OCC Update BDUG Annual Meeting September 24, 2013

1. OCC Update BDUG Annual MeetingSeptember 24, 2013 Tish Dalton, Risk Specialist Asset Management Group Office of the Comptroller of the Currency Washington, DC

2. Disclosure • The views and opinions expressed in this presentation are my own, and do not necessarily represent those of the Office of the Comptroller of the Currency. • I’ll refer frequently to national bank and Federal savings association regulations and guidance – while similar in principle, you should refer to the regulations and guidance of your primary regulator.

3. Overview • OCC Asset Management Supervision • OCC Asset Management Regulation and Guidance • Key Risks/Asset Management Supervisory Focus • Asset Management Examination Findings • Discussion Topics • AM Operations Training • AM Operations Best Practices • DTC Initiatives • Appendix I: OCC Asset Management Guidance • Appendix II:

4. The Mission of the OCC • “assuring the safety and soundness of, and compliance with laws and regulations, fair access to financial services, and fair treatment of customers by, the institutions and other persons subject to its jurisdiction.” • From Title III of the Dodd-Frank Act

5. OCC Asset Management Supervision Statistics and Structure

6. OCC Supervision • The OCC regulates over 1,250 national banks and more than 500 Federal savings associations. • They range from large complex banks with global footprints to local community banks. • Includes 63limited purpose national trust banks and 15 trust only thrifts. • Approximately 42% of all national banks and 28% of Federal savings associations have Asset Management (AM) activities, which include: • Fiduciary services including trust and investment management services; • Institutional custody and securities lending activities; and, • Retail brokerage activities.

7. OCC Asset Management • Over 150 examiners with specialized Asset Management expertise perform ongoing supervision both on and off bank premises. • Large Banks – Resident Examiner Program • Midsize/Community Banks – Field Office Staff Program • National Trust Banks – Focus on limited purpose trust companies • OCC AM Policy Group in D.C. works extensively with OCC’s examiners on policy guidance for the industry, internal training, and addressing specific bank issues, including potential violations and matters requiring attention. • AM Policy also works closely with OCC Legal and other internal and external groups on matters including Dodd Frank (Volcker Rule); FSOC issues (including identification of systemically important entities and MMF risks); and interpretations of Regs 9 and 12.

8. Fiduciary & Related AssetsJune 30, 2013(all national banks, insured state banks, and FSAs)

9. OCC Asset Management Guidance Recent and Upcoming OCC & AM Group Guidance

10. AM Group Guidance • OCC’s objective to integrate and consolidate OTS and OCC regulations. Consolidated regulations are still in development. As with most Federal rulemakings, there will be opportunities for industry comment. • Handbook update project – OCC’s AM Policy Group publishes ten booklets in the Comptroller’s HB series. We are working on re-issuing each of these – starting with Retirement Plan Products and Services; Collective Investment Funds; Conflicts of Interest; and Retail Non-Deposit Products. • Where possible, older guidance (such as the remaining Trust Banking Circular and certain AM Banking Circulars) will be rescinded and incorporated into revised HBs.

11. AM Group Guidance • OCC Revised Short-Term Investment Fund (STIF) Regulation • Revises 12 CFR 9.18(b)(4)(ii)(B); filing requirements described in OCC Bulletin 2013-8 (March 2013) • Became effective July 1, 2013 • Objectives: Enhanced safeguards designed to address potential risk of loss to a participant’s principal; achieve a level of consistency with regulation of comparable MMFs (Rule 2a-7) • STIF Final Rule requirements include: • Measures governing the nature of a STIF’s investments • Ongoing monitoring of a STIF’s amortized cost and mark-to-market values • Assessment of potential changes in STIF’s mark-to-market value under adverse market conditions • Greater transparency and reporting of STIF’s holdings • Procedures to protect fiduciary accounts from undue dilution in the event that the STIF loses ability to maintain a stable NAV. • Fund level portfolio information – disclosures to OCC and STIF participants within five business days of month end.

12. Key Risks & Asset Management Examination Focus

13. Key Risks • Market Volatility • Impact on earnings • Investment Management & Liquidity Risks • Product selection, suitability, and potential conflicts of interest • Regulatory Change • Resources to manage regulatory change and implement necessary platform and process changes.

