TO: Chief Executive Officers of National Banks Authorized to Exercise
Fiduciary Powers, Deputy Comptrollers (District), and Examining
Personnel

##### PURPOSE

This issuance is intended to remind national banks of laws prohibiting
bank trust departments from receiving any financial benefits, including
discounts or rebates on goods or services purchased, or other items of
value, in exchange for investing trust funds in particular investments.

##### BACKGROUND

It has come to the OCC\'s attention that a number of national bank trust
departments may have accepted financial incentives from investment
management firms that sponsor mutual funds or other investment funds in
exchange for the investment of fiduciary assets in specific funds
offered by those firms. These financial incentives appear to have taken
the form of (i) discounts or rebates on fees paid for other products or
services purchased by these banks from those same firms or from a third
party pursuant to an agreement with the investment management firm, (ii)
computer goods or services, or (iii) seminars and travel expenses for
bank personnel in connection with programs offered or sponsored by
investment fund sponsors. In some cases, these financial incentives have
been provided pursuant to verbal agreements or understandings.

##### FIDUCIARY DUTIES OF BANK TRUST DEPARTMENTS

National bank trustees owe exacting fiduciary duties to customers who
place trust funds under the bank\'s management. Trustees are obliged to
make decisions concerning the investment of trust assets based
exclusively on the best interests of trust customers. This principle is
reflected in 12 C.F.R. § 9.12(a), which provides:

Unless lawfully authorized by the instrument creating the relationship,
or by court order or by local law, funds held by a national bank as
fiduciary shall not be invested in stock or obligations of, or property
acquired from\... individuals\... or organizations in which there exists
such an interest, as might affect the exercise of the best judgment of
the bank in acquiring the property\....

A majority of the states have adopted this principle as a matter of
fiduciary law. See 2A W.F. Fratcher, [Scott on Trusts]{.underline}, §
170, Duty of Loyalty (4th ed. 1987). Many states have adopted statutes
that expressly prohibit self-dealing by fiduciaries. [Id]{.underline}.
[See]{.underline}, [e.g.]{.underline}, Cal. Prob. Code § 16004: N.Y.
Est. Powers & Trust Law § 11-2.2: 7 Pa. Cons. Stat. §§ 403, 405.

The OCC has provided specific guidance in past issuances on the
applicability of these principles to bank trust department relationships
with investment companies. In Banking Circular 219 (October 31, 1986),
the OCC warned national banks that the receipt of supplemental fees for
placing fiduciary assets in 12b-1 funds was subject to 12 C.F.R. §
9.12(a). Because the receipt of 12b-1 fees creates a strong incentive
for banks to continue investing in a particular fund over other
alternatives, such fees are prohibited by Section 9.12, unless, in the
case of non-ERISA accounts, specific lawful authority exists for the
practice. Reference should be made to Banking Circular 219 (October 31,
1986) for additional guidance on the subject.

The acceptance by a national bank trustee of [any]{.underline} financial
benefits directly or indirectly conditioned on the investment of trust
assets in a particular investment is prohibited under 12 C.F.R. §
9.12(a), and also is prohibited under the fiduciary laws of most states.
When selecting a mutual or money market investment, a trustee should
evaluate the return being paid, the composition and length of maturities
of its portfolio, the fund\'s management and all other factors relevant
to the suitability of the investment for the customers. Trustees must
not place themselves in a position where their judgments concerning the
optimal investment for trust accounts may be influenced by the
trustees\' receipt of financial benefits for selecting a particular
investment.

The same principles apply whether banks receive (i) rebates or discounts
on services provided by or at the direction of an investment management
firm (such as accounting and administrative services), (ii) computer
goods or services, (iii) seminars and travel expenses which are offered
by, or at the direction of, such firms, or (iv) any, other financial
benefits in exchange for investing trust funds in particular money
market or mutual funds. Those principles also are applicable whether the
financial benefits are received directly from the provider or indirectly
through third parties. [See]{.underline} OCC Handbook for National Trust
Examiners, Precedents and Opinions 9.3115: G. Bogert,
[Trusts]{.underline}, 341-342 (6th ed. 1987); Restatement (Second) of
Trusts Section 170(o) (1974).

When a national bank receives a financial benefit that is calculated
based on the amount of trust funds invested with the provider of those
products, the bank has a financial interest which interferes with its
ability to select investments based solely on the best interests of
trust beneficiaries. Unless financial benefits received in this manner
are passed on to all beneficiaries according to the level of their
investment in a fund, or are lawfully authorized by the instrument
creating the relationship, by court order or by local law, the receipt
of rebates, credits, services or other financial benefits is contrary to
Section 9.12 and a bank\'s common law fiduciary duties. Further,
national bank trust departments should be aware that the acceptance of
financial incentives in the manner described above is not protected by
Securities Exchange Act Section 28(e). Section 28(e) merely provides a
statutory \"safe harbor\" for certain \"soft dollar\" arrangements
whereby money managers use brokerage commissions to pay for brokerage
and research services. [See]{.underline} Trust Banking Circulars 17
(March 19, 1980) and 25 (June 19, 1986). The use of trust fund balances
to obtain financial benefits does not constitute payment for brokerage
or research services within the meaning of Section 28(e).

