This subchapter applies to loans or extensions of credit made on or after September 1, 1995. A loan or extension of credit existing prior to September 1, 1995, that was within a bank's legal lending limit when made but is currently in excess of the limitations of Finance Code, §34.201 , is not a violation of the Finance Code, §34.201, and this subchapter, but [ ~~and~~ ] is considered a nonconforming [ ~~conforming~~ ] loan.

(b)-(c)

(No change.)

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

TRD-9716983

For further information, please call: (512) 475-1300

Subchapter C. Investment Limits

7 TAC §12.61

The amendment is proposed under Finance Code, §31.003(a)(1) and §34.101(j), which authorizes the commission to adopt rules necessary or reasonable to implement and clarify Finance Code, Title 3, Subtitle A, and further to adopt rules to administer the provisions of Finance Code, §34.101.

Finance Code, §34.101 and §34.104, is affected by the proposal.

§12.61. Transition Provisions.

An investment in securities made prior to September 1, 1995, that was within a state bank's investment limit when made but is currently in excess of the limitations of Finance Code, §34.101 or §34.104, is not a violation of Finance Code, §34.101 or §34.104, but is considered a nonconforming [ ~~conforming~~ ] investment.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

(No change.)

TRD-9716984

For further information, please call: (512) 475-1300

Chapter 17. Trust Company Regulation

The Finance Commission of Texas (the commission) proposes new §§17.1, 17.2, 17.21, and 17.22, regarding ratable increases in required capital, advertising, the physical location of books and records, and examination fees applicable to trust companies.

Effective September 1, 1997, Texas Civil Statutes, Articles 342a-1.001 et seq, became the governing law for trust companies under the jurisdiction of the Texas Department of Banking (the department). New regulations implementing this law require proposal and adoption. As part of this process, 7 TAC Chapter 17 will contain generally applicable rules pertaining to trust companies. Proposed §17.1 and §17.2 will initially comprise all of Subchapter A, entitled "General," and proposed §17.21 and §17.22 will initially comprise all of Subchapter B, entitled "Examination and Call Reports."

Proposed §17.1 concerns ratable increases in capital and provides a timetable for a trust company to comply with minimum restricted capital requirements under Texas Civil Statutes, Article 342a-3.007. Proposed §17.1 is comparable to and drawn from 7 TAC §10.1, proposed for repeal in this issue of the Texas Register .

Proposed §17.2 prohibits certain misleading advertising by trust companies, and is comparable to and drawn from 7 TAC §10.4, proposed for repeal in this issue of the Texas Register .

Proposed §17.21 provides for the preservation and location of corporate and fiduciary records of a trust company to enhance the examination process by the department and to provide flexibility to trust companies in conducting their affairs. Proposed §17.21 is comparable to and drawn from 7 TAC §10.2, proposed for repeal in this issue of the Texas Register .

Proposed §17.22 specifies examination fees to be charged to trust companies by the department, and is comparable to and drawn from 7 TAC §10.3, proposed for repeal in this issue of the Texas Register , and 7 TAC §3.36(h).

Mr. Jobe also has determined that for each year of the first five years the sections are in effect, the public benefit anticipated as a result of enforcing these sections are the clarification of complex statutory standard to aid the industry in compliance. No net economic cost will result to persons required to comply with the proposed sections. No difference will exist between the cost of compliance for small businesses and the cost of compliance for the largest businesses affected by these sections.

Comments on the proposed sections may be submitted in writing to Jerry Sanchez, Assistant General Counsel, Texas Department of Banking, 2601 North Lamar Boulevard, Austin, Texas 78705-4294, or by e-mail to jerry.sanchez@banking.state.tx.us.

Subchapter A. General

7 TAC §17.1, §17.2

The new sections are proposed under Texas Civil Statutes, Articles 342a-1.003(a)(1), 342a-1.003(a)(2), and 342a-3.103(a), which authorize the commission to adopt rules to implement and clarify Texas Civil Statutes, Articles 342a-1.001 et seq, preserve or protect the safety and soundness of trust companies, and establish the basis for reductions and increases in restricted capital.

Texas Civil Statutes, Articles 342a-1.001 et seq, are affected by the proposal.

§17.1. Ratable Increases in Required Capital.

Beginning restricted capital. As used in this section, the term "beginning restricted capital" means, at any time, the level of restricted capital of a trust company as determined by the immediately preceding September 30th statement of condition and income filed by the trust company pursuant to Texas Civil Statutes, Article 342a-2.003, subject to correction or restatement as a result of examination.

