Federal Deposit
Insurance Corporation

Collective Fund Limited to Funds Awaiting Investment or Distribution: Self-Deposits in a STIF

OCC Interpretive Letter #936, June 2002

12 C.F.R. 9.18

Comptroller of the Currency
Administrator of National Banks
Washington, DC 20219

May 22, 2002

Re:            Proposed Creation of the "[                        ] Fund"

Dear [            ]:

This letter confirms our February 13, 2002 teleconference, and responds to your letter dated March 5, 2002, regarding the establishment by [                         ] ("Bank"), as trustee, of the [                          ] ("Fund").  You have inquired whether the OCC would object to an aspect of the Fund's operations under the OCC's rules governing collective investment funds at 12 C.F.R. § 9.18.  Specifically, you have inquired whether the Bank, as trustee, may allow participant withdrawals from the Fund at the sole discretion of the Bank, or when a participant becomes ineligible to continue as a participant in the Fund.  Based on your representations, and for the reasons described below, the OCC does not object to this aspect of the Fund's operations under the OCC's rules governing collective investment funds at 12 C.F.R. § 9.18.[1]

I.  Proposal
The Bank seeks to establish the Fund for the collective investment of money contributed to the Fund by the Bank in its capacity as trustee of certain tax-exempt charitable trusts.  The Bank is forming the Fund in order to enable several small trusts for which it serves as trustee to invest in private equity limited partnerships ("PELP").  However, the trusts cannot invest in the PELP directly because an appropriate private equity investment for these trusts would not satisfy the minimum investment requirement of the limited partnership.  The Fund will pool the investments of several tax-exempt trusts that are "qualified purchasers,"[2] allowing the Fund to satisfy the minimum requirement of the limited partnership.
 

Under the Bank's proposal, Fund participants will be unable to make discretionary withdrawals from the Fund.[3]  Sections 6.2(a), (b), (c) and (e) of the Declaration of Trust provide:

(a)  Unless otherwise limited hereunder, the decision on when to allow, the form of, and the timing of all Fund withdrawals shall be within the sole discretion of the Trustee;

(b) Participants will not have the right to withdraw from the Fund at any particular time or interval;

(c) At the time of the creation of a Fund, the Trustee does not anticipate allowing any withdrawals from the Fund prior to the termination and liquidation of the [private equity investments] of the Fund; and

(d)  Upon the occurrence of an event that renders a participant ineligible to continue as a participant in the Fund, [4] within one year of such event the Trustee shall redeem such participant's units in the Fund, in kind, with a proportionate share of the [private equity investments] and the other assets of the Fund; subject, however, to any liens for incurred and unpaid capital contributions, debts, fees and expenses.

You represented during our February 13, 2002 teleconference that the Fund will be valued semi-annually on April 1 and October 1.  The Bank will use the valuation reports provided by the PELP's general partner to determine the Fund's fair value.  To comply with 12 C.F.R. § 9.18(b)(4)(ii), and as provided in § 5.3(f) of the Declaration of Trust, the Bank will determine whether the valuation provided by the PELP's general partner represents the fair value of the Fund's assets as of the date of the valuation.

II.  Discussion
 The OCC's regulation governing collective investment funds does not mandate the frequency of admissions and withdrawals from collective investment funds.  The regulation requires that the written plan governing the administration of the collective investment fund include appropriate provisions related to the terms and conditions governing the admission and withdrawal of participating accounts.[5]

 In addition, the regulation provides that admissions and withdrawals may only be "on the basis of the valuation described in paragraph (b)(4)."  Section 9.18(b)(4), in turn, provides in part that,

A bank administering a collective investment fund shall determine the value of the fund's assets at least once every three months.  However, in the case of a fund described in paragraph (a)(2) of this section that is invested primarily in real estate or other assets that are not readily marketable, the bank shall determine the value of the fund's assets at least once a year.[6]

These provisions require that bank trustees use the valuation derived under section 9.18(b)(4) to determine the amount participants are entitled to when they are admitted to or withdraw from a fund.  It does not mandate the frequency of admissions and withdrawals.[7]  National banks and institutions that must comply with this regulation to receive favorable tax treatment should have valid reasons for limiting admissions and withdrawals, however.  In addition, the admissions and withdrawal policies must be consistent with fiduciary duties.

In this case, the Bank does not anticipate allowing any withdrawals from the Fund prior to the termination and liquidation of the underlying trust investments because the Fund might fail to satisfy the minimum investment requirement of the PELP if the Fund permitted discretionary withdrawals from the Fund.  In addition, you represent that the Bank will limit admissions to, and withdrawals from the Fund, because the Fund's private equity investments will be in limited partnerships that will be illiquid over their projected ten to fifteen year business cycles. Specifically, the limited partnership interests are not transferable without the permission of the General Partner.  You have also represented that the amount of the investment that each participating trust will make in the Fund will not impair the liquidity of the participating trusts. The Fund is designed as, and will be used as, only one part of an overall investment strategy for the participating trusts.

 Based on your representations and consistent with applicable law, the Bank may permit a participant to withdraw from the Fund solely at the Bank's discretion, or when a participant becomes ineligible to continue as a participant in the Fund.[8] 

 I trust this is responsive to your inquiry.  Please do not hesitate to contact me if you have any questions.

 Sincerely,

-signed-

Asa L. Chamberlayne
Counsel
Securities and Corporate
Practices Division


Footnotes
[1] We limit our no-objection to the Bank's proposal to allow participant withdrawals from the Fund at the sole discretion of the Bank, or when a participant becomes ineligible to continue as a participant in the Fund.  We offer no views on whether other aspects of the Fund's operations comply with the provisions of 12 C.F.R. § 9.18 or with applicable fiduciary law.

[2] While the Investment Company Act of 1940 ("1940 Act") is not applicable to the Bank's proposal, the Bank represents that if the 1940 Act were applicable to the Bank's proposal, the tax-exempt trusts for which the Bank is trustee would meet the definition of "qualified purchasers" under § 2(a)(51) of the 1940 Act.

 [3] The Bank represents that it will provide appropriate disclosures to the board of directors or the trustee(s) of the beneficiaries of each Fund participant with respect to the nature of the Fund's investments and capital calls, and that Fund participants will not have the right to withdraw from the Fund at any particular time or time interval.

 [4] The Bank represents that the only way a participant would cease to be eligible to continue as a participant in the Fund would be if the Bank was removed, for cause, as trustee of the participating account.

[5] The regulation also provides that certain funds may require a prior notice period of up to one year for withdrawals.  12 C.F.R. § 9.18(b)(5)(iii).

 [6] 12 C.F.R. § 9.18(b)(4)(i).  Section 9.18(b)(4) also establishes the method of valuation.  In general, bank trustees are required to value fund assets at market value as of the date set for valuation, unless the bank cannot readily ascertain market value, in which case the bank shall use a fair value determined in good faith.  See 12 C.F.R. § 9.18(b)(4)(ii)(A).  Different valuation methods apply to short term investment funds.  See 12 C.F.R. § 9.18(b)(4)(ii)(B).

 [7] OCC Trust Interpretive Letters interpreting the prior version of 12 C.F.R. § 9.18 concluded that admissions and withdrawals must occur as frequently as valuations.  See e.g., Trust Interpretive Letter #13 (February 14, 1986).  Upon closer examination of the regulation, however, we have concluded that the regulation does not mandate the frequency of admissions and withdrawals.  See Interpretive Letter #920 (December 6, 2001).

 [8] See footnote 4, supra.

 

OCC Interpretive Letter #920, December 2001

12 C.F.R. 9.18

Comptroller of the Currency
Administrator of National Banks
Washington, DC 20219

December 6, 2001

Subject:[               ] Trust Company -- [                      ]Fund

 Dear [             ]:

 This is in response to your request for an exemption under 12 C.F.R. § 9.18(c)(5) to permit annual admissions to and withdrawals from a collective investment fund established by     [                  ]Trust Company.  For the reasons discussed below, we have concluded that annual admissions and withdrawals are permitted under 12 C.F.R. § 9.18 and, therefore an exemption from 12 C.F.R. § 9.18 is not required.  

Proposal 
[                       ] ("Trust Company"), a [                  ] trust company, seeks to establish a collective investment fund, [                                         ] ("CIF"), exclusively for the collective investment and reinvestment of money contributed to the fund by the Trust Company in its capacity as trustee of certain trusts. The Trust Company is forming the CIF in order to enable several small trusts for which it serves as trustee to invest in [                                  ] ("Limited Partnership"), a limited partnership formed by the Trust Company.  Those trusts are not qualified to invest directly in the Limited Partnership because of their size.  

The Limited Partnership invests in third party investment partnerships engaged in hedge fund investing. The Limited Partnership will receive cash flow from its partnership investments once a year.  As a result, the Limited Partnership will only allow annual admissions and withdrawals.  Because the Limited Partnership only permits annual admissions and withdrawals, the Trust Company has proposed that the CIF only allow annual admissions and withdrawals.

 The CIF will be valued quarterly.  The Trust Company will use the valuation reports provided to it from the third-party investment partnerships that constitute the underlying investments of the Limited Partnership to determine the fund's fair value.  To comply with 12 C.F.R. § 9.18(b)(4)(ii), the Trust Company must determine that the valuation provided by the limited partnerships represents the fair value of the fund's assets as of the date of the valuation.

Discussion
The OCC's regulation governing collective investment funds does not mandate the frequency of admissions and withdrawals from collective investment funds.  The regulation requires that the written plan governing the administration of the CIF include appropriate provisions related to the terms and conditions governing the admission and withdrawal of participating accounts.[1] 

In addition, the regulation provides that admissions and withdrawals may only be "on the basis of the valuation described in paragraph (b)(4)." Section 9.18(b)(4), in turn, provides in part that,

A bank administering a CIF shall determine the value of the fund's assets at least once every three months.  However, in the case of a fund described in paragraph (a)(2) of this section that is invested primarily in real estate or other assets that are not readily marketable, the bank shall determine the value of the fund's assets at least once a year.[2]

These provisions require that bank trustees use the valuation derived under section 9.18(b)(4) to determine the amount participants are entitled to when they are admitted to or withdraw from a fund.  It does not mandate the frequency of admissions and withdrawals.[3]  National banks and institutions that must comply with this regulation to receive favorable tax treatment should have valid reasons for limiting admissions and withdrawals, however.  In addition, the admissions and withdrawal policies must be consistent with fiduciary duties.

In this case, you have represented that the CIF will not have sufficient liquidity to permit admissions and withdrawals more than once a year because the CIF is invested in a Limited Partnership that only permits annual admissions and withdrawals.  You also have represented that the amount of the investment that each participating trust will make in the CIF will not impair the liquidity of the participating trusts.  The CIF is designed as, and will be used as, only one part of an overall investment strategy for the participating trusts. 

Based on these representations and consistent with applicable law, the Trust Company may permit annual admissions and withdrawals from the CIF.  The proposed schedule of admissions and withdrawals must be disclosed to fund participants in the CIF's written plan.  

I trust this is responsive to your inquiry.  Please do not hesitant to contact me if you have any questions.

Sincerely,

 -signed-

Beth Kirby
Special Counsel
Securities and Corporate Practices

Footnotes
[1] The regulation also provides that certain funds may require a prior notice period of up to one year for withdrawals.  12 C.F.R. § 9.18(b)(5)(iii).

[2]  12 C.F.R. § 9.18(b)(4)(i).  Section 9.18(b)(4) also establishes the method of valuation.  In general, bank trustees are required to value fund assets at market value as of the date set for valuation, unless the bank cannot readily ascertain market value, in which case the bank shall use a fair value determined in good faith.  See 12 C.F.R. § 9.18(b)(4)(ii)(A).  Different valuation methods apply to short term investment funds.  See 12 C.F.R. § 9.18(b)(4)(ii)(B).

[3]  OCC Trust Interpretive Letters interpreting the prior version of 12 C.F.R. § 9.18 concluded that admissions and withdrawals must occur as frequently as valuations. See e.g., Trust Interpretive Letter #13 (February 14, 1986).  Upon closer examination of the regulation, however, we have concluded that the regulation does not mandate the frequency of admissions and withdrawals.

Expense Recovery for Model-Driven Funds

OCC Interpretive Letter #919, December 2001

12 C.F.R. 9.18

Comptroller of the Currency
Administrator of National Banks
Washington, DC 20219

November 9, 2001

RE:  Model-Driven Funds

Dear [               ]:

This is in response to your request for confirmation that the OCC permits model-driven funds, established pursuant to 12 C.F.R. § 9.18, to allocate costs to individual participants being admitted to or withdrawing from such funds in the same manner and to the same extent as section 9.18 index funds.  Based on your representations and for the reasons set forth below, we conclude that model-driven funds, as defined below, may allocate costs to individual participants in the manner described below.[1] 

Background
You represent a national bank that administers index funds and model-driven funds, established pursuant to 12 C.F.R. § 9.18.[2]   The index funds are collective investment funds that seek to replicate the performance of a specified index, such as the Standard and Poor's 500 Index.  Trading decisions are made according to a formula that tracks the rate of return of the index by replicating the entire portfolio of the index or by investing in a representative sample of that portfolio.
The model-driven funds are collective investment funds that seek to outperform a specified index or benchmark based on a pre-determined investment strategy.[3]  In the model-driven funds, a computer model selects the identity and amount of securities contained in the funds.  The model is based on prescribed objective criteria, using independent third party data that is not within the control of the fund manager.

Proposal
The Bank has proposed to charge or credit fund participants who are admitted to, or withdraw from its model-driven funds with the costs, expenses and related adjustments (collectively, the "Costs") involved in the acquisition of securities when the participants are admitted to the funds, and the disposition of securities upon the participants' withdrawal from the funds. [4]  The Bank currently charges or credits fund participants who are admitted to, or withdraw from its index funds in this manner. With respect to domestic model-driven funds, these Costs would include:

(1) commissions paid by the fund to broker/dealers on purchases or sales, as applicable, of portfolio investments relating to the participant's contribution or redemption, respectively; 

(2) Securities and Exchange Commission fees on sales of portfolio investments of U.S. listed and traded securities by the fund relating to the participant's redemption; and

(3) the net difference (positive or negative) between:

(a) the market value of the portfolio investments purchased or sold by the funds, relating to the participant's contribution or redemption, on the date the fund's investments are valued for purposes of determining the number of units in the fund to be issued to or redeemed for the participant, and

(b) the fund's execution price for such portfolio investments. [5]

The Bank has represented that it will inform all participants in the model-driven funds it manages that these Costs will be allocated to contributing and redeeming participants.

You contend on behalf of the Bank that allocating costs in this manner is appropriate for two reasons.  First, you believe that allocating costs to individual participants entering or exiting the fund will be fair and equitable to all the participants in the fund.  You believe that a procedure that did not allocate costs to a contributing or withdrawing participant could be unfair to other participants in the fund because these other participants would bear the expenses and charges attributable to the contributing or withdrawing participant.

Second, you note that the OCC has previously permitted section 9.18 index funds to charge brokerage fees and expenses to accounts that are purchasing or selling units of the index fund.   You believe that model-driven funds should be treated in the same manner as index funds for purposes of allocating costs, given the similarities between these types of funds.  You note that both index funds and model driven funds limit the discretion of fund managers, are based upon certain pre-specified formulae or algorithms, and are quantitative in nature.

For these reasons, you believe the OCC should permit model-driven funds, established pursuant to 12 C.F.R. § 9.18, to allocate costs to individual participants being admitted to or withdrawing from such funds in the same manner and to the same extent as section 9.18 index funds.

Discussion
Collective Investment Funds, established pursuant to 12 C.F.R. § 9.18, generally are not permitted to charge individual participants with the cost of entering or exiting a fund.[6]  The OCC has determined, however, that funds with certain characteristics may charge individual participants the costs associated with being admitted to or withdrawing from a fund.  In particular, the OCC has permitted a section 9.18 index fund to charge brokerage fees and expenses to accounts that are purchasing or selling units of the index fund provided that the fund document authorizes such charges.[7]

Model-driven funds, established pursuant to 12 C.F.R. § 9.18(a)(2), have characteristics similar to section 9.18 index funds.  In particular, both index funds and model-driven funds do not involve any significant exercise of investment discretion by investment managers managing the funds.  For example, an investment manager of an index fund makes investments according to a formula that tracks the rate of return, risk profile, or other characteristics of an independently maintained index by either replicating the entire portfolio of the index or by investing in a representative sample of such portfolio designed to match the projected risk/return profile of that index.

Similarly, an investment manager of a model-driven fund makes investments based upon a formula by which an "optimal" portfolio is created to implement a pre-determined investment strategy that is either based upon or measured by an independently maintained index of securities.  A computer model must select the identity and the amount of the securities contained in a model-driven fund.  Although managers may use their discretion to design the computer model, the model must be based on prescribed objective criteria using third party data, not within the control of the managers, to transform an independently maintained index.[8]  

This limited management discretion helps ensure that all fund participants, including those entering or exiting a fund, will be treated fairly and equitably.  For example, the Bank has committed that fund participants being admitted to or withdrawing from a fund will have the same access to and benefit from cross-trading opportunities and other low cost trading mechanisms as other fund participants.[9]  For these reasons, we conclude that model-driven funds, as defined in this letter, should be permitted to allocate costs to individual participants being admitted to or withdrawing from such funds in the same manner and to the same extent as index funds.[10]

Model Validation and Testing
As noted above, trading decisions in model-driven funds are made by computer models, based on pre-determined investment strategies and prescribed objective criteria.  These computer models are designed to systematically control risk and costs and achieve above benchmark returns.  Computer models that are improperly validated or tested, however, may expose the bank to risks from erroneous model input or output or incorrect interpretation of model results.  To mitigate those risks, the bank should ensure that its computer models are frequently verified, validated and reviewed.  To ensure proper validation and testing, the bank should develop formal written policies and procedures consistent with the guidance provided in OCC Bulletin 2000-16 on Risk Modeling and Model Validation.

Conclusion
Model-driven funds, established pursuant to 12 C.F.R. § 9.18(a)(2), may allocate costs to individual participants being admitted to or withdrawing from such funds in the same manner and to the same extent as section 9.18 index funds, provided the fund document authorizes such charges.   If you have any questions, please do not hesitate to contact me at (202) 874-5210.

Sincerely,

-signed-

Beth Kirby
Special Counsel
Securities and Corporate Practices

Footnotes  
[1]   You have represented that the proposed allocation, if properly disclosed, complies with applicable law, including the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), to the extent that the model-driven funds have assets of clients subject to ERISA.  The OCC has not addressed and does not opine whether the proposed allocation complies with ERISA or applicable federal securities law and state law.   

[2]    Section 9.18 collective investment funds include funds maintained by the bank, exclusively for the collective investment or reinvestment of money contributed to the fund by the bank, or one or more affiliated banks, in its capacity as trustee, executor, administrator, guardian, or custodian under a uniform gifts to minors act.  12 C.F.R. § 9.18(a)(1).  Section 9.18 collective investment funds also include funds consisting solely of assets of retirement, pension, profit sharing stock bonus or other trusts that are exempt from Federal income tax.  12 C.F.R. § 9.18(a)(2). 
 

[3]   The index or benchmark must represent the investment performance of a specific segment of the public market for debt or equity securities. In addition, the index or benchmark must be established and maintained by an independent organization that is in the business of providing financial information or brokerage services to institutional clients, a publisher of financial news or information or a public stock exchange or association of securities dealers. The index or benchmark must be a standardized index of securities that is not specifically tailored for the use of the manager.

[4]  The Bank has represented that trades would be effected in a prudent and expeditious manner.  The Bank has committed that the fund would not engage in any "market timing" (i.e., the fund would not seek to "time" the transactions in anticipation of broad market movements).

 [5]   With respect to international model-driven funds investing in foreign securities, these Costs would include items (1) and (3) listed above, as well as the following:  (1)  transaction-related charges to convert, as applicable, the participant's contribution of U.S. dollars to the relevant foreign currencies or the proceeds on sales relating to the participant's redemption to U.S. dollars from the relevant foreign currencies, and any applicable stamp taxes or other types of transfer fees imposed by a foreign jurisdiction or a foreign exchange; and (2) bank custodian charges paid by the fund representing fees levied on a per-portfolio transaction basis relating to the participant's contribution or redemption, as applicable.  In general, you state that the charges to contributing and redeeming participants are higher in foreign markets than in U.S. markets because the costs associated with purchases and sales of securities are higher in foreign markets.

[6]    Section 9.18(b)(10) permits a bank that manages a collective investment fund to charge reasonable expenses (except expenses incurred in establishing or reorganizing a collective investment fund) to the fund as long as those expenses are permissible under state law and are fully disclosed to fund participants.  12 C.F.R. § 9.18(b)(10). 

[7]  OCC Fiduciary Precedent 9.5980, which interpreted the former Part 9, stated, among other things, that the OCC will not object to an index fund charging brokerage fees and expenses to accounts that are purchasing or selling units of an index fund provided the fund document authorizes such charges.  See OCC Fiduciary Precedent 9.5980, Comptroller's Handbook for Fiduciary Activities (September 1990). See also OCC Trust Interpretive Letter No. 228 (August 8, 1989), where the OCC permitted an index fund to charge individual participants with brokerage expenses and certain trading or market gains or losses.  Part 9, including 12 C.F.R. 9.18, was amended effective January 29, 1997.  61 Fed. Reg. 68,543 (1996).  The fiduciary precedents and trust interpretive letters preceding the January 29, 1997 effective date of 12 C.F.R. Part 9 are interpretations of the former regulation.  Those precedents and interpretations can still be persuasive in interpreting the language in the new Part 9, however.  Furthermore, in many instances the precedents and interpretations have become industry practice or simply articulate sound fiduciary principles.  

[8]    Fund managers do not have discretion to override trading decisions made by the computer model.  Fund managers may, however, verify the data the computer model is relying on and make adjustments to the model output to correct inaccuracies or outdated information.  Fund managers may not make such adjustments for arbitrary reasons or to benefit the fund manager, its affiliates, of any party in which the manager or its affiliates have an interest.  In addition, any adjustment must be made in compliance with written policies and procedures. 

[9]   Cross-trading refers to a practice where an investment manager offsets an order to buy a particular security with an order to sell a particular security between two or more accounts under its management without a broker acting as intermediary.  The Department of Labor has granted the Bank exemptive authority to engage in cross-trading securities with regard to its index funds and model-driven funds. 

[10] The Department of Labor has recognized these similarities in its proposed class exemption for Model-Driven Funds and Index Funds under ERISA. The proposed class exemption would treat Model-Driven Funds and Index Funds identically for purposes of allowing certain cross-trades of securities under ERISA.  The proposed class exemption is based on the limited management discretion associated with these types of funds.  See 64 Fed. Reg. 70057, 70069 (December 15, 1999).  The DOL has adopted this same approach for many years with respect to numerous individual prohibited transaction exemptions relating to cross-trading.  See, e.g., PTE 95-96, Mellon Bank, N.A., 60 Fed. Reg. 35,933 (July 12, 1995) ; PTE 94-47, Bank of America National Trust and Savings Association, 59 Fed. Reg. 32,021 (June 21, 1994); and PTE 94-43, Fidelity Management Trust Company, 59 Fed. Reg. 30,041 (June 10, 1994).

