ABA Trust Letter
February 2011 Issue No. 543
Inside
2 EB Trust Focus:
• “Fiduciary” Definition Rulemaking
• EBSA Web Chat
on Regulatory
Agenda
3 Special Feature:
Collective Investment Funds:
Regulatory Implications of “Prudent
Delegation” by
William P. Wade
10Swap Execution
Facilities Rules and
Practices Proposed
14Group Trusts, IRS
Guidance
15Volcker Rule Conformance Period,
ABA Comments
16FSOC Volcker Rule
Study and Recommendations
18Tax Return Preparer
Registration, IRS
Guidance
A Regulatory & Legislative Advisory for Trust Professionals
Municipal Advisor Registration Proposal
Would Encompass Banks
T
he Securities and Exchange Commission (SEC) proposed a rule on January
6, 2011 (76 Federal Register 824) to implement a Dodd-Frank Wall Street Reform and
Consumer Protection Act (DFA) provision
requiring “municipal advisors” to register
with the SEC.
Section 975 of the legislation amended
Section 15B of the Securities Exchange
Act of 1934 to enlarge the scope of federal
and self-regulatory oversight of municipal
advisors. The statutory provision became
effective on October 1, 2010. Pending
promulgation of a final implementing rule,
the SEC enabled municipal advisors to temporarily satisfy the registration requirement
under an interim final temporary rule and
registration form. Rule 15Ba2-6T and Form
MA-T will expire on December 31, 2011.
The proposed rule would establish a
permanent registration regime for municipal advisors and impose on them certain
recordkeeping requirements. Comments
on the proposal are due on or before February 22, 2011, and ABA intends to submit
a comment letter. This article explains the
proposal.
Municipal Advisors
The DFA defines “municipal advisor” as
any person that provides advice to a “municipal entity” with respect to “municipal
(continued on page 12)
MMF Stability Options Critiqued
H
aving weighed the options identified
by the President’s Working Group on
Financial Markets (PWG) in its report
on mitigating systemic risk and reducing
the susceptibility of money market funds
(MMFs) to runs, ABA conveyed its recommendations to the Securities and Exchange
Commission (SEC) in a comment letter
dated January 10, 2011.
As an initial matter, ABA made clear
that it strongly opposes any policy change
that would require MMFs to adopt floating
net asset values (NAVs) instead of stable
NAVs, or that would restrict investments in
stable NAV funds to retail investors only.
Trust departments invest in stable NAV
funds on behalf of their institutional and
personal trust clients and for important
transactional purposes as fiduciaries and
service providers.
Because the options identified in the
PWG report are at the conceptual stage,
ABA’s comment letter focuses primarily on
arguing for the continued availability of
stable NAV funds and against establishing a
program of federal government support for
MMFs. ABA expects to offer more extensive
and specific comments once more detailed
proposals are offered.
Breaking the Buck
The PWG report on the stability of
MMFs was prepared at the behest of the
Treasury Department following the extraordinary events of September 2008, when the
Reserve Primary Fund broke the buck after
(continued on page 19)
American Bankers Association
EB TRUST FOCUS
“Fiduciary”
Definition Rulemaking Adjusted
The Employee Benefits Security
Administration (EBSA) published a
notice of hearing and extension of
the comment period on its proposed
definition of “fiduciary” in connection with providing investment advice
to employee benefit plans. Comments
were due by February 3, 2011, and a
public hearing will be held on March
1 and, if necessary, March 2.
EBSA is contemplating a broader
definition of “fiduciary” that would
encompass those who advise a plan,
the plan’s fiduciaries, or the plan’s
participants. For example, an advisory firm hired by a bank trustee to
provide expert advice on plan investments would assume fiduciary duties
under the proposed definition.
Investment advisers who fall under the definition would have to observe fiduciary standards of conduct
under the Employee Retirement
Income Security Act (ERISA) and
would be prohibited from engaging
in conflicts of interest, self-dealing,
and other prohibited acts.
By providing extra time for comments and holding a public hearing, EBSA appears to recognize the
significance of the proposed rule
for plans, participants, beneficiaries,
and service providers. The notice
was published on January 12, 2011
(76 Federal Register 2142) and can be
found at http://edocket.access.gpo.
gov/2011/pdf/2011-483.pdf
Previous article in ABA Trust Letter
“Bank Trust Departments Gauge
Impact of Broader Definition of
“Fiduciary,” January 2011, page 1.
2 • February 2011
EBSA Web Chat
Reveals Regulatory
Plans
As another means of communicating with the employee benefit
plan community, Assistant Secretary
Phyllis Borzi and her staff held a
live, hour-long web chat on January
4, 2011, to discuss EBSA’s upcoming regulatory agenda. The web
chat was interactive and participants
could submit comments and questions and have them answered.
Following are a few highlights:
• “Fiduciary” Definition. The EBSA
proposal to clarify the circumstances
under which a person will be considered a “fiduciary” when providing investment advice to employee
benefit plans and their participants
and beneficiaries “is intended to assure retirement security for workers
in all jobs, regardless of income level,
by ensuring that financial advisers
and similar persons are required
to meet ERISA’s strict standards of
fiduciary responsibility,” Borzi said.
The proposal would change a rule
that “we believe may inappropriately
limit the types of investment advice
relationships that give rise to fiduciary
duties,” she added.
• Service Provider Compensation
Disclosure. EBSA hopes to finalize
the interim final rule on Section
408(b)(2) by April 2011. It was not
clear whether a delayed effective
date would be provided. The rule,
which will become effective on July
16, 2011, requires pension plan service providers to disclose the direct
and indirect compensation they
receive for plan services.
• 401(k) Plan Disclosures. EBSA
expects to issue a request for information regarding electronic delivery
of required 401(k) plan disclosures
under ERISA sometime during the
next six to eight weeks. The EBSA
will evaluate whether the current
regulatory standards for electronic
distribution of required plan disclosures should be updated to harmonize with, among other things, recent
guidance from the Securities and
Exchange Commission on the use
of electronic channels for delivering
proxy materials to shareholders.
• Investment Advice Arrangements. A final regulation on investment advice arrangements for participant-directed individual account
plans is expected to be issued by May
2011. The rule was re-proposed on
March 2, 2010, and would implement a new prohibited transaction
exemption created by the Pension
Protection Act of 2006. Under the
rule, an “eligible investment advice
arrangement” is one that uses feeleveling or computer modeling to
determine what advice to give participants and beneficiaries.
• Target Date Fund Disclosures.
EBSA has no plan at this point to
develop a model format for the
proposed disclosures for target date
funds. The comment period on the
TDF transparency rule closed on
January 14, 2011.
Those who were unable to participate can replay the web chat by
going to: http://www.dol.gov/regulations/chat-ebsa-201012.htm n
Previous articles in ABA Trust Letter
“EBSA Proposes Target Date
Funds Transparency Rule,” January
2011, page 11.
“Plan Service Provider Fee Disclosure Interim Final Rule,” October
2010, page 1.
“EBSA Re-Proposes Plan Investment Advice Rules,” April 2010,
page 9.
ABA TRUST LETTER
American Bankers Association
Collective Investment Funds:
Regulatory Implications of “Prudent Delegation”
by William P. Wade*
R
egulation 9 (12 C.F.R. Part 9) of
the Office of the Comptroller
of the Currency (OCC) requires a
bank maintaining a collective investment fund (CIF) to have “exclusive
management” of the CIF. However,
Regulation 9 also permits the bank
to delegate responsibilities as a
“prudent person” might do.1 A bank
considering a delegation of CIF
investment responsibilities should
consider two important questions:
First, what are the expectations
of the OCC and other bank regulators in regard to a “prudent delegation” of CIF investment responsibilities to an investment adviser?2
Second, what are the regulatory
implications of a “prudent delegation” of CIF investment responsibilities under the Employee Retirement Income Security Act of 1974
(ERISA)? The Internal Revenue
Code of 1986 (Code)? The federal
securities laws?
The answers require a review
of the origins and purposes of the
“exclusive management” and “prudent delegation” requirements under
banking regulations, and consideration of how those requirements
apply — or should apply — in the
context of other applicable regulatory
schemes. Not surprisingly, the U.S.
Department of Labor (DOL), the Internal Revenue Service (IRS), and the
Securities and Exchange Commission
(SEC) have different perspectives on
these requirements. However, certain
fundamental principles suggest common ground for reconciling relevant
regulatory requirements.
© Copyright William P. Wade 2010. All rights
reserved.
ABA TRUST LETTER
Exclusive Management
Regulation F
The “exclusive management”
requirement originated with “Regulation F,” promulgated by the Federal Reserve Board (FRB) in 1937 to
govern the management and operation of common trust funds. Regulation F provided, in pertinent part,
that a bank must have the “exclusive
management” of a common trust
fund.3 This was consistent with trust
principles prevailing at the time,
which generally prohibited a trustee
from delegating functions the trustee
reasonably could be expected to
perform itself.4
Accordingly, the FRB took a strict
view of the “exclusive management”
requirement, generally interpreting
it to forbid delegation of common
trust fund investment management
functions. In a ruling issued in 1959,
for example, the FRB concluded
that the investment of common trust
fund assets in shares of an “investment trust” (i.e., mutual fund) would
involve delegation of investment
management “which would be both
inconsistent with the stated purposes
and uses of such funds and in violation of the…[exclusive management
requirement].”5
Regulation 9
The “exclusive management” requirement applicable to common trust
funds under Regulation F technically did not extend to collective trust
funds for employee benefit trusts,
which began to appear in the 1950s.
