The Office of General Counsel issued the following opinion on August 1, 2003, representing the position of the New York State Insurance Department.
Re: Regulation 114 Trusts Custody of Assets
May the trustee ("Trustee") of a trust ("Trust") established under N. Y. Comp. Codes R. & Regs. tit. 11, § 126.1 et seq. (2000) ("Regulation 114") place the assets of the Trust into an account with an investment manager?
The Department strictly interprets the provisions of Regulation 114 and thus would not allow the Trustee to place the assets of the Trust into an account with an investment manager.
The inquirer wrote on behalf of Citibank, N.A., the Trustee of a trust established in accordance with Regulation 114. Under Section 2.2 of the existing Trust Agreement, the Trustee has established a Trust Account for the benefit of the beneficiary at the Trustees office in the United States. Under the express terms of the Trust Agreement, all cash, certificates and other instruments representing the Trust Assets initially deposited, any additional deposits and all investments and reinvestments of the Trust Assets are held in the Trust Account. Some of these investments and reinvestments may be certificated and some may be book entry, but in all events, the Trust Account is credited with the investments, and the Trustee has sole control over the disposition of the Trust Assets in the Trust Account, subject, of course, to the terms of the Trust Agreement.
The inquirer states that the parties have agreed under Section 2.4 of the Trust Agreement to the appointment of an investment manager (the "Investment Manager"), with its offices in southeast Florida, to invest or reinvest Trust Assets. After any such investment or reinvestment, the assets are deposited in the Trust Account at the Trustees offices to the extent that the same are certificated, and credited to the account to the extent that they are not, all under the control of the Trustee.
The inquirer states that all parties to the Trust Agreement have agreed that the administration of the Trust would be much improved by the Trustees establishing an account with the Investment Manager, in the name of the Trustee for the benefit of the Trust. Investments and reinvestments of the Trust Assets in accordance with the terms of the Trust Agreement could be more efficiently effected by the investment Manager from such an account. The inquirer argues that the primary advantage of this arrangement would be the immediate access to reporting (online and otherwise) by each of the parties to the Trust Agreement, including the beneficiary, using the Investment Managers sophisticated account information system. The required quarterly statement of assets and 10-day notice of deposits and withdrawals may arguably be made much more promptly, and accessed and updated whenever and as often as desired.
In order to provide for the establishment of such an account of the Trustee, the parties propose adding the following language to Section 2.2 of the Trust Agreement:
The Required Reserve Account shall be credited at all times with all Trust Assets, if any, which are held in the name of the Trustee for the benefit of the Trust, in an account or accounts established by the Trustee with the Investment Manager (as identified in Section 2.4 hereof).
The inquirers proposal involves an interpretation of Section 126.3 of Regulation 114. That section provides, in relevant part, as follows:
§ 126.3 Required conditions.
(a) The agreement must be in the form of a trust agreement made and entered into among the beneficiary, the grantor and a bank. The bank must be either a member of the Federal Reserve System, or a New York State-chartered bank or trust company. Such bank shall be designated the trustee and shall not be a parent, subsidiary or affiliate of the grantor or the beneficiary.
(b) The trust agreement must create a trust account into which assets shall be deposited.
(c) All assets in the trust account must be held by the trustee at the trustees office in the United States .
N.Y. Comp. Codes R. & Regs. tit. 11, § 126.3(a)-(c) (2000).
The Department interprets the language of the above-quoted provisions literally and strictly, thus mandating that the Trust assets be held by the Trustee directly and not through an intermediary custodian such as an account with an investment manager. In addition, the introduction of this additional custodial entity would run counter to the regulatory requirement that the Trust Agreement be "clean and unconditional" as specified by Section 126.3(d) of Regulation 114, which provides, in pertinent part, as follows:
(3) the trust agreement must indicate that it is not subject to any conditions or qualifications outside of the trust agreement;
(4) the trust agreement cannot contain references to any other agreements or documents;
N.Y. Comp. Codes R. & Regs. tit. 11, § 126.3(d) (3) & (4) (2000).
By amending the Trust Agreement to reference the establishment of an account in the name of the Trustee, the Trust Agreement is necessarily referencing the documents necessary for the establishment and maintenance of that account. Furthermore, the establishment of an account relationship between the Trustee and the Investment Manager invariably adds additional conditions to the operation of the Trust.
In addition, the establishment of an account to hold the Trusts assets for the benefit of the Trustee runs counter to N.Y. Comp. Codes R. & Regs. tit. 11, § 126.3(f) (2000), which requires that the Trust Agreement must provide for the Trustee to "receive and hold all assets in a safe place." This provision clearly mandates that the custody of the assets themselves remain with the Trustee, and not the Trustees designee or other agent. Finally, the establishment of an account and the attendant administrative requirements would necessarily result in the imposition of additional fees and expenses. Accordingly, the Department would not approve of the establishment of the account with the Investment Manager.
For further information you may contact Supervising Attorney Michael Campanelli at the New York City office.