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FED ERA L R ESERV E BANK O F NEW YORK C ircular No. 4 3 4 0 1 M ay 31, 1956 J [ Fiscal Agent of the United States Offering o f $ 1 ,6 0 0 ,0 0 0 ,0 0 0 of 91-Day Treasury B ills Dated June 7, 1956 Maturing September 6, 1956 To all Incorporated Banks and Trust Companies, and Others Concerned, in the Second Federal Reserve District: Following is the text of a notice published to d ay : F O R R E L E A S E , M O R N IN G N E W S P A P E R S , T hursday, May 31, 1956. TREA SU RY D E PA R T M E N T W ashington T he T reasury Departm ent, by this public notice, invites tenders for $1,600,000,000, or thereabouts, of 91-day T reasury bills, for cash and in exchange for T reasury bills m aturing June 7, 1956, in the am ount of $1,600,068,000, to be issued on a discount basis under competitive and noncom petitive bidding as hereinafter provided. T he bills of this series will be dated June 7, 1956, and will m ature Septem ber 6, 1956, when the face am ount will be payable without interest. T hey will be issued in bearer form only, and in denominations of $1,000, $5,000, $10,000, $100,000, $500,000 and $1,000,000 (m aturity value). T enders will be received a t Federal Reserve Banks and Branches up to the closing hour, one-thirty o’clock, p.m., E astern Daylight Saving time, Monday, June 4, 1956. Tenders will not be received at the T reasury Departm ent, W ashington. Each tender m ust be for an even m ultiple of $1,000, and in the case of competitive tenders the price offered m ust be expressed on the basis of 100, with not m ore than three decimals, e. g., 99.925. Fractions may not be used. I t is urged that tenders be m ade on the printed forms and forw arded in the special envelopes which will be supplied by Federal Reserve Banks or Branches on application therefor. O thers than banking institutions will not be perm itted to submit tenders except for their own account. T enders will be received without deposit from incorporated banks and tru st companies and from responsible and recognized dealers in invest m ent securities. T enders from others m ust be accompanied by paym ent of 2 percent of the face am ount of T reasury bills applied for, unless the tenders are accompanied by an express guaranty of paym ent by an incorporated bank or tru st company. Im m ediately after the closing hour, tenders will be opened a t the Federal Reserve Banks and Branches, following which public announcem ent will be made by the T reasury D epartm ent of the am ount and price range of accepted bids. Those subm itting tenders will be advised of the acceptance or rejection thereof. T he Secretary of the T reasury expressly reserves the right to accept or reject any or all tenders, in whole or in part, and his action in any such respect shall be final. Subject to these reservations, noncompetitive tenders for $200,000 or less w ithout stated price from any one bidder will be accepted in full a t the average price (in three decimals) of accepted competitive bids. Settlem ent for accepted tenders in accordance with the bids m ust be made or completed at the Federal Reserve Bank on June 7, 1956, in cash or other immediately available funds or in a like face am ount of T reasury bills m aturing June 7, 1956. Cash and exchange tenders will receive equal treatm ent. Cash adjustm ents will be made for differences between the par value of m aturing bills accepted in exchange and the issue price of the new bills. T he income derived from T reasury bills, w hether interest or gain from the sale or other disposition of the bills, does not have any exemption, as such, and loss from the sale or other disposition of T reasury bills does not have any special tre a t ment. as such, under the Internal Revenue Code of 1954. T he bills are subject to estate, inheritance, gift or other excise taxes, w hether Federal o r State, but are exem pt from all taxation now or hereafter imposed on the principal or interest thereof by any State, or any of the possessions of the U nited States, or by any local taxing authority. F or purposes of taxation the am ount of discount at which T reasury bills are originally sold by the U nited States is considered to be interest. Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954 the am ount of discount a t which bills issued hereunder are sold is not considered to accrue until such bills are sold, redeemed or otherw ise disposed of, and such bills are excluded from consideration as capital assets. Accordingly, the ow ner of T reasury bills (other than life insurance com panies) issued hereunder need include in his income tax return only the difference between the price paid for such bills, w hether on original issue or on subsequent purchase, and the am ount actually received either upon sale or redemption a t m aturity during the taxable year for which the return is made, as ordinary gain or loss. T reasury D epartm ent Circular No. 418, Revised, and this notice, prescribe the term s of the T reasury bills and govern the conditions of their issue. Copies of the circular may be obtained from any Federal Reserve Bank or Branch. This Bank will receive tenders up to 1 :30 p.m., Eastern Daylight Saving time, Monday, June 4, 1956, at the Securities Department of its Head Office and at its Buffalo Branch. Please use the form on the reverse side of this circular to submit a tender, and return it in an envelope marked “Tender for T reasury Bills.” Tenders may be submitted by telegraph, sub ject to w ritten confirm ation; they may not be submitted by telephone. Paym ent fo r the Treasury bills cannot be made by credit through the Treasury T a x and Loan Account. Settlem ent must be made in cash or other immediately available fu n d s or in maturing Treasury bills. A l l a n S p r o u l , President. R esu lts o f la st o fferin g o f T r ea su ry b ills ( 9 1 -d a y bills d a ted M ay 3 1 , 1956, m a tu rin g A u g u s t 3 0 , 1 9 5 6 ) Total applied for . . . $2,604,922,000 Total accepted ........ $1,600,097,000 (includes $211,855,000 entered on a noncompetitive basis and accepted in full a t the average price shown below) Average price . . . 99.350 Equivalent rate of discount approx. 2.573% per annum .. , , Range of accepted competitive bids: H igh ................ 99.352 Equivalent rate of discount approx. 