Purpose. Pursuant to Texas Civil Statutes, Article 342a-3.007, a trust company is required to possess minimum restricted capital of not less than $1 million, or a higher or lower amount set by the banking commissioner. Under prior law, the minimum restricted capital was $500,000. An existing trust company must achieve the new required level of restricted capital by September 1, 2000. This section provides for ratable increases in minimum restricted capital and for deferrals and extensions of time for a trust company acting in good faith to achieve minimum required restricted capital.

Transition for under-capitalized trust company.

A trust company with restricted capital as of September 1, 1995, that was less than the minimum restricted capital required under Texas Civil Statutes, Article 342a-3.007, must increase its restricted capital annually thereafter, by the end of September 30th of each year, according to the following schedule:

(A)

September 30, 1996--by a sufficient amount to cause restricted capital to equal such company's beginning restricted capital plus at least 20% of the difference between the minimum restricted capital required at that time and such trust company's restricted capital as of the preceding September 30th;

(B)

September 30, 1997--by a sufficient amount to cause restricted capital to equal such trust company's beginning restricted capital plus at least 25% of the difference between the minimum restricted capital required at that time and such trust company's restricted capital as of the preceding September 30th;

(C)

September 30, 1998--by a sufficient amount to cause restricted capital to equal such trust company's beginning restricted capital plus at least 33% of the difference between the minimum restricted capital required at that time and such trust company's restricted capital as of the preceding September 30th;

(D)

September 30, 1999--by a sufficient amount to cause restricted capital to equal such trust company's beginning restricted capital plus at least 50% of the difference between the minimum restricted capital required at that time and such trust company's restricted capital as of the preceding September 30th; and

(E)

September 30, 2000--by a sufficient amount to cause restricted capital to equal at least the minimum restricted capital required at that time. Thereafter, the trust company shall have and maintain at least the minimum restricted capital required by Texas Civil Statutes, Article 342a-3.007.

The implementation schedule set forth in paragraph (1) of this subsection is a minimum requirement, and does not authorize a reduction of restricted capital for a trust company that has more restricted capital than is required under the implementation schedule but less than is required under Texas Civil Statutes, Article 342a-3.007. Any trust company that possesses restricted capital in excess of minimal requirements or that achieves the minimum transition level of restricted capital prior to the required deadlines in the transition schedule may not reduce its restricted capital without the express written consent of the banking commissioner.

(d)

Extensions of time. Upon application by a trust company subject to subsection (c) of this section, the banking commissioner, in the exercise of discretion, may grant one or more extensions to a trust company to permit additional time to achieve the required restricted capital levels if, in the banking commissioner's opinion, the trust company has made a good faith effort to achieve such restricted capital levels.

(e)

Inapplicability to new trust company. This section does not create a presumption regarding the adequacy of the capital structure proposed for a new trust company in a charter application to the banking commissioner.

§17.2. Advertising.

An advertisement published by or on behalf of a trust company may not include the following:

a guaranteed rate of return or interest rate on funds deposited in trust;

a statement that tends to deceive or mislead the public; or

a term that may deceive the public into belief that the trust company is engaged in the banking business.

Advertisements published by or on behalf of a trust company must be retained in the trust company's records for examination by department personnel.

A trust company that violates this section is subject to an enforcement action initiated by the banking commissioner under Texas Civil Statutes, Articles 342a-6.001 et seq.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

TRD-9716986

For further information, please call: (512) 475-1300

Subchapter B. Examination and Call Reports

7 TAC §17.21, §17.22

The new sections are proposed under Texas Civil Statutes, Articles 342a-1.003(a)(1), 342a-1.003(a)(4), and 342a-4.109, which authorize the commission to adopt rules to implement and clarify Texas Civil Statutes, Articles 342a-1.001 et seq, to provide for the recovery of the cost and maintenance and operation of the department and the cost of enforcing Texas Civil Statutes, Articles 342a-1.001 et seq, through the imposition and collection of ratable and equitable fees for notices, applications and examinations, and to require maintenance of fiduciary records.

Texas Civil Statutes, Articles 342a-1.001 et seq, are affected by the proposal.

§17.21. Physical Location of Books and Records.

Purpose. The purpose of this section is to provide for the preservation and location of trust company records to enhance the examination process by the department and to provide flexibility to trust companies in conducting their affairs. A trust company that maintains fiduciary records at one or more locations other than its principal place of business should be aware that a separate examination may be required at each such location, the cost of which will be borne by the trust company. This section may not be construed to prevent the maintenance of a duplicate set of records if the trust company considers such to be advisable.