However, when regulatory authority over national bank trust activities
was transferred from the FRB to the
OCC in 1963, the OCC retained the
requirement in Regulation 9 and
extended it to all CIFs.6 The OCC
indicated that the exclusive management requirement was:
designed generally to ensure that
a national bank fiduciary has the
requisite authority to administer
a collective fund in satisfaction
of all its fiduciary responsibilities,
and to prevent delegations or
reservations of authority which
interfere with the bank’s fulfillment of these responsibilities.7
The OCC generally took the position that the “exclusive management”
requirement did not preclude a bank
from retaining an investment adviser
to assist it in managing a CIF. If the
investment adviser was not affiliated
with the bank, the OCC typically
required, among other things, that
the bank retain authority to make
“final” investment decisions for the
fund, which meant that an unaffiliated investment adviser was permitted
only to make investment “recommendations” for the bank’s consideration
and final decision.8 If the adviser
was an affiliate of the bank, the bank
was expected to establish specific
investment guidelines the affiliated
adviser would be obligated to follow,
frequently review the adviser’s activities, and retain contractual authority
to terminate the adviser at will.9 The
OCC also indicated that, if the adviser
was affiliated with the bank through
the bank’s holding company, the
bank would need to approve each
investment transaction before the affiliate placed the trade.10
(continued on page 4)
February 2011 • 3
American Bankers Association
(continued from page 3)
Prudent Delegation
The Restatement
The law of trusts eventually
evolved from where it had stood in
1937. In 1992, the “Prudent Investor
Rule” of the Restatement (Third) of
Trusts (Restatement) accepted modern investment theories as part and
parcel of basic trustee investment responsibilities.11 Importantly, the Prudent Investor Rule authorized — and
in some cases required — trustees to
delegate investment responsibilities
to others. However, any such delegation must be prudent and appropriate under the circumstances.12
The Restatement provides guidance as to when delegation is appropriate and how a delegation should
be implemented and monitored.13
The general principle, however,
is that a trustee who delegates its
responsibility to an agent should carefully monitor the agent to confirm
that the delegation continues to be
appropriate and in the best interests
of the trust. Among other things,
the trustee has a duty to monitor the
agent’s performance and compliance
with the terms of the delegation and,
upon discovering a breach of duty by
the agent, the trustee must take reasonable steps to remedy the breach.14
The degree to which a trustee may
rely on the agent’s decisions and actions depends on what is reasonable
under the circumstances. However,
if the trustee acts prudently in regard
to a delegation, it will not be liable for
the decisions or actions of the agent
to whom the function is delegated.15
Regulation 9
In 1997, as part of its comprehensive amendments of Regulation
9, and to be “consistent with the
modern prudent investor rule as set
forth in the American Law Institute’s
Restatement (Third) of Trusts,”16 the
OCC formally revised the “exclusive
4 • February 2011
Special Feature:
“Prudent Delegation”
management” requirement of Regulation 9 to permit “prudent delegation” of CIF management responsibilities. The OCC explained that:
It is the OCC’s position that a
bank may delegate CIF investment responsibilities if the
delegation is prudent. The bank
should conduct a due diligence
review of the investment advisor prior to the delegation. The
board of directors, or its designee, should approve the delegation and ensure an agreement
setting forth duties and responsibilities is in place. In addition,
the bank should closely monitor
the performance of the investment adviser.17
The OCC also made it clear that,
even if a bank delegates investment
authority (or receives delegated
investment authority), the bank
nonetheless is deemed to have investment discretion for bank regulatory
purposes.18 Thus, the OCC’s position is that:
[d]elegation decisions are matters of fiduciary judgment and
discretion. A bank must exercise
care, skill, and caution in selecting agents and in negotiating
and establishing terms of delegation, including investment
responsibilities.19
The OCC’s handbook on “Investment Management Services” sets
forth detailed examination procedures focusing on the process by
which a bank delegates investment
management authority. Among
other things, the OCC considers the
“adequacy and effectiveness” of the
bank’s due diligence procedures for
selecting an investment adviser, including whether the bank conducts a
thorough evaluation of “all available
information” about the adviser and
monitors the adviser on a “routine”
basis.20 In regard to the monitoring function, OCC examination
procedures focus on whether the
bank: (i) reviews information reports
provided by the adviser; (ii) reviews
portfolios regularly to ensure adherence to established investment policy
guidelines; (iii) analyzes the adviser’s
financial condition at least annually;
(iv) evaluates the cost of the relationship; (v) reviews independent
audit reports of the adviser; and (vi)
performs on-site quality assurance
reviews and tests the adviser’s risk
management controls.21 It also generally would be advisable to describe
the respective roles and responsibilities of the bank and the adviser in
any CIF marketing materials.22
Regulatory Implications
ERISA
When it enacted ERISA in 1974,
Congress saw fit to include Section
408(b)(8), a statutory exemption
from ERISA’s prohibited transaction
restrictions for employee benefit
plan investments in “a common or
collective trust fund or pooled investment fund maintained by a party
in interest which is a bank or trust
company supervised by a State or
Federal agency,” if certain conditions
are satisfied.23 Congress observed
simply that “it is common practice
for banks, trust companies and insurance companies to maintain pooled
investment funds for plans.”24 Six
years later, the DOL issued Prohibited Transaction Exemption (PTE)
80-51 (now designated as PTE 9138), a class exemption that provides
relief for transactions between “a
ABA TRUST LETTER
common or collective trust fund or
pooled investment fund maintained
by a bank” and “parties in interest”
of employee benefit plans investing
in the fund, if certain conditions
are satisfied. The DOL stated that
“regulation and oversight” by federal
or state banking authorities under
Regulation 9 and other regulations
provided the basis on which relief
under PTE 91-38 was granted.25
Neither ERISA Section 408(b)
(8) nor PTE 91-38 (herein, the
“ERISA Exemptions”) provides
guidance as to what a bank must do
to “maintain” a CIF for purposes of
those Exemptions. However, in Advisory Opinion 96-15A (Aug. 7, 1996),
issued shortly before the “prudent
delegation” amendment of Regulation 9, the DOL concluded that
several New Hampshire investment
trusts established by a trust company (Funds) would not fail to be
“maintained” by the trust company
where it hired its parent, a registered
investment adviser, to exercise investment discretion with respect to Fund
investments.26 The DOL based its
conclusion on, among other things,
the trust company’s representations
that the adviser would be subject to
guidelines and restrictions specified
by the trust company, and the trust
company would retain exclusive
authority and control over all aspects
of the management and operation
of the Funds and would monitor the
adviser’s performance on an ongoing basis. The trust company also
represented that it would at all times
“remain responsible for the management and operation of each Fund
and will retain liability under ERISA
with respect to plans investing in the
Funds for the consequences of the
Adviser’s investment decisions.” The
DOL reached similar conclusions,
based on similar facts and representations, in subsequent advisory
opinions issued after the “prudent
American Bankers Association
Special Feature:
“Prudent Delegation”
delegation” amendment of Regulation 9.27
The DOL does not appear to
have issued an advisory opinion
specifically addressing a situation in
which a bank delegates responsibility
for CIF investments to an investment
adviser in reliance on Regulation 9’s
“prudent delegation” provision. In
such a case, however, it seems that
the bank should be able to rely on
the ERISA Exemptions and at the
same time assert that it does not
“retain liability” under ERISA for the
consequences of the Adviser’s investment decisions,” so long as the bank
acts prudently with respect to the
delegation.
“Prudent delegation” is widely
accepted as a tenet of modern
trust and fiduciary law.
In this regard, ERISA’s fiduciary
standards — which are derived from
the law of trusts28 — provide in pertinent part that the trustee of a plan
has exclusive authority and discretion to manage and control plan
assets, except to the extent a “named
fiduciary” of the plan (an ERISA
term of art) delegates management
authority to an “investment manager” (another ERISA term of art).29
In such case, if the named fiduciary acts prudently in selecting and
continuing the use of an investment
manager, the trustee and other plan
fiduciaries generally (and subject to
certain exceptions under ERISA’s
“co-fiduciary” liability rules) will not
be liable for the acts or omissions of
the investment manager.30
Importantly, the DOL also indicated in Advisory Opinion 83-026A
(May 26, 1983) that, where a CIF invests in other “plan-asset” investment
vehicles, the trust company maintaining the CIF may designate institutions maintaining the other vehicles
as ERISA “investment managers”
with respect to ERISA plans participating in the CIF, provided the CIF’s
governing documents specifically
authorize such investments and identify the trust company as a “named
fiduciary” of the ERISA plans with
authority to appoint investment
managers. The DOL was not asked
in that situation to interpret the
ERISA Exemptions. However, there
do not appear to be significant
practical or legal differences (from
an ERISA point of view) between the
case where a bank maintaining a CIF
appoints the manager of a plan-asset
investment vehicle in which the CIF
invests as an investment manager,
and that in which the bank appoints
an investment manager to manage
plan assets held in the CIF directly,
provided, in either case, the bank
acts “prudently” with respect to the
appointment.
Internal Revenue Code
A bank seeking favorable tax
treatment for a common trust fund
under Code Section 584 is required
to maintain the fund in conformity
with Regulation 9. Until 1992, the
IRS routinely issued determination
letters confirming the status of common trust funds under Code Section
584. Effective June 29, 1992, however, the IRS announced that generally it no longer would issue rulings
or determination letters regarding
whether a common trust fund met
the requirements of Code Section
584.31 The IRS also issued Revenue
Procedure 92-51 (RP 92-51) to provide “guidance to banks that want
to draft common trust fund plans
(continued on page 6)
ABA TRUST LETTER
February 2011 • 5
American Bankers Association
(continued from page 5)
that will meet the requirements of
Section 584 of the Internal Revenue
Code.” The IRS stated that it would:
recognize a common trust fund
plan drafted in accordance with
the guidelines contained in this
revenue procedure as meeting
the requirements for qualification under section 584 and the
regulations thereunder provided
that the plan adopted does not
contain any language that is
inconsistent with the guidelines
herein.32
The guidelines in RP 92-51
include, consistent with Regulation 9
as it existed at the time, the requirement that the bank have “exclusive
managerial and investment authority”
over the common trust fund. RP 9251 also states that, while a bank may
delegate such authority to a committee limited to bank officers, RP 92-51
expressly does not apply to a common
trust fund that “permits the delegation of management and investment
of the fund to non-bank persons.”33
The IRS appears not to have
revised or updated RP 92-51 since
1992, and the delegation exception described above remains
unchanged, even though Regulation 9 has since been amended to
permit “prudent delegation” of CIF
investment and other responsibilities to non-bank persons. Assuming
the IRS wishes to continue its policy
of providing general common trust
fund “guidelines” in lieu of issuing
individual determination letters
regarding common trust fund status
under Code Section 584, the most
logical solution would seem to be an
update of RP 92-51 to conform to
Regulation 9’s “prudent delegation”
provision. That would be consistent
with Code Section 584 itself, which
requires that a common trust fund
be maintained “in conformity with”
rules and regulations of the OCC,
6 • February 2011
Special Feature:
“Prudent Delegation”
i.e., Regulation 9, “prevailing from
time to time.” In the absence of
changes to RP 92-51, however, there
seems to be no legal or policy basis
on which a common trust fund
otherwise established and operated
in compliance with Code Section
584, Regulation 9, and other “guidelines” under RP 92-51 should be denied favorable tax treatment under
Code Section 584, solely because
the bank prudently delegates investment responsibility to a non-bank
person pursuant to Regulation 9.
Federal Securities Laws
A CIF “maintained by a bank”
is not considered an “investment
company” for purposes of the Investment Company Act of 1940, and
interests in such a CIF are exempt
from securities registration under
the Securities Act of 1933 and the
Securities Exchange Act of 1934.34
(These exceptions and exemptions
are referred to for convenience as
the “CIF Exemptions.”)
The CIF Exemptions themselves
and their legislative histories do
not explain or elaborate the “maintained” requirement and do not
appear to place any particular or
special importance on it, beyond
the obvious requirement that a CIF
be sponsored and operated by a
bank. A tacit Congressional acknowledgment underlying the CIF
Exemptions, however, is that banks
maintaining CIFs are subject to
significant regulation under banking
and fiduciary laws, and that the CIF
Exemptions are justified in order
to avoid duplicative federal regulation of banks and CIFs. The SEC
staff confirms this view in a relatively
recent no-action letter, in which the
staff stated that:
…the phrase “maintained by a
bank” makes clear that the basis
of the exception for collective
funds under the 1940 Act is regulation by bank regulatory authorities of trust and other fiduciary
functions of banks….35
In the same letter, however, the
staff also stated that the “maintained”
requirement “ensures that other
collective investment media are not
excepted.” In that regard, the SEC’s
1980 release on “Employee Benefit
Plans” (the “1980 Release”), which in
part interpreted the CIF Exemptions
applicable to collective trust funds,
stated that:
the word “maintained” has been
interpreted by the staff to mean
that the bank must exercise
“substantial investment responsibility” over the trust fund administered by it. Thus, a bank which
functions in mere custodial or
similar capacity will not satisfy
the “maintained” requirement.36
The “substantial investment
responsibility” gloss on the “maintained” requirement appears to
derive from the SEC staff’s assumption that a bank exercising “substantial investment responsibility” over a
CIF would be “regulated,” whereas
a bank that did not exercise such
responsibility for a CIF would not be
“regulated” and, consequently, would
not “maintain” the CIF for purposes
of the CIF Exemptions. Although
the legal basis for this assumption
is not completely clear,37 the staff
applied these principles in numerous no-action letters addressing the
nature and extent of the investment
responsibility a bank was expected
to exercise with respect to a CIF.
Where the bank hired an investment
adviser, the staff explained that:
[t]he language of…[the Invest-
ABA TRUST LETTER
American Bankers Association
ment Company Act exception
for collective trust funds] effectuates a Congressional determination to except the collective trust
fund of a banking institution,
which, for its own convenience,
pools…plan assets and exercises full investment authority
over such assets. Such a bank
would be subject to regulation by
banking authorities whereas…[a]
collective trust… [managed by an
outside adviser] would operate with
a complete lack of regulation, absent
registration under the [Investment
Company] Act. Pension trusts…
which have been commingled, in
effect, by other than a bank, even
if brought to a bank for mere
custodian purposes, in our view
are not entitled to rely upon the
exception in the second clause of
Section 3(c)(11).38
Thus, the staff took the position
that a bank could, in the exercise of
“substantial investment responsibility” with respect to a CIF, hire an
investment adviser. In such case,
however, the staff expected that “the
final decision whether or not to
invest must be made by the bank.”39
The staff issued numerous no-action
letters over a twenty year period
ending in the early 1990s echoing
this theme in various fact situations.
While the details varied, the basic
concept was that a bank generally
could rely on an adviser’s advice and
recommendations with respect to
CIF investments. However, the staff
typically conditioned favorable noaction relief on representations that
the bank would approve or otherwise
authorize all fund investments contemporaneously or in advance.40
On the other hand, the staff
also concluded that a bank would
satisfy the “substantial investment
responsibility” requirement where
the bank invested CIF assets in
Special Feature:
“Prudent Delegation”
other pooled investment vehicles
maintained by unaffiliated banks or
insurance companies, if the bank
appropriately evaluated the merits
of investing in the other vehicles and
retained full discretion to make or
to liquidate the investments.41 The
staff provided similar relief in connection with investments by separate
accounts “maintained” by insurance
companies in other pooled investment vehicles, including CIFs and
other separate accounts.42 In one
such case, the insurance company
proposed to invest “some or all” of its
A bank that prudently delegates
CIF investment responsibilities is
subject to substantial regulatory
oversight under Regulation 9 and
general banking regulation, as
well as ERISA.
separate account in “one or more”
separate accounts maintained by a
single unaffiliated insurance company.43 Significantly, none of these
letters mentioned, much less required, pre- or post-trade approvals
of investments made by the managers of the underlying funds. Yet, the
practical differences between these
situations and that in which a bank
directly retains an investment adviser
to assist in the management of a CIF
seem subtle at best.
The SEC appears not to have
issued a no-action letter or other
significant interpretation dealing
with a bank’s retention of an investment adviser for a CIF or a fund-to-
fund investment by a CIF since the
“prudent delegation” amendment
of Regulation 9 in 1997. In the
spring of 2010, however, in the wake
of widespread publicity about CIF
arrangements between non-bank
investment advisers and banks/trust
companies unaffiliated with the advisers, the then Director of the SEC’s
Division of Investment Management
expressed “concern” about “collective investment trust platforms” operated by banks or trust companies,
but managed by unaffiliated investment advisers that also are responsible for marketing and distribution
of the CIF. The Director noted that:
Collective investment trusts are
regulated by the banking agencies, and may rely on an exclusion from registration under
the Investment Company Act.
The premise underlying this
exclusion is that banks exercise
full investment authority over
the pooled assets, among other
things. As collective investment
trusts become more popular and
their structures more varied, the
Division is looking at whether,
under certain conditions, this
exemption is properly relied
upon and consistent with the Act
and whether it denies investors
appropriate protections. For
example, are banks operating
merely in custodial or similar
capacity while providing a place
for an adviser to simply place
pension plan assets of its clients?
As we learn more about the
structure and operation of these
platforms, we will be considering
this and other issues and whether there may be a need for any
regulatory recommendations.44
The Director’s “concern” appears to be based in part on the fact
that a bank may create a CIF at the
(continued on page 8)
ABA TRUST LETTER
February 2011 • 7
American Bankers Association
(continued from page 7)
request of an adviser, which thereafter
assumes primary responsibility for
marketing the CIF to the adviser’s employee benefit plan clients. Although
plans and trusts participating in a CIF
necessarily become “clients” (more
aptly, beneficiaries) of the bank, as
trustee of the CIF, the situation differs
from that in which the bank initiates
the CIF to manage investments of
bank customers. However, whether
this difference should be significant
for purposes of the CIF Exemptions is
not at all clear.
The SEC staff’s traditional view
has been that CIFs are created by
banks for their own convenience
to manage investments of fiduciary
customers on a pooled basis. The
staff, in fact, has stated that a primary
basis for distinguishing between a
CIF, which is “maintained by a bank,”
and a non-CIF investment vehicle,
which is not, is whether the vehicle is
created by or at the instance of a bank
(CIF) or a third party (non-CIF).45
The question remains, however,
whether the initiation process is or
should be, in itself, a hallmark of a
CIF described in the CIF Exemptions.
Although banks historically initiated
the creation of CIFs, the rationale
underlying the CIF Exemptions is,
as described above, a desire to avoid
overlapping or duplicative regulation.
As also described above, a bank maintaining a CIF is subject to significant
regulatory requirements, regardless
of whether it initiates the creation of
the CIF or whether the bank or the
“initiating adviser” is involved in marketing interests in the CIF.
