Supervision of Bank Trust Departments – Reporting and Compliance Issues

1. Supervision of Bank Trust Departments – Reporting and Compliance Issues FIRMA – National Risk Management Conference, New Orleans, April 29, 2009

2. Topics • Call Report Changes – Schedules RC-T and RC-M • Regulation R – Examiner Guidance

3. 2009 Changes to the Call Report of Condition

4. 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

5. Changes Effective March 2009 • Elimination of Confidential Treatment for Fiduciary Income, Expense, and Loss Data

6. 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?

7. Changes Effective December 2009 • Fiduciary and Related Assets Section • Fiduciary and Related Services Income • Managed Assets of Fiduciary Accounts • Corporate Trust and Agency Accounts

8. Schedule RC-T – ChangesFiduciary and Related Assets

9. 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.

10. Schedule RC-T – ChangesFiduciary and Related Services Income

11. Schedule RC-T – ChangesMemorandum Item 1 - Managed Assets Held in Fiduciary Accounts

12. 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

13. Schedule RC-T – ChangesMemorandum Item 2 – Corporate Trust and Agency Accounts

14. 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

15. 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;

16. 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.

17. Examiner Guidance – GLBA/Regulation R – Exceptions and Exemptions from the Definition of Broker in the Securities Exchange Act of 1934

18. 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

19. 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.

20. 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” requirementcannot 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.

21. 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.

22. 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.

23. 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.

24. 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;

25. 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;

26. 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).

27. 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

28. Contact Information Anthony J. DiMilo Examination Specialist – Trust Policy and Program Development Section 550 17th Street N.W., Room F-6044 (202) 898-7496 adimilo@fdic.gov