Organization of a Limited Purpose Trust Company

Please refer to the Department's Application Fee Schedule to determine the proper fee for the application being filed.

Introduction

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 general power to take deposits or make loans.

Background

Limited purpose trust companies were originally authorized in 1971, partly 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.

Today, our regulations specifically state that we are receptive to a wide range of chartering proposals. Requirements stipulate that the applicant “must demonstrate to the satisfaction of the Superintendent that public convenience and advantage would be promoted by the proposed new facility.” Approvals are conditioned upon any restrictions on doing business that the Department deems necessary.

Applicants for limited purpose trust company charters have included, for example, 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. In addition, some limited purpose trust company applicants seek to engage in virtual currency-related activity.

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.

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 for a full service bank or trust company charter, 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.

Restrictions imposed on the operations of a limited purpose trust company are contained in its organization certificate. The basic restriction is the prohibition on receiving deposits and making loans except as directly arising from the exercise of fiduciary powers. Recent chartering documents have included 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 it will not materially change any of its products, services, or activities without the prior approval of the Superintendent for each such proposed change.

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 limited purpose trust company. While this outline applies to both corporation-form and LLC-form limited purpose trust companies, for brevity it usually provides only the corporation-form terms (e.g., “director,” “by-laws” and “organization certificate”) and not the LLC-form terms (e.g., “manager,” “operating agreement” and “articles of organization”). Please refer to New York Banking Law Section 2-b for a list of the respective LLC-form terms.

Among the areas which must be addressed by the organizing group are the following:

Type of Business

• Description of the type of business to be undertaken; and
• Size and characteristics of the market to be served.

Public Convenience and Advantage

The manner in which the establishment of the limited purpose trust company would enhance public convenience and advantage.

Competitive Impact

The likely impact of the proposed limited purpose trust company on the financial institutions now located in the target market area.

Proposed Site

• Where the institution will be located;
• Availability;
• Advantages of purchasing or leasing the site;
• Cost of developing the site as a limited purpose trust company 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 stockholder has any interest in the proposed site.

Policies and Procedures

Submission of proposed policies and procedures, including but not limited to those that address risk areas such as anti-money laundering, transaction monitoring, cybersecurity, market manipulation, personnel vetting, conflicts of interest, capital adequacy, accounting, and confidential supervisory information. This would also include a resolution plan appropriate to the applicant’s proposed business.

Name of Representative

The incorporators 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 incorporators 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 of a Certificate of Merit.

Forms to comply with certain of the legal steps in chartering are available. Some of the applicable sections of the Banking Law are Sections 23, 24, 25, 106, 1003, 4001, 4001-b, 4003, 4004, 4005, 7001 and 7015.

Supervisory Agreement

Toward the end of the application process, the applicant enters into a supervisory agreement with the Department. The supervisory agreement addresses a variety of specific safety-and-soundness, customer-protection, and other matters.

Surety Bond

The limited purpose trust company must obtain a surety bond in the form and amount determined by the Department. A DFS Surety Bond template is available.

Steps Involved in Organizing a Limited Purpose Trust Company

The following is a general outline of the steps involved in organizing a limited purpose trust company under the New York Banking Law (“BL”).

1. Submission of the following: a) Certificate of Merit including personal data on each incorporator, director and major shareholder (owner of 10% or more of the proposed limited purpose trust company's capital stock); b) Investigation fee by wire transfer or check made payable to the Superintendent of Financial Services; c) Draft letter application for an exemption from the requirements of deposit insurance; d) Copy of lease or option on the proposed site; e) Draft Organization Certificate.
2. Investigation of incorporators/directors and major stockholders by the Superintendent.
3. Execution by the incorporators of an Organization Certificate (BL Section 4001; and, regarding an LLC’s Articles of Organization, BL Section 4001-b).
4. Submission to the Superintendent of the Organization Certificate executed in duplicate originals (BL Section 4003)
5. Filing of Organization Certificate for examination by the Superintendent; refusal or approval of Organization Certificate (BL Sections 23, 24).
6. Issuance of Filing Certificate. Beginning of corporate existence, but the entity is not yet authorized to act as a limited purpose trust company.
7. Meeting of the incorporators and adoption of by-laws (BL Section 4005); first meeting of the Board of Directors; submission of certified copies of the minutes of these meetings and resolution regarding the exemption from deposit insurance request (BL Section 32).
8. Designation of banking depositaries by the Superintendent (BL Section 106) upon receipt and processing of proper application.
9. Filing of Affidavit of Payment of Capital Stock in the office of the Superintendent (BL Section 4004).
10. Filing of Verified List of Stockholders in the office of the Superintendent (BL Section 4004).
11. Filing of Oaths of Directors in the office of the Superintendent (BL Section 7015).

