The conduct of the trust functions of a trust company gives occasion for the investment and reinvestment of trust funds; and the trust company has funds of its own to invest. To carry out these investment operations a special department is de veloped which deals in high-grade securities for itself, its clients who have established trusts with it, and other customers, and func tions as a bond house. One favorite line of investments is mort gages or debentures issued by mortgage bond houses, or the trust companies may issue such bonds themselves and sell them to their customers. Under investment-deposit agreements, deposits received from customers are invested in securities which are held in trust for the depositors.
Another type of service is the care of real estate committed to a trust company by private agreement, by will, or by appoint ment of court. This line of activity may develop into a real estate business engaged in the purchase, sale, and renting of real estate on commission.
Trust companies are permitted in some states to act as as signees, receivers, and trustees in bankruptcy. An assignee or trustee in bankruptcy cares for the just distribution of the assets of insolvent persons, firms, or corporations among their creditors. The assets are taken over, some or all of them are converted into cash, the preferred claims are paid, and the rest of the assets are distributed among the creditors on the basis of their claims. As signees and trustees are accountable to the court having juris diction.
A receiver is a person or a corporation appointed by the court to take charge of a property in dispute. If the shareholders of a company or the partners of a firm are dissatisfied with its manage ment the court may be asked to handle the property until the dispute is settled. Sometimes, although a company is insolvent, the prospect for early rehabilitation may be good and the court may appoint a receiver to handle the property during the period of recovery. On the other hand, the company may be so insolvent as to be hopeless, and the receiver may be appointed to cut down fixed charges, assess the present holders, borrow funds, and put the reorganized company on its feet again. The trust company, by reason of its experience, good credit, and financial responsibil ity, is well fitted to act in any of these cases.
Trust Functions for Corporations A trust company commonly acts as trustee under the trust deed or mortgage securing an issue of bonds. It certifies to the regularity of the issue and to the genuineness of the document, but does not guarantee the value or payment of the bond. In this capacity the company acts for the interest of the bondholders, and in case of default of the issuing company it could foreclose on the property covered by the deed or mortgage.
Another trust activity is to act as fiscal agent for states, municipalities, railroads, and industrials, handling the payments relating to the bonds, coupons, interest, dividends, taxes, acting as depository for the above corporations, receiving subscriptions to their securities, and delivering the issues.
Trust companies act as transfer agents for stocks and regis trars for stocks and bonds, their duty being, in that connection, to prevent the fraudulent overissue of securities. The transfer agent cancels old certificates of stock and issues new ones in the names of the new owners. Bonds are registered as to principal or interest, or both, and usually the trustee of the mortgage un derlying the bonds acts also as registrar of the bonds.
Other important operations of trust companies are connected with corporate reorganization and financing. This is a risky line of service and if the trust company is to maintain its good-will it must handle only conservative propositions. When charged with such work the trust company determines upon a plan of reorgan ization, recalls the outstanding certificates, distributes the new ones, makes assessments, and manages the reorganized company until it is an assured success. When a new enterprise is to be fi nanced, the trust company investigates the concern and the value of its physical and other assets, undertakes the sale of its securities, and acts as a regular investment banker.
Insurance and Safe-Deposit Functions Some few states permit trust companies to do a fidelity insur ance and title insurance business similar to that done by regular bond or surety companies. Fidelity insurance is devoted chiefly to acting as surety for the honesty and fidelity of officers and employees holding positions of trust and responsibility. Such an arrangement is better for all concerned than to have friends go surety for the person bonded, for the person signing the bond, and for the security afforded the beneficiary named in the bond. The fidelity company receives compensation for its service, assumes the risk as an actuarial business matter, and protects the bene ficiary with its known financial responsibility. Title insurance is an agreement of the trust compay to defend, at its own expense, all litigation directed against the title insured by it, and in case of unsuccessful defense to bear losses up to the full sum insured for.
Trust companies also do a safe-deposit business, maintaining vaults so constructed as to be proof alike against burglars and mobs, fire, and water. Boxes are rented for the keeping of money, jewels, and valuable papers and access thereto is given only when the vault guard is in attendance.
While there are other minor functions performed by trust companies, those just described are the most important and indi cate the wide variety and complexity of the trust banking business.