Date: September 20, 2010
Description: Self-Deposit of Fiduciary Funds
Background and Purpose
The Office of the Comptroller of the Currency (OCC) is providing guidance to national banks that place funds for which a national bank is a fiduciary on deposit in the bank or with a bank affiliate. This bulletin refers to such deposits as "self-deposits." Self-deposits include fiduciary funds held in interest-bearing accounts, such as Money Market Deposit Accounts (MMDA) or certificates of deposit (CD); short-term investment pools consisting of own-bank deposits; and omnibus cash or other processing accounts. Self-deposits of fiduciary funds are subject to 12 USC 92a(d) and 12 CFR 9. The OCC is issuing this guidance to clarify the agency's overall expectations for self-deposits and to highlight the associated risks and the need for national banks and trust companies to ensure that bank self-deposit activities meet fiduciary standards.
Overview of Self-Deposited Fiduciary Funds
Twelve CFR 9.10(b) permits the self-deposit of fiduciary funds that are awaiting investment or distribution, unless prohibited by applicable law. Twelve CFR 9.10(b) also requires a bank to set aside collateral to secure such deposits to the extent those deposits are not insured by the Federal Deposit Insurance Corporation (FDIC). Under 12 CFR 9.10(c), a bank may set aside collateral to secure fiduciary funds deposited by or with an affiliate that are awaiting investment or distribution, unless prohibited by applicable law. A bank fiduciary exercising investment discretion that makes a long-term investment in a self-deposit is engaged in prohibited self-dealing under 12 CFR 9.12, unless the investment is authorized by applicable law.
The primary supervisory concern with self-deposits of fiduciary funds is that a bank may fail to fulfill its duties of undivided loyalty and care to fiduciary account beneficiaries if the bank's interests conflict with those of its fiduciary clients. Self-depositing fiduciary funds can potentially benefit the bank by providing the bank increased liquidity, stable funding, and low-cost deposits. These potential financial benefits, however, should not influence a bank when it makes fund-placement decisions for its fiduciary clients. The bank's standards for initial and ongoing diligence should require that the same criteria applied to other alternatives for the placement of client funds are applied to self-deposits. If a bank inappropriately self-deposits fiduciary funds, it may breach its fiduciary duties to its clients of undivided loyalty and care, with the potential to adversely affect those clients. This may expose the bank to increased risk of legal action by account beneficiaries and increased risk that the bank may violate existing laws or regulations.
Another key consideration for self-deposits of fiduciary funds is safety. The level of credit risk to which fiduciary funds are exposed—based on a bank's financial condition and the extent to which that risk is mitigated by collateralization and/or FDIC insurance coverage—should be considered as part of a bank's decision to self-deposit fiduciary funds.
Fiduciary Funds Awaiting Investment or Distribution
Funds awaiting investment or distribution include
- Aggregate cash balances in fiduciary accounts, as reflected on the asset management accounting system.1
- Other cash balances in suspense or operating accounts that can be identified as belonging to one or more specific fiduciary accounts.
- Funds for checks that have been issued on behalf of fiduciary accounts that have not yet been presented and paid.
- Cash management vehicles into which fiduciary funds are swept.
- Fiduciary assets consisting of deposit accounts with maturities of less than one year.
Insured or collateralized self-deposits can help satisfy fiduciary account needs for safe, temporary placement of funds awaiting investment or distribution.
Permissibility of Self-Depositing Fiduciary Funds and Collateral Requirements
Under 12 CFR 9.10(b), a national bank may deposit fiduciary account funds that are awaiting investment or distribution in the commercial, savings, or other department of the bank, unless prohibited by applicable law. The bank is required by 12 CFR 9.10(b) to set aside appropriate collateral as security, under the control of fiduciary officers and employees, for self-deposits that exceed FDIC insurance coverage. The market value of collateral set aside must at all times equal or exceed the amount of the uninsured fiduciary funds.
Under 12 CFR 9.10(c), a national bank may deposit fiduciary funds awaiting investment or distribution with an affiliated FDIC-insured depository institution, unless prohibited by applicable law. Collateral may be pledged to secure such funds, unless prohibited by applicable law.2
To determine collateral requirements, a bank must have procedures in place to identify all self-deposits of fiduciary funds awaiting investment or distribution and the applicable FDIC insurance coverage for these funds. Twelve CFR 9.10(b)(2) describes various types of collateral that satisfy the pledge requirement.
