The Federal Reserve has advised banks not bail out mutual funds they also advise. “The agencies have concluded that recent market developments, including market volatility, the continued low interest rate environment, and operational and corporate governance weaknesses, warrant the issuance of this guidance,” said the Federal Reserve Board, the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Office of Thrift Supervision, in a joint statement.
The move comes amid a rash of revelations about the US mutual fund market in recent weeks. Among those affected was Bank One, which says it expects regulators to take action against Bank One Investment Advisors. In a release accompanying the statement yesterday, regulators warned “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.”
While banks are not obliged to support funds they advise, they may want to do so to protect their reputations or minimize their liability, the regulators said. Though some types of transactions between banks and their advised funds are permissible, “the agencies are concerned about other occasions when emergency liquidity needs may prompt banks to support their funds in ways that raise prudential and legal concerns.” Banks were advised to notify regulators if they plan to support a fund.