I. Background
The Bank is contemplating the establishment of a fluctuating net asset collective investment fund (      ) for employee benefit plans that would invest primarily in guaranteed investment contracts (GICs).(1)  The GICs are issued primarily by insurance companies. Generally, the bank intends to maintain a 10% cash position in [        ].

At present, the Bank (together with its affiliate banks) offers to 401(k) employee benefit plans and certain other employee benefit plans, choices of different retirement programs designed to meet the investment and administrative needs of the plans. Plan sponsors initially choose a retirement program offered by the Bank, then select from the investment alternatives available under the program (usually no more than eight) those alternatives it will make available to plan participants as investment options under its plan.( 2) The investment alternatives offered in this type of 401(k) product include certain mutual funds and [       ]. Before a sponsor decides to offer [         ] as an investment alternative to its plan participants, the Bank proposes to provide the plan sponsor with a Disclosure Statement describing how [        ] works and a

copy of the [      ] Declaration of Trust. The Bank also would provide the plan sponsor with information concerning the management fees applicable to its plan prior to the sponsor's decision whether to offer [        ] as an investment option.

Under the Bank's proposal, the management fee structure varies the fees charged to [        ] participants depending on the services they receive. For example, the Bank intends to charge a lower fee to plan participants investing in [        ] that contract directly with a third party for participant accounting or if the size of the plan allows for more cost-efficient servicing. The Bank would charge a higher fee to plan participants who take advantage of the full range of services the Bank offers for managing and administering the [        ], including [         ]'s portion of participant accounting. The Bank's CIF presently has a single in-fund management fee. As a result, plans that would require fewer services or allow for more cost efficient services tend not to participate in the CIF. Indeed, if such plans invested in the CIF and were to pay for services they did not receive or to pay more than warranted for the plan's services they did receive, the Bank and the plan trustee(s) could potentially breach the fiduciary duty they owe to the plans and plan participants. Conversely, the Bank does not believe a waiver of the entire management fee is appropriate, because it provides all CIF participants some level of customary services, including investment management, and they should pay a reasonable fee for those services.
 

The Bank has proposed a management fee structure for [      ] so that plan participants (or their employers) pay only for those services participants receive and only those plan participants whose assets are actually invested in [      ] (or their employers) pay the management fees associated with [      ]. The proposed fees generally fall within one of the three following areas:

1. No Fee. The Bank would not charge a fund management fee where the employer

pays the Bank's fees in one of the following three situations:

(a) where a plan and its participants otherwise would pay either the base service

or full service fees but the employer decides instead to pay the appropriate fee

directly;(3)
 

(b) where a plan, rather than employing the Bank for administrative services,

instead opens a so-called "Invest Only" custody or investment advisory account

for the sole purpose of investing in [     ]. The employer would pay a graduated fee
that varies inversely with the amount of assets invested in [      ]. The Bank would
have no responsibilities with respect to participant accounts; and

(c) where certain existing customers (mainly Bank customers) previously

negotiated various plan level fees that the employer pays, these arrangements

would remain unchanged.

2. Base Fee. The Bank charges a base service management fee for certain general

management and administrative services. The Bank anticipates that, based on the CIF

fees it currently charges, the base service management fee will range from [ # ] to [ # ]

basis points.(4)
 

3. Full Fee. The Bank charges a full service management fee for the full range of

management and administrative services that a trustee usually and customarily renders

to a CIF. The Bank would charge that fee in exchange for providing all administrative

services to the plan and its participants' accounts. The Bank anticipates that, based on

the CIF fees it currently charges, a full service management fee will be approximately
[# ] basis points.

The Bank believes that this fee structure would provide national banks a tool to price fiduciary services competitively and allow it to offer [        ] as a viable and competitive product to other investment alternatives. The Bank believes that if it cannot offer multiple pricing flexibility, it cannot present a viable alternative to other, more attractive investment options, e.g., where the sponsor of a 401(k) plan that qualifies for a lower expense ratio may select from a "menu" of more favorably priced investment options for plan participants (such as the purchase of institutional shares of a mutual fund).
 

The Bank would charge all CIF plans annual fees for trustee and custodian services. The annual fee would vary, depending upon other administrative services the Bank provides that are not directly related to investment services that the plans contract for, such as testing required under ERISA, filing the Form 5500, making contributions, issuing participant statements, and administering participant loans.
 

You represented on behalf of the Bank that each unit has a proportionate interest in [       ]'s assets. No unit would have any right, title, or interest in [        ] superior to, or different from, the right, title, or interest of any other [          ] unit. Due to the charging of fund management fees corresponding to the services the Bank would provide plan participants, unit values may vary. As the Bank deducts management fees at the [ ] fund level, the unit value of units held by plan participants who pay the full service fee will of necessity be lower than the unit value of units of plan participants subject only to the base service fee. Where a plan sponsor pays all fees directly, that plan's participants' units would have the largest per unit value since the Bank would not charge fees at the [         ] fund level.
 

Participants will always purchase [       ] units at their then fair market value. If one participant buys units subject to the full service fee and another participant purchases units subject only to the base service fee and each participant invests $1,000, both participants will receive units worth $1,000. The participant buying the full service fee units will receive more units, however, since units subject to a full service fee will have a lower fair market value, due to the larger fund management fee that the Bank periodically will deduct from those units. The value of the units will vary only to reflect the different fund management fees. You represent on behalf of the Bank that appropriate Bank systems and procedures will accurately account for, calculate, and report those value differences.  

II. Discussion
As fiduciaries, national banks may invest funds held on behalf of retirement, pension, profit sharing, stock bonus or other trusts that are exempt from Federal income taxation under the Internal Revenue Code in CIFs.
(5)  CIFs may invest in various assets, including GICs.
(6)  GICs are individually negotiated investment contracts between insurance companies and investors that resemble debt instruments and provide for fixed returns over a period of time, typically less than ten years.
(7)  The OCC previously has approved the use of CIFs for employee benefit accounts that invest primarily in GICs.
(8) OCC regulations govern the administration of CIFs by national bank trustees.
(9)  National banks may charge fees for the management of CIFs consistent with the limitations in 12 C.F.R. §9.18(b)(9) (1997). The management fees national bank may charge for administering CIFs are subject to an overall "reasonableness" standard. Accordingly, national banks may charge management fees for CIFs that are reasonable
(10), consistent with applicable state law requirements, and commensurate with the services the bank trustee is providing to the CIF.
(11)  A bank must also disclose the management fees to be charged to a CIF and to participating accounts in the bank's written plan
(12) and at least annually in a manner consistent with applicable law in the state where the bank maintains the CIF.
(13)  Part 9's reasonableness standard replaces a quantitative management fee limitation formerly applicable to CIF management fees.
(14)  The quantitative management fee limitation permitted a national bank trustee to charge a CIF a management fee only if the fractional part of such fee proportionate to the interest of each participant would not exceed the total fees that the participant would be charged if the participant had not invested assets in the CIF.
(15)  The OCC replaced the more restrictive quantitative management fee limitation with the reasonableness standard, in order to provide "updated operating standards for national bank fiduciary activities" and "sufficient protections for bank's fiduciary customers."
(16) Under the new standard, national banks may charge CIF management fees provided that the fees are reasonable under the particular facts and circumstances. OCC regulations do not address the ability of national banks to charge different fees to different classes of CIF participating accounts. The OCC determined under the former quantitative limitation that national banks may charge different management fees to different classes of participant accounts.
(17)  In OCC Interpretive Letter No. 300,
(18)the OCC permitted a bank trustee to charge a reduced management fee to large dollar employee benefit CIF participants because the bank made available reduced fees for individually invested large dollar accounts.
(19)  The fee concession conformed with the quantitative management fee restrictions then applicable under section 9.18(b)(12) because, while the bank charged different management fees to different classes of CIF participants, the total fees charged did not exceed the total fees the bank charged accounts receiving individual investment management.  Similarly, Part 9 does not address the issue of whether national banks may accept management fees from other than CIF participants and plans as the Bank proposes under its no fee option, or how the reasonableness standard applies when a bank chooses to do so. The OCC concluded that a national bank may receive fees in a similar circumstance under the quantitative standard. In OCC Interpretive Letter No. 722
(20), a national bank inquired about the permissibility of assessing management fees to CIF participants where the CIF simultaneously received fee payments from nonparticipants. The OCC concluded that a national bank CIF could receive both the participant and nonparticipant fee payments provided the bank concluded, based on a reasoned opinion of trust counsel, that applicable state law, the governing trust instrument, and the management fee restrictions contained in 12 C.F.R. § 9.18 permitted the fees.  Provided the Bank's management fee structure, including the trustee/custodian fee, meets the reasonableness standard and the Bank complies with appropriate disclosure requirements, the Bank can proceed with its proposal. Although OCC has reviewed the ability of national banks to charge different classes of management fees and accept fees from other than the CIF participants and plans under the old quantitative test, those former precedents support the position that a national bank may also do so under the current reasonableness standard. Indeed, the Bank's ability to charge different management fees based on employer fee payments, previously negotiated fees, and services the Bank provides to participants, furthers the OCC's goal of updating the operating standards for national banks fiduciary activities, as envisioned by the OCC when drafting the new Part 9. In addition, allowing the Bank to offer CIF units incorporating the proposed fee structure will enable the Bank to offer an investment product that can effectively compete with other investment alternatives, including similarly structured mutual funds.
(21)   Equally important, the Bank's proposed fee structure enables the Bank to establish one CIF that offers a variety of fee options as opposed to multiple CIFs that accomplish that same result, saving the Bank the expense associated with establishing and administering numerous CIFs. Therefore, consistent with the OCC's desire to provide sufficient protections for Bank's fiduciary customers, the Bank may charge the proposed CIF management fees to CIF participants if, based on the relevant facts and supported by a well reasoned opinion of trust counsel, the Bank concludes that: (1) the fees are reasonable; (2) applicable law permits the fees (and the bank complies with fee disclosure requirements, if any) in the state where the Bank maintains the fund; (3) the amount of the fees do not exceed an amount commensurate with the value of legitimate services of tangible benefit to the participating fiduciary accounts that would not have been provided to accounts were they not invested in the fund; (4) the management fees to be charged to the fund and to participating accounts are disclosed in the Bank's written plan; and (5) the Bank discloses the management fees, along with other fees and expenses charged to the plan, at least annually in a manner consistent with applicable law in the state where the Bank maintains the CIF.Finally, 12 C.F.R. § 9.18(b)(3) requires that all participating accounts in a CIF have a proportionate interest in all of the CIF's assets. Under the Bank's proposal, the value of the [       ] units will vary depending, in part, on the services the Bank provides in connection with the units. Under the Bank's proposal, the Bank will subtract all fees from the value of a participant's [       ] units so that the unit value of units held by plan participants that incur the full service fees will be lower than the unit value of units subject to base service fees and no service fees, and the unit value of units subject to base service fees will be lower than the unit value of units subject to no service fees. The Bank will provide participants buying full service units with more units for the same dollar investment as participants buying base service units or no service fee units and participants buying base service units will receive more units than participants purchasing no service fee units. Under these circumstances, the Bank's increase in the number of units provided to purchasers of full service units over base service units and to purchasers of base service units over no fee units permits all unit purchasers to

retain a proportionate interest in [         ]'s assets. Despite the fact that the value of the units will vary due to the different fund management fees, each [        ] participant will have a proportionate interest in [        ]'s underlying assets as required under 12 C.F.R. §9.18(b)(3).

III. Conclusion
Based on the representations made by the Bank, the Bank may charge different management fees to FCCIF participants, commensurate with the amount and types of services it provides to the participants, where the fees meet the requirements of the reasonableness standard of 12C.F.R. § 9.18(b)(9) and each participant retains a proportionate interest in [       ]'s underlying assets as required by 12 C.F.R. § 9.18(b)(3).  

I trust this letter responds to your inquiry. If you have any further questions, please contact Tena M. Alexander, a Senior Attorney with the Securities and Corporate Practices Division, at (202) 874-5210.

Sincerely,

/s/

Dean E. Miller

Senior Advisor for Fiduciary Activities

Footnotes
(1)  One of the Bank's investment objectives will be to keep the [ ] units at a constant unit value to avoid administering fractional shares and for ease of transfer.

(2)  Although any defined benefit or defined contribution plan may invest in [ ], the Bank anticipates that the primary source of growth for the [ ] will come from 401(k)defined benefit plans in which the sponsor may select [ ] as one of several investment alternatives available to participants under the plan and in which the investments are participant-directed.

(3)  [   ] could rebate the payments. The Bank, however, believes that a rebate procedure would unnecessarily add to the administrative structure and expenses of [ ], and be cumbersome, costly, and confusing to participants.  

(4) The Bank's fee proposal would allow both small and large plans to benefit. While some bond and equity mutual funds allow only the largest plans ($100 million or more) to purchase their institutional shares, the Bank would allow plans to participate in [ ] regardless of size, similar to certain other GIC commingled funds and institutional money market mutual funds.

(5)12 C.F.R. § 9.18(a).  

(6)See OCC Interpretive Letter No. 716 (December 21, 1996), reprinted in [1995-1996 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 81-031; OCC Trust Interpretive Letter No.173 (August 31, 1988), reprinted in [1987-1988 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 84,940; OCC Trust Interpretive Letter No. 128 (November 17, 1987).  

(7) See OCC Interpretive Letter No. 716, supra.

(8)See OCC Trust Interpretation No. 194 (January 13, 1989), reprinted in [1988-1989 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 84,961.

(9) See 12 C.F.R. § 9.18 (1997). Part 9, including 12 C.F.R. § 9.18, was amended effective January 29, 1997. 61 Fed. Reg. 68,543 (1996). The fiduciary precedents and trust interpretive letters preceding the January 29, 1997 effective date of 12 C.F.R. Part 9 are interpretations of the former regulation. Even so, those precedents and interpretations can still be persuasive in interpreting the language in the new Part 9. Furthermore, in many instances the precedents and interpretations have become industry practice or simply articulate sound fiduciary principles. See OCC Bulletin 97-22 (May 15, 1997).  

(10)Banks may charge "management" fees for any services that assist the bank in fulfilling its management role. See Investment Securities Letter No. 48 (May 3, 1990),

reprinted in [1990-1991 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 83,261. The reasonableness of a fee depends in part on the services obtained for the fee. See OCC

Interpretive Letter No. 722 (March 12, 1996), reprinted in [1995-1996 Transfer Binder] Fed.Banking L. Rep. (CCH) ¶ 81-031.

(11) The OCC's regulation on CIF management fees provides:

Management fees. A bank administering a collective investment fund may charge a reasonable fund management fee only if: (i) 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; and (ii) The amount of the fee does not exceed an amount

commensurate with the value of legitimate services of tangible benefit to the participating fiduciary account that would not have been provided to the accounts were

they not invested in the fund.  12 C.F.R. § 9.18(b)(9)(i) and (ii) (1997).  

(12)National banks are required to establish and maintain each CIF in accordance with a written plan approved by a resolution of the bank's board of directors or by a committee authorized by the bank's board of directors. 12 C.F.R. § 9.18(b)(1)(iii).  

(13)  12 C.F.R. § 9.18(b)(6)(ii). Alternatively, if the Bank concludes that the proposed management fees do not conform with the overall reasonableness standard in Part 9, the Bank must request an exemption to Part 9 management fee requirements, by submitting to the OCC a written plan that identifies: (i) The reasons that the CIF requires a special exemption; (ii) The provisions of the proposed CIF that are inconsistent with 12 C.F.R. § 9.18; (iii) The provisions of 12 C.F.R. § 9.18 for which the bank seeks an exemption; and the manner in which the proposed CIF addresses the rights and interest of participating accounts; and (v) The manner in which the proposed fund addresses the rights and interests of the participating accounts. The OCC will grant the Bank an exemption if the written proposal is consistent with the Bank's fiduciary duties and with safe and sound banking practices.  

(14)  12 C.F.R. § 9.18(b)(12) (1996).  

(15)  12 C.F.R. § 9.18(b)(12) (1996).

(16) See 61 Fed. Reg. 68,543, 68,550 (1996).  

(17)  See OCC Trust and Securities Letter No. 300 (April 26, 1984), reprinted in [1985-1987 Transfer Binder] (CCH) ¶ 85,470.

(18)  OCC Trust and Securities Letter No. 300, supra.

(19)  The Bank reduced its management fees when it rebated a portion of its management fee to purchase additional fund units for its large dollar CIF participants. OCC Trust and Securities Letter No. 300, supra.

(20)  See OCC Interpretive Letter No. 722, supra.  

(21)  A mutual fund may issue multiple class shares under Rule18f-3 of the Investment Company Act of 1940. 12 C.F.R. § 270.18f-3.  

Letter to SEC

June 19, 1991

Ms. Nancy M. Morris

Associate Chief Counsel

Securities and Exchange Commission

Washington, DC 20219

RE: Banks Common Trust Funds

Dear Ms. Morris:

Santa Barbara Bank & Trust is a state chartered bank and trust company located in Santa Barbara, California. We presently are operating two common trust funds exclusively for our personal trust clients. We would like to be able to commingle funds held in employee benefit accounts, both qualified plans and IRA accounts, into these personal trust funds.

Our bank's legal counsel has checked with the California Financial Codes, the Comptroller's regulations, and the Internal Revenue regulations and has not been able to find any restrictions on using our current common trust funds for employee benefit accounts. Could you please let me know if the Securities and Exchange Commission would have any restrictions or problems with the Bank commingling personal trust and employee benefit trust accounts.

Your prompt attention to this question would be greatly appreciated.

Yours very truly,

Paulette Posch

Vice President

Employee Benefits Manager

SEC Letter

1940 Act / s 3(c)(3)

November 1, 1991

Publicly Available November 1, 1991

Paulette Posch, Vice President

Santa Barbara Bank & Trust

Trust Division

820 State St.

P.O. Box 2340

Santa Barbara, CA 93120-2340

Dear Ms. Posch:

Your letter of June 19, 1991, asks whether there are any restrictions under the federal securities laws on Santa Barbara Bank & Trust (the "Bank") commingling the assets of qualified employee benefit plan accounts and individual retirement accounts ("IRAs") with the assets of personal trust accounts in its common trust funds.

A pooled securities fund in which interests are offered to the public as investments is an investment company as defined in Section 3(a) of the Investment Company Act of 1940 ("1940 Act"). Section 3(c) provides certain exclusions from this definition.

Section 3(c)(3) excludes bank common trust funds from the 1940 Act.¹ The staff has interpreted this exclusion as applying only to a common trust fund, for moneys which a bank has received for bona fide fiduciary purposes, that is not offered to the public.² Such a common trust fund serves as an administrative convenience of the bank incidental to its traditional trust department activities.³

The Commission and its staff have stated that this exception is not available for common trust funds holding assets of IRAs.⁴ Thus, a common trust fund which pools assets of IRAs, alone or with bona fide trust assets, would be subject to registration and regulation under the 1940 Act and interests in the fund would be subject to the registration provisions of the Securities Act of 1933 ("1933 Act"). A number of banks have organized funds consisting exclusively of IRA assets and have registered them under the 1940 Act.

The staff further takes the position that a common trust fund that commingles the assets of employee benefit plans meeting the requirements for qualification under Section 401 of the Internal Revenue Code with Section 3(c)(3) trust assets must register under the 1940 Act, and interests in that fund must be registered under the 1933 Act.⁵ The staff does not believe that the Section 3(c)(3) exclusion extends to employee benefit plan funds held by a bank as trustee because a separate provision of the 1940 Act, Section 3(c)(11), already excludes certain employee benefit plans.⁶

Section 3(c)(11) provides that a collective trust fund maintained by a bank consisting solely of the assets of employee benefit plan trusts qualified under Section 401 of the Internal Revenue Code and government plans is not an investment company. Thus, the Bank could commingle its qualified plan trusts in a collective trust fund consisting solely of assets of such trusts without registering either the fund or interests in the fund.⁷ However, since IRAs are qualified under Section 408 of the Internal Revenue Code, and not Section 401, the collective trust fund would not meet the requirements of Section 3(c)(11) if it included assets of IRAs and would, therefore, be required to register as an investment company.⁸ Finally, the interests in such a fund must be registered under the 1933 Act.

I hope this information will be helpful to you. Please contact this Office if you have any additional questions or concerns.

Sincerely,

Richard F. Jackson

Attorney

Office of Chief Counsel

Securities and Exchange Commission (S.E.C.)

- Footnotes -

1 Section 3(c)(3) excepts from the definition of investment company "any common trust fund or similar fund maintained by a bank exclusively for the collective investment and reinvestment of moneys contributed thereto by the bank in its capacity as a trustee, executor, administrator, or guardian." For a discussion of the legislative and administrative history with respect to common trust funds, see United Missouri Bank of Kansas City, N.A. (pub. avail. Dec. 31, 1981).

2 See, e.g., Union Bank & Trust (pub. avail. July 8, 1987); Owensboro National Bank (pub. avail. July 29, 1981); Citytrust (pub. avail. Mar. 9, 1980); Howard Savings Bank (pub. avail. Aug. 13, 1979); Genessee Merchants Bank & Trust (pub. avail. Jan. 8, 1979).

3 See Commercial Bank (pub. avail. Feb. 24, 1988), reconsideration denied (pub. avail. July 13, 1988), Commission review denied (pub. avail. Jan. 11, 1989); First National Bank of Peoria (pub. avail. Aug. 4, 1979); Millikin National Bank of Decatur (pub. avail. Mar. 31, 1979).

4 See Testimony of Richard C. Breeden Before the Subcommittee on Telecommunications & Finance of the House Committee on Energy and Commerce, Concerning Proposed Revisions to Rules Governing Bank Common Trust Funds, at n. 8 (Oct. 4, 1990) (discussing registration of common trust funds for IRA assets). See also Commercial Bank, supra note 3; Hibernia National Bank of New Orleans (pub. avail. Sept. 24, 1986); United Missouri Bank of Kansas City, N.A., supra note 1; Owensboro National Bank, supra note 2; Citytrust, supra note 2; First National Bank of Peoria, supra note 3; Millikin National Bank of Decatur, supra note 3; Continental Illinois National Bank and Trust Company of Chicago (pub. avail. Apr. 28, 1975).

5 See Millikin National Bank of Decatur, supra note 3; First National Bank of Peoria, supra note 3; National Boulevard Bank of Chicago (pub. avail. Mar. 22, 1974), reconsideration denied (pub. avail. Oct. 18, 1974).

6 See Millikin National Bank of Decatur, supra note 3; First National Bank of Peoria, supra note 3; National Boulevard Bank of Chicago, supra note 5.

7 A collective trust fund consisting solely of the assets of qualified plans, including assets of Keogh plans, is excepted by Section 3(c)(11). However, interests in a collective trust fund which includes Keogh plan assets are securities that must be registered under the 1933 Act unless the plan meets the requirements of Rule 180 thereunder.

8 See, e.g., United Missouri Bank of Kansas City, N.A., supra note 1; Owensboro National Bank, supra note 2; Citytrust, supra note 2; First National Bank of Peoria, supra note 3; Millikin National Bank of Decatur, supra note 3; Continental Illinois National Bank and Trust Company of Chicago, supra note 4.

