View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Federal Reserve Bank
of

Dallas

R O B ERT D. M cTEER , JR.
DALLAS, TEXAS

PRESIDENT
AND CHIEF EXECUTIVE OFFICER

75265-5906

November 2, 1998

Notice 98-100

TO:

The Chief Executive Officer of each
financial institution and others concerned
in the Eleventh Federal Reserve District
SUBJECT
Uniform Interagency Trust Rating System
DETAILS

The Federal Financial Institutions Examination Council (FFIEC) has revised the
Uniform Interagency Trust Rating System, commonly referred to as the trust rating system. The
revisions update the rating system to reflect changes that have occurred in the fiduciary services
industry and in supervisory policies and procedures since the rating system was first adopted in
1978. The changes
•

revise the definitions for the numerical ratings to conform to the language and
tone of the Uniform Financial Institutions Rating System rating definitions,
commonly referred to as the CAMELS rating system;

•

reformat and clarify the component rating descriptions;

•

reorganize the account administration and conflicts of interest components into a
new component addressing compliance;

•

emphasize the quality of risk management processes in each of the rating compo­
nents, particularly in the management component;

•

add language in composite rating definitions to parallel the changes in the compo­
nent rating descriptions; and

•

explicitly identify the types of risk that are considered in assigning component
ratings.

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal
Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012;
Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

ATTACHMENT
A copy of the FFIEC’s notice as it appears on pages 54704-11, Vol. 63, No. 197 of the
Federal Register dated October 13, 1998, is attached.
MORE INFORMATION
For more information, please contact Daniel Kirkland at (214) 922-6256. For addi­
tional copies of this Bank’s notice, contact the Public Affairs Department at (214) 922-5254.
Sincerely yours,

Federal Registe

Tuesday
October 13,1998

Federal Financial Institutions
Examination Council
Uniform Interagency Trust Rating System

54704

Federal Register/Vol. 63, No. 197/Tuesday, October 13, 1998/Notices
The Federal Financial
Institutions Examination Council
(FFIEC) is revising the Uniform
Interagency Trust Rating System
(UITRS), commonly referred to as the
trust rating system. The revisions
update the rating system to reflect
changes that have occurred in the
fiduciary services industry and in
supervisory policies and procedures
since the rating system was first adopted
in 1978. The changes revise the
definitions for the num erical ratings to
conform to the language and tone of the
Uniform Financial Institutions Rating
System (UFIRS) rating definitions,
commonly referred to as the CAMELS
rating system; reformat and clarify the
com ponent rating descriptions;
reorganize the account adm inistration
and conflicts of interest components
into a new com ponent addressing
compliance; emphasize the quality of
risk management processes in each of
the rating components, particularly in
the m anagement component; add
language in composite rating definitions
to parallel the changes in the
com ponent rating descriptions; and
explicitly identify the types of risk that
are considered in assigning com ponent
ratings.
The term “financial institution” refers
to those FDIC insured depository
institutions w hose prim ary Federal
supervisory agency is represented on
the FFIEC. U ninsured trust companies
that are chartered by the OCC, members
of the Federal Reserve System, or
subsidiaries of registered bank holding
com panies or insured depository
institutions are also covered by this
notice. The Federal supervisory
agencies participating in this notice are:
the Board of Governors of the Federal
Reserve System (FRB), the Federal
Deposit Insurance Corporation (FDIC),
the Office of the Comptroller of the
Currency (OCC), and the Office of Thrift
Supervision (OTS).
DATES: Effective October 13,1998.

SUMMARY:

FOR FURTHER INFORMATION CONTACT:

FEDERAL FINANCIAL INSTITUTIONS
EXAMINATION COUNCIL
Uniform Interagency Trust Rating
System

Federal Financial Institutions
Examination Council.
a c t i o n : Notice.
AGENCY:

FRB: W illiam R. Stanley, Supervisory
Trust Analyst, Specialized Activities,
(202) 452-2744, Division of Banking
Supervision and Regulation, Board of
Governors of the Federal Reserve
System, Mail Stop 175, 20th and C
Streets, NW, W ashington, D.C. 20551
FDIC: John F. Harvey, Trust Review
Examiner, (202) 898-6762, Division of
Supervision, Federal Deposit
Insurance Corporation, Room F2078,
550 17th Street, NW, W ashington,
D.C. 20429.
OCC: Laurie A. Edlund, National Bank
Examiner, (202) 874-3828, Division of
Asset Management, Office of the

Comptroller of the Currency, 250 E
Street, SW, Mail Stop 7-7,
W ashington, D.C., 20219.
OTS: Larry A. Clark, Senior Manager,
Compliance and Trust Programs, (202)
906-5628, Gary C. Jackson, Program
Analyst, (202) 906-5653, Compliance
Policy, Office of Thrift Supervision,
1700 G Street, NW, W ashington, D.C.
20552.
SUPPLEMENTARY INFORMATION:

Background information
On February 17, 1998, the FFIEC
published a notice in the Federal
Register (February Notice), 63 FR 7802,
requesting comment on proposed
revisions to the Uniform Interagency
Trust Rating System (UITRS). The
UITRS is an internal supervisory
exam ination rating system used by the
Federal supervisory agencies for
evaluating the adm inistration of
fiduciary activities of financial
institutions and uninsured trust
companies on a uniform basis and for
identifying those institutions requiring
special supervisory attention. The
UITRS was adopted on September 21,
1978 by the Office of the Comptroller of
the Currency (OCC), the Federal Deposit
Insurance Corporation (FDIC), and the
Board of Governors of the Federal
Reserve System (FRB), and in 1988 by
the Federal Home Loan Bank Board,
predecessor agency to the Office of
Thrift Supervision (OTS).
U nder the UITRS, each institution is
assigned a composite rating based on an
evaluation and rating of essential
com ponents of an institution’s fiduciary
activities. The composite rating reflects
the overall condition of an institution’s
fiduciary activities and is used by the
Federal supervisory agencies to monitor
aggregate trends in the overall
adm inistration of fiduciary activities.
U nder the former UITRS, each financial
institution or trust com pany was
assigned a composite rating based on an
evaluation and rating of six essential
com ponents of an institution’s fiduciary
activities. These com ponents addressed:
the capability of management; the
adequacy of operations, controls and
audits; the m anagement of fiduciary
assets; the adequacy of account
adm inistration practices; the adequacy
of practices relating to self-dealing and
conflicts of interest; and the quality and
level of earnings. Both the composite
and com ponent ratings are assigned on
a 1 to 5 num erical scale. A 1 indicates
the strongest performance and
management practices, and the least
degree of supervisory concern, while a
5 indicates the weakest performance
and management practices and,

