Sec. 204.123 Sale of Federal funds by investment
companies or trusts in which the entire beneficial interest is held exclusively
by depository institutions.
(a) The Federal Reserve Act, as amended by the Monetary Control Act
of 1980 (Title I of Pub. L. 96-221) imposes Federal Reserve requirements
on transaction accounts and nonpersonnel time deposits held by depository
institutions. The Board is empowered under the Act to determine what types
of obligations shall be deemed a deposit. Regulation D--Reserve Requirements
of Depository Institutions exempts from the definition of deposit those
obligations of a depository institution that are issued or undertaken and
held for the account of a domestic office of another depository institution
(12 CFR 204.2(a)(1)(vii)(A)(1)). These exemptions from the definition of
deposit are known collectively as the Federal funds or interbank exemption.
(b) Title IV of the Depository Institutions Deregulation and Monetary
Control Act of 1980 authorizes Federal savings and loan associations to
invest in open-ended management investment companies provided the funds'
investment portfolios are limited to the types of investments that a Federal
savings and loan association could hold without limit as to percentage
of assets (12 U.S.C. 1464(c)(1)(Q)). Such investments include mortgages,
U.S. Government and agency securities, securities of states and political
subdivisions, sales of Federal funds and deposits held at banks insured
by the Federal Deposit Insurance Corporation. The Federal Credit Union
Act authorizes Federal credit unions to aggregate their funds in trusts
provided the trust is limited to such investments that Federal credit unions
could otherwise make. Such investments include loans to credit union members,
obligations of the U.S. government or secured by the U.S. government, loans
to other credit unions, shares or accounts held at savings and loan associations
or mutual savings banks insured by FSLIC or FDIC, sales of Federal funds
and shares of any central credit union whose investments are specifically
authorized by the board of directors of the Federal credit union making
the investment (12 U.S.C. 1757(7)).
(c) The Board has considered whether an investment company or trust
whose entire beneficial interest is held by depository institutions, as
defined in Regulation D, would be eligible for the Federal funds exemption
from Reserve requirements and interest rate limitations. The Board has
determined that such investment companies or trusts are eligible to participate
in the Federal funds market because, in effect, they act as mere conduits
for the holders of their beneficial interest. To be regarded by the Board
as acting as a conduit and, thus, be eligible for participation in the
Federal funds market, an investment company or trust must meet each of
the following conditions:
(1) The entire beneficial interest in the investment company or trust
must be held by depository institutions, as defined in Regulation D. These
institutions presently may participate directly in the Federal funds market.
If the entire beneficial interest in the investment company or trust is
held only by depository institutions, the Board will regard the investment
company or trust as a mere conduit for the holders of its beneficial interest.
(2) The assets of the investment company or trust must be limited to
investments that all of the holders of the beneficial interest could make
directly without limit.
(3) Holders of the beneficial interest in the investment company or
trust must not be allowed to make third party payments from their accounts
with the investment company or trust. The Board does not regard an investment
company or trust that offers third party payment capabilities or other
similar services which actively transform the nature of the funds passing
between the holders of the beneficial interest and the Federal funds market
as mere conduits.
The Board expects that the above conditions will be included in materials
filed by an investment company or trust with the appropriate regulatory
agencies.
(d) The Board believes that permitting sales of Federal funds by investment
companies or trusts whose beneficial interests are held exclusively by
depository institutions, that invest solely in assets that the holders
of their beneficial interests can otherwise invest in without limit, and
do not provide third party payment capabilities offer the potential for
an increased yield for thrifts. This is consistent with Congressional intent
to provide thrifts with convenient liquidity vehicles.
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