tive provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940 to a collective fund in which IRA assets are invested?

13. Is the present regulatory framework of the securities laws consistent with the provisions of the Pension Reform Act which is designed to encourage and facilitate private retirement plans?

14. In view of the fiduciary and disclosure provisions of the Pension Reform Act, the supervision of the Labor Department, the Internal Revenue Service and the banking agencies under the appropriate banking laws, is any public purpose served in subjecting Keogh Plans or IRA's, or collective funds for their investment, under that Act, to the registration requirements of the securities laws?

15. Does the inability of banks to pool certain types of retirement accounts deprive retirement plan participants of the same opportunities for diversification, sound management, and the economies of scale which are enjoyed by large qualified corporate retirement plans and other types of retirement plans which can be pooled?

SECTION VI-COMMINGLED AGENCY ACCOUNTS

A. DESCRIPTION

Since the 1930's, banks have been permitted by federal and state law to establish common trust funds for the collective investment of money held by the bank in a fiduciary capacity.38 Until 1972 the Comptroller of the Currency's Regulation 9 has expressly allowed national banks to commingle funds that are held as fiduciaries in three types of collective investment funds: 39

1. common trust funds maintained exclusively for the investment of moneys held as executor, administrator, guardian or trustee under a will or deed;

2. funds consisting solely of assets of pension, profit-sharing, stock bonus or other trusts which are exempt from federal income taxation under the Internal Revenue Code;

3. funds maintained exclusively for the investment of moneys held by the bank as managing agent created by an agreement authorizing the bank to exercise investment discretion in managing the assets of the principal ("commingled agency accounts"). Although the applicability of the securities laws to the first two types of collective investment funds also will be within the scope of the Study, the principal consideration will be given to the investment advisory and management features of the third category, commingled agency accounts.

In 1962 the Congress transferred jurisdiction over most of the trust activities of national banks from the Board of Governors of the Federal Reserve to the Comptroller of the Currency, without modifying any provision of substantive law.40 The Comptroller, after soliciting

38 See Saxon and Miller, Common Trust Funds, 53 Geo. U.L.J. 994 (1965).

39 12 C.F.R. $ 9.18(a) the authorization for commingled agency accounts was deleted · by the Comptroller on November 15, 1972. 37 F.R. 24161.

40 Public law 87-722, 76 Stat. 668, 12 U.S.C. § 92a. (Sept. 28, 1962)

suggestions for improving the regulations applicable to trust activities, proposed new regulations to expressly authorize commingled agency accounts. Prior to this, banks were authorized to invest funds held in the capacity of managing agency, but only on an individual account basis.

Regulation 9 was officially adopted in 1963. On May 10, 1965, the Comptroller approved a plan submitted by First National City Bank of New York for the establishment and operation of a collective investment fund to be called the Commingled Investment Account."1 The Commingled Investment Account was organized along the lines of an investment company. Acquescing to the jurisdiction of the Securities and Exchange Commission, First National City Bank registered the Account as an investment company under the Investment Company Act of 1940 42 and the participations as securities under the Securities Act of 1933.

Generally, the Commingled Investment Account operated as follows. Investors turned over to First National City Bank pursuant to an agency agreement $10,000 or more for investment in the Account and received "units of participation" for their pro rata share in the assets of the Account. The Account's investments were made primarily in common stocks with long-term growth and income as the investment objectives. Operations were managed by a committee of five persons, no more than three of whom could be affiliated with the bank, which served in a capacity similar to the Board of Directors of a corporation. First National City Bank paid the cost of the administrative and clerical services of the Account and received a quarterly management fee of 1% of 1% of the assets of the Account.

B. THE DIVERGENT VIEWS OF THE COMPTROLLER OF THE CURRENCY AND THE SEC ON THE APPLICABILITY OF THE FEDERAL SECURITIES LAW

From the beginning commingled agency accounts were the subject of sharp controversy between the SEC and the Comptroller. The following excerpts from a 1963 report of the House Committee on Government Operations illustrates these divergent positions.

Among the issues on which the two agencies are poles apart are the following: The SEC claims that the units of participation or interest in a commingled investment fund are "securities," whether or not represented by a written document. The Comptroller claims that under revised regulation 9 the participation interests in a common trust fund will run from the bank as trustee of the common trust fund to itself as (in the case of managing accounts) holder of funds entrusted to it, and that such participation will not be evidenced by any certificate or document, but by mere book entries. In such circumstances, says the Comptroller, no "security" is issued; further, even if a "security" were involved, the 1933 act would have no application to it, because that act specifically exempts from the operation of its provisions the securities issued by a "bank," and these would be issued by the bank.

