Table of Contents
Introduction
Uniform Interagency Trust Rating System
Overview
Composite Ratings
Component Ratings
Management
Operations, Internal Controls & Auditing
Earnings
Compliance
Asset Management
First Day Letter
Introduction
This appendix is intended to serve the examiner in gathering and
recording information for the trust examination. Examiners have the discretion of using
all, part, or none of these tools. Nevertheless, their use, particularly by inexperienced
trust examiners, is encouraged.
The trust examination report is in narrative form. Its core pages only
contain a few schedules. Normally, most other documents or information supporting report
comments and conclusions should be placed in examination work papers. The information
contained in this appendix offers examiners a means for both examining trust departments
and documenting their work papers.
Uniform Interagency Trust Rating System (UITRS)
The UITRS was originally adopted in 1978 and was revised in 1998. The
1998 revision of the UITRS is appears later in this appendix. It has been adopted by each of the Federal
financial institution regulatory agencies. Both the Trust Manual and examination report
have been designed around its structure. Examiners should review each of the five UITRS
rating guidelines and summaries when assigning ratings and preparing comments for the
report.
Trust Examiner's First Day Letter
The first day letter requests management to provide specific
information. A copy of this letter is reproduced in this appendix. Use of this letter is optional, and it
may be modified by deleting or adding information at the discretion of the
Examiner-in-Charge. In addition, the distribution of the letter should be coordinated with
the state banking authority if that agency will participate in the examination. It should
be prepared during the pre-examination work phase, and submitted to trust management,
together with the "Trust Officer's Questionnaire" [FDIC Form 6350/11
(7-95)], prior to beginning the examination.
In the automated version of the first day letter, deletion of an entire
question (from the beginning of the question # to the end of the question) will
automatically renumber questions and repaginate the entire letter.
Uniform Interagency Trust
Rating System
The information that follows was published 10-13-98 in the Federal
Register (63 FR 54711) and was distributed by FDIC in FIL 115-98 dated 10-21-98.
Introduction
The Uniform Interagency Trust Rating System (UITRS) was adopted on
September 21, 1978 by the Office of the Comptroller of the Currency (OCC), the
Federal Deposit Insurance Corporation (FDIC), and the Board of Governors of the Federal
Reserve System (FRB), and in 1988 by the Federal Home Loan Bank Board, predecessor agency
to the Office of Thrift Supervision (OTS). Over the years, the UITRS has proven to be an
effective internal supervisory tool for evaluating the fiduciary activities of financial
institutions on a uniform basis and for identifying those institutions requiring special
attention.
A number of changes have occurred in both the banking industry and the
Federal supervisory agencies' policies and procedures which prompted a review and
revision of the 1978 rating system. The revisions to the UITRS:
-
Realign the UITRS rating definitions to bring them in line with the Uniform Financial
Institutions Rating System (UFIRS).
-
Reduce the component rating categories from six to five, combining the Account
Administration and Conflicts of Interest components into a new Compliance component.
-
Require Earnings to be rated only in
institutions with more than $100 million in total trust assets, and in all
non-deposit trust companies. An earnings rating is not required for the
remaining institutions; however, each Federal supervisory agency has the option
of requiring the earnings of these institutions to be rated using the alternate rating
definitions where applicable.
-
Explicitly refer to the quality of risk
management processes in the management component, and the
identification of risk elements within the composite and component
rating definitions.
These revisions are intended to promote and
complement efficient examination processes. The revisions update the
rating system but retain its basic framework. Consequently, the
revised rating system will not result in additional regulatory
burden to institutions or require additional policies or processes.
The UITRS considers certain managerial,
operational, financial and compliance factors that are common to all
institutions with fiduciary activities. Under this system, the
supervisory agencies endeavor to ensure that all institutions with
fiduciary activities are evaluated in a comprehensive and uniform
manner, and that supervisory attention is appropriately focused on
those institutions exhibiting weaknesses in their fiduciary
operations.
Overview
Under the UITRS, the fiduciary activities of
financial institutions are assigned a composite rating based on an
evaluation and rating of five essential components of an
institution's fiduciary activities. These components address the
following: the capability of management; the adequacy of operations,
controls and audits; the quality and level of earnings; compliance
with governing instruments, applicable law (including self-dealing
and conflicts of interest laws and regulations), and sound fiduciary
principles; and the management of fiduciary assets.
Composite and component ratings are assigned
based on a 1 to 5 numerical scale. A 1 is the highest rating
and indicates the strongest performance and risk management
practices and the least degree of supervisory concern. A 5 is the
lowest rating and indicates the weakest performance and risk
management practices and, therefore, the highest degree of
supervisory concern. Evaluation of the composite and components
considers the size and sophistication, the nature and complexity,
and the risk profile of the institution's fiduciary activities.
The composite rating generally bears a close
relationship to the component ratings assigned. However, the
composite rating is not derived by computing an arithmetic average
of the component ratings. Each component rating is based on a
qualitative analysis of the factors comprising that component and
its interrelationship with the other components. When assigning a
composite rating, some components may be given more weight than
others depending on the situation at the institution. In general,
assignment of a composite rating may incorporate any factor that
bears significantly on the overall administration of the financial
institution's fiduciary activities. Assigned composite and component
ratings are disclosed to the institution's board of directors and
senior management.
The ability of management to respond to
changing circumstances and to address the risks that may arise from
changing business conditions, or the initiation of new fiduciary
activities or products, is an important factor in evaluating an
institution's overall fiduciary risk profile and the level of
supervisory attention warranted. For this reason, the management
component is given special consideration when assigning a composite
rating.
The ability of management to identify, measure,
monitor, and control the risks of its fiduciary operations is also
taken into account when assigning each component rating. It is
recognized, however, that appropriate management practices may vary
considerably among financial institutions, depending on the size,
complexity, and risk profiles of their fiduciary activities. For
less complex institutions engaged solely in traditional fiduciary
activities and whose directors and senior managers are actively
involved in the oversight and management of day-to-day operations,
relatively basic management systems and controls may be adequate. On
the other hand, at more complex institutions, detailed and formal
management systems and controls are needed to address a broader
range of activities and to provide senior managers and directors
with the information they need to supervise day-to-day activities.
