Most trust assets were in custodial or other accounts for which the bank did not provide investment management service. 1 and 2.) Evidence on the Investment of Trust Assets in Proprietary Mutual Funds

While it was not possible to quantify the exact extent to which assets in trust accounts had been invested in bank proprietary mutual funds, some inferences could be drawn from the information that was available. Finally, industry and regulatory officials said that most of the trust assets that had been converted into proprietary mutual funds had come from employee benefit accounts. Most banks that offered pooled trust investment funds in 1986 continued to do so in 1993. The $24 billion represented about 15 percent of the $161 billion in total assets invested in proprietary mutual funds at the end of 1992. This practice is generally referred to as charging double fees. part 9 requirement that fees be reasonable. Given the limited number of examinations we reviewed and the general nature of the trust examination manuals, we have no basis for judging the effectiveness of trust examinations in detecting and controlling unresolved conflicts of interest when investing trust assets in proprietary mutual funds. Although the data on trust assets and the mutual funds data did not document the extent to which banks have invested trust assets in proprietary mutual funds, we were able to gain some insight into this question by comparing these data sources. To determine disclosure and consent requirements and whether double fees are permitted, we reviewed the federal laws and regulations that are generally relevant to the investment of trust assets and in particular to the investment of such assets in proprietary mutual funds. They also provided their views regarding potential fiduciary conflicts of interest, fees, disclosure, and customer consent when trust assets are invested in proprietary mutual funds. For these assets, banks are to provide investment management services. These factors include (1) the profitability of continuing to offer both pooled trust investment funds and proprietary mutual funds, especially since proprietary mutual funds can be offered to a wider range of customers; (2) changes in federal tax laws to allow capital gains accrued in common trusts to be deferred in a conversion; and (3) changes in federal regulation, such as that which has been proposed by OCC for a number of years to allow banks to advertise the performance of their pooled trust investment funds.
Why GAO Did This Study

Pursuant to a congressional request, GAO provided information on the extent to which banks have invested trust assets into proprietary mutual funds, focusing on: (1) the disclosure and consent requirements that apply when trust assets are invested into these funds; (2) whether double fees on invested trust assets are legal; and (3) the regulatory controls that prevent banks from acting in their own self-interest.

What GAO Found

GAO found that: (1) most banks have not invested trust assets in proprietary mutual funds; (2) the majority of funds invested in bank proprietary mutual funds are from non-trust assets; (3) by the end of 1992, about $24 billion in trust assets had been used to start up proprietary mutual funds which represented about 15 percent of the total assets in these funds; (4) the bank industry believed the trust asset investments were understated because the estimates did not take into account conversions and new trust investments; (5) in 1993, about $45 billion in employee benefit and personal trust assets were invested in short-term money market mutual funds; (6) industry and regulatory officials believe that trust investments are becoming more attractive to investors for tax reasons; (7) investment disclosure requirements vary by state and most states that allow proprietary mutual fund investments do not require beneficiary consent; (8) although 8 states are in compliance with the double fee prohibitions on employee accounts, 27 states allow double fees to be charged; (9) most banks lack incentives to charge double fees because of competition and the possibility of federal penalties and beneficiary lawsuits; (10) when investing trust assets, banks are prohibited from acting in their own self-interest, must justify their investments, and are subject to federal review; and (11) the effectiveness of trust examinations could not be determined, since the number of examinations are limited and use of proprietary mutual funds in trusts is new.