Collective Investment Funds

Self-Dealing and Conflicts of Interest – 9.18(b)(8)

The self-dealing and conflicts of interest provisions that apply to all fiduciary relationships (12 CFR 9.12) apply to bank-administered CIFs.

The OCC, however, has authorized banks to self-deposit funds awaiting investment or distribution in a STIF that invests primarily in own-bank certificates of deposits and other deposit products. The apparent conflict of interest in this arrangement is authorized by “applicable law,” specifically 12 CFR 9.10. The standard set forth in section 9.10 requires a bank to establish that the conflict is “not prohibited by applicable law.” (The customary standard for conflicts of interest requires a conflict to be “authorized by applicable law.”) Refer to the “Conflicts of Interest” booklet of the Comptroller’s Handbook for more information about conflicts that arise in the fiduciary context.

In addition to section 9.12, the OCC identifies three specific areas in section 9.18(b)(8) related to CIFs where conflicts of interest may arise:

• Bank interests. A bank administering a CIF is prohibited from having an interest in that fund other than in its fiduciary capacity. When the bank acquires an interest in an account that participates in a bank-administered CIF, through a creditor relationship or otherwise, the bank must withdraw that account from the CIF at the next withdrawal date. A bank is permitted, however, consistent with section 408(b)(1) of ERISA, to invest assets of an EB plan that the bank operates for the benefit of its own employees or employees of an affiliate in CIFs that the bank administers.

• Loans to participating accounts. A bank is prohibited from making any loan the collateral for which is a participant’s interest in a CIF administered by the bank. A bank is authorized, however, to make an unsecured advance to a fiduciary account that participates in a bank-administered fund, so long as the advance extends only until the fund’s next valuation date. This exemption enables a bank to avoid overdrafts on the participating accounts.

• Purchase of defaulted investments. When a bank-administered CIF holds a defaulted investment, the bank should promptly withdraw the investment from the fund and segregate and administer it for the benefit of all fund participants, proportionate to each participant’s interest in the fund at the time of withdrawal of the investment. The OCC recognizes an exemption from this requirement when the bank determines that the cost of segregating the investment is excessive in light of the investment’s market value. In those instances, the bank is authorized to purchase the defaulted investment for its own account at the greater of market value or the sum of cost and accrued unpaid interest.

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