Fed to Break Precedent If It Lets Commerzbank Buy Retail Fund Group

Commerzbank AG's agreement last week to acquire Montgomery Asset Management would be the first acquisition of a U.S. retail mutual fund complex by a foreign bank if the Fed approves it.

The deal is scheduled to close by July 31, but the Fed has never before given the green light to a foreign bank's acquisition of a U.S. retail mutual fund, according to an industry lawyer.

"This is a potentially groundbreaking acquisition," said the lawyer, who asked not to be identified. "If this goes through this would make it easier for foreign banks to get in this business, and many have expressed interest."

Germany's Commerzbank agreed to buy $8 billion of assets under management from San Francisco's Montgomery Securities, including the 19 no- load Montgomery Funds.

When U.S. banks acquire retail mutual funds, they typically do it through nationally chartered subsidiaries, which are regulated by the Office of the Comptroller of the Currency, the lawyer said. The OCC permits banks to market and advertise mutual funds.

The Federal Reserve, however, does not. The banking companies it oversees cannot market or advertise retail mutual funds.

But since most foreign banks, like Commerzbank, do not have nationally chartered U.S. subsidiaries, the lawyer said, they do not have the option of seeking approval from the OCC rather than the Fed.

Other European banks with strong footholds in the U.S. asset management business compete only in the institutional, or wholesale, end of the business. Therefore, they are not subject to the Fed's prohibition on marketing and advertising retail funds.

In addition to limits on marketing, foreign banks without a large U.S. branch system face other disadvantages.

"Foreign banks typically do not have a U.S. distribution network, so they have to look at other distribution options," such as wire houses and financial planners, said David Huber, president of Bisys Fund Services, a Columbus, Ohio.

But foreign banks have been more willing than their U.S. competitors to pay up for U.S. money managers. The $250 million-plus Commerzbank reportedly agreed to pay for Montgomery is more than industry consultant Geoffrey H. Bobroff expected the fund complex to fetch, he said.

But should Germany's public pension system go private, as industry observers expect, the German bank's U.S. acquisition could be a model for managing retirement assets, Mr. Bobroff said.

"The U.S. markets have been leaders in the retirement business, and they might believe they can import it to Germany," he said. And that could set off a wave of acquisitions by European banks.

While the lawyer said Fed approval would be groundbreaking, he said he does not expect it to open the floodgates for German bank entry into the U.S. asset management business. "It might loosen the gates around the dam, though," he said.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER