May 22, 2002 **Interpretive Letter #936**

**June 2002**

**12 CFR 9.18**

Re: Proposed Creation of the \"**\[ \]** Fund\"

Dear **\[ \]**:

This letter confirms our February 13, 2002 teleconference, and responds
to your letter dated March 5, 2002, regarding the establishment by **\[
\]** (\"Bank\"), as trustee, of the **\[ \]** (\"Fund\"). You have
inquired whether the OCC would object to an aspect of the Fund\'s
operations under the OCC\'s rules governing collective investment funds
at 12 C.F.R. § 9.18. Specifically, you have inquired whether the Bank,
as trustee, may allow participant withdrawals from the Fund at the sole
discretion of the Bank, or when a participant becomes ineligible to
continue as a participant in the Fund. Based on your representations,
and for the reasons described below, the OCC does not object to this
aspect of the Fund\'s operations under the OCC\'s rules governing
collective investment funds at 12 C.F.R. § 9.18.[^1]

**I. Proposal**

The Bank seeks to establish the Fund for the collective investment of
money contributed to the Fund by the Bank in its capacity as trustee of
certain tax-exempt charitable trusts. The Bank is forming the Fund in
order to enable several small trusts for which it serves as trustee to
invest in private equity limited partnerships (\"PELP\"). However, the
trusts cannot invest in the PELP directly because an appropriate private
equity investment for these trusts would not satisfy the minimum
investment requirement of the limited partnership. The Fund will pool
the investments of several tax-exempt trusts that are \"qualified
purchasers,\"[^2] allowing the Fund to satisfy the minimum requirement
of the limited partnership.

Under the Bank\'s proposal, Fund participants will be unable to make
discretionary withdrawals from the Fund.[^3] Sections 6.2(a), (b), (c)
and (e) of the Declaration of Trust provide:

> \(a\) Unless otherwise limited hereunder, the decision on when to
> allow, the form of, and the timing of all Fund withdrawals shall be
> within the sole discretion of the Trustee;
>
> \(b\) Participants will not have the right to withdraw from the Fund
> at any particular time or interval;
>
> \(c\) At the time of the creation of a Fund, the Trustee does not
> anticipate allowing any withdrawals from the Fund prior to the
> termination and liquidation of the \[private equity investments\] of
> the Fund; and
>
> \(e\) Upon the occurrence of an event that renders a participant
> ineligible to continue as a participant in the Fund, [^4] within one
> year of such event the Trustee shall redeem such participant\'s units
> in the Fund, in kind, with a proportionate share of the \[private
> equity investments\] and the other assets of the Fund; subject,
> however, to any liens for incurred and unpaid capital contributions,
> debts, fees and expenses.

You represented during our February 13, 2002 teleconference that the
Fund will be valued semi-annually on April 1 and October 1. The Bank
will use the valuation reports provided by the PELP\'s general partner
to determine the Fund\'s fair value. To comply with 12 C.F.R.
§ 9.18(b)(4)(ii), and as provided in § 5.3(f) of the Declaration of
Trust, the Bank will determine whether the valuation provided by the
PELP\'s general partner represents the fair value of the Fund\'s assets
as of the date of the valuation.

**II. Discussion**

The OCC\'s regulation governing collective investment funds does not
mandate the frequency of admissions and withdrawals from collective
investment funds. The regulation requires that the written plan
governing the administration of the collective investment fund include
appropriate provisions related to the terms and conditions governing the
admission and withdrawal of participating accounts.[^5]

In addition, the regulation provides that admissions and withdrawals may
only be \"on the basis of the valuation described in paragraph (b)(4).\"
Section 9.18(b)(4), in turn, provides in part that,

> A bank administering a collective investment fund shall determine the
> value of the fund\'s assets at least once [every three
> months]{.underline}. However, in the case of a fund described in
> paragraph (a)(2) of this section that is invested primarily in real
> estate or other assets that are not readily marketable, the bank shall
> determine the value of the fund\'s assets [at least once a
> year]{.underline}.[^6]

These provisions require that bank trustees use the valuation derived
under section 9.18(b)(4) to determine the amount participants are
entitled to when they are admitted to or withdraw from a fund. It does
not mandate the frequency of admissions and withdrawals.[^7] National
banks and institutions that must comply with this regulation to receive
favorable tax treatment should have valid reasons for limiting
admissions and withdrawals, however. In addition, the admissions and
withdrawal policies must be consistent with fiduciary duties.

