Authorizing trust companies to make affiliated investments and to receive fiduciary compensation for making such investments

Summary of provisions

Section One. Adds a new section 100-e to the Banking Law. New section 100-e has four subdivisions.

Subdivision 1 contains five definitions, of affiliate, affiliated investment, fee or commission, investment, and trust company.

Subdivision 2 authorizes trust companies to purchase, sell, hold, or otherwise deal with an affiliate or affiliated investments, including hedge funds, private equity vehicles and other non-traditional investments already authorized under the Prudent Investor Act for trustees to invest in. It also makes clear that trust companies engaged in such investments, so long as they satisfy the conditions in subdivision 3, may receive their full trustee commissions.

Subdivision 3 requires that any trust company seeking a trustee commission disclose to each principal in an agency relationship and all current recipients of account statements all fees and commissions either being paid by the account or being received by an affiliate. The disclosure must be given at least annually unless there has been no increase in the rate of commission or fee since the last disclosure. Disclosure could be provided directly or through providing a copy of a prospectus or other State or federally approved securities disclosure.

Subdivision 4 makes clear that trust companies in compliance with subdivision 3 have full authority, including proxy voting rights, to administer an affiliated investment.

Section Two. Provides that the bill will be effective upon enactment.

Justification

This legislation would authorize New York corporate trustees to invest the trust funds of trusts they manage in investments offered by their corporate affiliates or in investments in which they have an interest. It will provide additional flexibility in investing to corporate trustees and to grantors establishing trusts in New York.

Currently, New York corporate trustees are authorized to invest the funds of trusts they manage in registered investment companies, mutual

funds and common trust funds with which they are affiliated. Under the Prudent Investor Act (EPTL section 11-2.3), they can invest in a broad range of other types of investment vehicles, including such alternative investments as private equity funds, hedge funds, limited liability companies, limited partnerships, venture capital investments and other sophisticated investments. In the absence of language in the trust instrument or a court order, however, New York corporate trustees may not invest in these alternative investment vehicles if they are affiliated with them. This legislation would broaden the investment authority of corporate trustees to permit them to invest trust funds under management in alternative investment vehicles with which they are affiliated and which they may have a much higher degree of knowledge. Alternative investments offered by its own affiliates will almost always be more transparent to the corporate trustee than will be those offered by third patties.

Furthermore, corporate trustees must provide a range of additional trust services in addition to the investment management decision needed to select a particular investment. Such services include periodic reporting, ensuring that beneficiary needs are identified and met, filing of tax returns, oversight of all investments and record-keeping. The costs of these services are over and above the cost incurred by investors in an alternative investment vehicle and should be compensated. This legislation will allow trustees to accept a trustee commission as well as having their affiliates accept the normal compensation provided for the type of affiliated investment offered. Competition among corporate trustees for grantor trust business will continue to ensure that this compensation remains reasonable.

In providing trustees and grantors needed flexibility while protecting the interests of and financial returns for beneficiaries, this legislation will begin the process of updating and modernizing those laws in an effort to keep busts and the employees who manage and administer them in New York.

Legislative history

New bill.

Fiscal implications

None.

Effective date

Immediately.