Unique Asset Exam Survey Results Regarding Closely Held Assets

Patrick Alyward



We have received feedback from numerous clients that examiners at all levels have an increased focus on “unique assets” during their fiduciary exams.  Administering these asset types can pose significant challenges whether these assets reside in an Irrevocable Trust, IRA, or perhaps even a Custodian Account.  The OCC Unique and Hard-To-Value Handbook provides guidance on the risks associated with these assets and insight into the examination process; however, the handbook often does not fully prepare a Trustee for the actual examination experience, which may include an emphasis on certain areas or industry trends. In an effort to better understand the examiner’s process, RIC conducted a brief survey of fiduciary organizations of all sizes to determine what the focus has been for regulators looking at unique assets with an emphasis on closely held entities.

Overwhelmingly, the surveyed fiduciary organizations stated the primary areas of focus of exams were demonstrating a set of policies and procedures are in place—including a review process—and the valuation of assets. The overarching themes for examiners with respect to policies and procedures have been discipline and consistency. Examiners want to ensure a fiduciary’s policies and procedures are being followed organization-wide. Furthermore, they want to determine if these policies and procedures are being periodically reviewed, if changes are being made and, if so, how are employees trained and/or educated about the changes so they may execute them properly.

Of special note is examiners’ apparent emphasis on having procedures for conducting reviews prior to accepting an asset. Examiners are reviewing the policies and procedures in place to accept (or dispose of) assets and seek documentation that employees are following these procedures. Aside from being an increasingly scrutinized component of exams, having a disciplined asset acceptance process in place can greatly reduce future administrative issues, as due diligence and other decisions are made prior to accepting the asset into the fiduciary’s account.

Intertwined with an examiner’s emphasis on policies and procedures is how asset valuations are being obtained and managed by the Trustee. Frequently evaluated policies and procedures as they pertain to unique asset valuations include:

  • Frequency and consistency. Examiners are assessing not only how often valuations (compliance calculations) for unique assets are being generated but also if there is a consistency of valuation methodologies across the portfolio of assets. How these valuations align with the fiduciary’s Reg 9 and annual administrative review processes is also identified.
  • Audit quality. The examiner’s review may additionally consider how a valuation is managed within a fiduciary organization. Recent examinations have included audits ensuring the most recent valuations are accurately reflected in the fiduciary’s accounting system, that proper documentation supporting the valuation is maintained, and that committees are properly ratifying the valuations, with any exceptions being monitored accordingly.
  • Conflicts of interest. Examiners have been evaluating whether, as a fiduciary, generating valuations internally produces any conflicts of interest. An example cited on a survey was the impact of internal reviews on fiduciary fees.

In addition to the areas of focus above, survey respondents noted some trends from recent exams regarding closely held asset valuations that they expect will continue:

  • With the tax reporting rules changing in 2015, a heightened focus is on the valuations for closely held assets held in IRAs. Two new boxes (15a & 15b) were added to Form 5498 to accurately report the valuation of these assets. Fiduciaries need to report the value annually and also pay close attention if the IRA holder is in RMD (required minimum distribution) status to avoid penalties and any disqualifications.
  • Valuation Discounts. Discounts for lack of marketability are being closely scrutinized by the IRS when filing Forms 706 and 709 (estate and gift tax). Ensuring a fiduciary hires a qualified and accredited appraiser (and not the family accountant) is critical to avoid harsh penalties and any disqualifications. In addition, making sure there is sufficient supporting documentation to support any discounts will help avoid tax audits. The IRS almost passed Section 2704 which would have changed the discount landscape across the industry. Although it was not passed in December 2017, the pressure on discounts is not going away any time soon.

Another trend some fiduciary organizations believe is gaining more traction is the concept of “continuous monitoring.” While many examinations and audits are currently “during a point in time” or for a selected period, in the future fiduciaries may need to demonstrate the ability to support ongoing audit requests as transactions and exceptions arise (“continuous monitoring”) as opposed to a rear-view mirror approach or “at a past point in time” review. In adopting any new technology within their organizations, fiduciaries should consider its capacity to accommodate “continuous monitoring.”

Overall, the survey results illustrate that closely held entities residing in fiduciary accounts will continue to be a focus during examinations and audits. A few best practices are to confirm your organization’s policies and procedures are in order and that your organization has aligned itself (externally and internally) with qualified resources or vendors to minimize any risks to your organization and wealth management clients.

For more information regarding RIC’s Closely Held Valuation Solutions, please click on the following link https://ricomaha.com/solutions/closely-held/


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