Day 13 - Government Regulations on Trusts PDF

Government Regulations on Trust 2 TRUST LAWS AND REGULATIONS Chapter IX of Republic Act 8791 (General Banking Law) – general framework Part IV and T Regulations of the BSP Manual of Regulation for Banks/NBFIs; BSP Circulars, Circular Letters, Memoranda Oth...

Government Regulations on Trust 2 TRUST LAWS AND REGULATIONS Chapter IX of Republic Act 8791 (General Banking Law) – general framework Part IV and T Regulations of the BSP Manual of Regulation for Banks/NBFIs; BSP Circulars, Circular Letters, Memoranda Other sections of the MORB (AMLA, IT, consumer protection provisions) 3 BASIC PROVISIONS GBL MORB PROVISION SEC. 79; SEC 411; Authority to Perform Trust and Other Fiduciary Business; SEC. 81 Application for authority to perform trust and other fiduciary business; Prerequisite for engaging in trust and other fiduciary business SEC. 80 SEC 401 Statement of Principles SEC. 82 SEC 411/121 Required Capital SEC. 83 Powers of a trustee SEC. 84 SEC 417 Deposit for the Faithful Performance of Trust Duties SECS. 85 & 86 Bond of certain persons for the faithful performance of duties/Exemption from Bond requirement SEC. 87 SEC 412 Separation of trust business from general business (organization & management) SEC. 88 SEC 413 Investment limitations of a trust entity SEC. 89 Real estate acquired by a trust entity (ROPA) SEC. 90 Investment of non-trust funds SEC. 91 SEC 499 Sanctions and penalties SEC. 92 Exemption of trust assets from claims SEC. 93 Establishment of branches of a trust entity 4 BSFIs with Trust Authority As of 30 September 2022 # (Inactive) APPLICABLE PROVISIONS U/KBs 23 (4) Part IV, MORB* Thrift Banks 5 (1) Part IV, MORB Trust Corp. 6 T-Reg’ns, MORNBFI Other NBFIs 3 (1) Part IV, Q/N-Reg’ns, MORNBFI *Manual Of Regulations (MOR) for Banks/ Non-Bank Financial Institutions (NBFI) 5 PART IV of MORB/MORNBFI and T-Regulations STATEMENT OF PRINCIPLES – SEC 401/- Q SCOPE OF TRUST REGULATIONS - SEC. 402 Trust and Other Fiduciary Business – Sec. 411 to 420 Investment Management Activities – Sec. 421 to 426 General Provisions – Sec. 431 to 440 Sanctions – Sec 499 DEFINITION of TERMS – SEC. 403/ 102-T APPLICABLE REGULATIONS TO TC – SEC 101-T 6 ESTABLISHMENT OF TRUST AND OTHER FIDUCIARY BUSINESS LICENSING PROCESS (Section 111 and App. 125/T-5) CATEGORIES of Applications for Licenses: ▪ Type “A” – requires compliance with prudential criteria ▪ Type “B” – processed regardless of risk profile ▪ Type “C” – no application required but subject to submission of reports/certification/ notification within stated deadlines. Subject to post verification. 7 ESTABLISHMENT OF TRUST AND OTHER FIDUCIARY BUSINESS BSFI BSP Eligibility Test - Signify interest to - Check compliance w/ Stage 1 apply for a license and Assessment Prudential Criteria - perform self- assessment Web-based self-assessment questionnaire (SAQ) Accessed in the BSP website through a link and by using the FI Code of bank/TC. To be accomplished only by the CCO or authorized SVP W/in 24 hours, bank/TC will receive an auto-reply from BSP informing of its eligibility or non-eligibility to submit application W/in 5 banking days from receipt of auto-reply, BSFI will receive confirmation from BSP as eligible In case there are concerns raised by the BSP, BSFI should address them first Bank’s eligibility or non-eligibility is valid for 30 days from receipt of notification BSP MEMORANDUM NO. M – 2020 – 077 dated 20 Sept 2020 8 ESTABLISHMENT OF TRUST AND OTHER FIDUCIARY BUSINESS BSFI BSP Eligibility Test - Signifies interest to - Checks compliance Stage 1 apply for a license and Assessment w/ Prudential Criteria - performs self- assessment - submit application - Checks completeness Stage 2 Application letter with the of documents. If documentary incomplete, application requirements is returned Stage 3 Processing - Prepare the memo to MB with recomm. - Notify the BSFI of the Stage 4 decision on the Decision application 9 REQUIREMENTS TO ENGAGE IN TRUST/IM BUSINESS Requirements for the Issuance of the Certificates 1. Within 30 days from receipt of advice of MB approval on application for authority to establish TC, pay P500K as license fee 2. Within 60 days from receipt of advice of MB approval: − Submit 7 copies of articles of incorporation (AOI); treasurer’s sworn statement and by-laws; − Deposit with any UB/KB of the initial paid-up capital of TC 3. Within 30 days after clearance by MB of the AOI and by-laws and the certificate of authority to register had been issued, file and register the documents with the SEC 10 REQUIREMENTS TO ENGAGE IN TRUST/IM BUSINESS Requirements for the Issuance of the Certificates 4. Within 6 months from receipt of advice of MB approval, secure certificate of authority to operate the trust/IM business and submit to the appropriate FSS department: a) Proof of registration of AOI and by-laws; b) Certification of compliance with the conditions for approval, including the set up of basic security deposit; c) Names and positions of board and senior management; d) Organizational chart; e) Manuals on risk management, consumer protection and operations, duly certified by the President as aligned with BSP requirements and that these shall be implemented; f) Excerpts of the minutes of organizational meeting confirming organizational and pre-opening transactions; g) Alpha list of stockholders and their stockholdings ❖ Start operations within 1 year from date of MB approval of authority to operate 11 Limited Trust to TBs/RBs (Sec 411-B/411-C) REQUIREMENTS… Scope ❑ Court trusts Executor or administrator of a will; and Guardian of the estate of a minor or incompetent ❑ Administration of properties Requirements ▪ Application – same as in UBs/KBs ▪ Prerequisites and pre-operating requirements 12 REQUIREMENTS TO ENGAGE IN TRUST/IM BUSINESS ❖ Pre-operating requirements (Sec. 411/421) Basic security deposit Establishment of the trust department; development of policies and procedures, RMS and internal controls; delineation of functions Establishment of personnel and management positions. 