2.564% per annum I-ow W'348 ^ approx. “ o ale2n 5797 e ^ annum ™ 2.579%° per (67 percent of the am ount bid for at the low price was accepted) Federal Reserve ------ District----Boston N ew Y ork ....... Philadelphia ....... Cleveland ......... Richmond ......... A tlanta Chicago St. Louis Minneapolis ....... San ^Francisco ..... T otal .............. Total Total Applied fo r .4 £ cePted $ 34,348,000 $ 20,833,000 1,976,954,000 1,155,145,000 33,111,000 11,506,000 67,815,000 65,332,000 11,769,000 8,569,000 28,209,000 25,659,000 272,914,000 193,701,000 12,300,000 11,355,000 9,505,000 9,405,000 94,382,000 ------------------$2,604,922,000 62,554,000 -----------------$1,600,097,000 ( over) 35 L IM P O R T A N T — I f y o u d esire to bid on a co m p e titiv e basis, fill in r a te p er 100 a n d m a tu r ity v a lu e in p aragrap h h ead ed " C o m p etitiv e Bid.** I f y o u d esire to b id on a n o n c o m p e titiv e basis, fill in o n ly th e m a tu r ity v a lu e in p a ra g ra p h h ead ed " N o n c o m p e titiv e B id .” D O N O T fill in b o th p a ragraphs on one fo r m . A separate ten d e r m u st be u sed fo r ea ch b id , e x c e p t th a t bank s su b m ittin g bids on a c o m p e titiv e basis f o r th e ir o w n an d th eir cu sto m ers’ a cc o u n ts m a y su b m it one ten d er fo r th e t o ta l a m o u n t b id a t ea ch p rice, p ro v id ed a lis t is a tta c h e d sh o w in g th e nam e o f each b id d er, th e a m o u n t b id fo r h is a c c o u n t, a n d m ethod o f p a y m en t. Form s fo r th is purpose w ill be fu rn ish ed u p o n req u est. N o .................................. TENDER FOR 91-D A Y TREASURY BILLS M a tu rin g S ep tem b er 6, 1956 D a te d J u n e 7, 1956 To F ed era l R eserv e B a n k of N ew Dated at ................................................. Y ork, Fiscal Agent of the United States. 1956 C O M PE T IT IV E B ID N O N C O M P E T IT IV E B ID Pursuant to the provisions of Treasury Department Circular No. 418, Revised, and to the provisions of the public notice on May 31, 1956, as issued by the Treasury Department, the P ursuant to the provisions of Treasury Departm ent Circular No. 418, Revised, and to the provisions of the public notice on May 31, 1956, as issued by the T reasury Department, the undersigned offers a noncompetitive tender undersigned o f f e r s .........................................* for a (R ate p er 100) total amount of $ .................................... (m aturity value) of the T reasury bills therein described, or fo r any less amount that may be awarded, settle ment therefor to be made at your Bank, on the date stated in the public notice, as indicated below : for a total amount of $ ............................................... (N o t to exceed $200,000) By surrender of m aturing T reasury bills (m aturity value) of the T reasury bills therein described, at the average price (in three decimals) of accepted competitive bids, settlement therefor to be made at your Bank, on the date stated in the public notice, as indicated below : □ By surrender of m aturing T reasury bills amounting to ................... $____________________ amounting to ................... $____________________ □ □ □ By cash or other immediately available funds By cash or other immediately available funds *Price must be expressed on the basis o f 100, with not more than three decimal places, fo r example, 99.925. The T reasury bills for which tender is hereby made are to be dated June 7, 1956, and are to m ature on September 6, 1956. T his tender will be inserted in special envelope marked “Tender fo r Treasury Bills.” N am e of Bidder ........................................................................... (P lease p rin t) By. (Official signature required) (T itle) Street Address (C ity, Tow n o r V illage, P . O . No., and S tate) I f this tender is subm itted by a bank for the account of a custom er, indicate the custom er’s nam e on line below: (N am e o f Custom er) (C ity, Tow n or V illage, P . O . N o., an d S tate) IM P O R T A N T IN S T R U C T IO N S : 1. N o tender for less than $1,000 will be considered, and each tender m ust be for an even multiple of $1,000 (m aturity value). 2. If the person making the tender is a corporation, the tender should be signed by an officer of the corpora tion authorized to m ake the tender, and the signing of the tender by an officer of the corporation will be construed as a representation by him that he has been so authorized. If the tender is made by a partnership, it should be signed by a m em ber of the firm, who should sign in the form “ ..........................................................................................., a copartnership, by ........................................................................................................................... . a m em ber of the firm.” 3. T enders will be received w ithout deposit from incorporated banks and tru st companies and from respon sible and recognized dealers in investm ent securities. Tenders from others m ust be accompanied by paym ent of 2 percent of the face am ount of T reasury bills applied for, unless the tenders are accompanied by an express guaranty of paym ent by an incorporated bank or tru st company. 4. If the language of this tender is changed in any respect, which, in the opinion of the Secretary of the T reasury, is material, the tender may be disregarded. P a y m e n t b y c r e d it th r o u g h T r e a su ry T a x a n d Loan A c c o u n t w ill n o t be p e rm itte d . T E N T B — 1353-a (OVEK) o J t V3 4 0 ADMINISTRATIVE INTERPRETATIONS OF REGUIATION F - SECTION 17 *** Connon T r u s t Funds *** B oard o f G overnors o f th e F e d e r a l R eserv e System A p r i l 1956 INTRODUCTION T h is b o o k le t c o n ta in s a l l r u l i n g s o f th e Board is s u e d i n r e f e r e n c e to s e c t i o n 17 o f th e Board* s R e g u la tio n F - Connon T r u s t F u n d s. The r u l i n g s have b een a r r a n g e d by s u b j e c t n a t t e r , an d each i s a n n o ta te d t o th e F e d e r a l R eserv e BULLETIN i n w hich i t was f i r s t p u b lis h e d . Supplem ents to t h i s b o o k le t w i l l b e i s s u e d f r o n tim e t o tim e a s n e c e s s i t a t e d by new a d m in is t r a tiv e i n t e r p r e t a t i o n s o f t h e R e g u la tio n . I t i s hoped t h a t p u b l i c a t i o n i n t h i s form o f th e B o a rd 's a d m in is t r a tiv e i n t e r p r e t a t i o n s o f th e p r o v is io n s o f s e c t i o n 1 7 , R e g u la tio n F , w i l l be fo u n d u s e f u l b y bank s u p e r v i s o r s an d ex a m in e rs, bank a u d i t o r s , t r u s t a d m i n i s t r a t o r s , an d o th e r s who have f r e q u e n t n eed t o r e f e r t o th e R e g u la tio n and r e l a t e d r u l i n g s c o n c e rn in g cannon t r u s t fu n d a d m i n i s t r a t i o n . CONTENTS O p e ra tio n a s In v e stm e n t T r u s t (tw o r u l i n g s ) .............................................. 