Fiduciary Regulations; Non-Fiduciary Custody Activities: Advance Notice of Proposed Rulemaking
April 29, 2019 / Source: OCC
OCC BULLETIN 2019-21
Subject: Fiduciary Regulations; Non-Fiduciary Custody Activities
Date: April 29, 2019
To: Chief Executive Officers of National Banks and Savings Associations, All Department and Division Heads, All Examining Personnel, and Other Interested Parties
Description: Advance Notice of Proposed Rulemaking
On April 29, 2019, the Office of the Comptroller of the Currency (OCC) published an advance notice of proposed rulemaking (ANPR) inviting comment on possible revisions to the OCC’s fiduciary regulations, 12 CFR 9 and 150. Specifically, the ANPR requests comment on whether the OCC should update the regulatory definition of “fiduciary capacity” to make it more consistent with recent developments under state laws. The ANPR also requests comment on the potential addition of new provisions to OCC regulations to establish certain basic requirements for non-fiduciary custody activities of national banks, federal savings associations, and federal branches and agencies (collectively, banks), which are not currently addressed by specific OCC rules. The ANPR has a 60-day comment period, ending on June 28, 2019.
Note for Community Banks
The rules contemplated by the OCC in this ANPR would apply to all OCC-supervised institutions, including community banks.
The ANPR invites comment on two possible revisions to the OCC’s regulations.
- Updating the definition of “fiduciary capacity” to include certain capacities that are based on the authority a bank has with respect to a trust, e.g., the power to make discretionary contributions, override the trustee, or select a new trustee. This change could
- remove ambiguity and confusion for banks because of differences between how OCC regulations and state laws define “fiduciary capacity,” and
- provide for the uniform application of OCC regulations to trust activities that state laws describe with different terminology.
- Codifying OCC guidance related to non-fiduciary custody activities. A proposed rule could be based on the following core elements of sound risk management, which are similar to those required in the current rules for fiduciary custody activities:
- Separation and safeguarding of custodial assets.
- Due diligence in selection and ongoing oversight of sub-custodians.
- Disclosure in custodial contracts and agreements of the custodian’s duties and responsibilities.
- Effective policies, procedures, and internal controls.
- The OCC believes that a non-fiduciary custody rule could
- eliminate any confusion that exists over a bank’s obligtions with respect to custody arrangements;
- impose minimal new responsibilities on well-managed banks, as the OCC would be codifying the OCC’s guidance on custody service activities for banks; and
- complement regulations related to the custody of client assets issued by the U.S. Securities and Exchange Commission, U.S. Commodity Futures Trading Commission, Internal Revenue Service, various states, the United Kingdom, and the European Union.
The OCC has the statutory authority to permit banks to act in certain fiduciary capacities, including fiduciary capacities that may be permitted for state banks, trust companies, or other corporations that compete with banks in the states in which they are located.1 12 CFR 9 and 12 CFR 150 provide federal law requirements for national banks and federal savings associations, respectively, if they act in such fiduciary capacities. Specifically, 12 CFR 9.2(e) defines “fiduciary capacity” to mean trustee, executor, administrator, registrar of stocks and bonds, transfer agent, guardian, assignee, receiver, or custodian under a uniform gifts to minors act; investment adviser, if the bank receives a fee for its investment advice; any capacity in which the bank possesses investment discretion on behalf of another; or any other similar capacity that the OCC authorizes pursuant to 12 USC 92a. A similar definition with respect to federal savings associations is given at 12 CFR 150.30.
Numerous states have modified their trust laws in recent years to define and set expectations for various trust-related roles, including roles that do not possess the investment discretion traditionally granted to trustees. Because some of these state laws frequently describe these roles by using terms other than those specified in the OCC definition of “fiduciary capacity” in 12 CFR 9.2(e) and 150.30, these state fiduciary roles may not explicitly be included in the OCC’s definition. As a result, this expanding list of fiduciary roles under state law may create uncertainty for banks about the activities governed by OCC fiduciary rules. The OCC believes that this potential uncertainty may make it difficult for banks to assess and manage litigation risk and to understand OCC expectations for engaging in these roles in a safe and sound manner.
Non-Fiduciary Custody Activities
12 CFR 9.8 and 9.13 impose general recordkeeping and custody requirements for national banks when acting as a fiduciary. 12 CFR 150.230 through 150.250 and 150.410 through 150.430 impose similar requirements for federal savings associations. Specifically, these provisions require bank fiduciaries to provide adequate safeguards and controls over client fiduciary account assets, to keep these fiduciary account assets separate from bank assets, and to maintain and segregate certain records related to these accounts. Although the OCC has issued substantial guidance regarding non-fiduciary custody activity, which is contained in the Comptroller’s Handbook,2 the OCC has not specifically addressed these requirements in an OCC regulation for non-fiduciary custody accounts.
Bank non-fiduciary custody activities have increased in both asset size and sophistication since the OCC updated its fiduciary regulation in 1996. Bank non-fiduciary custody assets total, as of December 31, 2018, approximately $41.7 trillion, which is significantly more (in dollar terms) than bank fiduciary assets ($8.7 trillion) and on-balance-sheet total assets ($12.1 trillion).3 This increase in size and sophistication of non-fiduciary custody activities increases operational, reputational, credit, and other risks for bank custodians. Because of these risks, the OCC believes it may be appropriate to issue regulations codifying the core standards for non-fiduciary custody activities. The OCC also could consider updating comparable standards for fiduciary custody activities in 12 CFR 9 and 150 to include the same standards applied to non-fiduciary custody accounts, thereby providing a single consistent standard for safeguarding client assets and clarifying expectations for custody of both fiduciary and non-fiduciary accounts.
Please contact Patricia Dalton, Technical Expert for Market Risk, Asset Management, (202) 649-6401; David Stankiewicz, Special Counsel, or Asa Chamberlayne, Counsel, (202) 649-7299, Heidi Thomas, Special Counsel, or Chris Rafferty, Attorney, Chief Counsel’s Office, (202) 649-5490. For persons who are deaf or hearing impaired, TTY, (202) 649-5597.
Jonathan V. Gould
Senior Deputy Comptroller and Chief Counsel
2 See the “Custody Services,” “Asset Management Operations and Controls,” “Unique and Hard-to-Value Assets,” “Retirement Plan Products and Services,” and “Conflicts of Interest” booklets of the Comptroller’s Handbook, and OCC Bulletin 2013-29, “Third-Party Relationships: Risk Management Guidance.”