Memo RM2002-1
To: All State-Chartered Banks
From: Franklin W. Nelson, Bank Commissioner
Date: January 9, 2002
RE: Revisions to Kansas Administrative Regulations
For some time now, this department, along with the assistance of the various trade groups and a special task force of trust industry representatives, has been working on proposed changes to various Kansas Administrative Regulations governing Kansas banks and trust companies. We have appreciated the comments and input from Kansas bankers and trust company representatives, as well as the State Banking Board, in this undertaking.
Enclosed please find copies of all the changes, which were published in the Kansas Register on January 3, 2002. All of these changes will become effective January 18, 2002.
Each regulation should be reviewed by appropriate personnel in your institution to ensure that your practices comply with the regulations' requirements. Should you have questions concerning any of the changes, please contact our general counsel directly, either by phone at (785) 296-2266, or by e-mail at sonya.allen@osbckansas.org. While it was our goal to make the regulations more clear, and to provide regulatory relief when appropriate, we understand that all changes do not necessarily always have the intended consequences. Therefore, as you implement the changes in your policies that may be necessary to comply with the revised regulations, we would appreciate any comments or suggestions for further improvements that you may have. Following is a brief description of the primary changes to the regulations. However, each one should be read in its entirety to ensure that all changes are understood.
Bank and/or Trust Company Regulations
K.A.R. 17-11-14. Directors' meetings. This regulation sets out the items to be reviewed at a bank or trust company's board of directors' meeting. The regulation is being amended to clarify that we expect the board to review all of the regulatory reports, state or Federal, which have been received since the board's last meeting.
K.A.R. 17-11-18. Loans; documentation requirements. This regulation is being amended to change the dollar level at which title insurance or a title opinion is required on a real estate loan. Subsection (b) has been amended to allow the bank to conduct a simple lien search at the county Register of Deeds office on real estate loans between $25,000 and $50,000, and require title insurance or a title opinion on loans in excess $50,000. Previously, the regulation required all loans in excess of $25,000 to have title insurance or a title opinion. The intent of the regulation is to allow a bank, or any person designated by the bank, to conduct a lien search at the County Register of Deeds Office to determine the bank's lien position. This means that the bank can designate anyone to complete a search of the records of the County Register of Deeds Office where the property is located, or the bank can conduct the search itself. Once completed, the regulation requires verification that the search has been conducted, and retention of a copy of the search in the banks' files. The verification requirement will be satisfied by an officer of the bank signing and dating the lien search record obtained from the Register of Deeds Office, or the record received from the third party conducting the search on behalf of the bank. In addition to issuing true title insurance policies, most title companies also offer a lien search type of report, referred to by many in the industry as an ownership and encumbrances report. Receipt of such a report, verified (i.e., signed and dated) by an officer of the bank upon receipt, will also satisfy the new regulatory requirement for a loan between $25,000 and $50,000 which is secured by real estate.
K.A.R. 17-11-19. Charged-off assets; records. This regulation was amended to address the time required for retention of a charged-off asset ledger. Currently, it must be maintained permanently. As the banks are barred from actively collecting on most items included in the ledger due to expiration of the statue of limitations, or, in some cases, are barred through filing of bankruptcy by the debtor, it makes sense to set the retention period at some reasonable point after which collection is highly improbable. The ten year time-frame represents a balance between the OSBC's concerns with tracking officer defalcation of funds which may be brought in voluntarily by a debtor after the point at which the bank could legally pursue collection, and the banks' concerns that keeping the record permanently is an undue burden. Another proposed amendment is also included to clarify that the bank must keep a separate ledger detailing this information, and not simply maintain this as part of the bank's general ledger. Most banks maintain the ledger separately now. Note: While the existing general record retention regulation, K.A.R. 17-15-1 still indicates the ledger must be retained permanently, it is our office's intent to also amend that regulation to make it consistent with the new 17-11-19 ten-year requirement. On and after January 18, 2002, banks will only be required to comply with the 10-year retention requirement for the charged-off asset ledger in K.A.R. 17-11-19.
K.A.R. 17-11-21. Appraisals and evaluations. The regulation was amended to clarify when an appraisal is required if there are new moneys advanced on an existing loan. Our intent is to make our requirement consistent with the FDIC's regulation on this subject. It will simplify compliance for banks to have a common rule to follow on this subject at the state and federal level.
K.A.R. 17-16-2. Application; contents. This regulation specifies the information required in a new charter application. Amendments to this regulation are primarily to put into regulation form the information that is currently being requested in the OSBC's application form. In practice, we are already receiving the bulk of this information, but would like to provide this additional clarity in the regulation.
Trust Regulations
The trust regulations were reviewed not only to determine outdated and overly-burdensome provisions, but also with the goal of making the regulations consistent with certain portions of Part 9 of the Office of the Comptroller of the Currency's regulations.
K.A.R. 17-23-1. Definitions. This regulation contains the definitions for terms used in all of the other trust regulations. Expanding the definitions in subsections (d) and (f) will allow funds held as custodian under any Uniform Transfers to Minors Act or Uniform Gifts to Minors Act, to be invested in a collective investment fund authorized in K.A.R. 17-23-11. Prior to this amendment, the definition encompassed only the fiduciary relationship under the Kansas Uniform Transfers to Minors Act, K.S.A. 38-1701 et seq. This amendment will provide more operational flexibility to custodians.
The other substantive amendment is found in subsection (h). The amendment is intended to clarify that a "fiduciary", for purposes of the regulation, is a person or entity that has investment discretion or authority. If the person or entity does not fall in one of the listed categories, or does not have investment discretion or authority, that person or entity would not be a "fiduciary" under the regulation. Finally, the old (r) and (s) were rewritten and inserted into the definition list in (b), (q) and (l).
K.A.R. 17-23-3. Administration of fiduciary powers. This regulation allows for designation of a trust committee by the board of directors to administer the trust functions of the bank or trust company. Revisions are to address structural inconsistencies within the regulation, and not to change the meaning or how it is applied.
K.A.R. 17-23-6. Funds awaiting investment or distribution. This regulation sets out the general prohibition against allowing fiduciary funds to remain uninvested and undistributed for any longer than reasonable for proper account management. The regulation allows fiduciary funds held by a bank or trust company that are awaiting investment to be deposited in a bank. If the deposits, per fiduciary account, exceed FDIC limits, the regulation requires the bank of deposit to set aside securities to cover those excess amounts. The amendment in (b) (1) specifies that securities which are deposited or substituted as collateral must at all times be at least equal in market value to the amount of the excess funds deposited. Prior to the amendment, it was only required that securities be equal in face value to the amount of excess funds. Requiring market value, rather than face value, will provide more adequate security for the fiduciary funds.
K.A.R. 17-23-8. Self-dealing. Paragraph (b) (1) was restructured for technical reasons. It also adds an additional provision clarifying that the bank or trust company may lend, sell or otherwise transfer assets held in a fiduciary capacity to directors, officers or employees if such a transaction is required in writing by this office. Paragraph (b) (2) grants specific authority for a bank or trust company to lend funds held in trust in the bank's own employee benefit plan to directors, officers and employees who are participants in the plan, in accordance with section 408 of ERISA. ERISA specifically authorizes loans to participants and beneficiaries of such plans under certain circumstances.
K.A.R. 17-23-9. Custody of investments. Before the proposed amendments, the regulation's language required any fiduciary assets held by someone other than the fiduciary to be held subject to a written agreement. However, the regulation did not specify the minimum terms we believe are necessary to include in the agreement. The amendments to subsection (b) specify these minimum requirements. In addition, the amendments are intended to clarify that the nature of the relationship established by any such agreement should be custodial in nature, so that the fiduciary assets remain under the ultimate control of the fiduciary. Other amendments were technical in nature. All regulated entities with assets being held by a third party already have some sort of custody agreement in place. The amendments are to provide clarity with respect to specific provision that must be contained in the agreement.
K.A.R. 17-23-11. Collective investment. This regulation allows state banks and trust companies to invest fiduciary assets in collective investment funds. As in the definitions regulation, paragraph (a) (1) clarifies that funds held by a custodian pursuant to any state law substantially similar to the uniform gifts to minors act or the uniform transfers to minors act as published by the National Conference of Uniform State Law Commissioners may be invested in a collective investment fund.
Paragraph (b) (1) requires each collective investment fund to be established and maintained pursuant to a written plan. The first amendment to this paragraph allows either the board of directors of the bank or trust company, or a committee authorized by the board, to approve the plan. This modification will provide banks and trust companies additional flexibility in approving new plans. Other amendments to the paragraph include additional items that must be included in the written plan. Those additional items include a list of the fees and expenses that will be charged to the collective investment fund and to the participating accounts, and a statement of the expected frequency for income distribution to participating accounts.
Paragraph (b) (4) was amended to allow an exception to the three-month valuation rule for a fund primarily invested in real estate or other assets that aren't readily marketable. In the case of such funds, the bank or trust company is allowed to determine the value of the funds annually. This change is an effort to be consistent with the one-year prior notice allowance for withdrawals from illiquid asset investment funds currently found elsewhere in the regulation.
The next amendment was to eliminate the 10% participation limitation, the 10% investment limitation, and the liquidity requirements which were applicable to common trust funds. These restrictions have at times interfered with optimal management of common trust funds, particularly newly-created funds.
In paragraph (b) (10), a change was proposed to recognize that a prudent trustee may delegate certain management activities to other qualified individuals or entities.
Finally, a section of the regulation was removed which allowed a bank or trust company to establish a mortgage reserve account for overdue interest payments on mortgages in a collective investment fund. It is our understanding that banks and trust companies no longer use these accounts because they are unnecessary and may not be appropriate under generally accepted accounting principles.
All proposed changes to this regulation are to promote efficient management of a collective investment fund, and are to provide consistency with OCC regulations concerning such funds.
K.A.R. 17-23-14. Time of notification for securities transactions. This regulation was amended to allow notification of securities transactions that occur in connection with trust accounts to be given at intervals which are specified in the trust agreement. The amendment gives additional control to the person establishing the trust to specify the timing in which notifications are provided by the trustee, depending on their own personal needs and desires.
K.A.R. 17-23-15. Securities trading policies and procedures. This regulation contained a record keeping requirement that was deemed unduly burdensome, and therefore the regulation was revoked. We believe examiners have adequate tools to assess such conflict of interest issues without requiring this record to be maintained.
