Fiduciary Risk Management: OCC Perspective 2015 Delaware Trust Conference October 27, 2015

Disclosure The views and opinions expressed in this presentation are my own, and do not necessarily represent those of the Office of the Comptroller of the Currency or of the Chief National Bank Examiner. I will periodically refer to national bank and federal savings association regulations and guidance. Although I generally refer to Regulation 9 citations, Regulations 9 and 150 apply to national banks and federal savings associations, respectively. These regulations are in most respects identical. 2

AM Risk Management OCC Expectations & Guidance

OCC – National Bank and Federal Savings Association AM Supervision  OCC regulates over 1,600 national banks, federal savings associations, and federal branches and agencies.  They range from large complex banks with global footprints to local community banks.  Includes 62 limited purpose national trust banks and 19 trust only thrifts.  Approximately 44% of all national banks and 27% of Federal savings associations have Asset Management (AM) activities, which include fiduciary and custody services & retail brokerage services. 4 OCC AM Supervision Source: Call Report 6/30/2015

OCC AM Supervision Over 150 examiners with specialized Asset Management expertise perform ongoing supervision both on and off bank premises. Large Banks – Resident Examiner Program Midsize/Community Banks – Field Office Staff Program National Trust Banks – Focus on limited purpose trust banks OCC AM Policy Group in D.C. works extensively with OCC’s examiners on policy guidance for the industry, internal training, and addressing specific bank issues, including potential violations and matters requiring attention (MRAs). AM Policy also works closely with OCC Legal and other internal and external groups on matters including Dodd Frank (Volcker Rule); FSOC issues (including identification of systemically important entities and activities); and interpretations of the fiduciary and recordkeeping regulations. 5

OCC Regulation and Guidance OCC Handbooks provide both examiners and the industry with core OCC expectations for each subject area. HBs include background on the product line and identify risks posed by the specific activities discussed. Specific examination procedures provide guidance to field examiners regarding many of the issues that warrant particular scrutiny. Most OCC Handbooks have either recently been or are in the process of being revised. – Safety and Soundness – Asset Management – Consumer Compliance – Securities Compliance Comptroller’s Handbooks 6

OCC Handbook Updates – Asset Management Asset Management (update projected 2015) Investment Management Services (update projected 2016) Personal Fiduciary Activities (February 2015) Conflicts of Interest (January 2015) Retail Sales of Non-Deposit Investment Products (January 2015) Collective Investment Funds (May 2014) Retirement Plan Products and Services (February 2014) Unique and Hard to Value Assets (August 2012) AM Operations and Controls (2011)/Custody Services (2002) Where possible, older guidance (e.g., remaining Trust Banking Circulars and AM Bulletins and Circulars) has been rescinded and is now incorporated into revised HBs so that examiners and the industry may focus on most recent guidance. OCC Guidance 7

Conflicts of Interest HB OCC Guidance 8 Details conflict regulations for NB and FSA fiduciaries Clarifies longstanding guidance relating to traditional conflicts (e.g., BHC stock; purchase of fiduciary assets by related parties and interests). Broadens the discussion of conflicts of interest to address current business practices – Use of proprietary products (e.g., mutual funds, hedge funds, structured notes) in discretionary fiduciary accounts. – Business referral arrangements, including delegation of fiduciary activities back to referring entity. Rescinds BC 218 (Sweep Fees); BC 233 (Acceptance of Fin’l. Benefits by Bank Trust Depts.), and TBC-19 (Fiduciary Purchases of Banks when Bank Participates in Underwriting Syndicate), and incorporates relevant principles into the HB.

Conflicts of Interest HB OCC Guidance 9 Handbook includes series of appendices that drill down into specific scenarios where conflicts are likely to crop us. – Use of Material Nonpublic Information – Transactions between Fiduciary Accounts and Related Parties and Interests – Brokerage Allocation and Securities Trading – Soft Dollars and Brokerage Commission Arrangements – Use of Mutual Funds as Fiduciary Investments – Mutual Funds and Collective Funds – Late Trading and Market Timing – Unique Situations Posing Potential Conflicts of Interest – Reasonable Compensation

Personal Fiduciary Activities HB OCC Guidance 10 Details the applicable regulatory structure for NBs and FSAs acting as fiduciaries. Describes a variety of fiduciary accounts (trusts), roles a bank typically acts in, and responsibilities imposed upon a bank fiduciary. Recognizes evolving state trust laws. – Directed trustees/excluded fiduciaries – Trust decanting – Trust protectors/trust advisors – Virtual representation Reinforces core fiduciary obligations under Parts 9 and 150 even when responsibilities are bifurcated between a bank trustee and an investment manager.

