Fiduciary Capacity; Non-Fiduciary Custody Activities, 17967-17971 [2019-08505]

Download as PDF 17967 Proposed Rules Federal Register Vol. 84, No. 82 Monday, April 29, 2019 This section of the FEDERAL REGISTER contains notices to the public of the proposed issuance of rules and regulations. The purpose of these notices is to give interested persons an opportunity to participate in the rule making prior to the adoption of the final rules. DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 12 CFR Parts 9 and 150 [Docket ID OCC–2018–0018] RIN 1557–AE46 Fiduciary Capacity; Non-Fiduciary Custody Activities The Office of the Comptroller of the Currency, Department of the Treasury. ACTION: Advanced notice of proposed rulemaking. AGENCY: The Office of the Comptroller of the Currency (OCC) is inviting comment on an advance notice of proposed rulemaking (ANPR) regarding its fiduciary activities rules and a potential rule for non-fiduciary custody activities of national banks, Federal savings associations, and Federal branches of foreign banks. Specifically, the OCC is considering an amendment to its fiduciary rule to update the definition of fiduciary capacity to include certain State recognized trustrelated activities. The OCC also is considering issuing a regulation that would establish certain basic requirements for non-fiduciary custody activities of national banks and Federal savings associations. DATES: Comments must be received by June 28, 2019. ADDRESSES: You may submit comments to the OCC by any of the methods set forth below. Commenters are encouraged to submit comments through the Federal eRulemaking Portal or email, if possible. Please use the title ‘‘Fiduciary Capacity; Non-Fiduciary Custody Activities’’ to facilitate the organization and distribution of the comments. You may submit comments by any of the following methods: • Federal eRulemaking Portal— ‘‘Regulations.gov’’: Go to www.regulations.gov. Enter ‘‘Docket ID OCC–2018–0018 in the Search Box and khammond on DSKBBV9HB2PROD with PROPOSALS SUMMARY: VerDate Sep<11>2014 16:06 Apr 26, 2019 Jkt 247001 click ‘‘Search.’’ Click on ‘‘Comment Now’’ to submit public comments. Click on the ‘‘Help’’ tab on the Regulations.gov home page to get information on using Regulations.gov, including instructions for submitting public comments. • Email: regs.comments@ occ.treas.gov. • Mail: Chief Counsel’s Office, Office of the Comptroller of the Currency, 400 7th Street SW, Suite 3E–218, Washington, DC 20219. • Hand Delivery/Courier: 400 7th Street SW, Suite 3E–218, Washington, DC 20219. • Fax: (571) 465–4326. Instructions: You must include ‘‘OCC’’ as the agency name and ‘‘Docket ID OCC–2018–0018’’ in your comment. In general, the OCC will enter all comments received into the docket and publish the comments on the Regulations.gov website without change, including any business or personal information provided such as name and address information, email addresses, or phone numbers. Comments received, including attachments and other supporting materials, are part of the public record and subject to public disclosure. Do not include any information in your comment or supporting materials that you consider confidential or inappropriate for public disclosure. You may review comments and other related materials that pertain to this rulemaking action by any of the following methods: • Viewing Comments Electronically: Go to www.regulations.gov. Enter ‘‘Docket ID OCC–2018–0018’’ in the Search box and click ‘‘Search.’’ Click on ‘‘Open Docket Folder’’ on the right side of the screen. Comments and supporting materials can be viewed and filtered by clicking on ‘‘View all documents and comments in this docket’’ and then using the filtering tools on the left side of the screen. Click on the ‘‘Help’’ tab on the Regulations.gov home page to get information on using Regulations.gov. The docket may be viewed after the close of the comment period in the same manner as during the comment period. • Viewing Comments Personally: You may personally inspect comments at the OCC, 400 7th Street SW, Washington, DC 20219. For security reasons, the OCC requires that visitors make an appointment to inspect comments. You PO 00000 Frm 00001 Fmt 4702 Sfmt 4702 may do so by calling (202) 649–6700 or, for persons who are deaf or hearing impaired, TTY, (202) 649–5597. Upon arrival, visitors will be required to present valid government-issued photo identification and submit to security screening in order to inspect comments. FOR FURTHER INFORMATION CONTACT: Patricia Dalton, Technical Expert for Market Risk, Asset Management, (202) 649–6401; David Stankiewicz, Special Counsel, or Asa Chamberlayne, Counsel, (202) 649–7299, or Heidi M. Thomas, Special Counsel, or Chris Rafferty, Attorney, (202) 649–5490, Chief Counsel’s Office, Office of the Comptroller of the Currency, 400 7th Street SW, Washington, DC 20219. For persons who are deaf or hearing impaired, TTY, (202) 649–5597. SUPPLEMENTARY INFORMATION: I. Introduction Twelve U.S.C. 92a 1 and 12 U.S.C. 1464(l) and (n) 2 set forth the authority for fiduciary activities of national banks 3 and Federal savings associations, respectively. While there are some differences, the fiduciary authority for national banks and Federal savings associations is substantially similar. OCC regulations implementing the substantive provisions of these statutes are set forth at 12 CFR part 9 for national banks and Federal branches of foreign banks (collectively, national banks) and 12 CFR part 150 for Federal savings associations.4 The OCC is considering an amendment to these fiduciary rules that would update the definition of ‘‘fiduciary capacity’’ so that this term would be more consistent with how the role of bank fiduciaries has developed under State law. The OCC also is considering adopting a rule to address non-fiduciary custody activities of national banks and Federal savings associations. The OCC is seeking public comment on all aspects of these two 1 Section 1 of the Act of September 28, 1962. 5(l) and (n) of the Home Owners’ Loan Act of 1933. 3 Twelve U.S.C. 92a also applies to Federal branches and agencies pursuant to 12 U.S.C. 3102(b), which provides that the operations of Federal branches and agencies shall be conducted with the same rights and privileges accorded national banks. 4 Twelve CFR 5.26 sets forth the OCC’s requirements for national banks and Federal savings associations to obtain OCC approval to engage in fiduciary activities. 2 Section E:\FR\FM\29APP1.SGM 29APP1 17968 Federal Register / Vol. 84, No. 82 / Monday, April 29, 2019 / Proposed Rules possible actions, discussed in detail below. The OCC will use these comments to determine whether to proceed with a proposed rule and, if so, to inform the content of a proposed rule. The OCC will invite public comment on a detailed proposal before adopting any final rule.5 khammond on DSKBBV9HB2PROD with PROPOSALS II. Definition of ‘‘Fiduciary Capacity’’ Twelve CFR parts 9 and 150 apply to national banks and Federal savings associations, respectively, that act in a ‘‘fiduciary capacity.’’ Section 9.2(e) defines ‘‘fiduciary capacity’’ 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; any capacity in which the bank possesses investment discretion on behalf of another; or any other similar capacity that the OCC authorizes pursuant to 12 U.S.C. 92a.’’ Twelve CFR 150.30 applies a similar definition with respect to Federal savings associations. Many of the named capacities listed in these rules are specified by statute.6 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 involve investment discretion. Because some of these laws use terms other than those specified in 12 CFR 9.2(e) and 150.30 to describe trust-related and fiduciary capacities, they are not explicitly included in the definition of fiduciary capacity in 12 CFR 9.2(e) and 150.30. For example, some States have amended their trust laws to authorize directed trusts. In a traditional trust, the trustor grants the trustee the power to control the investment, management, distribution, and other administration decisions of the trust. By contrast, in a directed trust, the trustor may grant one or more trust advisers the power to direct the trustee with respect to these powers. State laws may not always refer to such trust advisers as ‘‘trustees’’ but instead may use other names not listed in the OCC’s regulations. For example, the Uniform Directed Trust Act 7 refers 5 The OCC plans to issue a proposed rulemaking at a later date that would integrate its national bank and Federal savings association fiduciary activities rules so that only one rule applies to both national banks and Federal savings associations, taking into account consistency with the underlying statutes that apply to each type of institution. 6 See 12 U.S.C. 92a; 12 U.S.C. 1464(n). 7 The Uniform Directed Trust Act was drafted by the National Conference of Commissioners on Uniform State Laws in order to address the rise of directed trusts. See Nat’l Conf. of Comm’rs on Uniform State Laws, Uniform Directed Trust Act VerDate Sep<11>2014 16:06 Apr 26, 2019 Jkt 247001 to such advisers generally as ‘‘trust directors.’’ Meanwhile, Illinois law refers to such advisers as either ‘‘investment trust advisers,’’ ‘‘distribution trust advisers,’’ or ‘‘trust protectors’’ depending on the discretion exercised.8 By default under the Illinois statute, an ‘‘investment trust adviser’’ controls investment decisions; a ‘‘distribution trust adviser’’ controls distribution decisions; and a ‘‘trust protector’’ may be given various powers by the trust instrument, including the power to remove and appoint a trustee, investment trust adviser, or distribution trust adviser.9 Delaware law similarly refers to such trust advisers generally as ‘‘advisers’’ or, in the case of advisers with the power to remove and appoint trustees and other advisers, as ‘‘protectors.’’ 10 State directed trust statutes often provide that trust advisers are fiduciaries with the same responsibility to exercise the authority or power granted to them as a trustee would have, unless provided otherwise by the trust instrument.11 This expanding list of terms for trustrelated and fiduciary roles under State law that are not explicitly identified as fiduciary capacities under OCC regulations, and that may not involve investment discretion or investment advisory services, may create uncertainty for national banks and Federal savings associations with respect to the activities governed by OCC fiduciary regulations. This potential uncertainty may make it difficult for institutions to assess and manage litigation risk and to understand OCC expectations for managing these accounts in a safe and sound manner. Therefore, the OCC is considering amending the definition of fiduciary capacity to include these new roles. Possible Regulatory Revisions The OCC is contemplating updating the regulatory definition of ‘‘fiduciary capacity’’ to include any activity based on the authority a national bank or Federal savings association has with (2017). New Mexico recently adopted this uniform law. See Uniform Directed Trust Act, 2018 N.M Laws, ch. 63 (S.B. 101) (to be codified at the Uniform Trust Code N.M. Stat. § 46a). 8 See 760 ILCS 5/16.3. 9 Id. 10 See 12 Del. C. § 3313. In addition, the Employee Retirement Income Security Act of 1974 (ERISA) defines fiduciary based on function and not only on named capacities. For example, pursuant to section 3(21) of ERISA (29 U.S. Code 1002(21)), a person using discretion in administering and managing a plan or controlling the plan’s assets is a fiduciary to the extent of that discretion or control. 11 See, e.g., Nat’l Conf. of Comm’rs on Uniform State Laws, Uniform Directed Trust Act § 8 (2017); 760 ILCS 5/16.3(e); 12 Del. C. § 3313(a). PO 00000 Frm 00002 Fmt 4702 Sfmt 4702 respect to a trust, such as the power to make discretionary distributions, override the trustee, or select a new trustee.12 This change could reduce ambiguity and confusion for national banks and Federal savings associations. It also could provide for the uniform application of OCC regulations to trust activities that State laws describe with different terminology. Request for Comments The OCC invites comment on whether amending the definition of ‘‘fiduciary capacity’’ to include these trust advisory functions would be useful and, if so, whether the approach suggested by the OCC is appropriate. The OCC specifically invites comment on what trust adviser activities or other capacities national banks and Federal savings associations are performing in providing services to their customers, and whether the OCC should consider explicitly identifying these activities as fiduciary activities subject to 12 CFR part 9 or 12 CFR part 150, respectively. Furthermore, the OCC invites commenters to identify any specific State statutes, uniform laws, or terminology that the OCC should consider when assessing whether an activity or appointment is a ‘‘fiduciary capacity.’’ The OCC also invites comments on other ways to amend this definition so that it encompasses evolving trust capacities, including trust capacities recognized or permitted under State law. Finally, the OCC invites comment on whether there are any additional fiduciary roles that State chartered banks currently perform that national banks and Federal savings associations also may be interested in performing that the OCC should consider identifying as a fiduciary capacity. III. Custody Activities Twelve CFR 9.8 and 9.13 impose general recordkeeping and custody requirements for a national bank that acts as a fiduciary. Twelve CFR 150.230 through 150.250 and 150.410 through 150.430 impose similar requirements for Federal savings associations. Specifically, these provisions require bank and savings association fiduciaries to provide adequate safeguards and controls over client fiduciary account assets, to keep these fiduciary account assets separate from bank and savings association assets, and to maintain and segregate certain records related to these accounts. 12 This ANPR refers to activities based on the authority an institution has with respect to a trust as ‘‘trust adviser activities.’’ E:\FR\FM\29APP1.SGM 29APP1 Federal Register / Vol. 84, No. 82 / Monday, April 29, 2019 / Proposed Rules khammond on DSKBBV9HB2PROD with PROPOSALS National banks and Federal savings associations also provide custody and recordkeeping services to clients for non-fiduciary accounts. In doing so, these banks and savings associations are not acting in a fiduciary capacity and, therefore, these activities are not subject to the OCC’s fiduciary regulations. However, whether acting in a fiduciary or non-fiduciary custodial capacity, the principal roles of a national bank and Federal savings association custodian remain the same: To safeguard a client’s assets and to operate in a safe and sound manner. Non-fiduciary custody activities have become more sophisticated since the OCC issued its fiduciary regulation and may include additional services such as fund accounting, fund administration, securities lending, and global custodial services involving the execution of foreign exchange transactions and the processing of tax reclaims.13 In addition, the types of custody activities and assets continue to evolve with, for example, some banks assessing the risk and benefits of providing custody services for cryptocurrencies and other digital assets. Furthermore, the volume of nonfiduciary custody assets held in national banks and Federal savings associations has increased since the OCC updated its fiduciary regulation in 1996, and, as of December 31, 2018, totaled approximately $41.7 trillion, with national banks holding $39.9 trillion and Federal savings associations holding $1.8 trillion.14 The size of the custody services provided by national banks and Federal savings associations is significantly more (in dollar terms) than fiduciary assets ($8.7 trillion) 15 and on-balance sheet total assets ($12.1 trillion).16 The expansion of non-fiduciary custody activities and the growth in size of non-fiduciary custody assets increase operational, reputational, credit, and 13 A global custodian provides custody services for cross-border securities transactions in various markets around the world through either its own office in the local market or the use of agent banks as sub-custodians. 14 Schedule RC–T—Fiduciary and Related Services, Consolidated Reports of Condition and Income, December 31, 2018. The OCC notes that because national banks and Federal savings associations may provide custody services that are not reportable on Schedule RC–T, including custody services offered by banks and savings associations that do not possess fiduciary powers, the amount of non-fiduciary custody assets is likely larger. 15 Schedule RC–T—Fiduciary and Related Services, Consolidated Reports of Condition and Income, December 31, 2018. 16 Schedule RC–Balance Sheet, Consolidated Reports of Condition and Income, December 31, 2018. VerDate Sep<11>2014 17:14 Apr 26, 2019 Jkt 247001 other risks for national bank and Federal savings association custodians. The OCC believes that current OCC guidance appropriately identifies safe and sound risk management practices for custodians, including the protection of client assets in the custody of national banks and Federal savings associations.17 However, the OCC also believes that it may be appropriate to set out in regulation the core standards for non-fiduciary custody activities because of the heightened risks a business line of this scale poses to banks and savings associations and because of the importance of providing adequate safeguards for client assets. Because non-fiduciary custody activities are not subject to 12 CFR 9.13, 150.230, 150.240, and 150.250 and are not governed by any other OCC regulation that specifically requires a custodial bank or savings association to safeguard or segregate client assets, the OCC invites comment on whether it should issue rules to govern non-fiduciary custody activities. The OCC expects that any custody rule the agency issued would be consistent with its guidance on custody service activities for national bank and Federal savings association custodians 18 and be compatible with industry standards. Therefore, the OCC believes that such a custody rule would impose minimal new responsibilities on well-managed national banks or Federal savings associations. If the OCC were to implement a rule specific to non-fiduciary custodial capacities, the OCC also could consider amending the existing fiduciary custody language in 12 CFR 9.13, 150.230, 150.240, and 150.250 to ensure that the same standards would apply to fiduciary custody accounts. This would provide a single consistent standard for safeguarding client assets and clarify expectations for custody of both fiduciary and non-fiduciary account assets. The OCC notes that an OCC custody rule for national banks and Federal savings associations would complement 17 The OCC has issued substantial guidance regarding non-fiduciary custody activity. See the ‘‘Custody Services’’ (Jan. 2002), ‘‘Asset Management Operations and Controls’’ (Jan. 2011), ‘‘Unique and Hard-to-Value Assets’’ (August 2012), ‘‘Retirement Plan Products and Services’’ (Feb. 2014), and ‘‘Conflicts of Interest’’ (Jan. 2015) booklets of the Comptroller’s Handbook, and OCC Bulletin 2013– 29, ‘‘Third-Party Relationships—Risk Management Guidance’’ (Oct. 30, 2013). The OCC made its guidance on asset management operations and controls applicable to Federal savings associations on January 6, 2012 (see OCC Bulletin 2012–2) and its guidance on custody services applicable to Federal savings associations on May 17, 2012 (see OCC Bulletin 2012–15). 