Collective Investment Funds

Admission and Withdrawal of Accounts – 9.18(b)(5)

The admission and withdrawal requirements for CIFs provide flexibility so long as certain standards are met. These standards are designed to ensure that a bank treats all participating accounts fairly when governing the timing of admissions and withdrawals and when determining a fund’s value for the purpose of admissions and withdrawals.

First and foremost, a bank may only admit an account to a CIF or withdraw an account from the fund on the basis of the valuation process established in the plan. This means that admissions to and withdrawals from a fund must be processed as of a specified time on an established valuation date and must be based on the market value of the fund’s assets as of such time. Banks must ensure that “late trading” of their CIFs does not occur. A bank cannot provide different fund valuations to accounts that enter or withdraw from the same CIF on the same valuation date. A bank is also prohibited from allowing one account to withdraw from a CIF while barring withdrawals for all other accounts.

At the time it establishes a fund, a bank is required to establish in the written plan the terms and conditions that govern the admissions and withdrawals of participating accounts. A bank’s CIF plan should state that the CIF can admit or withdraw an account at a certain asset value only if the bank (either directly or through a designated third party) accepts a request for the admission or withdrawal, or has received a notice of the account’s intent to take such an action, on or before the time when the fund’s assets are revalued. If the bank in those circumstances were to process the admission or withdrawal after the new valuation date at the previous net asset value, the institution would be allowing prohibited “late trading.”

A bank may operate similar funds that have different notification periods depending upon the nature of the accounts that will have admissions and withdrawals from the funds. In addition, for A2 funds that are invested primarily in assets that are not readily marketable, a bank may require a prior notice period not to exceed one year for withdrawals.

The OCC recognizes that some CIFs contain illiquid assets, such as interests in private equity limited partnerships and hedge funds. To the extent that a bank has valid reasons for limiting admissions and withdrawals for one of these funds, and these restrictions are consistent with the bank’s fiduciary duties, a bank may establish an A2 fund that severely restricts admissions to and withdrawals from the fund. While, to date, the OCC has provided this flexibility only to certain A2 funds, a bank sponsoring an A1 fund that has similarly sophisticated investors and that invests in similarly illiquid investments could request comparable authority.

Method of Distributions and Segregation of Investments – 9.18(b)(5)(iv) and 9.18(b)(5)(v). A bank has several options when making distributions to accounts withdrawing from a fund. It may make distributions in cash, ratably in kind, a combination of cash and ratably in kind, or in any manner consistent with applicable law in the state in which the bank maintains the fund. This flexible approach is designed so that a bank has the ability to address complex distributions (such as CIFs with illiquid assets or assets that may not be transferred) while still maintaining the basic protections of state fiduciary law. In addition, this provision enables either a bank administering a CIF, or beneficiaries or other interested parties of fiduciary accounts in that fund, to seek a court order from a court of competent jurisdiction, authorizing an equitable solution if issues arise regarding distribution of fund assets.

To the extent a bank withdraws an investment in kind from a CIF for the benefit of all participants in the fund at the time of the withdrawal, but the investment is not distributed ratably in kind, the bank is required to segregate and administer the investment for the benefit ratably of all the participants in the fund at the time of the withdrawal.

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