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Law360 (August 4, 2020, 8:55 PM EDT) -- The Office of the Comptroller of the Currency issued a rule Tuesday allowing banks to extend the time they have to withdraw customer accounts from collective investment funds, a move that the regulator said will help protect investors in the pooled funds from the impacts of COVID-19.
The OCC said in the interim final rule that it will give national banks and federal savings associations more time to withdraw accounts from the so-called CIFs — by as many as three additional years from the standard one-year period — to prevent "avoidable" harm to participants while preventing potential "fire sales."
"During normal market conditions, a bank can typically satisfy withdrawal requests within the standard withdrawal period," the OCC said in the rule. "However, in the event of unanticipated and severe market conditions, a bank may be faced with an increased number of withdrawal requests and reduced market liquidity."
Prior to the new rule, banks looking to withdraw accounts from CIFs had to do so within one year of giving notice to the OCC.
The OCC tacked a one-year extension period on top of that on an exceptional basis, and said that banks that cannot execute the withdrawal within that time frame "without causing harm to participants" may request approval for up to two additional one-year extensions.
CIFs pool the accounts of individuals or organizations to create a single diversified portfolio. While they can typically invest in a range of stocks, bonds and alternative assets, the OCC noted that it's those invested primarily in real estate or other assets that are "not readily marketable" that may require the usual one-year notice period.
A bank allowing a CIF participant to withdraw their account must execute the redemption on the basis of a valuation of the CIF's assets, the OCC noted.
However, "if the bank is required to sell assets held by a CIF to satisfy withdrawals within the standard withdrawal period, it may have difficulty realizing a fair value for those assets," according to the rule.
The regulator said this could lead to "fire sales" of CIF assets or "avoidable economic harm" for participants that is "contrary to general fiduciary principles" guiding a bank to act in the interests of CIF clients.
The OCC noted that the extensions will only be granted if certain conditions are met by the bank, including that the potential extensions are written into client disclosures; the bank's board has determined that the extensions are necessary to preserve the fund's value; and that the bank executes the withdrawal "as soon as practicable."
This isn't the first time the OCC has issued extension relief of this kind for CIFs, noting in the rule that it also did so during the 2009 financial crisis.
--Editing by Abbie Sarfo.
For a reprint of this article, please contact reprints@law360.com.
