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FEDERAL RESERVE BANK OF DALLAS Dallas, Texas, June 6,1940 R EVISED EDITION O F REGU LATIO N F To the Member Banks of the Eleventh Federal Reserve District: Under date of May 28, 1940, there was forwarded to your bank a copy of Regulation F of the Board of Governors of the Federal Reserve System in the form as amended effective June 1, 1940. The printing of that regula tion is faulty and there is enclosed herewith a corrected copy. Please insert this copy in your ring binder in lieu of the one sent your bank under date of May 28, which should be removed and destroyed. Yours very truly, R. R. GILBERT President This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) IN QU IRIES R E G A R D IN G TH IS R E G U L A T IO N A ny inquiry relating to this regulation should be addressed to the Federal Reserve Bank o f the district in w hich the inquiry arises. CONTENTS Page A uthority for R egulation................................................................................. ....... Sec. 1. A pplications ................... .............. ......................- .............................-....... Sec. 2. C onsideration of A pplications..................... -..... ............... ................— 1 1 Sec. 3. C onsolidation of T wo Sec. 4. C onsolidation of State B an k Sec. 5. C hange Sec. 6. T rust D epartment and M anagement............................... (a) Separate trust department........................................................... ( b ) Directors’ supervision of trust department------------------------(c) Trust investment committee........................................................ ( d ) Executive officer— ..................................................................... (e) Competent legal counsel.................................................... — ..... (/) Principles of trust institutions..... — ............ - ................. 3 3 4 4 4 5 5 Sec. 7. B ooks and A ccounts....................................... — (a) In general.................. .— -----------------------( b ) Record of pending litigation-------- --------------- ---- --------- -------- 5 5 5 of or M ore N ational B anks ..— ........................... 1 with N ational B ank ....................... N ame................... Sec. 8. E xaminations 2 3 3 T rust D epartment-------------------- ----------------------- 5 Sec. 9. T rust F unds A waiting I nvestment or D istribution------------------(a) In general.----------------------------- ---------------------- -------------------(b) Use in conduct of business of trustee bank------------------------- 6 6 6 Sec. 10. I nvestment of T rust F unds ......................-—........-----------------(a) Private trusts............................... ................................................. ( b) Court trusts_______________________ — (c) Collective investment of trust funds.----------—.--------------------- 7 7 7 S Sec. of 11. P urchase or Sale of T rust A ssets to or from T rusteeB an k or I ts D irectors, O fficers or E mployees----------------------- — (a) Obligations of trustee bank or its directors,officers, etc— — ( b ) Sale or transfer of trust assets to trustee bank or its direc tors, officers, etc---------------------------- ------------------------ ------( c-) Dealings between trust accounts---------- Sec. 12. C ustody Sec. 13. D eposit of T rust Securities and I nvestments----------------------------- 8 8 9 State A uthorities----------------------------- 9 Sec. 14. C ompensation of B an k ------------------------------------- --------------------------(a) In general;---------------------------------------------------------------------- --( b ) Officer or employee of bank as co-fiduciary— -------- ---------- ---- 9 9 9 Sec. 15. I nsolvency or V oluntary L iquidation of B an k ----------------------------(a) Insolvency------------------------------------------------------------------------( b ) Voluntary liquidation--------------------------------------------------------- 10 10 10 Sec. 16. Surrender 10 of Securities 8 8 of w ith T rust P owers_____________________ ________________ ( b) Words “ Trust Company” as part of bank’s title---------.-------(c) Examination of trust department--------------------------------------( d ) Certificate of Board of Governors of the Federal Reserve System _________________________________________________ Sec. 17. C ommon T rust F unds_______-__________________________________ — (а) In general____________________________________________ (б) Common Trust Funds for investment of small amounts— (c) Common Trust Funds for general investment—---------------( d) Com mon Trust Funds composed principally of mortgages (Mortgage Investment Funds)----------------------------------------Sec. 18. B oard F o r m s _________________________________________ ..__________ 23 A p p e n d i x _______________________________________ ; ________________________25 _ 10 11 11 12 12 13 13 17 R E G U L A T IO N F As amended effective June 1, 1940 T R U S T P O W E R S O F N A T IO N A L B A N K S A U T H O R IT Y FO R R E G U L A T IO N This regulation is issued under authority of the provisions of section 11 (k) of the Federal Reserve Act, as amended, which, together with related provisions of law, are published in the Appendix hereto. S E C T IO N 1. A P P L IC A T IO N S A national bank desiring to exercise any or all of the powers author ized by section 11 (k) of the Federal Reserve Act, as amended, shall make application to the Board of Governors of the Federal Reserve System for a special permit authorizing such national bank to exercise such powers. If the applying bank is not authorized to exercise any of such powers, the application should be made on Form 61; and if the applying bank is authorized to exercise one or more but not all of such powers, the application should be made on Form 61b. In the case of the organization of a new national bank, the conver sion of a State bank or trust company into a national bank, or the consolidation of two or more national banks or of a State bank or trust company with a national bank under the charter -of the latter, when none of the national banks involved in such consolidations is authorized to exercise trust powers, application for such a permit may be made in advance on behalf of the new, converted or consolidated national bank, and the permit may be issued simultaneously with the consummation of such organization, conversion or consolidation. Such application may be made by the organizers in the case of a new national bank, by the State bank or trust company in the case of a conversion, and by the national bank the charter of which is to be retained in the case of a consolidation. Each application made under the provisions of this section shall be executed and forwarded in duplicate, together with duplicate copies of any documents containing any information submitted with the appli cation, to the Federal Reserve Bank of the district in which the apply ing bank is located. S E C T IO N 2. C O N S ID E R A T IO N O F A P P L IC A T IO N S In passing upon an application for permission to exercise the fiduci ary powers authorized by section 11 (k) of the Federal Reserve Act, 1 2 REGULATION F as amended, the Board of Governors of the Federal Reserve System will give special consideration to the following matters: (a) Whether, under the provisions of section 11 (k) of the Fed eral Reserve Act, as amended, the bank has sufficient capital and surplus to render it eligible to receive permission to exercise the fiduciary powers applied for and whether the granting of any or all of such powers would be in contravention of State or local law; (b) The needs of the community for trust service of the kind applied for and the probable volume of such trust business avail able to the bank; (c) The general condition of the bank, particularly the ade quacy of its net capital and surplus funds in relation to the char acter and condition of its assets and to its deposit liabilities and other corporate responsibilities, including the proposed exercise of trust powers; (d) The general character and ability of the management of the bank; (e) The nature of the supervision to be given to the proposed trust activities, including the qualifications and experience of the members of the proposed trust investment committee; (/) The qualifications, experience and character of the pro posed executive officer or officers of the trust department; , (g) Whether the bank has available competent legal counsel to advise and pass upon trust matters whenever necessary; and (h) Any other facts and circumstances that seem to it proper. S E C T IO N 3. C O N S O L ID A T IO N O F T W O O R M O R E N A T IO N A L B A N K S Where two or more national banks consolidate under the provisions of the Act of Congress approved November 7, 1918,1 as amended, and any one of such banks has, prior to such consolidation, received a permit from the Board of Governors of the Federal Reserve System to act in fiduciary capacities which is in force at the time of the con solidation, the rights existing under such permit pass by operation of law to the consolidated bank and the consolidated bank may act in such fiduciary capacities in the same manner and to the same extent as the bank to which such permit was originally issued; and no new application to continue to act in such capacities is necessary. How ever, in order that the records of the consolidated bank may be com plete and that it may have convenient evidence of its right to exercise trust powers, the Board, upon receipt of advice from the Comptroller of the Currency that the consolidation has been consummated, will issue a certificate to the consolidated bank showing its right to exer1 Applicable provisions of the Act of Congress approved November 7, 1918, as amended, are printed in the Appendix to this regulation. REGULATION F 3 cise the trust powers theretofore granted by the Board to any of the national banks taking part in the consolidation. SE C T IO N 4. C O N S O L ID A T IO N OF S T A T E B A N K W IT H N A T IO N A L B A N K Section 3 of the Act of Congress approved November 7, 1918,2 as amended, authorizes any bank, trust company, savings bank, or other banking institution incorporated under the laws of any State or in the District of Columbia to be consolidated directly with a national bank located in the same State, county, city, town, or village under the charter of such national bank, and provides in effect that, when such consolidation is consummated, the consolidated national bank shall succeed to the specific fiduciary appointments, designations and nom inations of the State institution at the time of the consolidation. It is not necessary for the national bank to have a permit from the Board of Governors of the Federal Reserve System in order to admin ister the specific trusts to which it thus succeeds, but the provision does not confer upon the consolidated national bank the right to act generally in fiduciary capacities or to undertake any other trust busi ness. Unless the national bank already has a permit from the Board of Governors of the Federal Reserve System to act in fiduciary capac ities which is in force at the time of the consolidation, it will be necessary for the bank to obtain such a permit before undertaking to act generally in fiduciary capacities or to accept any other trust business. SECTION 5. CHANGE OF NAME If a national bank has received a permit from the Board of Gov ernors of the Federal Reserve System to act in fiduciary capacities and subsequently, while the permit is in force, changes its name under the provisions of the Act of Congress approved May 1, 1886,3 it is not necessary for the bank to make a new application to continue to act in such capacities. However, in order that the records of the bank may be complete and that it may have convenient evidence of its right to exercise trust powers under its new name, the Board, upon receipt of advice from the Comptroller of the Currency that such change in name has been legally effected, will issue a certificate to it under such new name evidencing its right to exercise the trust powers previously granted to it under its old name. S E C T IO N 6. T R U S T D E P A R T M E N T M A N A G E M E N T (a) Separate trust department.