[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: 12CFR250.410]

[Page 692-693]
 
                       TITLE 12--BANKS AND BANKING
 
                   CHAPTER II--FEDERAL RESERVE SYSTEM
 
PART 250--MISCELLANEOUS INTERPRETATIONS--Table of Contents
 
Sec. 250.410  Interlocking relationships between bank and its commingled investment account.

    (a) The Board of Governors was asked recently whether the 
establishment of a proposed ``Commingled Investment Account'' 
(``Account'') by a national bank would involve a violation of section 32 
of the Banking Act of 1933 in view of the interlocking relationships 
that would exist between the bank and Account.
    (b) From the information submitted, it was understood that Account 
would comprise a commingled fund, to be operated under the effective 
control of the bank, for the collective investment of sums of money that 
might otherwise be handled individually by the bank as managing agent. 
It was understood further that the Comptroller of the Currency had taken 
the position that Account would be an eligible operation for a national 
bank under his Regulation 9, ``Fiduciary Powers of National Banks and 
Collective Investment Funds'' (part 9 of this title). The bank had 
advised the Board that the Securities and Exchange Commission was of the 
view that Account would be a ``registered investment company'' within 
the meaning of the Investment Company Act of 1940, and that 
participating interests in Account would be ``securities'' subject to 
the registration requirements of the Securities Act of 1933.
    (c) The information submitted showed also that the minimum 
individual participation that would be permitted in Account would be 
$10,000, while the maximum acceptable individual investment would be 
half a million dollars; that there would be no ``load'' or payment by 
customers for the privilege of investing in Account; and that:

    The availability of the Commingled Account would not be given 
publicity by the Bank except in connection with the promotion of its 
fiduciary services in general and the Bank would not advertise or 
publicize the Commingled Account as such. Participations in the 
Commingled Account are to be made available only on the premises of the 
Bank (including its branches), or to persons who are already customers 
of the Bank in other connections, or in response to unsolicited 
requests.

    (d) Such information indicated further that participations would be 
received by the bank as agent, under a broad authorization signed by the 
customer, substantially equivalent to the power of attorney under which 
customers currently deposit their funds for individual investment, and 
that the participations would not be received ``in trust.''
    (e) The Board understood that Account would be required to comply 
with certain requirements of the Federal securities laws not applicable 
to an ordinary common trust fund operated by a bank. In particular, 
supervision of Account would be in the hands of a committee to be 
initially appointed by the bank, but subsequently elected by 
participants having a majority of the units of participation in Account. 
At least one member of the committee would be entirely independent of 
the bank, but the remaining members would be officers in the trust 
department of the bank.
    (f) The committee would make a management agreement with the bank

[[Page 693]]

under which the bank would be responsible for managing Account's 
investments, have custody of its assets, and maintain its books and 
records. The management agreement would be renewed annually if approved 
by the committee, including a ``majority'' of the independent members, 
or by a vote of participants having a majority of the units of 
participation. The agreement would be terminable on 60 days' notice by 
the committee, by such a majority of the participants, or by the bank, 
and would terminate automatically if assigned by the bank.
    (g) It was understood also that the bank would receive as annual 
compensation for its services one-half of one percent of Account's 
average net assets. Account would also pay for its own independent 
professional services, including legal, auditing, and accounting 
services, as well as the cost of maintaining its registration and 
qualification under the Federal securities laws.
    (h) Initially, the assets of Account would be divided into units of 
participation of an arbitrary value, and each customer would be credited 
with a number of units proportionate to his investment. Subsequently, 
the assets of Account would be valued at regular intervals, and divided 
by the number of units outstanding. New investors would receive units at 
their current value, determined in this way, according to the amount 
invested. Each customer would receive a receipt evidencing the number of 
units to which he was entitled. The receipts themselves would be 
nontransferable, but it would be possible for a customer to arrange with 
Account for the transfer of his units to someone else. A customer could 
terminate his participation at any time and withdraw the current value 
of his units.
    (i) Section 32 of the Banking Act of 1933 provides in relevant part 
that:

    No officer, director, or employee of any corporation or 
unincorporated association, no partner or employee of any partnership, 
and no individual, 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, shall serve [at] the same time as an officer, director, or 
employee of any member bank * * *.

    (j) The Board concluded, based on its understanding of the proposal 
and on the general principles that have been developed in respect to the 
application of section 32, that the bank and Account would constitute a 
single entity for the purposes of section 32, at least so long as the 
operation of Account conformed to the representations made by the bank 
and outlined herein. Accordingly, the Board said that section 32 would 
not forbid officers of the bank to serve on Account's committee, since 
Account would be regarded as nothing more than an arm or department of 
the bank.
    (k) In conclusion, the Board called attention to section 21 of the 
Banking Act of 1933 which, briefly, forbids a securities firm or 
organization to engage in the business of receiving deposits, subject to 
certain exceptions. However, since section 21 is a criminal statute, the 
Board has followed the policy of not expressing views as to its meaning. 
(1934 Federal Reserve Bulletin 41, 543.) The Board, therefore, expressed 
no position with respect to whether the section might be held applicable 
to the establishment and operation of the proposed ``Commingled 
Investment Account.''

(12 U.S.C. 248(i))

[30 FR 12836, Oct. 8, 1965. Redesignated at 61 FR 57289, Nov. 6, 1996]