Trust Examiner School - September 2023

Trust Examiner School

September 19-28, 2023 Live Virtual

@ www.csbs.org � @csbsnews

CONFERENCE OF STATE BANK SUPERVISORS 1129 20th Street NW / 9th Floor / Washington, DC 20036 / (202) 296-2840

Trust Examiner School Live Virtual September 19 – 28, 2023

Tuesday, September 19, 2023

Introduction & Pre-Course Review

1:00 pm – 2:30 pm 2:30 pm – 2:45 pm 2:45 pm – 4:00 pm

Break

Introduction (continued)

Wednesday, September 20, 2023 Prior Class Review

1:00 pm – 1:15 pm 1:15 pm – 2:30 pm 2:30 pm – 2:45 pm 2:45 pm – 3:30 pm 3:30 pm – 4:00 pm 1:00 pm – 1:15 pm 1:15 pm – 2:30 pm 2:30 pm – 2:45 pm 2:45 pm – 4:00 pm 1:00 pm – 1:30 pm 1:30 pm – 2:45 pm 2:45 pm – 3:00 pm 3:00 pm – 4:00 pm 1:00 pm – 1:15 pm 1:15 pm – 2:15 pm 2:15 pm – 2:30 pm 2:30 pm – 3:00 pm 3:00 pm – 4:00 pm 1:00 pm – 1:15 pm 1:15 pm – 2:30 pm 2:30 pm – 2:45 pm 2:45 pm – 3:45 pm 3:45 pm – 4:00 pm

Supervision & Organization

Break

Supervision & Organization

Operations, Internal Controls & Audit

Thursday, September 21, 2023 Prior Class Review

Operations, Internal Controls & Audit

Break

Asset Management

Tuesday, September 26, 2023 Prior Class Review

Asset Management

Break

Account Administration

Wednesday, September 27, 2023 Prior Class Review

Account Administration

Break

Account Administration Conflicts of Interest

Thursday, September 28, 2023 Prior Class Review

Conflicts of Interest

Break

Earnings

Final Assessment

Internal Use Only

Virtual Trust Examiner School Introduction

1

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Introductions

NAME

STATE AGENCY

YEARS OF EXAMINATION EXPERIENCE & WITH TRUST

FUN FACT ABOUT YOU

SOMETHING YOU HOPE TO LEARN DURING THIS CLASS

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Instructor Contact Information

Kirk Schreiber

Senior Depository Analyst Indiana Department of Financial Institutions kschreiber@dfi.in.gov

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Instructor Contact Information

Bank Examinations Supervisor Alabama State Banking Department Andre.Scott@banking.alabama.gov Andre Scott

4

OhlandB@michigan.gov

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OhlandB@michigan.gov

Instructor Contact Information

Trust Activities Regional Supervisor Michigan Department of Insurance & Financial Services OhlandB@michigan.gov Bruce Ohland

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Session Learning Objectives: 1. Review Day One: Trust Examiner Training

6

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Session Learning Objectives: 2. Understand the

role of pre-exam planning in risk scoping an exam

7

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Session Learning Objectives: 3. Discuss agency and/or joint exam

approaches to pre-notification package

8

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Session Learning Objectives: 4. Understand Trust

Department and Trust Company structures

9

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Session Learning Objectives: 6. Recognize Trust

Companies have additional rating components

10

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Session Learning Objectives: 7. Understand who regulates trusts

11

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Session Learning Objectives: 8. Understand the Uniform Interagency Trust Rating System (UITRS) and other rating systems

12

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Session Learning Objectives: 10. Apply concepts to exam scenario exercises

13

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Introduction Review Day One: Trust Examiner Training

Trust Pre-Examination Planning

Trust Department VS Trust Company

Ratings

14

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Go to www.kahoot.it

15

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Introduction Overview of Day One: Trust Examiner Training

Trust Pre-Examination Planning

Trust Department VS Trust Company

Ratings

16

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Trust Pre-Examination Planning

Prior Issues

Prior Exam & Workpapers

Call Reports & Financials

Financial Condition

Off ‐ Site Review

Requested Information

17

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Trust Pre-Examination Planning

Familiarize Yourself with the Trust Department/Company • Internal and external documents • Conversations with examiners and management

Identify Key Risk Areas • Draw conclusions on risks, examination

Initial Contact with Management • Introduction • Sooner rather than later

strategy, and assignments

18

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Trust Pre-Examination Planning

Requesting Examination Information • Draw conclusions about risks, examination strategy, and assignments

Creation of Scope Memo • Varies by department • At a minimum, should cover • Institutional overview • Risk assessment • Discussions with Management • Prior examination findings • Financial analysis • Assignments/logistics

Determine Staffing

• Subject matter experts • Sufficient to complete a timely examination

19

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Pre-Notification Package

Also called: • Entrance Letter • First Day Letter • Request List

20

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Off-Site Review of Workpapers