All institutions are expected to properly
manage their risks. For less complex institutions engaging in less
risky activities, detailed or highly formalized management systems
and controls are not required to receive strong or satisfactory
component or composite ratings.
The following two sections contain the
composite rating definitions, and the descriptions and definitions
for the five component ratings.
Composite
Ratings
The five composite ratings are defined as
follows:
Composite
1
Administration of fiduciary activities is sound
in every respect. Generally all components are rated 1 or 2. Any
weaknesses are minor and can be handled in a routine manner by
management. The institution is in substantial compliance with
fiduciary laws and regulations. Risk management practices are strong
relative to the size, complexity, and risk profile of the
institution's fiduciary activities. Fiduciary activities are
conducted in accordance with sound fiduciary principles and give no
cause for supervisory concern.
Composite
2
Administration of fiduciary activities is
fundamentally sound. Generally no component rating should be more
severe than 3. Only moderate weaknesses are present and are well
within management's capabilities and willingness to correct.
Fiduciary activities are conducted in substantial compliance with
laws and regulations. Overall risk management practices are
satisfactory relative to the institution's size, complexity, and
risk profile. There are no material supervisory concerns and, as a
result, the supervisory response is informal and limited.
Composite
3
Administration of fiduciary activities exhibits
some degree of supervisory concern in one or more of the component
areas. A combination of weaknesses exists that may range from
moderate to severe; however, the magnitude of the deficiencies
generally does not cause a component to be rated more severely than
4. Management may lack the ability or willingness to effectively
address weaknesses within appropriate time frames. Additionally,
fiduciary activities may reveal some significant noncompliance with
laws and regulations. Risk management practices may be less than
satisfactory relative to the institution's size, complexity, and
risk profile. While problems of relative significance may exist,
they are not of such importance as to pose a threat to the trust
beneficiaries generally, or to the soundness of the institution. The
institution's fiduciary activities require more than normal
supervision and may include formal or informal enforcement actions.
Composite
4
Fiduciary activities generally exhibit unsafe
and unsound practices or conditions, resulting in unsatisfactory
performance. The problems range from severe to critically deficient
and may be centered around inexperienced or inattentive management,
weak or dangerous operating practices, or an accumulation of
unsatisfactory features of lesser importance. The weaknesses and
problems are not being satisfactorily addressed or resolved by the
board of directors and management. There may be significant
noncompliance with laws and regulations. Risk management practices
are generally unacceptable relative to the size, complexity, and
risk profile of fiduciary activities. These problems pose a threat
to the account beneficiaries generally and, if left unchecked, could
evolve into conditions that could cause significant losses to the
institution and ultimately undermine the public confidence in the
institution. Close supervisory attention is required, which means,
in most cases, for mal enforcement action is necessary to address
the problems.
Composite
5
Fiduciary activities are conducted in an
extremely unsafe and unsound manner. Administration of fiduciary
activities is critically deficient in numerous major respects, with
problems resulting from incompetent or neglectful administration,
flagrant and/or repeated disregard for laws and regulations, or a
willful departure from sound fiduciary principles and practices. The
volume and severity of problems are beyond management's ability or
willingness to control or correct. Such conditions evidence a
flagrant disregard for the interests of the beneficiaries and may
pose a serious threat to the soundness of the institution.
Continuous close supervisory attention is warranted and may include
termination of the institution's fiduciary activities.
Component
Ratings
Each of the component rating descriptions is
divided into three sections: a narrative description of the
component; a list of the principal factors used to evaluate that
component; and a description of each numerical rating for that
component. Some of the evaluation factors are reiterated under one
or more of the other components to reinforce the interrelationship
among components. The listing of evaluation factors is in no
particular order of importance.
Management
Description
This rating reflects the capability of the
board of directors and management, in their respective roles, to
identify, measure, monitor and control the risks of an institution's
fiduciary activities. It also reflects their ability to ensure that
the institution's fiduciary activities are conducted in a safe and
sound manner, and in compliance with applicable laws and
regulations. Directors should provide clear guidance regarding
acceptable risk exposure levels and ensure that appropriate
policies, procedures and practices are established and followed.
Senior fiduciary management is responsible for developing and
implementing policies, procedures and practices that translate the
board's objectives and risk limits into prudent operating standards.
Depending on the nature and scope of an
institution's fiduciary activities, management practices may need to
address some or all of the following risks: reputation, operating or
transaction, strategic, compliance, legal, credit, market, liquidity
and other risks. Sound management practices are demonstrated by:
active oversight by the board of directors and management; competent
personnel; adequate policies, processes, and controls that consider
the size and complexity of the institution's fiduciary activities;
and effective risk monitoring and management information systems.
This rating should reflect the board's and management's ability as
it applies to all aspects of fiduciary activities in which the
institution is involved.
Factors Evaluated
The management rating is based upon an
assessment of the capability and performance of management and the
board of directors, including, but not limited to, the following
evaluation factors:
-
The level and quality of oversight and
support of fiduciary activities by the board of directors and
management, including committee structure and adequate
documentation of committee actions.
-
The ability of the board of directors and
management, in their respective roles, to plan for, and respond
to, risks that may arise from changing business conditions or
the introduction of new activities or products.
-
The adequacy of, and conformance with,
appropriate internal policies, practices and controls addressing
the operations and risks of significant fiduciary activities.
-
The accuracy, timeliness, and effectiveness
of management information and risk monitoring systems
appropriate for the institution's size, complexity, and
fiduciary risk profile.
-
The overall level of compliance with laws,
regulations, and sound fiduciary principles.
-
Responsiveness to recommendations from
auditors and regulatory authorities.
-
Strategic planning for fiduciary products
and services.
-
The level of experience and competence of
fiduciary management and staff, including issues relating to
turnover and succession planning.
-
The adequacy of insurance coverage.
-
The availability of competent legal
counsel.
-
The extent and nature of pending litigation
associated with fiduciary activities, and its potential impact
on earnings, capital, and the institution's reputation.