—Every national bank which obtains permission from the Board of Governors of the Federal Reserve System to act in a fiduciary capacity shall, before undertaking to act in such 2 Section 3 of the Act of Congress approved November 7, 1918, as amended, is printed in the Appendix to this regulation. 3 The applicable provisions of the Act of Congress approved M ay 1, 1886, are printed in the Appendix to this regulation. 4 REGULATION F capacity, establish a trust department which shall be separate and apart from every other department of the bank. (b) Directors’ supervision o f trust department.—The board of directors is responsible for the investment of trust funds by the bank, the disposition of trust investments, the supervision of the trust de partment, the determination of the policies of such department and for the review of the actions of all committees appointed by the board of directors for the conduct of the trust department. The acceptance of all trusts shall be approved by the board of directors or a com mittee appointed by such board, and the closing out or relinquish ment of all trusts shall be approved or ratified by the board of direc tors or a committee appointed by such board; and such committee or committees shall be composed of capable and experienced officers or directors of the bank. Any such approval or ratification shall be recorded in the minutes of the board of directors or of such committee as the case may be. (c) Trust investment com mittee.— Before any such national bank undertakes to act in. any fiduciary capacity, the board of directors of the bank shall appoint a trust investment committee which shall be composed of at least three members, who shall be capable and experi enced officers or directors of the bank.4 All investments of trust funds by the trust department of every such national bank shall be made, retained or disposed of only with the approval of the trust investment committee; and such committee shall keep minutes of all its meetings, showing the disposition of all matters considered and passed upon by it. Such committee shall, at least once during each period of twelve months, review all the assets held in or for each fiduciary account to determine their safety and current value and the advisability of retain ing or disposing of them; and a report of all such reviews, together with the action taken as a result thereof, shall be noted in the minutes of the trust investment committee. Such committee may have such additional duties relating to the trust department as may be prescribed by the board of directors. (d ) Executive officer.— Before any such national bank undertakes to act in any fiduciary capacity, its trust department shall be placed under the management and immediate supervision of an executive officer or officers qualified and competent to administer trusts, and the duties of such officer or officers shall be prescribed by the board of directors of the bank. Such duties shall be evidenced by the by-laws of the bank or by a resolution duly adopted by and entered in the 4 It is contemplated that there shall be a committee the members of which shall have a con tinuity of responsibility for the discharge of the duties of the committee. However, alternates appointed by the board of directors may serve in place of regular members of the committee who are unable to serve on account of vacations, illness, or other good and sufficient reasons if the minutes of the committee show the reason for the service of such alternate in place of the regular member. REGULATION F 5 minutes of the board of directors. All officers and other persons taking part in the operation of the trust department shall be adequately bonded. (e) Competent legal counsel.—Every such national bank shall designate, employ or retain competent legal counsel who shall be readily available to pass upon trust matters and to advise with the bank and its trust department; but the bank shall not engage in the practice of law. (/) Principles of trust institutions.—Every such national bank shall conform to sound principles in the operation of its trust department.5 S E C T IO N 7. B O O KS A N D A C C O U N T S (а) In general.—Every national bank which has received permis sion from the Board of Governors of the Federal Reserve System to exercise fiduciary powers shall keep the books and records of the trust department separate and distinct from other records of the bank. All trust accounts opened shall be so kept as to enable the national bank to furnish such information or reports with respect thereto as may be required by the Comptroller of the Currency or the Board of Gov ernors of the Federal Reserve System. The records of the trust depart ment shall contain full information relating to each trust. (б) Record of pending litigation.—Every such national bank shall keep an adequate record of all litigation pending against it in connec tion with its administration of any trust. S E C T IO N 8. E X A M I N A T IO N S OF T R U S T D E P A R T M E N T In addition to examinations by examiners appointed by the Comp troller of the Currency 6 or designated by the Board of Governors of the Federal Reserve System, a committee of directors, exclusive of any active officers of the bank, shall, at least once during each period of twelve months, make suitable audits of the trust department or cause suitable audits of such department to be made by auditors responsible only to the board of directors, and shall, likewise at least once during each period of twelve months, ascertain by thorough examination made or caused to be made by such committee— (1) Whether a review of all the assets in each trust as to their safety and current value and the advisability of retaining or dis5 The Statement of Principles of Trust Institutions approved by the Executive Council of the American Bankers Association under date of April 11, 1933, is included in the Appendix to this regulation and is commended to banks operating trust departments. 6 Section l l( k ) of the Federal Reserve Act, as amended by the Banking Act o f 1935, approved August 23, 1935, provides that “ The State banking authorities m ay have access to reports of examination made by the Comptroller of the Currency in so far as such reports relate to the trust department of such bank, but nothing in this Act shall be construed as authorizing the State banking authorities to examine the books, records, and assets of such bank.” W hile this provision denies to the State banking authorities the right to examine the trust department of any national bank without the bank’s consent, it does not prohibit the bank from permitting an inspection of its records by any one it desires. 6 REGULATION F posing of them has been made in accordance with section 6(c) of this regulation; (2) Whether trust funds awaiting investment or distribution have been held uninvested or undistributed any longer than was reasonably necessary. Such committee shall promptly make a full report of such audits and examination, in writing, to the board of directors of the bank, together with a recommendation as to the action, if any, which may be neces sary to correct any unsatisfactory conditions. The board of directors shall give due consideration to such report and recommendation, together with the latest report of examination by the Comptroller of the Currency or examiners designated by the Board of Governors of the Federal Reserve System 7 furnished to the bank, and shall take such steps as are appropriate to correct any criticized matters. A report of the audits and examination required under this section, together with the action taken thereon, shall be noted in the minutes of the board of directors; and such report shall be made a part of the records of the bank. SECTION 9. TRUST FUNDS AWAITING INVESTMENT OR DISTRIBUTION (a) In general.—Funds received or held by a national bank as fiduciary awaiting investment or distribution shall not be held unin vested or undistributed by the bank any longer than is reasonably necessary. (b) Use in conduct of business of trustee bank.—Funds received or held by a national bank as fiduciary awaiting investment or distribu tion shall not be used by the bank in the conduct of its business, unless the bank, under authorization by its board of directors, first delivers to the trust department, as collateral security— (1) Bonds, notes, bills, certificates of indebtedness or other direct obligations of the United States, or obligations fully guar anteed by the United States as to principal and interest; or (2) Other readily marketable securities of the classes in which State trust companies or State banks exercising trust powers are authorized or permitted to invest trust funds under the laws of the State in which such national bank is located; or (3) Other readily marketable securities of the classes defined 7 This does not relieve the board of directors of any responsibility for prompt consideration of, and action on, matters criticized in the latest report of examination by the Comptroller of the Currency or the Board of Governors of the Federal Reserve System furnished to the bank or for the prompt consideration and action on any matter coming to the attention of the board of directors from any other source which requires action for the protection of parties at interest. REGULATION F 7 as “ investment securities” pursuant to section 5136 of the Revised Statutes of the United States, as amended.8 The securities so deposited as collateral shall be owned by the na tional bank and shall at all times be at least equal in market value to the amount of the trust funds so used in the conduct of the bank’s business.9 S E C T IO N 10. I N V E S T M E N T O F T R U S T F U N D S (a) Private trusts.—Funds received or held by a national bank as fiduciary shall, with the approval of the trust investment committee and subject to the rules of law applicable to fiduciaries, be invested promptly and in strict accordance with the will, deed or other instru ment creating the trust. When the instrument creating the trust con tains provisions expressly authorizing the bank, its officers or its di rectors to exercise a discretion in the matter, funds received or held in trust shall be invested only with the approval of the trust investment committee. When such instrument does not specify the character or class of investments to be made and does not expressly vest in the bank, its officers or its directors a discretion in the matter, funds received or held in trust shall be invested, with the approval of the trust investment committee, in any investments in which corporate or individual fiduciaries in the State in which the bank is acting may lawfully invest. (b) Court trusts.—A national bank acting in any fiduciary capacity under appointment by a court of competent jurisdiction shall, subject to the supervision of the trust investment committee, make all invest ments of funds received or held by it in trust under an order of that court, and copies of all such orders shall be filed and preserved with the records of the trust department of the bank. If the court order vests a discretion in the bank to invest funds received or held by it in trust, or if, under the laws of the State in which the bank is acting, corporate fiduciaries appointed by the court are permitted to exercise 8 Section 5136 of the Revised Statutes of the United States, as amended, provides that as used in that section “ the term ‘ investment securities’ shall mean marketable obligations evidencing indebtedness of any person, copartnership, association, or corporation in the form of bonds, notes, and/or debentures commonly known as investment securities under such further definition of the term ‘investment securities’ as may by regulation be prescribed by the Comptroller of the Currency’’ ; and a copy of the regulation prescribed by the Comptroller under the authority of section 5136 may be obtained upon request made to his office. 