Investment Co. Institute v. Clarke, Civ. No. H 85-160 (JAC).

• Decision Date: 21 January 1986
• Docket Number: Civ. No. H 85-160 (JAC).
• Citation: 630 F. Supp. 593
• Court: U.S. District Court — District of Connecticut
• Parties: INVESTMENT COMPANY INSTITUTE, v. Robert CLARKE, et al.

630 F. Supp. 593

INVESTMENT COMPANY INSTITUTE, v. Robert CLARKE, et al.

Civ. No. H 85-160 (JAC).

United States District Court, D. Connecticut.

January 21, 1986.

John F. Scully, Hartford, Conn., Henry A. Hubschman, Harvey L. Pitt, David M. Miles, Washington, D.C., for plaintiff Inv. Co. Institute.

L. Robert Griffin, Eugene M. Katz, Washington, D.C., for defendant Comptroller of the Currency.

Scott P. Moser, Thomas J. Groark, Jr., J. Bruce Boisture, Joan K. Willin, Hartford, Conn., Howard N. Cayne, Washington D.C., for defendants-intervenors Connecticut Bank & Trust Co., N.A., and The Connecticut Bank & Trust Co. IRA Collective Inv. Fund.

RULING ON CROSS-MOTIONS FOR SUMMARY JUDGMENT

JOSÉ A. CABRANES, District Judge:

This challenge to a decision of the Comptroller of the Currency ("the Comptroller") is before the court on the parties' cross-motions for summary judgment.¹

The Investment Company Institute ("ICI" or "the plaintiff") contends that the Comptroller erred in permitting the Connecticut Bank and Trust Company ("CBT" or "the bank") to market a Collective Investment Fund ("the Fund") consisting of Individual Retirement Account ("IRA") assets. ICI asserts that the bank's sale and promotion of interests in the Fund to settlors of IRA trusts violates the restrictions on the activities of commercial banks contained in the Glass-Steagall Banking Act of 1933, 48 Stat. 162 (codified as amended in various sections of 12 U.S.C.) ("the Glass-Steagall Act").

The relevant provisions of the Glass-Steagall Act state that a national bank "shall not underwrite any issue of securities or stock," 12 U.S.C. § 24 (Seventh), and that anyone "engaged in the business of issuing, underwriting, selling or distributing ... securities" cannot also engage in "the business of receiving deposits." 12 U.S.C. § 378(a)(1). The plaintiff contends that the units of the Fund offered to settlors of IRA trusts constitute "securities" that the bank is prohibited from issuing under the Glass-Steagall Act.²

I.

The court is required to accord substantial deference to the Comptroller's construction of federal banking statutes, such as the Glass-Steagall Act, that fall within his regulatory jurisdiction. See Securities Industry Association v. Board of Governors, 468 U.S. 207, 104 S.Ct. 3003, 3009, 82 L.Ed.2d 158 (1984). Accordingly, the Comptroller's interpretation of the Glass-Steagall Act, as applied to the activity at issue in this lawsuit, "should be overturned only if the Court finds that it conflicts with or otherwise frustrates the policies that the statute seeks to implement." Investment Company Institute v. Conover, 593 F.Supp. 846, 850 (N.D.Calif.1984) ("Conover I"). See Investment Company Institute v. Conover, 596 F.Supp. 1496, 1500 (D.D.C.1984) ("Conover II") (same).³

It is undisputed that the commingling of retirement trust assets is a fidicuary service that may be offered by national banks consistently with the requirements of the Glass-Steagall Act. The federal banking agencies have, for nearly 60 years, administratively authorized national banks to commingle trust assets in common trust funds.⁴ Furthermore, banks have been authorized for some 30 years to operate "collective investment funds" consisting solely of assets of tax-exempt retirement, pension, profit-sharing, stock bonus or other similar trusts. See 12 C.F.R. § 9.18. See also Investment Company Institute v. Camp, 401 U.S. 617, 624, 91 S.Ct. 1091, 1096, 28 L.Ed.2d 367 (1971) (observing that "for at least a generation, ... there has been no reason to doubt that a national bank can, consistently with the banking laws, commingle trust funds"); Stipulation of Facts (filed Oct. 28, 1985) at ¶ 18.

These activities were recognized by Congress in providing statutory authority for the establishment of tax-preferred IRAs as part of the Employment Retirement Income Security Act of 1974 ("ERISA"). For example, the statute prohibits IRA trustees, expressly including banks, from commingling the assets of IRA trusts "except in a common trust fund or common investment fund." 26 U.S.C. § 408(a)(2), (5). The legislative history of ERISA further reflects the understanding of Congress that it is "common practice for banks ... to maintain pooled investment funds for retirement plans." H.R.Conf.Rep. No. 1280, 93rd Cong., 2d Sess. 316, reprinted in 1974 U.S.Code Cong. & Ad.News 4639, 5038, 5096. The Senate Finance Committee, in its report on ERISA, clearly contemplated that IRA assets could be invested, inter alia, in "a common trust fund managed by a bank." S.Rep. No. 383, 93d Cong., 1st Sess. 132 (1973), reprinted in 1974 U.S.Code Cong. & Ad.News 4890, 5015.