18 Id. PO 00000 Frm 00003 Fmt 4702 Sfmt 4702 17969 the applicable regulations of other regulators related to the custody of client assets. Specifically, the Securities and Exchange Commission and the Commodity Futures Trading Commission have issued regulations related to the custody of client assets by their regulated entities,19 and the Internal Revenue Service has issued rules applicable to the custody of Individual Retirement Accounts.20 Furthermore, U.S. Department of the Treasury regulations 21 set forth specific requirements for banks and savings associations that hold government securities in a custodial capacity, Freddie Mac and Fannie Mae impose specific requirements to be included in document custody agreements,22 and the National Association of Insurance Commissioners has adopted a model act that addresses custody and the holding and transferring of an insurance company’s securities.23 Various States also have adopted custody requirements for insurance companies and investment advisers operating in their jurisdictions.24 In addition, foreign jurisdictions, including the United 19 See 17 CFR 275.206(4)–2 (Custody of funds or securities of clients by investment advisers); 17 CFR 270.17f–1 (Custody of securities with members of national securities exchanges); 17 CFR 270.17f–2 (Custody of investments by registered management investment company); 17 CFR 270.17f–4 (Custody of investment company assets with a securities deposit); 17 CFR 270.17f–5 (Custody of investment company assets outside the United States); 17 CFR 270.17f–6 (Custody of investment company assets with Futures Commission Merchants and Commodity Clearing Organizations); and 17 CFR 270.17f–7 (Custody of investment company assets with a foreign securities depository). 20 See 26 CFR 1.408–2(d). 21 17 CFR 450 (Custodial Holding of Government Securities by Depository Institutions). 22 See Freddie Mac Document Custody Procedures Handbook (August 2015), https:// www.freddiemac.com/cim/pdf/EntireManual.pdf and Fannie Mae Requirements for Document Custodians (Version 12.0, April 2018), https:// www.fanniemae.com/content/eligibility_ information/document-custodiansrequirements.pdf. 23 See Nat’l Ass’n of Ins. Comm’rs, Model Act on Custodial Agreements and the Use of Clearing Corporations, MDL–295 (2008), https:// www.naic.org/prod_serv_model_laws.htm. 24 Regarding State custody requirements for insurance companies, see, e.g., Fla. Admin. Code Ann. r. 690–143.042 (2017) (Custody Agreements; Requirements); Tenn. Comp. R. & Regs. 0780–01– 46 (2013) (Regulations on Custodial Agreements and the Use of Clearing Corporations); Wyoming Administration Rules—Insurance Department— General Agency, Board of Commission Rules, Chapter 57 (2017) (Regulation on Custodial Agreements and the Use of Clearing Corporations). Regarding State custody requirements for investment advisers, see. e.g., Mass. Regs. Code tit. 950, § 12.205(5) (2014) (Discretion and Custody Requirements); 10 Pa. Code § 404.014 (2018) (Custody Requirements for Investment Advisers); Wash. Admin. Code § 460–24A–105 to 460–24A– 108 (2019) (Custody Requirements for Investment Advisers). E:\FR\FM\29APP1.SGM 29APP1 17970 Federal Register / Vol. 84, No. 82 / Monday, April 29, 2019 / Proposed Rules Kingdom and the European Union, have adopted specific regulatory requirements covering custody activities, many of which were strengthened in the wake of the 2008 financial crisis.25 In general, these regulatory requirements impose certain minimum safekeeping and segregation requirements on a regulated entity for the custody of client assets. The objective of these requirements is to safeguard the assets of clients, with bank custodians playing a key role in this process. Some of these requirements may directly or indirectly apply to accounts for which a national bank or Federal savings association is custodian. The OCC believes a welldefined regulatory framework for national bank and Federal savings association custody activities would codify the expectations of other regulators that bank custodians safeguard the client assets of the entities that they regulate in a safe and sound manner. khammond on DSKBBV9HB2PROD with PROPOSALS Possible Regulatory Revisions An OCC rule governing the nonfiduciary custody activities of national banks and Federal savings associations would be based on the following core elements of sound risk management, consistent with OCC guidance: (1) Separation and safeguarding of custodial assets; (2) due diligence in selection and ongoing oversight of subcustodians; 26 (3) disclosure in custodial contracts and agreements of the custodian’s duties and responsibilities; 25 See, e.g., Financial Conduct Authority, FCA Handbook, Cass § 6 (custody rules) (UK), https:// www.handbook.fca.org.uk/handbook/CASS/6/ ?view=chapter; Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2001 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 Text with EEA relevance, 2011 O.J. (L 174), 1–73, https://eur-lex.europa.eu/eli/dir/2011/ 61/oj; Directive 2014/91/EU of the European Parliament and of the Council of 23 July 2014 amending Directive 2009/65/EC on the coordination of laws, regulations, and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) as regards depositary functions, remuneration policies, and sanctions. 2014 OJ (L257), 186–213, https://eur-lex.europa.eu/ legal-content/EN/TXT/?uri=celex%3A32014L0091. 26 Sub-custodians are third party entities that provide custody services to national banks or Federal savings associations, pursuant to a written agreement, with respect to custody assets for which the bank or savings association is custodian. For example, bank or savings association custodians that are not members of a central securities depository often engage financial institutions that are members as their agents or sub-custodians. Bank and savings association custodians also use subcustodians known as global custodians to facilitate securities transactions in other countries. The global custodian provides access to central securities depositories in those countries either through its local offices or by engaging a local subcustodian. VerDate Sep<11>2014 16:06 Apr 26, 2019 Jkt 247001 and (4) effective policies, procedures, and internal controls.27 These core elements focus on protecting client assets from loss due to physical damage, fraud, inaccurate or improper accounting, or bankruptcy or insolvency of a custodian or its sub-custodian, and enhance the safety and soundness of the national bank or Federal savings association engaged in custody activities or services. A rule including these core elements would codify safeguards to protect client assets, including imposing risk management standards on banks and savings associations that use subcustodians. Request for Comments The OCC invites comment on all aspects of a potential non-fiduciary custody rule. In particular, the OCC is interested in whether a custody rule would help clarify the role of a national bank or Federal savings association acting as a non-fiduciary custodian; whether the potential elements of such a rule, as outlined in this ANPR, are appropriate; and whether the OCC should consider additional elements. In particular, the OCC invites comment on potential provisions that would implement the core elements of a custody rule. Specifically, should an OCC rule direct national banks and Federal savings associations to: • Implement and maintain effective internal controls to safeguard both physical and book-entry assets held in custody accounts by the national bank or Federal savings association? • Implement and maintain adequate safeguards and controls when custody account assets are maintained offpremises? • Maintain custody assets separate from the bank’s or savings association’s assets, as currently required in 12 CFR 9.13 and 150.250 for custody of fiduciary assets? • Maintain the custody assets of each account separate from all other accounts or maintain records that identify the custody assets as the property of each particular account, as currently required in 12 CFR 9.8, 9.13, 150.250, and 150.410 through 150.430 for custody of fiduciary assets? • Periodically verify the amount and location of custody assets held physically by comparing the bank’s or savings association’s books and records of custody assets to the physical assets in their possession? • Periodically compare custody assets held in book-entry form or off-premises by comparing the bank’s or savings association’s books and records of 27 Comptroller’s PO 00000 Frm 00004 Handbook, supra, note 17. Fmt 4702 Sfmt 4702 custody assets to the books and records of the book-entry issuer, sub-custodian, or central securities depository? • Place custody assets in the joint custody or control of no fewer than two officers or employees, which would be consistent with the current requirement in 12 CFR 9.13 and 150.230? • Undertake effective due diligence by performing an in-depth assessment of a sub-custodian’s ability to perform the activity in compliance with all applicable laws and regulations prior to depositing custodial funds with the subcustodian, and perform ongoing periodic monitoring of the subcustodian? 