Information and Procedure for the Organization of a Trust Company for the Limited Purpose of Exercising Fiduciary Powers.
Please refer to the Department's Application Fee Schedule to determine the proper fee for the application being filed.
The term “limited purpose trust company” refers to institutions chartered under the bank and trust company provisions of the New York Banking Law but without the power to take deposits or make loans.
Limited purpose trust companies were originally authorized by our Banking Board in 1971, basically in response to the “paper crisis” in the securities industry during this period. At that time, regulations were changed to provide for consideration of restrictive charter applications, provided the proposal was for a limited purpose such as a security transfer agency or related function. The policy was further amended in 1981 to broaden the range of activities to include full trust powers.
In its present form, our regulations specifically state that we are receptive to chartering proposals. Requirements stipulate that the applicant “…must demonstrate to the satisfaction of the Banking Board that public convenience and advantage would be promoted by the new facility.” Approvals are conditioned upon any restrictions on doing business that the Department of Financial Services deems necessary.
Most limited purpose trust companies now operating were chartered under the most recent revision of the policy statement. Over the past several years, the vast majority of applicants have been out-of-state or foreign banking organizations desiring an expanded New York presence, and insurance and securities companies seeking to complement activities by conducting various trust businesses through subsidiaries.
The principal businesses of the group comprise a diverse range of activities under the fiduciary umbrella, such as employee benefit trust, personal trust, corporate trust, transfer agency, securities clearance, investment management, and custodial services. Because of size considerations, the institutions tend to focus on one or two business lines.
Historically, limited purpose trust companies have presented few regulatory problems.
Chartering Procedures and Restrictions
In general, informational requests and financial criteria required in the application process for a limited purpose trust company charter are similar to those of a full service bank or trust company with two notable exceptions: the minimum level of capitalization and the requirement for FDIC insurance. Once submitted in acceptable form, the application receives the same level of scrutiny as other bank and trust company proposals and ultimately requires the approval of the Superintendent of Financial Services.
Restrictions imposed on the operations of limited purpose trust companies are contained in its organization certificate. The basic restriction is the prohibition on receiving deposits and making loans except as incidental to the exercise of fiduciary powers. Recent chartering documents include this standard clause:
“The corporation is to exercise the powers conferred by Section 100 of the Banking Law. The corporation shall neither accept deposits nor make loans except for deposits and loans arising directly from the exercise of the fiduciary powers specified in Section 100 of the Banking Law.”
While the organization certificate places the basic restriction on the operation, it does not specifically prescribe the type of business in which the limited purpose trust company may engage. However, as a condition of granting the charter, the institution must agree that the general character of its business, as proposed in the application, will not change without the prior approval of the Superintendent of Financial Services.
Substantial and well-recognized financial institutions have submitted the large majority of applications for limited purpose trust company charters. However, over the years, a diverse range of companies and individuals have also proposed business strategies that are somewhat outside the norm, for example, specialized foreign currency investment management and the holding and investment in dividend reinvestment plans under IRA and Keogh accounts. Our comfort level with individual ownership has not been as high and we have been reluctant to charter these types of entities.
The following outline gives prospective incorporators an idea of the scope of subjects to be considered in evaluating the merits of a proposal to charter a trust company for the sole purpose of exercising trust powers. Among the areas which must be addressed by the organizing group are the following:&
- Name of Institution A suitable name should be selected.
- Incorporators/Directors Number, names, occupations, business interests, approximate financial worth, standing in the community, character and fitness to serve on the Board of Directors and its various committees. Incorporators should be aware that they:
- will be subject to an investigation;
- will be asked to submit a questionnaire, a financial report, a litigation affidavit, an investigative report, and fingerprints;
- may be asked to attend a conference with Department representatives; and
- will be required to assume legal and other responsibilities upon becoming directors.
- Type of Business
- Description of the type of business to be undertaken;
- Size and characteristics of the market to be served; and
- Reasons for failure of existing institutions to service the market.
- Public Convenience and Advantage: The manner in which the establishment of the trust company would enhance public convenience and advantage.
- Competitive Impact: The likely impact of the proposed trust company on the financial institutions now located in the target market area.
- Proposed Site
- Where the institution will be located;
- Advantages of purchasing or leasing the site;
- Cost of developing the site as a banking office; cost of improvements, furniture, fixtures and equipment; the relation of these costs to the proposed capital funds; and
- Whether any incorporator, director, or major shareholder has any interest in the proposed site.
- Capital Funds
- Adequacy: To determine the amount of capital initially needed to support the operations of a new institution, it will be necessary to consider the proposed business plan and develop projections on the volume of business that may be expected. If operating losses are projected for the initial years of operation, this must be taken into consideration in establishing an absolute minimum initial capitalization. The initial capitalization must be in an amount deemed satisfactory to the Superintendent of Financial Services but in no event shall such amount be less than $2,000,000 in Tier 1 capital. Tier 1 capital will consist of permanent core capital elements (common stockholders’ equity, noncumulative perpetual preferred stock, a limited amount of cumulative preferred stock, and minority interest in the equity of consolidated subsidiaries) less goodwill and other intangible assets that are required to be deducted. The Department requires limited purpose trust companies to at all times maintain their Tier 1 capital at a level no less than 0.25% of discretionary assets under administration. The operational, reputational and legal risks associated with non-discretionary assets under administration will be assessed in the course of the periodic supervisory examinations. The assessment may require the agreed-upon capital to be maintained at all times to be increased to reflect the risks associated with the business line.
- Shares and Distribution: The number of shares, their par value and subscription price, adequacy of surplus to absorb pre-opening costs and operating losses in the initial years, and the amount of stock to be purchased by the incorporators and directors and any known large investors.
- Other: Other standard conditions to which all applicants must agree before the granting of the charter include: prohibitions on changes in ownership and, for the first two years of operation, changes in the composition of the board of directors or senior management without the approval of the Superintendent of Financial Services. In certain instances, an additional condition requires that the parent organization provide a “comfort letter”. Normally, such letters are required of limited purpose trust companies owned by insurance and securities firms and bank holding companies. Although the language is not uniform, comfort letters essentially stipulate that the ownership interest will provide support for the trust company.
- Management Team
Candidate for the Chief Executive Officer of the institution; resume of his/her education, experience and general knowledge of the type of business contemplated; probable salary; stock participation; etc. For this position, the Department of Financial Services will only consider an individual who has extensive experience in the type of business to be conducted by the trust company. He/she should be available for an interview with the Department. Top management personnel should also have substantial experience in the type of business contemplated. At least one member of senior management, preferably the proposed Chief Executive Officer, should be prepared to devote full time to the operation of the trust company.
- Name of Representative
The organizers must select an individual who will be responsible for submitting all material to the Department, and will have authority to discuss all aspects of the submission in detail (including, but not limited to, personal questionnaires, litigation affidavits, financial statements, and investigative reports) and respond to requests for additional information.
Before the formal application process begins, a meeting with the appropriate Department of Financial Services staff will be held to discuss the proposal.
If the organizers decide to proceed with the formation of the institution, it is recommended that the group’s representative gather and develop all economic and financial data outlined in the form a Certificate of Merit.
Forms to comply with certain of the legal steps in chartering are available upon request. Some of the applicable sections of the Banking Law are Sections 23, 24, 25, 106, 1003, 4001, 4003, 4004, 4005, 7001 and 7015.)
The steps involved in organizing a trust company follow:
- Execution by the incorporators of an Organization Certificate (Section 4001).
- Submission to the Superintendent of the Organization Certificate executed in duplicate originals (Section 4003) accompanied by the following documents: a) Certificate of Merit (in quadruplicate) including personal data on each incorporator, director and major shareholder (owner of 5% or more of the proposed trust company's capital stock); b) Investigation fee of [please refer to the Department's Application Fee Schedule] by check made payable to the Superintendent of Financial Services; c) Application for an exemption from the requirements of deposit insurance; d) Copy of lease or option on the proposed site.
- Filing of Organization Certificate for examination by the Superintendent (Section 23).
- Investigation of incorporators/directors and major shareholders by the Superintendent; refusal or approval of Organization Certificate (Section 23).
- Approval by the Superintendent of Financial Services.
- Commencement of solicitation of subscriptions for shares of stock of the proposed trust company, via an Offering Circular or Private Placement Memorandum.
