A federal regulator is warning trust officers that they may see more suits stemming from the conversion of common trust funds to mutual funds.
Because of tax code changes, since 1997 there has been a flurry of these conversions to proprietary mutual funds or to create a fund family.
But banks may have skipped some steps that could have protected them from suits, said Lisa J. Lintecum, the director of asset management at the Office of the Comptroller of the Currency. She spoke here last week at the American Bankers Association's annual trust, asset management, and marketing conference.
Trustees planning conversions must be diligent in demonstrating the soundness of the investments and disclosing additional fees, the regulator said. This could help avoid litigation, she said.
Failing to strictly adhere to these steps is "where people are going to stumble," Ms. Lintecum said.
Amsouth Bancorp, Bank One Corp. subsidiary First National Bank of Chicago, and Provident Bancorp have already been sued over trust conversions. The Amsouth case has been dismissed.
And, Ms. Lintecum said, others may have settled quietly before attracting attention.
The suits claimed investments in proprietary mutual funds caused conflicts of interest, higher fees, less-prudent investments-and, in one case, tax liabilities.
"If it was an ideal world, you would have to look at each individual relationship and make sure it's the right thing to do. I'm not sure everyone has done that," Ms. Lintecum said.
The personal trust assets involved-at least $27.2 billion were converted in the past two years, according to the Investment Company Institute-are a fraction of the proprietary mutual fund business. There were $755.4 billion in the 104 mutual fund families managed by banks and thrifts on Sept. 31, according to Lipper Analytical Services of Summit, N.J.
Trust assets continue to be a driving force in banks' mutual fund business, according to an OCC study that examined a number of large national banks in 1996 and 1997.
"Some of the growth or most of the growth in proprietary funds is still being fueled by fiduciary dollars," Ms. Lintecum said. "Not everyone offers proprietary mutual funds and there's still definitely a place for collective and common funds."
Fees associated with mutual funds charged to trust accounts should be "reasonable," the regulator said. But one audience member questioned how to determine what is a reasonable fee.
Proponents of conversions say the oversight offered by mutual funds-such as outside boards of directors and Securities and Exchange Commission regulation, which common funds lack-make the cost worthwhile.
"Is that worth a 10- or 20-basis-point drag on investment performance?" said W. Christopher Maxwell, a mutual fund consultant based in Rock Hall, Md.
There is no marketwide 'reasonable' fee, Mr. Maxwell said. Fees are "something you have to convince your clients" are fair, Mr. Maxwell added.
