The complete text of OCC Regulation 9 -  Section 9.18, regarding the operation of collective investment funds, can be found in Appendix G.  The following is a synopsis of significant parts of Section 9.18.

E.1. Section 9.18  Applicability to State Nonmember Banks
State nonmember banks need to comply with Section 9.18 for funds granted tax-exempt status pursuant to IRC Section 584.  Funds granted tax-exempt status pursuant to Revenue Ruling 81-100, such as employee benefit CIF's, are generally not subject to Section 9.18 requirements.  However, state law often requires that all CIF's comply with Section 9.18 or comply with a similarly written state provisions.  Even where not required by law, the standards set forth in Section 9.18 should be followed by state nonmember banks as industry best-practices for all funds. 

E.2. 1997 Revision of Section 9.18
The OCC revised its national bank fiduciary regulations in 1997.  At the time, several OCC fiduciary precedents and trust interpretive letters had been issued under the prior version of the regulation.  The OCC opined that the precedents and interpretations in these interpretation letters have become industry practice or simply articulate sound fiduciary principals. 

At the same time, the OCC opined that whether a CIF plan needs to be amended to accommodate the changes in the revised regulation, depends upon the language in the existing plan.  If the language specifically states the requirements of the old regulation, management should continue to operate the plan in compliance with the original plan - unless the plan is amended.  If the plan's language merely makes general reference to 12 CFR 9.18, an amendment may not be necessary.  However, banks operating short-term investment funds should amend their plans to reflect the new valuation provision in the revised regulation.  Any amendment should be approved by the bank's board or its designee.  Expenses incurred in amending a plan are considered the cost of establishing or organizing a CIF, and, therefore, may not be charged to the fund (Section 9.18(b)(10)).  Refer to Appendix G for OCC Bulletin 97-22 (Excerpts) for further information regarding the implementation of the revised Section 9.18 to pre-existing CIF's.    

E.3. Section 9.18(a)(1)
Section 9.18(a)(1) provides that banks may operate a fund maintained exclusively for the collective investment of monies contributed by the bank in its capacity as trustee.  Section 9.18(a)(1) funds are commonly referred to as common trust funds and are defined in Subsection B.2. Common Trust Fund.  In the administration of funds created pursuant to Section 9.18(a)(1), bank procedures should provide that no units of participation may be held by an agency account.

The 1997 revision to Section 9.18(a)(1) eliminated the 10% limit on a participant's interest in a common trust fund, and the 10% limit on investment of a common trust fund in the obligations of one issuer. The revised regulation also eliminated the requirement that a bank maintain, in cash and readily marketable assets, a percentage of common trust fund assets as necessary to provide for the liquidity needs of the common trust funds.

E.4. Section 9.18(a)(2)
Section 9.18(a)(2) states the general permissibility of banks to operate a fund consisting solely of assets of retirement, profit sharing, stock bonus, or other trusts that are exempt from Federal income tax.  Section 9.18(a)(2) funds are often referred to as Collective Investment Funds (as previously described in Subsection B.2.).  In the administration of funds created pursuant to Section 9.18(a)(2), bank procedures should not allow participation by any trust accounts which are subject to Federal income tax.

E.5. Section 9.18(b)(1)  The Written Plan
A CIF must be established and maintained in accordance with a written plan.  The plan may cover multiple funds.  The plan must be approved by resolution of the bank's board of directors or a committee authorized by the board.  (Although not required by 9.18, it is recommended that legal counsel examine the plan.)  A copy of the plan must be made available to any person for inspection at the main office of the bank during banking hours.

Section 9.18(b)(1) sets forth the required minimum content of the written plan establishing a CIF:

1. Investment powers and policies with respect to the fund,

2. Allocation of income, profits, and losses,

3. Fees and expenses that will be charged to the fund and to participating accounts,

4. Terms and conditions governing the admission and withdrawal of participating accounts,

5. Audits of participating accounts,

6. Basis and method of valuing assets in the fund,

7. Expected frequency for income distribution to participating accounts,

8. Minimum frequency for valuation of fund assets,

9. Amount of time following a valuation date during which the valuation must be made,

10. Bases upon which the bank may terminate the fund, and

11. Any other matters necessary to define clearly the rights of participating accounts.

Items (iii) and (vii) are 1997 additions to Section 9.18.  Plans that were approved and in operation prior to the 1997 revisions (unless the plan is amended) are not required to maintain such provisions.  .

