Fiduciary Responsibilities and Year 2000

In looking at your Year 2000 issues, have you taken a close look at your trust department and other fiduciary activities? Your regulator wants you to.

There are Y2K issues arising in the trust department that make some of the commercial loan department issues look simple. Begin with the proposition that the bank managing an account for a customer has a fiduciary responsibility to that customer. You are supposed to be doing the best for them.

Now, just for fun, let's assume that in early January 2000, the stock market has a great deal of activity, up and down. Companies that made it through the century date change without a hitch are doing very well. However, those companies experiencing difficulties with the date change are selling for cheap - and cheaper by the day.

Your bank needs to be able to make the right kind of investments for your customer. Do you know what you need to know about these companies? Has the trust department made wise investments?

Effective management of the bank's fiduciary responsibilities to customers now includes assessing the Y2K readiness of every aspect of the fiduciary role. It begins with account and asset administration.Account and Asset Administration. Take steps to ensure that the internal accounting systems are Y2K ready. Also, make sure that assets held for beneficiaries do not expose the fiduciary - or the customer - to unnecessary risks. FFIEC advises banks to review fiduciary account assets for Y2K problems. Look particularly closely at companies likely to experience problems, such as closely held companies, partnerships, and income-producing real estate. Look at these companies just as closely as you would look at the bank.

Third Party Risk. Third party vendors or service provides may expose the bank to risk. The bank's own readiness will be no better than that of vendors it uses. Review the efforts of transfer agents, paying agencies, custodial agents and the like to determine their Y2K readiness. The bank will be holding the bag if a customer's assets get trapped in a third party's computer failure.

Counterparty Risk. If the bank uses third parties, such as counterparties to complete execution of a transaction, the ability of the counterparty to function and fulfil its role in year 2000 is critical to the bank's ability to deliver its products and maintain any fiduciary responsibilities to its customers. The bank should evaluate the preparedness of each counterparty it uses. If there are any concerns - or even if everything seems OK, the bank should have alternatives to its counterparties ready in its contingency plan.

Transfer Agent Services. Review any transfer agent systems the bank uses and make sure that they are Y2K ready. In particular, look at automated transfer agent systems.

Client Disclosures. Finally, review documents that establish a fiduciary relationship with customers. These should account for Y2K in several ways. First, disclose or explain what the bank is doing to prepare for Y2K. Second, identify any significant Y2K issues with respect to assets in customer accounts and with respect to third parties and counterparties. To avoid legal liability in its most ominous forms, make sure your lawyers look at these documents.

Copyright © 1998 Compliance Action. Originally appeared in Compliance Action, Vol. 3, No. 13 & 14, 10/98