What Is Reg 9? Fiduciary Rules for Banks

Regulation 9, formally known as 12 CFR Part 9, is a federal rule from the Office of the Comptroller of the Currency (OCC). This regulation establishes the standards that national banks and federal savings associations must follow when acting in a fiduciary capacity. A fiduciary is an entity legally entrusted to manage assets for a beneficiary, and this role requires the bank to act in the beneficiary’s best interest. The roles covered include serving as a trustee, an executor for an estate, a guardian, or an investment advisor. Before a bank can exercise these powers, it must receive prior approval from the OCC to ensure it has the necessary systems in place.

Core Fiduciary Principles

The duty of loyalty mandates that a bank must act solely in the interests of the beneficiaries. This principle requires the bank to avoid any situation where its own interests could conflict with the interests of the fiduciary account it manages. All decisions must be made with the exclusive purpose of benefiting the account holders.

Complementing the duty of loyalty is the duty of care, which requires the bank to manage fiduciary accounts with competence and prudence. This means the bank must use the skills and expertise expected of a professional asset manager. The decisions made must be thoughtful and well-reasoned, reflecting a careful consideration of the account’s objectives and circumstances.

The duty of impartiality is another guiding principle, particularly when a fiduciary account has multiple beneficiaries. In these situations, the bank must treat all beneficiaries fairly and equitably. It cannot favor the interests of one beneficiary over another, ensuring that distributions and investment decisions are balanced.

Investment Management Requirements

Regulation 9 sets specific standards for how banks manage investments within fiduciary accounts where they have investment discretion. The framework is built upon the “prudent investor rule,” which requires fiduciaries to manage a portfolio as a whole, considering the relationship between risk and return. It moves away from evaluating each investment in isolation and instead focuses on its role within the overall portfolio.

A central requirement of the prudent investor rule is diversification. Banks are expected to diversify the investments of a fiduciary account to manage risk, unless the governing document, such as a will or trust agreement, specifies otherwise.

To ensure these standards are met, the regulation requires the bank to establish written policies and procedures for its investment activities. For each fiduciary account, the bank must create a tailored investment plan that aligns with the account’s unique objectives. These written policies must also address brokerage placement practices and methods to prevent the use of insider information.

Rules on Self-Dealing and Conflicts of Interest

Regulation 9 establishes strict prohibitions against self-dealing and other conflicts of interest to reinforce the duty of loyalty. Self-dealing occurs when a bank, acting as a fiduciary, engages in a transaction that benefits itself or its affiliates at the expense of the fiduciary account. These prohibitions apply specifically to accounts where the bank has investment discretion.

The regulation explicitly forbids several types of transactions. For instance, a bank cannot lend funds from a fiduciary account to itself, its directors, officers, or employees. It is also prohibited from purchasing assets for a trust from itself or selling assets from a trust to itself. These transactions are considered inherently conflicted because the bank is on both sides of the deal, making it impossible to ensure the terms are fair to the beneficiary.

Account Administration and Recordkeeping

Regulation 9 mandates specific procedures for account administration and recordkeeping. The regulation requires a series of reviews for each fiduciary account, beginning with a pre-acceptance review where the bank analyzes a potential account before agreeing to take it on. This assessment determines whether the bank has the expertise and resources to manage the account properly.

Shortly after accepting a new account, the bank must conduct an initial post-acceptance review to confirm that the account has been set up correctly and that a proper investment plan is in place. Following this, the bank is required to perform an annual review of each fiduciary account. This yearly check-up assesses the account’s administration, investment performance, and overall compliance with legal requirements and the account’s objectives.

In addition to these reviews, banks must maintain detailed and accurate records for every fiduciary account. This documentation provides a clear trail of all decisions made, transactions executed, and communications with beneficiaries.

Audits and Regulatory Oversight

Compliance with Regulation 9 is enforced through a system of audits and regulatory examinations. The first layer of oversight is an internal requirement. The regulation mandates that a bank must conduct a suitable audit of all its significant fiduciary activities at least once every calendar year. This audit can be performed by the bank’s internal audit department or by an external accounting firm.

The purpose of this annual audit is to assess whether the bank’s fiduciary activities are in compliance with the law and its own policies. The audit covers all aspects of fiduciary management, from account administration and investment decisions to conflict-of-interest rules and recordkeeping. The findings of the audit are reported to the bank’s board of directors, which is ultimately responsible for overseeing the bank’s fiduciary functions.

The second layer of oversight comes from the Office of the Comptroller of the Currency itself. The OCC conducts its own periodic examinations of a bank’s trust and fiduciary services. These examinations are carried out by specialized OCC examiners who review the bank’s policies, procedures, account records, and audit reports. The goal of these examinations is to independently verify the bank’s compliance with Regulation 9 and ensure the safety and soundness of its fiduciary operations.