What Is Regulation 9?
Regulation 9 is the federal rule that prescribes the standards that apply to the fiduciary activities of national banks which have received approval to act as fiduciaries by the Office of the Comptroller of the Currency (OCC). As fiduciaries, national banks may exercise discretion on behalf of third parties with respect to investments and other financial matters, generally through the establishment and operation of trust departments.
- Regulation 9 is a federal regulation that allows national banks to open and operate trust departments in-house and function as fiduciaries.
- If a bank wants to invest on behalf of others, Regulation 9 requires that there are policies in place to ensure compliance with applicable rules.
- Regulation 9 prohibits self-dealing and conflicts of interest.
Understanding Regulation 9
Regulation 9 allows banks to hold stocks, bonds, and other securities and act as trustees with respect to them. Although Regulation 9 gives banks permission to engage in trust-related activities at a federal level, banks must still adhere to state statutes as well.
Regulation 9 was issued by the Office of the Comptroller of the Currency (OCC) and only applies to national banks and not regional or local entities. National banks are permitted to operate in multiple states and serve in fiduciary capacities in any state unless that state prohibits its own local banks from those particular activities.
A national bank that wishes to exercise fiduciary functions and powers through Regulation 9, which allows the bank to make investments on behalf of others, must adhere to written policies that ensure its activities as a fiduciary are within compliance. The policies in place should cover the bank’s brokerage placement practices, as well as ways to ensure that the fiduciary officers and employees of the bank do not use insider information in their decision-making or recommendations on the sale or purchase of securities. The banks' policies must also establish methods to prevent self-dealing and conflicts of interest.
Annual Investment Reviews
At least once every year, banks must conduct an official review of all assets held in fiduciary accounts over which the bank has investment discretion. These reviews, known as annual investment reviews, are intended to evaluate whether the investment decisions made by the bank’s fiduciaries are appropriate and in the best interests of clients.
An effective annual review process ensures:
- Investment objects are appropriate and current and are made consistently with these objectives
- Each portfolio is reviewed in its entirety
- Exceptions are tracked accurately
- Each asset is valued appropriately
- Performance is tracked accurately and there is a process in place for handling performance outliers
These banks should also retain legal counsel that can advise the bank, its officers, and staff on fiduciary matters.
There are further restrictions under Regulation 9 regarding the investment of funds by banks. Unless an applicable officer authorizes such actions, national banks cannot invest funds from a fiduciary account over which the banks hold investment discretion into the stock, obligations of, or in assets acquired from certain sources. Those sources include the bank itself, its directors, officers, and employees. This also applies to organizations and individuals who have interests that could influence the bank’s judgment. In other words, those who serve in a fiduciary role cannot use those funds of investing clients to make investments into assets under their own control or influence.
Such stipulations also apply to the lending, sale, or transfer of assets of fiduciary accounts the banks have investment discretion over. This is to ensure the actions of the bank do not conflict with the best interests of the clients that they serve.