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The views and opinions expressed in this presentation are my own, and do not necessarily represent those of the Office o

OCC Update BDUG Annual Meeting October 24, 2012 Tish Dalton, Risk Specialist Asset Management Group Office of the Comptroller of the Currency Washington, D.C . 1. Disclosure….

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  1. OCC UpdateBDUG Annual Meeting October 24, 2012 Tish Dalton, Risk SpecialistAsset Management Group Office of the Comptroller of the CurrencyWashington, D.C . 1

  2. Disclosure… • The views and opinions expressed in this presentation are my own, and do not necessarily represent those of the Office of the Comptroller of the Currency. • I’ll refer frequently to national bank and Federal savings association regulations and guidance – while similar in principle, you should refer to the regulations and guidance of your primary regulator.

  3. The Mission of the OCC “assuring the safety and soundness of, and compliance with laws and regulations, fair access to financial services, and fair treatment of customers by, the institutions and other persons subject to its jurisdiction.” • From Title III of the Dodd-Frank Act

  4. OCC – National Bank and Federal Savings Association AM Supervision

  5. OCC – National Bank and Federal Savings Association AM Supervision OCC regulates 1,304 national banks & 566 Federal savings associations. They range from large complex banks with global footprints to local community banks. Includes 70limited purpose national trust banks and 15 trust only thrifts. Approximately 43% of all national banks and 26% of Federal savings associations have Asset Management (AM) activities, which include: Fiduciary and custody services; Retail brokerage; Investment banking and advisory services; and, Securities lending activities. 5

  6. Large Banks: Deputy Comptroller, Examiner in Charge (EIC), AM Team Leader (On-site teams) Mid-size Banks: Deputy Comptroller, Assistant Deputy Comptroller, EIC, Functional EIC – AM Examiner Community Banks: Deputy Comptroller, Assistant Deputy Comptroller, Portfolio Manager, AM Examiner Trust Companies: Assistant Deputy Comptroller, Portfolio Manager – national cadre of AM Examiners OCC – National Bank and Federal Savings Association AM Supervision 6

  7. OCC – National Bank and Federal Savings Association AM Supervision Examiners are supported by • Five AM Lead Experts • Northeast District • Southern District • Central District • Western District • Mid-Size banks • AM Policy Group • Credit and Market Risk Division/Chief National Bank Examiner’s office • Handbooks, bulletins, other guidance • Training, field support, and on-site exam support

  8. Supervision by Risk Objective: Assess banks’ ability to identify, measure, monitor and control risk Risk Assessment System (RAS) – For 8 risk categories, determine Quantity of risk/Quality level of risk management/Direction. AM focus: Compliance, Operational, Reputation, Strategic, Credit FFIEC: Uniform Ratings System (CAMELS). FFIEC: Uniform Interagency Trust Ratings System (UITRS) – OCC focus: Composite Rating. OCC – National Bank and Federal Savings Association AM Supervision

  9. OTS/OCC Integration (Effective July 21, 2011) Federal savings association (FSA) charters are still in effect. OCC now supervises FSAs. (FDIC supervises state savings associations, FRB supervises thrift holding companies.) Combined OCC/OTS teams now examine both National Banks (NB) and FSAs. OCC – National Bank and Federal Savings Association AM Supervision 9

  10. OCC/OTS Integration - Related Regulation Changes Required rule changes implemented (See OCC Bulletin 2011-35.) OCC and OTS regulations have been reviewed and differences identified. The goal is to integrate into single set of rules – watch for NPR. Fiduciary Activities: 12 CFR 9 (NB) – 12 CFR 150 (FSA) Securities Transactions: 12 CFR 12 (NB) – 12 CFR 151 (FSA) Call report Schedule RC-T has replaced TFR-FS (3/31/12) OCC – National Bank and Federal Savings Association AM Supervision 10

  11. OTS/OCC Integration – Policy Impact OCC Bulletin 2011-47 – Supervisory Policy Integration Process OCC Bulletin 2012-15 – Rescission of most OTS documents “Outdated,” “Duplicative,” “Conveyance” and “Replaced” Most OCC Handbooks now applicable to FSAs OCC Bulletin 2012-16 - “Capital Planning: Guidance for Evaluating Capital Planning and Adequacy” Policy Integration initiatives continue Efforts to replace similar guidance with updated, combined guidance is ongoing and will take time. Look for updated, consolidated booklets of the Comptroller’s Handbook as applicable regulations are updated. OCC – National Bank and Federal Savings Association AM Supervision 11