The current Director of the
Division has not as yet publicly stated
her views on the subject. Although
the staff has made various inquiries
and obtained information about
bank-adviser arrangements, there
has been no indication as to how or
whether the SEC intends to pursue
these issues. It seems clear, however,
8 • February 2011
Special Feature:
“Prudent Delegation”
that there are ample grounds for
concluding that CIF arrangements
between banks and investment
advisers can fully satisfy the fundamental principles announced in the
1980 Release and more recent SEC
pronouncements. In particular,
a bank that retains an investment
adviser will be expected, as a matter
of banking regulation and general
fiduciary principles, to satisfy the
requirements of a “prudent delegation” under Regulation 9, general
trust law, and ERISA. In short, a
bank that carefully selects an adviser,
establishes appropriate parameters
for CIF investments, and monitors
and exercises diligent oversight over
the adviser’s performance and adherence to those parameters seems
far closer to the exercise of “substantial investment responsibility” than to
acting as a “mere custodian” of a CIF.
Conclusion
This discussion necessarily represents a substantial condensation of
numerous statutory and regulatory
interpretations and concepts that
evolved over several decades, and
omission of at least some relevant
details and variations of those interpretations, although unintentional,
is unavoidable. However, certain
fundamental conclusions appear to
be reasonably clear.
“Prudent delegation” is widely
accepted as a tenet of modern trust
and fiduciary law. A bank that prudently delegates CIF investment responsibilities is subject to substantial
regulatory oversight under Regulation 9 and general banking regulation, as well as ERISA. In addition,
the bank retains potential liability for
the consequences of CIF investments
if, but only if, it fails to monitor and
exercise appropriate oversight over
the adviser’s investment decisions.
Importantly, the bank has no obligation to substitute its judgment, or
otherwise make “final decisions,” for
particular CIF investments.
As described above, existing
official pronouncements of other
regulators, almost all of which
pre-date the “prudent delegation”
amendment of Regulation 9, have
yet to reflect the prudent delegation
concept. In the author’s view, both
regulators and the regulated alike
would benefit from the following
basic, but important, clarifications
and/or confirmations of the regulators’ existing positions:
First, the DOL should clarify
that a bank may, consistently with
the ERISA Exemptions and ERISA
generally, delegate CIF investment
responsibility to an investment adviser. In such case, the bank remains
liable for the adviser’s investment
decisions only if the bank fails to
exercise prudence and diligence in
retaining and exercising oversight
over an investment adviser.
Second, the IRS, in the interest
of conserving time and resources
that otherwise might be expended in
processing determination letters with
respect to common trust funds that
involve delegation of investment responsibility, should update RP 92-51
to conform to the “prudent delegation” provisions of Regulation 9.
Finally, the SEC should confirm
that a bank that delegates CIF investment responsibilities to an investment
adviser — whether or not the bank
and the adviser are affiliated, and
regardless of whether the adviser initiates the creation of the CIF — will be
considered to “maintain” the CIF for
purposes of the CIF Exemptions, provided the bank exercises the appropriate level of prudence and oversight
with respect to the delegation. n
ABA TRUST LETTER
Notes
Partner, K&L Gates LLP. The views
expressed in this article are those of the
author and do not necessarily represent
the views of the firm or any other of its
partners or clients. In addition, this article
is intended for informational purposes
only, and is not intended to convey legal
advice. The information herein should
not be used or relied upon in regard to any
particular facts or circumstances without
first consulting a lawyer.
1
12 C.F.R. §9.18(b)(2) (2010) (footnote
omitted). Unless indicated otherwise,
references below to “CIFs” include both
collective trust funds consisting solely of
assets of employee benefit trusts and common trust funds consisting solely of assets
of trusts for which the bank acts as trustee.
2
The OCC notes that Regulation 9 establishes basic standards for CIF management
and administration for federal and state
banks. Collective Investment Funds (OCC
2005) (“CIF Handbook”), at 3.
3
12 C.F.R. §17(c)(8), 2 Fed. Reg. 2976
(Dec. 30, 1937).
4
Restatement of Trusts (Second), § 171
(1959).
5
12 C.F.R. §206.118, 24 Fed. Reg. 4906
(June 17, 1959).
6
12 C.F.R. §9.18(b)(12), 28 Fed. Reg.
3309, 3313 (Apr. 5, 1963); now codified at
12 C.F.R. § 9.18(b)(2) (2010).
7
See, e.g., OCC Interpretive Letter No.
696 (Nov. 28, 1995).
8
Handbook for Fiduciary Activities
(OCC 1990) (“Fiduciary Handbook”),
Fiduciary Precedents 9.5317, 9.5785.
9
Fiduciary Handbook, note 8, Fiduciary
Precedent 9.5320.
10
OCC Interpretive Letter No. 696 (Nov.
28, 1995) (designating affiliate to make investment recommendations does not alter
bank’s exclusive management of collective
investment fund if bank “ultimately directs
the fund’s investments”).
11
The Prudent Investor Rule is now
reflected in Restatement §90.
12
Restatement §90(c)(2) (a trustee “must
act with prudence in deciding whether
and how to delegate [investment] authority and in the selection and supervision of
agents”).
13
See, e.g., Restatement §80, comments d,
e, f(1), and §90, comment j.
14
Restatement §80, comment d(2).
15
Restatement § 80, comment g.
16
60 Fed. Reg. 66163, 66169 (Dec. 21,
1995) (preamble to proposed amendment
of Regulation 9).
*
ABA TRUST LETTER
American Bankers Association
OCC “Questions and Answers 12 CFR
Part 9,” Q&A No. 15 (May 15, 1997). See
also Investment Management Services (OCC
2001) (“Investment Management Handbook”), at 117 (trustees have duty as well as
authority under “prudent investor rule” to
delegate investment authority as a prudent
investor would).
18
12 C.F.R. § 9.2(i) (2010) (definition of
“investment discretion”).
19
CIF Handbook, note 2, at 49.
20
Investment Management Handbook,
note 17, at 62.
21
Id.
22
See, e.g., Fiduciary Handbook, note 8,
Fiduciary Precedent 9.5118 (collective trust
advertisements subject to antifraud provisions of securities laws).
23
Code § 4975(d)(8) is a counterpart
exemption for purposes of the parallel
prohibited transaction excise tax provisions
of Code § 4975.
24
H.R. No. 93-1280, at 316 (1974) (Conf.
Rep.).
25
DOL Advisory Opinion 2007-03A (June
8, 2007). See also DOL Advisory Opinion
2006-07A (Aug. 15, 2006) (regulation
under Regulation 9 provided “a” basis on
which PTE 91-38 was granted).
26
The DOL also concluded, by implication, that the “New Hampshire investment
trusts,” which were not characterized as
CIFs subject to Regulation 9, were “pooled
investment vehicles” maintained by the
trust company for purposes of the ERISA
Exemptions.
27
DOL Advisory Opinion 2007-03A (June
8, 2007); DOL Advisory Opinion 2006-07A
(Aug. 15, 2006).
28
H.R. No. 93-1280, at 295 (1974) (Conf.
Rep.).
29
ERISA §§ 402(c)(3), 403(a)(2). See also
ERISA § 3(38) (definition of “investment
manager”).
30
ERISA § 405(d)(1); H.R. No. 93-1280,
at 302 (1974) (Conf. Rep.).
31
Rev. Proc. 92-50.
32
Rev. Proc. 92-51, § 3. The IRS noted
that it would “consider” a request for a
ruling where the terms of a common trust
fund did not fall within the “guidelines” in
the Revenue Procedure 92-51 or the bank
raised an issue under Code Section 584
that needed to be resolved. Id.
33
Rev. Proc. 92-51, § 4.02.
34
See Investment Company Act § 3(c)(3)
(common trust funds) and § 3(c)(11) (collective trust funds); Securities Act § 3(a)
(2) (interests in CIFs); Securities Exchange
Act § 3(a)(12) (interests in CIFs) and §
17
12(g) (interests in collective trust funds).
The SEC and its staff have interpreted
the “maintained by a bank” requirement
discussed below consistently for purposes
of all the CIF Exemptions.
35
Honeywell International Inc. Savings
Plan Trust, SEC No-Action Letter, at n. 5
(avail. Oct. 7, 2002).
36
Employee Benefit Plans, Securities Act
Release No. 6188 (Feb. 1, 1980), 45 Fed.
Reg. 8960, 8972 (Feb. 11, 1980). Notably,
the staff applied the same principles to
both collective trust funds for employee
benefit trusts and to common trust funds.
See Bank of Delaware, SEC No-Action Letter (avail. Jan. 7, 1973).
37
See Bank of America, SEC No-Action
Letter (avail. Jan. 9, 1972); Gibson, Dunn
& Crutcher, SEC No-Action Letter (avail.
Apr. 18, 1974).
38
Narragansett Capital Corporation, SEC
No-Action Letter (avail. Feb. 26, 1975)
(emphasis added).
39
Employee Benefit Plans, Securities Act
Release No. 6188 (Feb. 1, 1980), 45 Fed.
Reg. 8960, 8973 (footnote omitted).
40
See, e.g., First Liberty Real Estate Fund,
SEC No-Action Letter (avail. July 14, 1975);
State Street Bank and Trust Co., SEC NoAction Letter (avail. Dec. 31, 1991).
41
Frank Russell Trust Company, SEC NoAction Letter (avail. Sept. 2, 1982).
42
See Maccabees Mutual Life Insurance
Company Separate Account, SEC NoAction Letter (avail. July 29, 1983); Maccabees Mutual Life Insurance Company,
SEC No-Action Letter (avail. Aug. 1, 1990).
Securities law exemptions applicable to a
separate account “maintained by an insurance company” parallel the CIF exemptions
and were enacted in recognition of the fact
that insurance company separate accounts
and CIFs “are very similar to each other and
serve essentially the same purpose” and,
therefore, the exemptions are “intended to
grant banks and insurance companies equal
treatment under the Federal securities laws
to the extent that they compete with each
other.” S. Rep. No. 91-184, at 23 (1969).
