holding companies and their affiliates to engage in the activity of serving as adviser to registered investment companies and REITs so long as the companies are not "primarily or frequently engaged in the issuance, sale and distribution of securities." It was adopted effective February 1, 1972.25

D. RECENT DEVELOPMENTS

In December, 1973, the Investment Company Institute filed a petition with the Federal Reserve Board for reconsideration and recission of Regulation Y, maintaining that such bank advisory services to registered investment companies violate Sections 16 and 21 of the GlassSteagall Act. On March 8, 1974, the Federal Reserve Board reaffirmed its view and denied the Investment Company Institute request.2 In May of 1974, the Investment Company Institute filed a law suit against the Federal Reserve Board seeking a declaratory judgment that the provisions violated Sections 16 and 21 of the Glass-Steagall Act and an injunction to stop the Federal Reserve Board from authorizing any bank holding company or affiliate from sponsoring, organizing, controlling or serving as investment adviser to any registered closed-end or open-end investment company.27 The District Court recently dismissed the suit on procedural grounds and it is not clear when or whether these legal questions will be resolved on the merits.

E. QUESTIONS AND ISSUES

1. The Board of Governors of the Federal Reserve System has stated that the "Glass-Steagall Act provisions . . . forbid a bank holding company to sponsor, organize, or control a mutual fund. However, the Board does not believe that such restrictions apply to closed-end investment companies . . ." (37 Fed. Reg. 1464 (1972)). Is this a proper interpretation of the Supreme Court's decision in Investment Company Institute v. Camp?

2. What kind of services are provided by bank advisers to mutual funds? Does a bank acting as investment adviser to a registered investment company merely provide services similar to those which banks have traditionally performed as fiduciary, trustee or financial adviser for trust funds, pension funds and other fiduciary accounts?

3. What provisions of the federal securities laws are applicable to banks and bank holding company affiliates who serve as advisers to investment companies or REIT's? How do they affect bank policies or practices?

4. Could abuses such as those which gave rise to the Glass-Steagall Act be effectively eliminated if banks were permitted to sponsor mutual funds subject to Investment Company Act of 1940 safeguards? 5. How does the Glass-Steagall Act affect banks and bank holding company affiliates who serve as advisers to REIT's?

25 12. C.F.R. 225.4 (a) (5) (ii).

26 Investment Company Institute Request to FRB for Recission of Ruling Permitting Bank Holding Companies to Act as Investment Advisers [1973-74 Transfer Binder] CCH Fed. Sec. L. Rep. ¶ 79,707 (March 8, 1974).

27 Investment Company Institute v. Board of Governors of the Federal Reserve System. Civil No. 74-697 (D.C.D.C., filed May 8, 1974). The complaint is reprinted at [1973-74 Transfer Binder] CCH Fed. Sec. L. Rep. 94,540.

6. Are there any parallels between the present affiliations of banks and bank holding companies with REIT's and the securities affiliates of the 1920's?

7. Do relationships of banks and bank holding company affiliates with REIT's raise any of the potential abuses mentioned by the Supreme Court in Investment Company Institute v. Camp?

(a) banks may invest their own assets in frozen or otherwise imprudent investments;

(b) the bank and the REIT would be closely associated in the public mind, and, if the REIT should fare badly, public confidence in the bank might be impaired;

(c) banks could misuse their credit facilities to shore up an affiliated REIT through unsound loans or by making credit more freely available to the REIT;

(d) bank customers could suffer losses in the REIT which could destroy goodwill and this, in turn, could become an important handicap to a bank.

SECTION V-TAX-BENEFITED RETIREMENT PLANS

A. DESCRIPTION

Retirement funds have been the beneficiaries of a great deal of competition among all types of financial institutions, including investment advisory firms and insurance companies as well as banks, brokerage firms and investment companies. The competition has involved offering retirement funds special services in addition to discounts from customary advisory fees and sales commissions.

Institutions seeking to manage retirement fund dollars are operating under many different sets of regulations. For example, insurance companies and banks are exempt from the registration requirements and regulations of the Investment Advisers Act of 1940 and the Securities Exchange Act of 1934. And the collective investment funds into which they pool the assets of retirement funds generally are exempt from the Investment Company Act of 1940.

