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Transcript of 11 OCC Update BDUG Annual Meeting October 24, 2012 Tish Dalton, Risk Specialist Asset Management...
11
OCC UpdateBDUG Annual Meeting
October 24, 2012
Tish Dalton, Risk SpecialistAsset Management Group
Office of the Comptroller of the CurrencyWashington, D.C .
2
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.
I’ll refer frequently to national bank and Federal savings association regulations and guidance – while similar in principle, you should refer to the regulations and guidance of your primary regulator.
Disclosure…
3
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
4
OCC – National Bank and Federal Savings
Association AM Supervision
55
OCC – National Bank and Federal Savings Association
AM Supervision OCC regulates 1,304 national banks & 566
Federal savings associations. They range from large complex banks with global
footprints to local community banks. Includes 70 limited purpose national trust banks and 15
trust only thrifts.
Approximately 43% of all national banks and 26% of Federal savings associations have Asset Management (AM) activities, which include:
Fiduciary and custody services; Retail brokerage; Investment banking and advisory services; and, Securities lending activities.
66
Large Banks: Deputy Comptroller, Examiner in Charge (EIC), AM Team
Leader (On-site teams) Mid-size Banks:
Deputy Comptroller, Assistant Deputy Comptroller, EIC, Functional EIC – AM Examiner
Community Banks: Deputy Comptroller, Assistant Deputy Comptroller, Portfolio
Manager, AM Examiner Trust Companies:
Assistant Deputy Comptroller, Portfolio Manager – national cadre of AM Examiners
OCC – National Bank and Federal Savings Association
AM Supervision
7
Examiners are supported by Five AM Lead Experts
Northeast District Southern District Central District Western District Mid-Size banks
AM Policy Group Credit and Market Risk Division/Chief National Bank Examiner’s
office Handbooks, bulletins, other guidance Training, field support, and on-site exam support
OCC – National Bank and Federal Savings Association
AM Supervision
8
Supervision by Risk Objective: Assess banks’ ability to identify,
measure, monitor and control risk Risk Assessment System (RAS) – For 8 risk
categories, determine Quantity of risk/Quality level of risk
management/Direction. AM focus: Compliance, Operational, Reputation,
Strategic, Credit FFIEC: Uniform Ratings System (CAMELS). FFIEC: Uniform Interagency Trust Ratings System
(UITRS) – OCC focus: Composite Rating.
OCC – National Bank and Federal Savings Association
AM Supervision
99
OTS/OCC Integration (Effective July 21, 2011) Federal savings association (FSA) charters are
still in effect. OCC now supervises FSAs.
(FDIC supervises state savings associations, FRB supervises thrift holding companies.)
Combined OCC/OTS teams now examine both National Banks (NB) and FSAs.
OCC – National Bank and Federal Savings Association
AM Supervision
1010
OCC/OTS Integration - Related Regulation Changes
Required rule changes implemented (See OCC
Bulletin 2011-35.) OCC and OTS regulations have been reviewed and
differences identified. The goal is to integrate into single set of rules – watch for NPR.
Fiduciary Activities: 12 CFR 9 (NB) – 12 CFR 150 (FSA)
Securities Transactions: 12 CFR 12 (NB) – 12 CFR 151 (FSA)
Call report Schedule RC-T has replaced TFR-FS (3/31/12)
OCC – National Bank and Federal Savings Association
AM Supervision
1111
OTS/OCC Integration – Policy Impact
OCC Bulletin 2011-47 – Supervisory Policy Integration Process
OCC Bulletin 2012-15 – Rescission of most OTS documents
“Outdated,” “Duplicative,” “Conveyance” and “Replaced” Most OCC Handbooks now applicable to FSAs OCC Bulletin 2012-16 - “Capital Planning: Guidance for
Evaluating Capital Planning and Adequacy” Policy Integration initiatives continue
Efforts to replace similar guidance with updated, combined guidance is ongoing and will take time.
Look for updated, consolidated booklets of the Comptroller’s Handbook as applicable regulations are updated.