Federal Register/Vol. 63, No. 197/Tuesday, October 13, 1998/Notices
therefore, the highest degree of
supervisory concern.
The UITRS has proven to be an
effective way for the Federal
supervisory agencies to determ ine the
condition of an institution’s fiduciary
activities. A num ber of changes,
however, have occurred in the fiduciary
industry and in supervisory policies and
procedures since the rating system was
first adopted. As a result, the FFIEC is
making certain enhancem ents to the
rating system, b u t is retaining its basic
framework. The UITRS enhancements:
• Realign the UITRS rating
definitions to bring them in line w ith
UFIRS.
• Reduce the com ponent rating
categories from six to five, combining
the Account A dm inistration and
Conflicts of Interest com ponents into a
new Compliance component.
• Require Earnings to be rated only in
institutions w ith more than $100
m illion in total trust assets, and in all
non-deposit trust companies. An
earnings rating is not required for the
remaining institutions (those
institutions not required to file
Schedule E ■); however, each Federal
supervisory agency has the option of
requiring the earnings of these
institutions to be rated using the
alternate rating definitions where
applicable.
• Explicitly refer to the quality of risk
management processes in the
management component, and the
identification of risk elements w ithin
the composite and com ponent rating
definitions.
Comments Received and Changes Made
The FFIEC received two public
comments from industry trade
associations regarding the proposed
revisions to the UITRS. Both
commenters generally favored the
changes made, in particular the
emphasis on risk management, the
changes to the UITRS to conform to the
language and tone of the UFIRS, and the
considerations given to the earnings
com ponent w hen evaluating a small
trust department.
Examiners field tested the revised
rating system’during 61 bank and thrift
fiduciary examinations conducted
between February and May 1998. The
examiners provided comments
regarding the revised rating system.
1 Schedule E is the Trust Income Statem ent of the
FFIEC A nnual Report of Trust Assets (FFIEC 001).
Schedule E is required to be filed by each financial
institution w ith total trust assets of more than $100
m illion as reported on line 18, colum n F of
Schedule A, and by all non-deposit trust
companies, w hether or not they report any assets
on Schedule A.

Examiner response was generally
favorable, and no significant problems
or unanticipated rating differences were
encountered between the former and
updated UITRS. Some of the examiner
comments recom m ended clarifying
changes to various aspects of the revised
rating system.
The FFIEC carefully considered each
com ment and examiner response and
m ade certain changes. The following
discussion describes the comments
received (both through public comment
and agency field testing) and changes
m ade to the UITRS in response to those
comments. The updated UITRS is
included at the end of this Notice.
February Notice Specific Questions
In addition to requesting general
comments regarding the proposed
system, the FFIEC invited comments on
four specific questions:
(1) Does the proposal capture the
essential risk areas of the fiduciary
services industry?
The majority of the responses to this
question were positive, and no changes
were made.
(2) Does the proposed management
com ponent adequately assess the
quality of the board of directors’ and
m anagem ent’s oversight regarding its
fiduciary responsibility and its ability to
identify and manage all areas of risk
involved in the exercise of its fiduciary
powers?
The majority of the responses to this
question were positive, and no changes
were made.
(3) Are there any components w hich
should be added to or deleted from the
proposal?
The majority of the responses
received regarding the com ponents were
favorable. A num ber of examiners
recom m ended strengthening the conflict
of interest section of the Compliance
component. Several examiners also
requested clarification of the application
of the optional earnings rating to the
Earnings component. These concerns
are addressed later in this Notice.
(4) Are the definitions for the
individual com ponents and the
composite num erical ratings in the
proposal consistent w ith the language
and tone of the UFIRS definitions?
The majority of the responses to this
question were positive. The agencies
received several examiner comments
recommending changes to address
m inor inconsistencies in wording
throughout the UITRS. M any of these
m inor wording changes were m ade to
improve the consistency of the rating
system.

54705

Compliance Com ponent
The February notice combined the
former Account A dm inistration and
Conflicts of Interest com ponents into a
new Compliance component. The new
com ponent assesses the institution’s
compliance w ith the terms of governing
instrum ents, applicable laws and
regulations, sound fiduciary principles,
and internal policies and procedures. In
addition, the new com ponent addresses
compliance w ith applicable laws,
regulations, and internal policies and
procedures on a broader, institutionw ide basis by focusing on compliance
and strategic risk.
Several examiners expressed concern
that the new rating com ponent deemphasizes the seriousness of selfdealing and conflicts of interest. The
FFIEC emphasizes that self-dealing and
other conflicts of interest, and the
associated risks to the institution,
continue to be areas of great importance
and concern. The intent of the new
Compliance com ponent was not to deemphasize the seriousness or
importance of self-dealing or other
conflicts of interest. Accordingly, the
description of the new com ponent and
its rating definitions has been revised
and expanded to clarify the importance
of these issues.
Earnings Com ponent
Under the former UITRS, an Earnings
rating was required for all institutions.
The February notice proposed several
changes to the Earnings component. An
earnings rating w ould be required for
institutions w ith more than $100
m illion in total trust assets (as reported
on FFIEC 001 Schedule A, line 18,
colum n F) and for non-deposit trust
companies. An earnings rating would
not be required for the remaining
institutions (those institutions not
required to file Schedule E of FFIEC
001); however, each Federal supervisory
agency w ould have the option of
requiring the earnings of these
institutions to be rated using either the
rating definitions designated for
Schedule E filers or, in accordance w ith
the agency’s im plem enting guidelines,
the definitions for the alternate ratings.
The majority of the comments
received on the Earnings com ponent
changes were positive; however, several
examiners requested that the FFIEC
clarify various aspects of this
component. In response, the FFIEC
added an evaluation factor section for
the alternate earnings rating, and
separated the two rating definitions. In
addition, each agency w ill issue
im plem enting guidance addressing the

