|For immediate release|
The Federal Reserve Board today announced its approval of the notice of Lloyds TSB Group plc, London, England, to retain its indirect ownership of IAI Holdings, Inc., Minneapolis, Minnesota, and thereby engage in certain nonbanking activities.
Attached is the Board's Order relating to this action.
Lloyds TSB Group plc
Lloyds TSB Group plc, London, England ("Notificant"), a foreign banking organization subject to the provisions of the Bank Holding Company Act ("BHC Act"), has requested the Board's approval under section 4(c)(8) of the BHC Act (12 U.S.C. § 1843(c)(8)) and section 225.24 of the Board's Regulation Y (12 CFR 225.24) to retain its indirect ownership of IAI Holdings, Inc., Minneapolis, Minnesota, and thereby engage in the following nonbanking activities in the United States:1
Notice of this proposal, affording interested persons an opportunity to submit comments, has been published (62 Federal Register 11,455 (1997)). The time for filing comments has expired, and the Board has considered the notice and all comments received in light of the factors set forth in section 4(c)(8) of the BHC Act.
Notificant, with total consolidated assets of approximately $267 billion,2 acquired all the voting shares of Lloyds Bank Plc, London, England ("Lloyds Bank"), on December 28, 1995, and thereby became a foreign banking organization subject to the BHC Act.3 Notificant operates a branch in New York, New York, and an agency in Miami, Florida. Notificant controlled IAI Holdings and IAI International, Ltd. prior to its acquisition of Lloyds Bank and has filed this notice to obtain the Board's approval to retain its interest in these entities.4
IAI, IAI Ventures, and IAI International are registered as investment advisers with the Securities and Exchange Commission ("SEC") under the Investment Advisers Act of 1940 (15 U.S.C. § 80b-1 et seq.). Accordingly, IAI, IAI Ventures, and IAI International are subject to the recordkeeping and reporting obligations, fiduciary standards, and other requirements of the Investment Advisers Act and the SEC. IAI-Securities is registered with the SEC as a broker-dealer under the Securities Exchange Act of 1934 (15 U.S.C. § 78a et seq.). IAI Trust is a limited purpose trust company organized under the laws of Minnesota.
IAI provides investment advice to institutions, pension and profit sharing plans, municipalities, and individuals.5 IAI also provides investment advisory and administrative services to 25 mutual funds ("Funds"), including the 19 mutual funds that form the IAI family of mutual funds ("IAI Funds").6 Each of the Funds advised and administered by IAI is registered with the SEC under the Investment Company Act of 1940 (15 U.S.C. § 80a-1 et seq.) ("1940 Act").7 Unlike most mutual funds, the IAI Funds do not have a "principal underwriter" for purposes of the 1940 Act.8 A broker-dealer that is not affiliated with Notificant or IAI serves as the principal underwriter and distributor of the other six Funds that are advised and administered by IAI.
As noted above, the Board previously has determined by regulation that investment advisory, securities brokerage, foreign exchange execution, and trust activities are closely related to banking for purposes of the BHC Act.9 Notificant would conduct these activities in accordance with the limitations set forth in Regulation Y. Notificant also proposes that IAI provide the administrative services listed in Appendix B to mutual funds that are advised by IAI. The Board previously has determined that mutual fund administrative services are closely related to banking within the meaning of section 4(c)(8) of the BHC Act.10
Notificant's proposal differs from the proposals previously approved by the Board in one material respect. Unlike in previous cases, the IAI Funds do not have an independent third party distributor that serves as the funds' principal underwriter for purposes of the 1940 Act. Notificant has stated that this structure allows the IAI Funds to lower their operating costs and thereby makes the funds more appealing to cost-conscious investors.14 In addition, Notificant has stated that the IAI Funds do not engage in general advertising and, therefore, do not need a distributor to market their shares.15 The Board has not previously considered a proposal whereby a bank holding company would provide advisory and administrative services to mutual funds that were not distributed by an independent third-party.
