Request By:
Honorable Leonard B. Marshall, Jr.
Secretary, Public Protection and
Regulation Cabinet and
Commissioner, Department of Banking
and Securities
911 Leawood Drive
Frankfort, Kentucky 40601
Opinion
Opinion By: Steven L. Beshear, Attorney General; By: Penny R. Warren, Assistant Attorney General
Re: Trust Company Application
You advised that the Department of Banking and Securities has received an application to certify a trust company to transact business in Kentucky. You indicate this applicant is the first in modern history not to be affiliated with a chartered bank and is the first ever in Kentucky to be affiliated with a non-bank corporation. In light of the absence of legal precedent you ask whether KRS Chapter 287 adequately provides for such an institution and seek guidance on such questions as minimum capitalization, regulatory powers of your agency, and limitations, if any, on conflicts of interest and statewide branching.
Our review of KRS Chapter 287 reveals that the terms "bank," "trust company," "combined banking and trust company," "bank and trust company," "bank or trust company" and "state bank" are used throughout the chapter in a rather loose fashion so as to engender confusion regarding the commissioner's authority to certify a trust company which is not affiliated with a banking institution. Compare, for example, KRS 287.010 ("bank," "trust company," "'state bank' means a bank or trust company . . ."); KRS 287.020 ("banks or trust companies"); 287.040 ("bank," "trust company," "bank and trust company"); 287.070 ("bank or trust company"); 287.090 ("bank"); 287.140 ("bank, trust company or combined bank and trust company"); 287.190 ("bank or trust company"); etc.
Initially, in Kentucky, the activities of banks and the activities of trust companies were clearly separated as evidenced by 1893 Acts, ch. 171, § 75, which stated: "No trust company, hereafter organized, shall engage in a banking business, or buy or sell bills of exchange." Modern statutes, however, appear to reflect the long-standing combination of such activities in banking and trust institutions. KRS 287.010(1) includes the following definitions:
"(a) 'Bank' includes every corporation authorized by this chapter to do a banking business;
"(b) 'State bank' means a bank or trust company organized pursuant to KRS Chapter 287;
* * *
"(g) 'Trust company' includes every corporation authorized by this chapter to do a trust business; . . ." (Emphasis added.)
KRS 287.190 notes the following powers common to banks and trust companies:
"Any bank or trust company may accept for payment at a future date drafts or bills of exchange drawn upon it by its customers, issue letters of credit authorizing the holders thereof to draw drafts upon it or its correspondents at sight or on time, and accept or discount acceptances."
Trust companies are granted additional powers related to a trust business under KRS 287.210 and additional powers for banks are noted in KRS 287.180.
Immediately apparent is the fundamental question of whether a trust company exercising some banking powers would automatically be deemed a "bank" for all purposes of Chapter 287. Prior Kentucky case law supports a contrary conclusion. In Dietrich v. Rothenberger, 25 Ky. Law Rep. 338, 75 S.W. 271 (1903), the Court distinguished the activities of trust companies and banks as follows:
"'The distinction between a bank and trust company is well defined. The powers of the trust company depend upon the terms of its charter, of course, but they are not banking powers. The trust company, like the savings bank, pays interest upon deposits, but its deposits are strictly loans, not subject to check. It may not issue its own notes for circulation, nor does it buy or sell exchange in the ordinary course of its dealings. . . . The exercise by a trust company of some of the functions of a bank does not make the company a banking institution, nor lay its officers liable to prosecutions for violating the banking laws.' Banks receive deposits subject to check. They are public agencies created for the public service, and are required to serve the public." Id. at 272.
Although this case was decided at a time when trust companies were prohibited from engaging in a "banking business, " the Court noted the following additional analogies:
"An express company is not a bank, although it draws and sells bills of exchange. Wells, Fargo & Co. v. Northern Pacific Railroad Co. (C.C.) 23 Fed. 469. Nor is a corporation a bank, which borrows money for its own use on bonds." Id.