-
The process for identifying and responding
to fiduciary customer complaints.
Ratings.
A rating of 1 indicates strong performance by
management and the board of directors and strong risk management
practices relative to the size, complexity and risk profile of the
institution's fiduciary activities. All significant risks are
consistently and effectively identified, measured, monitored, and
controlled. Management and the board are proactive, and have
demonstrated the ability to promptly and successfully address
existing and potential problems and risks.
A rating of 2 indicates satisfactory management
and board performance and risk management practices relative to the
size, complexity and risk profile of the institution's fiduciary
activities. Moderate weaknesses may exist, but are not material to
the sound administration of fiduciary activities, and are being
addressed. In general, significant risks and problems are
effectively identified, measured, monitored, and controlled.
A rating of 3 indicates management and board
performance that needs improvement or risk management practices that
are less than satisfactory given the nature of the institution's
fiduciary activities. The capabilities of management or the board of
directors may be insufficient for the size, complexity, and risk
profile of the institution's fiduciary activities. Problems and
significant risks may be inadequately identified, measured,
monitored, or controlled.
A rating of 4 indicates deficient management
and board performance or risk management practices that are
inadequate considering the size, complexity, and risk profile of the
institution's fiduciary activities. The level of problems and risk
exposure is excessive. Problems and significant risks are
inadequately identified, measured, monitored, or controlled and
require immediate action by the board and management to protect the
assets of account beneficiaries and to prevent erosion of public
confidence in the institution. Replacing or strengthening management
or the board may be necessary.
A rating of 5 indicates critically deficient
management and board performance or risk management practices.
Management and the board of directors have not demonstrated the
ability to correct problems and implement appropriate risk
management practices. Problems and significant risks are
inadequately identified, measured, monitored, or controlled and now
threaten the continued viability of the institution or its
administration of fiduciary activities, and pose a threat to the
safety of the assets of account beneficiaries. Replacing or
strengthening management or the board of directors is necessary.
Operations, Internal Controls &
Auditing
Description
This rating reflects the adequacy of the
institution's fiduciary operating systems and internal controls in
relation to the volume and character of business conducted. Audit
coverage must assure the integrity of the financial records, the
sufficiency of internal controls, and the adequacy of the compliance
process.
The institution's fiduciary operating systems,
internal controls, and audit function subject it primarily to
transaction and compliance risk. Other risks including reputation,
strategic, and financial risk may also be present. The ability of
management to identify, measure, monitor and control these risks is
reflected in this rating.
Factors Evaluated
The operations, internal controls and auditing
rating is based upon, but not limited to, an assessment of the
following evaluation factors:
-
Staff, facilities and operating systems;
-
Records, accounting and data processing
systems (including controls over systems access and such
accounting procedures as aging, investigation and disposition of
items in suspense accounts);
-
Trading functions and securities lending
activities;
-
Vault controls and securities movement;
-
Segregation of duties;
-
Controls over disbursements (checks or
electronic) and unissued securities;
-
Controls over income processing activities;
-
Reconciliation processes (depository, cash,
vault, sub-custodians, suspense accounts, etc.);
-
Disaster and/or business recovery programs;
-
Hold-mail procedures and controls over
returned mail; and,
-
Investigation and proper escheatment of
funds in dormant accounts.
-
The independence, frequency, quality and
scope of the internal and external fiduciary audit function
relative to the volume, character and risk profile of the
institution's fiduciary activities;
-
The volume and/or severity of internal
control and audit exceptions and the extent to which these
issues are tracked and resolved; and
-
The experience and competence of the audit
staff.
Ratings
A rating of 1 indicates that operations,
internal controls, and auditing are strong in relation to the volume
and character of the institution's fiduciary activities. All
significant risks are consistently and effectively identified,
measured, monitored, and controlled.
A rating of 2 indicates that operations,
internal controls and auditing are satisfactory in relation to the
volume and character of the institution's fiduciary activities.
Moderate weaknesses may exist, but are not material. Significant
risks, in general, are effectively identified, measured, monitored,
and controlled.
A rating of 3 indicates that operations,
internal controls or auditing need improvement in relation to the
volume and character of the institution's fiduciary activities. One
or more of these areas are less than satisfactory. Problems and
significant risks may be inadequately identified, measured,
monitored, or controlled.
A rating
of 4 indicates deficient operations, internal controls or audits.
One or more of these areas are inadequate or the level of problems
and risk exposure is excessive in relation to the volume and
character of the institution's fiduciary activities. Problems and
significant risks are inadequately identified, measured, monitored,
or controlled and require immediate action. Institutions with this
level of deficiencies may make little provision for audits, or may
evidence weak or potentially dangerous operating practices in
combination with infrequent or inadequate audits.
A rating
of 5 indicates critically deficient operations, internal controls or
audits. Operating practices, with or without audits, pose a serious
threat to the safety of assets of fiduciary accounts. Problems and
significant risks are inadequately identified, measured, monitored,
or controlled and now threaten the ability of the institution to
continue engaging in fiduciary activities.
Earnings
Description
This
rating reflects the profitability of an institution's fiduciary
activities and its effect on the financial condition of the
institution. The use and adequacy of budgets and earnings
projections by functions, product lines and clients are reviewed and
evaluated. Risk exposure that may lead to negative earnings is also
evaluated.
An
evaluation of earnings is required for all institutions with
fiduciary activities. An assignment of an earnings rating, however,
is required only for institutions that, at the time of the
examination, have total trust assets of more than $100 million, or
are a non-deposit trust company.
For institutions where the assignment of an
Earnings rating is not required by the UITRS, the Federal
supervisory agency has the option to assign an earnings rating using
an alternate set of ratings. A rating will be assigned in accordance
with implementing guidelines adopted by the supervisory agency. The
definitions for the alternate ratings are included in the revised
UITRS and may be found in the section immediately following the
definitions for the required ratings.
Factors Evaluated
The evaluation of earnings is based upon, but
not limited to, an assessment of the following factors:
-
The profitability of fiduciary activities
in relation to the size and scope of those activities and to the
overall business of the institution.