The Internal Revenue Code of 1954, as amended, (the "Code") requires that a bank serve as trustee or custodian for all § 401 qualified plans, § 401 (c) Keogh Plans, § 403 (b) custodial accounts and $ 408(a) Individual Retirement Accounts ("IRA"). Brokerage firms and investment companies, investment advisers and insurance companies presently may not serve as trustees or custodians of qualified retirement funds. The Employee Retirement Income Security Act of 1974 (the "Pension Reform Act") 28 amended $401 (f) of the Code to permit persons other than banks to be designated by the Secretary of the Treasury as a qualified trustee or custodian for custodial accounts and IRAs. The only request so far for such a designation has been made by the Investment Company Institute on behalf of the mutual fund industry.

28 P.L. 93-406, 88 Stat. 829 (Sept. 2, 1974).

1. Keogh Plans

Keogh Plans (also called HR 10 Plans) were first authorized by the Congress in 1962 by the Smathers-Keogh Act-the Self-Employed Individuals Retirement Act of 1962 20-as a way for self-employed individuals to establish tax qualified retirement plans.

29

In general the Act provided that contributions to a qualified Keogh Plan by a self-employed individual for himself and on behalf of his employees may be deducted from income (within specified limits) and that any income and gains with respect to such contributions are free from Federal income tax until distributed to the participant.

Contributions made pursuant to Keogh Plans may be funded in various ways. Funds may be deposited in a trust of which a bank is the trustee; a special custodial account can be established with a bank; or the funds may be used to purchase life insurance or annuities. Many bank Keogh Plans permit investors to invest only in a savings account, but some banks have made arrangements with investment companies and insurance companies whereby Keogh Plan investments may be made in mutual fund shares or insurance policies or deposited in a savings account or any combination of the above.

2. Individual Retirement Accounts

Section 2002 (b) of the Pension Reform Act added section 408 to the Code to create a new form of retirement savings medium known as an Individual Retirement Account. An individual not covered by a qualified or government pension plan or a Code § 403 (b) "tax-sheltered annuity" may save up to $1500 a year by investment in a qualified trusteed or custodial account with a bank, savings and loan association or credit union, by the purchase of an annuity contract or by investment in qualified retirement bonds. Amounts contributed to an IRA and the income from those contributions are exempt from Federal income taxation under IRS § 408.

1. Keogh Plans

B. SECURITIES LAWS

Under the Federal securities laws, single and collective trusts maintained by a bank in connection with pension and profit sharing plans which are qualified under Internal Revenue Code section 401, including Keogh Plans, are exempt from the registration requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940 by sections 12(g) (2) (H) and 3(c) (11) thereof, respectively. However, interests in Keogh Plans and collective trust funds for Keogh Plans are not exempt from the registration requirements of the Securities Act of 1933.

The treatment of these plans was most recently considered by the Congress in 1970.30 The Investment Company Amendments Act of 1970 31 subjected interests and participations issued in connection

29 Pub. L. 87-792, 76 Stat. 809 (Oct. 10, 1962); see Section 401 (c) of the Internal Revenue Code of 1954, as amended.

30 See Hearings on S. 34 and S. 296 (Investment Company Amendments Act of 1969) before the Senate Comm. on Banking and Currency, 91st Cong., 1st Sess. (1969); S. Rep. No. 91-184, 91st Cong., 1st Sess. (1969); H.R. Rep. No. 91-1382, 91st Cong., 2d Sess. (1970); Conf. Rep., H.R. Rep. No. 91-1631, 91st Cong., 2d Sess. (1970). 1 P.L. 91-547, 84 Stat. 1416 (December 14, 1970).

65-699 - 76-14

with Keogh Plans to the registration and other requirements of the Securities Act of 1933 but authorized the SEC to exempt such interests if and to the extent the Commission determines this to be necessary or appropriate in the public interest and consistent, with the protection of investors.22 The SEC has never acted to exempt pooled Keogh Plans from these requirements and banks have availed themselves of the "intrastate offering exemption" of the Securities Act in order to avoid the burden and costs of full registration.