E.6. Section 9.18(b)(2)  Fund Management
Under Section 9.18(b)(2), a bank administering a CIF shall have exclusive management thereof, except as a prudent person might delegate responsibilities to others.  The ability of management to delegate certain responsibilities to others under the prudent person standard was added in 1997.  Management, however, is responsible for conducting a due diligence review prior to delegation, having board or designee approval of the delegation, ensuring an written agreement sets forth duties and responsibilities, and closely monitoring the activities and performance of the third party.  In OCC Bulletin 97-22, the OCC recommended that a bank review, with their attorney, the securities laws and tax implications prior to any delegation of investment responsibility.  Delegating investment advise is discussed in Subsection F.1 - Use of Outside Investment Advisers.

E.7. Section 9.18(b)(4)  Valuation
Section 9.18(b)(4) requires that the fund be valued at least once every three months.  Funds must be valued at market value or, if such valuation is not readily ascertainable, at a fair value determined by the trustee. 

The current regulation grants a valuation frequency exception for 9.18(a)(2) funds (retirement, pension, profit sharing, stock bonus, or other trusts exempt from Federal taxation) that invest primarily in real estate or other assets that are not readily marketable.  For these types of funds, the bank is only required to determine the value of the fund's assets at least once each year.  Note:  Section 9.18(b)(4), "Valuation", is currently being revised to provide increased flexibility when valuing assets that are illiquid, difficult to value, or not readily marketable.  The anticipated change will allow these assets to be valued once per year within all funds (without the existing restrictions on fund type).  The valuation of the fund's readily marketable assets will still be required to be valued at least once every three months.  Refer to www.occ.treas.gov for most current regulatory information on this issue.

There are specific valuation guidelines for Short-term Investment Funds (STIF's).  The assets of a STIF may be valued at cost (as opposed to fair market value), if the STIF maintains a dollar weighted average portfolio maturity of 90 days or less, the bank uses straight line accrual between the cost and anticipated principal receipt on maturity, and the bank holds fund's assets until maturity under usual circumstances [Section 9.18(b)(4)(ii)(B)].  Revisions to Section 9.18 made substantial changes with respect to the operation of STIF's.  One significant change is the elimination of the requirement that a STIF invest at least 80% of the STIF's assets in instruments payable on demand or that have a maturity date not exceeding 91 days from date of purchase.  The revised regulation also eliminated the requirement that at least 20% of the fund's assets must be cash, demand obligations, and assets that will mature at the fund's next business day.

E.8. Section 9.18(b)(5)  Admission and Withdrawal Under Section 9.18(b)(5), participants should be admitted to or withdrawn from a fund only on the basis of the valuation described in Section 9.18(b)(4), and on such valuation date.  The admission or withdrawal must be under prior request or notice on or before the valuation date.  The bank may require notice of up to one year for withdrawals from funds with assets that are not readily marketable.  No admission or withdrawal request or notice can be canceled or countermanded after the valuation date.  Distributions to withdrawing participants may be made in cash, ratably in kind, a combination of cash and ratably in kind, or in any other manner consistent with the applicable state law.

In OCC Interpretive Letters #920 and #936, the OCC stated that while Section 9.18(b)(4) addresses the frequency of valuing a CIF, that requirement does not mandate a similar frequency for admissions and withdrawals.  The confusion, the OCC writes, results from the fact that the regulation provides that admissions and withdrawals may only be on the basis of the valuation.  The Interpretive Letters are located in Appendix G.

E.9. Section 9.18(b)(6)(i)  Annual Audit
Section 9.18(b)(6)(i) requires that each CIF be audited at least once during each 12-month period by auditors responsible only to the bank's board of directors.  [If permitted by state law, Section 9.18(b)(10) permits the plan to pay reasonable expenses incurred to operate the fund.  The regulation does not define reasonable or specify which expenses may be paid.  The OCC had interpreted the prior regulation to permit the recapture of the audit costs associated with independent outside auditors, but not internal audit costs.]