54706

Federal Register/Vol. 63, No. 197/Tuesday, October 13, 1998/Notices

applicability of the Earnings rating to its
supervised institutions.
Im plem entation Date
The FFIEC recom mends that the
Federal supervisory agencies im plem ent
the updated UITRS January 1, 1999.
This date ensures that institutions w ith
examinations commenced in 1999 w ill
be assessed under the updated UITRS.
Text o f the Revised Uniform
Interagency Trust Rating System
Uniform Interagency Trust Rating
System
Introduction
The Uniform Interagency Trust Rating
System (UITRS) was adopted on
September 21, 1978 by the Office of the
Comptroller of the Currency (OCC), the
Federal Deposit Insurance Corporation
(FDIC), and the Board of Governors of
the Federal Reserve System (FRB), and
in 1988 by the Federal Home Loan Bank
Board, predecessor agency to the Office
of Thrift Supervision (OTS). Over the
years, the UITRS has proven to be an
effective internal supervisory tool for
evaluating the fiduciary activities of
financial institutions on a uniform basis
and for identifying those institutions
requiring special attention.
A num ber of changes have occurred
in both the banking industry and the
Federal supervisory agencies’ policies
and procedures w hich prom pted a
review and revision of the 1978 rating
system. The revisions to the UITRS:
• Realign the UITRS rating
definitions to bring them in line with
the Uniform Financial Institutions
Rating System (UFIRS).
• Reduce the com ponent rating
categories from six to five, combining
the A ccount A dm inistration and
Conflicts of Interest com ponents into a
new Compliance component.
• Require Earnings to be rated only in
institutions w ith more than $100
m illion in total trust assets, and in all
non-deposit trust companies. An
earnings rating is not required for the
remaining institutions (those
institutions not required to file FFIEC
001 Schedule E);2 however, each
Federal supervisory agency has the
option of requiring the earnings of these
institutions to be rated using the
2 Schedule E is the T rust Income Statem ent of the
FFIEC Annual Report of Trust Assets (FFIEC 001).
Schedule E is required to be filed by each financial
institution w ith total trust assets of more than $100
m illion as reported on line 18, colum n F of
Schedule A, and by all non-deposit trust
com panies, w hether or not they report any assets
on Schedule A.

of the factors comprising that
alternate rating definitions where
com ponent and its interrelationship
applicable.
•
Explicitly refer to the quality of risk w ith the other components. W hen
m anagem ent processes in the
assigning a composite rating, some
management component, and the
com ponents may be given more weight
identification of risk elements w ithin
than others depending on the situation
the composite and com ponent rating
at the institution. In general, assignment
definitions.
of a composite rating may incorporate
These revisions are intended to
any factor that bears significantly on the
promote and com plem ent efficient
overall adm inistration of the financial
examination processes. The revisions
institution’s fiduciary activities.
update the rating system but retain its
Assigned composite and component
basic framework. Consequently, the
ratings are disclosed to the institution’s
revised rating system w ill not result in
board of directors and senior
additional regulatory burden to
management.
institutions or require additional
The ability of management to respond
policies or processes.
to changing circumstances and to
The UITRS considers certain
address the risks that m ay arise from
managerial, operational, financial and
changing business conditions, or the
compliance factors that are common to
initiation of new fiduciary activities or
all institutions w ith fiduciary activities.
products, is an im portant factor in
U nder this system, the supervisory
evaluating an institution’s overall
agencies endeavor to ensure that all
fiduciary risk profile and the level of
institutions w ith fiduciary activities are
supervisory attention warranted. For
evaluated in a comprehensive and
this reason, the m anagement com ponent
uniform m anner, and that supervisory
is given special consideration w hen
attention is appropriately focused on
assigning a composite rating.
The ability of m anagement to identify,
those institutions exhibiting weaknesses
measure, monitor, and control the risks
in their fiduciary operations.
of its fiduciary operations is also taken
Overview
into account w hen assigning each
Under the UITRS, the fiduciary
com ponent rating. It is recognized,
activities of financial institutions are
however, that appropriate management
assigned a composite rating based on an practices may vary considerably among
evaluation and rating of five essential
financial institutions, depending on the
com ponents of an institution’s fiduciary size, complexity and risk profiles of
activities. These components address
their fiduciary activities. For less
the following: the capability of
complex institutions engaged solely in
management; the adequacy of
traditional fiduciary activities and
operations, controls and audits; the
w hose directors and senior managers are
quality and level of earnings;
actively involved in the oversight and
compliance w ith governing instrum ents, m anagement of day-to-day operations,
applicable law (including self-dealing
relatively basic m anagement systems
and conflicts of interest laws and
and controls may be adequate. On the
regulations), and sound fiduciary
other hand, at more complex
principles; and the management of
institutions, detailed and formal
fiduciary assets.
management systems and controls are
Composite and com ponent ratings are needed to address a broader range of
assigned based on a 1 to 5 numerical
activities and to provide senior
scale. A 1 is the highest rating and
managers and directors w ith the
indicates the strongest performance and information they need to supervise dayrisk management practices and the least to-day activities.
degree of supervisory concern. A 5 is
All institutions are expected to
the lowest rating and indicates the
properly manage their risks. For less
weakest performance and risk
complex institutions engaging in less
management practices and, therefore,
risky activities, detailed or highly
the highest degree of supervisory
formalized management systems and
concern. Evaluation of the composite
controls are not required to receive
and com ponents considers the size and
strong or satisfactory com ponent or
sophistication, the nature and
composite ratings.
complexity, and the risk profile of the
The following two sections contain
institution’s fiduciary activities.
the composite rating definitions, and the
The composite rating generally bears
descriptions and definitions for the five
a close relationship to the com ponent
com ponent ratings.
ratings assigned. However, the
Composite Ratings
composite rating is not derived by
Composite ratings are based on a
computing an arithmetic average of the
careful evaluation of how an institution
com ponent ratings. Each com ponent
conducts its fiduciary activities. The
rating is based on a qualitative analysis

