For Sicovam, I believe all French shares are eligible. For foreign shares, the sponsoring bank introduces a file of information including specimens of securities of the Stock Exchange for listing. Assuming approval, the Board of Directors of Sicovam would consider the case, but prior approval by the Exchange always results in acceptance by Sicovam. 3. Sicovam's membership—A list of January 1973, updated in ink, is enclosed. Also enclosed is a red booklet, dated 1970, on the German depository Deutscher Auslandskassenverein. Fortunately, this document is written in English as well as French and German; we hope it will be of interest. Their 1973 annual report (in German) is also included. Sincerely, CHARLES W. BISSET, Vice President, First National City Bank. [The materials summarized above are retained in the committee. files.] "REGULATION OF BANK TRUST DEPARTMENT ACTIVITIES," BY MARTIN E. LYBECKER Name: Martin E. Lybecker. RÉSUMÉ Address: 2447 North Powhatan Street, Arlington, Va. Marital status: Married; no children. Present employment: Attorney, Office of Chief Counsel, Division of Investment Management Regulation, Securities and Exchange Commission, Washington, D.C. Adjunct Professor of Law, Georgetown University Law Center, Washington, D.C. Legal education: Graduate Fellow, Center for the Study of Financial Institutions and the Securities Markets, 1971-72. University of Pennsylvania School of Law, LL.M. degree, May 1973. New York University School of Law, Graduate Division, LL.M. (in Taxation) degree, June 1971. University of Washington School of Law, J.D. degree, June 1970. Class Standing: top quarter. American Jurisprudence Awards: Securities Regulation, Race Relations Law, Phi Delta Phi Fraternity. Member, Washington State and District of Columbia Bars. Prelegal education: University of Washington School of Business, B.B.A. degree, June 1967. Major: Accounting; Minor: History. Class Standing: top quarter. Beta Alpha Psi (Accounting Honorary) Fraternity. Legal, academic, and business experience: Associate Attorney, part-time, Morgan, Lewis & Bockius, Philadelphia, Pa., 1971-72. Associate Attorney, Bogle, Gates, Dobrin, Wakefield & Long, Seattle, Wash., Summer 1971. Lecturer on Corporate Financial Accounting, Department of Accounting, University of Washington, 1967–70. Research Assistant, Accounting Research Division, American Institute of CPAS (AICPA), Summers of 1968, 1969, 1970: Transnational Reporting to Investors, Professor Gerhard G. Mueller; and Accounting for Working Capital, Professor Loyd C. Heath. Lecturer, CPA Coaching Series-1970, 1971, University of Washington: Accounting for Stockholders' Equity; Partnerships; Business Law. Law Clerk, part-time, Ashley, Foster, Pepper & Riviera, Seattle, Wash., 1969-70. Articles, speeches, and testimony: Regulation of Bank Trust Department Investment Activities," 82 Yale L.J. 977 (April 1973) reprinted in Commercial Banking 1974 at 181 (PLI April 1974). "Bank Investment Activities and the Securities Laws," Address before the Banking, Corporation, and Business Law Section of the New York State Bar Association, Syracuse, New York, October 12, 1973, published in that Section's Addresses at Fall Meeting at 33. "Regulation of Bank Trust Department Investment Activities: Seven Gaps, Eight Remedies," 90 Banking L.J. 912 (November-December 1973) (Part I), 91 Banking L.J. 6 (January 1974) (Part II); reprinted in 2 Sec. Req. L.J. 122 (Summer 1974) (Part I), 2 Sec. Reg. L.J. (Fall 1974) (Part II). 37-733 074 - pt. 3 - 31 Panel Member, Regulation of Tax Shelters, 7th Annual Northwest StateFederal-Provincial Securities Conference, Seattle Washington, May 30, 1974. New SEC Rules 146 and 147 Interpreting the Nonpublic and Intrastate Offering Exemptions From Registration for the Sale of Securities, 74 Colum. L. Rev. (May 1974) with Tom A. Alberg. Testimony before the Subcommittee on Budgeting, Management and Expenditures and the Subcommittee on Intergovernmental Relations of the Senate Committee on Government Operations regarding Disclosure of Corporate Ownership, Washington, D.C., August 14, 1974. [From the Yale Law Journal, Vol. 82:977, 1973] Regulation of Bank Trust Department Among the most powerful (and most anonymous) of our nation's financial institutions are bank trust departments. They manage assets substantially exceeding the assets of the largest one hundred corporations in the United States.1 In fact, bank trust departments have larger securities portfolios than all other institutional investors combined. As a result, certain commercial banks have the potential power to control major corporations.3 Yet, the regulation of bank trust departments seems cursory in many respects compared to that applied to other institutional investors. Only superficial data are gathered by bank examiners, whose responsibilities relate primarily to the banks' other departments. Even less information is made available to the public. In the past, recommendations for reform have focused on increasing public disclosure of investment activity and making trust department regulation similar to that of other financial institutions.5 STAFF NOTE. - A more detailed exposition of Professor Lybecker's views may be found in the Banking Law Journal (90 Banking L. J. 912, Nov.