1 P u b lic a tio n o f In fo rm a tio n ......................................................................................3 A d v e r tis in g (an d s o l i c i t a t i o n o f re v o c a b le t r u s t s ) ................................ 3 l i m i t a t i o n s on In v e stm e n ts by Two o r More T r u s ts (tw o r u l i n g s ) , . U L im i ta ti o n upon A g g reg ate In v e stm e n ts by S in g le T r u s t ....................... 5 I n t e r - t r u s t T ra n s f e r o f P a r t i c i p a t i o n s ............................................................5 V a lu a tio n o f U n ite d S t a t e s S av in g s Bonds.......................................................6 V a lu a tio n o f N onm arketable U n ite d S t a t e s Bonds..........................................6 T r a n s f e r t o Fund o f U n ite d S ta te s Bonds ....................................................... A c q u is itio n by Bank o f I n t e r e s t i n r t i r t i c l p a t i o n a - By A ssignm ent o f P a r t i c i p a t i o n ................................................................ 7 - By A ssignm ent o f Ihcome from P a r t i c i p a t i o n .....................................7 D i s t r i b u t i o n o f A ccrued Incom e..............................................................................8 F ees C harged T ru s ts H olding P a r t i c i p a t i o n s ...................................................9 7 COMMON TRUST FUNDS O PERATIO N AS INVESTMENT TRUST (September 1947 B U LLET IN , p. 1115) U nder the facts presented, it appears that there is no reason for the creation of the trust other than the desire o f the corporation to invest its funds in participations in the common trust fund. T h e trust merely is a mechanism designed to enable the cor poration to acquire such participations in lieu of other investments. T h e analogy w ith the purchase of investment trust certificates is apparent; and the use o f a common trust fund for this purpose am ounts in substance to the operation of the fund as an ordinary investm ent trust. In the circum stances, the Board is of the opinion th at the pro posed investment in participations in the common trust fund is clearly contrary to the above-quoted provisions o f Regulation F. T h e Board has received a request for a ruling w ith respect to w hether a national bank may invest certain funds in participations in a common trust fund operated by the bank. T h e facts as set forth in the bank’s letter are as follows: “W e have been approached by a local corpora tion which wishes to place $8000 in o u r common trust fund. They assure me that this money is not needed in their business at the present time and probably will not be needed until the next serious depression such as 1932. They insist that any trust fund w hich they set u p is a bona fide one to perm it them to have this small sum of money invested properly from the diversification point of view. “ It is tru e however that the settler company reserves the rig h t to revoke the agreem ent a t any tim e or to w ithdraw p art of the money placed in this tru st fund. T h e trust fund was established w ith the idea of having it placed in the common trust fund. * • * W e have been approached indirectly by other small corporations along the same lines and they all w ant to protect their reserve position as m uch as possible. T hey have indicated to me th at the savings banks will not take their money and they apparently are not satisfied to obtain the small income return avail able on the short term governm ent bonds that we first recommend to such people for invest m ent purposes.” Section 17(a) o f Regulation F provides in part as follows: O PERA T IO N OF COMMON TRUST FUNDS AS IN V ESTM EN T TRUSTS FO R O THER THAN S T R IC T L Y F ID U C IA R Y PURPOSES (Moy 1940 B U L L E T IN , pp. 393-94) Section 17 of the Board’s Regulation F, Trust Powers of National Banks, provides in part as follows: “ T he purpose of th is section is to perm it the use o f Common T r u s t F unds, as defined in sec tion 169 o f th e In te rn a l Revenue Code, fo r the investm ent o f funds held fo r tru e fiduciary pu r poses; and th e operation of such Common T ru st F u n d s as investm ent tru s ts fo r o th er than s tric tly fiduciary purposes is hereby prohibited. No ban k ad m inistering a Common T r u s t Fund shall issue any docum ent evidencing a direct or indirect in te re st in such Common T r u s t Fund in an y fo rm which p u rp o rts to be negotiable or assignable. T he tr u s t investm ent com m ittee of a bank o p e ra tin g a Common T r u s t F und shall n o t p erm it any funds of any tr u s t to be invested in a Common T r u s t F u n d if i t has reason to believe th a t such tr u s t was not created o r is n o t bein g used fo r bona fide fiduciary purposes.” “T h e purpose o f this section is to perm it the use of C om m on T ru st Funds, as defined in sec tion 169 of the Internal Revenue Code, for the in vestment of funds held for tru e fiduciary p u r poses; and the operation o f such Common T rust F unds as investm ent trusts for other than strictly fiduciary purposes is hereby prohibited. * * • T h e trust investm ent committee of a bank operat in g a Com m on T ru st F und shall not perm it any funds of any trust to be invested in a Common T ru st F u n d if it has reason to believe th at such tru st was not created o r is not being used for bona fide fiduciary purposes.” In amending Regulation F to permit the operation of Common Trust Funds, the Board intended th at a Common Trust Fund should be used merely to aid in the administration of trusts by a trust institution through the com mingled investment of funds of various trusts. While the operation of a Common Trust Fund might thus enable a trust institution to accept small trusts which it otherwise would be un willing to handle, it was contemplated that 1 2 trust guise or form should not be used to en able a trust institution to operate a Common Trust Fund as an investment trust attracting money seeking investment alone and to em bark upon what would be in effect the sale of participations in a Common Trust Fund to the public as investments. In dealing with this matter, it appeared desirable to use largely general language, omitting certain exact, arbitrary restrictions which might un duly hamper the use of Common Trust Funds for proper purposes, and, accordingly, the above-quoted provisions were incorporated in the regulation. By adopting this approach, the Board placed reliance upon the exercise of sound judgment and good faith on the part of trust institutions and their trust invest ment committees in carrying out the broad intent and purposes of such provisions. In determining whether a particular trust is created and used for "bona fide fiduciary pur poses”, it is necessary to