Collective Investment Funds

Fund Termination

CIFs may be terminated for a variety of reasons: A bank may find its customer base no longer benefits from the CIF; it may lose a substantial employee benefit customer that participated in the bank’s CIFs; or its business strategy may change over time.

Because of a change in federal tax laws in 1996, neither an A1 fund nor the fund’s customers are required to recognize capital gains if the fund is converted into an investment company. Following that change, some banks converted their A1 funds to investment companies. Though such a conversion is free of federal tax consequences, a bank should be aware of any state tax implications of such a conversion, as well as other accounting and tax issues resulting from such a conversion. In addition, a bank must address potential conflict of interest issues associated with a conversion from an A1 fund to a mutual fund, and the bank must ensure that the mutual fund is suitable for the A1 fund participants being transferred.

When a bank terminates a fund, the bank is responsible for valuing the fund’s assets, distributing those assets, and preparing and filing required reports. A bank should ensure that its risk control processes continue to be strong during the fund termination process.

The terms of the CIF plan control the form and manner of asset distribution from a CIF. If the plan is silent as to the form of distribution, the bank is responsible for developing a plan of distribution. This plan should be approved internally by the board or by its designee. The plan should consider factors such as:

• The type and value of assets,

• Difficulties in dividing the assets,

• Distributions in cash or in kind,

• Tax consequences,

• Timing of distributions,

• Needs and circumstances of remaindermen, and

• Judicial and beneficiary accountings.

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