Supervision of Bank Trust Departments – Reporting and

Compliance Issues

FIRMA – National Risk Management Conference,

New Orleans, April 29, 2009

Topics

Call Report Changes – Schedules RC-T and RC-M

Regulation R – Examiner Guidance

2009 Changes to the Call Report of Condition

Call Report Schedules RC-T and RC-M

73 Federal Register 54807, September 23, 2008 – proposed changes to the Call Report which included changes to Schedule RC-T

74 Federal Register 5028, January 28, 2009 – responded to the comments of the September 23, 2008 request for comment and provided an additional 30 day response period

Changes Effective March 2009

Elimination of Confidential Treatment for Fiduciary Income, Expense, and Loss Data

Changes Effective June 2009

Schedule RC-M – Two questions added: Does the bank act as trustee or

custodian for IRAs, HSAs, and other similar accounts?

Does the bank provide custody and safekeeping services involving the acceptance of securities purchase and sales orders?

Changes Effective December 2009

Fiduciary and Related Assets Section

Fiduciary and Related Services Income

Managed Assets of Fiduciary Accounts

Corporate Trust and Agency Accounts

Schedule RC-T – ChangesFiduciary and Related

Assets

Dollar Amounts in Thousands

FIDUCIARY AND RELATED ASSETS 4. Personal trust and agency accounts ………............ 5. Employee benefit and other retirement related trust

and agency accounts: a. Employee benefit—DC …………………. b. Employee benefit—DB ………………….

c. Other employee benefit and other retirement-related accounts

6. Corporate trust and agency accounts ……………….. 7. Investment management and investment advisory

agency accounts 8. Foundations and endowments 9. Other fiduciary accounts ……………………………… 10. Total fiduciary accounts (sum of items 4 through 8) 11. Custody and safekeeping accounts ………………….. 12. Fiduciary accounts held in foreign offices …………… 13. IRA, HSA, and other similar accounts.

(Column A) Managed Assets

(Column B) Non-Managed Assets

(Column C) Number of Managed Accounts

(Column D)

Number of Non-

Managed Accounts

Tril Bil Mil Thou Tril Bil Mil Thou

IRAs, HSAs, and Other Similar Accounts

The Agencies reiterate that IRAs, HSAs, and Other Similar Accounts maintained in the retail side of the bank should not be reported in RC-T. Only those offered through a fiduciary business unit of the bank should be reported in RC-T.

Schedule RC-T – ChangesFiduciary and Related Services

Income

FIDUCIARY AND RELATED SERVICES INCOME 14. Personal trust and agency accounts 15. Employee Benefit and Retirement related trust and agency accounts:

a .Employee benefit—defined contribution b .Employee benefit—defined benefit

c. Other employee benefit and other retirement accounts 16. Corporate trust and agency accounts 17. Investment management and investment advisory agency accounts 18. Foundations and endowments 19. Other fiduciary accounts 20. Custody and safekeeping accounts 21. Other fiduciary and related services income 22. Total gross fiduciary and related services income (sum of items 16 through 23) (must equal Schedule RI, item 5.a) 23. Less: Expenses 24. Less: Net losses from fiduciary and related services 25. Plus: Intracompany income credits for fiduciary and related services 26. Net fiduciary and related services income

Schedule RC-T – ChangesMemorandum Item 1 - Managed

Assets Held in Fiduciary Accounts Dollar Amount in Thousands 1. Managed assets held in fiduciary accounts:

a Noninterest-bearing deposits

b. Interest-bearing deposits

c. U.S. Treasury and U.S. Government agency obligations d. State, county and municipal obligations e. Mutual Funds

1. Equity 2. Money Market 3. Other

f. Common Trust Funds/Collective Investment Funds g. Short-term obligations h .Other notes and bonds i .Common and preferred stocks j. Investments in unregistered funds and private equity investments k. Real estate mortgages l. Real estate m. Miscellaneous assets

n. Total managed assets held in fiduciary accounts (sum of Memorandum items l.a through 1l) (must equal Schedule RC-T, item 10column A) ……… o. Investments of managed fiduciary accounts in advised or sponsored mutual funds