There are no regulatory requirements as to the scope of the audit. Therefore, as long as the audit appears reasonably complete, examiners should express no objection.  As mentioned previously, CIF's that obtain tax-exempt status under RR 81-100 are not necessarily subject to Section 9.18 requirements except if required to do so under state law or regulation.  Nonetheless, audits are strongly recommended by the Corporation, and examiners should criticize any CIF that is not audited annually.  When OCC Regulation 9.18 sets specific requirements, a reasonable equivalent should be in place for a CIF subject to RR 81-100. 

Both internal and external audits are acceptable, if the audit scope is adequate.  Items typically addressed in a CIF audit:

• Sufficient tests to permit the auditor to provide an opinion on financial data required by OCC Regulation 9.18(b)(6)(ii).

• Confirmation or verification of the fund's assets, together with a reconciliation of pending transactions.

• Reconciliation of any cash positions in deposit or money-market funds.

• General compliance with OCC Regulation 9.18, especially as to: advertising restrictions [Section 9.18(b)(7)] and prohibited transactions regarding self-dealing and conflicts of interest [Section 9.18(b)(8) and Section 9.12(b)].

• General compliance with any applicable state laws or regulations.

• Conformance with the plan document, particularly as to: limitations on the types of eligible participants and limitations on permissible investments.

• Review of any transactions with bank insiders or investments in their related interests.

• Review of any fees paid by the CIF to the bank, its insiders, and their related interests.

• A test to ensure that income receivable from investments is posted to the CIF, and that proper accruals are used in distributing net income.

E.10. Section 9.18(b)(6)(ii)  Financial Report
Section 9.18(b)(6)(ii) requires each CIF to issue an annual report that is intended both for the bank and the beneficiaries of participating accounts.  At least once during each 12 month period, a financial report of the fund based on the audit (Section 9.18(b)(6)(i) above) must either be furnished, or made available, at no charge to each person who would receive an accounting from each participating trust account.  It may also be provided to prospective customers.

The financial report must contain a list of investments at both cost and current market value, a summary of investment changes for the period reflecting purchases (with costs) and sales (with profit or loss), income and disbursements since the last report, and notation of any investments in default.  The report may not contain predictions of future fund performance, but may include historical performance data.

Additionally, Part 344 of the FDIC Rules and Regulations - Recordkeeping and Confirmation Requirements For Securities Transactions requires an annual financial report for all CIF's (even RR 81-100 Employee Benefit CIF's).  Part 344.6(e) states that for collective investment fund accounts: "The bank shall at least annually give or send to the customer a copy of a financial report of the fund, or provide notice that a copy of such report is available and will be furnished upon request to each person to whom a regular periodic accounting would ordinarily be rendered with respect to each participating account. This report shall be based upon an audit made by independent public accountants or internal auditors responsible only to the board of directors of the bank." 

E.11. Section 9.18(b)(7)  Advertising of Collective Investment Funds
Advertising of common trust funds established for personal trust accounts (9.18(a)(1) funds) is prohibited under OCC Section 9.18(b)(7), except in connection with the advertisement of general fiduciary services.  The advertising restrictions of this section do not apply to employee benefit collective investment funds (9.18(a)(2) funds) typically organized under RR 81-100.  Be advised that advertising of any collective investment fund may jeopardize its exemption from securities laws, thereby requiring registration. 

E.12. Section 9.18(b)(8)  Self-Dealing and Conflicts of Interest
Section 9.18(b)(8) requires banks administering CIF's to comply with Self-Dealing and Conflicts of Interest requirements.  The following is a summary of CIF self-dealing and conflict of interest rules (with links to the specific Regulation 9 sections):

• The bank may not have an interest in the CIF, except in its fiduciary capacity.  (This includes a prohibition on any creditor relationship between the bank and the fund or its participants.  This section has been interpreted to extend to overdrafts.)  [9.18(b)(8)(i)] 

• The bank may not make a loan on the security of the participant's interest in the fund.  [9.18(b)(8)(ii)]

• The bank may not lend, sell, or otherwise transfer assets of a fiduciary account to the bank, insiders, or affiliates.  [ 9.12(b) as referenced by Section 9.18(b)(8)]

• Defaulted investment exception:  A bank may purchase a defaulted fixed income investment from a fund for its own account.  If it does so, the purchase price must be at the greater of: market value, or cost plus accrued unpaid interest.  [9.18(b)(8)(iii)]

• No fund assets may be invested in the bank's stock or obligations.  [Section 9.12(a) as referenced by Section 9.18(b)(8)]

See entire text of Section 9.18(b)(8) and Section 9.12 in Appendix G for further information.