14. Key Risks • Investment Management Risk • AM Governance Risk • AM Operations Risk • Regulatory Reform Risk

15. Key Risks • Investment Management Risk • Market influences • Government policies and politics • Economic uncertainty • Interest rates Investment Opportunities/Risks • Use of increasingly complex products • Reaching for yield • Potential conflicts of interest • Need for Heightened Investment Risk Management • Initial and ongoing due diligence • Investment selection, retention and disposition process • Analytical tools and systems, with an emphasis on credit and interest rate risk • Valuation practices

16. Key Risks • Investment Management Risk – Examination Focus • New product approval processes • Increasing complexity/increasing need for due diligence • Focus on conflicts of interests • Review of Investment models/analytical tools • Refer to OCC Bulletin 2011-12 “Sound Practices for Model Risk Management • Initial and ongoing due diligence • Should accurately evaluate risk on an individual security and portfolio basis. • Pre-purchase and ongoing credit analysis of fixed income securities • Emphasis on analytical tools, and particularly fixed income credit analytics. • Investment portfolio performance • Under or over performance • Risk management and controls.

17. Key Risks • AM Governance Risk • Committee and Management Structures • Management, Board, and Committee Reporting • Control Infrastructure Evolution • Conflicts of Interest • Metrics • Supervisory Focus • New product due diligence and approval • Internal and third party vendor management • Staffing levels and expertise • Conflicts of interest

18. Key Risks • AM Operations Risks • Core Operational Processes – Capability/Capacity of Legacy Systems • System capabilities – new products, regulations, industry infrastructure changes • Manual Processes/“Work-Arounds”/User Developed Tools • Internal Controls • Money Movement • Asset Custody • Reconciliations • Oversight of Internal and Third Party Vendors • Fraud

19. Key Risks • Regulatory Reform Risk • Significant Regulatory Change • Dodd-Frank Implementation Continues • SEC and DOL proposals (money market reform, muni advisor, fiduciary standard, etc.) • CFPB’s Involvement in AM Activities Remains Uncertain • Increased focus on Financial Market Utilities • Resources and Infrastructure to Analyze and Implement Change • Oversight • Project teams • Reporting • Legal, Audit, Compliance, Risk Management involvement

20. Examination Issues and Findings • Review of fiduciary accounts – failure to comply with 12 CFR 9.6 - pre-acceptance, initial post-acceptance, annual review • Inadequate account acceptance • Not including all assets in review • Adequacy of assets in meeting investment objective • Not meeting requirements of OCC Bulletin 2008-10 • Audit requirements – failure to comply with 12 CFR 9.9 • Inadequate scope of audit • Not including all significant fiduciary activities • Ineffective audit program • Majority of audit committee members are involved in day-to-day oversight of trust area

21. Examination Issues and Findings • Account Administration • Adequacy of administrative review process • Discretionary distribution process • Self-directed IRAs • Asset/Money Movement • Free deliveries • Disbursement controls • Vendor Management • Inadequate monitoring of 3rd party providers

22. Examination Issues and Findings • Pledge Requirements of 12 CFR 9.10 • Expiration of TAG – increase in self-deposits > FDIC coverage • Fiduciary control of collateral • Computation of required collateral • Discretionary and non-discretionary funds awaiting investment/distribution • Sweep vehicles/short term deposits • Suspense accounts • Outstanding checks • Requirements of 12 CFR 9.12 • Confirms - Notification by agreement • Requirements for fixed income securities • Officer and employee personal securities transaction reports • Portfolio Accounting – P & I allocation/cash management • Fraud – disbursement controls

23. Discussion Topics

24. AM Operations - Training • Discussion Topic – Operations Training • Systems training • Internal process training • Regulatory compliance training • Line of business/product knowledge training • Securities Industry Training • Risk assessment • Challenges • Keeping current • Time constraints • Costs