28 • Adopt and follow written policies and procedures to ensure that custody services are provided in accordance with custody agreements and in compliance with the custody regulation and applicable law, similar to the requirements of 12 CFR 9.5 and 150.140, respectively, for national banks and Federal savings associations exercising fiduciary powers? The OCC also invites comments on whether a custody rule should include any specific requirements for custodial agreements. Specifically, should an agreement: • Clearly define the custodian’s duties and responsibilities, and include a full and accurate disclosure of fees and pricing, as well as provisions detailing the relationship between the client as principal and the custodian as agent? • Disclose whether the bank or savings association is acting in any other capacity with respect to services ancillary to the custody relationship, e.g. principal capacity for foreign exchange trades or depository for cash? • Include adequate disclosures, when applicable, to make clear that the national bank or Federal savings association custodian is not acting in a fiduciary capacity? In addition to comments on specific components of an OCC rule, the OCC invites comment on the following issues: • Should the OCC update the fiduciary standards of 12 CFR 9.13, 150.230, 150.240, and 150.250 to be consistent with any non-fiduciary account standards that the OCC may adopt? • Do any of the standards mentioned above conflict with any other Federal requirements applicable to national banks and Federal savings associations or regulated entities that use bank custody services? 28 See OCC Bulletin 2013–29, ‘‘Third-Party Relationships—Risk Management Guidance’’ (Oct. 30, 2013). E:\FR\FM\29APP1.SGM 29APP1 Federal Register / Vol. 84, No. 82 / Monday, April 29, 2019 / Proposed Rules • Should the OCC limit the types of entities that a national bank or Federal savings association may use as a subcustodian or limit the type of subcustodian for specific types of accounts? For example, the Internal Revenue Service limits which entities may act as custodians for Individual Retirement Accounts.29 If the OCC imposes a limit, what types of accounts should be subject to the limitation and why? • What type of retail or commercial custody and safe keeping activities should an OCC non-fiduciary custody rule exclude, if any, and why? Finally, the OCC invites comment on whether any of the possible provisions listed above would be overly burdensome, especially for community institutions, and if so, whether there are approaches that would address the same issues in a less burdensome way. The OCC also invites comment from clients of national bank and Federal savings association custodians on the appropriateness of these suggested provisions and whether the OCC should consider additional provisions to safeguard custody assets. Dated: April 23, 2019. Joseph M. Otting, Comptroller of the Currency. [FR Doc. 2019–08505 Filed 4–26–19; 8:45 am] BILLING CODE 4810–33–P BUREAU OF CONSUMER FINANCIAL PROTECTION 12 CFR Part 1005 [Docket No.: CFPB–2019–0018] Request for Information Regarding Potential Regulatory Changes to the Remittance Rule Bureau of Consumer Financial Protection. ACTION: Request for information. AGENCY: The Electronic Fund Transfers Act (EFTA), as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), establishes certain protections for consumers sending international money transfers, or remittance transfers. The Bureau of Consumer Financial Protection’s (Bureau) remittance rules (Remittance Rule or Rule) implement these protections. This document seeks information and evidence that may inform possible changes to the Rule that would not eliminate, but would mitigate the effects of the expiration of a statutory exception for certain financial khammond on DSKBBV9HB2PROD with PROPOSALS SUMMARY: 29 See 26 CFR 1.408–2. VerDate Sep<11>2014 16:06 Apr 26, 2019 Jkt 247001 institutions. EFTA expressly limits the length of the temporary exception to July 21, 2020 and does not authorize the Bureau to extend this term. Therefore, the exception will expire on July 21, 2020 unless Congress changes the law. In addition, the Bureau seeks information and evidence related to the scope of coverage of the Rule, including whether to change a safe harbor threshold in the Rule that determines whether a person makes remittance transfers in the normal course of its business, and whether an exception for small financial institutions may be appropriate. Comments must be received on or before June 28, 2019. ADDRESSES: You may submit responsive information and other comments, identified by Docket No. CFPB–2019– 0018, by any of the following methods: • Federal eRulemaking Portal: Go to https://www.regulations.gov. Follow the instructions for submitting comments. • Email: 2019-RFI-RemittanceRule@ cfpb.gov. Include Docket No. CFPB– 2019–0018 in the subject line of the message. • Mail: Comment Intake, Bureau of Consumer Financial Protection, 1700 G St. NW, Washington, DC 20552. • Hand Delivery/Courier: Comment Intake, Bureau of Consumer Financial Protection, 1700 G Street NW, Washington, DC 20552. Instructions: Please note the number associated with any question to which you are responding at the top of each response. You are not required to answer all questions to receive consideration of your comments. The Bureau encourages the early submission of comments. All submissions must include the document title and docket number. Because paper mail in the Washington, DC area and at the Bureau is subject to delay, commenters are encouraged to submit comments electronically. In general, all comments received will be posted without change to https://www.regulations.gov. In addition, comments will be available for public inspection and copying at 1700 G St. NW, Washington, DC 20552, on official business days between the hours of 10 a.m. and 5 p.m. Eastern Standard Time. You can make an appointment to inspect the documents by telephoning (202) 435–7275. All submissions, including attachments and other supporting materials, will become part of the public record and subject to public disclosure. Please do not include in your submissions sensitive personal information, such as account numbers or Social Security numbers, or names of DATES: PO 00000 Frm 00005 Fmt 4702 Sfmt 4702 17971 other individuals, or other information that you would not ordinarily make public, such as trade secrets or confidential commercial information. Submissions will not be edited to remove any identifying or contact information, or other information that you would not ordinarily make public. If you wish to submit trade secret or confidential commercial information, please contact the individuals listed in the FOR FURTHER INFORMATION CONTACT section below. Information submitted to the Bureau will be treated in accordance with the Bureau’s Rule on the Disclosure of Records and Information, 12 CFR part 1070 et seq. FOR FURTHER INFORMATION CONTACT: Jane Raso, Senior Counsel; Yaritza Velez, Counsel; Office of Regulations, at (202) 435–7309. If you require this document in alternative electronic format, please contact CFPB_Accessibility.cfpb.gov. SUPPLEMENTARY INFORMATION: I. Background Consumers in the United States send ‘‘remittance transfers’’ 1 in the billions of dollars to recipients in foreign countries each year. The funds that consumers send abroad are commonly referred to as remittances, and consumers send remittances (often for a fee) in a variety of ways, including by using banks, credit unions, or money services businesses (MSBs). The term ‘‘remittance transfers’’ is sometimes limited to describing consumer-toconsumer transfers of small amounts of money, often made by immigrants supporting friends and relatives in other countries. But ‘‘remittance transfers’’ may also include payments of larger dollar amounts to pay, for instance, bills, tuition, or other expenses. Prior to the Dodd-Frank Act, remittance transfers fell largely outside of the scope of Federal consumer protection laws. Section 1073 of the Dodd-Frank Act amended EFTA by adding a new section 919 to EFTA to create a comprehensive system for consumer protection for remittance transfers sent by consumers in the United States to individuals and businesses in foreign countries.2 EFTA applies broadly in terms of the types of ‘‘remittance transfers’’ it covers and persons and financial institutions subject to it. EFTA section 919(g)(2) defines ‘‘remittance transfer’’ as the electronic transfer of funds by a sender in any State to designated recipients located in foreign countries that are 1 The definition of ‘‘remittance transfer’’ in the Remittance Rule is described below. 2 15 U.S.C. 1693 et seq. EFTA section 919 is codified at 1693o–1. E:\FR\FM\29APP1.SGM 29APP1

