The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
R-143
BOARD OF GOVERNORS
364
CF" THE
FEDERAL RESERVE SYSTEM
WASHINGTON
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
December 22, 1937.
Dear Sir:
There are inclosed herewith six copi~s of amendments
to the Board's Regulation F which have been approved by the
Board to bGcome effective December 31, 1937. Twenty-five additional copies are going forward to you under separate cover.
The amendment to section lO(c) and the new section 17 have
to do with the operation of Common Trust Funds by national
banks for the collective investment of funds of separate
trusts, and the amendments to subsections (b) and (c) of section 6 have to do with what persons may serve on trust department committees already provided for in the regulation. There
is also inclosed herewith a copy of a press statement which
will be released by the Board for publication in the morning
papers of December 27, 1937.
As soon as practicable, you will be furnished with
printed copies of Regulation F, as amended, and, in the mean~
time, you are authorized, on and after the date of the release of tho press statement mentioned above, to furnish
copies of the amendments to such interested parties as you
deem desirable.
Please advise inunediately by wire how many copies of
the revised regulation you desire sent to your bank. The
amendments will appear in the Januaxy issue of the Federal
Reserve Bulletin.
VerJ truly yours,
Chester Morrill,
Secretary.
j
Inclosures.
TO PRESIDENTS OF ALL FEDERAL RESERVE BANKS
365
L-544
Amend Re£lllation F by runending subsection (c) of sec.!Jon
JP 8.nd adding a new section 17.
SECTI_ON 10.
INVESTMENT OF TRUST FUNDS
(c) Colle~tive investmen:t of trustl fundG. -- Funds received or held by a national bank as fiduciary shall not be invested
collectively2 except as permitted in section 17 of t:b.J.s regulation.
*
SECTION 17.
COMMON TRU..§.l. FUNDS
(a) In general. -- Funds received or held by a national
bank as fiduciary may be invested collectively in any Common Trust
Fund established and maintained in accordance with the provisions
of this section whenever the laws of the State in which the national
lUnless the context otherwise indicates, the term "trust",
as used in this section or in any other part of this regulation,
refers to any fiduciary relationship which a national bank is
authorized to enter into under the provisions of section ll(k)
of the Federal Reserve Act.
2This does not prevent the bank from investing the funds of
several trusts in a single real estate loan of the kind whlch could
be made by the bank under tho provisions of section 24 of the Federal Reserve Act, as amended, if the bank owns no participation in
the loan and has no interest therein except in its capacity as
fiduciary.
366
-2-
L-544
bank is located authorize or permit such investments by State banks,
trust companies, or other corporations which compete with national
banks.
As used in this regulation the term "Common Trust Fund"
means a fund maintained by a national bank exclusively for the
collective investment and reinvestment of moneys contributed thereto by the bank in its capacity as trustee, executor, administrator,
or guardian3.
'I'he purpose of this section is to permit the use of
Common Trust Funds, as defined in section 169 of the Revenue
Act of 1936,4 for the investment of funds held for true fiduciary
purposes; and the operation of such Common Trust Funds as investment trusts for other than strictly fiduciary purposes is hereby
prohibited.
N8 bank administering a Common Trust Fund shall
issue any document evidencing a direct or indirect interest in
such Common Trust Fund in ony form which purports to be negotiable or assignable.
The trust :i.nvestmcnt committee of a bank
operating a Common Trust Fund shall not permit any funds of any
trust to be invested in a Common Trust Fund if it has reason to
3As used in this regulation the term "guardi8n 11 means guardian
or committee of the estate of an infant, incompetent, or absentee,
by whatever name known in the State in which a particular national
bank is located.
4For applicable provisions of the Revenue Act of 1936, see
Appendix.
367
-5-
L-544
believe thn t such trust was not created or is not being used for
bona fide fiduciary purposes.