9 Section ll( k ) of the Federal Reserve Act, as amended, requires that the national bank shall set aside in the trust department “ United States bonds or other securities approved by the Board of Governors of the Federal Reserve System.” This subsection of this regulation is intended as a general approval by the Board of all securities which comply with the requirements thereof and the Board will not give specific approval to any particular securities. I f a national bank desires to substitute securities for securities already deposited in the trust department as collateral for trust funds used in the conduct of the business of such bank, such a substitution may be made provided the substituted securities comply with the requirements of this subsection and the substituted securities and other securities so deposited as collateral at all times are at least equal in market value to the amount of trust funds so used in the conduct of the bank’s business. 8 REGULATION F such a discretion, the bank, with the approval of the trust investment committee, shall invest such funds in any investments in which corpo rate or individual fiduciaries in the State in which the bank is acting may lawfully invest. (c) Collective investment of trust1 funds.—Funds received or held 0 by a national bank as fiduciary shall not be invested collectively 1 1 except as permitted in section 17 of this regulation. S E C T IO N 11. P U R C H A S E O R SA L E OF T R U S T ASSE TS T O OR FR O M T R U S T E E B A N K OR IT S D IR E C T O R S . O F F IC E R S O R E M P L O Y E E S (a) Obligations of trustee bank or its directors, officers, etc.—Funds received or held by a national bank as fiduciary shall not be invested in stock or obligations of, or property acquired from, the bank or its directors, officers, or employees, or their interests,1 or in stock or obli 3 gations of, or property acquired from, affiliates of the bank. (£>) Sale or transfer of trust assets to trustee bank or its directors, officers, etc.—Trust assets shall not be sold or transferred to the na tional bank, to its directors, officers, or employees, or their interests,1 3 or to affiliates of the bank, except that, in cases in which the bank has been advised by its counsel in writing that it has incurred a contingent or potential liability to a trust and desires to relieve itself from such liability, such a sale or transfer may be made with the approval of the board of directors; provided that in all such cases the bank, upon the consummation of the sale or transfer, shall reimburse the trust involved in cash or other acceptable assets. (c) Dealings between trust accounts.—A national bank acting as fiduciary shall not make any advance to any trust from the funds belonging to any other trust, except when the making of such advances to a designated trust is specifically authorized by the trust instrument covering the trust from which such advances are made. 10 Unless the context otherwise indicates, the term “ trust,” as used in this section or in any other part of this regulation, refers to any fiduciary relationship which a national bank authorized to enter into under the provisions of section 11 (k) of the Federal Reserve Act. is 11 This does not prevent the bank from investing the funds of several trusts in a single real estate loan of the kihd which could be made by the bank under the provisions of section 24 of the Federal Reserve Act, as amended, if the bank owns no participation in the loan and has no interest therein except in its capacity as fiduciary. ’ a The requirements of this section shall not be deemed to prohibit the making of any invest ments or the carrying out of any transactions which are expressly required by the instrument creating the trust or are specifically authorized by court order. 53 Under recognized principles of sound practice regarding the handling of trust assets, a trus tee or other fiduciary should not have any interest, direct or indirect, in the assets of a trust except as a fiduciary; and the requirements of this section contemplate that the national bank will not invest trust funds in the stock or obligations of, or property Acquired from, any organi zation in which officers, directors, or employees of the bank have such an interest as might affect the exercise of the best judgment of the management of the bank in investing trust funds and that the national bank will not sell or transfer trust assets to any organization in which the officers, directors, or employees o f the bank have such an interest as might affect the exercise of the best judgment of the management of the bank in selling or transferring trust assets. REGULATION F 9 S E C TIO N 12. C U S T O D Y OF T R U S T S E C U R IT IE S A N D IN V E S T M E N T S The securities and investments of each trust shall be kept separate from the properties of the bank, and the securities and investments of each trust also shall be kept separate from those of all other trusts except as provided in subsection (c) of section 10 and section 17 of this regulation.1 Trust securities and investments shall be placed in 4 the joint custody of two or more officers or employees of the bank desig nated for that purpose by the board of directors of the bank; and all such officers and employees shall be adequately bonded. S E C TIO N 13. D E P O S IT OF S E C U R IT IE S W IT H S T A T E A U T H O R IT IE S Whenever the laws of a State require corporations acting in a fidu ciary capacity to deposit securities with the State authorities for the protection of private or court trusts, every national bank in that State which obtains permission from the Board of Governors of the Federal Reserve System to act in fiduciary capacities shall, before undertaking to act in any fiduciary capacity, make a similar deposit of securities with the State authorities. If the State authorities refuse to accept such a deposit, the securities shall be deposited with the Federal Re serve Bank of the district in which such national bank is located and such securities shall be held for the protection of private or court trusts with like effect as though the securities had been deposited with the State authorities. S E C T IO N 14. C O M P E N SA T IO N O F B A N K (a) In general.—If the amount of the fee or compensation for act ing in a fiduciary capacity is not regulated by State law or stipulated or provided for in the instrument creating the trust, a national bank acting in such capacity may charge or deduct not more than a reason able fee or compensation for its services. When the bank is acting in a fiduciary capacity under appointment by a court, it may receive such fee or compensation as shall be lawfully allowed or approved by that court. All income derived from the investment of the funds of a trust, less a proper fee or compensation and all other proper charges, shall be paid over to, or credited to the account of, such trust. (b) Officer or employee of bank as co-fiduciary.—No national bank shall, except with the specific approval of its board of directors, permit any of its officers or employees, while serving as such, to retain any fee or other compensation for acting as a co-fiduciary with the bank in the administration of any trust accepted or undertaken by it. 14 This does not prevent the bank from investing the funds o f several trusts in a single real estate loan o f the kind which could be made b y the bank under the provisions o f section 24 o f the Federal Reserve Act, as amended, if the bank owns no participation in the loan and has no interest therein except as trustee or other fiduciary. 10 REGULATION F S E C T IO N 15. IN S O L V E N C Y OR V O L U N T A R Y L IQ U ID A T IO N O F B A N K (a) Insolvency.— Whenever a national bank exercising fiduciary powers becomes insolvent and a receiver is appointed therefor by the Comptroller of the Currency, such receiver shall, pursuant to the in structions of the Comptroller and to the orders of the court or courts of appropriate jurisdiction, proceed to close such trusts and estates as can be closed promptly and transfer all other trusts and estates to properly appointed substitute fiduciaries. (b ) Voluntary liquidation.— Whenever a national bank exercising fiduciary powers is placed in voluntary liquidation, the liquidating agent shall, in accordance with the laws of the State in which such national bank is located, proceed at once to liquidate the affairs of the trust department as follows: 1. All court trusts and estates under the jurisdiction of a court shall be closed or disposed of as soon as practicable in accordance with the orders or instructions of the court having jurisdiction. 2. All voluntary trusts which can be closed promptly shall be closed as soon as practicable and final accounting made therefor. 3. All other trusts shall be transferred by appropriate legal pro ceedings to properly appointed substitute fiduciaries. S E C T IO N 16. S U R R E N D E R O F T R U S T P O W E R S (a) Procedure.—Any national bank which has been granted the right by the Board of Governors of the Federal Reserve System to act in any fiduciary capacity or capacities and which desires to sur render such right shall signify such desire through a resolution duly adopted by, and recorded in the minutes of, its board of directors. A properly certified copy of such resolution shall be filed with the Fed eral Reserve Bank of the district in which such national bank is located and shall be accompanied by (1) a letter stating the reason why, or the purpose for which, such national bank wishes to surrender its right to exercise trust powers, unless such reason or purpose shall have been amply stated in the resolution itself, (2) the permit or permits previously issued by the Board to such national bank granting it the right to act in any fiduciary capacity, and (3) any certificate or certifi cates previously issued to such national bank by the Board under the provisions of sections 3 and 5 of this regulation, except that, in case any such permit or certificate shall have been lost or destroyed, an affidavit by any officer of such national bank as to such loss or destruc tion shall be filed in lieu of such lost or destroyed permit or certificate. ( b ) W ords “ Trust Com pany” as part o f bank’s title.—Before issuing the certificate described in subsection (d) of this section of this regu lation, the Board will require any national bank which desires to sur render its right to exercise trust powers, and which has the words “ trust REGULATION F 11 company” as part of its title, to eliminate such words from the title. The elimination of such words involving a change in the name of the bank is a matter within the jurisdiction of the Comptroller of the Currency. Such a national bank, therefore, at the time of the adoption of the resolution referred to in subsection (a) of this section of this regulation, should communicate with the Comptroller of the Currency for advice as to the procedure it will be necessary for it to pursue in order to eliminate such words. Advice that such national bank has taken this step should be given, in writing, to the Federal Reserve Bank at the time of the filing of the documents required by subsection (a) of this section of this regulation. (c) Examination o f trust department.