Own-Bank Deposits in a Short-Term Investment Fund (STIF):  OCC Interpretive Letter #969 states that a bank may use own-bank deposits for fiduciary assets awaiting investment or distribution collectively in a STIF administered by the bank.  However, the activities must comply with conditions set forth in the letter and Section 9.10 and Section 9.12 of the regulation.  The activity must be "lawfully authorized by the instrument creating the relationship, or by court order or by local law".  Refer to Interpretive Letter #969 in Appendix G for further information. 

 
Underperforming CIF's:  In addition to the specific conflicts of interest principles addressed in Section 9.18, banks confront other conflicts of interest in the administration of CIF's.  One of the most difficult is management's continued use of a CIF that consistently under-performs general market indices.  The costs of establishing and maintaining CIF's, together with marketing or public relations, and potential litigation considerations, may influence management's decision to continue to invest customer assets in CIF's.   Sound fiduciary investment practice, on the other hand, might require that account assets invested in an underperforming CIF be sold and investments made in more productive investment vehicles.  CIF performance must be evaluated in the same manner as other investments.  CIF performance should be compared with mutual fund performance indices and overall market indices (S&P 500, Dow Jones Industrials, etc.).  Examiners should not recommend either the continuation or termination of a particular fund.  However, management's failure to routinely evaluate and document fund performance should be criticized.  Funds that have underperformed general market indices should receive management's (including the board of directors) close scrutiny, and be covered by a strategic plan to improve performance.

E.13. Section 9.18(b)(9)  Management Fees
Section 9.18(b)(9) permits a bank administering a CIF to charge a reasonable fund management fee only if the fee is permitted under applicable law (and complies with fee disclosure requirements, if any) in the state in which the bank maintains the fund.  The amount of the fee must be commensurate with value of legitimate services of tangible benefit.

Through various interpretive letters, the OCC has provided some clarification to Section 9.18(b)(9) regarding what constitutes reasonable fees commensurate with the value of services provided.  OCC Interpretive Letter #829, responds to a bank inquiry regarding applying different management fees to common participants commensurate with the amount and type of participant services provided.  Interpretive Letter #829 addressed charging different fees to various 401(k) employee benefit plans participating in the bank's CIF's based on the complexity of the 401(k) plans' administrative characteristics.     

E.14. Section 9.18(b)(10)  Expenses 
Section 9.18(b)(10) permits a bank administering a CIF to charge reasonable expenses incurred in operating the CIF, to the extent not prohibited by applicable state law.  The section specifies that the bank shall absorb the expenses of establishing or reorganizing a CIF. 

OCC Interpretive Letter #919, located in Appendix G, provides guidance for permissible expense recovery from participants in model-driven funds and index funds.  Model-driven funds are collective investment funds that seek to outperform a specified index or benchmark based on a pre-determined investment strategy.  The Interpretive Letter indicated that model-driven funds may charge participants the cost of entering or exiting a fund just as index funds do, provided the fund's governing document authorizes such changes.

E.15. Section 9.18(b)(11) and (12)  Prohibition Against Certificates / Good Faith Mistakes
Sections of 9.18(b)(11) and 9.18(b)(12) prohibit issuing certificates or documents representing an interest in the CIF and provide an opportunity for bank's to promptly correct good faith mistakes, respectively. 

E.16. Section 9.18(c)  Other Collective Investments
Section 9.18(c) prescribes other permissible instances when banks may collectively invest assets that it holds as fiduciary.  Under certain circumstances, 9.18(c) address commingling single loans or obligations, variable amount notes (vans), mini-funds, trust funds of corporations and closely-related settlors, and other, special exemption funds subject to OCC approval.