Trust Application Opens Questions on Interstate Commerce
Titus, Nancy Raiden, THE JOURNAL RECORD
A request by a Merrill Lynch subsidiary for authority to operate a general trust business in Oklahoma continues to cause a stir, even though the company has backed away from the matter.
Paul Foster, general counsel for the Oklahoma Banking Department, has continued his research into the larger question of the state's authority to regulate out-of-state trusts since the Merrill Lynch application was withdrawn in September. As part of that effort, he headed a discussion on how the matter relates to interstate commerce at a meeting of the nation's state banking attorneys earlier this month.
"It is important that states act responsibly in these kinds of issues and to avoid even the appearance of proprietary or parochial interests or attitudes in our treatment while at the same time jealously guarding the rights to regulate these financial matters of a local concern."
He said that was the general attitude among other banking department attorneys.
The controversy erupted in August after Chicago-based Merrill Lynch Trust Co. of America sought a declaratory order from the Oklahoma State Banking Board giving it authority to operate in Oklahoma.
Merrill Lynch's withdrawal of its application came after what could be described as a pre-emptive strike launched by in-state trust companies anxious to protect their territory. The board granted a motion from the Oklahoma Bankers Association and 20 Oklahoma-based banking and trust companies to intervene in the matter.
Bruce Day, the Oklahoma City attorney representing Merrill Lynch, said the company has not decided whether or not it will continue the matter.
Even if Merrill Lynch does not pursue the issue, Foster said it will gain in importance because trust services are seen as a way to generate fee income, something banks across the country want to do. Japanese banks also have begun aggressively entering this business in America. Foster said he knows such companies are operating in Oklahoma because he personally received a solicitation from an out-of-state trust company.
"It is good to have a company like Merrill Lynch to help define the standards," Foster said. "I think that is something everyone needs to bear in mind."
Regulations pertaining to interstate trust companies become very sticky very fast, he said, because Congress has not given states any specific authority to regulate them.
"The Supreme Court has said that states don't have power in the absence of Congress giving it to them."
The states have congressional approval to regulate banks because of such measures as the McFadden Act and the Douglas Amendment, which deal with interstate branching and bank holding companies. No such measures apply to trusts, however. The federal law that does apply deals with not prohibiting interstate commerce.
"Clearly, states can enact laws to protect and preserve the public health, welfare and economy. So these are competing interests," Foster said.
He said the question becomes how far states can go to protect their residents. "That's what Merrill Lynch all comes down to."
Foster commended the firm for being upfront with the state about its intentions. He said other foreign, or out-of-state, trust companies have not been so forthright. Finding those companies is the next step in his research.
"Merrill Lynch was just trying to do it the right way."
Foster said state regulation of foreign corporate trusts falls into four categories: those that allow the trusts to operate without having to qualify to do business, those that require them to qualify, those that allow them to operate if they are based in a state with a reciprocal law and those that prohibit foreign trusts altogether. …