-Dec. 1973 and 91 Banking L. J. 6, Nov.-Dec. 1973). • After substantial completion of this Article, the author became a member of the B.B.A. 1967, University of Washington, J.D. 1970; LL.M. (in Taxation) 1971, New 1. As of 1971, the total assets managed by bank trust departments were valued at 2. The amount of all bank trust departments' securities holdings exceeded the sum of securities administered by investment advisors, insurance companies, self-administered employee benefit plans, foundations, and education endowments. SEC, INSTITUTIONAL INVESTOR STUDY REPORT, H.R. Doc. No. 64, 92d Cong., 1st Sess. pt. 2, at 413-14 [hereinafter cited as IIS REPORT). As of April, 1968, the size of bank trust departments' securities holdings was $238.6 billion. STAFF REPORT FOR THE HOUSE SUBCOMM. ON DOMESTIC FINANCE, COMM. ON BANKING AND CURRENCY, 90TH CONG., 2D SESS., COMMERCIAL BANKS AND THEIR TRUST ACTIVITIES: Emerging Influence on the American Economy 47 (Comm. Print 1968) [hereinafter cited as PATMAN REPORT]. 3. PATMAN REPORT, supra note 2. 4. The SEC has recommended that all professional portfolio managers, including those not presently registered with the SEC, provide improved public disclosure of investment return, portfolio volatility, and short-term trading. IIS REPORT, supra note 2, pt. 1, at XI, XIII. 5. REPORT OF THE PRESIDENT'S COMMISSION ON FINANCIAL STRUCTURE AND Regulation (1971) [hereinafter cited as HUNT COMMISSION REPORT]. The Hunt Commission Report recommended that the bank examining agencies assure themselves that banks were not This article concentrates instead on the bank examination process— and suggests that it be upgraded to preclude practices exploiting loopholes in the present laws. It also proposes that the Securities and Exchange Commission be given jurisdiction to collect information about bank securities and portfolio management policies. II. Bank Trust Department Investment Practices and Regulatory Responses The overriding reason for examining commercial banks' generally has been to assure bank depositors of the bank's continuing solvency. Bank trust department examinations are conducted by regulatory agencies and bank directors1o to assure that the trust department has trading on the basis of commercial department or other "inside" information, were properly investing cash, and were properly handling the commission brokerage of their securities transactions. 6. To obtain some insight into bank trust department examinations and investment activities, confidential interviews were conducted with regulatory agency officials and bank trust department officers during the first four months of 1972. Officials of several states and several branches of all three federal regulatory agencies were interviewed. Also interviewed were officers of several banks in each major Eastern money-center city, in several major Midwest money-center cities, and in several major Southern money-center cities. A prerequisite to obtaining interviews with federal regulatory agency officials and bank trust department officers was the author's agreement that the sources of information would not be identified. 7. Definitions of certain terms used in this Article may be helpful to the reader. A "commercial bank" for purposes of this Article means a corporation that engages in receiving demand deposits subject to checks and "time and savings" deposits. Using these deposits, the corporation makes loans of various kinds, including business, consumer, personal and real estate loans. The term "bank" or "bank complex" is used here to mean a commercial bank which may provide trust services to its customers, and not a mutual savings bank, savings and loan association, insurance company, finance com. pany or other financial institution which may compete with banks but does not meet the traditional concept of a commercial bank. A "trust company" is a state-chartered corporation empowered by its charter to engage in all kinds of trust activities; it may or may not be a commercial bank. Generally, trust companies are not subject to federal regulation; and thus, they are outside the scope of this Article. 8. See, eg, Davis, Banking Regulation Today: A Banker's View, 31 LAW & CONTEMP. PROB. 639, 640 (1966); Masters, Trust Examinations-Development of Supervisory Protection for Better Service, 93 TRUST & ESTATES 280, 282 (1954). But see Miller, Trust Supervisor's Role-Improved Services Through Exchange of Ideas Between Trustmen and Supervisory Authority, 103 TRUST & ESTATES 1244 (1964). 