  12. Recent AM Guidance and Regulation

  13. Recent AM Guidance and Regulation • Unique & Hard-to-Value Assets Handbook – (August 2012) • Defines and describes characteristics and risks of unique & hard to value assets such as: • Real estate • Farm & ranch • Commercial real estate • Timber • Mineral Interests • Closely held businesses • Loans and notes • Life insurance • Tangible assets, collectibles

  14. Recent AM Guidance and Regulation • Unique & Hard-to-Value Assets Handbook • Highlights risks associated with these assets – operational, compliance, reputation and strategic • Require specialized expertise • May by subject to special ownership rules • Are frequently hard to value • Safeguarding assets often presents challenges • Specialized transaction processing requirements • Complex framework of applicable law, including governing instrument • Often have special meaning/value to beneficiaries

  15. Recent AM Guidance and Regulation • Unique & Hard-to-Value Assets - OCC Expectations • Pre-acceptance, initial and annual reviews • Policy guidelines for valuation frequency and methods • Sufficient expertise to monitor third parties servicing asset class • Process to ensure payment of applicable taxes and insurance • Process to ensure and track timely management actions • Process to track, collect and follow up on income receipts • Controls such as audit and compliance reviews • Risk assessment and defined risk tolerance • Exception monitoring and reporting • Controls to safeguard assets • Proper segregation of duties

  16. Recent AM Guidance and Regulation • OCC Short Term Collective Investment Fund (STIF) Rule • Revisions to 12 CFR 9.18(b)(4)(ii)(B) published 10/9/2012 – See OCC Bulletin 2012-31 • Effective July 1, 2013 • Objective of revisions: To add safeguards designed to address participating interests risk of loss to a STIF’s principal • STIFs, like money market mutual funds are designed to provide a relatively risk free liquidity option. • Both STIFs and MMFs received sponsor support in 2007-2009. • SEC imposed additional restrictions on MMFs; OCC considers comparable restrictions on STIFs to be warranted.

  17. Recent AM Guidance and Regulation • STIF Final Rule requirements include: • Measures governing the nature of STIFs investments • Shorter duration • Concentration standards • Portfolio and issuer qualitative standards • Ongoing monitoring of the STIF’s mark-to-market value • Assessment of potential changes in STIF’s mark-to-market value under adverse market conditions • Greater Transparency and regulatory reporting about the STIF’s holdings • Procedures to protect fiduciary accounts from undue dilution in the event that the STIF loses ability to maintain a stable NAV.

  18. Recent AM Guidance and Regulation • STIF Final Rule Disclosure requirements (continued): • Fund level portfolio information - Disclose to OCC, STIF participants within 5 days of End-of-month (EOM): • Total assets under management • Mark-to-market and amortized cost NAV (both with and without capital support agreements) • Dollar-weighted average portfolio maturity • Dollar-weighted average portfolio life maturity • For each security owned as of EOM:

  19. Forthcoming AM Guidance • AM Model Validation guidance (4th quarter 2012) • Will supplement OCC Bulletin 2011-12 “Sound Practices for Model Risk Management.” “Model” refers to a quantitative method, system, or approach that applies statistical, economic, financial, or mathematical theories, techniques, and assumptions to process input data into quantitative estimates • Purpose: to provide detailed information for managing model risk in banks’ AM related lines of business. • Focus: models used by asset managers.

  20. OCC Supervisory Focus – Asset Management

  21. OCC Risk Management Expectations - AM • OCC focuses on banks’ ability to effectively identify, measure, monitor and control risk. • Bank’s risk management program should be tailored to the size and complexity of operations. • Product development process should include thorough risk assessment, that includes an evaluation of bank’s ability to manage the incremental risk. • Account acceptance process should include assessment of bank’s ability to meet operational requirements and manage operational risk.