2. Individual Retirement Accounts

Section 2002 of the Pension Reform Act permits a bank to commingle the assets of the account in a "common trust fund or common investment fund." Thus, banks are permitted to commingle in a common trust fund or common investment fund Individual Retirement Accounts which invest in equities. With respect to the jurisdiction of the securities laws over such commingled funds, however, the Conference Report on the provision expressly stated:

The conferees intend that this legislation with respect to individual retirement accounts is not to limit in any way the application of the Federal Securities laws to individual retirement accounts or the application to them of the laws relating to common trusts or investment funds maintained by any institution. As a result, the Securities and Exchange Commission will have the authority to act on the issues arising with respect to individual retirement accounts independently of this legislation.34

As a result, because IRA's are not trusts described in Section 401 of the Code, IRA's and collective investment funds for IRA's clearly are not exempt from registration under the Investment Company Act of 1940 and the Securities Act of 1933. However, the SEC staff has: issued no action letters to the effect that registration of IRA's invested in mutual fund shares under either the Investment Company Act of 1940 or the Securities Act of 1933 will not be required if (a) the assets of each account are invested solely in specific mutual fund hares, (b) the trustee or custodian has no investment discretion over the assets of the IRA, and (c) there is no pooling of assets of more. than one IRA.35

C. RECENT DEVELOPMENTS

Testifying before the Subcommittee earlier this year on S. 249, the Necurities Acts Amendments of 1975, the American Bankers Association requested amendments to the Securities Act of 1933 to "extend the exemption for qualified corporate plans to qualified plans for selfsmployed persons and to individual retirement accounts." 36 Moreover, the Subcommittee received draft language to accomplish this objec

W

**Securities Act of 1933, § 3(a) (2), 15 U.S.C. & 77c (a) (2).

*Spurities Act of 1933, § 3(a) (11), 15 U.S.C. § 77c(a) (11); see testimony of William Gaulty, American Bankers Association, Hearings on S. 249 (Securities Act AmendMats of 1975) before Subcommittee on Securities of the Senate Committee on Banking, Haastus and Urban Affairs, 94th Cong., 1st sess. 463-65 (1975).

Hep No. 93-1090, 93d Cong., 2d Sess. 338 (1974).

Investment Company Institute [1974-75 Transfer Binder] CCH Fed. Sec. L.. 2001 (avail. Oct. 1974). See also, SEC staff letter to Continental Illinois Na

don Book and Trust Company of Chicago (avail. Apr. 28, 1975).

*ffected on S. 249 (Securities Acts Amendments of 1975) Before Subcomm. on rities of the Senate Comm. on Banking, Housing and Urban Affairs. 94th Cong., ada 75 (1975).

tive.37 The proposed language would have exempted interests in collective investment funds for Keogh Plans from the Securities Act of 1933 and collective investment funds for individual retirement accounts from the provisions of the Securities Exchange Act of 1934 and the Investment Company Act of 1940. No action was taken by the subcommittee with respect to the proposal.

D. QUESTIONS AND ISSUES

1. How do the federal securities laws apply to retirement plans? What has been the impact of the laws on bank policies and practices with respect to these services?

2. May a bank invest assets of a corporate pension or profit sharing trust for which it is trustee in a "common trust fund" without affecting its exemption?

3. Are banks precluded from investing IRA assets in any collective fund unless it is registered under the Investment Company Act of 1940? Under the Securities Act of 1933?

4. May a bank maintain one money market collective fund for the temporary investment of cash of personal trusts, pension and profit sharing trusts, Keogh Plans, etc., without registering the participations under the Securities Act of 1933? Without registering the fund as an investment company under the Investment Company Act of 1940?

5. Is the intrastate exemption or any other exemption from the Securities Act of 1933 available to a collective fund for which IRA assets may be invested?

6. When a bank serves as a trustee of a Keogh Plan, can the assets of the Keogh Plan be invested in a "common trust fund" without affecting its exemption under Section 3(a) (2) of the 1933 Securities Act?

7. Under what conditions may a Keogh Plan qualify for the private placement exemption under Section 4 (2) of the Securities Act of 1933? 8. Has the requirement of registration of the interests in Keogh Plans and common trust funds for Keogh Plans impeded or otherwise adversely affected the growth of these funds?

9. What public policy goal would suffer if banks were allowed to commingle in a collective fund with Keogh Plan assets qualified under the "intrastate exemption" other pension and profit sharing trusts which qualify for the exemption in section 3(a)(2) of the Securities Act of 1933 ?

10. Does the Glass-Steagall Act apply to retirement plans?

11. Did Congress in effect amend the Glass-Steagall Act when it provided for commingling assets of IRA's in common trust funds or common investment funds?

12. Does the language of Code Sections 408 (a) (5) and 408 (e) (6) regarding the investment of IRA Plans in common trust funds have any significance to the applicability of the common trust fund exemp

87 Id., 472-75.