Financial Services

A Primer on Nondepository Trust Companies

February 8, 2010

New Hampshire has carved out a niche as the best state in the country to organize a nondepository trust company. A nondepository trust company is a bank without depository or lending powers. In practical effect, a nondepository trust company provides only fiduciary services.

Over the years, New Hampshire has streamlined the application and regulatory process and has amended its laws governing trusts so that they are among the most sophisticated in the country. Many companies have taken advantage of the state’s experienced regulatory environment. Recently, as federal regulators have tightened client protections under securities laws governing investment advisors, a number of firms have formed nondepository trust companies in New Hampshire to serve as qualified custodians to complement their advisory functions. A list of nondepository trust companies is maintained on the website of the New Hampshire Banking Department.

Organization and Operation of Nondepository Trust Companies in New Hampshire

The New Hampshire Banking Department is responsible for the regulation of nondepository trust companies under NH RSA Chapter 392 and other state banking statutes. Currently, charters are obtained through application to the Board of Trust Company Incorporation (Board), although there is a bill, House Bill 1459, pending in the New Hampshire Legislature to dissolve the Board and give full jurisdiction to the department.

Typically, the process begins with a pre-filing meeting with representatives of the department to generally discuss the plans for a new nondepository trust company. Three persons may petition for the charter; however, more commonly nondepository trust companies are formed as part of a holding company and only the immediate parent company is required to be the applicant. The advantage of this latter approach is that for an out-of-state company, the majority of its managing board does not have to be New Hampshire residents, whereas that would be required in a non-holding company structure. The application fee is currently $5,000, but may rise to $10,000 if pending House Bill 1613 is enacted. The principal features of the application are the identification of the management team, the business plan and three years of pro forma financial projections. There must be a managing board of at least five persons. There is a standard background check and fingerprinting requirement on the prospective managing members and officers, consistent with other banking applications.

The minimum capital for a nondepository trust company is $500,000. The regulators may increase this amount based on the risks of the enterprise. This amount must be invested in approved investments, such as treasuries or high grade corporate bonds and securities. Working capital must be provided in addition to this minimum amount. There is also a requirement that an amount of up to $1,000,000 be pledged to the Banking Department in the form of approved investments or a surety bond to be available in the event of a failure of the trust company to cover the costs of dissolution. It has been the experience of recent applicants that the full amount is required to be pledged.

A nondepository trust company may be in corporate or limited liability form. Typically, reference is made to the corporate and limited liability company statutes to the extent not inconsistent with the banking statutes to govern the internal affairs of the trust company.

A nondepository trust company is not required to have an office in New Hampshire – but some companies maintain a nominal presence so that they have a presence in the state.

Once the application is filed and accepted as complete, a notice is published in a newspaper of state-wide circulation seeking comment. The staff of the Banking Department will review the application, seek clarifications if necessary and conduct interviews with the prospective board of directors or managers. If the staff is satisfied with the application, then it will pass the application on to the Board for action. The Board will review the application and recommendations from the staff at a public hearing and then either approve or deny the application.

If the application is approved by the Board, then the organization of the nondepository trust company may be completed. The charter must be filed with the Secretary of State. When all of the pieces are in place, the Banking Department will give a final review and, if satisfied, issue a certificate of authority to engage in business. If an application is rejected, the applicant can re-file, but must pay an additional re-filing fee equal to the original fee paid.

If an applicant is well organized, the process can be completed in as little as four months.

Once up and running, the trust company can expect an examination within the first year of operation and then every 18 months thereafter. The Banking Department basically follows the examination standards of the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. The actual costs of examination are paid by the trust company. There is also an annual assessment based on the amount of its assets (including trust assets for which it is acting in a fiduciary capacity) to cover, along with other banks and licensed financial companies, the general overhead expenses of the Banking Department. The costs are proportionately allocated among the institutions based on the size of their assets. With respect to nondepository trust companies, 25% of assets up to $5 billion are counted, and there is a stepped percentage decrease in its assets above that amount. In 2009, a nondepository trust company having $500,000 million in assets would have paid approximately $4,000; $1 Billion, approximately $8,000; and $5 Billion, approximately $38,000 (these amounts vary from year to year based on the Banking Department’s expenses and the assets of the companies sharing the cost).

A nondepository trust company is required to file quarterly call reports with the department that are similar to those filed by other banking institutions with the FDIC.

If you wish to discuss the features of nondepository trust companies in more detail, please contact John Funk at 603 228-1181 or . Attorney Funk has extensive experience in the formation and operation of nondepository trust companies. Please look for his next article on family fiduciary services companies, a subset of nondepository trust companies designed for exclusive family use.

* John Funk is admitted in New Hamsphire, Massachusetts and Vermont.

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