Corporate records. Those books and records of a trust company that are related to corporate governance and operations must be kept and maintained at the trust company's principal place of business in this state. Such books and records include but are not necessarily limited to:

general and subsidiary ledgers;

income and expense ledgers;

supporting documentation for assets and liabilities;

(4)

contracts with suppliers and service providers;

(5)

corporate state and federal tax information and documentation;

(6)

correspondence with the department;

(7)

directors minutes;

(8)

shareholders minutes;

(9)

corporate governance documents such as bylaws, articles of association, and stock register; and

(10)

reports of condition and income.

Fiduciary records. Those books and records of a trust company that are related to fiduciary accounts and operations may be kept and maintained either at the trust company's principal place of business in this state or at the place where the trust company's fiduciary accounts are administered; provided that such books and records may not be divided and kept partially at different locations without the prior consent of the department. Such books and records include but are not necessarily limited to:

governing documents for each trust, custodial account, agency or other type of account administered;

documentation supporting the purchase or sale of any investments from or to the accounts administered, including broker confirmations and safekeeping receipts;

documentation on any assets accepted in-kind with supporting documentation justifying the amount booked;

(4)

account reviews, including administrative and asset reviews;

(5)

copies of all correspondence on each account administered, including documents relating to litigation, bankruptcy proceedings or other court action;

(6)

copies of income tax returns on any accounts which are required to submit income tax returns;

(7)

copies of customer account statements;

(8)

trial balance of all accounts administered reflecting all investments, including principal cash and income cash, at market value and cost;

(9)

overdraft listing of any overdrawn account administered and reflecting date of overdraft;

(10)

large cash balance listing of accounts administered;

(11)

safekeeping report from each institution holding items for safekeeping, with reconcilement to the trust company account trial balance;

(12)

master asset listing of all investments by type, reflecting account holder, number of units held with cost and market values;

(13)

assets by account holder reflecting investments with number of units, cost and market values;

(14)

broker commission report reflecting all brokers utilized for purchase or sale of investments, dollar volume, commissions paid and number of transactions;

(15)

reconcilement of fiduciary cash accounts including copies of bank account statements;

(16)

reconcilement of suspense accounts with listing of items outstanding and origination dates;

(17)

complaint file; and

(18)

copies of quarterly report of trust assets.

§17.22. Examination and Investigation Fees.

Calculation of fees. A trust company shall pay to the department a fee for examination, whether a regular or special examination, or for an investigation in connection with an application, calculated at a uniform rate of $500 per examiner per day, to recoup the salary expense of examiners plus a proportionate share of the department's overhead allocable to the examination or investigation function. The commissioner may lower the uniform rate without the prior approval of the finance commission.

Travel expenses. In connection with an examination or investigation, a trust company shall reimburse the department for actual travel expenses incurred, including mileage, public transportation, food, and lodging, in addition to paying the fees set forth in subsection (a) of this section.

Payment due. Fees and expenses charged under this section are due no later than the 30th day after a bill for fees and expenses is submitted to the trust company. Failure to pay such fees and expenses or file a request for hearing within the time period may subject the trust company to enforcement proceedings.

(d)

Dispute of fees and expenses.

A trust company may dispute the amount of a bill for fees and expenses assessed under this section by paying the amount of fees and expenses that are undisputed and filing a written request for hearing with the banking commissioner on or before the 30th day after a bill for fees and expenses is submitted to the trust company. If the trust company does not request a hearing in writing within the time period allowed, the assessed fees and expenses are final and nonappealable.

A requested hearing must be held not later than the 30th day after the date the request was received by the banking commissioner unless the parties agree to a later hearing date. Each party shall be given written notice by personal delivery or by registered or certified mail, return receipt requested, of the date set by the banking commissioner for the hearing not later than the 11th day before that date. The hearing shall be conducted as provided by Chapter 9 of this title (relating to Rules of Procedure for Contested Case Hearings, Appeals, and Rulemakings).

After the hearing, the banking commissioner shall affirm or modify the bill for fees and expenses by written order.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

TRD-9716987

For further information, please call: (512) 475-1300

Chapter 19. Trust Company Loans and Investments

The Finance Commission of Texas (the commission) proposes new §§19.1, 19.21, and 19.22, concerning loans or extensions of credit and investments by trust companies.