— Upon receipt of the docu ments referred to in subsection (a) of this section of this regulation, the Board will request the Comptroller of the Currency, upon the occasion of the next regular examination of such national bank, to have one of his examiners make an investigation of the trust depart ment of the bank in order to determine whether the bank, pursuant to authority granted to it under section 11 (k) of the Federal Reserve Act, has actually accepted or undertaken the exercise of any trust; and, if so, whether it appears from the records of the trust department in the case of each trust so accepted or undertaken— (1) That all assets and papers belonging to the trust estate have been delivered by the bank to the persori or persons entitled to receive them; and (2) That the duties of the bank as fiduciary have been com pletely performed and that the bank has been discharged or other wise properly relieved of all of its duties as fiduciary. In exceptional cases, the Board may make, or may request the Comptroller of the Currency to make, a special examination of the trust department of such national bank in order to obtain the informa tion referred to in this subsection. (d ) Certificate o f Board o f Governors o f the Federal Reserve Sys tem.— If, upon the basis of the examination referred to in subsection (c) of this section of this regulation, the Board shall be satisfied that the national bank desiring to surrender its right to exercise trust powers has never accepted or undertaken to exercise any trust or that its duties as fiduciary have been completely performed and that it has been discharged or otherwise properly relieved of all of its duties as fiduciary, and if, in the case of a national bank the title of which previously had included the words “ trust company”, the Board shall also be satisfied, from advice received from the Comptroller of the Currency, that the bank has properly eliminated these words from its 12 REGULATION F title, the Board may, in its discretion, issue to such national bank a certificate certifying that such bank is no longer authorized to exercise any of the trust powers conferred upon it by the Board.1 5 S E C T IO N 17. C O M M O N T R U S T FU N DS (a) In general.— Funds received or held by a national bank as fiduciary may be invested collectively in any Common Trust Fund established and maintained in accordance with the provisions of this section whenever the laws of the State in which the national bank is located authorize or permit such investments by State banks, trust companies, or other corporations which compete with national banks: Provided,, however, That funds shall not be invested in a Common Trust Fund of the type provided for in subsection (d) of this section unless such investments are specifically authorized by the State statutes. As used in this regulation the term “ Common Trust Fund” means a fund maintained by a national bank exclusively for the collective investment and reinvestment of moneys contributed thereto by the bank in its capacity as trustee, executor, administrator, or guardian.1 6 The purpose of this section is to permit the use of Common Trust Funds, as defined in section 169 of the Internal Revenue Code,1 for the 7 investment of funds held for true fiduciary purposes; and the opera tion of such Common Trust Funds as investment trusts for other than strictly fiduciary purposes is hereby prohibited. No bank administer ing a Common Trust Fund shall issue any document evidencing a direct or indirect interest in such Common Trust Fund in any form which purports to be negotiable or assignable. The trust investment committee of a bank operating a Common Trust Fund shall not per mit any funds of any trust to be invested in a Common Trust Fund if it has reason to believe that such trust was not created or is not being used for bona fide fiduciary purposes. Common Trust Funds administered under this section shall be sub ject to the following requirements: (1) Assets in a Common Trust Fund shall be considered as assets held by the bank as fiduciary; (2) A bank administering a Common Trust Fund shall not invest any of its own funds in such Common Trust Fund and if a 10 Section ll ( k ) o f the Federal Reserve Act provides that, upon the issuance o f such a certificate b y the Board, “ such bank (1) shall no longer be subject to the provisions o f this subsection or the regulations o f the Board o f Governors o f the Federal Reserve System made pursuant thereto, (2 ) shall be entitled to have returned to it any securities which it m ay have deposited with the State authorities for the protection o f private or court trusts, and (3) shall not exercise there after any o f the powers granted b y this subsection without first applying for and obtaining a new permit to exercise such powers pursuant to the provisions o f this subsection.” is \ a U Sed in this regulation, the term "guardian” means guardian or committee o f the estate o f an infant, incompetent, or absentee, b y whatever name known in the State in which a par ticular national bank is located. 17 For applicable provisions o f the Internal Revenue Code, see Appendix. REGULATION F 13 bank, because of a creditor relationship or any other reason, ac quires any interest in a participation in a Common Trust Fund under its administration the participation shall be withdrawn on the first date on which such withdrawal can be effected in accord ance with the provisions of this section ; (3) A bank administering a Common Trust Fund shall not have any interest1 in the assets held in such Common Trust 8 Fund, other than in its capacity as fiduciary, except to the extent permitted for a temporary period as provided in the immediately preceding paragraph. (5) Common Trust Funds for investment of small amounts.—Sub ject to all other provisions of this regulation except subsections (c) and (d) of this section, cash balances received or held by a bank in its capacity as trustee, executor, administrator, or guardian, which the bank considers to be individually too small to be invested sepa rately to advantage may be invested, with the approval of the trust investment committee, in participations in a Common Trust Fund, provided the total investment of the funds of any one trust in one or more such Common Trust Funds shall not exceed $1,200. (c) Common Trust Funds for general investment.—Subject to all other provisions of this regulation except subsections (b) and (d) of this section, funds received or held by a bank in its capacity as trustee, executor, administrator, or guardian may be invested in par ticipations in a Common Trust Fund administered pursuant to the provisions of this subsection. All participations in such a Common Trust Fund shall be on the basis of a proportionate interest in all of the assets of the Common Trust Fund. (1) Common Trust Fund to be operated under written plan.— Each Common Trust Fund administered by a bank shall be established and maintained in accordance with a written plan (referred to herein as the Plan) approved by a resolution of the bank’s board of directors and approved in writing by competent legal counsel. The Plan shall provide that the Common Trust Fund shall be administered in conformity with the rules and regulations, prevailing from time to time, of the Board of Gov ernors of the Federal Reserve System pertaining to the collec tive investment of trust funds by national banks, and shall con tain full and detailed provisions not inconsistent with the pro visions of such rules and regulations as to the manner in which the Common Trust Fund is to be operated, including provisions 18 A bank shall not be deemed to have an interest in assets in which collective investments are made merely because of the fact that the bank owns in its own right other stocks, or bonds or other obligations of a person, firm, or corporation, the stocks, or bonds or other obligations of which are among the assets of a Common Trust Fund. 14 REGULATION F relating to the investment powers of the bank with respect to the Common Trust Fund, the allocation of income, profits and losses, the terms and conditions governing the admission or with drawal of participations in the Common Trust Fund, the audit ing and settlement of accounts of the bank with respect to the Common Trust Fund, the basis and method of valuing assets in the Common Trust Fund, the basis upon which the Common Trust Fund may be terminated, and such other matters as may be necessary to define clearly the rights of participants in the Common Trust Fund. A copy of the Plan shall be available at the principal office of the bank for inspection, during all bank ing hours, to any person having an interest in a trust any funds of which are invested in a participation in the Common Trust Fund; and upon reasonable request a copy of the Plan shall be furnished to such person. (2) Trust investment committee to approve participation.— No funds of a trust shall be invested in a participation in a Common Trust Fund without the approval of the trust invest ment committee. 3efore permitting any funds of any trust to be invested in a participation in a Common Trust Fund, the trust investment committee shall review the investments comprising the Common Trust Fund; and, if it finds that any such investment is one in which funds of such trust might not lawfully be invested at that time, funds of such trust shall not be invested in a participation in such Common Trust Fund. At the time of making the first investment of funds of a trust in any Common Trust Fund, the bank shall send a notice of such investment to each person to whom a regular periodic accounting ordinarily would be rendered, except that such notices need not be sent to a court unless required by the court, and except that such notices need not be sent where the trust instru ment specifically authorizes investments in Common Trust Funds. (3) Common Trust Fund to be audited annually.—A bank administering a Common Trust Fund shall, at least once during each period of twelve months, cause an audit to be made of the Common Trust Fund by auditors responsible only to the board of directors of the bank. The report of such audit shall include a list of the investments comprising the Common Trust Fund at the time of the audit which shall show the valuation placed on each item on such list by the trust investment com mittee of the bank as of the date of the audit, a statement of purchases, sales and any other investment changes and of in come and disbursements since the last audit, and appropriate com ments as to any investments in default as to payment of principal REGULATION F 15 or interest. The reasonable expenses of any such audit made by independent public accountants may be charged to the Common Trust Fund. The bank shall, without charge, send a copy of the latest report of such audit annually to each person to whom a regular periodic accounting of the trusts participating in the Common Trust Fund ordinarily would be rendered or shall send advice to each such person annually that the report is available and that a copy will be furnished without charge upon request. (If) Value of assets to be determined periodically.—Not less frequently than once during each period of three months the trust investment committee of a bank administering a Common Trust Fund shall determine the value of the assets in the Common Trust Fund. No participation shall be admitted to or withdrawn from the Common Trust Fund except on the basis of such valuation and on the date of the determination of such valuation or, if permitted by the Plan, within two busi ness days subsequent to the date of such determination. No participation shall be admitted or withdrawn unless, in accord ance with provisions of the Plan, prior to the date of the deter mination of such valuation, notice of intention to participate or to make such withdrawal shall have been given in writing to the bank administering the Common Trust Fund, or a written notation of the contemplated participation or withdrawal shall have been made in the records of the bank. (5) Miscellaneous limitations.