Agencies

[Federal Register Volume 84, Number 82 (Monday, April 29, 2019)]
[Proposed Rules]
[Pages 17967-17971]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-08505]


========================================================================
Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

========================================================================


Federal Register / Vol. 84, No. 82 / Monday, April 29, 2019 / 
Proposed Rules

[[Page 17967]]



DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Parts 9 and 150

[Docket ID OCC-2018-0018]
RIN 1557-AE46


Fiduciary Capacity; Non-Fiduciary Custody Activities

AGENCY: The Office of the Comptroller of the Currency, Department of 
the Treasury.

ACTION: Advanced notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: The Office of the Comptroller of the Currency (OCC) is 
inviting comment on an advance notice of proposed rulemaking (ANPR) 
regarding its fiduciary activities rules and a potential rule for non-
fiduciary custody activities of national banks, Federal savings 
associations, and Federal branches of foreign banks. Specifically, the 
OCC is considering an amendment to its fiduciary rule to update the 
definition of fiduciary capacity to include certain State recognized 
trust-related activities. The OCC also is considering issuing a 
regulation that would establish certain basic requirements for non-
fiduciary custody activities of national banks and Federal savings 
associations.

DATES: Comments must be received by June 28, 2019.

ADDRESSES: You may submit comments to the OCC by any of the methods set 
forth below. Commenters are encouraged to submit comments through the 
Federal eRulemaking Portal or email, if possible. Please use the title 
``Fiduciary Capacity; Non-Fiduciary Custody Activities'' to facilitate 
the organization and distribution of the comments. You may submit 
comments by any of the following methods:
     Federal eRulemaking Portal--``Regulations.gov'': Go to 
www.regulations.gov. Enter ``Docket ID OCC-2018-0018 in the Search Box 
and click ``Search.'' Click on ``Comment Now'' to submit public 
comments. Click on the ``Help'' tab on the Regulations.gov home page to 
get information on using Regulations.gov, including instructions for 
submitting public comments.
     Email: [email protected].
     Mail: Chief Counsel's Office, Office of the Comptroller of 
the Currency, 400 7th Street SW, Suite 3E-218, Washington, DC 20219.
     Hand Delivery/Courier: 400 7th Street SW, Suite 3E-218, 
Washington, DC 20219.
     Fax: (571) 465-4326.
    Instructions: You must include ``OCC'' as the agency name and 
``Docket ID OCC-2018-0018'' in your comment. In general, the OCC will 
enter all comments received into the docket and publish the comments on 
the Regulations.gov website without change, including any business or 
personal information provided such as name and address information, 
email addresses, or phone numbers. Comments received, including 
attachments and other supporting materials, are part of the public 
record and subject to public disclosure. Do not include any information 
in your comment or supporting materials that you consider confidential 
or inappropriate for public disclosure.
    You may review comments and other related materials that pertain to 
this rulemaking action by any of the following methods:
     Viewing Comments Electronically: Go to 
www.regulations.gov. Enter ``Docket ID OCC-2018-0018'' in the Search 
box and click ``Search.'' Click on ``Open Docket Folder'' on the right 
side of the screen. Comments and supporting materials can be viewed and 
filtered by clicking on ``View all documents and comments in this 
docket'' and then using the filtering tools on the left side of the 
screen. Click on the ``Help'' tab on the Regulations.gov home page to 
get information on using Regulations.gov. The docket may be viewed 
after the close of the comment period in the same manner as during the 
comment period.
     Viewing Comments Personally: You may personally inspect 
comments at the OCC, 400 7th Street SW, Washington, DC 20219. For 
security reasons, the OCC requires that visitors make an appointment to 
inspect comments. You may do so by calling (202) 649-6700 or, for 
persons who are deaf or hearing impaired, TTY, (202) 649-5597. Upon 
arrival, visitors will be required to present valid government-issued 
photo identification and submit to security screening in order to 
inspect comments.

FOR FURTHER INFORMATION CONTACT: Patricia Dalton, Technical Expert for 
Market Risk, Asset Management, (202) 649-6401; David Stankiewicz, 
Special Counsel, or Asa Chamberlayne, Counsel, (202) 649-7299, or Heidi 
M. Thomas, Special Counsel, or Chris Rafferty, Attorney, (202) 649-
5490, Chief Counsel's Office, Office of the Comptroller of the 
Currency, 400 7th Street SW, Washington, DC 20219. For persons who are 
deaf or hearing impaired, TTY, (202) 649-5597.

SUPPLEMENTARY INFORMATION:

I. Introduction

    Twelve U.S.C. 92a \1\ and 12 U.S.C. 1464(l) and (n) \2\ set forth 
the authority for fiduciary activities of national banks \3\ and 
Federal savings associations, respectively. While there are some 
differences, the fiduciary authority for national banks and Federal 
savings associations is substantially similar. OCC regulations 
implementing the substantive provisions of these statutes are set forth 
at 12 CFR part 9 for national banks and Federal branches of foreign 
banks (collectively, national banks) and 12 CFR part 150 for Federal 
savings associations.\4\
---------------------------------------------------------------------------

    \1\ Section 1 of the Act of September 28, 1962.
    \2\ Section 5(l) and (n) of the Home Owners' Loan Act of 1933.
    \3\ Twelve U.S.C. 92a also applies to Federal branches and 
agencies pursuant to 12 U.S.C. 3102(b), which provides that the 
operations of Federal branches and agencies shall be conducted with 
the same rights and privileges accorded national banks.
    \4\ Twelve CFR 5.26 sets forth the OCC's requirements for 
national banks and Federal savings associations to obtain OCC 
approval to engage in fiduciary activities.
---------------------------------------------------------------------------

    The OCC is considering an amendment to these fiduciary rules that 
would update the definition of ``fiduciary capacity'' so that this term 
would be more consistent with how the role of bank fiduciaries has 
developed under State law. The OCC also is considering adopting a rule 
to address non-fiduciary custody activities of national banks and 
Federal savings associations. The OCC is seeking public comment on all 
aspects of these two

