The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
FEDERAL RESERVE BANK
OF NEW YORK
[
Circular No. 10763
January 13, 1995
BANK HOLDING COMPANIES
Proposed Amendment to an Interpretative Rule
Regarding Investment Adviser Activities
Comments Invited by January 30
To A ll Bank Holding Companies, and Others
Concerned, in the Second Federal Reserve District:
Following is the text of a statement issued by the Board of Governors of the Federal Reserve
System:
The Federal Reserve Board has requested public comment on a proposal to amend a restriction
in its interpretive rule on investment adviser activities of bank holding companies. The current
restriction requires that a bank holding company and its bank and nonbank subsidiaries not purchase,
in its sole discretion in a fiduciary capacity, any securities of an investment company advised by the
bank holding company. The Board now proposes to modify the interpretive rule to provide that a bank
holding company and its bank and nonbank subsidiaries may purchase in a fiduciary capacity,
securities of an investment company advised by the bank holding company if the purchase is
specifically authorized by the terms of the instrument creating the fiduciary relationship, by court
order, or by the law of the jurisdiction under which the trust is administered.
Comment is requested by January 30, 1995.
Printed on the following pages is the text of the proposal, as published in the Federal
Register. Comments thereon should be submitted by January 30, 1995, and may be sent to the
Board, as indicated in the notice, or to our Banking Applications Department.
W
il l ia m
J.
M
cD o n o u g h ,
President.
67654
Federal Register
Vol. 59, No. 250
Friday, December 30, 1994
3565), Legal Division, Board of
Governors of the Federal Reserve
System. For the hearing impaired only,
Telecommunication Device for the Deaf
(TDD), Dorothea Thompson (202/4523544).
SUPPLEMENTARY INFORMATION:
I. Background
In 1972, the Board permitted bank
12CFR Part 225
holding companies to serve as an
investment adviser to mutual funds and
[Regulation Y; Docket No. R-0868]
other registered investment companies.
See 12 CFR 225.25(b)(4). When the
Bank Holding Companies and Change
Board added this activity to Regulation
in Bank Control; Investment Adviser
Y, it also published an interpretive rule
Activities
that placed certain prudential and other
AGENCY: Board of Governors of the
limitations on the manner in which
Federal Reserve System.
bank holding companies could conduct
ACTION: Notice of proposed rulemaking.
the activity. 12 CFR 225.125.
Among the restrictions in the
SUMMARY: The Board seeks public
interpretive rule is a requirement that a
comment on a proposal to revise its
bank holding company and its bank and
interpretive rule regarding investment
nonbank subsidiaries should not
adviser activities of bank holding
purchase, in its sole discretion in a
companies to allow a bank holding
fiduciary capacity, any securities of an
company and its bank and nonbank
investment company advised by the
subsidiaries to purchase in their sole
bank holding company. 12 CFR
discretion in a fiduciary capacity,
225.125(g). The Board adopted the
securities of an investment company
restriction because of concern that a
advised by the holding company if this
bank holding company might use its
purchase is specifically authorized by
position as a fiduciary to support an
the terms of the instrument creating the investment company that the bank
fiduciary relationship, by court order, or holding company advised, to increase
by the law of the jurisdiction under
the asset size of the investment
which the trust is administered.
company or as a means of increasing
DATES: Comments must be received on
advisory fees.
A number of bank holding companies
or before January 30,1995.
have recently indicated that a mutual
ADDRESSES: Comments should refer to
fund advised by the bank holding
Docket No. R-0868, and may be mailed
to William W. Wiles, Secretary, Board of company is often the most cost-effective
method of providing investmeht advice
Governors of the Federal Reserve
to customers and is increasingly
System, 20th Street and Constitution
attractive to customers because a mutual
Avenue, N.W., Washington, DC 20551.
fund provides customers with a readily
Comments also may be delivered to
marketable and easily valued
Room B-2222 of the Eccles Building
investment product.1These bank
between 8:45 a.m. and 5:15 p.m.
weekdays, or to the guard station in the holding companies point out that a
number of statutory and regulatory
Eccles Building courtyard on 20th
developments have occurred since 1972
Street, N.W. (between Constitution
that address the concerns that originally
Avenue and C Street) at any time.
prompted the Board to adopt its
Comments may be inspected in Room
MP-500 of the Martin Building between prohibition on fiduciary purchases by a
bank holding company of shares of a
9:00 a.m. and 5:00 p.m. weekdays,
mutual fund advised by the bank
except as provided in 12 CFR 261.8 of
holding company. In light of these
the Board’s rules regarding availability
developments, several bank holding
of information.
companies have requested that the
FOR FURTHER INFORMATION CONTACT:
Scott G. Alvarez, Associate General
• See Letter, dated August 12,1994, to Chairman
Counsel (202/452-3583), Thomas M.
Greenspan from Edward L. Yingling, Executive
Corsi, Senior Attorney (202/452-3275),
Director Government Relations. American Bankers
Association.
or Timothy Byrne, Attorney (202/452FEDERAL RESERVE SYSTEM
Board modify its current interpretive
rule to permit bank holding companies
to purchase, on behalf of fiduciary
customers, shares of mutual funds
advised by the bank holding company.