consider, in the light of such intent and purposes, not only the terms of the trust instrument but also other facts and circumstances concerning the crea tion and use of the trust. The regulation for bids the investment of funds of a trust in a Common Trust Fund if the trust investment committee “has reason to believe” that the trust does not conform. In a recent ruling, the Board had occasion to consider the application of the above quoted provisions of the regulation to the facts of a particular case. In that instance, a national bank proposed to create a Fund as a part of a plan under which the bank would solicit the public (through paid solicitors or agents of the bank, newspaper advertise ments, circulars, etc.) to create uniform re vocable trusts designed specifically to partici pate in the Fund. With this in view, the bank had prepared an application and receipt form and a so-called “Participating Trust Agree ment” form. Under such trust agreement form, the creator of a trust was to deposit with the bank, as trustee, a stated principal sum in 120 equal monthly deposits and the bank was directed to invest such deposits, less authorized deductions, in participations in the Fund. The trust was to terminate upon revocation, death of the creator, notice deliv ered to the creator after continued default in making deposits, or the expiration of 10 years (i.e., the expiration of the period during which the deposits were to be made). In ad dition to an acceptance fee of $10, an annual fee of 6 per cent of the income of the trust, and a termination fee of 2 per cent of the then cash value of the trust assets, the bank was to receive the first year a fee of 2 per cent of the stated principal sum and each year thereafter a fee of $5. Among other things, the trust agreement form referred to the fact that “other trust estates have been or are being established under participating trust agree ments respectively, substantially similar to this instrument”. In the application form, the person desiring to create such a trust applied for the execution of a Participating Trust Agreement, such “ participation” to be in a stated principal sum. Such application form recited that there was paid therewith a stated sum, consisting of an acceptance fee of $10 and the first of 120 equal deposits, and also that the bank would be empowered to invest the net deposits of the applicant in a Common Trust Fund to be held and managed by the bank as Collective Trustee pursuant to a Collective Trust Plan of a speci fied date. The bank’s representative receiv ing the application was to give a receipt for the money but there was to be no binding agreement until the application was accepted by the bank and a Participating Trust Agree ment was executed by the bank and the appli cant. These facts indicate broadly the nature of the bank’s plan with respect to the creation and operation of the proposed Fund; and in view of such facts and other details of the plan, the Board expressed the opinion that the Fund could not be considered to be one oper ated in conformity with the Board’s Regula tion F and particularly those provisions of the regulation quoted above. 3 P U BLIC A TIO N OF INFORMATION ON COMMON TRUST FUNDS (F*bfoory 1955 B U L L E T IN , p. 142) The Board of G overnors has been asked to comment w ith respect to the limitations con tained in section 17 of Regulation F concerning the publication o f inform ation on common trust funds m aintained by a bank. Preparation of a pam phlet descriptive of the operations of a com m on trust fund which w ould contain information taken from the annual audit report of such fund, including inform ation concerning the earnings realized on the fund and the value of the assets thereof, was proposed. It was planned to make the pam phlet available to directors and stock holders of the bank, to present and prospective cus tomers, to selected attorneys, and to correspondent banks for the purpose of furnishing inform ation relative to the common trust fund and presumably to point out the desirability o f its use by prospective tru st customers. It is believed that the following discussion will clarify the principles and restrictions embodied in Regulation F w ith respect to the advertising of common trust funds. T h e annual reports of audits required to be made of common trust fund operations are for use solely in inform ing those persons to w hom a regular periodic accounting of the trusts participating in the fund ordinarily would be rendered. Material contained in these au d it reports, o r similar to that so contained, cannot, under existing provisions of Regulation F. be publicized in booklet form, or in any other form, w ith the intent to inform the gen eral public concerning the operations of a common trust fund. T h e word ''publish” , as used in the publicity prohibition contained in sections 17(a) and 1 7 (f)(3 ) of the Regulation, refers not only to publication in newspapers or periodicals, but to publication in any form designed to reach outside the group comprising those who ordinarily w ould receive periodic accountings related to adm inistra tion of a common trust fund. T h e unsolicited furnishing of inform ation to the general public, or to selected portions of the public, should be confined to acquainting the reader with the existence o f the com m on trust fund and the purpose and use of such fund. It is wholly appro priate, therefore, to publicize the fact that a com m on trust fund has been established o r is m ain tained by a bank, as well as to make know n its special and restricted purposes and uses. However, the common trust fu n d is not to be regarded as an investm ent “entity” to be popularized in and of itself. Publicity efforts of a trust institution oper ating a common trust fu n d should be directed tow ard dem onstrating the desirability of and need for corporate fiduciary services. Reference to the common trust fu n d in such publicity should be in cidental to the provision of such services and should be discussed only as one m edium possibly to facil itate the investm ent of funds held for true fiduciary purposes. Furtherm ore, trusts created and used for bona fide fiduciary purposes are to be distinguished from trusts created by individuals prim arily seeking the benefits to be derived from corporate fiduciary investm ent m anagement. W hile banks operating common trust funds are enjoined to use particular care in the preparation of advertising and publicity m aterial to see that it is in every way compatible w ith the spirit as well as w ith the letter of provisions of sections 17(a) and 1 7 (f)(3 ) of Regulation F, the Board has not adopted a practice of determ ining the propriety of any specific common trust fund advertising in a d vance of its use. ADVERTISING (March 1956 B U L L E T IN , p. 228) T h e following opinion has been expressed by the B oard o f G overnors relative to the adver tising o f com m on tru st funds and the solicitation th ro u g h such advertising of revocable trusts: T h e pertinent provisions of section 17 o f Regu lation F , authorizing the establishm ent and m ain tenance o f com m on tru st funds, provide in part as follows: The purpose of this section is to permit the use of Common Trust Funds . . . 