interests or patcipations therein, that has been furnished by the insurance company to an employer for transmission or which may reasonably be expected to be transmitted to employees;

(c) A separate account shall be entitled to the exemptions provided by paragraph (a) of this Rule only if:

(1) the separate account is a legally segregated asset account, the assets of which have a value at least equal to the reserves and other contract liabilities with respect to such account, and that portion of such assets, which has a value equal to the reserves and other contract liabilities of such account, is not chargeable with liabilities arising out of any other business which the insurance company may conduct; provided that this condition need not be satisfied until six months after the effective date of this rule.

(2) any contract which provides for allocation of contributions to the separate account, authorizes the contract holder to direct that assets held in the separate account applicable to the contract (other than amounts which, pursuant to the contract, have been allocated to provide retirement benefits to individual employees) be withdrawn or transferred, although such contract may (A) limit the amount that may be transferred in any one month to the greater of (i) $1,000,000 or (ii) 5% of the value of the contract holder's interest in the separate account at the time the original request for withdrawal or transfer is made and (B) impose a surrender charge not to exceed 2 percent of the amount transferred, provided that a surrender charge in excess of 2 percent of the amount transferred may be imposed if the sales load and surrender charge, in the aggregate, do not exceed 6 percent.

(d) "Separate account," as used in this Rule, shall mean a fund established and maintained by an insurance company pursuant to the law of any state or territory of the United States or the District of Columbia, under which income, gains, and losses, whether or not realized, from assets allocated to such fund, are, in accordance with the applicable contract, credited to or charged against such fund without regard to other income, gains, or losses of the insurance company. (e) "Insurance company," as used in this Rule, shall have the same meaning as that prescribed in Section 2(a)(17) of the Act.

The text of proposed amended Rule 156 under the Securities Act reads as follows:

Proposed Rule 156, as amended

PROPOSED RULE 156. DEFINITION OF "TRANSACTIONS BY AN ISSUER NOT INVOLVING ANY PUBLIC OFFERING" IN SECTION 4(2) AND OF "SALE," "OFFER," "OFFER TO SELL," AND "OFFER FOR SALE" FOR PURPOSES OF SECTION 5, IN CONNECTION WITH SEPARATE ACCOUNTS EXEMPTED BY RULE 3c-3 OR RULE 6E-1 UNDER THE INVESTMENT COMPANY ACT OF 1940

(a) The phrase "transactions by an issuer not involving any public offering" in Section 4(2) of the Act shall include any transaction with an employer, employers or persons acting on their behalf (herein called the "employer") whereby an isurance company offers, pursuant to a contract, interests or participations in a separate account, which meets the conditions and limitations set forth in Rule 3c-3 or Rule 6e-1 under the Investment Company Act of 1940, provided that: (1) Such contract is negotiated with such employer for the benefit of at least 25 employees, provided further that, in the case of a contract which covers selfemployed individuals and owner-employees some or all of whom are employees within the meaning of Section 401 (c) of the Internal Revenue Code, each partnership or sole proprietor employs at least 25 employees including such self-employed individuals and owner-employees; and

(2) Such contract is not advertised in any written communication which, insofar as it relates to interests or participations in a separate account, does more than identify the insurance company, state that it is engaged in the business of writing such contracts, sets forth a brief description of the nature of the separate account and of the basic provisions of the contract, and invites inquiries in regard thereto. The limitations of this clause shall not apply to disclosure made in the course of direction discussion or negotiation of such contract.

(b) For purposes only of Section 5 of the Act, no "sale," "offer," "offer to sell," or offer for sale" shall be deemed to be involved so far as an employee is concerned (whether or not there is a public offering to the employer), where allocations of employee contributions are made to a separate account entitled to the exemptions provided by Rule 6e-1 under the Investment Company Act of 1940

pursuant to a contract which meets the conditions and limitations set forth in subparagraph (1) of paragraph (a) of this Rule, provided that:

(1) The employer does not engage any person for the purpose of inducing employees to participate under such contract or in a plan based on such contract or of inducing any elections on the part of employees under such contract or in such plan; and

(2) Any solicitation of individual employees by or on behalf of the insurance company is limited to discussions with the employer and to furnishing the employer with explanatory documents as required ot contemplated by Rule 6e-1 under the Investment Company Act, or giving oral explanations, including answering of questions, at meetings of groups of employees arranged by the employer and no commissions are paid to the persons responsible for drafting the explanatory documents or for inducing any election on the part of the employee; and