[[Page 17968]]

possible actions, discussed in detail below. The OCC will use these 
comments to determine whether to proceed with a proposed rule and, if 
so, to inform the content of a proposed rule. The OCC will invite 
public comment on a detailed proposal before adopting any final 
rule.\5\
---------------------------------------------------------------------------

    \5\ The OCC plans to issue a proposed rulemaking at a later date 
that would integrate its national bank and Federal savings 
association fiduciary activities rules so that only one rule applies 
to both national banks and Federal savings associations, taking into 
account consistency with the underlying statutes that apply to each 
type of institution.
---------------------------------------------------------------------------

II. Definition of ``Fiduciary Capacity''

    Twelve CFR parts 9 and 150 apply to national banks and Federal 
savings associations, respectively, that act in a ``fiduciary 
capacity.'' Section 9.2(e) defines ``fiduciary capacity'' 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; any capacity in which the bank possesses 
investment discretion on behalf of another; or any other similar 
capacity that the OCC authorizes pursuant to 12 U.S.C. 92a.'' Twelve 
CFR 150.30 applies a similar definition with respect to Federal savings 
associations. Many of the named capacities listed in these rules are 
specified by statute.\6\
---------------------------------------------------------------------------

    \6\ See 12 U.S.C. 92a; 12 U.S.C. 1464(n).
---------------------------------------------------------------------------

    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 involve investment discretion. Because some of these 
laws use terms other than those specified in 12 CFR 9.2(e) and 150.30 
to describe trust-related and fiduciary capacities, they are not 
explicitly included in the definition of fiduciary capacity in 12 CFR 
9.2(e) and 150.30.
    For example, some States have amended their trust laws to authorize 
directed trusts. In a traditional trust, the trustor grants the trustee 
the power to control the investment, management, distribution, and 
other administration decisions of the trust. By contrast, in a directed 
trust, the trustor may grant one or more trust advisers the power to 
direct the trustee with respect to these powers. State laws may not 
always refer to such trust advisers as ``trustees'' but instead may use 
other names not listed in the OCC's regulations. For example, the 
Uniform Directed Trust Act \7\ refers to such advisers generally as 
``trust directors.'' Meanwhile, Illinois law refers to such advisers as 
either ``investment trust advisers,'' ``distribution trust advisers,'' 
or ``trust protectors'' depending on the discretion exercised.\8\ By 
default under the Illinois statute, an ``investment trust adviser'' 
controls investment decisions; a ``distribution trust adviser'' 
controls distribution decisions; and a ``trust protector'' may be given 
various powers by the trust instrument, including the power to remove 
and appoint a trustee, investment trust adviser, or distribution trust 
adviser.\9\ Delaware law similarly refers to such trust advisers 
generally as ``advisers'' or, in the case of advisers with the power to 
remove and appoint trustees and other advisers, as ``protectors.'' \10\ 
State directed trust statutes often provide that trust advisers are 
fiduciaries with the same responsibility to exercise the authority or 
power granted to them as a trustee would have, unless provided 
otherwise by the trust instrument.\11\
---------------------------------------------------------------------------

    \7\ The Uniform Directed Trust Act was drafted by the National 
Conference of Commissioners on Uniform State Laws in order to 
address the rise of directed trusts. See Nat'l Conf. of Comm'rs on 
Uniform State Laws, Uniform Directed Trust Act (2017). New Mexico 
recently adopted this uniform law. See Uniform Directed Trust Act, 
2018 N.M Laws, ch. 63 (S.B. 101) (to be codified at the Uniform 
Trust Code N.M. Stat. Sec.  46a).
    \8\ See 760 ILCS 5/16.3.
    \9\ Id.
    \10\ See 12 Del. C. Sec.  3313. In addition, the Employee 
Retirement Income Security Act of 1974 (ERISA) defines fiduciary 
based on function and not only on named capacities. For example, 
pursuant to section 3(21) of ERISA (29 U.S. Code 1002(21)), a person 
using discretion in administering and managing a plan or controlling 
the plan's assets is a fiduciary to the extent of that discretion or 
control.
    \11\ See, e.g., Nat'l Conf. of Comm'rs on Uniform State Laws, 
Uniform Directed Trust Act Sec.  8 (2017); 760 ILCS 5/16.3(e); 12 
Del. C. Sec.  3313(a).
---------------------------------------------------------------------------

    This expanding list of terms for trust-related and fiduciary roles 
under State law that are not explicitly identified as fiduciary 
capacities under OCC regulations, and that may not involve investment 
discretion or investment advisory services, may create uncertainty for 
national banks and Federal savings associations with respect to the 
activities governed by OCC fiduciary regulations. This potential 
uncertainty may make it difficult for institutions to assess and manage 
litigation risk and to understand OCC expectations for managing these 
accounts in a safe and sound manner. Therefore, the OCC is considering 
amending the definition of fiduciary capacity to include these new 
roles.

Possible Regulatory Revisions

    The OCC is contemplating updating the regulatory definition of 
``fiduciary capacity'' to include any activity based on the authority a 
national bank or Federal savings association has with respect to a 
trust, such as the power to make discretionary distributions, override 
the trustee, or select a new trustee.\12\ This change could reduce 
ambiguity and confusion for national banks and Federal savings 
associations. It also could provide for the uniform application of OCC 
regulations to trust activities that State laws describe with different 
terminology.
---------------------------------------------------------------------------

    \12\ This ANPR refers to activities based on the authority an 
institution has with respect to a trust as ``trust adviser 
activities.''
---------------------------------------------------------------------------

Request for Comments

    The OCC invites comment on whether amending the definition of 
``fiduciary capacity'' to include these trust advisory functions would 
be useful and, if so, whether the approach suggested by the OCC is 
appropriate. The OCC specifically invites comment on what trust adviser 
activities or other capacities national banks and Federal savings 
associations are performing in providing services to their customers, 
and whether the OCC should consider explicitly identifying these 
activities as fiduciary activities subject to 12 CFR part 9 or 12 CFR 
part 150, respectively. Furthermore, the OCC invites commenters to 
identify any specific State statutes, uniform laws, or terminology that 
the OCC should consider when assessing whether an activity or 
appointment is a ``fiduciary capacity.'' The OCC also invites comments 
on other ways to amend this definition so that it encompasses evolving 
trust capacities, including trust capacities recognized or permitted 
under State law. Finally, the OCC invites comment on whether there are 
any additional fiduciary roles that State chartered banks currently 
perform that national banks and Federal savings associations also may 
be interested in performing that the OCC should consider identifying as 
a fiduciary capacity.

III. Custody Activities

    Twelve CFR 9.8 and 9.13 impose general recordkeeping and custody 
requirements for a national bank that acts as a fiduciary. Twelve CFR 
150.230 through 150.250 and 150.410 through 150.430 impose similar 
requirements for Federal savings associations. Specifically, these 
provisions require bank and savings association fiduciaries to provide 
adequate safeguards and controls over client fiduciary account assets, 
to keep these fiduciary account assets separate from bank and savings 
association assets, and to maintain and segregate certain records 
related to these accounts.