-
The overall importance to the institution
of offering fiduciary services to its customers and local
community.
-
The effectiveness of the institution's
procedures for monitoring fiduciary activity income and expense
relative to the size and scope of these activities and their
relative importance to the institution, including the frequency
and scope of profitability reviews and planning by the
institution's board of directors or a committee thereof.
For those institutions for which a rating of
earnings is mandatory, additional factors should include the
following:
-
The level and consistency of profitability,
or the lack thereof, generated by the institution's fiduciary
activities in relation to the volume and character of the
institution's business.
-
Dependence upon non-recurring fees and
commissions, such as fees for court accounts.
-
The effects of charge-offs or compromise
actions.
-
Unusual features regarding the composition
of business and fee schedules.
-
Accounting practices that contain practices
such as (1) unusual methods of allocating direct and
indirect expenses and overhead, or (2) unusual methods of
allocating fiduciary income and expense where two or more
fiduciary institutions within the same holding company family
share fiduciary services and/or processing functions.
-
The extent of management's use of budgets,
projections and other cost analysis procedures.
-
Methods used for directors' approval of
financial budgets and/or projections.
-
Management's attitude toward growth and new
business development.
-
New business development efforts, including
types of business solicited, market potential, advertising,
competition, relationships with local organizations, and an
evaluation by management of risk potential inherent in new
business areas.
Ratings
A rating of 1 indicates strong earnings. The
institution consistently earns a rate of return on its fiduciary
activities that is commensurate with the risk of those activities.
This rating would normally be supported by a history of consistent
profitability over time and a judgment that future earnings
prospects are favorable. In addition, management techniques for
evaluating and monitoring earnings performance are fully adequate
and there is appropriate oversight by the institution's board of
directors or a committee thereof. Management makes effective use of
budgets and cost analysis procedures. Methods used for reporting
earnings information to the board of directors, or a committee
thereof, are comprehensive.
A rating of 2 indicates satisfactory earnings.
Although the earnings record may exhibit some weaknesses, earnings
performance does not pose a risk to the overall institution nor to
its ability to meet its fiduciary obligations. Generally, fiduciary
earnings meet management targets and appear to be at least
sustainable. Management processes for evaluating and monitoring
earnings are generally sufficient in relationship to the size and
risk of fiduciary activities that exist, and any deficiencies can be
addressed in the normal course of business. A rating of 2 may also
be assigned to institutions with a history of profitable operations
if there are indications that management is engaging in activities
with which it is not familiar, or where there may be inordinately
high levels of risk present that have not been adequately evaluated.
Alternatively, an institution with otherwise strong earnings
performance may also be assigned a 2 rating if there are significant
deficiencies in its methods used to monitor and evaluate earnings.
A rating of 3 indicates less than satisfactory
earnings. Earnings are not commensurate with the risk associated
with the fiduciary activities undertaken. Earnings may be erratic or
exhibit downward trends, and future prospects are unfavorable. This
rating may also be assigned if management processes for evaluating
and monitoring earnings exhibit serious deficiencies, provided the
deficiencies identified do not pose an immediate danger to either
the overall financial condition of the institution or its ability to
meet its fiduciary obligations.
A rating of 4 indicates earnings that are
seriously deficient. Fiduciary activities have a significant adverse
effect on the overall income of the institution and its ability to
generate adequate capital to support the continued operation of its
fiduciary activities. The institution is characterized by fiduciary
earnings performance that is poor historically, or faces the
prospect of significant losses in the future. Management processes
for monitoring and evaluating earnings may be poor. The board of
directors has not adopted appropriate measures to address
significant deficiencies.
A rating of 5 indicates critically deficient
earnings. In general, an institution with this rating is
experiencing losses from fiduciary activities that have a
significant negative impact on the overall institution, representing
a distinct threat to its viability through the erosion of its
capital. The board of directors has not implemented effective
actions to address the situation.
Alternate Rating of
Earnings
Description
Alternate ratings are assigned based on the
level of implementation of four minimum standards by the board of
directors and management. These standards are:
-
Standard No. 1 - The institution has
reasonable methods for measuring income and expense commensurate
with the volume and nature of the fiduciary services offered.
-
Standard No. 2 - The level of profitability
is reported to the board of directors, or a committee thereof,
at least annually.
-
Standard No. 3 - The board of directors
periodically determines that the continued offering of fiduciary
services provides an essential service to the institution's
customers or to the local community.
-
Standard No. 4 - The board of directors, or
a committee thereof, reviews the justification for the
institution to continue to offer fiduciary services even if the
institution does not earn sufficient income to cover the
expenses of providing those services.
Ratings.
A rating of 1 may be assigned where an
institution has implemented all four minimum standards. If fiduciary
earnings are lacking, management views this as a cost of doing
business as a full service institution and believes that the
negative effects of not offering fiduciary services are more
significant than the expense of administrating those services.
A rating of 2 may be assigned where an
institution has implemented, at a minimum, at least three of the
four standards. This rating may be assigned if the institution is
not generating positive earnings or where formal earnings
information may not be available.
A rating of 3 may be assigned if the
institution has implemented at least two of the four standards.
While management may have attempted to identify and quantify other
revenue to be earned by offering fiduciary services, it has decided
that these services should be offered as a service to customers,
even if they cannot be operated profitably.
A rating of 4 may be assigned if the
institution has implemented only one of the four standards.
Management has undertaken little or no effort to identify or
quantify the collateral advantages, if any, to the institution from
offering fiduciary services.
A rating of 5 may be assigned if the
institution has implemented none of the standards.
Compliance
Description
This rating reflects an institution's overall
compliance with applicable laws, regulations, accepted standards of
fiduciary conduct, governing account instruments, duties associated
with account administration, and internally established policies and
procedures. This component specifically incorporates an assessment
of a fiduciary's duty of undivided loyalty and compliance with
applicable laws, regulations, and accepted standards of fiduciary
conduct related to self-dealing and other conflicts of interest.