  22. Operating Environment – Asset Management • Prolonged domestic and global economic weakness and uncertainty. • AM activities – revenue streams increasingly important to bank earnings. • Anxiety for income/improved investment performance. • Fees for liquid asset management continue to be impacted by fee waivers due to low rate environment. • Business restructuring, exiting certain products and markets, expanding into others. • Strategic initiatives designed to improve earnings and growth in challenging market environment.

  23. Operating Environment – Asset Management • Proliferation of New Product Offerings • Exchange traded fund growth • Number of funds • Total assets • Complexity Concentration (sponsors) and leverage pose risk • Structured products • Provide alternatives in low-rate environment • Heightened reputation risk

  24. Operating Environment – Asset Management • Compliance Risk and Control Structures • Regulatory exams, investigations and inquiries • Client trading activity • Documentation • Privacy • Investment suitability • Impact of new and proposed rules (US and foreign) • Potential impact of Volcker Rule on banks and affiliates that organize and offer unregistered hedge and private equity funds.

  25. OCC Supervisory Focus – Operating Environment • FDIC Transaction Account Guarantee (TAG)Program • TAG program guarantees certain transaction accounts above $250,000. • The TAG will expire on December 31, 2012, unless extended by Congress. • Pledge requirements under 12 C.F.R. 9.10 and 150.290–320 will increase with the termination of unlimited FDIC coverage. • Impact of expiration on bank deposit levels remains to be seen.

  26. OCC Supervisory Focus – AM • OCC Expectations - Governance and Risk Management • “Heightened expectations”- Large banks must have strong audit and risk management functions • Investment risk management – must be supported by metrics, data, systems • Effective management of conflicts of interest/use of affiliated investment products • Focus on regulatory change management • Make sure that strategic initiatives are well thought out and do not outpace control and operations area resources and capabilities

  27. OCC Supervisory Focus – AM • Investment Issues/concerns • Anxiety for income/improved investment performance – increased risk taking • Ineffective due diligence processes in selecting, retaining, and monitoring investment managers and funds • Lack of independent risk management function over investment area • Inadequate model risk management • Improper oversight and controls over delegation of trust AM to affiliated broker’s financial advisors

  28. OCC Supervisory Focus – Asset Management • Investment Issues • Performance related litigation risk. • Program/algorithmic trading activities. • Investment Issues – Unique Assets • Stale valuations/valuation practices • Stale reviews of unique assets • Lack of financial transparency • Lack of product knowledge and expertise • Client suitability

  29. OCC Supervisory Focus – Asset Management • BSA/AML Compliance (OCC Bulletin 2012-30) • It’s not just a compliance issue – its management • BSA/AML findings will now be reflected in “management” part of CAMELS • BSA/AML finding will continue to be reflected in “compliance risk” assessment under the OCC’s RAS • Quicker reaction when a bank has multiple matters requiring attention • More flexibility for citing BSA/AML violations for individual “pillar” violations

  30. OCC Supervisory Focus – Asset Management • Impact of earnings pressure on: • Internal controls • Staffing • Compliance/Risk Management functions • Audit Coverage • Third party service provider oversight • IT, outsourced operations, administration, tax preparation, investments, custody • Affiliated and non-affiliated service providers • Asset controls • On-premises/off-premises/all locations/all assets

  31. Appendix I Common AM Violations of Law and Regulation and “Matters Requiring Attention” 2012

  32. Common AM Violations of Law • Most common AM-related Violations of Law and Regulation (2012): • Review of fiduciary accounts – violations for pre-acceptance, post-acceptance and annual review. • Audit requirements • Annual audit • Standards of audit • Audit committee membership. National banks and Federal savings associations

  33. Common AM MRAs - 2012 National banks and Federal savings associations

  34. Appendix II - Asset Management Statistics 34

  35. Asset Management Statistics • Approximately 44% of all National Banks reported income from fiduciary, retail brokerage, and investment banking and advisory activities. • All Large and Midsize Banking organizations • Community Banks – 42% (528/1,273) • Central District 52% (180/344) • Northeastern District 57% (108/190) • Western District 35% (93/264) • Southern District 31% (147/475) Source: FDIC Call Reports