Common ·rrust Ftmds administered tmder this section shall
bo subject to the following requirements:
(1) z'\.SSElts in a Common Trust Ftmd shall be consider·ed
us assets held by the bank as fiduciary;
(2) A bank administering a Common Trust Fund shall not
invest any of its ovm funds in such Common Trust Fund and
lf a bnnk, because of a creditor relationship or any other
reason, acquires any interest in a participation in a Common Trust Fund under its administration the participation
shall be wi tb:irawn on tho first date on which such withdrawal can be effected in accordance with the provisions
of this section;
(3) A bank administering a Common Trust Fund shall not
have ·any interestS in the assets held in such Common Trust
Fund, other than in its capacity as fiduciary, except to
the extent permitted for a temporary period as provided in
the immediately preceding paragraph.
5A bank shall not be deemed to nave an interest in assets
in which collective investments are made merely because of the
fact that the bank owns in its own right other stocks, or bonds or
other obligations of a pe.rson, firm, or CC)rporation, the stocks, or
bonds or other obligations of which ore among the assets of a Common
Trust Fund •
•
368
L-544
-4(b)
Common Trust Funds for investment of small amounts.
Subject to all other provisions of this regulation except subsection (c) of this section, cash balances received or held by a bank
in its capacity as trustee, executor, administrator, or guardian,
which the bank considers to be individually too small to be invested
separately to advantage may be invest0d, with the approval of the
trust investment committee, in participations in a Common Trust Fund,
provided the total investment of the funds of
aQy
one trust in one
or more such Common Trust Funds shall not exceed $1,200.
(c) Common Trust F1mds for general investment. -- Subject
to all other provisions of this regulation except sub section (b) of
this section, funds received or held by a bank in its capacity as
trustee, executor, administrator, or guardian may be invGstod in
participations in a Common Trust Fund.
All participations in such
a Common Trust Fund shall be on the basis of a proportionate interest in all of the assets of the Common Trust Fund.
(1) Common Trust Fund to be operated under written plan. -Each Common Trust Fund administered by a bank shall be established and maintn.incd in accordance with a written plan (referred to herein as the Plan) approved by a resolution of
the bank's board of directors and approved in writing by
competent legal counsel.
The Plan shall provide that
th~
369
-5-
L-544
Common Trust Fund shall be administered in conformity v:i th
the rules and regulations, prevailing from time to time, of
the Board of Governors of the Fodoral Rcsorvo System pertaining to tho collective investment of trust funds bJ national
banks, and shall contain full and detailed :provisions not inconsistent with tho provisions of such rules and rogulations
as to tho manner in which tho Common Trust Fund is to bo
operated, including provisions relating to.the investment
powers of tho bank with rospoct to tho Common Trust Fund, tho
allocation of income, profits and l'osscs, the terms and conditions governing the admission or withdruwal of purticipations in tho Cor::unon 'I'rust Fund, tho r.cudi ting and settlement
of accounts of the ballk with respect to the Common Trust Fund,
the basis and method of valuing assets in the Common Tru::>t
Fund, the basis upon whicl1 the Common Trust Fund may be krminated, and such other matters o.s may be necessary to define
clearly tho rights of participants in tho Common Trust Fund.
A copy c,f the Plan shDll be available at tho principal office;
of the bank for inspection, during ell banking hours, to any
person having an interest in a trust a.ny funds of which are
invested in a participation in tho Common Trust Fund; and
upon reasonable request a copy of tho Plan shall bo furnishod
to such parson.
370
L-544
-6-
(2) Trust investment committee to approve participation.
No funds of a trust shall be invested in a participation in
a Common Trust Fund without the approval of the trust investment committee.
Before permitting any funds of any trust
to be invested in a participation in a Common Trust Fund,
the trust investment committee shall review the investments
comprising the Common Trust Fund; and, if it finds that any
such investment is one in which funds of such trust might not
lawfully be invested at that time, funds of such trust shall
not be invested in a participation in such Common Trust Fund.
At the time of making the first investment of funds of
a trust in a participation in any Common Trust Fund, the
bank shall send a notice of such investment to each person
to whom an accounting ordinarily would be rendered.