43
Nippon Life Insurance Company of
America, SEC No-Action Letter (avail. Nov.
2, 1992).
44
Remarks of Andrew J. Donohue, Director, SEC Division of Investment Management, before the Practicing Law Institute’s
Investment Management Institute 2010
(April 8, 2010).
45
See, e.g., Communications Workers of
America, SEC No-Action Letter (avail. Jan.
27, 1980).
February 2011 • 9
American Bankers Association
Swap Execution Facilities Rules
and Practices Proposed
Banks Seek to Clarify “Processing of Swaps”
Under Rule Proposal
T
he Commodity Futures Trading
Commission (CFTC) proposed
new rules, guidance, and acceptable practices that will apply to the
registration and operation of a new
type of regulated entity called a
“swap execution facility” (SEF). The
proposal, published on January 7,
2011 (76 Federal Register 1214) implements amendments to the Commodity Exchange Act (CEA) made by the
Dodd-Frank Wall Street Reform and
Consumer Protection Act.
The Dodd-Frank amendments
to the CEA establish a comprehensive new regulatory framework for
swaps and security-based swaps. The
overarching purpose of the new
framework is to create a regulated
marketplace for swaps and securitybased swaps that will function to
reduce risk, increase transparency,
and promote market integrity.
The banking industry is closely
watching the development of the
new regulatory framework. In particular, banks want to make sure that
post-execution processing activities,
such as middle-office and back-office
functions, do not expose them to
registration and regulation as SEFs.
Comments on the proposed
rules are due on or before March 8,
2011.
Statutory Trade Execution
Requirements
Section 723(a) of the DoddFrank Act amended Section 2(h) of
the CEA to establish an exchange
trading requirement for swaps. The
provision requires counterparties
to execute on a designated contract
10 • February 2011
market (DCM) or an SEF any transaction involving a swap that is subject
to the clearing requirement.
Section 733 of the Dodd-Frank
Act added new Section 5h to the
CEA to require SEFs to register,
maintain registration, and comply
with 15 enumerated core principles
(see the box on page 11 for a summary) and any other requirements
the CFTC might establish by regulation. New Section 5h gives the CFTC
authority to prescribe rules governing the regulation of SEFs.
The proposed regulations, guidance, and acceptable practices would
implement the regulatory obligations
that each SEF must meet in order to
comply with Section 5h, both initially
upon registration and on an ongoing
basis.
The Dodd-Frank amendments to
the CEA establish a comprehensive new regulatory framework for
swaps and security-based swaps.
SEF Definition
The proposal defines an SEF
as “a trading system or platform in
which multiple participants have the
ability to execute or trade swaps by
accepting bids and offers made by
multiple participants in the facility or system through any means of
interstate commerce, including any
trading facility, that (a) facilitates
execution of swaps between persons;
and (b) is not a DCM.
The proposal elaborates on this
basic definition by indicating that an
acceptable SEF platform or system
must provide at least a basic functionality to give market participants
the ability to make executable bids
or offers and indicative quotes, and
to display them to multiple parties,
including all other parties participating in the SEF, if the market participants wish to do so. The CFTC is also
proposing that the SEF must provide
market participants with the ability
to make a bid, make an offer, hit a
bid, or lift an offer, and may provide the ability to request a bid and
request an offer.
Coverage of Trade Processing
Functions
Under new Section 5h(b) of the
CEA, a registered SEF may (a) make
available for trading any swap, and
(b) facilitate trade processing. The
proposal release acknowledges that
these provisions could be read to
require the registration as SEFs of
entities that engage in trade processing (but not trade execution). Banks
that process post-execution trades
are concerned that their processing
activities could be captured under
the rule’s description of regulated
SEF activities.
According to the rule release,
however, the CFTC states its belief
that “entities that operate exclusively
as swap processors do not meet the
SEF definition and should not be
required to register as SEFs because:
(1) they do not provide (as required
by the definition) the ability to
execute or trade a swap; and (2) the
definition does not include the term
“process.”
In a letter to the CFTC and SEC,
dated December 7, 2010, BNY Mellon reiterated a point also made by
State Street. According to the letter,
“BNY Mellon agrees with State Street
Corporation’s view, expressed in its
ABA TRUST LETTER
American Bankers Association
November 24 letter to the Commissions, that “processing of swaps” in
this context should be read to mean
trade execution matching and comparison functions that occur before a
trade is submitted for clearing.” The
phrase should not be interpreted
as covering other post-execution
activities, including middle-office
or back-office processing functions
performed by banks for their clients.
According to the BNY Mellon letter, middle-office or back-office functions might include, for example:
• Affirmation and confirmation of
trades executed with counterparties by bank clients and/or their
investment managers;
• Valuation of transactions in reli-
ance on third-party vendor data;
• Reconciliation, involving the
matching and identification of
discrepancies between trade details on executed trades provided
to the bank by its clients and/or
their investment managers and
their counterparties;
• Lifecycle management, involving
the capture and processing of
Core Principles for SEFs
The proposed regulations, guidance, and acceptable practices are built on a foundation of 15 core
principles for implementing and operating SEFs. The
core principles are as follows:
9. An SEF must make available to the public timely
information on price, trading volume, and other
trading data on swaps to the extent required by
the CFTC.
1. Compliance with the core principles and the
CFTC implementing rules is a condition for obtaining and maintaining registration as an SEF.
10. All SEFs must adhere to a three-part recordkeeping and reporting requirement that includes
investigatory and disciplinary files and that also
observes minimum retention periods.
2. An SEF must establish rules to deter abuses and
must have the capacity to detect, investigate, and
enforce its rules.
3. The swaps that SEFs offer for trading must not be
readily susceptible to manipulation.
4. An SEF must take an active role in preventing
manipulation, price distortion, and disruptions of
the delivery or cash settlement process.
5. An SEF must have the ability and authority to obtain information necessary to perform its obligations.
6. An SEF must adopt, for each swap, position limits
or position accountability. For any contract subject
to a federal position limit under the CEA, the SEF
must set its position limits at a level no higher
than the position limitation established in the
CFTC’s regulations.
7. An SEF must establish and enforce rules to ensure
the financial integrity of swaps entered on or
through its facilities, including the clearing and
settlement of the swaps.
8. An SEF must provide for emergency situations, including participating in cross-market coordination
and establishing alternate lines of communication
and approval procedures to address emergencies
in real time.
11. An SEF must comply with antitrust obligations.
12. An SEF must maintain procedures for identifying and mitigating conflicts of interest (rules of
conflict of interest mitigation are proposed in
separate releases; see the box on page 12).
13. An SEF must have adequate financial resources to
discharge its responsibilities.
14. An SEF is responsible for safeguarding its systems
by establishing and maintaining a program of risk
oversight capable of identifying and minimizing
sources of operational risk. An SEF should develop appropriate internal controls and procedures
and automated systems that are reliable, secure,
and have adequate scalable capacity. SEFs must
also establish and maintain emergency procedures, backup facilities, and a disaster recovery
plan and should periodically conduct tests to
verify that backup resources will ensure continued
order processing and trade matching, price reporting, and market surveillance. An SEF’s systems
should also be able to create a comprehensive and
accurate audit trail.
15. SEFs must have an internal regulatory framework
headed up by a chief compliance officer who
serves as a focal point for compliance with the
amended CEA and implementing rules.
(continued on page 12)
ABA TRUST LETTER
February 2011 • 11
American Bankers Association
(continued from page 11)
events occurring in the lifecycle
of a particular derivative transaction; and
• Collateral management, involving the determination of appropriate collateral posting and
management of the collateral
process based on the criteria
agreed upon by the parties to the
trade in connection with execution of the trade.
The BNY Mellon letter agreed
that trade execution matching and
comparison functions are a necessary
part of the ability to execute or trade
swaps by accepting bids and offers. As
a result, oversight of these activities, as
part of the regulation of trade execution platforms, is “logical and consistent with the aims of Dodd-Frank.”
But, the letter continued, “middle-office and back-office processing
activities are often not performed by
trade execution platforms and, as a
result, do not neatly fit into regulatory regimes for the oversight of trade
execution.” In fact, many middleoffice and back-office activities may
fall under other regulatory schemes,
such as the CFTC and SEC authority over clearinghouses, swap data
repositories, swap dealers, and major
swap participants.
“Subjecting these activities to
the regulatory regime for SEFs and
exchanges will lead to unnecessary
dual regulation that will be costly to
Related Proposed Rules on SEF Conflicts of Interest and
Governance Standards
The CFTC is separately proposing related rules to further implement
the core principles under the Dodd-Frank Act that are applicable to
SEFs, derivatives clearing organizations (DCOs), and DCMs. The proposals have been published as follows.
• Mitigation of conflicts of interest requirements for DCOs, DCMs, and
SEFs, published October 18, 2010 (75 Federal Register 63732). Comments were due November 17, 2010. In the proposal, the CFTC states
that it “anticipates conducting at least one other rulemaking that may
impose requirements on DCOs, DCMs, and SEFs with respect to governance and mitigation of conflicts of interest. That proposal follows.
• Governance fitness standards, composition of governing bodies,
and additional requirements for resolving conflicts of interest in the
operation of certain DCOs, DCMs, and SEFs, notice of proposed
rulemaking, published January 6, 2011 (76 Federal Register 722). Comments are due by March 7, 2011.
The Dodd-Frank Act statutory deadline for completing these rulemakings
is July 15, 2011.
swap market participants and will not
further any of the goals of DoddFrank,” the letter asserted.