Federal Register/Vol. 63, No. 197/Tuesday, October 13, 1998/Notices
review encompasses the capability of
management, the soundness of policies
and practices, the quality of service
rendered to the public, and the effect of
fiduciary activities upon the soundness
of the institution. The five key
com ponents used to assess an
institution’s fiduciary activities are: the
capability of management; the adequacy
of operations, controls and audits; the
quality and level of earnings;
compliance w ith governing instrum ents,
applicable law (including self-dealing
and conflicts of interest laws and
regulations), and sound fiduciary
principles; and the management of
fiduciary assets. The composite ratings
are defined as follows:
Composite 1. A dm inistration of
fiduciary activities is sound in every
respect. Generally all components are
rated 1 or 2. Any weaknesses are m inor
and can be h andled in a routine m anner
by management. The institution is in
substantial compliance w ith fiduciary
laws and regulations. Risk management
practices are strong relative to the size,
complexity, and risk profile of the
institution’s fiduciary activities.
Fiduciary activities are conducted in
accordance w ith sound fiduciary
principles and give no cause for
supervisory concern.
Composite 2. A dm inistration of
fiduciary activities is fundam entally
sound. Generally no com ponent rating
should be more severe than 3. Only
moderate weaknesses are present and
are w ell w ithin m anagem ent’s
capabilities and willingness to correct.
Fiduciary activities are conducted in
substantial compliance w ith laws and
regulations. Overall risk m anagement
practices are satisfactory relative to the
institution’s size, complexity, and risk
profile. There are no material
supervisory concerns and, as a result,
the supervisory response is informal
and limited.
Composite 3. Adm inistration of
fiduciary activities exhibits some degree
of supervisory concern in one or more
of the com ponent areas. A combination
of weaknesses exists that may range
from moderate to severe; however, the
m agnitude of the deficiencies generally
does not cause a com ponent to be rated
more severely than 4. M anagement may
lack the ability or willingness to
effectively address weaknesses w ithin
appropriate tim e frames. Additionally,
fiduciary activities may reveal some
significant noncom pliance w ith laws
and regulations. Risk management
practices may be less than satisfactory
relative to the institution’s size,
complexity, and risk profile. While
problems of relative significance may
exist, they are not of such im portance as

to pose a threat to the trust beneficiaries
generally, or to the soundness of the
institution. The institution’s fiduciary
activities require more than normal
supervision and may include formal or
informal enforcement actions.
Composite 4. Fiduciary activities
generally exhibit unsafe and unsound
practices or conditions, resulting in
unsatisfactory performance. The
problems range from severe to critically
deficient and may be centered around
inexperienced or inattentive
management, weak or dangerous
operating practices, or an accum ulation
of unsatisfactory features of lesser
importance. The weaknesses and
problems are not being satisfactorily
addressed or resolved by the board of
directors and management. There may
be significant noncom pliance w ith laws
and regulations. Risk management
practices are generally unacceptable
relative to the size, complexity, and risk
profile of fiduciary activities. These
problems pose a threat to the account
beneficiaries generally and, if left
unchecked, could evolve into
conditions that could cause significant
losses to the institution and ultim ately
underm ine the public confidence in the
institution. Close supervisory attention
is required, w hich means, in m ost cases,
formal enforcement action is necessary
to address the problems.
Composite 5. Fiduciary activities are
conducted in an extremely unsafe and
unsound manner. A dm inistration of
fiduciary activities is critically deficient
in num erous major respects, w ith
problems resulting from incom petent or
neglectful adm inistration, flagrant and/
or repeated disregard for laws and
regulations, or a willful departure from
sound fiduciary principles and
practices. The volum e and severity of
problems are beyond m anagem ent’s
ability or willingness to control or
correct. Such conditions evidence a
flagrant disregard for the interests of the
beneficiaries and may pose a serious
threat to the soundness of the
institution. Continuous close
supervisory attention is w arranted and
may include term ination of the
institution’s fiduciary activities.
Com ponent Ratings
Each of the com ponent rating
descriptions is divided into three
sections: a narrative description of the
component; a list of the principal factors
used to evaluate that component; and a
description of each num erical rating for
that component. Some of the evaluation
factors are reiterated under one or more
of the other com ponents to reinforce the
interrelationship among components.

54707

The listing of evaluation factors is in no
particular order of importance.
M anagement. This rating reflects the
capability of the board of directors and
management, in their respective roles, to
identify, measure, monitor and control
the risks of an institution’s fiduciary
activities. It also reflects their ability to
ensure that the institution’s fiduciary
activities are conducted in a safe and
sound m anner, and in compliance w ith
applicable laws and regulations.
Directors should provide clear guidance
regarding acceptable risk exposure
levels and ensure that appropriate
policies, procedures and practices are
established and followed. Seniorfiduciary management is responsible for
developing and im plem enting policies,
procedures and practices that translate
the board’s objectives and risk limits
into prudent operating standards.
Depending on the nature and scope of
an institution’s fiduciary activities,
management practices may need to
address some or all of the following
risks: reputation, operating or
transaction, strategic, compliance, legal,
credit, market, liquidity and other risks.
Sound management practices are
dem onstrated by: active oversight by the
board of directors and management;
com petent personnel; adequate policies,
processes, and controls th at consider the
size and complexity of the institution’s
fiduciary activities; and effective risk
monitoring and management
information systems. This rating should
reflect the board’s and m anagem ent’s
ability as it applies to all aspects of
fiduciary activities in w hich the
institution is involved.
The management rating is based upon
an assessment of the capability and
performance of m anagem ent and the
board of directors, including, but not
lim ited to, the following evaluation
factors:
• The level and quality of oversight and
support of fiduciary activities by the board of
directors and m anagement, including
com mittee structure and adequate
docum entation of committee actions.
• The ability of the board of directors and
management, in their respective roles, to plan
for, and respond to, risks that may arise from
changing business conditions or the
introduction of new activities or products.
• The adequacy of, and conformance with,
appropriate internal policies, practices and
controls addressing the operations and risks
of significant fiduciary activities.
• The accuracy, timeliness, and
effectiveness of managem ent inform ation and
risk m onitoring systems appropriate for the
in stitution’s size, complexity, and fiduciary
risk profile.
• The overall level of com pliance w ith
laws, regulations, and sound fiduciary
principles.

