– Dick Arnold, President, San Pasqual Trust
– Dick Patterson, Chief Fiduciary Officer, San Pasqual Trust
For several years, individuals who serve as a trustee have been required to register with the California Attorney General. The only exceptions are those who serve as trustees of trusts for family members or for a limited number of non-family members. For now, this requirement is still in effect.(1)
Now, California has moved beyond registration and will be requiring formal licensing of private fiduciaries.
In 2006, California adopted the Professional Fiduciaries Act (the “Act”), creating the Professional Fiduciaries Bureau and requiring the licensing and ongoing regulation of individuals who act as trustees, guardians, conservators, or other fiduciaries (such as agents acting under a durable power of attorney for health care or for finances).(2) There are exceptions, principally for lawyers, Certified Public Accountants, enrolled agents and individuals acting only on behalf of family members. Effective July 1, 2008, most other individuals acting as a fiduciary must obtain a license.
The Act includes a de minimis exception for an individual serving as trustee only for a limited number of persons or families or for family members.(3) For simplicity, the balance of this article will assume that this exception threshold has been exceeded, and that the individual trustee is serving more than the minimum number of non-family members.
No regulations have been issued. However, it is clear that individuals will be required to register, undertake 30 hours of pre-examination education, submit to background and credit checks, pass an examination and pay processing, licensing and annual renewal fees in order to be licensed. The content of the examination has yet to be determined. For more information, please see http://www.fiduciary.ca.gov/ . On that website, you can enroll to receive the Bureau's e-mail newsletter. The Bureau has indicated that they expect to begin taking applications by the end of 2007.
Unless an individual falls within an exemption, he or she must obtain a license or he or she may not act as trustee.(4) Unless they are licensed, non-exempt individuals cannot be appointed as a trustee by a California superior court.(5)
A number of professionals who serve their clients as broker/dealers or investment advisors have asked us for our view of the requirements and how they could affect their practices. While we have no special insight into the regulatory process, we have attempted to analyze the specific exceptions which are included in the Act. Some of our conclusions are set forth below.
1. Several financial professionals who serve as trustees have told us that they believe they are exempt from licensing. This is incorrect. A broker-dealer or registered investment advisor who acts as a fiduciary only in that capacity appears to be exempt. However, this exemption applies to those investment professionals who are “fiduciaries” only because they handle their clients' investments; in the words of the statute, only a person whose sole activity as a professional fiduciary is as an investment professional is exempt. Fiduciary activity beyond that is not exempt. If the investment professional is also acting as a fiduciary in one of the other capacities under the Act (e.g., as a trustee, as the holder of a durable power of attorney for health care or as the holder of a durable power of attorney for finances), he or she must be licensed . Thus, financial professionals who are also serving as trustees are required to become licensed.(6)
2. There is a question as to whether a broker-dealer or other financial professional who is compensated on a fee-per-transaction basis has an innate conflict of interest, or otherwise commits a breach of fiduciary duty, when he or she also serves as trustee. The issue is not the conduct allowed under securities laws or SEC or NASD regulations, but rather the conduct allowed under California trust law. The acceptable conduct can be significantly different. We do not address that question here. A separate article specifically dealing with this issue will be posted on our website.
3. An employee of a trust company or an FDIC-insured institution is exempt, to the extent that they are acting as a fiduciary within the scope of their employment. Thus, a bank officer is exempt when he is acting as a trust administrator, but is not exempt when he or she is acting individually as a fiduciary.
4. Several questions arise:
If an individual is acting as a co-trustee with a corporate trustee, is the individual exempt from licensing? We believe that the individual co-trustee would be subject to licensing. We recognize that it could be argued that licensing should not be required, since many of the protections sought by the Act (financial stability, professional qualification, recordkeeping, regulatory supervision and accountability, etc.) would be provided by the corporate co-trustee, but the Act contains no language addressing this concept as grounds for an exemption.
Does an individual need to be licensed if the governing instrument gives a corporate co-trustee complete fiduciary powers and gives the individual co-trustee very limited powers? What if an individual holds only the power to act as a “trust protector” and remove and replace the corporate trustee with another corporate trustee? We would assume that the nature and extent of the individual's powers and responsibilities would control, but there is no authority on point at the moment. There are no guidelines, yet, as to what constitutes being a “trustee” or a “fiduciary.” An individual who is acting as a co-trustee, even with limited powers, appears to be subject to the same requirements as an individual who is acting alone as trustee. A “trust protector” may be in a different category, as discussed below.
Does the Act address powers held by an individual who is not labeled as a “trustee?” In many cases, trust instruments give an individual or a trust beneficiary a defined investment advisory role, such as the right to consult on, or direct, the investments of the trust, or to require that the trust maintain or dispose of a non-productive asset (such as a surviving spouse's home).
Assuming that there are both current beneficiaries and remaindermen, the exercise of such powers can affect the amount of income available to one or more of the current beneficiaries versus the amount of principal destined for the remainder beneficiaries. If that individual is not a broker-dealer or registered investment advisor, does this power cause him or her to be subject to the licensing requirements?
Even if he or she is a broker-dealer or registered investment advisor, does the individual's power to affect which beneficiary gets what benefit from the trust create a fiduciary relationship beyond the investment one, thereby requiring licensing?
While there are no guidelines for the following situations, we believe that there should be scenarios where an individual might not be subject to the licensing requirements because he or she does not fit the definition of a professional fiduciary.
1. For example, an individual trustee who resigns in favor of a corporate trustee and continues to serve as investment advisor (only) to the new trustee should not be subject to the licensing requirements, because he or she does not have any remaining non-exempt fiduciary relationship with the beneficiaries.(7)
2. If an individual resigns as trustee and thereafter serves the new successor corporate trustee as a non-fiduciary advisor (for example, to advise the new trustee regarding the individual fact situations of the individual beneficiaries), he or she should not be subject to the licensing requirements, because he or she does not have any fiduciary responsibility.(8)
3. Similarly, an individual who is serving solely as a “trust protector” with the sole power to remove a corporate trustee and replace it with another corporate trustee may not be subject to the requirements, because he or she does not have trustee powers.(9)
As indicated above, when he or she acts as a trustee, a broker-dealer or other financial professional who also is compensated on a fee-per-transaction basis may risk breaching his or her fiduciary duty under California trust law. This body of law is different from federal and California securities laws, and SEC and NASD regulations, both as to the scope of the duty and as to the actions required in order to avoid a breach. For example, “full disclosure” of actions taken, or in advance of taking them, may not protect a trustee in the same manner as it would protect a broker-dealer.
We at San Pasqual Trust will continue to monitor this area, and would be pleased to share our thoughts with individual professional fiduciaries (whether they intentionally or inadvertently fall within the definition). Additionally, a number of continuing education organizations are beginning to address the Professional Fiduciaries Act, and the above issues (and many others) should be resolved over time. The problem, of course, is that the licensing deadline is likely to arrive before all of the questions have been answered.
© 2007 Richard S. Arnold [vCard] and Richard H. Patterson, Jr. [vCard]
This article contains a general description of the subject matter addressed, and is not intended to offer legal or other professional advice to any reader. The authors do not intend to create an attorney-client relationship with any reader. Great care has been taken to ensure the accuracy of this article's copy at press time; however, legal, tax and regulatory matters can change quickly. You should consult with your own attorney or other professional for advice on your particular situation.