13 BASIC PROVISIONS ❖ BASIC SECURITY DEPOSIT (SEC 417/424/114-T) - security for the TE’s faithful performance of its duties - Covers: Trust and other fiduciary business Investment Management activities Securities custodianship operations PERA administration - 1% (for banks) / 0.05% (for TCs) of the book value of total trust volume, but not lower than P500K 14 BASIC PROVISIONS ❖ BASIC SECURITY DEPOSIT For TC, after first year of operation, BSD will be based on the latest ROE trust rating Trust Rating BSD: the higher between P500K and: 4 0.03% of the BV of AUM 3 0.05% of the BV of AUM 2 0.10%of the BV of AUM 1 0.20% of the BV of AUM 15 BASIC PROVISIONS REQUIREMENTS… ❖ BASIC SECURITY DEPOSIT - Eligible Government Securities a. Evidences of indebtedness of the ROP/BSP b. Other kinds of securities declared eligible by the BSP ✓ Free/unencumbered ✓ Not utilized for any other purpose 16 BASIC PROVISIONS REQUIREMENTS… ❖ BASIC SECURITY DEPOSIT Valuation ✓Fair Value or FV (using MTM guidelines for GS), with haircuts as follows: GS maturing: Minimum Haircut 3 years and below 0.0 % >3 years up to 5 years 2.0% >5 years 4.0% ✓Basis = quarter-end total trust, IM and other fiduciary assets ✓ GS issued/purchased within the quarter shall be valued at their purchase price subject to applicable haircuts 17 BASIC PROVISIONS REQUIREMENTS… ❖ BASIC SECURITY DEPOSIT Compliance Period FV of GS is reckoned as of end of calendar quarter 30-calendar day grace period Upon withdrawal, replacement or redemption - Continue to comply with the BSD after every withdrawal/ replacement or redemption - BSD shall be the amount computed as of quarter-end preceding the date of withdrawal/replacement/redemption In case of change in the trust rating, reckoning date of 30 days shall be quarter end from receipt of ROE. 18 BASIC PROVISIONS REQUIREMENTS… ❖ BASIC SECURITY DEPOSIT Sanctions: (for deficiency) For TC – higher of P1K or 1/10 of 1% per day on the amount of deficiency, but not exceeding P10K, reckoned 30 days from occurrence of deficiency until corrected. 19 BASIC PROVISIONS REQUIREMENTS… ❖ BASIC SECURITY DEPOSIT Sanctions: (for deficiency) From third offense – cannot accept new TOFA/IMA and renew expiring accounts until violation is corrected. Head of Trust and other officers responsible: 1st offense – warning 2nd offense – reprimand w/ stern warning 3rd offense – 30 calendar day-suspension w/out pay Subsequent offenses – 60 calendar day-suspension w/o pay 20 BASIC PROVISIONS REQUIREMENTS… ❖ RESERVES AGAINST PESO-DENOMINATED TOFA- OTHERS (SEC 418) CTF-like TOFA-Others Regular Reserves UBs/KBs 19% TBs 9% RBs 4% TOFA-Others UBs/KBs 17% TBs 9% RBs 4% ▪ Composition of Required Reserves - Demand deposit account with the BSP (not to earn int.) 21 BASIC PROVISIONS ❖ RESERVES AGAINST PESO-DENOMINATED TOFA-OTHERS Trust Accounts Exempt from Reserve Requirements: 1. Administratorship 2. Trust Under Indenture 3. Custodianship and Safekeeping 4. Depository and Reorganization 5. Employee Benefit Plans Under Trust 6. Escrow 7. Personal Trust (testamentary trust) 8. Executorship 9. Guardianship 10. Life Insurance Trust 11. Pre-Need Plans (Institutional/Individual) 12. PERA 13. Legislated and Quasi-Judicial Trust 14. Specialized Institutional Accounts Under Trust 22 BASIC PROVISIONS ❖ RESERVES AGAINST PESO-DENOMINATED TOFA-OTHERS Specialized Institutional Accounts under Trust – Trust arrangements established by institutions, foundations, government or private agencies (e.g., NGOs) registered with the SEC or CDA – primarily for charitable, religious, educational, athletic, scientific, medical, cultural, specialized lending or developmental project, or such other purposes of similar nature; and – no part of the earnings of the account inure to the benefit of a private individual 23 BASIC PROVISIONS ❖ RESERVES AGAINST PESO-DENOMINATED TOFA-OTHERS Trust Accounts Not Exempt 1. Other Institutional Trust Accounts 2. Other Individual Trust Accounts 3. Property Administratorship 4. Facility Loan Agency 5. Transfer Agency 6. Other Fiduciary Services Personal Trust (Personal Management Trust) – 0% 24 BASIC PROVISIONS ❖ RESERVES AGAINST PESO-DENOMINATED TOFA-OTHERS ▪ Computation reserve position - 7-day week from Friday to Thursday, including weekends, holidays and non-banking days - reserves for current period – based on prior week level ▪ Sanctions for deficiencies ✓ 1/10 of 1% per day on the amount of the deficiency or 91- day TBill rate + 3 percentage points, whichever is higher ✓ bank can offset excess reserves, except when there is “abuse” (reserve def of 4 or more times at any given week for 2 consecutive weeks, even if it does not result to weekly def ) ✓ “Chronic” (reserve def for 2 consecutive weeks) a) denied credit facilities of the BSP b) limit/prohibit granting new loans c) prohibit declaration of cash dividends 25 ORGANIZATIONAL STRUCTURE