Legislature(1997 - 1998)
02/16/1998 03:21 PM House L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 321 - UNIFORM PRUDENT INVESTOR ACT Number 1471 CHAIRMAN ROKEBERG announced the committee's next order of business was HB 321, "An Act relating to trusts, to the prudent investor rule, and to standards of care applicable to personal representatives, conservators, and trustees; and providing for an effective date." Chairman Rokeberg asked Representative Ryan, the bill sponsor, how he wished to proceed. Number 1481 REPRESENTATIVE RYAN noted there was information in the bill packet that briefly outlined the bill function. He said it is uniform law [promulgated by the National Conference of Commissioners on Uniform State Laws], it is not something that would be new and unique to Alaska; he thought there were 19 other states who have already adopted this. He said the bill mainly deals with trustees of trusts, the people who are running trusts, and he stated, "The trustee must manage a trust in such a manner that they look to manage the assets of the trust for the maximum benefit of the beneficiaries, that's the primary duty of ... the trustee." He said trustees have been constrained in some previous legislation and court decisions that allow the trustees, or make it difficult for them, depending on the type of asset in the trust, as to what they can do with it. He stated, "This bill sets up the standards for prudent investor, and I'll ... read you a slight paragraph here [from a letter by L.S. "Jerry" Kurtz], 'Many fiduciaries find themselves holding mines, family businesses, fishing boats, real estate, zero coupon bonds and other property, which doesn't produce interest and can feel ... compelled under common law to liquidate such property, when common sense dictates otherwise. [The] Prudent Investor Act makes it clear that a fiduciary must use good sense rather than rigid guidelines in carrying out fiduciary duties, and consider the current status of markets, tax consequences, liquidation and other factors before taking such action.'" Number 1576 REPRESENTATIVE RYAN stated HB 321 gives trustees latitude for making investments; at the same time, it also gives them ethical guidelines inasmuch as the trustee may be the trustee for numerous trusts. He noted there are many provisions in the bill about dealings between trusts, selling one asset of one trust to another, and it states how the trustees must act if they have any kind of a relationship with any of the beneficiaries. He said it tells them what they do and they don't do, to make sure everybody gets a square deal, and to cover their liability standards. Representative Ryan stated this is to avoid unnecessary litigation if some person feels that the trustee has taken an investment action which wasn't as optimum as it could have been. He stated the reason he was putting this bill forward, "We passed a trust bill last year, and it was signed by the Governor on ... April 1. Subsequently the state of Delaware, in two weeks, passed an identical bill, because they saw that Alaska was going to get ahead of 'em. So in only two weeks time, and it took two years to do here, it was through and became law." Number 1648 REPRESENTATIVE RYAN stated this bill was the Alaska trust Act. He noted Delaware made one small error, it allowed the corpus of the trust to be invaded for child or spousal support; he said there was a "rule of thumb" in the estate planning community and the court decisions that have been made, that if invasion of the corpus was allowed for any reason, it could be allowed for all reasons. He stated Delaware was going to amend their law this year to do away with those provisions. Representative Ryan commented on the provision in Alaska's law, that an individual could not settle any assets into the corpus of a trust if the individual was 30 days or more in arrears on child or spousal support. He stated, "What you're basically doing when you establish a trust is you're making a gift, you pay a gift tax, and Alaska law is unique, inasmuch as once you've settled it, and the money is what we call, quote, clean money, there are no obligations or pending obligations or so forth, that money cannot -- it's a gifting, it's gone away, for tax purposes it doesn't become part of your estate when you die, and ... it cannot be attacked by subsequent creditors, ... it stays inviolate, and that's a unique feature of Alaska law, as long as it wasn't a fraudulent transfer, and we have a (indisc.) portion in there for that, but that's getting away from what this does." Number 1713 REPRESENTATIVE RYAN said the major point of HB 321 is that the standards of prudence apply to a trust as a whole instead of individual investments. He said that when an individual makes an individual investment the overall portfolio of the corpus of the trust needs to be looked at, the various investments that are being made, and the question asked, "Is this a prudent action