Collective Investment Funds

Appendix D: Specialized Collective Investment Funds

This section highlights certain special-purpose CIFs that hold selected assets that may be operated in compliance with limited securities law exemptions. These funds may be operated under exemptions that do not generally apply to CIFs.

Individual Retirement Accounts (IRAs) are authorized as tax-exempt accounts under section 408 of the IRC. OCC and IRS regulations authorize a bank to invest IRA assets in a CIF. Under the SEC’s interpretation of the securities laws, however, a bank that operates a CIF and invests IRA assets in that fund may be considered to be operating the CIF in violation of the ’33 Act and ’40 Act. The SEC, however, has expressly authorized banks to operate CIFs that accept IRAs if those funds are registered with the SEC as registered investment companies under the ’40 Act and as securities under the ’33 Act.

Keogh plans (retirement plans for self-employed individuals) are authorized as tax-exempt under section 401(c)(1) of the IRC. Because Keogh plans, like IRAs, are not authorized as tax exempt under section 401(a) of the IRC, the securities laws may be interpreted so as to prevent a bank from collectively investing IRA assets or Keogh plan assets in a CIF unless the fund is registered as an investment company and a security. Under this interpretation of the securities laws, only employee benefit plans qualified under section 401(a) of the IRC may be invested in A2 funds. In the absence of guidance from securities law counsel, a bank should be careful not to place IRA or Keogh assets in a CIF unless the fund qualifies for a specific exemption or is registered under the securities laws.

The SEC has recognized only limited exemptions from ’33 Act registration for a CIF that contains Keogh funds. For example, ’33 Act Rule 180 contains a “sophisticated investor” exemption from ’33 Act registration for CIFs holding Keogh account assets when the plan is either a single employer or has only employees of interrelated partnerships and when:

• The employer is a law firm, accounting firm, investment banking firm, pension consulting firm, or investment advisory firm that is engaged in furnishing services of a type that involve such knowledge and experience with financial and business matters that the employer is able to represent adequately its interests and those of its employees; or

• Before adopting the plan, the employer obtains expert financial advice from an entity, which is independent of the bank operating the CIF, that by virtue of knowledge and experience in financial and business matters is able to represent adequately the interests of the employer and its employees.

In addition to the narrow ’33 Act rule 180 exemption, a CIF holding Keogh funds may also be structured to qualify for the “intrastate exemption” under section 3(a)(11) of the ’33 Act. For the intrastate exemption to be available, however, all of the interests in the CIF must be sold within a single state or territory, and the parties to that plan must all reside and do business within that state. Any commingling of intrastate Keogh plan assets with assets from another state may nullify this exemption.

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