TRUST DEPARTMENT POLICIES

Transcription

1 TRUST DEPARTMENT POLICIES The Iowa Division of Banking Trust Examiners perspective on trust department policies. Gregory E. Garrels David M. Leigh Roger K. Roland General Comments If your bank is going to adopt a boiler plate trust policy manual, make sure all of the policies are applicable to your institution. Do NOT include policies that would never apply to your trust department e.g., collective investment funds, securities lending, etc. Policies are what will be done or not done. The policies should be reviewed annually by the Trust Committee not a rubber stamp review, but an in depth review to ensure new/changing regulations, increasing documentation requirements and evolving business lines, are appropriately addressed. Procedure is how the policy will be implemented. Documented internal procedures for recurring tasks are critical to provide consistency and support in the cases of staff turnover and other continuity issues. There has been a recent push for documenting not only operations procedures, but investment management and administration procedures. Statement of Principles of Trust Department Management (FDIC) This provides the minimum policy statement that is expected for all bank trust departments. The SPTDM should be adopted by all banks providing trust services, either as a stand-alone document or as part of the trust policy manual. Several of the requirements are also addressed below. o Trust Committee (ideally) including three directors, at least one being an outside director. o Scope of the Trust Committee review. o Account reviews. o Internal controls. o Annual audit coverage.

2 Management Define committees and oversight responsibilities. Recommended, where appropriate, develop a Trust Committee Watch List of accounts with complaints, litigation, problem beneficiaries, problem investments, etc. o If trust department accounts are risk rated, policies should define the criteria used to determine the ratings. Review and approval process for new business. (Possibly consider defining the types of fiduciary appointments that will be accepted or declined by Board direction.) Account review scope and frequency. Administrative and Investment reviews. o New accounts 60/90-day review. o Existing accounts annual review. Managed vs. Non-Managed accounts. Approval for closed accounts. Bank officers and employees serving as an individual fiduciary. o For state chartered banks, it must comply with Code of Iowa Section (1)(b), board of directors approval of appointment and fees. Transactions between the trust department and directors, officers and employees (must be authorized by the governing document, court order or Iowa law). Complaints and litigation. Officers and employees will not draft legal documents. Operations, Internal Controls and Auditing Vendor management due diligence requirements (e.g., annual review of control reports, financial statements, etc.). Liquid cash management. Overdrafts. Internal controls (limits for check signing and initiating wire transfers, reconcilements, and dual control over physical assets). Restitution for losses caused by administration errors. Allocation of gains from administration errors (with a de minimis amount). Frequency of audit coverage. (Audit scope should be left to the audit committee, with trust committee input.) Earnings Policy statement that a fee schedule will be established/approved by the Trust Committee and/or Board of Directors. Approval process for fee schedule exceptions discounts or waivers. Recommended an annual committee review of all discounts and waivers. o Specifically address fee discounts or waivers for insiders. Compliance Administration Discretionary distributions of principal and/or income. Describe the approval process, including authorization limits.

3 Co-fiduciary approval requirements. Compliance Laws and Regulations Regulation R (the federal regulators like to see a policy on this). Quarterly reporting of personal investment transaction (Regulation H for Federal Reserve Bank member banks, FDIC Rules and Regulations Section for non-member banks). Fee unbundling. Compliance Conflicts of Interest Duty of loyalty. Address documentation requirements for any compensation received by the bank, beyond the fiduciary administration fee. o Use of affiliate services. Define authorization/approval process and documentation requirements. o 12b-1/mutual fund fees. Transactions (directly or indirectly) between trust departments and bank directors, officers and employees [Code of Iowa Section (5)]. Use of own-bank deposit investments. Interest rates must be competitive. o Own-bank money market sweep arrangements define the methodology for determining the interest rate and frequency of adjustment. (This may be more of a more procedure, but it should be defined.) Investments in own-bank and/or holding company securities (purchase, sale, retention and voting). Inter-account transactions. Trust department borrowing, including authorization for own-bank borrowing (governing document, court order or beneficiary). Asset Management Investment Policy Statement (this includes investment objectives). o Required for managed accounts. o Reference to the Uniform Prudent Investor Act. Use of outside investment managers and advisors, and investment performance reviews. Approved investments. o Stocks. Bonds. Mutual funds. Certificates of Deposits. Preferred stocks. REITs? Approved lists of stocks and mutual funds, with committee oversight. Written direction/hold harmless to retain non-approved investments. Closely-held companies (if applicable). Investment diversification/concentration limits. Written direction/hold harmless requirements to retain concentrations. Approved list of brokers/dealers. Review of brokerage commissions. Proxy voting.

