The Senate Finance Committee turns its attention this week to writing tax legislation that could transform bank trust-department assets into a mutual-fund bonanza.
Committee Chairman Sen. William Roth, R-Del., has co-sponsored a bill with Sen. Max Baucus, D-Mont., that would allow the conversion of common trust assets to proprietary mutual fund shares without having to pay any capital-gains taxes.
If the proposal becomes law, bank mutual funds could swell with fresh money. Last year 439 banks had common trust assets of $153 billion, according to the American Bankers Association.
Collective trust assets are frequently used to seed new bank mutual funds, but common trusts have remained largely untouched because moving them usually triggers tax liabilities.
"This is probably the last ready source of aggregate assets that can be converted," said David Master, vice president, the Optima Group, a Fairfield, Conn.-based mutual fund consulting firm.
Although the measure commands banks' rapt attention, it has been forgotten in the congressional budget shuffle for the last four years. "We're hopeful it doesn't get lost this year," said James D. McLaughlin, director trust and securities, American Bankers Association.
The House has not passed similar legislation, so bankers are counting on inclusion of the Roth-Baucus measure as part of budget reconciliation.
Some observers say the money unleashed by a tax-free conversion law would be a blessing for banks striving to increase proprietarmutual fund assets to profitable levels.
Daily valuation, in-kind distributions and investment portability are all compelling advantages for mutual funds over common trusts, said Robert S. Kniejski, president, Wachovia Investments, broker-dealer subsidiary of Wachovia Corp., Winston-Salem, N.C.
But others, burned by broken promises every year since the Bush administration first proposed the dispensation in 1991, aren't holding their breath.
"I'm a disbeliever that Congress is going to give us relief," said Timothy J. Leach, president and chief investment officer, Qualivest Capital Management, a subsidiary of U.S. Bancorp., Portland, Ore. The bank has $2 billion in common trust assets that could migrate to its $1.3 billion-asset family of 10 proprietary mutual funds, he said.
Recent rulings from the Office of the Comptroller of the Currency have lowered the hurdles for some common trust investments that create the possibility of a virtual conversion.
The OCC has liberalized its interpretation of regulations forbidding common trusts from placing more than 10% of assets in any single investment, including a mutual fund. Common funds' investments in mutual fund shares are now recognized as "essentially investments in the underlying assets held by those funds," according to an Aug. 2 clarification letter.
Quirks in the interpretation make conversion into existing mutual funds difficult, but using the common trust assets to start a new fund presents few problems, mutual fund executives said.
Federated Investors has helped two bank customers convert common trust into newly formed mutual funds since the OCC clarification, said Eugene F. Maloney, Federated's corporate counsel.
Mr. Leach said U.S. Bancorp is poised to convert trust assets into an equity-income stock mutual fund that was registered with the Securities and Exchange Commission last year but has been unused so far.
