FTC Staff Comment Before the Office of the Comptroller of the Currency In the Matter of Fiduciary Powers of National Banks and Collective Investment Trusts

BEFORE THE OFFICE OF THE
COMPTROLLER OF THE CURRENCY
V900035
COMMISSION AUTHORIZED
In The Matter of
Fiduciary Powers of National Banks
and Collecthe Investment Trusts
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Docket No. 90-3
Comments of the Staff of the
Bureau of Economics of the
Federal Trade Commlssion 1
I. 	Introduction
The staff of the Bureau of Economics of the Federal Trade Commission
(FTC) appreciates this opportunity to comment on the Office of the Comptroller
of the Currency's (OCC) proposed amendments to its regulations governing the
exercise of fiduciary powers by national banks. One of the proposals contained
in 	the 	OCC's 	Notice 	of 	Proposed 	Rulemaking 	would 	lift 	the 	regulatory
restrictions that limit the ways in which national banks can advertise their
trust services to the public.2 	For example, the proposed changes would allow,
for the first time, a national bank to compare the financial performance of its
collective investment trust with the performances of similar tr.usts managed by
other financial institutions.
Restrictions on truthful advertising claims can 	harm consumers by
increasing their costs of collecting useful information and can burden firms by
hindering their efforts to bring innovations to the market. 	Consequently, we
believe the OCC's proposal to relax the restrictions on truthful advertising by
national banks is likely to benefit consumers.
II. 	Interest and Experience of the Staff of the Federal Trade Commission
The FTC is an independent regulatory agency charged with maintaining
competition and safeguarding the interests of consumers. 3 	The staff of the
FTC, upon request by federal, state, and local government bodies, regularly
analyzes regulatory or legislative proposals that may affect competition or the
ability of consumers to make informed purchase decisions. In the course of this
work, the staff has gained considerable experience in analyzing the likely costs
and benefits of various governmental restrictions on competition. In particular,
the 	staff 	has 	commented 	on 	federal 	proposals 	to 	restrict 	mutual 	fund
1 These comments are the views of the staff of the Bureau of Economics of
the Federal Trade Commission. 	They are not necessarily the views of the
Commission 	or 	any 	individual 	Commissioner. 	Inquiries 	regarding 	these
comments should be directed to Timothy P. Daniel, Assistant Director for
Economic Policy Analysis, Bureau of Economics, (202) 326-3520.
2 55 Fed. Reg. 4184, February 7, 1990. 	While the notice contains several
proposed regulatory changes, our comments are limited to the likely effects
from OCC's proposal to remove paragraph (b)(5)(v) from 12 CFR 9.18, which
contains the advertising restrictions currently in place.
s 15 US.C. I§ 41 et seq.

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advertising,· and on state proposals to restrict rental car advertising.1i The staff
has also conducted 	research 	to examine 	the effects on 	consumers of 	the
dissemination of truthful, nondeceptive health claims in advertisements for and
on labels of ready-to-eat cereals. 6
III. 	Analysis or Proposed Changes in Advertising Restrictions '
One of the services that some national banks offer to the public is
establishing and managing a financial trust. 	Banks offering trust services
assume a myriad of responsibilities and obligations to individuals who purchase
these services. 	An important element of the bank's trust services involves
investing the funds placed into the trust in ways that conform with the trust
agreement. 	In carrying out this investment function, banks often combine the
financial assets from several individuals into a collective investment trust. 7
Currently, national banks are restricted in the ways in which they can
advertise the financial performance of their collective investment trusts. 	The
OCC has interpreted the regulations to permit national banks to compare the
financial performance of their collective investment trusts with the average
performance of all funds of a particular type (e.g., fixed-income funds or
municipal 	bond 	funds), 	and 	with 	national 	performance 	indices (e.g., 	the
Standard & 	Poor's index of 500 leading stocks.) 	However, the regulations
currently prohibit national banks from comparing the perfo.rmance of their
collective investment trusts with the performances of specific trusts managed
by other financial institutions.
The proposed amendments would lift the remalOlOg restrictions on
collective 	investment 	trust 	advertising, 	subject 	to 	the 	provisos 	that 	the
advertisements (I) be truthful and nondeceptive and (2) promote the banks'
• ~, Comments of the Bureaus of Competition, Consumer Protection and
Economics of the Federal Trade Commission to the Securities and Exchange
Commission 	on 	Proposed 	Regulations 	Governing 	Performance 	Claims 	in
Advertising by Investment Companies, December 22, 1986.
Ii ~ e.g., Letter from Paul K. Davis, Director, Atlanta Regional Office, to
the Honorable Elaine Gordon, Florida House of Representatives (April 17,
1989); and Letter from C. Steven Baker, Director, Chicago Regional Office, to
the Honorable James R. ThompsoJt, Governor of Illinois (December 22, 1988).
6 Pauline M Ippolito & Alan D. Mathios, Health Claims in Advertising and
Labeling. A Study of the Cereal Market. FTC Bureau of Economics Staff Report
(1989).
