Magazine article American Banker

Fund's Acquisition of Bank Hangs on High Court Action

Magazine article American Banker

Fund's Acquisition of Bank Hangs on High Court Action

Article excerpt

NEW YORK -- Franklin Resources Inc. is not the first mutual fund company to own a bank, but it may be the last -- depending on how the U.S. Supreme Court decides a pending case affecting the future of nonbank banks.

Franklin, which is based in San Mateo, Calif., on Friday said that it has completed its acquisition of a controlling interest in Pacific Union Bank & Trust Co. and that simultaneously it has sold off the Menlo Park, Calif., bank's commercial loan portfolio.

Franklin Resources, which manages 20 mutual funds with total assets of $15 billion, also said it added $2.8 million in capital to the bank, which it intends to run as a consumer bank specializing in the retail market.

However, whether Franklin will be able to keep Pacific Union will depend on a case that the Supreme Court might take up next year involving a plan by U.S. Trust Corp. of New York to establish a consumer bank in Florida.

At issue in the U.S. Trust case is the "nonbank-bank loophole," a provision in the Bank Holding Company Act that has been used since 1980 by nonbanking companies, including mutual fund operators besides Franklin, to buy or establish commercial banks.

The statute defines banks as institutions that both accept demand deposits and make commercial loans. By divesting themselves of either function, the companies avoid the federal ban on ownership of banks by nonbanking companies.

U.S. Trust has asked the Supreme Court to hear an appeal of a lower-court ruling that the Federal Reserve Board erred in March 1984 when it allowed the New York bank holding company to form its consumer bank. …

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