Personal Trust and Agency, Investment

Management Agency Accounts

Employee Benefit, and Other Individual Retirement

Accounts

All Other Accounts Totals

RCON Bil Mil Thou RCON Bil Mil Thous RCON Bil Mil Thou RCON Bil Mil Thous

(Column A) Managed Assets

(Column B) Number of Managed Accounts

Reporting Common/Collective Funds in Memorandum Item 1

The Agencies are ending the current method of reporting CTFs/CIFs – No longer required to allocate the underlying assets of the CTFs/CIFs

Separate category for CTFs/CIFs has been added – MV of CTF/CIF units held in managed accounts will be reported

Schedule RC-T – ChangesMemorandum Item 2 – Corporate

Trust and Agency Accounts

Dollar Amount in Thousands

2. Corporate trust and agency accounts:

a. Corporate and municipal trusteeships…………………………………………………………….… (1) Issues reported in 2.a. that are in default b. Transfer agent, registrar, paying agent, and other corporate agency…………………………...

(Column A) Number of

Issues

Column (B) Principal Amount

Reporting Defaulted Issues in Memorandum Item 2 Issues not reported in default until a

default has been declared; Issues not reported in default during a

cure period, if such a period is provided for;

Issues no longer reported in default after trustee’s duties have been completed;

Amount outstanding for debt issues is the unpaid principal balance

Instructions - Clarifications Directed trustees for DC and DB EB

Plans should report such accounts as non-managed;

Memorandum Item 3 – Number of funds should be reported, not the number of assets held by the fund, number of participants in the fund, or number of accounts invested in the fund;

Instructions - Clarifications Whether an account where investment

discretion has been delegated to an RIA, affiliated or not, should be reported as a managed account depends on whether the delegation was the result of the reporting institution’s exercise of discretionary authority; and

An institution that delegates its investment authority and an institution that receives delegated authority over investments are both deemed to have investment discretion.

Examiner Guidance – GLBA/Regulation R – Exceptions

and Exemptions from the Definition of Broker in the

Securities Exchange Act of 1934

Broker Exception – The Big Picture

Determine whether the institution effects securities transactions for customers. If so, ensure that any such transactions satisfy the requirements of at least one of the GLBA and Regulation R broker exceptions or exemptions

Examiner Guidance – Trust & Fiduciary Exception

Transactions are effected in the bank's trust department or other department regularly examined for compliance with fiduciary principles and standards;

The bank does not publicly solicit brokerage business; The bank is "chiefly compensated" for its trust and fiduciary

activities on the basis of: An administrative or annual fee; or A percentage of assets under management; or A flat or capped per order processing fee that does not exceed the cost

incurred; or A combination of the above; and

Trades are effected in compliance with Securities Exchange Act of 1934 (Exchange Act) Section 3(a)(4)(C), which requires trades to be effected:

By a registered broker-dealer; or Via a cross trade or substantially similar trade either within the bank or

between the bank and an affiliated fiduciary in a manner not contrary to fiduciary principles; or

In some other manner the SEC permits.

Examiner Guidance – “Chiefly Compensated”

The “chiefly compensated” requirement of the TF exception is based on the calculation of the ratio of the institution’s “relationship” compensation to total compensation attributed to the institution’s trust and fiduciary accounts or line of business over a moving two-year period. As a result, compliance with the “chiefly compensated” requirement cannot be determined until 2011, for those banks using a calendar year as the basis for calculating the required ratio, expressed as a percentage. During this period, examiners will:

Assess management’s familiarity with the “chiefly compensated” requirements;

Determine if the institution has established policies and procedures to ensure compliance with the “chiefly compensated” requirement;

Determine if the institution has implemented procedures to keep adequate records for accurately calculating “relationship compensation” as a percentage of total trust and fiduciary compensation; and

Comment as appropriate on deficiencies noted in these areas.

