The OCC issued a bulletin (2008-10, the “Bulletin”) concerning annual reviews of fiduciary accounts. Under OCC regulation 12 C.F.R. 9.6(c), a national bank is required to review, no less frequently than annually, all assets of each fiduciary account for which the bank has investment discretion “to evaluate whether they are appropriate, individually and collectively, for the account.”
Elements of an Effective Annual Investment Review Process. The Bulletin states that a national bank’s annual investment review process should: (1) ensure that investment objectives are current and appropriate and that the investments are consistent with these objectives; (2) ensure that the review covers all assets in the investment portfolio; (3) identify and track exceptions and provide for follow-up and resolution of exceptions; (4) include performance measurements and a process for handling performance “outliers”; and (5) ensure that each asset is valued using an appropriate valuation process. The Bulletin stresses the need for thorough documentation of all reviews.
Unique or hard-to-value assets (e.g., real estate, oil interests, farms, closely held businesses) should be included in the annual review. Moreover, the bank’s review should document the bank’s determination that the asset is appropriate given the account’s investment objectives, should provide updated asset valuations appropriate for the type of asset and the nature of the account and should ensure that proper insurance coverage is maintained on the assets.
Automated and Manual Investment Review Processes. The OCC states in the Bulletin that national banks may use manual, automated or hybrid systems to perform annual investment reviews. Manual reviews provide a more hands-on approach, but can be time-consuming and review quality may vary with the individual performing that review. Automated systems allow for efficient and frequent valuations of marketable securities and securities in collective investment funds and effective identification of exceptions to account objectives. Automated systems, however, do not provide the independent perspective provided by committee review nor will they spot when investment objectives need to be changed to reflect market changes or changes derived from the passage of time.The Bulletin concludes by noting that the OCC expects annual investment reviews to be performed in a timely and comprehensive manner and that bank examiners will seek corrective action “for significant weaknesses or unwarranted risks” in the annual investment review process.