How is it carried out? (Sec. 412) 26 ORGANIZATIONAL STRUCTURE a. Organizationally, operationally, administratively, and functionally separate and distinct from bank proper; ✓direct control of the trust department, ✓may only share – EDP; credit investigation; collateral appraisal; and messengerial, janitorial & security services But can outsource under Section 112 b. TD and officers - only directly responsible to the TC; c. Adherence to minimum internal control standards; d. Legal assistance 27 ORGANIZATIONAL STRUCTURE How is it managed/administered? (Sec. 412) 28 ORGANIZATION, STRUCTURE AND MANAGEMENT/GOVERNANCE BOARD OF DIRECTORS TRUST COMMITTEE TRUST OFFICER Marketing Investment Administration 29 ORGANIZATION, STRUCTURE AND MANAGEMENT/GOVERNANCE Board of Directors* ✓ Define the corporate culture and values. ✓ Approve objectives and strategies and oversee management’s implementation ✓ Oversee the selection and performance of senior management and approval of a sound remuneration and incentives policy for personnel ✓ Approve corporate governance and risk governance framework and oversee the implementation thereof 30 ORGANIZATION, STRUCTURE AND MANAGEMENT/GOVERNANCE Trust Committee ✓ Ensure prudent conduct of fiduciary activities ✓ Ensure that policies and procedures are in place and continue to be relevant, comprehensive and effective; ✓ Oversee the implementation of the risk management framework and ensure that internal controls are in place; ✓ Adopt an appropriate organizational structure/ staffing pattern and operating budgets to effectively carry out trust functions ✓ Oversee and evaluate performance of the TO; ✓ Meet at least quarterly or more frequently as necessary; and ✓ Regularly report trust-related matters to the BOD. 31 ORGANIZATION, STRUCTURE AND MANAGEMENT/GOVERNANCE Trust Officer/President ✓ Adhere to the basic standards in the administration of trust/IM ✓ Develop and implement relevant policies and procedures ✓ Observe sound risk management practices and maintain necessary controls and measures to protect assets ✓ Carry out trust/IM activities in accordance with trust agreements and parameters set by the TC as approved by the BOD ✓ Report to TC on business performance and other matters requiring its attention; ✓ Maintenance of adequate books, records and files; and ✓ Submit periodic reports to regulatory agencies 32 ORGANIZATION, STRUCTURE AND MANAGEMENT/GOVERNANCE Composition of Trust Committee ✓At least 5 members: ▪ President (Resident Manager for branches of Fx banks); OR ANY SENIOR OFFICER ▪ Trust Officer; ▪ Any of the following, including the Chairman: NON-EXECUTIVE**/INDEPENDENT DIRECTORS (not a member of the Audit Comm.) QUALIFIED INDEPENDENT PROFESSIONALS For Fx branches, REPS FROM THE HEAD OFFICE OR AFF/SUBS OF THE HEAD OFFICE (not involved in audit) ✓If >5 members, MAJORITY SHOULD BE COMPRISED OF QUALIFIED NON-EXECUTIVE DIRECTORS ** not involved in the day to day management of the bank 33 ORGANIZATION, STRUCTURE AND MANAGEMENT/GOVERNANCE QUALIFIED INDEPENDENT PROFESSIONALS Not a director/officer/employee of the bank during the last 12 months from date of committee membership Not related within the 4th degree of consanguinity or affinity of officers involved in the operations of the bank Not engaged in any transaction with the bank, except for arm’s length transactions and those that cannot influence the exercise of his judgment. ✓ May be appointed as TC member in other banks belonging to the same financial conglomerate ✓ Appointment must be confirmed by the Monetary Board 34 ORGANIZATION, STRUCTURE AND MANAGEMENT/GOVERNANCE Qualifications of directors/TC/officers/staff In addition to the qualification standards for directors and officers: ✓Competent, honest and with integrity; ✓Relevant experience indicated by any of the following: ▪ One (1) year experience in trust/IM activities; ▪ Three (3) years of professional experience in related fields (banking, finance, etc); ▪ Ninety (90) training hours on trust/IM activities acceptable to the BSP; or ▪ Completion of a relevant global or local professional certification program ✓TC member must be familiar with laws and regulations on trust 35 ORGANIZATION, STRUCTURE AND MANAGEMENT/GOVERNANCE Qualifications of TO/President/officers Any of:) ▪ 5 years of actual experience (as TO or TC member) in trust operations; or ▪ 3 years + 90 training hours in trust operations acceptable to the BSP; or ▪ 5 years as officer of a bank/related activities + 90 training hours or completed a relevant global or local professional certification program Other officers of TC – at least last bullet ✓Subject to confirmation by the Monetary Board 36 ORGANIZATION, STRUCTURE AND MANAGEMENT/GOVERNANCE Disqualifications of Directors and Officers Permanent Disqualification – ▪ Persons convicted by final judgment of a court for dishonesty or breach of trust ▪ Persons convicted by final judgment of a court sentencing them to imprisonment of >6 years; ▪ Persons convicted by final judgment of a court for violation of banking laws, rules and regulations; ▪ Persons judicially declared insolvent, spendthrift or incapacitated to contract; ▪ Directors/officers or employees of closed banks/QBs found to be culpable for such institution’s closure as determined by the MB; ▪ Directors/officers of banks/QBs found by the MB as administratively liable for violation of banking laws, rules and regulations where a penalty of removal from office is imposed, and which