The Board has long held that the distribution of mutual fund shares is an activity covered by the Glass-Steagall Act.16 Although the specific services provided by mutual fund distributors vary widely from fund to fund, a distributor generally enters into a distribution agreement with a fund to act as agent for the fund in selling shares to the public and to serve as the fund's "principal underwriter" for purposes of the 1940 Act. The distributor generally fulfills its responsibility for selling the mutual fund shares by entering into selling agreements with broker-dealers or other financial intermediaries under which the intermediaries purchase fund shares from the distributor and sell those shares to their customers. In this manner, the distributor controls the sales channels through which shares of the fund are sold to the public. A mutual fund distributor also typically promotes the fund through advertising and is responsible for filing advertisements with the National Association of Securities Dealers ("NASD") or the SEC.
The IAI Funds have not contracted with an independent broker-dealer to serve as the funds' distributor or principal underwriter for purposes of the 1940 Act. Instead, the IAI Funds would enter directly into selling agreements with various brokers and would rely on independent sources for advertising. The IAI Funds have hired an individual (who will not also be an employee of Notificant) who would be responsible for initiating contact with broker-dealers and other financial intermediaries regarding the sale of Fund shares, and for negotiating any broker selling agreements on behalf of the Funds. In addition, in the event the IAI Funds determine to change strategies and begin advertising, this individual would be responsible for placing, reviewing, and filing with regulators, advertisements on behalf of the Funds.17
As the investment advisor and administrator, Notificant proposes to provide assistance to the Funds in these matters. Notificant maintains that the services that it proposes to provide to the IAI Funds are permissible for bank holding companies and would not constitute the distribution of the funds' shares.
Notificant has committed that IAI will not act as an underwriter of shares of the IAI Funds for purposes of the Securities Act of 1933, or as the funds' principal underwriter for purposes of the 1940 Act. Notificant has committed that neither Notificant, IAI, nor any affiliate of Notificant will enter into a distribution agreement with the IAI Funds, purchase shares of the funds as principal, or be identified as the funds' distributor in Fund prospectuses or sales material.18 In addition, Notificant has committed that neither Notificant, nor IAI, nor any other affiliate will engage in any activity that would cause it to be considered a broker of shares of the IAI Funds under the Securities Exchange Act of 1934. Thus, neither Notificant nor IAI would receive any transaction-based compensation in connection with the sale of shares of the IAI Funds, or enter into any selling agreement with the funds.19
Notificant has committed that the Marketing Officer will not be an employee, officer, or director of Notificant or any of its affiliates. Furthermore, Notificant has committed that the Marketing Officer will report directly to the boards of directors of the IAI Funds, which will be entirely independent from Notificant, and will not report to any officer that is affiliated with Notificant. Notificant also has committed that the independent boards of directors of the IAI Funds will have sole responsibility for all decisions regarding the employment, termination, and compensation of the Marketing Officer and will approve each selling agreement negotiated by the Marketing Officer, both initially and annually thereafter.20
In light of the foregoing, the commitments provided by Notificant and the specific facts of this case, the Board concludes that the proposed operational structure of the IAI Funds would be consistent with the Glass-Steagall Act.21
Proper Incident to Banking Test
The Board expects that consummation of the proposal can reasonably be expected to provide added convenience and services to Notificant's customers by offering them an expanded range of investment products and management expertise. The Board previously has determined that the provision of administrative services to mutual funds within the parameters established by the Board is not likely to result in the types of subtle hazards at which the Glass-Steagall Act is aimed or in any other adverse effects. Notificant also would be required to comply with the Board's interpretive rule on Investment Adviser Activities, which was designed to mitigate potential conflicts of interests and the potential for customer confusion associated with the proposed activities.24 There are numerous providers of the proposed nonbanking services, and there is no evidence in the record to indicate that consummation of this proposal is likely to result in significantly adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices, that would outweigh the public benefits of the proposal. Based on all the facts of record, the Board finds that the public benefits of Notificant's proposed activities outweigh any adverse effects, and, therefore, that the activities are a proper incident to banking for purposes of section 4(c)(8) of the BHC Act.
