[Code of Federal Regulations]
[Title 12, Volume 3]
[Revised as of January 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 12CFR250.220]

[Page 678-679]
 
                       TITLE 12--BANKS AND BANKING
 
                   CHAPTER II--FEDERAL RESERVE SYSTEM
 
PART 250--MISCELLANEOUS INTERPRETATIONS--Table of Contents
 
Sec. 250.220  Whether member bank acting as trustee is prohibited by section 20 of the Banking Act of 1933 from acquiring majority of shares of mutual fund.

    (a) The Board recently considered whether section 20 of the Banking 
Act of 1933 (12 U.S.C. 377) would prohibit a member bank, while acting 
as trustee of a tax exempt employee benefit trust or trusts, from, under 
the following circumstances, acquiring a majority of the shares of an 
open-end investment company (``Fund'') registered under the Investment 
Company Act of 1940, or more than 50 percent of the number of Fund's 
shares voted at the preceding election of directors of the Fund.
    (b) The bank has acted as trustee, since December 1963, pursuant to 
a trust agreement with a county medical society to administer its group 
retirement program, under which individual members of the society could 
participate in accordance with the provisions of the Self-Employed 
Individuals Tax Retirement Act of 1962 (commonly referred to as ``H.R. 
10'').
    (c) Under the trust agreement as presently constituted, each 
employer, who is a participating member of the medical society, directs 
the bank to invest his contributions to the retirement plan in such 
proportions as he may elect in insurance or annuity contracts or in a 
diversified portfolio of securities and other property. The diversified 
portfolio held by the bank is invested and administered by the bank 
solely at the direction of a committee of the medical society.
    (d) It has now been proposed that the trust agreement be amended to 
provide that all investments constituting the trust fund, apart from 
insurance and annuity contracts, will be made exclusively in shares of a 
single open-end investment company to be named in the trust agreement 
and that the assets constituting the diversified portfolio now held by 
the bank, as trustee, will be exchanged for the Fund's shares. The bank 
will, in addition to holding the shares of the Fund, allocate income and 
dividends to the accounts of the various participants in the retirement 
program, invest and reinvest income and dividends, and perform other 
ministerial functions.
    (e) In addition, it is proposed to amend the trust agreement so that 
voting of the shares held by the bank as trustee will be controlled 
exclusively by the participants. Under the proposed amendment, the bank 
will sign all proxies prior to mailing them to the participants,

    it being intended that the Participant(s) shall vote the proxies 
notwithstanding the fact that the Trustee is the owner of the shares * * 
*.

    (f) The bank believes that amendments are now under consideration 
that will also require investment of the assets of these plans 
exclusively in the Fund's shares. Accordingly, the bank may eventually 
own the Fund's shares in several separate trust accounts and in an 
aggregate amount equal to a majority of the Fund's shares.
    (g) Section 20 of the Banking Act of 1933 provides in relevant part 
that

    no member bank shall be affiliated in any manner described in 
section 2(b) hereof with any corporation * * * engaged principally in 
the issue, flotation, underwriting, public sale, or distribution at 
wholesale or retail or through syndicate participation of stocks * * * 
or other securities: * * *.

    (h) Section 2(b) defines the term affiliate to include

    any corporation, business trust, association or other similar 
organization (1) Of which a member bank, directly or indirectly, owns or 
controls either a majority of the voting shares or more than 50 per 
centum of the number of shares voted for the election of its directors, 
trustees, or other persons exercising similar functions at the preceding 
election, or controls in any manner the election of a majority of its 
directors, trustees, or other persons exercising similar functions; * * 
*.

    (i) The Board has previously taken the position, in an 
interpretation involving the term affiliate under the Banking Act of 
1933, that it would not require a member bank to obtain and publish a 
report of a corporation the

[[Page 679]]

majority of the stock of which is held by the member bank as executor or 
trustee, provided that the member bank holds such stock subject to 
control by a court or by a beneficiary or other principal and that the 
member bank may not lawfully exercise control of such stock 
independently of any order or direction of a court, beneficiary or other 
principal. 1933 Federal Reserve Bulletin 651. The rationale of that 
interpretation--which was reaffirmed by the Board in 1957--would appear 
to be equally applicable to the facts in the present case. In the 
circumstances, and on the basis of the Board's understanding that the 
bank will not vote any of Fund's shares or control in any manner the 
election of any of its directors, trustees, or other persons exercising 
similar functions, the Board has concluded that the situation in 
question would not fall within the purpose or coverage of section 20 of 
the Banking Act of 1933 and, therefore, would not involve a violation of 
the statute.