In Young v. Bankers' Trust Company's Receiver, 250 Ky. 1, 61 S.W.2d 904 (1933), the Court distinguished a combined bank and trust company's duties as trustee from its other duties and held that only a court could appoint a successor trustee for the active trusts held by the company when it closed its doors. The power of the banking commissioner to act as receiver during liquidation of other operations was recognized but the commissioner was without power to assume the duties of trustee for the trusts.
The business of banking was defined in Marvin v. Kentucky Title Trust Co., 218 Ky. 135, 291 S.W. 17 (1927), as:
"Having a place of business where deposits are received and paid out on checks, and where money is loaned upon security, is the substance of the business of a banker." Id. at 18.
That case recognized, however, that "present day banking business is not to be confined to the narrow limits of its original inception" and that "the matter must be considered in a practical way and in light of modern conditions." Wilson v. Louisville Title Company, 244 Ky. 683, 51 S.W.2d 971 (1932), excluded the activities of a real estate title insurance company from the following definition of bank:
"A 'bank' is ordinarily understood to be an association or corporation whose business it is to receive money on deposit, to cash checks or drafts, to discount commercial paper, and to make loans. That is what the average reasonable man understands a bank to be." Id. at 972.
Although, by statute, the title company had the power to do general banking business and trust company business, the Court noted there was no evidence the company engaged in those activities. Thus the title company was held to be excluded from the jurisdiction of the commissioner of banking and subject only to the jurisdiction of the insurance commissioner. KRS 287.180(1) includes the following activities in the "business of banking" :
"discounting and negotiating notes, drafts, bills of exchange and other evidences of debt, and . . . purchasing bonds, receiving deposits, and allowing interest thereon, buying and selling exchange, coin and bullion and lending money on personal or real security."
Unless the activities of the applicant would be such as to place it squarely within the statutory definition of a "corporation authorized by [Chapter 287] to do a banking business, " it should be treated as a separate and distinct form of financial institution if possible.
The next fundamental question is whether the language of existing statutes permits the commissioner of banking to make such a distinction. Some provisions, such as KRS 287.010(1)(a) and (g), 287.040(1) and (3), 287.100, and 287.110, support an argument that separate trust companies might exist. However, other language suggests that this result was not anticipated by the current legislation. For example, KRS 287.010(1)(b) defines "state bank" as "a bank or trust company organized pursuant to KRS Chapter 287." KRS 287.020(3) authorizes the commissioner of banking and securities to "prescribe, amend and appeal regulations authorizing banks or trust companies to engage in any banking activity in which such banks could engage were they operating as national banks at the time such authority is granted . . ." KRS 287.060 includes, among conditions precedent to issuance of a certificate to any bank, trust company or combined bank and trust company, the following:
(3)(b) "The commissioner has received satisfactory proof that the accounts of the institution's depositors will be insured by the Federal Deposit Insurance Corporation; . . ."
It is our understanding that this applicant would not accept deposits requiring FDIC insurance. It is not insignificant that "bank" was formerly defined to include "all banks, trust companies, savings banks, combined banks, real estate mortgage companies . . . and combined banks and trust companies." Kentucky Statutes, Carroll's edition, § 165a-1. Subsequently, separate chapters have been established for petty loan companies (Ch. 288), savings and loan associations (Ch. 289), credit unions (Ch. 290), investment companies and industrial loan corporations (Ch. 291), and mortgage loan companies (Ch. 294), but trust companies continue to be included within Chapter 287 relating to banks.
Assuming for purposes of argument that the FDIC insurance requirement could be met and that legislative intent could be interpreted to encompass a trust company which is not affiliated with a bank, the following considerations would be relevant:
1. General Qualifications
The applicant must meet the requirements of KRS 287.040(3) relating to number of organizers; KRS 287.050 regarding capability of the incorporators and probable success and public advantage of the institution; and KRS 287.060 relating to director's oath and compliance with other minimum statutory requirements.