Collective Investment Funds

SEC No-Action Letter

 Old Kent Financial Corporation

Publicly Available July 25, 1989

(Cite as: 1989 WL 246145 (S.E.C.))

Letter to SEC

March 17, 1989

Office of Chief Counsel

Division of Corporate Finance

Securities and Exchange Commission

450 Fifth Street

Washington, D.C. 20549

Office of Chief Counsel

Division of Investment Management

Securities and Exchange Commission

450 Fifth Street

Washington, D.C. 20549

Dear Sirs:

We are writing on behalf of Old Kent Bank and Trust Company ("Old Kent Bank"), a state banking corporation organized under the laws of and having its principal place of business in the state of Michigan, Old Kent Financial Corporation, a bank holding company incorporated under the laws of and having its principal place of business in the state of Michigan, and Unibanc Trust Company, a state banking corporation incorporated under the laws of and having its principal business in the state of Illinois.

Old Kent Financial Corporation is a bank holding company registered with the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, as amended. Old Kent Bank is a subsidiary of Old Kent Financial Corporation. Unibanc Trust Company and seven other banks having their principal place of business in Illinois, which are organized as national banking associations under the laws of the United States or state banking corporations under the laws of Illinois (the "Illinois Banks"), are also subsidiaries of Old Kent Financial Corporation. Old Kent Bank, Unibanc Trust Company, the Illinois banks, and Old Kent Financial Corporation are members of an "affiliated group," as that term is defined in § 1504(a) of the Internal Revenue Code of 1986, as amended (the "Code"). Old Kent Bank, Unibanc Trust Company, and the Illinois Banks (as well as any other affiliated banks hereafter acquired which maintain common and collective trust funds substantially in the manner described herein) are sometimes referred to collectively as "the Banks" in this letter.

Old Kent Financial Corporation's subsidiary banks operate a system of interbank common and collective trust funds for the collective investment and reinvestment of funds held in fiduciary capacities by the Banks. In reliance upon earlier letters from the Division of Corporate Finance and from the Division of Investment Management, several Old Kent Financial Corporation affiliate banks (listed on Exhibit A to the letter to Old Kent Financial Corporation, available February 29, 1988) are permitted to invest funds those banks hold in a fiduciary capacity into the common trust funds and collective trust funds maintained by Old Kent Bank.

Old Kent Financial Corporation would now like to allow Old Kent Bank to invest assets it holds in a fiduciary capacity into common and collective trust funds maintained by Unibanc Trust Company and the other Illinois Banks.

We hereby request your confirmation that the staff of the Division of Corporate Finance and the staff of the Division of Investment Management will not recommend that the Securities and Exchange Commission take any enforcement action if Old Kent Financial Corporation and its subsidiaries conduct the activities described below without effecting any registration under the Securities Act of 1933 (the "Securities Act"), the Securities Exchange Act of 1934 (the "Exchange Act"), and the Investment Company Act of 1940 (the "Investment Company Act").

Facts

The trust department of Old Kent Bank currently maintains certain common trust funds for the commingled investment of assets that Old Kent Bank holds in its capacity as trustee, executor, administrator, or guardian of personal fiduciary accounts, and certain collective investment funds for assets which Old Kent Bank holds in its capacity as trustee or agent for employee benefit trusts. The trust departments of Unibanc Trust Company and the other Illinois Banks also currently maintain certain common trust funds for the commingled investment of assets which Unibanc Trust Company and the Illinois Banks hold in their capacities as trustee, executor, administrator, or guardian of personal fiduciary accounts, and certain collective investment funds for assets which Unibanc Trust Company and the Illinois Banks hold in their capacities as trustee or agent for employee benefit trusts. Both types of funds are sometimes referred to generically as common trust funds or the "Funds."

In order to qualify for tax exemption under Section 584 of the Code, all of the common trust funds maintained by the Banks are maintained in conformity with the rules and regulations of the Comptroller of the Currency. All of the collective investment funds maintained by the Banks are operated either in conformity with the rules and regulations of the Comptroller of the Currency or in conformity with the conditions for tax exemption set forth in Section 401(a) of the Code and Rev.Rul. 81-100, 1981-1 C.B. 326 (superseding Rev.Rul. 56-267, 1956-1 C.B. 206 and Rev.Rul. 75-530, 1975-2 C.B. 146). Both the common trust and collective investment funds maintained by the Banks are in all cases maintained in conformity with a version of the Uniform Common Trust Fund Act, the Michigan Common Trust Fund Act, or the Illinois Common Trust Fund Act, as appropriate. The Banks exercise ultimate investment and management discretion over the respective common and collective trust funds they maintain.

Old Kent Financial Corporation wishes to expand its system of interbank common trust and collective investment funds in order to achieve certain operational efficiencies and economies of scale by eliminating the unnecessary duplication of common and collective trust funds having substantially identical investment characteristics, to assure the availability throughout the entire bank system of high quality investment management service, and to make available greater opportunities for diversification of trust assets and for participation in collective investment funds with specialized objectives.

Currently Unibanc Trust Company and the other Illinois Banks are able to invest assets which those Banks hold as trustee, executor, administrator, or guardian in common trust funds maintained by Old Kent Bank, and assets of employee benefit trusts which those Banks hold as trustee in collective trust funds maintained by Old Kent Bank. Any common or collective trust fund maintained by Unibanc Trust Company or another Illinois Bank can invest all or part of its assets in common and collective trust funds maintained by Old Kent Bank having compatible investment characteristics; subject, in each case, to the provisions of the governing trust or plan instruments and any applicable state laws. These investments are permitted in reliance on a letter from the Division of Corporation Finance and a letter from the Division of Investment Management to Old Kent Financial Corporation (available February 29, 1988), stating that neither division would recommend enforcement action under the Securities Act, the Exchange Act, or the Investment Company Act if such investments were allowed. In all cases, such investment transactions are undertaken in accordance with applicable state laws which permit such transactions.

Old Kent Financial Corporation would now like to permit personal fiduciary accounts for which Old Kent Bank serves as trustee, and common trust funds maintained by Old Kent, to participate in common trust funds maintained by Unibanc Trust Company. Old Kent Financial Corporation would also like to enable employee benefit trusts for which Old Kent Bank serves as Trustee, and collective trust funds maintained by Old Kent Bank, to participate in collective trust funds maintained by Unibanc Trust Company. It is possible that in the future Old Kent Financial Corporation will wish to permit similar participations by Old Kent Bank and Trust Company in common and collective trust funds maintained by the other Illinois Banks.

Each common trust fund in the interbank system would continue to be operated in compliance with substantially the same state and federal regulatory requirements as would apply if the Bank contributing funds thereto (the "contributing Bank") were the same entity as the bank maintaining the common or collective trust fund (the "maintaining Bank"). Michigan has adopted the Michigan Common Trust Funds Act, MCLA s 555.101, et seq., MSA s 23.1141, et seq. Illinois has adopted the Illinois Common Trust Fund Act, Ill.Rev.Stat. Ch.17, P 2101, et seq., S.H.A. Ch.17, P 2101, et seq. Funds maintained by Old Kent will continue to be operated in accordance with the Michigan Common Trust Funds Act, and funds maintained by Unibanc Trust Company and any other Illinois Banks that are Illinois state banks will continue to be operated in accordance with the Illinois Common Trust Fund Act. While there are minor variations between these two acts, they are substantially the same. Similarly, while we recognize that the supervision and regulation of banks and trust departments varies somewhat in different states, we believe that the regulation of banks and trust companies by the states of Michigan and Illinois is closely comparable. In any event, the fiduciary duties owed to customers by Old Kent, Unibanc Trust Company, or any of the other Illinois Banks will remain the responsibility of the contributing Bank, and thus will be unaffected by the proposed interbank investments.

The rights of the beneficiaries of the contributing Bank's personal fiduciary accounts and the rights of the beneficiaries of the contributing Bank's employee benefit trusts investing in the maintaining Bank's common and collective trust funds, either directly or through the intermediary of the contributing Bank's own common and collective trust funds, would not be diminished by reason of such investment. The fees charged for services in the management of the interbank system would be no greater than those that would have been charged each participating personal fiduciary account and employee benefit trust had they been individually invested by the contributing Bank as trustee. The records maintained by the maintaining Bank and the contributing Bank would reflect the participation in each common and collective trust fund of all trusts and other accounts which participate in such fund, either directly or indirectly through intermediary Contributing Banks. The contributing Bank and the maintaining Bank would adhere to the various reporting requirements and percentage limitations on participations for the common and collective trust funds as required by the regulations of the Comptroller of the Currency.

Request for Commission Action

Based upon the foregoing facts, upon the prior no-action position taken by the Staff of the Commission regarding the ability of Illinois subsidiaries of Old Kent Financial Corporation to invest assets they hold and funds they maintain in a fiduciary capacity into the common and collective trust funds of Old Kent Bank, upon prior no-action positions taken by the Staff of the Commission concerning other companies, (in particular, First Wachovia Corporation (available May 18, 1988), United Virginia Bankshares, Inc. (available June 15, 1987), and SunTrust Banks, Inc. (available June 18, 1986)), and upon our analysis of the statutes, regulations, and policy considerations involved, we request that the staff of the Commission confirm our opinion that:

Copies of Old Kent Financial Corporation (available February 29, 1988), the prior letter in which the Staff of the Commission took a no-action position concerning interbank common and collective trust funds that Old Kent Financial Corporation sought to establish are enclosed with this letter.

Applicable Law

Section 3(a)(2) of the Securities Act exempts from registration any interest or participation in any common trust fund maintained by a bank for the collective investment and reinvestment of assets contributed thereto by such bank in its capacity as trustee, executor, administrator, or guardian. That section also exempts any interest or participation in a collective trust fund maintained by a bank when such interest or participation is issued in connection with a stock bonus, pension, or profit sharing plan which meets the requirements for qualification under section 401 of the Internal Revenue Code. Rule 132 of the General Rules and Regulations under the Securities Act defines common trust fund, as used in section 3(a)(2) of the Act, as including a common trust fund maintained by a bank which is a member of an affiliated group (as defined by section 1504(a) of the Code) which is maintained exclusively for the collective investment and reinvestment of monies contributed thereto by one or more bank members of the affiliated group in the capacity of trustee, executor, administrator, or guardian. There are two conditions to this expanded definition: The common trust fund must be operated in compliance with the same state and federal regulatory requirements as would apply if the bank maintaining such a fund and any other contributing banks were the same entity; and the rights of persons for whose benefit a contributing bank acts as trustee, executor, administrator, or guardian must not be diminished by reason of the maintenance of such common trust fund by another bank member of the affiliated group.

Section 3(a)(12) of the Exchange Act includes in its definition of exempted security any interest or participation in any common trust fund or similar fund maintained by a bank exclusively for the collective investment and reinvestment of assets contributed thereto by such bank in its capacity as trustee, executor, administrator, or guardian, and any interest or participation in a collective trust fund maintained by a bank which interest or participation is issued in connection with a stock bonus, pension, or profit sharing plan which meets the requirements for qualification under section 401 of the Internal Revenue Code of 1954. Section 12(g)(2)(H) specifically exempts from the registration requirements of subsection (g) any interest or participation in collective trust funds maintained by a bank, which interest or participation is issued in connection with a stock bonus, pension, or profit sharing plan that meets the requirements for qualification under section 401 of the Code. Rule 12(h)-1(b) states that issuer shall be exempt from the provisions of 12(g) of the Act with respect to any interest or participation in any common trust fund or similar fund maintained by a bank exclusively for the collective investment and reinvestment of the monies contributed thereto by the bank in its capacity as a trustee, executor, administrator, or guardian. That Rule goes on to state that for its purposes, the term "common trust fund" includes a common trust fund which is a member of an affiliated group, as defined in section 1504(a) of the Code, and which is maintained exclusively for the investment and reinvestment of monies contributed thereto by one or more bank members of the affiliated group in the capacity of trustee, executor, administrator, or guardian. This definition assumes the same two conditions as does Rule 132 under the Securities Act.

Section 3(c)(3) of the Investment Company Act excludes from the definition of an "investment company" any common trust fund maintained by a bank exclusively for the collective investment and reinvestment of monies contributed thereto by the bank in its capacity as a trustee, executor, administrator, or guardian. Similarly, Section 3(c)(11) excludes from the definition of investment company any collective trust fund maintained by a bank consisting solely of the assets of employees stock bonus, pension, or profit sharing trusts which meet the requirements for qualification under Section 401 of the Code. Rule 3c-4 states that the term common trust fund, as used in Section 3(c)(3) of the Investment Company Act, includes a common trust fund maintained by a bank which is a member of an affiliated group and which is maintained exclusively for the collective investment and reinvestment of monies contributed thereto by one or more bank members of the affiliated group, in the capacity of trustee, executor, administrator, or guardian. Again, the same two conditions are imposed: the common trust fund must be operated in compliance with the same state and federal regulatory requirements as would apply if the bank maintaining such fund and any other contributing banks were the same entity; and the rights of persons for whose benefit a contributing bank acts as trustee, executor, administrator, or guardian, must not be diminished by the reason of the maintenance of such common trust fund by another bank member of the affiliated group.

We note that, while the Commission has extended the exemptions from the registration requirements of the Securities Act, the Exchange Act, and the Investment Company Act by enacting the Rules cited above, the Commission has not specifically included in such Rules a reference to common trust funds maintained by out-of-state affiliates of a bank serving as trustee, executor, administrator, or guardian. However, we can find no reason why there should be any additional restrictions on an interstate common trust fund system operated as proposed by Old Kent Financial Corporation. In enacting these rules, the Commission noted that it would appear appropriate to view banks in an affiliated group as a single economic unit. Securities Act Release No. 5875, October 21, 1977. It seems appropriate, therefore, for the Commission to confirm that the above-cited statutes and Rules apply to interstate common and collective trust fund systems. With the amendments to the Bank Holding Company Act and state banking laws to allow interstate ownership of banks, there appears to be little policy concern against interstate banking affiliate operations, including common trust funds.

In SunTrust Banks, Inc., the staff of the Commission took a no-action position, finding that a regional bank holding company could implement a system of interbank common and collective trust funds for the collective investment and reinvestment of funds held in fiduciary capacities by subsidiary banks without registration under the Securities Act, the Exchange Act or the Investment Company Act, so long as the exceptions in Section 3(c)(3) and 3(c)(11) of the Investment Company Act were otherwise available to the common trust funds and collective trust funds maintained by the subsidiary banks. The staff emphasized that (a) all the SunTrust banks were members of an "affiliated group" as defined in the Code, (b) each fund would continue to be operated in compliance with the same state and federal regulatory requirements as would apply if the bank maintaining the fund and the bank contributing assets thereto were the same entity, and (c) investment by a contributing bank in the maintaining bank's common trust fund would not diminish the rights of the beneficiaries of the contributing bank's personal fiduciary accounts.

Similarly, in United Virginia BankShares, Inc., the staff of the Commission took a no-action position. The staff stated that it would not recommend enforcement action based on counsel's opinion that participating in a maintaining Bank's common or collective trust funds, including funds of those banks that act as intermediaries, are exempt from registration under the Securities Act and the Exchange Act. Additionally, the staff said that it would not recommend any enforcement action under the Investment Company Act. The staff emphasized the same factors as it did in SunTrust Banks, Inc.

In First Wachovia Corporation, the staff again took a no-action position, stating that it would not recommend any enforcement action under the Securities Act, the Exchange Act or the Investment Company Act if a regional bank holding company implemented a system of interbank common and collective trust funds for the subsidiary banks of its two subsidiary bank holding companies. The staff again stressed the factors emphasized in SunTrust Banks, Inc., along with the fact that the subsidiary banks currently maintained the funds in question in their capacity as trustee, executor, administrator or guardian of personal fiduciary accounts, and in their capacity as trustee, co-trustee or managing agent of certain employee benefit trusts.

Like the facts presented in these prior no-action letters, the present situation justifies the issuance of a no-action letter. In particular, the following facts are true:

(i) Old Kent Bank, Unibanc Trust Company and the other Illinois Banks are members of an "affiliated group" as that term is defined in Section 1540(a) of the Code;

(ii) all funds maintained by the Banks would continue to be operated in compliance with substantially the same state and federal regulatory requirements as would apply if Old Kent Bank and the maintaining Bank were the same entity; and

(iii) investment by Old Kent Bank into a common trust fund maintained by Unibanc Trust Company or another Illinois Bank would not diminish the rights of the beneficiaries of Old Kent Bank's personal fiduciary accounts, nor would investment by Old Kent Bank into a collective trust fund maintained by Unibanc Trust Company or another Illinois Bank diminish the rights of the persons for whose benefit Old Kent Bank acts as agent or trustee.

As required by Securities Act Release No. 6269, seven copies of this letter are enclosed herewith. By sending this letter to the Division of Corporation Finance and to the Division of Investment Management simultaneously, we are requesting both divisions to confirm that they will not recommend that the Commission take any enforcement action if Old Kent Financial Corporation and its subsidiaries conduct the activities described herein.

Should you determine that you are unable to take the action requested in this letter, we request the opportunity to consult further with the staff prior to any written response to this letter. If you have any questions regarding the requested ruling or desire further information, please do not hesitate to call me, or, in my absence, M. Gayle Robinson of this firm, by telephone at (616) 459-6121.

Very truly yours,

Gordon R. Lewis

SEC Letter

(Cite as: 1989 WL 246145, (S.E.C.))

1933 Act / s 3(a)(2)

July 25, 1989

Publicly Available July 25, 1989

We would not recommend that the Commission take any enforcement action against Old Kent Bank and Trust Company ("Old Kent Bank"), Old Kent Financial Corporation, or Unibanc Trust Company ("Unibanc Trust"), under the Investment Company Act of 1940 ("1940 Act"), if assets held by Old Kent Bank or the common and collective trust funds maintained by Old Kent Bank are invested in the common and collective trust funds ("Funds") maintained by Unibanc Trust, without registration of the Funds under the 1940 Act. As we noted in our earlier response to Old Kent Financial Corporation (pub. avail. Feb. 29, 1988),¹ our position is based on the facts and representations in your letter, including that:

(1) Old Kent Bank and Unibanc Trust are members of an "affiliated group" as that term is defined in section 1504(a) of the Internal Revenue Code of 1986;

(2) Old Kent Bank and Unibanc Trust currently maintain their common and collective trust funds pursuant to the exceptions in section 3(c)(3) and section 3(c)(11), respectively, of the 1940 Act in their capacity as trustee, executor, administrator, or guardian of personal fiduciary accounts and in their capacity as trustee or agent for employee benefit trusts;

(3) all funds maintained by Old Kent Bank and Unibanc Trust would continue to be operated in compliance with the same state and federal regulatory requirements as would apply if Old Kent Bank maintained the funds it contributes to Unibanc Trust; and

(4) neither the rights of the beneficiaries of Old Kent Bank's personal fiduciary accounts nor the rights of the persons for whose benefit Old Kent Bank acts as agent or trustee would be diminished by reason of their investment in the Funds.

The Division of Corporation Finance has asked us to advise you that, based on the facts presented, that Division will not recommend any enforcement action to the Commission if Old Kent Financial Corporation, in reliance on your opinion that participations in Unibanc Trust Company's common or collective trust funds are exempt from registration under section 3(a)(2) and Rule 132 of the Securities Act of 1933 and from registration under section 3(a)(12) and 12(g)(2)(H) and Rule 3a12-6 and Rule 12h-1 of the Securities Exchange Act of 1934, permits funds maintained by Old Kent Bank to participate in Unibanc Trust Company's common and collective trust funds as proposed without registration of the interests in the funds under the 1933 Act or the 1934 Act.

Because these positions are based on the representations made to our Divisions it should be noted that any different facts or representations might require different conclusions. Moreover, this response only expresses the Divisions' positions on enforcement action and does not purport to express any legal conclusions on the questions presented.

Carol A. Peebles

Attorney

Securities and Exchange Commission (S.E.C.)

- Footnote -

1 See also First Wachovia Corporation (pub. avail. May 18, 1988); United Virginia Bankshares, Inc. (pub. avail. June 15, 1987); SunTrust Banks, Inc. (pub. avail. June 18, 1986).

Definitions concerning multi-bank common trust funds

Securities and Exchange Commission

Securities Act of 1933

Release No. 5896

Securities Exchange Act of 1934

Release No. 14363

Investment Company Act OF 1940

Release No. 10089

January 10, 1978

Summary: These rules have the effect, provided certain conditions are met, of treating common trust funds for several banks in the same affiliated group ("multi-bank common trust funds") in the same manner as traditional single bank common trust funds which are ordinarily exempt from regulation as investment companies, and from the registration and reporting requirements normally applicable to publicly held companies and other issuers of securities. Some state laws permit multi-bank common trust funds, which may operate as non-taxable entities. In the absence of these rules, multi-bank common trust funds might be treated differently under the federal securities laws from single bank common trust funds.

Common trust funds maintained by a bank exclusively for the collective investment and reinvestment of assets contributed thereto by such bank in its capacity as trustee, executor, administrator, or guardian, and interests or participations therein, are exempted or excluded from provisions of the federal securities laws by section 3(a)(2) [15 USC 77c(a)(2)] of the Securities Act of 1933 [15 USC 77a et seq.) ("Securities Act"), section 3(a)(12) [15 USC 78c(a)(12)] and rule 12h-2 [17 CFR 240.12h-2] of the Securities Exchange Act of 1934 [15 USC 78a et seq.) (Exchange Act"), and section 3(c)(3) [15 USC 80a-3(c)(3)] of the Investment Company Act of 1940 [15 USC 80a-1 et seq.] ("Investment Company Act").

These provisions apply only to common trust funds for assets contributed by a bank in a bona fide fiduciary capacity and incidental to the bank's traditional trust department activities.

These rules define the term "common trust fund" to include multi-bank common trust funds, and thus have the effect of exempting them from the provisions of the Investment Company Act. Also, under these rules interests or participations therein would be exempt from the registration requirements in section 5 [15 USC 77e] of the Securities Act and section 12(g) of the Exchange Act [15 USC 781(g)], and be "exempted securities" under section 3(a)(12) of the Exchange Act.

Part 230 - General Rules and Regulations, Securities Act of 1933

230.132 Definition of "common trust fund" as used in section 3(a)(2) of the Act.

The term "common trust fund" as used in section 3(a)(2) of the Act [15 USC 77c(a)(2)] shall include a common trust fund which is maintained by a bank which is a member of an affiliated group, as defined in section 1504(a) of the Internal Revenue Code of 1954 (26 USC 1504(a)], and which is maintained exclusively for the collective investment and reinvestment of monies contributed thereto by one or more bank members of such affiliated group in the capacity of trustee, executor, administrator, or guardian, provided that:

(a) the common trust fund is operated in compliance with the same state and federal regulatory requirements as would apply if the bank maintaining such fund and any other contributing banks were the same entity; and

(b) the rights of persons for whose benefit a contributing bank acts as trustee, executor, administrator, or guardian would not be diminished by reason of the maintenance of such common trust fund by another bank member of the affiliated group.

Codified to 15 USC 77s(a).

Part 240 - General rules and regulations, Securities Exchange Act of 1934

240.12h-2 Exemptions from registration under section 12(g) of the act.