9. All national banks are examined by the Comptroller of the Currency; certain statechartered member banks of the Federal Reserve System are examined by the regional Federal Reserve bank; and all remaining state-chartered, non-Federal Reserve system banks insured by the FDIC are examined by the FDIC. See IIS Report, supra note 2, pt. 2, at 44243; Robertson, Federal Regulation of Banking: A Plea for Unification, 31 Law & CONTEMP. PROB. 673, 674 (1966) [hereinafter cited as ROBERTSON]. Non-insured banks and trust companies are regulated only by whatever local state regulatory agency has jurisdiction over the respective financial institution. Only the Federal Reserve presently has trust examination specialists; the FDIC and Comptroller examiners are basically commercial bank examiners who have some degree of familiarity with trust examinations. See generally C. GOLEMBE, THE ECONOMIC POWER OF COMMERCIAL BANKS 56-59 (1969); Randall, The Federal Deposit Insurance Corporation: Regulatory Functions Philosophy, 31 LAW & CONTEMP. PROB. 696 (1966). Few state banks administering trust assets operate outside the FDIC insurance umbrella of $20,000 per deposit; at the end of 1969, there were 3.289 insured banks and only forty-nine non-deposit, non-insured trust companies. FDIC ANN. REP. 242 (1969). Thus, very few bank shareholders were without the benefit of some federal oversight. 10. State and federal laws require that directors of banks conduct annually their own not breached its fiduciary duties and subjected the bank to potential suits which might threaten its solvency." Rather than prohibit absolutely by rule specific activities, bank regulatory agencies have long informally prescribed what sound fiduciary principles require.12 This traditional informality may be maintained by expanding the role of the individual trust examiner. As an improved trust examination process would provide a natural occasion for communication between the regulators and the regulated, it may ultimately strengthen bank self-regulation. The reforms envisioned by this section can be adopted by mutual consent of examiners and banks, or if necessary by rulemaking within existing bank regulatory agencies. A. Conforming Investments J Bank trust investment activity must conform with the explicit investment directions of a trust instrument13 and with general fiduciary principles. Trust accounts with specific investment restrictions are reviewed yearly for conformity to the instrument's express limitations; the unrestricted trust instruments, those giving the trust department unlimited investment discretion, are reviewed broadly for conformity to "prudence,"14 through a perusal of both a trust department's "approved list"1 and its actual holdings. The present system has two possible defects. First, the trust examiners may be able to review only a third or a quarter of the large number of restricted trust accounts each year.1 Second, the test for "prudence" has been unsophisticated: it has meant scrutiny only of the risk profiles of individual securities, internal examination. See, e.g., CAL. FIN. CODE ANN. § 1902 (West 1968, Supp. 1971); N.Y. BANKING LAW § 122 (McKinney 1971); 7 PA. ANN. STAT. § 1407(a) (Purdons 1968). See, e.g., 12 C.F.R. § 9.9 (1972). Because this section of the Comptroller of the Currency's Regulations is usually referred to as Regulation 9 by persons in the banking industry, it will hereinafter occasionally be referred to as such. 11. E. NEILAN, TRUST EXAMINATION: AN EXAMINER'S ANALYSIS 28 (1939) [hereinafter cited as NEILAN]. 12. Miller, Regulation of Fiduciaries, AMER. BANKERS ASS'N, PROCEEDINGS, FIDUCIARY RESPONSIBILITY SEMINAR 56, 58 (July 22, 1970) [hereinafter cited as MILLER). 13. NEILAN, supra note 11, at 54-57; 12 C.F.R. § 9.11 (1972). 14. An "approved list" generally consists of several hundred securities which have received the trust department investment committee's approval for investment by trust accounts. 15. State law, statutory and judicial, may be applicable to the investment powers of a trustee when the trust instrument is silent or simply follows state law. Thus, the "prudent man" rule, since it is rarely waived in the trust instrument, is usually the ultimate test. See, e.g., Harvard College v. Amory, 26 Mass. (9 Pick) 446, 461 (1830). For a discussion of present fiduciary investment practices and policy, see Trustee's Duties Regarding Investments, 4 REAL PROP., PROB. & TRUST L.J. 604 (1969). Liability is now incurred when the trustee violates his duty "to make such investments as a prudent man would make of his own property having primarily in view the preservation of the estate and the amount and regularity of income to be derived." 2 A. SCOTT, Law of TRUSTS 1409-10 (3d ed. 1967) [hereinafter cited as ScoTT]. 16. COMPTROLLER OF THE CURRENCY, COMPTROLLER's Manual FOR REPRESENTATIVES IN TRUST 46, 60 (1969) [hereinafter cited as CompTROLLER'S MANUAL]. |