finding of the MB has become final and executory; or ▪ Directors/officers of QBs or any person found by the MB to be unfit for the position of directors/ officers because they were found administratively liable by another government agency for violation of banking laws, rules and regulations or any offense/violation involving dishonesty or breach of trust, and which finding of said government agency has become final and executory 37 ORGANIZATION, STRUCTURE AND MANAGEMENT/GOVERNANCE Disqualifications of Directors and Officers Temporary Disqualification – ▪ Persons who refuse to fully disclose the extent of their business interest or any material information to BSP when required pursuant to a provision of law or regulation of the BSP. This shall be in effect as long as the refusal persists; ▪ Directors absent or have not participated in more than 50% of all meetings, both regular and special, of the board of directors during their incumbency, and directors who failed to physically attend in at least twenty-five percent (25%) of all board meetings in any year, except that when a notarized certification executed by the corporate secretary has been submitted attesting that said directors were given the agenda materials prior to the meeting and that their comments/decisions thereon were submitted for deliberation/discussion and were taken up in the actual board meeting, said directors/trustees shall be considered present in the board meeting. ▪ Persons who are delinquent in the payment of their obligations as defined in this Section 38 ORGANIZATION, STRUCTURE AND MANAGEMENT/GOVERNANCE Disqualifications of Directors and Officers Temporary Disqualification – ▪ Persons convicted by a court for offenses involving dishonesty or breach of trust or those sentenced to serve a maximum imprisonment of >6 years but whose conviction has not yet become final and executory; ▪ Directors and officers of closed banks/QBs/TEs pending clearance by the MB; ▪ Directors disqualified for failure to observe/discharge their duties and responsibilities prescribed under existing regulations. Disqualification applies until the lapse of the specific period of disqualification or upon approval by the MB; ▪ Directors who failed to attend the special seminar for board of directors/trustees required under Section 132. Disqual applies until the director had attended seminar; ▪ Persons dismissed from employment for cause. This disqualification shall be in effect until they have cleared themselves of involvement in the alleged irregularity or upon clearance, on their request, from the MB after showing good and justifiable reasons, or after the lapse of five (5) years from the time they were officially advised by the BSP of their disqualification; 39 ORGANIZATION, STRUCTURE AND MANAGEMENT/GOVERNANCE Disqualifications of Directors and Officers Temporary Disqualification – ▪ Those under preventive suspension; ▪ Persons with derogatory records as certified by, or on the official files of, the judiciary, NBI, PNP, quasi-judicial bodies etc. for irregularities or violations that would adversely affect the integrity of the director/officer or the ability to effectively discharge his duties. This disqualification applies until they have cleared themselves or after a lapse of five (5) years from the time the complaint was initiated; ▪ Directors and officers found by the MB as administratively liable for violation of banking laws, rules and regulations where a penalty of removal from office is imposed, which is pending appeal before the appellate court; ▪ Directors and officers or any person found by the MB to be unfit for the position of director or officer because they were found administratively liable by another government agency but finding is pending appeal before the appellate court; and ▪ Directors and officers found by the MB as administratively liable for violation of banking laws, rules and regulations where a penalty of suspension from office or fine is imposed. 40 ORGANIZATION, STRUCTURE AND MANAGEMENT/GOVERNANCE Disqualifications of Directors and Officers (Section 121-T) In addition to Section 137 and those prescribed under the Corporation Code of the Phils. and other existing applicable laws and regulations: a. Negligence in the performance of the duties and responsibilities stipulated in the contract creating the trust, other fiduciary and investment management account and which directly or indirectly caused material loss/impairment of the managed trust, other fiduciary and investment management assets; b. Entering into an arrangement or scheme which will compromise or prejudice the interest, rights and privileges of the trustor, principal and/or beneficiaries; and c. Other grounds as may be approved by the Monetary Board. 41 CARDINAL PRINCIPLE (SEC 401/301-T) FIDELITY – ✓ PRUDENT ADMINISTRATION - adherence and conformity with the terms of the trust agreement ✓ UNDIVIDED LOYALTY AND UTMOST CARE - Administer affairs solely for the benefit of clients Free from any intrusion of conflict of interest Objective and fair administration of properties with regard to beneficiaries’ interest. 