In the past, the staff has stated that under limited circumstances, the
use by a national bank trust department of free automated order entry
systems to place orders with funds offered by an investment company may
be permissible if the availability of such systems is not dependent on
the investment of trust assets in a particular fund or group of funds.
[See]{.underline}, OCC Letter to William M. Doran dated July 1, 1983
(unpublished) ([Attachment A]{.underline}). In such an arrangement,
however, a bank trust department must receive no financial benefits
based on its investment of trust funds in a particular investment. Past
positions on the permissibility of such automated order entry (including
\"sweep\") services may not be relied on as legal support for the
acceptance of such financial benefits.

In sum, if a bank receives incentives for placing trust assets in an
investment fund offered by a particular provider, the bank must pass
those incentives on to the accounts which have had their assets invested
in the fund. In the alternative, the receipt of such financial
incentives must be authorized by local law, court order, or the
governing instrument. See 2A W.F. Fratcher[, Scott on
Trusts]{.underline}, § 170, Duty of Loyalty (4th ed. 1987). In the
absence of those circumstances, the receipt of such financial incentives
is prohibited under 12 C.F.R. § 9.12(a) and is contrary to a bank\'s
fiduciary responsibilities.

##### REMEDIAL ACTION

National banks that engage, or have engaged, in conduct inconsistent
with their fiduciary duties may be subject to significant liability for
breaches of these duties. They may also be subject to appropriate
enforcement actions by the OCC which may be publicized. National banks
that receive, or have received, financial benefits contingent upon
investment of trust assets in particular investment funds in violation
of 12 C.F.R. § 9.12(a) and applicable fiduciary duties may be required
to reimburse these benefits to the appropriate fiduciary accounts and to
take other appropriate actions. In addition, appropriate referrals may
be made to other interested federal and state government agencies,
including the Securities and Exchange Commission, with respect to any
investment companies or individuals aiding and abetting conduct by
national banks that is inconsistent with the foregoing.

##### ORIGINATING OFFICE

Questions regarding this issuance may be directed to the Trust
Activities Division at (202) 447-1731, or the Securities and Corporate
Practices Division at (202) 447-1954.

Robert J. Herrmann

Senior Deputy Comptroller for

Bank Supervision Policy

Attachment

# O Attachment "A"

+-----------------------------------------------------------------------+
| ## Comptroller of the Currency                                        |
|                                                                       |
| > Administrator of National Banks                                     |
+-----------------------------------------------------------------------+

Washington, DC 20219

July 1, 1983

William M. Doran, Esq.

Morgan, Lewis & Bockius

1800 M Street, NW

Washington, DC 20035

Dear Mr. Doran:

This is in response to your letter dated April 6, 1983. In your letter,
you requested an opinion concerning the permissibility of certain
services offered to national bank trust departments by your client, SEI
Corporation (\"SEI\") and its subsidiary, SEI Financial Services
(SFS\"). Your letter contained a summary of the operation of your
client\'s system.

Your letter noted that SEI generally is in the business of providing
accounting, reporting, and management services to banks and other
financial institutions. Included among these services are a general
accounting, reporting and management service for bank trust departments.
The trust system involves a standard level of computer software
capability for which trust departments pay a service or license fee. The
trust system provides certain accounting and administrative services,
on-line portfolio information, and information relating to the
processing of securities trades. Supplementary optional modules are
available for additional fees.

According to your letter, SFS, a wholly-owned subsidiary of your client,
is registered with the Securities Exchange Commission as a
broker-dealer. SFS acts as the distributor and manager for several money
market funds (\"Funds\") which are made available to customers of SEI
and its subsidiaries. Purchase and sale orders may be communicated by
telephone or automatically through software and terminals provided by
SFS. As part of the latter arrangement, SFS provides trust departments
with software which facilitates the placement of buy and sell orders to
the funds after sweeping trust accounts to determine the cash balance
available for investment (hereinafter referred to as \"automated order
entry system\"). The trust department selects the particular Fund or
portfolio within a Fund in which to invest trust assets by programming
the automated order entry system. According to your letter, the features
of the automated order entry system also include:

(1) the daily detection of uninvested cash in each account and automatic
    daily investment of any or all of such balances;

(2) the monthly crediting of money market fund dividends directly to
    each account;

(3) a communication link to enable the bank fiduciary to execute special
    investment and redemption decisions when desired;

(4) the display and printing of reports of each portfolio\'s
    composition, yield, tax characteristics, and other details upon the
    trustee\'s request so that the trust funds can be invested in the
    most appropriate portfolio of the subsidiary\'s money market funds.

Your letter also noted that SFS, as distributor of the Funds, provides
the automated order entry system to maximize investment efficiencies and
to eliminate errors that may occur in manual systems. Because the
purpose of the automated order entry system is to facilitate investment
in the Funds distributed by SFS, the trust departments are supplied with
the system at no cost.