Based on the foregoing and all the facts of record, including the commitments discussed in this order and all other commitments and representations made by Notificant in connection with this notice, and subject to the terms and conditions set forth in this order, the Board has determined that the notice should be, and hereby is, approved. The Board's determination is subject to all the conditions set forth in Regulation Y, including those in sections 225.7 and 225.25(c) of Regulation Y (12 CFR 225.7 and 225.25(c)), and to the Board's authority to require modification or termination of the activities of a bank holding company or any of its subsidiaries as the Board finds necessary to assure compliance with, and to prevent evasion of, the provisions of the BHC Act and the Board's regulations and orders issued thereunder. The Board's decision is specifically conditioned on Notificant's compliance with the commitments and representations made in connection with this notice, including the commitments and conditions discussed in this order. The commitments, representations, and conditions relied on in reaching this decision shall be deemed to be conditions imposed in writing by the Board in connection with its findings and decision and may be enforced in proceedings under applicable law.
This transaction shall not be consummated later than three months after the effective date of this order, unless such period is extended for good cause by the Board or the Federal Reserve Bank of New York, acting pursuant to delegated authority.
By order of the Board of Governors,25 effective December 18, 1997.
(signed) Jennifer J. Johnson
Jennifer J. Johnson
Nonbanking Subsidiaries and Activities:
List of Administrative Services
1 IAI Holdings's principal subsidiaries are Investment Advisers, Inc. ("IAI"); IAI Securities, Inc. ("IAI-Securities"); IAI Ventures, Inc.; and IAI Trust Company, all in Minneapolis, Minnesota. Notificant also indirectly owns all the shares of IAI International Ltd., a United Kingdom company that engages in certain nonbanking activities in the United States. A list of the nonbanking activities to be engaged in by IAI Holdings and IAI International is provided in Appendix A.
2 All asset data are as of June 30, 1997, and use exchange rates then in effect.
3 Prior to this acquisition, Notificant was known as TSB Group plc.
4 Notificant and Lloyds Bank committed that they would keep their respective U.S. businesses separate following the merger until Notificant received Board approval under section 4(c)(8) of the BHC Act to retain the United States nonbanking operations of the combined entity. See Letter from Jonathan M. Weld and Timothy J. Byrne, Sherman & Stearling, to Kathleen M. O'Day, Associate General Counsel of the Board, dated November 6, 1995.
5 As of August 1, 1996, IAI had approximately $15 billion in assets under management.
6 IAI International serves as sub-adviser to certain of the mutual funds advised by IAI.
7 The Funds are sold through a variety of sales channels, including broker-dealers and 401(k) plans, and are not marketed primarily to customers of Lloyds Bank. Accordingly, the Funds are not proprietary mutual funds.
8 The 1940 Act defines a "principal underwriter" of a mutual fund's securities as "any underwriter who as principal purchases from [the mutual fund], or pursuant to contract has the right (whether absolute or conditional) from time to time to purchase from [the mutual fund], any such security for distribution, or who as agent for such company sells or has the right to sell any such security to a dealer or to the public or both." 15 U.S.C. § 80a-2(a)(29). The term does not include a dealer who purchases shares of a mutual fund through a principal underwriter that acts as agent for the mutual fund. Id.
9 See 12 CFR 225.28(b)(5), (6), (7)(i), and (7)(v).
10 See The Chase Manhattan Corporation, 81 Federal Reserve Bulletin 883 (1995); Mellon Bank Corporation, 79 Federal Reserve Bulletin 626 (1993) ("Mellon"). The administrative services would include providing telephone services to shareholders through a toll-free 800 number. Notificant has stated that telephone service operators would not solicit callers to purchase shares in particular mutual funds or make outgoing calls to solicit investors. Upon the request of a caller, the service operators may provide historical performance information concerning a Fund or general information concerning a Fund's investment objectives.
11 12 U.S.C. §§ 221a and 377.
12 See 12 CFR 225.125.
13 See 12 CFR 225.28(b)(6)(i); Mellon. The Board also has determined that the Glass-Steagall Act does not prohibit a bank holding company from controlling a closed-end investment company if that company is not frequently engaged in the issuance, sale, or distribution of securities. See 12 CFR 225.125. A closed-end investment company that is controlled by a bank holding company must conform its activities to the requirements of section 4 of the BHC Act. Accordingly, if Notificant sponsors, organizes, or controls any closed-end fund, Notificant must limit such fund's investments to less than 5 percent of the voting shares of any issuer.