Examiner Guidance – Solicitation

Determine whether the institution advertises or otherwise solicits securities transactions. If the institution advertises that it effects

securities transactions, examiners will review such advertisements.

Note: Banks allowed to indicate briefly – in a more general announcement of all the services provided in its trust department – that securities execution in connection with trust and fiduciary services are also provided. Regulation R states that reference to securities execution can not be more prominent.

Examiner Guidance – Trade Execution

Examiners will determine how securities transactions are executed. Note: Regulation R provides several exemptions from the Section 3(a)(4)(C) requirements. For example, banks may effect transactions in open-end mutual funds through the National Securities Clearing Corporation or directly with a fund’s transfer agent. Banks may also effect transactions in a company’s securities for such company’s employee benefit plans directly with the transfer agent for the company’s securities.

Examiner Guidance – Regularly Examined

For those institutions acting as trustee or custodian of individual retirement accounts, self-employed retirement plans, such as Keogh accounts; health savings accounts; and other similar accounts without the prior written consent of the Corporation as provided by FDIC Part 333.101, examiners conducting the safety and soundness examination will assess compliance with the broker exception rules.

Part 333.101 permits banks not exercising trust powers to act as trustee or custodian for such accounts provided the bank’s duties as trustee or custodian are essentially custodial or ministerial in nature; and the bank is required to invest the funds from such plans only:

In its own time or savings deposits, or In any other assets at the direction of the customer, provided the

bank does not exercise any investment discretion or provide any investment advice with respect to such account assets, and

The bank's acceptance of such accounts without trust powers is not contrary to applicable State law.

Examiner Guidance – Custody & Safekeeping Exemptions Examiners will:

Determine that accounts are those for which the bank is acting as custodian, as defined in Regulation R.

If the bank chooses to rely on the CS exception/exemptions for directed trust accounts, verify that the bank is a directed trustee for such accounts;

Determine whether the bank advertises that it effects securities transactions for custodial accounts. If so, review such advertisements;

Review the compensation arrangements for bank employees involved in custodial activities to determine that they are not compensated based on whether a securities transaction is executed, or based on the quantity, price, or type of security bought or sold;

Examiner Guidance – Custody & Safekeeping Exemptions For accommodation trades, review the bank’s

fee arrangements to determine that fees do not vary based on whether the bank accepted the order or based on the quantity or price of securities bought or sold;

When effecting accommodation trades for accounts other than directed trusts, determine that the bank:

Is not acting as a fiduciary for custodial accounts; Does not offer investment advice or recommendations; If the bank cross-markets trust and fiduciary services

to custodial customers, review cross-marketing materials for compliance with the prohibition on providing investment advice and recommendations;

Examiner Guidance – Custody & Safekeeping Exemptions If the bank is acting as a non-custodial third-party

administrator or as a subcustodian, review any cross-trading for compliance with Regulation R;

If the bank is acting as a non-custodial third-party administrator (TPA) or as a subcustodian, ascertain that management is aware that both the bank and the parties to which the bank is providing TPA and sub-custodial services must comply with the CS exemption requirements.; and

Review trade execution arrangements for compliance with SEC trade execution requirements, i.e., Exchange Act Section 3(a)(4)(C).

Other Exceptions and Exemptions

Securities Lending Transactions – Agent; Regulation S Securities; Permissible Securities Transactions; Stock Purchase Plans; Private Securities Offerings; Municipal Securities; Affiliate Transactions; Identified Banking Products; and De Minimis Exception

Contact Information

Anthony J. DiMiloExamination Specialist – Trust

Policy and Program Development Section550 17th Street N.W., Room F-6044

(202) 898-7496adimilo@fdic.gov