Opinion ID: 287861
Heading Depth: 2
Heading Rank: 1

Heading: The Federal Reserve Act

Text: 17 The District Court relied on the differences between the trustee and agency relationships, noting especially the higher standard of care of a trustee, to conclude that a collective managing agency account was not a true fiduciary activity within the purview of 92a of the Federal Reserve Act. The differences between the traditional trust relationships of trustee, executor, or administrator and the contractual principal-agent relationship do not, in my view, make the agent any less a fiduciary, nor does commingling of funds, subject to the principal's authorization, change the fiduciary character of the duty owed to each. Brown v. Christman, 75 U.S.App.D.C. 203, 126 F.2d 625 (1942). The District Court apparently recognized that the Account might pass muster under the phrase authorizing banks to act 'in any other fiduciary capacity,' but held that it did not qualify as an activity open to competing State banks under the New York law. 18 Section 100-c of the New York Banking Law, McKinney's Consol. Laws, c. 2, specifically authorizes trust companies to commingle funds held in the strict trust capacities, but New York law contains no specific grant of authority to commingle funds held as managing agent. The District Court concluded that the absence of such authority was an implied prohibition. Section 100-c, however, simply permits commingling in cases where the governing trust instrument does not authorize it. The conditions on commingling imposed by 100-c have not been imposed upon collective accounts authorized by a trust instrument. The real question, therefore, was whether commingling was permissible under the general authority of 100, which empowers a State bank to act as agent for any lawful purpose and to manage a principal's funds according to the terms of the power conferred upon the bank. N.Y. Banking Law 100(1) and (5) (McKinney 1950). 19 Since the decision of the District Court, the New York State Banking Department has given formal approval of commingled managing agency accounts to two New York banks, stating that the operation of the accounts is authorized by 100 of the Banking Law. Appellee ICI describes this approval as a defensive response to enable State banks to meet the national banks' competition. This is surely true. Prior to the Comptroller's issuance of revised Regulation 9, no State banks operated commingled managing agency accounts. Still, the Banking Department's action cannot fairly be dismissed as merely following the Comptroller's lead. The question of whether collective accounts are a proper fiduciary activity for banks appears to have been open under both Federal and New York law, and both banking agencies could reasonably have resolved it the same way. 20 The Bank concedes, of course, that the commingling of managing agency accounts represents a departure from past banking practice of limiting commingling to funds held by the bank in the traditional trust capacities and as trustee of a pension or profit-sharing trust. Regulation 9.18 permits banks to serve multiple principals under a standard agreement vesting the bank with broad discretion to invest their money, subject to the duties and liabilities of a managing agent, and not a trustee. This is a new and free-wheeling form of fiduciary activity. 21 I am persuaded, however, that the Comptroller's regulations, together with the protection of the customer qua investor afforded by the securities acts, will reasonably assure the proper exercise of this broad fiduciary power. The restrictions imposed by Regulation 9, 12 C.F.R. 9, secure the Comptroller's powers of examination and supervision of the Account. (9.8, 9.9.) The rules safeguard the fiduciary relationship by requiring the separation of the Account's funds from other assets (9.13, 9.18(b)(2)), by enforcing the obligations to refrain from self-dealing and conflicts of interest (229.10, 9.12, 9.18(b)(8)), and by limiting the Bank's charge to its normal fiduciary compensation 9.15, 9.18(b)(12)). 22 The major difference between the Bank's relationship to the customers of the Account and its relationship to the beneficiaries of other management and trust services is the absence of an individually negotiated agreement. The character of the Bank's initial advice and ultimate accountability to the customer is necessarily altered by a package deal offered to all comers. This was one reason why the Securities and Exchange Commission required registration of the Account. 4 The provisions for disclosure and participant control contained in the securities laws substantially compensate for the drawbacks of a standardized fiduciary service. The Securities Act of 1933 requires that potential customer-investors receive a prospectus describing the management of the Account, its investment objectives and policies, and the rights of participants. 15 U.S.C. 77j (1964). Periodic reports and proxy statements must be issued for inspection by both the participants and the Commission. 80a-20(a) and 80a-29(d). Pursuant to the provisions of the Investment Company Act, participants in the Account will elect their directors (80a-16(a)), retain the power to terminate the contract (80a-15(a)(3)), and ratify the selection of auditors (80a-31(a)(2)). The interests of the principals participating in the Account, though not identical, are bound to be similar; and as a group, they possess a measure of control over the management of their money. Dual regulation by the Comptroller and the Commission should assure the proper operation of the Account.