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 pro hibited. . . . The trust investment committee of a bank operating a Common Trust Fund shall not per mit any funds of any trust to be invested in a Com mon Trust Fund if it has reason to believe that such trust was not created or is not being used for bona fide fiduciary purposes. A bank administering a Com mon Trust Fund shall not, in soliciting business or otherwise, publish or make representations which are inconsistent with this paragraph . . . T h e B oard has placed considerable reliance u pon the exercise o f sound judgm ent and good faith on the p art of trust institutions and their tru st investm ent com m ittees in carrying o u t the intent and purposes o f these provisions which are h necessarily expressed in broad, general terms. Particularly is this so with respect to th e phrase “bona fide fiduciary purposes" which cannot be simply o r categorically defined. D eterm ination of bona fide fiduciary purpose depends not only on the provisions o f a trust instrum ent but in con siderable measure upon other facts and circum stances relating to the creation and the use o f a particular trust. This, it seems to the Board, is particularly true in the field o f revocable living trusts where legal trust form is not, by itself, suf ficient evidence o f bona fide fiduciary purpose. A uthorization o f revocable trusts for common tru st fund participation should be preceded by particularly careful determ ination o f the bona fides of their use and purpose to avoid improper use of the com m on trust fund as a m edium a t tracting individuals prim arily seeking investment managem ent o f their funds. In recognition o f the usefulness o f common trust funds when soundly adm inistered within the fram ew ork o f their intended purposes, it would seem th at the tone o f com m on trust fund adver tising should in every m anner be appropriate to the collective uses and advantages o f such funds w ithout seeking to popularize any particular use o r advantage. H ow ever, advertising which fails to m ake clear th a t a com m on trust fund is solely a facility fo r the investm ent o f funds held for true fiduciary purposes o r advertising which overem phasizes the advantages o f such funds for invest m ent o r estate building purposes would be incon sistent with the applicable restrictions o n publicity o f such funds. Banks operating com m on trust funds are enjoined to use particular care in the preparation o r the approval o f advertising copy and to see that it is in every way com patible with the spirit as well as the letter o f the provisions o f section 1 7 (a ) o f Regulation F. LIM ITATIO N S UPON INVESTMENTS IN COMMON TRUST FUND B Y TWO OR MORE TRUSTS HAVING SAME REM AINDERM AN (July 1941 B U L L E T IN , p. 618) Section 17(c) (5) of Regulation F relating to trust powers of national banks provides in part as follows: “ No fu n d s o f any tru s t shall be invested in a pa rticipatio n in a Common T r u s t F und if such in vestm ent would re s u lt in such tr u s t having an in terest in th e Common T ru st F u n d in excess of 10 per cent o f th e value of the assets of th e Com mon T ru st F und, as determ ined by the tr u s t in vestm ent committee, or th e sum of $25,000, which ever is less a t th e tim e of investm ent. • • * In applying th e lim itations contained in th is p a ra g rap h , if two or more tru s ts a re created by the same settlo r or settlors and as much as one-half o f the income or principal or both of each tru s t is payable o r applicable to th e use of th e same person o r persons, such tr u s t shall be considered as one.” The Board recently considered an inquiry concerning the application of the above quoted provisions of the regulation in two situations which were described as follows: “ (1) A settlo r creates tw o tru s ts o f $25,000 each. In one tru s t th e life te n a n t is ‘A ’, and in the other the life te n a n t is ‘B \ Upon the death of each life tenant, th e principal in each tru s t is payable to ‘C’. “ (2) A settlor creates tw o tru s ts of $25,000 each. In one tr u s t th e life te n a n t is ‘A ’, upon whose death the principal is payable to ‘C’. The life te n a n t o f the o th er is ‘B’, upon whose death the principal is payable to ‘D \ or if ‘D’ be n o t living, to ‘C \” The Board concluded that in neither situa tion should the two trusts be considered as one for the purpose of such limitations upon investments in common trust funds. It was pointed out, however, that the ruling was based upon an understanding that there were no powers of revocation or other additional facts which might have a bearing on the matter. LIMITATIONS ON PA R TIC IP A TIO N (S«ptamb«r 1948 B U LLET IN , p. 1113) Section 1 7 (f)(5 ) of Regulation F, dealing with limitations upon investments in common trust funds, provides in part as follows: “N o funds of aoy trust shall be invested in a participation in a Common T ru st F und if such investm ent w ould result in such trust having invested in the aggregate in the C om mon T ru st F und an am ount in excess of 10 per cent o f the value of the assets of the C om mon T ru st F u n d at the tim e of investment, as determined by the trust investment committee, o r the sum of $50,000, whichever is less. • • • In applying the limitations contained in this paragraph, if tw o or more trusts are created by the same settlor or settlors and as much as one-half of the income or principal 5 or both of each trust is payable o r applicable to the use of the same person o r persons, such trusts shall be considered as one.” T h e Board o f G overnors has considered an in quiry w ith respect to the application o f the above quoted provisions o f the Regulation in the follow ing situation: ‘‘T w o trusts are created by the same settlor. T h e first trust is for her benefit for life, then for the benefit of the life of a second party w ith rem ainder over to a th ird party. T h e second trust is for the life benefit of the second party w ith rem ainder over to a th ird party. T h e beneficial interest m ight m erge for a time for the rem aining period o f the life o f the second party if he should survive