TO: Chief Executive Officers of all National Banks and Examining
Personnel

[PURPOSE]{.underline}

The purpose of this issuance is to advise national banks of their
authority to purchase investment company shares and of the specialized
reporting and accounting considerations applicable to such holdings.
This issuance supersedes Banking Bulletin 83-58, dated December 15,
1983, which limited bank investment in investment companies to certain
types of money market mutual funds.

[SCOPE]{.underline}

This issuance addresses all national bank purchases for their own
account of investment company shares.

[POLICY]{.underline}

This Office has determined that it is permissible for a national bank to
purchase for its own account shares of investment companies as long as
the portfolios of such companies consist solely of obligations which are
eligible for purchase by national banks for their own account pursuant
to the provisions of paragraph Seventh of 12 USC 24.

National banks which desire to make such purchases should be aware that
it remains the responsibility of a bank\'s management to ensure that the
particular investment company is a proper holding for the bank\'s
investment portfolio. That decision is the ultimate responsibility of
the bank\'s board of directors. Each holding of shares of an investment
company must be reviewed at least on a quarterly basis in order to
determine whether that particular investment company continues to be
appropriate for the bank\'s investment portfolio.

[Investment Limits]{.underline}

National banks may purchase and hold investment company shares without
limitation, if the portfolio of such an investment company consists
wholly of investments in which the bank could invest directly without
limitation pursuant to provisions of paragraph Seventh of 12 USC 24.
Shares of investment companies whose portfolios contain investments
which are subject to the limits of 12 USC 24 or 12 USC 84 may only be
held in an amount not in excess of 10% of bank capital and surplus. That
is, a bank may only invest an amount not in excess of 10% of its capital
and surplus in each such investment company.

In addition, banks which invest in investment companies that have
portfolio investments of this type must be aware of the possibility of a
violation by the bank of the 10% limitation of paragraph Seventh of 12
USC 24, by virtue of the cumulative holdings of a particular security in
the portfolios of more than one investment company or in combination
with the bank\'s direct holdings. Accordingly, it will be the
responsibility of the bank which has invested in the shares of more than
one investment company to determine that its pro rata share of any
security in the fund portfolio which is subject to the 10% limitation is
not in excess of that limitation by reason of being combined with the
bank\'s pro rata share of that security held by all other funds in which
the bank has invested and with the bank\'s own direct investment
portfolio holdings. Periodic reviews of the holdings of investment
companies whose shares are held by the bank must be conducted for this
purpose.

[Futures, Forwards, Options, Repurchase Agreements and Securities
Lending]{.underline}

Certain investment companies use futures, forward placement and options
contracts as well as repurchase agreements and securities lending
arrangements as part of their portfolio management strategy. Bank
investment in shares of such investment companies is permitted provided
these instruments are used in a manner that would be considered
acceptable for use in a national bank\'s own investment portfolio. Refer
to:

-   Banking Circular No. 79 (3rd revision), dated April 19, 1983, for
    information on permissible use of futures, forward placement and
    options contracts. Such contracts must be based on instruments
    eligible for banks\' purchase and sale.

-   Banking Circular No. 210, dated October 31, 1985, for prudential
    guidelines for investment in repurchase agreements.

-   Banking Circular No. 196, dated May 7, 1985, for information on
    prudent management of securities lending arrangements.

[Liquidity]{.underline}.

In addition to considering the types of instruments used by each
investment company and applicable investment limits, national bank
portfolio managers shall consider the practical liquidity of holdings of
investment company shares. Securities issued by investment companies are
generally less marketable than many types of \"investment securities\",
particularly U.S. government and federal agency securities. Indeed,
certain investment company fee structures such as \"deferred
contingency\" fees (declining rear-end load fees) may actually serve as
an impediment to marketability. Shares in investment companies may not
be acceptable on the same basis as U.S. government or federal agency
obligations as collateral for pledge against uninsured public deposits
or for other pledging purposes. Shares of closed-end funds may present
particular liquidity problems because they may not be readily redeemable
and they may not have a secondary market.

[Regulatory Reporting and Accounting]{.underline}

Existing instructions for the quarterly Reports of Condition require
bank holdings of investment company shares to be reported at the lower
of the aggregate cost or market value in Schedule RC-B SECURITIES, Item
No. 4(b) (3) (see the instructions for the Report of Condition, glossary
entry for \"marketable equity securities\" and Statement of Financial
Accounting Standards No. 12; [Accounting for Certain Marketable
Securities]{.underline}, (\"FAS 12\")). For reporting purposes market
value of \"open-end\" investment companies should be based on net asset
value rather than offering price; shares in \"closed-end\" investment
companies should be marked to the bid price. In no case should the
carrying value of investment company holdings be increased above their
aggregate cost as a result of net unrealized gains. Net unrealized
losses on marketable equity securities and subsequent recoveries of net
unrealized losses [should be excluded]{.underline} from Schedule
RI-INCOME STATEMENT and instead be reported (reduced by applicable
income tax effect) in Schedule RI-A CHANGES IN EQUITY CAPITAL as an
adjustment to \"Undivided Profits and Capital Reserves\". A loss on an
individual investment which is other than temporary should be charged to
noninterest expense on Schedule RI-INCOME STATEMENT. As part of the
market value determination referred to above, mutual fund sales fees,
both \"front end load\" and \"deferred contingency\", must be deducted
in calculating market value to more accurately reflect the current value
of fund shares. Consequently, unless the market value of such shares
increases sufficiently to offset these fees, the amount of these fees
will be reflected as unrealized losses and effectively charged against
\"Undivided Profits and Capital Reserves\".

[SUMMARY]{.underline}

In summary, the approval of this Office for the investment of bank
portfolio funds in the shares of investment companies is conditioned as
follows:

1.  The investment company must be registered with the Securities and
    Exchange Commission under the Investment Company Act of 1940 and
    Securities Act of 1933 or be a privately offered fund sponsored by
    an affiliated commercial bank.

2.  When an investment company\'s assets consist solely of and are
    limited to obligations that are eligible for unlimited investment by
    a national bank, there is no limit on the bank\'s investment. But
    where the investment company portfolio contains securities subject
    to the bank\'s investment or lending limitations, investment by the
    bank must be limited to 10% of capital and surplus.

3.  When the investment company makes use of futures, forwards, options,
    repurchase agreements and securities lending arrangements, their use
    must be consistent with standards established for use of such
    instruments in a national bank\'s investment portfolio.

4.  The shareholder has a proportionate undivided interest in the
    underlying assets of the investment company.

5.  Shareholders are shielded from personal liability for acts or
    obligations of the investment company.

6.  The bank\'s investment policy, as formally approved by its board of
    directors, specifically provides for such investments; prior
    approval of the board of directors is obtained for initial
    investments in specific investment companies and recorded in the
    official board minutes; and procedures, standards, and controls for
    managing such investments are implemented prior to the investment
    being made.

7.  The bank conducts reviews at least quarterly of its holdings of
    investment company shares to ensure that such investments are in
    accordance with the foregoing principles.

8.  Regulatory reporting of holdings in investment companies is
    consistent with established standards for \"marketable equity
    securities\".

[ORIGINATING OFFICE]{.underline}

Questions may be referred to the Investment Securities Division, (202)
874-4660.

Robert J. Herrmann

Deputy Comptroller of the Currency