on the part of this individual as far as the whole trust assets are concerned, versus that particular individual investment?" Representative Ryan stated, "The overall investment strategy should be based upon risk and reward objective suitable for the trust." Since the distributions in most trusts usually come from the earnings of the trust, which is a capital gain, rather than from the corpus, it is a good point that an income necessary for the distributions must be maintained, but at the same time, he stated, "You don't want to be too conservative because you won't have any monies to do it." Number 1763 REPRESENTATIVE RYAN stated that the duties to diversify must be part of the investment strategy, unless the trustee reasonably determines it is in the interests of the beneficiaries not to diversify, taking into account the purposes, terms and provisions of the governing document. He noted, when a governing document is set up instructing how the trust will be managed and how distributions will be made, indenture, et cetera, the person who settles the trust outlines what he or she wants to do. Representative Ryan commented that now some people allow distributions out of the corpus too, depending upon how they want to structure the trust. He stated Alaska has made an exception to the statute on perpetuities, allowing the trust to go on in perpetuity, and he described the financial considerations, "If you were to settle a million dollars in a trust today, at the 8 1/2 percent that the markets returned over the last couple hundred years, in 120 years you'd have over a billion dollars in that trust, so money does grow money, depending upon the management of the trust." Representative Ryan commented that no special status was given to the original investments and the trustee must review those investments from time to time. He stated, "(Indisc.) corporate trusts (indisc.) paid professional advisor acting as trustee is accountable under special investment skills standard, and the delegation of investment authority is permitted but the trustee retains liability for the investment performance of the 'delegee.'" Number 1836 REPRESENTATIVE RYAN noted that not all trustees are good financial managers, so they are allowed to hire professionals, but the trustees still bear the responsibility if those investments go wrong to the point where it adversely affects the trust; this raises the level of responsibility and duties to the beneficiaries. He stated the overall strategy is to be designed to enable the trustee to make appropriate present and future distributions to the beneficiaries. Representative Ryan noted 20 states have anticipated this, and he said it looks like a lot more will in the future because it is a standard that can be used, a uniform law, all over the country. He stated, "You can be as assured as you possibly can that you're getting responsible actions from the trustee." He stated he was open to questions, noting he was the author of the Alaska trust Act. Number 1903 REPRESENTATIVE COWDERY noted the presence of a letter from Attorney General Bruce M. Botelho supporting HB 321 in the bill packet. Number 1910 REPRESENTATIVE RYAN commented that politics made strange bedfellows. Number 1919 CHAIRMAN ROKEBERG asked if Representative Ryan could provide a copy of the uniform law issued by the uniform law conference to the committee, and also give the committee the listing of the states which have adopted it, or some modification. Chairman Rokeberg noted Mr. Peterson indicates his letter listed the only changes made to the uniform Act by HB 321. He asked Representative Ryan if that was correct, noting it was hard to make that analysis without having the uniform Act, as far as the committee was concerned. Chairman Rokeberg also asked Representative Ryan if he had requested a sectional analysis from Legislative Legal and Research Services. Number 1978 REPRESENTATIVE RYAN replied that legislative legal had been very busy lately trying to draft bills for the deadline, and fighting cases in the court at Legislative Council's request, noting he thinks they have three current cases. He said his office will urge them to see what they can do with it. Number 1998 CHAIRMAN ROKEBERG asked if Representative Ryan had talked to many investment houses in the state, and any other investment bankers, banks or other investment mediums. Chairman Rokeberg noted, as he took it, this would not affect those entities; the repeal of the "prudent man rule" and its replacement with this prudent investor Act was only in relationship to trusts. Number 2018 REPRESENTATIVE RYAN indicated that was correct and noted it did not apply to the permanent fund either. He said he had called them early on and asked if they would like this law to be applicable to them. He stated they took some time to consider it and decided to pass. Representative Ryan commented his response was that he had no desire to include them against their