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INVESTMENT CO. INST. v. CONOVER

November 8, 1984

INVESTMENT COMPANY INSTITUTE, Plaintiff,
v.
C.T. CONOVER, et al., Defendants



The opinion of the court was delivered by: RICHEY

 INTRODUCTION

 This action for declaratory and injunctive relief challenges an October 28, 1982, final Ruling (the "Ruling") issued by the Comptroller of the Currency (the "Comptroller") which approved a plan by Citibank, N.A., to establish a "Collective Investment Trust" for individual retirement account (IRA) trust assets exempt from taxation under the Employee Retirement Income Security Act ("ERISA"), 26 U.S.C. § 408. Plaintiff Investment Company Institute is a national association of open-ended investment companies, their investment advisors, and principal underwriters. Plaintiff claims that the Ruling allows Citibank to establish a "mutual fund" in direct contravention of the prohibitions against banks becoming involved in the sale and marketing of securities found in the Glass-Steagall Banking Act of 1933 ("Glass-Steagall"), 48 Stat. 162 (codified as amended in various sections of 12 U.S.C.), one of several depression-era pieces of legislation designed to restore and maintain public confidence in financial institutions. Defendants counter that Citibank's Common Investment Trust, as authorized by the Comptroller's Ruling, is not a prohibited mutual fund, but a common trust fund which does not violate the strictures of Glass-Steagall, and which is in any event specifically authorized by statute in ERISA. There being no genuine issue of material fact present in this case, the parties have filed cross-motions for summary judgment.

 STATUTORY AND REGULATORY BACKGROUND

 In 1974, Congress enacted the Employee Retirement Income Security Act ("ERISA"). As part of ERISA, the Internal Revenue Code was amended to add § 408, which permits qualified individuals to deduct from taxable income up to a specified amount (currently $2,000 annually, not to exceed 100% of salary), I.R.C. § 408(a)(1). Such tax-deductible contributions and earnings on trust assets are not taxed until they are distributed or withdrawn. Id., § 408(d)(1). Withdrawals are not permitted until the individual establishing the account dies or reaches the age of 59 1/2, without a 10% tax penalty being imposed. I.R.C. § 408(f)(1). In addition, § 408(a)(2) requires that only banks and other institutions which receive specific approval of the Secretary of the Treasury may serve as trustees for IRA trust assets. These IRA trust assets may only be commingled in a common trust fund or common investment fund. I.R.C. § 408(a)(5).

 In addition to the statutory framework laid out by ERISA, there is another regulatory scheme applicable to this case. 12 C.F.R. § 9.18 contains the Comptroller's regulations relating to the establishment and operation of collective trusts by national banks with trust powers. Under these regulations, a national bank acting as trustee, or in a similar capacity, may invest funds held in that capacity in a common trust fund. 12 C.F.R. § 9.18(a)(1). Similarly, 12 C.F.R. § 9.18(a)(2) permits a national bank acting in a fiduciary capacity for retirement or similar trusts exempt from federal taxation to invest collectively any funds so received. Retirement fund assets may also be invested in common trust funds. 12 C.F.R. § 9.18(b)(2).

 Finally, the Glass-Steagall Act provides that national banks are forbidden to engage in the securities business. Section 16 of Glass-Steagall provides that national banks shall not underwrite or deal in "securities or stock." 12 U.S.C. § 24 (Seventh). Section 21 of the Act in turn prohibits any person in the business of selling, underwriting or distributing "stocks, bonds, debentures, notes or other securities" from engaging "at the same time to any extent whatsoever" in the business of taking deposits, except to the extent permitted in Section 24 of the Act. 12 U.S.C. § 378(a)(1). The term "securities" is not defined anywhere in Glass-Steagall.

 FACTUAL BACKGROUND

 The interest of each IRA trust in the CIT is expressed by "units of beneficial interest." These units are available only to IRA trusts of which Citibank is trustee and are not transferable. There is no charge for the acquisition or withdrawal of these units. Citibank acts as trustee and investment advisor of the CIT and receives a monthly fee based partly on the net value of the CIT's portfolios.

 The Securities and Exchange Commission has at various times stated its opinion that the units of interest in collective funds such as the one in issue here are securities within the meaning of the federal securities laws. Citibank, while not conceding that the Commission is correct on this point, and without raising that particular issue here, filed registration statements with the Commission to have the CIT registered as an investment company under the Investment Company Act of 1940, and to register the units of beneficial interest as securities under the 1933 Act. Citibank asserts that this was done merely to avoid a long and costly exemption proceeding before the Commission.

 Citibank then sought approval of the CIT from the Office of the Comptroller. In its application, Citibank asked for a ruling that the CIT did not violate the prohibition against national banks marketing securities, found in §§ 16 and 21 of Glass-Steagall. In addition, Citibank asked to be exempted from those parts of the Comptroller's regulations which might be in conflict with those of the Investment Company Act.

 THE COMPTROLLER'S RULING

 On October 28, 1982 the Comptroller issued a detailed and reasoned final Ruling which approved the Citibank CIT as being lawful under 12 C.F.R. Part 9 and not in conflict with the proscriptions of Glass-Steagall. The Comptroller initially determined that the CIT was a proper exercise of Citibank's fiduciary powers under either 12 C.F.R. § 9.18(a)(1) or (a)(2). The CIT was found to fall under the former provision because the assets invested therein are received and held by Citibank in trust. The latter provision was found also to apply as the trust assets invested in the CIT are retirement plan assets. (Ruling 4-5). Next, the Comptroller found that such a collective investment of IRA trust assets was specifically ...


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