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.