OCC – National Bank and Federal Savings Association
AM Supervision
Recent AM Guidance and Regulation
12
Unique & Hard-to-Value Assets Handbook – (August 2012) Defines and describes characteristics and risks of unique &
hard to value assets such as: Real estate Farm & ranch Commercial real estate Timber Mineral Interests Closely held businesses Loans and notes Life insurance Tangible assets, collectibles 13
Recent AM Guidance and Regulation
Unique & Hard-to-Value Assets Handbook Highlights risks associated with these assets – operational,
compliance, reputation and strategic
Require specialized expertise May by subject to special ownership rules Are frequently hard to value Safeguarding assets often presents challenges Specialized transaction processing requirements Complex framework of applicable law, including
governing instrument Often have special meaning/value to beneficiaries
14
Recent AM Guidance and Regulation
Unique & Hard-to-Value Assets - OCC Expectations Pre-acceptance, initial and annual reviews Policy guidelines for valuation frequency and methods Sufficient expertise to monitor third parties servicing asset
class Process to ensure payment of applicable taxes and
insurance Process to ensure and track timely management actions Process to track, collect and follow up on income receipts Controls such as audit and compliance reviews Risk assessment and defined risk tolerance Exception monitoring and reporting Controls to safeguard assets Proper segregation of duties 15
Recent AM Guidance and Regulation
OCC Short Term Collective Investment Fund (STIF) Rule
Revisions to 12 CFR 9.18(b)(4)(ii)(B) published 10/9/2012 – See OCC Bulletin 2012-31
Effective July 1, 2013
Objective of revisions: To add safeguards designed to address participating interests risk of loss to a STIF’s principal
STIFs, like money market mutual funds are designed to provide a relatively risk free liquidity option.
Both STIFs and MMFs received sponsor support in 2007-2009.
SEC imposed additional restrictions on MMFs; OCC considers comparable restrictions on STIFs to be warranted.
16
Recent AM Guidance and Regulation
STIF Final Rule requirements include: Measures governing the nature of STIFs investments
Shorter duration Concentration standards Portfolio and issuer qualitative standards
Ongoing monitoring of the STIF’s mark-to-market value Assessment of potential changes in STIF’s mark-to-
market value under adverse market conditions Greater Transparency and regulatory reporting about
the STIF’s holdings Procedures to protect fiduciary accounts from undue
dilution in the event that the STIF loses ability to maintain a stable NAV.
17
Recent AM Guidance and Regulation
STIF Final Rule Disclosure requirements (continued):
Fund level portfolio information - Disclose to OCC, STIF participants within 5 days of End-of-month (EOM):
Total assets under management Mark-to-market and amortized cost NAV (both with and
without capital support agreements) Dollar-weighted average portfolio maturity Dollar-weighted average portfolio life maturity For each security owned as of EOM:
18
Recent AM Guidance and Regulation
• Issuer name • Category of investment
• Principal amount • Maturity information
• Coupon or yield • Amortized cost value
• CUSIP or other standard identifier
19
AM Model Validation guidance (4th quarter 2012) Will supplement OCC Bulletin 2011-12
“Sound Practices for Model Risk Management.”
“Model” refers to a quantitative method, system, or approach that applies statistical, economic, financial, or mathematical theories, techniques, and assumptions to process input data into quantitative estimates
Purpose: to provide detailed information for managing model risk in banks’ AM related lines of business.
Focus: models used by asset managers.
Forthcoming AM Guidance
20
OCC Supervisory Focus – Asset Management
21
OCC Risk Management Expectations - AM
OCC focuses on banks’ ability to effectively identify, measure, monitor and control risk.
Bank’s risk management program should be tailored to the size and complexity of operations.
Product development process should include thorough risk assessment, that includes an evaluation of bank’s ability to manage the incremental risk.
Account acceptance process should include assessment of bank’s ability to meet operational requirements and manage operational risk.
22
Prolonged domestic and global economic weakness and uncertainty.
AM activities – revenue streams increasingly important to bank earnings.
Anxiety for income/improved investment performance.
Fees for liquid asset management continue to be impacted by fee waivers due to low rate environment.
Business restructuring, exiting certain products and markets, expanding into others.
