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4000 - Advisory Opinions

Establishment of Collective Investment Pool


November 17, 1983

Pamela E. F. LeCren, Senior Attorney

The following is in response to your request that the FDIC comment as to whether the overall plan by * * * to establish a collective investment pool is both acceptable to the FDIC and in accord with FDIC's regulations. According to your letter and its accompanying material, the bank is considering forming a collective investment pool that would operate substantially as follows. The bank would establish an investment trust with respect to which it would act as trustee. The investment trust would pool funds contributed thereto by individuals who execute a trust agreement with the bank specifying that the funds are transferred to the bank as trustee for investment in accordance with the trust agreement. The agreement indicates that the trustee intends to commingle funds from other "grantors" and to invest the commingled funds.

The fund's investments will be limited to (1) obligations of the United States or obligations fully guaranteed as to principal and interest by the United States, (2) student loans that are at least 80 percent insured and/or reinsured as to principal and interest by the United States, (3) obligations issued by Banks for Cooperatives, Federal Land banks, Federal Home Loan banks, The Federal Home Loan Bank Board, or a wholly-owned Government corporation, (4) obligations, participations, or other instruments of or issued by, or fully guaranteed as to principal and interest by, the Federal National Mortgage Association, (5) mortgages, obligations, or other securities which are or have ever been sold by The Federal Home Loan Mortgage Corporation, or (6) participation certificates evidencing beneficial interest in (or the right to receive interest and principal collections from) obligations which have been subjected by one or more Government agencies to a trust for which an executive department, agency, or instrumentality of the United States has been named a trustee.

Each grantor would receive an undivided interest in the pooled assets. The trustee is to distribute monthly to the individual grantors the total accrued income from the pool less the trustee's fees. The Bank intends to sell student loans to the collective investment fund that it is presently holding. The sale would be at par and on a nonrecourse basis. U.S. Treasury Bills and other United States obligations will be purchased from an unrelated broker/dealer. The trustee will receive a fee equalling 3 - 3.5 percent of the average total assets of the fund.

In addition to the above, the information forwarded to this office indicates that it is the Bank's counsel's opinion that neither the investment trust nor the interests therein will be required to be registered under the Federal Securities laws or the state's blue sky Laws. We also note in the material a letter from the * * * Banking Department indicating that the collective investment pool constitutes an underwriting function that will require the approval of the State Department of Banking and Finance.

While FDIC does not have any regulations that would prohibit the bank from entering into the proposed collective investment plan, we are concerned that the arrangement would involve the Bank in the sale, issuance, underwriting, or distributing of securities in violation of section 21 of the Glass-Steagall Act (12 U.S.C. 378). That provision of law prohibits any deposit taking institution from engaging in the above activities except to the extent permitted to a national bank under section 16 of the Glass-Steagall Act (12 U.S.C. 24(7th)). The Supreme Court in ICI v. Camp, 401 US 617 (1971) held that a collective investment fund operated by a national bank for managed agency accounts was in violation of sections 16 and 21 of the Glass-Steagall Act. Although the collective investment fund your bank is proposing would technically involve funds deposited with the bank in trust as opposed to managed agency accounts, the distinction is illusory in this instance as there would not appear to be any true trust relationship involved.

The Supreme Court did recognize that banks have traditionally invested funds held by them in trust and have managed common trust funds. The Court in doing so impliedly found that such activities do not constitute a violation of the Glass-Steagall Act. The pooled investment trust at issue here would not appear, however, to qualify as a common trust fund within the commonly accepted understanding of that term. The fund at issue would not be exempt from registration under the Securities Laws. The SEC has over the years maintained that the exemption from registration for common trust funds under 15 U.S.C. 77c(a)(2) is not available where monies commingled in the fund are not held for a true fiduciary purpose but are accepted and commingled as vehicles for direct investment by members of the public. Nor would the fund seem to qualify for the exemption from registration for collective investment funds found in 15 U.S.C. 80a-3(c)(11). That exemption applies to commingled funds made up of contributions to employee stock bonus, pension, or profit sharing trusts that meet certain qualifications under Title 26 of the U.S. Code.

Although we have commented on the possible need for registration of the fund and the interests therein, our opinion is not binding on the topic. The Bank would be best advised to direct such a question to the Securities and Exchange Commission. As to the Glass-Steagall Act issue, there is sufficient basis for the FDIC to preliminarily conclude that the operation of the collective investment pool as described may be a violation and that the bank should therefore not proceed or should be aware that if it does so, it proceeds at its own risk.

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