New York's highest court ruled Tuesday that trust departments may charge clients for mutual fund investments.

The Court of Appeals in Al-bany said Onbancorp, Syracuse, may invest trust assets in mutual funds and charge two fees: one for trust administration and the other to cover outside investment management.

The Onondaga County surrogate court in January 1996 gave banks permission to invest trust assets in mutual funds but barred them from imposing additional fees on the client.

Writing for a unanimous court, Chief Judge Judith S. Kaye said a law enacted in July specifically authorizes banks and other corporate trustees in New York to charge common trust clients fees and expenses from securities, including mutual fund shares.

She added that the law applies retroactively to any bank or corporate trustee in New York that passed on mutual fund fees to trust clients.

"I feel like a huge weight has been lifted off my shoulders," said Eugene F. Maloney, corporate counsel of Pittsburgh-based Federated Investors, which was selling mutual funds through OnBank trust department, a subsidiary of Onbancorp.

The lower court decision barring the charges was surprising because the Comptroller of the Currency gave trust departments at national banks permission in 1975 to pass on mutual fund fees to clients, he said.

"It became commonplace all over the country, not just in New York," Mr. Maloney said. "Here we are two decades into fiduciaries using mutual funds, and this aberration surfaced."

In OnBank and Trust Co. v. Hartnett, guardians of common trust funds argued that OnBank improperly delegated fiduciary duties by investing in mutual funds. They also complained that the additional mutual fund fees were too much and not in clients' interest.

There are 117 common trust funds with about $20 billion of assets in New York, according to the New York State Bankers Association. Many banks in the state that had not already done so held back from putting trust assets in mutual funds because of the surrogate court ruling, representatives of the trade group said.

"To have to absorb the fees made that alternative extremely costly," said Michael P. Smith, association president.

Onbancorp is to be acquired next quarter by Buffalo-based First Empire State Corp.

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