4000 - Advisory Opinions
Plan to Make Mutual Funds Available to Bank's Customers
November 21, 1986
Gerald J. Gervino, Senior Attorney
In your letters of October 6 and October 16, 1986, you indicate that you represent *** ("bank") of ***. You state that you are writing on behalf of the bank to confirm your opinion that a plan of the bank to make mutual funds available to the bank's customers conforms to the pattern approved generally in FDIC General Counsel's Opinion No. 6. In your letter of October 20, 1986, you enclose a copy of a letter dated October 15, 1986, from the Commissioner of Banks of the *** *** approving the bank's plan.
The bank plans to offer its facilities for mutual fund investments to the bank's IRA customers and also to its non-IRA customers for the purpose of investment in mutual funds. The bank has signed several agreements, which you describe as "rule 12b-1 agreements," with *** *** and corporations affiliated with ***. The *** Commissioner of Banks has approved the bank's use of proposed arrangements with *** and its affiliated companies under the provisions of *** ***.
*** is a registered broker-dealer under the Federal securities laws and a member of the National Association of Securities Dealers, Inc. As a wholly owned subsidiary of *** acts as the principal underwriter of the mutual funds sponsored by *** and advised by affiliates of ***. *** currently sponsors a number of mutual funds registered as investment companies under section 8 of the Investment Company Act of 1940. Only those mutual funds hereafter listed will be available through the bank.
The so-called *** Funds are:
*** Bond Fund
*** U.S. Government Fund
Other funds are:
*** International Trust
*** Growth Trust
Tax-Free Instruments Trust
*** has obtained from the Securities & Exchange Commission ("SEC") a "no action letter" dated January 6, 1985, which states that the staff of the Division of Market Regulation would not recommend action against ***, the funds, the banks with which it contracts, nor the bank's employees if the banks enter into a contract similar to that enclosed without registering as broker-dealers under section 15(b) of the Securities Exchange Act of 1934. Since that no action letter, the SEC has issued rule 3b-9, 17 C.F.R. § 240.3b-9 (1986), which contains a "networking'' exception in paragraph (a)(1) of the rule. The exception parallels the provisions of the SEC no action letter. Under both the no action letter and the rule and the agreements enclosed with this letter, *** is to carry out all broker-dealer activities and the bank will perform only clerical and ministerial functions. The bank's employees do not offer any investment advice. Their only advice in this regard is to deliver a copy of the mutual fund prospectus to the customer and to refer all questions to the *** toll-free telephone number. The bank's employees will receive only the regular compensation and no employee of the bank will receive any compensation for, nor will any employee of the bank perform, any broker-dealer activities.
All securities issued to customers for each of the funds will be evidenced not by actual certificates but by computer-generated acknowledgement in the name of the bank's customer. If the bank is acting as custodian under a self-directed IRA, the acknowledgement will not only be in the customer's name, but also show the bank as custodian.
You have enclosed some draft forms you intend to use in connection with customer requests and copies of the bank's agreements with *** and certain of its affiliates.
You indicate that the bank will receive fees in respect to the *** Funds in the amount of 2% of the net asset value of all shares purchased during the month (other than shares acquired through reinvestment of dividends and capital gains) plus .25% of the average aggregate net asset value of shares held in customers' accounts invested through the bank. The bank's compensation as to the other funds will be .25% of the average aggregate net asset value of the shares held during the month in customers' accounts for which the bank provides services.
The bank's materials which you have furnished state that the bank does not endorse or recommend any mutual funds available through its facilities and that investment by a customer in any of the funds is the customer's own decision based upon the prospectus for each fund.
You enclose a copy of a March 8, 1985 letter from the Assistant Director of the Legal Advisory Services Division of the Comptroller of the Currency, [Current] Banking L. Rep. (CCH) ¶ 85,502. In that letter, Assistant Director Liebesman indicates that he has no legal objection to a service similar to that you have proposed as far as the Glass-Steagall Act is concerned.
You indicate that the bank's proposed plan conforms with each of the criteria set forth in General Counsel's Opinion No. 6.
(1) The bank will be acting solely at the customer's direction.
(2) Transactions under the plan are for the account of the customer and not the bank, and all securities issued by the mutual funds in the customer's name alone or in the customer's name with the bank as custodian under the IRA.
(3) Transactions will be without recourse against the bank.
(4) The bank makes no warranty as to the performance or quality of any of the securities or mutual funds purchased by customers.
(6) None of the transactions will involve the bank in a trustee capacity.
You ask that we confirm that the bank's plan to provide its customers with facilities to purchase mutual fund shares conforms with the requirements of General Counsel's Opinion No. 6.
Under the facts and opinion which you have presented, the bank's plan appears to conform with the requirements of General Counsel's Opinion No. 6.