> TO: Regional Administrators, Presidents of National Banks with Trust
>
> Powers (Attention: Senior Trust Officer), and All Examining
>
> Personnel.
>
> This circular sets forth the position of the Comptroller of the
> Currency concerning national banks purchasing for trust accounts
> securities which have been underwritten by bond syndicates of which
> the bank was a member.
>
> [Background]{.underline}
>
> National banks are authorized to deal in and to underwrite certain
> types of securities such as general obligations of a state or
> political subdivision thereof. Underwriting of such securities
> frequently is done through syndicates. These syndicates may take the
> form of an \"undivided account\" or a \"divided account.\" In an
> undivided account, each syndicate member is responsible for a
> specified share of any loss incurred by the syndicate, regardless of
> the amount of bonds that each syndicate member sells. In a divided
> account, each syndicate member is responsible only for the sale of the
> bonds allocated to it. The member of a divided account syndicate who
> sells all its allocation will not be responsible for any loss
> experienced if other syndicate members fail to sell their allocations.
>
> [Policy]{.underline}
>
> It has been a basic principle of the law of trusts that a trustee
> exercising discretionary powers violates its duty to the trust estate
> if it sells to itself as a trustee property which it owns
> individually. This is called self-dealing. The corporate trustee
> violates this duty to its beneficiary if it purchases property for the
> trust from one of its own departments, as where is purchases for the
> trust securities owned by it in its securities or banking department
> Thus, this duty would prohibit a corporate trustee from purchasing for
> its trust accounts securities that are being underwritten by the
> commercial department of the bank, either individually or as a member
> of a syndicate. This would preclude a corporate trustee from
> purchasing securities from the commercial department when the bank is
> a member of a divided syndicate. It would also preclude the purchase
> of securities from an affiliate of the corporate fiduciary when the
> affiliate is a member of a divided syndicate, even though the
> corporate fiduciary is not also a member.
>
> An exception to this principle would occur when such purchases are
> specifically authorized by local law or the provisions of the
> governing trust instrument or directed, in writing, by an authorized
> power holder.
>
> In addition, the purchase of securities by the corporate trustee from
> other members of a divided account is not precluded, so long as there
> is no agreement, tacit or express, between syndicate members to
> purchase each others commitments.
>
> In the case of a syndicate in the form of an undivided account where
> the corporate trustee is a member, the corporate trustee would also be
> violating its duty of undivided loyalty to its fiduciary accounts by
> purchasing securities from other members of the syndicate. Our
> examiners will criticize any direct purchases from members of an
> undivided member syndicate made while the syndicate is open. Examiners
> will also criticize the purchase of securities from affiliates of the
> corporate trustee when the affiliate is a member of an undivided
> syndicate, even though the corporate trustee is not also a member.
>
> In addition to the foregoing, the purchase of securities which the
> bank or an affiliate has underwritten as a member of an undivided
> syndicate, either from another syndicate member or another
> intermediary, within sixty days of the close of a syndicate will
> create a rebuttable presumption of self-dealing. Among factors which
> are relevant to rebut this presumption are evidence establishing: the
> ultimate fairness of the price as established by market quotations or
> independent appraisals; the absence of other securities which would
> serve to the same degree the needs of the trust accounts; the absence
> of a pattern of purchasing securities immediately after the syndicate
> has closed; or the fact that numerous purchases of this security were
> made by parties independent of members of the syndicate at the time
> the purchase was made. Documentation establishing such factors should
> be obtained at the time of the transaction. As is the case with
> purchases from syndicate members during the life of the syndicate,
> this presumption of self-dealing arising from the purchase of
> securities within sixty days of the close of the syndicate would not
> apply when such purchases are specifically authorized by local law or
> the provision of the governing trust instrument or are directed in
> writing by an authorized power-holder.
>
> Should a corporate fiduciary purchase securities for fiduciary
> customers in violation of the foregoing principles, the bank must take
> appropriate corrective action. Such appropriate action includes sale
> of the securities at no loss to the trust estate; obtaining
> beneficiary consent, if all beneficiaries are sui juris; or obtaining
> court approval after full and complete disclosure of the facts and
> circumstances.
>
> When the purchase is made by a common trust fund full disclosure,
> subject to the review of this Office, may be an appropriate remedy of
> the self-dealing transaction. In these circumstances, the Office of
> the Comptroller of the Currency will generally require:
>
> \(1\) disclosure to every ascertainable holder of a vested beneficial
> interest in a trust account having an interest in the common trust
> fund during the period the fund held the securities; (2) disclosure
> that the bank\'s trust department violated federal regulations
> prohibiting self-dealing; (3) complete disclosure of the facts and
> events which occurred, the parties or entities involved, and the terms
> of the syndicate agreement in relation to the securities purchased;
> and (4) disclosure of the amount of depreciation, if any, as a
> percentage of the purchase price of the securities on the date of
> disclosure.
>
> National banks should adopt written policies and implement procedures
> to ensure that self-dealing transactions as outlined in this Circular
> do not occur. Examiners will criticize those situations where it is
> determined that adequate controls are not in place. Further, this
> Office will require that self-dealing syndicate transactions are
> remedied in a manner described above.
>
> Questions concerning the contents of this issuance should be directed
> to Donald R. Johnson, Director for Trust Examinations, at (202)
> 447-0445.
>
> Paul M. Homan
>
> Senior Deputy Comptroller
>
> for Bank Supervision