiveness of the organization's control environment, including its audit function, and the adequacy of its risk management practices relative to the nature and scope of its business.

Reserve Banks should distribute this letter to supervised institutions in their districts.  Questions regarding fiduciary examination frequency should be directed to Heidi Richards, Assistant Director, at (202) 452-2598.

Stephen C. Schemering

Deputy Director

Cross references: SR letters

00-13

and

99-15

.

Partially supersedes: SR letter 86-39 (supersedes trust, clearing agency, and transfer agent portions).

SR letters

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2001

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Last update: July 26, 2001