The New Florida Family Trust Company Act
The Florida Family Trust Company Act, signed into law by Governor Scott on June 13, 2014, created new F.S. Ch. 662. The act establishes a statutory framework authorizing the organization, operation, and regulation of family trust companies (FTC) in Florida. An FTC is an entity that provides trust services similar to those that can be provided by an individual or public financial institution, such as serving as a trustee of trusts held for the benefit of family members, while at the same time providing services typically provided by a family office, including investment advisory services, wealth management, and general administrative services. A Florida FTC must be owned by family members and must limit its services to members of one or two families and a limited number of key employees.1 There was no statutory authority for operating an FTC in Florida prior to the October 1, 2015, effective date of the act.
The need for statutory authority is evidenced by the fact that several FTCs are currently serving families in Florida. They were able to do so by obtaining private exemption letters issued by Florida’s Office of Financial Regulation (OFR), the state agency charged with supervising banks and trust companies in Florida. FTCs currently operating under OFR exemption letters will need to act quickly to comply with the act. Specifically, existing FTCs will need to apply to become licensed FTCs or register as unlicensed FTCs prior to the end of 2015 or cease operating in Florida.2
House Bill 825 (the glitch bill)3 was intended to improve the Florida Family Trust Company Act as passed by the 2014 legislature. It was hoped that the glitch bill would be passed prior to the act’s October 1 effective date. The bill was scheduled for a final vote on the House floor on the afternoon of March 28, 2015, the day the annual legislative session came to an abrupt end. This article sets forth the general licensure and registration requirements under the act and describes the act’s shortcomings, which the glitch bill was intended to remedy.
Existing FTCs Must Comply with the Act by Year-end or Cease Operations
The Estate and Trust Tax Committee of the Real Property, Probate and Trust Law Section of The Florida Bar drafted the act and the glitch bill to exclude existing FTCs operating under OFR exemption letters from compliance with the act.4 Unfortunately, the legislature’s failure to pass the glitch bill in its original form means that all FTCs currently operating in Florida must either apply to become licensed FTCs or register as unlicensed FTCs under the act before the end of 2015 even if OFR has previously issued them an exemption letter. There is concern that Florida may lose the opportunity to keep existing FTCs and attract new ones.
• Registration of Unlicensed FTCs — For FTCs that don’t wish to become licensed FTCs, compliance with the act’s initial registration requirements should not be difficult. Although OFR has yet to publish the application for registering an unlicensed FTC, it is expected that a prospective FTC need only provide the name of the FTC’s designated relative, the telephone number, and street address of the FTC’s physical office in Florida and the name and address of its registered agent in Florida. The FTC must pay a nonrefundable registration fee of $5,000, which will be deposited into the Financial Institution Regulatory Trust Fund. The funds will be used to administer the act.5 FTCs filing an application for registration under the act will also be required to provide OFR with a statement indicating that they will not engage in activities prohibited by the act including providing fiduciary services to the general public, advertising services to the general public, engaging in commercial banking, serving as a personal representative or co-personal representative of a probate estate administered in Florida, or serving as an attorney-in-fact under a power of attorney pursuant to F.S. Ch. 709.6 Finally, unlicensed FTCs will be required to maintain minimum capital of $250,000,7 which must be held in the form of cash or treasury obligations.8 The registration application for an unlicensed FTC, and even the minimum capital requirements, aren’t particularly burdensome.
More worrisome for existing FTCs and families considering forming new unlicensed FTCs are the potentially intrusive, mandatory OFR examinations, which unlicensed FTCs will be subject to under the act.9 The glitch bill would have exempted unlicensed FTCs from OFR examinations.10
• Application for Licensed FTCs — Existing or prospective FTCs wishing to become licensed FTCs will be subject to much closer scrutiny during the application process. The overwhelming majority of FTCs are expected to organize as unlicensed FTCs because they do not want the additional regulatory supervision applicable to licensed FTCs. Some FTCs, however, will prefer additional scrutiny in order to qualify for exemption from SEC regulation, to avoid adverse gift or estate tax consequences, or simply to give their families additional comfort that an independent agency is overseeing the operation of the FTC.
OFR will conduct an investigation of each prospective licensed FTC upon receipt of a completed application to determine whether the FTC satisfies certain requirements. In order to become licensed, an FTC must file an application with OFR, pay a $10,000 application fee, and undergo an initial investigation by OFR. The application for licensure will require FTCs to provide copies of the FTC’s organizational documents and certain other basic information including the FTC’s physical address and mailing address in Florida; a detailed description of services to be provided by the FTC; the name and background information for each 10 percent owner of the FTC and each individual expected to serve as an officer, director, manager, or member acting in a managerial capacity for the FTC; and the name or names of each of the FTC’s designated relatives. In short, OFR conducts a higher level of investigation into the persons who actively manage the FTC. The application process will include an examination of the FTC’s capital, fidelity bonds, and liability insurance. A licensed FTC applicant will need to describe the amount and form of its initial capital. Licensed FTCs with one designated relative will be required to maintain capital of at least $250,000. Licensed FTCs with two designated relatives will be required to maintain capital of at least $350,000.11 In addition to meeting capital requirements, licensed FTCs are required to obtain fidelity bonds and errors and omissions insurance protecting against losses incurred as the result of the bad acts of the FTC’s active management personnel. Licensed FTCs must maintain fidelity bonds in a minimum amount of $1 million on all active officers, directors, and other individuals acting in a management capacity;12 and must carry errors and omissions insurance with coverage of at least $1 million on its officers, directors, and other management personnel.13 These requirements don’t apply to unlicensed FTCs.
The background of persons responsible for the management of the licensed FTC will be examined. Persons in management positions cannot have a history of certain crimes involving dishonesty or violations of the banking laws. The prospective licensee must submit a statement, signed under penalty of perjury, affirming that none of its management personnel has 1) been convicted of or pled guilty to a violation of the financial institution codes of Florida or any similar state or federal law or a crime involving fraud, misrepresentation, or moral turpitude within the preceding 10 years; 2) served in any management position with a financial institution that had its license revoked in the preceding 10 years; or 3) had a professional license suspended or revoked within the preceding 10 years.14
The Benefits of Family Trust Companies to Florida’s Economy
The committee worked on the act for several years in an effort to create FTC legislation that would attract large family offices to this state and persuade family offices already in Florida to stay and form their FTCs in Florida. The committee reviewed FTC legislation in a number of jurisdictions and consulted with scores of family offices in an effort to ensure that Florida would become a destination of choice for families considering an FTC. Florida has inherent advantages over most other FTC jurisdictions, including favorable tax laws, modern trust laws, and, perhaps most significantly, geographic convenience. Many family offices find their way to Florida because senior family members have retired to Florida or have family members or trusted business advisors who have relocated to Florida. Geographic convenience is an important consideration when forming an FTC because the FTC must establish a business situs in its jurisdiction of organization in order to avail itself of a state’s favorable tax and trust laws. Attracting wealthy families to Florida creates a need for services and goods provided by Floridians, results in increased tax revenue, and benefits local economies, as well as the state as a whole.
It is important for both the FTC and the state of Florida to establish the situs of the FTC in Florida. Although the business situs of any particular trust is typically determined on a state-by-state basis, the domicile of the trustee and the location where the trust is administered are usually important considerations. An FTC will have a business situs in the jurisdiction where it conducts the majority of its trust business.15 In order to establish situs in a particular jurisdiction, an FTC should hold board meetings in that jurisdiction, store important documents in that jurisdiction, and establish and implement important policy decisions in that jurisdiction.16 If an FTC holds no meetings in its state of organization, has no directors, officers, or employees residing in that state and otherwise conducts no business there, it is extremely unlikely to have established situs in that state for purposes of determining which tax or trust laws apply to a trust for which the FTC serves as trustee. Family offices consulted during the drafting of the act believe Florida will become a favored FTC jurisdiction because many such offices already have family members in Florida or would prefer Florida as a destination for board and committee meetings over most other FTC-friendly states.
Perceived Deficiencies in the Act Addressed by the Glitch Bill
Florida won’t attract new FTCs or retain existing FTCs, however, if the act doesn’t offer a statutory framework that is competitive with or superior to the law in other FTC jurisdictions. Unfortunately, revisions during the legislative process and last minute changes to the legislation rendered Florida’s 2014 FTC legislation unworkable for many families considering an FTC. The act has two primary flaws: unlicensed FTCs are over-regulated under the act and licensed FTCs are under-regulated. The glitch bill was intended to remedy these shortcomings, as well as other lesser problems, and make Florida an immediate contender in the increasingly competitive FTC landscape.
• Scope of Examination: Unlicensed FTCs — The glitch bill would have eased the regulation of unlicensed FTCs by the Office of Financial Regulation. This was based upon the burdens of regulatory compliance under Florida law, a comparison of regulatory burdens for unlicensed FTCs in other states, the stated purpose of the Family Trust Company Act, and an effort to treat unlicensed FTCs as exempt under the 1940s Investment Advisers Act.
OFR is charged with supervising banks and trust companies in Florida. The act requires OFR to conduct mandatory examinations of every unlicensed FTC once every 18 months in order to determine that it is operating in compliance with Ch. 662.17 In addition, OFR may examine an unlicensed FTC at any time it suspects the FTC to be operating in violation of the act. OFR has not indicated how it intends to conduct examinations of unlicensed FTCs, but at a minimum, an examination would necessarily require a review of private family trust instruments, financial arrangements between the FTC and the trusts for which it serves as a fiduciary, and perhaps the propriety of the investments an FTC implements on behalf of its family trust clients.
The committee believed that the level of regulation for unlicensed FTCs was an important factor for attracting and keeping FTCs in Florida. An overwhelming majority of family offices considering forming an FTC will organize as unlicensed FTCs specifically because they do not want their private family matters subject to intrusive examinations. Other jurisdictions that offer an unlicensed or unregulated FTC option, most notably Nevada18 and Wyoming,19 do not subject unlicensed FTCs to examinations and will likely remain the jurisdiction of choice for unlicensed FTCs if the glitch bill is not ultimately enacted.
Examination of unlicensed FTCs is inconsistent with the purpose of the act. The act provides that “[u]nlike trust companies formed under [Ch.] 658, there is no public interest to be served [by regulating family trust companies] outside of ensuring that fiduciary activities performed by a family trust company are restricted to family members….”20 Early drafts of the family trust company legislation excluded unlicensed FTCs from OFR examinations. The glitch bill similarly eliminated OFR examinations of unlicensed FTCs, restoring the act to its original form.21 The elimination of mandatory examinations of unlicensed FTCs would not leave OFR powerless with respect to wayward FTCs. OFR would still have the ability to shut down an unlicensed FTC, which it determines to be operating in violation of the act through the use of broad cease and desist powers.22
The examination of unlicensed FTCs is not only inconsistent with the express purpose of the act, it is inconsistent with the decades-old determination of the U.S. Securities and Exchange Commission (SEC) not to regulate family offices as investment advisers under the Investment Advisers Act of 1940. Congress and the SEC determined that family offices, which are analogous to FTCs, should not be subject to SEC regulation for the same reasons that the Florida Legislature determined that there was no “public interest” served by regulating FTCs. Because family offices are owned and controlled by family members and limit services to family members, the SEC:
…viewed the typical single family office as not the sort of arrangement that Congress designed the Advisers Act to regulate. [The SEC was also] concerned that application of the Advisers Act would intrude on the privacy of family members. Thus, each of [the SEC’s] orders exempted the particular family office from all of the provisions of the Advisers Act (and not merely the registration provisions). As a consequence, disputes among family members concerning the operation of the family office could be resolved within the family unit or, if necessary, through state courts under laws specifically designed to govern family disputes, but without the involvement of the [c]ommission.23
In order for Florida to compete successfully for FTC business, the act must be restored to its original form through an amendment that removes the requirement for mandatory examinations of unlicensed FTCs.
• Scope of Examination: Licensed FTCs. Licensed FTCs face stricter scrutiny during the application process and more burdensome regulation — Although there is no public interest served by having OFR regulate FTCs, a small number of FTCs may desire OFR supervision for any of a number of reasons, including family governance issues, federal estate and gift tax considerations, and exemptions avoiding stricter regulation under the 1940 Investment Advisers Act. The glitch bill would have increased the regulation of licensed FTCs, addressing the factors that would cause FTCs to apply for status as a licensed FTC. At the same time, increased regulation under Florida law would help avoid more burdensome regulation under federal law.
The majority of FTCs that choose to become licensed FTCs, however, are likely to do so in order to secure exemption from SEC regulation as an investment adviser under the 1940 act. The 1940 act was intended to regulate an “investment adviser,” defined as any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities.24 On June 22, 2011, the SEC adopted Rule 202(a)(11)(G)-1 exempting “family offices” from regulation under the 1940 act. The SEC somewhat restrictively defined the class of family members a family office may serve for this purpose excluding, for example, certain in-laws, aunts, uncles, and cousins. A family office that falls outside the SEC definition of “family office” would be required to register under the 1940 act as an investment adviser, subjecting it to burdensome filing requirements, SEC inspections, and surprise examinations.
Families that aren’t able to structure their family offices within the SEC family office exemption will seek alternative exemptions from SEC regulation. One such alternative is referred to as the bank exemption. Banks are specifically excluded from the definition of “investment advisers” and are not required to register under the 1940 act.25 The Family Trust Company Act was intended to permit licensed FTCs to qualify for the bank exemption from SEC regulation under the 1940 Investment Advisers Act. A “bank” for this purpose includes a “trust company…a substantial portion of the business which consists of receiving deposits or exercising fiduciary powers similar to those permitted to national banks….and which is supervised and examined by state or federal authority having supervision over banks…and which is not operated for the purpose of evading the provisions of this subchapter.”26
The examination framework for licensed FTCs under the act was originally believed to be sufficient to constitute “supervised and examined” within the meaning of the bank exemption. The view of whether state supervision and examination is sufficient to allow an FTC to qualify for the bank exemption is trending toward the notion that an FTC must be regulated in substantially the same manner as a public trust company in order to qualify for the exemption.
The regulation and examination of licensed FTCs under the act likely falls short of this standard. The act requires OFR to examine licensed FTCs once every 18 months, but only for compliance with very specific provisions of Ch. 662. Licensed FTCs may even be able to satisfy the act’s examination requirements through the submission of audits conducted by certified public accounting firms.
contrast, public trust companies are subject to on-site examinations every 12 to 18 months and must respond to an extraordinarily detailed 80-question information request sent by OFR prior to commencing an examination. OFR requires public trust companies to submit audited financial statements and an external fiduciary audit. OFR conducts an on-site examination of all aspects of the public trust company’s operations, including a review of governance and investment policies and a random inspection of client trust accounts to determine that investment policies are implemented.
Examinations are costly and can consume the full-time attention of multiple employees for months at a time for even the smallest public trust companies. The glitch bill would have substantially expanded the scope of OFR examinations of licensed FTCs. Examinations of licensed FTCs under the glitch bill would almost certainly be sufficiently similar to examinations of public trust companies as to allow licensed FTCs to qualify for the “bank exemption” from regulation under the 1940 Investment Advisers Act. Although examinations of licensed FTCs would be more rigorous, the glitch bill provided that the examinations would occur only once every 36 months rather than once every 18 months making the prospect of intrusive examinations somewhat more palatable.
• Clarification of Purpose — The glitch bill substantially rewrote and clarified the “purpose” provision of the act. Specifically, the glitch bill clarified that the public interest to be served by the act is limited to ensuring that FTCs restrict their services to family members and their related interests. The glitch bill clarified that OFR is not responsible for examining an unlicensed FTC for the purpose of determining the safety and soundness of its operations. The glitch bill also provided that OFR would regulate, supervise, and examine any FTC wishing to become a licensed FTC under the act, language taken from the definition of a bank for purposes of the bank exemption from the 1940 Investment Advisers Act.
• Operational Changes — The act provides that an FTC’s organizational documents must prohibit services to the general public and the advertising of services to the general public. An FTC’s documents must also prohibit amendments to organizational documents without prior written notice to OFR. The act requires FTCs to submit any proposed amendment to its articles or bylaws at least 30 days prior to the effective date of the amendment regardless of how ministerial the proposed amendment.27 The glitch bill would have modified the act to require 30 days notice to OFR for proposed amendments to an FTC’s articles of incorporation, articles of organization, or certificate of organization, but would allow for amendments to an FTC’s bylaws without prior OFR approval under the presumption that bylaw amendments tend to be more administrative in nature.28
The act requires FTCs to file annual renewal applications within 30 days of the end of each calendar year. Any FTC that fails to file its annual application within 60 days of the end of the year will have its registration or license automatically terminated without opportunity to cure. The glitch bill would have amended the act to allow FTCs to file annual renewal applications within 90 days of the end of each calendar year and would allow for the automatic reinstatement of any FTC that files its renewal application by August 31 of any calendar year.29
• Enforcement Changes — The act sets forth several reasons for which OFR may revoke the license of a licensed FTC, including “[a]n act of commission or omission that is judicially determined to be a breach of trust or fiduciary duty pursuant to a court of competent jurisdiction.”30 If a court determines that a licensed FTC has committed an act constituting a breach of trust or fiduciary duty, OFR may immediately revoke the FTC’s license without regard to the severity of the violation. The glitch bill would modify the act to allow a licensed FTC an opportunity for a hearing prior to revocation of its license for a breach of trust or breach of fiduciary duty.31 Similarly, the act allows OFR to issue a cease and desist order upon any licensed or unlicensed FTC in the event of certain violations of the act, including “an act of commission or omission … that [OFR] has reason to believe is a breach of trust or a fiduciary duty.”32 The glitch bill would modify the act to require that any such act be judicially determined to be a breach of trust or fiduciary duty prior to OFR issuing a cease and desist order.33
Conclusion
Florida is a preferred destination for family trust companies because of its favorable tax and trust laws and geographic desirability. Existing FTCs and families considering forming a new FTC will find initial compliance with the act simple and straight-forward because Florida is one of only a handful of states that offers a standalone statutory framework for the formation, operation, and regulation of FTCs. The glitch bill was noncontroversial legislation, which would make Florida’s FTC legislation competitive with or superior to FTC legislation anywhere. The glitch bill had passed each of the five legislative committees to which it was assigned unopposed and will likely be re-introduced for consideration in the 2016 legislation session.
1 Fla. Stat. §§662.111(12)(d) and 662.120 (2014).
2 Fla. Stat. §662.151(3) (2014).
3 SB 568 was the companion glitch bill in the Senate.
4 The final version of the glitch bill eliminated the exemption for FTCs operating under OFR exemption letters and would have required all existing FTCs to become licensed or registered under the act. CS for SB 568 §7.
5 Fla. Stat. §662.122(3) and (5) (2014).
6 Fla. Stat. §662.131 (2014).
7 Fla. Stat. §662.124(1) (2014).
8 Fla. Stat. §662.132(1)(a) (2014).
9 Fla. Stat. §662.141(1) (2014).
10 CS for SB 568 §11.
11 Fla. Stat. §662.124(1) (2014).
12 Fla. Stat. §662.126(1) and (2) (2014).
13 Fla. Stat. §662.126(4) (2014).
14 Fla. Stat. §662.121(10) (2014).
15 See Pabst v. Wisconsin Dept. of Taxation, 19 Wis. 2d 313 (1963).
16 See Robert L. Galloway, Private Trust Companies: I Know Them When I See Them But I Can’t Define Them, Baker & Hostetler, LLP, Cleveland, OH.
17 Fla. Stat. §662.141(1) (2014).
18 Nev. Stat. §669A.260 (2014).
19 Wy. Stat. §13-5-204(a)(1)(vii)(D) (2015).
20 Fla. Stat. §662.102 (2014).
21 CS for SB 568 §11.
22 Fla. Stat. §662.143 (2014).
23 Family Offices, Investment Adviser Act Rel. No 3098 (Oct. 12, 2010) (proposing release) (emphasis added).
24 15 U.S.C. §80b-2(a)(11).
25 15 U.S.C. §80b-2(a)(2)(C).
26 15 U.S.C. § 80b-2(a)(11)(A).
27 Fla. Stat. §662.123(1)(d) and (2) (2014).
28 CS for SB 568 §8.
29 Fla. Stat. §§662.128 and 662.144 (2014); CS for SB 568 §§9 and 14.
30 Fla. Stat. §662.142 (2014).
31 CS for SB 568 §12.
32 Fla. Stat. §662.143 (2014).
33 CS for SB 568 §13.
Stephen G. Vogelsang is a shareholder in the West Palm Beach office of Gunster, Yoakley & Stewart, P.A. He is board certified in tax law, and served on the drafting committee for the Florida Family Trust Company Act and as co-chair of the drafting committee for the glitch bill.
This column is submitted on behalf of the Real Property, Probate and Trust Law Section, Michael J. Gelfand, chair, and Jeff Goethe and Doug Christy, editors.
