August 10, 1992

Dear M________:

This responds to your letters of February 20, April 2, and May 5, 1992, regarding __________.

Your letters raise two questions which I believe are accurately restated as follows:

1. Is ________ (“________”), an affiliate of your client, ________ (“________”), required by California Financial Code (“Code”) Section 1500 to obtain a certificate of authority pursuant to Code Section 401 to engage in the trust business in order to continue the activities outlined in your letter of February 20, 1992?

2. If an individual or individuals were to engage in these activities, would they be subject to similar requirements?

For the reasons set forth in this letter, the answer to both of these questions is in the affirmative.

Code Section 1500 prohibits any corporation from engaging in the trust business unless it meets a number of requirements, including obtaining the authorization of the Superintendent of Banks to do so. Code Section 106 includes in the definition of the term “trust business”, the business of acting as a trustee.

Your February 20th letter gives a number of reasons for your belief that the activities of ________ do not result in its engaging in the trust business. The following responses are indexed to coincide with your designations:

(a) We do not agree that ________ will not receive any compensation for its services. These services clearly facilitate the main profit-making enterprise of ________ and its affiliate, ________. Indeed, ________ in his letter dated July 31, 1992, to Stan Cardenas, Chief Deputy Superintendent of Banks, indicates that your client will be put out of business if the services cannot be provided.

(b) While it may be true that the trustee is initially selected by _______, its services thereafter are rendered to and on behalf of the individual investors in the _______. To the extent of the aggregate sums repayable under outstanding _______, it is solely for the investors’ benefit and protection that the trustee holds a security interest in, or direct legal title to, the beneficial interests under the deeds of trust securing repayment of the loans which form the only real source of recovery in the event of default by the issuer of the ________. The investors are beneficiaries, in every sense of the word, of the trust created for their benefit and it is this group that the provisions of the Banking Law relating to trust companies primarily protect.

(c) The transactional activities engaged in by trustees are almost always entirely similar to those of individuals and other entities. It is the nature of a trustee to transact all manner of business on behalf of the beneficiaries of the trust. The difference is that in doing so the trustee acts not for himself, but as a fiduciary for the exclusive benefit of others.

It is thus concluded that ________, in carrying out the described activities, is engaging in the trust business, and is prohibited from continuing to do so without complying with the requirements of Code Section 1500.

With regard to question 2, Code Section 3390 provides, in part, that, “No person which has not received a certificate from the superintendent authorizing it to engage in the banking business shall … transact business in the way or manner of a commercial bank or trust company.” Since, by definition, a trust company is a corporation authorized to engage in the trust business (Code Section 107), we regard any person engaging in the trust business as transacting business in the way or manner of a trust company.

In addition, Code Section 102 provides that, “It shall be unlawful for any corporation, partnership, firm, or individual to engage in or transact a banking business within this state except by means of a corporation duly organized for such purpose.” The term “banking business” includes both commercial banking business and trust business. When read together, Code Sections 102 and 1500 make it clear that only a corporation can engage in the trust business and that, in order to do so, the corporation must have received a certificate of authority from the Superintendent.

It is therefore concluded that the Banking Law prohibits an individual from engaging in the activities described in your letter.

I have received today a copy of letter dated August 4, 1992 to Mr. Cardenas and will respond to it in a separate communication.

Please call me if you have any questions.

Very truly yours,

Superintendent of Banks



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Last updated: Jun 28, 2019 @ 12:18 pm