The compliance component includes reviewing and
evaluating the adequacy and soundness of adopted policies,
procedures, and practices generally, and as they relate to specific
transactions and accounts. It also includes reviewing policies,
procedures, and practices to evaluate the sensitivity of management
and the board of directors to refrain from self-dealing, minimize
potential conflicts of interest, and resolve actual conflict
situations in favor of the fiduciary account beneficiaries.
Risks associated with account administration
are potentially unlimited because each account is a separate
contractual relationship that contains specific obligations. Risks
associated with account administration include: failure to comply
with applicable laws, regulations or terms of the governing
instrument; inadequate account administration practices; and
inexperienced management or inadequately trained staff. Risks
associated with a fiduciary's duty of undivided loyalty generally
stem from engaging in self-dealing or other conflict of interest
transactions. An institution may be exposed to compliance,
strategic, financial and reputation risk related to account
administration and conflicts of interest activities. The ability of
management to identify, measure, monitor and control these risks is
reflected in this rating. Policies, procedures and practices
pertaining to account administration and conflicts of interest are
evaluated in light of the size and character of an institution's
fiduciary business.
Factors Evaluated
The compliance rating is based upon, but not
limited to, an assessment of the following evaluation factors:
-
Compliance with applicable federal and
state statutes and regulations, including, but not limited to,
federal and state fiduciary laws, the Employee Retirement Income
Security Act of 1974, federal and state securities laws, state
investment standards, state principal and income acts, and state
probate codes;
-
Compliance with the terms of governing
instruments;
-
The adequacy of overall policies,
practices, and procedures governing compliance, considering the
size, complexity, and risk profile of the institution's
fiduciary activities;
-
The adequacy of policies and procedures
addressing account administration;
-
The adequacy of policies and procedures
addressing conflicts of interest, including those designed to
prevent the improper use of "material inside information";
-
The effectiveness of systems and controls
in place to identify actual and potential conflicts of interest;
-
The adequacy of securities trading policies
and practices relating to the allocation of brokerage business,
the payment of services with "soft dollars" and the combining,
crossing, and timing of trades;
-
The extent and permissibility of
transactions with related parties, including, but not limited
to, the volume of related commercial and fiduciary relationships
and holdings of corporations in which directors, officers, or
employees of the institution may be interested;
-
The decision making process used to accept,
review, and terminate accounts; and,
-
The decision making process related to
account administration duties, including cash balances,
overdrafts, and discretionary distributions.
Ratings.
A rating of 1 indicates strong compliance
policies, procedures and practices. Policies and procedures covering
conflicts of interest and account administration are appropriate in
relation to the size and complexity of the institution's fiduciary
activities. Accounts are administered in accordance with governing
instruments, applicable laws and regulations, sound fiduciary
principles, and internal policies and procedures. Any violations are
isolated, technical in nature and easily correctable. All
significant risks are consistently and effectively identified,
measured, monitored and controlled.
A rating of 2 indicates fundamentally sound
compliance policies, procedures and practices in relation to the
size and complexity of the institution's fiduciary activities.
Account administration may be flawed by moderate weaknesses in
policies, procedures or practices. Management's practices indicate a
determination to minimize the instances of conflicts of interest.
Fiduciary activities are conducted in substantial compliance with
laws and regulations, and any violations are generally technical in
nature. Management corrects violations in a timely manner and
without loss to fiduciary accounts. Significant risks are
effectively identified, measured, monitored, and controlled.
A rating of 3 indicates compliance practices
that are less than satisfactory in relation to the size and
complexity of the institution's fiduciary activities. Policies,
procedures and controls have not proven effective and require
strengthening. Fiduciary activities may be in substantial
noncompliance with laws, regulations or governing instruments, but
losses are no worse than minimal. While management may have the
ability to achieve compliance, the number of violations that exist,
or the failure to correct prior violations, are indications that
management has not devoted sufficient time and attention to its
compliance responsibilities. Risk management practices generally
need improvement.
A rating of 4 indicates an institution with
deficient compliance practices in relation to the size and
complexity of its fiduciary activities. Account administration is
notably deficient. The institution makes little or no effort to
minimize potential conflicts or refrain from self-dealing, and is
confronted with a considerable number of potential or actual
conflicts. Numerous substantive and technical violations of laws and
regulations exist and many may remain uncorrected from previous
examinations. Management has not exerted sufficient effort to effect
compliance and may lack the ability to effectively administer
fiduciary activities. The level of compliance problems is
significant and, if left unchecked, may subject the institution to
monetary losses or reputation risk. Risks are inadequately
identified, measured, monitored and controlled.
A rating of 5 indicates critically deficient
compliance practices. Account administration is critically deficient
or incompetent and there is a flagrant disregard for the terms of
the governing instruments and interests of account beneficiaries.
The institution frequently engages in transactions that compromise
its fundamental duty of undivided loyalty to account beneficiaries.
There are flagrant or repeated violations of laws and regulations
and significant departures from sound fiduciary principles.
Management is unwilling or unable to operate within the scope of
laws and regulations or within the terms of governing instruments
and efforts to obtain voluntary compliance have been unsuccessful.
The severity of noncompliance presents an imminent monetary threat
to account beneficiaries and creates significant legal and financial
exposure to the institution. Problems and significant risks are
inadequately identified, measured, monitored, or controlled and now
threaten the ability of management to continue engaging in fiduciary
activities.
Asset
Management
Description
This rating reflects the risks associated with
managing the assets (including cash) of others. Prudent portfolio
management is based on an assessment of the needs and objectives of
each account or portfolio. An evaluation of asset management should
consider the adequacy of processes related to the investment of all
discretionary accounts and portfolios, including collective
investment funds, proprietary mutual funds, and investment advisory
arrangements.
The institution's asset management activities
subject it to reputation, compliance and strategic risks. In
addition, each individual account or portfolio managed by the
institution is subject to financial risks such as market, credit,
liquidity, and interest rate risk, as well as transaction and
compliance risk. The ability of management to identify, measure,
monitor and control these risks is reflected in this rating.
Factors Evaluated
The asset management rating is based upon, but
not limited to, an assessment of the following evaluation factors:
-
The adequacy of overall policies, practices
and procedures governing asset management, considering the size,
complexity and risk profile of the institution's fiduciary
activities.
