Trust Examinations: Their Current Focus and What This Means to You - 2024

For the previous twenty-five years, I’ve had the honor to train regulators from most of the relevant agencies in the US how to examine trust accounts. My students are professionals from the Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), Federal Reserve Bank (FRB), and numerous state banking regulatory agencies.

Which Regulators Examine Which Organizations
Before giving you my perceptions of their current focus areas, I want to explain which regulators examine which organizations.

• OCC examines Banks and Trust Companies with National Charters and Savings Banks with Federal Charters
• FRB examines State-Member Banks
• FDIC examines State Non-Member Banks who are not members of the Federal Reserve System
• Both FDIC and FRB examine state-chartered banks jointly with state bank regulators
• State bank regulators examine trust companies not affiliated with a depository institution alone. Either states or the OCC can charter a trust company not affiliated with a depository institution and referred to as independent.

Current Areas of Focus by Regulators

No matter what type of charter you have, regulators often choose three to five “focus” areas for their examinations because they can’t focus on every single area under their purview every time.

One of the prime concerns to auditors reviewing trust departments is any conflicts of interests between trusts departments and the beneficiaries of trust accounts under the bank’s aegis. Their top concern in this area is self-dealing.

Identifying Conflicts of Interest
Regulators want to see uniformity across the organization so banks should have written procedures in place, which they use to identify conflicts of interests so they can mitigate these conflicts. For example, does your trust department only use vendors who are commercial clients of the bank? This is a concern. Your internal auditors must absolutely learn to identify any instance of self-dealing before the regulators do.

Risk Management in Place
Does your bank have risk management policies in place to identify self-dealing, so you can mitigate regulatory enforcement risk? You also need to be aware that a negative audit also carries with it reputational risk. But be aware that it’s almost impossible not to have some activities of self-dealing occurring.

One of the most frequent instances occurs when trust departments use their bank’s brokerage subsidiary for purchases and sales of securities. This isn’t a violation if it is disclosed to the client when the account is opened, and the client gives permission in writing.

Specific Fiduciary Expertise
Of particular note, your internal auditors must have fiduciary specific expertise and be under the direction of an independent fiduciary audit committee. Fulfilling the requirement for such an arrangement is often overlooked, or the independent committee is simply inactive.

Using Proprietary Products in Trust Accounts
When banks place funds over which they have investment discretion into proprietary products, such as their in-house mutual funds, they are self-dealing. Banks have to show auditors why their propriety products are appropriate and if they have been subject to the same due diligence standards used for third party products.

Delegating to Third Parties
If banks delegate certain fiduciary activities to third parties, the most common being investment management of trust assets, they are required to exercise heightened oversight of the third parties to ensure the bank is meeting its fiduciary obligations. Example, is the third-party investment manager adhering to the Prudent Person Rule?

Regulators are very focused on ensuring all third-party relationships entered into by banks acting in their fiduciary capacity, are precisely defined, with written contracts outlining each party’s rights and responsibilities.

While banks often make substantial profits when engaging in fiduciary activities, they also take on substantial risk. Only trained employees can mitigate that risk.

For those in the profession seeking a certification demonstrating their knowledge of these issues, you can take Cannon’s Certified Fiduciary and Investment Risk Specialist® course (CFIRS). This program is designed for professionals working in Trust Audit, Compliance, and Risk Management activities in the financial services industry.