Trust Updates Archive
a Wake-up Call for Bank Directors
and Compliance Managers
(Oct. 7, 2005--Chicago, IL)--The recent U.S. Securities and Exchange Commission settlement by the asset management division of U.S. Bank serves as a wake-up call for bank fiduciaries to ensure that compliance officers are well versed in securities, not just bank, regulation. At issue in the dispute were transactions from 1994 to 2001 between the bank as investment advisor and certain of its proprietary mutual funds.
The SEC contends that the bank “willfully violated” section 17(a) of the Investment Company Act, which prohibits sales or purchases between a registered investment company—a mutual fund—and its affiliates. According to the SEC, the mutual funds paid the bank’s foreign exchange department to assist in the processing of foreign securities transactions. The violation was corrected in 2001 when, after merging with Firstar, a nonaffiliate was hired.
Under the settlement, the bank has agreed to establish a risk committee composed of senior executives and to hire an independent consultant.
The bank also has agreed to hire a “full-time senior-level” staffer whose responsibilities include section 17(a) compliance and who reports directly to the bank’s chief risk officer. Additionally, the bank has agreed to establish a compliance training program designed to minimize the potential for future violations. The SEC maintains that in addition to inadequate staffing, violations occurred because U.S. Bank did not provide its employees with training that addressed prohibited affiliated transactions.
The SEC is “pushing for increased training,” warns a banking regulator, “but they’re less heavy-handed when it comes to smaller institutions.
Regardless of a bank’s size, say Dean Miller, of the law firm of Kirkpatrick Lockhart and former OCC Senior Advisor for Fiduciary Responsibilities, “the issue at U.S. Bank should be a wake-up call for all banks that they need to be more aware of securities laws.“
Regarding the SEC’s criticism of an inadequately trained compliance staff, the OCC—the bank’s primary regulator—says its examination policies and procedures only address compliance training with banking laws and regulations.
Security violations, says an OCC spokesman, "are not our responsibility." He adds that while banking regulators may monitor potential violations, citing violations of another agency’s laws or regulations "treads on touchy turf."
The OCC’s position may be troubling to directors and senior management. While the OCC examines banks and fiduciaries on a regular cycle, the SEC does not. Bank management may therefore erroneously assume that the lack of any violations in an OCC report means no potential securities violations were found.
U.S. Bank declined to comment on the settlement.
For more information, see the current issue of TRN.
No statement in this issue is offered as or should be
construed as legal opinion or advice.
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