- Filing by the Superintendent of the Organization Certificate when conditions have been satisfied (Section 24).
- Beginning of corporate existence, but entity is not yet a trust company (Section 4004).
- Meeting of the incorporators and adoption of by-laws (Section 4005); first meeting of the Board of Directors; submission of certified copies of the minutes of these meetings.
- Designation of banking depositaries by the Superintendent (Section 106) upon receipt and processing of proper application (Supervisory Procedure CB-109).
- Filing of Affidavit of Payment of Capital Stock in the office of the Superintendent (Section 4004).
- Filing of Verified List of Stockholders in the office of the Superintendent (Section 4004).
- Filing of Oaths of Directors in the office of the Superintendent (Section 7015).
- Upon receipt and clearance of the above and other required items, issuance of an Authorization Certificate by the Superintendent and the filing of duplicate originals thereof (Section 25).
CERTIFICATE OF MERIT
Brochure of Economic and Financial Data In Support of an Application to Establish a Trust Company for the Limited Purpose of Exercising Fiduciary Powers
Listed below is the information required for the Superintendent of Financial Services to assess the merits of an application to establish a trust company for the sole purpose of exercising fiduciary powers.
It is incumbent upon the applicant to provide complete and reliable information and to supplement the information requested with any additional data deemed relevant or material to the application. It may also be necessary to require additional information from the applicant during the application analysis process.
In accordance with Supervisory Procedure G-106, the entire application and all supporting material are available for public inspection except for confidential material. If the applicant believes that the public availability or disclosure of certain information requested in the brochure would be clearly harmful, such information should be segregated from the public portion and labeled "Confidential." The applicant should also state the reasons for any request for confidentiality.
I. Rationale for Establishment of the Proposed Trust Company Discuss the events leading to the preliminary talks with the Department staff. Include the incorporators' motives and aspirations for desiring to organize a trust company for the sole purpose of exercising fiduciary powers.
II. Name of Proposed Trust Company Give reasons for selection of name.
III. Market Analysis
- Define the community or market from which the majority of the business of the proposed trust company is expected to be derived.
- Discuss present and possible future economic trends which might have an impact on the proposed trust company.
- Explain the strategies to be followed to capture an adequate share of the target market.
IV. Public Convenience and Advantage
- Discuss the products and services to be offered, and the anticipated hours of operation. If the proposed trust company is to assume an existing business, indicate the services which the trust company will be able to offer that the present business can not.
- Describe the clientele to be served.
- Describe how the establishment of the trust company will enhance public convenience and advantage.
- Discuss the likely impact, if any, of the trust company upon other financial institutions.
- Describe in detail the proposed or altered building and plot plan. To illustrate further, furnish copy of plot plan, interior layout and artist's or architect's sketch of exterior. If parking is involved, give details: area, size, location and number of parking spaces available for bank customers.
- Furnish a copy of the conditional lease or option to lease or purchase the property. The option or conditional lease should contain a renewable clause. No lease for the proposed premises may contain a clause prohibiting the landlord from renting space to another banking institution.
- Give a summary of rental terms by years, together with renewal options, if property is to be leased. In the case of an option to purchase, give a summary of its terms.
- State whether any incorporator, director or major shareholder has any interest, direct or indirect, in the proposed site or in the construction of the premises, and describe fully the nature of such interest. Submit documentation demonstrating that any agreement involving such individual is at fair market value.
- List all development costs (i.e., improvements, alterations, furniture, fixtures, equipment, etc.) that will be incurred in preparing the site as a banking office.
- Establishment does not conflict with any of the provisions of the New York State Historic Preservation Act.
VI. Capitalization Give number of shares, par value, subscription price, and allocation of capital funds to capital stock and surplus. Per Department policy, at least one-third of total capital must be allocated to capital stock. Also, the par value of the capital stock must be at least $1.00.
(NOTE: Department policy does not permit authorized but unissued shares, options, or warrants for new trust companies.)
- Capital Adequacy Give reasons for believing that: (a) total capital funds will be adequate; (b) surplus will be ample to absorb all start-up costs and operating losses in the initial years; and (c) additional capital funds can and will be raised if needed.
