Investment Company Institute -75 The frequency and magnitude of these conflict of interest deposits are staggering. The bank regulators' latest joint report showed that, as of December 31, 1980, $3.08 billion of trust department assets were held in non-interest demand deposits in the trustee bank. Approximately $650 million of that amount represented assets of employee benefit plans.* Anti-self-dealing provisions of the Investment Company Act prohibit an investment company from purchasing securities from its investment adviser.** They also prohibit an investment company from loaning money to or purchasing securities issued by its adviser.*** The unregulated bank collective funds for retirement plans, however, are not inhibited by these proscriptions against self-dealing, and it appears that the frequency and magnitude of their conflicts of interest in this area are significant. The bank regulators joint report on trust assets showed that, as of December 31, 1980, $6.4 billion of trust account assets were held in time deposits of the trustee banks.**** Federal Financial Institutions Examination Council, Trust Assets of Banks and Trust Companies 1980, Table at 10 (1981). Section 17(a)(1), 15 U.S.C. $80a-17(a)(1) (1976). Section 17(a)(3), 15 U.S.C. $80a-17(a)(3) (1976). Federal Financial Institutions Examination Council, Trust Assets of Banks and Trust Companies - 1980, Table at 10 (1981). Investment Company Institute -76 Nearly $2.25 billion of this amount represented employee benefit plan assets. Lack of Disclosure An examination of the sales material of 17 banks relating to their pooled investment funds for Keogh plans reveals a startling lack of disclosure. None of the 17 banks describes the fund's investment restrictions; none provides relevant information describing the policies of the bank in operating and advising the fund; none gives background information regarding the bank's officers and directors; none discloses the total fees paid to the bank in each of the last three years; none describes the fund's policy with respect to buying or selling portfolio securities; none discloses amounts of brokerage commissions paid by the fund or to whom; and over half do not contain the fund's current financial statements or the fund's current portfolio. In contrast, under the federal securities laws every mutual fund must provide all this information to all investors, including employee benefit plans. Investment Company Institute -77 Mass-Merchandising of Funds The Comptroller's 1972 action opened the door to aggressive advertisement of the investment performance of their collective investment funds for retirement plans, and banks have done so with little restraint. A survey of recent bank advertisments promoting collective funds for retirement plans reveals numerous extravagant promises of extraordinary investment performance.* For example, United Jersey Bank advertised in a June 1978 issue of the Newark Star-Ledger that "We're #1 nationally in investment performance." The bank proclaimed it was ranked "(F)irst in the nation for the year ending March 1978" in a Merrill-Lynch "survey of commingled equity funds." It went on to state that it has achieved "superior relative and absolute performance consistently." Hibernia National Bank also claimed to be "number one" in the April, 1978 issue of Institutional Investor Magazine. The bank advertised that it was the "#1 Bank Equity Fund Manager for the five years ended December 31, 1977, as measured by Frank Russell Co., Inc." Not to be outdone, First National Bank of Atlanta made a similar claim in the November, Attached at Appendix D are samples of the advertising employed by banks for their collective funds for retirement plans. Investment Company Institute -78 1978 issue of Institutional Investor Magazine. The bank Other banks have claimed that their performance made Marine Midland advertised in an April, 1978 Fifth Third Bank of Cincinnati, Ohio, boasted First Pennsylvania's October, 1978 advertisement In many instances, the banks' claims can be justified, if at all, only because they very carefully selected the time periods used to measure their funds' performances. Thus, -Investment Company Institute -79 during 1977 and 1978, National City Bank of Cleveland claimed superior performance based on results during one, two, and three year periods. Marine Midland used one, three and five years; the First National Bank & Trust Company of Tulsa used seven years; Detroit Bank & Trust used an eight year period; First Pennsylvania Bank used one, three, five and nine year periods; and the National Bank of Detroit used a ten year period. Not only have different banks carefully selected different time periods for purposes of advertising their performance records, they can change the period whenever necessary. For example, in the April, 1977 issue of Pensions & Investments, The First National Bank of Birmingham told readers about its "great investment record." Using the five year period from "1972-76 [as] a good example," the bank claimed that it "has been outperforming the industry standards for years." The following year, in an August, 1978 issue of Institutional Investor magazine, the bank advertised that it has "been topping the industry standards for years." This time, however, it selected the ten year period from 1968 to 1977 to describe its equity fund's performance. In addition, banks have touted their investment performance by selecting the particular market index which best suited their claims. As noted above, Hibernia National Bank |