Collective Investment Funds

A1 and A2 Funds

An A1 fund is established under 12 CFR 9.18(a)(1) and is limited to assets held by the sponsoring bank, or by an affiliate, as trustee, executor, administrator, guardian, or custodian under a Uniform Gifts to Minors Act. The industry generally uses the term “common trust fund” when referring to A1 funds.

An A2 fund is established under 12 CFR 9.18(a)(2) and may consist only of assets of retirement, pension, profit sharing, stock bonus, or other trusts that are exempt from federal income tax. The industry generally uses the term “collective investment fund” when referring to A2 funds.

A bank is not required to be a fiduciary with discretion in order to commingle assets in an A2 plan. For purposes of an A2 plan, a bank may serve as directed agent or nondiscretionary custodian for an employee benefit (EB) plan account and may invest plan assets into its A2 fund, so long as the fund itself qualifies for an exemption from federal taxation. The bank need not act as the trustee for the underlying tax-exempt trust.

A bank is authorized by 12 CFR 9.18(a)(2)(i) to combine assets eligible for participation in an A2 fund into an A1 fund, so long as the bank serves as trustee for the underlying EB plan(s). However, a bank should carefully consider both the tax and securities law implications of combining assets in this way. It would be unusual for a bank to combine assets subject to different tax treatments or with different investment objectives into a single A1 fund. A bank may establish a network of funds or a “fund of funds” in which assets of one or more A2 funds are invested in another A2 fund. Banks should ensure that admissions into their CIFs are closely scrutinized to ensure that ineligible accounts are not admitted into a CIF. The admission of even one ineligible account into a CIF could potentially raise tax and securities implications for the entire fund.

A subset of both A1 and A2 funds are “short-term investment funds,” or “STIFs.” A STIF is a CIF that, while analogous to a money market mutual fund (MMMF), has significant differences. STIFs are similar to MMMFs because they offer liquidity, an optimum return, and a stable value. Unlike MMMFs, however, STIFs are not required to maintain a stable net asset value or price per share as their primary objective. In addition, STIFs do not operate under the same portfolio quality and diversification requirements as MMMFs. STIFs must comply with the valuation and recordkeeping requirements of 9.18 rather than Rule 2a-7 of the ’40 Act, which imposes the standards for MMMFs. STIFs and MMMFs are both required to limit their dollar-weighted average portfolio maturities to 90 days or less. STIFs, however, are not bound by the maximum maturity limit of 397 days for most single securities held in an MMMF.

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