- Distribution of Capital Stock List all known subscribers to the capital stock of the trust company, giving name, place of residence, and number of shares to be subscribed.
(IMPORTANT: If the proposed trust company's stock is to be sold through a public or private offering, solicitation for stock subscriptions may not be made until (1) the Organization Certificate has been approved by the Superintendent of Financial Services, and (2) the Offering Circular/Private Placement Memorandum, Subscription Agreement, and Escrow Agreement have been reviewed and found acceptable by the Department.)
VII. Incorporators, Directors and Major Shareholders
- 1. Discuss the diversity and quality of experience which each prospective incorporator and director has in banking and/or business. If any incorporator or director has been involved in any business which will be undertaken, or taken over, by the proposed bank, annual reports of such businesses for the past three years should be included.
- The members of the Board of Directors should be allocated to the respective committees to show that their experience is well fitted to the respective duties of the committees. Where possible, we would not expect to see a director, except the President, on more than one committee. However, no director who is an operating officer of the bank may be a member of the Examining Committee. Discuss any plans to pay fees to the directors.
- Each incorporator, each director, and each major shareholder owning or controlling 10% or more of the proposed bank’s capital stock must submit: (a)a questionnaire (on Department form); (b)a litigation affidavit (on Department form); (c) a financial report (on Department form); (d) fingerprints (see Fingerprinting Procedures) ; and (e) an explanation of the source of funds for his/her intended stock purchase. NOTE: If an individual's ownership interest constitutes statutory control (10% or more of the proposed bank’s capital stock), C.P.A. prepared and reviewed financial statements, in accordance with Section 117.5(k) of Supervisory Procedure CB 117, will be required in lieu of the financial report mentioned in (c) above
- If there is to be a corporate owner of the trust company, and the incorporators/directors will not be purchasing any capital stock and will not be relied upon for financial support, no personal financial information on such individuals will be required. Further, if these individuals are employees of the parent corporation or an affiliate, are sufficiently well-known to the corporation, and have undergone investigations by the corporation as a condition of employment, then the investigative report described above will not be required. Consultation with the Department of Financial Services is advised whenever it is believed that the conditions set forth in this paragraph are applicable.
- In addition, a personal investigative report on each of the above-mentioned persons must be developed by a licensed private investigator and sent directly to the Department by the private investigator. It is incumbent upon those individuals or their representative to advise the licensed private investigator selected that they must be subject to the broadest possible background investigation. In this regard, the portion of the investigation involving the access of public records should include, but not be limited to, contact with the following sources: (a) U.S. District Court, (b) U.S. Bankruptcy Court, (c) State Supreme Court, (d) local Criminal Court, (e) local Civil Court, (f) County Clerk's office, (g) Federal tax lien files, (h) Uniform Commercial Code files, (i) Department of Motor Vehicles, (j) a credit reporting agency, (k) a national news database network, and, where applicable (l) regulatory/administrative agencies and (m) professional licensing agencies. These sources should be contacted in and around all jurisdictions in which the subject of the investigation has resided and been employed for at least the past ten years. A copy of a credit report from a major credit reporting agency should be included with the personal investigative report. It is also expected that the personal background information contained in each individual's questionnaire will be verified, and that references will be interviewed.
- Each major shareholder who owns or controls at least 5% but less than 10% of the proposed bank’s capital stock is required to submit fingerprints (see Fingerprinting Procedures).
- In addition to the above individuals, the Superintendent reserves the right to require fingerprints and/or any additional background information from any person involved in the proposal.
- Counsel should submit a letter stating that the proposed directors are eligible locally to serve on the Board under the provisions of the Laws of New York and the United States, including Canon 4D(3) of the Code of Judicial Conduct, Appending to New York Judiciary Law, and 12 U.S. Code §§3201-3208, the Depository Institution Management Interlocks Act, as amended, and regulations thereunder.
VIII. Chief Executive Officer and Official Staff
In addition to the questionnaire and litigation affidavit, a resume for the prospective CEO, giving his/her education, experience, age, community and social interests, other qualifications, availability, and present salary is required. Give the views of the incorporators on their choice for the CEO and outline any arrangements made to secure his/her services. Provide a copy of his/her proposed employment contract, if any.