4 Soft dollars. 12b-1 fees. Life insurance policy management. o At a minimum, an annual review of company financial ratings. o Address policy review requirements (e.g., internal in force illustration reviews, outside vendor reviews). Real estate management. o Pre-acceptance review environmental liability. o Adequate insurance coverage. o Annual inspections. o Frequency of market valuations (appraisals) annual review recommended. o Rental real estate will be supported by leases.

5 STATEMENT OF PRINCIPLES OF TRUST DEPARTMENT MANAGEMENT The minimum requirements to provide for sound banking practices in the operation of a trust department and to provide safeguards for the protection of depositors, fiduciary beneficiaries, creditors, stockholders, and the public, should include: Involvement by the board of Directors in providing for the establishment and continuing operation of a trust department; Operation of the trust department separate and apart from every other department of the bank, with trust assets separated from other assets owned by the bank, and the assets of each trust account separated from the assets of every other trust account; and Maintenance of separate books and records for the trust department in sufficient detail to properly reflect all trust department activities. Nothing herein is intended to prohibit the board of Directors from acting as the trust committee, or from appointing additional committees and officers to administer the operations of the trust department. When delegating duties to subcommittees and/or officers, the board and the trust committee continue to be responsible for the oversight of all trust activities. Sufficient reporting and monitoring procedures should be established to fulfill this responsibility. The board of Directors, by proper resolution included in its minutes, should: 1. Designate an officer, qualified and competent, to be responsible for and administer the activities of the trust department. In addition, the board should define the officer s duties. 2. Name a trust committee consisting of at least three Directors to be responsible for and supervise the activities of the trust department. The committee should include, where possible, one or more Directors who are not active officers of the bank. The trust committee should: (a) Meet at least quarterly, and more frequently if considered necessary and prudent to fulfill its supervisory responsibilities; (b) Approve and document the opening of all new trust department accounts; all purchases and sales of, and changes in, trust assets; and the closing of trust accounts; (c) Provide for a comprehensive review of all new accounts for which the bank has investment responsibility promptly following acceptance; (d) Provide for a review of each trust department account, including collective investment funds, at least once during each calendar year. The scope, frequency, and level of review (trust committee, subcommittee, or disinterested account officer) should be addressed in appropriate written policies which give consideration to the department s fiduciary responsibilities, type and size of account, and other relevant factors. Generally, discretionary account reviews should cover both administration of the account and suitability of the account s investments, and non-discretionary account reviews should address account administration; (e) Keep comprehensive minutes of meetings held and actions taken; and (f) Make periodic reports to the board of its actions.

6 3. Provide comprehensive written policies which address all important areas of trust department activities. 4. Provide competent legal counsel to advise trust officers and the trust committee on legal matters pertaining to fiduciary activities. 5. Provide for adequate internal controls including appropriate controls over trust assets. 6. Provide for an adequate audit (by internal or external auditors or a combination thereof) of all fiduciary activities, annually. The findings of the audit, including actions taken as a result of the audit, should be recorded in its minutes. If a bank adopts a continuous audit process instead of performing annual audits, audits may be performed, on an activity-by-activity basis, at intervals commensurate with the level of risk associated with that activity. Audit intervals must be supported and reassessed regularly to ensure appropriateness given the current risk and volume of the activity. 7. Receive reports from the trust committee and record actions taken in its minutes. 8. Review the examination reports of the trust department by supervisory agencies and record actions taken in its minutes.