April 9, 1998

Re: ________ — Investment of Fiduciary Funds in ________

Dear ________:

This is in response to your letter of November 19, 1997, regarding ________ (“________”).

Your letter suggested alternative approaches for dealing with the breach of fiduciary duty cited in our report of examination of ________. In summary, the violations involve investments (the “________”) by ________ of assets which it holds as trustee with full investment discretion in ________ (“________”). ________ is a non-public, pooled investment fund which was organized and is managed by ________ and for which ________ serves as investment advisor. ________ receives a managerial and investment advisor fee from ________ with respect to each ________ Investment in addition to the customary trust administration fee it receives from each trust whose assets it has invested in ________. ________ is operated as an investment vehicle for both trusts administered by ________ and investors with whom ________ has no trust relationship.

Your letter and the letter of December 24, 1997 from ________, ________, indicate that ________ views our concerns as focusing exclusively on the issue of whether fees paid to ________ by ________ are unauthorized or undisclosed trust management fees. However, as explained in our letter July 30, 1997, that is only part of our concern. A fundamental conflict of interest arises when a trustee’s duty to make investment decisions based exclusively on the best interests of its trust customers is compromised by its interest in a separate business enterprise into which the trust funds are invested.

Accordingly, we do not consider appropriate your proposal for dealing with this matter by obtaining affirmations of the ________ Investments only from persons who under the California Trust Law are entitled to account statements or notices of changes in trust administration fees.

In the alternative, you suggested that ________ obtain affirmations of the ________ Investments from persons entitled under Probate Code Section 15804 to notice of proceedings concerning the involved irrevocable trusts, and, in the case of the one involved revocable trust, from the trustor. The Commissioner will not take formal enforcement action regarding the ________ Investments if ________ obtains such affirmations, subject to the following conditions:

(1) On or before April 30, 1998, ________ shall submit to the Commissioner for review and comment drafts of (i) a document (the “Disclosure Document”) pursuant to which ________ will solicit the affirmations, which document will fully disclose the additional fees and conflicts of interest associated with the ________ Investments, and (ii) a form of affirmation.

(2) On or before July 10, 1998, ________ shall submit to the Commissioner confirmation that each of the persons mentioned above has executed an affirmation after having received an appropriate Disclosure Document.

Our agreement to refrain from taking enforcement action should not be construed as expressing the opinion that compliance with the foregoing conditions will excuse or cure the violations.

If you have any questions concerning this matter please contact me at (415) 263-8512.

Very truly yours,

Commissioner of Financial Institutions


Senior Counsel


cc: Steven A. Anderson, Esq.

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