42 CARDINAL PRINCIPLE (SEC 401/301-T) FIDELITY – ✓ NON-DELEGATION OF RESPONSIBILITIES ▪ Personally do transactions ▪ Clients’ confidence is reposed on the trust entity. ✓ PRESERVING AND PROTECTING PROPERTY ▪ Take and keep control of the property ▪ Enforce claims & defend against actions ▪ Assets are kept legally separate and distinct from that of the bank/TC ✓ KEEPING AND RENDERING REPORT ▪ efficiency in administration and operation ▪ full disclosure 43 RULES APPLICABLE TO BOTH TRUST AND IMA ❖MINIMUM DOCUMENTARY REQUIREMENTS (SEC 413/415) ✓Written order - order of the court ✓Trust agreement – individuals, corporations, business firms, organizations or institutions –(except for individuals) board resolution authorizing the establishment and designating signatories to trust accounts Minimum Provisions:  Title or nature of contractual agreement;  Termination and provision for successor-  Legal capacities of parties sought to be trustee or fiduciary; covered;  Trustee fee;  Purposes and objectives;  A statement that trusts are not covered  Funds and/or properties subject of the by the PDIC and that losses, if any, for the arrangement; account of the client;  Distribution of the funds and/or properties;  Disclosure requirements for transactions  Duties and powers of trustee/fiduciary; requiring prior authority and/or specific  Liabilities of the trustee/fiduciary; directive from the client.  Reports to the clients; 44 RULES APPLICABLE TO BOTH TRUST AND IMA ❖LENDING AND INVESTMENT DISPOSITION (SEC 413/415) ✓Traditional deposit products of UKBs with long-term credit rating of at least AA- or equivalent ✓Tradable securities issued by the govt. of a foreign country with long term credit rating of at least AA- or equivalent ✓GS/T-Bills/T-Notes and other ROP/BSP indebtedness ✓Loans fully guaranteed by the ROP (principal & interest) ✓Loans fully secured by hold-out on deposits or bonds ✓Loans fully secured by REM/chattel Information required for specific directives:  transaction to be entered into;  borrower’s name;  amount involved; and  collateral securities, if any 45 RULES APPLICABLE TO BOTH TRUST AND IMA ❖TRANSACTIONS REQUIRING PRIOR AUTHORITY (SEC 413/415) ✓Lend, sell, or assign money/property to DOSRI ✓Purchase or acquire property/debt instruments from DOSRI ✓Invest in equities of or in securities underwritten by trustee ✓Sell, transfer, assign or lend money/property from one trust account to another (except for investments in the first 4 items on Lending and Investment Disposition) 46 RULES APPLICABLE TO BOTH TRUST AND IMA ❖LENDING AND INVESTMENT DISPOSITION (SEC 413/415) ✓Traditional deposit products of UKBs with long-term credit rating of at least AA- or equivalent ✓Tradable securities issued by the govt. of a foreign country with long term credit rating of at least AA- or equivalent ✓GS/T-Bills/T-Notes and other ROP/BSP indebtedness ✓Loans fully guaranteed by the ROP (principal & interest) ✓Loans fully secured by hold-out on deposits or bonds ✓Loans fully secured by REM/chattel Information required for specific directives:  transaction to be entered into;  borrower’s name;  amount involved; and  collateral securities, if any 47 RULES APPLICABLE TO BOTH TRUST AND IMA ❖CEILINGS ON LOANS - SBL and DOSRI ceilings (for trust accounts) - DOSRI ceilings (for IMA accounts) Trust Corporations are exempt from these ceilings ❖BASIC REQUIREMENTS FOR OPERATIONS & ACCOUNTING - in accordance with the Trust Agreement - individual account accounting 48 RULES APPLICABLE TO BOTH TRUST AND IMA ❖ TAX-EXEMPT INDIVIDUAL TRUST/IM ACCOUNTS (SEC 413/415) ✓TA is between individual Filipino citizens or resident aliens; TA/IMA is non-negotiable and non-transferable; ✓Specific provision in the TA: ▪ Interest income of the trust fund derived from investments in interest-bearing instruments subject to 20% FT shall be exempt from such FT provided the fund is held for at least 5 years. ✓ For IM accounts, minimum investment shall not be less than P100 thousand NOT APPLICABLE TO TCs (Section 312-T) 49 RULES APPLICABLE TO BOTH TRUST AND IMA ❖NON-TRUST, NON-FIDUCIARY OR NON-IM ACTIVITIES (SEC 438) Preponderance of purpose; Agreement or contract is itself used as a certificate of indebtedness; Agreement is accepted under the signatures of those other than the TO or subordinate officer of the TD; Fixed rate or guaranty of interest, income or return: - issuance of certificates/side agreements indicating or guaranteeing income; - paying trust earnings based on expected yield regardless of actual investment results; - increasing/reducing fees to meet quoted/expected yield; Risk or responsibility is exclusively with the trustee/investment manager in case of loss of investment not due to failure of trustee to exercise prudence. Fees must be stipulated and fixed in the contract/indenture - should be reported as deposit substitute subject to required reserves - subject to sanctions 50 RULES APPLICABLE TO BOTH TRUST AND IMA ❖NON-TRUST, NON-FIDUCIARY OR NON-IM ACTIVITIES (SEC 438) Preponderance of purpose; Agreement or contract is itself used as a certificate of indebtedness; Agreement is accepted under the signatures of those other than the TO or subordinate officer of the TD; Fixed rate or guaranty of interest, income or return: - issuance of certificates/side agreements indicating or guaranteeing income; - paying trust earnings based on expected yield regardless of actual investment results; - increasing/reducing fees to meet quoted/expected yield; Risk or responsibility is exclusively with the trustee/investment manager in case of loss of investment not due to failure of trustee to exercise prudence. Fees must be stipulated and fixed in the contract/indenture - should be reported as deposit substitute subject to required reserves - subject to sanctions 51 RULES