54708

Federal Register /Vol. 63, No. 197/Tuesday, October 13, 1998/Notices

• Responsiveness to recom m endations
from auditors and regulatory authorities.
• Strategic planning for fiduciary products
an d services.
• The level of experience and com petence
of fiduciary m anagem ent and staff, including
issues relating to turnover and succession
planning.
• The adequacy of insurance coverage.
• The availability of com petent legal
counsel.
• The extent and nature of pending
litigation associated w ith fiduciary activities,
and its potential im pact on earnings, capital,
and the in stitution’s reputation.
• The process for identifying and
responding to fiduciary custom er complaints.

Ratings. A rating of 1 indicates strong
performance by managem ent and the
board of directors and strong risk
m anagem ent practices relative to the
size, complexity and risk profile of the
institution’s fiduciary activities. All
significant risks are consistently and
effectively identified, m easured,
monitored, and controlled. M anagement
and the board are proactive, and have
dem onstrated the ability to prom ptly
and successfully address existing and
potential problems and risks.
A rating of 2 indicates satisfactory
management and board performance
and risk management practices relative
to the size, complexity and risk profile
of the institution’s fiduciary activities.
M oderate weaknesses m ay exist, b ut are
not material to the sound adm inistration
of fiduciary activities, and are being
addressed. In general, significant risks
and problems are effectively identified,
m easured, monitored, and controlled.
A rating of 3 indicates management
and board performance that needs
im provem ent or risk management
practices that are less than satisfactory
given the nature of the in stitu tio n’s
fiduciary activities. The capabilities of
management or the board of directors
may be insufficient for the size,
complexity, and risk profile of the
institution’s fiduciary activities.
Problems and significant risks may be
inadequately identified, m easured,
m onitored, or controlled.
A rating of 4 indicates deficient
management and board performance or
risk managem ent practices that are
inadequate considering the size,
complexity, and risk profile of the
institution’s fiduciary activities. The
level of problems and risk exposure is
excessive. Problems and significant
risks are inadequately identified,
measured, monitored, or controlled and
require im m ediate action by the board
and m anagement to protect the assets of
account beneficiaries and to prevent
erosion of public confidence in the
institution. Replacing or strengthening

management or the board may be
necessary.
A rating of 5 indicates critically
deficient m anagement and board
performance or risk management
practices. Management and the board of
directors have not dem onstrated the
ability to correct problems and
im plem ent appropriate risk
management practices. Problems and
significant risks are inadequately
identified, m easured, monitored, or
controlled and now threaten the
continued viability of the institution or
its adm inistration of fiduciary activities,
and pose a threat to the safety of the
assets of account beneficiaries.
Replacing or strengthening management
or the board of directors is necessary.
Operations, Internal Controls &
•
Auditing. This rating reflects the
adequacy of the institution’s fiduciary
operating systems and internal controls
in relation to the volume and character
of business conducted. A udit coverage
m ust assure the integrity of the financial
records, the sufficiency of internal
controls, and the adequacy of the
compliance process.
The institution’s fiduciary operating
systems, internal controls, and audit
function subject it prim arily to
transaction and compliance risk. Other
risks including reputation, strategic, and
financial risk may also be present. The
ability of management to identify,
measure, m onitor and control these
risks is reflected in this rating.
The operations, internal controls and
auditing rating is based upon, but not
lim ited to, an assessment of the
following evaluation factors:
Operations and Internal Controls,
including the adequacy of:
• Staff, facilities and operating systems;
• Records, accounting and data processing
systems (including controls over systems
access and such accounting procedures as
aging, investigation and disposition of items
in suspense accounts);
• Trading functions and securities lending
activities;
• Vault controls and securities movement;
• Segregation of duties;
• Controls over disbursem ents (checks or
electronic) and unissued securities;
• Controls over income processing
activities;
• Reconciliation processes (depository,
cash, vault, sub-custodians, suspense
accounts, etc.);
• Disaster and/or business recovery
programs;
• Hold-mail procedures and controls over
returned mail; and,
• Investigation and proper escheatm ent of
funds in dorm ant accounts.

Auditing, including:
• The independence, frequency, quality
and scope of the internal and external

fiduciary audit function relative to the
volume, character and risk profile of the
institu tio n’s fiduciary activities;
• The volum e and/or severity of internal
control and audit exceptions and the extent
to w hich these issues are tracked and
resolved; and
• The experience and com petence of the
audit staff.

Ratings. A rating of 1 indicates that
operations, internal controls, and
auditing are strong in relation to the
volume and character of the institution’s
fiduciary activities. All significant risks
are consistently and effectively
identified, measured, m onitored, and
controlled.
A rating of 2 indicates that operations,
internal controls and auditing are
satisfactory in relation to the volume
and character of the institution’s
fiduciary activities. Moderate
weaknesses may exist, but are not
material. Significant risks, in general,
are effectively identified, measured,
monitored, and controlled.
A rating of 3 indicates that operations,
internal controls or auditing need
im provem ent in relation to the volume
and character of the institution’s
fiduciary activities. One or more of
these areas are less than satisfactory.
Problems and significant risks may be
inadequately identified, measured,
m onitored, or controlled.
A rating of 4 indicates deficient
operations, internal controls or audits.
One or more of these areas are
inadequate or the level of problems and
risk exposure is excessive in relation to
the volum e and character of the
institution’s fiduciary activities.
Problems and significant risks are
inadequately identified, measured,
m onitored, or controlled and require
im m ediate action. Institutions w ith this
level of deficiencies may make little
provision for audits, or may evidence
weak or potentially dangerous operating
practices in combination w ith
infrequent or inadequate audits.
A rating of 5 indicates critically
deficient operations, internal controls or
audits. Operating practices, w ith or
w ithout audits, pose a serious threat to
the safety of assets of fiduciary
accounts. Problems and significant risks
are inadequately identified, measured,
monitored, or controlled and now
threaten the ability of the institution to
continue engaging in fiduciary
activities.
Earnings. This rating reflects the
profitability of an institution’s fiduciary
activities and its effect on the financial
condition of the institution. The use and
adequacy of budgets and earnings
projections by functions, product lines
and clients are reviewed and evaluated.

