[Federal Register Volume 61, Number 251 (Monday, December 30, 1996)]
[Rules and Regulations]
[Pages 68543-68559]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-32943]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Parts 9 and 19

[Docket No. 96-30]
RIN 1557-AB12


Fiduciary Activities of National Banks; Rules of Practice and 
Procedure

AGENCY: Office of the Comptroller of the Currency, Treasury.

ACTION: Final rule.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) is 
revising its rules that govern the fiduciary activities of national 
banks. The OCC also is relocating provisions concerning disciplinary 
sanctions imposed by clearing agencies to its rules of practice and 
procedure. This final rule is another component of the OCC's Regulation 
Review Program, which is intended to update and streamline OCC 
regulations and to reduce unnecessary regulatory costs and other 
burdens.

EFFECTIVE DATE: January 29, 1997.

FOR FURTHER INFORMATION CONTACT: Andrew T. Gutierrez, Attorney,

[[Page 68544]]

Legislative and Regulatory Activities Division, (202) 874-5090; Donald 
N. Lamson, Assistant Director, Securities and Corporate Practices 
Division, (202) 874-5210; Lisa Lintecum, Director, Fiduciary 
Activities, (202) 874-5419; Dean Miller, Senior Advisor, Fiduciary 
Activities, (202) 874-4852; Aida M. Plaza, Director for Compliance, 
Multinational Banking, (202) 874-4610, Office of the Comptroller of the 
Currency, 250 E Street, SW, Washington, DC 20219.

SUPPLEMENTARY INFORMATION:

Background

    The OCC is revising 12 CFR part 9, which governs the fiduciary 
activities of national banks, based on its authority under 12 U.S.C. 
92a. This action is a component of its Regulation Review Program. One 
goal of the Regulation Review Program is to review all of the OCC's 
rules with a view toward eliminating provisions that do not contribute 
significantly to maintaining the safety and soundness of national banks 
or to accomplishing the OCC's other statutory responsibilities, 
including oversight of national banks' fiduciary activities. Another 
goal of the Program is to improve the clarity of the OCC's regulations.
    This final rule is the OCC's first comprehensive revision of part 9 
since 1963.1 Much about national banks' fiduciary business has 
changed since that time, including the nature and scope of the 
fiduciary services that banks offer and the structures and operational 
methods that banks use to deliver those services. The OCC's primary 
goal in revising part 9 is to accommodate those changes by removing 
unnecessary regulatory burden and facilitating the continued 
development of national banks' fiduciary business consistent with safe 
and sound banking practices and national banks' fiduciary obligations.
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     1 National banks have been authorized to exercise 
fiduciary powers since 1913. In 1962, the oversight responsibility 
for national banks' fiduciary activities was transferred from the 
Board of Governors of the Federal Reserve System to the OCC. See 12 
U.S.C. 92a. Following the transfer of oversight responsibility, the 
OCC promulgated part 9 on October 3, 1962 (27 FR 9764), and revised 
it soon thereafter on April 5, 1963 (28 FR 3309).
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    On December 21, 1995, the OCC published a notice of proposed 
rulemaking to revise part 9 (60 FR 66163) (proposal). The proposal 
reflected three principal themes. First, bank organizational 
structures--particularly with respect to the geographic structure of 
banking organizations--have changed significantly since Congress 
created the basic framework for national banks' fiduciary operations. 
The OCC proposed to adjust part 9 to make the requirements of the rule 
more workable for both large, multistate fiduciary banking 
organizations and small banks that conduct fiduciary activities 
primarily on a local basis. Second, national banks' fiduciary 
activities are subject to state law in many respects, though the OCC 
often can establish uniform Federal standards. In the proposal, the OCC 
attempted to strike an appropriate balance between Federal and state 
law. Third, over the years, the OCC has applied part 9 to a wide 
variety of investment advisory activities and related services, not all 
of which involve the bank's exercise of investment discretion. In some 
cases, national banks engaged in these activities operate under 
different standards than other financial services providers that 
conduct the same type of business.
    Moreover, the proposal reflected an effort to update, clarify, and 
streamline part 9, to incorporate significant interpretive positions, 
and to eliminate unnecessary regulatory burden wherever possible to 
promote more efficient operation and supervision of national banks' 
fiduciary activities. The proposal added headings for ease of 
reference, but, for the most part, retained the numbering system used 
in the former regulation.
    The OCC received 57 comments regarding the proposal, including 
letters from banks, bank trade groups, state bank supervisors, law 
firms, consultants, auditors, and a member of Congress. With the 
exception of certain aspects of the rule that concerned state bank 
supervisors, the commenters generally supported the proposal. However, 
the commenters recommended numerous modifications to the proposal. The 
OCC carefully considered these recommendations and incorporates many of 
them into this final rule.

Section-by-Section Discussion

Authority, Purpose, and Scope (Sec. 9.1)

    The proposal added a new provision explicitly setting forth the 
statutory authority for, and the purpose and scope of, part 9. One 
commenter recommended that the OCC clarify that part 9 applies to 
national banks and their operating subsidiaries, but not to other 
subsidiaries or affiliates. The OCC notes that 12 CFR 5.34(d)(3), as 
recently revised at 61 FR 60342 (November 27, 1996), already clarifies 
that the OCC's regulations, including part 9, apply to national banks' 
operating subsidiaries unless otherwise provided by statute or 
regulation. Moreover, the OCC recognizes that its regulations generally 
do not apply to other subsidiaries or affiliates of national banks, and 
believes that it is unnecessary to enumerate those or other entities 
excluded from the coverage of its regulations. However, the OCC is 
amending this section to clarify that part 9 applies to Federal 
branches of foreign banks, which, unlike Federal agencies, may receive 
fiduciary powers.

Definitions (Sec. 9.2)

    The proposal modified or removed some of the former regulation's 
definitions, and added new definitions. Moreover, the proposal 
relocated the definitions from former Sec. 9.1 to proposed Sec. 9.2. 
For the most part, the OCC is adopting the definitions contained in the 
proposal. The following discussion highlights the definitions that the 
OCC has modified significantly.
    Applicable law (Sec. 9.2(b)). The former regulation used the term 
``local law,'' as defined at Sec. 9.1(g), to refer to the laws of the 
state or other jurisdiction governing a fiduciary relationship. The 
proposal replaced the term ``local law'' with ``applicable law'' in 
order to streamline some of the operative provisions of the regulation 
and to clarify that the law that governs a national bank's fiduciary 
relationships may include Federal law,2 state law governing a 
national bank's fiduciary relationships (that is, fiduciary duties and 
responsibilities), the terms of the instrument governing a fiduciary 
relationship, and any court order pertaining to the relationship.
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     2 The Federal law relevant to a national bank's fiduciary 
activities includes, for example, provisions of the Federal banking 
laws (12 U.S.C. 1 et seq.), the Employee Retirement Income Security 
Act of 1974 (29 U.S.C. 1001 et seq.) (ERISA), the Securities Act of 
1933 (15 U.S.C. 77a et seq.), the Securities Exchange Act of 1934 
(15 U.S.C. 78a et seq.), the Investment Company Act of 1940 (15 
U.S.C. 80a-1 et seq.), the Investment Advisers Act of 1940 (15 
U.S.C. 80b-1 et seq.) (Advisers Act), the Trust Indenture Act of 
1939 (15 U.S.C. 77aaa et seq.) (Trust Indenture Act), the Internal 
Revenue Code of 1986 (26 U.S.C. 1 et seq.) (Internal Revenue Code), 
and the rules issued pursuant to those acts.
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    Some commenters supported the proposed language without 
reservation. Others requested that the OCC clarify what type of law 
takes precedence. Some believed that Federal law should override state 
law, while others believed that state law should override Federal law.
    The OCC recognizes that the proposed definition does not provide a 
priority among the various bodies of authority. Thus, the definition 
does not resolve situations in which the terms of a trust instrument, 
for example, conflicts with

[[Page 68545]]

a state statute or a Federal regulation. Conflicts of law issues in the 
fiduciary area are highly fact specific and, thus, cannot be resolved 
by reference to a general rule of priority. The OCC does not intend the 
term ``applicable law'' to resolve conflicts of law; rather, the OCC 
merely intends to identify concisely the various bodies of authority 
that may govern national banks' fiduciary activities.
    Some commenters were concerned that the OCC intended this term to 
effectuate a wholesale Federal preemption of conflicting state law, or 
otherwise to change the status quo regarding conflicts of laws. This is 
not the case. To clarify the OCC's intention, the OCC is modifying the 
definition's reference to Federal law to read ``any applicable Federal 
law'' governing a national bank's fiduciary relationships. This allows 
the OCC to use the concise ``applicable law'' term, but the definition 
does not presume that Federal law necessarily will apply in any 
particular context. Rather, Federal law is merely one of many sources 
of law that may govern a fiduciary relationship.
    Additionally, a few commenters noted that the proposed definition 
of ``applicable law'' did not mention foreign law, and asked the OCC to 
clarify the extent to which foreign law governs a national bank's 
fiduciary activities in foreign branches. Recognizing that the law of 
other jurisdictions, including foreign countries, may apply to a 
national bank's fiduciary activities, the OCC is modifying the 
definition to include the law of the state or other jurisdiction 
governing a national bank's fiduciary relationships. However, as with 
other conflicts of law, the extent to which foreign law applies to a 
national bank's fiduciary activities in foreign branches is a complex 
issue and depends on the specific factual situation. Thus, the OCC is 
not addressing that issue in the regulation.
    Fiduciary capacity (Sec. 9.2(e)). In the proposal, the OCC 
attempted to establish a clearer and more objective boundary for the 
coverage of part 9. The proposal retained the statutory list of 
fiduciary capacities, but, unlike the former rule, it limited the 
definition of other fiduciary activities to: (1) any other capacity 
involving investment discretion on behalf of another; and (2) any other 
similar capacity that the OCC authorizes pursuant to 12 U.S.C. 92a. 
Thus, the proposal defined fiduciary capacity to exclude relationships 
(other than those listed in the statute) in which the bank does not 
have investment discretion. Under this approach, an investment advisory 
activity for which the bank does not have investment discretion 
generally is not a fiduciary activity subject to part 9.
    The proposal also solicited comment on an alternative approach 
under which part 9 would apply to investment advisory and other 
activities if, when the same or similar activity is conducted by a 
competing state bank or corporation, the state regulates the activity 
as a fiduciary activity.
    A majority of commenters who addressed this issue supported the 
proposed definition, which utilizes investment discretion as a test, 
and opposed the alternative approach on the grounds that it would lead 
to inconsistent treatment of accounts in a bank with multistate 
operations, and increase risk by creating undue complexity in fiduciary 
compliance. A few commenters voiced concerns with the proposed 
definition, and recommended that the OCC define ``fiduciary capacity'' 
to include any capacity that is fiduciary under state law.
    The OCC believes that ``fiduciary capacity'' should be defined in a 
manner that fosters consistent application of part 9 throughout the 
national banking system. Thus, the OCC is not defining ``fiduciary 
capacity'' exclusively with reference to state law. Rather, the final 
rule retains the proposal's approach and defines ``fiduciary capacity'' 
by using investment discretion as a test for determining whether part 9 
applies to certain activities.
    With respect to non-discretionary investment advisory activities, 
commenters differed widely as to whether and the extent to which the 
OCC should treat those activities as fiduciary. After carefully 
considering the comment letters, the OCC has concluded that when a 
customer pays a national bank a fee in return for providing investment 
advice (whether or not the customer follows that advice), the customer 
has a reasonable expectation of receiving advice that is free of 
conflicts of interest. Additionally, other Federal statutes provide 
heightened fiduciary-type protection to customers of certain investment 
advisers who receive a fee.3 By contrast, when a national bank 
does not receive a fee for investment advice (e.g., directed custodian 
accounts), it has no contractual or other obligation to provide 
investment advice. Therefore, the bank should not incur fiduciary 
liability for any incidental advice it offers.4 Thus, the OCC is 
adding ``investment adviser, if the bank receives a fee for its 
investment advice'' to the list of fiduciary capacities. The OCC 
believes that this distinction between paid and unpaid investment 
advisers reflects the reasonable expectations of national bank 
customers.
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    \3\ For example, under ERISA, a person is a fiduciary with 
respect to a plan, to the extent he renders investment advice for a 
fee or other compensation. 29 U.S.C. 1002(21)(A). As another 
example, the Advisers Act generally applies to any person who, for 
compensation, engages in the business of advising others (although 
banks are exempt). 15 U.S.C. 80b-2(a)(11).
     4 The OCC does not treat non-discretionary custodial 
activities as fiduciary, and the final rule continues that approach. 
Those activities are authorized under 12 U.S.C. 24 (Seventh).
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    Fiduciary records (proposed Sec. 9.2(g)). The proposal defined 
``fiduciary records'' and used that term in the record retention and 
separation requirement of Sec. 9.8. The final rule, however, does not 
use the term. Thus, the definition is eliminated in the final rule.
    Fiduciary powers (Sec. 9.2(g)). The proposal provided that 
``fiduciary powers'' means the authority the OCC permits a national 
bank to exercise pursuant to 12 U.S.C. 92a. Moreover, in the proposal's 
preamble, the OCC discussed and invited comment on the legal framework 
set forth in the OCC's Interpretive Letter No. 695 (December 8, 1995), 
in which the OCC analyzed the authority of a national bank to exercise 
fiduciary powers on an interstate basis under 12 U.S.C. 92a. Some 
commenters questioned the analysis contained in this letter. However, 
as stated in the letter, the effect of 12 U.S.C. 92a is that in any 
specific state, the extent of fiduciary powers is the same for out-of-
state national banks as for in-state national banks, and that extent 
depends upon what powers the state grants to the fiduciaries in the 
state with which national banks compete. The OCC has considered the 
comments, but continues to believe that the legal analysis contained in 
Interpretive Letter No. 695 reflects a correct interpretation of the 
basic fiduciary powers of national banks under 12 U.S.C. 92a. The 
definition of fiduciary powers summarizes this basic principle. The OCC 
notes that neither Interpretive Letter No. 695 nor the definition of 
national banks' fiduciary powers in Sec. 9.2(g) addresses the 
applicability of particular state laws to national banks' exercise of 
their fiduciary powers.5
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    \5\ To the extent they arise, the OCC intends to handle specific 
questions about the applicability of particular state laws on a 
case-by-case basis, which in many cases will involve preemption 
opinions developed with the aid of a public notice and comment 
process.

