Ruling Should Help Banks Move Funds With Back-End Loads

WASHINGTON - A new legal opinion from the Office of the Comptroller of the Currency should make it easier for banks to get distribution for proprietary mutual funds with deferred sales charges.

Under a "no-objection" letter the OCC issued March 13, National banks may lend to their fund distributors to finance funds' back-end loads, or sales charges.

"This is good news, because it allows banks to be on an equal, competitive footing with other mutual fund advisers," said James D. McLaughlin, director of agency relations at the American Bankers Association.

Commercial banks are barred from distributing mutual funds, but the agency allowed a bank to lend to its fund distributor, which in turn would pay brokerage commissions to a bank-affiliated brokerage.

The decision removes another brick from the Glass-Steagall Act wall that separates commercial and investment banking. Several bills are pending in Congress that would modify those restrictions.

But the new OCC ruling may prove controversial.

"An argument can be made that it does violate Glass-Steagall," said Securities and Exchange Commissioner Richard Y. Roberts.

The OCC minimized the ruling's importance.

"It provides a small measure of additional flexibility to banks in how they conduct this activity but subjects them to some very substantial safeguards to limit their exposure," said Julie L. Williams, OCC chief counsel. "We have concluded that there aren't impediments under the transactions-with-affiliates rules or under Glass-Steagall."

In its opinion, the OCC allowed a bank - which it did not name - to lend an initial $300,000 to its mutual fund distributor. The proceeds would go toward paying commissions to the bank's brokerage affiliate.

The distributor would repay the loans with proceeds from the deferred charges, or back-end loads, on mutual fund sales. The OCC required that the loans be fully collateralized either with U.S. government securities or with a segregated, earmarked cash deposit at the bank.

The OCC concluded that the transaction represented a lending relationship, not a securities distribution relationship.

Practically, that makes it easier for banks to finance the back-end-load mutual funds sold in their lobbies.

Banking lawyers were pleased by the opinion.

"The OCC is putting to rest the concerns that some people have had about banks' being in the distribution business," said Rebecca H. Laird, a Kirkpatrick & Lockhart partner who specializes in banking and mutual funds. "The agency is clearly taking a position that we don't have a Glass- Steagall violation if a bank lends in a way that facilitates the distribution" of mutual funds.

Nonetheless, the agency imposed special precautions on the loans. The OCC said it would treat bank loans to third-party distributors in the same way it treats direct transactions with affiliates, requiring them to be heavily collateralized.

"This keeps it all in the family," Ms. Laird said, "and that is probably easier."

The OCC did not address any issue raised by the securities or bank holding company laws.

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