The State of Florida's new Family Trust Company Act, codified under Fl. Stat. § 662 (“FTCA”), went into effect on October 1, 2015. Prior to that there was no statutory authority for operating a family trust company ("FTC") in Florida. The FTCA provides for the organization, operation, and regulation of family trust companies in Florida. An FTC is an entity that provides trust services for trusts held for the benefit of family members and other services for family offices, such as 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.
It is anticipated that Florida will become a preferred destination for FTCs 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 FTCA 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.
An FTC must have a business situs in the jurisdiction where it conducts the majority of its trust business. 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. 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. The domicile of the trustee and the location where the trust is administered are usually important considerations too.
Registration of FTCs with Florida’s Office of Financial Regulation (“OFR”) should be relatively easy. Although some FTCs will want to remain unlicensed, registration is still required. OFR is charged with supervising banks and trust companies in Florida. The FTCA requires OFR to conduct mandatory examinations of unlicensed FTCs every 18 months. OFR may examine an unlicensed FTC at any time it suspects the FTC to be operating in violation of the FTCA.
Most FTCs that choose to become licensed FTCs will do so to help secure exemption from United States Securities Exchange Commission (“SEC”) regulations pertaining to investment advisers under the Investment Advisers Act of 1940 (“40 Act”). The 40 Act defines “investment advisers” 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. Under Rule 202(a)(11)(G)-1 of the 40 Act family offices are exempt from most regulatory oversight. A family office that falls outside the SEC definition of a family office would be required to register under the 40 Act as an investment adviser, subjecting it to burdensome filing requirements, recordkeeping and compliance requirements, SEC inspections and surprise examinations.
Families offices that cannot qualify for the SEC family office exemption will seek alternative exemptions from SEC regulation, such as the bank exemption. Banks are excluded from the definition of “investment advisers.” Banks are not required to register under the 40 Act. A bank 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.” The FTCA was designed to help licensed FTCs to qualify for the bank exemption under the 40 Act.
A glitch bill designed to revise the FTCA’s current shortcomings (i.e., over-regulation of unlicensed FTCs) is expected to be passed in the next legislative session.
The full legislation is available here.