A detailed description of First National City Bank's Commingled Investment Account is given in the opinion of the District Court in Investment Company Institute v. Camp, 274 F. Supp. 624, 630-31 (D.C.D.C. 1967).

42 Investment Company Act Registration No. 811-1385. The Account was deregistered on July 30, 1971 (Inv. Co. Act Rel. No. 6654).

To that, the SEC asserts that the securities would not be issued by a "bank," as that word is used in the Federal securities laws, but by a separate entity, to wit: the common trust fund. The Comptroller denies that a common trust fund is a separate entity, arguing that it is the bank itself, acting as a fiduciary which is involved, and not a collective investment fund.

The Comptroller also contends that common trust funds are not subject to the 1940 act because that act expressly excludes from its definition of investment companies both "banks" and "any common trust fund or similar fund maintained by a bank." The SEC, on the other hand, claims that common trust funds are clearly within the act's definition of "investment company," and that such funds are excluded from the definition only when they are "maintained by a bank exclusively for the collective investment and reinvestment of moneys contributed thereto by the bank in its capacity as trustee, executor, administrator, or guardian." The common trust funds here involved, says the SEC, do not derive their moneys from such sources, and therefore are not excluded from the act's operation.

The Comptroller claims that the word "trustee" as used in the above-quoted exclusionary provision includes not only inter vivos and testamentary trusts in which the bank is formally designated and acts as trustee, but also managing agents who have discretion to determine whether or not funds held by them will be invested in a common trust fund of managing agency accounts. This position the SEC refutes.

The Comptroller also contends that under revised regulation 9 the decision of whether or not to invest managing agency accounts in a common trust fund rests solely with the bank holding such accounts, and that the regulation so restricts advertising and solicitation that no "public offering" (a prerequisite in certain circumstances, to applicability of Federal securities laws) could be involved. Contrariwise, the SEC position is that a bank could not profitably render those services unless it obtained many accounts and pooled them, and that this necessarily means solicitation of customers, i.e., a public offering, whether or not advertising is used.

This brief cataloging of but some of the positions of the two agencies illustrates how far apart their views are on the interpretation and applicability of Federal securities laws as regards common trust funds. Their differences run not to mere peripheral matters, but to the very basics; in fact, so far as is evident, there appears to be no common ground upon which they agree.43

The argument over the applicability of the securities laws and banking laws to commingled agency accounts was finally settled by the Supreme Court. In 1966, the Investment Company Institute sued the Comptroller of the Currency, contending that the regulations of the Comptroller, in authorizing banks to establish and operate commingled agency accounts, sought to permit activities prohibited to national banks or their affiliates by the Glass-Steagall Act. The Investment Company Institute also specifically attacked the Comptroller's approval of the application of First National City Bank for permission to establish and operate its Commingled Investment Account.

45

44

In 1967, the District Court held the First National City Bank's commingled agency account violated the Glass-Steagall Act. The Court of Appeals reversed; 5 but the Supreme Court, on April 6, 1971, decided that the operation of a collective investment fund of the kind established by First National City Bank involved a bank in the underwriting, issuing, selling and distributing of securities in violation of the Glass-Steagall Act. In reaching this conclusion, the Court stated:

46

43 Common Trust Funds-Overlapping Responsibility and Conflict in Regulations, Fifth Report by the House Comm. on Government Operations, H.R. Rep. No. 429, 88th Cong.. 1st Sess. 10-11 (1963).

Investment Company Institute v. Camp, 274 F. Supp. 624 (D.C.D.C. 1967).

45 National Association of Securities Dealers v. SEC, 420 F. 2d 83 (D.C. Cir. 1969). 48 Investment Company Institute v. Camp, 401 U.S. 617 (1971).

But in any event we are persuaded that the purposes for which Congress enacted the Glass-Steagall Act leave no room for the conclusion that a participation in a bank investment fund is not a "security" within the meaning of the Act. From the perspective of competition, convenience, and expertise, there are arguments to be made in support of allowing commercial banks to enter the investment banking business. But Congress determined that the hazards are clearly present when a bank undertakes to operate an investment fund."

C. RECENT DEVELOPMENTS

Commingled agency accounts have also been the subject of legislative attention on a number of occasions since 1963.48 In the area of investment companies and related banking activities, there have been numerous bills and legislative hearings. However, none of the bills were enacted. As a result of the Investment Company Institute v. Camp decision, banks are not permitted to offer participations in a commingled agency account.