—No funds of any trust shall be invested in a participation in a Common Trust-Fund if such investment would result in such trust having an interest in the Common Trust Fund in excess of 10 per cent of the value of the assets of the Common Trust Fund, as determined by the trust investment committee, or the sum of $25,000, whichever is less at the time of investment. If the bank administers more than one Common Trust Fund under this subsection, no investment shall be made which would cause any one trust to have an interest in all such Common Trust Funds in excess of the sum of $25,000; and, if the bank administers Funds under both subsections (c) and (d) of this section, no investment shall be made which would cause any one trust to have an interest in all such Funds in excess of the sum of $25,000. In applying the limitations contained in this paragraph, if two or more trusts are created by the same settlor or settlors and as much as one-half of the income or principal or both of each trust is payable or applicable to the use of the same person or persons, such trusts shall be considered as one. No investment for a Common Trust Fund shall be made in 16 REGULATION F stocks, or bonds or other obligations of any one person, firm or corporation which would cause the total amount of investment in stocks, or bonds or other obligations issued or guaranteed by such person, firm, or corporation to exceed 10 per cent of the value of the Common Trust Fund, as determined by the trust investment committee, provided that this limitation shall not apply to in vestments in obligations of the United States or for the payment of the principal and interest of which the faith and credit of the United States shall be pledged. No investment for a Common Trust Fund shall be made in any one class of shares of stock of any one corporation which would cause the total number of such shares held by the Common Trust Fund to exceed 5 per cent of the number of such shares out standing. If the bank administers more than one Common Trust Fund no investment shall be made which would cause the aggregate investment for all such Common Trust Funds in shares of stock of any one corporation to exceed such limitation. Any bank administering a Common Trust Fund shall have the responsibility of maintaining in cash and readily marketable se curities1 such part of the assets of the Common Trust Fund as 9 shall be deemed by the bank to be necessary to provide adequately for the needs of participating trusts and to prevent inequities be tween such trusts. In any event, prior to any admissions to or withdrawals from a Common Trust Fund, the trust investment committee shall determine what percentage of the value of the assets of a Common Trust Fund is composed of cash and readily marketable securities; and if such committee determines that, after effecting the admissions and withdrawals which are to be made pursuant to notice given as required in subdivision (4) of this subsection, less than 40 per cent of the value of the remaining assets of the Common Trust Fund would be composed of cash and readily marketable securities, no admissions to or withdrawals from the Common Trust Fund shall be permitted as of the valuation date upon which such determination is made, except that ratable distribution upon all participations is not prohibited. (6) Distribution upon withdrawal of participation.—When par ticipations are withdrawn from a Common Trust Fund distribu tions may be made in cash or ratably in kind, or partly in cash and partly ratably in kind, provided that all distributions as of any one valuation date shall be made on the same basis. Before any distribution in cash is made, the trust investment committee 10 A readily marketable security within the meaning of this section means a security which is the subject of frequent dealings in ready markets with such frequent quotations of price as to make (a) the price easily and definitely ascertainable and (b ) the security itself easy to realize upon by sale at any time. REGULATION F 17 shall determine whether any investment remaining in the Com mon Trust Fund would be unlawful for one or more participating trusts if funds of such trusts were being invested at that time; and no distribution shall be made in cash until any such unlawful investment shall have been eliminated from the Common Trust Fund either through sale, distribution in kind, or segregation as provided in the subdivision immediately following hereafter. (7) Segregation of investments.—If for any reason an invest ment is withdrawn in kind from a Common Trust Fund for the benefit of all trusts participating in the Common Trust Fund at the time of such withdrawal and such investment is not distributed ratably in kind it shall be segregated and administered or realized upon for the benefit ratably of all trusts participating in the Com mon Trust Fund at the time of withdrawal. (8) Management of Common Trust Fund and fees.—A national bank administering a Common Trust Fund shall have the exclusive management thereof and shall not charge a fee for the management of the Common Trust Fund, or receive, either from the Common Trust Fund or from any trusts the funds of which are invested in participations therein, any additional fees, commissions, or com pensations of any kind by reason of such participation. The bank shall not pay a fee, commission, or compensation out of the Com mon Trust Fund for management. Nothing in this paragraph shall be construed as prohibiting a bank from reimbursing itself out of a Common Trust Fund for such reasonable expenses in curred by it in the administration thereof as would have been chargeable to the respective participating trusts if incurred in the separate administration of such participating trusts. (9) Effect of mistakes.—No mistake made in good faith and in the exercise of due care in connection with the administration of a Common Trust Fund shall be deemed to be a violation of this regulation if promptly after the discovery of the mistake the bank takes whatever action may be practicable in the circumstances to remedy the mistake. (d) Com m on Trust Funds com posed principally o f mortgages (Mortgage Investment F u n ds). —Subject to all other provisions of this regulation except subsections (b) and (c) of this section,2 funds 0 received or held by a bank in its capacity as trustee, executor, ad ministrator, or guardian may be invested in participations in a Com mon Trust Fund administered pursuant to the provisions of this sub section (hereinafter referred to as a "Mortgage Investment Fund” ). All admissions and withdrawals of participations in a Mortgage Invest20 Note, however, that certain provisions of subsection (c) are incorporated in this subsection by reference. 18 REGULATION F ment Fund shall be made on the basis of the actual amount invested by each participant, and, except in final liquidation of a Mortgage Invest ment Fund, participants therein shall not have an interest in reserves accumulated or enhancement in the value of assets, except such as may be distributable as income. (1) Mortgage Investment Fund to be operated under written plan— Each Mortgage Investment Fund shall be subject to the provisions of subdivision (1) of subsection (c) of this section. (2) Trust investment committee to approve participation.—No funds of a trust shall be invested in a participation in a Mort gage Investment Fund without the approval of the trust invest ment committee. Before permitting any funds of any trust to be invested in a participation in a Mortgage Investment Fund, the trust investment committee shall review the assets comprising the Mortgage Investment Fund; and, if it finds that the condition of the Mortgage Investment Fund is such that the funds of such trust might not lawfully be invested in a participation therein at that time, or that such investment would be contrary to the pro visions of this subsection, funds of such trust shall not be so invested. At the time of making the first investment of funds of a trust in any Mortgage Investment Fund, the bank shall send a notice of such investment to each person to whom a regular periodic accounting ordinarily would be rendered, except that such notices need not be sent to a court unless required by the court, and except that such notices need not be sent where the trust instru ment specifically authorizes investments in Mortgage Investment Funds. (3) Mortgage Investment Fund to be audited annually.—Each Mortgage Investment Fund shall be subject to the provisions of subdivision (5) of subsection (c) of this section. (4) Value of assets to be determined periodically.—Not less frequently than once during each period of three months, the trust investment committee of a bank administering a Mortgage In vestment Fund shall determine the value of the assets in the Mortgage Investment Fund. No participation .shall be admitted to or withdrawn from the Mortgage Investment Fund except on the date of determination of such valuation or, if permitted by the Plan, within two business days subsequent to the date of such determination; and no participation shall be admitted to or with drawn from the Mortgage Investment Fund unless, on the basis of such valuation, the value of the assets of the Mortgage Invest ment Fund, exclusive of accrued income, is at least equal to the amount of the outstanding participations. No participation shall REGULATION F 19 be admitted or withdrawn unless, in accordance with the pro visions of the Plan, prior to the date of the determination of such valuation, notice of intention to participate or to make such with drawal shall have been given in writing to the bank administering the Mortgage Investment Fund, or a written notation of the con templated participation or withdrawal shall have been made in the records of the bank. The real estate securing each obligation contained in a Mort gage Investment Fund and any real estate contained in the Mort gage Investment Fund shall be appraised at least once every three years by two persons, one of whom shall not have participated in the last preceding appraisal of the particular property for the purposes of the Mortgage Investment Fund. Such persons shall be appointed by the bank’s board of directors and shall, in the opinion of the board, be familiar with real estate values in thevicinity in which any such real estate is situated and qualified to make such appraisals. The persons appointed shall actually inspect such real estate and shall so certify in a written certificate of appraisal, which shall be filed and preserved in the bank’s records. The trust investment committee shall require more frequent appraisals of all properties or any particular property if such action is deemed by the committee to be necessary to enable it properly to discharge the duties imposed upon it by this subsection. (o) Miscellaneous limitations.