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Regulation and Compliance > Federal Regulation

Agencies Warn Banks About Shoring Up Funds

By Trevor Thomas

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NU Online News Service, Jan. 6, 2004, 5:51 p.m. EST – Federal agencies supervising banks and thrifts have issued a policy statement warning U.S. financial institutions against providing significant financial support for mutual funds for which they or their subsidiaries also provide investment advice. [@@]

“Today’s policy statement is prompted by recent market developments, including market volatility, the continued low interest rate environment, and operational and corporate governance weaknesses,” the agencies say in a statement.

The statement, issued jointly by the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corp. and the Office of Thrift Supervision, also warns that “investment advisory services can pose material risks to a financial institution’s liquidity, earnings, capital and reputation and can harm investors, if the associated risks are not effectively controlled.”

If a fund has a sudden need for an infusion of funds due to cash emergencies, banks should try to get financial support from their parent holding companies, nonbank affiliates or outside third parties, the statement says. Banks can provide limited financial props dictated by law and regulations, but, if they do, they should impose a strict oversight process, the agencies say.

Industry experts say the statement spells out what already had been set down in the Federal Reserve Act and the Federal Reserve Board’s Regulation W, both of which place strict limits on transactions between a bank and its advised funds.

“The statement reiterates prudential safeguards banks need to follow to make sure they stick to existing laws and investing principles,” says Beth Climo, executive director of the ABA Securities Association, an arm of the American Bankers Association, Washington. “It makes banks think about it for their advance planning, just to make sure they realize their limits for funding those funds. It’s pretty much a reminder more than anything new and earthshaking.”

The statement does not mean the practice of banks shoring up troubled funds is widespread, Climo says.

Kathleen Collins, an attorney with Morgan, Lewis and Bockius, Washington, calls the policy statement “a classic regulatory heads up,” designed to make sure banks limit their risk if a bank-advised fund runs into trouble.

“The laws and regulations which form the basis for this guidance are already in place, and this is a good reminder to banks that these legal requirements would come into play in an emergency,” says Collins, who is Washington legal counsel for the Bank Insurance and Securities Association, Wayne, Pa.

A copy of the advisory services statement is on the Web at //www.occ.treas.gov/ftp/release/2004-2a.pdf

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