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[[Page 68546]]

    Investment discretion (Sec. 9.2(i)). As mentioned previously, the 
proposal defined the term ``fiduciary capacity'' to include any 
capacity where the bank possesses investment discretion on behalf of 
another, and the final rule retains this approach. The proposed term 
``investment discretion'' includes any account for which a national 
bank has the authority to determine what securities or other assets to 
purchase or sell on behalf of the account.
    Some commenters recommended that the OCC clarify that a bank has 
investment discretion with respect to an account whether or not the 
bank exercises that discretion. Others recommended that the OCC clarify 
whether a bank has investment discretion with respect to an account in 
which the customer or another fiduciary also has investment discretion. 
In response to these commenters, the OCC is modifying the proposed 
definition to clarify that the term does not depend on whether or not 
the bank exercises its authority over investments, or whether or not 
its authority over investments is sole or shared. Moreover, the OCC is 
clarifying that a bank is deemed to have investment discretion even 
when it delegates its authority over investments, as well as when 
another fiduciary delegates its authority over investments to the bank.
    Several commenters asked whether the OCC considers a national bank 
to have investment discretion when it administers asset allocation 
accounts or sweep accounts. Asset allocation programs differ widely in 
the extent of the administering bank's discretion. In some asset 
allocation programs, the bank has discretion to invest initially the 
customer's assets among several mutual funds, and to reallocate the 
assets as it deems appropriate based on the customer's investment 
profile and the prevailing market conditions. In these programs, and in 
any other program in which the bank may purchase or sell an investment 
without the customer's approval, the OCC considers the bank to have 
investment discretion. In sweep programs, on the other hand, a bank 
typically has no investment discretion. Rather, the bank is 
automatically sweeping excess cash into investments pre-selected by the 
customer (e.g., money market funds).

Approval Requirements (Sec. 9.3)

    Consistent with Sec. 9.2 of the former regulation, the proposal 
directed an applicant for fiduciary powers (whether the applicant is a 
national bank seeking approval to exercise fiduciary powers, or a 
person seeking approval to organize a special-purpose national bank 
limited to fiduciary powers) to appropriate provisions in 12 CFR part 
5, which contains rules, policies, and procedures for corporate 
activities. This is designed as a useful reader aid. The OCC received 
no specific comments on this section and adopts this section as 
proposed.

Administration of Fiduciary Powers (Sec. 9.4)

    Consistent with Sec. 9.7 of the former rule, the proposal permitted 
a national bank's board of directors to assign functions related to the 
exercise of fiduciary powers to bank directors, officers, employees, 
and committees thereof. The proposal also retained the requirement that 
all fiduciary officers and employees must be bonded adequately. 
Moreover, the proposal permitted a national bank to use personnel and 
facilities of the bank to perform services related to the exercise of 
its fiduciary powers, and permitted any department of the bank to use 
fiduciary officers and employees and facilities to perform services 
unrelated to the exercise of fiduciary powers, to the extent not 
prohibited by applicable law. Additionally, the proposal added a new 
provision to the section clarifying that a national bank may enter into 
an agency agreement with another entity to purchase or sell services 
related to the exercise of fiduciary powers.
    Some commenters recommended that the OCC allow a national bank to 
use personnel and facilities of its affiliates (and not just other 
departments of the bank) to perform services related to its fiduciary 
activities, and allow affiliates to use fiduciary officers and 
employees and facilities to perform services unrelated to the bank's 
fiduciary activities, to the extent not prohibited by applicable law. 
The OCC believes that utilizing affiliates in this manner enhances 
efficiency and is consistent with safety and soundness. Moreover, this 
recommendation reflects the realities of modern bank organizational 
structures. Thus, the OCC is modifying the provision accordingly.

Policies and Procedures (Sec. 9.5)

    The proposal required a national bank to establish written policies 
and procedures to ensure that its fiduciary practices comply with 
applicable law, and also provided a list of particular fiduciary 
practices that a bank's policies and procedures should cover. Several 
items on the list were derived from requirements in the former 
regulation, including brokerage placement practices (former Sec. 9.5); 
methods for ensuring that fiduciary officers and employees do not use 
material inside information in connection with any decision or 
recommendation to purchase or sell any security (former Sec. 9.7(d)); 
selection and retention of legal counsel readily available to advise 
the bank and its fiduciary officers and employees on fiduciary matters 
(former Sec. 9.7(c)); and investment of funds held as fiduciary, 
including short-term investments and the treatment of fiduciary funds 
awaiting investment or distribution (former Sec. 9.10(a)).
    Other items on the proposed list were not based on requirements in 
the former regulation, including methods for preventing self-dealing 
and conflicts of interest, allocation to fiduciary accounts of any 
financial incentives the bank may receive for investing fiduciary funds 
in a particular investment, and disclosure to beneficiaries and other 
interested parties of fees and expenses charged to fiduciary accounts.
    Many commenters were concerned that specific items on the list, 
particularly the items addressing the allocation of financial 
incentives and disclosures to interested parties, could be construed 
overbroadly (e.g., to prohibit otherwise permissible fee arrangements, 
or to require disclosures to creditors of settlors of revocable 
trusts). Some commenters suggested that the OCC not provide a list of 
required policies and procedures, but rather provide guidance through 
less formal means.
    The OCC is retaining the proposal's general requirement that a 
national bank adopt and follow written policies and procedures adequate 
to maintain its fiduciary activities in compliance with applicable law. 
The OCC is not attempting to assemble an exhaustive list of required 
policies and procedures. However, the OCC believes that the regulation 
should provide examples of areas that a bank's policies and procedures 
should address. Thus, the OCC is adopting an abbreviated list of areas 
that a bank's policies and procedures should address. The list includes 
brokerage placement practices, the prevention of misuse of material 
inside information, the prevention of self-dealing and conflicts of 
interest, the selection and retention of legal counsel, and the 
investment of funds (including funds awaiting investment or 
distribution).

Review of Assets of Fiduciary Accounts (Sec. 9.6)

    The proposal, like the former rule, required national banks to 
perform reviews with respect to fiduciary accounts at least once during 
each calendar year, and within 15 months of the last review. Moreover, 
the proposal required two distinct types of annual

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written reviews: individual account reviews and reviews of assets by 
issuer. To contrast the two types of review, a review of assets by 
issuer determines what investments (e.g., common stock of Corporation 
X) are appropriate investments for the bank's fiduciary accounts in 
general. In some banks, the review of assets by issuer results in a 
list of permissible fiduciary investments for the bank's fiduciary 
accounts, and the person or committee in charge of investing for a 
particular fiduciary account chooses investments from this list. Under 
an individual account review, on the other hand, the person or 
committee in charge of a particular account's investments determines 
whether the current investments are appropriate, individually and 
collectively, given the objectives of the account.
    Several commenters indicated that the requirement for an annual 
review of assets by issuer is burdensome, redundant, and may conflict 
with the modern portfolio theory embraced by the prudent investor 
rule.6 The OCC agrees with these commenters and, thus, is 
eliminating the requirement for an annual review of assets by issuer.
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    \6\ Modern portfolio theory, which underlies modern asset 
management practices, focuses on the reduction of specific risk 
through portfolio diversification. This theory, along with 
corresponding practice, demonstrated that ``arbitrary restrictions 
on trust investments are unwarranted and often counterproductive.'' 
Rest. 3rd, Trusts (Prudent Investor Rule), Introduction (1992), at 
4. The prudent investor rule states that the standard of prudent 
investment ``is to be applied to investments not in isolation but in 
the context of the trust portfolio and as a part of an overall 
investment strategy, which should incorporate risk and return 
objectives reasonably suited to the trust.'' Rest. 3rd, Trusts 
(Prudent Investor Rule), sec. 227(a) (1992).
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    Some commenters recommended that the OCC make the requirement for a 
``written'' review more flexible by allowing other forms of evidence of 
a review (e.g., an automated screening process that screens out routine 
and non-complex assets and accounts), in order to allow bank personnel 
to conduct their reviews more efficiently. In response to this 
recommendation, the OCC is eliminating the requirement that the review 
be ``written.'' However, if a bank adopts a review system in which 
reviews are not documented individually, the bank must be able to 
demonstrate that its review system is designed to perform all required 
reviews.
    One commenter recommended that the OCC eliminate the requirement to 
perform a review within 15 months after the last review, and instead 
rely on the requirement to perform a review at least once during each 
calendar year. The OCC has determined that the 15-month requirement is 
somewhat rigid, raises timing issues (e.g., whether to measure the 
period from the start date to start date or end date to start date), 
and does not contribute significantly to safety and soundness. 
Consequently, the OCC is eliminating it in favor of a requirement that 
a national bank perform a review at least once during each calendar 
year.

Recordkeeping (Sec. 9.8)

    Section 9.8(a) of the proposal required a national bank to document 
the establishment and termination of fiduciary accounts and to maintain 
adequate records for all fiduciary accounts. Section 9.8(b) of the 
proposal required a national bank to retain all ``fiduciary records'' 
for a specified period. Section 9.2(g) of the proposal defined 
``fiduciary records'' to include all written or otherwise recorded 
information that a national bank creates or receives relating to a 
fiduciary account or the fiduciary activities of the bank.
    Some commenters asserted that the proposed definition of 
``fiduciary records'' is overly broad, and recommended that the OCC 
limit the record retention requirement of Sec. 9.8(b) to the records 
described in Sec. 9.8(a). The OCC agrees that the proposed definition 
of fiduciary records is overly broad and has limited the record 
retention requirement accordingly.

