Legislature(2001 - 2002)
03/27/2002 01:40 PM Senate JUD
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 157-TRUST COMPANIES & FIDUCIARIES
MS. ROBIN PHILLIPS, Staff to Representative Lisa Murkowski, read
the following sponsor statement:
At the request of the Division of Banking and
Securities, [Representative Murkowski] introduced House
Bill 157, the Revised Alaska Trust Company Act. The
purpose of this bill is to update the existing Trust
Company Act which has not undergone any major revisions
since its adoption during the territorial days of 1949.
If enacted, this legislation will be a tool that will
enhance the process of formation, operation,
supervision and regulation of the trust industry in
Alaska.
Recent changes to Alaska trust laws make creation of
trust charters in Alaska more desirable. However, the
Alaska Trust Act does not provide guidance as to who or
what needs a charter, nor guidance for the formation
and organization of a trust entity, or provisions for
permissible activities including interstate or
intrastate business expansion.
The bill repeals existing AS 06.25 and replaces it with
AS 06.26 "Providers of Fiduciary Services." This
chapter clarifies who may provide fiduciary services in
Alaska, expands on who may be a trust company, what
their powers may be, and covers specific items such as
certificate of authority, required capital, operations
of offices, and the like.
[We] have worked with local trust companies, trust
attorneys and the Division to formulate this
legislation. This bill meets the needs of the Division
to adequately regulate new and existing trust companies
and also for those providing fiduciary services without
being a burden to their overall business activities.
[We] urge your support of this legislation.
CHAIRMAN TAYLOR asked for a background on uniform trust acts and
how HB 157 related to uniform trust acts adopted in other states.
MR. TERRY LUTZ, Chief Financial Institution Examiner, Division of
Banking, Securities & Corporations (DBSC), said they contacted
between 15 and 20 states while putting HB 157 together. He said
they also used portions of a model act from the Conference of
State Bank Supervisors.
CHAIRMAN TAYLOR asked about the involvement of the Bar
Association, attorneys and other professionals.
MR. LUTZ said they contacted the Bar Association and many
attorneys and had received many comments and questions from them.
He said there was also a lot of input from the trust industry.
He noted there were only two state chartered trust companies in
Alaska. He said there wasn't much input from banks because he
didn't believe any of them were involved in the trust business.
CHAIRMAN TAYLOR asked if Mr. Lutz had looked at the issues raised
by Theresa Bannister, Legislative Council, concerning federal
preemption.
MR. LUTZ said he wasn't aware of those issues.
CHAIRMAN TAYLOR read the following from Ms. Bannister's
memorandum dated March 27, 2002:
Please be aware that there may be a federal preemption
issue present in this bill to the extent that financial
institutions organized under federal law are covered by
the requirements of the new chapter. Although proposed
AS 06.26.010(4)-(5) exclude national banks and
federally chartered savings associations, the exclusion
is limited to those associations and banks that have
their principal offices in this state. Whenever you
have a financial institution established under federal
law, it is possible that it may not be subject to the
particular state regulation involved. From the limited
research that I have been able to do, it appears that
some state laws limiting the right and power of a
national bank under federal law may not be binding on a
national bank and that if there is a conflict between
state law and federal law that cannot otherwise be
reconciled or resolved, federal law will prevail. I do
not know if this is a serious problem, but I wanted to
bring it to your attention as you review the bill.
MR. LUTZ didn't know to what extent federal law might preempt HB
157. He said DBSC regulated nine different types of entities and
there were federal laws that preempted state law with a lot of
those entities. He said there wasn't much that could be done
about that.
CHAIRMAN TAYLOR assumed DBSC and other states that used the model
act had addressed most of the federal preemption issues.
MR. LUTZ said most of the acts they looked at had been rewritten
recently so he assumed most of the bill would not have a problem
with preemption.
SENATOR DONLEY said Sec. 06.26.670 dealt with dissenting
shareholders of a proposed merger. He asked for an example of a
merger or a consolidation of a trust that could occur.
MR. LUTZ said that provision was necessary in case there were
trust companies in Alaska that wished to merge.
CHAIRMAN TAYLOR said it was interesting that the model code
considered the possibility because mergers weren't uncommon. He
appreciated the fact that it provided for a continuity of
responsibility and integrity as far as finances and
capitalization required and types of officers involved. He said
that protection was in HB 157 so a company couldn't merge its way
into or out of some level of liability.
SENATOR DONLEY asked if there was anything in HB 157 that would
affect how trusts functioned in regards to the rights of
beneficiaries.
MR. LUTZ didn't believe so. He said that would be in other areas
of law that covered trusts. He said HB 157 didn't attempt to
regulate trusts, only the trust companies and the way they did
business.
SENATOR DONLEY asked for the Chairman's intent in dealing with
the concerns raised by Ms. Bannister.
CHAIRMAN TAYLOR said Ms. Bannister suggested a sort of savings
clause that said if a portion of the legislation was preempted by
federal law it didn't apply.
SENATOR DONLEY asked about the second concern raised in the
memorandum:
Also, we have noticed another oddity, not caused by the
committee's amendment. AS 06.26.900(7) authorizes
examinations of subsidiaries of private trust
companies, but does not specifically mention private
trust companies themselves.
MR. TERRY ELDER, Director, DBSC, said private trust companies
didn't offer services to the public and while they were subject
to examination they weren't routinely examined. He said there
might be a problem if DBSC was only able to examine private trust
company subsidiaries and not private trust companies themselves.
He said DBSC would normally only be verifying whether or not they
were in fact private and not offering services to the public.
CHAIRMAN TAYLOR said they would be examined if they offered
services to the public.
MR. ELDER said they would be routinely examined. He didn't
anticipate examining private trust companies on a regular basis.
He said they would also examine private trust companies to see if
there was a violation of the law.
CHAIRMAN TAYLOR asked why they would be examining the
subsidiaries.
MR. ELDER thought the only issue they would have with a private
trust company would be whether they were in fact a private trust
company and they wouldn't look beyond that. He said they could
deal with that issue with the trust company itself and not with
the subsidiaries unless the company was offering services to the
public through a subsidiary.
MR. LUTZ thought the language meant examining a series of trust
companies and private fiduciaries.
SENATOR DONLEY thought the problem was with the conjunctive and
"subsidiaries of" should apply to trust companies and private
trust companies. He thought the section should read, "perform
examinations of trust companies, private trust companies, branch
offices, representative offices, and subsidiaries of trust
companies and private trust companies."
CHAIRMAN TAYLOR asked if taking out the first "and" and putting a
comma in place of it would take care of the problem.
SENATOR DONLEY thought they wanted the subsidiaries of both types
of trust companies to be covered. He thought the drafters would
be able to fix the problem.
MR. ELDER also thought it was just a matter of rearranging the
sentence.
SENATOR DONLEY moved the B version of HB 157 as the working
document.
There being no objection, the B version of HB 157 was adopted as
the working document.
SENATOR DONLEY moved conceptual Amendment #1 to redraft AS
06.26.900(7) on page 53 to include both subsidiaries and primary
companies of both private trust companies and trust companies.
There being no objection, Amendment #1 was adopted.
TAPE 02-12, SIDE B
2:30 p.m.
MR. JOE NEWHOUSE said he was a certified public accountant (CPA)
with the firm of Newhouse & Vogler in Anchorage. He said he had
been in the CPA business for about 20 years.
He was contacted three years previously by an attorney in
Connecticut asking him to serve as trustee on some trusts,
providing a more cost-effective service for smaller estate
planning trusts. He acted as a trustee for about 50 of those
types of trusts. He said most of those trusts were simple life
insurance trusts with a savings account of about $10,000 and
maybe a CD. He noted this was not much in the way of liquid
assets. He didn't manage the assets of the trusts and didn't
want to. He said his duties included taking some gifts into the
trusts, paying for life insurance premiums, sending notices to
the beneficiaries, running a tally at the end of the year and
filing a tax return if required.
MR. NEWHOUSE said Alaska trusts were attractive to many of the
attorney's clients. He said they had to set up trusts through a
trust company or an Alaska resident. Trust services were well
within the scope of what attorneys and CPAs could and did do on a
regular basis. He said the Alaska Trust Company had a minimum
fee that was fairly expensive and he thought Alaska USA did as
well. He said his fees were at most 25% of what the trust
companies were charging.
He said he wanted to offer testimony supporting some language to
reduce regulation for attorneys and CPAs providing trust
services. He understood HB 157 would potentially limit the
number of trusts he could serve as a trustee for.
CHAIRMAN TAYLOR said there was nothing in the bill that limited
him.
MR. NEWHOUSE said he was worried about potential regulation. He
thought Chairman Taylor had also spoken with Mr. Kevin Sullivan
regarding these issues.
CHAIRMAN TAYLOR said the concerns Mr. Sullivan had shared with
him were that the Department of Community & Economic Development
(DCED) might in the future constrain or regulate professionals
who were doing small amounts of trust work. DCED told him they
were only concerned when and if an individual practitioner or
firm took on so many trusts that they were primarily a trust
company. He noted that DCED could not tell him what number of
trusts that might be. He said when they felt that had happened
they might feel some form of bonding or additional liability
coverage and annual reviews might be in order.