The plaintiff nonetheless contends that the marketing by CBT of interests in the Fund is inconsistent with the provisions of the Glass-Steagall Act as interpreted by the Supreme Court in Investment Company Institute v. Camp, supra. That decision indicated that the Glass-Steagall Act, while prohibiting a bank from promoting commingled agency accounts that were deemed to be essentially equivalent to mutual funds, would permit a bank to "commingle assets which it has received for a true fiduciary purpose rather than for investment." 401 U.S. at 638, 91 S.Ct. at 1102. Accordingly, the determinative question presented first to the Comptroller, and now to this court, is whether the IRA contributions commingled by CBT in the Fund can be said to have been "received for a true fiduciary purpose."⁵

II.

The Comptroller concluded that the nature of the relationships between CBT and the Fund, and between CBT and the individual IRA participants, provides sufficient assurance that the challenged activities constitute "fidicuary services" that are not barred by the Glass-Steagall Act. See Decision of the Office of the Comptroller of the Currency on the Application by Connecticut Bank and Trust Company, N.A., to Establish a Common Trust Fund for the Collective Investment of Individual Retirement Account Trust Assets (dated Feb. 7, 1985) ("Comptroller's Decision") at 16. The Comptroller's interpretation of the statute cannot be deemed unreasonable with respect to the Fund at issue in the instant case.

First, CBT is the trustee under Connecticut law of both the Fund and the individual IRA trusts and therefore is required to administer all of these trusts "with the care of a prudent investor." C.G.S. § 45-88. As the Comptroller observed in his decision,

Connecticut law imposes upon the Trustee significant fiduciary duties and obligations, including the duty to obey the donor's instructions, to protect the fund, to exercise due diligence, to be completely loyal to the interests of the beneficiaries, and to avoid being influenced by any third-party or personal interest which may conflict with duties as Trustee.

Comptroller's Decision at 4-5, citing Palmer v. Hartford National Bank & Trust Co., 160 Conn. 415, 279 A.2d 726 (1971); Phillips v. Moeller, 148 Conn. 361, 170 A.2d 897 (1961); Conway v. Emeny, 139 Conn. 612, 96 A.2d 221 (1953); Lyman v. Stevens, 123 Conn. 591, 197 A. 313 (1938); McClure v. Middletown Trust Co., 95 Conn. 148, 110 A. 838 (1920).

Moreover, CBT's relationship to the Fund and to the individual IRA trusts is regulated under ERISA as well as under Connecticut law. For example, ERISA requires that the individual IRA trusts be established "for the exclusive benefit of an individual or his beneficiaries" pursuant to written governing instruments that satisfy specified requirements. 26 U.S.C. § 408(a)(1). The trustee bank is prohibited under the Internal Revenue Code from engaging in various forms of self-dealing with the trusts. See 26 U.S.C. § 4975. A person may contribute no more than $2,000 per year to an IRA trust. See 26 U.S.C. § 408(a)(1). The assets in an IRA trust can be distributed only when the individual trustor reaches age 59½, dies or becomes disabled unless he is willing to incur a substantial tax penalty. See 26 U.S.C. § 408(f). The trustor's interest in his IRA is not transferable except by death, see 26 U.S.C. § 408(a), and is not to be used as security for indebtedness. See 26 U.S.C. § 408(e)(4). These restrictions satisfied the Comptroller that the Fund "cannot serve simply as a vehicle for investment" because "the participant is not seeking a short-term profit, but is primarily interested in preservation, management and growth of assets that will be available to him" only at some future date. Comptroller's Decision at 19.

The fiduciary nature of the Fund is also evidenced by CBT's intent to "offer the Trust to IRA customers as part of a total IRA program" and to "advertise the Trust as being merely one of several IRA alternatives." Id. at 5. CBT's representations to the Comptroller that the Fund "will not be marketed as a separate investment service independent of the other IRA options being offered," id. at 6, further indicate that CBT is offering a package of "fidicuary services" rather than a mere investment vehicle. The plaintiff concedes that CBT has acted in accordance with these representations. See Stipulation of Facts at ¶ 10.

The fidicuary obligations of CBT are not appreciably altered by its appointment of an independent supervisory committee to oversee the Fund as required by the Investment Company Act of 1940, 15 U.S.C. §§ 80a-1 et seq. Indeed, the existence of an independent supervisory committee, as well as the Comptroller's reservation of the right to withdraw approval of the Fund if the supervisory committee removes CBT as trustee or investment adviser, see Comptroller's Decision at 12-13, offers additional assurance to IRA customers that CBT will observe its fidicuary responsibilities under state law with respect to the Fund. Furthermore, CBT is separately accountable to its IRA customers as trustee of their individual IRA trusts.

It is clear that the concerns that motivated the Congress to adopt the Glass-Steagall Act are no more present in the Fund than in the traditional common...