[Federal Register Volume 59, Number 250 (Friday, December 30, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-32053]


[[Page Unknown]]

[Federal Register: December 30, 1994]


                                                   VOL. 59, NO. 250

                                          Friday, December 30, 1994

FEDERAL RESERVE SYSTEM

12 CFR Part 225

[Regulation Y; Docket No. R-0868]

 

Bank Holding Companies and Change in Bank Control; Investment 
Adviser Activities

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: The Board seeks public comment on a proposal to revise its 
interpretive rule regarding investment adviser activities of bank 
holding companies to allow a bank holding company and its bank and 
nonbank subsidiaries to purchase in their sole discretion in a 
fiduciary capacity, securities of an investment company advised by the 
holding company if this 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.

DATES: Comments must be received on or before January 30, 1995.

ADDRESSES: Comments should refer to Docket No. R-0868, and may be 
mailed to William W. Wiles, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, N.W., 
Washington, DC 20551. Comments also may be delivered to Room B-2222 of 
the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, or to the 
guard station in the Eccles Building courtyard on 20th Street, N.W. 
(between Constitution Avenue and C Street) at any time. Comments may be 
inspected in Room MP-500 of the Martin Building between 9:00 a.m. and 
5:00 p.m. weekdays, except as provided in 12 CFR 261.8 of the Board's 
rules regarding availability of information.

FOR FURTHER INFORMATION CONTACT: Scott G. Alvarez, Associate General 
Counsel (202/452-3583), Thomas M. Corsi, Senior Attorney (202/452-
3275), or Timothy Byrne, Attorney (202/452-3565), Legal Division, Board 
of Governors of the Federal Reserve System. For the hearing impaired 
only, Telecommunication Device for the Deaf (TDD), Dorothea Thompson 
(202/452-3544).

SUPPLEMENTARY INFORMATION:

I. Background

    In 1972, the Board permitted bank holding companies to serve as an 
investment adviser to mutual funds and other registered investment 
companies. See 12 CFR 225.25(b)(4). When the Board added this activity 
to Regulation Y, it also published an interpretive rule that placed 
certain prudential and other limitations on the manner in which bank 
holding companies could conduct the activity. 12 CFR 225.125.
    Among the restrictions in the interpretive rule is a requirement 
that a bank holding company and its bank and nonbank subsidiaries 
should not purchase, in its sole discretion in a fiduciary capacity, 
any securities of an investment company advised by the bank holding 
company. 12 CFR 225.125(g). The Board adopted the restriction because 
of concern that a bank holding company might use its position as a 
fiduciary to support an investment company that the bank holding 
company advised, to increase the asset size of the investment company 
or as a means of increasing advisory fees.
    A number of bank holding companies have recently indicated that a 
mutual fund advised by the bank holding company is often the most cost-
effective method of providing investment advice to customers and is 
increasingly attractive to customers because a mutual fund provides 
customers with a readily marketable and easily valued investment 
product.1 These bank holding companies point out that a number of 
statutory and regulatory developments have occurred since 1972 that 
address the concerns that originally prompted the Board to adopt its 
prohibition on fiduciary purchases by a bank holding company of shares 
of a mutual fund advised by the bank holding company. In light of these 
developments, several bank holding companies have requested that the 
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.
---------------------------------------------------------------------------

    \1\See Letter, dated August 12, 1994, to Chairman Greenspan from 
Edward L. Yingling, Executive Director Government Relations, 
American Bankers Association.
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \2\Citicorp, J.P. Morgan & Company Incorporated, and Bankers 
Trust New York Corporation, 73 Federal Reserve Bulletin 473 (1987) 
(1987 Section 20 Order), aff'd 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).
---------------------------------------------------------------------------

    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 the 
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\
---------------------------------------------------------------------------

    \3\See OCC 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 Sec. 487.485 (1992) (amended in 1992); 
Md. Code Ann., Est. & Trusts Sec. 15-106 (1993) (amended in 1991); 
Ind. Code Ann. Sec. 28-1-12-3 (Burns 1993).
---------------------------------------------------------------------------

    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 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 
principles that require the purchase to be 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 
on 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. 95-354, 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 amended (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, 1831i, 1831p-1, 
1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3907, 3909, 3310, and 
3331-3351.

    2. Section 225.125 is amended by revising paragraph (g) to read as 
follows:


Sec. 225.125  Investment adviser activities.

* * * * *
    (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\
---------------------------------------------------------------------------

    \1\A bank holding company or its subsidiary bank or nonbank must 
inform a fiduciary customer in writing at the time that the 
fiduciary relationship is created, that the bank holding company or 
its subsidiary serves as investment adviser to the investment 
company whose shares are purchased in a fiduciary capacity.
---------------------------------------------------------------------------

    (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.
* * * * *
    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