7 According to the Federal Register Notice, 514 national banks currently
administer 	collective 	investment 	trust 	funds. 	In 	total, 	675 	institutions
administered collective investment trusts in 1988, with over $345 billion in
assets from more than 1.675 million accounts. 	Approximately one Quarter of
these collectively invested assets were managed for personal (as opposed to
employee benefit) trusts. 	~ 55 Fed. Reg. 4187 (February 7, 1990).
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legitimate fiduciary services and not a particular investment fund. 8 We believe
that such an amendment would be likely to benefit consumers of financial trust
services by increasing the quality and quantity of information available to
them.
Consumers in the market for trust services face differing circumstances
and have varying preferences. 	Thus, they seek various types of information.
At the same time, sellers of trust services (in this case, national banks) offer a
number of options. Restrictions on truthful advertising, such as those currently
being reconsidered by the OCC, may increase consumers' costs of locating the
most suitable combination of goods and services at the lowest possible price. If
these restrictions were lifted, consumers would be likely to benefit because they
could more easily locate a preferred seller and make superior purchase decisions.
Furthermore, with a greater ability to inform consumers about specific features
of their trust services, banks will be better able to attract new customers and,
as a result, it is possible that the variety of available products may be increased.
The effects of advertising restrictions in other industries support these
propositions. Economic research conducted by the staff of the FTC shows that
regulations restricting the dissemination of nondeceptive truthful information
harm consumers by increasing their costs of collecting information on the array
of goods and services available to them.9 In addition, numerous other economic
studies have demonstrated that price advertising enhances competition and
lowers prices. lO We believe that thi~ body of research provides strong support
for the conclusion that the removal of restrictions on non deceptive truthful
advertising could benefit consumers.
8 The latter requirement stems from 	the restrIctIOns on national 	bank
practices imposed 	by, among other 	things, 	the Glass-Steagall 	Act. 	These
restrictions erect a regulatory barrier between the banking industry and the
securities industry. The proposed amendments would not affect this distinction,
or the requirement that national banks' advertising promote their legitimate
fiduciary services and not particular investment funds. 	While we claim no
expertise in the issue of determining the bounds of permissible national bank
practices, we note that according to the OCC, "there is no basis in law or policy
to restrict the advertisement of collective trust funds." 	(55 Fed. Reg. 4189
(February 7, 1990»
9 The FTC staff's research on advertising restrictions includes: 	W. Jacobs
~ Improving Consumer Access to Legal Services: 	The Case for Removing
Restrictions on 	Truthful 	Advertising (1984); 	R. Bond, ~, Effects of
Restrictions on Advertising and Commercial Practice in the Professions: 	The
Case of Optometry (1980); and A. Masson & R. Steiner, Generic Substitution
and 	Prescription 	Drug 	Prices: 	Economic 	Effects 	of State 	Drug 	Product
Substitution Laws. (1985).
10 Stt. e.g., J. Schroeter tl.I.L.. Advertising and Competition in Routine Legal
Service 	Markets: 	An 	Empirical 	Investigation, 	36 	Journal 	of 	Industrial
Economics 	49 	(1987); 	J. 	K woka, 	Advertising 	and 	Price 	and 	Ouality 	of
Optometric Services, 74 American Economic Review 211 (1984); J. Cady, All.
Estimate of the Price Effects of Restrictions on Drug Price Advertising, 14
Economic Inquiry 493 (1976); and L. Benham, The Effects of Advertising on
the Price of Eyeglasses, 15 Journal of Law and Economics 337 (1972).
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In 	addition, 	we 	believe 	that 	the 	experience of 	the 	Securities 	and
Exchange Commission (SEC) in regulating the advertising of performance
claims is instructive. In the late 1970s and early 1980s the SEC abandoned many
of the long-standing restrictions it had imposed on advertising of performance
claims by 	investment companies. 	The agency recognized that revising its
regulations 	to 	keep 	pace. with 	innovations 	in 	financial 	instruments 	was
extremely difficult. 	This deregulatory effort was also intended to increase
investor interest and access to information about no-load funds. 	Following
these reforms, the market share of no-load funds increased dramatically and
many innovative funds were established. ll
IV. 	Coadusloa
Consumers generally benefit from the free flow of truthful nondeceptive
information. 	The 	ace's 	proposal 	to 	lift 	restrictions 	on 	national 	bank
advertising of collective investment trusts would appear likely to 	benefit
consumers by reducing their costs of collecting information on the various
options available and by allowing national banks to advertise the existence of
new services involving collective investment trusts.
11 A narrative of these events can be found in the Investment Company
Institute's comments to the SEC concerning File No. S7-23-86 (December 22,
1986). 	These comments responded, in part, to SEC staff proposals to ban
truthful mutual fund advertising that did not appear in a proscribed format.
The SEC voted to delete this provision of the SEC staff's proposals.
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