APPLICABLE TO BOTH TRUST AND IMA ❖UNSAFE AND UNSOUND BANKING (SEC 420/426) Under what circumstances? Result in material loss or damage or pose abnormal risk to: - the safety, stability, liquidity or solvency of the bank; - bank’s stakeholders, the BSP or public in general Caused any undue injury or has advanced the bank’s interest ; Transaction is grossly disadvantageous to the bank 52 RULES APPLICABLE TO BOTH TRUST AND IMA List of unsound banking: An arrangement where client is at the same time the borrower of own funds or where the trustor/principal is the borrower of trust funds belonging to the same family or business group of such trustor/principal; Loans to any TC member, officer and employee of the trust dept. except if under employee benefit plan of the bank; Borrowing from or selling trust assets to bank proper to cover portfolio losses and/or guarantee return of principal or income; Granting new loans to borrower with past due/ classified account; Requiring clients to sign documents in blank. 53 RULES APPLICABLE TO BOTH TRUST AND IMA Based on Appendix 48 Engaging in speculative and hazardous investment policies; Excessive amounts of loan participations sold. Operating the bank with inadequate internal controls. Failure to keep accurate and updated books and records. Continued and flagrant violation of any laws, rules, regulations or written agreements between the institution and the BSP Sanctions ✓ Cease and desist from unsound banking practice; ✓ Fines of not exceeding P30k/day/transaction ✓ Suspension of interbank clearing; rediscounting or access to BSP credit facilities; lending/fx operations or make new investments; and of responsible directors/officers; ✓ Revocation of quasi-banking license; ✓ Receivership and liquidation 54 RULES APPLICABLE TO BOTH TRUST AND IMA ❖ OTHER APPLICABLE REGULATIONS ON LOANS AND INVESTMENTS (SUBSEC 413/415) ✓Sections 39 (grant and purpose of loans) and 40 (requirement for the grant of loans) of the GBL; (implemented by Sections X143 and X304 of the MORB) ✓Criteria for past due accounts; ✓Qualitative appraisal of loans, investments and other assets ✓Requirements of Sections 3 and 8 of the SRC on the registration of securities; ✓Provisions of Section 44 of the BSP MOR for Fx Transactions 55 RULES APPLICABLE TO BOTH TRUST AND IMA ❖ OTHER APPLICABLE REGULATIONS ON LOANS AND INVESTMENTS (SUBSEC 413/415) Section 44 - Outward Investments by Phil. Residents In line with the increasing globalization of the Philippine economy Any form of instruments − Issued/created offshore by non-residents (except FCD accounts offshore) − Issued/created onshore by non-residents requiring settlement in foreign currency. − Not contrary to applicable Phil. Laws, rules and regulations. 56 RULES APPLICABLE TO BOTH TRUST AND IMA ❖ OTHER APPLICABLE REGULATIONS ON LOANS AND INVESTMENTS (SUBSEC 413/415 Section 44 - Outward Investments by Phil. Residents ✓ Citizen of the Phils.; ✓ Alien permanently residing in the Phils; ✓ Corporation or other juridical person organized under the laws of the Phils; ✓ A branch/subsidiary/affiliate/extension office of corporations organized under the laws of any country but operating in the Phils. except OBUs. 57 RULES APPLICABLE TO BOTH TRUST AND IMA ❖ OTHER APPLICABLE REGULATIONS ON LOANS AND INVESTMENTS (SUBSEC 413/415) Section 43 – General Policy on Outward Investments When allowed? 1. The investments are funded by resident’s own FCDU account; or 2. Sourced from authorized agent banks (AABs) or forex corp. of AABs up to a max. of US$60 million per investor or per fund per year - Without prior BSP approval - Subject to compliance with applicable laws, rules/regn 58 RULES APPLICABLE TO BOTH TRUST AND IMA ❖ OTHER APPLICABLE REGULATIONS ON LOANS AND INVESTMENTS (SUBSEC 413/415 Section 43 – General Policy on Outward Investments - Investor may purchase in excess of US$60 million without prior BSP approval: ▪ Submit notification to the BSP, at least 15 banking days after determining that FX requirement will exceed the threshold ▪ Present to the AAB a copy of the notice duly acknowledged by the BSP. 59 RULES APPLICABLE TO BOTH TRUST AND IMA ❖ OTHER APPLICABLE REGULATIONS ON LOANS AND INVESTMENTS (SUBSEC 413/415 Section 43 – General Policy on Outward Investments - Fx sold for investment shall be: ▪ Paid directly to the intended beneficiary (IB) on the date of FX sale; or ▪ Credited to the buyer’s FCDU account with the fx selling AAB or another AAB, but buyer shall certify that: (i) Fx used for investment; and (ii)Funds credited to the FCDU account will eventually be remitted to the IB Also, the buyer should include in the remittance instructions to the remitting bank the purpose of remittance 60 RULES APPLICABLE TO BOTH TRUST AND IMA ❖ OTHER APPLICABLE REGULATIONS ON LOANS AND INVESTMENTS (SEC 413/415 Section 43 – General Policy on Outward Investments* Dividends/earnings or divestment proceeds from outward investments may be freely disposed of and need not be inwardly-remitted and sold for pesos All fx sold shall be consolidated for the purpose of determining compliance with the $60 million threshold 61 RULES APPLICABLE TO BOTH TRUST AND IMA ❖ OTHER APPLICABLE REGULATIONS ON LOANS AND INVESTMENTS (SEC 413/415) Section 44 - Outward Investments by Residents Conditions for outward investments of trust/IM accounts ▪ All cash flows shall only be in pesos ▪ Trustee shall purchase or sell Fx financial instruments through distributors/underwriters duly authorized