-
The decision-making processes used for
selection, retention, and preservation of discretionary assets
including adequacy of documentation, committee review and
approval, and a system to review and approve exceptions.
-
The use of quantitative tools to measure
the various financial risks in investment accounts and
portfolios.
-
The existence of policies and procedures
addressing the use of derivatives or other complex investment
products.
-
The adequacy of procedures related to the
purchase or retention of miscellaneous assets including real
estate, notes, closely held companies, limited partnerships,
mineral interests, insurance, and other unique assets.
-
The extent and adequacy of periodic reviews
of investment performance, taking into consideration the needs
and objectives of each account or portfolio.
-
The monitoring of changes in the
composition of fiduciary assets for trends and related risk
exposure.
-
The quality of investment research used in
the decision-making process and documentation of the research.
-
The due diligence process for evaluating
investment advice received from vendors and/or brokers
(including approved or focus lists of securities).
-
The due diligence process for reviewing and
approving brokers and/or counter parties used by the
institution.
This rating may not be applicable for some
institutions because their operations do not include activities
involving the management of any discretionary assets. Functions of
this type would include, but not necessarily be limited to, directed
agency relationships, securities clearing, non-fiduciary custody
relationships, transfer agent and registrar activities. In
institutions of this type, the rating for Asset Management may be
omitted by the examiner in accordance with the examining agency's
implementing guidelines. However, this component should be assigned
when the institution provides investment advice, even though it does
not have discretion over the account assets. An example of this type
of activity would be where the institution selects or recommends the
menu of mutual funds offered to participant directed 401(k) plans.
Ratings.
A rating of 1 indicates strong asset management
practices. Identified weaknesses are minor in nature. Risk exposure
is modest in relation to management's abilities and the size and
complexity of the assets managed.
A rating of 2 indicates satisfactory asset
management practices. Moderate weaknesses are present and are well
within management's ability and willingness to correct. Risk
exposure is commensurate with management's abilities and the size
and complexity of the assets managed. Supervisory response is
limited.
A rating of 3 indicates that asset management
practices are less than satisfactory in relation to the size and
complexity of the assets managed. Weaknesses may range from moderate
to severe; however, they are not of such significance as to
generally pose a threat to the interests of account beneficiaries.
Asset management and risk management practices generally need to be
improved. An elevated level of supervision is normally required.
A rating of 4 indicates deficient asset
management practices in relation to the size and complexity of the
assets managed. The levels of risk are significant and inadequately
controlled. The problems pose a threat to account beneficiaries
generally, and if left unchecked, may subject the institution to
losses and could undermine the reputation of the institution.
A rating of 5 represents critically deficient
asset management practices and a flagrant disregard of fiduciary
duties. These practices jeopardize the interests of account
beneficiaries, subject the institution to losses, and may pose a
threat to the soundness of the institution.
Trust
Examination Request List
NAME OF INSTITUTION:
DATE OF EXAMINATION:
PRIOR EXAMINATION DATE:
EXAMINER-IN-CHARGE:
THE FOLLOWING ITEMS OR MATERIALS ARE REQUESTED
TO EXPEDITE THE EXAMINATION OF YOUR INSTITUTION'S TRUST ACTIVITIES.
THE ACCURACY AND TIMELINES OF DATA PROVIDED ARE VITAL TO THE
SUCCESSFUL EXAMINATION OF YOUR INSTITUTION. PLEASE HAVE THE
FOLLOWING AVAILABLE ON (INSERT DATE).
Please provide the following information as of
(Insert Date).
If information requested is not applicable,
please indicate with a NA.
Feel free to use your software provider's audit
package to provide the requested information.
Regulatory and Legal
Information
-
Trust Officer's Questionnaire (form
provided), certified by the senior trust officer or other senior
bank officer as of (Insert Date).
Current trust department statement of assets
and liabilities or trust department statement of condition.
Information on pending fiduciary matters
describing any threatened and/or pending litigation against the
bank in connection with its fiduciary activities. Please include
the following information:
-
identification of accounts concerned;
-
nature of, or basis for, the litigation;
-
amount involved;
-
present status of the action; and
-
statement as to the probable outcome of the
action, together with its cost to the bank.
-
Indicate if legal counsel is retained on an
on-going basis to advise the Board of Directors, the trust
committee(s), and the trust officer(s) on legal matters pertaining
to fiduciary administration.
-
Indicate if written legal opinions are
obtained and filed in connection with legal questions arising
during the course of an account's administration.
-
Provide a copy of any communication with the
Department of Labor, Securities and Exchange Commission, Internal
Revenue Service, or National Association of Securities Dealers for
the bank, its subsidiaries or affiliates since the previous
examination.
-
Provide a copy of the customer complaint log
since the last examination. If a complaint log is not maintained,
provide a list of customer complaints filed since the last
examination including the following information:
-
name of complainant;
-
date of complaint;
-
description of the complaint
-
resolution of the complaint
Organization
-
Provide an organization chart of the
department.
-
Provide a copy of the department's current
strategic plan, marketing plan, and budget.
-
Provide a list of all bank subsidiaries and
affiliates, together with a brief synopsis of capitalization and
activities engaged in by the subsidiary or affiliate. (Annual
report will suffice.)
-
If there has been any acquisition of, or
mergers with, other trust departments since the last examination,
please provide the following:
-
method for establishing the purchase price;
-
extent of due diligence performed on trust
accounts before acquisition or merger; and
-
date of regulatory approval received from
state or FDIC, if required.
-
Make available the Minutes of the Board of
Directors and/or trust committee(s) pertaining to trust activities
since (Insert Date).
-
Provide the following information with
respect to each committee supervising trust (and transfer agent)
activities:
-
name of committee;
-
principal functions of the committee;
-
number of members authorized by the Board
of Directors;
-
annual fees paid, if any;
-
attendance fee paid members;
-
list of committee members;
-
year of birth of committee members;
-
principal business interests, or occupation
of committee members;
-
salary of committee members who are also
officers of the bank.
