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Collective Investment Funds
Trust and Investment Services Subcommittee
Banking Law Committee
Business Law Section
American Bar Association
April 16, 2015
Jeanne M. Belanger, Esq.
Managing Director, BlackRock
David W. Lauer, Esq.
Senior Vice President and Senior Company Counsel, Wells Fargo & Co.
William P. Wade, Esq.
K&L Gates
Table of Contents
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I.
Federal Law Applicable to Collective Funds - OCC Regulation 9
II.
Federal Law Applicable to Collective Funds - Securities Laws
III.
Federal Law Applicable to Collective Funds - ERISA
VI.
Federal Law Applicable to Collective Funds - Internal Revenue Code and IRS Rulings
V.
Other Potentially Relevant Laws and Regulations
1
Federal Law Applicable to Collective Funds – OCC Regulation 9
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
Collective investment funds (“CIFs”) are trusts organized under state law that have
been established by a bank or trust company (hereinafter included in reference to a
“bank”) to pool assets of certain types of clients with whom the bank has a fiduciary
relationship.
•
•

A CIF is typically a common law trust.
A CIF is typically either a collective trust fund or a common trust fund.
If the bank is nationally chartered, the CIFs would be established and maintained
under 12 CFR 9.18 (sometimes referred to herein as “OCC Regulation 9.18”).
•
Typically, collective trust funds are established under OCC Regulation 9.18(a)(2),
and common trust funds are established under OCC Regulation 9.18(a)(1).
2
Federal Law Applicable to Collective Funds – OCC Regulation 9
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A1 and A2 Funds
An A1 Fund is established under 12 CFR 9.18(a)(1) and is limited to assets held by
the sponsoring bank, or by an affiliate bank, as trustee, executor, administrator,
guardian, or custodian under a Uniform Gifts to Minors Act. The industry generally
uses the term “common trust fund” when referring to A1 funds.
An A2 Fund is established under 12 CFR 9.18(a)(2) and may consist only of assets of
retirement, pension, profit sharing, stock bonus, or other trusts that are exempt from
federal income tax. The industry generally uses the term “collective trust fund” when
referring to A2 funds.
3
Federal Law Applicable to Collective Funds – OCC Regulation 9
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
Certain state chartered banks may administer CIFs that also are maintained under
OCC Regulation 9.18, pursuant to state law.
•

Regulators of state chartered banks generally look to OCC regulations and
interpretive guidance in shaping regulation of state chartered banks’
establishment and operation of CIFs.
Under OCC Regulation 9.18(b)(1), a bank administering CIFs must establish and
maintain each CIF in accordance with a written plan, which must include provisions
relating to, among other things (i) investment powers and policies with respect to the
CIF; (ii) allocation of income, profits and losses; (iii) fees and expenses that will be
charged to the CIF and to participants; (iv) terms and conditions governing the
admission and withdrawal of participants; and (v) the basis and method for valuing
CIF assets.
4
Federal Law Applicable to Collective Funds – OCC Regulation 9
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
The bank is the CIF’s trustee (with full discretionary authority), and may also be the
CIF’s custodian, investment manager and/or administrator.
•
Under OCC Regulation 9.18(b)(2), a bank administering a CIF shall have
exclusive management thereof, except as a prudent person might delegate
responsibilities to others. Recent OCC guidance regarding outsourcing
articulates a risk management process that includes the following critical
components:
•
•
•
•
Risk assessment to identify the bank’s needs and requirements;
Proper due diligence to identify and select a third-party provider;
Written contracts that outline duties, obligations and responsibilities of the
parties; and
Ongoing oversight of the third-party service providers and their activities.

Under OCC Regulation 9.18(b)(3), each participant in a CIF must have a proportionate
interest in all of the CIF’s assets.

A participant’s interest in a CIF is typically called a “unit”. A unit is a bookkeeping entry of a
participant’s interest in the CIF. Units are not transferable.

Each CIF is a separate legal entity with a separate tax identification number.
5
Federal Law Applicable to Collective Funds – OCC Regulation 9
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OCC Regulation 9.18: Other Key Requirements

A bank administering a CIF shall value the CIF’s holdings at least quarterly (illiquid
assets may be valued only annually), unless participants are permitted to purchase
and redeem units on a more frequent basis. Most banks value funds more frequently
and those CIFs offered to defined contribution plans, such as 401(k) plans, are most
often valued daily.
•
Market values must be used, unless not readily ascertainable.
•
If market value is not readily ascertainable, fair value determined in good faith
may be used.
•
Assets held by short term investment funds (“STIFs”) may be valued on a cost
basis rather than mark-to-market value, provided certain conditions are met.
•
STIF are most closely analogous to mutual funds managed under SEC Rule
2a-7, commonly known as “money market” mutual funds.

A bank administering a CIF shall admit or withdraw a participant in that CIF only on
the basis of the valuation as determined above.