• Prior examination issues • Any enforcement actions • Logistics • Information from the confidential pages

21

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Introduction Overview of Day One: Trust Examiner Training

Trust Pre-Examination Planning

Trust Department vs. Trust Company

Ratings

22

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What is a Trust Company? • Stand-alone

• Assigned CAMELS ratings • Earnings component is standardized • Regulators: • If nationally chartered, OCC • If state chartered

• State & FRB if bank in org chart • State only if not

23

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What is a Trust Department? • Part of a bank

• Not assigned CAMELS ratings • Earnings component based on size • Regulators: • If nationally chartered, OCC • If state chartered, State & Federal agencies (FDIC, FRB)

24

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Trust Company • Term can be misleading •Use of “trust” in name •Can only rely on the errors & omissions insurance coverage

Trust Department • Errors & omissions insurance coverage; and •Backing of bank/bank holding company

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Trust Company

Deposits • State ‐ chartered cannot accept, generally • Limitation distinguishes from banks • Separate charters

OCC • Charters &

Historically

• Held &

regulates limited ‐ purpose national trust banks • Fiduciary powers in all states

safeguarded client assets

• Form & act as trustee for common trust

funds & collective investment trusts

26

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TRUST DEPARTMENT

TRUST COMPANY

TRUST DEPARTMENT VS. TRUST COMPANY

Division of a bank

Yes

No

Typically, state and Federal agencies

Usually, state or Federal agency In accordance with either state or Federal statutes

Regulator

Examination schedule

Generally, in accordance with both state and Federal statutes

Examinations subject to agency rotation Accepts deposits and makes loans Capital requirement

Yes

No

No

Only under special circumstances

Usually none

Based on state or Federal agency statutory requirements

Separate regulatory assessment

Usually none

Yes

27

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Introduction Overview of Day One: Trust Examiner Training

Trust Pre-Examination Planning

Trust Department VS Trust Company

Ratings

28

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Trust Rating System

• Uniform Interagency Trust Rating System (UITRS) • Five components of an institution’s fiduciary activities to be evaluated • An overall Composite rating considers each component

29

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Trust Rating Components

1. Management 2. Operations, Internal Controls & Audit 3. Earnings 4. Compliance 5. Asset Management

30

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Trust Rating Scale

• Scale from 1 to 5 • 1 is the best rating available • Ratings are distinguished by key words or phrases

31

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Rating the Component: Management • Capability of Board & management

• Level & quality of oversight • Risk monitoring systems • Responsiveness • Experience & competence

32

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Rating the Component: Operations, Internal Controls & Audit • Adequacy of systems & internal controls • Reconciliation processes • Independence, frequency, quality & scope of audit

33

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Rating the Component: Earnings • Profitability • Budgets • Rating only required when total trust assets are over $100 million or if non depository trust company

34

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Rating the Component: Compliance • Overall compliance with: • Laws • Regulations • Standards of conduct • Governing instruments • Policies & procedures • Evaluation of self-dealing & conflicts of interest

35

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Rating the Component: Asset Management • Risks associated with managing assets

• Portfolio management • Evaluation of processes • Committee review & approval • Periodic reviews of investment performance

36

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Resources • FDIC Trust Examination Manual https://www.fdic.gov/regulations/examinations/trustmanual/index.html

• UITRS Update Letter – 10/7/1998 https://www.fdic.gov/news/news/financial/1998/fil98115b.html

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Exercise

40

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Virtual Trust Examiner School Supervision & Organization

1

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Session Learning Objectives: 1. Understand the role of the Statement of Principles

2

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Session Learning Objectives: 2. Discuss

evaluation of staffing and organization

3

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Session Learning Objectives: 3. Provide examples of areas to review related to Board oversight

4

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Session Learning Objectives: 4. Understand the role of the Trust Committee

5

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Session Learning Objectives: 5. Discuss the role of policies and procedures

6

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Session Learning Objectives: 6. Provide tips for

evaluating insurance coverage

7

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Session Learning Objectives: 7. Discuss some common legal issues

8

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Session Learning Objectives: 8. Apply concepts to exam scenario exercises

9

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Supervision & Organization Statement of Principles of Trust Department Management

Staffing & Organization

Fiduciary Insurance Coverage

Legal Counsel & Litigation

10

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Statement of Principles of Trust Department Management

11

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Statement of Principles of Trust Department Management

Designate Officer

Trust Committee

Legal Counsel

Policies

Internal Controls

Examination Reports

Audit

Reports

12

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Statement of Principles of Trust Department Management

Designate Officer

• Qualified & competent • Define officer’s duties

13

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Statement of Principles of Trust Department Management

Trust Committee

• At least 3 directors • One or more who are not active officers of bank

14

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Statement of Principles of Trust Department Management

• Comprehensive written policies

Policies

15

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Statement of Principles of Trust Department Management

