Agencies issue policy statement on financial support to advised investment funds

Federal Reserve Bulletin, Winter, 2004

The federal banking and thrift supervisory agencies issued a policy statement on January 5, 2004, alerting financial institutions to the safety and soundness and legal issues involved in providing financial support to investment funds advised by the institution or its subsidiaries or affiliates.

The statement is prompted by recent market developments, including market volatility, the continued low-interest rate environment, and operational and corporate governance weaknesses. It warns that investment advisory services can pose material risks to a financial institution's liquidity, earnings, capital, and reputation and can harm investors, if the associated risks are not effectively controlled.

To ensure safe and sound banking practices, the policy statement makes clear that a financial institution should not inappropriately place its resources and reputation at risk for the benefit of the fund's investors and creditors. In addition, financial institutions should not violate the limits and requirements contained in applicable legal requirements or in any supervisory conditions imposed by the agencies, and should not create an expectation that they will prop up an advised fund.

The statement sets forth the agencies' expectations regarding the nature of controls that financial institutions should have in place over investment advisory activities and further provides that financial institutions should notify and consult with their primary federal regulator before, or in the event of an emergency, immediately after, providing financial support to an advised fund.