Since the Board adopted its
investment advisory interpretive rule,
Congress enacted section 23B of the
Federal Reserve Act, which specifically
permits a bank or its subsidiary to
purchase securities, as a fiduciary, from
an affiliate if such purchases are
permitted by the instrument creating the
fiduciary relationship, by court order, or
by the law of the jurisdiction governing
the fiduciary relationship. In addition,
in an analogous area, the Board since
permitted fiduciary purchases of
securities that are underwritten by a
section 20 affiliate if the purchase was
specifically authorized under the
instrument creating the fiduciary
relationship, by court order, or by the
law of the jurisdiction under which the
trust is administered.•2
Both the Office of the Comptroller of
the Currency and the Federal Deposit
Insurance Corporation have recently
permitted the banks that they regulate to
purchase, in a fiduciary capacity,
securities of an investment company
advised by an affiliate of the bank if the
purchase is specifically authorized by
the terms of the instrument creating {he
fiduciary relationship, by court order, or
by local law.3 Moreover, many states
have amended their laws to allow banks
to engage in these types of transactions.4
The Board now proposes to modify its
investment advisory interpretive rule to
provide that a bank holding company
and its bank and nonbank subsidiaries
may purchase in their sole discretion in
a fiduciary capacity, securities of an
investment company advised by the
bank holding company if this purchase
2 Citicorp, J.P. Morgan &■Company Incorporated,
and Bankers Trust New York Corporation, 73
Federal Reserve Bulletin 473 (1987) (1987 Section
20 Order), affd sub nom. Securities Industry
Association v. Board of Governors of the Federal
Reserve System, 839 F.2d 47 (2d Cir. 1988), cert,
denied, 486 U.S. 1059 (1988).
3 See QCC Trust Interpretations No. 234
(September 21,1989); 12 CFR 9.12; 12 CFR 337.4(e).
See also Letter dated May 4,1994, from Frank
Maguire, Senior Deputy Comptroller for Corporate
Activities and Policy Analysis, OCC, to Michael E.
Bleier, General Counsel, Mellon Bank, N.A.
(regarding Mellon Bank’s acquisition of The Dreyfus
Corporation).
4 See Mich. Comp. Laws §487.485 (1992)
(amended in 1992); Md. Code Ann., Est. &Trusts
§ 15-106 (1993) (amended in 1991); Ind. Code Ann.
§28-1-12-3 (Burns 1993).
Federal Register / Vol. 59, No. 250 / Friday, December 30, 1994 / Proposed Rules
is specifically authorized by the terms of
the instrument creating the fiduciary
relationship, by court order, or'by the
law of the jurisdiction under which the
trust is administered. To assure that
fiduciary customers are aware of the
potential conflicts of interest that may
arise, the proposed change would
contain a requirement that the bank
holding company disclose, in writing at
the time that the fiduciary relationship
is created, to its fiduciary customer, that
it, or an affiliate, serves as investment
adviser to the investment company
whose shares are purchased in a
fiduciary capacity. These purchases
would also be governed by fiduciary
rinciples that require the purchase to
e made on market terms. The Board
seeks comment on the proposed
disclosure requirement and whether it is
adequate to assure that fiduciary
customers are aware of potential
conflicts of interest. In particular, the
Board seeks comment oft whether the
required written disclosure should be
given to a fiduciary customer
immediately prior to each initial
investment in an investment company
advised by the bank holding company.
II. Regulatory Flexibility Act Analysis
Pursuant to section 605(b) of the
Regulatory Flexibility Act (Pub. L. 95354, 5 U.S.C. 601 et seq.), the Board of
Governors of the Federal Reserve
System certifies that the proposed
regulation will not have a significant
economic impact on a substantial
number of small entities that would be
subject to the regulation. This revision
will not place additional burdens on
any bank holding company. It will
clarify the rules as they currently apply
to all bank holding companies.
List of Subjects in 12 CFR Part 225
Administrative practice and
procedure, Banks, banking, Federal
Reserve System, Holding companies,
Reporting and recordkeeping
requirements, Securities.
For the reasons set forth in the
preamble, and pursuant to the Board’s
authority under section 5(b) of the Bank
Holding Company Act of 1956, as
^mended (12 U.S.C. 1844(b)), the Board
proposes to amend 12 CFR part 225 as
set forth below:
PART 225— BANK HOLDING
COMPANIES AND CHANGE IN BANK
CONTROL (REGULATION Y)
1.
The authority citation for part 225
continues to read as follows:
Authority: 12 U.S.C. 1817(j)(13). 1818,
1831 i, 1831p-l, 1843(c)(8), 1844(b). 1972(1),
3106, 3108, 3907, 3909, 3310, and 33313351.
2.
Section 225.125 is amended by
revising paragraph (g) to read as follows:
§ 225.125
it
it
Investm ent adviser activities.
it
it
it
(g)
In view of the potential conflicts
of interests that may exist, a bank
holding company and its bank and
nonbank subsidiaries should not:
(1) Purchase for their own account
securities of any investment company
for which the bank holding company
acts as investment adviser;
(2) Purchase any such securities in a
fiduciary capacity (including as
managing agent) unless the purchase is
specifically authorized by the terms of
the instrument creating the fiduciary
relationship, by court order, or by the
law of the jurisdiction under which the
trust is administered;1
(3) Extend credit to any such
investment company; or
(4) Accept the securities of any such
investment company as collateral for a
loan which is for the purpose of
purchasing securities of the investment
company.
*
*
.
it
ft
it
By order of the Board of Governors of the
Federal Reserve System, December 22,1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-32053 Filed 12-29-94; 8:45 am)
Billing Code 6210-01-P
67655
@FedFRASER