The letter concluded with a
request that the meaning of “processing of swaps” be clarified in the
regulation to exclude banks’ middleoffice and back-office processing
functions and other post-execution
processing activities. n
Municipal Advisor Registration
Proposal
(continued from page 1)
financial products or the issuance
of municipal securities.” Municipal
financial products are defined as:
(1) municipal derivatives; (2) guar-
12 • February 2011
anteed investment contracts (GIC);
or (3) “investment strategies” that
include plans or programs for the
investment of the proceeds of municipal securities that are not municipal derivatives or GICs or municipal
escrow investments.
Related articles in ABA Trust Letter
“SEC and CFTC Propose Definitions for Swap Market; Establish
Framework for Forthcoming Regulation of Swaps,” January 2011,
page 5.
“Swap Definitions Must Be Carefully Crafted to Exclude Financial
End Users,” November 2010,
page 6.
The DFA defines “municipal
entity” to include governmental bodies and “any plan, program, or pool
of assets sponsored or established by
[governmental bodies].”
The DFA excludes registered
investment advisers (RIA), but not
banks, from the definition of municipal advisor. The RIA exemption
extends only to activities that require
registration under the Advisers Act.
ABA TRUST LETTER
American Bankers Association
When the legislation was being
considered, all believed it was intended to cover heretofore unregulated
financial advisors, not other entities
in the municipal market that are
already subject to regulation by the
SEC or the bank regulators. The
actual language of the statute turned
out to be much broader.
Accordingly, the SEC bases its
registration proposal on the following analysis of the scope of the
registration requirement:
Depending on their role with respect to investment strategies for
municipal entities, commercial
banks subject to regulation by
various federal and state regulators may also engage in activities
that would subject them to registration as municipal advisors.
Such commercial banks may act
as trustees with respect to an
issuance of municipal securities
or otherwise provide advice with
respect to municipal financial
products. Other persons that are
subject to registration as municipal advisors include those who
solicit municipal entities on behalf of…municipal advisors…as
well as on behalf of brokers, dealers, municipal securities dealers,
and other parties.
The Proposed Permanent Rule
Section 975 of the Dodd-Frank
Act requires the registration of
“municipal advisors” both with the
SEC and with the Municipal Securities Rulemaking Board (MSRB). SEC
registration is free, but MSRB registration will impose ongoing costs.
In addition, the MSRB will write
rules of conduct, education requirements, and fiduciary standards that
will apply to registered municipal
advisors. Importantly, registration
will be required not only of the
entity itself, but each employee who
provides municipal advisory services.
Functional Enforcement
Unlike the MSRB rules or the
municipal securities provisions of
the Exchange Act, enforcement
of the registration and associated
requirements would be by the SEC
or the Financial Industry Regulatory
Authority (FINRA) — not the bank
regulators in the case of banks. In
addition, there is no provision for
examining a “separately identifiable department of a bank” (SID) as
there is for municipal securities dealers that are banks. As a result, the
SEC could come in and examine the
bank directly if municipal advisory
activities are conducted in the bank.
Rule Proposal’s Impact on Bank
Activities
As previously noted, Section 975
of the DFA expressly links registration to the provision of advice about
the proceeds of municipal securities.
However, neither the statute nor the
proposal defines “advice.”
Significantly, the SEC’s proposal has expanded the registration
requirement beyond advice about
“proceeds” of municipal securities.
Rather, the proposal would require
registration if advice is given about
“funds held by or on behalf of a municipal entity.”
The proposal acknowledges
that municipal pension plans and
529 college plans are not funded
by “proceeds,” but yet the SEC has
determined that advice to such
entities would require registration.
The proposal further states that this
treatment would eliminate the need
to determine the point at which
“proceeds” that are commingled with
other funds no longer are “proceeds.”
Among other things, the proposal could affect the following bank
activities:
• Bank deposits, cash management tools, and other traditional
bank products. Because “advice” is
not defined, it is unclear whether
letting a municipality know it can get
better interest on a money market
deposit account instead of a checking account constitutes “advice.”
The proposal references advice by
“money managers,” but again this is
undefined and appears only in the
preamble.
• Bank advisory activities exempt
under the Advisers Act. The statute
provides no exemption for activities
conducted pursuant to the statutory exception from the Investment
Advisers Act for banks and trust
companies, thus potentially requiring registration by bank advisers to
municipalities.
• Advice to municipal pension
plans. Such advice is now covered
because the requirement for “proceeds” has been eliminated. This
provision could also encompass directed trustees to employee benefit
plans.
• Liquidity facilities for municipal
bond issuances. The proposal would
exempt from registration banks and
other liquidity providers that offer
letters of credit and other instruments to back bonds. However, if a
bank will not provide a letter of credit unless the municipality structures
the issuance in a certain manner, the
bank may be subject to registration
for providing advice about “structuring” the issuance.
• Corporate trust. The proposal
cites its potential applicability to corporate trustees for bond issuances.
Comments Sought
The SEC is seeking input on a series of questions about the proposal’s
(continued on page 14)
ABA TRUST LETTER
February 2011 • 13
American Bankers Association
(continued from page 13)
impact on banks, including whether
there should be exemptions for:
• Banks exempt under the Advisers Act;
• Bank deposit accounts;
• Banks responding to requests for
proposals from municipalities
for investment products offered
by banks, such as money market
funds or exempt securities;
• Banks that provide a list of options available from the bank for
short-term investments and that
negotiate the terms of an investment; and
• Banks providing the terms to a
municipal entity upon which it
would buy the entity’s securities
for the bank’s own account.
The SEC is also requesting input
on whether it should permit registration only of SIDs and whether
registration would work where a
bank’s municipal advisory activities
are scattered among its departments
and geographical locations. n
Previous articles in ABA Trust Letter
“Municipal Advisor Registration
Rule Creates Uncertainty for Banks
and Trust Companies; ABA and ABASA Submit Comment Letter Seeking
Clarifications,” November 2010, page
1.
“Now in Effect: Temporary Municipal Advisor Registration,” November 2010, page 2.
IRS Offers Up Guidance on Group Trusts
I
n Revenue Ruling 2011-1, the
Internal Revenue Service (IRS)
made several modifications to the
rules governing “group trusts” —
which are tax-exempt pooled investment vehicles consisting of taxqualified employee benefit trusts,
governmental employee plans, and
other eligible plans and trusts. The
revenue ruling, which is of interest
to banks that maintain collective
trust funds for employee benefit
plans, became effective on January
10, 2011.
The rules for group trusts are described in Revenue Ruling 81-100, as
clarified by Revenue Ruling 2004-67.
Revenue Ruling 2011-1 revises these
rules to clarify the conditions under
which the assets of qualified plans
under § 401(a), individual retirement accounts under Section 408
(including Roth IRAs), and eligible
governmental plans under § 457(b)
may be pooled in a group trust with
the assets of custodial accounts (§
403(b)(7)), retirement income
accounts (§ 403(b)(9)), and governmental plans (§ 401(a)(24)) without
affecting the tax status of these entities or the group trust.
The Revenue Ruling states
that, to ensure that the assets of a
14 • February 2011
group trust are commingled only
with the assets of similar plans or
arrangements, each entity must be
tax-exempt under § 501(a) of the
Internal Revenue Code and be part
of a plan that satisfies an exclusive
benefit rule. Each group trust must
also keep separate records of each
adopting entity’s interest in the
group trust.
Under the Revenue Ruling, a
custodial account under § 403(b)
(7) must be invested in the stock of
a regulated investment company,
and any group trust in which the
assets of a § 403(b)(7) custodial account is invested must comply with
this restriction. As a result of this
investment restriction, the assets of a
custodial account under § 403(b)(7)
generally will be commingled in a
group trust that consists solely of the
assets of other § 403(b)(7) custodial
accounts.
If the requirements enumerated
in the Revenue Ruling are satisfied,
the tax-exempt status of the group
trust will be derived from the taxexempt status of the participating
entities to the extent of their equitable interests in the group trust.
Revenue Ruling 2011-1 also sets
forth two model amendments for
group trusts to use. The first one
is for a group trust that received a
determination letter from the IRS
before January 10, 2011, that the
group trust satisfies Revenue Ruling 81-100 but does not satisfy the
separate account requirement under
Revenue Ruling 2011-1. The second
amendment is for group trusts that
received a determination letter from
the IRS before January 10, 2011, that
the group trust satisfies Revenue
Ruling 81-100 and intends to permit
custodial accounts (§ 403(b)(7)), retirement income accounts (§ 403(b)
(9)), or governmental retirement
plans (§ 401(a)(24)) to participate
in the group trust.
According to the revenue ruling,
both model amendments should be
adopted by group trusts that do not
satisfy the separate account requirement but do intend to permit the
aforementioned types of plans to
participate in the group trust.
Revenue Ruling 2011-1 also
extends the transition relief provided
in Revenue Ruling 2008-40 to Puerto
Rico retirement plans participating
in group trusts from January 1, 2011,
to January 1, 2012. Revenue Ruling
2011-1 may be found at http://www.
irs.gov/pub/irs-drop/rr-11-01.pdf. n
ABA TRUST LETTER
American Bankers Association
ABA Comments on Proposed
Volcker Rule Conformance Period
A
BA submitted comments to the
Federal Reserve Board (FRB) on
its proposed rule implementing the
Volcker Rule conformance period,
as provided in the Dodd-Frank Wall
Street Reform and Consumer Protection Act. The comment due date,
January 10, 2011, prompted ABA to
caution the FRB to take a measured
approach and be prepared to revisit
the Volcker Rule conformance period
rule in light of two relevant matters:
• The ongoing efforts by the federal banking agencies, Securities
and Exchange Commission, and
Commodity Futures Trading
Commission to propose a rule to
implement the substance of the
Volcker Rule; and
• The Financial Stability Oversight
Council’s (FSOC) study of the
Volcker Rule, which was released
after ABA submitted the letter
(see page 11).