by the government of the issuer of the instrument; provided documentation and settlement shall be outside Phil. jurisdiction ▪ Recorded in the peso regular books at their Fx amounts and their local currency equivalent ▪ Compliance with BSP reportorial requirements 62 RULES APPLICABLE TO FCDU TRUST AND IMA ❖FCDU TRUST/IMAS (SEC 416) - Only a bank with authority to operate FCDU/ EFCDU may accept FCD trust/IM accounts - A TC may accept FCDenominated trust/IM accounts ❖BASIC SECURITY DEPOSIT (SEC 416) - At least 1% of the value of FCDU trust/IM assets ❖APPLICABILITY OF RULES AND REGULATIONS - Rules and regulations in the administration of trust/IM accounts are likewise applicable - Regulations on acceptable fx currencies, eligible and ineligible fx currency sources; fx cover; and allowable loans and investments 63 RULES APPLICABLE TO TRUST ONLY ❖PERSONAL MANAGEMENT TRUST (SEC 413) - For preservation of assets or property for future use or answer for their current needs - May or may not nominate a beneficiary - Trust Agreement shall include: Purpose or intention of the trust Nature and value of property/money that comprise the trust Trustee’s investment powers; Distribution Clause ✓Marketing – officers/personnel of bank proper may make referrals and give short introduction but not allowed to market LTA. 64 RULES APPLICABLE TO TRUST ONLY ❖PERSONAL MANAGEMENT TRUST (SEC 413) Minimum Criteria: ✓Entry Amount – P100K; balances up to P500K-invested in deposit and GS ✓Length of PMT's existence - consistent with the purpose. Any termination for causes inconsistent with the purpose/ distribution clause shall render the trustor ineligible from opening a new PMT within a period of one (1) year from termination date; ✓Pre-printed LTAs – allowed but the ff: must be left blank: ▪ trust purpose-clearly stated (consistent with objectives) ▪ distribution clause – clear and specific terms and conditions under which principal and/or income shall be distributed 65 RULES APPLICABLE TO TRUST ONLY ❖TRUST FUND OF PRE-NEED COS. (SEC 413) Responsibilities of the Trustee (Section 33 of RA 9829*) ✓Prudently administer and manage the trust fund ✓Exclusive management and control over the funds ✓Not to use the trust fund to invest in or extend loan to the pre- need company and its DOSRI ✓Maintain liquidity reserve sufficient to cover at least 15% of the trust fund but in no case 40%, up to 100% fin’l allied enterprise Regulated non-bank entities up to 100% (finance, insurance, asset management and the like) Filipino individuals and non- Up to 40% each Up to 40% regulated corporations No aggregate ceiling Aggr. ceiling – 40% Individual + corp. majority Up to 40% , combined owned by him Family groups/related interests; Up to 40% each 2 or more corps owned or (relationship is fully controlled by same family group disclosed) 86 ADDITIONAL REGULATIONS for TRUST CORPORATIONS ❖Limits of Stockholdings in a single TC (Subsec. 116-T) Factors to consider in allowing foreign banks and regulated foreign non-bank entities: ✓ Strategic trade and investment relationship between the Philippines and the home country of the foreign bank/entity ✓ Relationship between the applicant foreign bank and the Philippines ✓ Demonstrated capacity, global reputation for financial innovations and stability in a competitive environment ✓ Reciprocity enjoyed by Philippine banks in the country of the foreign bank ✓ Willingness to share technology 87 ADDITIONAL REGULATIONS for TRUST CORPORATIONS ❖Establishment of Branches/Marketing Offices (Sec. 105-T) Branch - any permanent office other than the HO - May perform activities and provide products and services that are within the scope of its authority and licenses - Complete set of books and records is maintained 88 ADDITIONAL REGULATIONS for TRUST CORPORATIONS ❖Establishment of Branches/Marketing Offices (Sec. 105-T) Marketing Office - any permanent office annexed to the HO or branch - Perform marketing (promotion and presentation of products and services); client profiling; and preparation of receipt and docs for the opening and establishment of account - Records transactions in the books of the HO/Branch to which it is annexed - Perform UITF-related transactions (i.e., receive funds and/or instructions for subscription or redemption/ withdrawal); but only when the account has been created and approved. 89 ADDITIONAL REGULATIONS for TRUST CORPORATIONS Branch Marketing Office Establishment ▸ Prior MB Approval ▸Prior notification (within 10 banking days from TC board approval) Documentary ▸a. Application letter signed by the President, indicating the number of ▸Items b and c Requirements branches to be established and location b. Corp. Sec’s certificate on the board approval to establish branches c. Certification signed by the President that TC complies with prudential requirement under Section 111-T Date of Opening ▸Within 6 months from date of approval (non-extendible) ▸Notify the BSP of actual date of opening within 5 days from date of ▸-do- opening 90 ADDITIONAL REGULATIONS for TRUST CORPORATIONS ❖Management Contracts/Outsourcing of Functions (Sec. 112-T) Subject to prior BSP approval Agreements shall be for a maximum of 5 years Will not compromise confidentiality or access to client sensitive information Cannot outsource inherent trust functions Provisions of Sec 112 shall apply 91 ADDITIONAL REGULATIONS for TRUST CORPORATIONS ❖Business Continuity Management (Sec. 164-T) An enterprise-wide framework