Federal Register/Vol. 63, No. 197/Tuesday, October 13, 1998/Notices
Risk exposure that may lead to negative
earnings is also evaluated.
An evaluation of earnings is required
for all institutions w ith fiduciary
activities. An assignment of an earnings
rating, however, is required only for
institutions that, at the time of the
examination, have total trust assets of
more than $100 million, or are a non­
deposit trust com pany (those
institutions that w ould be required to
file Schedule E of FFIEC 001).
For institutions where the assignment
of an Earnings rating is not required by
the UITRS, the Federal supervisory
agency has the option to assign an
earnings rating using an alternate set of
ratings. A rating w ill be assigned in
accordance with implementing
guidelines adopted by the supervisory
agency. The definitions for the alternate
ratings are included in the revised
UITRS and may be found in the section
immediately following the definitions
for the required ratings.
The evaluation of earnings is based
upon, but not lim ited to, an assessment
of the following factors:
• The profitability of fiduciary activities in
relation to the size and scope of those
activities and to the overall business of the
institution.
• The overall im portance to the institution
of offering fiduciary services to its customers
and local community.
• The effectiveness of the institu tion ’s
procedures for m onitoring fiduciary activity
income and expense relative to the size and
scope of these activities and their relative
im portance to the institution, including the
frequency and scope of profitability reviews
and planning by the institutio n’s board of
directors or a com mittee thereof.

For those institutions for w hich a
rating of earnings is mandatory,
additional factors should include the
following:
• The level and consistency of
profitability, or the lack thereof, generated by
the in stitution’s fiduciary activities in
relation to the volum e and character of the
institution ’s business.
• D ependence up on non-recurring fees and
commissions, such as fees for court accounts.
• The effects of charge-offs or compromise
actions.
• U nusual features regarding the
com position of business and fee schedules.
• Accounting practices that contain
practices such as (1) unusual m ethods of
allocating direct and indirect expenses and
overhead, or (2) unusual m ethods of
allocating fiduciary income and expense
w here two or more fiduciary institutions
w ithin the same holding com pany family
share fiduciary services and/or processing
functions.
• The extent of m anagem ent’s use of
budgets, projections and other cost analysis
procedures.
• Methods used for directors’ approval of
financial budgets and/or projections.

• M anagem ent’s attitude tow ard growth
and new business development.
• New business developm ent efforts,
including types of business solicited, market
potential, advertising, com petition,
relationships w ith local organizations, and an
evaluation by management of risk potential
inherent in n ew business areas.

Ratings. A rating of 1 indicates strong
earnings. The institution consistently
earns a rate of return on its fiduciary
activities that is com m ensurate w ith the
risk of those activities. This rating
w ould norm ally be supported by a
history of consistent profitability over
tim e and a judgement that future
earnings prospects are favorable. In
addition, management techniques for
evaluating and monitoring earnings
performance are fully adequate and
there is appropriate oversight by the
institution’s board of directors or a
committee thereof. M anagement makes
effective use of budgets and cost
analysis procedures. Methods used for
reporting earnings inform ation to the
board of directors, or a committee
thereof, are comprehensive.
A rating of 2 indicates satisfactory
earnings. Although the earnings record
may exhibit some weaknesses, earnings
performance does not pose a risk to the
overall institution nor to its ability to
meet its fiduciary obligations. Generally,
fiduciary earnings m eet management
targets and appear to be at least
sustainable. Management processes for
evaluating and monitoring earnings are
generally sufficient in relationship to
the size and risk of fiduciary activities
that exist, and any deficiencies can be
addressed in the normal course of
business. A rating of 2 may also be
assigned to institutions w ith a history of
profitable operations if there are
indications that management is
engaging in activities w ith w hich it is
not familiar, or where there may be
inordinately high levels of risk present
that have not been adequately
evaluated. Alternatively, an institution
w ith otherwise strong earnings
performance may also be assigned a 2
rating if there are significant
deficiencies in its m ethods used to
m onitor and evaluate earnings.
A rating of 3 indicates less than
satisfactory earnings. Earnings are not
commensurate w ith the risk associated
w ith the fiduciary activities undertaken.
Earnings may be erratic or exhibit
dow nw ard trends, and future prospects
are unfavorable. This rating may also be
assigned if m anagement processes for
evaluating and monitoring earnings
exhibit serious deficiencies, provided
the deficiencies identified do not pose
an im m ediate danger to either the
overall financial condition of the

54709

institution or its ability to meet its
fiduciary obligations.
A rating of 4 indicates earnings that
are seriously deficient. Fiduciary
activities have a significant adverse
effect on the overall income of the
institution and its ability to generate
adequate capital to support the
continued operation of its fiduciary
activities. The institution is
characterized by fiduciary earnings
performance that is poor historically, or
faces the prospect of significant losses
in the future. Management processes for
m onitoring and evaluating earnings may
be poor. The board of directors has not
adopted appropriate measures to
address significant deficiencies.
A rating of 5 indicates critically
deficient earnings. In general, an
institution w ith this rating is
experiencing losses from fiduciary
activities that have a significant negative
im pact on the overall institution,
representing a distinct threat to its
viability through the erosion of its
capital. The board of directors has not
im plem ented effective actions to
address the situation.
Alternate Rating o f Earnings.
Alternate ratings are assigned based on
the level of im plem entation of four
m inim um standards by the board of
directors and management.
These standards are:
• Standard No. 1—The institution has
reasonable m ethods for m easuring income
and expense com m ensurate w ith the volume
and nature of the fiduciary services offered.
• Standard No. 2—The level of
profitability is reported to the board of
directors, or a committee thereof, at least
annually.
• Standard No. 3—The board of directors
periodically determ ines that the continued
offering of fiduciary services provides an
essential service to the institu tio n’s
customers or to the local community.
• Standard No. 4—The board of directors,
or a committee thereof, reviews the
justification for the institution to continue to
offer fiduciary services even if the institution
does not earn sufficient income to cover the
expenses of providing those services.

