August 25, 1989
TO: BOARD OF GOVERNORS NO. 53-89
SEC RULES MEMBERS NO. 47-89
UNIT INVESTMENT TRUST MEMBERS NO. 44-89
RE: FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT
ACT OF 1989
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The President has signed into law the Financial
Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), which restructures the thrift industry and
reorganizes the federal deposit insurance funds. FIRREA also
alters certain investment powers of thrift institutions and
contains other provisions of special interest to investment
companies. A brief summary of certain of these provisions
follows.
Investments in Mutual Funds
The FIRREA codifies certain investment authority previously
granted to federal savings associations. Those associations are
permitted to invest in mutual funds registered under the
Investment Company Act, provided that any such fund has a
fundamental policy that limits its investments to those in which
federal associations may invest directly without limitation.
Service corporations of federal associations are also permitted
to own shares of such mutual funds.
The investment authority of state chartered savings
associations was formerly governed under state law. The FIRREA
prohibits state associations from directly acquiring or retaining
equity investments of a type not permissible for federal
associations. It is not clear whether shares of an investment
company that does not hold any equity securities itself would be
considered "equity investments" for purposes of this provision.
However, even if they are not, state associations are prohibited,
commencing January 1, 1990, from engaging as principal in any
activity not permissible for federal associations unless the
state association (1) is in compliance with the fully phased-in
revised capital requirements and (2) the FDIC determines that the
activity poses no significant risk to the deposit insurance fund.
Thus, even if shares of mutual funds that invest only in debt
securities are not treated as equity securities, commencing
January 1, 1990, state associations can only purchase these
shares, as principal, if federal associations are permitted to do
so, unless the above tests are satisfied.
High Yield Bonds
Both federal and state associations are prohibited from
acquiring corporate bonds that are not investment grade. In
addition, all savings associations must divest all such
securities "as quickly as can be prudently done" and, in any
event, no later than July 1, 1994. As a result, savings
associations are not permitted to purchase shares of high yield
bond mutual funds. It is not clear from the legislation whether
the requirement to divest high yield bond holdings also applies
to shares of high yield bond mutual funds. Certain affiliates of
savings associations are exempt from the prohibition on acquiring
or holding non-investment grade debt.
Deposit Insurance Pass-Through Study
The FDIC is directed to submit to Congress, within six
months, a report relating to the pass-through of deposit
insurance to individual investors in unit investment trusts and
participants in qualified pension and profit sharing plans. The
FDIC is instructed to assess the potential effects of broadening
insurance coverage on the safety of the insurance funds and the
operation of capital markets.
Brokered Deposits
The FIRREA prohibits any savings institution not in
compliance with the relevant minimum capital requirements from
accepting deposits obtained, directly or indirectly, from a
deposit broker. A "deposit broker" includes "any person engaged
in the business of placing deposits, or facilitating the
placement of deposits, of third parties with insured depository
institutions or the business of placing deposits with insured
depository institutions for the purpose of selling interests in
those deposits to third parties." This prohibition becomes
effective 120 days after the enactment of the FIRREA. The FDIC
is authorized to waive the prohibition on a case-by-case basis.
Craig S. Tyle
Assistant General Counsel