District Circular Letters
March 16, 2001
BANKING SUPERVISION AND REGULATION:
EXAMINATION OF FIDUCIARY ACTIVITIES
To State Member Banks, Bank
Holding Companies, U.S. Branches
and Agencies of Foreign Banks,
and Others Concerned,
In the Twelfth Federal Reserve District
Examination of Fiduciary Activities
The Federal Reserve is integrating the examination frequency
mandates for trust and transfer agency examinations with safety and soundness
examinations. This reorganization will better integrate the supervisory
assessment of banking organizations' fiduciary activities into the overall
safety and soundness supervision process. It will also focus Federal Reserve
System supervisory resources on areas of greatest potential risk. The
frequency and scope of examination coverage of fiduciary activities at
banking organizations that are supervised by the Federal Reserve should
be based on the guidelines provided below. Supervisory risk profiles,
risk assessments, and supervisory plans should also reflect fiduciary
activities.
Fiduciary activities and other related services generally
include traditional trust services such as personal trust, corporate trust,
transfer agent services, and employee benefit account products and services,
as well as custody and securities lending services, clearing and settlement,
asset management, and investment advisory activities.
Previously, frequency mandates for most "specialty" examinations
were established by SR letter 86-39. The frequency of trust examinations
was based primarily on the size of the institution's fiduciary operations
and its latest rating based on the Uniform Interagency Trust Rating System
(UITRS). Transfer agent examination mandates were based on the number
of securities serviced and the latest transfer agent examination rating.
This letter revokes the trust and transfer agent examination frequency
requirements of SR letter 86-39.
Complex Fiduciary Organizations
Complex fiduciary organizations include such entities
as large complex banking organizations (LCBOs), other large or regional
institutions for which fiduciary activities represent a significant portion
of their business, as well as clearing agencies registered with the Securities
and Exchange Commission for which the Federal Reserve is the primary supervisor.
Fiduciary examination frequency should be determined based on the impact
of fiduciary activities on the organization's risk profile. At a minimum,
all material fiduciary business lines should be subject to examination
over a two-year period or examination cycle as part of the continuous
supervision process, with higher risk areas generally reviewed annually.
Reviews of fiduciary activities for financial holding companies should
be conducted in accordance with the guidelines provided in SR letter 00-13.
Composite UITRS and transfer agent ratings reflecting
the overall condition of the fiduciary function at each institution, and
any component ratings considered relevant, should be assigned or updated
in a timely manner based on the results of examinations, targeted reviews,
or other assessments of fiduciary activities. UITRS ratings do not need
to be assigned for each targeted business line review. However, at a minimum,
composite UITRS and transfer agent ratings should be updated annually
and any material findings related to these areas should be included in
the annual summary supervisory report and any significant concerns should
be reflected in the safety and soundness examination ratings. Fiduciary
risks and fiduciary risk management assessments should also be reflected
in the relevant risk assessment and risk management ratings for the banking
organization, as necessary.
Other Institutions Offering Fiduciary and Transfer
Agent Services
The frequency of fiduciary and transfer agent examinations
for those institutions that are generally smaller state chartered Federal
Reserve member banks and trust companies with non-complex operations,
should be determined based on the significance of fiduciary and transfer
agent activities and an assessment of the level of risk the activities
present to the institution. This applies also to initial examinations
of new institutions and those subject to Federal Reserve supervision as
a result of charter conversion.
At a minimum, fiduciary activities should be reviewed
no less frequently than during every other routine safety and soundness
examination. Examinations governed by alternating examination programs
with state banking authorities may continue to be performed in accordance
with those arrangements or as necessary to incorporate the provisions
of this SR letter. Examinations of fiduciary activities at non-complex
limited-purpose trust companies and other fiduciary institutions subject
to supervision by the Federal Reserve that do not receive routine safety
and soundness examination should be conducted no less frequently than
every two years.
Composite UITRS and transfer agent examination ratings
reflecting the overall condition of the function, and any component ratings
considered relevant, should be assigned or updated at the completion of
the examination or assessment. Material examination findings should be
integrated into the overall examination report for the institution, which
should clearly indicate the significance of any findings to the safety
and soundness of the institution and the impact on any relevant risk assessments
and risk management ratings.
Organizations with Supervisory Concerns
Organizations for which supervisory concerns have been
raised regarding fiduciary activities should be subject to an additional
level of supervisory attention based on the severity of the supervisory
concerns. Generally, this would include those with a composite UITRS rating
of 3, 4, or 5, a transfer agent rating of B or C, or significant deficiencies
in one or more component rating categories. In the case of an institution
assigned a UITRS rating of 4 or 5 or a transfer agent rating of C, supervisory
action should be initiated promptly and continued until the problems or
deficiencies have been addressed.
Under the Securities and Exchange Act of 1934, the Federal
Reserve continues to be responsible for examining transfer agents and
clearing agencies for which it is the primary supervisor, including reviewing
compliance with Securities and Exchange Commission rules. Any material
violations of transfer agent or clearing agency rules must be promptly
reported to Board staff to facilitate coordination with the Securities
and Exchange Commission.
Risk Profiles
Regular supervisory assessments of the risk of fiduciary
activities support the revised examination requirements discussed above.
Risk profiles for LCBOs are updated quarterly in accordance with the provisions
of SR letter 99-15. These risk profiles should include explicit consideration
of the risks of fiduciary activities. For other complex fiduciary organizations,
risk profiles reflecting fiduciary activities should be prepared and updated
as needed, but no less frequently than annually. For these organizations,
supervisory plans should detail the fiduciary specialist's recommended
examination coverage of fiduciary activities. For banking organizations
supervised by the Federal Reserve with smaller, non-complex fiduciary
operations, formal risk profiles may not be necessary, but fiduciary risk
information should normally be updated at each examination or inspection
and incorporated into supervisory plans.
Risk profiles should include an assessment of the inherent
risk in the organization's fiduciary activities, as well as a consideration
of the effectiveness of its management of these risks.
Risk assessments would normally include the following
factors:
- The size and number of fiduciary accounts and assets administered
- The nature and complexity of fiduciary products and services offered
- Significant changes to management or staffing for fiduciary services
- Significant changes to data processing systems supporting fiduciary
services
- New affiliations, partnerships, or outsourcing arrangement
- Changes in strategic direction affecting fiduciary services or exposure
to emerging risks
- Significant litigation, settlements, or charge-offs
- Length of time since the last on-site examination in which fiduciary
activities were reviewed, and the scope of that examination
- Significance of prior examination findings
- Effectiveness of the organization's control environment, including
its audit function, and the adequacy of its risk management practices
relative to the nature and scope of its business
Additional Information
For additional information about the examination of fiduciary
activities please contact our Banking Supervision and Regulation Department,
at (415) 974-2802.
FEDERAL RESERVE BANK OF SAN FRANCISCO
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