by Sharon Johnson and Mike Vesel

There is a common misconception in the trust industry that a trust department operates on its own and, as a result, does not need significant oversight. Because it is specialized, the activities of a trust department are not always fully understood, and this can often lead to less supervision and monitoring.

As a department of a bank, the trust department is no different than any other department, and must be adequately monitored to protect customers, employees, shareholders, and the bank.

Current regulatory guidance dictates the board of directors (the "board") is responsible for the management of the fiduciary activities of the bank. Under Regulation 9, these responsibilities include new account acceptance, prompt initial asset reviews and annual asset reviews of discretionary accounts, and account terminations.

Additional regulatory guidance and industry standards dictate that in addition to these items, the board should also monitor other aspects of the fiduciary activities, including policies, conflicts of interest, investment purchases and sales for discretionary accounts, pending litigation, third-party vendor performance, discretionary distributions, applicable regulatory compliance issues such as Bank Secrecy Act administration related to trust, and extraordinary expenditures.

The board is allowed to discharge these responsibilities by assigning any function related to the exercise of fiduciary powers to any director, officer, employee, or committee.

Most boards will delegate to a trust committee the responsibility for monitoring the fiduciary activities of the bank. A trust committee should include some members of the board, and the its activities and minutes should be discussed and approved by the full board.

There are no specific regulatory guidelines with respect to the establishment of subcommittees to the trust committee, but it is common practice to have subcommittees.

When the trust committee delegates responsibilities to subcommittees, it is important to document the members assigned to each committee and their specific responsibilities. Changes to membership or responsibilities should also be documented as they occur. This is best achieved through documentation in the minutes and through department policy.

It is equally important for the trust committee to establish sufficient reporting and monitoring procedures for the activities of these subcommittees. It may be beneficial to ensure the chair of any subcommittee is also a member of the trust committee to aid in establishing open lines of communication between these committees. In addition, this will provide educational opportunities for those members of the board who sit on the trust committee.

Subcommittees are typically responsible for the detailed review and approval of the fiduciary activities assigned to them. The trust committee should be presented with summaries of the activities approved by all subcommittees.

Discussions of these summaries should occur and detailed minutes of any subcommittee should be presented and ratified in the trust committee meetings. This is the primary method for documenting the trust committee's and board's continued monitoring of subcommittees' actions.

The board remains responsible for the oversight of all fiduciary activities and only through written records can the board document it has satisfactorily exercised the necessary authority and responsibility over these activities.

The number and type of subcommittees are typically based on the level of activities in the department. Common subcommittees include administrative, investment, and operations committees. The number and type of subcommittees should be established in a manner to provide balance between the commitments of trust personnel and the need to address and document the important activities and discussions that must occur.

In summary, adequate monitoring systems for trust activities can and should take place through a committee structure, and it is important that all these activities be reviewed and approved by the bank's board of directors.