—No funds of any trust shall be invested in a participation in a Mortgage Investment Fund if such investment would result in such trusts having an interest in the Mortgage Investment Fund in excess of the sum of $1,200 or 2 per cent of the amount of the outstanding participations in the Mortgage Investment Fund, whichever is greater at the time of investment, or in any event in excess of the sum of $10,000. If the bank administers more than one Mortgage Investment Fund, no investment shall be made which would cause any one trust to have an interest in all such Mortgage Investment Funds in excess of the sum of $10,000; and, if the bank administers Funds under both subsections (c) and (d) of this section, no investment shall be made which would cause any one trust to have an interest in all such Funds in excess of the sum of $25,000. In applying the limi tations contained in this paragraph, if two or more trusts are created by the same settlor or settlors and as much as one-half of the income or principal or both of each trust is payable or applicable to the use of the same person or persons, such trusts shall be considered as one. 20 REGULATION F No investment for a Mortgage Investment Fund shall be made in obligations of any one person, firm, or corporation which would cause the total amount of investment in obligations issued or guar anteed by such person, firm, or corporation to exceed 10 per cent of the amount of the outstanding participations in the Mortgage Investment Fund, provided that this limitation shall not apply to investments in obligations of the United States or for the pay ment of the principal and interest of which the faith and credit of the United States shall be pledged. The unpaid balance of any obligation secured by real estate in which the funds of a Mortgage Investment Fund are invested shall not exceed $10,000 on the date of the investment therein unless the aggregate amount of all outstanding participations in the Mortgage Investment Fund exceeds $200,000, in which event the unpaid balance of such obligation shall not exceed 5 per cent of the amount of such outstanding participations or $50,000, which ever amount is less. Any bank administering a Mortgage Investment Fund shall have the responsibility of maintaining in cash such part of the assets of the Mortgage Investment Fund as shall be deemed by the bank to be necessary to provide adequately for the needs of participating trusts and to prevent inequities between such trusts. No invest ment of the moneys of a Mortgage Investment Fund shall be made if following such investment the cash balance, exclusive of col lected income on hand, in the Mortgage Investment Fund would be less than an amount equal to 5 per cent of the total amount of all outstanding participations in the Mortgage Investment Fund. Unless, upon computing the amount of the admissions and withdrawals which are to be made as of any valuation date pur suant to notice given as required in subdivision (4) of this sub section, the trust investment committee determines that there will be sufficient cash in the Mortgage Investment Fund to permit all such withdrawals, no admissions to or withdrawals from the Mortgage Investment Fund shall be permitted as of such valuation date. Unless the trust investment committee determines that, after effecting the admissions and withdrawals which are to be made as of any valuation date pursuant to notice given as required in subdivision (4) of this subsection, the amount of investments of a Mortgage Investment Fund represented by assets in which moneys of the Mortgage Investment Fund could not then be invested under the provisions of subdivision (8) of this sub section will not exceed 10 per cent of the amount of the outstand REGULATION F 21 ing participations in the Mortgage Investment Fund, no admis sions to or withdrawals from the Mortgage Investment Fund shall be permitted as of such valuation date. (6) Reserve account and distribution of income.—In each Mortgage Investment Fund the bank shall establish and main tain a reserve account as part of the principal thereof, to which, to the extent available, all realized losses shall be charged. Any realized gain in the value of assets of a Mortgage Investment Fund, other than income, shall be credited to such reserve account. At least semiannually a bank administering a Mortgage In vestment Fund shall determine the net income of the Mortgage Investment Fund during the period since the last determination thereof. At the close of each earning period, if the total amount contained in such reserve account is less than 10 per cent of the total amount of all outstanding participations in the Mortgage In vestment Fund, the bank shall transfer to the reserve account, out of the net income of the Mortgage Investment Fund, such amount as the bank shall determine to be proper under the circumstances. The total amount so to be transferred to the reserve account, during any year shall not be lesa than 10 per cent of the amount of the gross income of the Mortgage Investment Fund for such year or more than one per cent of the average of the total amounts of all outstanding participations in the Mortgage Investment Fund at the close of each earning period. No such transfers to the reserve account shall be made which will cause the amount contained therein to exceed 10 per cent of the amount of all outstanding participations. The balance of the net income remaining after transferring the appropriate part thereof, if any, to the1reserve account; shall thereupon be distributed to the owners of the outstanding parti cipations in the Mortgage Investment Fund in proportion to the amounts of their participations and the period of time owned since the previous determination of net income. (7) Withdrawal of participation in a Mortgage Investment Fund.- -Upon the withdrawal of a participation of any trust prior to termination and final liquidation of a Mortgage Investment Fund, such trust shall be entitled to be paid in cash the total amount of the funds of such trust invested in the participation, with net income thereon to the date of such payment, but such income shall not be paid until the amount thereof shall have been determined at the close of the current earning period. Upon the termination and final liquidation of a Mortgage 22 REGULATION F Investment Fund, all assets of the Mortgage Investment Fund shall be distributed among the owners of the participations at that time in proportion to the amounts thereof. (8) Investment of moneys of Mortgage Investment Funds.— The moneys of a Mortgage Investment Fund shall be invested in— (A ) Obligations secured by real estate which, at the date of the investment, are legal for investment of trust funds under the laws of the State in which the bank is located and are insured by the Federal Housing Administrator, hav ing been insured prior to the first' day of July 1939, pursuant to the provisions of Title II of the National Housing Act, approved the 27th day of June 1934, as amended, or having been so insured thereafter, with like force and effect, pur suant to any revision or extension of the provisions of the said Act; or (B) Obligations secured by real estate which, at the date of the investment, are legal for investment of trust funds under the laws of the State in which the bank is located and are of the kind which might be acquired by a national bank under the provisions for making amortized loans con tained in the third sentence of section 24 of the Federal Reserve A ct; or (C) Obligations secured by real estate which, at the date of the investment, are legal for investment of trust funds under the laws of the State in which the bank is located, which are payable within 20 years, and which either provide for semiannual payments reducing the principal thereof an nually in an amount equal to at least 5 per cent of the amount of the principal on the date of investment, or pro vide for the amortization of the total unpaid principal amount of such mortgage on the date of investment by equal monthly payments during the term of such mortgage, such monthly payments being fixed at an amount which will include the interest due on such mortgage on the date of such payments and an additional amount to be applied in the reduction of the unpaid principal amount of such mort gage. In the case of a renewal or extension of any such obligation held by a Mortgage Investment Fund, the date upon which the Mortgage Investment Fund originally ac quired the obligation shall be considered the date of invest ment. If in the judgment of the trust investment committee such ob ligations are not available for investment of moneys of a Mort REGULATION F 23 gage Investment Fund, such moneys may be invested temporarily in obligations of the United States or of the State in which the bank is located or for the payment of the principal and interest of which the faith and credit of the United States or of such State shall be pledged, and Which are legal for investment of trust funds under the laws of the State in which the bank is located. As soon as obligations secured by real estate in which the moneys of the Mortgage Investment Fund may be invested are available, such securities shall be disposed of and the pro ceeds invested in such obligations if this can be accomplished without disadvantage to the Mortgage Investment* Fund. (9) Management of Mortgage Investment Fund and fees.— Each Mortgage Investment Fund shall be subject to the provisions of subdivision (8) of subsection (c) of this section. (10) Effect of mistakes.—Each Mortgage Investment Fund shall be subject to the provisions of subdivision (9) of subsection (c) of this section. SECTION 18. BOARD FORMS All forms referred to in this regulation and all such forms as amended from time to time shall be a part of this regulation. APPENDIX Section 11 (k) of the Federal Reserve Act, as amended by the Acts of Congress approved September 26, 1918, June 26, 1930, and August 23, 1935, provides as follows: The Board of Governors of the Federal Reserve System shall be authorized and empowered: (k) To grant by special permit to national banks applying therefor, when not in contravention of State or local law, the right to act as trustee, executor, administrator, registrar of stocks and bonds, guardian of estates, assignee, receiver, committee of estates of lunatics, or in any other fiduciary capacity in which State banks, trust companies, or other corporations which come into competition with national banks are permitted to act under the laws of the State in which the national bank is located. Whenever the laws of such State authorize or permit the exercise of any or all of the foregoing powers by State banks, trust com panies, or other corporations which compete with national banks, the granting to and the exercise of such powers by national banks shall not be deemed to be in contravention of State or local law within' the meaning of this Act. National banks exercising any or all of the powers enumerated in this subsection shall segregate all assets held in any fiduciary capacity from the general assets of the bank and shall keep a separate set of books and records showing in proper detail all transactions engaged in under authority of this subsection. The State banking authorities may have access to reports of examina tion made by the Comptroller of the Currency insofar as such reports relate to the trust department of such bank, but nothing in this Act shall be construed as authorizing the State banking authorities to examine the books, records, and assets of such bank. No national bank shall receive in its trust department deposits of current funds subject to check or the deposit of checks, drafts, bills of exchange, or other items for collection or exchange pur poses. Funds deposited or held in trust by the bank awaiting investment shall be carried in a separate account and shall not be used by the bank in the conduct of its business unless it shall first set aside in the trust department United States bonds or other securities approved by the Roard of Governors of the Federal Reserve System. In the event of the failure of such bank the owners of the funds held in trust for investment shall have a lien on the bonds or other securities so set apart in addition to their claim against the estate of the bank. Whenever the laws of a State require corporations acting in a fiduciary capacity, to deposit securities with the State authorities for the protection of private or court trusts, national banks so acting shall be required to make similar deposits and securities so deposited shall be held for the protection of private or court trusts, as provided by the State law. National banks in such cases shall not be required to execute 25 26 REGULATION F the bond usually required of individuals if State corporations under similar circumstances are exempt from this requirement. National banks shall have power to execute such bond when so required by the laws of the State. In any case in which the laws of a State require that a corpora tion acting as trustee, executor, administrator, or in any capacity specified in this section, shall take an oath or make an affidavit, the president, vice president, cashier, or trust officer of such na tional bank may take the necessary oath or execute the necessary affidavit. It shall be unlawful for any national banking association to lend any officer, director, or employee any funds held in trust under the powers conferred by this section. Any officer, director, or employee making such loan, or to whom such loan is made, may be fined not more than $5,000, or imprisoned not more than five years, or may be both fined and imprisoned, in the discretion