WASHINGTON -- Trust examiners from the Office of the Comptroller of the Currency have come up with a draft of guidelines for inspecting banks' mutual fund management activities.
The guidelines would set ground rules for trust departments that have a hand in running banks' proprietary mutual funds. The key aim is to ensure that banks don't take risks that would jeopardize their financial stability.
For example, examiners would review whether banks would face a liquidity crisis in the event of heavy mutual fund redemptions.
The 13-page document hasn't been sanctioned, and may never be, top agency officials said.
But the guidelines are being circulated and tested, and provide a glimpse of how some staffers within the agency are approaching the issues.
'Marching Orders'
Some bankers who have seen the document are already taking it to heart.
"These are the marching orders we are using to prepare for the forthcoming OCC exam," said Robert J. Shurman, senior vice president of Shawmut National Corp.'s mutual funds unit.
A major theme of the draft guidelines is to make sure that banks are avoiding conflicts of interest that may crop up in their role as investment advisers to mutual funds.
For instance, examiners will review what policies the bank has in place to make loans to their mutual fund management units. Banks are permitted to make such loans to affiliates, but strict limits apply.
Examiners are also directed to scan fund portfolio holdings to identify securities purchased or sold since the last trust exam, with an eye toward detecting conflicts of interest.
Red flags would be raised if, for example, securities were sold to reduce the issuer's debt to the bank, or bought to benefit insiders of the bank or one of its affiliates.
Top-Level Involvement
The draft guidelines stress that senior managers and board members, including each mutual fund's board of directors, must demonstrate that they are actively involved in steering the course.
As part of that strategy, the agency has directed its examiners to review the minutes of meetings of the fund's board of directors and major committees to see if any significant policy changes have been adopted since the previous examination.
Examiners will also ask nittygritty questions, such as whether the fund's directors regularly attend board and committee meetings. They are also advised to see if the minutes are detailed enough to accurately reflect the discussion at fund board meetings.
Industry sources say the expanded scrutiny of the roles banks play in their proprietary mutual fund business has acquired new significance in the wake of a disclosure earlier last month that BankAmerica Corp. had propped up a money market fund managed by its lead bank.
The money market fund, which had a surge of redemptions as interest rates rose, was forced to sell securities, including some derivatives, before they matured, and would have fallen below the the customary value of $1 per share without the cash infusion.
The incident highlighted the "real risk" that banks face as they plunge into the mutual fund business, said Donald W. Smith, a law partner at Kirkpatrick & Lockhart in Washington, namely, bank exposure to losses in the proprietary funds they manage.
The OCC is "at last getting back on track, instead of crucifying people because their non-FDIC sign wasn't big enough," Mr. Smith said.
Still, some bankers are expressing reservations about the OCC's approach.
W. Christopher Maxwell, executive vice president of Keycorp's mutual fund management unit, said the minutes of the meetings of a fund's board are "privileged" information.
"It isn't automatic that a bank has access to these things, even if the Comptroller wants them," Mr. Maxwell said. Even if a bank does have access, it may be inappropriate to release the minutes, he said.
But a top OCC official said it's too early for banks to start worrying.
"We haven't made any final decisions," said David Apgar, senior policy adviser to the Comptroller.