D. QUESTIONS AND ISSUES

1. How do the federal securities laws apply to common trust funds and commingled agency accounts?

2. How does the Glass-Steagall Act apply to common trust funds and commingled agency accounts?

3. To what extent would commingled agency accounts compete directly with investment companies?

4. Does the Investment Company Institute v. Camp prohibition against pooling by banks of managed agency accounts deprive investors of a desirable opportunity to participate in the securities markets?

5. Would individual investors be better served by permitting banks to establish commingled agency accounts?

6. Would the interests of depositors be adversely affected by the establishment of such funds?

7. Are the differences between common trust funds and commingled agency accounts sufficient to justify different treatment under the securities and banking laws?

8. In the event banks are permitted to commingle agency accounts, would present banking law be sufficient to protect investors?

9. The U.S. Supreme Court and critics of banks offering commingled agency accounts have listed certain potential conflicts of interest. Are current collective trust funds susceptible to similar potential conflicts? Are there documented cases of abuse? Can these potential conflicts be dealt with by legal restraints, internal controls and regulatory supervision, as an alternative to a complete prohibition against commingled agency accounts?

47 Id.

48 Hearings on Common Trust Funds-Overlapping Responsibility and Conflict in Regulation Before a Subcomm. of the House Comm. on Government Operations, 88th Cong., Ist Sess. (1963); Hearings on H.R. 8499 and H.R. 9410 Before the Subcomm. on Commerce and Finance of the House Comm. on Interstate and Foreign Commerce, 88th Cong., 2d Sess. (1964); Hearings on H.R. 9510 and H.R. 9511 Before the Subcomm. on Commerce and Finance of the House Comm. on Interstate and Foreign Commerce, 90th Cong., 1st Sess. (1967); Hearing on Amendment No. 438 to S. 1659 Before the Senate Comm. on Banking and Currency, 90th Cong., 1st Sess. (1967); Hearings on S. 34 and S. 296 Before the Senate Committee on Banking and Currency, 91st Cong., 1st Sess. (1969); and Hearings on H.R. 11995, S. 2224 and others Before the Subcomm. on Commerce and Finance of the House Comm. on Interstate and Foreign Commerce, 91st Cong., 1st Sess. (1969).

10. What provisions of the Investment Company Act of 1940 are incompatible with bank collective investment funds from a structural point of view? If a collective investment fund seeks registration as an investment company, is there any public purpose served in requiring the bank to restructure the fund? If certain collective investment funds are to be registered, should a new statute be designed specifically for such funds rather than straining funds to fit within present statute? SECTION VII-UNDERWRITING MUNICIPAL REVENUE BONDS

A. DESCRIPTION

The Glass-Steagall Act was designed to separate commercial banking from investment banking. Although commercial banks are prohibited from underwriting and dealing in "investment securities," exceptions are made for U.S. Government bonds and general obligation bonds of State and local governments. Banks are not, however, authorized to underwrite nongeneral obligation bonds issued by States and municipalities, thus continuing a pattern established in the National Banking Act of 1927.49

B. SECURITIES LAWS

All of the securities which commercial banks are permitted to underwrite and in which they may make a market are exempt from all but the fraud provisions of the federal securities laws. The banks also are exempt from the definition of broker and dealer.50 The Securities Acts Amendments of 1975, however, brought the municipal securities activities of banks under the Securities Exchange Act of 1934 by creating a new category of registrant designated "municipal securities dealer.' 51 Dealer banks or "separately identifiable departments or divisions" of the banks are required to register with the SEC. As a result, banks that buy, sell or effect transactions in municipal securities as part of a regular business other than a fiduciary capacity are subject to the jurisdiction of the Securities and Exchange Commission.

C. BANKING LAWS AND REGULATIONS

The Glass-Steagall Act prohibits national banks from dealing in or underwriting securities, with certain exceptions.52 These exceptions include obligations of the U.S., general obligations of any state or of any political subdivision thereof, obligations insured by the Secretary of Housing and Urban Development under Title XI of the National Housing Act and other enumerated federally guaranteed issues.

Banks are expressly permitted under the Glass-Steagall Act to underwrite and deal in state and municipal general obligation securities, e.g., bonds supported directly or indirectly by the full faith and credit of the obligor. Thus, municipal revenue bonds, since they can be repaid only from specified revenues such as road tolls or rents from private

Public Law 69-639, 44 Stat. 1201. (Feb. 25, 1927)

50 See Appendix C.

51 Securities Exchange Act, § 3(a) (30), Public Law 94-29, 6; see Appendix B.12 U.S.C. 24; see Appendix A.