Resumes, questionnaires, litigation affidavits and employment contracts, if any, for the remainder of the proposed management team should be submitted.
IX. Staff Plans to recruit the remaining members of the staff should be set forth in detail, including the number, salary, fringe benefits, etc.
X. Organization Chart Show how the trust company will be organized and operated, and indicate how much time each member of the proposed management team intends to devote to the trust company. Also, provide an organization chart showing all direct and indirect reporting lines to all board committees including audit, compliance and BSA (Bank Secrecy Act).
XI. Fidelity Insurance Type, amount and annual costs of insurance. The statement should be supported by a letter from a qualified insurance agent on bank protection. A Financial Institutions Bond, Type 24, would be acceptable. Minimum primary coverage of $1,000,000 is required (a deductible of $25,000 or $50,000 is advisable). If the trust company is to be covered by a policy in place for a parent corporation, and such policy has a high deductible in relation to the capital funds of the trust company, then the parent must provide assurances that losses incurred by the trust company below the deductible will be covered.
XII. Internal Audit and Control Give plans for safeguarding assets and operations, i.e., development of adequate internal controls, full time auditor, periodic C.P.A. audits, etc.
XIII. Compliance with Bank Secrecy Act Anti-Money Laundering Programs
The prospective trust company must establish policies and procedures designed to ensure and monitor compliance with the Bank Secrecy Act (BSA) as amended by the USA PATRIOT Act and the anti-money laundering programs of Part 115 of the General Regulations of the Banking Board. A compliance program must include, at a minimum, a system of internal controls to assure ongoing compliance, independent testing for compliance to be conducted by bank personnel or by an outside party, the designation of an individual or individuals responsible for coordinating and monitoring day-to-day compliance, and training for appropriate personnel.
XIV. Electronic Data Processing Service
Provide a detailed description of proposed operating systems, whether in-house or outsourced, together with projected professional-level staffing. If off-premises electronic data processing services are to be used, provide copies of any electronic data processing agreements that have been executed. The contract must include provision for examination of the facility by the Department of Financial Services. If the proposed trust company intends to purchase or lease the equipment, include cost of purchase and/or maintenance and the qualifications of personnel who will be responsible for its operation.
XV. Counsel for the Proposed Trust Company
Give name and address. Will counsel receive a retainer?
XVI. Organizational Fees and Expenses
List all anticipated fees and expenses which will be incurred in connection with the organization of the trust company. State separately the expenses of raising capital. The funds for such fees and expenses must be provided by the incorporators and may not be deducted from subscriptions for the authorized shares of capital stock. If an Authorization Certificate is issued, the incorporators may be reimbursed by the trust company for organization fees and expenses determined to be reasonable and proper. Such reimbursement may only occur after submission to the Department of an audit of such expenses by an independent C.P.A., and the receipt of specific written permission from the Superintendent.
(IMPORTANT: In no event shall the amount or payment of any fee be contingent upon any action, decision, or forbearance on the part of the Department of Financial Services.)
XVII. Estimated Assets and Liabilities, Income and Expenses
Furnish pro forma income and expense statements, balance sheets, and cash flow statements. The data should reflect the volume and type of business to be conducted during the first three years of operations.
XVIII. Description of Parent Organization
If the proposed trust company is to be a subsidiary of another corporation, the following information concerning the ultimate control party should be provided:
- A description of the type of business conducted;
- A discussion of its ownership and management, including whether there are any entities which have ownership interests of 5% or more; and
- Financial statements for the past three years.
XIX. Exemption from the Requirements of Deposit Insurance
As the trust company will be ineligible for FDIC deposit insurance due to the limited nature of its activities, an application for an exemption from the requirements of deposit insurance should be submitted, in accordance with Section 32 of the Banking Law and Supervisory Procedure G 109. The application must be executed by the incorporators of the trust company, and must include a provision that such incorporators, as the initial Board of Directors of the trust company, will cause a resolution of the Board to be adopted that will (i) provide that the trust company will not receive deposits or share accounts from the general public, (ii) ratify all actions taken by the incorporators in applying for an exemption under Section 32 of the Banking Law, and (iii) provide that such resolution will not be revocable without the prior consent of the Superintendent of Financial Services.