BC - 233
Type:  Banking Circular       
Subject:  Acceptance of Financial Benefits by Bank Trust 
          Departments
Date: February 3, 198

TO:  Chief Executive Officers of National Banks Authorized to Exercise
     Fiduciary Powers, Deputy Comptrollers (District), and Examining
     Personnel

This issuance is intended to remind national banks of laws prohibiting
bank trust departments from receiving any financial benefits, including
discounts or rebates on goods or services purchased, or other items of
value, in exchange for investing trust funds in particular investments.

BACKGROUND

It has come to the OCC's attention that a number of national bank trust
departments may have accepted financial incentives from investment
management firms that sponsor mutual funds or other investment funds in
exchange for the investment of fiduciary assets in specific funds offered
by those firms. These financial incentives appear to have taken the form
of (i) discounts or rebates on fees paid for other products or services
purchased by these banks from those same firms or from a third party
pursuant to an agreement with the investment management firm, (ii)
computer goods or services, or (iii) seminars and travel expenses for bank
personnel in connection with programs offered or sponsored by investment
fund sponsors. In some cases, these financial incentives have been
provided pursuant to verbal agreements or understandings.

FIDUCIARY DUTIES OF BANK TRUST DEPARTMENTS

National bank trustees owe exacting fiduciary duties to customers who
place trust funds under the bank's management.  Trustees are obliged to
make decisions concerning the investment of trust assets based exclusively
on the best interests of trust customers. This principle is reflected in
12 C.F.R. § 9.12(a), which provides:
 
Unless lawfully authorized by the instrument creating the relationship, or
by court order or by local law, funds held by a national bank as fiduciary
shall not be invested in stock or obligations of, or property acquired
from... individuals... or organizations in which there exists such an
interest, as might affect the exercise of the best judgment of the bank in
acquiring the property....

A majority of the states have adopted this principle as a matter of
fiduciary law. See 2A W.F.  Fratcher, Scott on Trusts, § 170, Duty of
Loyalty (4th ed. 1987). Many states have adopted statutes that expressly
prohibit self-dealing by fiduciaries.  Cal. Prob. Code § 16004: N.Y. Est.
Powers & Trust Law § 11-2.2: 7 Pa. Cons. Stat. §§ 403, 405.

The OCC has provided specific guidance in past issuances on the
applicability of these principles to bank trust department relationships
with investment companies. In Banking Circular 219 (October 31, 1986), the
OCC warned national banks that the receipt of supplemental fees for
placing fiduciary assets in 12b-1 funds was subject to 12 C.F.R. §
9.12(a). Because the receipt of 12b-1 fees creates a strong incentive for
banks to continue investing in a particular fund over other alternatives,
such fees are prohibited by Section 9.12, unless, in the case of non-ERISA
accounts, specific lawful authority exists for the practice.  Reference
should be made to Banking Circular 219 (October 31, 1986) for additional
guidance on the subject.

The acceptance by a national bank trustee of financial benefits directly
or indirectly conditioned on the investment of trust assets in a
particular investment is prohibited under 12 C.F.R.  § 9.12(a), and also
is prohibited under the fiduciary laws of most states. When selecting a
mutual or money market investment, a trustee should evaluate the return
being paid, the composition and length of maturities of its portfolio, the
fund's management and all other factors relevant to the suitability of the
investment for the customers. Trustees must not place themselves in a
position where their judgments concerning the optimal investment for trust
accounts may be influenced by the trustees' receipt of financial benefits
for selecting a particular investment.

The same principles apply whether banks receive (i) rebates or discounts
on services provided by or at the direction of an investment management
firm (such as accounting and administrative services), (ii) computer goods
or services, (iii) seminars and travel expenses which are offered by, or
at the direction of, such firms, or (iv) any, other financial benefits in
exchange for investing trust funds in particular money market or mutual
funds. Those principles also are applicable whether the financial benefits
are received directly from the provider or indirectly through third
parties. OCC Handbook for National Trust Examiners, Precedents and
Opinions 9.3115: G. Bogert, Trusts, 341-342 (6th ed. 1987); Restatement
(Second) of Trusts Section 170(o) (1974).

When a national bank receives a financial benefit that is calculated based
on the amount of trust funds invested with the provider of those products,
the bank has a financial interest which interferes with its ability to
select investments based solely on the best interests of trust
beneficiaries. Unless financial benefits received in this manner are
passed on to all beneficiaries according to the level of their investment
in a fund, or are lawfully authorized by the instrument creating the
relationship, by court order or by local law, the receipt of rebates,
credits, services or other financial benefits is contrary to Section 9.12
and a bank's common law fiduciary duties. Further, national bank trust
departments should be aware that the acceptance of financial incentives in
the manner described above is not protected by Securities Exchange Act
Section 28(e). Section 28(e) merely provides a statutory "safe harbor" for
certain "soft dollar" arrangements whereby money managers use brokerage
commissions to pay for brokerage and research services. Trust Banking
Circulars 17 (March 19, 1980) and 25 (June 19, 1986). The use of trust
fund balances to obtain financial benefits does not constitute payment for
brokerage or research services within the meaning of Section 28(e).

