219
ALI-ABA
Conference on Collective Trust Funds:
Current Banking, SEC, and ERISA Regulatory
and Compliance Issues
May 5, 2011
Philadelphia, Pennsylvania
CIF Marketing, Distribution and Advertising Issues
By
Donald W. Smith
K&L Gates LLP
Washington, D.C.
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CIF Marketing, Distribution and Advertising
Issues
Donald W. Smith
Partner
K&L Gates LLP
Marketing of CIFs* is subject to overlapping regulatory
requirements including those administered by:
  Federal and state bank regulatory agencies, most
importantly the Office of the Comptroller of the
Currency (OCC)
  The Securities and Exchange Commission (SEC)
and the Financial Industry Regulatory Authority
(FINRA)
  The U.S. Department of Labor (DOL)
  Prospectively, the Municipal Securities Rulemaking
Board (MSRB)
*  For the purposes of this presentation, a “CIF” is a bank collective fund exempt under Section 3(c)(11) of the
Investment Company Act.
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Most state bank regulators as well as the Federal Deposit
Insurance Corporation look to the OCC for primary
guidance regarding operation of CIFs.
In the area of marketing and advertising, the OCC has
emphasized in particular that banks should not:
  Provide projections of future CIF performance
  Provide unsubstantiated or misleading historical
performance data
  Suggest that the bank will guarantee or ensure a CIF’s
performance or safety
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If third party advisers or others market a CIF, the OCC has
recently stressed that:
  There should be prominent disclosure to investors
in all marketing materials that the CIF is offered and
maintained by the bank trustee and not by the third
party
  The third party should be contractually obligated to
make this disclosure
  The contract with the third party marketer should
clearly delineate responsibilities for accepting new
investors in the CIF
For additional guidance, the OCC generally refers banks to
certain positions of the SEC and FINRA in light of the fact
that offering and sales of CIF interests are subject to the
antifraud provisions of the federal securities laws.
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Offerings of CIF interest are exempt from registration under the
federal securities laws, and they are not subject to the offering
restrictions applicable to private offerings of securities generally
or the Investment Company Act Section 3(c)(3) restrictions on
the advertisement and offering of common trust funds.
  The SEC staff has issued little specific guidance with
regard to the manner of marketing interests in CIFs
  The SEC staff has not objected to suggestions that CIFs
can be marketed in mailings, professional publications and
other media that are reasonably designed to reach
sponsors of, and other investment decision makers for,
plans that are eligible to invest in CIFs
  CIF sponsors typically avoid marketing through mass
media without a nexus to the plan investor community
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The securities laws and SEC staff interpretations have a much
more direct potential impact on the content of advertising and
informational materials related to CIFs.
Section 17 of the Securities Act and Rule 10b-5 under the
Securities Exchange Act both prohibit sales of securities, including
interests in CIFs, through false or misleading statements,
omissions of material facts or through other fraudulent acts.
  Both of these antifraud provisions may be used by the SEC
for enforcement actions
  Section10(b) can serve as the basis for private claims as well
  In 2010, the SEC brought a high profile enforcement case
under Section 17 against a bank, in part premised on
allegations of misleading statements in marketing and
informational materials provided to CIF investors
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Depending on the characteristics of the CIF, there may be additional
grounds for regulation of marketing materials by the SEC and other
agencies.
  If a registered investment adviser is involved in managing or
marketing the CIF, the SEC staff can assert that marketing and
informational materials conform to regulations and
interpretations under the Investment Advisers Act
  If the CIF is marketed by a registered broker-dealer, marketing
materials may be subject to FINRA requirements
  The DOL is in the process of completing detailed regulations
regarding disclosures about investment products offered to
sponsors of and participants in plans subject to ERISA
(discussed below)
  As regulation of “municipal advisors” by the SEC and MSRB
develops, new disclosure requirements may be imposed with
regard to marketing to state and municipal plans
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Increased regulatory attention to CIFs and concern over
civil liability appear to be driving changes in the character
of marketing and other disclosure materials.
  More attention to risk disclosure
  Increased standardization and controls on
performance and other CIF disclosure
  Regular review and updating of CIF disclosure
  Conforming disclosure to that for similar strategies
used by registered investment companies
There is still some leeway for more concise disclosure due
to the presumed investment sophistication of plan
sponsors and advisers who select the CIF as a plan
investment option.
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Attention must be paid to the appropriate supervision of persons
engaged in the marketing effort. In particular, the bank should
maintain oversight of both its own employees and those of third
parties who market the CIF.
  Bank employees and those of registered investment
advisers that advise the CIF do not have to be registered
representatives of a broker
  Persons who are registered representatives of a broker will
be subject to supervision by the broker under applicable
FINRA rules
  This may be the case even if they market the CIF in the
capacity of dual employees of the broker and the bank or
investment adviser
  Any person, other than an employee of a registered
investment adviser, who markets the CIF to a state or
municipal plan may need to be registered with the SEC
and the MSRB as a registered municipal advisor under
rules recently proposed by the SEC
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The maintenance of web sites by trust companies and their
advisers present a number of issues for marketing CIFs.
  Past practice suggests that some effort should be
made to obtain representations that persons with
access to marketing information are “qualified” plan
representatives
  Disclaimers and click through agreements can be
utilized
  Consideration may be given to further limiting access
for plan participants
  Care should be taken to clearly identify the role of the
bank responsible for the CIF and to not present the
fund as a product of any third party adviser
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