Legislature(2001 - 2002)
03/28/2001 03:25 PM House L&C
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 157-TRUST COMPANIES & FIDUCIARIES Number 0035 [Contains discussion of HB 106 relating to confidentiality provisions.] CHAIR MURKOWSKI announced that the committee would hear HOUSE BILL NO. 157, "An Act relating to trust companies and providers of fiduciary services; amending Rules 6 and 12, Alaska Rules of Civil Procedure, Rule 40, Alaska Rules of Criminal Procedure, and Rules 204, 403, 502, 602, and 611, Alaska Rules of Appellate Procedure; and providing for an effective date." CHAIR MURKOWSKI, speaking as the sponsor of HB 157, explained that she has been working on this bill for three years, and said proposed amendments and suggestions are still being received. CHAIR MURKOWSKI directed the committee to the bill sectional analysis entitled "Overview of HB 157," submitted by the Division of Banking, Securities and Corporations, which she said was helpful. She explained that she didn't sit down and write this legislation herself; division personnel had asked her to work with them to update the Trust Company Act, which dates back to the late 1940s. CHAIR MURKOWSKI stated that several years back there were substantial changes in the trust world through the Alaska Trust Act, and since [Alaska] is going to have a trust industry, there needs to be regulation of it like what is being done in the banking industry. Number 0281 TERRY LUTZ, Supervisor, Banking Section, Division of Banking, Securities, and Corporations, Department of Community and Economic Development (DCED), remarked that the current Act dates back to 1949, with few changes over the years. In writing HB 157, he said, [the division] worked with the trust industry, attorneys both inside and outside the trust industry, and Representative Murkowski. He prefaced his testimony by saying that he would go over the areas lacking in the law. MR. LUTZ commented that in putting the bill together, [the division] reviewed trust Acts from several states. [The division] chose from [examples provided by] other states and from the model Act from the Conference of State Bank Supervisor (CSBS). Mr. Lutz pointed out that committee members had a copy of the letter of requested amendments dated March 15 [2001]. Number 0433 MR. LUTZ said a new Act is needed because the current one is lacking in the following areas: it lacks direction as to who should be chartered; it gives limited guidance on the formation process of trust companies; it provides no provisions for branching either intrastate or interstate; it provides no provisions for liquidations, mergers, or sales of trust companies; and it is limited regarding the powers of the department. Mr. Lutz explained that [the current Act] merely says that [the division] has the power to supervise trust companies. MR. LUTZ, referring to Section 2, AS 06.26.010, pages 1 and 2 of the bill, explained that this section states who can undertake a trust business in the state, including: a trust company chartered by [the division]; state financial institutions (indisc.) for which [the division] has asked and received authority to [create] a trust business; national banks with home offices in Alaska; interstate national banks with branches in [Alaska]; national trust companies; interstate-state banks with trust powers; and interstate trust companies. MR. LUTZ, referring to Section 2, AS 06.26.020. Exemptions, pages 3 and 4 of the bill, pointed out that this section lists many exempt trust activities, a few of which include: attorneys with limitations, broker-dealers, investment advisers, insurance companies, cemetery associations, certified public accountants (CPAs), family members, homeowner associations, court-appointed conservators, representatives, and business partners. Number 0606 MR. LUTZ, referring to Section 2, AS 06.26.050. Powers of Trust Companies, pages 5 and 6 of the bill, explained that this expands trust powers for trust companies, including: acting as a trustee under written agreement; receiving money as a trustee for investment in real estate property; acting as a trustee by court appointment; acting as an executor for an estate; [acting as a] custodian for minors and incapacitated persons; [ensuring] safekeeping for any type of personal property; acting as an investment adviser in an agreed-upon activity; and other incidental powers that are reasonable and necessary to exercise powers exclusively conferred. Number 0658 MR. LUTZ, referring to Section 2, AS 06.26.060. Organizers, page 7 of the bill, said it gives details of how to obtain a charter. He then referred to Section 2, AS 06.26.120, page 10 of the bill, which addresses the minimum capital requirements for trust companies. It has been increased in the bill to a minimum of $400,000 plus [maintaining] 20 percent of that amount in surplus. [The division] looked at what other states required, he said, and [Alaska] is probably at the low end because other states require millions of dollars for capitalization of a trust company. [The division] met with Jonathan Blattmachr, Alaska Trust Company, who was comfortable with that number. The current provision in law [indicates] a minimum of $100,000, but is [at the discretion] of the director. MR. LUTZ, referring to Section 10, page 63 of the bill, remarked that it has a grandfathering transition period for existing trust companies, giving them until 2007 to obtain the minimum capital. Number 0795 MR. LUTZ, referring to Section 2, Article 3, Operation of Offices, AS 06.26.150, Trust Company Home Office, page 12 of the bill, said this section requires a state trust company to maintain its home office and records in Alaska, and each executive officer is an agent for service of process for the trust company. It provides for interstate and intrastate branching, he explained, and details