(5)
Common Trust Fund to be audited annually.
A bank
administering a Common Trust Fund shall, at least once during each period of twelve months, cause an audit to be made
of the Common 'Trust Fund by auditors responsible only to the
board of directors of the bank.
The report of such audit
shall include a list of the investments comprising the Common Trust Fund at tho time of the audit which shall. show the
valuation placed on each item on such list b.Y the trust investment committee of the bank as of the date of tho audit,
a statement of purchases, sales and any other investment
371
L-544
-7-
changes and of income and disbursements since the last audit,
and appropriate comments as to any investments in default as
to pCJ.yment of principal or interest.
The rensonable expenses
of any such audit made by independent public accountants may
be charged to the Common Trust Fuml.
Tho bonk
shc~ll,
without charge, send a copy of the latest
report of such audit annually to each
per~;on
to whom an
:lC-
counting of the trusts participating in the Comrnon Trust Fund
ordinarily would be rendered or rhall send advice to each such
person annually that the roport is available and that a copy will
be furnished vdthout c"J.arge upon request.
(4) Value of asf'ets to be determined periodicnlly. -- Not
less frequently than once during each period of three months
the trust invost'nent committee of a bank administering a Common Trust Ftmd shall determine the value of the assets in the
Common Trust Fund.
No participation shall be admitted to or
withdravm fro'll the Common 'l'rust :Fund except on the basis of
such valuation ".lllO. on the date of the determination of such
valuation or, if permitted by the Plan, within two business
deys sut)sequent to the date of such determination.
No par-
ticipe.tion shall be B.dmi tted or V'lithdrawn unless, in rtccor·dance
with provisions of the Plan, prior to the date of the
determina-
tion of such valuation, notice of intention to participate or
to :nake such withdrawal shall have been given in writiag to
372
L-544
--8-
the bank administering the Common ·frust Fund, or e. written
notation of the contemplated participation or
~~thdrawal
shall
have been made in the records of the bank.
(5) Miscellaneous limitations. -No funds of any tru.st
shall be invested in a participation in a Common Trust Fw1d
if such investment would result in such trust having an
inte:rest in the Common Trust l''und in excess of 10 per cent
of the: value of the assets of the Common Trust Fund, e.s deter!!lined by the trust investment committee, or tbe sum Qf
$25,000, whichever is
le~s
at the time of investment.
If
the bank administers rnore than one Common Trust Fund, no
investment shall be made which would cause the aggregate
investment of funds of any one trust in all such Common Trust
Funds
to exceed such limitations.
In applying the limita-
tions contained in this paragraph, if two or more trusts
are created by the same settlor or settlers and as much as
one-half of the income or principal or both of each trust is
payable or applicable to the use of t..'le saMe person or persons,
such trusts shall be considered as one.
No investment for a Common Trust Fund shall be made in
stocks, or bonds or other obligations of any one person, .firm,
or corporation which woUld cause the total amount of investment in stocks, or bonds or other obligations issued or
guaranteed by such person, firm, or corporation to exceed
373
-9-
L-544
10 per cent of the value of the Common. Trust Fund, as determined by the trust investment committee, provided that
this limitation shall not apply to investments in obligations of the United States or for the payment of the principal and interest of which the faith and credit of the United
States shall be pledged.
No investment for a Common Trust Flmd shall be made in
any one class of shares of stock of any one corporation whlch
would cause the total number of such shares held by the Comman Trust Fund to exceed 5 per cent of the number of such
shares outstanding.
If the bank administers more than one
Common Trust Fund no j.nvestment shall be made which would
cause the aggregate investment for all such Common Trust
Funds in shares of stock of any one corporation to exceed
such limitation.
