Senate committee OKs bill regulating trust companies

Independent retail trust companies pose at least as big a risk to the public as Nevada's financially struggling banks and credit unions, a state regulator said Friday.

So George Burns, commissioner of the Financial Institutions Division, persuaded a state Senate committee Friday to pass a bill designed to provide more protection to trust companies' customers.

Nevadans most frequently rely on trust companies to handle self-directed Individual Retirement Accounts containing nontraditional investments, such as gold, silver, real estate, insurance contracts and trust deeds, which are short-term loans secured by real estate. In other cases, trust companies serve as trustees or administrators for family trusts.

Burns' proposal changes the law to require new trust companies to maintain more capital, which can be used to pay for receivership expenses or to replace assets diverted from client trust accounts.

While he considers the bill an improvement over existing law, Burns said he was compelled to compromise on several of his proposals because of opposition from a "relatively small group" of existing trust companies. The amended bill contains a "grandfather" clause allowing some existing trust companies to continue operating with less capital than new trust companies. About 25 trust companies are licensed in Nevada.

"We just didn't want the bill to unintentionally force some good folks out of business," lobbyist Chris Ferrari said.

Burns referred to recent trust company cases to illustrate his point.

"I can tell you that not all trust companies are trustworthy," Burns told the committee.

One case deals with a trust company license application by the former president of a failed Illinois trust company.

While Burns did not mention the applicant by name, he was referring to Gary Bertacchi, who was president of JPM Trust Co., from which directors were accused of embezzling $68,000. JPM was sold to Independent Trust Co. in 1992 and Bertacchi became president of Independent, according to papers in a lawsuit filed by the Nevada attorney general's office.

Independent Trust Co. put client funds in an escrow account from which Intercounty Title Co. diverted $61 million of investor funds, according to legal papers filed by the Nevada attorney general's office. That was "the largest trust failure in Illinois history," Burns told the committee.

During regulatory proceedings, Bertacchi denied knowledge of embezzlement at the trust companies.

Meanwhile, Bertacchi's company, Triex Financial Services, has appealed the denial of his license application to the Nevada Supreme Court. Burns complained that the legal challenge relates to "inadequate and ambiguous" provisions in state law, but he believes the new law clears up those problems.

In another case, Burns suspended the license of Enterprise Trust Co. of Henderson, which closed in 2007 without notifying the division. The action was taken in connection with a lawsuit that the Securities and Exchange Commission filed in Chicago, alleging Enterprise diverted $49 million in customer funds.

Nevada law requires that trust companies maintain $300,000 in capital, compared to a national average of $1.4 million, Burns said. He compared that to typical capital requirements of $20 million to $25 million for new state banks. Receivership expenses for a trust company average $1 million, the commissioner said.

The bill gradually increases the minimum capital for new trust companies to $1 million by 2012. The bill "grandfathers in" some existing trust companies and will give those companies until 2012 to establish minimum capital levels of $500,000.

The bill doesn't affect trust companies that are regulated as bank divisions.

The Senate committee voted 6-0 in favor of the trust company bill with one member absent. The bill now goes to the Assembly Commerce and Labor Committee.

Contact reporter John G. Edwards at jedwards@reviewjournal.com or 702-383-0420.