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Regulation and Compliance > State Regulation

OCC Mulls Fiduciary Regulations Similar to State Trust Laws

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The Office of the Comptroller of the Currency is mulling updating its fiduciary regulations to be consistent with “recent developments under state laws,” as well as a new set of potential provisions on non-fiduciary custody rules for national banks.

In an April 29 advance notice of proposed rulemaking, the OCC is seeking comment on whether to update the regulatory definition of “fiduciary capacity” under OCC regs 12 CFR 9 and 150 to be more consistent with recent developments under state laws.

The OCC plan states that “numerous states have modified their trust laws in recent years to define and set expectations for various trust-related roles, including roles that do not possess the investment discretion traditionally granted to trustees. Because some of these state laws frequently describe these roles by using terms other than those specified in the OCC definition of ‘fiduciary capacity’ … these state fiduciary roles may not explicitly be included in the OCC’s definition. As a result, this expanding list of fiduciary roles under state law may create uncertainty for banks about the activities governed by OCC fiduciary rules.”

The proposal also requests comment on adding new provisions to OCC regulations to establish “certain basic requirements for non-fiduciary custody activities of national banks, federal savings associations, and federal branches and agencies (collectively, banks), which are not currently addressed by specific OCC rules.”

The OCC is taking comments on the proposal until June 28.

George Michael Gerstein, co-chair of Stradley Ronon’s fiduciary governance group, notes in the firm’s Fiduciary Governance Blog that the two possible revisions to the OCC’s regulations would update the definition of “fiduciary capacity” to include certain capacities that are based on the authority a bank has with respect to a trust, e.g., the power to make discretionary contributions, override the trustee, or select a new trustee.

This change could remove ambiguity and confusion for banks because of differences between how OCC regulations and state laws define “fiduciary capacity,” and provide for the uniform application of OCC regulations to trust activities that state laws describe with different terminology, Gerstein writes.

The OCC, as the proposal states, has the statutory authority to permit banks to act in certain fiduciary capacities, including fiduciary capacities that may be permitted for state banks, trust companies, or other corporations that compete with banks in the states in which they are located.

“Fiduciary capacity” is defined to mean “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,” the OCC proposal states.

The OCC states that its proposal could be based on the following core elements of sound risk management, which are similar to those required in the current rules for fiduciary custody activities: separation and safeguarding of custodial assets; due diligence in selection and ongoing oversight of sub-custodians; disclosure in custodial contracts and agreements of the custodian’s duties and responsibilities; and effective policies, procedures, and internal controls.

A non-fiduciary custody rule, Gerstein writes, could:

  • eliminate any confusion that exists over a bank’s obligations with respect to custody arrangements;
  • impose minimal new responsibilities on well-managed banks, as the OCC would be codifying the OCC’s guidance on custody service activities for banks; and
  • complement regulations related to the custody of client assets issued by the Securities and Exchange Commission, Commodity Futures Trading Commission, Internal Revenue Service, various states, the United Kingdom, and the European Union.

NAIFA Takes on New York Regulation 187

Meanwhile, the National Association of Insurance and Financial Advisors for New York State is awaiting a decision in its case challenging the New York Department of Financial Services’ Regulation 187, which requires insurance agents, brokers, and insurers “to establish standards and procedures” so that any transaction of such products are in the “best interest of the consumer.”

In its lawsuit, NAIFA-NY argues that promulgating “unprecedented fiduciary obligations across all participants industry wide, DFS exceeded any statutory grant of rulemaking authority.”

DFS’s “best interest” standard “directly contradicts existing New York insurance law and statutes,” NAIFA-NY argues.

NAIFA–NY also contends that the regulation “is unconstitutional and violates due process because DFS acted without any legislative mandates or adequate standards, and promulgated impermissibly vague and confusing terms that will lead to arbitrary enforcement.”

DFS “acted solely on its own ideas of sound policy without any legislative or statutory guidelines,” NAIFA-NY said.


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