Collateral must be appropriate when pledged and continue to be appropriate as long as it remains pledged. If the pledged collateral characteristics change so that the collateral no longer meets the requirements of 12 CFR 9.10(b)(2), conforming collateral must replace the ineligible collateral. Pledged collateral must be valued frequently enough to ensure that its value equals or exceeds the bank's pledge requirement at all times. Market activity, price volatility of the pledged securities, and the amount by which the actual collateral exceeds required collateral will dictate the frequency of valuation. Fiduciary policies, practices, and records should adequately ensure that pledged collateral is eligible, sufficient, properly identified; and controlled by appropriate fiduciary officers and employees.
A bank fiduciary's primary responsibility is the obligation to protect the interests of its fiduciary accounts and beneficiaries. If the bank's liquidity, credit quality, or capital is stressed, fiduciary management must consider the increased risks to fiduciary accounts arising from self-deposits. Depending upon the condition of the fiduciary bank or affiliate in which funds are deposited, the use of self-deposits for sweep vehicles3 and short-term investments may not be in the fiduciary beneficiaries' best interests.
Rate of Return
Twelve CFR 9.10(a) requires that with "respect to a fiduciary account for which a national bank has investment discretion, the bank shall obtain for funds awaiting investment or distribution a rate of return that is consistent with applicable law."4 While national banks are not required to obtain the absolute maximum rate of return for fiduciary funds awaiting investment or distribution, they must ensure and be able to demonstrate that the rate paid on self-deposits is consistent with applicable law and with their fiduciary responsibilities.
Special Considerations for Sweep Vehicles and Short-Term Investment Pools
Many short-term investment vehicles are available, both locally and nationally, into which fiduciary funds awaiting investment or distribution may be automatically swept or otherwise invested on a short-term basis. These include MMDAs5 and short-term investment pools, including pools that consist of the bank's or an affiliate's deposit instruments. When selecting sweep or other short-term investment vehicles for fiduciary accounts, the bank should consider the specific characteristics of available choices. Risk/reward characteristics, such as the rate of return, credit quality, liquidity, duration, and average maturity, should be considered and compared with those of other available short-term investment vehicles, such as money market mutual funds.
One particular short-term investment vehicle for fiduciary funds awaiting investment or distribution is a short-term investment fund (STIF). A bank may pool funds from individual fiduciary accounts and self-deposit them into a STIF, subject to 12 CFR 9.18. The STIF may consist of CDs of varying maturities and checking or other "transaction" deposits needed to meet anticipated liquidity needs. Refer to "Appendix A: Types of Collective Investment Funds" of the "Collective Investment Funds" booklet of the Comptroller's Handbook (Asset Management) for additional guidance on STIFs.
Self-Deposits as Long-Term Investments
Deposits that extend beyond one year are generally presumed to be long-term investments.6 A bank is prohibited under 12 CFR 9.12(a) from self-depositing fiduciary funds that are long-term investments unless such investments are authorized by applicable law.
A national bank is not authorized to pledge collateral for self-deposited fiduciary funds unless the funds are awaiting investment or distribution. Consequently, a bank's financial condition and applicable FDIC coverage of self-deposited funds are of even greater importance when self-deposits represent long-term investments of fiduciary funds, and even greater initial and ongoing due diligence is required.
Guidelines for Self-Deposits
Bank fiduciaries should take appropriate steps to meet their fiduciary responsibilities and properly administer their customers' accounts, especially in light of the often-conflicting needs of banks and their clients. Decisions on self-deposits require continuing evaluation of account objectives, risks, and features of available investment vehicles. Initial due diligence and periodic reviews are critical to self-deposit decisions. An effective process should provide clear standards for deposit decisions and rates. The process should
- Be based upon well-designed policies and procedures.
- Include initial and periodic assessments of the factors considered in decisions to place or continue self-deposits.
- Be documented, including factors considered and decisions made.
Initial Due Diligence
Banks should consider the following prior to self-depositing fiduciary funds:
- The fiduciary account's objectives and the beneficiaries' needs;
- Applicable law and regulations;
- Investment vehicles and returns available both locally and nationally;
- The risks/rewards to the account associated with the various deposit/investment arrangements available;
- The bank's duty to represent the fiduciary account diligently in all negotiations, especially considering the inherent conflicts of interests associated with self-depositing fiduciary funds;
- The bank's obligation to ensure that the rate of return paid to the self-deposited fiduciary funds is consistent with applicable law;
- The bank's obligation to ensure that a decision to self-deposit fiduciary funds is made exclusively in the best interests of the fiduciary account beneficiaries and clients and is in accordance with account agreements, applicable laws, and regulations;
- The credit risk to which self-deposited fiduciary funds are exposed; and
- The extent to which the funds are eligible for FDIC insurance, or for which the bank is pledging collateral to secure funds awaiting investment or distribution as required by 12 CFR 9.10.
