The OCC issued a bulletin (the “Bulletin”, OCC 2010-37) providing guidance to national banks regarding the placement of funds, for which the national bank is a fiduciary, on deposit with the national bank or one of its affiliates. These deposits, referred to as “self‑deposits,” include, among other deposits, short-term investment pools consisting of own‑bank deposits, omnibus cash or other processing accounts, money market deposit accounts and certificates of deposit.
The OCC states that there are two main types of self-deposited fiduciary funds: (i) self‑deposits of fiduciary funds that are awaiting investment or distribution; and (ii) self‑deposits that extend beyond one year as long term investments of the fiduciary funds. The OCC’s main supervisory concern with self-deposits of fiduciary funds is to ensure that the national bank fulfills its fiduciary duty to provide its undivided loyalty and care to the beneficiaries of such fiduciary accounts. The Bulletin notes that self-deposit of fiduciary funds can serve as a windfall for a national bank by providing the bank with stable funding, low cost deposits, and increased liquidity; therefore, the OCC wants to make certain that the bank’s interests do not conflict with those of a holder of a fiduciary account or its beneficiaries.
Self-Deposits Awaiting Investment or Distribution
Under 12 CFR 9.10(b) and (c), self-deposits for fiduciary funds that are awaiting investment or distribution with a bank or an affiliated FDIC-insured depository institution are permitted, unless prohibited by applicable law. Furthermore, a bank is required to set aside collateral to secure fiduciary funds to the extent the deposit exceeds FDIC insurance limits. To determine the collateral requirements, a national bank must have procedures in place to identify all self-deposits of fiduciary funds awaiting investment or distribution and the applicable FDIC insurance coverage for these funds. The collateral for such funds must be appropriate, not only when pledged, but also at all times while it is pledged. The OCC wants the collateral valued frequently to ensure it is not impaired and that it meets or exceeds the bank’s pledge requirements. National banks are not required to obtain a maximum rate of return for fiduciary funds awaiting investment or distribution, however, a bank must ensure that interest rates paid on such self-deposits are consistent with applicable law and with the national bank’s fiduciary duty to the account and its beneficiaries.
Many short-term investments into which fiduciary accounts may be swept are available to national banks. When selecting a sweep or other short-term investment vehicle, the Bulletin states, a national bank should consider the specific characteristics of the available choices (including the credit quality, return, average maturity and liquidity of such vehicles).
Self Deposits as Long-Term Investments
Under 12 CFR 9.12(a), self-deposits of fiduciary funds as long-term investments are prohibited, unless such investments are authorized under applicable law. Deposits that extend beyond twelve months are generally assumed to be “long-term” investments. A national bank is not required to pledge collateral for self-deposits of fiduciary funds unless the funds are awaiting investment or distribution. As a result, a bank’s financial condition and the FDIC insurance coverage of self-deposited long-term investments are of even greater importance when assessing a national bank’s fiduciary duties to a fiduciary account and its beneficiaries.
In publishing the Bulletin, the OCC stressed its concern that a national bank’s primary responsibility is to its fiduciary duty to protect the interests of the fiduciary accounts and their beneficiaries; not the national bank’s own self interest and well-being. When making a decision as to whether or not to self-deposit such fiduciary funds, a bank must consider many risks, including whether its liquidity, credit quality or capital are stressed. In the context of self-deposits, the OCC states, the interests of the fiduciary account and its beneficiaries must come before the interests of the bank.