Audit of Fiduciary Activities (Sec. 9.9)

    The proposal required a national bank to perform, through its 
fiduciary audit committee, suitable audits of its fiduciary activities 
annually and to report the results of the audit, including all actions 
taken as a result of the audit, in the minutes of the board of 
directors. The proposal also clarified that if a bank adopts a 
continuous audit system in lieu of performing annual audits, the bank 
may perform discrete audits of each fiduciary activity, on an activity-
by-activity basis, at intervals appropriate for that activity. For 
example, a bank may determine that it is appropriate to audit certain 
low-risk fiduciary activities every 18 months. Moreover, the proposal 
permitted a national bank to use an affiliate's audit committee as the 
bank's fiduciary audit committee.
    Most commenters strongly supported allowing a continuous audit 
system and allowing an affiliate's audit committee to serve as a bank's 
fiduciary audit committee. The OCC is adopting these elements. A few 
commenters recommended that the OCC clarify whether a bank may use 
external auditors in performing the required audits. In response, the 
OCC is adding parentheticals to clarify that a bank may use internal or 
external auditors. A few commenters expressed concern that the 
requirement to note in the board's minutes ``all'' actions taken as a 
result of the audit could be interpreted to require a board to note 
excessive detail. To alleviate this concern, the OCC is modifying the 
provision to require the board to note ``significant actions'' instead 
of ``all actions.''
    One commenter also noted that the proposal required a suitable 
audit of ``all'' fiduciary activities (or, for continuous audits, a 
discrete audit of ``each'' fiduciary activity), and pointed out that 
certain fiduciary activities at certain banks may be de minimis (e.g., 
a bank may have only one small account under a particular fiduciary 
activity, as an incidental service for a particular customer). They 
asserted that these de minimis fiduciary activities may not merit a 
full-scope audit. To provide a measure of flexibility with respect to 
de minimis activities, the OCC is modifying the regulation to require a 
suitable audit of ``all significant'' fiduciary activities (or, for 
continuous audits, a discrete audit of ``each significant'' fiduciary 
activity). The OCC intends for this standard to exclude only de minimis 
fiduciary activities conducted by a bank.
    Moreover, as with annual reviews under Sec. 9.6, the OCC is 
eliminating the requirement that a national bank that performs audits 
annually (rather than using a continuous audit system) perform an audit 
not later than 15 months after the last audit. The 15-month requirement 
is somewhat rigid, raises timing issues, and does not contribute 
significantly to safety and soundness. The OCC is retaining the 
requirement that a national bank perform an audit at least once during 
each calendar year.
    The proposal required that a national bank's fiduciary audit 
committee must not include directors who are members of a fiduciary 
committee of the bank. Several commenters noted that some banks would 
experience difficulties in complying with this restriction due to their 
fiduciary committee structure. To provide those banks with a reasonable 
degree of flexibility, the OCC is modifying this restriction to require 
that a national bank's fiduciary audit committee must consist of a 
majority of members who are not also members of any committee to which 
the board of directors has delegated power to manage and control the 
fiduciary activities of the bank. The OCC believes that this 
modification will not impair the safety and soundness of those banks.

[[Page 68548]]

Fiduciary Funds Awaiting Investment or Distribution (Sec. 9.10)

    The proposal retained the former regulation's general prohibition 
against allowing fiduciary funds to remain uninvested and undistributed 
any longer than reasonable for proper account management. One commenter 
pointed out that directing the treatment of fiduciary funds is 
appropriate only if the bank has investment discretion with respect to 
those funds. The OCC agrees that the duty to invest funds applies only 
to accounts for which a bank has investment discretion. However, the 
duty to distribute uninvested funds within a reasonable time may apply 
even in the absence of investment discretion. Thus, the OCC is limiting 
this prohibition to fiduciary accounts for which a bank has investment 
discretion or discretion over distributions.
    The proposal eliminated the requirement that a bank obtain the 
``maximum'' rate of return for fiduciary funds awaiting investment or 
distribution. One commenter asserted that the OCC should have some 
policy with respect to the rate of return for fiduciary funds awaiting 
investment or distribution. The OCC agrees, and is adopting a 
requirement that a bank obtain for such funds a rate of return 
consistent with applicable law. Thus, in states that require their 
corporate fiduciaries to obtain a market rate of return for fiduciary 
funds awaiting investment or distribution, a national bank must do the 
same. In other states, national banks are placed on a level playing 
field with competing corporate fiduciaries.
    The proposal permitted a national bank to set aside, as collateral 
for self-deposits of fiduciary funds awaiting investment or 
distribution, any assets (including surety bonds) that qualify under 
state law as appropriate security. Several commenters recommended that 
the OCC allow a bank to collateralize self-deposits with surety bonds 
without regard to state law. Other commenters recommended that the OCC 
allow a bank to collateralize self-deposits with surety bonds only if 
state law permits that practice. The OCC has determined that it is 
consistent with national banks' fiduciary powers for banks to use 
surety bonds as collateral for self-deposits unless prohibited by 
applicable law. This standard grants national banks the ability to 
collateralize self-deposits with surety bonds, yet preserves for each 
state the ability to prohibit this practice for all fiduciaries 
operating in the state.
    The proposal also permitted a national bank to deposit fiduciary 
funds awaiting investment or distribution with an affiliate and to 
secure a deposit of idle fiduciary funds by or with an affiliate ``if 
consistent with applicable law''. Several commenters recommended that 
the OCC modify the applicable law standard, though the commenters 
suggested various alternatives ranging from ``without regard to state 
law'' to ``only if permitted by applicable law''. After considering the 
various standards, the OCC is adopting ``unless prohibited by 
applicable law'' as the standard. This standard allows national banks 
to secure deposits of idle fiduciary funds by or with an affiliate, yet 
permits a state to preclude this practice for all fiduciaries operating 
in the state, if the state so chooses.

Investment of Fiduciary Funds (Sec. 9.11)

    The proposal directed a national bank to invest fiduciary funds in 
a manner consistent with applicable law. One commenter pointed out that 
directing a bank how to invest fiduciary funds is appropriate only if 
the bank has investment discretion. This commenter's point is generally 
true. However, situations may arise in which a bank trustee without 
investment discretion receives a direction from a party with investment 
discretion to make an investment that violates applicable law (e.g., 
ERISA or the trust instrument). The bank, in these situations, should 
comply with applicable law notwithstanding its lack of investment 
discretion. Thus, the OCC is adopting the provision generally as 
proposed.

Self-Dealing and Conflicts of Interest (Sec. 9.12)

    The proposal clarified that a bank may not lend to any of its 
directors, officers, or employees any funds it holds as trustee, except 
with respect to bank's own employee benefit plans in accordance with 
section 408(b)(1) of ERISA, which specifically authorizes loans to 
participants and beneficiaries of such plans under certain 
circumstances. One commenter noted that section 408(b)(1) covers plans 
that the bank administers for other employers, as well as the bank's 
own plans. The OCC agrees, and is extending the proposed exception to 
plans that the bank administers for other employers. Moreover, the OCC 
is broadening the regulation's reference to ERISA by citing to section 
408 rather than section 408(b)(1), because section 408 contains several 
exemptions from ERISA's prohibited transaction provisions, and not just 
the exemption found in 408(b)(1).
    The proposal authorized a national bank to make a loan between any 
of its fiduciary accounts if the transaction is authorized by the 
instrument creating the account from which the loan is made and is not 
prohibited by applicable law. One commenter recommended that the OCC 
change this standard to ``if the transaction is fair to both accounts 
and is not prohibited by applicable law,'' in order to be consistent 
with the standard for loans to fiduciary accounts and for sales between 
fiduciary accounts. The OCC agrees that there is no compelling reason 
to have different standards for these transactions and, thus, is 
modifying the standard accordingly.
    Finally, one commenter pointed out that these self-dealing and 
conflicts of interest provisions are appropriate only if the bank has 
investment discretion. The OCC agrees, and is limiting this provision 
to fiduciary accounts for which a bank has investment discretion.

Custody of Fiduciary Assets (Sec. 9.13)

    The proposal allowed a national bank to maintain fiduciary assets 
off-premises if the bank maintains adequate safeguards and controls. 
However, some off-premise locations may not be appropriate for the 
safekeeping of fiduciary assets, depending on applicable law. 
Consequently, the OCC is modifying the provision to allow a bank to 
maintain fiduciary investments off-premises only if consistent with 
applicable law.

Deposit of Securities With State Authorities (Sec. 9.14)

    The proposal allowed a national bank with fiduciary assets in more 
than one state to meet its deposit requirement in each state based on 
the amount of trust assets administered from offices located in that 
state. The OCC intended this provision to avoid duplicative securities 
deposits for the same trust asset.
    Some commenters requested that the OCC clarify that the deposit 
requirement for a multistate bank depends on the amount of trust assets 
that the bank administers ``primarily'' or ``principally'' from offices 
in that state. These commenters were concerned that the proposed 
language still could be interpreted in a manner that results in 
duplicative securities deposits for the same trust asset. To ensure 
that the requirement is not interpreted in a manner that results in 
duplicative securities deposits, the OCC is clarifying that the 
required deposit for each state is based on the amount of trust assets 
that the bank administers ``primarily'' from offices located in that 
state.

[[Page 68549]]

Fiduciary Compensation (Sec. 9.15)

    The proposal retained the substance of former Sec. 9.15, which 
addressed fiduciary compensation. The proposal authorized a national 
bank to charge a reasonable fee for its fiduciary services if the 
amount is not set or governed by applicable law. Moreover, the proposal 
prohibited an officer or an employee of a national bank from retaining 
any compensation for acting as a co-fiduciary with the bank in the 
administration of a fiduciary account, except with the specific 
approval of its board of directors.
    One commenter requested that the OCC provide guidance on what 
constitutes a reasonable fee, and that the OCC allow a bank to rely on 
their regularly published fee schedules to satisfy the reasonableness 
test. However, because reasonableness of fiduciary compensation depends 
heavily upon the facts of each situation, the OCC does not believe that 
it is possible to establish specific rules on what is and what is not 
reasonable. Thus, the OCC is adopting this section as proposed. The OCC 
points out, however, that the amount of fiduciary compensation is 
typically set or governed by applicable law (e.g., by the terms of the 
governing instrument, state fee schedules, a probate court, etc.), in 
which case the general reasonableness standard does not apply.

Receivership or Voluntary Liquidation of Bank (Sec. 9.16)

    The proposal directed a receiver or liquidating agent for a 
national bank to close promptly all fiduciary accounts to the extent 
practicable (in accordance with OCC instructions and the orders of the 
court having jurisdiction) and to transfer all remaining fiduciary 
accounts to substitute fiduciaries. Some commenters recommended that 
the OCC modify this provision to reflect that a national bank's 
receiver or liquidating agent generally transfers fiduciary accounts to 
substitute fiduciaries, noting that the FDIC's usual practice is to 
sell a failed bank's fiduciary business. The OCC agrees that a national 
bank should have the option to transfer fiduciary accounts to 
substitute fiduciaries, regardless of whether it can practicably close 
those accounts. Thus, the OCC is modifying the provision accordingly.
    Additionally, the OCC is clarifying that this provision does not 
apply to the receiver of insured national banks, which, under 12 U.S.C. 
191, is the Federal Deposit Insurance Corporation.

Surrender or Revocation of Fiduciary Powers (Sec. 9.17)

    The proposal retained the substance of former Sec. 9.17, which 
addresses surrender and revocation of fiduciary powers. The proposal 
set forth the standards and procedures that apply when a national bank 
seeks to surrender its fiduciary powers. The proposal also described 
the standards that apply when the OCC seeks to revoke a bank's 
fiduciary powers. This section provides useful guidance to banks 
surrendering or revoking their fiduciary powers. The OCC did not 
receive any comments that warranted changes to this section and, thus, 
the OCC is adopting it as proposed.

Collective Investment Funds (Sec. 9.18)

    The proposal retained the general structure of Sec. 9.18. Paragraph 
(a) authorized national banks to invest fiduciary assets in two types 
of collective investment funds (called (a)(1) funds and (a)(2) funds, 
in reference to the paragraphs of Sec. 9.18 that authorize them). 
Paragraph (b) set forth the requirements applicable to funds authorized 
under paragraph (a). Paragraph (c) described other types of collective 
investments available to national bank fiduciaries. The OCC is adopting 
much of proposed Sec. 9.18, but with several significant modifications.