He and Mr. Sullivan had looked at an amendment to limit trustees
to 20 trusts, each of which was not to exceed $50,000 in
liquidity. He was fearful that establishing a number might be
premature because five years down the road, each trustee might be
handling 50 trusts. He said at that point somebody would have to
come back to the legislature and put a bill through the process
to change that arbitrary number. He said the law of unintended
consequences had often come back to haunt him. He estimated that
10% to 15% of the legislation coming before the committee that
year was nothing more than clean-up language changing some number
that was put into some bill with the best of intentions. He said
that was the reason he backed off that amendment. He thought
they were better off to trust the professionals within DCED. He
said if trustees felt they were subject to regulations that
appeared to be onerous or without good cause, it would be just as
easy to get a bill introduced to debate the policy calls before
the legislature.
MR. NEWHOUSE appreciated Chairman Taylor's comments. He said not
capping trusts at a certain number was a wise thing to do. He
was fearful that there might be over-regulation down the road.
He said not limiting the number would alleviate some of that
threat. He said trusts were an ancillary part of his business he
didn't intend to spend a lot of time on. He said the attorney
from Connecticut referred 75% of the approximately 50 trusts he
managed. He did not actively pursue trusts as part of his
business. He said his firm was in general practice and they
weren't ever going to get away from that. He said trust laws
were intended to bring money into Alaska. He wanted to make sure
that there wasn't anything in HB 157 that was going to create an
oligopoly where the big companies had more opportunities than the
attorneys and CPAs because of regulations.
He said CPAs were required to carry errors & omissions insurance.
He said that insurance policy required them to write down the
trusts they served as trustee for and the assets in those trusts
to provide for adequate protection.
CHAIRMAN TAYLOR asked if there were any further questions for Mr.
Newhouse. There were none.
MR. DAVE SHAFTEL said he was a member of an informal group of
estate planning attorneys who worked with the legislature
regarding estate planning and estate trust legislation. He said
they reviewed HB 157 carefully and worked with Representative
Murkowski's office and Mr. Lutz on the bill. He said they were
supportive of the bill.
He said there were some exemptions they were concerned about to
make sure that family members and friends could serve as
trustees. Those exemptions were put into HB 157. They were also
concerned that charitable organizations would be able to serve as
trustees and those provisions were also added to the bill. He
asked about the amendment that was to be offered regarding
private trust companies.
CHAIRMAN TAYLOR said that was in the CS.
MR. SHAFTEL said they were very supportive of that amendment
dealing with private trust companies, which were used extensively
on the east coast. He had just returned from a convention where
there was an hour and a half presentation dealing with family
offices and private trust companies. He said this was an area
that may develop further work for the financial industry in
Alaska.
CHAIRMAN TAYLOR thanked Mr. Shaftel for his testimony and his
years of work in the field and the assistance he provided to the
committee.
MR. DICK THWAITES, Chairman, Alaska Trust Company, said he was an
attorney in Anchorage. He said the Alaska Trust Company
supported HB 157. He thought it clarified a lot of issues. They
supported the exemptions mentioned earlier and thought the
committee should rely on the administration to make decisions.
CHAIRMAN TAYLOR asked where Alaska's original trust laws came
from and how long it had been since they had been changed or
modified.
MR. THWAITES noted that HB 157 didn't address trust law. It
addressed trust company regulation law. He said that came from
1949. He said most of the other trust law came from territorial
statutes and federal common law. Adopting uniform probate code
in 1969 amended that. He said there were certain provisions that
dealt with trusts but not very extensively. He said they started
working on the new trust laws in 1995 and the first of those laws
passed in 1997.
He said those laws placed Alaska in the forefront as the
preeminent state finance jurisdiction in the United States. He
said Alaska still had that lead although Delaware, Rhode Island,
South Dakota and Nevada were attempting to catch up. He said
Delaware recently passed laws similar to Alaska's. He said
Delaware had a lot of weight because everybody thought of
Delaware as the banking jurisdiction of the United States and for
corporations. He said Alaska, being a small state, had a fair
amount of luck establishing itself as the preeminent
jurisdiction. He said we're trying to keep things a little bit
ahead of the Internal Revenue Service and Delaware.
CHAIRMAN TAYLOR asked if there were any further questions for Mr.
Thwaites. There were none. He thanked Mr. Thwaites for the hard
work that he and his colleagues had done. He also thanked DBSC
for their effort on HB 157.
