Experts blame regulator and over-burdensome rules for closure and zero growth since enactment of higher capital requirements. Complying with Nevada’s residency requirement rules worries most local firms with sizable non-Nevada business. New players continue to find better alternatives from other states.

Reno based Nevada Agency and Trust Company had been doing business since 1903, but Andrea Cardinalli, the company’s president, decided to abandon its state trust charter earlier this year.

“We did let it expire,” she confirms. “And we’ve changed our name to reflect that.”

Now known as Nevada Agency and Transfer, Reno-based NATCO is not aggressively pursuing another charter from any other state or federal agency.

Cardinalli wasn’t eager to talk about operating conditions for retail trust companies in Nevada, but the state’s decision to tighten the rules late last year probably made it easier for NATCO to cut the 100-year cord.

“There is the distinct possibility that the Financial Institutions Division is causing the lowest-capitalized trust companies to leave,” says Matthew Saltzman, a banking attorney at Las Vegas law firm Kolesar & Leatham.

“Some might not be able to comply with the new requirements,” he added. “Others may just not want to do so.”

Not enough incentives

NATCO was not a prominent player in the Nevada trust landscape. Neither Saltzman nor Nevada Trust president Peter Kingman was familiar with the company, which has moved away from trust services over the decades to focus on the stock transfer and registrar business.

Although most institutions that engage in these activities have traditionally been banks or independent trust companies, you don’t actually need a trust charter to do so.

In fact, because NATCO isn’t a bank, it needed to register with the SEC and comply with federal securities industry rules whether it kept its state charter or not.

However, Nevada’s stricter rules made it more expensive to keep that charter. Even though NATCO was grandfathered into the new capital requirements, it still would have had to commit an extra $200,000 by October 1 and another $250,000 a year for the next two years.

It also needed to meet various customer residency tests to prove that it was primarily doing business with Nevada clients.

Because most Nevada trust companies serve a primarily out-of-state client base, this rule looks especially onerous to L. Scott Walshaw, the state’s former banking commissioner.

“I don’t think it’s enforceable,” he says. “Someone ought to take the regulator to court on this one. But in the meantime, it only encourages trust companies to leave the state.”

The canary meets the coalmine

NATCO’s quiet exit brings the number of public trust companies operating in Nevada its lowest level in over a year, and Matthew Saltzman agrees with Walshaw: more departures are on the horizon.

“As the state goes from an attractive low-cost jurisdiction to a more expensive one, marginal players may be more likely to relocate to South Dakota or wherever the hot jurisdiction is right now,” he says.

While client privilege prevented him from telling me who it is, he says at least one more trust company is planning on abandoning its Nevada charter in order to become a more loosely regulated family trust company instead.

Chicago financial institutions lawyer John P.C. Duncan warned of such a flight from the state last year when he asked the Nevada legislature to soften the new rules.

Unless a more trust-friendly overhaul could be found, he warned back in April of last year, trust companies would “be driven from Nevada or barred from being licensed here.”

That testimony appears to have come true. While Duncan’s amendments helped save Nevada’s private trust companies, their retail cousins got no such savior.

While “friendlier jurisdictions” like South Dakota are luring big business from out-of-state applicants, Nevada has not licensed a single public trust company since last May, when Saturna Trust got its charter—well before the heavier regulatory burden kicked in.

Whether Nevada lets more trust institutions slip off its rolls or starts actively courting new ones, Matthew Saltzman would simply like to see the state clarify its position.

“A more formal Nevada trust office needs to be established,” he says. “Unfortunately, there’s no way to compensate the regulators based on the amount of license fees the state brings in.”

Scott Martin, contributing editor, The Trust Advisor Blog. Steven Maimes contributed to the research and the editing.

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LAS VEGAS, NV. Sept 25 – This Thursday, October 1^st, Nevada’s Financial Institutions Division, the state agency that supervises trust companies, and its Commissioner George E. Burns can celebrate a long fought victory for promoting major trust company regulatory reforms and carrying them through the legislature to the Governors’ desk.

The new law, Nevada Senate Bill SB-310, provides for $1 million in capital to be posted, a 330% increase in the requirement needed to license and maintain a retail trust company in the state. In addition to the need for additional capital, other major requirements include:

• Verifiable physical office to administer trust business in Nevada.
• Nevada employee with trust experience “satisfactory” to the Commissioner.
• Original or “true” copies of business records and accounts readily available for examination.
• Maintenance of the required cash portion of the capital requirement in a Nevada financial institution.
• Services provided to Nevada residents consistent with the business plan.
• Other conditions that the Commissioner may require to protect the “public interest.”

To give time to the state’s currently licensed 17 public trust companies to comply, the new law calls these grandfathered trust companies and provides for a reasonable time to meet the new $1 million requirement:

• $500,000 by October 1, 2010
• $750,000 by October 1, 2011
• $1,000,000 by October 1, 2012

SB-365 Establishes Provisions Relating to Family Trust Companies

A second law, Nevada Senate Bill SB-365, establishes provisions relating to family trust companies. Private family trust companies do not do business with the public and are a lessor concern to Commissioner Burns.