Strategic initiatives designed to improve earnings and growth in challenging market environment.
Operating Environment – Asset Management
23
Proliferation of New Product OfferingsExchange traded fund growth
Number of funds Total assets ComplexityConcentration (sponsors) and leverage pose risk
Structured products Provide alternatives in low-rate environment Heightened reputation risk
Operating Environment – Asset Management
24
Compliance Risk and Control StructuresRegulatory exams, investigations and inquiries
Client trading activity Documentation Privacy Investment suitability
Impact of new and proposed rules (US and foreign)
Potential impact of Volcker Rule on banks and affiliates that organize and offer unregistered hedge and private equity funds.
Operating Environment – Asset Management
OCC Supervisory Focus –
Operating Environment FDIC Transaction Account Guarantee
(TAG)Program
TAG program guarantees certain transaction accounts above $250,000.
The TAG will expire on December 31, 2012, unless extended by Congress.
Pledge requirements under 12 C.F.R. 9.10 and 150.290–320 will increase with the termination of unlimited FDIC coverage.
Impact of expiration on bank deposit levels remains to be seen.
25
26
OCC Supervisory Focus – AM
OCC Expectations - Governance and Risk Management“Heightened expectations”- Large banks
must have strong audit and risk management functions
Investment risk management – must be supported by metrics, data, systems
Effective management of conflicts of interest/use of affiliated investment products
Focus on regulatory change managementMake sure that strategic initiatives are well
thought out and do not outpace control and operations area resources and capabilities
27
OCC Supervisory Focus – AM
Investment Issues/concernsAnxiety for income/improved investment
performance – increased risk taking Ineffective due diligence processes in
selecting, retaining, and monitoring investment managers and funds
Lack of independent risk management function over investment area
Inadequate model risk management Improper oversight and controls over
delegation of trust AM to affiliated broker’s financial advisors
28
OCC Supervisory Focus – Asset Management
Investment IssuesPerformance related litigation risk.Program/algorithmic trading activities.
Investment Issues – Unique AssetsStale valuations/valuation practicesStale reviews of unique assetsLack of financial transparencyLack of product knowledge and expertiseClient suitability
BSA/AML Compliance (OCC Bulletin 2012-30) It’s not just a compliance issue – its
managementBSA/AML findings will now be reflected in
“management” part of CAMELS BSA/AML finding will continue to be reflected in
“compliance risk” assessment under the OCC’s RAS
Quicker reaction when a bank has multiple matters requiring attention
More flexibility for citing BSA/AML violations for individual “pillar” violations
29
OCC Supervisory Focus – Asset Management
30
Impact of earnings pressure on: Internal controlsStaffingCompliance/Risk Management functionsAudit Coverage
Third party service provider oversight IT, outsourced operations, administration,
tax preparation, investments, custodyAffiliated and non-affiliated service
providers Asset controls
On-premises/off-premises/all locations/all assets
OCC Supervisory Focus – Asset Management
31
Appendix ICommon AM Violations of Law and Regulation
and “Matters Requiring
Attention”2012
Common AM Violations of Law
Most common AM-related Violations of Law and Regulation (2012):
Review of fiduciary accounts – violations for pre-acceptance, post-acceptance and annual review.
Audit requirements Annual audit Standards of audit Audit committee membership.
32National banks and Federal savings associations
ComplianceTrust Risk
ManagementProcess
Trust Asset/Investment
Management
Trust Board/Management
Oversight
No Pre-acceptance Reviews
Audit & Internal Controls
Annual Investment Reviews
Policies & Procedures
Pledging Problems
Lack of Exception Tracking Report
Lack of guidance on use of alternative investments
Repeat of Weak Internal Controls
No initial post acceptance review
Vendor Management
Problems with third party investment manager agreements
Poor corporate governance of AM dept
Conflicts of interest
Poor risk management process/controls
Weak unique asset administration
Lack of Reg R documentation
33
Common AM MRAs - 2012
National banks and Federal savings associations
3434
Appendix II - Asset Management Statistics
35
Asset Management Statistics
Source: FDIC Call Reports
Approximately 44% of all National Banks reported income from fiduciary, retail brokerage, and investment banking and advisory activities.
