On July 27, 2022, the FDIC published its updates to Section 1 – Management of its Trust Examination Manual. This update provides clarity to various sections of the manual, as well as new sections to consider. While none of these changes are new to the examination and risk management process of management of trust departments, their expansion and highlighting signifies the potential for focus in reviews to come and emphasizes the importance that banks must place on the effectiveness of trust operations.
The manual now includes five new areas for risk evaluation: strategic planning, dominant officials or policymakers, management information systems, automated and manual account review process, and incentive compensation arrangements and policies.
The new strategic planning section defines the use of a strategic plan as a “means to anticipate and respond to changing fiduciary business conditions.” As such, this should be trust departments’ primary goal of implementing their strategic plan. The manual highlights the importance of a strengths, weaknesses, opportunities, and threats analysis to identify potential opportunities and gaps through short- and long-term goals. The manual states the plan should “align activities with Bank’s core mission and values as well as Board’s risk appetite and policies.” The plan should have measurable objectives that are periodically reviewed, and adjustments should be made as changes arise. The plan should be driven by the business model, resources, risk appetite, size, geographic location, and clientele, among other considerations.
The now-included dominant officials or policymakers section defines these persons as “an individual, family, shareholder, or group of persons with close business dealings or otherwise acting together that exert material influence over virtually all decisions involving the bank’s policies and operations.” The section does indicate this definition is not intended to include employees who occupy multiple positions in small departments if they do not have significant influence over many decisions. The manual states that a dominant person coupled with other ineffective risk management practices can lead to increased risk and the need for enhanced supervision. Banks should ensure that risk controls are in place if any persons in the department meet this definition.
The manual now includes a management information systems section that highlights the importance of sound information systems procedures to “ensure directors and senior executives are fully apprised of the nature, breath, and condition of risks posed by the fiduciary services for which they are responsible.” The manual states that the reporting processes may be informal for small, noncomplex activities and routine operations, but more detailed or more formal reports may be needed for larger departments with multiple product offerings or levels of authority. The manual also includes a listing of items that may be included in these reports, though it mentions that the content and frequency of reporting may vary depending on the type of services and volume of activity of each department.
Another new section covers automated and manual account review processes. This section describes the benefits and weaknesses of each process and indicates a hybrid process is beneficial for banks to meet both the detailed focus and efficiency each review type provides.
The new incentive compensation arrangements and policies section indicates that compensation agreements based on arrangements where employees are rewarded for increasing revenue or short-term profit that do not recognize the long-term effects may present additional risk. The section states that departments should have “balanced risk-taking incentives, compatibility with effective controls and risk management, and provide strong corporate governance.”
The manual provides several updated points regarding account reviews, including the following details:
- Purpose of Account Review – Reviews should facilitate the identification of weaknesses in account administration or investment management that could result in a higher risk profile for the department or cause financial harm to the bank. Larger departments may delegate this responsibility to another committee or “disinterested trust officer.”
- Policies Regarding Reviews – A department should have policies and procedures that clearly establish standards for the scope and documentation of account reviews, exception reporting, and tracking.
- Review Independence – Reviews are most effectively performed by independent account officers who do not administer or manage the account. This is considered a strong risk management technique to help identify fiduciary risks in account administration.
- Committee Review as a Risk Mitigant – Reviews performed by a committee prove effective since the review process benefits from group experience and knowledge.
- New Account Review Consideration
- Hold Mail and Returned Items – Are the addresses on-file valid and is communication properly addressed?
- Litigation – Is there appropriate documentation in the file or retained elsewhere? Is an associated status report or summaries included, up to date, and accurate?
- Investment Review Considerations – The manual includes seven items in this section that are considered effective process concerns.
In addition, the updates provide additional details in existing sections regarding:
- Acceptance of New Accounts – New account reviews should be documented in committee or board minutes to acknowledge responsibilities in the administration of accounts.
- Receipts of Asset Transfer to Successor Trustee – Files should document the transfer of ownership and responsibility of assets to new parties along with the value and condition of those assets. The files also should provide supporting evidence should disagreements arise later.
- Distribution, Reallocation, and Extraordinary Expenditure Documentation – These items should be documented in committee or board minutes to signify their approval and ratification. The manual states effective risk management typically involves comprehensive documentation that outlines responsibilities, decision rationale, and clear understanding of the decision process.
- Committee Meeting Frequency – The manual indicates committees should be meeting at least quarterly to stay informed of trust department activity, and more frequently when practical and necessary to fulfill responsibilities.
- Policy Requirements – New policy considerations include the following sections:
- Broker and investment advisor selection
- Incentive compensation
- Reg R/SEC/GLBA broker exception rules
- Business continuity planning and testing
- Digital banking
- Third-party and vendor management
These changes indicate regulators’ renewed interest in trust and asset management operations going forward and should signal department management to review its policies and processes in place.
FORVIS provides trust consulting services from experienced specialists to assist financial institutions looking to outsource their audit function, perform target-based reviews, and evaluate policies and implementation, as well as identify potential risks in trust departments, among other services. For more information, reach out to a professional at FORVIS or submit the Contact Us form below.