Corporate trust and agencies are accounts where the bank serves as trustee, agent, or global custodian. Corporate trust and agency services normally concern services performed in connection with the issuance, redemption, transfer, or recordkeeping for debt or equity securities.

Trustee under a bond indenture or trustee for an issue of trust preferred securities are typically the only trust relationships administered by a corporate trust department. For example, under a bond indenture, one trustee is appointed for a given bond issue, but several agents or co-agents may provide various related services to the same issue. It is not uncommon for a single indenture to name both the trustee for the issue and the related corporate agents, such as a paying agent for the issue.

The most common corporate agency activities include stock or bond transfer agent. registrar for stock or bond issues. paying agent for bond interest or stock dividends, dividend reinvestment agent, and escrow agent.

Unlike personal and employee benefit accounts, where the interest of the beneficiary is the primary concern, banks serving in a corporate trust capacity serve two different constituencies. On the one hand, the issue of the security covered under the indenture hires the indenture trustee and pays the trustee’s fees. The indenture trustee and other agents owe the issuer of the security effective and efficient administration of the duties assigned under the indenture. On the other hand, a fundamental duty of the indenture trustee is to monitor the issuer’s compliance with the terms of the indenture and to take all necessary actions to protect the interests of the bondholders. In fact, the principal reason for appointing a trustee under a bond indenture is for the protection of those purchasing the securities issued under the indenture.

Departments that serve as corporate trustee assume the greatest amount of responsibility and potential risk among the various types of corporate trust and agency accounts discussed in this chapter. The responsibilities of the trustee may include some or all of the following: the issuance of bonds, the maintenance of bondholder records, transfer of recorded ownership, the payment of principal and interest, and payment of remaining principal at maturity.

The issuer could be a corporation, state, municipality, quasi-public authority, school, church, or any incorporated organization, which chooses to finance its needs through the issuance of bonds. Bonds may also be distinguished by whether they are secured or unsecured. Examples of secured bonds include mortgage bonds, secured notes and equipment trust certificates. More complex types of issues are securitized or asset-backed securities which are discussed in the section Asset-backed/Securitized Debt Issues. Unsecured bonds are called debentures. Some bond issues are subject to the Trust Indenture Act of 1939 (amended by the Trust Indenture Reform Act of 1990) and others are not. Refer to Sub-section D, Compliance with the Trust Indenture Act of 1939 for additional information on the Trust Indenture Act.

Bonds issued may be sold to the general public, a limited investor group, or a single investor such as an insurance company or governmental agency. Bonds are now typically issued in registered, as opposed to bearer, form. They come in a wide variety of other distinguishing features, such as single or serial maturities; fixed or floating rates of interest; call provisions; convertibility into other types of securities; and sinking fund provisions for payment of principal.

The document creating the corporate trust is called a trust indenture, a trust agreement, an indenture, or simply an agreement. The indenture defines the:

• Purpose(s) and/or nature of the debt to be created,
• Nature and description of the bonds to be issued, Parameters of administration during the life of the bonds,
• Nature, method, and place of repayment of principal and interest,
• Relationship between the corporation (borrower or obligor), the bank (trustee and/or agent) and lender(s) (bondholder(s)),
• Duties of the respective parties to the indenture,
• Description of the collateral (if any),
• Events of default,
• Actions to be taken in the event of default.

Indentures tend o be of uniform construction and design, but may be tailored to include unique provisions. Associated with the indenture is the instrument that perfects a lien on collateral, if any, securing the bonds. These instruments are called the trust mortgage, deed of trust, collateral trust, equipment trust, etc. depending on the type of collateral.

The primary duty of the trustee under the indenture is to perform the duties specified by the indenture. These normally include the following:

• Arranging for the printing and issuance of the bonds,
• Maintaining required records, accounts and documentation,
• Paying principal and interest,

• Holding beneficial title to collateral (if any),
• Safeguarding and appraising collateral (if any),
• Investing idle cash (if permitted or directed under the indenture),
• Ensuring the issue is in compliance with legal requirements,
• Monitoring for events of default under the indenture during the life of the bonds,
• Protecting the interests of bondholders in the event of a default.

Transfer agents usually perform three functions. First, they issue stock certificates, which constitute an increase in shares outstanding (e.g. original issues, stock dividends and splits, etc.). Second, they maintain records identifying the owners of the shares of stock, how many shares are owned, and which certificates are owned. Third, they cancel and reissue certificates to reflect changes in ownership.

In connection with the latter, certificates and accompanying documents are checked for authenticity and appropriateness; canceled; and replaced by new certificates. The transfer agent sends both the canceled certificates and the newly issued certificates to the registrar for verification. This involves only an in-house transmittal when the institution acts both as transfer agent and registrar. After registration, the newly issued certificates are sent to the registered owners or their representatives and appropriate disposition (destruction, return of canceled certificates to the issuer, or cancellation and retention in a safeguarded area) is made of the canceled certificates.

Refer also to the discussion on registered transfer agents.

A stock registrar performs the critical duty of guarding against the over- or under-issuance of a security, sometimes referred to as a record difference, out-of-proof or out-of-balance condition. In addition to checking original issues, the registrar checks each transfer made by the transfer agent: to ensure the genuineness of the certificates presented for transfer; to make certain that the old certificates have been canceled; and to ensure that the number of shares represented by the new certificates does not exceed the number of shares represented by the old (canceled) certificates. In the case of bonds, the indenture trustee normally performs this function. New York Stock Exchange rules permit one institution to act as both transfer agent and registrar for listed securities other than its own.

