District Circular Letters

September 15, 1998

BANKING SUPERVISION AND REGULATION:
YEAR 2000 QUESTION AND ANSWER GUIDANCE
FIDUCIARY SERVICES AND YEAR 2000 READINESS

To State Member Banks, Bank
Holding Companies, Edge Act Corporations,
U.S. Branches and Agencies of Foreign Banks,
and Others Concerned
in the Twelfth Federal Reserve District

Interagency Guidance Answering Common Questions Regarding the Century Date Change

The Federal Financial Institutions Examination Council (FFIEC) has issued the enclosed guidance, "Questions and Answers Concerning FFIEC Year 2000 Policy," addressing issues of concern to depository institutions and their service providers and software vendors. The publication focuses primarily on testing, the most difficult and time-consuming phase of a depository institution's Year 2000 preparation process, but also cover topics such as documentation and FFIEC report distribution.

The document reiterates previous FFIEC guidance that, to the extent possible, depository institutions should test their systems for Year 2000 readiness in their own unique operating environments. However, the FFIEC recognizes that it is not always feasible for a depository institution that relies on service providers or software vendors to perform Year 2000 testing in its own environment. As a result, a depository institution can rely on proxy testing, under several specific conditions.

In addition, the guidance covers the following areas:

• Additional details about the conditions that apply when depository institutions use Year 2000 proxy testing for service providers. Also, for the first time, the FFIEC indicates that proxy tests can be acceptable for products provided by software vendors under several specific conditions. These conditions are outlined in the guidance.
• Encouragement for depository institutions to participate in testing efforts coordinated by industry trade associations and other organizations. Institutions may find this approach more cost-effective, as they may be able to share the cost of testing with other depository institutions and material third parties.
• A clarification of FFIEC policy concerning the types of testing documentation that depository institutions should retain.
• Expectations regarding software and operating system upgrades in 1999.
• Conversions to new mission-critical systems in 1999.
• Procedures for regulators to examine service providers and software vendors.

Depository institutions, service providers, and software vendors are reminded in the guidance that they may not disclose Year 2000 examination report information, including Year 2000 ratings. The FFIEC agencies are solely responsible for disclosing this information to client depository institutions.

Interagency Year 2000 Guidance on Fiduciary Services

The Federal Financial Institutions Examination Council (FFIEC) has issued the enclosed "Guidance Concerning Fiduciary Services and Year 2000 Readiness." The guidance stresses fiduciaries’ obligations to protect the assets of all account beneficiaries and manage all client assets solely in those beneficiaries’ best interest. The guidance emphasizes particular areas that may affect fiduciary services. This guidance supplements the advisory entitled "Guidance Concerning the Year 2000 Impact on Customers" that was mailed by this Reserve Bank to Twelfth District depository institutions in a letter dated March 31, 1998.

FFIEC member agencies expect that depository institutions will act to mitigate and manage Year 2000 exposures by reviewing their fiduciary services and fiduciary account assets. Directors and senior management are expected to take active roles in this process.

The action a depository institution takes to manage fiduciary risks depends on the types of fiduciary services it offers and the types of assets it manages for account beneficiaries. Areas of potential concern include account and asset administration, third-party risk, counterparty risk, transfer agent services, and client disclosures. The guidance addresses each of these areas.

With respect to account and asset administration, the guidance discusses thorough reviews of significant fiduciary account assets to determine potential liability or exposure attributable to issuers of securities with Year 2000 problems. The guidance states that financial institutions can conduct these reviews as part of ongoing account reviews. However, relying on the regular account review cycle might provide too little time to make the changes needed to deal with any Year 2000 problems found in individual assets. An alternative approach is to conduct the reviews in connection with reviews of assets on the approved or working list of investments. Any securities that are not on the approved or working list would have to be reviewed separately. Your institution can use any other procedure of its choice that would accomplish the reviews in a timely manner.

A depository institution’s lack of response to fiduciary Year 2000 issues may be interpreted by beneficiaries and other interested parties as a failure to fulfill its fiduciary duties and to observe the standards of prudence set by the Employee Retirement Income Security Act of 1974 and other applicable laws and regulations.

The FFIEC agencies expect each depository institution to address Year 2000 problems it identifies in fiduciary relationships in order to protect account beneficiaries and limit potential risks to the institution.

Additional Information

For additional information regarding "Guidance Concerning Fiduciary Services and Year 2000 Readiness," please contact Mr. Starr Seegmiller, Assistant Vice President, at (415) 974-2944, or Mr. Robert Johnson, Assistant Vice President, at (213) 683-2738, both of our Banking Supervision and Regulation Department.

For additional information regarding "Questions and Answers Concerning FFIEC Year 2000 Policy" or Federal Reserve's Year 2000 bank supervision program, please contact Mr. Johnson.

If you have questions about the Federal Reserve System’s Century Date Change Project, please contact your local Business Development office, as listed below:

FEDERAL RESERVE BANK OF SAN FRANCISCO

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