the settlor, and then upon the second party’s death there would be an ultim ate m erger upon vesting of the principal of both trusts in the third party.” T h e Board pointed out that this situation was very sim ilar to the one considered in a ruling pub lished in the 1941 Federal Reserve B u l l e t i n at page 618, the only difference being in the possible m erger o f the beneficial interests for a tim e in one of the tw o life tenants before ultim ate merger upon vesting o f the principal of both trusts in the re m ainderm an. T h e Board concluded that this situa tion cam e w ithin the scope of the 1941 ruling and th at investments in a common trust fund m ight be made w ithout considering the tw o trusts as one for the purpose of applying the limitations of sec tion 1 7 (c )(5 ) quoted above. T h e Board also stated th at the m erger o f the beneficial interests through vesting thereof in one person a t some future date w ould not necessitate a t such tim e w ithdraw al o r reduction of the par ticipation by either trust in the common trust fund, as section 1 7 (f)(5 ) is intended to deal only with the act o f investing in participations in common tru st funds and does not require the w ithdraw al or reduction of participations once legally acquired. LIMITATION UPON AGGREGATE INVESTMENTS BY SINGLE TRUST (Nov«mb«r 1953 B U L L E T IN , p. 1152) T h e Board has been requested to interpret the following sentence of section 1 7 (f)(5 ) of its R egu lation F: “N o funds of any tru st shall be invested in a participation in a C om m on T ru st F u n d if such investment w ould result in such trust having in vested in the aggregate in the Common T rust Fund an am ount in excess of 10 per cent of the value of the assets of the Com m on T ru st F und at the tim e of investment, as determ ined by the trust investm ent committee, or the sum of $100,000 whichever is less.” T h e specific question was whether (1 ) the actual am ount previously invested in participations in the common trust fund or ( 2 ) the present m arket value o f such participations, should determ ine the am ount of additional investments, if any, which may be m ade in such participations. I t is the Board’s view that under this language of the regulation the additional am ount which a trust may invest in a com m on trust fund is de term ined by the dollar am ount which the trust ac tually invested in the participations which it now holds, rather than by the present m arket value of such participations. F or example, if a total of $75,000 was paid for units purchased for the trust on previous occasions, the am ount which could now be invested w ould be $25,000 (assum ing that $100,000 does not exceed 10 per cent of the present value of the assets of the common trust fu n d ), regardless of the present m arket value of the units already held by the trust. T his interpretation supersedes the one published in the 1938 Federal Reserve B u l l e t i n at page 762 which w as to the opposite effect, bu t was based on a provision o f the regulation which was revised in 1945. INTER-TRUST TRANSFER OF PARTICIPATIONS (August 1954 B U L L E T IN , pp. 834-35) T h e Board of G overnors has been presented with two questions w ith respect to the inter-trust trans fer of participations in a com m on trust fund. In the first case, a donor wishes to combine two trusts, both revocable and created by him at different times, all assets of each having been in vested in the common trust fund. T h e trustee wishes to consumm ate this transaction by transfer of the units of participation in the com m on trust fund rather than by liquidation and reinvestment o f such units. 6 In the second case, the beneficiary of a term inat ing testamentary trust, invested in the common trust fund, wishes to create a living trust w ith his distributable share. In carrying out this transaction, the trustee wishes to transfer units o f participation rather than liquidate them and reinvest the proceeds in the living trust. T he only provision of Regulation F pertaining to this m atter is the second sentence of the third paragraph of section 17(a), which provides that "N o bank adm inistering a Common T ru st Fund shall issue any docum ent evidencing a direct o r in direct interest in such Common T ru st F und in any form which purports to be negotiable o r assign able.” T h e purpose of this provision was to minimize the possibility of common trust funds being used as investment trusts, the shares of which ordinarily are negotiable or assignable, and to preclude any evidence of participation in such funds reaching the hands o f the general public. It was not the intent o f this provision to prohibit, in all instances, inter-trust transfers of participations in a common trust fund. T h e Board is of the opinion, therefore, that, in these two cases, the transfer of units in a common trust fund does not violate the spirit and purpose of the regulation and is not prohibited. However, it should be borne in m ind that any trust which acquires, by inter trust transfer, an investment in a common trust fund m ust be one created and used for bona fide fiduciary purposes. T h e possible tax aspects o f the cases submitted have not been explored, but it is assumed that a bank will take appropriate steps to satisfy itself that transactions o f this kind w ould not be used to accomplish an im proper avoidance of tax liability. V A LU A T IO N OF UN ITED ST A T E S SAVINGS BONDS (April 1948 B U L L E T IN , p. 397) T h e Board has received inquiries concerning the question w hether, in the periodic valuation o f as sets in a Com m on T ru st F u n d operated in accord ance w ith section 1 7 (f) of the Board's Regulation F , it is permissible to value Series G U nited States Savings Bonds at p a r value rather than redemption value. In a statement published in the Federal Reserve B ulletin for January 1942 at page 7, the Board expressed the opinion that redemption value was the most appropriate basis for valuing such bonds. As pointed out at that time, however, the only provision o f the Board’s Regulation F which is pertinent to this m atter is the requirem ent, in sec tion 1 7 (f)(1 ), that the w ritten plan for the opera tion of a Common T ru st F u n d shall include, among other things, provisions relating to the basis and method of valuing the assets in the F und, and the Regulation does not undertake to prescribe any precise basis o r method of valuation. Accordingly, Regulation F does not prohibit the valuing of Series G U nited States Savings Bonds at par value in the periodic valuation of assets in a Common T ru st F und, and such action is permissible if it is consistent w ith the term s of the w ritten plan governing the