In General (Sec. 9.18(a))

    The proposal removed a provision from former Sec. 9.18(b)(3) that 
specifically provided that a bank may look at a collective investment 
fund's portfolio in the aggregate in determining whether it may invest 
fiduciary assets in the collective investment fund. This treatment is 
consistent with the prudent investor rule.7 One commenter noted 
that not all states have adopted the prudent investor rule, and 
recommended that the OCC retain the provision. The OCC agrees, and is 
retaining the provision as a footnote to Sec. 9.18(a).
---------------------------------------------------------------------------

     7 See Rest. 3rd, Trusts (Prudent Investor Rule), sec. 
227(a) (1992).
---------------------------------------------------------------------------

Written Plan (Sec. 9.18(b)(1))

    The former regulation required the full board of directors of a 
national bank to approve a new collective investment fund plan. The 
proposal provided additional management flexibility by allowing a 
committee of the board of directors to perform this function. Some 
commenters recommended that the OCC modify this requirement further by 
allowing a committee authorized by the board to approve a new plan. 
Because this modification provides banks with some flexibility in 
approving new plans and presents no supervisory concerns, the OCC is 
adopting it as recommended.

Frequency of Valuation (Sec. 9.18(b)(4)(i))

    The proposal allowed a bank to value an illiquid collective 
investment fund (i.e., one invested primarily in real estate or other 
assets that are not readily marketable) at least annually rather than 
at least quarterly, in an effort to be consistent with the one-year 
prior notice allowance for withdrawals from illiquid collective 
investment funds found at former Sec. 9.18(b)(4). Because the prior 
notice allowance is limited to (a)(2) funds, it is appropriate to limit 
the valuation exception to (a)(2) funds. The OCC is modifying the 
proposed valuation exception to include this limitation.

Short-term Investment Funds (Sec. 9.18(b)(4)(ii)(B))

    The proposal retained the former regulation's restrictions on 
short-term investment funds. Several commenters noted, however, that 
these restrictions are more stringent than the Securities and Exchange 
Commission's Rule 2a-7 (17 CFR 270.2a-7), which governs money market 
funds. The commenters recommended that the OCC revise the restrictions 
to make them more consistent with Rule 2a-7. The OCC agrees that its 
restrictions regarding short-term investment funds should be more 
consistent with Rule 2a-7. Consequently, the OCC is removing (1) the 
requirement that a bank invest at least 80 percent of the fund's assets 
in instruments payable on demand or that have a maturity date not 
exceeding 91 days from the date of purchase, and (2) the requirement 
that at least 20 percent of the fund's assets must be cash, demand 
obligations, or assets that will mature on the fund's next business 
day. In their place, the OCC is adding a requirement that a bank 
maintain a dollar-weighted average portfolio maturity of 90 days or 
less, consistent with Rule 2a-7.

Method of Distributions (Sec. 9.18(b)(5)(iv))

    The proposal revised substantially the former regulation's standard 
for distributions to an account withdrawing from a collective 
investment fund. Former Sec. 9.18(b)(6) required a bank to make 
distributions in cash, ratably in kind (i.e., a proportional share in 
each of the assets held by the collective investment fund), or a 
combination of the two. The proposal allowed a bank to make any 
distributions consistent with applicable law. The proposal reflected an 
effort to provide banks with sufficient flexibility to address complex 
distribution problems that may arise (particularly with respect to 
collective investment funds that invest primarily

[[Page 68550]]

in illiquid assets), while maintaining the basic protections of state 
fiduciary law. In the proposal's preamble, the OCC invited comment on 
whether to adopt this applicable law approach in lieu of the former 
regulation's distribution options.
    Many commenters supported replacing the former regulation's 
distribution options with the proposed approach. Several commenters 
supported the proposed approach, but only as a supplement to the former 
regulation's distribution options. Some commenters noted that relying 
wholly on applicable law, as proposed, could be unworkable for a bank 
whose collective investment fund includes accounts from different 
states.
    The OCC has determined to retain the former regulation's 
distribution options (i.e., cash, ratably in kind, or a combination of 
the two) and to add, as a fourth option, ``any other manner consistent 
with applicable law in the state in which the bank maintains the 
fund.'' The OCC believes that this approach provides ample flexibility 
while maintaining the basic protections of state fiduciary law. 
Moreover, it resolves the proposal's potential problems regarding a 
fund with accounts from different states by clarifying that the only 
state whose law applies to the fourth distribution option is the state 
in which the bank maintains the fund (though other forms of 
``applicable law,'' such as Federal law, may apply).

Audits and Financial Reports (Sec. 9.18(b)(6))

    Consistent with OCC precedent, the proposal clarified that a 
national bank must disclose in a collective investment fund's annual 
financial report the fees and expenses charged to the fund. One 
commenter recommended that the OCC further clarify that the regulation 
does not require per se that a national bank disclose fees and expenses 
on a line-item basis, or as a specific dollar amount (as opposed to a 
percentage of assets). The OCC affirms that the regulation does not 
require per se a particular form of disclosure. However, if state law 
(or other applicable law) governing the collective investment fund 
requires a particular form of disclosure, then national banks must 
comply with that requirement.8 To clarify this issue, the OCC is 
modifying the provision to clarify that disclosures of fees and 
expenses are required in a manner consistent with applicable law in the 
state in which the bank maintains the fund.
---------------------------------------------------------------------------

     8 See Trust Interpretive Letter #242 (January 1990).
---------------------------------------------------------------------------

Advertising Restriction (Sec. 9.18(b)(7))

    The proposal retained and clarified the former regulation's 
restriction on advertising (a)(1) funds. In particular, the proposal 
prohibited a bank from advertising a common trust fund except in 
connection with the advertisement of the general fiduciary services of 
the bank.
    Many commenters recommended that the OCC eliminate or at least 
relax the restriction on advertising past performance. Other 
commenters, apparently in support of the restriction, warned that if a 
bank markets its common trust fund to the general public, then that 
fund will be subject to registration and regulation under the 
securities laws.
    The views of commenters opposed to the advertising restriction may 
have some merit. The OCC has carefully considered their views but has 
decided that, on balance, it is not appropriate to remove the 
advertising restriction. Therefore, the OCC is adopting the provision 
as proposed.

Self-Dealing and Conflicts of Interest (Sec. 9.18(b)(8))

    The proposal retained the substance of former Sec. 9.18(b)(8), 
which addressed self-dealing and conflicts of interest specific to 
collective investment funds. The OCC noted in the preamble that a 
national bank administering a collective investment fund must comply 
with not only these provisions, but also the general self-dealing and 
conflicts of interest provisions found in Sec. 9.12. One commenter 
recommended that the OCC clarify this position in the regulatory text. 
The OCC agrees, and is amending the provision accordingly.

Elimination of Mortgage Reserve Account Provision

    The proposal retained the substance of former Sec. 9.18(b)(11), 
which allowed a bank administering a collective investment fund to 
establish a mortgage reserve account for overdue interest payments on 
mortgages in the fund. Suspecting that this provision was outdated, the 
OCC invited comment on the extent to which banks use mortgage reserve 
accounts. The only commenter on this provision recommended that the OCC 
eliminate it, stating that national banks no longer maintain mortgage 
reserve accounts because they are unnecessary and may not be 
appropriate under generally accepted accounting principles. 
Accordingly, the OCC is eliminating this provision.

Management Fees (Sec. 9.18(b)(9))

    The proposal retained the quantitative management fee limitation, 
found at former Sec. 9.18(b)(12), but invited comment on whether the 
OCC should defer to state law instead of retaining the fee limitation. 
Under this limitation, a bank administering a collective investment 
fund may charge a fund management fee only if the total fees charged to 
a participating account (including the fund management fee) does not 
exceed the total fees that the bank would have charged had it not 
invested assets of the fiduciary account in the fund.
    Many commenters supported eliminating the management fee limitation 
altogether in favor of a ``reasonableness'' standard or a state law 
based approach, arguing that these alternatives would reflect modern 
fiduciary law standards in this area. However, some commenters 
supported retaining the limitation. Other commenters were concerned 
that a state law approach could be unworkable for a collective 
investment fund with participants from different states whose fee 
standards differ.
    The OCC recognizes the desirability of providing updated operating 
standards for national bank fiduciary activities, but is concerned that 
a general ``reasonableness'' standard, or even a state law standard, 
alone, may not provide sufficient protections for banks' fiduciary 
customers. Accordingly, the final rule provides that a national bank 
may charge a fund management fee only if: (1) the fee is reasonable; 
(2) the fee is permitted under applicable law (and complies with fee 
disclosure requirements, if any) in the state in which the bank 
maintains the fund; and (3) the amount of the fee does not exceed an 
amount commensurate with the value of legitimate services of tangible 
benefit to the participating fiduciary accounts that would not have 
been provided to the accounts were they not invested in the fund.
    This modification safeguards the interests of customers in several 
ways. First, a fund management fee is subject to an overall 
reasonableness standard. Second, in order to charge a fund management 
fee, applicable law must allow the type of fee charged. Third, the bank 
must justify the amount of a fund management fee based on particular 
services that provide a tangible benefit to participating fiduciary 
accounts that would not have been provided to the accounts were they 
not invested in the fund. Fourth, a bank that charges a fee under this 
approach also must comply with applicable fee disclosure

[[Page 68551]]

requirements. Finally, a separate provision in the final rule requires 
a bank to disclose a management fee, along with other fees and expenses 
charged to the fund, in the annual financial report in a manner 
consistent with applicable law in the state in which the bank maintains 
the fund.9
---------------------------------------------------------------------------

    \9\ See Sec. 9.18(b)(6)(ii).
---------------------------------------------------------------------------

    Additionally, this modification eliminates the possibility that 
multiple conflicting states' laws could apply to the same fund, and 
thus is responsive to commenters' concerns about administering a 
collective investment fund with participants from different states.

Expenses (Sec. 9.18(b)(10))

    The proposal retained the requirement that the bank absorb 
establishment and reorganization expenses, but eliminated other 
provisions that specifically permitted or prohibited a bank to charge 
certain expenses to the fund. Rather than mandating the treatment of 
specific expenses (other than establishment and reorganization 
expenses), the proposal deferred to state law, in effect, by allowing a 
bank to charge reasonable expenses incurred in administering the fund 
to the extent not prohibited by applicable law.
    Many commenters supported this approach. However, some commenters 
were concerned that a state law approach to permissible expenses could 
be unworkable for funds with participants from different states.
    The OCC continues to believe that, when expenses of a fund are 
reasonable and permissible under state law, and are fully disclosed in 
appropriate documentation,\10\ a bank should be allowed to charge them 
directly to the fund. Thus, the final rule retains the proposal's 
approach of allowing a bank to charge any reasonable expenses (except 
expenses incurred in establishing or reorganizing a collective 
investment fund) not prohibited by applicable law, and clarifies that 
the applicable law in the state in which the bank maintains the fund--
including Federal law where appropriate, and excluding the law of 
states other than the state in which the bank maintains the fund--
determines whether particular expenses are prohibited. This standard 
addresses commenters' concerns about funds with participants from 
different states.
---------------------------------------------------------------------------

    \10\ See Sec. 9.18(b)(1)(iii) (disclosure of anticipated fees 
and expenses in the written plan) and Sec. 9.18(b)(6)(ii) 
(disclosure of fees and expenses in the annual financial report).
---------------------------------------------------------------------------

Prohibition Against Certificates (Sec. 9.18(b)(11))

    The proposal prohibited a national bank from issuing certificates 
of interest in a collective investment fund. One commenter recommended 
that the OCC provide an exception allowing a bank to issue a 
certificate of participation in a segregated investment to a customer 
withdrawing from a fund, consistent with OCC fiduciary precedents. The 
OCC agrees. The exception for segregated investments should not raise 
any of the securities-related concerns underlying the prohibition 
against certificates. Consequently, the OCC is adopting the exception.