A bank administering a CIF may make distributions to withdrawing participants in
cash, ratably in-kind, a combination of cash and ratably in-kind, or in any other
manner consistent with applicable state law.
6
Federal Law Applicable to Collective Funds – OCC Regulation 9
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
A bank administering a CIF
•
May charge a reasonable management fee only if the fee is permitted under
applicable law and the amount of the fee does not exceed an amount
commensurate with the value of legitimate services of tangible benefit to the
participants that would not have been provided to those participants were they
not invested in the CIFs, and
•
May charge reasonable expenses incurred in operating the CIF to the extent not
prohibited by applicable law and to the extent such expenses are not related to
the establishment or reorganization of the CIF.
7
Federal Law Applicable to Collective Funds - Securities Laws
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Federal Securities Laws

A CIF typically qualifies for an exception from the definition of “investment company” under
Section 3(a) of the Investment Company Act of 1940 (“1940 Act”).

The 1940 Act contains two specific exceptions from the definition of “investment company” that
allow banks to operate CIFs without registering them with the SEC.
•
Section 3(c)(3) provides an exception for:
Any common trust fund or similar fund maintained by a bank exclusively for the collective
investment and reinvestment of moneys contributed thereto by the bank in its capacity as
a trustee, executor, administrator or guardian, if:
(a) such fund is employed by the bank solely as an aid to the administration of trusts,
estates, or other accounts created and maintained for a fiduciary purpose;
(b) except in connection with the ordinary advertising of the bank’s fiduciary services,
interests in such fund are not:
(i) advertised; or
(ii) offered for sale to the general public; and
(c) fees and expenses charged by such fund are not in contravention of fiduciary
principles established under applicable Federal or State law.
8
Federal Law Applicable to Collective Funds - Securities Laws
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•
Section 3(c)(11) provides an exception for:
•
•
•
•
Any employee stock bonus, pension or profit-sharing trust which meets the
requirements for qualification under Section 401 of the Internal Revenue
Code of 1986 as amended, (the “Code”); or
Any governmental plan described in Section 3(a)(2)(C) of the Securities Act
of 1933 as amended, (the “1933 Act”); or
Any collective trust fund maintained by a bank consisting solely of assets of
one or more of such trusts, government plans, or church plans, companies
or accounts that are excluded from the definition of an investment
company under paragraph (14) of this subsection; or
Any separate account the assets of which are derived solely from
•
•
•
contributions under pension or profit-sharing plans which meet the
requirements of Section 401 of the Code or the requirements for
deduction of the employer’s contribution under Section 404(a)(2) of the
Code,
contributions under governmental plans in connection with which
interests, participations, or securities are exempted from the
registration provisions of Section 5 of the 1933 Act by Section
3(a)(2)(C) and
advances made by an insurance company in connection with the
operation of such separate account.
9
Federal Law Applicable to Collective Funds - Securities Laws
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
Section 3(a)(2) of the 1933 Act provides that an “exempted security” (i.e., a security
exempted from 33 Act registration and other requirements) includes:
•
any interest or participation in any common trust fund or similar fund that is
excluded from the definition of the term “investment company” under Section
3(c)(3) of the 1940 Act; or
•
any interest or participation in a single trust fund, or in a collective trust fund
maintained by a bank, or any security arising out of a contract issued by an
insurance company, which interest, participation, or security is issued in
connection with employee benefit plans and trusts substantially identical to
those described in Section 3(c)(11) of the 1940 Act.
•
“Bank-maintained” under the federal securities laws has been interpreted by the
SEC to mean “substantial investment responsibility”.
10
Federal Law Applicable to Collective Funds - Securities Laws
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
Exchange Act of 1934 (“1934 Act”)


CIF units typically qualify for an exemption from registration under Section 12(g)
of the Securities Exchange Act of 1934 (“1934 Act”), because they qualify as
“exempted securities” under Section 3(a)(12) of the 1934 Act.
Anti-Fraud Laws

CIFs are subject to the anti-fraud provisions of the federal securities laws.
11
Federal Law Applicable to Collective Funds - ERISA
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
Under the DOL’s “plan-asset regulations,” the assets of a CIF in which ERISA plans
participate are treated as “plan assets” for purposes of ERISA’s fiduciary responsibility
standards and prohibited transaction restrictions.

Statutory Exemption under ERISA Section 408(b)(8)

Prohibited Transaction Restrictions do not apply to:
Any transaction between a plan and (i) a common 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 or (ii) a pooled
investment fund of an insurance company qualified to do business in a State,
if:
•
•
•
the transaction is a sale or purchase of an interest in the fund,
the bank, trust company, or insurance company receives not more than
reasonable compensation, and
such transaction is expressly permitted by the instrument under which the
plan is maintained, or by a fiduciary (other than the bank, trust company,
or insurance company, or an affiliate thereof) who has authority to manage
and control the assets of the plan.
12
Federal Law Applicable to Collective Funds - ERISA
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
Collective Investment Fund Class Exemption (PTE 91-38)

PTE 91-38 generally permits collective investment funds to engage in certain
transactions with parties in interest with respect to a participating plan and
provides limited relief for transactions involving employer securities, provided
certain conditions are met.