* * *

(b) Any interest or participation in any common trust fund or similar fund maintained by a bank exclusively for the collective investment and reinvestment of monies contributed thereto by the bank in its capacity as a trustee, executor, administrator, or guardian. For purposes of this paragraph (b), the term "common trust fund" shall include a common trust fund which is maintained by a bank which is a member of an affiliated group, as defined in section 1504(a) of the Internal Revenue Code of 1954 [26 USC 1504(a)], and which is maintained exclusively for the investment and reinvestment of monies contributed thereto by one or more bank members of such affiliated group in the capacity of trustee, executor, administrator, or guardian, provided that:

* * *

240.3a12-6 Definition of "common trust fund" as used in section 3(a)(12) of the act.

The term "common trust fund" as used in section 3(a)(12) of the Act [15 USC 78c(a)(12)) shall include a common trust fund which is maintained by a bank which is a member of an affiliated group, as defined in section 1504(a) of the Internal Revenue Code of 1954 [26 USC 1504(a)], and which is maintained exclusively for the collective investment and reinvestment of monies contributed thereto by one or more bank members of such affiliated group in the capacity of trustee, executor, administrator, or guardian, provided that:

(a) the common trust fund is operated in compliance with the same state and federal regulatory requirements as would apply if the bank maintaining such fund and any other contributing banks were the same entity; and

(b) the rights of persons for whose benefit a contributing bank acts as trustee, executor, administrator, or guardian would not be diminished by reason of the maintenance of such common trust fund by another bank member of the affiliated group.

Codified to 15 USC 78c(b).

Part 270 - Rules and Regulations, Investment Company Act of 1940

270.3c-4 Definition of "common trust fund" as used in section 3(c)(3) of the Act.

The term "common trust fund, as used in section 3(c)(3) of the Act [15 USC 80a-3(c)(3)] shall include a common trust fund which is maintained by a bank which is a member of an affiliated group, as defined in section 1504(a) of the Internal Revenue Code of 1954 [26 USC 1504(a)], and which is maintained exclusively for the collective investment and reinvestment of monies contributed thereto by one or more bank members of such affiliated group in the capacity of trustee, executor, administrator, or guardian, provided that:

(a) the common trust fund is operated in compliance with the same state and federal regulatory requirements as would apply if the bank maintaining such fund and any other contributing banks were the same entity; and

(b) the rights of persons for whose benefit a contributing bank acts as trustee, executor, administrator, or guardian would not be diminished by reason of the maintenance of such common trust fund by another bank member of the affiliated group.

Codified to 15 USC 80a-6(c), 8Oa-37(a).

Collective Investment Funds

SEC No-Action Letter

First Jersey National Bank

Publicly Available November 13, 1987

(Cite as: 1987 WL 108740 (S.E.C.))

Letter to SEC

July 10, 1987

Office of Chief Counsel

Division of Corporation Finance

Securities and Exchange Commission

Washington, D.C. 20549

Office of Chief Counsel

Division of Investment Management

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20519

Gentlemen:

We are writing on behalf of First Jersey National Bank (the "Bank"), a national banking association organized under the laws of the United States of America, to request that the staff of the Securities and Exchange Commission (the "Staff" and the "Commission") advise us that it will not recommend any action to the Commission if the Bank, through its Trust Department, maintains common trust funds without compliance with the registration requirements of Section 3(a)(2) of the Securities Act of 1933 (the "1933 Act"), Section 3(a)(12) of the Securities Exchange Act of 1934 (the "1934 Act") and Section 3(c)(3) of the Investment Company Act of 1940 (the "1940 Act") (collectively the "Acts").

I. Statement of Facts

The Bank is a national banking association located in New Jersey, which had total assets as of March 31, 1987 of 4.9 billion. The Bank is a qualified bank under the provisions of state law and is authorized to act in various fiduciary capacities, including administrator, executor and/or trustee under a decedent's Last Will and Testament, a trustee under an intervivos trust and as a guardian of an incompetent or a minor. The Bank presently administers assets exceeding 1.25 billion, including approximately 900 million for personal trust services and 350 million for employee benefit trust services. The assets administered in this capacity include approximately 525 trusts and estates ranging in size from $20,000 to $8,800,000.

In connection with the administration of its Trust Department, the Bank maintains three common trust funds. The first, which was established in 1965, is called The First Jersey National Bank Commingled Trust Fund For Employee Benefit Plans (the "Commingled Fund"). The Commingled Fund is used exclusively for the administration of employee benefit plan assets. The Commingled Fund has assets of approximately 145 million. At all times since the Commingled Fund was established and at the present time, the Commingled Fund was and is subject to all applicable New Jersey trust and banking laws, Comptroller of the Currency rules and regulations and is qualified as a common trust fund under Section 584 of the Internal Revenue Code of 1986.

Unlike the Commingled Fund, the other two common trust funds are not limited to use for employee benefit plans. Rather, The First Jersey National Bank Plan of Common Trust Equity Fund "I" (the "Equity Fund") and the First Jersey National Bank Plan of Common Trust Fixed Income Fund "I" (the "Fixed Income Fund") were established in 1985 for personal assets. The Equity Fund and Fixed Income Fund are designed so that the Bank can contribute to such Funds provided that the underlying trust or Last Will and Testament, as the case may be, allow for such an investment and the Bank is appropriately designated as a trustee, executor or guardian. The Equity Fund has assets of approximately 11.3 million and the Fixed Income Fund has assets of approximately 19.3 million. At all times since the Equity Fund and the Fixed Income Fund were established and at the present time, the Equity Fund and the Fixed Income Fund were and are subject to all applicable New Jersey trust and banking laws, Comptroller of the Currency rules and regulations and are qualified as common trust funds under Section 584 of the Internal Revenue Code of 1986.

Through its Trust Department, the Bank is proposing to continue and expand its existing common trust funds pursuant to the First Jersey National Bank Plan of Common Trust Funds (the "Common Trust Fund") (see attached). The Common Trust Fund will allow the Bank, while acting as a fiduciary, to contribute monies to the Common Trust Fund that it holds as trustee, executor, administrator or guardian. The Bank will at all times act as trustee of the Common Trust Fund. After the participant designates the type of common trust fund in which the underlying corpus is to be placed, the trustee shall have the exclusive management and control of the common trust fund including the authority to invest and reinvest the principal and/or the undistributed income of the trust's or estate's assets in any such class or classes of property as the trustee determines are appropriate for the participation and in accordance with the common trust fund's investment powers.

The Common Trust Fund will be administered as part of and incidental to the Trust Department's regular trust activities. The Bank will not utilize any general advertising or solicitation for the Common Trust Fund and will continue to offer the Common Trust Fund as one of the many trust services provided by the Bank. The Common Trust Fund will be administered in compliance with all applicable trust and banking statutes, rules and regulations existing in New Jersey, regulations of the Comptroller of the Currency and the Internal Revenue Code of 1986, as amended, and regulations of the Internal Revenue Service.

Interests could be deposited into the Common Trust Fund in anyone of three (3) ways. First, the interests currently being administered in the Equity Fund and Fixed Income Fund would be transferred to the Common Trust Fund and such interests would continue to be administered in the equity fund and fixed income fund. As stated above, the Equity Fund and Fixed Income Fund were previously established and are currently administered to allow the Bank, when acting in the capacity of a trustee, executor or guardian, to invest in a common trust fund. This transfer of funds will in no way adversely affect the rights of persons who have an interest in the Equity Fund and the Fixed Income Fund. Further, all of the statutes, rules and regulations that are applicable to the Equity Fund and Fixed Income Fund are also applicable to the Common Trust Fund.

Once the transfer of interests to the Common Trust Fund is made, the Bank may contribute assets to the Common Trust Fund where the Bank has been designated as a trustee or co-trustee under the terms of a trust agreement prepared outside the Bank's auspices. Interests accepted by the Bank in this manner will continue to be incidental to the Bank's regular Trust Department activities.

Second, the Bank is proposing to utilize a Participating Trust Agreement (see attached) to provide clients of the Trust Department with a trust document under which assets are deposited with the Bank as a trustee with complete fiduciary authority including the right and obligation to invest all trust assets. The Participating Trust Agreement will be evaluated, accepted or rejected and administered by the Trust Department in the same manner and with the same degree of scrutiny as every other trust agreement in which the Bank is either a trustee or co-trustee. It is envisioned that the minimum interest that a grantor could invest would be $50,000 Dollars. As trustee, the Bank will have all of the fiduciary duties, responsibilities and liabilities as provided for under New Jersey statutes (N.J.S.A. 3B:14-1 et seq.; 3B:10-1 et seq.) and common law.

During the lifetime of the grantor, the Participating Trust Agreement provides the trustee with the ability to determine whether or not to make payments to or for the benefit of the grantor in instances in which the trustee deems it advisable for the care, maintenance and support of the grantor or when the grantor becomes disabled. In carrying out this provision, the Bank is subject to the standard of care imposed upon fiduciaries by the laws of the State of New Jersey. Additionally, the Participating Trust Agreement provides for the grantor to designate his spouse or his estate as a beneficiary of the trust upon the death of the grantor. In the instance in which the spouse is designated as a beneficiary, the trust could continue, as would the Bank's obligations as trustee, until the death of the spouse or upon the earlier termination of the trust by the spouse. Under certain circumstances, the Bank may allow the grantor to choose additional dispositive provisions that best meets the grantor's needs.

Other fiduciary responsibilities imposed on the trustee include the obligation to determine and settle any federal estate and gift tax liability imposed on the trust, which tax liability potentially increases at any time in which the trustee makes a discretionary payment. Furthermore, there is the obligation to render a statement to both grantor and beneficiary which shall serve as an accounting to properly inform such parties of activities within the trust account.

Third, the Bank would accept interests into the Common Trust Fund if the Bank is appointed as a conservator, a guardian for a minor or mental incompetent, as administrator or as an executor of the estate of a decedent. To serve in the capacity of a conservator, the Bank would need the consent of the conservatee and the appointment as such by the Superior Court of New Jersey upon a finding that a conservatee, by reason of advanced age, illness or physical infirmity, is unable to provide for himself or others dependent upon him for support. N.J.S.A. 3B:13A-1 et seq; N.J.Ct.R. 4:83-1 et seq. The court proceeding may be initiated by the conservatee or some other person in his behalf. A conservator has both formal and informal accounting requirements and may have to post a bond.

To serve in the capacity of a guardian for a minor, the Bank must be appointed by a court and act in a fiduciary manner with an obligation to preserve and manage the property and rights of a minor. N.J.S.A. 3B:12-1 et seq. To serve in the capacity of a guardian for a mental incompetent, the Bank must be appointed by the Superior Court of New Jersey following a declaration of incompetency by such court pursuant to New Jersey statutes and court rules. N.J.S.A. 3B:12-1 et seq.; N.J.Ct.R. 4:83-1 et seq.

To serve in the capacity of an executor, the Bank would have to be designated as such under a testator's will. As an executor, the Bank must act in a fiduciary manner as set forth by New Jersey statutes and common law.

II. Requested No-Action Position.

On the basis of the foregoing facts, we request that the Staff advise us that it will not recommend any action to the Commission if the Common Trust Fund is not registered under the 1940 Act and the interests in the Common Trust Fund are not registered under the 1933 Act and 1934 Act.

III. Discussion.

Subject to the concurrence of the Staff as requested herein, it is our belief that the continuation and expansion of the Common Trust Fund will not require registration under the 1940 Act by virtue of Section 3(c)(3) which excepts from the definition of investment company "any common trust fund or similar fund maintained by a bank exclusively for the collective investment and reinvestment of money contributed thereto by the bank in its capacity as trustee, executor, administrator or guardian ..." Similar exemptions from registration are available for interests in the Common Trust Fund under Section 3(a)(2) of the 1933 Act and Section 3(a)(12) of the 1934 Act.

In prior No-Action Letters, both the Division of Corporate Finance and Division of Investment Management have stressed that moneys contributed to a common trust fund must be received by a bank acting in a bona fide fiduciary capacity rather than serving as a mere vehicle for the general investment by the public. We believe that the interests in the Common Trust Fund will be received by the Bank while acting in a bona fide fiduciary capacity and will not be utilized by the public as a vehicle for investment.

In the case where interests are admitted into the Common Trust Fund from the existing Equity Fund and Fixed Income Fund, such a transfer is very similar to the transfers that were described in the Allied Trust Company No-Action Letter (available April 25, 1984) ("Allied") and Sun Trust Banks, Inc. No-Action Letter (available June 18, 1986) ("Sun Trust"). Allied and Sun Trust involved existing common trust funds with respect to which either Allied or Sun Trust, or their subsidiaries, maintained a common fund in which such entities held interests in their capacity as trustee, executor, administrator or guardian. In addition, in both cases the rights of the beneficiaries were not diminished by the transfer of existing trust assets, the fees charged were not increased by reason of such a transfer and the resulting common fund agreed to comply with the same statutes, rules and regulations of the particular state and of the Comptroller of the Currency and the Internal Revenue Service. The staff granted Allied's and Sun Trust's request for a no-action determination.

The transfer of interests from the Equity Fund and the Fixed Income Fund to the Common Trust Fund will involve all of the same characteristics found in Allied and Sun Trust. Prior to and after the transfer, the interests are and will be maintained by the Bank as a trustee, executor, administrator or guardian. The proposed transfer will not adversely affect the rights of any persons who have an interest in the Equity Fund or Fixed Income Fund; nor will the proposed transfer increase fees, vary the applicability or change the required compliance with any applicable statutes, rules and regulations. Not only are the investment characteristics virtually the same between the Equity Fund and Fixed Income Fund when compared to the Common Trust Fund, but all of the Bank's reporting obligations and virtually all of the mechanics involved in administering the trusts are the same.

In the case where interests are admitted into the Common Trust Fund by grantors utilizing the Participating Trust Agreement, the moneys will be received by the Bank while acting in a bona fide fiduciary capacity. The Bank will become a fiduciary subject to the duties, responsibilities and liabilities imposed by New Jersey statutes and common law. N.J.S.A. 3B:11-1 et seq. Since the Acts specifically use the term "trustee" and under New Jersey law the Bank would be acting as a trustee, we believe, absent a determination that the interests would be used by the public for general investment, that the clear language used in such Acts would exempt interests admitted to the Common Trust Fund in this manner.

As in the case of interests admitted into the Common Trust Fund from the existing Equity Fund and Fixed Income Fund, the interests admitted by virtue of a Participating Trust Agreement will not be used by the public for general investment. The Participating Trust Agreement is substantially different than a general investment money market or mutual fund account. Under the investment agreements used for money market or mutual fund accounts, the investment manager does not trigger any of the duties, responsibilities or liabilities of a trustee. Rather, acting as an investment manager simply imposes the obligation to invest assets in accordance with the investment agreement, upon the death of the customer, to distribute the principal and proceeds of the assets to the customer's estate and to render a financial report to all the customers. A money market or mutual fund account is fully subject to the federal and state securities laws and most allow a relatively small dollar amount of approximately $1,000 or $2,500 dollars to open an account. Finally, the procedures used in executing a money market or mutual fund investment agreement and depositing and withdrawing from such an account are very informal and can even include instructions over the telephone.

In almost complete contrast, the Participating Trust Agreement appoints the Bank as a trustee, under state law, with complete fiduciary authority including the right and obligation to invest all trust assets. The duties, responsibilities and liabilities of the Bank, as trustee, are much more substantial and onerous than that of an investment manager of a money market or mutual fund account. For instance, the Bank, as trustee, has the responsibility for determining whether or not to make payments to or for the benefit of the grantor in instances in which the Bank deems it advisable for the care, maintenance and support of the grantor or when the grantor is deemed disabled. The investment manager for a money market or mutual fund account is not so responsible, but simply must follow the customer's instructions to either deposit or withdraw the deposited assets or portions thereof.

The Participating Trust Agreement allows the grantor to designate his spouse or his estate as a beneficiary of the trust upon the death of the grantor. In the instance in which the spouse is designated as a beneficiary, the trust could continue, as would the Bank's obligations as trustee, until the death of the spouse or upon the earlier termination of the trust by the spouse. Under certain circumstances, the Bank may allow the grantor to choose additional dispositive provisions. By allowing the grantor, in consultation with a representative of the Trust Department, to choose a dispositive provision which would encompass estate planning decisions and tax implications, the Bank is acting far beyond an investment manager who simply remits the balance of the account to the estate of the customer without the ability to consider any estate planning decisions and tax implications at the outset or conclusion of the customer-investment manager relationship.

Another contrast between the Participating Trust Agreement and a money market or mutual fund account is that the grantor may not receive the net income of the trust estate more frequently than once a month. This same restriction, relating to the ability to receive the net income of the trust estate, is also found for all interests admitted and distributions made to the Common Trust Fund. In most money market or mutual fund accounts, deposits and withdrawals can be made on a daily basis.

As a trustee, the Bank has certain other fiduciary duties that are not imposed on an investment manager. There is an obligation to render a statement to both grantor and beneficiary which shall serve as an accounting to properly inform such parties of activities within the trust account. In addition, upon the death of the grantor, the Bank has a clear obligation under state law to settle the tax obligations of the trust with a view toward the care and preservation of the corpus of the trust. In fact, under Section 6324 of the Internal Revenue Code of 1986, if the Bank does not act in such a fiduciary manner, the Bank can be held liable. An investment manager does not provide any accounting, but instead distributes a quarterly financial summary that is also used for general advertising purposes. Upon the death of a customer, there is no obligation, nor is there any possibility of liability, imposed on the investment manager except to remit the balance of the account to the customer's estate.

Lastly, the Participating Trust Agreement is designed for interests of at least $50,000 Dollars. While there may be extremely limited circumstances in which the Bank may accept an interest of less than $50,000, but never any less than $25,000, even $25,000 is substantially greater than the $1,000-$2,500 Dollar minimums being used by money market or mutual fund accounts. The greater minimum amount under the Participating Trust Agreement limits the availability of this fiduciary instrument to grantors with, not only greater financial wherewithal and presumably greater financial acumen, but also to grantors desiring a more individualized and personal relationship.

In the case where interests are admitted into the Common Trust Fund pursuant to an appointment of the Bank as a conservator, a guardian for a minor or mental incompetent, an administrator or a designation under a testator's Last Will and Testament as an executor, will clearly impose traditional fiduciary duties, responsibilities and liabilities on the Bank. In instances in which the Bank is acting as a conservator or guardian, there will be court supervision and scrutiny over such proceedings. Once again, since the Acts specifically use the term "executor" and "guardian" and under New Jersey law the Bank would be acting as an executor or guardian, the clear language used in such acts would exempt interests admitted to the Common Trust Fund in this manner.

In the instance of the Bank acting as a conservator, the Staff has previously issued a no-action determination to Wells Fargo Bank National Assoc. (available January 15, 1978) ("Wells Fargo"). In Wells Fargo, the staff was asked to determine whether a bank acting as a conservator under California law would be exempt from registration under the Acts because of the similarity in fiduciary responsibility imposed on the bank between its role as a conservator and guardian. In granting the no-action determination, the Staff simply wrote that they would not recommend that the Commission take any action under the 1940 Act (the Division of Corporate Finance did not opine in Wells Fargo) provided that solicitation of clients for this service would not be by advertisements in the mass media. Rather, solicitation of clients would be accomplished only through brochures describing trust department services.

In instances when the Bank contributes interests to the Common Trust Fund while acting as a conservator, the Bank will be acting in an analogous manner to Wells Fargo. The Bank will be acting as a conservator under the applicable state law (New Jersey) and will be performing similar fiduciary responsibilities as a guardian would under New Jersey law. Also, the Bank will not utilize any advertising through the mass media. Therefore, while the Acts do not specifically list the term "conservator", the Staff should issue a no- action determination for interests admitted to the Common First Fund while the Bank is acting in the capacity of a conservator.

In addition to the interests admitted to the Common Trust Fund being exempt from registration under the 1933 Act and the 1934 Act, the Common Trust Fund's formation and operation by the Bank is also exempt from registration under the 1940 Act. Since the Common Trust fund is being maintained by the Bank exclusively for the collective investment and reinvestment of money contributed thereto by the Bank in its capacity as a trustee executor, administrator or guardian, registration under the 1940 Act is not required. The Bank will administer the Common Trust Fund in compliance with all applicable trust and banking statutes, rules and regulations existing in New Jersey, of the Comptroller of the Currency and the Internal Revenue Code. These rules and regulations include 12 C.F.R. 9.18 and the precedent and opinions of the Comptroller of the Currency issued thereunder. Concurrently with the submission of this no-action request, the Bank has submitted the Common Trust Fund to the Internal Revenue Service for a determination that the same is in compliance with Internal Revenue Code Section 584.

As previously written, the Bank will not solicit any participants to the Common Trust Fund through advertisements aimed at the mass media. Instead, any publicity about the Common Trust Fund and copies of the annual financial report shall be made solely in connection with the promotion of the fiduciary services of the Bank. Lastly, the Common Trust Fund will be maintained as incidental to the Trust Department's regular activities.

IV. Conclusion

As a result of the fact that the Bank will maintain the Common Trust Fund for the collective investment and reinvestment of money contributed thereto by the Bank in its capacity as trustee, executor, guardian or conservator, and based on the fact that the Common Trust Fund will not serve as a mere vehicle for the general investment by the public, we believe that the Common Trust Fund is exempt from registration under Section 3(c)(3) of the 1940 Act and the interests in the Common Trust Fund are exempt from Section 3(a)(2) of the 1933 Act and Section 3(a)(12) the 1934 Act.

Hannoch Weisman

A Professional Corporation

By Ellen B. Kulka

A Member of the Firm

SEC Letter

1940 Act / s 3(c)(3)

October 14, 1987

Publicly Available November 13, 1987

Re: First Jersey National Bank

Incoming letter dated July 10, 1987

On the basis of the facts presented, and particularly noting that the Division of Investment Management has determined that it is unable to assure you that it would not recommend any enforcement action to the Commission if the Bank maintains the Funds as proposed in your letter without registering the Funds under the Investment Company Act of 1940, we are unable to advise you that this Division would not recommend enforcement action to the Commission should the Bank offer and maintain the Funds as described in your letter without registration of interests therein under the Securities Act of 1933 and the Securities Exchange Act of 1934.

The Division of Investment Management has asked us to inform you of their position as follows.

Your letter of July 10, 1987, requests our assurance that we would not recommend any enforcement action to the Commission under the Investment Company Act of 1940 ("1940") if the Bank implements the proposed expansion of its existing common trust funds (namely, the Equity Fund and the Fixed Income Fund; collectively, "Funds") without registering them under the 1940 Act. The proposal contemplates that the Bank will solicit participations in the Funds by offering to its customers its services as trustee under participating trust agreements ("mini-trusts") that are standardized and revocable and can be set up generally with a $50,000 minimum initial investment, except in limited cases where the Bank may accept a lesser amount not less than $25,000. The grantor designates which of the Funds his money should be invested in. Also, the grantor may withdraw any sum or sums from the principal as often as once a month and, with the Bank's consent, add to the principal from time to time. The grantor is entitled to a monthly distribution of the net income unless he shall have instructed the Bank otherwise. The Bank has discretionary authority to provide out of the principal for the grantor's support and, in the event of the grantor's illness or disability, for expenses related thereto. In the event of the grantor's death, the Bank, after payment of the obligations of the grantor's estate, must distribute the principal and accrued net income to the grantor's estate or spouse, as the grantor may designate. If the spouse is designated as beneficiary, the mini-trust could continue until the earlier of the spouse's death or the spouse's revocation of the trust.

