THE TRUST COMPANY QUESTION + A Paper read before the Missouri Bankers’ Association, June 9, 1892, by Breckinridge Jones, First Vice-President and Counsel of Mississippi Valley Trust Company, St. Louis. VALLEY TRUST COMPANY FOURTH AND PINE STREET SAINT | PRESS OF GOTTSCHALK PTG. CC ST. LOUIS MVIISSISSIPPI VALLEY TRUST COMPANY SAINT LOUIS Shs CART AR! Tes ok $3,000,000 SURPLUS AND PROFITS , 1,000,000 OFFICERS JULIUS S. WALSH, President BRECKINRIDGE JONES, Ist Vice-President and Counsel SAMUEL E. HOFFMAN, 2d Vice-President DELACY CHANDLER, Secretary JAMES E. Brock, Assistant Secretary FREDERICK VIERLING, Trust Officer NAT. W. EWING, Superintendent of Safe Deposit Vault DIRECTORS Elmer B. Adams David R. Francis Wm. F. Nolker Williamson Bacon August Gehner Wm. D. Orthwein James Campbell Geo. H. Goddard Thos. O'Reilly, M. D. David W. Caruth Henry Hitchcock Chas. H. Turner Charles Clark S. E. Hoffman Julius S. Walsh Harrison I. Drummond Breckinridge Jones Rolla Wells Auguste B. Ewing Sam M. Kennard Eugene F. Williams HEN we find large financial institutions like the trust companies springing up among us, it is pertinent to inquire: 1. In what do they differ from banks? 2. What are the reasons of their existence? 3. What is the scope of their powers? t. What legal safeguards are thrown about the exercise of these powers? The published information as to trust companies is meagre. Notwithstanding they are established in all the large cities in the United States, and control hundreds of millions of dollars, and the larger trans- actions of the last generation have been completed through their instrumentalities, there is not to be found fifty pages of literature concerning them. In every community the business of banking is carried on by individuals before the volume and com- plexity of the business justifies the incorporation of a 3 VIVE public bank. Such incorporations bring together an aggregation of capital that largely answers the banking demands of the community. ‘The corporation does not BANK’S die, nor become sick ; it is always at home, MISSION. and its existence is not affected by ‘‘war, pestilence or famine.’’ After its establishment, its advantages are conceded by all, and no one then thinks of banking with a private individual. Banks are created for the purpose of receiving the To accommo- : E : : : Wives Giticicns deposits of the business community, for community. furnishing money to it and for facilitating its financial exchanges. " Receiving, without interest, Pays no interest the on deposits, but : ; : : gives right to nature of their business, will need dis- discounts. counts, the bank, in fairness, must give its depositor the preference in a line of discount in keep- Gives preference ing with the value of his balances ; and the to depositors in ~~* : discounts depositor to be entitled to the discounts he needs in his business and at the time he needs them, deposits of those who, from the known must keep in his bank balances commensurate with the Depositor gives accommodations he will require. Instead preference to “5 bank in deposits. of interest on the money that the depositor has idle in the bank, the thing of value that he Discounts dis- tributed among ; : : depositors, notice to have discounts in a recognized proportion to his balances. It follows that the bank’s receives is the conceded right on short discounts must.be distributed mainly among its deposi- tors. No one depositor can have an unfair share of One not a deposi- tor no right to a depositor, can rightfully expect a discount discount. the bank’s funds, and no one, other than a until those who keep balances without interest are reasonably supplied. ‘To bring about this distribution of the funds of a bank is, in part, the object of the Discounts limited 5 : to one-tenth of borrowed’? from a National bank to an capital. limitation that, no one shall have ‘‘money amount in excess of one-tenth of its actual paid-up capital ; and this, notwithstanding the deposits may be many times the capital. "This distribution among, and accommodation of, depositors in their Discounts gener- 4 : : z ally small and business, brings the discounts of the bank are name or un- generally, into an aggregation of small or secured paper. medium sized items, largely of accommodation or name or unsecured paper. To protect the bank on this name paper, and to meet the probable demands of its deposi- tors, both as to checks and the discounts incident to the requirements of varied lines of business in different seasons the bank must confine itself to shor loans. In its legitimate field of short discounts for the | And for short business community on secured paper, the — above limitation as to lending to one customer not to exceed one-tenth of the capital does not apply, for the law expressly says: ‘‘ But the discount of bills of ° exchange, drawn in good faith, against actually exist- ing values, and discount of commercial or business paper actually owned by the person negotiating the same shall not be considered as ‘money borrowed.’ ’’ This is in emphasis of the fact that the bank’s duty is to accommodate the business public in facilitating the speedy transfer of property. One of the purposes for which the bank is created Capital not in- being: to furnish money to the business vested, but with deposits is loaned Che. «vt which it solicits deposits being its ability community, and one of the arguments on to provide a liberal line of discounts for its customers, it does not invest its capital in settled securities, but makes an effort to use it and about seventy per cent. of its deposits in accommodations to the business com- Larger part of munity. The law fixes the lawful limit reserve kept in . : gee its own vaults. Of reserve as to National banks and State banks. Asarule, banks keep the larger part of their reserves in their own vaults. The general discounts of a bank being thus in business paper, or in small or medium-sized discounts Cannot as rule or in short-time discounts, it is plain that a make large of hank cannot respond to the many demands long-time loans, , ; : : in a community for either large or long time loans on either real estate or collateral ; and this, whether such demands come from its depositors or 6 others. And National banks are prohibited National banks by law from lending on real estate for a 227°! lend'on : ; \ real estate. present or future debt. Nor is the bank’s business such as to enable it to fairly answer in a general way demands for short-time loans from that large class of people in its Cannot accom- modate persons not depositors. Paying no interest on its individual deposits, and its community who are not its depositors. principal return therefor being the express or implied obligation to furnish a commensurate line of discounts, it is not to the advantage of one who asks Non-borrowing no discounts or only an occasional discount, ¢¢Ppositer gets : : : nothing for his nor of one whose loans are of a character deposits. not acceptable to a bank, to deposit his money there. The mere keeping of its office open, and keeping the money safe, and paying it out when checks are pre- sented, is not a fair equivalent where the deposits are large and the number of checks comparatively small. Especially is this true when it is considered that the bank keeps, or attempts to keep, about seventy per cent. of its depositors’ money out at interest for its own account. ; It is to supplement and aid the functions of the bank, not to compete with them, that the trust company is formed. Its purpose is to TRUB® S < Ne) As . nc a ot pare x eee Pet '© COMPANY’S utilize the deposits of those who are not in MISSION. commercial, industrial or mercantile business, and who Toaccommodate Have little or no need for a regular line of those whose busi- discounts, and who are desirous of deposit- ness is not suited . _ #3 : . a haeily. ing their money where they can obtain a small return of interest. For convenience Pays interest on all deposits, as trust depositors in contradistinction to bank deposit- of designation, such persons may be classed ors. ‘They are, for example: 1. ‘The laborer, mechanic, clerk, teacher— Who are Trust 3 Depositors ? all those who work for wages or ona salary. 2. The capitalist, the professional man, the mar- ried woman who has a separate estate. 3. The business man who wishes to separate his private income or the surplus profits of his business from his general business capital. 4. ‘The corporation, public or private, that is accu- mulating a sinking fund, or any individual who is husbanding a balance to pay a debt. 5. ‘The executor, administrator, curator, guardian, assignee, receiver, trustee under deed or will or order of court. In short, all such who wish all their daily deposits to draw interest. Promising no line of discount in return for depos its, the trust company receives money and Promises no line : d me nA : Ai dtic oust. allows interest thereon. The depositor expecting no preference in loans, by reason of his deposits, keeps on deposit only such sums as suits his convenience from time to time, while the company, having paid for the deposits in money instead of a promised line of discounts, is under no obligation to discount his unsecured paper nor to keep itself con- tinually advised as to his business responsibility. Hav- ing its deposits without the obligation of lending them to any particular person or class of persons, and havy- ing received some of its deposits 2 tvwst, aS Treats deposits as a rule it treats all. of them as trust funds trust funds, as to the character of security taken when lending them. It selects from the community at large the best class of loans on collateral and real Makes loans on real estate and collateral. there being no obligation to distribute them, there is estate. Its loans being thus secured, and no reason for restriction as to the amount of a loan to any individual or corporation. Whether a Suited to large as ; ; : well as small loan should be large or small is left to {oans, the intelligent judgment of the company’s officers. In the recent cases brought by the Attorney General of Missouri to forfeit the charters of the several trust companies