Customers may wonder how their managed assets held in bank trust departments are safeguarded. Here is a brief explanation of how extensive regulation, examination, and sound practices protect a bank customer’s interests.
Bank trust departments and trust companies often act as both custodian and investment manager of client assets. Banking institutions that offer these services are subject to rigorous and frequent examination, as well as extensive regulation, by federal regulators such as the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), or by state banking regulators.
Assets, including certificates of deposit, but not cash, held in managed accounts for which the bank trust department also serves as custodian are neither assets nor liabilities of the bank. By law, assets held in these accounts must be segregated from all other bank assets. Likewise, the books and records of these accounts must also be kept separate from the books and records of other bank activities, such as routine deposit and withdrawal transactions. The ownership of these assets remains vested in the individuals or entities for whose benefit the bank is acting as investment manager and custodian. In addition, many institutions use third-party entities, such as Federal Reserve banks or the Depository Trust & Clearing Corporation, to hold these assets. In all of these instances, the assets are not subject to the claims of a bank’s creditors.
All custodial assets held in deposit accounts (cash) are entitled to FDIC insurance. The FDIC will fully insure cash held in non-interest-bearing transaction accounts and will insure cash held in other types of deposit accounts up to $250,000.
Bank trust departments are extensively regulated not only to protect the interests of bank customers, but also to ensure the safety and soundness of the institution for the public good. With respect to custodial and investment management services, state and federal regulations address various aspects of these activities, including the fiduciary obligations of the bank, potential conflicts of interest, and the bank’s management of transactional, strategic, compliance, and reputational risks.
Federal and state banking regulators routinely examine trust departments for compliance with laws and regulations, as well as the bank’s management of various risks. These thorough onsite examinations occur at least every 18 months. Some institutions have regulators within the bank’s premises throughout the year to examine fiduciary activities continuously.
During an examination, examiners do not simply rely on documentation provided by the institution to determine compliance with banking laws. Examiners sample and test various operations to ensure that important transactions may be properly completed and that the record-keeping function is accurate. In addition, examiners review and test the bank’s internal controls on custodial and investment management activities, conflicts of interest, recordkeeping of securities transactions, and management information systems. The testing of internal controls allows the examiner to determine whether the bank is able to identify transactional mistakes or fraudulent activity.
All FDIC-insured institutions must disclose extensive financial information in quarterly reports known as Call Reports. These publicly available reports provide timely and accurate data regarding a bank's financial condition and the results of its operations. Bank regulators use the information in the Call Reports to monitor the institutions when not engaged in an on-site examination. The information provided in these reports is extensive and covers everything from the income and expenses of the bank as a whole, to the number of fiduciary accounts and the amount held in those accounts.
Investments are not a deposit or other obligation of, or guaranteed by, the bank, are not FDIC insured, not insured by any Federal government agency, and are subject to investment risks, including possible loss of principal.