wishes. Representative Ryan also said he had spoken with Jerry Weaver from NBA (National Bank of Alaska) who was the spokesperson for, not only NBA, but also a consortium of representatives of the banking community. Representative Ryan stated Mr. Weaver said he had seen the bill and didn't have any problem with it, but commented he would get back to Representative Ryan if he came up with something. Representative Ryan stated that trust business was an arcane sort of a business, it was not very large in Alaska, but was building since the passage of the [trust] law last year. He said, however, a few banks have trust companies, noting he thought both KeyBank (KeyBank National Association) and NBA do. Number 2064 CHAIRMAN ROKEBERG added that both NBA and First National (First National Bank of Anchorage) have trust departments, and he stated it might even be helpful if Representative Ryan had some kind of correspondence from those institutions indicating they had looked the legislation over. Number 2070 REPRESENTATIVE RYAN commented he had been assured by Mr. Weaver that they had, but he would have somebody go back and check. Number 2077 CHAIRMAN ROKEBERG explained he was suggesting they help build the record here so HB 321 could proceed. Number 2082 REPRESENTATIVE RYAN stated that there was quite a record, and he would have Mr. Peterson provide the committee with more information, if that was the wish of the committee, than they would probably want to see. Number 2095 CHAIRMAN ROKEBERG stated there were just a few things he would recommend; he didn't think he was asking for any more than any of his colleagues "down the stream" would be asking for, and noted he was attempting to assist Representative Ryan. Number 2103 REPRESENTATIVE RYAN commented he was sure everyone understood this trust business very well and said he would have his staff get on that. Number 2114 CHAIRMAN ROKEBERG asked if investment bankers that act at the behest of, or (indisc.) by their clients to make investments, would be governed by this particular provision. Number 2120 REPRESENTATIVE RYAN stated, from inquiries made last year when they were working on the trust bill, that, to his knowledge there are no investment bankers in Alaska. Number 2130 CHAIRMAN ROKEBERG stated that Merrill Lynch (Merrill Lynch and Company, Incorporated), Paine Webber (Paine Webber Incorporated) and all (indisc.) are investment banking houses. Number 2135 REPRESENTATIVE RYAN replied that those institutions do not claim to be investment bankers according to what they had done last year, but perhaps the institutions had reassessed themselves. Number 2140 CHAIRMAN ROKEBERG stated that was just the companies' general definition. He said he meant that is what they are, and stated, "You can authorize -- you could sign a contract setting up a managed account for investment purposes with those institutions that gives the discretion to the investment manager to run those accounts. Now will this bill affect any of that type of business?" Number 2160 REPRESENTATIVE RYAN replied in the negative. He stated one does not create a legal trust situation when one does that, referring to the first paragraph, "A personal representative is a fiduciary who should observe the standards of care applicable to trustees, under AS 13.36.200." Number 2184 CHAIRMAN ROKEBERG noted then, that to Representative Ryan's knowledge, there was no other duty in state statute for investment houses and things of that nature, unless there was a formal trust established, asking if this only affected that. Number 2191 REPRESENTATIVE RYAN stated that you have to be a trust company to handle trusts in the state of Alaska, they had set that up last year in the bill, as to what constitutes the Alaska trust Act and how it was structured. Number 2206 CHAIRMAN ROKEBERG stated, "But it's your opinion, Representative Ryan, that the act of an individual under contract for an investment banking house and managing money is not the creation of a trust, is that correct?" Number 2215 REPRESENTATIVE RYAN stated that a trust has particular rules (indisc.) has to operate, and (indisc.) managed accounts under a investment house was not the same as a trust. Number 2225 CHAIRMAN ROKEBERG noted he was sorry Mr. Kirkpatrick (Willis Kirkpatrick, Director, Division of Banking, Securities and Corporations, Department of Commerce and Economic Development) could not be here to elucidate on this for the record, in order to make sure. Number 2234 CHAIRMAN ROKEBERG called an at-ease at 4:00 p.m. The committee reconvened at 4:03 p.m. Number 2236 CHAIRMAN ROKEBERG stated he would entertain a motion. Number 2249 REPRESENTATIVE COWDERY made a motion to move HB 321 to the next committee of referral with individual recommendations and the accompanying fiscal note. Number 2251 CHAIRMAN ROKEBERG asked if there were any objections. Hearing none, HB 321 was so moved.
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