Much less frequently, banks may be appointed solely as the outside registrar of a stock issue, without the more typical dual appointment as transfer agent and registrar.

Refer also to the discussion on registered transfer agents.

I n the case of bonds, the bond registrar usually performs the duties of both transfer agent and registrar. usually, the indenture trustee performs the function of bond registrar. On rare occasions, however, there may be a separate bond registrar for an issue.

At one time, corporate, government bonds, and other debt securities were issued primarily in bearer form. Unlike stock issues, which were in registered form, the issuer did not know who held the bonds. The bondholder clipped interest coupons attached to the bond and sent them to the trustee or paying agent as interest became due. Eventually, the bond itself matured or was called prior to maturity, and was sent to the trustee for payment.

Today, however, most bond issues are registered for both principal and interest. Under Section 149 of the Internal Revenue Code, in order to qualify for the Federal tax exemption for interest with respect to state, county, and municipal bonds, such bonds must be in registered form. A transfer agent is, therefore, needed to maintain records of ownership. Since bond issues often have a 20 or 30 year maturity, some bearer bonds, (and associated coupons) may still be encountered by examiners.

For bond issues, the entity that performs transfer agent services is termed the bond registrar. A bond registrar performs all of the functions of the stock transfer agent and the stock registrar.

While unusual, banks are sometimes appointed solely as registrar of a bond issue, without the associated bond trustee duties.

Also refer to the discussion of registered transfer agents.

A mutual fund transfer agent performs the functions of both the stock transfer agent and stock registrar. It maintains ownership records, transfers shares, and ensures the number of shares is kept in balance. A mutual fund’s transfer agent is identified in the mutual fund’s prospectus.

Two characteristics of mutual fund transfer operations are very different from stock or bond transfers. Mutual funds normally do not issue certificates to evidence ownership. Instead, entries on the books of the mutual fund or its transfer agent identify the owners and record the number of shares owned. In addition, open-end mutual funds do not have a limit on the number of shares issued and outstanding. Therefore, the registrar function faces a situation where the total number of shares outstanding is constantly changing (increasing or decreasing, depending upon the volume of purchases or redemptions).

Despite the general statements in the above paragraph, there are exceptions to both. Some mutual funds allow the issuance of share certificates on special request, such as when a customer wants to pledge fund shares as collateral for a loan. While most mutual funds are open-end, with no set number of shares issued and outstanding, closed-end mutual funds do have such limits. There are, however, fewer closed-end mutual funds than open-end funds.

Every mutual fund transfer agent must be a registered transfer agent. In addition, operations of mutual funds are subject to the Investment Company Act of 1940.

Some institutions transfer securities, which are either listed on a national stock exchange or, more commonly, are registered under Federal securities laws. Section 17A of the Securities and Exchange Act of 1934 and Part 341 of the FDIC Rules and Regulations, require FDIC-supervised institutions that transfer these types of securities (including securities of a parent company or an affiliate) to register with the Corporation as a transfer agent. State nonmember banks serving solely as transfer agent for their own registered stock must also register as a transfer agent, whether or not the bank exercises trust powers and regardless of which department performs the transfer function. Registration as a transfer agent is also required when the institution is merely named as transfer agent for these securities, but has contracted with a third-party organization to actually perform all of the transfer processing and recordkeeping, a situation referred to as a private label arrangement.

As part of the registration process, each institution must obtain a FINS (Financial Industry Numbering System) Number from the Depository Trust Company in New York City. The FINS Number is a standardized numbering system used to identify each institutional party (banks, broker-dealers, transfer agents, etc.) to a securities transaction.

As of November 30, 2003, 92 FDIC-supervised institutions were registered as transfer agents. The FDIC utilizes a separate examination report for registered transfer agents and the Registered Transfer Agent Examination Report of Examination is completed for all such banks.

Examiners should note that, if a bank is a registered transfer agent, all bond and stock issues (regardless of which department of the bank transfers the securities) must b processed according to the SEC’s operational regulations for registered transfer agents. This includes municipal and industrial revenue/development bond issues (which are not subject to securities registration and, were it not for the bank’s registration as a transfer agent, would not otherwise be subject to securities transfer regulations).

Stocks must be registered under Federal securities laws, if they meet one of the following two criteria:

As of January 1, 1998, equity securities must be registered under Section 12(g) of the Securities and Exchange Act of 1934 and SEC regulation 17 C.F.R. Section 240.12g when an issuer has (i) $10 million or more in total assets and (ii) more than 500 shareholders. Refer to 12 C.F.R. Part 335 of the FDIC Rules and Regulations.

Prior to January 1, 1998, the applicable exemption threshold governing the registration of equity securities is (i) less than $1 million in total assets and (ii) 500 or fewer shareholders.

Less frequently, examiners will encounter corporate bond issues listed on a national securities exchange or mutual funds where the bank has been named a transfer agent. These also require registration as a transfer agent.

As the fiscal agent for a corporation or a municipality, an institution makes interest payments on coupon bonds (often referred to as bearer bonds) as the coupons are presented; redeems maturing bonds; or prepares and mails interest checks for registered bonds, or dividend checks for stock issues. A fiscal agent may also be called a dividend disbursing agent, coupon and bond paying agent, or some similar name indicative of its duties.