OCC Asset Management Issues and Risks

FIRMA Risk Management Conference

San Diego April 23, 2018

1

Chizoba Egbuonu, Asset Management Policy

Disclosure

The views and opinions expressed in this presentation are my own, and do not necessarily represent those of the Office of the Comptroller of the Currency or the Chief National Bank

Examiner.

2

The Mission of the OCC

“assuring the safety and soundness of, and compliance with laws and regulations, fair access to financial services, and fair treatment of customers by, the institutions and other persons subject to its jurisdiction.”

• From Title III of the Dodd-Frank Act

3

Agenda

• OCC Asset Management Supervision

• AM Risks and Areas of Focus

• Recent Developments

• Appendix I: AM Statistics

• Appendix II: OCC Asset Management Guidance

4

• OCC regulates 928 national banks and 344 Federal savings associations (FSAs).

– They range from large complex banks with global footprints to local community banks.

– Includes 55 limited purpose national trust banks and 15 trust only FSAs.

• Approximately 43% of all national banks and 27% of Federal savings associations have Asset Management (AM) activities, which include fiduciary, custody and retail nondeposit services.

• Over 150 examiners with specialized Asset Management expertise perform ongoing supervision.

5

OCC Asset Management Supervision

Source: Active Charters as of 12/31/17

6

Asset Management Statistics

National Banks & FSAs Combined Fiduciary and Custody Assets - $51 trillion

Source: Call Report Schedule RC-T, 12/31/17

Total Fiduciary Assets Total Custody Assets

Total Fiduciary & Custody Assets

LB $7 trillion $40 trillion $47 trillion

MB $800 billion $700 billion $1.5 trillion

NE $1 trillion $1.5 trillion $2.5 trillion

CE $107 billion $54 billion $161 billion

SO $39 billion $31 billion $70 billion

WE $36 billion $14 billion $50 billion

Total $9 trillion $42 trillion $51 trillion

Role of AM Policy

• Works extensively with OCC’s examiners and bankers on policy guidance and interpretations for both examiners and the industry.

– AM Booklets of the Comptroller’s Handbook and OCC Bulletins

– Informal guidance on technical AM issues

– OCC examiner training

– Participates in on-site examinations

• With OCC Legal, interpret relevant banking law and regulations; assists bankers and examiners with securities, ERISA and tax law issues.

• Supports OCC Licensing and District offices on licensing matters, particularly national trust banks.

• Participates in outreach events, highlighting AM issues and risks for the industry.

7

Asset Management Risks and Areas of Supervisory Focus

8

AM Areas of Supervisory Focus

• What do OCC AM examiners typically focus on?

– Bank Management’s evaluation of AM Risk

– Fiduciary Audit – scope, staffing, expertise

– Conflicts of Interest

– Collective Fund Risk Management

– Third Party and New Product Oversight

– Model Risk management

– RNDIP

9

Investment Risk

10

• Market Volatility

• Interest Rate Risk

• Use of complex products

• Liquidity

• Increased Litigation and Reputation risks

Retail Non-Deposit Investment Products

• Principal risks include

– Aggressive sales practices

– Improper use of complex products

– Weaknesses in determining suitability and proper use of higher-risk products

• Areas of Focus

– Banks’ initial & ongoing due diligence

– Effective governance and bank oversight of RNDIP sales processes

• “Retail Nondeposit Investment Products” booklet of the Comptroller’s Handbook (January 2015)

11

Conflicts of Interest

• Conflicts of interest pose legal, reputation and compliance risk.

• Banks need effective processes to identify and address all types of conflicts of interest.

• Unless authorized by applicable law, placing client funds for which the bank has investment discretion in proprietary products is, by definition, self-dealing.

• Even when self-dealing is authorized, bank fiduciaries must still demonstrate how proprietary products are appropriate for that client and establish how those products meet the bank’s fiduciary obligations for its clients.

• Proprietary products should be subject to same due diligence standards as third party products.

12

Other Risks

• Operational Risk

– Cyber risks

– External fraud – Distribution requests/authentication

Client email account take-over

– Third party service provider oversight

Legacy systems

Emerging systems

Interconnectedness

– New Product Bulletin

Understanding of risks associated with new product

On-going focus on value added (if any) of new product

– Service provider consolidation/concentration

– AM outsourcing – effective oversight

– Internal Controls – fundamental risk management

13

Other Risks • Overall bank AM asset accumulation is slowing and revenues are

flat. Earnings compression appears to be due to competition

– Passive investment strategies

– Digital advisers

– Other asset managers (Banks and RIAs)

• Emerging state laws introduce new capacities, some limiting liability for bank fiduciaries. For NBs and FSAs, core requirements of a fiduciary remain regardless of whether a bank has investment discretion or is merely a directed trustee.

– Fiduciary powers; documented pre-acceptance account reviews; custody of fiduciary assets; annual fiduciary audits; policies; record keeping, and self-deposit pledge requirements.

– While state laws may permit banks to rely on a 3rd party investment manager for valuations, banks remain responsible for accuracy of Schedule RC-T, and IRS reporting.

14

Recent Developments

15

DOL Fiduciary Rule • Key Dates

– Previous administration proposed rule in 2010, re-proposed in 2012, finalized April 2016; Extended Initial Applicability Date - June 9, 2017; Full Compliance Date - July 1, 2019

– Provisions applicable on June 9, 2017

• Revised definition of Fiduciary

• Impartial conduct standards

– DOL Enforcement Policy

• Between June 9, 2017 and July 1, 2019, DOL will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary rule and prohibited transaction exemptions, or treat those fiduciaries as being in violation of the fiduciary rule and prohibited transaction exemptions

• The DOL will not pursue a claim against a fiduciary based solely on a failure to comply with the arbitration limitation of the BIC exemption. (FAB 2017-3, August 30, 2017)

16

• OCC Bulletin 2017-7, (January 24, 2017) – “Third-Party Relationships: Supplemental Examination Procedures”

– Tailored to risk and complexity of bank’s third-party relationships.

– Procedures to assess a bank’s quantity of risk and quality of risk management, especially over critical service providers.

– Includes consideration of

Service providers’ use of subcontractors.

Banks’ due diligence and ongoing monitoring of financial market utilities.

Reg W compliance for affiliated service providers.

Conflicts of interest.

– Focus on risk management throughout the lifecycle of third party relationship.

17

Third Party Relationships: Examination Procedures

• OCC Bulletin 2017-21 (June 7, 2017) – “Third-Party Relationships: Frequently Asked Questions to Supplement OCC Bulletin 2013-29”

– Risk management practices should be commensurate with risk and complexity of third-party relationship, adjusted for risk, and should be periodically reviewed and updated as needed.

– Highlights bank collaboration for oversight, including user groups.

– Provides guidance for Fintech relationships.

– Addresses use of third party compliance management systems.

– Addresses use of SSAE 18 Service Organization Control Report, especially with respect to third party’s oversight of subcontractors to assess whether additional audit or review is required.

– Addresses bank access to Service Provider ROEs.

18

Third Party Relationships: FAQ

• OCC Bulletin 2017-43 (October 20, 2017) – “New, Modified, or Expanded Bank Products and Services – Risk Management Principles” – Adequate due diligence and approvals before introducing a new

activity.

– Policies & procedures to properly identify, measure, monitor, report, and control risks.

– Effective change management for new activities or affected processes and technologies.

– Ongoing performance monitoring and review systems.

• Management and board limits on risk exposure.

• Specific objectives and criteria to evaluate whether the new activities are successful.

• Testing for compliance and effectiveness of operational controls and safeguards.

• Exit strategy for activities that fail to achieve projections.

19

New Products

• “Fiduciary Powers” Booklet of the Comptroller’s Licensing Manual – Published May 8, 2017 (OCC Bulletin 2017-16) – updates 2002

Booklet

– Incorporates revised 12 CFR 5, “Rules, Policies, and Procedures for Corporate Activities” (effective 7/1/2015) consolidating OTS and OCC regulations.

• “Corporate and Risk Governance” booklet of the Comptroller’s Handbook (OCC Bulletin 2016-25)

• “Internal and External Audit” booklet of the Comptroller’s Handbook. (OCC Bulletin 2016-47)

• “Foreword” booklet of the Comptroller’s Handbook – describes how banks will be able to identify changes to booklets going forward. (OCC Bulletin 2017-36)

20

Other Recent Issuances

Appendix I

Asset Management Data

21

Asset Management Statistics Fiduciary and Custody Assets

Source: Call Report Schedule RC-T, 12/31/17 Includes all banks except uninsured state-chartered trust companies.

22

Asset Management Statistics Managed Fiduciary Assets by Asset Class

Source: Call Report Schedule RC-T, 12/31/17 Includes all banks except uninsured state-chartered trust companies.

23

Asset Management Statistics Collective Investment Funds

Source: Call Report Schedule RC-T, 12/31/17 Includes all banks except uninsured state-chartered trust companies.

National Banks are trustee for $2.39 trillion in CIFs State Banks are trustee for $1.09 trillion in CIFs

24

Asset Management Statistics Common and Collective Investment Funds by Asset Class

Source: Call Report Schedule RC-T, 12/31/17 Includes all banks except uninsured state-chartered trust companies.

42% of CIF assets – Domestic Equities 26% of CIF assets – International Equities

25

Appendix II

Selected OCC Asset Management

Guidance

OCC Bulletins, Banking Circulars, Interpretive Letters and Booklets of the Comptroller’s Handbook for Asset Management are available at

OCC: Capital Markets: Asset Management 26

https://www.occ.treas.gov/topics/capital-markets/asset-management/index-asset-management.html

• Asset Management (2000)

• Asset Management Operations & Controls (2011)

• Collective Investment Funds (2014)

• Conflicts of Interest (2015)

• Custody Services (2002)

• Investment Management Services (2001)

• Personal Fiduciary Services (2015)

• Retirement Plan Products and Services (2014)

• Unique and Hard to Value Assets (2012)

• Insurance Activities (2002)

• Retail Nondeposit Investment Products (2015)

OCC AM Guidance

27

Comptrollers Handbook for Asset Management Booklets

OCC AM Guidance

• Community Bank Supervision (2010)

• Large Bank Supervision (2010)

• Bank Supervision Process (2007)

• Corporate Risk and Governance (2016)

• Internal and External Audits (2016)

• Internal Control (2001)

• Insider Activities (2014)

28

Comptrollers Handbook for Safety and Soundness - Selected Booklets

Selected OCC Bulletins

• OCC Bulletin 2017-43, New, Modified, or Expanded Bank Products and Services – Risk Management Principles

• OCC Bulletin 2016-17, Compliance with SEC Money Market Fund Rules by Bank Fiduciaries, Deposit Sweep Arrangements, and Bank Investments

• OCC Bulletin 2014-52, Matters Requiring Attention: Updated Guidance

• OCC Bulletin 2013-29, Third-Party Relationships: Risk Management Guidance

• OCC Bulletin 2017-7, Third-Party Relationships: Supplemental Examination Procedures

• OCC Bulletin 2017-21, Third-Party Relationships: Frequently Asked Questions to Supplement OCC Bulletin 2013-29

• OCC 2013-8, Short-term Investment Funds Reporting Requirements

29

Selected OCC Bulletins

• OCC 2011-11, Risk Management Elements: Collective Investment Funds and Outsourced Arrangements

• OCC 2011-12, Supervisory Guidance on Model Risk Management

• OCC 2010-37, Self-Deposit of Fiduciary Funds

• OCC 2009-19, New Notice Requirements for Sweep Accounts

• OCC 2008-10, Fiduciary Activities of National Banks: Annual Reviews of Fiduciary Accounts Pursuant to 12 CFR 9.6(c)

• OCC 2008-5, Conflicts of Interest: Risk Management Guidance Divestiture of Certain Asset Management Businesses

• OCC 2007-42, Bank Securities Activities: SEC's and Federal Reserve's Final Regulation R

30

Selected OCC Bulletins

• OCC 2007-21, Supervision of National Trust Banks: Revised Guidance: Capital and Liquidity

• OCC 2007-6, Registered Transfer Agents: Transfer Agent Registration, Annual Reporting, and Withdrawal from Registration

• OCC 2006-24, Interagency Agreement on ERISA Referrals

• OCC 2004-2, Banks/Thrifts Providing Financial Support to Funds Advised by the Banking Organization or its Affiliates

• OCC Bulletin 2002-16, Bank Use of Foreign-Based Third-Party Service Providers

• OCC Bulletin 2001-35, Examination Procedures to Evaluate Compliance with the Guidelines to Safeguard Customer Information

31

OCC Contact Information

Joel Miller Director, Asset Management Policy Market Risk Division

Joel.Miller@occ.treas.gov

202 649-6417

Chizoba Egbuonu

Risk Specialist, Asset Management Policy

Chizobal.Egbuonu@occ.treas.gov

202 649-5643

32

mailto:Joel.Miller@occ.treas.govmailto:Chizobal.Egbuonu@occ.treas.gov