2. Capitalization
KRS 287.070 establishes minimum capital stock requirements for "any bank or trust company." These amounts, plus additional capital surplus under KRS 287.080, must be paid before commencing business. The same capitalization required for a bank is required for a trust company. Combined bank and trust companies must be capitalized in an amount "not less than twice the amount stated in subsection (2) of this Section." These amounts, adopted in 1954, may be wholly inadequate today.
KRS 287.090 provides that "a bank" may not reduce capital below the amount required for organization and that all reductions in capital require approval of the commissioner. No mention is made of trust companies in this statute nor are trust companies encompassed by any comparable statute. It could be inferred from KRS 287.070 that the statutory minimums must be maintained throughout the existence of the financial institution; however, reductions in excess capital of trust companies would not require approval under KRS 287.090.
3. Branching
Branching of banks is restricted by KRS 287.180 and savings and loan institutions are limited by KRS 289.060. No similar restrictions appear to exist for pure trust companies. Consolidation of trust companies is authorized under KRS 287.150.
4. Conflicts of interest and self-dealing
Corporate fiduciaries have the same duties and responsibilities as individuals. KRS 287.325. Fiduciaries are bound by the terms of the trust document or will creating the trust. The standard applied to their conduct is the "prudent man." See KRS 386.710. To the extent not otherwise restricted, trustees have the powers enumerated in KRS 395.195 and KRS 386.810. Similarly, investment of trust assets is generally controlled by KRS Chapters 386 and 287. See, e.g., KRS 386.020, 287.110, 287.240. Trusts created after June 19, 1976, must be registered and judicial proceedings concerning administration and distribution of trusts may be initiated by "interested persons." KRS 386.675. While there is a historical recognition that trust companies, like banks, are to be supervised, visited and examined by the department of banking, primary enforcement action is by interested persons through the courts. See: Wilson v. Louisville Title, supra, and Young v. Bankers' Trust Company's Receiver, 250 Ky. 1, 61 S.W.2d 904 (1933); KRS 386.650 et seq. (trusts created after June, 1976). Where a conflict of interest exists, including an advantage to an affiliated or subsidiary company, trustee powers may be exercised only by court authorization. KRS 386.820(2). Fiduciary investment companies are controlled by the Department. KRS 386.570.
5. Regulatory Power
Defects in the Department's general regulatory power noted in Phelps v. Sallee, Ky., 529 S.W.2d 361 (1975), were remedied by amendment to KRS 287.020 in 1976. The commissioner's power is broadly defined as that "necessary to interpret and carry out the provisions and intent of this chapter." The following statutes may lead to disparate regulatory treatment of banks and trust companies in the areas mentioned.
A. Applicable to "banks" only:
1) KRS 287.030 -- right to engage in business and own stock
2) KRS 287.090, 287.095 -- approval required for reduction of capital stock, reporting of change of control or loans secured by 25 percent or more of voting stock
3) KRS 287.100 -- investment of funds; compare KRS 287.110, 386.020
4) KRS 287.180 -- branching, limitations, approval and minimum capitalization requirements
5) KRS 287.185 -- change of location
6) KRS 287.199 -- emergency closing of banks
7) KRS 287.375 -- retention of bank records
8) KRS 287.510 -- procedure when reserve becomes low
9) KRS 287.630, 287.640 -- transfer of assets and relief for aggrieved shareholders
10) KRS 284.690 -- cease and desist orders
11) KRS 287.800 -- notice of adverse claim to deposit
12) KRS 287.990(5) -- liability of directors for knowing violations
KRS 287.990(13) -- bar from recovering finance charges where revolving credit statutes violated
KRS 287.990(15) -- penalties for violations of cease and desist orders.
B. Applicable to trust companies:
1) KRS 287.150 -- consolidation of trust companies
2) KRS 287.210 -- powers of trust companies.
C. Applicable to "state banks" which includes trust companies by definition in KRS 287.010(1)(b):
1) KRS 287.160 through 287.174 -- conversions of state and national banks
2) KRS 287.380 -- removal of minor disability for educational loans.
D. Applicable to both banks and trust companies:
Generally the commissioner is empowered to control organization and initial capitalization of trust companies and to examine their activities regularly.