You argue that investment of mini-trust moneys in the Funds should not make section 3(c)(3) of the 1940 Act¹ unavailable to the Funds because section 3(c)(3) specifically uses the term "trustee," the Bank would be acting as a "trustee" under New Jersey law, and you believe that the public will not use the mini-trusts for general investment in the Funds. Where, as in this case, a bank makes a public offer of mini-trusts the assets of which are to be invested in such of the bank's common trust funds as the grantors may designate, the offer could involve an offer of participations in the common trust funds for investment unless the grantors are likely to create and use the mini-trusts primarily to avail of the bank's fiduciary functions in addition to money management. This view is supported, among other things, by statements of the Federal Reserve Board ("Board") regarding the proper scope of activities of bank common trust funds, which formed the basis for the common trust fund exception under the 1940 Act. In May 1940, the Board stated

In amending Regulation F to permit the operation of Common Trust Funds, the Board intended that a Common Trust Fund should be used merely to aid in the administration of trusts by a trust institution through the commingled investment of funds of various trusts. While the operation of a Common Trust Fund might thus enable a trust institution to accept small trusts which it otherwise would be unwilling to handle, it was contemplated that trust guise or form should not be used to enable a trust institution to operate a Common Trust Fund as an investment trust attracting money seeking investment alone and to embark upon what would be in effect the sale of participations in a Common Trust Fund to the public as investments.... In determining whether a particular trust is created and used for "bona fide fiduciary purposes," it is necessary to consider, in the light of such intent and purposes, not only the terms of the trust instrument but also other facts and circumstances concerning the creation and use of the trust.²

Under the mini-trust, the grantor designates which of the Funds his money should be invested in, will receive the monthly net income thereof unless he instructs the Bank otherwise, and may add to, withdraw from, and revoke the mini-trust. Although the Bank also stands ready to provide, in addition to money management, such traditional fiduciary services as providing for the grantor's support from the trust corpus, paying for expenses related to the grantor's illness, disability, death, etc., and continuing the mini-trust for the benefit of the grantor's spouse at the spouse's option, we are unable to conclude that grantors of the mini-trusts would create and use the mini-trusts primarily to avail of the Bank's fiduciary services.³ Thus, we cannot conclude that the Bank's proposal would not involve an offer of participations in the Funds to the public as investments.⁴ Accordingly, we cannot assure you that we would not recommend any enforcement action to the Commission under the 1940 Act if the Bank implements its proposal without registering the Funds under that Act.

Because these positions are based upon the representations made to the Division in your letter, it should be noted that any different facts or conditions might require different conclusions. Moreover, this letter merely expresses the Divisions' positions regarding enforcement action, and does not purport to express any legal conclusion with respect to the questions presented.

Sincerely,

Cecilia D. Blye

Special Counsel

Securities and Exchange Commission (S.E.C.)

- Footnotes -

1 Section 3(c)(3), in relevant part, excepts from the definition of an investment company any common trust fund "maintained by a bank exclusively for the collective investment and reinvestment of moneys contributed thereto by the bank in its capacity as a trustee, executor, administrator, or guardian." (emphasis added)

2 26 Fed.Reserve Bull. 393-394 (1940) (emphasis added).

3 See, generally, Provident National Bank (pub. avail. Feb. 17, 1982); Mechanics Bank (pub. avail. Jan. 5, 1981); The Howard Savings Bank of Newark, New Jersey (pub. avail. May 1, 1980); Genesee Merchants Bank & Trust (pub. avail. Jan. 8, 1979).

4 The fact that the Bank will not solicit participants to the Funds through advertisements in the mass media does not necessarily mean that the mini-trusts would not be publicly offered as a means of participating in the Funds. See, e.g., Howard Savings Banks, supra.

Collective Investment Funds

SEC No-Action Letter

United Virginia Bankshares Incorporated

Publicly Available June 15, 1987

(Cite as: 1987 WL 108274 (S.E.C.))

Letter to SEC

January 26, 1987

Office of the Chief Counsel

Division of Corporate Finance

Securities and Exchange Commission

450 Fifth Street

Washington, D.C. 20549

Dear Sirs:

We are writing on behalf of United Virginia Bankshares, Incorporated ("Bankshares"), a regional bank holding company incorporated under the law of Virginia and having its principal place of business in Richmond, Virginia. Bankshares's principal subsidiaries are United Virginia Bank ("UVB"), a banking corporation incorporated under the laws of and having its principal place of business in the state of Virginia, NS & T Bank, N.A. ("NS & T"), a national banking association having its principal place of business in the District of Columbia, and Bank of Bethesda ("Bethesda"), a banking corporation incorporated under the laws of and having its principal place of business in the state of Maryland (UVB, NS & T and Bethesda are sometimes hereinafter referred to as the "Banks"). Bankshares is a bank holding company registered with the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"). All of the Banks and Bankshares are members of an "affiliated group" as that term is defined in Section 1504(a) of the Internal Revenue Code of 1986, as amended (the "Code").

Bankshares proposes to implement a system of interbank common and collective trust funds for the collective investment and reinvestment of funds held in fiduciary capacities by the Banks. We hereby request your confirmation that the staff of the Division of Corporate Finance will not recommend that the Securities and Exchange Commission take any enforcement action if Bankshares and its subsidiaries conduct the activities described below without effecting any registration under the Securities Act of 1933 (the "Securities Act"), the Securities Exchange Act of 1934 (the "Exchange Act") and the Investment Company Act of 1940 (the "Investment Company Act").

Facts:

The trust departments of certain of the Banks currently maintain certain common trust funds for the commingled investment of assets which such Banks hold in their capacity as trustee, executor, administrator or guardian of personal fiduciary accounts and certain collective investment funds for assets which such Banks hold in their capacity as trustee or agent for employee benefit trusts. Both types of funds are sometimes referred to generically as common trust funds. In order to qualify for tax exemption under Section 584 of the Code, all of the common trust funds maintained by the Banks, including those maintained by state Banks, are maintained in conformity with the rules and regulations of the Comptroller of the Currency. All of the collective investment funds maintained by the Banks are operated either in conformity with the rules and regulations of the Comptroller of the Currency or in conformity with the conditions for tax exemption set forth in Section 401(a) of the Code and Rev.Rul. 81-100, 1981-1 C.B. 326 (superseding Rev.Rul. 56-267, 1956-1 C.B. 206 and Rev.Rul. 75-530, 1975-2 C.B. 146). Both the common trust and collective investment funds are in all cases maintained in conformity with a version of the Uniform Common Trust Fund Act or a similar law in force in the respective state or jurisdiction of the Bank which maintains them. The Banks exercise ultimate investment and management discretion over the respective common and collective trust funds they maintain.

In order to achieve certain operational efficiencies and economies of scale, to assure the availability throughout the Bankshares bank system of high quality investment management service, and to make available greater opportunities for diversification of trust assets and for participation in collective investment funds with specialized objectives, Bankshares wishes to establish a system of interbank common trust and collective investment funds in which all the Banks could participate. Initially, employee benefit trusts for which certain Banks serve as trustee and collective investment funds maintained by those Banks will be permitted to participate in collective investment funds maintained by UVB, and personal fiduciary accounts for which certain Banks serve as trustee and common trust funds maintained by those Banks will be permitted to participate in common trust funds maintained by UVB. It is anticipated, however, that ultimately (1) any Bank would be able to invest assets which it holds in its capacity as trustee, executor, administrator or guardian in common trust funds maintained by other Banks and assets of employee benefit trusts which it holds as trustee in collective investment funds maintained by other Banks, and (2) any common or collective trust fund maintained by a Bank would be able to invest all or part of its assets in common and collective trust funds maintained by other Banks having compatible investment characteristics, subject, in each case, to the provisions of the governing trust or plan instruments and any applicable state laws. In all cases, the proposed investment transactions would be undertaken in accordance with applicable state laws which permit such transactions.

Each common trust fund in the Bankshares interbank common trust fund system would continue to be operated in compliance with the same state and federal regulatory requirements as would apply if the Bank contributing funds thereto (the "contributing Bank") were the same entity as the Bank maintaining the common trust fund (the "maintaining Bank"). The rights of the beneficiaries of the contributing Bank's personal fiduciary accounts investing in the maintaining Bank's common trust funds, either directly or through the intermediary of the contributing Bank's own common trust funds, would not be diminished by reason of such investment. The fees charged for services in the management of the Bankshares interbank system would be no greater than those that would have been charged each participating personal fiduciary account had it been individually invested by the contributing Bank as trustee in the contributing Bank's common trust fund. The records maintained by the maintaining Bank and the contributing Bank would reflect the participation in each common trust fund of all trusts and other accounts which participate in such fund, either directly or indirectly through intermediary contributing Banks. The contributing Bank and the maintaining Bank would adhere to the various reporting requirements and percentage limitations on participations for the common trust funds as required by the regulations of the Comptroller of the Currency.

Request for Commission Action:

Based upon the foregoing facts, upon prior no-action positions taken by the staff of the Commission, in particular, Western Bancorporation (available May 22, 1980) and SunTrust Banks, Inc. (available June 18, 1986), copies of which are enclosed with this letter, and upon our analysis of the statutes, regulations and policy considerations involved, we request that the staff of the Commission confirm that:

(1) Participations in a maintaining Bank's common or collective trust funds, including funds of those Banks which act as intermediaries by investing in the common or collective trust funds of another Bank, may be issued without registration under the Securities Act by virtue of the exemption provided by Section 3(a)(2) of such Act and Rule 132 thereunder;

(2) Participations in a maintaining Bank's common or collective trust funds, including funds of those Banks which act as intermediaries by investing in the common or collective trust funds of another Bank, will be exempt from registration under the Securities Exchange Act by virtue of the exemptions provided by Sections 3(a)(12) and 12(g)(2)(H) of such Act and Rules 3a12-6 and 12h-1(b) thereunder; and

(3) The common and collective trust funds of a maintaining Bank, including funds of those Banks which act as intermediaries by investing in the common or collective trust funds of another Bank, may exist and operate without registration under the Investment Company Act by virtue of the exemptions provided by Sections 3(c)(3) and 3(c)(11) of such Act and Rule 3c-4 thereunder.

We note that, while the Commission has extended the exemptions from the registration requirements of the Securities Act, the Securities Exchange Act and the Investment Company Act by enacting the Rules cited above, the Commission has not specifically included in such Rules a reference to common trust funds maintained by out-of-state affiliates of a bank serving as trustee, executor, administrator or guardian. However, we can find no reason why there should be any additional restrictions on an interstate common trust fund system operated as proposed by Bankshares. In enacting these Rules, the Commission noted that it would appear appropriate to view banks in an affiliated group as a single economic unit. Securities Act Release No. 5875, October 21, 1977. It seems appropriate, therefore, for the Commission to confirm that the above cited statutes and Rules apply to interstate common and collective trust fund systems. With the amendments of the Bank Holding Company Act and state banking laws to allow interstate ownership of banks, there appears to be little policy concern against interstate banking affiliate operations, including common trust funds.

In Western Bancorporation, the staff of the Commission took a "no-action" position under the exemptions referred to above with respect to an interstate common trust fund system to be implemented and operated by a multi-state bank holding company. Western Bancorporation, which had been grandfathered out of compliance with Section 3(d) of the Bank Holding Company Act, had 22 subsidiary banks, operating in 11 states and consisting of a combination of national and state banks. As in the case of the Bankshares system, those subsidiary banks were governed by the requirements of various federal and state laws.

In SunTrust Banks, Inc., based on facts very similar to Bankshare's proposal, the staff of the Commission took a "no-action" position, finding that a regional bank holding company could implement a system of interbank common and collective trust funds for the collective investment and reinvestment of funds held in fiduciary capacities by subsidiary banks so long as the exceptions in Sections 3(c)(3) and 3(c)(11) of the 1940 Act were otherwise available to the common trust funds and collective trust funds maintained by the subsidiary banks. The staff emphasized that (i) all the SunTrust banks were members of an "affiliated group" as defined in the Code, (ii) each fund would continue to be operated in compliance with the same state and federal regulatory requirements as would apply if the bank maintaining the fund and the bank contributing assets thereto were the same entity and (iii) investment by a contributing bank in the maintaining bank's common trust fund would not diminish the rights of the beneficiaries of the contributing bank's personal fiduciary accounts.

As required by Securities Act Release No. 6269, seven copies of this letter are enclosed herewith. By a separate letter, we have simultaneously requested that the Division of Investment Management confirm that it will not recommend that the Commission take any enforcement action if Bankshares or its subsidiaries conduct the activities described herein. A copy of that letter is enclosed as an attachment to each copy of this letter.

If you have any questions regarding the requested ruling or desire further information, please do not hesitate to call the undersigned at (804) 783-6419 or Robert L. Musick, Jr., at (804) 783-6414.

Sincerely yours,

R. Hart Lee

SEC Letter

1934 Act / s 12(g)(2)(H)

May 14, 1987

Publicly Available June 15, 1987

Re: United Virginia Bankshares, Inc.

Incoming letter dated January 26, 1987

On the basis of the facts presented, the Division of Corporation Finance will not recommend any enforcement action to the Commission if United Virginia Bankshares, Inc., in reliance upon your opinion as counsel that participations in a maintaining Bank's common or collective trust funds, including funds of those Banks that act as intermediaries by investing in the common or collective trust funds of another Bank, are exempt from registration under the Securities Act of 1933 ("Securities Act") by virtue of the exemptions provided by Section 3(a)(2) of the Act and Rule 132 thereunder, and also from registration under the Securities Exchange Act of 1934 ("Exchange Act") by virtue of the exemptions provided by Sections 3(a)(12) and 12(g)(2)(H) of that Act and Rules 3a12-6 and 12h-1(b) thereunder, implements and operates the common and collective trust funds as proposed without registration of interests therein under the Securities Act or the Exchange Act.

In addition, the Division of Investment Management has asked us to inform you that, on the basis of the facts and representations in your letter, and as long as the exceptions in Section 3(c)(3) and Section 3(c)(11) of the Investment Company Act of 1940 ("1940 Act") are otherwise available to the common trust funds and collective trust funds (collectively, "Funds") maintained by each subsidiary bank of Bankshares ("Bank"), that Division would not recommend any enforcement action to the Commission if, without registration of the Funds under the 1940 Act:

(1) a Bank contributes assets, which it holds in its capacity as trustee, executor, administrator or guardian, to common trust funds maintained by other Banks;

(2) a Bank invests assets, which it holds as trustee or agent of any employee's stock bonus, pension, or profit-sharing trust that meets the requirements for qualification under Section 401 ("Section 401 assets") of the Internal Revenue Code of 1986 ("Code") in collective trust funds maintained by other Banks for Section 401 assets held by them;

(3) any common trust fund maintained by a Bank invests all of part of its assets in common trust funds maintained by other Banks having compatible investment characteristics subject to governing trust instruments and any applicable state laws; or

(4) any collective trust fund maintained by a Bank invests all or part of its assets in collective trust funds maintained by other Banks having compatible investment characteristics subject to governing trust or plan instruments and any applicable state laws.

The position of the Division of Investment Management is based on the facts presented in your letter and your oral representations to Elizabeth Tsai of the staff on February 11, 1987, including the following: (a) all the Banks are members of an "affiliated group" as that term is defined in Section 1504(a) of the Code; (b) the Funds would continue to be operated in compliance with the same state and federal regulatory requirements as would apply if the Bank maintaining the Funds ("maintaining Bank") and the Bank contributing assets thereto ("contributing Bank") were the same entity; and (c) investment by a contributing Bank in the maintaining Bank's common trust fund would not diminish the rights of the beneficiaries of the contributing Bank's personal fiduciary accounts, nor would investment by a contributing Bank in the maintaining Bank's collective trust fund diminish the rights of the persons for whose benefit the contributing Bank acts as agent or trustee.

Because these positions are based upon the representations made to the Division in your letter, it should be noted that any different facts or conditions might require a different conclusion or conclusions. Further, this response only expresses the Divisions' positions on enforcement action and does not purport to express any legal conclusion on the questions presented.

Sincerely,

William H. Carter Special Counsel

Securities and Exchange Commission (S.E.C.)

Collective Investment Funds

SEC No-Action Letter

The National Bank of Fairfax

Publicly Available December 29, 1976

(Cite as: 1976 WL 12983 (S.E.C.))

Letter to SEC

October 15, 1976

Chief Counsel

Division of Corporation Finance

Securities and Exchange Commission

500 North Capitol Street

Washington, D. C. 20549

Re: The National Bank of Fairfax Self-Employed Retirement Plan and Trust Agreement--Amended and Restated as of January 1, 1975

The National Bank of Fairfax

P. O. Box 278

Fairfax, Virginia 22030

Request for a "no-action letter" under Section 3(a)11 and 3(a)(2) of the Securities Act of 1933

Dear Sir:

The request herein for a "no-action letter" relates to Section 3(a)(11) of the Securities Act of 1933 (the "Act"), involving a security offered and sold only to persons resident within a single State, and to Section 3(a)(2) of the Act involving the establishment of separate trust accounts for retirement plans of self-employed individuals where the intrastate exemption of Section 3(a)(11) of the Act is not available.

The undersigned counsel for The National Bank of Fairfax, P. O. Box 278, Fairfax, Virginia 22030 (the "Bank") respectfully requests that the Division of Corporation Finance indicate that it will not recommend any action to the Commission if the Bank publicly offers for sale or sells participations in The National Bank of Fairfax Self-Employed Retirement Plan and Trust Agreement-- Amended and Restated as of January 1, 1975 (the "Plan"), in the manner set forth in the Plan. In support of this request, the following representations are made:

1. The National Bank of Fairfax is a national bank doing business in Fairfax, Virginia.

2. The Bank on December 12, 1975, adopted the Plan, and a copy thereof is attached hereto and incorporated herein by reference.

3. A copy of the Adoption Agreement relative to the Plan is attached hereto and incorporated hereby reference.

4. The Plan has been submitted to the Commissioner of Internal Revenue for approval but no determination letter has as of this date been issued by the Commissioner.

5. The Plan is restricted to self-employed individuals and their employees.

6. Under the Plan, the Bank is the Trustee (Section 1.21 of Plan).

7. The pertinent provisions of the Plan relative to who may become a Member thereof (as "Member" is defined in the Plan), from whom voluntary contributions shall be accepted, and to the establishment of separate trusts, are as follows:

"Section 2.6. Residence. No individual may become a Member who is not a bona fide resident of the Commonwealth of Virginia; provided, however, that a Hired Employee who is a non-resident but who is in the employ of an Employer who is a bona fide resident of Virginia may become a Member if he makes no contributions under the Plan. For this purpose, if the Employer is a partnership, such partnership shall be considered a bona fide resident of Virginia only if its principal place of business is in Virginia and all partners are bona fide residents of Virginia.

The restrictions of the foregoing provisions shall be inapplicable where the Employer has made an election pursuant to Section 10.5(a) to have his participation in the Plan segregated from the Trust Fund and held by the Trustee upon a separate trust. Such election shall be mandatory if the Employer is not a resident of Virginia, as defined above, at the time the Plan is adopted by the Employer.

If a sole proprietor or a partner (in case the Employer is a partnership) ceases to be a resident of the Commonwealth of Virginia (or if a partnership, the partnership shall remove its offices from within the Commonwealth of Virginia, or if the personal representative of a deceased sole proprietor or a member of the partnership, as the case may be, shall be or become a non-resident of Virginia) subsequent to the date on which the Plan is adopted by the Employer, the Employer shall forthwith give notice of such fact to the Trustee. Unless or until the Employer has given notice of his intention to transfer his participation in the Plan to a new Trustee pursuant to Section 7.4, effective as of the date that the Employer ceases to be a resident of Virginia, the Employer shall be deemed to have made the election pursuant to Section 10.5(a). Within a reasonable time after the Trustee receives notice that such Employer has ceased to be a resident of Virginia, the Trustee shall provide for the segregation of such Employer's participation in the Plan as a separate trust, pursuant to Section 10.5(a).

The Trustee shall not accept any contributions to the Plan by the Employer unless (1) such contribution or contributions are accompanied by a statement signed by the Employer acknowledging that the Employer is a resident of Virginia, as defined above, or (2) the Employer has made an election pursuant to Section 10.5(a). Further, the Trustee shall not accept any voluntary contributions to the Plan by any Member unless (1) such contribution or contributions are accompanied by a statement signed by such Member acknowledging that he is a resident of Virginia, as defined above, or (2) the Employer of such Member has made an election pursuant to Section 10.5(a)."

"Section 10.5(a) Separate Trusts. Notwithstanding the foregoing provisions of this Article with respect to the collective investment of the Trust Fund, the Employer may elect to have the contributions and assets allocable to the Plan of such Employer segregated from the Trust Fund and held by the Trustee upon a separate trust containing the same terms and conditions as the Plan. The Employer's Plan shall not be otherwise affected by such separation. Such election shall be made either in the Adoption Agreement or in writing in a form acceptable to the Trustee.

Section 10.5(b) Employer-Directed Investments. If the Employer has made the election specified in Section 10.5(a), then notwithstanding the foregoing provisions of this Article X, the Employer shall have the right to direct the investment of any or all of the funds constituting the Participating Interests of each of its Employees who are Members under the Plan, either by directing the Trustee with respect to investments (including reinvestments, disposals and exchanges) or by disapproving proposed investments by the Trustee (including reinvestments, disposals and exchanges). Any such direction by an Employer to the Trustee shall be in writing signed by the Employer and in a form acceptable to the Trustee. The Trustee shall comply with the investment directions of an Employer as promptly as possible; provided, however, that the Trustee may review each such investment direction and it may decline to follow any direction determined by it to be in violation of the terms of the Plan or the provisions of the Employee Retirement Income Security Act of 1974. The Trustee shall assume no liability and shall be fully protected in carrying out the directions of an Employer with respect to any such Employer- directed investments or disapproval of proposed investments. In the absence of any directions pursuant to the foregoing, the funds constituting the separate trust of the Employer shall be invested and reinvested as the Trustee, in its sole discretion, shall determine."

8. The pertinent provisions in the Adoption Agreement relative to who may become a Member of the Plan (as "Member" is defined in the Plan), from whom voluntary contributions shall be accepted, and to the establishment of separate trusts, are as follows:

Fifth

The Trustee shall not accept any contributions to the Plan by the Employer unless (1) such contribution or contributions are accompanied by a statement signed by the Employer acknowledging that the Employer is a resident of Virginia, as defined in the Plan, or (2) the Employer has made an election pursuant to Section (B) of Article Eighth below."

Sixth

Each Member (check one) ( ) shall ( ) shall not be entitled to make annual voluntary contributions of per cent (not to exceed 10) of such Member's Aggregate Compensation. In the case of Owner Employees, such Contributions shall not exceed $2,500 for each year of Service with the Employer. Each Member (check one) ( ) shall ( ) shall not be entitled to withdraw his voluntary contributions. The Trustee shall not accept any voluntary contributions to the Plan by any Member unless (1) such contribution or contributions are accompanied by a statement signed by such Member acknowledging that he is a resident of Virginia, or (2) the Employer of such Member has made an election pursuant to Section (B) of Article Eighth below."

