Readings in Money and Banking Part 26

As trustee under will, the trust company carries out the provisions of the will, investing and managing the estate or particular fund in accordance with the directions of the testator. As such it may hold real and personal property.

As trustee under deed or private agreement, a contract is entered into between the company and the owner of the property, by which the t.i.tle to the property is vested in the corporation subject to the terms recited in the instrument. Such deeds of trust may be revocable or irrevocable.

Marriage settlements are frequently made in this way.

The trustee's duty in investing the funds is a double one; namely, to invest them securely so that the princ.i.p.al shall be preserved intact, and to invest them as productively as possible under his powers, so that they shall yield the best rate of interest obtainable for the benefit of the person or persons ent.i.tled to the income. He must hold the scales evenly, regarding scrupulously his duties to all beneficiaries. The popular idea that security is the only consideration is erroneous, as the trustee is equally bound to invest the funds as profitably as possible and cannot neglect one duty more than the other. The mistaken impression that the corporate trustee, even more than the individual, is mindful only of the safety of the princ.i.p.al and entirely loses sight of the question of income, has arisen from the restrictions as to investments imposed by law, and frequently also by the will or trust deed, and from the fact that the individual executor or trustee, rightly or wrongly, sometimes a.s.sumes risks and personal liability which the proper rules of a trust company would not permit it to a.s.sume.

The executor or trustee is governed, as to the kinds of investments, by the directions of the will or deed of trust. This may require the purchase of "legal investments" only, or state that the trustee is not to be confined to securities prescribed by law, or give specific directions as to the cla.s.ses of securities which are to be bought. The terms of such doc.u.ments are always strictly construed by the courts; if no directions are given, the trustee is expected to buy only "legal"

securities, and when he exceeds his powers he is held responsible for any loss. Administrators and guardians without broader powers given by will are obliged to invest, except at their personal risk, in such securities as are sanctioned by law or directed by the court.

Some states prescribe by statute the securities in which a trustee may invest. "Where there is no statute or decision of the highest court fixing the cla.s.s of securities in which a trustee may invest, he can safely follow the rule prescribed for the investment of the funds of savings banks." In general, city, State, and United States bonds, first mortgages secured on improved real estate with ample margin, are among the investments sanctioned by law. As to real estate, stocks, and first mortgage bonds of railroad, manufacturing, and other corporations, the practice varies in the different states. Loans on personal property, second mortgages, and other investments subject to prior liens or of a speculative character are excluded. All investments must possess "intrinsic" value; the courts hold trustees liable for any losses from speculative risks--but any gains accrue to the trust estate.

OTHER FUNCTIONS

The trust company acts as guardian, curator, or committee of the estates, and in some states, of the persons of minors, those who are insane or mentally incompetent, spendthrifts, drunkards, and any other persons not legally qualified to take charge of their own affairs. In the case of a minor, the trust terminates on the ward's becoming of age; in other cases, when the disability is removed, or in accordance with a decree of court. These appointments are frequently made by order of court, and to it accounting must be made. In some states the company is styled "conservator" when caring for the estates of persons of unsound mind.

When acting as attorney in fact, the company obtains its authority by virtue of a letter of attorney which usually is or can be recorded, conveying certain definitely specified powers. This may be either to perform a single act--such as to satisfy a mortgage--or may be broader and continuing, granting authority to sell and transfer securities and collect income. A general power of attorney, as the term indicates, is a delegation to another of the general powers of the person appointing--as to payments, collections, transfers of property, and all transactions of a business nature.

As agent merely, the company takes charge of property, real or personal, for its owner, but such agency does not imply nor ordinarily include authority to sell or convey t.i.tle. Moreover, trust companies as agent often take up lines of business which they either cannot or would not engage in on their own account. Thus, a trust company can act as agent for fire or life insurance companies, for water, gas, and other public service corporations. In new communities and where it is difficult to find responsible representatives, the trust company can often render efficient service and secure a steady income without risk by a.s.suming agencies of various sorts.

As a.s.signee the trust company takes possession of the property a.s.signed for the purpose of carrying out the terms of the deed of a.s.signment in the interest both of the a.s.signor and the creditors of the a.s.signor. The deed of a.s.signment is an acknowledgment of an embarra.s.sed or insolvent condition, and the efforts of the a.s.signee are directed to realizing as much as possible from the a.s.sets intrusted to its management.