Common T ru st Fund and w ith ap plicable State law. V A LU A T IO N OF N O N M AR K ETA BLE UN ITED S T A T E S BONDS (April 1951 B U LLET IN , p. 392) T h e recent Treasury D epartm ent announcement regarding a new investment series of 2-54% Treas ury Bonds which will be offered M arch 26, 1951, in exchange for outstanding 2-14% Treasury Bonds o f June 15 and December 15, 1967-72, has given cause to inquiries concerning the question w hether, in the periodic valuation of assets in a Common Trust F und operated in accordance w ith the pro visions of Section 17 ( f ) of the Board's Regulation F, it w ould be permissible to value the new nonmarketable 2 - / % Treasury Bonds at p ar value or w hether such bonds should be valued a t the market value of the 5 year 1-l/ i % Treasury Notes for which they w ill be exchangeable. In a statem ent published in the Federal Reserve B u l l e t i n for A pril 1948 at page 397, regarding a sim ilar inquiry relating to the valuation of Series G U nited States Savings Bonds, reference was made to the fact that Regulation F does not undertake to prescribe any precise basis o r method of valuation and that the only provision of the regulation which is pertinent to this m atter is the requirem ent, con tained in Section 17 ( f ) (1 ) , that the w ritten Plan for the operation of a C om m on T ru st F u n d shall include, am ong other things, provisions relating to the basis and m ethod of valuing the assets in the Fund. Accordingly, Regulation F does not prohibit the valuing of Series G U nited States Savings Bonds, 7 o r other nonm arketable direct obligations o f the U nited States, at par value in the periodic valu ation o f assets in a Common T ru st F u n d , and such action is permissible if it is consistent w ith the terms of the w ritten Plan governing the Common T ru st F u n d and w ith applicable State Law. T R A N SF E R TO FUND OF U N IT ED S T A T E S BONDS (May 1951 B U L L E T IN , p. 510) T h e Treasury D epartm ent has issued a ruling to the effect that the D epartm ent does not object to the transfer at par value o f the nonm arketable 2% per cent Treasury bonds from individual trusts to a common trust fund. A similar ruling was contained in Public D ebt Bulletin N o. 21 of March 6, 1945, w ith respect to the transfer of Series F or G U nited States savings bonds. A lthough it is provided in the second paragraph of section 17(a) o f Regulation F that the term “common tru st fu n d ” means a fund m aintained by a national bank exclusively for the collective invest m ent and reinvestment of moneys contributed thereto by the bank in its capacity as trustee, ex ecutor, adm inistrator, o r guardian, the Board will not object to the direct transfer a t par value of U nited States savings bonds o r the recently issued 2% per cent nonm arketable Treasury bonds from individual trust estates to a common trust fund in exchange for participations therein. A CQ U ISITIO N OF IN T ER EST IN PA R TIC IP A TIO N S (August 1947 B U L L E T IN , pp. 980-81) T h e Board was recently advised by a bank that it occasionally makes loans to the trustors o f re vocable living trusts secured by assignments of their interests in the trusts. T h e bank inquired w hether, when such a loan is made to the trustor o f a trust w hich holds participations in the com m on trust fu n d operated by the bank, the bank acquires an interest in such participations w ithin the m eaning of the following provisions o f section 17(a) of Regulation F : “ (2 ) A bank adm inistering a Common T ru st F u n d shall not invest any o f its own funds in such Com m on T ru st F u n d and if a bank, because o f a creditor relationship o r any other reason, acquires any interest in a partici pation in a C om m on T ru st F u n d u n d e r its adm inistration the participation shall be w ith draw n on th e first date on which such w ith draw al can be effected in accordance w ith the provisions of this section;” T h e Board is of the opinion that a loan such as that described m ay cause the bank to have an intei est in participations in the common trust fund, w ithin the m eaning of Regulation F, even though there has been no default on the loan. T h e Board has heretofore expressed the opinion that a plan for the operation of a common trust fu n d which contained the following provision is not in conflict w ith Regulation F: "T h e T ru st Company shall not be deemed to have acquired an interest in a participation in the com m on fund by reason of an advance to the trust holding such participation (1 ) if the T ru st Com pany is not entitled to reimburse m ent out of the principal of the participating trust, o r (2 ) if the advance is adequately se cured by assets of the participating trust other than the participation in the common fund.” T h e Board believes that the same principles a p ply to loans o f th e character described above, and that this is as liberal an interpretation of the Regu lation as can be justified. U nder the facts pre sented, it appears that the bank could resort to the principal o f the participating trusts to collect the loans. Accordingly, in m aking such a loan, the bank acquires a n interest in participations in the com m on trust fund, w ithin the m eaning of the Regulation, unless the loan is adequately secured by assets other than such participations. ASSIG NM ENT OF INCOME T O BANK (March 1956 B U L L E T IN , pp. 228-29) T h e following opinion has been expressed by the B oard o f G overnors with respect to the assign m ent o f a beneficiary’s income from a partici pation in a com m on trust fund as collateral secu rity fo r loans m ade to such beneficiary by the b ank's com m ercial d e p artm e n t: Regulation F provides th a t if a bank, because o f a cred ito r relationship o r any o th er reason, acquires any interest in a participation in a com m on tru st fund under its adm inistration, the p a r ticipation shall be w ithdraw n on the first date on which such w ithdraw al can be effected. T he pu r pose o f this provision obviously is to preclude or 8 minimize the developm ent o f conflicts o f interest in the adm inistration o f com m on trust funds. T he answ er to this question therefore depends upon w hether the bank, because o f the loan by its C om m ercial D epartm ent to the income bene ficiary, w ould acquire an “ interest” in a participa tion in the com m on trust fund. In the ruling o f the Board published in the 1947 Federal Reserve B u l l e t i n 980, the Board took the position th at a loan was im proper in view o f the above-m entioned provision o f Regu lation F, where it appeared th a t the bank was entitled to resort to the “principal” o f the p a r ticipating trust in o rd er to