Megan Brooks
Trust banks are subject to regulatory oversight by the SEC, as seen in the case of Great Plains Trust Company, Inc., which was charged by the SEC with operating unregistered investment companies and failing to register securities offerings. The Securities Exchange Act of 1934 and the Investment Company Act of 1940 are key legislations that impact trust banks. The former defines fiduciary activity and dealer activity, while the latter provides exemptions for common trust funds used for fiduciary purposes. Additionally, Regulation R, jointly issued by the Federal Reserve and the SEC, outlines the requirements for banks to qualify for exemptions from the definition of a broker, including the trust and fiduciary exception. These regulations highlight the interplay between trust banks and the SEC, indicating that trust banks do indeed have reporting obligations and interactions with the SEC.
| Characteristics | Values |
|---|---|
| Trust banks filing with the SEC | Not mandatory |
| Trust banks filing with the SEC required when | An activity does not meet any of the exemptions |
| Trust powers | Granted to state-chartered banks under state law |
| Trust powers | Granted by state authorities |
| Trust powers | Not granted by the FDIC |
| Trust powers | Exemptions include Trust & Fiduciary exception, Custody & Safekeeping exemption, Networking exception, Sweep accounts exception |
| Trust banks | Need not apply for FDIC consent to exercise trust powers |
| Trust banks | Need to apply for FDIC consent to exercise trust powers if they are separately chartered and capitalized uninsured trust company subsidiaries of banks |
| Trust banks | Need to apply for FDIC consent to exercise trust powers if they are state nonmember institutions that acquire or start registered investment adviser subsidiaries |
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What You'll Learn
Trust companies operating unregistered investment companies
Trust companies are subject to the US Securities and Exchange Commission's (SEC) regulatory authority. The SEC has the power to take action against trust companies that violate securities laws, including operating unregistered investment companies.
On September 30, 2020, the SEC announced that it had settled charges with Great Plains Trust Company, Inc. (Great Plains), a Kansas-chartered trust company, for operating unregistered investment companies and offering unregistered securities. Great Plains began selling investment interests in its trust funds in 1994, and by the end of 2018, held over $480 million in 18 regular and retirement trust funds.
The SEC's order found that Great Plains violated the registration provisions of Sections 5(a) and 5(c) of the Securities Act and caused the trust funds to violate the registration provisions of Section 7(a) of the Investment Company Act of 1940. Great Plains failed to satisfy the requirements for exclusions from the definition of "investment company" under the 1940 Act, specifically because it did not exercise substantial investment authority over the funds. The SEC's interpretation of the necessary involvement by a bank trustee to qualify for these exclusions remains unclear.
Additionally, the SEC determined that the common trust funds did not qualify for statutory exclusions because they were advertised to the general public and were not used solely for a fiduciary purpose. Great Plains consented to a cease-and-desist order and agreed to pay a $300,000 penalty without admitting or denying the findings.
This case highlights the importance of trust companies and investment advisers regularly reviewing their processes, policies, and procedures to ensure compliance with securities laws and avoid regulatory action.
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Trust powers and fiduciary services
Trust powers are granted to state-chartered banks under state law, which is usually administered through a bank's chartering authority. State law defines the activities constituting fiduciary or trust powers, and the FDIC defers to state law in these matters. State statutes and corporation regulations do not always uniformly identify what functions constitute "fiduciary" activities requiring trust powers. Some state statutes define "trust activity" as serving in legally defined capacities of trustee, executor, or administrator of estates, or guardian of the estate of a minor or incompetent.
Banks approved for Federal Deposit Insurance after December 1, 1950, are required to file an application to exercise trust powers unless such a filing was made simultaneously with the application for Federal Deposit Insurance. The FDIC does not grant trust powers but gives its consent to exercise such powers as granted by state authorities.
The FDIC examines a bank's trust operations and, when applicable, Registered Transfer Agent, Government Securities Dealer, and Municipal Securities Dealer activities to determine if policies or account administration procedures could result in a contingent liability or loss that could impact the institution's earnings performance or capital impairment. The Board of Directors and senior management must be able to identify, measure, monitor, and control the risks inherent in fiduciary activities and respond appropriately to changing business conditions.
Trust Examination Manual outlines examination processes, defines rating criteria used for safety and soundness examinations, and serves as a reference on trust concepts, principles, laws, and regulations that govern the behaviour of fiduciaries. The Statement of Principles of Trust Department Management outlines sound banking practices in the operation of a trust department.
Separately chartered and capitalized uninsured trust company subsidiaries of banks do not need to apply for FDIC consent to exercise trust powers. State non-member institutions that acquire or start registered investment adviser subsidiaries do not have to apply for FDIC consent to exercise trust powers under Section 24 of the FDI Act or Part 362 of the FDIC Rules and Regulations.
Bank of America and Wells Fargo are examples of banks that offer fiduciary and trust services. Bank of America can support your trustee with fiduciary investment management and administrative services, and can serve as a co-trustee or sole trustee. Wells Fargo offers comprehensive fiduciary and trust services and can create custom strategies to help retain and disburse your wealth.
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Trust fund exemptions
Trust funds are subject to certain exemptions from registration with the Securities and Exchange Commission (SEC). These exemptions are outlined in the Securities Act and allow certain securities offerings to be exempt from registration with the SEC.