-
Provide the following information with
respect to principal officers:
-
name and title;
-
principal duties;
-
year of birth;
-
percent of time devoted to the trust
institution;
-
current salary and last year's bonus;
-
if hired since the last examination, please
provide a résumé of the officer or list education and degrees
awarded, work history, names of other financial institutions
where employed, title, and principal duties.
-
proof of quarterly investment reports
completed by applicable department/bank personnel since the
previous examination pursuant to Section 344.9(d) of the FDIC's
Rules and Regulations.
-
Provide aggregate number of junior officers
and the total amount of their salaries.
-
Provide aggregate number of staff other than
officers and the total amount of their salaries.
-
With respect to directors, officers, and
employees of the bank, provide the following:
-
a list of their direct obligations held in
any account, indicating whether any such items are receiving
special or preferential treatment, e.g., rates of interest, etc;
-
a list of holdings of stock and/or
obligations of their corporations held in any account; and
-
a list of fiduciary accounts for which they
serve as co-fiduciary; a list of fiduciary accounts for which
they have any interest as either a donor or beneficiary (exclude
interests in own bank employee benefit plans).
-
Provide a summary of insurance policies
currently carried to cover fiduciary activities, including
coverage for real estate properties held in trust.
General Account
Administration
-
Make available a copy of the department's
written policies and procedures. Please indicate the date on which
the Board of Directors approved the policies.
-
Provide a copy of the bank and/or
department's privacy policy and customer disclosures.
-
Provide a list of all accounts (e.g., account
trial balance), listing for each: (Note: for items f, g and h
please identify if shown at "book" or "market" value)
-
account title and number;
-
account officer;
-
investment officer;
-
principal cash;
-
income cash;
-
invested principal (summary total per
account, not detail of assets or tax lots unless requested);
-
invested income (summary total per account,
not detail of asset or tax lots unless requested); and
-
summary totals for cash and assets of all
accounts (by major appointment category).
-
Provide a summary listing of assets by type
and CUSIP number and the aggregate number of units held. The
report should also provide the total "book" and "market" value of
each asset.
-
Provide a copy of the account codes used to
read the reports requested in items 2
1 and 22.
-
Provide a list of liabilities within
accounts, such as borrowings, etc. Please indicate the dollar
value of assets pledged by the account, if any, to collateralize
such liabilities.
-
Provide a list of terminated accounts that
have not been distributed, including the reasons therefore.
-
Provide a list of watch-listed accounts.
Operations/Audits
-
Provide copies of following reports, as they
pertain to overall trust activity, since the previous examination.
-
internal audits, including scope of account
review;
-
external audits' including scope of account
review;
-
FDICIA Risk matrix, if applicable; and
-
SAS 70, if applicable.
-
Provide the most recent reconcilement(s) and
supporting documentation of the department's
-
demand deposit account(s);
-
safekeeping and/or safekeeping exception
report;
-
brokerage accounts;
-
suspense accounts;
-
house accounts; and
-
failed trades.
-
Provide a list of bank assets (indicate par
and market values of each security):
-
pledged with state authorities;
-
pledged with the trust department; or
-
otherwise segregated and earmarked to
secure trust activities or uninvested trust cash.
-
Provide copies of the last year-end
Call Report and the work papers for the preparation of Schedule
RC-T. If the institution files Schedule RC-T data on a quarterly
basis, also provide the last quarter's Call Report and the work
papers for the preparation of Schedule RC-T.
-
Provide reports used to review the following:
-
overdrafts;
-
cash equivalent balances;
-
large cash balances; and
-
other cash balances available for
investment.
-
Provide a listing of outside service
providers and have copies of their contracts available for review.
Examples include software service providers, pricing services,
record keepers, proxy voting services, and so on.
-
Provide the date of the most recent business
resumption (contingency) plan and the results of the last
contingency plan test.
-
Please provide summary information on the
following trust activities, if applicable
-
electronic banking, including the use of
web sites. Please provide web site addresses, if any:
-
new trust products developed since last
examination.
Investments
-
Provide a list of accounts with discretionary
investment authority that hold own-bank or affiliated financial
institution interest-bearing deposits. Please indicate interest
rates paid and maturity. Report own bank and
affiliated-institution deposits separately. Also report money
market deposits and certificates of deposit separately.
-
Provide a copy of the following:
-
a list of approved investments (buy/sell
list), including mutual funds and cash equivalents;
-
details of any asset allocation models used
to select investments; and
-
investments on any internal watch list.
-
Provide a copy of the last Rule 13f-1
quarterly report submitted to the Securities and Exchange
Commission pursuant to Regulation 240.13f-1, if applicable.
(Institutional investment managers that use the United States
mail, or other means or instrumentality of interstate commerce, in
the course of their business and that exercise investment
discretion over $100 million or more in Section 13(f) securities
must file Form 13F)
-
Provide the following information on
broker-relationships:
-
a list of brokers utilized and broker fees
and commissions paid during the last three calendar years and
year-to-date;
-
a description of the procedures followed
regarding the placement of brokerage business for fiduciary
accounts;
-
a description of the procedures followed to
ensure that the most favorable execution and commission rates
are obtained; and
-
the last formal analysis of broker
relationships.
-
Describe all payments, since the last
examination, of soft dollars to securities brokers and dealers.
Please state if written policies have been adopted to ensure
compliance with the safe harbor provisions of Section 28(e) of the
Securities Exchange Act of 1934.
-
List appointments where the institution has
sole or joint responsibility for assets that are not in its
possession, or those over which accounting control has not been
established.
-
If the bank operates common or collective
investment funds or other pooled investment vehicles, provide for
each fund:
-
if a new fund has been established
or a previously established fund has been closed since the last
FDIC examination, the rationale and analysis supporting the
decision to open or close the fund;
-
a copy of any amendments to governing
instruments since the previous examination;
-
a list of all participants, providing
detail and summary totals for: number of participants, units
held, and cost of units held;
-
a copy of the last valuation for each fund;
-
a copy of each fund's last annual report;
and
-
a list of assets held by each fund as of
the last valuation date.