Any bank administering a Common Trust Fund shall have
the responsibility of maintaining in cash and readily marketable securities6 such part of the assets of the Common Trust
Fund as shall be deemed by the bank to be necessary to provide adequately for the needs of participating trusts and to
6A readily marketable security within the meaning of this
section means a security which is the subject of frequent dealings
in ready markets with such frequent quotations of price as to make
(a) the price easily and definitely ascertainable and (b) the security itself easy to realize upon by sale at any time.
-10 ....
L-544
prevent inequities between such trusts.
In ar1y event, prior
to any admissions to or withdrawals from a Common rrust Fund,
the trust investment committee shall determine what percentage
of the value of the assets of a Common Trust r1md is composed
of cash and readily marketable securities; and if such committee
determines that, after effecting the admissions and withdrawals
which are to be made pursuant to notice given as require,d in subdivision (4) of this subsection, less than 40 per cent of the
value of the remaining assets of the Common ·rrust Fund would
be
co~posed
of cash ru1d readily marketable securities, no ad-
missions to or withdrawals from the Common Trust Fund shall be
permitted as of the valuation date upon which such determination
is made, except that ratable distribution upon
all participations
is not prohibited.
{6)
Distribution upon withdrawnl of participation. -
When participations are
~~thdravm
from a Common Trust Fund,
distributions may be made in cash or ratably in kind, cr
partly in cash and pe.rtly ratably in kind, provided that all
distributions as of any one valuation date shall be made on
the same basis.
Before
a~v
distribution in cash is made, the
trust investment committee shall determine whether any investment remaining in the Common Trust Fund would be unlawful
for one or more participating trusts if funds of such trusts
were being invested at that time; and no distribution shall
374
375
L-544
-11-
be made in cash until any such unlawful investment shall have
been eliminated from the Common Trust Fund either through sale,
distribution in kind, or segregation as provided in the subdivision immediately following hereafter.
(7) Segrt:Jgation of investments. -- If for any reason
an investment is withdrawn in kind from a Common Trust Fund
for the benefit of all trusts participating in the Common
Trust Fund at the time of such withdrawal and such investment
is not distributed ratably in kind it shull be segregated and
administered or realized upon for the benefit ratably of all
trusts participating in the Common Trust Fund at the time of
wi thdruwal.
(8) Management of Common Trust Fund and fees. -- A national bank administering a ComJ;.on Trust Fund sh1.Lll have the
exclusive manag(;)ment thereof and shall not charge
a
fet'} for the
management of the Common Trust Fund, or receive, either from
the Common Trust Fund or from any trusts the fund.s of which are
invested in participations therein, any ad.di tiomd fees, commissions, or compensations of any kind by reason of such participation.
The bQllk shall not pay a fee, commission, or com-
pensation out of the Common Trust Fund for management.
Nothing in this parugraph shall be construed as prohibiting
a bank from reimbursing itself out of a Common Trust Fund
for such rcusonable expenses incurred by it in the e.dministrction
376
-12-
L-544
thereof as would have been chargeable to the respective
participating trusts if incurred in the separate administration of such participating trusts.
(9) Effect of mistakes. -- No mistake made in good faith
and in the exercise of due co.re in connection with the administration of a Common Trust Fund shall be deemed to be a
violation of this regulation if promptly after tho discovery
of the mistake the bank takes whe.tever action mo.y be practicable in tho circumstances to r3rnedy the misk.ke.
NOTE:
The reference in section 12 of Regulation F to "subsection
(c) of section 10" will be changed ~ppropriately, footnotes to the proposed amendments to the regulation hnd subsequent footnotes in the regulation will be numbered appropriately, and tho pres0nt section l7 will h__; renumbered
18.
Amend the second sentence of subsection (b) of section 6
of Regulation F to read as follows:
"The acceptance of all trusts shall be approved by.the board
of directors or a con:mittee appointed by such board, and the
closing out or relinquishment of all trusts shall be
~pproved
or ratified by the board of directors or a committee appointed
by such board; and such committee or committees shall be composed of
b&nk."
c;;~pabl.J
and experienced officers or directors of the
377
L-544
-13-
Amend the first sentence of subsection (c) of section 6
of Regulation F by a footnote thereto reading o.s follows:
"It is contemplated that there shall be r:. committee the
members of which shall have a continuity of responsibility
for the discharge of the duties of the committee.