This bill, promoted both by the Nevada Bar Association and noted private trust company expert John P. C. Duncan retains the existing $300,000 capital requirement for licensed private family trust companies. In addition to the lock on lower capital, the bill provides for better definitions of what a family trust company is and a reduced annual fee of $1500.

Most significant about SB-365 is the option to be regulated or unregulated. Section 13 of SB-365 states:

A family trust company:

1. Is not required to be licensed pursuant to this chapter or chapter 669 of NRS.
2. May apply for a license as: a) A trust company pursuant to chapter 669 of NRS; or b) A licensed family trust company pursuant to this chapter.

This means that an organizer of a private family trust company can choose to be unlicensed and carry on its business with the full blessing of the state without obtaining a trust license from Nevada’s Financial Institutions Division.

Reaction to the New Laws

The reaction to Nevada’s trust company overhaul has been mixed. Les Revzon, an officer with Summit Trust Company, which has been in business since 2004, said reforms were needed. Revzon said: “By promoting the increase in capital and entry requirement standards, Nevada is raising the bar and will attract higher quality institutions.” Revzon added: “Summit already maintains $1 million in regulatory capital and we are pleased to see that now everyone else needs to measure up.”

Christopher Holtby, a Dallas-based wealth manager, said for a wealth manager that has less than $1 billion under management, Nevada makes no economic sense. The cost to maintain $1 million of capital and to support a stand-alone office with full-time staff makes Nevada cost prohibitive for any start-up.

Holtby and several other Dallas area wealth managers chose South Dakota over Nevada to launch Wealth Advisors Trust Company when they learned of the proposed changes in Nevada earlier this year. “The $1 million requirement did not bother us, but we felt that made no sense for a non-custodial institution. Also, that together with our group’s overriding concerns with Nevada’s surge of bank failures and reputation with gambling made South Dakota a better choice.”

Holtby continued: “Perhaps if you are a Morgan Stanley or LPL, Nevada may be the right fit for a trust company. But, I see those firms selecting Delaware over Nevada now with similar requirements. Delaware is a mature well-known trust center with close proximity to the east coast, with plenty of trust talent.”

All of the trust companies interviewed had no problems with the new law. They were pleased with the new rules because they are specific and clear. Most were pleased with the way Commissioner Burns was running the agency, including the handling of examinations. Revzon said: “The two examinations he oversaw on behalf of Summit Trust, the auditor was well trained, very professional, fair and reasonable.”

The Road to Reform

Reforming Nevada’s trust statues which go back to the 1940′s was no easy task. The quest to increase the capital requirements and modernize the licensing and supervision rules governing trust companies began over two years ago in early 2007.

The first proposal was introduced by Commissioner Burns’ predecessor Steve Kondrup for the 2007 Nevada legislative session. The bill, SB-537, asked for similar reforms found in SB-310 but with a $2 million capital requirement. The bill died before it could be heard since the Senate Committee Commerce Chairman Randolph J. Townsend thought the proposal was out of touch with the needs of the industry.

FID’s second attempt to close the loophole came in the form of proposed regulations by the Commissioner of Financial Institutions. On August 20, 2008, proposed regulations to the existing trust company law, NRS 669, were introduced. The regulations titled LCB File No. R134-08 were posted on the agency’s web site.

Most of the content from the 2007 Nevada legislative attempt was inserted into these regulations almost verbatim, making it seem the Commissioner was trying to bypass the approval required by the Nevada Legislature and Governor Jim Gibbons.

This proposal included a requirement that a trust company maintain $2 million in regulatory capital. In addition, there was an unusual provision added in Section 9 of the proposed regulations. It states: “Evidenced that a majority of the operations of the trust company serve residents of the state.” This meant a Nevada trust company would have to do more than half its business only with Nevada residents. This unusual requirement had no precedent anywhere in the country.

The procedure for promulgating regulations in Nevada requires a public hearing, called workshops so that those affected might have a chance to comment and hopefully prevent unnecessary and over-burdensome rules to be created. Among those in attendance was John P.C. Duncan who testified in opposition.

Duncan was concerned that the family trust companies he formed on behalf of his clients might be affected by these requirements. It was Duncan’s arguments which reportedly led to the Nevada FID withdrawing the regulations without further contention. By the time those regulations were withdrawn the window of time that the Nevada Financial Institution Division could introduce a bill in the next legislative session was coming near.

At that point, the Nevada FID abandoned its further attempt to control the trust companies through regulations. It set its sights on a higher and better target of actually getting the law changed. At that point the Division introduced a first draft of SB-310 on March 16, 2009 which contained much of what was requested in the proposed regulations.

Duncan said, according to my interview, that he followed the bill through the legislative process. He realized that if he didn’t reach out to Commissioner Burns, that his private trust company clients could become trampled and caught up in this new far-reaching proposal.

