[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: 12CFR250.406]

[Page 688-689]
 
                       TITLE 12--BANKS AND BANKING
 
                   CHAPTER II--FEDERAL RESERVE SYSTEM
 
PART 250--MISCELLANEOUS INTERPRETATIONS--Table of Contents
 
Sec. 250.406  Serving member bank and investment advisor with mutual fund affiliation.

    (a) The opinion of the Board of Governors of the Federal Reserve 
System has been requested with respect to service as vice president of a 
corporation engaged in supplying investment advice and management 
services to mutual funds and others (``Manager'') and as director of a 
member bank.
    (b) Section 32 of the Banking Act of 1933 (12 U.S.C. 78), forbids 
any officer, director, or employee of any corporation ``primarily 
engaged in the issue, flotation, underwriting, public sale, or 
distribution, at wholesale or retail, or through syndicate 
participation, of stocks, bonds, or other similar securities * * *'' to 
serve at the same time as an officer, director, or employee of a member 
bank.
    (c) Manager has for several years served a number of different open-
end or mutual funds, as well as individuals, institutions, and other 
clients, as an investment advisor and manager. However, it appears that 
Manager has a close relationship with two of the mutual funds which it 
serves. A wholly owned subsidiary of Manager (``Distributors''), serves 
as distributor for the two mutual funds and has no other function. In 
addition, the chairman and treasurer of Manager, as well as the 
president, assistant treasurer, and a director of Manager, are officers 
and directors of Distributors and trustees of both funds. It appears 
also that a director of Manager is president and director of 
Distributors, while the clerk of Manager is also clerk of Distributors. 
Manager, Distributors and both funds are listed at the same address in 
the local telephone directory.
    (d) While the greater part of the total annual income of Manager 
during the past five years has derived from ``individuals, institutions, 
and other clients'', it appears that a substantial portion has been 
attributable to the involvement with the two funds in question. During 
each of the last four years, that portion has exceeded a third of the 
total income of Manager, and in 1962 it reached nearly 40 percent.
    (e) The Board has consistently held that an open-end or mutual fund 
is engaged in the activities described in section 32, so long as it is 
issuing its securities for sale, since it is apparent that the more or 
less continued process of redemption of the stock issued by such a 
company would restrict and contract its activities if it did not 
continue to issue the stock. Clearly, a corporation that is engaged in 
underwriting or selling open-end shares, is so engaged.
    (f) In connection with incorporated manager-advisors to open-end or 
mutual funds, the Board has expressed the view in a number of cases that 
where the corporation served a number of different clients, and the 
corporate structure was not interlocked with that of mutual fund and 
underwriter in such a way that it could be regarded as being controlled 
by or substantially one with them, it should not be held to be 
``primarily engaged'' in section 32 activities. On the other hand, where 
a manager-advisor was created for the sole purpose of serving a 
particular fund, and its activities were limited to that function, the 
Board has regarded the group as a single entity for purposes of section 
32.
    (g) In the present case, the selling organization is a wholly-owned 
subsidiary of the advisor-manager, hence subject to the parent's 
control. Stock of the subsidiary will be voted according to decisions by 
the parent's board of directors, and presumably will be voted for a 
board of directors of the subsidiary which is responsive to policy lines 
laid down by the parent. Financial interests of the parent are obviously 
best served by an aggressive selling policy, and, in fact, both the 
share and the absolute amount of the parent's income provided by the two 
funds have shown a steady increase over recent years. The fact that 
dividends from Distributors have represented a relatively small 
proportion of the income of Manager, and that there were, indeed, no 
dividends in 1961 or 1962, does not support a contrary argument, in view 
of the steady increase in total income of Manager from the funds and 
Distributors taken as a whole.

[[Page 689]]

    (h) In view of all these facts, the Board has concluded that the 
separate corporate entities of Manager and Distributors should be 
disregarded and Distributors viewed as essentially a selling arm of 
Manager. As a result of this conclusion, section 32 would forbid 
interlocking service as an officer of Manager and a director of a member 
bank.

[28 FR 13437, Dec. 12, 1963. Redesignated at 61 FR 57289, Nov. 6, 1996]