that provides for continuous functioning of the TC during disruptions, proportionate to the TC’s risk exposures and tailored to the nature of the business. BCP – a documented plan detailing the orderly and expeditious process of recovery, resumption and restoration of business functions in the event of disruptions. BCM Framework: 92 ADDITIONAL REGULATIONS for TRUST CORPORATIONS ❖Business Continuity Management (Sec. 164-T) BCM Framework: Business Impact Analysis and Risk Assessment Personnel Training Strategy and Plan BUSINESS Formulation Maintenance CONTINUITY MANAGEMENT Plan Testing Plan Development 93 ADDITIONAL REGULATIONS for TRUST CORPORATIONS ❖Receivership and Involuntary Liquidation (Sec. 192-T) By the MB after considering the report of SES. Upon revocation, TC shall wind down and liquidate its trust assets and distribute proceeds to clients If a receiver is appointed: either liquidate and/or transfer to substitute trustees/Imanagers acceptable to the clients Any director/officer who: ✓ Refuses to turn over the TC’s records and assets under mgt. to the appointed successor trustee; ✓ Tampers with the TC’s records; ✓ Appropriates for himself or other parties the TC’s assets ✓ Receives any part of the AUM - Shall be subject to appropriate sanctions. 94 ADDITIONAL TRUST-RELATED REGULATIONS ❖Section X009– BSP Supervisory Enforcement Policy Objectives: Achieve desired changes – change in the overall condition and governance of BSP Supervised Institutions Mitigate risk – to maintain stability of the financial system General Principles: Root cause diagnosis Consistently matching the severity of enforcement action (EA) vis- à-vis the supervisory issue – based on prevalence and persistence Successive or simultaneous deployment of EA Monitorability and follow-through Escalation of EA – if desired change is not achieved and root causes are not addressed. 95 ADDITIONAL TRUST-RELATED REGULATIONS ❖ Section X009– BSP Supervisory Enforcement Policy Categories of EA Corrective Actions – BSP directives; letter of commitment (LOC) Sanctions ✓ FI – restrictions on or suspension of authorities, activities and privileges; divestment or unwinding; monetary sanctions ✓ Directors and officers – reprimand; restriction on compensation and benefits; divestment; suspension; disqualification; removal; monetary penalties Other Supervisory Actions – PCA framework; issuance of cease and desist order (CDO); conservatorship;receivership Due Process – FIs and directors/officers are afforded fair and reasonable opportunity to explain and submit evidences 96 ADDITIONAL TRUST-RELATED REGULATIONS ❖Section X499– Sanctions; Sec 004 - Monetary Penalties on BSFIs and/or their Directors/Trustees, Officers and/or Employees (DTOE) To hold banks and/or their DTOE accountable for their conduct and to deter the future commission of violations. Based on the general objectives under Section 009 Monetary penalty: - Maximum of P1.0 million for each transactional violation; or - P100 thousand per calendar day for violations of continuing nature - If profit is gained or loss is avoided, up to 3x the profit gained or loss avoided - May be imposed singly or in combination with non-monetary sanctions, if appropriate. 97 ADDITIONAL TRUST-RELATED REGULATIONS ❖Section X499– Sanctions; Sec 004 - Monetary Penalties on BSFIs and/or their Directors/Trustees, Officers and/or Employees (DTOE) Taking into consideration the attendant circumstances, such as: a) Nature and gravity of the violation or irregularity; b) Size of the BSFI c) Aggravating and mitigating factors Subject to usual due process Allows request for reconsideration or appeal 98 99 REQUIREMENTS TO ENGAGE IN TRUST AND OTHER FIDUCIARY BUSINESS ❖ Prior Monetary Board approval (Sec. 411) ❖ Prerequisites/Criteria a) CAMELS* composite rating – at least “3” in the last regular exam; management at least “3” b) Profitable Operations c) Well Capitalized with capital adequacy ratio of “12.0%” d) Risk assessment rating of at least “Acceptable” e) Compliant with directives and/or are not subject to enforcement actions * CAMELS – capital adequacy, asset quality, management, earnings, liquidity, sensitivity to market risk 100 REQUIREMENTS TO ENGAGE IN TRUST AND OTHER FIDUCIARY BUSINESS ❖ Prior Monetary Board approval (Sec. 411) ❖ Prerequisites/Criteria a) No major supervisory concerns in: ✓ Corporate governance ✓ Risk management systems (RMS)- comprehensive ✓ Internal controls and compliance system * CAMELS – capital adequacy, asset quality, management, earnings, liquidity, sensitivity to market risk 101 REQUIREMENTS TO ENGAGE IN TRUST/IM BUSINESS Organizational Requirements (Sec. 103-T) ❖ Prior Monetary Board approval ❖ Must have suitable shareholders, adequate financial strength, legal structure, fit and proper management ❖ Incorporators/subscribers must: a) Be persons of integrity and of good credit reputation b) Have adequate and legitimate financial capacity c) No criminal records; d) Not officers/employees of government agencies (unless allowed by law), charged with the supervision of or granting of credit to trust entities. e) Upholds consumer protection practices (adopt an appropriate board- approved consumer protection framework) 102 REQUIREMENTS TO ENGAGE IN TRUST/IM BUSINESS ❖ Required Capital (Subsec. 411) Univ Banks Comm’l Banks ❖ Thrift Banks - P650.00 mm; P100 mm (limited trust) ❖ Rural Banks - P100.00 million (limited trust) ❖ Branches of foreign banks – Sec. 103 ❖ For IM - not