14 The IAI Funds are pure "no-load" funds which do not impose a sales charge or a Rule 12b-1 distribution fee.
15 Notificant has indicated that the IAI Funds rely on articles and performance information regularly published by independent sources to inform potential investors about the funds. Notificant has stated, furthermore, that the development of mutual fund "supermarkets" provides the IAI Funds with readily available sales channels, thereby diminishing the need for the funds to hire a distributor to establish and maintain distribution channels for the funds.
16 See 12 CFR 225.125.
17 As noted above, the IAI Funds currently do not engage in general advertising or marketing activities. However, IAI prepares a quarterly newsletter and other sales material regarding the IAI Funds and maintains an "IAI Funds" home page on the internet. Notificant has stated that any sales materials prepared by IAI, including the information posted on the internet site, will be reviewed by the Marketing Officer of the IAI Funds for compliance with federal securities laws and will be filed by the Marketing Officer on behalf of the funds with the NASD or SEC. The Board previously has permitted bank holding companies to prepare advertising and marketing materials for funds that are advised and administered by the bank holding company, provided that the funds' distributor remained responsible for placing all advertisements and filing the materials with the NASD or SEC. See Commerzbank.
18 The pension plan for IAI employees currently holds shares of the IAI Funds, which are attributed to Notificant under section 2(g)(2) of the BHC Act. Notificant has committed that the IAI pension plan, together with Notificant and its affiliates, will not acquire more than 5 percent of the shares of any Fund, and that any such ownership interest in the Funds will not be used in any way in marketing or selling the Funds. See Mellon.
19 Because the IAI Funds do not have a distributor, independent broker-dealers that wish to sell shares of the funds would enter into selling agreements directly with, and would acquire shares directly from, the IAI Funds. Such activity could cause the broker-dealers to be considered "underwriters" of fund shares for purposes of the Securities Act of 1933. See 15 U.S.C. § 77b(11). As noted above, Notificant has committed that it will not act as a broker of shares of the IAI Funds or enter into selling agreements with the funds.
20 Notificant proposes that officers or employees of IAI serve as president, treasurer, secretary, assistant treasurer, and assistant secretary of the IAI Funds. Notwithstanding the fact that the IAI Funds would not employ an independent third party distributor, this case is consistent with prior Board decisions prohibiting bank holding company control of mutual funds. Notificant does not propose to have any director interlocks with the Funds, including the IAI Funds. The Board previously has found that a bank holding company may, consistent with the Glass-Steagall Act and the BHC Act, have certain officer and director interlocks with mutual funds that the bank holding company advises and administers. See Bankers Trust New York Corporation, 83 Federal Reserve Bulletin 780 (1997); Commerzbank AG, 83 Federal Reserve Bulletin 678 (1997); The Governor and Company of the Bank of Ireland, 82 Federal Reserve Bulletin 1129 (1996).
21 The Board previously has stated that the Glass-Steagall Act also prohibits a bank holding company from sponsoring or organizing a mutual fund. See 12 CFR 225.125. Notificant has committed that it will not provide the seed money for any mutual funds established in the future. In addition, Notificant has committed that the completely independent board of directors of the Funds will serve as the board of directors of any newly established fund that is advised and administered by IAI and that is not distributed by an independent third party.
22 12 U.S.C. § 1843(c)(8).
23 See 12 CFR 225.26; see also The Fuji Bank, Limited, 75 Federal Reserve Bulletin 94 (1989); Bayerische Vereinsbank AG, 73 Federal Reserve Bulletin 155 (1987).
24 Under the interpretive rule on Investment Adviser Activities, a bank holding company and its bank and nonbank subsidiaries should not purchase in their sole discretion, in a fiduciary capacity securities of any investment company for which the bank holding company acts as investment adviser unless the purchase is specifically authorized by the terms of the instrument creating the fiduciary relationship, by court order, or by the law of the jurisdiction under which the trust is administered. The interpretive rule also prohibits a bank holding company from acting as investment adviser to any investment company that has either the same name as the bank holding company or any of its subsidiary banks, or a name that includes the word "bank." See 12 CFR 225.125.
25 Voting for this action: Chairman Greenspan, Vice Chair Rivlin, and Governors Kelley, Phillips, Ferguson, and Gramlich. Absent and not voting: Governor Meyer.
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1997 Orders on banking applications