Personal Fiduciary Activities HB OCC Guidance 11 Regardless of state trust law, the trust instrument, or a court order, the following requirements apply to all NB and FSA fiduciaries: – Grant of fiduciary powers from OCC – Fiduciary powers managed by, or under direction of Board of Directors – Self-dealing and conflicts of interest policies and procedures – Annual or continuous fiduciary audit – Pre-acceptance reviews of all accounts – includes consideration of bank’s ability to administer fiduciary relationship under the terms of the fiduciary arrangement which includes physical custody or adequate safeguards and controls over all fiduciary assets (12 CFR 9.13(a)) – Dual control over all fiduciary assets – Physical separation of all fiduciary assets from those of the bank

Third-Party Risk Management Guidance 12 OCC Bulletin – “Third-Party Relationships: Risk Management Guidance” Issued October 2013 Provides OCC Expectations for – Risk management practices for third-party relationships involving critical activities. – Risk management practices throughout the lifecycle of a third-party relationship. – Board and senior management oversight. Sets general risk-based baseline standards for oversight of third party relationships. Some relationships, such as delegated fiduciary activities are subject to higher and/or specialized standards. OCC Bulletin Highlights

OCC expects more rigorous and comprehensive oversight of critical activities. Applies to oversight of service providers that support significant bank functions, significant shared services, or other activities that – Could cause a bank to face significant risk if the third party fails to meet expectations. – Could have significant customer impact. – Require significant investment in resources to implement the third- party arrangement and manage the risk. – Could have major impact on bank operations if the bank has to find an alternate third party or if the outsourced activity has to be brought in-house. Oversight of Critical Activities – 3 rd Parties 13 Third-Party Risk Management Guidance

14 Banks should practice effective risk management regardless whether the bank performs the activity internally or through a third party. Management must be knowledgeable of the outsourced activity. Bank must: – Adopt risk management practices that are commensurate with the level of risk and complexity of the third-party relationship. – Ensure robust oversight and risk management of relationships involving critical activities. – Adopt an effective risk management process that follows the third-party relationship through its lifecycle. – Ensure periodic independent review of bank’s third-party risk management process. Key Takeaways Third-Party Risk Management Guidance

Key Risks & Asset Management Examination Focus

Risk Considerations Market Volatility/Low Interest Rate Environment Impact on earnings Strong correlation between AM earnings and performance of the domestic and global equity markets Investment Management Product selection, suitability, and need for heightened investment risk management Potential conflicts of interest Use of bank and affiliate funds and products Use of third-party funds and products which provide incentives to the trustee bank Contractual relationships and outsourcing arrangements with affiliates and third parties in which bank trustee is incented to refer business or make investments with those entities AM Operations Internal and external processes Third party vendor oversight Cyber threats Regulatory Change Resources to manage regulatory change and implement necessary platform and process changes. 16

Key Risks Investment Management Risks Government Policies and Politics will Heavily Influence Markets Markets feel Impact of Economic Uncertainty Investment Opportunities/Returns Use of increasingly complex products Reaching for yield Potential conflicts of interest Need for Heightened Investment Risk Management Initial and ongoing due diligence Investment selection, retention and disposition process Analytical tools and systems, with an emphasis on credit and interest rate risk Valuation practices 17

Key Risks Conflicts of Interests Use of bank and affiliate mutual funds, ETFs, alternative funds, structured funds and other proprietary products Use of funds and products that provide incentives to the trustee bank Contractual relationships and outsourcing arrangements with affiliates and third parties in which bank trustee is incented to refer business or make investments with those entities 18

Key Risks AM Operations Risks Core Operational Processes – Capability/Capacity of Legacy Systems Manual Processes/“Work-Arounds”/User Developed Tools Conversion risks Internal Controls Money Movement; Asset Custody; Reconciliations Cyber threats – Cyber attacks on asset management clientele, particularly private banking – Attacks moving beyond phishing to hacking and outright takeover of accounts – Robust ID and verification procedures (e.g., mandatory callbacks) needed to confirm requested transactions were customer originated Oversight of Internal and Third Party Vendors – System providers – Outsourced operations providers 19

OCC Contact Information Joel Miller Asset Management Group Leader Market Risk Division