That the Office of the Comptroller of the Currency was willing to let a national bank advance commissions and marketing expenses directly to selling brokers and dealers-rather than lend these funds to a distributor- was a useful decision for banking organizations seeking additional flexibility in managing their mutual fund selling and compensation arrangements.

This is particularly true for mutual funds with B-class shares, also known as back-end loads.

The Federal Reserve Board's corresponding willingness to let a bank holding company provide advisory and administrative services to "distributorless" mutual funds-an action the OCC quietly approved several years ago for national banks-by itself was marginally useful to banking organizations that manage and administer these types of funds. Read together, however, the OCC and Federal Reserve Board decisions may have more important and intriguing implications for bank mutual fund activities under the Glass-Steagall Act.

Specifically, if it is permissible for a bank to pay retail sales commissions directly to selling agents without running afoul of Glass- Steagall (or the affiliate transaction restrictions in federal law), and if a banking organization can manage and provide services to a mutual fund that does not have a distributor, the regulatory framework might be in place for a banking organization to establish a viable commission-driven sales and marketing network for its mutual funds without involving a third- party distributor.

Put another way, if a banking organization can assemble an effective network of selling dealers and agents, pay sales commissions and other compensation to these sellers, and be reimbursed directly by the mutual fund for the payment of sales compensation and marketing expenses, why must the bank retain the services of a distributor at all?

This conclusion may prove intriguing for several banking organizations, particularly for those with large mutual fund complexes marketed through strong and diversified sales networks.

But before bank mutual fund managers jump on this regulatory bandwagon, there are some important business and legal issues to consider.

First, there is the value added by an independent distributor to marketing arrangements. Though some bank mutual fund distributors do little more than let their names be used on the cover page of a mutual fund prospectus, others provide important and effective distribution and marketing services.

If a bank is prepared to show its mutual fund distributor the door, it must be sure its own distribution systems are adequate-which is simply not the case for many, if not most, bank mutual fund distribution networks. It must also be sure that its mutual fund business objectives and priorities do not depend on focused distribution activities, as might be the case for private-label bank mutual fund products offered primarily to fiduciary, employee benefit, and private banking network customers.

Further, banks wanting to go the route of "distributorless" mutual funds will need to consider and resolve some important regulatory and legal issues.

For instance, will the Securities and Exchange Commission (or a court in a shareholder lawsuit) be willing to conclude that a bank paying retail commissions and providing the primary marketing support for a distributorless mutual fund is not a statutory "underwriter" under the Securities Act of 1933?

Similarly, will the Fed be willing to accept a bank holding company's payment of marketing and administrative expenses, coupled with a reimbursement of these expenses through asset-based fees paid by the mutual fund, particularly if the recipients of those commissions include brokerage affiliates of the holding company? Or if holding company employees, not independent marketing workers, provide marketing and sales support?

In short, though the OCC and Federal Reserve Board decisions together hold out interesting possibilities for banks wanting to reorganize and consolidate their mutual fund marketing and servicing operations, the business and legal issues involved in such a move would not make it a panacea for banks wanting to find an excuse to fire their distributors.

In the end, it is uncertain how many banking organizations are likely to "go distributorless" purely as a result of these regulatory decisions. Still, it is precisely this type of regulatory agency action that keeps the Glass-Steagall landscape ever undulating and will continue to do so, in the face of Congress' continuing inability to take a leadership role in financial services reform.

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