• Competent • Advise trust officers & trust committee

Legal Counsel

16

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Statement of Principles of Trust Department Management

Internal Controls

• Adequate internal controls • Controls over trust assets

17

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Statement of Principles of Trust Department Management

• Adequate audit • Minutes record the findings

Audit

18

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Statement of Principles of Trust Department Management

• Receive reports • Record actions taken in minutes

Reports

19

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Statement of Principles of Trust Department Management

Examination Reports

• Review reports • Record actions taken in minutes

20

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Supervision & Organization Statement of Principles of Trust Department Management

Staffing & Organization

Fiduciary Insurance Coverage

Legal Counsel & Litigation

21

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Board Duties

• Trust Committee • Overall responsibility

22

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Committee Duties

• At least 3 directors • Items to note when reviewing minutes

23

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Management

• Key roles • Questions to consider

24

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Policies & Procedures

• Trust Committee • Overall responsibility

25

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Staffing & Organization

• Evaluate adequacy • Indicators of weaknesses

26

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Supervision & Organization Statement of Principles of Trust Department Management

Staffing & Organization

Fiduciary Insurance Coverage

Legal Counsel & Litigation

27

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Fiduciary Insurance Coverage

• Main source of protection • Declarations page • Cost/benefit analysis • Annual review

28

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Supervision & Organization

Statement of Principles of Trust Department Management

Staffing & Organization

Fiduciary Insurance Coverage

Legal Counsel & Litigation

29

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Legal Counsel & Litigation

• General indicators • Legal opinions

30

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Resources • Statement of Principles of Trust Department Management https://www.fdic.gov/regulations/examinations/trustmanual/section_1/se ction_i.html#_toc491753853

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Virtual Trust Examiner School Operations, Internal Controls & Audits

1

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Session Learning Objectives: 1. Understand the importance of recordkeeping related to trust accounts, as well as the trust company/department

2

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Session Learning Objectives: 2. Discuss the importance of internal routines & controls

3

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Session Learning Objectives: 3. Understand audit requirements under the Statement of Principles of Trust Department Management

4

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Session Learning Objectives: 4. Discuss what factors are included in the evaluation of the audit function

5

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Session Learning Objectives: 5. Discuss aspects

of and effective audit program

6

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Session Learning Objectives: 6. Understand what

elements should be in the scope of audit coverage

7

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Session Learning Objectives: 7. Discuss call report

requirements, frequency, and accuracy

8

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Session Learning Objectives: 8. Apply concepts to an exam scenario exercise

9

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Operations, Internal Controls & Audits

Recordkeeping

Internal Routines & Controls

Audit Function

Call Reports

10

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Recordkeeping Operation of the trust department separate and apart from every other department of the bank, with trust assets separated from other assets owned by the bank, and the assets of each trust account separately from unrelated accounts

Maintain records in sufficient detail to properly reflect all activities

Account for principal and income according to the governing agreement

11

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Operations, Internal Controls & Audits

Recordkeeping

Internal Routines & Controls

Audit Function

Call Reports

12

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Internal Routines & Controls

Segregation of Duties

Reconcilements Vault Control Procedures

Dormant/ Unclaimed Funds

Blank Check Control

Hold-Mail Procedures

Vacation Policies

13

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Internal Routines & Controls

• Timeliness • In balance • Stale ‐ dated items • Signatures • Independence

Reconcilements

14

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Internal Routines & Controls

• Dual control • Vault log/verification • Periodic audit • Location

Vault Control Procedures

15

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Internal Routines & Controls

• Most fundamental I/C • Not one individual • Administrative separate from operations

Segregation of Duties

16

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Internal Routines & Controls

• Pre ‐ numbered • Signatures/approvals • Controls

Blank Check Control

17

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Internal Routines & Controls

• Written procedures/forms • Frequency of physical mailings

Hold and Return Mail Procedures

18

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Internal Routines & Controls

• Everyone • Time away from job

Vacation Policies

19

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Internal Routines & Controls

• Effective controls • Monitoring • Escheated timely

Dormant/ Unclaimed Funds

20

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Operations, Internal Controls & Audits

Recordkeeping

Internal Routines & Controls

Audit Function

Call Reports

21

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Statement of Principles of Trust Department Management

Provide for an adequate audit (by internal or external auditors or a combination thereof) of all fiduciary activities, annually. Trust committee minutes should record the findings of the audit, including actions taken as a result of the audit.

22

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Statement of Principles of Trust Department Management

Continuous Audit Process

Annual Audit Process

23

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Statement of Principles of Trust Department Management

• Activity ‐ by ‐ activity basis • Internal audit staff or independent third ‐ party • Should cover all areas within 3 ‐ 5 years

Continuous Audit Process

24

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Statement of Principles of Trust Department Management

• Typically, smaller institutions • Internal audit staff or independent third ‐ party • Intervals must be supported & reassessed to ensure appropriate

Annual Audit Process

25

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Factors Evaluated

26

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Factors Evaluated

Independence

Quality

Scope

Frequency

Staff experience & competence

Volume and/or severity of exceptions

27

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Audit Program

Aspects/Features of an effective audit program: • Written policy • Audit Committee Charter • Audit risk assessment • Written audit program approved by Audit Committee and/or Board • The findings of the audit, including actions taken as a result of the audit, should be recorded in Audit Committee and/or Board minutes

28

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Audit Program

29

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Audit Program

Audit Risk Assessment: • Auditable areas • Inherent risk • Mitigating controls • Residual risk • Risk trend • Audit frequency • Audit Risk Assessment Example

30

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Scope of Audit Coverage

• The accuracy and validity of transactions • Fee calculations, collections, and waivers • Compliance with governing instruments, internal policies, statutory and regulatory requirements • Internal routines and controls

31

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Scope of Audit Coverage

Account administration practices, such as documentation of: • Trust agreements and court orders • Income receipts and distributions; • Principal invasions such as appropriate approvals; • Receipt of assets; • Co-fiduciary and grantor approvals; • Beneficiary and third-party approvals; • Unique assets; and • Annual administrative and investment reviews

32

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Scope of Audit Coverage

• Management information systems • Verification of assets • Trust committee minutes • Trading activities • Assessment of management's corrective actions

33

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Scope of Audit Coverage

34

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SAS, SSAE & SOC Reports • SAS 70

• SSAE 16 • SSAE 18

• SOC 1 • SOC 2 • SOC 3

35

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SAS, SSAE & SOC Reports Statement on Auditing Standards (SAS) 70 • Effective after March 31, 1993 • Guidance on factors independent auditor should consider when entity uses a service organization • Guidance for reports on processing of transactions by a service organization • Effect of IT on the consideration of internal control

36

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SAS, SSAE & SOC Reports Statement on Standards for Attestation Engagements (SSAE) 16 & 18 • SSAE 16 • Published by AICPA in April 2010 to replace SAS 70 • Brought standards in line with International Federation of Accountants (IFAC) • SSAE 18 • Effective May 1, 2017 – supersedes SSAE 16 • Requires companies to take more control & ownership of internal controls related to vendor management

37

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SAS, SSAE & SOC Reports System and Organization Controls (SOC) Reports • Designed to help service organizations build trust • There are three types of SOC reports: • SOC 1 – Internal Control over Financial Reporting • SOC 2 – Trust Services Criteria • SOC 3 – Trust Services Criteria for General Use Report

38

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Operations, Internal Controls & Audits

Recordkeeping

Internal Routines & Controls

Audit Function

Call Reports

39

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Call Reports

FFIEC Call Report

State Specific Requirements

40

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Resources • FDIC: Audits & Accounting Issues https://www.fdic.gov/regulations/examinations/trustmanual/section_2/fdic_section_ 2-internal_controls_and_auditing.html#audits_and_accounting_issues • SOC for Service Organizations https://www.aicpa.org/interestareas/frc/assuranceadvisoryservices/serviceorganiza tion-smanagement.html • FFIEC Call Report Requirements https://www.ffiec.gov/forms041.htm

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Virtual Trust Examiner School Asset Management

1

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Session Learning Objectives: 1. Discuss different types of investments and securities used by trust departments and trust companies

2

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Session Learning Objectives: 2. Understand the role of policies, procedures, and practices

3

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Session Learning Objectives: 3. Discuss how to approach asset review & how to assess asset quality

4

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Session Learning Objectives: 4. Understand the key factors to review related to asset management

5

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Session Learning Objectives: 5. Discuss what is required for investment reviews

6

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Session Learning Objectives: 6. Understand the implications related to insurance for real and personal property

7

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Session Learning Objectives: 7. Apply concepts to exam scenario exercises.

8

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Discussion Topics

Investments & Securities

Asset Quality

Policies, Procedures & Practices

Investment Reviews

Insurance for Real & Personal Property

Asset Review

9

Internal Use Only

Investments & Securities

10

Internal Use Only

Investments & Securities

Types of Investments: Cash Management

Fixed Income Products

Equity Securities

Unique or Hard-to-Value Assets

Mutual Funds

11

Internal Use Only

Investments & Securities

Examples of Investments: Money Market Funds

Municipal Bond Issues

Exchange Traded Funds

Limited Partnerships

Real Estate

12

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Investments & Securities

Asset Allocation Models: Range from conservative to aggressive

• Conservative = less risky • Aggressive = more risky Approach to allocation models & percentages vary, but must be documented

13

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Investments & Securities

Examples of Asset Allocations:

Capital Preservation

Income/Modest Growth

Balanced

Growth/Modest Income

Other Asset Mix

Growth

14

Internal Use Only

Policies, Procedures & Practices

15

Internal Use Only

Policies, Procedures & Practices

Trust Company or Department Practices

Policies & Procedures

16

Internal Use Only

Policies, Procedures & Practices

Review & Approval

Policy Exceptions

Unique Assets

17

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Asset Review

18

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Asset Review

Review

Determine

Consider

19

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Asset Review

Size or Circumstance

Titles

Risk

20

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Asset Quality

21

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Asset Quality Are holdings in line with investment objectives?

How often are unique assets being valued?

Are letters of retention obtained?

Annual reviews of Irrevocable Life Insurance Trusts (ILITs)?

22

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Asset Quality

Compliance with governing document?

Written authorizations obtained?

How are worthless assets tracked & addressed?

23

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Investment Reviews

24

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Investment Reviews

 Annual  Documented  Reported  Follow up  Independence

25

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Investment Reviews

 Explain the process  Benchmarking  Statement of Principles of Trust Department Management

26

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Insurance for Real & Personal Property

27

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Insurance for Real & Personal Property  Insurance in place?  Current?  Who is paying for it?

28

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Insurance for Real & Personal Property  Is amount sufficient?  Tracking premium due dates?

29

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30

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Resources • FDIC Trust Examination Manual – Asset Management https://www.fdic.gov/regulations/examinations/trustmanual/section_3/f dic_section_3-asset_management.html

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Virtual Trust Examiner School Account Administration

1

Internal Use Only

Session Learning Objectives: 1. Discuss types of accounts

2

Internal Use Only

Session Learning Objectives: 2. Discuss custodian responsibilities

3

Internal Use Only

Session Learning Objectives: 3. Discuss ERISA and employee benefit accounts

4

Internal Use Only

Session Learning Objectives: 4. Discuss self-directed IRAs

5

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Session Learning Objectives: 5. Understand special need trusts

6

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Session Learning Objectives: 6. Discuss stale estates

7

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Session Learning Objectives: 7. Understand the differences between discretionary and non-discretionary investment authority

8

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Session Learning Objectives: 8. Discuss unique and hard-to-value assets

9

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Session Learning Objectives: 9. Understand the nuisances of co-fiduciary accounts

10

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Session Learning Objectives: 10. Review compliance and related issues

11

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Session Learning Objectives: 11. Discuss guidelines for selecting accounts for review

12

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Session Learning Objectives: 12. Discuss account

review line sheet procedures, best practices, and common issues

13

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Session Learning Objectives: 13. Apply concepts to an examination scenario

14

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Discussion Topics

Account Line Sheets

Selection of Accounts

Discretionary / Non Discretionary

Types of Accounts

File Review

Custodian ERISA

15

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Discussion Topics

Unique & Hard-to Value Assets

Self Directed IRAs

Special Needs Trust

Co Fiduciary Accounts

Stale Estates

Compliance

16

Internal Use Only

Types of Accounts

Court Appointed

Charitable Trusts

Personal Trusts

Corporate Trusts

SNTs

ILITS

17

Internal Use Only

Types of Accounts

Investment Management

Agencies

Estates

Employee Benefits

ESOPs

IRAs

18

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Custodian Responsibilities Custody Account: An agency account concerning which the main duties of the custodian (agent) are to keep safe and preserve the property and to perform ministerial acts with respect to the property as directed by the principal. The agent has no investment or managerial responsibilities. To be distinguished from managing agency account and safekeeping account. Agent: A person who acts for another person by the latter's authority. The distinguishing characteristics of an agent are (1) that he acts on behalf and subject to the control of his principal, (2) that he does not have title to the property of his principal, and (3) that he owes the duty of obedience to his principal's orders. https://www.fdic.gov/regulations/examinations/trustmanual/appendix_h/appendix_h.html

19

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Custodian Responsibilities

Safekeeping

Annual reconciliation of holdings

Statements provided to appropriate parties

20

Internal Use Only

ERISA/Employee Benefit Accounts

ERISA: An acronym for the Employee Retirement Income Security Act of 1974 which set up federal minimum standards for employee benefit plans, including standards regulating the conduct of plan fiduciaries and trustees. The Act also established an insurance program designed to guarantee workers receipt of pension benefits if their defined benefit pension plan should terminate.

https://www.fdic.gov/regulations/examinations/trustmanual/appendix_h/appendix_h.html

21

Internal Use Only

ERISA/Employee Benefit Accounts

https://www.fdic.gov/regulations/examinations/trustmanual/section_5/section_v.html

22

Internal Use Only

ERISA/Employee Benefit Accounts Conformance with ERISA

Plan document: • What type is it? • What is trust company/department’s role? • Original plan date • Has there been a restatement of the plan?

23

Internal Use Only

ERISA/Employee Benefit Accounts Important to look at: • Participant loans • Employer securities or real property • IRS favorable determination letters • Summary plan description • Form 5500 • Premium Benefit Guarantee Corporation (PBGC) filing • Prohibited transactions

24

Internal Use Only

Self-Directed IRAs Regional Director Memorandum 98-058 June 23, 1998

Three minimum disclosures: • Not insured by the FDIC

• Not a deposit or obligation of, or guaranteed by, the institution • Subject to investment risks, including possible loss of principal

25

Internal Use Only

• If the accounts are not trust accounts, they should be reviewed as part of the Nondeposit Products under the above RD Memo Self-Directed IRAs Regional Director Memorandum 01-035 September 5, 2001

26

Internal Use Only

Self-Directed IRAs – Exam Concerns Account Documentation

Assets & Asset Valuations

Accounting Records

27

Internal Use Only

Self-Directed IRAs – Exam Concerns Investment Advice

Illegal Investments

Recordkeeping

28

Internal Use Only

Self-Directed IRAs – Exam Concerns Audit/Independent Review

Insurance

29

Internal Use Only

Special Needs Trust • A legal arrangement that provides access to funding for someone who is physically or mentally disabled or chronically ill • To help pay for expenses such as education, housing, transportation, and health care not covered by insurance • Are irrevocable and created by a grantor typically who is the parent or guardian

30

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Special Needs Trust • Account investments and earnings will not disqualify the individual’s eligibility for the public assistance disability benefit such as SS and Medicaid • Accounts are FDIC insured up to $250,000

31

Internal Use Only

Special Needs Trust Review:

• Governing document • Any court orders • Policies & procedures • Volume of accounts • Distributions

32

Internal Use Only

Stale Estates

18 months or older

Court accounting records

Officer’s Questionnaire

33

Internal Use Only

Discretionary/Non-Discretionary

Definitions: •Discretionary ‐ fiduciary makes investment decisions at their discretion for a clients account without the client’s consent for each trade •Non ‐ Discretionary ‐ investment decisions are directed by the client before the transaction takes place

34

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Discretionary/Non-Discretionary

Discretionary: •Appropriate investment reviews required • Include more in account review sample •Distribution approvals • Investments within stated objectives

35

Internal Use Only

Discretionary/Non-Discretionary

Non ‐ Discretionary: •Annual investment reviews not required • Include a few in account review sample

36

Internal Use Only

Unique & Hard-to-Value Assets

Policies & Procedures Evaluations – timing & frequency Letters of Retention Assets booked & valued

37

Internal Use Only

Unique & Hard-to-Value Assets

Consistency Safekeeping Secure & inventoried Insurance

38

Internal Use Only

Co-Fiduciary Accounts

Shared administration of an account with another fiduciary

Guardian of the Person

Family interests

Corporate fiduciary

39

Internal Use Only

Co-Fiduciary Accounts

Act in unison

Reasonable care

Responsibilities

Standards of care

40

Internal Use Only

Co-Fiduciary Accounts

Documentation is key

Physical control of account assets

Joint responsibility for administration

Disinterested or uncooperative co ‐ fiduciary

41

Internal Use Only

Co-Fiduciary Accounts Review:

• Governing document or court appointed • Proper approvals for all activity • Loan activity

42

Internal Use Only

Compliance

• Policies & procedures • Account opening & closing procedures • Bank Secrecy Act/Anti-Money Laundering (BSA/AML)

• Laws & regulations • Conflicts of interest

43

Internal Use Only

Guidelines for Selection of Accounts Non ‐ Approved Assets High Cash Balances Asset Concentrations Recently Opened or Closed Prior Exam Issues

44

Internal Use Only

Guidelines for Selection of Accounts Variety of Each Capacity Trustee & Co ‐ Trustee Agent, Custodian, etc. Riskier Account Types Accounts with Unique Assets

45

Internal Use Only

Account Line Sheets

Approach varies •Regulatory Agency •Account type

46

Internal Use Only

Account Line Sheets

Information on the line sheet •Confirms what is on synoptic record • Examples: • Date & type of governing document • Investment objective • Dates of annual reviews • Asset allocation • Discretionary distributions

47

Internal Use Only

Account Line Sheets

Issues at prior exams •Review at current exam to determine if corrected

48

Internal Use Only

Account Line Sheets

Investment authority • Is the trust company/department managing the investments? • Is an external company involved?

49

Internal Use Only

Account Review Procedures & Best Practices Start with synoptic record

Review statement preparation

Verify fee calculations

Court documentation

50

Internal Use Only

Account Review Procedures & Best Practices Account holdings as of review date

Account activity since prior exam

Partner with experienced trust examiner

51

Internal Use Only

Account Review – Common Issues Investments not within stated objective

Annual reviews

Account opening information

52

Internal Use Only

Account Review – Common Issues

Non ‐ compliance with governing document

Written direction

53

Internal Use Only

Personal Trust Line Sheet Walk Through • Synoptic Record • Trust Agreement • Investment Policy Statement • Line Sheet

54

Internal Use Only

55

Internal Use Only

Resources • FDIC: Compliance/Account Administration - Personal and Charitable Accounts https://www.fdic.gov/regulations/examinations/trustmanual/Section_4/section_iv.html • FDIC: Compliance/Account Administration – Employee Benefit Accounts https://www.fdic.gov/regulations/examinations/trustmanual/section_5/section_v.html

56

Internal Use Only

Resources • FDIC: Account Administration – Corporate Trust Accounts https://www.fdic.gov/regulations/examinations/trustmanual/section_6/section_vi.html • FDIC: Compliance – Pooled Investment Vehicles https://www.fdic.gov/regulations/examinations/trustmanual/section_7/section_vii.html

57

Internal Use Only

Resources • FDIC: ERISA – Prohibited Transactions https://www.fdic.gov/regulations/examinations/trustmanual/appendix_e/e_erisa.html#statute_prohib itedtransactions • Department of Labor – ERISA Advisory Opinions https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions • OCC Handbook – Unique and Hard-to-Value Assets https://www.occ.treas.gov/publications-and-resources/publications/comptrollers handbook/files/unique-hard-to-value-assets/index-unique-hard-to-value-assets.html

58

Internal Use Only

59

For Training Purposes Only

For Training Purposes Only

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LIVING TRUST

G

Internal Use Only

For Training Purposes Only

Personal Trust Line Sheet

Account Name : Henry F. Potter Trust

Bank Name : BB&L Trust Company Examiner : Mr. Carter Exam Start Date : 5/8/2023 Reviewed as of date : 3/30/2023

Account Number : 120000

Administrative Officer : George Bailey Total Assets (MV) : $1,142,034 Date of last administrative review : 1/22/2023 Reviewer Name : Uncle Billy Bailey

Date of last investment review : George Bailey

Reviewer Name : 1/22/2023

Governing Instrument: ☐ Revocable/Grantor ☒ Irrevocable

Trust Department Capacity: ☐ Trustee ☒ Co-trustee w/Martha C. Potter, wife ☐ Successor Trustee

Other Parties to Agreement: ☐ Directed Trust ☐ Trust Protector ☒ N/A

Date of Governing Instrument :

Date of Amendments/Revisions :

12/12/97

Purpose of Governing Instrument : Establish a living trust. Settlor died 11/18/99.

Dec 2016 documents: Resignation of Co-Trustee; Declination of Nominated Successor Trustee; Acceptance of Alternate Successor Trustee; Trustee Change Form for Schwab Brokerage

Adequate CIP/BSA/AML/OFAC ☒ Yes ☐ No ☐ N/A

Fee: ☒ Adopted Fee Schedule ☐ Other (Negotiated) Fee Charged: ☒ Monthly ☐ Quarterly ☐ Annually

Provisions for Distribution of Income : Quarterly to Settlor’s wife (Article 7)

Provisions for Principal Invasions or Distributions : health, education, maintenance, and support and consistent with accustomed standard of living. For health ins premiums for wife. And/or through wife’s last will and testament and/or inter vivas instrument (Article 7) Is the bank complying with requirements for distribution of principal ? ☒ Yes ☐ No ☐ N/A If no, please explain: If closed, were appropriate closing procedures followed ? ☐ Yes ☐ No ☒ N/A

Is the bank complying with requirements for distribution of income ? ☒ Yes ☐ No ☐ N/A If no, please explain:

Date trust was terminated ? (if applicable) N/A

System Records (please explain any ‘no’ answer) 1. Is the synoptic record accurate? ☒ Yes ☐ No 2. Is the account coded correctly? ☒ Yes ☐ No 3. Are there appropriate ticklers? ☒ Yes ☐ No 4. Shareholder Communication Act Disclosure A. Proxy Voting /Proxy Material ☒ Bank ☐ Client ☐ Client option B. Share Client’s Name with Issuer ☒ OBO ☐ NOBO ☐ Client option

Documentation of Client Contact (please explain any ‘no’ answer) 1. When was the last formally documented contact with client? 1/26/2023 2. Does this conform to department policy? ☒ Yes ☐ No ☐ N/A 3. Does documentation of client directions for disbursements conform to policy/agreement? ☒ Yes ☐ No ☐ N/A

Internal Use Only

Conflicts of Interest (please explain any ‘no’ answer) 1. Are the following fees adequately disclosed to clients? A. Shareholder Service Fees (sweep fees) B. 12b-1 fees ☐ Yes ☐ No ☒ N/A 2. Is the use of Own-bank Savings and Time Deposits appropriate? ☐ Yes ☐ No ☒ N/A 3. Are the receipt and use of Soft Dollars adequately disclosed to clients? ☐ Yes ☐ No ☒ N/A Comments: • Investments (Attach printout) – Applicable for Investment Management Agency Investment Objective : Aggressive - 80% equities, 20% fixed Investment Authority : ☒ Sole ☐ None ☐ Shared with Investment Officer : Uncle Billy Bailey Portfolio Composition – show as % of total Asset Class Target or Model Current Allocation

Comments (Ex: how assets are valued, unique asset class compositions, special characteristics, etc.)

Cash and Equivalents

0.0%

0.6%

Equities

80%

81.5%

Fixed Income

20%

17.9%

Real Estate Non-Traditional

Overdrafts Other Liabilities

1. Investment Objective

a. Is there support for the initial allocation on file? ☒ Yes ☐ No If no, please explain: b. Does management update and document the client’s objective each year? ☒ Yes ☐ No If no, please explain: c. Is the portfolio consistent with the current investment objective? ☒ Yes ☐ No If no, please explain: d. If not, is management executing a plan to remedy the inconsistency? ☐ Yes ☐ No If no, please explain:

Internal Use Only

2. Client Directions

a. Purchase specific assets? Exclude specific assets or classes? ☐ Yes ☒ No If yes, please explain: b. Retain specific assets? ☐ Yes ☒ No If yes, please explain: c. Maintain a concentration in a specific asset or asset class? ☐ Yes ☒ No If yes, please explain: d. If yes to any of the above, is there sufficient documentation to protect the bank? ☐ Yes ☐ No ☒ N/A If no, please explain: a. Is transaction volume reasonable? ☒ Yes ☐ No If no, please explain: b. Are there assets in the account that are prohibited by the grantor or not on approved lists? ☐ Yes ☒ No If yes, please explain: c. If yes, has management approved and is management monitoring those assets? ☐ Yes ☐ No ☒ N/A If no, please explain: d. If management is not monitoring, was proper disclosure made to the client? ☐ Yes ☐ No ☒ N/A If no, please explain: e. Are all assets priced, and if not, is this disclosed to the client? ☒ Yes ☐ No If no, please explain:

3. Asset Review

Comments • Mr. Potter was formerly a partner of a subsidiary, The FIRM; fee discounted 35 bps and the minimum fee waived • Living children: Jackson W. Potter, Elizabeth A. Potter Documentation Exceptions • None noted

Internal Use Only

Virtual Trust Examiner School Conflicts of Interest

1

Internal Use Only

Session Learning Objectives: 1. Understand the importance of evaluating

investments in own bank, affiliates, or obligations of insiders

2

Internal Use Only

Session Learning Objectives: 2. Discuss broker relationships

3

Internal Use Only

Session Learning Objectives: 3. Review what is permitted related to investments in 12b-1 mutual funds

4

Internal Use Only

Session Learning Objectives: 4. Understand the importance of evaluating investments in own bank or affiliate

repurchase agreements

5

Internal Use Only

Session Learning Objectives: 5. Discuss what constitutes material inside information

6

Internal Use Only

Session Learning Objectives: 6. Review requirements related to multi account and inter-trust transactions

7

Internal Use Only

Session Learning Objectives: 7. Apply concepts to exam scenario exercises

8

Internal Use Only

Conflicts of Interest

Interest Bearing Deposits

Stocks or Obligations

Insider Investments

Broker Relationships

9

Internal Use Only

Conflicts of Interest

12B-1 Mutual Funds

Repurchase Agreements

Inside Information

Multi-Account & Inter-Trust Transactions

10

Internal Use Only

Introduction

• Duty of undivided loyalty • Avoid even the appearance of a conflict of interest

11

Internal Use Only

Conflict of Interest

• Occurs when a fiduciary’s duty of loyalty to trust customers clashes with other interests

12

Internal Use Only

Self-Dealing

• Always involve conflicts of interest • Limited to trustee dealing with itself or an affiliate

13

Internal Use Only

Contingent Liabilities

• Major sources • Possible liability

14

Internal Use Only

Contingent Liabilities - Types • Contravention of Trust • Commingling • Prudent Investor Rule • Real Estate & Mortgages • Deposits with Self • Acts without Consent/Approval • Failure to Invest

15

Internal Use Only

Conflicts of Interest

Interest Bearing Deposits

Stocks or Obligations

Insider Investments

Broker Relationships

16

Internal Use Only

Interest Bearing Deposits

Investments in own-bank or affiliate interest bearing deposits

17

Internal Use Only

Interest Bearing Deposits

Written policy for investments in own-bank or affiliates

18

Internal Use Only

Interest Bearing Deposits

Assure competitiveness by retaining documentation

19

Internal Use Only

Interest Bearing Deposits

Must be fully insured by the FDIC

20

Internal Use Only

Interest Bearing Deposits

Prohibited for accounts subject to ERISA unless plan specifically allows

21

Internal Use Only

Conflicts of Interest

Interest Bearing Deposits

Stocks or Obligations

Insider Investments

Broker Relationships

22

Internal Use Only

Stocks or Obligations

Investments in own-bank, parent company, or holding company stock or obligations

23

Internal Use Only

Stocks or Obligations

Each account holding should have specific authorization for retention

24

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