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Subject: Fiduciary Activities of National Banks
Date: March 27, 2008
To: Chief Executive Officers of National Banks, Department and Division Heads, Examining Personnel, and Other Interested Parties
Description: Annual Reviews of Fiduciary Accounts Pursuant to 12 CFR 9.6 (c)
Background and Purpose
The Office of the Comptroller of the Currency (OCC) is providing guidance to national banks on the annual review requirement contained in OCC fiduciary regulation 12 CFR 9.6(c). Under the regulation, at least once during every calendar year, a national bank is required to conduct a review of all assets of each fiduciary account for which the bank has investment discretion to evaluate whether they are appropriate, individually and collectively, for the account. These annual reviews are commonly referred to as "annual investment reviews".
The OCC has developed this guidance to clarify the agency’s expectations for the depth and breadth of annual investment reviews. Specifically, the guidance will:
Elements of an Effective Annual Investment Review Process
In addition to being a regulatory requirement, annual investment reviews are among the most useful tools bank fiduciaries have to ensure they meet their fiduciary responsibilities and properly administer their customers’ accounts. An annual investment review is a point-in-time evaluation of both account assets and objectives. Regardless of the tools employed by a particular institution, management supervision, information systems, and follow-up are all critical to an effective investment review process. An effective investment review process should be based upon policies and procedures that provide clear standards for scope, documentation, and exception reporting and tracking. The process should:
Exception tracking systems are essential to a strong investment review process. An effective tracking system should provide notification to management of items such as investment reviews coming due, identification of reviews that are past due, and realistic time frames for implementing corrective action. The bank should have a process for reporting and escalating issues/exceptions to appropriate management or committee levels. Exceptions should be properly addressed and corrective action should be implemented in a timely manner. Any waivers granted by administrators or portfolio managers should be based upon clearly defined parameters.
Unique or hard-to-value assets such as real estate, oil, gas and mineral interests, farms and ranches, timberland, closely held businesses, loans, and personal property should be included as part of the annual investment review. The review of these assets should:
Various types of assets, including unique assets, held in a single account may be reviewed at different times. However, the investment review process must ensure that an assessment of the account as a whole is made at least annually. This is particularly important when unique assets make up a substantial portion of the account.
Appropriate document retention policies and procedures should be in place to ensure that the bank maintains adequate documentation of each annual investment review. This will provide evidence of the bank’s review process in the event complaints are lodged against the fiduciary, or litigation issues arise.
Automated and Manual Investment Review Processes
The annual investment review process has evolved over time. In an effort to increase efficiencies, many banks are increasing their use of automation to facilitate investment reviews. Some banks have acquired investment review packages from vendors, while others have developed their own in-house systems. Some automated systems have the ability to screen an account’s marketable securities on a daily basis. Many banks use hybrid processes that encompass features of both automated and traditional manual investment reviews.
Factors to consider in using a manual review process:
Automated investment reviews can also be a useful investment management and compliance tool. Lower risk accounts, such as those invested in model portfolios comprised of mutual funds or collective investment funds, lend themselves well to an automated process. Automated systems allow marketable securities to be screened efficiently and frequently to identify assets not on an approved list, concentrations, own-bank securities, or accounts with allocations inconsistent with account objectives. While automation can provide efficient identification, reporting, escalation, and ongoing monitoring of many types of exceptions, an automated investment review is not a substitute for good portfolio management or committee oversight and accountability.
Factors to consider in using an automated review process:
Kerri R. Corn
1 For example, valuation of assets in charitable trusts may require appraisals that comply with IRS rules such as Internal Revenue Code Section 6695A. Other rules addressing valuation of real estate or closely held companies may also apply.