However,
alternates appointed by the board of directors
serve in
m~w
plr,ce of regular members of the committee who are unable
to serve on account of vacations, illness, or other good
and sufficient reasons if the minutes of the committee show
the reason for tho service of such a.l ternate in
regular member."
pl~.ce
of the
378
L-544-a
APPEJ.~DIX
In the reprint of Regulation F, the following will be
included in the Appendix to Regulation F under the following
description:
There are printed below certain prov~s~ons of the Revenue
Act of 1956 which are pertinent to some of the subject matter
of this regulation.
SEC. 169.
COMMON TRUST FUNDS.
(a) DEFINITIONS. - The term "common trust fund" means
a fund m&int::ined by a bank (us defined in s.;ction 104)(1) exclusively for the collective investment and reinvestment of moneys contributed t.l-lereto by the bank in
its capncity as a trustee, executor, administrator, or
guardian; D.nd
(2) in conformity with the rules and rr3gulations, prevailing from time to time, of the Board of Governors of
the Federal Reserve System pertaining to the collective
investment of trust funds by national ronks.
...,
(b) TAXi.TION OF COMJIJiON TRUS'I' FUNDS. - A common trust fund
shall not be subject to taxe.tion undor this title, Title IA.
or section 105 or 106 of the Hevenae Act of 1935, and for ·
the purposes of such titlen c;nd sections shall not be considered a corporation.
(c) INCOME O.B~ PARTICIPANTS IN FUND. - Each participant
in the common trust fund sh&ll include in cc:>mputing its net
income its proportionate share, whether or not distributed
and whether or not distributable, of the net income of the
common trust fund. The net income of the common trust fund
shall be computed in the sume manner and on the same basis
as in the case of an individual. The proportionate share
of each participant in the &mount of interest specified in
section 25(a) received by the common trust fund shall for
the purposes of this Supplement be con:::idered as having been
received by such participant as such interest.
(d) ADMISSION AND WITHDRllWAL. - No gain or loss shall be
realized by tho common trust fund by the adm"i.ssion or withdrawal of a pE~rticipant. The wi thdrawnl of any participating
379
-2-
L-544-a
interest qy a participant shall be treated as a sale or exchange of such interest by the participant.
(e) RETURNS BY BANK. - Every bank (as defined in section 104)
maintaining a common trust fund shall make a return under onth
for each taxable year, stating specifically, with respect to such
fund, the items of gross income and the deductions allowed by this
title, and shall include in the return the nRmes and addresses of
the participants who would be entitled to share in the net income
if distributed and the amount of the proportionate share of each
participant. ·rhe return shall be sworn to as in the case of a retu~ filed by the bunk under section 52.
(f) DIFFERENT TAXABLE YEARS OF COMMON TRUST FUND AND PARTICIPAN·r • .:.:. If the taxable year of the common trust fund is
different from that of a participant, the proportionate share
of the net income of the common trust fund to be included in
computing the net income of the participant for its taxable
year shall be based upon the net income of the common trust
fund for any taxable year of the common trust fund (whether
beginning on, before, or after Janunry 1, 1956) ending within
the taxable year of the participant,
SEC. 104.
BANKS AND TRUfT COMPANIES.
(a) DEFINITION .... As used in this section the term "bank"
means a bank or trust company incorporated and doing business
under the laws of the United States (including laws relating to
the District of Columbia), of any State, or of any Territory, a
substantial part of the business of which ccmsists of receiving
deposits and making loons and discounts, or of exercising fiducia~
powers similar to those permitted to national banks under section
ll(k) of the Federal Reserve Act, as amended, and which is subject
by law to supervision and examination by State or Federal authority
having supervision over banking institutions.
@FedFRASER