Frequently Asked Questions – Collective Investment Trusts | CIT’s

FREQUENTLY ASKED QUESTIONS
(Click On Any Question For An Answer)

CIT | CIF     Collective Investment Trust or Fund

CIT Resources


Answers to CIT questions

Question: Define Collective Investment Trust – CIT

Answer:

Investopedia definition: A collective investment trust (CIT), also known as a collective investment fund, is operated by a bank or trust company that handles a group of pooled trust accounts. Collective investment funds group assets from individuals and organizations to develop a larger, diversified portfolio.

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What is the difference between a Collective Investment Trust and a Collective Investment Fund?

Answer:

There is no difference. They are the same investment vehicle.

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Question: Are CIT’s or CIF’s the same as Collective Trusts?

Answer:
Collective Trusts are grouped into 2 basic types; common trust funds and collective investment trusts.

The 2 basic types of Collective Trusts are further defined as:

•   A1 funds, which are also called common trust funds, are grouped assets contributed for the purpose of investment or reinvestment.
•   A2 funds are made up of defined benefit or contribution funds that are exempt from federal income tax as well as being grouped assets contributed by trusts.

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Question: What documentation is required to establish a CIT?

Answer:

Typically, a collective investment trust will include such documents as

Declaration of Trust, or Plan documents: This is the governing plan for the trust that provides the legal framework of the trust, i.e. who will maintain the trust, investor eligibility, terms of valuations and redemptions, disclosure documents, and relevant risk disclosures.

Fund Description: a definition of the fund investment strategy, objective, fees, identity of sub-advisers, and details pertinent for investors. Also called an Investment Guideline or Supplemental Declaration.

Investment Management Agreement: Outlines the duties and powers of the investment manager, or plan fiduciary with regards to fee terms, eligibility, and strategy. Also called a Custody agreement or Participation agreement.

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Question: What are the features / benefits of CIT’s Collective Investment Trusts?

Answer:
•   Flexibility with Plan-level pricing
•   Broad scope of investment objectives
•   Daily valuation capability
•   Automated systems track investor activity; i.e. contributions and withdrawals
•   Daily performance calculations available
•   Richer investment fund data and reporting
•   Available for defined-benefit and defined-contribution plans

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Question: What is a Collective Investment Scheme, or CIS?

Answer:
A CIS is a type of investment scheme that involves collecting money from investors and then combining all the money collected to fund an investment. A collective investment scheme is sometimes called a mutual fund. Similar to a mutual fund, the collective investment scheme assigns almost absolute control of the fund to the management company pooling and investing the money.

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Question: Are CIT’s registered with the SEC or FDIC?

Answer:
CITs are not registered with the Securities and Exchange Commission (SEC). Some investors feel this makes them much riskier. Other investors enjoy the lower management fees from relaxed disclosure requirements and regulation.

Additionally, CIT’s are not FDIC insured. Regardless, they are often offered by banks and trust companies that sell a variety of traditional investment vehicles which are also not FDIC insured.

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Question: How are CIT’s regulated?

Answer:
CITs are not registered with the Securities and Exchange Commission (SEC), allowing them to bypass expensive regulatory registration fees and launch fairly quickly. Regardless of their SEC registration status, governance is still subject to laws and regulations of several regulatory agencies including; OCC (Office of Comptroller of Currency); DOL (Dept. of Labor); IRS (Internal Revenue Service); SEC (Securities Exchange Commission); FINRA (Financial Industry Regulatory Authority); and even CFTC (Commodity Federal Trade Commission) – if they include commodity interests.

Most collective trusts are primarily regulated by the OCC where collective investment funds are described in Title 12, and further segregated as A1 funds or A2 funds.

CITs are subject to compliance with Department of Labor (DOL) disclosure requirements under (ERISA) the Employee Retirement Income Security Act. And, CIT trustees are subject to ERISA fiduciary standards where ERISA plan assets are invested in the Collective Trust.

FINRA – CIT’s are subject to FINRA when the plan sponsor uses services of a Broker-Dealer for sale of the securities.

SEC – Cit’s that qualify as exempt securities can be exempt from SEC registration when they are maintained by a bank.

IRS – CIT’s may qualify for exempt tax treatment as a ‘Group Trust’ under the IRS code.

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Question: Compare the cost of CIT’s to other retirement investment vehicles

Answer:

CIT’s accept investments from only certain retirement plans and eligible investors, thus the marketing and administrative efforts are more targeted and less expensive. The reduced costs are passed through to participants in the form of less expensive management fees.
CIT’s are not registered with the SEC, bypassing expensive registration fees and disclosures. Savings with regards to bypassing SEC registration are also passed through to investors in the form of lower management fees.

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Learn more about Collective Investment Trusts at the Coalition of Collective Trusts

Need help setting up a Collective Investment Trust? 

RND Resources Inc has been guiding RIA, Broker-dealers, and Fund managers through the maze of regulatory requirements since 1984. Our professionals take the time to understand client objectives and develop solutions that are vertically integrated to business goals. We work with start-up and emerging fintech firms, as well as traditional RIA’s and BD’s. Learn more about consulting services at RND Resources. For assistance call us at (818) 657-0288.