-
Provide a list of voting securities held in
discretionary fiduciary accounts where the department holds, in
the aggregate:
-
5% or more of the outstanding class of
securities (if securities are registered pursuant to Section 12
of the Securities Exchange Act of 1934); and
-
25% or more of the outstanding class of
securities, if not registered under Section 12.
-
Provide the following with respect to own
bank, parent, or affiliate stock and/or obligations:
-
a list of discretionary fiduciary accounts
that hold such securities and/or obligations, together with the
number of shares and/or face value of obligations held (include all shares held in any account,
including custodial and safekeeping, if management holds or
exercises voting authority);
-
total number of shares held in all trust
department accounts that were voted by management at the last
stockholders meeting;
-
total number of shares held in
discretionary fiduciary accounts that were voted by others;
-
total number of shares voted at the last
stockholders meeting;
-
total number of shares outstanding at the
last stockholders meeting, and currently outstanding;
-
date of the last review of such holdings,
if reviewed in the aggregate, by the trust committee;
-
if the stock is publicly traded, provide
the date of the last activity in such stock, total shares
traded, and the closing price;
-
if the stock is not publicly traded,
provide the date of the last sale of such stock, the number of
shares sold, and the execution price; and
-
current dividend (state whether annual or
other basis is being quoted).
-
If the department does not have written
policies on the following, identify current practices with respect
to these areas:
-
purchase and/or retention of own bank,
parent and/or affiliate stock and obligations; and
-
voting of own bank, parent, and/or
affiliate stock held in any account.
-
Describe the department's policies regarding
the voting of stock held in accounts, including common and
collective investment funds. Indicate whether the department has
solicited written instructions from beneficial owners as to the
forwarding of proxy material and voting of securities held on
their behalf.
-
Describe any receipt of fees from 12b-1,
shareholder servicing, record keeping or any other arrangements
with mutual fund companies. Please provide copies of any written
solicitations for customer approval to use their accounts in such
arrangements.
-
Describe any receipt of sweep fees. Please
provide copies of any written solicitations for customer approval
to use their accounts in such arrangements.
-
Provide the following information on real
estate holdings within trust accounts:
-
a list of mortgaged property on which
payments of principal, interest, or taxes are delinquent;
-
a list of any real property held by
accounts on which taxes are delinquent;
-
a list of expired property insurance on
mortgaged property, or other real property held as assets,
unless liability thereon is covered by blanket insurance;
-
a statement of the department's
policy/practice concerning employment of agents in the operation
or management of real estate owned in fiduciary accounts. If
such agents make cash collections, describe procedures for
monitoring the receipt of the funds.
-
a list of pending foreclosures involving
mortgages held as trust assets;
-
a list of real estate held by accounts on
which there exist delinquencies in rental income; and
-
a list of real property held in any
fiduciary account, that is leased to the bank, an affiliate, or
to any director, officer, or employee.
Earnings
Provide the trust department income (by
product line, if available) and expenses on a calendar basis for
the last 3 years and for the year-to-date. Also, include
information on surcharges, losses, fees waived, charge-offs, and
recoveries. Items of less than $100 may be grouped.
Provide a list of accounts on which no fees
or commissions are charged, including the reasons therefore.
Provide a list of client fees billed but
unpaid for six months or more.
Provide a copy of the current fee schedule.
Describe briefly the procedures for approving exceptions to the
schedule.
Describe the department's new business
development efforts, including types of business solicited,
minimum dollar size of accounts that will be accepted, nature of
new business efforts, competition, market potential and projected
growth.
Personal Trusts and
Estates
-
Provide a list of accounts for which
accountings have not been filed with courts, beneficiaries, or
other parties holding authority to release the bank from
liability.
-
Provide a list of estates that remain open
for a period exceeding 18 months and where the institution has not
filed an accounting.
Bank Sponsored Employee Benefit
Plans
-
With respect to own bank, holding company, or
subsidiary employee benefit plans carried within the department,
please supply:
-
the plan document and trust agreements, if
new since the previous examination;
-
amendments made to the plan since the last
examination;
-
the Form 5500 filed since the previous
examination;
-
the last year-end and most recent listing
of assets;
-
all audits conducted since the last
examination;
-
trustee and/or plan administrator committee
minutes;
-
information packet, initial and continuing
education, provided to participants; and
-
last investment analysis on reasonableness
of available investment options.
Corporate Trust Accounts
-
Provide a list of transfer agent and/or
registrar appointments.
-
Provide a list of transfer agent and/or
registrar accounts that are out of proof.
-
List corporate trusteeship appointments.
Please provide:
-
face value of bonds originally issued;
-
face value currently outstanding; and
-
whether any appointment is subject to the
Trust Indenture Act of 1939.
-
Provide a list of all corporate trusteeships
that are in default. Please indicate:
-
the date and nature of default;
-
actions taken by the institution;
-
current status; and
-
face value of bonds outstanding.
-
Provide a list of corporate trusteeships that
are receiving special administrative attention, and those in which
obligors have not complied with indenture requirements.
Other Activities
-
If the department engages in customer
securities lending activities, please provide the following:
-
a copy of the securities lending agreement
executed with trust department customers and counterparties; and
-
a copy of the department's securities
lending confirmation.
-
If the bank as principal or agent (a)
underwrites, trades, or deals in municipal securities, or (b)
provides investment or consultant services to issuers or
purchasers of municipal securities, please provide the name of the
individual supervising this activity.
-
If the bank as principal or agent trades or
deals in U.S. Treasury securities, please provide the name of the
individual supervising this activity.
-
If the bank or an affiliate conducts
securities brokerage activities, please provide the name of the
individual supervising this activity.
-
If the bank, any subsidiary, or any affiliate
serves as investment advisor or investment manager for any mutual
fund, or acts as sponsor, distributor, or custodian for any
outside, own bank, subsidiary or affiliate operated mutual fund,
please provide the name of the individual supervising this
activity.
-
If the bank as principal or agent sells
securities under agreement to repurchase, or purchases securities
under agreement to resell (whether or not the trust department
participates in the program on behalf of its customers), please
provide the name of the individual supervising this activity.
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