All Large and Midsize Banking organizations Community Banks – 42% (528/1,273)
Central District 52% (180/344) Northeastern District 57% (108/190) Western District 35% (93/264) Southern District 31%
(147/475)
36
Asset Management Statistics
Source: FDIC Call Reports
Approximately 26% of all Federal Savings Associations (FSA) reported income from fiduciary, retail brokerage, and investment banking and advisory activities.
Large FSA – 50% (2/4) Midsize FSA – 47% (7/15) Community FSA – 26% (138/547)
Central District 31% (54/176) Northeastern District 23% (43/191) Western District 21% (20/94) Southern District 24% (21/86)
37Source: FDIC Call Reports
FIDUCIARY AND RELATED ASSETS ($000s) Managed Non-Managed Total Assets% of Fid Assets
Personal trust and agency accounts $632,092,508 $297,934,197 $930,026,705 5%
Employee benefit and retirement related trust and agency
Employee benefit - Defined contribution $698,028,541 $2,421,990,268 $3,120,018,809 17%
Employee benefit - Defined benefit $867,935,637 $4,351,763,974 $5,219,699,611 29%
Other employee benefit and retirement related $242,202,467 $1,827,234,498 $2,069,436,965 11%
Corporate trust and agency accounts $35,529,870 $2,757,093,593 $2,792,623,463 15%
Investment management and investment advisory $1,041,936,273 $58,363,644 $1,100,299,917 6%
Foundation and endowment $190,798,881 $33,856,960 $224,655,841 1%
Other fiduciary accounts $186,434,001 $2,515,670,626 $2,702,104,627 15%
Total Fiduciary Accounts $3,894,958,178 $14,263,907,760 $18,158,865,938 100%
Custody and Safekeeping Accounts $77,508,201,089 $77,508,201,089
Total Fiduciary & Custody/Safekeeping Accounts $95,667,067,027
Fiduciary and Related Assets
All Banks and Federal Savings Associations - 6/30/2012
38Source: FDIC Call Reports
FIDUCIARY AND RELATED ASSETS ($000s) Managed Non-Managed Total Assets % of Fid Assets
Personal trust and agency accounts $445,454,505 $152,437,418 $597,891,923 10%
Employee benefit and retirement related trust and agency
Employee benefit - Defined contribution $397,703,021 $557,668,180 $955,371,201 16%
Employee benefit - Defined benefit $426,185,665 $582,576,074 $1,008,761,739 17%
Other employee benefit and retirement related $81,995,572 $162,507,882 $244,503,454 4%
Corporate trust and agency accounts $27,804,289 $1,751,080,340 $1,778,884,629 30%
Investment management and investment advisory $608,611,400 $21,008,949 $629,620,349 10%
Foundation and endowment $128,817,930 $11,020,058 $139,837,988 2%
Other fiduciary accounts $164,038,215 $484,267,906 $648,306,121 11%
Total Fiduciary Accounts $2,280,610,597 $3,722,566,807 $6,003,177,404 100%
Custody and Safekeeping Accounts $29,845,990,699 $29,845,990,699
Total Fiduciary & Custody/Safekeeping Accounts $35,849,168,103
Fiduciary and Related Assets
National Banks - 6/30/2012
Source: FDIC Call Reports
FIDUCIARY AND RELATED ASSETS ($000s) Managed Non-Managed Total Assets% of Fid Assets
Personal trust and agency accounts $9,253,560 $18,924,871 $28,178,431 9%
Employee benefit and retirement related trust and agency
Employee benefit - Defined contribution $1,825,412 $186,276,303 $188,101,715 58%
Employee benefit - Defined benefit $1,093,543 $32,543,482 $33,637,025 10%
Other employee benefit and retirement related $17,754,242 $12,524,779 $30,279,021 9%
Corporate trust and agency accounts $140,608 $5,107,795 $5,248,403 2%
Investment management and investment advisory $41,978,933 $181,079 $42,160,012 13%