PTE 91-38 generally exempts all transactions between parties in interest of any
participating plan and the collective investment fund if the plan’s participation
in the fund (together with interests of other plans maintained by the same
employer) does not exceed 10% of the fund’s total assets and if the party in
interest is not the bank that maintains the fund or any other collective
investment fund maintained by the bank or an affiliate of the bank.

When the plan’s participation in the fund (together with interests of other plans
maintained by the same employer) exceeds 10% of the fund’s total assets,
relief still may be available for certain types of transactions, including
transactions with service provider parties in interest if:
•
•
•
the service provider is a party in interest solely by virtue of being a service
provider or its affiliate;
the service provider does not exercise or have discretionary authority or
control over the investment of plan assets in the collective investment
fund, and
the service provider is not an affiliate of the bank maintaining the
collective investment fund.
13
Federal Law Applicable to Collective Funds - Internal Revenue
Code and IRS Rulings
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Eligible participants in a collective trust fund that qualifies as a “group trust” under
IRS Rev Ruling 81-100, as amended (“Revenue Ruling 81-100”), may include:

U.S. defined contribution and defined benefit plans qualified under Code Section
401(a) and tax exempt under Code Section 501(a);

Certain Puerto Rican employee benefit plans described in ERISA Section 1022(i);

U.S. governmental retirement plans (including Code Section 457 plans);

Certain church plans described in Code Section 403(b)(9);

Other bank-maintained collective trust funds that qualify as "group trusts“ under
Revenue Ruling 81-100; and

Separate accounts maintained by insurance companies consisting solely of assets of
one or more retirement plans described above, provided the insurance company enters
into a written arrangement with the bank meeting certain requirements and separate
account’s assets are insulated from the insurance company’s creditors.
Tax treatment of collective trust funds :

The collective trust fund is itself exempt from U.S. income tax under Code Section
501(a) (pursuant to Revenue Ruling 81-100).

Any unrelated business income tax (“UBIT”) is assessed at the collective trust fund
level.
•
UBIT can arise due to acquisition-related indebtedness such as through borrowings
or certain levered transactions.
14
Federal Law Applicable to Collective Funds - Internal Revenue
Code and IRS Rulings
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Eligible common trust fund participants may include the following types of
accounts for which the bank acts as trustee or in a similar fiduciary capacity:

Trusts formed by U.S. organizations that are tax-exempt under Code 501(c), such as
U.S. not- for-profit corporations, foundations and endowments.

Trusts formed by Voluntary Employees' Beneficiary Associations that are tax-exempt
under Code Section 501(c)(9).

Trusts formed by non-U.S. organizations “not engaged in a U.S. trade or business”
(e.g., U.S. and non-U.S. government entities).

Personal trusts and estates.

However, common trust fund participation by certain types of trusts may implicate
additional securities law considerations.
Tax treatment of common trust funds

Common trust funds are typically “look-through” vehicles for U.S. income tax
purposes under Code Section 584.

Code Section 584 requires compliance with OCC rules and the establishment of a trust
between the participant and the bank.
15
Other Potentially Relevant Laws and Regulations
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
Financial Industry Regulatory Authority rules, to the extent a registered brokerdealer is involved in the offer of CIFs.

Commodity Exchange Act and Commodity Futures Trading Commission rules to the
extent a CIF invests in futures or other “commodity interests”.

Applicable state banking law/regulation/interpretive guidance.

Applicable state trust law.
•
For example, under California Law, the following statute may apply to a common
trust fund subject to California Law:
•
California Probate Code § 16047. Standard of care; investment and
management; considerations.
• A trustee shall invest and manage trust assets as a prudent investor
would, by considering the purposes, terms, distributions requirements,
and other circumstances of the trust. In satisfying this standard, the
trustee shall exercise reasonable care, skill, and caution.
• A trustee may invest in any kind of property or type of investment or
engage in any course of action or investment strategy consistent with
the standards of this chapter.
16
Other Potentially Relevant Laws and Regulations
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California Financial Code § 1585.

•
Any trust company may establish and administer common trust funds
composed of property permitted by law for the investment of trust funds, for
the purpose of furnishing investments to any one or more of the following:
• itself, as fiduciary;
• itself and others;
• Any affiliated trust company including, without limitation, any foreign
(other state) affiliated trust company, as fiduciary; and
• Any affiliated trust company including, without limitation, any foreign
(other state) affiliated trust company and others, as co-fiduciaries.
17