[[Page 17969]]

    National banks and Federal savings associations also provide 
custody and recordkeeping services to clients for non-fiduciary 
accounts. In doing so, these banks and savings associations are not 
acting in a fiduciary capacity and, therefore, these activities are not 
subject to the OCC's fiduciary regulations. However, whether acting in 
a fiduciary or non-fiduciary custodial capacity, the principal roles of 
a national bank and Federal savings association custodian remain the 
same: To safeguard a client's assets and to operate in a safe and sound 
manner.
    Non-fiduciary custody activities have become more sophisticated 
since the OCC issued its fiduciary regulation and may include 
additional services such as fund accounting, fund administration, 
securities lending, and global custodial services involving the 
execution of foreign exchange transactions and the processing of tax 
reclaims.\13\ In addition, the types of custody activities and assets 
continue to evolve with, for example, some banks assessing the risk and 
benefits of providing custody services for cryptocurrencies and other 
digital assets.
---------------------------------------------------------------------------

    \13\ A global custodian provides custody services for cross-
border securities transactions in various markets around the world 
through either its own office in the local market or the use of 
agent banks as sub-custodians.
---------------------------------------------------------------------------

    Furthermore, the volume of non-fiduciary custody assets held in 
national banks and Federal savings associations has increased since the 
OCC updated its fiduciary regulation in 1996, and, as of December 31, 
2018, totaled approximately $41.7 trillion, with national banks holding 
$39.9 trillion and Federal savings associations holding $1.8 
trillion.\14\ The size of the custody services provided by national 
banks and Federal savings associations is significantly more (in dollar 
terms) than fiduciary assets ($8.7 trillion) \15\ and on-balance sheet 
total assets ($12.1 trillion).\16\
---------------------------------------------------------------------------

    \14\ Schedule RC-T--Fiduciary and Related Services, Consolidated 
Reports of Condition and Income, December 31, 2018. The OCC notes 
that because national banks and Federal savings associations may 
provide custody services that are not reportable on Schedule RC-T, 
including custody services offered by banks and savings associations 
that do not possess fiduciary powers, the amount of non-fiduciary 
custody assets is likely larger.
    \15\ Schedule RC-T--Fiduciary and Related Services, Consolidated 
Reports of Condition and Income, December 31, 2018.
    \16\ Schedule RC-Balance Sheet, Consolidated Reports of 
Condition and Income, December 31, 2018.
---------------------------------------------------------------------------

    The expansion of non-fiduciary custody activities and the growth in 
size of non-fiduciary custody assets increase operational, 
reputational, credit, and other risks for national bank and Federal 
savings association custodians. The OCC believes that current OCC 
guidance appropriately identifies safe and sound risk management 
practices for custodians, including the protection of client assets in 
the custody of national banks and Federal savings associations.\17\ 
However, the OCC also believes that it may be appropriate to set out in 
regulation the core standards for non-fiduciary custody activities 
because of the heightened risks a business line of this scale poses to 
banks and savings associations and because of the importance of 
providing adequate safeguards for client assets. Because non-fiduciary 
custody activities are not subject to 12 CFR 9.13, 150.230, 150.240, 
and 150.250 and are not governed by any other OCC regulation that 
specifically requires a custodial bank or savings association to 
safeguard or segregate client assets, the OCC invites comment on 
whether it should issue rules to govern non-fiduciary custody 
activities.
---------------------------------------------------------------------------

    \17\ The OCC has issued substantial guidance regarding non-
fiduciary custody activity. See the ``Custody Services'' (Jan. 
2002), ``Asset Management Operations and Controls'' (Jan. 2011), 
``Unique and Hard-to-Value Assets'' (August 2012), ``Retirement Plan 
Products and Services'' (Feb. 2014), and ``Conflicts of Interest'' 
(Jan. 2015) booklets of the Comptroller's Handbook, and OCC Bulletin 
2013-29, ``Third-Party Relationships--Risk Management Guidance'' 
(Oct. 30, 2013). The OCC made its guidance on asset management 
operations and controls applicable to Federal savings associations 
on January 6, 2012 (see OCC Bulletin 2012-2) and its guidance on 
custody services applicable to Federal savings associations on May 
17, 2012 (see OCC Bulletin 2012-15).
---------------------------------------------------------------------------

    The OCC expects that any custody rule the agency issued would be 
consistent with its guidance on custody service activities for national 
bank and Federal savings association custodians \18\ and be compatible 
with industry standards. Therefore, the OCC believes that such a 
custody rule would impose minimal new responsibilities on well-managed 
national banks or Federal savings associations.
---------------------------------------------------------------------------

    \18\ Id.
---------------------------------------------------------------------------

    If the OCC were to implement a rule specific to non-fiduciary 
custodial capacities, the OCC also could consider amending the existing 
fiduciary custody language in 12 CFR 9.13, 150.230, 150.240, and 
150.250 to ensure that the same standards would apply to fiduciary 
custody accounts. This would provide a single consistent standard for 
safeguarding client assets and clarify expectations for custody of both 
fiduciary and non-fiduciary account assets.
    The OCC notes that an OCC custody rule for national banks and 
Federal savings associations would complement the applicable 
regulations of other regulators related to the custody of client 
assets. Specifically, the Securities and Exchange Commission and the 
Commodity Futures Trading Commission have issued regulations related to 
the custody of client assets by their regulated entities,\19\ and the 
Internal Revenue Service has issued rules applicable to the custody of 
Individual Retirement Accounts.\20\ Furthermore, U.S. Department of the 
Treasury regulations \21\ set forth specific requirements for banks and 
savings associations that hold government securities in a custodial 
capacity, Freddie Mac and Fannie Mae impose specific requirements to be 
included in document custody agreements,\22\ and the National 
Association of Insurance Commissioners has adopted a model act that 
addresses custody and the holding and transferring of an insurance 
company's securities.\23\ Various States also have adopted custody 
requirements for insurance companies and investment advisers operating 
in their jurisdictions.\24\ In addition, foreign jurisdictions, 
including the United

[[Page 17970]]

Kingdom and the European Union, have adopted specific regulatory 
requirements covering custody activities, many of which were 
strengthened in the wake of the 2008 financial crisis.\25\ In general, 
these regulatory requirements impose certain minimum safekeeping and 
segregation requirements on a regulated entity for the custody of 
client assets. The objective of these requirements is to safeguard the 
assets of clients, with bank custodians playing a key role in this 
process. Some of these requirements may directly or indirectly apply to 
accounts for which a national bank or Federal savings association is 
custodian. The OCC believes a well-defined regulatory framework for 
national bank and Federal savings association custody activities would 
codify the expectations of other regulators that bank custodians 
safeguard the client assets of the entities that they regulate in a 
safe and sound manner.
---------------------------------------------------------------------------

    \19\ See 17 CFR 275.206(4)-2 (Custody of funds or securities of 
clients by investment advisers); 17 CFR 270.17f-1 (Custody of 
securities with members of national securities exchanges); 17 CFR 
270.17f-2 (Custody of investments by registered management 
investment company); 17 CFR 270.17f-4 (Custody of investment company 
assets with a securities deposit); 17 CFR 270.17f-5 (Custody of 
investment company assets outside the United States); 17 CFR 
270.17f-6 (Custody of investment company assets with Futures 
Commission Merchants and Commodity Clearing Organizations); and 17 
CFR 270.17f-7 (Custody of investment company assets with a foreign 
securities depository).
    \20\ See 26 CFR 1.408-2(d).
    \21\ 17 CFR 450 (Custodial Holding of Government Securities by 
Depository Institutions).
    \22\ See Freddie Mac Document Custody Procedures Handbook 
(August 2015), https://www.freddiemac.com/cim/pdf/EntireManual.pdf 
and Fannie Mae Requirements for Document Custodians (Version 12.0, 
April 2018), https://www.fanniemae.com/content/eligibility_information/document-custodians-requirements.pdf.
    \23\ See Nat'l Ass'n of Ins. Comm'rs, Model Act on Custodial 
Agreements and the Use of Clearing Corporations, MDL-295 (2008), 
https://www.naic.org/prod_serv_model_laws.htm.
    \24\ Regarding State custody requirements for insurance 
companies, see, e.g., Fla. Admin. Code Ann. r. 690-143.042 (2017) 
(Custody Agreements; Requirements); Tenn. Comp. R. & Regs. 0780-01-
46 (2013) (Regulations on Custodial Agreements and the Use of 
Clearing Corporations); Wyoming Administration Rules--Insurance 
Department--General Agency, Board of Commission Rules, Chapter 57 
(2017) (Regulation on Custodial Agreements and the Use of Clearing 
Corporations). Regarding State custody requirements for investment 
advisers, see. e.g., Mass. Regs. Code tit. 950, Sec.  12.205(5) 
(2014) (Discretion and Custody Requirements); 10 Pa. Code Sec.  
404.014 (2018) (Custody Requirements for Investment Advisers); Wash. 
Admin. Code Sec.  460-24A-105 to 460-24A-108 (2019) (Custody 
Requirements for Investment Advisers).
    \25\ See, e.g., Financial Conduct Authority, FCA Handbook, Cass 
Sec.  6 (custody rules) (UK), https://www.handbook.fca.org.uk/handbook/CASS/6/?view=chapter; Directive 2011/61/EU of the European 
Parliament and of the Council of 8 June 2001 on Alternative 
Investment Fund Managers and amending Directives 2003/41/EC and 
2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 
Text with EEA relevance, 2011 O.J. (L 174), 1-73, https://eur-lex.europa.eu/eli/dir/2011/61/oj; Directive 2014/91/EU of the 
European Parliament and of the Council of 23 July 2014 amending 
Directive 2009/65/EC on the coordination of laws, regulations, and 
administrative provisions relating to undertakings for collective 
investment in transferable securities (UCITS) as regards depositary 
functions, remuneration policies, and sanctions. 2014 OJ (L257), 
186-213, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32014L0091.
---------------------------------------------------------------------------

