Collective Investment Funds

Appendix C: Collective Investment Funds and the ‘40 Act

The Investment Company Act of 1940 (the ’40 Act) regulates the formation and operation of investment companies (e.g., mutual funds). The ’40 Act contains two specific exclusions from the definition of “investment company” that allow banks to operate CIFs without registering them with the SEC. The first exclusion, section 3(c)(3) of the ’40 Act, generally covers all A1 funds. It provides an exclusion from investment company registration for any common trust fund or similar fund maintained by a bank that is exclusively for the collective investment and reinvestment of moneys contributed by the bank in its capacity as a trustee, executor, administrator, or guardian, if:

1. A bank sponsors the CIF solely as an aid to the administration of trusts, estates, or other accounts created and maintained for a fiduciary purpose;

2. Interests in the CIF are not advertised or offered for sale to the general public except in connection with the ordinary advertising of the bank’s fiduciary services; and

3. Fees and expenses charged by the CIF do not violate fiduciary principles established under applicable federal or state law.

In 1999, the Gramm-Leach-Bliley Act narrowed the ’40 Act’s statutory exclusion under section 3(c)(3). GLBA imposed additional restrictions on a bank’s ability to advertise a CIF and to make it available to the general public, and further limited the fees these funds may charge. These statutory restrictions generally codified previous SEC interpretations that limited a bank’s ability to market A1 funds.

Section 3(c)(11) of the ’40 Act, which was not narrowed by the GLBA legislation, provides an exclusion from the registration, disclosure, and recordkeeping requirements of the ’40 Act for most A2 funds. Among other things, it exempts any “collective trust fund maintained by a bank” consisting solely of assets of:

• Any employee’s stock bonus, pension, or profit-sharing trusts which meet the requirements for qualification under section 401 of the Internal Revenue Code of 1986, and

• Governmental plans.

The ’40 Act’s exclusions under 3(c)(3) and 3(c)(11), like the ’33 Act exemptions, do not expressly cover CIFs that contain IRA assets. This is because IRAs are created under a different IRC section than qualified employee benefit plans, and IRAs receive their preferred tax treatment under a different IRC section. (See appendix D, “Specialized Collective Investment Funds.”) Health Savings Accounts (HSAs), and related tax-advantaged savings vehicles, raise similar issues. A bank should consult with securities counsel before commingling these assets in a CIF.

National banks should also consult with securities counsel if they intend to combine different assets (e.g., personal trust and pension assets) in a single CIF. While section 9.18(a)(2)(i) expressly authorizes these combinations, a bank should obtain specific securities law advice in this area. Banks should also consider potential securities law restricting the investment of fiduciary assets held by one bank into an A1 fund of an unaffiliated institution. While SEC guidance authorizes affiliated banks under a single holding company to combine their A1 and A2 funds, the SEC has not authorized a bank’s consolidation of assets from unaffiliated banks into a single A1 fund. This restriction may apply even where applicable law (state trust law or the governing instrument) expressly authorizes a trustee to invest the assets in an unaffiliated bank’s CIF.

A national bank that is considering operating a CIF that does not clearly meet either the 3(c)(3) or 3(c)(11) exclusions of the ’40 Act or the related exemptions of the ’33 Act should ensure that securities counsel has reviewed the proposed fund. If the fund violates securities laws, the SEC may take enforcement action against the bank, including the imposition of penalties. The OCC is also authorized to take remedial action if a national bank violates securities laws.

If a bank determines that a CIF must be registered because the fund does not meet the exemptions under the ’40 Act, the bank must also determine whether it must register interests in the CIF as a “security” under the ’33 Act.