Collective Investment Trust: Walking and Talking Like a Mainstream Product, But Not Regulated Like One

A Collective Investment Trust (CIT) is an investment vehicle that, like mutual funds, pools assets from multiple clients. Unlike mutual funds, these Trusts are created and administered by a bank or trust company. So long as the entity offering these funds is a bank or other authorized entity, they are exempt from SEC registration and reporting requirements. In addition, another significant different between CITs and mutual funds is that CITs are not offered directly to retail investors, but are considered an institutional investor product. Celent's recent report, The Defined Contribution Market, demonstrates that CITs are growing tremendously in the retirement market. One of the principal drivers of this growth is the less stringent regulatory burden (resulting in operational cost advantages) of operating a CIT as compared to mutual funds. Because they are not offered to retail investors, and because they are regulated by Office of the Comptroller of the Currency (OCC), they have simpler disclosure statements, lower advertising and marketing costs, and smaller prospectuses. Furthermore, CITs do not have trading restrictions in the 401(k) market related to short-term trading restrictions and do not have 12b-1 fees. Finally CITs have improved upon their transparency and reporting capabilities, which had previously prevented large-scale adoption of this investment vehicle. The National Securities Clearing Corporation decision to put CITs on its Fund/SERV settlement platform has allowed these vehicles to be traded and tracked the same way as mutual funds. Thanks to improved networks and connectivity, collective investment trusts can now be priced on a daily basis. In short, CITs have maintained their advantages over mutual funds and have closed the gap in terms of transparency, trading, and reporting. The growth of the CIT market (over 1200 trusts with at least $1.6 trillion total, and at least $800 billion in the DC market), combined with the improved tracking and trading abilities, have allowed the investment vehicle to “walk and talk” like a mainstream product (like a mutual fund), but avoid the burdens associated with being one. This has not been lost on former Director of the Division of Investment Management at the SEC, Andrew J. Donohue, who noted as early as 2010, “The SEC can’t get into the bank, but I can get into the advisors. It’s important for me to see if the banks are using their exemption properly … or merely renting a space [to advisors] inside a trust company.” To his later point, he is noting that while the pooled trust accounts are operated by a trust company or bank, each fund in the collective trust may be managed by an outside adviser that will also be responsible for marketing and distribution. The exemption for registration was based on the idea that banks exercise full investment authority over the pooled assets. But are the banks doing so? Are banks merely operating in a custodial capability and providing a place for the advisor to place the assets of his clients, as Andrew Donohue suggests? In the retirement world, investor protection is always a hot topic. After the financial crisis, target date funds already found themselves subject of tremendous scrutiny from investors and regulators alike who accused providers and money managers of not adjusting the asset allocation of near-retirement funds in a suitably conservative manner. So I ask, is this a turf grab on the part of the SEC, empty saber rattling, or a necessary inquiry for the sake of consumer protection? Currently, the consensus answer to this question is “all of the above.” However, when it comes to the retirement market, it seems we are merely one scandal or market downturn from this question being answered in favor of greater regulations.