Effective September 1, 1997, Texas Civil Statutes, Articles 342a-1.001 et seq, became the governing law for trust companies. New regulations implementing this new law require proposal and adoption. As part of this process, Chapter 19 will contain rules applicable to loans and investments of trust companies. Proposed §19.1 will initially comprise all of Subchapter A, entitled "Loans," and proposed §19.21 and §19.22 will initially comprise all of Subchapter B, entitled "Investments."

Proposed §19.1 clarifies that a state trust company does not violate the limitations on loans or extensions of credit, including lease financing transactions, if such transactions were legal when made but become nonconforming as a result of exceeding the new legal lending limit created by Texas Civil Statutes, Article 342a-5.201. Proposed §19.1 also authorizes the banking commissioner, under certain limited circumstances, to allow renewal, extension, or restructuring of loans which are not in compliance with a trust company's legal lending limit.

Proposed §19.21 clarifies that a state trust company does not violate the limitations on investments if such investments were legal when made but become nonconforming as a result of exceeding the new investment limit created by Texas Civil Statutes, Article 342a-5.101. A trust company may not make an investment on or after September 1, 1997, that is not in compliance with law, or that would cause an existing investment to become further out of compliance with law.

Pursuant to Texas Civil Statutes, Article 342a-5.104(c), a trust company's total investment in mutual funds for its own account may not exceed an amount equal to 15 percent of the trust company's restricted capital. Proposed §19.22 will substantially reduce this restriction by permitting investment of an amount up to 15 percent of the trust company's restricted capital in each qualified mutual fund, subject to the exercise of prudent investment judgment. A trust company must periodically review the investments in the portfolios of mutual funds in which it invests to determine that investment limits are not exceeded by reason of the combined holdings of the securities of a single issuer held directly by the trust company and held indirectly by multiple mutual funds in which the trust company is invested. Documentation of periodic reviews must be maintained by the trust company for examination purposes.

Further, proposed §19.22 will permit a trust company to invest without limitation in a mutual fund with stated objectives of investing solely in securities that the trust company could invest in directly for its own account without limit, provided the mutual fund's portfolio in fact consists entirely of such securities.

Finally, proposed §19.22 clarifies that a mutual fund investment is subject to the provisions of proposed §19.21. Thus, a mutual fund investment made prior to September 1, 1997, that was within a trust company's investment limit when made but became nonconforming as a result of the new limitations of Texas Civil Statutes, Article 342a-5.101, remains a legal but nonconforming investment. A trust company may not make a mutual fund investment on or after September 1, 1997, that is not in compliance with Texas Civil Statutes, Article 342a-5.101, or that would cause an existing mutual fund investment to become further out of compliance with Texas Civil Statutes, Article 342a-5.101, such as by electing to reinvest dividends.

Everette D. Jobe, General Counsel, Texas Department of Banking, has determined that for the first five-year period the sections are in effect, there will be no fiscal implication for state or local government as a result of enforcing or administering the sections.

Subchapter A. Loans

7 TAC §19.1

The new section are proposed under Texas Civil Statutes, Articles 342a-1.003(a)(1), 342a-1.003(a)(2), and 342a-5.201(c), which authorize the commission to adopt rules to implement and clarify Texas Civil Statutes, Articles 342a-1.001 et seq, to preserve or protect the safety and soundness of state trust companies, and to establish limits, requirements, or exemptions for particular classes or categories of loans or extensions of credit, and establish collective lending and investment limits.

Texas Civil Statutes, Article 342a-5.201, and Article 342a-5.202, are affected by the proposal.

§19.1. Grandfathered Loans.

Texas Civil Statutes, Article 342a-5.201, and this subchapter apply to loans or extensions of credit made on or after September 1, 1997. A loan or extension of credit existing prior to September 1, 1997, that was within a trust company's lending limit when made but is currently in excess of the limitations of Texas Civil Statutes, Article 342a-5.201, is not a violation of Texas Civil Statutes, Article 342a-5.201, or this subchapter, but is considered a nonconforming loan.

Except as provided in subsections (c)-(e) of this section, a trust company may not renew, extend the maturity of, or restructure a nonconforming loan or extension of credit described in subsection (a) of this section unless the renewed, extended, or restructured loan complies with Texas Civil Statutes, Article 342a-5.201.

Provided a trust company first makes a reasonable effort, consistent with safety and soundness principles, to collect a loan or extension of credit described in subsection (a) of this section at its maturity or to comply with subsection (b) of this section, a trust company may renew, extend the maturity of, or restructure the nonconforming loan or extension of credit unless: