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OCC Considers a New Definition of 'Fiduciary Capacity'

Regulatory Agencies

The Labor Department and Securities and Exchange Commission aren’t the only ones contemplating a new fiduciary standard.

Now the Office of the Comptroller of the Currency (OCC) is considering whether it should update the regulatory definition of “fiduciary capacity” to make it more consistent with recent developments under state trust laws. The OCC charters, regulates and supervises all national banks and federal savings associations, as well as federal branches and agencies of foreign banks. 

In an April 29 Advance Notice of Proposed Rulemaking (ANPR), the OCC announced that it is considering an amendment to its existing 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. 

Fiduciary Capacity

The ANPR is seeking comments on updating the definition of fiduciary capacity to include certain capacities that are based on the authority a bank has with respect to a trust (e.g., the power to make discretionary contributions, override the trustee or select a new trustee). According to the OCC, this change could:

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

The OCC explains that numerous states have modified their trust laws in recent years to define and set expectations for various trust-related roles, including roles that do not possess the investment discretion traditionally granted to trustees. But because some of these state laws frequently describe these roles by using terms other than those specified in the OCC definition of “fiduciary capacity,” these state fiduciary roles may not explicitly be included in the OCC’s definition. 

As a result, this expanding list of fiduciary roles under state law may create uncertainty for banks about the activities governed by OCC fiduciary rules. “The OCC believes that this potential uncertainty may make it difficult for banks to assess and manage litigation risk and to understand OCC expectations for engaging in these roles in a safe and sound manner,” the announcement explains.

Custody Activities

The potential new provisions to establish certain requirements for non-fiduciary custody activities would apply to national banks, federal savings associations and related branches that are not currently addressed by specific OCC rules. The OCC explains that the rules could be based on the following core elements of sound risk management, similar to those in the current rules for fiduciary custody activities: 

  • separation and safeguarding of custodial assets
  • due diligence in selection and ongoing oversight of sub-custodians
  • disclosure in custodial contracts and agreements of the custodian’s duties and responsibilities
  • effective policies, procedures and internal controls

As such, the OCC believes that a non-fiduciary custody rule could eliminate any confusion that exists over a bank’s obligations with respect to custody arrangements and would impose minimal new responsibilities on well-managed banks. 

The OCC contends that the growth in both asset size and sophistication of bank non-fiduciary custody activities since the OCC updated its fiduciary regulation in 1996 has led to an increase in operational, reputational, credit and other risks for bank custodians. As a result, the OCC believes it may be appropriate to issue regulations codifying the core standards for non-fiduciary custody activities.

The OCC is requesting that comments be submitted by June 28, 2019. 

Earlier this month, at a hearing on Capitol Hill, Secretary of Labor Alexander Acosta appeared to confirm that the Department of Labor will issue a new fiduciary rule.