(3) The employer makes a substantial contribution to the overall pension and profit-sharing program of which the contract is a part. An employer's contribution shall be deemed "substantial," as used in this Rule, if the overall pension and profit-sharing program applicable to the employees covered by the program can be reasonably expected to provide for a contribution by the employer, over a period for which the program may reasonably be expected to be in operation, which in the aggregate is at least half as much as the contributions made by the employees. The foregoing requirement shall be deemed to have been satisfied if the employer has in the preceding five fiscal years, or since the inception of the program, if less than such five years, contributed in the aggregate at least half as much under such program as have the employees and the basis for determining contributions has not been changed since such past contributions were made to reduce the employer's anticipated contributions. At the inception of a program and at any time thereafter, notwithstanding that the aggregate contributions by the employer during such five year (or shorter) period do not amount to at least half as much under such program as was contributed by the employees, or thas the basis for determining contributions has changed, a written certificate by a member of the American Academy of Actuaries, prepared in accordance with generally accepted actuarial standards, stating that the employer's contribution can reasonably be expected to be at least half as much as contributions to be made by the employees over a period for which the plan may reasonably be expected to be in operation and stating the basis thereof, shall be prima facie evidence of satisfaction of the requirement of this subparagraph at that time and for the ensuing year. A copy of each such certificate shall be filed with the Commission as an exhibit to the notification or report next following such certificate, filed pursuant to paragraph (b) of Rule 6e-1 under the Investment Company Act of 1940.

All interested persons are invited to submit views and comments on proposed Rule 6e-1 under the Investment Company Act and the proposed amendment to Rule 156 under the Securities Act. Written statements of views and comments in respect of the proposed Rule and the proposed amendment should be submitted to the Securities and Exchange Commission, Washington, D.C. 20549 on or before April 8, 1969. All such communications will be available for public inspection. By the Commission. ORVAL L. DuBois, Secretary.

The CHAIRMAN. Our next witness is Paul W. Eggers, general counsel, Department of the Treasury.

For the benefit of the record, state the name and capacity of the gentleman accompanying you.

STATEMENT OF PAUL W. EGGERS, GENERAL COUNSEL, DEPARTMENT OF THE TREASURY, ACCOMPANIED BY DEAN E. MILLER, DEPUTY COMPTROLLER OF CURRENCY

Mr. EGGERS. I am Paul W. Eggers, General Counsel for the Treasury. I have with me Dean E. Miller, Deputy Comptroller of Currency. He had the honor of testifying before this committee back in 1967. I think, for that reason, I have him with me today.

The CHAIRMAN. We are glad to see you back. We have your statement. Proceed as you see fit.

Mr. EGGERS. Mr. Chairman and members of the committee:

I appreciate the opportunity to appear before the committee this. morning to testify on S. 34 and S. 296.

These bills would affect a number of significant changes in the Investment Company Act and the Investment Advisors Act. In addition they have several features which would affect bank trust department activities. Because it is in this latter respect that the proposed legislation falls within the particular field of interest of the Treasury Department, I will devote the bulk of my comments this morning to these portions of the bills. Further, because the two bills have the same effect in this regard, I will for simplicity's sake, refer only to S. 34.

S. 34 would resolve several questions which have arisen concerning the operation by banks of collective investment funds. These questions are twofold: First, the extent to which the securities laws are applicable to such funds; and second, the extent to which the operation of such funds may violate the Banking Act of 1933.

These questions concern three distinct types of funds. The first is the traditional common trust fund for the collective investment of moneys held by banks in the capacities of trustee, executor, administrator, or guardian. These funds are tax-exempt if operated in conformity with the rules and regulations of the Comptroller of the Currency. They are also specifically exempted from the Investment Company Act of 1940. The bill would provide an exemption for these funds from the provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, except for the antifraud sections of those statutes. It would also recognize that the Banking Act of 1933 does not preclude banks from operating these funds.

The second type of collective fund is the group trust for the collective investment of assets of tax-exempt stock bonus, pension or profit sharing trusts. Such pooled funds are also tax-exempt, underRevenue Ruling 56-267. Banks operate these funds both for the collective investment of assets of corporate employee benefit trusts. and those established by self-employed persons.

The bill would recognize that all such group trusts are exempt. from the Investment Company Act. It would provide that, except for the antifraud sections, the provisions of the Securities Act and the Securities Exchange Act are not applicable to such pooled funds for corporate employees benefit trusts.

As to group trusts for the collective investment of assets of trusts of self-employed individuals, S. 34 provides that the bank regulatory agencies may exempt interests therein if necessary or appropriate in the public interest and consistent with the purposes of these acts. Thus, the Comptroller of the Currency as to national banks, the Board of Governors of the Federal Reserve System as to State member banks,. and the FDIC as to State nonmember insured banks, would supervise the application of the securities laws, as such agencies deem necessary, as to these funds. This would enable the banking agencies to coordinate such rules and regulations with their present supervisory activities. concerning trust departments. In so doing, the bill follows the precedent wisely established in the Securities Acts Amendments of 1964 as to bank securities. In addition, S. 34 would provide confirmation.

that the Banking Act of 1933 does not prevent the operation of these funds by banks, as long as in conformity with the regulations of the Comptroller of the Currency.