Elimination of Participation, Investment, and Liquidity Requirements

    The proposal eliminated the 10 percent participation limitation, 
the 10 percent investment limitation, and the liquidity requirement 
applicable to common trust funds under former Sec. 9.18(b)(9). The OCC 
received many comment letters on this issue. All who commented 
supported the proposal. These restrictions have at times interfered 
with optimal management of common trust funds. Moreover, the OCC 
believes that the protections found in state fiduciary law adequately 
address the concerns underlying these restrictions. Consequently, the 
OCC is eliminating the participation, investment, and liquidity 
requirements.

Other Collective Investments (Sec. 9.18(c))

    In addition to (a)(1) and (a)(2) funds, the proposal authorized 
other means by which a national bank may invest fiduciary assets 
collectively: (1) bank fiduciary funds, (2) single loans or 
obligations, (3) mini-funds (i.e., funds established for the collective 
investment of cash balances), (4) trust funds of corporations and 
closely-related settlors, and (5) special exemption funds. These other 
collective investments are not subject to the requirements of 
Sec. 9.18(b).
    While the OCC did not receive any comments on the provision 
authorizing bank fiduciary funds, the OCC believes that banks no longer 
maintain this type of fund. Thus, the OCC is eliminating the provision.
    With respect to single loans or obligations, the proposal 
eliminated the restriction that a bank invest in a variable-amount note 
on a short-term basis only. Those who commented on this change 
supported it. The change will bring that provision in conformity with 
Sec. 9.18(b)(4)(ii)(B), which allows a bank to invest fiduciary assets 
collectively in short-term investment fund composed of short-term 
vehicles, including variable-amount notes, but places no limitation on 
renewals of those investments. For this reason, the OCC is adopting the 
provision as proposed.
    With respect to mini-funds, the proposal eliminated the requirement 
that no participating account's interest in the fund may exceed 
$10,000. Moreover, the proposal increased the total amount of assets 
permitted in a mini-fund to $1,000,000. Those who commented on these 
changes supported them. These changes remove outdated limitations on 
mini-funds. Consequently, the OCC is adopting the provision as 
proposed.
    One commenter recommended that the OCC add a provision that permits 
a bank to use any collective investment authorized by applicable law 
(e.g., pre-need funeral statutes). The OCC agrees that a bank should be 
permitted to use any collective investment authorized by applicable 
law, and is adding a provision to this effect.
    With respect to special exemption funds, the proposal provided an 
expedited procedure for their review. While most commenters supported 
the expedited review procedure, a few commenters strongly opposed it. 
Those who opposed it objected that the provision does not require 
notice and comment, does not distinguish between routine and novel 
applications, and, because approval is automatic if the OCC does not 
act in 30 days, could lead to inadvertent approvals of common trust 
funds that are exempt from the regulation's management fee and common 
trust fund advertising provisions. After carefully considering these 
concerns, the OCC has decided that it may not be appropriate to adopt 
the proposed expedited review procedure. Thus, the OCC is modifying the 
provision to eliminate the expedited review procedure.
    Finally, one commenter recommended that the OCC extend the right to 
seek special exemptions from the OCC to state banks and other corporate 
fiduciaries that must comply with the OCC's collective investment fund 
regulation in order to receive favorable tax treatment under the 
Internal Revenue Code (26 U.S.C. 584). The OCC agrees that those 
corporate fiduciaries should have the same opportunity to establish 
special exemption funds as national banks. Consequently, the OCC is 
modifying the proposal to reflect this recommendation.

Transfer Agents (Sec. 9.20)

    The proposal incorporated by means of cross-reference the 
Securities and Exchange Commission (SEC) rules

[[Page 68552]]

prescribing procedures for registration of transfer agents for which 
the SEC is the appropriate regulatory agency (17 CFR 240.17Ac2-1). The 
proposal also clarified that a national bank transfer agent must comply 
with rules adopted by the SEC pursuant to section 17A of the Securities 
Exchange Act (15 U.S.C. 78q-1), which sets forth operational and 
reporting requirements that apply to all transfer agents (17 CFR 
240.17Ac2-2, and 240.17Ad-1 through 16).
    Several commenters noted that the SEC's rules regarding transfer 
agents do not apply to activities in foreign countries. The OCC 
acknowledges that the SEC's rules regarding transfer agents apply only 
to domestic activities. Consequently, the OCC is clarifying this point 
in the regulatory text.

Waiver of Regulatory Requirements

    In the preamble to the proposal, the OCC invited comment on whether 
the OCC should add a reservation of authority to part 9 for the purpose 
of setting forth standards and procedures under which a national bank 
may obtain a waiver from a specific provision. All but one of those who 
commented on this issue supported the addition of waiver standards and 
procedures. Upon reconsideration, the OCC has concluded that it is 
preferable to continue its current practice of considering any request 
to modify the application of any provision in part 9, and granting a 
request if the OCC deems it consistent with the bank's fiduciary duties 
and with safe and sound banking practices. The OCC expects that the 
additional flexibility it has incorporated into many of part 9's 
provisions will reduce the need for waivers and modifications. 
Moreover, the requests that banks are likely to file will vary 
significantly in subject matter and complexity, reducing the usefulness 
of generalized standards. Therefore, the OCC has decided not to include 
a specific waiver provision in part 9.

Acting as Indenture Trustee and Creditor (Sec. 9.100)

    In the proposal's preamble, the OCC indicated that it was inclined 
to modify its restrictions on allowing an indenture trustee to act as 
creditor to the same debt securities issuance. In particular, the OCC 
suggested allowing a national bank to act both as creditor and 
indenture trustee until 90 days after default, consistent with the 
Trust Indenture Act, with the added condition that the bank maintains 
adequate controls to manage any potential conflicts of interest. 
Additionally, the OCC indicated that it would apply this policy 
consistently to all debt securities issuances, including issuances 
exempt from the Trust Indenture Act. The OCC invited comment on how 
banks are managing these conflicts, and on the need to address this 
issue in part 9.
    Commenters supported a revision of the OCC's position, and 
indicated that bank policies and procedures effectively manage 
potential conflicts of interest. However, most who commented 
recommended that the OCC not add specific requirements to the 
regulation on this issue, though most of these commenters also 
supported less formal guidance.
    Based on its experience in this area, the OCC believes that banks 
generally have established adequate controls to manage those conflicts. 
Moreover, the OCC believes that it is important to clarify to all 
national banks the revised position on this issue. Consequently, the 
OCC is adding a short interpretive ruling to part 9 explaining that a 
national bank may act as creditor and indenture trustee to any debt 
securities issuance (whether or not covered by the Trust Indenture Act) 
until 90 days after default with the added condition that the bank 
maintains adequate controls to manage the potential conflicts of 
interest.

Disciplinary Sanctions Imposed by Clearing Agencies (Sec. 19.135)

    The proposal eliminated much of the detail of former Secs. 9.21 and 
9.22, which concern applications by national banks for stays or reviews 
of disciplinary sanctions imposed by registered clearing agencies. 
Instead, the proposal cross-referenced the SEC's rules in this area, 
which are virtually identical to former Secs. 9.21 and 9.22. The 
proposal also relocated the provision to 12 CFR part 19, the OCC's 
rules of practice and procedure, where readers are more likely to find 
it.
    The OCC received no comments on this provision and, thus, is 
adopting it as proposed.

Investment Adviser to an Investment Company

    Part 9 has never contained conditions applicable to national bank 
operating subsidiaries engaged in investment advisory activities. 
Instead, appropriate conditions for particular operating subsidiary 
activities have been dealt with by the OCC as part of the application 
process. However, one of the issues related to the treatment of 
investment advisory activities under part 9 that was raised in the 
proposal was whether to impose certain conditions in all situations 
where a national bank or its operating subsidiary acts as investment 
adviser to an investment company, and, if so, whether to include them 
in part 9.
    Most who commented on this issue expressed concerns that the 
conditions could impose unnecessary restrictions on certain activities. 
After carefully considering the comments, the OCC has decided to 
continue its current approach of dealing with conditions imposed on 
national bank operating subsidiaries as part of the corporate 
application process. Recent amendments to 12 CFR part 5 (61 FR 60342, 
November 27, 1996) also provide a specific new mechanism for conditions 
and policies to be developed that will be applicable to operating 
subsidiaries engaged in particular types of activities. One of these 
types of activities is serving as an investment adviser to an 
investment company (see Sec. 5.34(e)(3)(ii)(D)). Accordingly, the OCC 
has concluded that it is not appropriate to deal with conditions 
imposed on operating subsidiaries engaged in such activities as an 
aspect of part 9.

Derivation Table for 12 CFR Part 9

    This table directs readers to the provisions of the former 12 CFR 
part 9 on which the revised 12 CFR part 9 and the amended 12 CFR part 
19 are based.

--------------------------------------------------------------------------------------------------------------------------------------------------------
         Revised provision                                        Former provision                                              Comments                
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sec.  9.1..........................  .........................................................................  Added.                                  
Sec.  9.2(a).......................  .........................................................................  Added.                                  
    (b)............................  Sec.  9.1(g).............................................................  Significantly modified.                 
    (c)............................  Sec.  9.1(l).............................................................  Modified.                               
    (d)............................  Sec.  9.1(a).............................................................  Modified.                               
    (e)............................  Sec.  9.1(b) and (h).....................................................  Significantly modified.                 
    (f)............................  Sec.  9.1(j).............................................................  Modified.                               
    (g)............................  Sec.  9.1(c).............................................................  Significantly modified.                 
    (h)............................  Sec.  9.1(e).............................................................  Modified.                               

[[Page 68553]]

                                                                                                                                                        
    (i)............................  .........................................................................  Added.                                  
Sec.  9.3..........................  Sec.  9.2................................................................  Modified.                               
Sec.  9.4..........................  Sec.  9.7(a)(1), (b), and (d)............................................  Significantly modified.                 
Sec.  9.5..........................  Secs.  9.5, 9.7(c), 9.7(d), and 9.10(a)..................................  Significantly modified.                 
Sec.  9.6..........................  Sec.  9.7(a)(2)..........................................................  Significantly modified.                 
Sec.  9.8..........................  Secs.  9.7(a)(2) and 9.8.................................................  Modified.                               
Sec.  9.9..........................  Sec.  9.9................................................................  Significantly modified.                 
Sec.  9.10.........................  Sec.  9.10...............................................................  Significantly modified.                 
Sec.  9.11.........................  Sec.  9.11...............................................................  Significantly modified.                 
Sec.  9.12.........................  Sec.  9.12...............................................................  Modified.                               
Sec.  9.13.........................  Sec.  9.13...............................................................  Modified.                               
Sec.  9.14.........................  Sec.  9.14...............................................................  Significantly modified.                 
Sec.  9.15.........................  Sec.  9.15...............................................................  Modified.                               
Sec.  9.16.........................  Sec.  9.16...............................................................  Modified.                               
Sec.  9.17.........................  Sec.  9.17...............................................................  Modified.                               
Sec.  9.18(a)......................  Sec.  9.18(a), (b)(2), and (b)(3)........................................  Modified.                               
    (b)(1).........................    (b)(1).................................................................  Significantly modified.                 
    (b)(2).........................    (b)(12)................................................................  Significantly modified.                 
    (b)(3).........................    (b)(3).................................................................  Modified.                               
    (b)(4).........................    (b)(1), (4), and (15)..................................................  Significantly modified.                 
    (b)(5).........................    (b)(4), (6), and (7)...................................................  Significantly modified.                 
    (b)(6).........................    (b)(5)(i)-(iv).........................................................  Significantly modified.                 
    (b)(7).........................    (b)(5)(iv) and (v).....................................................  Significantly modified.                 
    (b)(8).........................    (b)(8).................................................................  Modified.                               
    (b)(9).........................    (b)(12)................................................................  Significantly modified.                 
    (b)(10)........................    (b)(5)(i) and (iv), (b)(10) and (b)(12)................................  Significantly modified.                 
    (b)(11)........................    (b)(13)................................................................  Modified.                               
    (b)(12)........................    (b)(14)................................................................  Modified.                               
    (c)(1).........................    (c)(2).................................................................  Modified.                               
    (c)(2).........................    (c)(3).................................................................  Significantly modified.                 
    (c)(3).........................    (c)(4).................................................................  Modified.                               
    (c)(4).........................  .........................................................................  Added.                                  
    (c)(5).........................    (c)(5).................................................................  Significantly modified.                 
Sec.  9.20.........................  Sec.  9.20...............................................................  Modified.                               
Sec.  9.100........................  .........................................................................  Added.                                  
Sec.  19.135.......................  Secs.  9.21 and 9.22.....................................................  Modified.                               
--------------------------------------------------------------------------------------------------------------------------------------------------------

Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act, the 
OCC certifies that this final rule will not have a significant economic 
impact on a substantial number of small entities in accord with the 
spirit and purposes of the Regulatory Flexibility Act (5 U.S.C. 601 et 
seq.). Accordingly, a regulatory flexibility analysis is not required. 
The final rule's requirements, for the most part, are not new to the 
regulation. The final rule eases requirements and reduces burden for 
all national banks that exercise fiduciary powers, regardless of size.