Ratings. A rating of 1 may be assigned
where an institution has im plem ented
all four m inim um standards. If fiduciary
earnings are lacking, management views
this as a cost of doing business as a full
service institution and believes that the
negative effects of not offering fiduciary
services are more significant than the
expense of adm inistrating those
services.
A rating of 2 m ay be assigned where
an institution has im plem ented, at a
m inim um , at least three of the four
standards. This rating may be assigned
if the institution is not generating
positive earnings or where formal

54710

Federal Register/Vol. 63, No. 197/Tuesday, October 13, 1998/Notices

earnings information may not be
available.
A rating of 3 may be assigned if the
institution has im plem ented at least two
of the four standards. While
management may have attem pted to
identify and quantify other revenue to
be earned by offering fiduciary services,
it has decided that these services should
be offered as a service to customers,
even if they cannot be operated
profitably.
A rating of 4 may be assigned if the
institution has im plem ented only one of
the four standards. Management has
undertaken little or no effort to identify
or quantify the collateral advantages, if
any, to the institution from offering
fiduciary services.
A rating of 5 m ay be assigned if the
institution has im plem ented none of the
standards.
Compliance. This rating reflects an
institution’s overall compliance with
applicable laws, regulations, accepted
standards of fiduciary conduct,
governing account instrum ents, duties
associated w ith account adm inistration,
and internally established policies and
procedures. This com ponent
specifically incorporates an assessment
of a fiduciary’s duty of undivided
loyalty and compliance w ith applicable
laws, regulations, and accepted
standards of fiduciary conduct related to
self-dealing and other conflicts of
interest.
The compliance com ponent includes
reviewing and evaluating the adequacy
and soundness of adopted policies,
procedures, and practices generally, and
as they relate to specific transactions
and accounts. It also includes reviewing
policies, procedures, and practices to
evaluate the sensitivity of management
and the board of directors to refrain’
from self-dealing, m inim ize potential
conflicts of interest, and resolve actual
conflict situations in favor of the
fiduciary account beneficiaries.
Risks associated w ith account
adm inistration are potentially unlim ited
because each account is a separate
contractual relationship that contains
specific obligations. Risks associated
w ith account adm inistration include:
failure to comply w ith applicable laws,
regulations or terms of the governing
instrum ent; inadequate account
adm inistration practices; and
inexperienced managem ent or
inadequately trained staff. Risks
associated w ith a fiduciary’s duty of
undivided loyalty generally stem from
engaging in self-dealing or other conflict
of interest transactions. An institution
may be exposed to compliance,
strategic, financial and reputation risk
related to account adm inistration and

conflicts of interest activities. The
ability of management to identify,
measure, m onitor and control these
risks is reflected in this rating. Policies,
procedures and practices pertaining to
account adm inistration and conflicts of
interest are evaluated in light of the size
and character of an institution’s
fiduciary business.
The compliance rating is based upon,
bu t not lim ited to, an assessm ent of the
following evaluation factors:
• Compliance w ith applicable federal and
state statutes and regulations, including, but
not lim ited to, federal and state fiduciary
laws, the Employee Retirement Income
Security Act of 1974, federal and state
securities laws, state investm ent standards,
state principal and income acts, and state
probate codes;
• Compliance w ith the terms of governing
instrum ents;
• The adequacy of overall policies,
practices, and procedures governing
com pliance, considering the size,
complexity, and risk profile of the
institution’s fiduciary activities;
• The adequacy of policies and procedures
addressing account adm inistration;
• The adequacy of policies and procedures
addressing conflicts of interest, including
those designed to prevent the im proper use
of “m aterial inside inform ation” ;
• The effectiveness of systems and controls
in place to identify actual and potential
conflicts of interest;
• The adequacy of securities trading
policies and practices relating to the
allocation of brokerage business, the paym ent
of services w ith “soft dollars” and the
combining, crossing, and timing of trades;
• The extent and perm issibility of
transactions w ith related parties, including,
bu t not lim ited to, the volume of related
commercial and fiduciary relationships and
holdings of corporations in w hich directors,
officers, or em ployees of the institution may
be interested;
• The decision making process used to
accept, review, and terminate accounts; and,
• The decision making process related to
account adm inistration duties, including
cash balances, overdrafts, and discretionary
distributions.

Ratings. A rating of 1 indicates strong
compliance policies, procedures and
practices. Policies and procedures
covering conflicts of interest and
account adm inistration are appropriate
in relation to the size and complexity of
the institution’s fiduciary activities.
Accounts are adm inistered in
accordance w ith governing instrum ents,
applicable laws and regulations, sound
fiduciary principles, and internal
policies and procedures. Any violations
are isolated, technical in nature and
easily correctable. All significant risks
are consistently and effectively
identified, m easured, m onitored and
controlled.

A rating of 2 indicates fundam entally
sound compliance policies, procedures
and practices in relation to the size and
complexity of the institution’s fiduciary
activities. A ccount adm inistration may
be flawed by moderate weaknesses in
policies, procedures or practices.
M anagement’s practices indicate a
determ ination to m inim ize the instances
of conflicts of interest. Fiduciary
activities are conducted in substantial
compliance w ith laws and regulations,
and any violations are generally
technical in nature. Management
corrects violations in a timely m anner
and w ithout loss to fiduciary accounts.
Significant risks are effectively
identified, m easured, monitored, and
controlled.
A rating of 3 indicates compliance
practices that are less than satisfactory
in relation to the size and complexity of
the institution’s fiduciary activities.
Policies, procedures and controls have
not proven effective and require
strengthening. Fiduciary activities may
be in substantial noncom pliance w ith
laws, regulations or governing
instrum ents, but losses are no worse
th an minimal. W hile management may
have the ability to achieve compliance,
the num ber of violations that exist, or
the failure to correct prior violations, are
indications that management has not
devoted sufficient time and attention to
its compliance responsibilities. Risk
management practices generally need
improvement.
A rating of 4 indicates an institution
w ith deficient compliance practices in
relation to the size and complexity of its
fiduciary activities. Account
adm inistration is notably deficient. The
institution makes little or no effort to
m inim ize potential conflicts or refrain
from self-dealing, and is confronted
w ith a considerable num ber of potential
or actual conflicts. Numerous
substantive and technical violations of
laws and regulations exist and many
may rem ain uncorrected from previous
examinations. Management has not
exerted sufficient effort to effect
compliance and m ay lack the ability to
effectively adm inister fiduciary
activities. The level of compliance
problems is significant and, if left
unchecked, may subject the institution
to m onetary losses or reputation risk.
Risks are inadequately identified,
m easured, m onitored and controlled.
A rating of 5 indicates critically
deficient compliance practices. Account
adm inistration is critically deficient or
incom petent and there is a flagrant
disregard for the terms of the governing
instrum ents and interests of account
beneficiaries. The institution frequently
engages in transactions that compromise