One such exemption is Section 4(a)(1) of the Securities Act, which is available to any person other than an issuer, underwriter, or dealer. This exemption permits the resale of securities without the need for registration. However, it is important to note that this exemption is not available to affiliates of the issuer or for the resale of restricted securities.
Another set of exemptions is outlined in Regulation D, which includes Rules 504(b)(3), 506(d), and 503. These exemptions are only available for offers and sales by an issuer of securities to initial purchasers and are not applicable for resales or by any affiliate of the issuer.
The SEC also provides exemptions for advisers to certain privately offered investment funds, as outlined in the Dodd-Frank Wall Street Reform and Consumer Protection Act. This includes exemptions for advisers to venture capital funds with less than $150 million in private fund assets under management in the United States and foreign private advisers.
Additionally, there are exemptions for trust funds held by banks, as seen in the case of Great Plains Trust Company, Inc. However, these exemptions have specific requirements, such as the funds being used solely for the administration of trust accounts maintained for a fiduciary purpose and the entity exercising substantial investment authority over the funds.
It is worth noting that even exempt transactions are subject to the antifraud provisions of federal securities laws, and companies are responsible for any false or misleading statements made regarding their securities offerings.
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Trust activities and securities
The SEC has taken enforcement actions against trust companies that fail to comply with registration requirements. For example, in the case of Great Plains Trust Company, Inc., the SEC charged the company with operating unregistered investment companies and failing to register securities offerings. This highlights the importance of understanding and adhering to SEC regulations in the trust context.
Trust activities often involve fiduciary responsibilities, where banks or other entities act as trustees, executors, or administrators of estates. State laws and regulations define fiduciary or trust powers, and the Federal Deposit Insurance Corporation (FDIC) typically defers to state law in these matters. Banks that engage in trust activities must comply with applicable state laws and regulations, ensuring that they act in the best interests of their clients and beneficiaries.
When it comes to securities, the Securities Exchange Act of 1934 and the Investment Company Act of 1940 are key pieces of legislation. The Acts outline important definitions, such as the terms "broker" and "dealer," and provide exemptions for certain bank activities. For example, a bank is not considered a broker or dealer solely because it engages in trust activities, fiduciary transactions, or investment transactions. However, banks must still comply with specific conditions outlined in regulations like Regulation R to qualify for these exemptions.
Additionally, banks seeking to exercise trust powers must file an application, unless they were simultaneously granted Federal deposit insurance and trust powers after December 1, 1950. Separately chartered and capitalized uninsured trust company subsidiaries of banks are exempt from seeking FDIC consent to exercise trust powers. The FDIC's rules and regulations, including Sections 333.2 and Part 303, govern the process and requirements for obtaining consent to exercise trust powers.
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Trust fund advertising
While I could not find specific information on 'Trust fund advertising', I discovered some details on the regulations surrounding trust funds and trust management.
Trust powers are granted to state-chartered banks under state law, which is usually administered through a bank's chartering authority. State law defines the activities that constitute fiduciary or trust powers. The FDIC always defers to state law in these matters. State statutes and corporation regulations do not always uniformly identify the functions that constitute "fiduciary" activities requiring trust powers. Some state statutes define "trust activity" as serving in legally defined capacities such as a trustee, executor, or administrator of estates, or guardian of the estate of a minor or incompetent person.
Banks approved for Federal Deposit Insurance after December 1, 1950, must file an application to exercise trust powers unless such a filing was made with the initial application for Federal Deposit Insurance. The FDIC does not grant trust powers but gives consent to exercise such powers as granted by state authorities. The FDIC Rules and Regulations prohibit an insured state nonmember bank from changing the general character of its business without prior written consent.
Separately chartered and capitalized uninsured trust company subsidiaries of banks are not required to apply for FDIC consent to exercise trust powers. Similarly, state nonmember institutions that acquire or start registered investment adviser subsidiaries are exempt from applying for FDIC consent to exercise trust powers under specific sections of the FDI Act and FDIC Rules and Regulations.
Additionally, the FSRRA mandated that the Federal Reserve and the SEC jointly issue Regulation R, which provides administrative exemptions from the definition of "broker" in the Exchange Act. This regulation details the requirements for banks to qualify for exemptions related to trust and fiduciary exceptions, among others.
In terms of trust fund advertising, it is important to note that the SEC has charged trust companies with operating unregistered investment companies and failing to register securities offerings. For example, the SEC found that Great Plains Trust Company, Inc. sold investment interests in its trust funds without registering the funds or the securities of the trust funds. The SEC's order stated that the funds did not qualify for registration exemptions because Great Plains did not exercise substantial investment authority over the funds, and the non-retirement funds were advertised to the general public rather than being used solely for a fiduciary purpose.
Therefore, when advertising trust funds, it is crucial to ensure compliance with relevant regulations, including registering investment companies and securities offerings as required by law.
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Frequently asked questions
Banks must register with the SEC if their activities do not meet any of the exemptions detailed in the Securities Exchange Act of 1934.
Examples of exemptions include the trust & fiduciary exception, the custody and safekeeping exemption, the networking exception, and the sweep accounts exception.
The bank must provide sufficient records to demonstrate that it qualifies for the exemption. Either the SEC or the NASD will provide regulatory oversight.