Possible Regulatory Revisions

    An OCC rule governing the non-fiduciary custody activities of 
national banks and Federal savings associations would be based on the 
following core elements of sound risk management, consistent with OCC 
guidance: (1) Separation and safeguarding of custodial assets; (2) due 
diligence in selection and ongoing oversight of sub-custodians; \26\ 
(3) disclosure in custodial contracts and agreements of the custodian's 
duties and responsibilities; and (4) effective policies, procedures, 
and internal controls.\27\ These core elements focus on protecting 
client assets from loss due to physical damage, fraud, inaccurate or 
improper accounting, or bankruptcy or insolvency of a custodian or its 
sub-custodian, and enhance the safety and soundness of the national 
bank or Federal savings association engaged in custody activities or 
services. A rule including these core elements would codify safeguards 
to protect client assets, including imposing risk management standards 
on banks and savings associations that use sub-custodians.
---------------------------------------------------------------------------

    \26\ Sub-custodians are third party entities that provide 
custody services to national banks or Federal savings associations, 
pursuant to a written agreement, with respect to custody assets for 
which the bank or savings association is custodian. For example, 
bank or savings association custodians that are not members of a 
central securities depository often engage financial institutions 
that are members as their agents or sub-custodians. Bank and savings 
association custodians also use sub-custodians known as global 
custodians to facilitate securities transactions in other countries. 
The global custodian provides access to central securities 
depositories in those countries either through its local offices or 
by engaging a local sub-custodian.
    \27\ Comptroller's Handbook, supra, note 17.
---------------------------------------------------------------------------

Request for Comments

    The OCC invites comment on all aspects of a potential non-fiduciary 
custody rule. In particular, the OCC is interested in whether a custody 
rule would help clarify the role of a national bank or Federal savings 
association acting as a non-fiduciary custodian; whether the potential 
elements of such a rule, as outlined in this ANPR, are appropriate; and 
whether the OCC should consider additional elements.
    In particular, the OCC invites comment on potential provisions that 
would implement the core elements of a custody rule. Specifically, 
should an OCC rule direct national banks and Federal savings 
associations to:
     Implement and maintain effective internal controls to 
safeguard both physical and book-entry assets held in custody accounts 
by the national bank or Federal savings association?
     Implement and maintain adequate safeguards and controls 
when custody account assets are maintained off-premises?
     Maintain custody assets separate from the bank's or 
savings association's assets, as currently required in 12 CFR 9.13 and 
150.250 for custody of fiduciary assets?
     Maintain the custody assets of each account separate from 
all other accounts or maintain records that identify the custody assets 
as the property of each particular account, as currently required in 12 
CFR 9.8, 9.13, 150.250, and 150.410 through 150.430 for custody of 
fiduciary assets?
     Periodically verify the amount and location of custody 
assets held physically by comparing the bank's or savings association's 
books and records of custody assets to the physical assets in their 
possession?
     Periodically compare custody assets held in book-entry 
form or off-premises by comparing the bank's or savings association's 
books and records of custody assets to the books and records of the 
book-entry issuer, sub-custodian, or central securities depository?
     Place custody assets in the joint custody or control of no 
fewer than two officers or employees, which would be consistent with 
the current requirement in 12 CFR 9.13 and 150.230?
     Undertake effective due diligence by performing an in-
depth assessment of a sub-custodian's ability to perform the activity 
in compliance with all applicable laws and regulations prior to 
depositing custodial funds with the sub-custodian, and perform ongoing 
periodic monitoring of the sub-custodian? \28\
---------------------------------------------------------------------------

    \28\ See OCC Bulletin 2013-29, ``Third-Party Relationships--Risk 
Management Guidance'' (Oct. 30, 2013).
---------------------------------------------------------------------------

     Adopt and follow written policies and procedures to ensure 
that custody services are provided in accordance with custody 
agreements and in compliance with the custody regulation and applicable 
law, similar to the requirements of 12 CFR 9.5 and 150.140, 
respectively, for national banks and Federal savings associations 
exercising fiduciary powers?
    The OCC also invites comments on whether a custody rule should 
include any specific requirements for custodial agreements. 
Specifically, should an agreement:
     Clearly define the custodian's duties and 
responsibilities, and include a full and accurate disclosure of fees 
and pricing, as well as provisions detailing the relationship between 
the client as principal and the custodian as agent?
     Disclose whether the bank or savings association is acting 
in any other capacity with respect to services ancillary to the custody 
relationship, e.g. principal capacity for foreign exchange trades or 
depository for cash?
     Include adequate disclosures, when applicable, to make 
clear that the national bank or Federal savings association custodian 
is not acting in a fiduciary capacity?
    In addition to comments on specific components of an OCC rule, the 
OCC invites comment on the following issues:
     Should the OCC update the fiduciary standards of 12 CFR 
9.13, 150.230, 150.240, and 150.250 to be consistent with any non-
fiduciary account standards that the OCC may adopt?
     Do any of the standards mentioned above conflict with any 
other Federal requirements applicable to national banks and Federal 
savings associations or regulated entities that use bank custody 
services?

[[Page 17971]]

     Should the OCC limit the types of entities that a national 
bank or Federal savings association may use as a sub-custodian or limit 
the type of sub-custodian for specific types of accounts? For example, 
the Internal Revenue Service limits which entities may act as 
custodians for Individual Retirement Accounts.\29\ If the OCC imposes a 
limit, what types of accounts should be subject to the limitation and 
why?
---------------------------------------------------------------------------

    \29\ See 26 CFR 1.408-2.
---------------------------------------------------------------------------

     What type of retail or commercial custody and safe keeping 
activities should an OCC non-fiduciary custody rule exclude, if any, 
and why?
    Finally, the OCC invites comment on whether any of the possible 
provisions listed above would be overly burdensome, especially for 
community institutions, and if so, whether there are approaches that 
would address the same issues in a less burdensome way. The OCC also 
invites comment from clients of national bank and Federal savings 
association custodians on the appropriateness of these suggested 
provisions and whether the OCC should consider additional provisions to 
safeguard custody assets.

    Dated: April 23, 2019.
Joseph M. Otting,
Comptroller of the Currency.
[FR Doc. 2019-08505 Filed 4-26-19; 8:45 am]
 BILLING CODE 4810-33-P
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.