Your letter to this Office was prompted by my March 9, 1983, letter to
the legal representative of another firm that designs and sells
automated trust accounting systems, in which I expressed the view that
an arrangement under which a national bank trust department receives a
fee waiver on a general cash management system in exchange for investing
funds in a particular money market fund was improper. Because the
benefits of the fee waiver would not be passed onto the trust accounts,
I concluded that the trust department would be receiving a benefit from
the investment of trust assets in a certain vehicle; an arrangement
which I believed violated the trust department\'s fiduciary duty of
loyalty to the trust beneficiary. I also noted that the money market
fund would presumably have to pay a lower return in order to compensate
for the fee waivers on the sweep system.

Your letter of April 6 noted several points of distinction between the
automated order entry system offered by SFS and the plan discussed in my
letter of March 9. First, you indicated that use of the automated order
entry system involves no fee waiver. The system is provided at no cost
regardless of the levels of investment in the Funds by the trust
department. Moreover, trust departments that use the automated order
entry system and invest in the Funds do not receive any fee waiver or
discount on other systems or products offered by SEI or its subsidiaries
including the trust system and the cash management system. Second, you
noted that the automated order entry system is an expense of SFS, the
Fund manager, and not of the Funds themselves. Management fees paid the
Fund manager by the Funds are a fixed percentage of daily fund assets
and, in your view, are competitive with other money market funds. Third,
your letter stated that the automated order entry system provides no
general benefit to a trust department. The system is used to place
orders only with SFS Funds. Fourth, you noted that even assuming,
arguendo, that the cost of the automated order entry system is charged
to the accounts that use the investment vehicle, you felt that this
would be a more equitable allocation of the cost that to charge all
accounts for a service that benefits only those accounts investing cash
balances in the funds.

In your letter, you expressed the opinion that a national bank trust
department could purchase shares in the Funds where an automated order
entry system, which includes a sweeping feature, is provided by the
Fund\'s distributor at no cost. In your view, such investment by a trust
department is proper as long as the trust department decides that the
investment is prudent under standard investment criteria. You believe
that trust accounts are benefitted by the automated order entry system
because cash is expeditiously invested and therefore yield is maximized.
Moreover, you noted that the automated order entry system allows trust
departments to monitor and reallocate account balances to the most
appropriate portfolios offered by the Funds.

Additionally, your letter noted that a June 25, 1982 OCC release
indicated that the sweep systems are an effective method by which trust
departments can invest uninvested cash into income-producing media on a
daily basis, that the cost of implementing such systems is not
necessarily prohibitive, and that \"certain money market funds can
provide banks with a daily investment service for individual accounts.\"
47 [Fed.]{.underline} [Reg.]{.underline} 27830 (June 25, 1982)
[reprinted]{.underline} [at]{.underline} \[Current\] Federal Bank Law
Reporter (CCH) ¶ 99, 205. You noted that the Funds are examples of money
market funds that provide such a daily investment service through the
automated order entry system.

Initially, I would like to stress my agreement with the views expressed
in the OCC release cited in you letter. Sweep systems are indeed an
effective method for national bank trust departments to invest
uninvested cash. However, the arrangement under which such a system is
provided to a trust department must still comply with the exacting
fiduciary standards imposed on a trustee.

The arrangement described in my March 9 letter, under which a fee waiver
for a general cash management system was expressly conditioned upon
investment of trust assets in a particular vehicle, represented, in my
opinion, a clear example of a breach of the trust department\'s
fiduciary duty of loyalty because it appeared that the trustee\'s
decision to invest in the subject funds was motivated in large measure
by the benefit conferred upon the trust department in the form of
lessened operating costs. I responded accordingly and I reaffirm the
opinion expressed in that letter. The arrangement described in your
letter, however, has several features which distinguish it from the
arrangement discussed in my March 9 letter. For example, your letter
indicated that the automated order entry system is provided to the trust
departments at no cost regardless of the amount of trust assets invested
in the Funds. Moreover, your letter stated that the use of the system is
limited to facilitating buy and sell orders in the Funds. Under these
circumstances, I do not believe that a trust department\'s use of the
automated order entry system to invest in the Funds would be improper
per se, provided that the investment itself is otherwise appropriate.

I stress that the primary responsibility of a trust department is to
ensure that the investments chosen for each account represent the most
appropriate investments for that account, considering all the relevant
facts and circumstances. If a trust department, after using its
independent investment judgement, determines that one of the Funds
represents the best investment available for certain accounts, I believe
that an automated order entry system may be employed to make the
investments. However, the trust department should keep appropriate
records to demonstrate that it is exercising the required independent
investment discretion on a continuing basis without regard to the
automated order entry system. The trust department must be prepared to
justify all its investment decisions.

My opinion is based strictly on the operations of your client as
described in your letter and repeated here. This letter expresses no
opinion on the merits of any product, service or investment vehicle
offered by any company.

Sincerely,

Peter Liebesman

Assistant Director

Legal Advisory Services Division