I write to dissent from the authorization to institute and settle a cease and desist proceeding against Great Plains Trust Company, Inc.  The proceeding finds that Great Plains violated Sections 5(a) and 5(c) of the Securities Act and caused several trust funds that it organized and sponsored to violate Section 7(a) of the Investment Company Act.[1]  While I appreciate the concerns that led my colleagues to approve this action, there are better ways of addressing those concerns.  Enforcement actions are not the only tool in our toolbox.

Great Plains, a non-depository trust company chartered by the State of Kansas, is regulated by the Office of the State Bank Commissioner of Kansas.  Great Plains organized and offered investments in two categories of trust funds, Collective Pension Trust Funds and Common Personal Trust Funds, which I will collectively refer to as the Trust Funds.[2]  When Great Plains organized the Trust Funds in the 1990s, it did not register them as investment companies under the Investment Company Act and similarly did not register the offer and sale of the interests in the Trust Funds under the Securities Act.[3]  It relied on certain statutory exclusions from the broad definition of “investment company.”[4]  The Commission has now determined that the Trust Funds do not qualify for the claimed statutory exclusions.

To qualify for the claimed statutory exclusions, the Trust Funds Great Plains operates must be “maintained by a bank.”[5]  Great Plains qualifies as a bank because it is a “trust company . . . doing business under the laws of any State.”[6]  The issue is what it means for the Trust Funds to be “maintained by” Great Plains.  The Commission has not spoken directly to this question.  The only interpretive guidance derives from a rather unconventional forty-year old release summarizing the views of the Commission’s staff.[7]  In that 1980 release, the staff explained its view that a bank that “functions in a mere custodial or similar capacity” does not satisfy the statutory “maintained” requirement; rather, the bank “must exercise substantial investment responsibility over the trust fund administered by it.”[8]  But at the same time, the staff stated that a bank could “hire an investment adviser to assist,” so long as “the final decision whether or not to invest [is] made by the bank.”[9]  So at best, the release identifies two scenarios where the staff would conclude that the bank did not maintain the trusts:  where it acted only as a custodian, and where it delegated to a third-party, such as an investment adviser, the final decision to invest.  That, of course, leaves an enormous amount of uncertainty as to precisely what constitutes “exercis[ing] substantial investment responsibility,” especially in those instances where the bank employs an investment adviser to assist it in managing the trust’s investments.  In a subsequent case from 2006, the Commission cited the release, but that case does not provide much additional clarity.[10]  

The Commission has not provided guidance of its own on what it means for a bank to maintain a fund.  Today, the Commission does so using an enforcement action.  This action is not a report under Section 21(a) of the Exchange Act, which is one method we sometimes use to communicate a new interpretation of the law.[11]  Rather, this action is a full-blown enforcement action with a hefty $300,000 penalty.  An enforcement action is an inappropriate way for a regulator to communicate its interpretation of the law.

I am particularly concerned about using an enforcement action to disentangle overlapping regulatory regimes.  Great Plains’ primary regulator is the Kansas banking authority, but, depending on the Trust Funds’ qualification for the statutory exclusions, it may be subject to the Commission as a secondary regulator.  We ought to be particularly wary of using enforcement actions to communicate with entities we do not directly regulate, especially when the message we are sending is how to interpret the provisions that determine whether an entity subject to direct supervision by another regulator might nonetheless be drawn into our regulatory orbit.  Moreover, the factual predicate for the Commission’s finding that Great Plains failed to exercise substantial investment responsibility over the Trust Funds implicitly raises questions about the way in which it carried out its obligations to the Trust Funds.[12]  It seems likely that this is a question of great importance to Great Plains’ primary regulator—the Kansas banking authority.  If the root of the problem was that Great Plains was not fulfilling its duties to the funds, then we could have handed the matter off to the banking regulators.

More generally, our construction of the scope of the exclusion for trusts “maintained by a bank” would benefit from consultations with our bank regulatory colleagues.  Upon seeing the facts here and learning of the potential concern that some funds are falling outside the scope of the Investment Company Act without being subject to an adequate alternative regulatory framework, the Commission should have convened a working group with state and federal bank regulators.  Together, we could have defined the scope of the exclusion in a manner to ensure that all funds operate within an appropriate regulatory structure.  The Commission, alone or in conjunction with bank regulators, could then have issued interpretive guidance to aid banks in determining what they need to do to qualify for the exemption.

Because I would have preferred to collaborate with the banking regulators when construing the relevant statutory exclusions, I cannot support this enforcement action.  I respectfully dissent.