Executive Order 12866

    The Office of Management and Budget has concurred with the OCC's 
determination that this final rule is not a significant regulatory 
action under Executive Order 12866.

Paperwork Reduction Act of 1995

    The OCC invites comment on:
    (1) Whether the information collection contained in this final rule 
is necessary for the proper performance of the OCC's functions, 
including whether the information has practical utility;
    (2) The accuracy of the OCC's estimate of the burden of the 
information collection;
    (3) Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    (4) Ways to minimize the burden of the information collection on 
respondents, including through the use of automated collection 
techniques or other forms of information technology; and
    (5) Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    The OCC asked similar questions in the proposed rule, but received 
no comments.
    Respondents/recordkeepers are not required to respond to this 
collection of information unless it displays a currently valid OMB 
control number.
    The collection of information requirements contained in this final 
rule have been approved by the Office of Management and Budget under 
Control No. 1557-0140 in accordance with the Paperwork Reduction Act of 
1995 (44 U.S.C. 3507(d)). Comments on the collection of information 
requirements should be sent to the Office of Management and Budget, 
Paperwork Reduction Project (1557-0140), Washington, DC 20503, with 
copies to the Legislative and Regulatory Activities Division (1557-
0140), Office of the Comptroller of the Currency, 250 E Street, SW, 
Washington, DC 20219.
    The collection of information requirements in this final rule are 
found in 12 CFR 9.8, 9.9, 9.17, and 9.18. The OCC requires this 
information for the proper supervision of national banks'' fiduciary 
activities. The likely respondents/recordkeepers are national banks.
    Estimated average annual burden hours per respondent/recordkeeper: 
15 hours.
    Estimated number of respondents and/or recordkeepers: 1,000.
    Estimated total annual reporting and recordkeeping burden: 15,010 
hours.
    Start-up costs to respondents: None.

Unfunded Mandates Reform Act of 1995

    The OCC has determined that this final rule will not result in 
expenditures by state, local, and tribal governments, or by the private 
sector, of $100 million or more in any one year. Accordingly, a 
budgetary impact statement is not

[[Page 68554]]

required under section 202 of the Unfunded Mandates Reform Act of 1995. 
The final rule's requirements, for the most part, are not new to the 
regulation. The final rule eases requirements and reduces burden for 
all national banks that exercise fiduciary powers, regardless of size.

List of Subjects

12 CFR Part 9

    Estates, Investments, National banks, Reporting and recordkeeping 
requirements, Trusts and trustees.

12 CFR Part 19

    Administrative practice and procedure, Crime, Investigations, 
National banks, Penalties, Securities.

Authority and Issuance

    For the reasons set out in the preamble, chapter I of title 12 of 
the Code of Federal Regulations is amended as follows:
    1. Part 9 is revised to read as follows:

PART 9--FIDUCIARY ACTIVITIES OF NATIONAL BANKS

Regulations

Sec.
9.1  Authority, purpose, and scope.
9.2  Definitions.
9.3  Approval requirements.
9.4  Administration of fiduciary powers.
9.5  Policies and procedures.
9.6  Review of fiduciary accounts.
9.8  Recordkeeping.
9.9  Audit of fiduciary activities.
9.10  Fiduciary funds awaiting investment or distribution.
9.11  Investment of fiduciary funds.
9.12  Self-dealing and conflicts of interest.
9.13  Custody of fiduciary assets.
9.14  Deposit of securities with state authorities.
9.15  Fiduciary compensation.
9.16  Receivership or voluntary liquidation of bank.
9.17  Surrender or revocation of fiduciary powers.
9.18  Collective investment funds.
9.20  Transfer agents.

Interpretations

9.100  Acting as indenture trustee and creditor.

    Authority: 12 U.S.C. 24 (Seventh), 92a, and 93a; 15 U.S.C. 78q, 
78q-1, and 78w.

Regulations


Sec. 9.1  Authority, purpose, and scope.

    (a) Authority. The Office of the Comptroller of the Currency (OCC) 
issues this part pursuant to its authority under 12 U.S.C. 24 
(Seventh), 92a, and 93a, and 15 U.S.C. 78q, 78q-1, and 78w.
    (b) Purpose. The purpose of this part is to set forth the standards 
that apply to the fiduciary activities of national banks.
    (c) Scope. This part applies to all national banks that act in a 
fiduciary capacity, as defined in Sec. 9.2(e). This part also applies 
to all Federal branches of foreign banks to the same extent as it 
applies to national banks.


Sec. 9.2  Definitions.

    For the purposes of this part, the following definitions apply:
    (a) Affiliate has the same meaning as in 12 U.S.C. 221a(b).
    (b) Applicable law means the law of a state or other jurisdiction 
governing a national bank's fiduciary relationships, any applicable 
Federal law governing those relationships, the terms of the instrument 
governing a fiduciary relationship, or any court order pertaining to 
the relationship.
    (c) Custodian under a uniform gifts to minors act means a fiduciary 
relationship established pursuant to a state law substantially similar 
to the Uniform Gifts to Minors Act or the Uniform Transfers to Minors 
Act as published by the American Law Institute.
    (d) Fiduciary account means an account administered by a national 
bank acting in a fiduciary capacity.
    (e) Fiduciary capacity means: trustee, executor, administrator, 
registrar of stocks and bonds, transfer agent, guardian, assignee, 
receiver, or custodian under a uniform gifts to minors act; investment 
adviser, if the bank receives a fee for its investment advice; any 
capacity in which the bank possesses investment discretion on behalf of 
another; or any other similar capacity that the OCC authorizes pursuant 
to 12 U.S.C. 92a.
    (f) Fiduciary officers and employees means all officers and 
employees of a national bank to whom the board of directors or its 
designee has assigned functions involving the exercise of the bank's 
fiduciary powers.
    (g) Fiduciary powers means the authority the OCC permits a national 
bank to exercise pursuant to 12 U.S.C. 92a. The extent of fiduciary 
powers is the same for out-of-state national banks as for in-state 
national banks, and that extent depends upon what powers the state 
grants to the fiduciaries in the state with which national banks 
compete.
    (h) Guardian means the guardian or conservator, by whatever name 
used by state law, of the estate of a minor, an incompetent person, an 
absent person, or a person over whose estate a court has taken 
jurisdiction, other than under bankruptcy or insolvency laws.
    (i) Investment discretion means, with respect to an account, the 
sole or shared authority (whether or not that authority is exercised) 
to determine what securities or other assets to purchase or sell on 
behalf of the account. A bank that delegates its authority over 
investments and a bank that receives delegated authority over 
investments are both deemed to have investment discretion.


Sec. 9.3  Approval requirements.

    (a) A national bank may not exercise fiduciary powers unless it 
obtains prior approval from the OCC to the extent required under 12 CFR 
5.26.
    (b) A person seeking approval to organize a special-purpose 
national bank limited to fiduciary powers shall file an application 
with the OCC pursuant to 12 CFR 5.20.


Sec. 9.4  Administration of fiduciary powers.

    (a) Responsibilities of the board of directors. A national bank's 
fiduciary activities shall be managed by or under the direction of its 
board of directors. In discharging its responsibilities, the board may 
assign any function related to the exercise of fiduciary powers to any 
director, officer, employee, or committee thereof.
    (b) Use of other personnel. The national bank may use any qualified 
personnel and facilities of the bank or its affiliates to perform 
services related to the exercise of its fiduciary powers, and any 
department of the bank or its affiliates may use fiduciary officers, 
employees, and facilities to perform services unrelated to the exercise 
of fiduciary powers, to the extent not prohibited by applicable law.
    (c) Agency agreements. Pursuant to a written agreement, a national 
bank exercising fiduciary powers may perform services related to the 
exercise of fiduciary powers for another bank or other entity, and may 
purchase services related to the exercise of fiduciary powers from 
another bank or other entity.
    (d) Bond requirement. A national bank shall ensure that all 
fiduciary officers and employees are adequately bonded.


Sec. 9.5  Policies and procedures.

    A national bank exercising fiduciary powers shall adopt and follow 
written policies and procedures adequate to maintain its fiduciary 
activities in compliance with applicable law. Among other relevant 
matters, the policies and procedures should address, where appropriate, 
the bank's:
    (a) Brokerage placement practices;
    (b) Methods for ensuring that fiduciary officers and employees do 
not use material inside information in connection with any decision or 
recommendation to purchase or sell any security;

[[Page 68555]]

    (c) Methods for preventing self-dealing and conflicts of interest;
    (d) Selection and retention of legal counsel who is readily 
available to advise the bank and its fiduciary officers and employees 
on fiduciary matters; and
    (e) Investment of funds held as fiduciary, including short-term 
investments and the treatment of fiduciary funds awaiting investment or 
distribution.


Sec. 9.6  Review of fiduciary accounts.

    (a) Pre-acceptance review. Before accepting a fiduciary account, a 
national bank shall review the prospective account to determine whether 
it can properly administer the account.
    (b) Initial post-acceptance review. Upon the acceptance of a 
fiduciary account for which a national bank has investment discretion, 
the bank shall conduct a prompt review of all assets of the account to 
evaluate whether they are appropriate for the account.
    (c) Annual review. At least once during every calendar year, a bank 
shall 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.


Sec. 9.8  Recordkeeping.

    (a) Documentation of accounts. A national bank shall adequately 
document the establishment and termination of each fiduciary account 
and shall maintain adequate records for all fiduciary accounts.
    (b) Retention of records. A national bank shall retain records 
described in paragraph (a) of this section for a period of three years 
from the later of the termination of the account or the termination of 
any litigation relating to the account.
    (c) Separation of records. A national bank shall ensure that 
records described in paragraph (a) of this section are separate and 
distinct from other records of the bank.


Sec. 9.9  Audit of fiduciary activities.

    (a) Annual audit. At least once during each calendar year, a 
national bank shall arrange for a suitable audit (by internal or 
external auditors) of all significant fiduciary activities, under the 
direction of its fiduciary audit committee, unless the bank adopts a 
continuous audit system in accordance with paragraph (b) of this 
section. The bank shall note the results of the audit (including 
significant actions taken as a result of the audit) in the minutes of 
the board of directors.
    (b) Continuous audit. In lieu of performing annual audits under 
paragraph (a) of this section, a national bank may adopt a continuous 
audit system under which the bank arranges for a discrete audit (by 
internal or external auditors) of each significant fiduciary activity 
(i.e., on an activity-by-activity basis), under the direction of its 
fiduciary audit committee, at an interval commensurate with the nature 
and risk of that activity. Thus, certain fiduciary activities may 
receive audits at intervals greater or less than one year, as 
appropriate. A bank that adopts a continuous audit system shall note 
the results of all discrete audits performed since the last audit 
report (including significant actions taken as a result of the audits) 
in the minutes of the board of directors at least once during each 
calendar year .
    (c) Fiduciary audit committee. A national bank's fiduciary audit 
committee must consist of a committee of the bank's directors or an 
audit committee of an affiliate of the bank. However, in either case, 
the committee:
    (1) Must not include any officers of the bank or an affiliate who 
participate significantly in the administration of the bank's fiduciary 
activities; and
    (2) Must consist of a majority of members who are not also members 
of any committee to which the board of directors has delegated power to 
manage and control the fiduciary activities of the bank.