Eighth

The Trustee hereby agrees to hold all contributions made to the Trust Fund by the Employer and his Employees as set forth above in trust in accordance with the terms of the Plan and Trust, and to distribute or pay out the same only as therein provided. (Check one):

(A) The Trustee shall allocate all such contributions % to the Common Stock Fund, % to the Fixed Income Fund, and % to the Insurance Fund established pursuant to the Trust. Changes in the allocation of contributions between the Common Stock Fund, the Fixed Income Fund, and the Insurance Fund shall be made by the Trustee only upon written request of the Employer and shall become effective as of the next Valuation Date following receipt of such notice from the Employer.

(B) In lieu of collective investment and pursuant to Section 10.5(a) of the Plan, the Employer elects to have the contributions and assets allocable to its Plan segregated from the Trust Fund and held by the Trustee upon a separate trust containing the same terms and conditions as the Plan. The election under this paragraph (B) shall be mandatory if the Employer is not a resident of Virginia, as defined in the Plan, at the time the Plan is adopted by the Employer."

9. The pertinent provision of the Plan relative to the Trustee terminating an Employer's interest in the Plan (as "Employer" is defined in the Plan), and to an Employer transferring his participation in the Plan to another Trustee is as follows:

"Section 7.2 Disqualified Plan. If at any time it shall be determined by the Internal Revenue Service that the Plan of any Employer fails to qualify under Sections 401 and 501(a) of the Internal Revenue Code, the Trustee, upon receiving notice of such disqualification, shall exercise its termination right under Section 7.4 below. The Plan of any Employer shall not be considered disqualified within the meaning of this Section merely because, pursuant to Section 401(e) of the Internal Revenue Code, the Plan is to be considered not qualified with respect to one or more particular Members."

4 "Section 7.3 Termination by Trustee. The Trustee, at any time, by written notice to any Employer may terminate that Employer's participation in the Plan effective as of a specified future Valuation Date. Upon such termination or upon revocation of the Plan pursuant to Section 6.4, every Employee of that Employer who is then a Member shall be entitled to receive his Participating Interest as provided in Section 7.1."

"Section 7.4 Transfer to New Trustee. An Employer, at any time, by written notice to the Trustee, in such form as is acceptable to the Trustee, and provided that transfer may be effected without adversely affecting the qualification of the Employer's participation in the Plan under Section 401 of the Internal Revenue Code of 1954, as amended (or corresponding provision of any subsequent Federal revenue law at the time in effect), may transfer his participation in the Plan to any other trustee eligible to act as trustee. As soon as practicable after the Valuation Date next following receipt of such notice, the Trustee shall transfer the assets of that part of the Trust Fund representing the Participating Interests of the Employees of that Employer on that Valuation Date, to the other trustee named in the notice. Upon such transfer, the Trustee shall have a right to have its accounts settled as provided in Section 10.9 of the Plan. When such assets All have been transferred and delivered to the other trustee and the relevant accounts of the Trustee have been settled as provided in Section 10.9 of the Plan, the Trustee shall be released and discharged from all further accountability of liability respecting such assets and shall not be responsible in any way for the further disposition of such assets or any part thereof."

10. The pertinent provisions of the Plan relative to the investment of the Trust Fund (as "Trust Fund" is defined in the Plan) are as follows:

"Article X--Investment of Trust Fund

Section 10.1 General. Subject to Section 10.5 below, the investment of the Trust Fund shall be made by the Trustee. All investments and reinvestments shall be made at such times and in such stocks, bonds, or other securities or property of any kind, including interest bearing savings accounts with its own banking department or with any other bank, which shall seem suitable and appropriate to the Trustee. The Trustee is specifically given the right to invest the assets of the Trust Fund in any common trust fund or funds operated by it. The Trustee shall not be confined to the class or type of investments prescribed by statute, by rule of court or otherwise, as legal investments for trustees or fiduciaries generally.

The assets of the Trust Fund shall be invested collectively for the accounts of all Members in the Plan; however, records shall be kept for each Member which shall reflect not only the contributions made on his behalf but also his pro rata share of the net income of the Trust Fund and of the net gains or losses thereof. The reflection of said items shall occur once each year upon the Valuation Date and shall be distributed among the accounts of the Members in the same ratio as the balance of each such account at the close of business on the last preceding Valuation Date bears to the aggregate of such balances at the close of business on such preceding Valuation Date."

"Section 10.2 Allocations. The Trustee is authorized: (a) Employer's Instructions. To allocate contributions pursuant to the Plan from each Employer and for his Employees to the Fixed Income Fund, and/or the Common Stock Fund, and/or the Insurance Fund, in accordance with the most recent instructions received by the Trustee from that Employer as to the allocation of such contributions.

(b) Fixed Income Fund. To invest and reinvest the Fixed Income Fund, without distinction between principal and income, in shares of stock (preferred, preference or guaranteed) or other evidences of ownership, bonds, debentures, equipment or collateral trust certificates, notes or other evidences of indebtedness, unsecured or secured by mortgages on real or personal property wherever situated (including any part interest in a bond and mortgage or note and mortgage whether insured or uninsured) and any other property, or part interest in property, real or personal, foreign or domestic, the rate of return from which is fixed by the instruments evidencing the investments, without regard to any restriction placed upon fiduciaries by any present or future applicable law, administrative regulation, rule of court or court decision. The Trustee's determination as to whether or not an investment is one the rate of return from which is fixed by the instrument evidencing it shall be conclusive and binding upon all persons interested in the Fixed Income Fund; and it may retain any otherwise ineligible property received by way of dividend, exchange, conversion, liquidation or otherwise than by purchase for as long as the Trustee in its discretion deems desirable for advantageous realization thereon.

(c) Common Stock Fund. To invest and reinvest the Common Stock Fund, without distinction between principal and income, in shares of common stock or other evidences of ownership and any other property, or part interest in property, real or personal, foreign or domestic, the rate of return from which is not fixed by the instruments evidencing the investments, whether or not productive of income or consisting of wasting assets; and to the extent the Trustee in its discretion deems desirable, or pending selection and purchase of other suitable investments, or to provide for current cash requirements, in investments the rate of return from which is fixed by the instruments evidencing the investments; without regard to any restriction placed upon fiduciaries by any present of future applicable law, administrative regulation, rule of court or court decision.

(d) Insurance Fund. To invest and reinvest the Insurance Fund, without distinction between principal and income, by payment of premiums on individual endowment contracts without an element of life insurance, and annuity policies on the lives of Participants purchased from such insurance companies and in such forms and amounts as the Employer shall designate (or as the Trustee may select in the absence of such designation). Such contracts shall be restricted to forms approved for retirement plans qualified under Section 401 of the Internal Revenue Code of 1954, as amended. Any dividends payable under such contracts shall be applied to reduce premiums. In no event shall the life insurance issued on any one Member's life exceed the amount of ordinary life insurance which may be purchased with less than 50% of the aggregate of all contributions credited to such Member's account, provided, however, if a Member so elects and Employee contributions are permitted under the Plan, life insurance contracts may be purchased for the Member in excess of this limitation. The Trustee on behalf of the individual Participant's Participating Interest, shall be owner, applicant and beneficiary on each such contract which shall be allocated to the individual Participant's account. On termination of a Participant's participation other than by reason of death, the Trustee shall cause any such contract for such Participant to be endorsed as a paid-up policy in accordance with its terms and distributed to the former Participant (subject to the provisions of Article V). On death of a Participant while in the employ of an Employer, the Trustee shall assign any proceeds payable under any such contracts on the Participant's life to the Participant's Beneficiary as designated in accordance with Section 5.4."

11. In the opinion of the undersigned counsel for The National Bank of Fairfax, the public offer and sale by the Bank of participations in the Plan in the manner set forth in the Plan would not make the Section 3(a)(11) exemption of the Act unavailable, and, further, that the provisions of the Plan relative to the establishment of separate trusts in those cases where initially an Employer is not a resident of Virginia, or where a Member ceases to be a resident of Virginia, would not violate the provisions of Section 3(a)(2) of the Act, which Section 3(a)(2) does not exempt interests or participations in a single or collective trust fund maintained by a bank, by a pension or profit-sharing plan which covers employees some or all of whom are employees within the meaning of Section 401(c)(1) of the Internal Revenue Code of 1954.

On the basis of the foregoing, it is respectfully requested that the Division of Corporation Finance indicate, as expeditiously as is convenient to it, that it will not recommend any action to the Commission if the Bank publicly offers for sale or sells participations in the Plan, in the manner set forth in the Plan, without compliance with the registration requirements of the Securities Act of 1933, as amended.

Respectfully submitted,

Boothe, Prichard & Dudley

Arthur P. Scibelli

SEC Letter

1933 Act / s 3(a)(2); 3(a)(11)

Publicly Available December 29, 1976

Arthur P. Scibelli, Esq.

Boothe, Princhard & Dudley

4085 University Drive

Fairfax, Virginia 22030

Re: The National Bank of Fairfax

Dear Mr. Scibelli:

This is in response to your letter dated October 15, 1976, concerning the establishment of the National Bank of Fairfax Self-Employed Retirement Plan & Trust (the "Plan") without compliance with the registration requirements of the Securities Act of 1933 (the "Act") in reliance upon the exemptions contained in Sections 3(a)(11) and 3(a)(2) of the Act.

You have requested our views with respect to the applicability of Section 3(a)(11) of the Act to the offer and sale of participations in the Plan only to persons resident within a single state. In Securities Act Release No. 33-5450, dated January 7, 1974, the Commission stated that the Staff would consider requests for "no-action" letters in reliance upon Section 3(a)(11) for transactions outside Rule 147, "only on an infrequent basis and in the most compelling circumstances." The Staff is of the opinion that the transaction proposed in your letter does not meet this requirement and, accordingly, we are not in a position to issue a no-action letter in this regard.

Furthermore, you request the Division's concurrence in your opinion that, in situations where the intrastate exemption of 3(a)(11) is unavailable, the Bank could rely upon the exemption provided by Section 3(a)(2) of the Act for the establishment of separate trust accounts.

The issue raised deals with the extent to which an exemption might be available under Section 3(a)(2) of the Act for interests and participations in H.R. 10 ("Keogh") Plans. The view of this Division is that the 1970 amendments to that Section, including the legislative history and the language of the statute, evidence a clear intent that no specific exemption was intended to be created for interests in H.R. 10 Plans. Accordingly, we are unable to concur in your opinion that the exemption provided by Section 3(a)(2) of the Act would be available to the Bank for the establishment of the separate interest accounts.

Please contact Mr. Thomas C. Lauerman of the Division of Investment Management (202-755-0217) if you have any questions regarding the Keogh Plan exception in Section 3(a)(2).

Sincerely,

Consuela M. Washington

Attorney Adviser

Securities and Exchange Commission (S.E.C.)

Collective Investment Funds

SEC No-Action Letter

Citizens and Southern National Bank

Publicly Available October 26, 1981

Letter to SEC

This firm represents the Citizens and Southern National Bank, a national banking association having an office and place of business in Atlanta, Fulton County, Georgia, (hereinafter called "C&S"); the C&S Pooled Profit Sharing and Pension Trust (hereinafter called the "Pooled Trust") and the C&S Commingled Retirement Trust Fund, (hereinafter called the "H.R. 10 Trust"). C&S is the trustee for both the Pooled Trust and the H.R. 10 Trust, both of which serve as the collective investment vehicles of various pension or profit sharing plans which meet the requirements for qualification under section 401 of the Internal Revenue Code of 1954 (hereinafter called "Qualified Plans").

The Pooled Trust holds only funds of Qualified Plans which do not cover persons who are employees within the meaning of section 401(c)(1) of the Internal Revenue Code of 1954 (hereinafter called the "Code"). Assets contributed to Qualified Plans sponsored by both Georgia and foreign employers are so held. The Pooled Trust relies on section 3(a)(2) of the Securities Act of 1933, as amended (hereinafter called the "1933 Act"), for exemption form the registration provisions of the 1933 Act.

The H.R. 10 Trust holds only funds of Qualified Plans sponsored by sole proprietors and partnerships. All partnerships, sole proprietors, partners owning more than a 10% interest in the capital or profits of a partnership, and members of the plan making voluntary contributions to the H.R. 10 Trust are residents of Georgia. The H.R. 10 Trust relies on section 3(a)(11) of the 1933 Act for exemption from the registration provisions of the 1933 Act.

In order to increase operating efficiency, C&S desires to commingle the funds of the Pooled Trust and the H.R. 10 Trust (the resulting entity hereinafter called the "Commingled Trust"). No funds contributed to a Qualified Plan which covers persons who are employees within the meaning of the Code section 401(c)(1) will be accepted by the Commingled Trust from any non-resident of Georgia, in accordance with the current policy of the H.R. 10 Trust. In our opinion, such a Commingled Trust will be exempt from the registration provisions of the 1933 Act by virtue of the principles stated in Release No. 33-6281, 17 C.F.R. 281 6281 (January 15, 1981).

Discussion of Law

Until recently, the Securities and Exchange Commission (hereinafter called the "Commission") has taken the position that the commingling of the assets of a retirement trust otherwise exempt under section 3(a)(2) of the 1933 Act with an H.R. 10 retirement trust exempt under section 3(a)(11) of the 1933 Act would result in neither exemption being available for the resultant commingled trust and, therefore, registration under the 1933 Act being required. Commercial National Bank in Shreveport, Federal Securities Law Reporter Transfer Binder 71-72, Paragraph 78,384 (1971); Release No. 33-6185, 17 C.F.R. 231. 6188 (February 1, 1980) at III(B)(1)(c).

However, on January 15, 1981, in Release No. 33-6281 at II(B)(2), the Commission announced a change in its position. Release No. 33-6281 set out four reasons for the change:

Accordingly, the Commission declared that "the availability of the section 3(a)(2) exemption no longer will be deemed by the staff to depend in part on whether the assets of Keogh plans are commingled with the assets of tax qualified corporate plans." The Commission noted, however, that interests or participations sold to plans not subject to the section 3(a)(2) exemption would still be subject to registration under the 1933 Act, absent some other exemption.

Under Release No. 33-6281, section 3(a)(2) of the 1933 Act will clearly exempt from registration the interests or participations in the proposed Commingled Trust which would otherwise be the interests or participations in the Pooled Trust. Release No. 33-6281 implies that interests or participations in the proposed Commingled Trust which would otherwise be the interests or participations in the H.R. 10 Trust will be exempt from registration as long as such interests or participations are offered or sold only to residents of Georgia in accordance with section 3(a)(11) of the 1933 Act. Indeed, if the portion of the Commingled Trust represented by the current H.R. 10 Trust loses its exemption under section 3(a)(11) of the 1933 Act merely by virtue of the commingling, the Commission's change of position announced in Release No. 33-6281 would be of very little practical significance. Thus, it is our opinion that in accordance with Release No. 33-6281, a Commingled Trust of the type described herein will not be subject to registration under the 1933 Act.

In view of the foregoing, we respectfully request your confirmation that the staff will not recommend any action to the Commission if C&S commingles the Pooled Trust and the H.R. 10 Trust and offers and sells interests or participations in the resultant Commingled Trust under the terms stated herein without registration under section 5 of the 1933 Act.

SEC Letter

1933 Act / s 3(a)(2); 3(a)(11)

1981

September 25, 1981

Publicly Available October 26, 1981

After consideration of the facts presented, we are unable to agree with your view that the Section 3(a)(11) exemption would be available for interests in the proposed Commingled Trust sold exclusively to H.R. 10 plans who are Georgia residents. The Section 3(a)(11) exemption is by its terms unavailable where an offering of securities is extended to non-residents of the state in which the issuer resides and conducts its business. In the case of the proposed Commingled Trust, a Georgia resident, interests therein would be issued not only to H.R. 10 plans resident in Georgia, but also to tax-qualified corporate plans sponsored by employers who are non-residents of Georgia. The offer and sale of interests to these nonresident plans would, in our view, render the Section 3(a)(11) exemption unavailable for the offer and sale of interests to resident H.R. 10 plans.

The Statements in Release 33-6281 which you believe support your view regarding the availability of the Section 3(a)(11) exemption for the H.R. 10 portion of the Commingled Trust were intended to indicate simply that the Section 3(a)(2) exemption for trust interests sold to tax-qualified corporate plans would not be lost merely because assets of H.R. 10 plans were commingled with the assets of the corporate plans. The statements reflected the longstanding views of many insurance companies that they could commingle corporate and H.R. 10 plan monies in the same fund and register only the H.R. 10 interests, while relying on the Section 3(a)(2) exemption for the corporate plan interests. The statements were not designed to convey the impression that it is possible in a single trust to rely on the Section 3(a)(2) exemption for interests sold to non-resident corporate plans and on the Section 3(a)(11) exemption for interests sold to resident H.R. 10 plans. We recognize, however, that the statements in the release regarding this issue are ambiguous and could therefore be misconstrued. Accordingly, this Division, as a matter of policy, will not recommend any enforcement action to the Commission with respect to past transactions by commingled trusts who in good faith have been selling interests to resident H.R. 10 plans in reliance upon their belief that the statements in the release permitted Section 3(a)(11) to be available for such sales at the same time that Section 3(a)(2) was available for sales to non-resident corporate plans. This no-action position will also apply for the reasonable time after publication of this letter necessary for the taking of corrective action to conform to the interpretation herein.

Collective Investment Funds

SEC No-Action Letter

The Provident Bank

Publicly Available September 24, 1991

Letter to SEC

June 4, 1990

Office of Chief Counsel

Division of Corporate Finance

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20519

Office of Chief Counsel

Division of Investment Management

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20519

RE: Request for No Action Letter Regarding The Provident Bank

Section 3(a)(2) of the Securities Act of 1933

Section 3(a)(12) of the Securities Act of 1934

Section 3(c)(11) of the Investment Company Act of 1940

Gentlemen:

We are writing on behalf of The Provident Bank ("Provident"). Provident proposes to form a collective trust fund for the investment of funds held on behalf of employee benefit plans qualified under Section 401(a) of the Internal Revenue Code (the "Code") and exempt from tax under Section 501(a) of the Code, governmental plans under Section 414(d) of the Code and group trusts consisting entirely of assets of such plans.

We respectfully request a determination that the Staff will not recommend any enforcement action to the Commission if Provident maintains and operates the fund:

(i) without registering the interests in the fund under the Securities Act of 1933 (the "1933 Act"), in reliance upon the exemption provided by Section 3(a)(2);

(ii) without registering the interests in the fund under the Securities Exchange Act of 1934 (the "1934 Act"), in reliance upon the exemption provided by Section 3(a)(12) of such Act; and

I. Statement of Facts

A. General
Provident is an Ohio banking corporation authorized to engage in the banking business and to conduct trust activities. A substantial portion of Provident's business consists of receiving deposits and exercising fiduciary powers similar to those permitted to national banks under the authority of the Office of the Comptroller of the Currency ("OCC"). On December 31, 1989 it had total assets of approximately $2 billion and deposits of approximately $1.6 billion. Provident is a member of the Federal Reserve System and of the Federal Deposit Insurance Corporation.

 

Provident proposes to establish a collective trust fund to be known as the Provident Investment Contract Fund (the "Fund"). The Fund's assets would be invested primarily in guaranteed investment contracts ("GICs") issued by insurance companies and bank investment contracts ("BICs") issued by commercial banks and trust companies. GICs and BICs are contracts issued on a negotiated basis, guaranteed by the issuer, having specific terms governing yield, payment of interest, benefit and withdrawal rights and length of commitment, and are generally carried at book value. Under the Fund's plan of operation, the trustees of a qualified employee benefit plan or other prospective participant (the "Participating Trust") may elect to participate in the Fund by satisfying the eligibility criteria, by providing appropriate evidence of authority to invest in the Fund and by establishing a qualifying relationship with the Bank.

B. Participation in the Fund
Provident proposes to limit participation in the Fund to the following trusts:

(i) retirement, pension, profit-sharing, stock bonus and other trusts forming a part of a plan or plans qualified under the provisions of Section 401(a) and exempt from federal income taxation under Sections 501(a) of the Code;

(ii) trusts maintained in connection with a governmental plan within the meaning of Section 414(d) of the Code; and

(iii) group trusts maintained by a bank the assets of which consist entirely of assets of trusts described in (i) or (ii) above.

Certain qualified plans are not eligible, however, such as a plan covering employees described by Section 401(c)(1) of the Code or a plan funded by an annuity contract described in Section 403(b) of the Code, except to the extent by rule or regulation of the SEC the participation of such plans would be permissible without requiring registration of the interests in the Fund under the 1933 Act or the 1934 Act or the registration of the Fund as an investment company under the 1940 Act. This provision is intended to permit H.R. 10 (Keogh) plans or Individual Retirement Accounts (IRAs) to participate at such time as the legal effects of including those types of plans become clearer, particularly the application of the 1940 Act.

Provident intends to limit investment in the Fund to plans satisfying the requirements of your March 18, 1977 letter re Guaranteed Investment Contracts, i.e. a plan may not participate unless it (a) covers at least fifteen persons, (b) has annual contributions of more than $10,000 or (c) is established by a corporate employer with a net worth of at least $100,000 on the last day of its prior fiscal year. Provident would also deliver to each prospective Participating Trust and include in any printed sales literature an offer by Provident to provide, upon request and without cost, financial statements and other material information about the issuer(s) of the GICs and BICs and would direct any advertising to employers that may adopt qualified plans or to the trustees of such plans and not to individual employees.

In addition, investment in the Fund would be permissible only if Provident serves in one of the following capacities:

(i) Provident is a trustee of the Participating Trust;

(ii) Provident is an investment manager, within the meaning of Section 3(38) of Employee Retirement Income Security Act of 1974, as amended ("ERISA"), with respect to all or a portion of the assets of such trust; or

(iii) Provident has been appointed by the trustees of the Participating Trust to render investment advice with respect to all or a portion of the assets of such trust.

The Fund would also prohibit Provident from participating in the Fund, directly or indirectly (e.g., by taking participations as security for a debt).

C. Investment Policy
The Fund would be invested in fixed income securities, primarily GICs and BICs, with staggered maturities to provide a predictable cash flow from interest income and contract maturities. The Fund could also invest in certificates of deposit issued by banks and savings and loan associations, obligations of the U.S. Treasury and U.S. agencies, commercial paper and similar corporate obligations, other short-term cash equivalent instruments and variable rate contracts to provide liquidity for monthly benefit withdrawals.

D. Administration
Provident will have sole authority to select the GICs and BICs into which the Fund's assets will be invested. Although Provident intends to solicit advice and recommendations from firms which are knowledgeable as to the available contracts, Provident will make the final decision as to specific contracts to be purchased. In making investment decisions, Provident will consider, among other factors, the quality of the various issuers, the effective yield after expenses, the period of the guaranteed interest and other terms of the contracts.

Provident intends to enter into a marketing agreement with The New York GIC Exchange, Inc. which among other things is engaged in the business of marketing GICs, and to employ NYGIC Capital, Inc., a registered investment advisor, as an investment advisor to the Fund. Provident would pay all of the fees and expenses incurred for these services, separately and not from the assets of the Fund. The investment advisor would make recommendations to Provident concerning the purchase and disposition of GICs for the Fund, but Provident would be free to accept or reject any recommendation without justification or explanation. The proposed investment advisor is not affiliated with Provident but Provident is not precluded from using an affiliate or from performing these services itself.