“In particular, the coordinated
rulemaking may address such vital
issues as the scope of the terms
“banking entity,” “hedge fund,” and
“private equity fund,” ABA noted.
Furthermore, given the parallel Volcker Rule implementation activities,
“it is extremely difficult to foresee
and comment on all the concerns
that may arise with the conformance
period proposal when it operates in
conjunction with the other not-yetissued implementing rules.”
Nevertheless, in the specific
context of the proposed conformance period rule, ABA did offer a
number of recommendations. The
remainder of this article summarizes
ABA’s comments.
ABA Comments
of such extensions if it defines the
statute’s terms too narrowly. Accordingly, the letter stated, “ABA believes
the Board should preserve its statutory authority and more broadly define
the important terms in the statute.”
Scope of Definitions
The intent of Congress was for
the Volcker Rule to allow for the liquidation of long-term interests without hurting the safety and soundness
of the very institutions the rule seeks
to protect and without harming fund
investors or bank clients. Congress
also vested significant authority in
the FRB to consider and grant applications for extensions of the general
conformance period.
ABA pointed out, however, that
the FRB will undermine the utility
Extended Transition for Illiquid Funds
The rule proposal defines an “illiquid asset” as one that is not a “liquid asset” (that is, not cash, an asset
traded on an exchange or market,
an asset with a ready market, and so
forth) or one that may not be sold to
a person unaffiliated with the banking entity. In addition, the statute
also refers specifically to “portfolio
companies, real estate investments,
and venture capital investments” as
illiquid assets.
The proposed rule implement-
Overview: The Volcker Rule Conformance Period for
Banking Entities
Section 619 of the Dodd-Frank Act, commonly referred to as the
“Volcker Rule,” generally prohibits banking entities from engaging in
proprietary trading or from investing in, sponsoring, or having certain
relationships with hedge funds or private equity funds. Under the Volcker Rule, banking entities must come into conformance with its requirements two years after the earlier of one year after the issuance of final
rules under the section or two years after enactment of the Dodd-Frank
Act.
The proposed rule would implement the statutory conformance
period. The rule would also implement the authority in the Volcker Rule
that allows the Board to extend the conformance period for up to three
additional one-year periods if such an extension is consistent with the
purposes of Section 619 and not detrimental to the public interest. The
Board may also extend the conformance period for up to five years for
holdings of illiquid funds to the extent necessary to fulfill a contractual
obligation that was in effect on May 1, 2010.
The Dodd-Frank Act requires the conformance period rules to be
issued within six months of the law’s enactment, or January 21, 2011.
This statutory deadline is the reason the Board pursued an accelerated
schedule for proposing a rule that addresses only the Volcker Rule conformance period. As of the time of publication, the Federal Reserve had
not issued the final conformance period rule.
(continued on page 16)
ABA TRUST LETTER
February 2011 • 15
American Bankers Association
(continued from page 15)
ing the conformance period should
be modified to accommodate assets
that initially meet the definition
of liquid but, given the particular
circumstances of the investment or
market, subsequently become illiquid.
One example is large holdings in the
securities of one particular issuer that
may prohibit the fund from selling
the asset without material losses.
Consequently, ABA recommended
specifying in the proposal that other
circumstances may exist that make a
typically or historically liquid asset illiquid in the present circumstances.
ABA also urged the FRB to consider a more moderate interpretation of the term “principally invested” than the “substantially invested
in illiquid assets” standard used in
the proposed rule. As proposed, an
illiquid fund would be “principally
invested in illiquid assets if at least 75
percent of the fund’s consolidated
assets are illiquid assets or related
risk-mitigating hedges.”
At a minimum, ABA suggested,
the FRB should reduce the threshold
to a simple majority of the assets in
the fund, if not a lower amount.
The proposed rule would also
adopt a narrow interpretation of the
meaning of “contractual obligation”
that was in effect on May 1, 2010. In
the rule, the term means only certain
contractual obligations in which the
banking entity is (1) prohibited from
redeeming or selling its interest; or
(2) contractually obliged to provide
additional capital; and (3) either
prohibited from terminating the obligation or, if the obligation may be
terminated, required to use “reasonable best efforts” to obtain consent
to terminate.
ABA recommended a simpler
reading of the term “contractual
obligation” as any contractual obligation or agreement in effect on May
1, 2010, “to take or retain its equity,
partnership, or other ownership
16 • February 2011
interest in, or otherwise provide additional capital to, an illiquid fund.”
Bank-Managed Funds
Banks routinely establish funds
that potentially may fall within the
broad definition of “hedge fund” or
“private equity fund.” Such bankmanaged funds provide investment
opportunities to institutional, government, charitable, or trust customers. Bank sponsors often invest
side-by-side in these funds, at least
for the initial years of the fund. This
co-investment may be significant and
larger than the 3 percent de minimis
investment allowed as a permitted
activity in the statute.
“Given the fiduciary and other
obligations of a bank that is acting as
trustee, general partner, or managing member, the Board should
recognize, as a factor governing its
determinations, these duties to the
fund and its investors and not adopt
rules or interpretations that in effect
would not be in the best interests of
the investors,” ABA recommended.
Conclusion
ABA concluded its comments by
noting that the need for flexibility
under the conformance period rule
is paramount. “We strongly urge the
Board to instill more flexibility into
the rule so that it may consider a potentially wide variety of scenarios that
legitimately need additional relief
from the Volcker Rule.” n
Previous article in ABA Trust Letter
“ Volcker Rule Conformance Period Fleshed Out in Proposed Rule,”
January 2011, page 4.
FSOC Releases Study and
Recommendations on Volcker Rule
A
t its second meeting on January
18, 2011, the Financial Stability
Oversight Council (FSOC) released
its study report and recommendations on the Volcker Rule (Section
619 of the Dodd-Frank Wall Street
Reform and Consumer Protection
Act). The study weighs the impact
of, and makes suggestions for implementing, the Volcker Rule’s two general mandates applicable to banking
entities:
• Prohibits them from engaging in
proprietary trading activities in
which they act as a principal in
order to profit from near-term
price movements;
• Prohibits them from investing in,
or having certain relationships
with, hedge funds and private
equity funds.
The bank regulatory agencies are
currently engaged in a joint rulemaking process to implement the
Volcker Rule and will use the study
report to assist them in developing
the rules.
Highlights of the Report
Overall, the FSOC recommends
“robust implementation” of the
Volcker Rule’s prohibitions applicable to banking entities. The
report sets forth ten specific recommendations and contains detailed
discussions of the intention of the
Volcker Rule and the principles
that should guide the agencies in
their rulemaking.
ABA TRUST LETTER
American Bankers Association
Proprietary Trading. The report addresses the carve-out in the
Volcker Rule’s proprietary trading
prohibition for certain “permitted
activities” that represent core banking functions, such as certain types of
market making, asset management,
underwriting, and transactions in
government securities.
According to the report, “These
permitted activities — in particular,
market making, hedging, underwriting, and other transactions on behalf
of customers — often evidence
outwardly similar characteristics to
proprietary trading, even as they
pursue different objectives, and it
will be important for the agencies to
carefully weigh all characteristics of
permitted and prohibited activities as
they design the Volcker Rule implementation framework.”
Although these core banking
functions will be permitted, the Rule
includes a prudential “backstop”
that prohibits the functions if they
would result in a material conflict of
interest, material exposure to highrisk trading strategies, a threat to the
safety and soundness of the banking
entity, or a threat to the financial
stability of the United States.
The report notes that, even
though a banking entity may have
shut down its proprietary trading operations, impermissible proprietary
trading may continue to occur within
the permitted activities. The report
Permitted Activities Under the Volcker Rule
Banking entities are permitted to organize and offer or invest in
hedge funds and private equity funds to facilitate customer-focused advisory services if they meet the following conditions:
• The banking entity must provide bona fide trust, fiduciary, or investment advisory services as part of its business.
• The fund must be organized and offered only in connection with
such services and only to customers of such services.
• The banking entity may not acquire or retain an equity interest, partnership interest, or other ownership interest in the funds except for
a de minimis investment.
• The banking entity may not guarantee or otherwise assume or insure
the obligations or performance of the fund.
• The banking entity may not share the same name, or variation of the
same name, with the fund.
• No director or employee of the banking entity may have an ownership interest in the fund unless he or she is directly engaged in providing services to the fund.
• Certain other conditions must be met, such as that the banking entity
must comply with the restrictions on affiliate transactions with any
fund it sponsors, consistent with Sections 23A and 23B of the Federal
Reserve Act.
recommends that the agencies address this possibility in the rules and
include safeguards against this sort
of incidental proprietary trading.
Hedge Funds and Private Equity
Funds. With respect to the prohibition involving hedge funds and
private equity funds, the FSOC is
recommending that the agencies
prohibit banking entities from investing in or sponsoring any hedge
fund or private equity fund, except as
part of its services to bona fide trust,
fiduciary, and investment advisory
customers (see the adjacent box for
a list of conditions for this exception).
The Volcker Rule allows a banking entity to organize and offer a
fund to its bona fide trust, fiduciary,
and investment advisory customers.
However, the entity is not permitted
to invest in hedge funds or private
equity funds, beyond a specified de
minimis amount, in order to establish
funds and attract unaffiliated investors in connection with its customerrelated business.
To define hedge funds and private equity funds, the Volcker Rule
relies on two commonly used exclusions from the definition of the term
“investment company” under Section
3(c) of the Investment Company Act.
The report notes that these Section
3(c) exclusions were not designed to
apply only to traditional hedge funds
and private equity funds.