Sec. 9.10  Fiduciary funds awaiting investment or distribution.

    (a) In general. With respect to a fiduciary account for which a 
national bank has investment discretion or discretion over 
distributions, the bank may not allow funds awaiting investment or 
distribution to remain uninvested and undistributed any longer than is 
reasonable for the proper management of the account and consistent with 
applicable law. 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.
    (b) Self-deposits--(1) In general. A national bank may deposit 
funds of a fiduciary account that are awaiting investment or 
distribution in the commercial, savings, or another department of the 
bank, unless prohibited by applicable law. To the extent that the funds 
are not insured by the Federal Deposit Insurance Corporation, the bank 
shall set aside collateral as security, under the control of 
appropriate fiduciary officers and employees, in accordance with 
paragraph (b)(2) of this section. The market value of the collateral 
set aside must at all times equal or exceed the amount of the uninsured 
fiduciary funds.
    (2) Acceptable collateral. A national bank may satisfy the 
collateral requirement of paragraph (b)(1) of this section with any of 
the following:
    (i) Direct obligations of the United States, or other obligations 
fully guaranteed by the United States as to principal and interest;
    (ii) Securities that qualify as eligible for investment by national 
banks pursuant to 12 CFR part 1;
    (iii) Readily marketable securities of the classes in which state 
banks, trust companies, or other corporations exercising fiduciary 
powers are permitted to invest fiduciary funds under applicable state 
law;
    (iv) Surety bonds, to the extent they provide adequate security, 
unless prohibited by applicable law; and
    (v) Any other assets that qualify under applicable state law as 
appropriate security for deposits of fiduciary funds.
    (c) Affiliate deposits. A national bank, acting in its fiduciary 
capacity, may deposit funds of a fiduciary account that are awaiting 
investment or distribution with an affiliated insured depository 
institution, unless prohibited by applicable law. A national bank may 
set aside collateral as security for a deposit by or with an affiliate 
of fiduciary funds awaiting investment or distribution, unless 
prohibited by applicable law.


Sec. 9.11  Investment of fiduciary funds.

    A national bank shall invest funds of a fiduciary account in a 
manner consistent with applicable law.


Sec. 9.12  Self-dealing and conflicts of interest.

    (a) Investments for fiduciary accounts--(1) In general. Unless 
authorized by applicable law, a national bank may not invest funds of a 
fiduciary account for which a national bank has investment discretion 
in the stock or obligations of, or in assets acquired from: the bank or 
any of its directors, officers, or employees; affiliates of the bank or 
any of their directors, officers, or employees; or individuals or 
organizations with whom there exists an interest that might affect the 
exercise of the best judgment of the bank.
    (2) Additional securities investments. If retention of stock or 
obligations of the bank or its affiliates in a fiduciary account is 
consistent with applicable law, the bank may:
    (i) Exercise rights to purchase additional stock (or securities

[[Page 68556]]

convertible into additional stock) when offered pro rata to 
stockholders; and
    (ii) Purchase fractional shares to complement fractional shares 
acquired through the exercise of rights or the receipt of a stock 
dividend resulting in fractional share holdings.
    (b) Loans, sales, or other transfers from fiduciary accounts--(1) 
In general. A national bank may not lend, sell, or otherwise transfer 
assets of a fiduciary account for which a national bank has investment 
discretion to the bank or any of its directors, officers, or employees, 
or to affiliates of the bank or any of their directors, officers, or 
employees, or to individuals or organizations with whom there exists an 
interest that might affect the exercise of the best judgment of the 
bank, unless:
    (i) The transaction is authorized by applicable law;
    (ii) Legal counsel advises the bank in writing that the bank has 
incurred, in its fiduciary capacity, a contingent or potential 
liability, in which case the bank, upon the sale or transfer of assets, 
shall reimburse the fiduciary account in cash at the greater of book or 
market value of the assets;
    (iii) As provided in Sec. 9.18(b)(8)(iii) for defaulted 
investments; or
    (iv) Required in writing by the OCC.
    (2) Loans of funds held as trustee. Notwithstanding paragraph 
(b)(1) of this section, a national bank may not lend to any of its 
directors, officers, or employees any funds held in trust, except with 
respect to employee benefit plans in accordance with the exemptions 
found in section 408 of the Employee Retirement Income Security Act of 
1974 (29 U.S.C. 1108).
    (c) Loans to fiduciary accounts. A national bank may make a loan to 
a fiduciary account and may hold a security interest in assets of the 
account if the transaction is fair to the account and is not prohibited 
by applicable law.
    (d) Sales between fiduciary accounts. A national bank may sell 
assets between any of its fiduciary accounts if the transaction is fair 
to both accounts and is not prohibited by applicable law.
    (e) Loans between fiduciary accounts. A national bank may make a 
loan between any of its fiduciary accounts if the transaction is fair 
to both accounts and is not prohibited by applicable law.


Sec. 9.13  Custody of fiduciary assets.

    (a) Control of fiduciary assets. A national bank shall place assets 
of fiduciary accounts in the joint custody or control of not fewer than 
two of the fiduciary officers or employees designated for that purpose 
by the board of directors. A national bank may maintain the investments 
of a fiduciary account off-premises, if consistent with applicable law 
and if the bank maintains adequate safeguards and controls.
    (b) Separation of fiduciary assets. A national bank shall keep the 
assets of fiduciary accounts separate from the assets of the bank. A 
national bank shall keep the assets of each fiduciary account separate 
from all other accounts or shall identify the investments as the 
property of a particular account, except as provided in Sec. 9.18.


Sec. 9.14  Deposit of securities with state authorities.

    (a) In general. If state law requires corporations acting in a 
fiduciary capacity to deposit securities with state authorities for the 
protection of private or court trusts, then before a national bank acts 
as a private or court-appointed trustee in that state, it shall make a 
similar deposit with state authorities. If the state authorities refuse 
to accept the deposit, the bank shall deposit the securities with the 
Federal Reserve Bank of the district in which the national bank is 
located, to be held for the protection of private or court trusts to 
the same extent as if the securities had been deposited with state 
authorities.
    (b) Assets held in more than one state. If a national bank 
administers trust assets in more than one state, the bank may compute 
the amount of deposit required for each state on the basis of trust 
assets that the bank administers primarily from offices located in that 
state.


Sec. 9.15  Fiduciary compensation.

    (a) Compensation of bank. If the amount of a national bank's 
compensation for acting in a fiduciary capacity is not set or governed 
by applicable law, the bank may charge a reasonable fee for its 
services.
    (b) Compensation of co-fiduciary officers and employees. A national 
bank may not permit any officer or employee to retain any compensation 
for acting as a co-fiduciary with the bank in the administration of a 
fiduciary account, except with the specific approval of the bank's 
board of directors.


Sec. 9.16  Receivership or voluntary liquidation of bank.

    If the OCC appoints a receiver for an uninsured national bank, or 
if a national bank places itself in voluntary liquidation, the receiver 
or liquidating agent shall promptly close or transfer to a substitute 
fiduciary all fiduciary accounts, in accordance with OCC instructions 
and the orders of the court having jurisdiction.


Sec. 9.17  Surrender or revocation of fiduciary powers.

    (a) Surrender. In accordance with 12 U.S.C. 92a(j), a national bank 
seeking to surrender its fiduciary powers shall file with the OCC a 
certified copy of the resolution of its board of directors evidencing 
that intent. If, after appropriate investigation, the OCC is satisfied 
that the bank has been discharged from all fiduciary duties, the OCC 
will provide written notice that the bank is no longer authorized to 
exercise fiduciary powers.
    (b) Revocation. If the OCC determines that a national bank has 
unlawfully or unsoundly exercised, or has failed for a period of five 
consecutive years to exercise its fiduciary powers, the Comptroller 
may, in accordance with the provisions of 12 U.S.C. 92a(k), revoke the 
bank's fiduciary powers.


Sec. 9.18  Collective investment funds.

    (a) In general. Where consistent with applicable law, a national 
bank may invest assets that it holds as fiduciary in the following 
collective investment funds: 1
---------------------------------------------------------------------------

     1 In determining whether investing fiduciary assets in a 
collective investment fund is proper, the bank may consider the fund 
as a whole and, for example, shall not be prohibited from making 
that investment because any particular asset is nonincome producing.
---------------------------------------------------------------------------

    (1) A fund maintained by the bank, or by one or more affiliated 
banks,2 exclusively for the collective investment and reinvestment 
of money contributed to the fund by the bank, or by one or more 
affiliated banks, in its capacity as trustee, executor, administrator, 
guardian, or custodian under a uniform gifts to minors act.
---------------------------------------------------------------------------

     2  A fund established pursuant to this paragraph (a)(1) 
that includes money contributed by entities that are affiliates 
under 12 U.S.C. 221a(b), but are not members of the same affiliated 
group, as defined at 26 U.S.C. 1504, may fail to qualify for tax-
exempt status under the Internal Revenue Code. See 26 U.S.C. 584.
---------------------------------------------------------------------------

    (2) A fund consisting solely of assets of retirement, pension, 
profit sharing, stock bonus or other trusts that are exempt from 
Federal income tax.
    (i) A national bank may invest assets of retirement, pension, 
profit sharing, stock bonus, or other trusts exempt from Federal income 
tax and that the bank holds in its capacity as trustee in a collective 
investment fund established under paragraph (a)(1) or (a)(2) of this 
section.
    (ii) A national bank may invest assets of retirement, pension, 
profit sharing, stock bonus, or other employee benefit trusts exempt 
from Federal income tax and that the bank holds in any capacity 
(including agent), in a collective investment fund established under 
this

[[Page 68557]]

paragraph (a)(2) if the fund itself qualifies for exemption from 
Federal income tax.
    (b) Requirements. A national bank administering a collective 
investment fund authorized under paragraph (a) of this section shall 
comply with the following requirements:
    (1) Written plan. The bank shall establish and maintain each 
collective investment fund in accordance with a written plan (Plan) 
approved by a resolution of the bank's board of directors or by a 
committee authorized by the board. The bank shall make a copy of the 
Plan available for public inspection at its main office during all 
banking hours, and shall provide a copy of the Plan to any person who 
requests it. The Plan must contain appropriate provisions, not 
inconsistent with this part, regarding the manner in which the bank 
will operate the fund, including provisions relating to:
    (i) Investment powers and policies with respect to the fund;
    (ii) Allocation of income, profits, and losses;
    (iii) Fees and expenses that will be charged to the fund and to 
participating accounts;
    (iv) Terms and conditions governing the admission and withdrawal of 
participating accounts;
    (v) Audits of participating accounts;
    (vi) Basis and method of valuing assets in the fund;
    (vii) Expected frequency for income distribution to participating 
accounts;
    (viii) Minimum frequency for valuation of fund assets;
    (ix) Amount of time following a valuation date during which the 
valuation must be made;
    (x) Bases upon which the bank may terminate the fund; and
    (xi) Any other matters necessary to define clearly the rights of 
participating accounts.
    (2) Fund management. A bank administering a collective investment 
fund shall have exclusive management thereof, except as a prudent 
person might delegate responsibilities to others.3
---------------------------------------------------------------------------

     3  If a fund, the assets of which consist solely of Individual 
Retirement Accounts, Keogh Accounts, or other employee benefit 
accounts that are exempt from taxation, is registered under the 
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.), the fund 
will not be deemed in violation of this paragraph (b)(2) as a result 
of its compliance with section 10(c) of the Investment Company Act 
of 1940 (15 U.S.C. 80a-10(c)).
---------------------------------------------------------------------------