E. Valuation
The units would be valued by valuing each asset and liability in the Fund's portfolio at fair market value. Accordingly, the plan of operation for the Fund will specify valuation techniques which will result in a determination of fair market values.

F. Admissions and Withdrawals
Admissions and withdrawals from the Fund would be permitted only on a valuation date and would require advance notice to the Fund. Because of the long-term nature of the GICs in the Fund, withdrawals may require a waiting period. Provident proposes to allow for a waiting period of up to one year, while making a good faith effort to permit withdrawals sooner if possible. Interests in the Fund would be nonassignable.

G. Coordination with other Regulatory Requirements.
Provident presently maintains several common trust funds in compliance with the Ohio Revised Code and applicable regulations of the Internal Revenue Service and of the OCC. These common trust funds are utilized by Provident to administer funds held by it in applicable fiduciary roles incident to performing its trust services.

The Provident Investment Contract Fund will be established and administered in a similar manner as existing common trust funds, in accordance with the provisions of applicable state law and regulatory requirements.

One difference with existing common trust funds, however, is that Provident is not required to be a "trustee, executor, administrator or guardian" of each Participating Trust in the Fund. Provident may be an investment manager with respect to the Participating Trust, or appointed to render investment advice with respect to the plan assets.

Provident, as trustee of the Fund, has sought, but not yet received, a determination letter from the Internal Revenue Service to the effect that the Fund is a qualified trust under section 401(a) of the Code and is exempt from income tax under section 501(a) of the Code, pursuant to the requirements detailed in Rev.Rul. 81-100, 1981-1 C.B. 326. For purposes of this letter, we assume that the Fund would so qualify.

Another difference with existing common trust funds relates to the application of OCC regulations. Unlike Section 584 of the Internal Revenue Code, RR 81-100 does not require compliance with OCC regulations as a condition of the tax exemption under Section 501(a) of the Code. Because Provident is a state bank, the OCC regulations do not apply to the Fund. Furthermore, it is our understanding that the OCC as a matter of policy will only review the collective investment funds of national banks. Because Provident is a state-chartered bank, we would in any event be unable to obtain assurance of compliance with these regulations.

Nonetheless, in accordance with the policy of the Federal Reserve Board, Provident intends as a matter of prudence to operate and maintain the Fund in accordance with OCC regulations. We believe that the Fund complies with the specific requirements of Part 9 of such regulations (Section 9.18) relating to collective investment of trust funds.

II. Discussion

A. General
Based upon the facts set forth above, it is our opinion that the proposed Fund and the interests or participations therein comply with statutory provisions which permit the operation of the Fund without registration of interests or participations under the 1933 Act and the 1934 Act and without the registration of the Fund as an investment company under the 1940 Act.

Section 3(a)(2) of the 1933 Act provides an exemption for the following securities:

... any interest or participation in a single trust fund, or in a collective trust fund maintained by a bank, ..., which interest, participation, or security is issued in connection with (A) a stock bonus, pension, or profit-sharing plan which meets the requirements for qualification under section 401 of the Internal Revenue Code of 1954, (B) an annuity plan which meets the requirements for the deduction of the employer's contributions under section 404(a)(2) of such Code, or (C) a governmental plan as defined in section 414(d) of such Code which has been established by an employer for the exclusive benefit of its employees or their beneficiaries for the purpose of distributing to such employees or their beneficiaries the corpus and income of the funds accumulated under such plan, if under such plan it is impossible, prior to the satisfaction of all liabilities with respect to such employees and their beneficiaries, for any part of the corpus or income to be used for, or diverted to, purposes other than the exclusive benefit of such employees or their beneficiaries, other than any plan described in clause (A), (B), or (C) of this paragraph (i) the contributions under which are held in a single trust fund or in a separate account maintained by an insurance company ..., which covers employees some or all of whom are employees within the meaning of section 401(c)(1) of such Code, or (iii) which is a plan, funded by an annuity contract described in section 403(b) of such Code.

Section 3(a)(12)(A)(iv) of the 1934 Act provides a similar exemption for the following securities:

(iv) any interest or participation in a single trust fund, or a collective trust fund maintained by a bank, ..., which interest, participation, or security is issued in connection with a qualified plan as defined in subparagraph (C) of this paragraph; ....(C) For purposes of subparagraph (A)(iv) ..., the term "qualified plan" means (i) a stock bonus, pension, or profit-sharing plan which meets the requirements for qualification under section 401 of the Internal Revenue Code of 1954, (ii) an annuity plan which meets the requirements for the deduction of the employer's contribution under section 404(a)(2) of such Code, or (iii) a governmental plan as defined in section 414(d) of such Code which has been established by an employer for the exclusive benefit of its employees or their beneficiaries for the purpose of distributing to such employees or their beneficiaries the corpus and income of the funds accumulated under such plan, if under such plan it is impossible, prior to the satisfaction of all liabilities with respect to such employees and their beneficiaries, for any part of the corpus or income to be used for, or diverted to, purposes other than the exclusive benefit of such employees or their beneficiaries, other than any plan described in clause (i), (ii), or (iii) of this subparagraph which (I) covers employees some or all of whom are employees within the meaning of section 401(c) of such Code or (II) is a plan funded by an annuity contract described in section 403(b) of such Code. See also Section 12(g)(2)(H) of the 1934 Act.

Section 3(c)(11) of the 1940 Act excludes from the definition of an investment company the following:

(11) Any employee's stock bonus, pension, or profit-sharing trust which meets the requirements for qualification under section 401 of the Internal Revenue Code of 1986; or any governmental plan described in section 3(a)(2)(C) of the Securities Act of 1933; or any collective trust fund maintained by a bank consisting solely of assets of such trusts or governmental plans, or both;

The plan of operation for the Fund explicitly restricts participation in the Fund to those trusts and plans permitted by the foregoing provisions of the 1933 Act, the 1934 Act and the 1940 Act.

B. Provident as "Bank"
Provident is a "bank" for the purposes of Section 3(a)(2) of the 1933 Act, Section 3(a)(6) of the 1934 Act and Section 3(c)(11) of the 1940 Act by reason of the definition of "bank" in Section 2(a)(5) of the 1940 Act, since it is a state-chartered bank, a substantial portion of the business of which consists of receiving deposits or exercising fiduciary powers similar to those permitted to national banks under the authority of the OCC, supervised by the Ohio Superintendent of Banks and the Federal Reserve Board and not operated for the purposes of evading the provisions of the 1940 Act.

C. "Maintained by a Bank" Requirement
The Fund will be "maintained" by Provident because Provident, as trustee of the Fund, will exercise "substantial investment responsibility." See, generally, Securities Act Release No. 33-6188, 38 F.R. 8962 (Part IV(A)(3)(a)) (February 1, 1980), Bank of America (December 8, 1971) and Sterling National Bank and Trust Company of New York (February 10, 1976). Section 3(c)(11) of the 1940 Act is interpreted similarly. See Bank of Delaware (November 15, 1972). The use of an investment advisor as contemplated by Provident is not inconsistent with exercising substantial investment responsibility. See Lincoln First Bank, N.A. (October 24, 1983). Provident will have full and complete authority to determine the specific securities purchased, retaining discretion to accept or reject the advice of any investment advisor and will have officers and appropriate staff to make such decisions. See Frank Russell Trust Company (July 11, 1980), Frank Russell Trust Company (September 2, 1982) and First Liberty Real Estate Fund (July 14, 1975).

A separate copy of this letter has been submitted to the Division of Investment Management for consideration of the 1940 Act issues. If you have any questions with regard to the foregoing, please contact the undersigned at (513)579-6595.

Timothy B. Matthews

Keating, Muething & Klekamp

Keating, Muething & Klekamp

1800 Provident Tower

One East Fourth Street

Post Office Box 1800

Cincinnati, Ohio 45202

(513)579-6400

Letter to SEC

September 26, 1990

Office of Chief Counsel

Division of Corporate Finance

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20519

Attn: Ms. Laurie Green, Esq.

RE: Request for No Action Letter Regarding The Provident Bank

Section 3(a)(2) of the Securities Act of 1933

Section 3(a)(12) of the Securities Act of 1934

Section 3(c)(11) of the Investment Company Act of 1940

Dear Ms. Green:

Reference is made to our letter dated June 4, 1990 on behalf of The Provident Bank ("Provident") and to our subsequent telephone conversations concerning Provident's request. You have asked questions or requested clarification of our letter in four respects.

1. Participation in the Fund by Group Trusts

You have asked us to discuss further the aspect of participation in the Provident Investment Contract Fund (the "Fund") by "group trusts."

In Section I. B of our June 4, 1990 letter, we indicated that participation in the Fund was limited to trusts falling into one of three general categories. The third category is "group trusts maintained by a bank the assets of which consist entirely of assets of trusts described in [the first two categories]."

A group trust is a trust in which individual trusts have pooled their assets (often for diversifying their investments) where the group trust is declared to be part of the qualified plans of which it is comprised. Revenue Ruling 81-100, 81-13 I.R. B 32 describes the conditions under which a group trust may qualify for an exemption from taxation under Section 501(a) of the Internal Revenue Code (the "Code") and under which the tax qualification of its respective constituent trusts will not be affected by the pooling of their funds in a group trust.

The Provident Investment Contract Fund is an example of a group trust which qualifies under Rev.Rul. 81-100 and we have obtained a determination letter dated July 9, 1990 from the Internal Revenue Service to that effect. A group trust could be eligible to participate in the Fund only if it were maintained by a bank and only if its assets consisted entirely of assets of trusts which otherwise would be eligible to participate directly in the Fund, i.e., either (i) retirement, pension, profit-sharing, stock bonus and other trusts forming a part of a plan or plans qualified under the provisions of Section 401(a) and exempt from federal income taxation under Section 501(a) of the Code or (ii) trusts maintained in connection with a governmental plan within the meaning of Section 414(d) of the Code.

Participation in the Fund by a group trust meeting these conditions is substantively no different than participation by a qualified trust directly. Section 3(a)(2) of the 1933 Act provides an exception for "any interest or participation in ... a collective trust fund ... which interest, participation or security is issued in connection with (A) a stock bonus, pension, or profit-sharing plan which meets the requirements for qualification under Section 401 of the Internal Revenue Code." Since a group trust qualifies under Section 401 of the Code, Section 3(a)(2) of the 1933 Act describes an exemption for participation in the Fund by a group trust meeting Provident's conditions.

The language in Section 3(a)(12)(A)(iv) of the 1934 Act is similar. The 1940 Act describes a similar exclusion from the definition of an investment company. Since the assets comprising the Fund will consist solely of the type of assets described in Section 3(c)(11) of the 1940 Act (whether contributed directly from a qualified retirement plan, for example, or indirectly from a group trust comprised of assets of qualified plans), the Fund as a collective trust fund comprised of these assets is excluded from the definition of an investment company.

2. Application of the 1982 Frank Russell Letter

You have asked for clarification from us as to the relevance of the September 2, 1982 letter concerning the Frank Russell Trust Company cited by us at page 4 of our June 4 no-action letter request.

A part of the concept that a collective trust fund is "maintained by a bank" is that the bank exercises substantial investment responsibility. Where a bank proposes to retain the services of an investment advisor, a question may arise as to whether the nature of such services is inconsistent with the bank's continued exercise of investment responsibility.

In the Frank Russell Trust Company situation, the Trust Company proposed to use the consulting and advisory services of a third party, which would provide certain recommendations concerning the investments to be purchased and sold. However, the Trust Company retained final and complete authority to accept or reject such recommendations, reviewed and evaluated such recommendations independently, and represented that it had adequate staff to do so.

We have made similar representations on behalf of Provident in our letter of June 4 and therefore believe that the favorable position of the staff in the Frank Russell Trust Company situation supports our request in this respect.

3. Appointment of Provident to Render Investment Advice

You have requested clarification of our position on item (iii) appearing at page 3 of our June 4 letter, regarding the capacities in which Provident must serve vis-a-vis a prospective participant in order to make an investment in the Fund permissible.

Our letter states that investment in the Fund would be permissible only if Provident serves in one of three capacities: (i) Provident is a trustee of the Participating Trust; (ii) Provident is an investment manager with respect to the assets of such trust; or (iii) Provident has been appointed by the trustees of the Participating Trust to render investment advice with respect to all or a portion of the assets of such trust.

As we discussed, because of Ohio law concerning collective investment trusts, Provident has decided to delete the third qualifying relationship from the plan of operation of the Fund. Accordingly, Provident must be either a trustee or an investment manager in order to permit the prospective participant to invest in the Fund. Thus, it is now unnecessary to address your questions about this aspect of the Fund.

4. Application of Rule 180

You have asked us to clarify our request regarding the application of Rule 180 to the Fund.

We have not asked in our June 4 letter for the SEC to take a specific no-action position with respect to the application of Rule 180 to the Fund. However, the Fund does permit participation of certain types of plans (Keoghs) under the conditions described in Rule 180 and Provident reserves the right to permit participation on those terms. If this is inconsistent with our other requests or if you believe that the Rule 180 conditions could not be satisfied, we would appreciate the opportunity to discuss this further with you.

If you have any further questions with regard to the foregoing, please contact the undersigned at (513)579-6595.

Timothy B. Matthews

Keating, Muething & Klekamp

Letter to SEC

May 2, 1991

Office of Chief Counsel

Division of Corporate Finance

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20519

Office of Chief Counsel

Division of Investment Management

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20519

Re: Request for No Action Letter Regarding The Provident Bank

Section 3(a)(2) of the Securities Act of 1933

Section 3(a)(12) of the Securities Act of 1934

Section 3(c)(11) of the Investment Company Act of 1940

Gentlemen:

This letter is to follow up my discussions with Cecelia Blye and Larry Stadulis concerning our no action letter request dated June 4, 1990 submitted on behalf of The Provident Bank.

We requested that the Staff take a "no action" position with respect to The Provident Investment Contract Fund. You have indicated that you would not be in a position to take a "no action" position because one of the eligible participants in the proposed fund could be a "group trust" maintained by a bank the assets of which consist entirely of assets of trusts described in paragraphs (i) and (ii), page 2, of our June 4, 1990 letter.

Provident has decided not to permit the "group trusts" described in our letter to participate in the fund. In these circumstances, we believe that Provident may maintain and operate the fund without registering the interests in the fund under the Securities Act of 1933, in reliance upon the exemption provided by Section 3(a)(2), without registering the interests in the fund under the Securities Act of 1934, in reliance upon the exemption provided by Section 3(a)(12), and without registering the fund as an investment company under the Investment Company Act of 1940, in reliance upon the exemption provided by Section 3(a)(11). Therefore, on behalf of Provident, we hereby request that the Staff advise us that it would not recommend to the Commission that it take any action if Provident, on the basis of our opinion, maintains and operates the fund without registration under the Acts set forth above in reliance upon the exemptions so cited.

We will appreciate your expedited consideration of this request given the length of time since the date of our original request.

Sincerely,

Timothy B. Matthews

Keating, Muething & Klekamp

SEC Letter

1934 Act / s 3(a)(12)

September 24, 1991

Publicly Available September 24, 1991

On the basis of the facts presented in your letters of June 4, 1990, September 26, 1990, and May 2, 1991, we would not recommend that the Commission take any enforcement action under the Investment Company Act of 1940 ("1940 Act") if The Provident Bank (the "Bank") establishes and operates the Provident Investment Contract Fund (the "Fund") without registering the Fund under the 1940 Act in reliance upon the exclusion in Section 3(c)(11) of the 1940 Act. Our response is conditioned, among other things, upon the following: (1) your representation that although the Bank intends to solicit advice and recommendations from firms which are knowledgeable as to the available contracts, it will make the final decision as to specific contracts to be purchased and will have the sole authority to select the GICs and BICs in which the Fund's assets will be invested;¹ (2) the Bank's receipt of a letter from the Internal Revenue Service stating that the Fund is a Qualified Trust under Section 401(a) of the Internal Revenue Code of 1986, as amended;² and (3) the representation in your letter of May 2, 1991, that "group trusts" will not participate in the Fund.

The Division of Corporation Finance has asked us to advise you that, on the basis of the facts presented, that Division will not recommend any enforcement action to the Commission if the Bank, in reliance upon your opinion as counsel that the exemptions provided by Section 3(a)(2) of the Securities Act of 1933 and Section 12(g)(2)(H) of the Securities Exchange Act of 1934 are available, operates the described fund without compliance with the registration requirements of the 1933 and 1934 Acts. This position is based on the representations made in your letters, particularly your representation that the Bank will retain full investment authority for, and exclusive management of, the fund.

The Division of Market Regulation concurs in the position of the Divisions of Corporation Finance and Investment Management in reliance on your opinion of counsel and in particular your representations that The Provident Bank is a member of the Federal Deposit Insurance Corporation and the Federal Reserve System and that, in accordance with the policy of the Federal Reserve Board, Provident intends to operate and maintain the Fund in accordance with regulations of the Office of the Comptroller of the Currency.

Because these positions are based on the facts and representations made to the Divisions, you should note that any different facts or representations may require different conclusions. Moreover, this response only expresses the Division's positions on enforcement action and does not purport to express any legal conclusions on the questions presented.

Lawrence P. Stadulis

Attorney

Securities and Exchange Commission (S.E.C.)

¹ See Securities Act Rel. No. 6188 (Feb. 1, 1980); Citytrust (pub. avail. Feb. 12, 1988); Union Bank & Trust (pub. avail. July 8, 1987); National Bank of Commerce Investment Fund (pub. avail. Oct. 10, 1986); Frank Russell Trust Company (pub. avail. Sept. 2, 1982); Frank Russell Trust Company (pub. avail. Aug. 25, 1980); First Liberty Real Estate Fund (pub. avail. July 14, 1975).

² In a telephone conversation with the undersigned on July 25, 1990, Timothy B. Matthews represented that the assets of the Fund will not be commingled with the assets of trusts that are qualified under Section 408 of the Internal Revenue Code of 1986, as amended.

Collective Investment Funds

SEC No-Action Letter

The Idaho First National Bank

Publicly Available October 11, 1988

Letter to SEC

July 25, 1988

Division of Investment Management

Stop 5-2

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20549

Attention: Ms. Carol Peebles

Subject: The Idaho First National Bank

Gentlemen:

We are special counsel to The Idaho First National Bank ("Idaho First"), a national banking association which is a wholly owned subsidiary of Moore Financial Group Incorporated ("Moore"), a regional bank holding company. On behalf of Idaho First, we request that you advise us whether the staff of the Division of Investment Management will recommend any enforcement action to the Securities and Exchange Commission ("Commission") regarding the question set forth below.

Facts

Idaho First presently operates a collective investment fund ("Trust") maintained exclusively for assets of employee benefit plans qualified under section 401 of the Internal Revenue Code of 1986, as amended ("Code"). Presently, no funds of plans covering employees within the meaning of Code s 401(c)(1) are held in the Trust and, except as permitted pursuant to Rule 180 under the Securities Act of 1933 ("1933 Act"), no such funds will be permitted in the Trust.

Idaho First proposes to amend and restate the declaration of trust related to the Trust ("Amendment"). The Amendment will make the Trust a group trust pursuant to the provisions of 12 CFR 9.18(a)(2) and Revenue Ruling 81-100 and allow the participation or inclusion in the Trust of the moneys of certain plans or governmental units described in Code section 818(a)(6), as permitted by Code section 401(a)(24).

Code section 401(a)(24) provides that the tax-exempt status of a group trust will not be adversely affected merely because of the participation or inclusion in the trust of moneys of any plan or governmental unit described in Code section 818(a)(6). Code section 818(a)(6) includes

"(A) a governmental plan (within the meaning of Code section 414(d) or an eligible State deferred compensation plan (within the meaning of Code section 457(b)), or

"(B) the Government of the United States, the government of any State or political subdivision thereof, or by any agency or instrumentality of the foregoing, for use in satisfying an obligation of such government, political subdivision, or agency or instrumentality to provide a benefit under a plan described in subparagraph (A)."

Code section 414(d) defines a governmental plan as

Pursuant to the Amendment, the Trust proposes to receive moneys from any governmental plan (other than a Code section 457 state deferred compensation plan) whether or not the plan is qualified under Code section 401(a) and whether or not the assets of the plan are held in trust, as well as moneys from any federal, state, or local government or agency (a "governmental unit") held for use in satisfying an obligation of the government or agency to provide a retirement benefit under a governmental plan.

Before investing in the Trust, the administrator or trustee of each governmental plan or governmental unit will be required to represent in writing to Idaho First the following:

The approval of the Amendment by the Comptroller of the Currency and a favorable determination letter from the Internal Revenue Service with regard to the tax-exempt status of the Trust will be obtained.

Discussion

A discussion of the applicable provisions of the 1933 Act, the Securities Exchange Act of 1934 ("1934 Act"), and the Investment Company Act of 1940 ("1940 Act") follows.

1933 Act. The exemption from registration afforded by section 3(a)(2) of the 1933 Act applies to:

1934 Act. The exemption from registration under section 3(a)(12)(A)(iv) of the 1934 Act applies to:

1940 Act. Section 3(c)(11) of the 1940 Act provides an exemption from investment company status for:

The exemptions afforded by section 3(a)(2) of the 1933 Act, section 3(a)(12) of the 1934 Act, and section 3(c)(11) of the 1940 Act would encompass the receipt of moneys by the Trust directly from governmental plans which are qualified under Code section 401 as well as certain nonqualified governmental plans.

However, two specific aspects of the Trust with respect to governmental plans require further discussion:

Governmental Units. Under the Amendment, the Trust will be permitted to receive moneys directly from governmental units as well as from governmental plans. The lead-in phrase to the exemptions under sections 3(a)(2) and 3(a)(12) states that the exemption is available for any interest or participation issued in connection with a governmental plan. Since the moneys are being invested in the Trust to satisfy an obligation of the governmental unit under a governmental plan, we believe interests or participations issued to governmental units in this situation are issued in connection with governmental plans and should likewise be exempt under sections 3(a)(2) and 3(a)(12).

The exemption under section 3(c)(11) of the 1940 Act does not specifically refer to trust funds containing assets of governmental units. However, under the Amendment, a governmental unit will be able to invest in the Trust only to satisfy an obligation to provide a benefit under a governmental plan. Thus, when the Trust receives money from a governmental unit, the money will in effect become part of the assets of a governmental plan. Accordingly, in our view the Trust is exempt under section 3(c)(11) because it is a collective trust fund maintained by a bank consisting solely of assets of qualified employee benefit trusts or governmental plans, or both.

Investment by a Governmental Plan in the Securities of the Government Employer. It is possible that contributions to a governmental plan may be invested both in the Trust and directly by the governmental plan itself in securities of the government employer ("Employer") or of another state, federal, or local government or agency, or instrumentality thereof. For example, a governmental plan for a particular county in a state might invest in the securities of such state and its other instrumentalities. Such investment could exceed the contributions made by the county to the governmental plan.