“In implementing the Volcker
Rule, agencies should consider
criteria for providing exceptions
with respect to certain funds that are
technically within the scope of the
“hedge fund” and “private equity
fund” definitions in the Volcker
Rule but that Congress may not have
intended to capture in enacting the
statute,” states the report.
The report makes the following
recommendations in regard to the
(continued on page 18)
ABA TRUST LETTER
February 2011 • 17
American Bankers Association
(continued from page 17)
permitted hedge fund and private
equity fund activities:
1. Definition of customer. The Volcker Rule requires that organized or
sponsored funds be offered only to
“customers” of a banking entity, but it
does not define the term “customers.”
The agencies should consider certain
factors outlined in the report when
defining who is a customer and the
necessary nature of the relationship.
2. De minimis investment calculation. The Volcker Rule restricts the
exposure of a banking entity to 3
percent of any single fund and limits
the entity’s aggregate exposure to
3 percent of Tier 1 capital. These
limits should be calculated in a man-
ner that will require full accounting
of the banking entity’s risk, and the
limits should be monitored throughout the life of the fund.
3. Accountability. Agencies should
consider requiring banking entities
to establish internal programmatic
compliance regimes that will involve
strong investment and risk oversight
of permissible hedge fund and private
equity fund activities. An entity’s
board of directors should be engaged
in oversight, and the CEO should
publicly attest to the adequacy of
the compliance regime. The agencies should also consider requiring
banking entities that invest in a hedge
fund or private equity fund in order
to facilitate customer-related business
IRS Gives Guidance on Tax Return
Preparer Registration
No Relief for Bank Trust Department Employees
I
n Notice 2011-6, the Internal
Revenue Service (IRS) provides
guidance on how to implement new
regulations governing tax return
preparers. The regulations, issued
in 2010, create a new “registered
tax return preparer” designation
and require tax return preparers to
obtain a preparer tax identification
number (PTIN), pass a competency
examination, and complete qualifying continuing education credits in
order to maintain their registration.
The regulations do not affect
banks and their employees when
they prepare tax returns for trusts
and estates in their fiduciary capacity. However, the IRS did not include
a carve-out from the examination
and education requirements for
bank employees who assist in tax re-
18 • February 2011
turn preparation in other capacities.
Such capacities in which a bank
employee might contribute to the
preparation of a return include, for
example, assisting in tax preparation
services for trusts with third-party
trustees or making routine determinations about the tax treatment of
corporate actions (such as reorganizations, redemptions, and dividends).
Notice 2011-6 provides an exemption that relieves employees of
law firms, certified public accountant
(CPA) firms, or other “recognized
firms” from the testing and continuing education requirements if they
engage in return preparation under
the supervision of attorneys, CPAs,
or enrolled agents who sign the
returns. This exemption does not
reach employees of a bank or bank
to disclose the nature and amount of
the investments. n
Editor’s Note: To obtain a copy of
the FSOC study report, use the link:
http://www.treasury.gov/initiatives/
Documents/Volcker%20sec%20%20
619%20study%20final%201%20
18%2011%20rg.pdf
Previous articles in ABA Trust Letter
“Volcker Rule Conformance Period Fleshed Out in Proposed Rule,”
January 2011, page 4.
“FSOC’s Volcker Rule Study
Draws Comment,” December 2010,
page 1.
“FSOC Commences Operations:
Nonbank Supervision and Volcker
Rule,” November 2010, page 15.
trust department, even though such
employees may also be supervised by
lawyers, CPAs, and banking experts.
ABA will recommend to the IRS to
expand this exemption to the employees of well-regulated and examined banking entities.
Note that Notice 2011-6 provides
an exemption from the tax preparer
registration requirements for employees who prepare certain forms,
such as the Form 5500 series for employee benefit plans. The regulations
include a list of tax-related forms
that do not have to be prepared by
a registered tax return preparer,
but the list does not include trust
or estate tax returns. The list does,
however, include the forms for
Power of Attorney and Declaration
of Representative and several forms
relating to employee benefit plans
besides the Form 5500 series. n
Previous articles in ABA Trust Letter
“ABA Seeks Narrowing of Tax
Return Preparer Requirements,”
November 2010, page 9.
ABA TRUST LETTER
MMF Stability
Options
(continued from page 1)
the Lehman Brothers bankruptcy. As
a result, mostly institutional investors
began redeeming their shares from
MMFs because of fears that those
funds would follow suit. Overall,
investors withdrew approximately
15 percent of the assets of prime
MMFs in a single week. To stanch
the outflow, the Treasury took the
unprecedented step of providing a
temporary full guarantee of investors’ assets in any MMFs that agreed
to participate in the program.
A year ago, SEC amended its
regulations to shore up the stability
of MMFs by, among other things,
imposing additional credit quality
standards, reducing the weighted
average maturity of funds’ portfolios,
and permitting a fund that is breaking the buck to suspend redemptions and liquidate its portfolio in an
orderly manner.
Despite these regulatory measures, discussion continues whether
more action is needed. In any case,
ABA wrote, bank collective and common funds are not exposed to any
systemic risk issues similar to those
experienced in 2008 by MMFs. Because collective and common funds
are comprehensively regulated and
examined by the federal bank regulators, “we believe that no additional
remedial actions need be taken with
respect to such entities.”
Stable NAV Funds
ABA’s letter addressed three of
the policy options identified in the
PWG report:
1. Replacing all stable NAV MMFs
with floating NAV MMFs;
American Bankers Association
2. Creating a two-tier system of
stable and floating NAV funds
with enhanced protections for
stable NAV funds, such as access
to a private liquidity facility; and
3. Creating a two-tier system in
which stable NAV funds are restricted to retail investors.
ABA made clear that it strongly
opposes any policy change that
would require MMFs to adopt
floating net asset values instead
of stable NAVs, or that would
restrict investments in stable NAV
funds to retail investors only.
Retaining the option of funds
with a stable NAV in which both
retail and institutional investors may
invest is paramount, ABA pointed
out. Stable NAV funds have great
utility as cash management vehicles
and for transactional stability, as evidence by the large number of funds
that invest in them. Any attempt to
further reduce the potential risk of
a broad run on MMFs should be approached in another manner.
“A stable NAV fund provides a
level of simplicity for investors who
wish to keep their assets fairly liquid
for some period of time and gives
them confidence that the value of
the fund will remain constant no
matter which day they may purchase
or redeem shares,” ABA asserted.
This attribute is particularly important for accounts that are used for
transactional purposes rather than as
investments — for example, MMFs
used to fund transactions that occur
over the course of the day, as would
be necessary for employee benefit
plans and municipal bond issues.
In addition, trust departments
that sweep idle cash into MMFs on
an overnight or longer basis must
have the certainty that enough cash
will be available to fund the day’s
transactions. Also, certain trust investors may face legal or other constraints that require them to invest
their cash balances in funds that
maintain a stable NAV, ABA pointed
out. At least three states specify
stable NAV MMFs as permissible
investments under bond indentures.
For these reasons, it is imperative that stable NAV funds remain
available to institutional investors. It
is true that institutional investors are
better informed and equipped to redeem their shares when a fund begins
to lose value and that retail investors
in the same fund are disadvantaged in
this respect. “ABA believes, however,
that the recently adopted SEC rules
have diminished the vulnerability of
stable NAV funds to runs and that
other policy options are available
to ameliorate further the risks from
runs,” asserted the letter.
Mandatory Redemptions in Kind
ABA also opposes requiring
institutional investors to make large
redemptions in kind. The option is
not well defined and “is fraught with
both equitable and operational difficulties,” ABA wrote.
Public Insurance for MMFs
ABA’s comment letter also asserted strong opposition to any form
of public insurance for MMFs, as
the federal deposit insurance system
does for bank deposits. First, the deposit insurance system was intended
to forestall runs on banks by small
deposit account holders and is justified by the fact that small savers are
generally not well informed about
the financial condition of a bank. In
contrast, MMFs are more vulnerable
(continued on page 20)
ABA TRUST LETTER
February 2011 • 19
American Bankers Association
(continued from page 19)
to redemptions by large investors —
“the very ones with better information to judge the financial condition
of the fund,” ABA explained.
Another reason not to create an
insurance system for MMF investments is that any such protection carries the moral hazard that it will reduce market discipline. To offset this
moral hazard, the banking industry
is subject to a very intrusive regulatory system of safety and soundness
supervision and examination.
If a federal insurance program
were to be established to insure
large-scale MMF investments, it
would carry a correspondingly
greater reduction of market discipline, in turn requiring a greater and
more intrusive regulatory program
than the one that applies to insured
depository institutions. The costs of
creating such a public insurance system for MMFs would make these investments significantly less attractive.
Moreover, any such insurance system
would have to preserve competitive
fairness and be constructed so as not
to provide advantages to investors in
MMFs over owners of bank deposit
accounts.
“We believe it unwise, given the
current fiscal crisis, even to contemplate the task of creating a new
government agency to design an
insurance program and develop the
regulations and structure necessary
to implement such a program.” n
Editor’s Note: For a copy of the letter, go to http://www.aba.com/NR/
rdonlyres/DC65CE12-B1C7-11D4AB4A-00508B95258D/70308/cl_
WG_MoneyMarketReform2011Jan.
pdf
Previous articles in ABA Trust Letter
“SEC Seeks Input on Money Market Fund Reform Options,” December 2010, page 8.
“SEC Adopts MMF Stability
Rules,” March 2010, page 6.
“ABA Cautions SEC on Proposed
MMF Stability Rules,” October 2009,
page 11.
“Money Market Fund Stability
Rules Proposed,” August 2009,
page 6.
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ISSN 1524-4210
20 • February 2011
ABA TRUST LETTER