Foundation and endowment $1,043,351 $599,713 $1,643,064 1%
Other fiduciary accounts $102,601 $472,803 $575,404 0%
Total Fiduciary Accounts $69,789,766 $256,541,954 $326,331,720 100%
Custody and Safekeeping Accounts $550,673,979 $550,673,979
Total Fiduciary & Custody/Safekeeping Accounts $877,005,699
39
Fiduciary and Related Assets
Federal Savings Associations - 6/30/2012
Source: FDIC Call Reports
Jun-
06
Dec
-06
Jun-
07
Dec
-07
Jun-
08
Dec
-08
Jun-
09
Dec
-09
Jun-
10
Dec
-10
Jun-
11
Dec
-11
Jun-
12
$0
$5
$10
$15
$20
$25
$20.0$21.8
$22.6 $22.9
$18.2 $18.6$20.0
$18.8$20.3
$20.5
$17.5 $18.2
Tri
llio
n
40
Total Fiduciary Assets
All Banks and FSAs: 2006 - 6/30/2012
Source: FDIC Call Reports
Jun-
06
Dec
-06
Jun-
07
Dec
-07
Jun-
08
Dec
-08
Jun-
09
Dec
-09
Jun-
10
Dec
-10
Jun-
11
Dec
-11
Jun-
12
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$47.4$50.4
$57.8 $57.1
$50.3 $51.9$57.1
$60.4$67.6
$70.9$74.4
$77.6
Tri
llio
n
41
Total Custody Assets
All Banks and FSAs: 2006 - 6/30/2012
Source: FDIC Call Reports 42
Managed Assets –Fiduciary Accounts
All Banks and FSAs – 12/31/2011
Source: FDIC Call Reports
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 41090$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$0.85 $0.90
$1.33$1.51
$1.74
$2.01 $2.02
$1.26
$1.62 $1.64
$1.42$1.59
$1.75$1.67
$2.29
$2.51$2.68
$2.94 $3.00
$2.00
$2.36 $2.37
$2.12$2.23
National Banks All Banks
$Trillion
43
Collective Investment and Common Trust Funds
All Banks and FSAs: 2001 – 6/30/2012
Source: FDIC Call Reports 44
Collective Investment and Common Trust Funds
All Banks and FSAs: 2002 – 6/30/2012
45
Appendix III - OCC AM Guidance
OCC Bulletins, Banking Circulars, Interpretive Letters and Booklets of the Comptroller’s
Handbook for Asset Management are available at www.occ.gov
OCC Website: Capital Markets: Asset Management
4646
OCC AM Guidance
Comptrollers Handbook for Asset Management Booklets Asset Management (2000)
Asset Management Operations & Controls (2011)
Collective Investment Funds (2005)
Conflicts of Interest (2000)
Custody Services (2002)
Investment Management Services (2001)
Personal Fiduciary Services (2002)
Retirement Plan Services (2007)
Unique and Hard to Value Assets (2012)
47
Selected Safety and Soundness Booklets:
Community Bank Supervision (2010)
Large Bank Supervision (2010)
Bank Supervision Process (2007)
Internal and External Audits (2003)
Internal Control (2001)
Insurance Activities (2002)
Retail Nondeposit Investment Sales (1994)
OCC AM Guidance
48
Selected OCC Bulletins
OCC 2012-31, Short-Term Investment Funds OCC 2011-11, Risk Management Elements: Collective Investment
Funds and Outsourced Arrangement
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
OCC 2007-21, Supervision of National Trust Banks: Revised Guidance: Capital and Liquidity
49
Selected OCC Bulletins
OCC 2007-7, Soft Dollar Guidance: Use of Commission Payments by Fiduciaries
OCC 2007-6, Registered Transfer Agents: Transfer Agent Registration, Annual Reporting, and Withdrawal from Registration
OCC 2006-24, Interagency Agreement on ERISA Referrals
OCC Bulletin 2004-20, Risk Management of New, Expanded, or Modified Bank Products or Services: Risk Management Process
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 2001-47, Third-Party Relationships: Risk Management Principles
OCC Bulletin 2001-35, Examination Procedures to Evaluate Compliance with the Guidelines to Safeguard Customer Information