the processes with the authority to branch. MR. LUTZ, referring to Section 2, AS 06.26.400, page 22 of the bill, said it requires trust companies to disclose conflicts of interest. Number 0823 CHAIR MURKOWSKI directed Mr. Lutz to page 13 of the bill where it discusses branch and representative offices. She asked about the distinction between the two. MR. LUTZ referred back to AS 06.26.990, Definitions, paragraph (26), page 59 of the bill, which read: "'representative office' means an office that provides support services for a trust company, but at which the trust company does not provide fuduciary services". So a branch could provide fuduciary services, he explained, but the representative office could not. Mr. Lutz further explained that a representative office would probably be a small office set up with someone who isn't a trust expert to solicit business. If an actual trust were going to be set up, it would need to be sent to a branch or home office where the expertise lies. CHAIR MURKOWSKI asked if it is something that [Alaska] actually does. She said she didn't understand why there would be a representative office if it couldn't do any of the fiduciary things that a trust company does. She asked for a specific example of how this would work in a "real-world setting." Number 0914 MR. LUTZ replied that he didn't know if there would ever be any representative offices in Alaska, but he pictured credit unions having similar offices, not in Alaska, but in many states where customers are solicited. The model Act is used by the CSBS and in other states, and in almost every instance, has representative offices. Upon being asked whether [this language is in the bill] in case people want to avail themselves of it although it isn't something that is currently happening in Alaska, Mr. Lutz responded affirmatively. REPRESENTATIVE CRAWFORD asked Mr. Lutz to explain cumulative voting from Section 2, AS 06.26.140, page 12 of the bill. Number 1031 TERRY ELDER, Director, Division of Banking, Securities and Corporations, Department of Community and Regional Affairs (DCED), explained that cumulative voting is allowed in the corporations code, but is an option that companies can avail themselves of; the purpose is to allow minority shareholders a better opportunity to obtain representation on a board. It is a mechanism and procedure for voting so that, for example, if there are three people running for a board and a person has 100 shares, that person actually gets 300 votes, not just 100 votes. It is the number of shares times the number of people running, he explained, so that a person could give all 300 votes to one person. It would afford a better opportunity for minority shareholders to get representation on the board. MR. LUTZ, referring to Section 2, AS 06.26.450 to AS 06.26.470, pages 22 to 24 of the bill, stated that this legislation provides for transfer and ownership of a trust company. The department has the right to prevent the sale in the best interest of the public, should a trust company become for sale. Before someone purchased it, [the department] could deny the purchase for safety and soundness concerns. Number 1160 MR. LUTZ, referring to Section 2, AS 06.26.610, Customer Records Confidential, page 29 of the bill, said it provides for confidentiality of customer records similar to what is found in the banking code and in HB 106. He explained that he had considered taking it out of this bill; however, if HB 106 goes nowhere, then [Alaska] would be without confidentiality for trust companies. CHAIR MURKOWSKI asked if it is similar to what is being done in HB 106 and in compliance with Gramm-Leach-Bliley Act (GLBA), so, if HB 106 should pass, then the two wouldn't conflict. MR. LUTZ replied that he didn't believe that GLBA would come into play here since [a trust company] is not a bank; it doesn't conflict with what is in the banking code currently but would require an [opportunity to] "opt in," rather than "opt out." CHAIR MURKOWSKI asked whether the tie-in with HB 106 is because of the changes being made to the banking code. MR. LUTZ answered affirmatively. He said he had mentioned HB 106 because the committee was probably more familiar with that language. Number 1234 MR. LUTZ went on to explain that HB 157 provides a detailed process for mergers and consolidations of trust companies, and provides a process for voluntary liquidation of trust companies should they wish to discontinue business without going through a sale or merger. It also provides a process for involuntary liquidation; for example, if [the division] determines there to be safety and soundness concerns, or for other reasons that a trust company needs to be close, it gives [the division] the authority to close it. MR. LUTZ, referring to Section 2, AS 06.26.9000, pages 51 to 53 of the bill, stated that it details a list of powers of the department including the ability to: exercise general supervision over trust companies, which was the only thing covered in the current trust Act; adopt regulations; review and approve applications; determine minimal capital needs; approve transfer of ownership of trust companies; relieve a trust company of examination requirements contained in AS 06.01.015, requiring annual examinations; approve branch applications; require a trust company to maintain adequate capital; charge off assets not lawfully acquired; write down assets to market value; to record liens; maintain insurance; require directors to hold meetings; [allow] removal of directors under AS 06.26.510; to take possession of a trust company; and issue orders. Number 1340 MR. LUTZ explained that [the division] hopes all of the various scenarios have been encountered and [addressed] in the exemptions contained in AS 06.26.020, those in the private fiduciary section, and those in AS 06.26.010 where it talks about