MR. KEVIN SULLIVAN, Baxter, Bruce & Sullivan, read the following
testimony:
My name is [Kevin Sullivan]. I am a lawyer [with] the
law firm of Baxter, Bruce & Sullivan here in Juneau.
Approximately 90% of my practice is estate planning
work - wills, trusts, post mortem administration,
wealth transfer, and related matters.
[The] purpose of my testimony is to inform the
committee of the type of work I do that will be
impacted by this legislation and to give committee
members the opportunity to ask questions should there
be interest.
As background, the AK Trust Act and AK Community
Property Trust Act were intended, in part, to bring
trust business to Alaska.
As a consequence of my estate planning work, I attend
conferences, continuing legal education seminars and
other events where I have met lawyers from different
states. When the AK Trust Act and Alaska Community
Property Act became law, I was asked by lawyers Outside
to serve as a trustee for trusts that their clients
wanted to establish in Alaska. This work is a small
and ancillary part of my practice.
In terms of administration, as a lawyer I have a $2
million Errors & Omissions insurance policy and I have
a letter from my insurer expressly addressing my
service as a trustee pursuant to the Acts and outlining
that such trustee service is covered by my policy.
Given the structure of the trusts for which I serve and
that I do not manage any trust assets, my insurer
indicates that my work is within the policy definition
of professional services and legal services for an
attorney who acts as a trustee.
In terms of structure of these trusts:
· I often serve with [a] co-trustee and both co-
trustees must act jointly - a checks and balances
[system].
· Assets held in a trust are typically a small
deposit account - less than $10,000, and an
insurance policy or limited partnership interests,
or limited liability Company interests - assets
that are not publicly traded. I do not manage
liquid assets and have no desire to manage or hold
substantial liquid assets. Concerning the goal of
protection of beneficiaries, my access to the
liquid assets of a trust is virtually nonexistent
given the structure of these trusts.
· These trusts have very low activity - for example,
I may pay an annual premium on an insurance policy
or receive a distribution and then disburse the
funds as payment on a note for the [purpose] of
limited partnership interests. Transaction
activity.
· Lawyers I work with have told me they want me to
serve in this capacity because I am more
responsive than an institutional trustee, and
provide a much lower cost alternative for these
small trusts.
· I have never [engaged] in any advertising for this
service whatsoever.
I understand the purpose of this legislation, in part,
is to better determine the type and volume of trust
activity occurring here in Alaska.
As drafted, the exemption portion of the bill provides
that the state Department of Community and Economic
Development will establish the number of trusts for
which I may serve as a trustee. Further, when
establishing that number, the Department shall consider
protection of the public, effect on efficient delivery
of trust services at a reasonable cost and the
likelihood that the particular exemption can make the
trust services available to persons who need the
service.
I have been communicating with Dept. staff on this
issue for some time and I have been assured that the
Dept. will be responsive to the statutory direction,
and that the intent of this legislation is not to
disrupt existing business relationships or activity
customarily addressed by lawyers and certified public
accountants. I welcome the opportunity to work with
the Department in that regard.
CHAIRMAN TAYLOR thanked Mr. Sullivan for his testimony and the
amount of work he had put in on HB 157. He wanted to establish
for the record that HB 157 did not intend to allow DCED to pass
regulations to constrict or restrict the trustee activities that
attorneys and CPAs were starting to participate in. He thought
at some point in the future DCED would wish to regulate and he
hoped the standards Mr. Sullivan enunciated were sufficient
guidance to DCED to act on behalf of the public good. He said
the public would need the low-cost services that would be
provided by CPAs and attorneys. He said as long as the CPAs and
attorneys didn't get involved in the administrative aspects of
liquid assets, everything should be fine.
He had some fear that we would start to see the things that were
going on in Anchorage with the CAPA problems where people had
opportunities to play with private trust assets and were doing so
without much regulation or opportunity for enforcement of those
fiduciary responsibilities. He had faith that DCED would take a
period of time to get a feel for what the trust business was all
about and they would work with people such as Mr. Sullivan to
determine the appropriate level of regulation.
MR. DOUGLAS BLATTMACHR, President, Alaska Trust Company,
expressed support for HB 157.
SENATOR TAYLOR asked if there was anybody else who wished to
provide testimony on HB 157. There was nobody.
SENATOR COWDERY moved SCS CSHB 157(JUD) out of committee with
attached fiscal note and individual recommendations.
There being no objection, SCS CSHB 157(JUD) moved out of
committee with attached fiscal note and individual
recommendations.
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