Trust Funds Did Not Qualify for Investment Company Act Exemption
The SEC censured and fined a state chartered trust company because its common and collective trust funds did not qualify for exemption from Investment Company Act registration. The SEC maintains that the trust company failed to properly oversee its affiliated investment adviser, receiving only occasional information and neglecting to ensure compliance with investment policies. The SEC also faults the trust company for advertising the funds to the public. The Investment Company Act exclusions require a bank to maintain the funds (not delegate all responsibility) and to form the funds solely for a fiduciary purpose (not to sell investments). The trust company has determined to terminate and liquidate the funds, which had more than $500 million in assets.
Just because a fund is sponsored by a bank and called a “trust fund” doesn’t mean it automatically qualifies for Investment Company Act exemption. Trust funds must follow very specific rules that ensure that they are actually banking products offered in a fiduciary environment. Although the SEC has not often brought actions against banks, this case shows that the SEC will monitor how banks manage and offer their unregistered products.