who can [form] a trust business in this state. CHAIR MURKOWSKI asked for some idea about the implementation and transition [period], since the 2007 date for grandfathering seemed longer than normal. MR. LUTZ stated that the trust industry felt that it would need this amount of time to attain the minimal capital requirements proposed in the bill. Part of that transition period, he said, is for [the companies] to come up with a plan that has to be approved by [the division], addressing how they are going to meet those requirements. When asked whether that plan has to be submitted by April 1, 2002, Mr. Lutz replied affirmatively. And when asked whether - provided that the department signs off on the plan - [trust companies] then have until 2007 to meet the capital requirements. Mr. Lutz responded affirmatively. CHAIR MURKOWSKI asked Mr. Lutz to speak to the zero fiscal note and the impact to the department in regulating a new area. Number 1486 MR. ELDER said while this bill fleshes out and gives details on how [the department] will go about regulating trust companies, [the department] actually regulates them now, he remarked; there are only two trust companies in Alaska now and they are already examined by [the department]. [The department] has to look to the banking code for guidance in terms of when they are examined and the process. This just sets it up under their own chapter; it really doesn't add anything new. If there were a big growth of trust companies in Alaska, more trained staff would be required. He said training needs to be increased and improved for the current examiners regarding trust examination, because only one examiner was sent to a trust examination school. Number 1597 REPRESENTATIVE ROKEBERG asked whether trust departments with interstate national banks are considered trust companies. MR. ELDER replied affirmatively. And he confirmed that federal law regulates them. He explained that the [interstate national bank's trust departments] are addressed under AS 06.26.010, but when talking about the two [existing] trust companies, he said he is speaking about two Alaska chartered state trust companies. REPRESENTATIVE CRAWFORD asked if this is going to affect the trust company that manages pension funds. MR. LUTZ said he didn't believe it would. He clarified that he didn't believe it would be disrupting any current business. Number 1718 REPRESENTATIVE ROKEBERG asked whether the [Division of Banking, Securities and Corporations] had a chance to look at the memorandum from the Alaska Trust Company regarding Article 4, the private fiduciary section, and asked whether there had been any discussions on it. MR. ELDER stated that [the division] just received the memorandum. When asked if there was any conflict there, he replied that this is a work in progress and that amendments will continue to be proposed. And when asked if this has been a bone of contention, Mr. Elder responded that he didn't believe it to be; ideas have been worked through, he said, but there hasn't been any disagreement. REPRESENTATIVE ROKEBERG added that it looked like a pretty substantial difference [between what the two groups are proposing], because [the Alaska Trust Company] wants to have a change in the definition of a private fiduciary, which he said might not be entirely appropriate. The concept of a private trust company may need to be an addition rather than a supplement. [The Alaska Trust Company] had indicated that [the two] are the same, although he wasn't sure. MR. ELDER said [the department] didn't think it was necessary because in looking at [the definition of a] private fiduciary, it could be any person, which could be a company or an individual. He confirmed that [the Alaska Trust Company's] definition is different from what is in the bill; however, he said a private fiduciary could already be this. The key, he pointed out, is not to be offering the services to the public. Number 1867 REPRESENTATIVE ROKEBERG asked if this bill is what is referred to as the trust company regulations, or whether there are additional regulations. MR. ELDER responded that he didn't believe that [the division] was working on trust company regulations. Mr. Lutz works in the section that has spent a year or so drafting this; it has been ongoing, he remarked. And he verified that [the division] doesn't have a regulation project. Upon being asked if there has been ongoing discourse with the trust attorneys and companies in the state, Mr. Elder replied affirmatively and said he has worked closely with them since 1998. He said there are no existing regulations for trust companies at this time; however, as a result of this Act, there probably will be some areas where [the division] will be required to write some regulations. REPRESENTATIVE ROKEBERG referred to the new model trust Act and said [Alaska] doesn't have a model trust statutory regime. He asked Mr. Lutz, in drafting this, whether he looked at the whole body of law that [Alaska] has passed. MR. LUTZ explained that this Act doesn't affect all of the legislation that passed in the last five years for the Alaska trust, rules of perpetuity, and so forth. [The division] has not done anything here that would affect any of that, he said. MR. ELDER added that the Department of Law had also reviewed this [legislation]. He pointed out that this is a trust company Act, not a trust Act. This is just how the companies are regulated as providers of service and doesn't really affect the provisions in a trust. MR. ELDER explained that the letter from the division [dated March 15, 2001] addresses four suggested amendments to the exemptions at Section 2, AS 06.26.010. In the bill, there is language that says that this kind of person, whether a broker- dealer, attorney, or whatever, is exempted when the trust activity is solely incidental to their business. [The