In this case, the Bank does not anticipate allowing any withdrawals from
the Fund prior to the termination and liquidation of the underlying
trust investments because the Fund might fail to satisfy the minimum
investment requirement of the PELP if the Fund permitted discretionary
withdrawals from the Fund. In addition, you represent that the Bank will
limit admissions to, and withdrawals from the Fund, because the Fund\'s
private equity investments will be in limited partnerships that will be
illiquid over their projected ten to fifteen year business cycles.
Specifically, the limited partnership interests are not transferable
without the permission of the General Partner. You have also represented
that the amount of the investment that each participating trust will
make in the Fund will not impair the liquidity of the participating
trusts. The Fund is designed as, and will be used as, only one part of
an overall investment strategy for the participating trusts.

Based on your representations and consistent with applicable law, the
Bank may permit a participant to withdraw from the Fund solely at the
Bank\'s discretion, or when a participant becomes ineligible to continue
as a participant in the Fund.[^8]

I trust this is responsive to your inquiry. Please do not hesitate to
contact me if you have any questions.

Sincerely,

**-signed-**

Asa L. Chamberlayne

Counsel

Securities and Corporate

Practices Division

[^1]: We limit our no-objection to the Bank\'s proposal to allow
    participant withdrawals from the Fund at the sole discretion of the
    Bank, or when a participant becomes ineligible to continue as a
    participant in the Fund. We offer no views on whether other aspects
    of the Fund\'s operations comply with the provisions of 12 C.F.R. §
    9.18 or with applicable fiduciary law.

[^2]: While the Investment Company Act of 1940 (\"1940 Act\") is not
    applicable to the Bank\'s proposal, the Bank represents that if the
    1940 Act were applicable to the Bank\'s proposal, the tax-exempt
    trusts for which the Bank is trustee would meet the definition of
    \"qualified purchasers\" under § 2(a)(51) of the 1940 Act.

[^3]: The Bank represents that it will provide appropriate disclosures
    to the board of directors or the trustee(s) of the beneficiaries of
    each Fund participant with respect to the nature of the Fund\'s
    investments and capital calls, and that Fund participants will not
    have the right to withdraw from the Fund at any particular time or
    time interval.

[^4]: The Bank represents that the only way a participant would cease to
    be eligible to continue as a participant in the Fund would be if the
    Bank was removed, for cause, as trustee of the participating
    account.

[^5]: The regulation also provides that certain funds may require a
    prior notice period of up to one year for withdrawals. 12 C.F.R. §
    9.18(b)(5)(iii).

[^6]: 12 C.F.R. § 9.18(b)(4)(i). Section 9.18(b)(4) also establishes the
    method of valuation. In general, bank trustees are required to value
    fund assets at market value as of the date set for valuation, unless
    the bank cannot readily ascertain market value, in which case the
    bank shall use a fair value determined in good faith. *See* 12
    C.F.R. § 9.18(b)(4)(ii)(A). Different valuation methods apply to
    short term investment funds. *See* 12 C.F.R. § 9.18(b)(4)(ii)(B).

[^7]: OCC Trust Interpretive Letters interpreting the prior version of
    12 C.F.R. § 9.18 concluded that admissions and withdrawals must
    occur as frequently as valuations. *See e.g.*, Trust Interpretive
    Letter #13 (February 14, 1986). Upon closer examination of the
    regulation, however, we have concluded that the regulation does not
    mandate the frequency of admissions and withdrawals. *See*
    Interpretive Letter #920 (December 6, 2001).

[^8]: *See* footnote 4, *supra.*