Federal Register/Vol. 63, No. 197/Tuesday, October 13, 1998/Notices
its fundam ental duty of undivided
loyalty to account beneficiaries. There
are flagrant or repeated violations of
laws and regulations and significant
departures from sound fiduciary
principles. Management is unw illing or
unable to operate w ithin the scope of
laws and regulations or w ithin the terms
of governing instrum ents and efforts to
obtain voluntary compliance have been
unsuccessful. The severity of
noncom pliance presents an im m inent
monetary threat to account beneficiaries
and creates significant legal and
financial exposure to the institution.
Problems and significant risks are
inadequately identified, m easured,
m onitored, or controlled and now
threaten the ability of management to
continue engaging in fiduciary
activities.
A sset M anagement. This rating
reflects the risks associated with
managing the assets (including cash) of
others. Prudent portfolio management is
based on an assessment of the needs and
objectives of each account or portfolio.
An evaluation of asset management
should consider the adequacy of
processes related to the investm ent of
all discretionary accounts and
portfolios, including collective
investm ent funds, proprietary m utual
funds, and investm ent advisory
arrangements.
The institution’s asset management
activities subject it to reputation,
compliance and strategic risks. In
addition, each individual account or
portfolio managed by the institution is
subject to financial risks such as market,
credit, liquidity, and interest rate risk,
as well as transaction and compliance
risk. The ability of managem ent to
identify, measure, m onitor and control
these risks is reflected in this rating.
The asset management rating is based
upon, but not lim ited to, an assessment
of the following evaluation factors:
• The adequacy of overall policies,
practices and procedures governing asset
management, considering the size,
com plexity and risk profile of the
institu tio n’s fiduciary activities.
• The decision making processes used for
selection, retention and preservation of
discretionary assets including adequacy of
docum entation, com mittee review and
approval, and a system to review and
approve exceptions.
• The use of quantitative tools to measure
the various financial risks in investm ent
accounts and portfolios.
• The existence of policies and procedures
addressing the use of derivatives or other
com plex investm ent products.
• The adequacy of procedures related to
the purchase or retention of miscellaneous
assets including real estate, notes, closely
held com panies, lim ited partnerships,

m ineral interests, insurance and other unique
assets.
• The extent and adequacy of periodic
reviews of investm ent performance, taking
into consideration the needs and objectives
of each account or portfolio.
• The monitoring of changes in the
com position of fiduciary assets for trends and
related risk exposure.
• The quality of investm ent research used
in the decision-making process and
docum entation of the research.
• The due diligence process for evaluating
investm ent advice received from vendors
and/or brokers (including approved or focus
lists of securities).
• The due diligence process for reviewing
and approving brokers and/or counter parties
used by the institution.

This rating may not be applicable for
some institutions because their
operations do not include activities
involving the managem ent of any
discretionary assets. Functions of this
type w ould include, but not necessarily
be lim ited to, directed agency
relationships, securities clearing, non­
fiduciary custody relationships, transfer
agent and registrar activities. In
institutions of this type, the rating for
Asset Management may be om itted by
the examiner in accordance w ith the
examining agency’s im plem enting
guidelines. However, this com ponent
should be assigned w hen the institution
provides investm ent advice, even
though it does not have discretion over
the account assets. An example of this
type of activity w ould be w here the
institution selects or recom m ends the
m enu of m utual funds offered to
participant directed 401 (k) plans.
Ratings. A rating of 1 indicates strong
asset m anagement practices. Identified
w eaknesses are m inor in nature. Risk
exposure is m odest in relation to
m anagem ent’s abilities and the size and
complexity of the assets managed.
A rating of 2 indicates satisfactory
asset management practices. Moderate
weaknesses are present and are well
w ithin m anagem ent’s ability and
w illingness to correct. Risk exposure is
commensurate w ith m anagem ent’s
abilities and the size and complexity of
the assets managed. Supervisory
response is limited.
A rating of 3 indicates that asset
m anagem ent practices are less than
satisfactory in relation to the size and
complexity of the assets managed.
Weaknesses may range from moderate to
severe; however, they are not of such
significance as to generally pose a threat
to the interests of account beneficiaries.
Asset management and risk
management practices generally need to
be improved. An elevated level of
supervision is norm ally required.

54711

A rating of 4 indicates deficient asset
management practices in relation to the
size and complexity of the assets
managed. The levels of risk are
significant and inadequately controlled.
The problems pose a threat to account
beneficiaries generally, and if left
unchecked, may subject the institution
to losses and could underm ine the
reputation of the institution.
A rating of 5 represents critically
deficient asset management practices
and a flagrant disregard of fiduciary
duties. These practices jeopardize the
interests of account beneficiaries,
subject the institution to losses, and
m ay pose a threat to the soundness of
the institution.
Dated: October 7, 1998
Keith J. Todd,

Executive Secretary, Federal Financial
Institutions Examination Council.
[FR Doc. 98-27328 Filed 10-9-98; 8:45 am]
BILLING CODE 6 2 1 0 -0 1 -P 25%, 6720-01- P 25%, 6 7 1 4 01- P 25%, 4810 -3 3 -P 25%