In the past, the staff has stated that under limited circumstances, the
use by a national bank trust department of free automated order entry
systems to place orders with funds offered by an investment company may be
permissible if the availability of such systems is not dependent on the
investment of trust assets in a particular fund or group of funds. See,
OCC Letter to William M. Doran dated July 1, 1983 (unpublished)
(Attachment A). In such an arrangement, however, a bank trust department
must receive no financial benefits based on its investment of trust funds
in a particular investment. Past positions on the permissibility of such
automated order entry (including "sweep") services may not be relied on as
legal support for the acceptance of such financial benefits.

In sum, if a bank receives incentives for placing trust assets in an
investment fund offered by a particular provider, the bank must pass those
incentives on to the accounts which have had their assets invested in the
fund. In the alternative, the receipt of such financial incentives must be
authorized by local law, court order, or the governing instrument. See 2A
W.F.  Fratcher, Scott on Trusts, § 170, Duty of Loyalty (4th ed.  1987).
In the absence of those circumstances, the receipt of such financial
incentives is prohibited under 12 C.F.R. § 9.12(a) and is contrary to a
bank's fiduciary responsibilities.

REMEDIAL ACTION

National banks that engage, or have engaged, in conduct inconsistent with
their fiduciary duties may be subject to significant liability for
breaches of these duties. They may also be subject to appropriate
enforcement actions by the OCC which may be publicized. National banks
that receive, or have received, financial benefits contingent upon
investment of trust assets in particular investment funds in violation of
12 C.F.R.  § 9.12(a) and applicable fiduciary duties may be required to
reimburse these benefits to the appropriate fiduciary accounts and to take
other appropriate actions. In addition, appropriate referrals may be made
to other interested federal and state government agencies, including the
Securities and Exchange Commission, with respect to any investment
companies or individuals aiding and abetting conduct by national banks
that is inconsistent with the foregoing.

ORIGINATING OFFICE

Questions regarding this issuance may be directed to the Trust Activities
Division at (202) 874-4447, or the Securities and Corporate Practices
Division at (202) 874-5210.

Robert J. Herrmann
Senior Deputy Comptroller for
Bank Supervision Policy

Attachment

-----

Attachment "A"

July 1, 1983

William M. Doran, Esq.
Morgan, Lewis & Bockius
1800 M Street, NW
Washington, DC  20035

Dear Mr. Doran:

This is in response to your letter dated April 6, 1983. In your letter,
you requested an opinion concerning the permissibility of certain services
offered to national bank trust departments by your client, SEI Corporation
("SEI") and its subsidiary, SEI Financial Services (SFS"). Your letter
contained a summary of the operation of your clients's system.

Your letter noted that SEI generally is in the business of providing
accounting, reporting, and management services to banks and other
financial institutions. Included among these services are a general
accounting, reporting and management service for bank trust departments.
The trust system involves a standard level of computer software capability
for which trust departments pay a service or license fee. The trust system
provides certain accounting and administrative services, on-line portfolio
information, and information relating to the processing of securities
trades.  Supplementary optional modules are available for additional fees.

According to your letter, SFS, a wholly-owned subsidiary of your client,
is registered with the Securities Exchange Commission as a broker-dealer.
SFS acts as the distributor and manager for several money market funds
("Funds") which are made available to customers of SEI and its
subsidiaries. Purchase and sale orders may be communicated by telephone or
automatically through software and terminals provided by SFS. As part of
the latter arrangement, SFS provides trust departments with software which
facilitates the placement of buy and sell orders to the funds after
sweeping trust accounts to determine the cash balance available for
investment (hereinafter referred to as "automated order entry system").
The trust department selects the particular Fund or portfolio within a
Fund in which to invest trust assets by programming the automated order
entry system. According to your letter, the features of the automated
order entry system also include:

   1)  the daily detection of uninvested cash in each account and
   automatic daily investment of any or all of such balances;

   2)  the monthly crediting of money market fund dividends directly to
   each account;

   3)  a communication link to enable the bank fiduciary to execute
   special investment and redemption decisions when desired;

   4)  the display and printing of reports of each portfolio's
   composition, yield, tax characteristics, and other details upon the
   trustee's request so that the trust funds can be invested in the most
   appropriate portfolio of the subsidiary's money market funds.

Your letter also noted that SFS, as distributor of the Funds, provides the
automated order entry system to maximize investment efficiencies and to
eliminate errors that may occur in manual systems. Because the purpose of
the automated order entry system is to facilitate investment in the Funds
distributed by SFS, the trust departments are supplied with the system at
no cost.