  36. Asset Management Statistics • Approximately 26% of all Federal Savings Associations (FSA) reported income from fiduciary, retail brokerage, and investment banking and advisory activities. • Large FSA – 50% (2/4) • Midsize FSA – 47% (7/15) • Community FSA – 26% (138/547) • Central District 31% (54/176) • Northeastern District 23% (43/191) • Western District 21% (20/94) • Southern District 24% (21/86) Source: FDIC Call Reports

  37. Fiduciary and Related Assets All Banks and Federal Savings Associations - 6/30/2012 Source: FDIC Call Reports

  38. Fiduciary and Related Assets National Banks - 6/30/2012 Source: FDIC Call Reports

  39. Fiduciary and Related Assets Federal Savings Associations - 6/30/2012 Source: FDIC Call Reports

  40. Total Fiduciary Assets All Banks and FSAs: 2006 - 6/30/2012 Source: FDIC Call Reports

  41. Total Custody Assets All Banks and FSAs: 2006 - 6/30/2012 Source: FDIC Call Reports

  42. Managed Assets – Fiduciary Accounts All Banks and FSAs – 12/31/2011 Source: FDIC Call Reports

  43. Collective Investment and Common Trust Funds All Banks and FSAs: 2001 – 6/30/2012 Source: FDIC Call Reports

  44. Collective Investment and Common Trust Funds All Banks and FSAs: 2002 – 6/30/2012 Source: FDIC Call Reports

  45. Appendix III - OCC AM Guidance OCC Bulletins, Banking Circulars, Interpretive Letters and Booklets of the Comptroller’s Handbook for Asset Management are available at www.occ.gov OCC Website: Capital Markets: Asset Management

  46. OCC AM Guidance • Comptrollers Handbook for Asset Management Booklets • Asset Management (2000) • Asset Management Operations & Controls (2011) • Collective Investment Funds (2005) • Conflicts of Interest (2000) • Custody Services (2002) • Investment Management Services (2001) • Personal Fiduciary Services (2002) • Retirement Plan Services (2007) • Unique and Hard to Value Assets (2012) 46

  47. OCC AM Guidance • Selected Safety and Soundness Booklets: • Community Bank Supervision (2010) • Large Bank Supervision (2010) • Bank Supervision Process (2007) • Internal and External Audits (2003) • Internal Control (2001) • Insurance Activities (2002) • Retail Nondeposit Investment Sales (1994)

  48. Selected OCC Bulletins • OCC 2012-31, Short-Term Investment Funds • OCC 2011-11, Risk Management Elements: Collective Investment Funds and Outsourced Arrangement • OCC 2010-37, Self-Deposit of Fiduciary Funds • OCC 2009-19, New Notice Requirements for Sweep Accounts • OCC 2008-10, Fiduciary Activities of National Banks: Annual Reviews of Fiduciary Accounts Pursuant to 12 CFR 9.6(c) • OCC 2008-5, Conflicts of Interest: Risk Management Guidance – Divestiture of Certain Asset Management Businesses • OCC 2007-42, Bank Securities Activities: SEC's and Federal Reserve's Final Regulation R • OCC 2007-21, Supervision of National Trust Banks: Revised Guidance: Capital and Liquidity

  49. Selected OCC Bulletins • OCC 2007-7, Soft Dollar Guidance: Use of Commission Payments by Fiduciaries • OCC 2007-6, Registered Transfer Agents: Transfer Agent Registration, Annual Reporting, and Withdrawal from Registration • OCC 2006-24, Interagency Agreement on ERISA Referrals • OCC Bulletin 2004-20, Risk Management of New, Expanded, or Modified Bank Products or Services: Risk Management Process • OCC 2004-2, Banks/Thrifts Providing Financial Support to Funds Advised by the Banking Organization or its Affiliates • OCC Bulletin 2002-16, Bank Use of Foreign-Based Third-Party Service Providers • OCC Bulletin 2001-47, Third-Party Relationships: Risk Management Principles • OCC Bulletin 2001-35, Examination Procedures to Evaluate Compliance with the Guidelines to Safeguard Customer Information

  50. Contact information: Tish Dalton Asset Management Group Patricia.Dalton@occ.treas.gov 202-874-3206 50

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