Certificate of Merit

Brochure of Economic and Financial Data in Support of an Application to Establish a Limited Purpose Trust Company

Listed below is information required for the Superintendent to assess the merits of an application to establish a limited purpose trust company. As determined by the Department in its sole discretion, additional information and submissions may also be required.

It is incumbent upon the applicant to provide complete and reliable information in a timely manner throughout the application process.

In accordance with 23 NYCRR Part 3, the application and all supporting materials are available for public inspection except for materials exempted under applicable law. (See, for example, 23 NYCRR Section 3.7, which addresses the process by which applicants can request an exemption from disclosure with regard to trade secrets.)

Rationale for Establishment of the Proposed Limited Purpose Trust Company

This is a discussion of the events leading to the preliminary talks with Department staff and should include the incorporators’ motives and aspirations for organizing the proposed limited purpose trust company.

Name of Proposed Limited Purpose Trust Company

Provide the reasons for selection of the proposed name.

Market Analysis

1. Define the community or market from which the majority of the business of the proposed limited purpose trust company is expected to be derived.
2. Discuss present and possible future economic trends which might have an impact on the proposed limited purpose trust company.
3. Explain the strategies to be followed to capture an adequate share of the target market.

Public Convenience and Advantage

1. Discuss the products and services to be offered, and the anticipated hours of operation. If the proposed limited purpose trust company is to assume an existing business, indicate the services which the limited purpose trust company will be able to offer that the present business cannot.
2. Describe the clientele to be served.
3. Describe how the establishment of the limited purpose trust company will enhance public convenience and advantage.
4. Discuss the likely impact, if any, of the limited purpose trust company upon other financial institutions.

Premises

Describe in detail the proposal for maintaining premises in New York. This should include all information available at the time the application is submitted. It is noted that the address for the proposed premises must appear in the Organization Certificate as well.

Capitalization

Adequacy

Each limited purpose trust company must maintain at all times such capital in an amount and form as the Superintendent determines is sufficient to ensure the financial integrity of the limited purpose trust company and its ongoing operations.

Shares and Distribution

State the number of shares, their par value and subscription price, adequacy of surplus to absorb pre-opening costs, any operating losses in the initial years, the amount of stock to be purchased by the incorporators and directors as well as any known large investors.

At least one-third of total capital must be allocated to capital stock.

The par value of the capital stock must be at least $1.00.

Distribution of Capital Stock List all known subscribers to the capital stock of the limited purpose trust company, giving name, place of residence, and number of shares to be subscribed.

IMPORTANT: If the proposed limited purpose 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, and (2) the Offering Circular/Private Placement Memorandum, Subscription Agreement, and Escrow Agreement have been reviewed and found acceptable by the Department.

Incorporators, Directors and Major Stockholders

Information is required regarding 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 and directors 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.

In general, this section must include the following:

1. Discuss the diversity and quality of experience which each prospective incorporator or director has in financial services and/or other business. If any incorporator or director has been involved in any business which will be undertaken, or taken over, by the proposed limited purpose trust company, annual reports of such businesses for the past three years must be included.
2. The members of the respective committees of the Board of Directors should show that their experience is well fitted to the respective duties of such committees. Where possible, we would not expect to see a director, except the President or Chief Executive Officer, on more than one committee. In addition, no director who is an officer or employee of the limited purpose trust company may be a member of the Audit Committee. Discuss any plans to pay fees to the directors.

Each (i) incorporator, (ii) director, and (iii) major stockholder owning or controlling 10% or more of the proposed limited purpose trust company’s capital stock must submit: (a) a personal questionnaire (on department form); (b) a litigation affidavit (on department form); (c) fingerprints (see Fingerprinting Procedures); and (d) an explanation of the source of funds for such incorporator’s, director’s, or major stockholder’s intended stock purchase. Each major stockholder owning or controlling 10% or more of the proposed limited purpose trust company’s capital stock must also submit a financial report (on department form).

NOTE: Any individual who is to serve as a senior officer, incorporator, or director, or is a stockholder owning or controlling 10% or more of the proposed limited purpose trust company, who does not live in the United States or lives in the United States but for less than five years, must undergo a background investigation at the expense of the applicant. The background report resulting from such investigation must be submitted to the Department for review.

Generally, if the ownership of the limited purpose trust company is composed only of business entities, 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. Consultation with the Department is advised whenever it is believed that the conditions set forth in this paragraph are applicable. See also Guidance on Assessment of the Character and Fitness of Directors, Senior Officers, and Managers, dated January 22, 2024.

In addition to the above individuals, the Superintendent may require fingerprints and/or any additional background information from any person involved in the proposal.

Counsel must 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.

Chief Executive Officer and Official Staff

In addition to the questionnaire and litigation affidavit, a resume for the prospective Chief Executive Officer, including education, experience, community and social interests, other qualifications, availability, and present salary is required. Provide the views of the incorporators on their choice for the CEO and outline any arrangements made to secure the CEO’s services. Provide a copy of the CEO’s proposed employment contract, if any.

In addition, the prospective CEO must be available for an interview with the Department.

Top management personnel must also have substantial experience in the type of business contemplated. At least one member of senior management (generally the prospective Chief Executive Officer) should be prepared to devote full time to the operation of the limited purpose trust company.

Resumes, questionnaires, litigation affidavits and employment contracts, if any, for the remainder of the proposed management team must be submitted.

Additionally, the application must contain an analysis of any dual-hatting. For each senior officer, the analysis must discuss, among any other relevant issues: 1) the proportion of time dedicated to the limited purpose trust company as compared to other entities, and 2) the controls around conflicts of interest.

Staff

Plans to recruit the remaining members of the staff must be set forth in detail, including the number, salary, benefits, etc.

Organization Chart

Show how the limited purpose trust company will be organized and operated, and indicate how much time each member of the proposed management team intends to devote to the limited purpose trust company. Also, provide an organization chart showing all direct and indirect reporting lines to all board committees.

Fidelity Insurance

State the type, amount and annual costs of insurance. The statement must be supported by a letter from a qualified insurance agent on bank protection. Generally, 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 limited purpose 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 limited purpose trust company, then the parent must provide assurances that losses incurred by the limited purpose trust company below the deductible will be covered.

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.

Compliance with Bank Secrecy Act Anti-Money Laundering Programs

The proposed limited purpose 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 3 NYCRR Part 115. 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 limited purpose trust company 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.

Cybersecurity

Provide a detailed description of the proposed information systems, specifying whether they are to be managed in-house or through outsourced services. Include a projection of the professional-level staffing required, focusing on qualifications necessary for effective system management and security.

For any outsourced services, particularly those involving off-premises electronic data processing, provide copies of all executed electronic data processing agreements. These contracts must include clauses that permit routine examinations by the Department, in compliance with regulatory standards. The agreements must also specify adherence to a robust cybersecurity program designed to protect the confidentiality, integrity, and availability of information systems that store and transmit Non-public Information, as required under 23 NYCRR Part 500.

If the proposed trust company intends to purchase or lease equipment, provide to the Department the associated purchase or lease costs, as well as maintenance expenses. The qualifications of the personnel responsible for operating and maintaining this equipment must also be provided. These individuals must be capable of oversight and implementing risk-based cybersecurity practices designed to protect against potential cyber threats, and ensure alignment with the requirements of 23 NYCRR Part 500.

This comprehensive approach to cybersecurity must detail strategies for preventing unauthorized access, ensuring secure data handling, and maintaining data privacy, all while supporting the resilience and reliability of financial services operations. More information is provided on the Department’s website.

Counsel for the Proposed Limited Purpose Trust Company

Provide name and address, and state whether counsel will receive a retainer.

Organizational Fees and Expenses

List all anticipated fees and expenses which will be incurred in connection with the organization of the limited purpose 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 limited purpose 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.

Estimated Assets and Liabilities, Income and Expenses; Wind-Down

Furnish pro forma income and expense statements, balance sheets, and cash flow statements. The data must reflect the volume and type of business to be conducted during the first three years of operations.

Also provide a wind-down cost analysis.

Description of Parent Organization

If the proposed limited purpose trust company is to be a subsidiary of another corporation, the following information concerning the ultimate control party must be provided:

1. A description of the type of business conducted;
2. A discussion of its ownership and management, including whether there are any entities which have ownership interests of 5% or more; and
3. Financial statements for the past three years.

Exemption from the Requirements of Deposit Insurance

As the limited purpose 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 must 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 limited purpose trust company, and must include a provision that such incorporators, as the initial Board of Directors of the limited purpose trust company, will cause a resolution of the Board to be adopted that will (i) provide that the limited purpose 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.