in St. Louis, on the ground that they were exceed- State of Missouri ing their charter powers in receiving deposits sub- vs. ject to check,—he contending that under the law Trust Companies. all the money received on deposit by a trust company must be received zz ¢rust and not as a general deposit,—the Supreme 9 Court of the State (June, 1898) decided that a trust company, under the law in Missouri, in addition to receiving money zz Trust Companies ¢rus¢ has a right to receive money on general have right to receive general deposits subject to : ae ise : check. creditor, but prohibited the companies from receiv- deposit subject to the depositor’s check or sight draft, thereby creating the relation of debtor and ing such deposits without allowing interest thereon. Thus, the difference between the bank and the trust company as to general deposits, is, that while both may receive them subject to check, the bank is permitted, while the trust company is reguired, to pay interest thereon. The bank may pay interest on its general But must pay deposits; the trust company must. As a fact, while interest thereon. the bank may, it scarcely ever does pay interest on the general deposits. of individuals, while the trust company always does. This requirement, that the trust company shall allow interest on its general deposits, is based on the nature of the deposits, as shown above. The largest and most stable element of wealth in any community being real estate, and banks declining generally,to make real estate loans, and National banks Is of special inter- being prohibited from so doing for any pre- est to owner OF asad St Pebtinh. Ault. thes -+#awt os aly real estate. sel OF -FREUFE: Gebpt, Le rus company becomes of special interest to the real estate owner who wishes to cultivate business relations with an insti- tution which, by the scope of its organization, enables him to use his real estate in borrowing money with the same facility that he uses his bonds and stocks. From the demands of the investing class of peo ple who are the depositors and customers of a trust 10 company, from the fact that a considerable portion of its deposits are funds that are accumulating Capital invested in settled securi- ties. pany itself keeps its own capital constantly invested for investment, and the fact that the com- in the best class of securities, and has a ths -demmod ee large demand for such securities for the securities. trust funds that come into its hands in its various trust relations, larger loans than would be desirable to a bank are in constant demand by a Makes larger trust company. loans than banks. As to trust companies, there is no law fixing the amount of reserve of deposits to be kept, Amount of re- serve not fixed by law. general class as the banks, the question of how much but being managed by men of the same reserve should be kept is determined by the intelli- gent managers of the various companies to suit the character of the deposits and the varying lines of business of the several companies. While the bank keeps its reserve in its own vaults, the Reserve depos- ited in bank at interest, ies is to keep the bulk of its cash reserve distributed practice of all well-managed trust compan- on deposit in first-class banks, from whom it receives in return interest on its daily balances. ‘Thus the trust companies bring out many deposits that singly the banks do not desire, and at times money that they could not get, and after having brought the money 1] together and loaned the major part of the aggregate, the surplus or reserve goes to increase the deposits at one of its banks. ‘This course has been generally commended, and there is not an instance where the practice has turned out otherwise than satisfactorily. In this respect, the trust companies follow the practices of the large and successful joint stock banks Follows practice jn England, which banks do not keep large of English joint : ; saris Ba aice, reserves in their own vaults but keep them on deposit with the Bank of England. ‘There, the bulk of the money of the realm, instead of being required to be kept practically out of circulation in the vaults of the bank, as is practiced in this country, is brought together in one great bank, which, in turn, lends out the major portion thereof, keeping, however, the usual banking reserve. This method of business has been a primal element in England’s financial growth, and should be considered when we speak of the small fer capita of circulation there. A slight approach toward this principle is found in the provision of the national banking law permitting a national bank to count as a part of its legal reserve the deposit it has with another national bank in a reserve city. That you may have your attention drawn to the public favor in which trust companies are held as places of deposit and to enable you to say that they fill 12 a public want, it may be interesting to know that the aggregate of deposits in trust companies in the cities of New York and Brooklyn on January 1, 1892, was $174,588,000, and that in those cities the Ratio of deposits ratio of deposits to capital and surplus was to capital. 43 to 1 in trust companies, while it was only 34 to 1 in the banks. The aggregate of deposits in trust companies in the United States now exceeds $700,000,000. The statement that the work of the trust companies as to deposits and loans is not injurious to the banks, but rather augments their facilities, is further attested by the fact that the Boards of Directors Encouraged by of the various trust companies are com- bank officers. posed largely of the presidents and other directors of neighboring banks. Filling, thus, an important field not occupied by the banks, other opportunities and duties naturally result from rendering the various services Renders special ? ,, service to Trust Depositors. The ‘‘bank depositor’’ being engaged in a commercial, to the divers classes of ‘“‘trust depositors. industrial or mercantile pursuit, has always an estab- lished place of business, and during the dull seasons or during his absence from home, leaves trusted employees to attend to current matters. But many of when at home, exclu- the ‘‘trust depositors,’’ having, 13 sive charge of their personal business, have, when sick or from home, temporary need for some trained, intelli- gent, confidential and financially responsible agent, perchance to pay premiums on insurance policies, to collect the income from stocks or bonds, or real estate, to execute some detail of an open trust, to become custodian of a will or other important paper, and deliver it if occasion warrants ; indeed, to do any of the many things that one wishes looked after during his absence. ‘The business establishment has no demand Banks not equip- for services of this characrer by outside ped for such ser- vice, ‘ where there is great volume of business, are not parties, and the banks, especially in cities equipped for them. Many ‘“‘trust depositors’ ) have no opportunity to become acquainted with investments, nor with those May greatly aid general duties that devolve upon one who one who looks must take charge of his own financial after his own : * ‘ si thict, affairs. Many young and itexperienced persons inherit estates and suddenly find themselves in situations that demand the intelligent foresight of the experienced ancestor. A married woman has a sepa- rate estate, and prefers to give personal attention to her financial affairs. An executor, administrator, or any one having charge of trust funds, may have the best legal advice, and yet be in need of other assistance 14 in the proper execution of the financial side of his trust. These are among the demands that come from persons who must look after their own affairs. 3ut there comes a time when one wishes to convey a part of his property to be held in trust for Or one who creates a trust to 10 be executed by ” has or may hereafter marry a man incompe- others, some wayward son, for some daughter wl tent to take care of her estate, or for some other pur- pose that has become dear to the heart of the grantor; or it may be his desire to set aside a fund to accumu- late for a given time, or he may wish to make a general assignment of his assets for the benefit of his credi- tors, or establish any other of the various trusts that he desires to be executed by the trustee of his selection ; or a corporation, private or municipal, may wish to establish a sinking fund that is to accumulate and be managed for a long term of years, or it may be that the trust to be executed is contained in a will and is vested in a’selected executor or testamentary guar- dian or testamentary trustee; or, perchance a trustee has to be appointed by a court; there is need for an administrator, a curator, a guardian, a receiver. If any one of these trusts be committed to an individual, there is no assurance that he Disadvantages of Soe , : aving an indi- will live to execute it, or that he will keep vidyaf as trustee. in such health as will enable him to give the trust 15 proper attention. Unexpected mental derangement may come to him; and, if in health, he will need recreation, or he may have business that takes him from home at a time when the interest of the estate demands his presence. And the court records are replete with instances where men of the highest stand- ing have gone wrong. A bond may have been given for the faithful execution of the trust, but no super- vision is assumed by the appointing power over the dealings of either principal or surety, and poverty among those who thought they would have handsome estates is too often the monument to commemorate the worthlessness of the ordinary bond. Moreover, the individual trustee is usually selected by reason of his success in his own business—a success achieved by giving his undivided time to his business, and just the man who cannot give due attention to the execu- tion of an outside trust without neglecting his own business. ‘Io expect this for the small compensation that is usually allowed in trust matters, is illusory in this utilitarian age. Again while the individual selected may be ever so faithful, yet it 1s more than likely he has never before, or but seldom, discharged such a trust, while the special trust committed to him may require for its proper execution the very best class of the most experienced talent. 16 A corporation for building a railway, a water works, a gas works, or what not, is to be formed, and the citizens of a locality find it necessary Value of Trust oa : ~ Companies to to get a large part of the money from the new enterprises. investing public. But the enterprise cannot afford the expense of an investigation by each of the investors who may become interested in it. There is a demand at once for some one of recognized standing and finan- cial responsibility who can make an investigation and upon whose report the investing public will be willing to rely. Such a one must see that all proceedings connected with the issue of the proposed Trustee in corpo- securities are regular, that the mortgage ‘t mortgages, securing them is properly drawn, and that it will invest powers in the trustees to protect the security-holders if need be; and then a trustee must be selected that will not change and that will always be ready to do his duty. Moreover, when the securities are issued, it is important for the stockholder in the company to know that there is no over-issue of the stock ; hence there is the additional requirement that someone upon whom all can rely will register the certifi- Registrar of cates. Again, the holder of one of the stocks and bonds, bonds issued may wish to have it registered in his name, so that if it should be lost or destroyed he could get his money. Or a corporation, after having 17 Reorganization promulgated its securities, may need to be reorgan- ized ; to effect which, some one of experi- agent. ence in that line must originate a plan, and a satisfactory agent must be selected who can receive and hold the various securities while the plan of reorganization is being made effective. It is natural that the same corporate agent should be called on. Men of property in every community are continually besought to become surety on the bond of some friend. Corporate Recognizing that such bonds are required by suretyship. law, and there being no substitute for the individual sureties required, it is found hard to refuse ; such requests. In practice, the surety has no indem- ‘ nity, has no supervision over the management of the trust fund, and any effort in that direction is likely to be resented as an imputation upon the integrity of the principal. Naturally many losses occur, and moneyed men, to protect themselves, are forced to a general resolution to go on nobody’s bond. As the volume of business increases sufficiently to justify it, the demand arises that the matter of becoming surety on bonds be c= | considered a business, and it is argued that the public requirements in this line can be best undertaken by a corporation which keeps constantly advised as to the rules and practice of the courts requiring such bonds, which is familiar with securities and the handling of 18 them, and which keeps a safe place where the assets in the hands of the principal can be reduced to the joint possession of the principal and the corporate surety. As population becomes denser, and as wealth accu- mulates, demands of the above and kindred Advantages of . : - aving a corpo- classes increase in volume, and there is rate trustee, repeated the experience of the town, when its citizens realized the needs of an incorporated bank. The agent to whom these various duties are committed, to repeat the plea, must be always well and at home; must never run away and never steal; must have no exemp- tions ; must have life everlasting ; must be rich and stay rich; must have no partialities ; must be subject to no political influences; must make no mistakes ; must never forget ; must do what it is told to do, first, last and all the time; must keep a complete record of what it does; must make only reasonable charges, and must have the learning, the experience, the dis- cretion not only of one man, but of a number of the most successful men in the community. Sach is the Trast Company. It can be your guardian or cura tor when you are under age; your agent or trustee when you are grown, if you are sane, and your com- mittee or guardian if you are not; your assignee if your bankruptcy is voluntary, and your receiver if it is involuntary ; your most valuable friend while you 19 live, and your executor, administrator or testamentary trustee when you die. If there is any money in the trust, it never resigns. To meet these various requirements, all naturally relating to and interlacing with each other, a statute concerning trust companies was enacted in Missouri in 1885. Its scope was restricted, and no trust company Missouri having been formed under it, when the legislation. Legislature met in 1887, the provisions of the statute were enlarged. Following the idea of some of the Eastern States, where the volume of business in any particular line was sufficiently great to justify a : corporation to take up the business of that line alone, our lawmakers not recognizing that we had not reached the density of population and the abundance of wealth of some of the Eastern States, failed to appreciate that to make such a company a success here, it must run ‘““a general store.’’ After the broadening of the statutes in 1889, several large companies, composed of the most prominent financial men of the State, were & formed. But it was found that the statute governing them was not sufficiently flexible: so in 1891 the statute was made more definite, more certain, better guarded and yet more liberal in its provisions. Under that statute, trust companies have the powers generally 20 outlined above. [See Sec. 2,839, R. S. (Mo.) 1889, as amended in 1891. | No company can be incorporated under that act with less than $100,000 capital, its directors must be stockholders, and a majority of them must be residents of this State. If the number of directors of any such corporation exceeds five, they shall be divided into three classes, of which the first shall remain in office one year, the second two years, and the third three years, and at each annual election directors shall be elected for the term of three years, to fill the vacancies created by the retiring class. If the directors of any such corporation shall knowingly declare or pay any dividends when the corporation is insol- Special vent, or any dividend, the payment of which provisions. would render it insolvent, they shall be jointly and severally liable for all debts of the corporation then existing, and for all that shall thereafter be contracted while they respectively remain in office, saving to any director, however, the right to be exempt from such liability by timely objection. The books and all records of the proceedings of such corporation shall be kept open for inspection of all persons interested. Sidtechente oa The directors shall keep correct accounts conditions, of their transactions and have full statements of the 21 condition of the affairs of the corporation made out and exhibited at least annually to the stockholders ; and from time to time, as required by the Secretary of State, shall publish sworn statements of the actual condition of the corporation, and forward copies thereof to the Secretary of State. The Secretary of State is required, at least once in every year, either personally or by his examiners, to Examined by make a detailed and full examination of Secretary of - ‘ ; State. each trust company, and if he finds any of its practices are unsafe, illegal or unauthorized by law, he has power to remedy the evil. If any officer or agent of the trust company shall receive, or assent to the reception of deposits, or create, or assent to the creation, of any debt, by such trust company, after he shall have knowledge of the fact that it is insolvent or in failing circumstances, he shall Responsibility not only be individually responsible for such of Officers, deposit so received and all such debts so contracted, but he shall be deemed guilty of larceny, and upon conviction thereof shall be» punished by con- finement in the penitentiary; and if the trust company be insolvent, or in failing circumstances at the time of the reception of the deposit, or the creation of the debt, he is presumed (fpvima facie) by the law to have had knowledge thereof. > cat kt FE SE ov As part of the purpose of the formation of these companies was to relieve individuals from +. 04.0 without the burden of becoming surety, the corpo- bond. rations were not only given the corporate right to become a surety, but the law provided that as a substitute for the second surety, or as a substitute for any individual surety where the corporation was itself executing a trust, the corporation should Sole surety. deposit with the Superintendent of the Insurance Department of the State, $200,000, consisting of cash or its equivalent in acceptable securities, and the Superintendent of the Insurance Department, having a department of the State government equip- Under Supervis- ion of Insurance rvise Department. the transactions and accounts of such companies, they ped to properly investigate and supe are required to make periodic sworn statements for filing in his office, and he is given plenary rights to investigate and supervise the business of such com panies, and to close up any company if its business is irregularly or not safely conducted. ‘The fund deposited with the said superintendent shall be pri marily liable for the trust obligations of the company depositing it, and shall not be liable for any other debt or obligation of the company until all its trust liabil- ities have been discharged. This fund of $200,000 must always be kept intact No other corporations in the State are subject to be examined and supervised by two departments of the State government. Thus the trust companies having ample powers, have the strongest legal safeguards around the exer- cise of them; and, having for their operations a field that it is impossible for the banks to occupy, they work hand in hand with the banks. TS SRR Pe Pee a . 4 : t a RS cern as . x Gh “hey RE car iar bi, ee ge RTS: oe