As receiver, the duties may be very similar to those of a.s.signee, although they are usually broader in scope. The business may not be insolvent, and the application for the appointment of a receiver may be due to temporary difficulties only. By such an appointment the property is preserved intact and equal treatment is afforded creditors. An able receivers.h.i.+p often results in the adjustment of difficulties and the return of the property to its owners on a paying basis. While in the case of a.s.signee the appointment is by the individual, partners.h.i.+p, or corporation executing the deed of a.s.signment which specifies the powers and duties of the a.s.signee, in the case of receiver the appointment is by a court and the company so appointed acts as an appointee or ministerial officer of the court, and as such is directly subject to the court's orders.

A trust company acting as receiver is better able than an individual to furnish additional capital, if amply secured, and thus successfully to meet the difficulties which withdrawal of credit and restricted capital have temporarily brought upon an otherwise prosperous business. The courts authorize the issue of receivers' certificates to provide funds for purchase of equipment and the proper maintenance of the property and conduct of the business when the creditors are benefited by such expenditures. Such certificates may be made a first lien on all a.s.sets, taking precedence even of mortgages and other secured obligations. The receiver thus secures the capital necessary to make the property more productive and to secure the largest return from the business.

As custodian or depositary, the trust company sometimes holds property the t.i.tle to which is in dispute, delivering the same when the owners.h.i.+p is legally determined.

In taking charge of escrows or conditional instruments or deeds delivered to a third party until the condition is performed, the trust company acts in a similar capacity, as the joint representative of both parties.

The trust company acts as the representative of both the living and the dead in practically every legal relation in which an individual is qualified to act. Its function is not only to keep intact the estate of which it has charge, but to look to and safeguard the interest of every beneficiary.

CARE OF SECURITIES AND VALUABLES

The functions already recited have resulted in the a.s.sumption of the duty of caring for property other than that of the estates held in the trust department. In the safe deposit department, individual safes are rented, bulky packages--not containing stocks or bonds--are received on storage, certificates of deposit covering securities are issued, and provision is made for access to, and examination of, the property so deposited. For personal property received on storage, the charges are either according to bulk or value. Wills are usually receipted for and kept without charge.

INSURANCE

The examination and insurance of real estate t.i.tles is a later development often found in connection with the usual trust functions.

Fidelity insurance and suretys.h.i.+p providing against loss by reason of the dishonesty of individuals and the non-performance of obligations, contracts, etc., have often been combined with the various forms of trust company activity. They are, however, largely pa.s.sing into the hands of corporations especially organized for the transaction of such business.

COMPENSATION

When acting as trustee under corporation mortgages, a definite charge may be made for accepting the trust, and a fixed amount per annum thereafter for paying coupons and performing other duties. For the certification of bonds it is usual to charge fifty cents per bond in the case of large issues, and one dollar for small issues. The figures, however, vary in different places. The charge for certifying the bonds may be the only one, although an additional charge is usually made for counsel fees. In case of default and consequent foreclosure of the mortgage, extra payment is made to the trustee covering all services incident to the foreclosure.

For the disburs.e.m.e.nt of sinking funds, interest, or coupons, the temporary use of the money may be considered adequate compensation, if the amount involved is large. A commission on the sum distributed or a fixed amount is charged when acting as fiscal agent, apart from duties in other capacities. For acting as registrar or as transfer agent it is usual to make a fixed charge per annum, based on the amount of labor involved. The transfer agent is usually paid about twice as much as the registrar. Compensation for acting as manager of an underwriting syndicate may be a fixed sum or a commission, according to the provisions of the underwriting agreement. For acting as depositary under plans of reorganization, a.s.signee, or receiver, a lump sum is usually paid covering all services. Agency work of various sorts is paid for in accordance with the usual practice in the business which is undertaken; a fixed sum, or a fixed sum and a commission, or a commission only, may be received.

The trust company is in a position to render valuable, and often indispensable, aid to its corporate clients. Large amounts being involved, the great railroad and industrial corporations are willing to pay well for such services. Corporate trust business has, consequently, been a profitable field for the trust companies.

GOVERNMENT REGULATION

An examination of the laws of the various states is interesting as showing the attempts which are being made at regulation. Most of these laws have been enacted within recent years and to-day there are but few States which do not have such statutes on their books.

The step which Ma.s.sachusetts first took in requiring a legal reserve to secure deposits has been followed by similar action in other states. In general, the wisdom of prohibiting companies which engage in the care of estates from a.s.suming excessive risks is becoming better recognized. The promotion and underwriting of commercial ventures and the a.s.sumption of unknown risks are functions not compatible with the proper exercise of the duties of trustee or executor.

The supervision of trust companies by the separate states provides an elastic system to supplement the rigidly guarded powers of the national banks, and can adapt itself to changing conditions and enlarging needs, leaving for solution according to the requirements of each section of the country such questions as proper functions, reserves, and the authority to establish branch offices.

FOOTNOTES:

[91] Adapted from Kirkbride and Sterrett, _The Modern Trust Company_, pp. 1-13, 113, 114, 127, 143-146, 204, 205, 208. The Macmillan Company.

1913.

[92] Thomas L. Greene, _Corporation Finance_, p. 59.

CHAPTER XVI

SAVINGS BANKS

[93]The savings bank works with those unacquainted with the ways of business and who could not single handed take good care of their money, or invest it safely or profitably. The bank of discount is generally managed by business men versed in the ways of business, acquainted with monetary affairs, and able to conduct financial operations with intelligence. They combine their _capital_ in order to make it effective; the savings bank combines _savings_ in order to make them _capital_, and as such to acquire a power impossible to the scattered savings.

The savings bank is for the saver; its funds are invested permanently, while the business bank opens its doors to business men and loans rather than invests its funds, and for a short time only. The latter deals with borrowers rather than savers, and serves for hire. The one serves best by keeping--the other by lending. One _aims_ at profit, while the other _never_ makes (or should make) profit an end. The savings bank is the receiving reservoir for the little springs, the bank of discount is the distributing reservoir for acc.u.mulated capital.

We must get the last idea clearly in mind or we get a misconception of the savings bank. However much the element of interest may figure in the management, and whether we pay depositors 4 per cent. or 3 per cent., or no interest at all, the acc.u.mulation of interest is not to be compared in importance with the _acc.u.mulation of princ.i.p.al_.

No man ever acquired riches at 4 per cent. In fact, 4 per cent. upon small deposits is so trifling a matter that it may be ignored in considering the greater value of the increase of capital. However desirable the acc.u.mulation of interest may be (and this in the course of years is considerable), the chief end and aim of the savings bank should be the _acc.u.mulation of princ.i.p.al_.

CLa.s.sIFICATION OF SAVINGS BANKS

We may roughly cla.s.sify savings inst.i.tutions into: First, mutual (trustee), or philanthropic; second, stock (including "savings and trust companies"); third, co-operative, or democratic, as exemplified in the co-operative banks of Europe. The first are usually managed by a self-perpetuating body of trustees, who do not share the earnings; the second are managed by the directors elected by the stockholders; the third are managed by officials elected by the members.

A second cla.s.sification may be made into public and private inst.i.tutions; the first includes the postal and munic.i.p.al banks; the private embraces the mutual, stock, and co-operative. A third cla.s.sification may still be made into the "unit" and the chain system.

In the unit system the bank is an independent ent.i.ty and has no connection (aside from a managerial standpoint) with any other bank. The banks of the United States are all, excepting the Postal Savings Banks and a few branch savings banks, of this character. In the second, the bank is but a part of a chain, as in the postal system, the munic.i.p.al banks of Germany, and the co-operative credit banks of Europe. We shall briefly review each system.

TRUSTEE SAVINGS BANKS

The _original_ savings bank is the trustee bank. As Hamilton says, "It stands for the attempt on the part of the well-to-do to improve the condition of the poorer cla.s.ses, and involves a self-sacrificing service on the part of a few in the interest of the many." While many of the early savings banks partook of this character, others were organised from purely selfish motives and were characterised by bad management and bad faith from the start. A study of savings bank frauds will amply bear out this statement.

The "spirit of commercialism" hereafter spoken of has invaded the domain of the mutual savings bank and it cannot in truth be said that some of the newer banks were organised from any spirit of philanthropy, although the management as a whole may be above suspicion and honorable in the highest degree.