Duncan persuaded Burns that his chances of success were much greater with his help and his trust company credentials in front of the legislature. Duncan was the architect of New Hampshire’s trust company law overhaul and wrote the model trust company law for the Conference of State Bank Supervisors.

Commissioner Burns, according to Duncan, readily agreed to allow Duncan and the Nevada Bar Association retain its existing dominion over private trust companies if Duncan signed on and supported the Commissioner’s proposal for major retail trust company reform.

On April 6, 2009, Duncan delivered and provided testimony before the Senate Commerce and Labor Committee hearings on SB-310. Duncan said: “Can Nevada not only remain but become an even more attractive state for trust companies and family trusts and the good jobs associated with them, while at the same time providing superior protection to the assets and financial health of their clients and trusts?” He added: “In my opinion the clear answer to this question is yes.”

When the Senators heard him say that jobs might be created they easily went along and approved the bill. It was his testimony urging passage of SB-310 that closed the deal for the Commissioner. With only modest compromises, the bill wound up on the governor’s desk for signing on May 30, 2009.

The question still remains: will the reform of the trust company rules really create employment for Nevada as Duncan suggested? Of course, only the future can tell.

However, can a state deep in debt, suffering from a flood of bank failures and the worst housing and mortgage crisis in modern history find prosperity from tightening trust company rules? The likelihood that J.P. Morgan, Merrill Lynch and Citigroup will be lined up at the Nevada FID’s doorstep next Thursday remains to be seen.

As for John P.C. Duncan, the future is clear. His incredible reputation as a trust company law reformer and the nation’s leading expert on private trust companies has assured him a lucrative franchise by continuing to create both regulated and unregulated Nevada private family trust companies.

Duncan said that family trust companies in Nevada under this new set of rules are groundbreaking. He said: “It provides the best possible environment for hosting family trust companies.” He added that beginning October 1st he has five family trust companies that he will set up under the new rules.

Industry insiders have different opinions what motivated Commissioner Burns to promote reform. Las Vegas based financial institutions attorney Matthew Saltzmanwith the law firm of Kolesar and Leatham said he thought allegations of wrongdoing by several Nevada trust companies last year motivated the Commissioner to push for changes. Saltzman said that Burns did not want to see Nevada become a “Tijuana of Trust Companies” where trust companies establish themselves under Nevada’s relatively low capital requirements and then operate in other states. Saltzman’s firm represents many Nevada trust companies, including several that have been the subject of the regulators compliance actions. He is currently appealing the Nevada FID’s denial of a trust company license application that was filed shortly after Burns was appointed Commissioner.

Scott Walshaw, Nevada’s former FID Commissioner said there was no loophole that needed to be closed. “The Commissioner always had the power under the existing rules to require a trust company to put up any amount of capital he deems fit, including $1 million.”

Walshaw would not comment of what he thought of the new rules, but both Saltzman and Walshaw agree that the proposal will not likely attract the big banks and large financial organizations as promised. Walshaw added: “If they hadn’t come to Nevada already they certainly aren’t going to come now.”

Jerry Cooper, senior editor, The Trust Advisor Blog. Steven Maimes contributed to the reporting.

Private trust companies or family trust companies cater to ultra-high-net-worth individuals with at least $100 million in investable assets. These trust companies which have been set up by families to avoid the necessity of using third-party trust companies and who have special assets such as closely held family businesses, real estate or partnership interests or don’t feel comfortable handing over their assets either to an individual or to a big trust company to manage.

Private trust companies often have boards set up with various committees that enable family members from many generations of branches to be involved in managing the family’s wealth.

Private trust companies launches hit a peak in 2007 with 4 launches and when they were chronicled in a Wall Street Journal article; Wall Street Journal; Matters of Trust: Super-rich Setup Companies. According to the WSJ story, private trust companies have been promoted by private trust company expert John P. C. Duncan, a Chicago lawyer. Duncan reported, in 2007, that the numbers have increased because more trust lawyers have touted their benefits.

TRUST COMPANY TRENDS

South Dakota public trust company start-ups have surged this year. Last month, The Trust Advisor reported an increase in start-ups nationwide including South Dakota. With five launches completed and several other now awaiting filing, 2009 will likely become a record year for the State.

SHIFT TO NEVADA?

Perhaps the reason for the decline in South Dakota is that many trust lawyers are waiting for a new Nevada law to become effective October 1, 2009,  Nevada SB-310 which permits private family trust companies to be setup without special licensing and without regulatory capital. Previously, Nevada required private trust companies to have $300,000 of regulatory capital.

Earlier this year, Duncan testified at a Nevada State Senate Hearing in support of SB-310, endorsing higher capital requirements for public institutions and no licensing or capital requirements for private family trust companies.

L. Scott Walshaw, Nevada’s former banking commissioner and regulatory advisor with Garrison Institutional said, “It’s too early to determine that the decline in South Dakota is a definite trend. There is not enough data to statistically validate any conclusions.”

Walshaw added, “Besides the year is not over and there could be ten filings before the end of the year. As for the shift to Nevada no one knows how many new trust companies will be incorporated under SB-310.”