The third type of collective fund is the commingled account for the collective investment by banks of funds held as managing agent. S. 34 would confirm that such funds are governed by the Investment Company Act of 1940, as administered by the Securities and Exchange Commission. It would amend the act to remove present minor impediments to bank operation of such funds. In addition, S. 34 would provide that the operation of funds of this type by banks does not contravene the Banking Act of 1933 as long as in conformity with the rules and regulations of the Comptroller of the Currency. It would thus reverse the decision of the District Court for the District of Columbia in the case of Investment Company Institute v. Camp and provide a desirable uniformity of banking regulation for these funds, similar to that which now exists as to common trust funds.

This bill would not involve any novel activity for banks. Banks have been acting in fiduciary capacities for over a century. They have been operating formalized common trust funds for the collective investment of moneys held in these capacities since 1937. Banks have been administering pension trusts in one form or another since they were first established, and have been pooling such trusts for collective investment since 1956. They have been acting as trustee of retirement trusts for the self-employed, and pooling such trusts, since 1962. Banks have administered managing agency accounts since the early 1930's. The only activities which they have not heretofore been able to carry on has been the collective investment of moneys of these accounts.

We believe that it would be highly desirable for banks to be able to make their investment expertise, as well as their experience in acting in fiduciary capacities, available to the public in a form which will permit their accepting smaller accounts. The pooling of retirement trusts for the self-employed, and of managing agency accounts, as permitted by this proposed legislation, would accomplish this end.

We further believe that it would be most desirable to remove the technical impediments which have resulted from the uncertainty as to the applicability of the securities laws to these funds. A primary benefit from this would be to open the way for banks more fully to effectuate the Self-Employed Individuals Tax Retirement Act of 1962. To this date, the questions which exist as to the applicability of the securities laws to pooled funds for these trusts have greatly restricted bank acceptance of them. Since such trusts are necessarily small in amount, it becomes necessary to invest them collectively to be able profitably to offer this service. By enabling banks to pool these funds in a manner consistent with both the objectives of the securities laws, and banking regulatory practice, the bill accomplishes a most desirable objective.

Finally, these questions which have arisen pertaining to the securities and banking laws have also created uncertainty on the part of many bankers as to the status of traditional common trust funds, and group trusts for the collective investment of assets of corporate employee benefit trusts. We believe that the clarity which this bill would provide as to these points would also be highly desirable.

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Because the activities affected by S. 34 involve only a minor departure from the present fiduciary operations of banks, which they have carried on for years subject to the supervision of the banking agencies, it is apparent to us that the additional responsibilities which the bill would place in those agencies can be quite readily assumed. The continued utilization of the banking agencies for the supervision of these funds, and the administration of such of the securities laws as is necessary, would also provide economies which would not result if these responsibilities were instead conferred upon other agencies. Accordingly, the Treasury Department believes that the banking aspects of S. 34 are most desirable and strongly urges that the committee act favorably thereon.

As indicated at the beginning of my testimony, S. 34 and S. 296 would also accomplish some revisions of the Investment Company Act and the Investment Advisors Act. Some of these provisions are labeled as reforms in the investment company industry, while others are designed to facilitate, update and improve the administration and enforcement of these acts.

Because the Treasury Department has no extensive background of experience in dealing with conventional investment companies, and the system of regulation and control which has been established as to this type of operation, we believe that it would be inappropriate to comment as to the desirability of enactment of these proposals in either the form taken in S. 34 or in S. 296. However, should Congress in its wisdom determine that these measures should be passed, the Department is of the opinion that there will be no difficulty occasioned in their application to bank-operated commingled agency accounts.

Finally, the bills contain provisions which would assure an equal status for insurance company separate accounts as against bank commingled managing agency accounts. We feel that this principle may be desirable, and have no objection to its enactment.

We have submitted this statement of mine to the Budget Bureau and they have no objections.

The CHAIRMAN. Thank you very much, Mr. Eggers. That was a very clear statement. We appreciate it.

I want to ask you two very brief questions. Section 8 of the pending legislation provides that mutual fund management fees shall be reasonable and give shareholders the right to sue in court in order to have a determination of the reasonableness of the fee. Could the banking industry effectively manage mutual funds under this doctrine or does the banking industry raise the same objections to this section as the mutual fund industry?

Mr. EGGERS. I think the fiduciary trust departments have lived with the reasonable fee question through court action and in the community they have been forced to through competition and we take no position on that but we could live with it.

The CHAIRMAN. Would it be desirable in your opinion to apply the banking provisions of this legislation to savings and loan associations? Mr. EGGERS. I didn't understand the last part of the question. The CHAIRMAN. Would it be wise or desirable in your opinion to apply the banking provisions of this legislation to savings and loan associations?

Mr. EGGERS. Sir, I am not qualified in the savings and loan to testify.