More than 6½ years into the bull market, many investors still haven’t regained their confidence.
That, at least, is the impression two high-level strategists at Charles Schwab find when they speak to clients. Despite a rally that has seen the S&P
At a time when Nevada is suffering from the worst financial crisis since the great depression, Nevada’s top banking cop George E. Burns says he’s done a good job keeping the state’s financial institutions safe.
You would think all this tough regulation would be good for the state. But nothing Burns has accomplished has helped bring in new investors from other states and abroad, create jobs, boost home prices or restore Nevada’s soiled banking reputation.
As a matter of fact, experts say, he’s made matters worse because his red-tape regulation has sent new banking and trust business to other states.
After years of watching the Nevada trust industry shrink despite some of the best fiduciary statutes around, state lawmakers are now considering a bill that would stop Burns from his binge of “regulations gone wild.”
In an effort to slow Burns down from promoting new rules, Nevada Senate Bill 198 was introduced last week before the Nevada legislature. It is a straightforward attempt to restore the competitive advantages that once enticed out-of-state trust companies to come to the Silver State.
Sponsored by Senator Michael Roberson, the proposal fine-tunes the application process, clarifies the interstate branching rules and aims to eliminate the requirement that forces trust companies to set aside at least $500,000 of their reserves in cash.
However, while Burns is officially lukewarm on most of the bill’s provisions, he draws a line at loosening the cash requirement — apparently because if a trust company fails, selling off its stocks and bonds would be be too much trouble.
“Readily available cash to fund the costs of receivership is essential because the ability of the state or receiver to liquidate securities portfolios is cumbersome and protracted,” he testified in a recent Nevada state hearing.
How much cash does the “king” need?
By his estimates, it takes at least $500,000 to $1 million to wind down a failed trust company’s affairs, so it makes sense that every Nevada-chartered vendor keep that much capital on hand in the event of disaster.
But in a world where elite family offices and other entities looking to set up trust companies can pick and choose where they want to do business, this actually seems a little too “prudent.”
Nominally “conservative” states like New Hampshire — which actually disparage the Nevada rules as too loose to protect consumers — are fine with trust companies investing their entire reserve in marketable securities and earning a decent return on their capital.
Back when Nevada only insisted on $300,000 from trust companies — exactly what the regs want from start-up depositary banks, incidentally — the net opportunity cost of sinking $150,000 into near-zero-yielding Treasury bills was relatively small.
After the state tightened the rules in 2009, potential entrants are finding it easier to go to South Dakota, which only mandates $200,000 in cash.
“Now that the minimum capital has increased to $1 million, it is impractical for companies to maintain half their equity in cash,” Las Vegas trust attorney Matthew Saltzman tells me.
When pressed in the hearing, Burns conceded that he’s not really married to the $500,000 cash minimum. He just wants Nevada-chartered trust companies to keep as much cash as possible to ease the “cumbersome” task of liquidating the portfolio in a worst-case 2008-level scenario.
And while cash may be king, he’s also been quoted as defending troubled Nevada banks on the grounds that numbers are “not the entire picture.”
At the time, he said regulators need to consider “qualitative factors” like management, business plan and active oversight — which would arguably mean the character of a would-be trust company operator is the kingmaker.
Return to the Delaware of the West
As it is, Nevada under Burns’ watch has seen the number of trust companies licensed to do business drop significantly while the roster in South Dakota has practically doubled.
Insiders tell me they suspect there hasn’t even been an application for a Nevada charter in years, which has cost the state a bit of revenue in lost fees.
Although trust companies don’t employ hordes of people, every white-collar job that Nevada can lure to the state — where unemployment only recently dipped below 14%, compared to South Dakota’s 4% — counts a lot to lawmakers and the people who vote for them.
State Senator Michael Schneider, who chairs the committee reviewing the bill, noted in the hearing that it’s desirable that Nevada strive to regain its mantle as the “Delaware of the West,” Saltzman says.
Of course, there are issues of public safety to uphold. Burns’ testimony brought up the unfortunate case of Enterprise Trust Company, which had a Nevada charter but only a token physical presence in the state.
With only $300,000 in regulatory capital, Burns estimates that Enterprise clients lost $48 million. Under the new rules, of course, they would have still lost over $47 million, so the real burden is always going to be on the backs of the regulators, not the regulatory capital.
In that light, it’s admirable that, as Burns says, “gone now are the past days of anyone with a little capital coming to Nevada, easily securing a trust license, hanging it in a resident agent’s office, and heading off somewhere else.”
But as David Dunn — longtime Las Vegas resident and CEO of South Dakota-chartered Kingsbridge Trust — can attest, it’s a fine balancing act between making it tough for the shady operators and making it too tough for the legitimate vendors.
Dunn was probably one of the last people to consider a Nevada trust charter, but as the new rules were set in motion, he choose South Dakota instead.
Dunn asked Burns at the hearing, “Where were your examiners before Enterprise failed?” Burns never replied.
Burns is facing background noise about whether he has enough of the new governor’s confidence to stay on as commissioner.
Since taking office in January, Governor Brian Sandoval has fired two agency chiefs, the heads of Nevada’s Tax and Mortgage divisions: one for incompetence, the other for being a political liability. Questions remain whether Burns will be the third to go.
Scott Martin, contributing editor, The Trust Advisor Blog. Jerry Cooper and Steve Maimes contributed to the editing and research.
After sweeping “loophole closing” overhaul last year, banking chief proposes more “business unfriendly” rules designed, experts say, to thwart newcomers and choke local firms with costly compliance.
