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OCC Bulletin 2008-5
March 6, 2008
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Chief Executive Officers of National Banks, Department and Division Heads, All Examining Personnel, and Other Interested Parties
As of 1/14/2015, this guidance applies to federal savings associations in addition to national banks.
This bulletin describes the potential risks associated with a national banking organization's strategic divestiture of certain asset management business lines. Specifically, this issuance focuses on the potential conflicts of interest that national banks, as fiduciaries, may encounter when an affiliated mutual fund complex and/or its associated investment adviser are sold to unaffiliated parties. The bulletin provides guidance on risk management controls that have proven to be effective in evaluating, managing, and addressing the risks posed by such a divestiture.
The OCC broadly defines asset management as the business of providing financial products and services to a third party for a fee or commission. Asset management activities are varied and include trust and fiduciary services, investment management and advice, retail securities brokerage, investment company services, custody, and other asset servicing functions that are offered to individuals and institutions.
The asset management industry is undergoing considerable consolidation. Management at both bank and nonbank entities is evaluating the long-term profitability of various asset management business lines. Recently, several banking organizations have sold either all, or portions of, their investment management businesses to unaffiliated third parties. The rationales provided by banking organizations for divesting their affiliated mutual fund complexes and associated registered investment advisers include:
Bank divestitures of affiliated funds and advisers can raise potential conflicts of interest and self-dealing opportunities that concern the OCC. These arrangements may include certain contractual terms and conditions that provide financial incentives to a selling bank that could unduly influence the bank's fiduciary investment decision process. The OCC has identified both pre- and post-transaction risk controls that, when implemented, should mitigate risks to both the bank and its fiduciary clients in these divestiture situations. This guidance describes risk management controls banks should have in place when contemplating such a divestiture.
A transaction that raises the potential of a conflict of interest or self-dealing elevates the bank's reputation, compliance, and strategic risk exposures. As required by 12 CFR 9.12, national banks must ensure that they act in the best interests of their fiduciary clients and do not engage in self-dealing or conflicts of interest. This fiduciary duty applies not only when a bank or its affiliate structures a transaction to sell an affiliated investment management business, but also following investment of client assets with the successor fund manager1. The OCC has identified several issues with divestitures that could result in a bank placing its interests ahead of the interests of that institution's fiduciary customers.
Financial Incentives that Could Lead to a Potential Compromise of Fiduciary Duty
Transactions that include contractual terms or conditions with financial incentives to the bank selling its adviser or fund assets raise potential conflict of interest issues. Financial incentives and stipulations could influence a bank's current and future discretionary investment decisions. Examples of contractual terms and conditions that raise concerns include:
Inadequate Planning, Minimal Due Diligence, and Ineffective Risk Controls
Transactions with ineffective planning and implementation processes raise concerns and could include the following:
The OCC expects those national banks that contemplate divestiture of affiliated funds and associated advisers, whether directly, or through their broader corporate organizations, to evaluate the risks associated with these transactions and to implement effective risk management controls. National banks should work with their affiliated entities to implement effective due diligence processes prior to, during, and after a fund/adviser divestiture.2
Because bank fiduciaries are required to act in the best interests of their clients, they must identify and address any potential conflicts of interest, ideally prior to any divestiture. Bank fiduciaries should become familiar with the specific terms and conditions of any divestiture and, most importantly, must adhere to their fundamental obligations to their fiduciary customers.
National banks should adopt the following risk management practices. OCC management believes that a bank fiduciary that follows these practices, while not a complete list, will have a framework for effective management of potential conflicts of interest.
Pre-transaction risk controls:
Post-transaction risk controls:
Bank fiduciaries are required to act in the best interests of their clients and should work to ensure that no divestiture transaction, either in the bank or an affiliated entity, creates the potential for unauthorized conflicts of interest or self-dealing opportunities.
For further information, please contact Asset Management at (202) 649-6360.
Kerri R. Corn
Director for Credit and Market Risk
1 See "Conflicts of Interest" (June 2000) in the Comptroller's Handbook and OCC Banking Circular 233, Acceptance of Financial Benefits by Bank Trust Departments (February 1989).
2 The OCC recognizes that in some situations, these transactions will be structured by a bank affiliate and the bank may have little or no opportunity to weigh in on the due diligence process or contractual terms.