“Very often, consumer complaints and threatened litigation are a direct result of inadequate communication of policies, responsibilities, account objectives and strategies, and other client expectations.” OCC’s Handbook for Personal Fiduciary Services.

The fiduciary duty of care sets the minimum level of diligence and competence we expect of trustees, objectively measured by reference to what a “reasonable” or “prudent” person would do in like circumstances, and informed by industry norms and practices. As I previously wrote here in the context of trustee investment decisions, the duty of care focuses on process, not end results. Which means a trustee’s compliance with this duty is evidenced most directly by its practices and procedures.

Think like an auditor:

Talk of fiduciary duties makes sense in the abstract, but what kind of hard evidence is going to help you — a litigator — win your next trustee mismanagement case? Answer: think like an auditor. Whether you’re playing defense or offense, you’ll want to plan your discovery strategy by acting like a bank auditor evaluating your trustee’s practices and procedures. The goal here is to gather up the evidence (documents + witness statements) needed to answer one basic question: would the trustee “pass” or “fail” its next audit. If the answer is “fail,” then it’s a safe bet your trustee hasn’t complied with its fiduciary duty of care.

The OCC’s Comptroller’s Handbook for Fiduciary Activities:

Thinking like an auditor may sound like a good idea in concept, but, you might ask, how’s a working litigator to pull this off? One option is to purchase a trustee auditing manual, such as Sheshunoff’s Trust Department Policies and Procedures, and use it to design your “audit”. Another is to use a free resource, such as the OCC’s Comptroller’s Handbook for Fiduciary Activities. I like the second option better.

As explained by Jacqueline C. Zipser in What OCC Regulation of Corporate Fiduciaries Means to the Practicing Attorney, if a corporate trustee scores below a certain rating on its OCC audit, bad things can happen, including a loss of its bank trust powers. Again, this same evidence should also determine if your trustee’s complied with its fiduciary duty of care. Here’s how Ms. Zipser describes the OCC’s rating system:

The OCC uses the Uniform Financial Institutions Rating System (UFIRS) to evaluate a national bank’s fiduciary operations. Each bank gets a composite rating based on five factors: management, adequacy of operations and controls and audits, quality of earnings, compliance with laws and regulations and governing instruments, and asset management. The ratings go from a high of 1 to a low of 5. A rating of 1 indicates strong performance by the bank and the least degree of supervisory concern. A rating of 2 indicates that the bank is fundamentally sound. A 3 rating indicates general adequacy. A rating of 4 indicates the presence of at least one major problem and 5 indicates very weak performance and a high degree of supervisory concern. Regulatory Compliance Associates, Inc., Sheshunoff Trust Department Policies and Procedures Manual 9-3 (2001) [hereinafter Sheshunoff].

If the OCC assigns a rating of 3, 4 or 5, additional supervision will be imposed. Additional reports will be required, examinations will be more frequent. The OCC may issue a cease and desist order for a 4 or 5 rated bank, preventing it from opening any new fiduciary accounts until deficiencies are remedied. The OCC can also revoke a bank’s trust powers.

The OCC’s trust-department handbook is foreign territory for most estate planners. It shouldn’t be. Even if you never intend to use it as a litigation tool, it’s the kind of resource that will set you apart as a practitioner. According to Ms. Zipser, your existing (or future) corporate trust department clients live and die by these regulatory compliance issues. If it’s that important to them, shouldn’t it be for you? Here’s another excerpt from Ms. Zipser’s excellent article:

Based on an unscientific survey of trusts and estates attorneys, the OCC intrudes into the consciousness of those practitioners rarely, if at all. The most common response when I ask the question is, “The what?” . . .

In contrast to the drafting attorneys, trust officers are aware of OCC regulation on a daily basis. It affects just about every area of trust administration. We can’t forget about it, because most banks will have an on-site examination from the OCC every year. Some exams are more detailed than others, but trust officers always know that a bank regulator is looking over their shoulders.

Hat tip:

Hat tip to Stephen Salley, a Partner with Banyan Family Business Advisors LLC, whose recent LISI article entitled Trusts & Their Trustees: The Housekeeper in the Soap Opera, pointed me to the OCC handbook.