Your letter to this Office was prompted by my March 9, 1983, letter to the
legal representative of another firm that designs and sells automated
trust accounting systems, in which I expressed the view that an
arrangement under which a national bank trust department receives a fee
waiver on a general cash management system in exchange for investing funds
in a particular money market fund was improper.  Because the benefits of
the fee waiver would not be passed onto the trust accounts, I concluded
that the trust department would be receiving a benefit from the investment
of trust assets in a certain vehicle; an arrangement which I believed
violated the trust department's fiduciary duty of loyalty to the trust
beneficiary. I also noted that the money market fund would presumably have
to pay a lower return in order to compensate for the fee waivers on the
sweep system.

Your letter of April 6 noted several points of distinction between the
automated order entry system offered by SFS and the plan discussed in my
letter of March 9. First, you indicated that use of the automated order
entry system involves no fee waiver. The system is provided at no cost
regardless of the levels of investment in the Funds by the trust
department. Moreover, trust departments that use the automated order entry
system and invest in the Funds do not receive any fee waiver or discount
on other systems or products offered by SEI or its subsidiaries including
the trust system and the cash management system. Second, you noted that
the automated order entry system is an expense of SFS, the Fund manager,
and not of the Funds themselves.  Management fees paid the Fund manager by
the Funds are a fixed percentage of daily fund assets and, in your view,
are competitive with other money market funds. Third, your letter stated
that the automated order entry system provides no general benefit to a
trust department. The system is used to place orders only with SFS Funds.
Fourth, you noted that even assuming, arguendo, that the cost of the
automated order entry system is charged to the accounts that use the
investment vehicle, you felt that this would be a more equitable
allocation of the cost that to charge all accounts for a service that
benefits only those accounts investing cash balances in the funds.

In your letter, you expressed the opinion that a national bank trust
department could purchase shares in the Funds where an automated order
entry system, which includes a sweeping feature, is provided by the Fund's
distributor at no cost. In your view, such investment by a trust
department is proper as long as the trust department decides that the
investment is prudent under standard investment criteria. You believe that
trust accounts are benefitted by the automated order entry system because
cash is expeditiously invested and therefore yield is maximized. Moreover,
you noted that the automated order entry system allows trust departments
to monitor and reallocate account balances to the most appropriate
portfolios offered by the Funds.

Additionally, your letter noted that a June 25, 1982 OCC release indicated
that the sweep systems are an effective method by which trust departments
can invest uninvested cash into income-producing media on a daily basis,
that the cost of implementing such systems is not necessarily prohibitive,
and that "certain money market funds can provide banks with a daily
investment service for individual accounts." 47 Fed. Reg. 27830 (June 25,
1982) reprinted at [Current] Federal Bank Law Reporter (CCH)  99, 205. You
noted that the Funds are examples of money market funds that provide such
a daily investment service through the automated order entry system.

Initially, I would like to stress my agreement with the views expressed in
the OCC release cited in you letter. Sweep systems are indeed an effective
method for national bank trust departments to invest uninvested cash.
However, the arrangement under which such a system is provided to a trust
department must still comply with the exacting fiduciary standards imposed
on a trustee.

The arrangement described in my March 9 letter, under which a fee waiver
for a general cash management system was expressly conditioned upon
investment of trust assets in a particular vehicle, represented, in my
opinion, a clear example of a breach of the trust department's fiduciary
duty of loyalty because it appeared that the trustee's decision to invest
in the subject funds was motivated in large measure by the benefit
conferred upon the trust department in the form of lessened operating
costs. I responded accordingly and I reaffirm the opinion expressed in
that letter. The arrangement described in your letter, however, has
several features which distinguish it from the arrangement discussed in my
March 9 letter. For example, your letter indicated that the automated
order entry system is provided to the trust departments at no cost
regardless of the amount of trust assets invested in the Funds. Moreover,
your letter stated that the use of the system is limited to facilitating
buy and sell orders in the Funds. Under these circumstances, I do not
believe that a trust department's use of the automated order entry system
to invest in the Funds would be improper per se, provided that the
investment itself is otherwise appropriate.

I stress that the primary responsibility of a trust department is to
ensure that the investments chosen for each account represent the most
appropriate investments for that account, considering all the relevant
facts and circumstances. If a trust department, after using its
independent investment judgement, determines that one of the Funds
represents the best investment available for certain accounts, I believe
that an automated order entry system may be employed to make the
investments.  However, the trust department should keep appropriate
records to demonstrate that it is exercising the required independent
investment discretion on a continuing basis without regard to the
automated order entry system. The trust department must be prepared to
justify all its investment decisions.

My opinion is based strictly on the operations of your client as described
in your letter and repeated here. This letter expresses no opinion on the
merits of any product, service or investment vehicle offered by any
company.

Sincerely,

Peter Liebesman
Assistant Director
Legal Advisory Services Division