Limited Purpose Trust Companies: Definition, Functions, and Regulatory Insights

A limited purpose trust company is a state-chartered entity that specializes in providing specific trust functions. These functions typically include acting as a custodian or safekeeper for securities, mortgages, or other financial assets. Unlike full-service trust companies, limited purpose trust companies have a narrower scope of operations and are restricted to certain activities as defined by their charter.

One example of a limited purpose trust company is the Depository Trust Company (DTC) located in New York. Established in 1973, the DTC primarily holds securities in safekeeping for banks and investment firms, facilitating book-entry settlements and streamlining the clearing and settlement process for securities transactions. Another example is the Participants Trust Company, which specializes in mortgage depositing services.

The powers granted to a limited purpose trust company may vary depending on the state in which it is chartered. In New York, for instance, these entities typically do not have the authority to make loans or accept deposits. Any restrictions on their operations are outlined in their organization certificate, which specifies the type of business activities the trust company is permitted to engage in. Changes to these activities require approval from the state’s regulatory authorities.

Some fintech companies leverage the limited purpose trust charter as a regulatory solution to navigate compliance requirements. For example, companies like Gemini and itBit have obtained limited purpose trust company charters in New York to avoid licensing as money transmitters and comply with capital requirements. However, such charters restrict their operations to the state of issuance and may necessitate additional licensing for interstate activities.

Limited purpose trust companies typically specialize in specific trust functions, such as holding securities, mortgages, or other financial assets in safekeeping.

The powers granted to limited purpose trust companies may vary by state. In many cases, these entities do not have the authority to make loans or accept deposits.

Limited purpose trust companies obtain their charters from state regulatory authorities, which outline the specific business activities they are permitted to engage in. Any changes to these activities require approval from the relevant regulatory bodies.