TBC-19
Type:  Trust Banking Circular
Subject:  Fiduciary Purchases of Bonds when Bank Participates in
          Underwriting Syndicates
Date:  September 25, 1981

TO:  Regional Administrators, Presidents of National Banks with Trust
     Powers (Attention: Senior Trust Officer), and All Examining
     Personnel.

This circular sets forth the position of the Comptroller of the Currency
concerning national banks purchasing for trust accounts securities which
have been underwritten by bond syndicates of which the bank was a member.

Background

National banks are authorized to deal in and to underwrite certain types
of securities such as general obligations of a state or political
subdivision thereof. Underwriting of such securities frequently is done
through syndicates. These syndicates may take the form of an "undivided
account" or a "divided account." In an undivided account, each syndicate
member is responsible for a specified share of any loss incurred by the
syndicate, regardless of the amount of bonds that each syndicate member
sells. In a divided account, each syndicate member is responsible only for
the sale of the bonds allocated to it. The member of a divided account
syndicate who sells all its allocation will not be responsible for any
loss experienced if other syndicate members fail to sell their
allocations.

Policy

It has been a basic principle of the law of trusts that a trustee
exercising discretionary powers violates its duty to the trust estate if
it sells to itself as a trustee property which it owns individually. This
is called self-dealing. The corporate trustee violates this duty to its
beneficiary if it purchases property for the trust from one of its own
departments, as where is purchases for the trust securities owned by it in
its securities or banking department Thus, this duty would prohibit a
corporate trustee from purchasing for its trust accounts securities that
are being underwritten by the commercial department of the bank, either
individually or as a member of a syndicate.  This would preclude a
corporate trustee from purchasing securities from the commercial
department when the bank is a member of a divided syndicate. It would also
preclude the purchase of securities from an affiliate of the corporate
fiduciary when the affiliate is a member of a divided syndicate, even
though the corporate fiduciary is not also a member.

An exception to this principle would occur when such purchases are
specifically authorized by local law or the provisions of the governing
trust instrument or directed, in writing, by an authorized power holder.

In addition, the purchase of securities by the corporate trustee from
other members of a divided account is not precluded, so long as there is
no agreement, tacit or express, between syndicate members to purchase each
others commitments.

In the case of a syndicate in the form of an undivided account where the
corporate trustee is a member, the corporate trustee would also be
violating its duty of undivided loyalty to its fiduciary accounts by
purchasing securities from other members of the syndicate. Our examiners
will criticize any direct purchases from members of an undivided member
syndicate made while the syndicate is open. Examiners will also criticize
the purchase of securities from affiliates of the corporate trustee when
the affiliate is a member of an undivided syndicate, even though the
corporate trustee is not also a member.

In addition to the foregoing, the purchase of securities which the bank or
an affiliate has underwritten as a member of an undivided syndicate,
either from another syndicate member or another intermediary, within sixty
days of the close of a syndicate will create a rebuttable presumption of
self-dealing. Among factors which are relevant to rebut this presumption
are evidence establishing: the ultimate fairness of the price as
established by market quotations or independent appraisals; the absence of
other securities which would serve to the same degree the needs of the
trust accounts; the absence of a pattern of purchasing securities
immediately after the syndicate has closed; or the fact that numerous
purchases of this security were made by parties independent of members of
the syndicate at the time the purchase was made. Documentation
establishing such factors should be obtained at the time of the
transaction. As is the case with purchases from syndicate members during
the life of the syndicate, this presumption of self-dealing arising from
the purchase of securities within sixty days of the close of the syndicate
would not apply when such purchases are specifically authorized by local
law or the provision of the governing trust instrument or are directed in
writing by an authorized power-holder.

Should a corporate fiduciary purchase securities for fiduciary customers
in violation of the foregoing principles, the bank must take appropriate
corrective action. Such appropriate action includes sale of the securities
at no loss to the trust estate; obtaining beneficiary consent, if all
beneficiaries are sui juris; or obtaining court approval after full and
complete disclosure of the facts and circumstances.

When the purchase is made by a common trust fund full disclosure, subject
to the review of this Office, may be an appropriate remedy of the
self-dealing transaction. In these circumstances, the Office of the
Comptroller of the Currency will generally require:

(1) disclosure to every ascertainable holder of a vested beneficial
interest in a trust account having an interest in the common trust fund
during the period the fund held the securities; (2) disclosure that the
bank's trust department violated federal regulations prohibiting
self-dealing; (3) complete disclosure of the facts and events which
occurred, the parties or entities involved, and the terms of the syndicate
agreement in relation to the securities purchased; and (4) disclosure of
the amount of depreciation, if any, as a percentage of the purchase price
of the securities on the date of disclosure.

National banks should adopt written policies and implement procedures to
ensure that self-dealing transactions as outlined in this Circular do not
occur. Examiners will criticize those situations where it is determined
that adequate controls are not in place.  Further, this Office will
require that self-dealing syndicate transactions are remedied in a manner
described above.

Questions concerning the contents of this issuance should be directed to
Donald R.  Johnson, Director for Trust Examinations, at (202) 447-0445.

Paul M. Homan
Senior Deputy Comptroller
for Bank Supervision