6. Existing regulations
While 808 KAR 1:010 defines "bank" to include trust companies, the regulations in Chapter 1 of Title 808 are aimed toward banks, savings and loan associations and credit unions. No provision is made for individual notice of application for a trust company certificate, 808 KAR 1:070, Section 1(2). Nor are there regulations explicitly concerned with the trust functions of pure trust companies, combined bank and trust companies or trust companies combined with some institution other than a bank. Little statutory provision is made for the Department to enforce compliance with the laws relating to trust companies, and any proposed regulations in this area should be scrutinized to ensure sufficient statutory safeguards or standards.
Also absent are regulations "to govern the conduct and management of all fiduciary investment companies having investment advisers other than national banks." KRS 386.570. However, by statute, the commissioner may exercise over these companies all powers and authority conferred for state banks and trust companies. Id.
It is our understanding that existing trust companies are supervised, examined and regulated in accordance with the heretofore applicable requirements of the FDIC or Comptroller of Currency, etc. These requirements would not automatically be applicable to the proposed institutional form.
7. Duties and Powers of the Banking Commissioner
KRS 287.011(2) states in part:
"The department of banking and securities shall exercise all administrative functions of the state in relation to the regulation, supervising, chartering and licensing of banks, trust companies, savings and loan associations, petty loan companies, investment and industrial loan companies, and credit unions, and in relation to the regulation of securities." (Emphasis added.)
KRS 287.020(1) authorizes the commissioner to "prescribe, amend and repeal such rules, regulations, forms and orders as are necessary to interpret and carry out the provisions and intent of this chapter." Articles of incorporation for banks and trust companies must be submitted to the commissioner under KRS 287.050 and he:
". . . shall investigate the financial standing, moral character and capability of each of the incorporators, and determine whether there is reasonable assurance of sufficient volume of business for the proposed corporation to be successful, and whether the public convenience and advantage will be promoted by the opening of the proposed corporation."
If the commissioner determines "it is expedient and desirable to permit the proposed corporation to engage in business," the articles are to be approved and filed. KRS 287.050(2).
In Marvin v. Kentucky Title Trust Company, 218 Ky. 135, 291 S.W. 17 (1927), the Court acknowledged that banks "are the depositories of most of the funds of the country" and "are quasi public institutions established and regulated by statute." The need to carefully guard the safety of funds was noted. Id. at 18. KRS Chapters 288-291 and 294 reflect a similar concern with management practices and security of other financial institutions. It is only upon the most strict and literal reading of certain provisions of Chapter 287 and upon application for a trust company charter without bank affiliation that this overall scheme of supervision and control of financial institutions begins to suggest gaps in the commissioner's authority. KRS 446.080 provides, however, that Kentucky statutes are to be "liberally construed with a view to promote their objects and carry out the intent of the legislature. . . ." A related maxim of statutory construction is that the courts should not presume the legislature intended an absurd result. George v. Alcoholic Beverage Control Board, Ky., 421 S.W.2d 569 (1967). To interpret KRS Chapter 287 so that trust company management and activities involving vast sums of money are beyond the control of the banking commissioner once the charter is issued would be such an absurd result. We further note that deference must be given to the expertise of the Banking and Securities Department and to their findings relating to the carrying out of their duties. Department of Banking and Securities v. Coleman, Ky.App., 594 S.W.2d 895 (1979).
In light of the foregoing discussion we conclude that, depending upon the findings of the commissioner based on his investigation, one or more of the following courses of action might be taken:
a) issue a limited charter, similar to those being issued by the Comptroller of Currency under 12 U.S.C. § 24 et seq., which would ensure necessary regulation and supervision of the company's activities;
b) seek declaratory judgment for further clarification;
c) decline the charter on the grounds that existing statutes and regulatory powers are inadequate for the commissioner to carry out his duties;
d) submit appropriate regulations applicable to all trust companies;
e) request legislative clarification when the General Assembly convenes in January, 1984.
We hope this information is of some assistance to you.