Ongoing Monitoring and Due Diligence
In addition to monitoring the ongoing credit risk, liquidity risk, and relative rate of return of self deposits in relation to other alternatives, a national bank must have processes in place to ensure that
- Deposit accounts consisting of fiduciary funds are titled in a manner to reflect that the accounts consist of fiduciary funds, and fiduciary records are maintained that provide supporting detail to ensure that these funds obtain maximum FDIC pass-through coverage for fiduciary accounts and beneficiaries.7
- The bank determines the amount of FDIC coverage available to each account beneficiary and the extent to which available coverage may be affected by other fiduciary or nonfiduciary deposit accounts.
- The bank stays abreast of changes in FDIC insurance coverage, so that it can accurately determine the maximum insurance coverage that is available to each account or beneficiary.
- The bank maintains adequate collateral at all times to secure deposits of self-deposited fiduciary funds awaiting investment or distribution that exceed FDIC insurance coverage.
- The bank does not restrict an unnecessary portion of its investment portfolio by pledging securities significantly in excess of the required amount under 12 CFR 9.10.
- The bank complies with the FDIC Broker Deposit Rule.8
- If the bank becomes less than adequately capitalized, it complies with the resulting prohibition under 12 USC 1821(a)(1)(D)(ii) from accepting employee benefit (EB) plan deposits.9
The OCC expects that the placement of fiduciary funds awaiting investment or distribution and the selection of investment vehicles for fiduciary accounts will be performed in an objective, timely, comprehensive, and well-documented manner by all national banks that exercise fiduciary powers. Examiners will periodically evaluate the adequacy of this process and, to the extent that fiduciary funds are self-deposited, will ask banks to demonstrate that appropriate initial and ongoing due diligence is being applied to self-deposited fiduciary funds and that banks are complying with applicable law. Examiners will seek corrective action for significant weaknesses or unwarranted risks.
For additional information, contact Kerri Corn, Director for Market Risk, at (202) 649-6360; Joel Miller, Asset Management Group Leader, at (202) 649-6417; or Patricia Dalton, Asset Management Risk Specialist, at (202) 649-6360.
Timothy W. Long
Senior Deputy Comptroller for Bank Supervision Policy
and Chief National Bank Examiner
1 Aggregate balances should not be reduced by the amount of account-level overdrafts, or in those situations in which netting between income and principal portfolios is not permitted, by the amount of portfolio-level overdrafts.
3 Typically, at least daily, cash balances in fiduciary accounts are automatically transferred or "swept" into short-term investment vehicles or swept from such vehicles based on the daily cash activity in the account.
4 Applicable law includes applicable federal or state law, court order, or governing instrument. For accounts subject to ERISA, 29 USC 1108(b)(4) permits a national bank that is a fiduciary or other party-in-interest to a plan to self-deposit plan funds, if, in addition to other requirements, the deposits bear a reasonable interest rate.
5 MMDAs are subject to specific transaction restrictions under Federal Reserve Regulation D. Refer to 12 CFR 204 and to the "Depository Services" booklet of the Comptroller's Handbook (Consumer Compliance) for additional information on Regulation D and MMDA requirements.
6 See Appendix G of the "Conflict of Interest" booklet of the Comptroller's Handbook (Asset Management) for further guidance on whether self-deposited fiduciary funds are considered to be long-term investments or awaiting investment.
8 Twelve CFR 337.6 limits or prohibits the solicitation and acceptance of brokered deposits by insured depository institutions under certain conditions. The self-deposit of fiduciary funds by an insured depository institution is generally not defined as a brokered deposit under 12 CFR 337.6(a)(5)(ii)(C). However, if the fiduciary account has been established for the primary purpose of placing funds with one or more insured depository institutions, the fiduciary bank may be deemed a deposit broker, and the self-deposit of fiduciary funds would potentially be subject to brokered deposit limitations. Further, if an insured depository institution is not well-capitalized and engages directly or indirectly in the solicitation of deposits by offering rates of interest that are significantly higher than the prevailing rates of interest on deposits offered in the institution's normal market area, resulting deposits (including self-deposited fiduciary funds) may also be considered brokered deposits. See 12 CFR 337.6(a)(5)(iii).
9 Banks that do not fall within the definitions of either "well capitalized" or "adequately capitalized" may not accept employee benefit plan deposits pursuant to 12 USC 1821(a)(1)(D)(ii). (Note: This prohibition is applicable to all EB plan deposits, not just self-deposited EB plan funds for which the bank is a fiduciary.)