collect the loan. T hat case did not involve the assignment o f the bene ficiary's income from a participation in the com m on trust fund. In the opinion o f the Board, however, no valid distinction can be m ade between an assignment o f the principal and an assignment o f the income, having in mind the purpose o f the provision o f the regulation in question. I f the bank holds collateral in the form o f a n assign m ent of the incom e, its capacity as fiduciary would be com plicated by th at o f creditor, and decisions o f the bank in its m anagem ent o f the fund might be subject to the accusation, even though un justified, o f being m otivated by creditor's rights rath er th a n by a fiduciary’s duty. In the circum stances, it is the B oard's opinion th a t the acceptance o f an assignm ent o f a bene ficiary's incom e in a participation in a com m on tru st fund as collateral for a loan by the com m ercial dep artm en t o f a bank w ould w eaken the fiduciary relationship and w ould result in the bank having an “interest” in the participation in the com m on tru st fund which would bring the loan w ithin the intent and purpose o f the prohibition o f section 1 7 ( a ) ( 2 ) o f Regulation F. The B oard is also o f the opinion th at the use o f an assignment w hich expressly states th at un der no circum stances would the assignee have an interest in the com m on trust fund by virtue o f the assignment, and th a t the assignment w ould be effective only as to income after it actually had been received into the participating trust account, would not rem ove the b ank's interest in a p a r ticipation in the com m on trust fund. DISTRIBUTION OF ACCRUED INCOME (July 1949 B U L L E T IN , pp. 797-98) T h e Board has recendy considered the question w hether a bank operating a common trust fund m ay m ake advances to the fund for use in dis tributing accrued interest and declared dividends receivable on investments of the fund prior to the receipt of such income where such advances are made from a “general trust account” consisting of commingled uninvested funds of all trusts adm inis tered by the bank. T he Board has previously expressed the view that the use of uninvested cash in a com m on trust fund to distribute accrued interest and dividends re ceivable on investments of the fund prior to receipt is not inconsistent w ith the Board’s Regulation F, and has stated that it w ould not object if uninvested cash in a com m on trust fund w ere so used in reason able amounts. T h e situation is different, however, w here the bank operating a common trust fund makes ad vances to the fund for this purpose. Subject to an exception which is not pertinent here, subdivision num bered (3 ) of the fourth paragraph of section 17(a) of Regulation F provides as follows: (3 ) A bank adm inistering a C om m on T rust Fund shall not have any interest in the assets held in such Common T ru st F und, other than in its capacity as fiduciary, • • •. W here a bank operating a common trust fund advances its ow n tunds to the common trust fund in order to distribute accrued but uncollected in come of the fund, the bank relies upon the assets of the fund for reim bursem ent of its advances; and, in the Board's opinion, the bank acquires an interest in assets o f the common trust fund which is pro hibited by the above-quoted provision of Regu lation F. W here a bank advances uninvested trust funds held in a “general trust account” of the kind re ferred to above, it is the Board’s opinion that, in view of the bank’s liability to the trusts whose funds are advanced, the bank acquires an interest in assets o t the common trust fund which does not differ, in substance, from the interest which would be acquired by advances of its ow n funds, and that, in any event, this practice is not permissible because it violates section 11(f) of Regulation F which reads as follows: ( r ) Dealings between trust accounts— A national bank acting as fiduciary shall not m ake any ad vance to any trust from the funds belonging to any other trust, except w hen the m aking of such advances to a designated trust is specifically authorized by the trust instrum ent covering the trust from which such advances are m ade FEES CHARGED TRUSTS HOLDING PARTICIPATIONS (Jun« 1950 B U LLET IN , p. 678) T h e Board has considered an inquiry by a na tional bank relating to the fees which the bank may charge for the adm inistration of trusts which hold participations in a common trust fund operated by the bank. It appears th a t the bank has a schedule of trust fees based on principal and th at a higher rate is charged for a trust’s investments in real estate loans than for its investments in other personal property. Since there is this difference in rates when the funds of a tru st are invested separately, the bank inquired whether, upon the investment o f funds o f a trust in a participation in the bank's common trust fund which holds some real estate loans, the fee charged for the adm inistration of the participating trust may be based in p art upon the rate for real estate loan investments. F o r example, if 15 per cent o f the assets of the com m on trust fund consist of real estate loans, can the bank charge the real estate loan rate on 15 per cent o f a trust’s participation in the common trust fund? T h e bank’s inquiry was prom pted by the follow ing provision of section 17 (c)(8 ) of Regulation F: “A national bank • • • shall not • • • re ceive, either from the Common T ru st F u n d or from any trusts the funds o f which are invested in participations therein, any additional fees, com missions, o r compensations o f any kind by reason of such participation.” In the Board’s opinion, this provision o f Regula tion F does not prohibit the bank from basing its fee in part on the real estate loan rate as suggested above. It is the Board’s view that the bank would not be receiving any additional fee by reason of the tru st’s participation in the common trust fund if it received no greater fee than w ould be charged if the funds of the trust were separately invested in the same classes o f investments as are held by the com m on tru st fund. T h e Board has not undertaken to rule on any aspect of this m atter other than the application of the above-quoted provision of Regulation F. T h e fees which a national bank may charge for the a d m inistration o f trusts depend, o f course, on the farts of particular cases, including the term s o f the trust instrum ents, court orders, and State laws; and, in this connection, consideration should be given to the provisions of section 14(a) of Regulation F dealing generally w ith trust fees of national banks.
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