25. AM Operations - Best Practices • AM Operations Best Practices • Effective front-end controls • Straight through automated processing • Workflows and procedures that focus on “hand-offs” from one business group to another, including to service providers • Well thought out system access profiles, ongoing due diligence • Effective exception reporting/aging/escalation • Procedures that take processes “full-circle” to ensure completion • Third party servicer oversight/in-house expertise • Management and staff expertise – including specialized products and services

26. AM Operations – DTC Initiatives • DTC Initiatives • DTC Reduction of RAD limits • Settlement Finality Initiatives • Settlement Web • OCC focus • Impact on systemic risk (FSOC perspective) • Impact on participant banks’ risk profiles • Bank due diligence and oversight • Systems/risk analysis • Process Updates • Front-end controls • Employee training

27. Appendix I Selected OCC Asset Management Guidance OCC Bulletins, Banking Circulars, Interpretive Letters and Booklets of the Comptroller’s Handbook for Asset Management are available at www.occ.gov OCC: Capital Markets: Asset Management

28. OCC AM Guidance • Comptrollers Handbook for Asset Management Booklets • Asset Management (2000) • Asset Management Operations & Controls (2011) • Collective Investment Funds (2005) • Conflicts of Interest (2000) • Custody Services (2002) • Investment Management Services (2001) • Personal Fiduciary Services (2002) • Retirement Plan Services (2007) • Unique and Hard to Value Assets (2012)

29. OCC AM Guidance • Comptroller’s Handbook for Selected Safety and Soundness – Selected Booklets: • Community Bank Supervision (2010) • Large Bank Supervision (2010) • Bank Supervision Process (2007) • Internal and External Audits (2003) • Internal Control (2001) • Insurance Activities (2002) • Retail Nondeposit Investment Sales (1994)

30. Selected OCC Bulletins • OCC 2013-8, Short-term Investment Funds Reporting Requirements • OCC 2012-31, Short-Term Investment Funds • OCC 2011-11, Risk Management Elements: Collective Investment Funds and Outsourced Arrangement • OCC 2011-12, Supervisory Guidance on Model Risk Management • OCC 2010-37, Self-Deposit of Fiduciary Funds • OCC 2009-19, New Notice Requirements for Sweep Accounts • OCC 2008-10, Fiduciary Activities of National Banks: Annual Reviews of Fiduciary Accounts Pursuant to 12 CFR 9.6(c) • OCC 2008-5, Conflicts of Interest: Risk Management Guidance – Divestiture of Certain Asset Management Businesses • OCC 2007-42, Bank Securities Activities: SEC's and Federal Reserve's Final Regulation R • OCC 2007-21, Supervision of National Trust Banks: Revised Guidance: Capital and Liquidity

31. Selected OCC Bulletins • OCC 2007-7, Soft Dollar Guidance: Use of Commission Payments by Fiduciaries • OCC 2007-6, Registered Transfer Agents: Transfer Agent Registration, Annual Reporting, and Withdrawal from Registration • OCC 2006-24, Interagency Agreement on ERISA Referrals • OCC Bulletin 2004-20, Risk Management of New, Expanded, or Modified Bank Products or Services: Risk Management Process • OCC 2004-2, Banks/Thrifts Providing Financial Support to Funds Advised by the Banking Organization or its Affiliates • OCC Bulletin 2002-16, Bank Use of Foreign-Based Third-Party Service Providers • OCC Bulletin 2001-47, Third-Party Relationships: Risk Management Principles • OCC Bulletin 2001-35, Examination Procedures to Evaluate Compliance with the Guidelines to Safeguard Customer Information

32. Appendix II: Asset Management Statistics

33. Total Fiduciary Assets • All Banks and FSAs: 2006 – 1Q2013

34. Total Custody Assets • All Banks and FSAs: 2006 – 1Q2013

35. Managed Assets: Fiduciary Accts All Banks and FSAs: 2009 - 2012

36. CIFs & CTFs All Banks and FSAs: 2001 – 1Q 2013

37. CIFs & CTFs All Banks and FSAs: 4Q 2011 – 1Q 2013

38. Fiduciary & Related Svcs Revenue All Banks and FSAs: 2002 – 1Q 2013

39. OCC Contact Information Tish Dalton Asset Management Group Credit & Market Risk Division Patricia.Dalton@OCC.treas.gov 202 649-6401