    (3) Proportionate interests. Each participating account in a 
collective investment fund must have a proportionate interest in all 
the fund's assets.
    (4) Valuation--(i) Frequency of valuation. A bank administering a 
collective investment fund shall determine the value of the fund's 
assets at least once every three months. However, in the case of a fund 
described in paragraph (a)(2) of this section that is invested 
primarily in real estate or other assets that are not readily 
marketable, the bank shall determine the value of the fund's assets at 
least once each year.
    (ii) Method of valuation--(A) In general. Except as provided in 
paragraph (b)(4)(ii)(B) of this section, a bank shall value each fund 
asset at market value as of the date set for valuation, unless the bank 
cannot readily ascertain market value, in which case the bank shall use 
a fair value determined in good faith.
    (B) Short-term investment funds. A bank may value a fund's assets 
on a cost, rather than market value, basis for purposes of admissions 
and withdrawals, if the Plan requires the bank to:
    (1) Maintain a dollar-weighted average portfolio maturity of 90 
days or less;
    (2) Accrue on a straight-line basis the difference between the cost 
and anticipated principal receipt on maturity; and
    (3) Hold the fund's assets until maturity under usual 
circumstances.
    (5) Admission and withdrawal of accounts--(i) In general. A bank 
administering a collective investment fund shall admit an account to or 
withdraw an account from the fund only on the basis of the valuation 
described in paragraph (b)(4) of this section.
    (ii) Prior request or notice. A bank administering a collective 
investment fund may admit an account to or withdraw an account from a 
collective investment fund only if the bank has approved a request for 
or a notice of intention of taking that action on or before the 
valuation date on which the admission or withdrawal is based. No 
requests or notices may be canceled or countermanded after the 
valuation date.
    (iii) Prior notice period for withdrawals from funds with assets 
not readily marketable. A bank administering a collective investment 
fund described in paragraph (a)(2) of this section that is invested 
primarily in real estate or other assets that are not readily 
marketable, may require a prior notice period, not to exceed one year, 
for withdrawals.
    (iv) Method of distributions. A bank administering a collective 
investment fund shall make distributions to accounts withdrawing from 
the fund in cash, ratably in kind, a combination of cash and ratably in 
kind, or in any other manner consistent with applicable law in the 
state in which the bank maintains the fund.
    (v) Segregation of investments. If an investment is withdrawn in 
kind from a collective investment fund for the benefit of all 
participants in the fund at the time of the withdrawal but the 
investment is not distributed ratably in kind, the bank shall segregate 
and administer it for the benefit ratably of all participants in the 
collective investment fund at the time of withdrawal.
    (6) Audits and financial reports--(i) Annual audit. At least once 
during each 12-month period, a bank administering a collective 
investment fund shall arrange for an audit of the collective investment 
fund by auditors responsible only to the board of directors of the 
bank.4
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     4  If a fund, the assets of which consist solely of Individual 
Retirement Accounts, Keogh Accounts, or other employee benefit 
accounts that are exempt from taxation, is registered under the 
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.), the fund 
will not be deemed in violation of this paragraph (b)(6)(i) as a 
result of its compliance with section 10(c) of the Investment 
Company Act of 1940 (15 U.S.C. 80a-10(c)), if the bank has access to 
the audit reports of the fund.
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    (ii) Financial report. At least once during each 12-month period, a 
bank administering a collective investment fund shall prepare a 
financial report of the fund based on the audit required by paragraph 
(b)(6)(i) of this section. The report must disclose the fund's fees and 
expenses in a manner consistent with applicable law in the state in 
which the bank maintains the fund. This report must contain a list of 
investments in the fund showing the cost and current market value of 
each investment, and a statement covering the period after the previous 
report showing the following (organized by type of investment):
    (A) A summary of purchases (with costs);
    (B) A summary of sales (with profit or loss and any other 
investment changes);
    (C) Income and disbursements; and
    (D) An appropriate notation of any investments in default.
    (iii) Limitation on representations. A bank may include in the 
financial report a description of the fund's value on previous dates, 
as well as its income and disbursements during previous accounting 
periods. A bank may not publish in the financial report any predictions 
or representations as to future performance. In addition, with respect 
to funds described in paragraph (a)(1) of this section, a bank may not 
publish the performance of individual funds other than those 
administered by the bank or its affiliates.
    (iv) Availability of the report. A bank administering a collective 
investment

[[Page 68558]]

fund shall provide a copy of the financial report, or shall provide 
notice that a copy of the report is available upon request without 
charge, to each person who ordinarily would receive a regular periodic 
accounting with respect to each participating account. The bank may 
provide a copy of the financial report to prospective customers. In 
addition, the bank shall provide a copy of the report upon request to 
any person for a reasonable charge.
    (7) Advertising restriction. A bank may not advertise or publicize 
any fund authorized under paragraph (a)(1) of this section, except in 
connection with the advertisement of the general fiduciary services of 
the bank.
    (8) Self-dealing and conflicts of interest. A national bank 
administering a collective investment fund must comply with the 
following (in addition to Sec. 9.12):
    (i) Bank interests. A bank administering a collective investment 
fund may not have an interest in that fund other than in its fiduciary 
capacity. If, because of a creditor relationship or otherwise, the bank 
acquires an interest in a participating account, the participating 
account must be withdrawn on the next withdrawal date. However, a bank 
may invest assets that it holds as fiduciary for its own employees in a 
collective investment fund.
    (ii) Loans to participating accounts. A bank administering a 
collective investment fund may not make any loan on the security of a 
participant's interest in the fund. An unsecured advance to a fiduciary 
account participating in the fund until the time of the next valuation 
date does not constitute the acquisition of an interest in a 
participating account by the bank.
    (iii) Purchase of defaulted investments. A bank administering a 
collective investment fund may purchase for its own account any 
defaulted investment held by the fund (in lieu of segregating the 
investment in accordance with paragraph (b)(5)(v) of this section) if, 
in the judgment of the bank, the cost of segregating the investment is 
excessive in light of the market value of the investment. If a bank 
elects to purchase a defaulted investment, it shall do so at the 
greater of market value or the sum of cost and accrued unpaid interest.
    (9) Management fees. A bank administering a collective investment 
fund may charge a reasonable fund management fee only if:
    (i) The fee is permitted under applicable law (and complies with 
fee disclosure requirements, if any) in the state in which the bank 
maintains the fund; and
    (ii) The amount of the fee does not exceed an amount commensurate 
with the value of legitimate services of tangible benefit to the 
participating fiduciary accounts that would not have been provided to 
the accounts were they not invested in the fund.
    (10) Expenses. A bank administering a collective investment fund 
may charge reasonable expenses incurred in operating the collective 
investment fund, to the extent not prohibited by applicable law in the 
state in which the bank maintains the fund. However, a bank shall 
absorb the expenses of establishing or reorganizing a collective 
investment fund.
    (11) Prohibition against certificates. A bank administering a 
collective investment fund may not issue any certificate or other 
document representing a direct or indirect interest in the fund, except 
to provide a withdrawing account with an interest in a segregated 
investment.
    (12) Good faith mistakes. The OCC will not deem a bank's mistake 
made in good faith and in the exercise of due care in connection with 
the administration of a collective investment fund to be a violation of 
this part if, promptly after the discovery of the mistake, the bank 
takes whatever action is practicable under the circumstances to remedy 
the mistake.
    (c) Other collective investments. In addition to the collective 
investment funds authorized under paragraph (a) of this section, a 
national bank may collectively invest assets that it holds as 
fiduciary, to the extent not prohibited by applicable law, as follows:
    (1) Single loans or obligations. In the following loans or 
obligations, if the bank's only interest in the loans or obligations is 
its capacity as fiduciary:
    (i) A single real estate loan, a direct obligation of the United 
States, or an obligation fully guaranteed by the United States, or a 
single fixed amount security, obligation, or other property, either 
real, personal, or mixed, of a single issuer; or
    (ii) A variable amount note of a borrower of prime credit, if the 
bank uses the note solely for investment of funds held in its fiduciary 
accounts.
    (2) Mini-funds. In a fund maintained by the bank for the collective 
investment of cash balances received or held by a bank in its capacity 
as trustee, executor, administrator, guardian, or custodian under a 
uniform gifts to minors act, that the bank considers too small to be 
invested separately to advantage. The total assets in the fund must not 
exceed $1,000,000 and the number of participating accounts must not 
exceed 100.
    (3) Trust funds of corporations and closely-related settlors. In 
any investment specifically authorized by the instrument creating the 
fiduciary account or a court order, in the case of trusts created by a 
corporation, including its affiliates and subsidiaries, or by several 
individual settlors who are closely related.
    (4) Other authorized funds. In any collective investment authorized 
by applicable law, such as investments pursuant to a state pre-need 
funeral statute.
    (5) Special exemption funds. In any other manner described by the 
bank in a written plan approved by the OCC.5 In order to obtain a 
special exemption, a bank shall submit to the OCC a written plan that 
sets forth:
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     5  Any institution that must comply with this section in 
order to receive favorable tax treatment under 26 U.S.C. 584 
(namely, any corporate fiduciary) may seek OCC approval of special 
exemption funds in accordance with this paragraph (c)(5).
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    (i) The reason that the proposed fund requires a special exemption;
    (ii) The provisions of the proposed fund that are inconsistent with 
paragraphs (a) and (b) of this section;
    (iii) The provisions of paragraph (b) of this section for which the 
bank seeks an exemption; and
    (iv) The manner in which the proposed fund addresses the rights and 
interests of participating accounts.


Sec. 9.20  Transfer agents.

    (a) The rules adopted by the Securities and Exchange Commission 
(SEC) pursuant to section 17A of the Securities Exchange Act of 1934 
(15 U.S.C. 78q-1) prescribing procedures for registration of transfer 
agents for which the SEC is the appropriate regulatory agency (17 CFR 
240.17Ac2-1) apply to the domestic activities of national bank transfer 
agents. References to the ``Commission'' are deemed to refer to the 
``OCC.''
    (b) The rules adopted by the SEC pursuant to section 17A of the 
Securities Exchange Act of 1934 prescribing operational and reporting 
requirements for transfer agents (17 CFR 240.17Ac2-2, and 240.17Ad-1 
through 240.17Ad-16) apply to the domestic activities of national bank 
transfer agents.

Interpretations


Sec. 9.100  Acting as indenture trustee and creditor.

    With respect to a debt securities issuance, a national bank may act 
both as indenture trustee and as creditor

[[Page 68559]]

until 90 days after default, if the bank maintains adequate controls to 
manage the potential conflicts of interest.

PART 19--RULES OF PRACTICE AND PROCEDURE

    2. The authority citation for part 19 is revised to read as 
follows:

    Authority: 5 U.S.C. 504, 554-557; 12 U.S.C. 93(b), 164, 505, 
1817, 1818, 1820, 1831o, 1972, 3102, 3108(a), 3909 and 4717; 15 
U.S.C. 78(h) and (i), 78o-4(c), 78o-5, 78q-1, 78s, 78u, 78u-2, 78u-
3, and 78w; 28 U.S.C. 2461 note; 31 U.S.C. 330 and 5321; and 42 
U.S.C. 4012a.

    3. A new Sec. 19.135 is added to subpart E of part 19 to read as 
follows:


Sec. 19.135  Applications for stay or review of disciplinary actions 
imposed by registered clearing agencies.

    (a) Stays. The rules adopted by the Securities and Exchange 
Commission (SEC) pursuant to section 19 of the Securities Exchange Act 
of 1934 (15 U.S.C. 78s) regarding applications by persons for whom the 
SEC is the appropriate regulatory agency for stays of disciplinary 
sanctions or summary suspensions imposed by registered clearing 
agencies (17 CFR 240.19d-2) apply to applications by national banks. 
References to the ``Commission'' are deemed to refer to the ``OCC.''
    (b) Reviews. The regulations adopted by the SEC pursuant to section 
19 of the Securities Exchange Act of 1934 (15 U.S.C. 78s) regarding 
applications by persons for whom the SEC is the appropriate regulatory 
agency for reviews of final disciplinary sanctions, denials of 
participation, or prohibitions or limitations of access to services 
imposed by registered clearing agencies (17 CFR 240.19d-3(a)-(f)) apply 
to applications by national banks. References to the ``Commission'' are 
deemed to refer to the ``OCC.''

    Dated: December 23, 1996.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 96-32943 Filed 12-27-96; 8:45 am]
BILLING CODE 4810-33-P