May 17, 1990
TO: BOARD OF GOVERNORS NO. 37-90
RE: BANK ASSOCIATION PETITIONS FED FOR MUTUAL FUND POWERS
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As you know, the Federal Reserve Board has issued orders
authorizing subsidiaries of bank holding companies to underwrite
debt and equity securities, except mutual fund shares. The
Institute consistently has taken the position that the Board
lacks the legal authority to permit bank holding companies to
sponsor and underwrite mutual funds. Under prior Board
interpretations, any such mutual funds would be considered
affiliates of the bank holding company, which would be
principally engaged in distributing their shares to the public
and therefore in violation of the Glass-Steagall Act.
The Association of Bank Holding Companies has petitioned
the Federal Reserve Board to expand the scope of permitted
activities for bank holding companies under Regulation Y. One of
the additional activities being requested is mutual fund
distribution.
Specifically, the association requests that the Board amend
its regulations to permit bank holding companies to distribute
shares of mutual funds advised by affiliates. In support of its
request, the association argues that banks have provided similar
services (e.g., common trust funds), that banks are already
involved in many aspects of the mutual funds business (e.g.,
brokerage, sweep accounts), that the fund industry is highly
concentrated, and that the risks to the banking organization
would be minimal. The association also argues that the
activities would not violate the Glass-Steagall Act (1) provided
the subsidiary would not be "engaged principally" in such
activities and (2) if the mutual fund's board were independent in
accordance with the "Investment Advisors Act of 1940" [sic].
(The association claims that if the board were independent, the
fund would not be "controlled" by the bank holding company and
therefore would not be an affiliate.)
The petition also requests further amendments to the
Board's regulations, including raising the revenue limit for
Section 20 subsidiaries to 25% and relaxing certain firewalls.
The petition also requests that the provision of any new
financial product be considered a permitted "incidental power"
during its early development (i.e., research and test marketing).
Only when the product is ready for "full production" would the
Board be required to consider it on its individual merits.
A copy of the petition is attached. We will keep you
advised of developments in this area.
Craig S. Tyle
Associate General Counsel
Attachment