The question was raised whether
a state member bank could use the discount brokerage services of an
affiliate bank for transactions of its trust customer accounts. The
inquiry was prompted by the Board’s “BankAmerica-Schwab” order dated
January 7, 1983, which indicated Board approval of trust departments’
use of discount brokerage affiliates. Staff has also received other
inquiries on the use of discount brokerage affiliates by bank trust
departments, or arrangements with unaffiliated discount brokers in
which the bank would directly share in commissions generated by its
trust department accounts. In the following discussion, the term “affiliate”
refers to either a subsidiary of the bank or a subsidiary of a bank
holding company of which the bank is a member.
The inquiries arise because of the application
of common law fiduciary standards that are directed to preventing
conflicts of interest. Under the common law, it is generally accepted
that a fiduciary cannot profit from a transaction entered into for
a trust account, apart from the fees that it receives for discharging
its fiduciary responsibilities. Accordingly, the receipt of commission
income for securities brokerage transactions entered into on behalf
of a trust account, in addition to the fee received for account administration,
raises conflict of interest considerations to which traditional prohibitions
of fiduciary law are directed.
The BankAmerica-Schwab order only suggested that there
is no indication that banks would in fact use an affiliate discount
brokerage service in violation of any fiduciary duty. It did not attempt
to delineate under what circumstances such use would or would not
result in violations of fiduciary duty.
The general rule, often considered inflexible, is that
trustees shall not place themselves in a position where their own
interests are or may be in conflict with their fiduciary duty (see,
e.g.,
Albright v.
Jefferson County National Bank, 293
N.Y. 31, 53 NE 2d. 753 (1944)). As a corollary, it is widely recognized
that trustees may not receive any personal benefit, advantage, gain,
or profit from their administration of trusts, apart from their regular
administration fees (76
Am. Jur. 2d. § 318;
Scott on Trusts 3d Ed. § 170.22). A conflict, of course, arises from the trust institution’s
exercising any “discretion” to direct fee-producing securities transactions
to an affiliate. In this context, such discretion could involve either
investment discretion (deciding what investments to buy or sell) or
simply the discretionary power to choose among securities brokers.
Because of the obvious commonality of interest, when a discount broker
affiliate is used, the trust institution (i.e., bank or trust company)
may be considered to share indirectly in the commission income of
the affiliate even if there is no direct remittance of fee to the
bank. Therefore, except when specifically authorized
1 by the trust instrument,
account settlor, the beneficiaries, or a court, as appropriate under
the circumstances, the receipt of extra fees for discount brokerage
services is believed to constitute improper self-dealing. In the absence
of state law to the contrary, any such fees should be reimbursed to
the trust or trusts for which the securities transactions were executed.
Staff believes that the following more specific standards
provide additional guidance in determining whether and in what circumstances use
of affiliate brokerage services may be permissible:
- A trust institution or affiliate may receive additional
fee income from securities transactions executed on behalf of accounts
if specific written consent or authorization is obtained after disclosure
of the fee arrangement. Such specific, written authorization is usually
obtainable in connection with most agencies, as well as those directed
trusts and revocable trusts in which an outside authorizing party
has full power either to direct or to approve the arrangements in
question.
- Specific consent or authorization from all interested
parties is generally not obtainable for most personal trusts and estates,
other than the above-mentioned accounts, because of the difficulty
of ascertaining all beneficial interests or inability to obtain legally
binding consents from minor beneficiaries. Additional fee income for
securities transactions for such accounts would therefore be improper,
unless such an arrangement is determined to be specifically authorized
under state law. Furthermore, any such transactions resulting in extra
fees involving court-supervised accounts, such as executorships and
administratorships, would need court approval.
- As to most employee benefit accounts, the Employee
Retirement Income Security Act of 1974 (ERISA), has superseded state
law. The U.S. Department of Labor (DOL) has jurisdiction to interpret
what transactions, including payment of additional fees to plan fiduciaries
for brokerage services, may result in “prohibited transactions” pursuant
to that statute. Several provisions of ERISA appear to provide potential exemptions for “reasonable” fees in connection with
securities transactions. To date, however, related DOL rulings do
not appear to offer any but very narrowly circumscribed conditions
under which trust institutions or their affiliates could receive additional
fees for security transactions (if applicable, required conditions
would include a requirement of review and specific approvals by an
independent fiduciary (see 29 CFR 2550.408 b-2, and Prohibited Transaction
Class Exemption 79-1)). Therefore, the trust institution should obtain
a reasoned opinion of counsel or a DOL ruling on this matter before
proceeding with such a fee program involving employee benefit accounts.
Even when adequate specific authorizations have been obtained
for participating accounts, trust institutions charging separate fees
for securities transactions must, of course, still provide such service
and exercise any remaining fiduciary discretion, in the best interest
of the accounts in question. Examiners expect to see appropriate written
policies and committee approvals regarding the adoption of any such
program. In particular, the trust institution should establish safeguards
including appropriate monitoring procedures to ensure that abuses
such as “churning” do not occur. Periodic pricing adjustments and
redisclosures would also be expected as necessary to ensure that security
transaction fees remain reasonable and competitive, and disclosures
accurate. STAFF OP. of Sept. 19, 1983.