Section 3(a)(2) of the 1933 Act, unlike sections 3(a)(12) of the 1934 Act and 3(c)(11) of the 1940 Act, disallows the exemption provided by the section for any plan "the contributions under which are held in a single trust fund * * * for a single employer and under which an amount in excess of the employer's contribution is allocated to the purchase of securities (other than interests or participations in the trust * * * itself) issued by the employer or any company directly or indirectly controlling, controlled by, or under common control with the employer." (Emphasis added.)

This statutory language predated the addition of the governmental plan exemption under section 3(a)(2) and could be read to prohibit the purchase by a governmental plan of securities of which the Employer, or its controlled or commonly controlled entities, is the issuer if employee contributions under such plan are held in a single trust fund and such purchases exceed the Employer's contribution to the governmental plan. However, it does not seem likely that Congress intended the underlined language to apply to government entities because of its use of the word "company." A governmental entity is not ordinarily referred to as a "company."

In addition, in the event that all of the assets of a governmental plan are not committed to the Trust and the noncommitted assets are used by such plan to purchase securities of the Employer or its controlled or commonly controlled entities in excess of the amount contributed by the Employer, such a reading of s 3(a)(2) would seem not only to require the registration of interests in such governmental plan, but also interests in the Trust. Registration of the interests in the Trust would be required because the interests would be issued in connection with a governmental plan which does not fit within the exemption. We do not believe that the investment by the governmental plan of assets not committed to the Trust should affect the availability of the s 3(a)(2) exemption for interests in the Trust, because the investment of noncommitted funds is beyond the control of the Trust. Requiring registration of interests in the Trust would not provide disclosure of investments outside the Trust.

Further, a governmental plan that invests in securities issued by the government employer or any government entity controlling, controlled by, or under common control with the government employer will be investing in securities that are exempt from registration under the 1933 Act. Congress could not have intended to require registration of plan interests based on the indirect acquisition of government securities with employee contributions (through a plan) where the securities could be offered and sold to employees directly without registration pursuant to section 3(a)(2) of the 1933 Act.

Conclusion

Based upon the foregoing facts, upon the no-action position taken by the staff in InterFirst Bank Dallas, N.A. (available April 4, 1983), and upon the analysis discussed above, it is our opinion that the interests in the Trust to be issued pursuant to the Amendment outlined above are exempt securities under section 3(a)(2) of the 1933 Act and under section 3(a)(12) of the 1934 Act and would not require the Trust to register as an investment company under the 1940 Act by virtue of the exemption afforded by section 3(c)(11) thereof.

Request

We request that you advise us whether the staff of the Division of Investment Management will recommend any enforcement action to the Commission if the Amendment as described herein is undertaken without compliance with the various registration requirements of the 1933 Act, the 1934 Act, and the 1940 Act.

Very truly yours,

Rebecca S. Wilson

Letter to SEC

September 9, 1988

Division of Corporation Finance

Stop 7-2

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20549

Attention: Ms. Felicia Smith

Subject: The Idaho First National Bank

Gentlemen:

Pursuant to our telephone conversations of August 22, 1988, and September 8, 1988, and on behalf of The Idaho First National Bank, we submit the following information to supplement our no-action letter request dated July 25, 1988. Item 5 on page 3 of the July 25 letter should read as follows:

Very truly yours,

Rebecca S. Wilson

SEC LETTER

ICA 1940 Act / s 3(c)(11)

October 11, 1988

Publicly Available October 11, 1988

We would not recommend that the Commission take any enforcement action under the Investment Company Act of 1940 if The Idaho First National Bank ("Company") implements the proposed amendment to the declaration of trust related to the collective trust fund ("Trust") without registration of the Trust, under the 1940 Act in reliance upon Section 3(c)(11) thereof. See Interfirst Bank Dallas (pub. avail. Jan. 11, 1983) and e.g. Wachovia Bank and Trust Company, N.A. (pub. avail. Nov. 21, 1983).

The Division of Corporation Finance has requested us to advise you that, based on the facts presented, but without necessarily concurring in your analysis, that Division will not recommend enforcement action to the Commission if the Company, in reliance on your opinion that interests in the Company's collective investment fund by any governmental plan or unit are exempt from registration under Section 3(a)(2) of the Securities Act of 1933 ("1933 Act") and Section 3(a)(12) of the Securities Exchange Act of 1934 ("1934 Act"), implements and operates the Trust as proposed without registration under the 1933 Act or the 1934 Act. In arriving at this position, we have noted particularly that (1) the Company will require certain representations from the administrator or trustee of each governmental plan or governmental unit from which it receives monies for investment; and (2) in the event that a governmental plan or governmental unit invests in securities of the employer or a related entity, such securities must be exempt from registration under the 1933 Act and the 1934 Act.

Because these positions are based on representations made in your letters, it should be noted that any different facts may require a different conclusion. Furthermore, this response only expresses the Divisions' positions on enforcement action and does not express any legal conclusion on the questions presented.

Carol A. Peebles

Attorney

Securities and Exchange Commission (S.E.C.)

Collective Investment Funds

SEC No-Action Letter

Fidelity Management Trust Company

Publicly Available November 2, 1989

Letter to SEC

September 26, 1989

Office of Chief Counsel

Division of Investment Management

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20549

Attn.: Elizabeth T. Tsai

Re: Fidelity Management Trust Company Request for No-Action Letter under 1933 Act Section 3(a)(2), 1934 Act Section 3(a)(12) and 1940 Act Section 3(c)(11)

Dear Ms. Tsai:

This letter is intended to respond to the questions you raised during our recent telephone conversations with regard to our no-action request dated February 3, 1989 and, as you requested, to restate that request so that this letter could be reviewed as a request complete in itself.

On behalf of Fidelity Management Trust Company, an FDIC-insured Massachusetts chartered bank and trust company ("FMTC"), we respectfully request a determination that the Staff (the "Staff") of the Securities and Exchange Commission (the "Commission") will not recommend that the Commission take any enforcement action if the offering of the Fidelity Group Trust for Employee Benefit Plans (the "Trust") to deferred compensation plans maintained by state and local governmental units under Section 457 of the Internal Revenue Code of 1986, as amended (the "Code"), is undertaken without registration under the Securities Act of 1933 (the "1933 Act"), the Securities Exchange Act of 1934 (the "1934 Act") and the Investment Company Act of 1940 (the "1940 Act").

This request should be granted because it is consistent with both prior no-action positions of the Commission and the legislative history to the Acts and because no public policy interest would be served by requiring registration in this situation.

I. Statement of Facts

FMTC was organized in 1981 as a subsidiary of FMR Corp., a Massachusetts holding company. Despite its name, FMTC is not merely a trust company. Rather, FMTC is a bank engaged in a wide variety of banking activities, including the taking of deposits and the exercising of fiduciary powers similar to those permitted to national banks under the authority of the Comptroller of the Currency. These activities may be summarized as follows:

A. With respect to its depository activities, FMTC has accepted various types of deposits withdrawable by check, as well as time deposits and savings deposits. Deposits as of the end of each of the last 6 calendar years were as follows: 1983, $10,607; 1984, $21,347,590; 1985, $17,095,523; 1986, $14,496,551; 1987, $11,007,529; and 1988, $7,970,032. These depository activities represent 56% of FMTC's liabilities during such 6-year period. Furthermore, FMTC has been approved by the Federal Reserve System to participate in its automated clearing ("ACH") system, thereby enabling FMTC to wire funds, and to receive wired funds, through the Federal Reserve Bank of Boston.

B. FMTC invests the deposits it receives in a broad variety of investments and loans. The investments encompass money market instruments such as Treasury notes and commercial paper. The loans include consumer loans but not commercial loans. FMTC is also qualified to make student loans.

C. With respect to its fiduciary activities, FMTC acts, among other things, as (i) the trustee of over 100 large Code Section 401(a) pension and profit sharing plans maintained by non-affiliate corporate sponsors, (ii) the trustee or custodian of a variety of "prototype" or "prototype-like" Code Section 408 individual retirement accounts, Code Section 403(b) custodial accounts and Code Section 401(a) pension and profit sharing plans which are marketed through various affiliates of FMTC, the number of which accounts and plans exceed 1 million, and (iii) the investment manager for plan assets of approximately 50 large Code Section 401(a) pension and profit sharing plans (principally of the defined benefit type). FMTC's rapid growth in this area in recent years corresponds to the dramatic increase in retirement plan assets generally during this period.

D. FMTC acts as custodian to several registered investment companies. FMTC also operates a personal trust department, which serves as investment manager to wealthy individuals, foundations and educational institutions.

E. As indicated above, FMTC's fiduciary services fall into three categories. First, FMTC acts as the trustee or custodian for retirement accounts and plans. Second, FMTC acts as the investment manager under retirement plans. Third, FMTC acts as trustee of the Trust. The overwhelming majority of the total fees for fiduciary services are for services in the first two categories, that is, services other than services with respect to the Trust. In fact, the average annual percentage of total fiduciary fees represented by fiduciary fees other than Trust fees during the last 6 calendar years is as follows; 1983, 81.9%; 1984, 80.7%; 1985, 71.6%; 1986, 84.7%; 1987, 86.9%; and 1988, 86.7%. Accordingly, the average annual percentage of total fiduciary fees represented by fiduciary fees other than Trust fees is greater than 80%. All of the fiduciary fees other than those for the Trust are for services similar to those permitted to national banks. These non-Trust fiduciary services do not involve any "pooling" of investments and therefore do not require exemption under 1933, 1934 or 1940 Acts.

F. FMTC's ability to continue to engage in this wide variety of banking activities has been legislatively preserved by the Competitive Equality Banking Act of 1987 ("CEBA"). CEBA allows FMTC to continue to engage in any activity it engaged in prior to March 5, 1987.

As a bank FMTC is regulated by the Commonwealth of Massachusetts, just like any other bank. As a bank whose deposits are insured by the FDIC, FMTC is similarly regulated, and subject to examination, by the FDIC. The Commonwealth of Massachusetts and FDIC have conducted joint examinations and have also conducted independent examinations of FMTC.

Most recently, the Commonwealth of Massachusetts conducted two separate examinations of FMTC this year; one examined the banking department of FMTC (exclusive of trust operations), and the second examined the EDP systems utilized by FMTC.

In addition to periodic examinations, FMTC files reports at least annually with both the FDIC and the Commonwealth. These reports include, among others, the following:

Commonwealth of Massachusetts

FDIC

Certified Statement of Assets (for assessments)

FMTC has established the Trust as a collective investment fund, consisting of a series of investment portfolios including equity and bond portfolios. The Trust, as most recently amended and restated, is presently maintained exclusively for pension, profit sharing, stock bonus or other employee benefit plans which either (i) are qualified plans within the meaning of Section 401 of the Code and for which there is maintained a trust fund which is tax exempt pursuant to Section 501(a) of the Code, or (ii) are governmental plans as defined in Section 414(d) of the Code which have been established by employers for the exclusive benefit of their employees or their beneficiaries.

Accordingly, FMTC does not and will not offer interests in the Trust to (i) individual retirement accounts as defined in Section 408(a) of the Code, (ii) plans funded by annuity contracts described in Section 403(b) of the Code, or (iii) non-governmental Section 457 plans. Furthermore, FMTC does not offer the Trust to plans covering self-employed individuals as defined in Section 401(c)(1) of the Code. The Trust qualifies as a "group trust" under Internal Revenue Service Revenue Ruling 81-100.

A "governmental plan" is defined in Section 414(d) of the Code to include a plan established and maintained for its employees by the government of the United States, by any state or political subdivision thereof, or by any agency or instrumentality of any of the foregoing.¹

In connection with the offering of the Trust to any governmental Section 457 plan, FMTC will require the administrator of such plan to represent in writing that: (1) the plan is for the exclusive benefit of its participants or their beneficiaries, (2) the purpose of the plan is the distribution of corpus and income of the funds, if any, accumulated under such plan to the plan's participants or their beneficiaries, (3) no part of the corpus or income of the plan shall be used or diverted to any purpose other than the exclusive benefit of its participants or their beneficiaries prior to the satisfaction of all the plan's liabilities to such participants and beneficiaries, except that, solely to the extent necessary to retain qualification under Section 457 of the Code, such assets shall remain subject to the claims of the general creditors of the plan sponsor, (4) the plan does not cover self-employed individuals as defined in Section 401(c)(1) of the Code, (5) the plan is not funded by an annuity contract described in Section 403(b) of the Code, and (6) no employee contributions under the plan will be invested by the plan in securities of the governmental employer sponsoring the plan or its commonly controlled entities.

II. Discussion

A. Statutory Authority
The exemption from registration afforded by Section 3(a)(2) of the 1933 Act applies to:

"any interest or participation ... in a collective trust fund maintained by a bank ..., which interest, participation, or security is issued in connection with (A) a stock bonus, pension or profit-sharing plan which meets the requirements for qualification under Section 401 of the Internal Revenue Code of 1954, ... or (C) a governmental plan as defined in Section 414(d) of such Code which has been established by an employer for the exclusive benefit of its employees or their beneficiaries for the purpose of distributing to such employees or their beneficiaries the corpus and income of the funds accumulated under such plan, if under such plan it is impossible prior to the satisfaction of all liabilities with respect to such employees and their beneficiaries, for any part of the corpus or income to be used for, or diverted to, purposes other than the exclusive benefit of such employees or their beneficiaries, other than any plan described in clause (A) ... or (C) of this paragraph (i) the contributions under which are held in a single trust fund ... and under which an amount in excess of the employer's contribution is allocated to the purchase of securities (other than interests or participations in the trust ... itself) issued by the employer or any company directly or indirectly controlling, controlled by, or under common control with the employer, (ii) which covers employees some or all of whom are employees within the meaning of Section 401(c)(1) of such Code, or (iii) which is a plan funded by an annuity contract described in Section 403(b) of such Code."

Identical language, except for clause (i) above, makes such interests and participations an exempt security under Section 3(a)(12) of the 1934 Act. Section 3(c)(11) of the 1940 Act also provides an exemption from investment company status for "any employee's stock bonus, pension, or profit sharing trust which meets the requirements for qualification under Section 401 of the Internal Revenue Code of 1954 or which holds only assets of governmental plans described in Section 3(a)(2)(C) of the Securities Act of 1933; or any collective trust fund maintained by a bank consisting solely of assets of such trusts."

B. Applicability of Sections 3(a)(2), 3(a)(12) and 3(c)(11) to Section 457 Plans
In the no-action letter issued to Wells Fargo Bank, N.A. (available September 7, 1988), the Staff recognized, and it is the opinion of the undersigned, that Section 457 plans which are maintained by state or local governmental units qualify as governmental plans under Sections 3(a)(2), 3(a)(12) and 3(c)(11). See also the no-action letter issued to InterFirst Bank of Dallas (available April 4, 1983), which exempts certain other types of non-trusteed governmental plans. Moreover, as explained below, reference to the legislative history of Sections 3(a)(2), 3(a)(12) and 3(c)(11) indicates an intent to include Section 457 plans within the scope of the exemptions. Finally, no public policy interest would be served by requiring registration of interests offered to Section 457 plans in this situation.

1. Background
Governmental plans generally fall into three categories: those qualified under Section 401 of the Code; those qualified under Section 403 of the Code; and those qualified under Section 457 of the Code. In each case, the purpose of qualification is to avoid immediate taxation to employees of amounts deferred under the plans. Thus, if a governmental plan were to fail to qualify under Section 401, 403, or 457 of the Code, government employees would be subject to taxation on benefits as they vest under the plan. See, Code Section 457(f).

The assets of plans qualified under Section 401(a) of the Code must be maintained in trust and must, among other things, satisfy the requirement of Section 401(a)(2) of the Code that it is impossible, prior to satisfaction of all liabilities to participants and beneficiaries, for assets to be used, or diverted to, purposes other than the exclusive benefit of participants and beneficiaries.

Section 403(a) plans are funded by insurance company annuity contracts; 403(b) plans are funded either by such annuity contracts or under custodial agreements that invest exclusively in mutual funds. Section 403(b) plans, which may be sponsored by a state or local government for certain of its educational employees, are specifically excluded from the exemptions provided by Section 3(a)(2) of the 1933 Act and 3(a)(12) of the 1934 Act. As a consequence, FMTC will not permit 403(b) plans to participate in the Trust.

Section 457 plans generally permit employees of state and local governments to defer a portion of their current compensation until separation from service and, as such, are the counterpart to Section 401(k) arrangements maintained by private employers. Among the requirements to qualify as a Section 457 plan, Section 457(b)(6) of the Code provides that the plan must be "unfunded," in that all assets of the plan must remain the property of the employer subject only to the claims of the employer's general creditors.²

The legislative history of Section 457 states that "assets may not be segregated for [the] benefit [of participants] in any manner which would put an interest therein beyond the reach of the general creditors of the sponsoring entity." (Joint Committee on Taxation, General Explanation of the Revenue Act of 1978, p. 71.) This we believe, indicates the statute's intent only to insulate the deferral income and investment property of the Section 457 plan from access to, or receipt by, participants prior to their eligibility for benefits under the plan. The basis for this limitation is in the history of state and local government deferred compensation plans for employees. For years these plans had sought and obtained favorable rulings from the Internal Revenue Service allowing employees, under certain conditions, to postpone their tax liability on deferred compensation until actual receipt under the plan. The conditions necessary for this allowance were rooted in the "constructive receipt" of income doctrine which dictated that employees, in order to be considered as not having received current income under a deferred compensation plan, could not acquire a present interest "in either the amounts deferred or the assets used as the employer's funding medium." (Id. at 67 (footnote omitted)). In devising Section 457, Congress codified, in essence, this constructive receipt doctrine. This appears to be the sole aim of Section 457(b)(6).

Nonetheless, Treasury Regulation 1.457-2(j) expressly permits a participant to direct investment of assets of the plan attributable to his or her benefits, if the plan so provides. Consequently, assets under a Section 457 plan can be "dedicated" to provide benefits so long as they remain subject to the claims of the government's general creditors.

2. No-Action Positions
In the Wells Fargo letter, the Staff permitted the bank to rely on the Section 3(a)(2), 3(a)(12) and 3(c)(11) exemptions for its offerings of collective investment funds to Section 457 plans. The Staff thereby recognized that the unfunded status of such plans did not cause them to fail the "impossibility of diversion" requirements of Sections 3(a)(2) and 3(a)(12) merely because such plans were complying with applicable requirements for qualification under Section 457. We believe that the issues raised by the proposed offering by FMTC to Section 457 plans are identical to those raised in the Wells Fargo letter.³

3. Legislative History
As pointed out in the request for the Wells Fargo letter, the governmental plan exemptions contained in Sections 3(a)(2) and 3(a)(12), along with a corresponding change to Section 3(c)(11) of the 1940 Act, were added by the Small Business Incentive Act of 1980 (the "1980 Amendments"). In support of the 1980 Amendments, the Securities Exchange Commission issued a Memorandum to the United States Senate which provides, in pertinent part, that:

"Section 1 also adds government plans, as defined in Section 414(d) of the Internal Revenue Code, to the category of plans to which interests ... may be offered and sold without registration under the Securities Act ... Section 414(d) of the Internal Revenue code provides special tax treatment for state and local employee benefit plans, and was added to the Code in 1978 in recognition of the fact that it is often difficult if not impossible for such plans to meet all the qualification requirements of Section 401, particularly the antidiscrimination requirements of Section 401(a), because the states establishing such plans prescribe a shorter vesting period for elected and appointed officials than for other covered employees in recognition of the reality of political life. Section 1 of the Bill would make exemption from registration for bank and insurance company funding of public pension plans turn upon the plans' compliance with the substance of Section 401 as it is material to the operation of the securities laws, rather than on their compliance with all the technical requirements of that Section. Thus, it would provide an exemption from registration for bank and insurance company funding of Section 414(d) plans which have been established for the exclusive purpose of providing retirement benefits to employees or their beneficiaries and whose funds are segregated and cannot be diverted to other purposes. The two requirements contained in the amendment are based upon Section 401(a)(1) and Section 401(a)(2) respectively, which are two of the three central provisions of Section 401."⁴

 

Contrary to the above Memorandum, Section 414(d) was actually added to the Code by ERISA in 1974, and together with parallel provisions in Title 1 of ERISA, merely exempts governmental plans from certain of the requirements necessary for qualification under Section 401(a) of the Code. The amendment to the Code in 1978 that provided for special tax treatment for state and local government plans was the addition of Section 457.

Moreover, in his remarks before the Senate, Senator Sarbanes, the sponsor of the 1980 Amendments, stated that the purpose of the bill was to "exempt from registration bank and insurance company funding of certain public employee retirement plans without regard to their qualification under Section 401 of the IRS Code."⁵

Although the legislative history does not specifically reference Section 457 plans, it would seem anomalous to conclude that the 1980 Amendments were intended to cover only Section 401(a) governmental plans, since by virtue of enactment of ERISA in 1974, such plans should already have been covered under the existing provisions of Sections 3(a)(2), 3(a)(12) and 3(c)(11) that exempt securities listed in connection with Section 401(a) plans. The context of the Memorandum and Senator Sarbanes' remarks make sense only if the 1980 Amendments were intended to encompass Section 457 plans.

4. Policy Basis
There is no policy reason to exclude Section 457 plans from the Section 3(a)(2), 3(a)(12) and 3(c)(11) exemptions. In particular, the legislative history to Section 457 that permits segregation of plan assets and the Section 457 regulations that permit participant direction of plan investments provide a sufficient basis to satisfy the intent of the requirements of those assets by a government's creditors. Were the Staff to take the position that registration is required in this situation, it would obviously place Section 457 plan sponsors at a disadvantage as compared to both public and private employers that sponsor trusteed plans in terms of the investment options which may be offered to plan participants.

III. Requested Staff Position

Based upon the foregoing facts and analysis discussed above, it is our opinion that the interests in the Trust to be issued to Section 457 plans as described above are exempt securities under Section 3(a)(2) of the 1933 Act and under Section 3(a)(12) of the 1934 Act and would not require the Trust to register as an investment company under the 1940 Act by virtue of the exemption afforded by Section 3(c)(11) thereof. We would appreciate your advice that the Staff will not recommend to the Commission that any action be taken if FMTC proceeds with its proposed offering without compliance with the various registration requirements of the 1933, 1934 and 1940 Acts. If, however, the Staff contemplates recommending against a no-action position, we request that a conference be arranged to discuss these issues.

If you require additional information, please contact the undersigned at (617) 570-7924.

Very truly yours,

John M. Kimpel

SEC No-Action Letter

Northern Trust Corporation

   At present, common trust funds maintained by a bank exclusively for the collective investment and reinvestment of assets contributed thereto by such bank in its capacity as trustee, executor, administrator or guardian, and interests or participations therein, are exempted or excluded from the provisions of the federal securities laws ...

  The Bank wishes to make available to the trust departments of other banks and trust companies the ability to invest some portion or all of common funds administered under 12 CFR §  9.18(a)(1) in one or more of the Bank's common trust funds administered under that section.   Since it would be necessary for the Bank to be trustee with respect to assets invested in its common funds, the participating common trust fund agreement would permit the trustee of the fund to appoint the Bank as "investment trustee" under an "investment trust agreement."   The Bank proposes that the investment trust agreement would permit the trustee of the participating common trust fund to establish investment guidelines regarding the manner in which assets will be invested, although the particular investment program would be determined by the Bank as investment trustee.