of the court. In passing upon applications for permission to exercise the powers enumerated in this subsection, the Board of Governors of the Federal Reserve System may take into consideration the amount of capital and surplus of the applying bank, whether or not such capital and surplus is sufficient under the circumstances of the case, the needs of the community to be served, and any other facts and circumstances that seem to it proper, and may grant or refuse the application accordingly: Provided, That no permit shall be issued to any national banking association having a capital and surplus less than the capital and surplus required by State law of State banks, trust companies, and corporations exercising such powers. Any national banking association desiring to surrender its right to exercise the powers granted under this subsection, in order to relieve itself from the necessity of complying with the require ments of this subsection, or to have returned to it any securities which it may have deposited with the State authorities for the protection of private or court trusts, or for any other purpose, may file with the Board of Governors of the Federal Reserve Sys tem a certified copy of a resolution of its board of directors sig nifying such desire. Upon receipt of such a resolution, the Board of Governors of the Federal Reserve System, after satisfying itself that such bank has been relieved in accordance with State law of all duties as trustee, executor, administrator, registrar of stocks and bonds, guardian of estates, assignee, receiver, committee of estates of lunatics or other fiduciary, under court, private, or other appointments previously accepted under authority of this sub section, may, in its discretion, issue to such bank a certificate cer tifying that such bank is no longer authorized to exercise the powers granted by this subsection. Upon the issuance of such a certificate by the Board of Governors of the Federal Reserve System, such bank (1) shall no longer be subject to the provisions of this sub section or the regulations of the Board of Governors of the Federal Reserve System made pursuant thereto, (2) shall be entitled to have returned to it any securities which it may have deposited with the State authorities for the protection of private 27 REGULATION F or court trusts, and (3) shall not exercise thereafter any of the powers granted by this subsection without first applying for and obtaining a new permit to exercise such powers pursuant to the provisions of this subsection. The Board of Governors of the Federal Reserve System is authorized and empowered to promul gate such regulations as it may deem necessary to enforce compli ance with the provisions of this subsection and the proper exercise of the powers granted therein. Sections 1 and 3 of the Act of Congress approved November 7, 1918, as amended by the Acts of Congress approved February 25, 1927, June 16, 1933, and August 23, 1935, provide in part as follows: Be it enacted by the Senate and House of Representatives of the United States of America in Congress Assembled, That any two or more national banking associations located within the same State, county, city, town, or village may, with the approval of the Comp troller of the Currency, consolidate into one association under the charter of either existing banks, on such terms and conditons as may be lawfully agreed upon by a majority of the board of di rectors of each association proposing to consolidate, and be ratified and confirmed by the affirmative vote of the shareholders of each such association owning at least two-thirds of its capital stock outstanding, * * * * * * * # * * Sec. 3. That any bank incorporated under the laws of any State, or any bank incorporated in the District of Columbia, may be consolidated with a national banking association located in the same State, county, city, town, or village under the charter of such national banking association on such terms and conditions as may be lawfully agreed upon by a majority of the board of directors of each association or bank proposing to consolidate, and which agreement shall be ratified and confirmed by the affirmative vote of the shareholders of each such association or bank owning at least two-thirds of its capital stock outstanding, or by a greater proportion of such capital stock in the'case of such State bank if the laws of the State where the same is organized so require, * * * Upon such a consolidation, or upon a consolidation of two or more national banking associations under section 1 of this Act, the corporate existence of each of the constituent banks and national banking associations participating in such consolidation shall be merged into and continued in the consolidated national banking association and the consolidated association shall be deemed to be the same corporation as each of the constituent in stitutions. All the rights, franchises, and interests of each of such constituent banks and national banking associations in aqd to every species of property, real, personal, and mixed, and choses in action thereto belonging, shall be deemed to be transferred to and vested in such consolidated national banking association without any deed or other transfer; and such consolidated national banking association, by virtue of such consolidation and without any order or other action on the part of any court or otherwise, shall hold and enjoy the same and all rights of property, franchises, and interests, 28 REGULATION F including appointments, designations, and nominations and all other rights and interests as trustee, executor, administrator, regis trar of stocks and bonds, guardian of estates, assignee, receiver, committee of estates of lunatics and in every other fiduciary capacity, in the same manner and to the same extent as such rights, franchises, and interests were held or enjoyed by any such con stituent institution at the time of such consolidation: Provided, however, That where any such constitutent institution at the time of such consolidation was acting under appointment of any court as trustee, executor, administrator, registrar of stocks and bonds, guardian of estates, assignee, receiver, committee of estates of lunatics or in any other fiduciary capacity, the consolidated national banking association shall be subject to removal by a court of competent jurisdiction in the same manner and to the same ex tent as was such constituent corporation prior to the consolidation, and nothing herein contained shall be construed to impair in any manner the right of any court to remove such a consolidated national banking association and to appoint in lieu thereof a sub stitute trustee, executor, or other fiduciary, except that such right shall not be exercised in such a manner as to discriminate against national banking associations, nor shall any such consolidated association be removed solely because of the fact that it is a national banking association. * * * The Act of Congress approved May 1, 1886, provides in part as follows: Sec. 2. That any national banking association may change its name or the place where its operations of discount and deposit are to be carried on, to any other place within the same State, not more than thirty miles distant with the approval of the Comp troller of the Currency, by the vote of shareholders owning twothirds of the stock of such association. A duly authenticated notice of the vote and of the new name or location selected shall be sent to the office of the Comptroller of.the Currency; but no change of name or location shall be valid until the Comptroller shall have issued his certificate of approval of the same. Sec. 3. That all debts, liabilities, rights, provisions, and powers of the association under its old name shall devolve upon and inure to the association under its new name. Sec. 4. That nothing in this act contained shall be so construed as in any manner to release any national banking association under its old name or at its old location from any liability, or affect any action or proceeding in law in which said association- may be or become a party or interested. There are printed below certain provisions of the Internal Revenue Code which are pertinent to some of the subject matter of this regula tion. SEC. 169. COMMON TRUST FUNDS. (a) D e f in it io n s .— The term “ common trust fund” means a fund maintained by a bank (as defined in section 104)— REGULATION F 29 (1) exclusively for the collective investment and reinvest ment of moneys contributed thereto by the bank in its capacity as a trustee, executor, administrator, or guardian; and (2) in conformity with the rules and regulations, prevailing from time to time, of the JBoard of Governors of the Federal Reserve System pertaining to the collective investment of trust funds by national banks. (b) T a x a t io n of C o m m o n T ru st F u n d s .—A common trust fund shall not be subject to taxation under this chapter, subchap ters A or B of chapter 2, or section 105 or 106 of the Revenue Act of 1935, 49 Stat. 1017, 1019, or chapter 6 and for the purposes of such chapters and subchapters shall not be considered a corpora tion. (c) I n c o m e of P a r tic ipa n ts in F un d — (1) I n c lu sio n s in N et I n c o m e .—Each participant in the common trust fund in computing its net income shall include, whether or not distributed and whether or not distributable— (A) As a part of its short-term capital gains or losses, its proportionate share of the net short-term capital gain or loss of the common trust fund; (B) As a part of its long-term capital gains or losses, its proportionate share of the net long-term capital gain or loss of the common trust fund; (C) Its proportionate share of the ordinary net in come or the ordinary net loss of the common trust fund, computed as provided in subsection (d). (2) C redit for P ar tia lly E x e m p t I n t e r e st .—The pro portionate share of each participant in the amount of interest specified in section 25 (a) received by the common trust fund shall for the purposes of this Supplement be considered as having been received by such participant as such interest. (d) C o m p u ta tio n of C o m m o n T ru st F u n d I n c o m e .—The net income of the common trust fund shall be computed in the same manner and on the same basis as in the case of an individual, except that— (1) There shall be segregated the short-term capital gains and losses and the long-term capital gains and losses, and the net short-term capital gain or loss and the net long-term capital gain or loss shall be computed; (2) After excluding all items of either short-term or long term capital gain or loss, there shall be computed— (A) An ordinary net income which shall consist of the excess of the gross income over the deductions; or (B) An ordinary net loss which shall consist of the excess of the deductions over the gross income; (3) The so-called “ charitable contribution” deduction al lowed by section 23 (o) shall not be allowed. (e) A d m iss io n and W it h d r a w a l .—No gain or loss shall be realized by the common trust fund by the admission or with*drawal of a participant. The withdrawal of any participating 30 REGULATION F interest by a participant shall be treated as a sale or exchange of such interest by the participant. ( / ) R e tu r n s b y B a n k .— Every bank (as defined in section 104) maintaining a common trust fund shall make a return under oath for each taxable year, stating specifically, with respect to such fund, the items of gross income and the deductions allowed by this chapter, and shall include in the return the names and addresses of the participants who would be entitled to share in the net in come if distributed and the amount of the proportionate share of each participant. The return shall be sworn to as in the case of a return filed by the bank under section 52. ( g ) D iffe r e n t T axable Y ears of C o m m o n T rust F un d and P a r t ic ip a n t .— If the taxable year of the common trust fund is different from that of a participant, the inclusions with respect to the net income of the common trust fund, in computing the net income of the participant for its taxable year shall be based upon the net income of the common trust fund for any taxable year of the common trust fund (whether beginning on, before, or after January 1, 1939) ending within or with the taxable year of the participant. SEC. 104. BANKS AND TRUST COMPANIES. (a) D e f in it io n .— As used in this section the term “ bank” means a bank or trust company incorporated and doing business under the laws of the United States (including laws relating to the Dis trict of Columbia), of any State, or of any Territory, a substantial part of the business of which consists of receiving deposits and making loans and discounts, or of exercising fiduciary powers simi lar to those permitted to national banks under section 11 (k) of the Federal Reserve Act, 38 Stat. 262 (U. S. C., Title 12, § 248K), as amended, and which is subject by law to supervision and ex amination by State, Territorial or Federal authority having super vision over banking institutions. A STATEMENT OF PRINCIPLES OF TRUST INSTITUTIONS This statement was adopted by the Executive Committee of the Trust Division, American Bankers Association on April 10, 1933, and approved by the Executive Council of the American Bankers Asso ciation on A p ril! 1, 1933. foreword This Statement of Principles has been formulated in order that the fundamental principles of institutions engaged in trust business may be restated and thereby become better understood and recognized by the public, as well as by trust institutions, themselves, and in order that it may serve as a guide for trust institutions. In the conduct of their business trust institutions are governed b3r the cardinal principle that is common to all fiduciary relationships— namely, fidelity. Policies predicated upon this principle have for their objectives its expression in terms of safety, good management, and per REGULATION F 31 sonal service. Practices developed under these policies are designed to promote efficiency in administration and operation. The fact that the services performed by trust institutions have be come an integral part of the social and economic structure of the United States makes the principles of such institutions a matter of public interest. ARTICLE I DEFINITION OF TERMS Section 1. Trust Institutions.—Trust institutions are corporations engaged in trust business under authority of law. They embrace not only trust companies that are engaged in trust business exclusively but also trust departments of other corporations. Section 2. Trust Business.—Trust business is the business of settling estates, administering trusts and performing agencies in all appropriate cases for individuals; partnerships; associations; business corpora tions; public, educational, social, recreational, and charitable institu tions; and units of government. It is advisable that a trust institu tion should limit the functions of its trust department to such services. ARTICLE II ACCEPTANCE OF TRUST BUSINESS A trust institution is under no obligation, either moral or legal, to accept all business that is offered. Section 1. Personal Trust Business.— With respect to the acceptance of personal trust business the two determining factors are these: Is trust service needed, and can the service be rendered properly? In personal trusts and agencies, the relationship is' private, and the trust institution is responsible to those only who have or may have a financial interest in the account. Section 2. Corporate Trust Business.— In considering the acceptance of a corporate trust or agency the trust institution should be satisfied that the company concerned is in good standing and that the enterprise is of a proper nature. ARTICLE III ADMINISTRATION OF TRUST BUSINESS Section 1. Personal Trusts.—In the administration of its personal trust business, a trust institution should strive at all times to render unexceptionable business and financial service, but it should also be careful to render equally good personal service to beneficiaries. The first duty of a trust institution is to carry out the wishes of the creator of a trust as expressed in the trust instrument. Sympathetic, tactful, personal relationships with immediate beneficiaries are essential to the performance of this duty, keeping in mind also the interest of ulti mate beneficiaries. It should be the policy of trust institutions that all personal trusts should be under the direct supervision of and that beneficiaries should be brought into direct contact with the administra tive or senior officers of the trust department. 32 REGULATION F Section 2. Confidential Relationships.—Personal trust service is of a confidential nature and the confidences reposed in a trust department by a customer should never be revealed except when required by law. Section 3. Fundamental Duties o f Trustees.— It is the duty of a trustee to administer a trust solely in the interest of the beneficiaries without permitting the intrusion of interests of the trustee or third parties that may in any way conflict with the interests of the trust; to keep and render accurate accounts with respect to the administra tion of the trust; to acquaint the beneficiaries with all material facts in connection with the trust; and, in administering the trust, to exer cise the care a prudent man familiar with such matters would exercise as trustee of the property of others, adhering to the rule that the trus tee is primarily a conserver. Section 4. Corporate Trust Business.—In the administration of cor porate trusts and agencies the trust institution should render the same fine quality of service as it renders in the administration of personal trusts and agencies. Promptness, accuracy, and protection are funda mental requirements of efficient corporate trust service. The terms of the trust instrument should be carried out with scrupulous care and with particular attention to the duties imposed therein upon the trustee for the protection of the security-holders. ARTICLE IV OPERATION OF TRUST DEPARTMENTS Section 1. Separation of Trust Properties.—The properties of each trust should be kept separate from those of all other trusts and sepa rate also from the properties of the trust institution itself. Section 2. Investment of Trust Funds.— The investment function of a trustee is care and management of property, not mere safekeeping at one extreme or speculation at the other. A trust institution should devote to its trust investments all the care and skill that it has or can reasonably acquire. The responsibility for the investment of trust funds should not be reposed in an individual officer or employee of a trust department. All investments should be made, retained or sold only upon the authority of an investment committee composed of capable and experienced officers or directors of the institution. When the trust instrument definitely states the investment powers of the trustee, the terms of the instrument must be followed faithfully. If it should become unlawful or impossible or against public! policy to follow literally the terms of the trust instrument, the trustee should promptly seek the guidance of the court about varying or interpreting the terms of the instrument and should not act on its own respon sibility in this respect except in the face of an emergency, when the guidance of the court beforehand could not be obtained. If the trust instrument is silent about trust investments or if it expressly leaves the selection and retention of trust investments to the judgment and dis cretion of the trustee, the latter should be governed, by considerations of the safety of principal and dependability of incojne and not by hope or expectation of unusual gain through speculation. However, a trus tee should not be content with safety of principal alone to the dis regard of the reasonable income requirements of the beneficiaries. It is a fundamental principle that a trustee should not have any REGULATION F 33 personal financial interest, direct or indirect, in the trust investments, bought for or sold to the trusts of which it is trustee, and that it should not purchase for itself any securities or other property from any of its trusts. Accordingly, it follows that a trust institution should not buy for or sell to its estates or trusts any securities or other property in which it, or its affiliate, has any personal financial interest, and should not purchase for itself, or its affiliate, any securities or other property from its estates or trusts. ARTICLE V COMPENSATION FOR TRUST SERVICE Section 1.—A trust institution's entitled to reasonable compensation for its services. Compensation should be determined on the basis of the cost of the service rendered and the responsibilities assumed. Minimum fees in any community for trust services should be uniform and applied uniformly and impartially to all customers alike. ARTICLE VI PROMOTIONAL EFFORT Section 1. Advertising.—A trust institution has the same right as any other business enterprise to advertise its trust services in appro priate ways. Its advertisements should be dignified and not overstate or overemphasize the qualifications of the trust institutions. There should be no implication that legal services will be rendered. There should be no reflection, expressed or implied, upon other trust institu tions or individuals, and the advertisements of all trust institutions should be mutually helpful. Section 2. Personal Representation.—The propriety of having per sonal representatives of trust departments is based upon the same prin ciple as that of advertising. Trust business is so individual and dis tinctive that the customer cannot always obtain from printed matter all he wishes to know about the protection and management the trust institution will give his estate and the services it will render his beneficiaries. Section 3. New Trust Department.—A corporation should not- enter the trust field except with a full appreciation of the responsibilities involved. A new trust department should be established only if there is enough potential trust business within the trade area of the institu tion to justify the proper personnel and equipment. Section 4. Entering Corporate Trust Field.—Since the need for trust and agency services to corporations, outside of the centers of popula tion, is much more limited than is that of trust and agency services to individuals, a trust institution should hesitate to enter the corporate trust or agency field unless an actual demand for such services is evident, and the institution is specially equipped to render such service. ARTICLE VII RELATIONSHIPS Section 1. With Public.—Although a trust department is a distinctly private institution in its relations with its customers, it is affected with a public interest in its relations with the community. In its relations 34 REGULATION F with the public a trust institution should be ready and willing to give full information about its own financial responsibility, its staff and equipment, and the safeguards thrown around trust business. Section 2. W ith Bar.—Attorneys-at-law constitute a professional group that perform essential functions in relation to trust business, and have a community of interest with trust institutions in the com mon end of service to the public. The maintenance of harmonious relations between trust institutions and members of the bar is in the best interests of both, and of the public as well. It is a fundamental principle of this relationship that trust institutions should not engage in the practice of law. Section 3. W ith Life Underwriters.— Life underwriters also consti tute a group having a community of interest with trust institutions in the common purpose of public service. Cooperation between trust institutions and life underwriters is productive of the best mutual service to the public. It is a principle of this cooperation that trust institutions should not engage in the business of selling life insurance.