division] was trying to say that such are not people really in the trust business, so [the division] doesn't want to regulate them as trust companies. The idea for using the "solely incidental" [language] was taken from the securities Act because it provides that one doesn't have to register as an investment adviser if the advice is solely incidental to one's work as a broker- dealer. However, as [the division] looked at it further, it became apparent that it would be better to be more precise now, because there would always be the question of the definition of "solely incidental." So [these suggested amendments] were offered as a way to be more precise. The language here is based on the language in the CSBS model Act for those sections. These amendments proposed in the division's letter read: 1. (Section 2, page 3, lines 3-5) Replace language in lines 3-5 (AS 06.26.020(1)) with the following language: is licensed to practice law in this state, is acting within the scope of the license, and neither the attorney, or the attorney's law firm, is trustee of more than 50 trusts; 2. (Section 2, page 3, lines 10-14) Replace language in lines 10-14 (AS 06.26.020(4)) with the following language: engages in a securities transaction or provides an investment advisory service as a licensed and registered broker-dealer, agent of a broker-dealer, state investment adviser, investment adviser representative, or noticed federal covered adviser provided the person is acting within the scope of the notice filed or the license conferred and the activity is regulated by the Department of Community and Economic Development under AS 45.55 or by the U.S. Securities and Exchange Commission; 3. (Section 2, page 3, lines 15-18) Replace the language in lines 15-18 (AS 06.26.020(5)) with the following language: engages in the sale and administration of an insurance product as an insurance company licensed under AS 21 or an insurance producer licensed under AS 21; 4. (Section 2, page 3, lines 22-25) Replace the language in lines 22-25 (AS 06.26.020(8)) with the following language: renders services customarily performed by a certified public accountant licensed under AS 08 in a manner authorized by law, and neither the certified public accountant or the certified public accountant's firm is trustee of more than 50 trusts; Number 2155 CHAIR MURKOWSKI turned the committee's attention to another subject. She said she would like to see if [the division] and [the Alaska Trust Company] could look at the points that have come up and give feedback about private fiduciaries in preparation for a committee substitute (CS). She said Mr. Blattmachr and Mr. Greer have been instrumental in working through this process, but she thought it might alleviate some of the questions if the two groups got together and talked about what could be done. CHAIR MURKOWSKI asked Mr. Blattmachr and Mr. Greer if they wanted to add testimony. [Both men deferred their testimony until a later date.] REPRESENTATIVE ROKEBERG asked Mr. Blattmachr about the memorandum he had submitted to the committee. He said it suggested changing the definition of a private fiduciary to private trust company. Representative Rokeberg asked if that is the common term used in the industry. He further asked if the [term] private trust would be in addition to a private fiduciary, or whether they are incompatible. Number 2291 DOUGLAS BLATTMACHR, Alaska Trust Company, via teleconference, responded that the way he read the exemption from offering service to the public, referring to AS 06.26.990(a)(24) Definitions, page 58 of the bill, is that services are being provided to the general public unless it says "the person to whom the fiduciary services are provided is offered (A) by a family member of an individual who owns 100 percent of the person providing fiduciary services". MR. BLATTMACHR explained that the only place where services were originally offered to the general public was under the private fiduciary section, also known as a private trust company. It seems that one has to be some form of an entity, he said, to be able to get this exemption under this definition. [The Alaska Trust Company] thought it might be clearer. A lot of wealthy families want to be able to setup private trust companies, and they are starting to look at different states that have easy set up procedures for private trust companies for their own family trust businesses, which was one of the reasons why "we" put this in at a late date. It is a real issue now which could produce a lot of new activity in Alaska if [Alaska] has friendly statutes to accommodate what some of the other states have. REPRESENTATIVE ROKEBERG asked if the term and concept of a private fiduciary are common in trust law. Number 2363 MR. BLATTMACHR said it is an old concept, but people like the Rockefeller Trust Company used it when it started years ago; it was a private trust company just for them; however, over the years, it has gone into offering services for the general public. He thought the term "private trust company" had been around for a long time, but there has been a lot more interest in recent years. The actual term isn't that important, he said, but it could be limited to some extent to more of a defined activity that constitutes a private fiduciary. Number 2417 REPRESENTATIVE HALCRO referred to Mr. Blattmachr's memorandum dated March 28, 2001. He said Mr. Blattmachr points out that the definition on page 4, subparagraph (18), lines 27 to 29 of the bill, seems confusing. Representative Halcro pointed out the additional sheet faxed to the committee by Mr. Greer dated March 27, 2001, amends it. He asked Mr. Blattmachr if he'd seen [the amendment]. MR. BLATTMACHR said he hadn't seen it, but he and Mr. Greer had spoken about it today. [HB 157 was held over.]
| Document Name | Date/Time | Subjects |
|---|