BREAKING NEWS – November 3rd – 5:00 pm
The Trust Advisor Blog has been notified that the full regulatory hearing scheduled for Thursday, November 4th has been cancelled due to lack of advance notice to Nevada’s trust firms.
George E. Burns and his banking agency, the Nevada Financial Institutions Division, intend to strike trust firms once again with new rules that go beyond federal trust requirements.
Only a year after Nevada’s legislature effectively took away the low capital entry rules for trust companies looking to do business in the state — which we reported here — the FID is gearing up to tighten the rules even further.
On the surface, NAC 669 — which just passed its workshop October 21 and is now slated for a full regulatory hearing on Thursday, November 4 — reads like a fairly straightforward clean-up of some of the points that last year’s rules left vague . . . and then some.
The distinction between “retail” and “family” trust companies gets pinned down, and so do the requirements for creating a branch office out of state.
However, even the clarifications are making local FID watchers scratch their heads.
I spoke to officials from several Nevada trust companies, but no one would go on the record for fear of retaliation. But outspoken Matthew Saltzman, an attorney at Las Vegas law firm Kolesar & Leatham, gave us plenty to talk about.
“They accomplished the dramatic stuff with the legislation enacted in the last session, so this seems to be more in the line of housekeeping,” says Saltzman.
“But some of the new rules are troubling and perhaps legally problematic,” he adds.
Shoot first, ask questions later
One of the issues that worries Saltzman is that under NAC 669, the FID can shut down a state-licensed trust company immediately and unilaterally if it suspects something goes wrong — but there’s no firm timetable for letting the trust company defend itself.
If the new rule passes, trust officers served with a cease and desist order have the right to ask for a hearing, but Saltzman notes that there’s nothing specifying when that hearing will happen.
“It could be months,” he explains. “And in the meantime, your business is shut down. This is a fundamental denial of rights to due process.”
The fact is, mistakes happen. The FID made headlines early last year by slapping a cease and desist order on celebrity Las Vegas pawnbroker ‘Pawnstar” Rick Harrison for looking like an unlicensed lender, only to withdraw the order when it turned out he wasn’t technically lending money after all.
But, Saltzman adds, unless there’s a system in place for catching mistakes like that fast, a trust company that’s unfairly accused could bleed to death before clearing its name.
NAC 669 also mandates that trust companies seeking an opinion from the FID have to pay its legal costs plus $1,000. Insiders warn that this only makes it more expensive for people who need to deal with the regulator, while discouraging everyone else.
“This appears to be a way for the FID to cover themselves while making things more difficult for the public to do business with them,” says a veteran of the process who talked to The Trust Advisor on condition of anonymity.
Doesn’t like phone calls from other regulators
Officials from one trust company told the Trust Advisor that Burns kept getting phone calls from a [unnamed] banking regulator in a southern U.S. state. The regulator complained that this Nevada trust company was operating in his state without supervision.
Each time the Nevada FID examined the firm, it found it 100% in compliance.
But to squelch the phone calls, the Nevada FID is proposing a provision to the regulations that would require the firm to obtain a trust license in the southern state with a huge regulatory capital burden, thus effectively exiting Nevada in the process making the supervison of the trust firm the complaining regulators problem.
The proposed regs also make would-be trust companies who get their application for a Nevada license denied appeal their case back to the commissioner who denied the application in the first place.
“That doesn’t appear to make much sense and probably wastes everyone’s time,” Saltzman says.
In theory, the commissioner could simply replace himself in an appeal or other application hearing. But in practice, unless the applicant had something new to put on the table, it looks like NAC 669 means the first decision is final.
This raises questions of potential conflicts of interest down the road and may even be unconstitutional, Saltzman says.
“We may have a great commissioner now, but we don’t know who the commissioners will be in the future,” he explains. “We don’t want to have laws and rules that depend on the unchecked judgment of a single person. You have to make them work forever, no matter who’s in charge.”
There are mixed views on the Burns administration. Industry observers say that Commissioner Burns promoted reforms to deal with allegations of wrongdoing by several Nevada trust companies in 2008. The view, at the time when SB-310 was introduced he 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 represented many Nevada trust companies, including several that have been the subject of the regulators compliance actions.
Burns may be out soon
Another confidential source tells us that if Brian Sandoval wins the gubernatorial election on Tuesday, November 2nd, as expected, the current FID commissioner may be replaced in any event.
He added, “We have compelling evidence that Burns issued bogus C&D orders that FID wound up recinding and wasted agency resources with baseless fishing expeditions.”
The campaign to “modernize” the then-booming Nevada trust industry only choked off applications from firms looking to do business in the state — leading one of the oldest Nevada trust companies to abandon its charter — and there are calls for a more business-friendly hand on the wheel.
Encouraging trust companies has translated into plenty of jobs and revenue for South Dakota, for example, and over the last year, locals from Reno to Henderson have told The Trust Advisor they’d love their state’s favorable statutes to open up similar opportunities for Nevadans.
Saltzman concluded that unless there is a change, newcomers seeking trust charters are likely to continue to launch somewhere else.
Scott Martin, contributing editor, The Trust Advisor Blog. Jerry Cooper and Steven Maimes contributed to the research and reporting.
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.
“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.”
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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After two failed attempts, determined regulator succeeds in closing Nevada’s low capital loophole.
LAS VEGAS, NV. Sept 25 – This Thursday, October 1st, 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:
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:
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:
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.
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