Trustworthy Trust
By Henry E. Seaton

July 2001
Reprinted from

Q I’m a broker. I have been approached by a financial institution that claims to represent hundreds of brokers in satisfying the bonding requirements by posting a bank trust agreement. We wouldn’t have to post $10,000 as cash collateral; instead the financial institution would hold a claim on our receivables as collateral. The fees are reasonable, and the institution advertises that no claim will be paid if we disagree, and no legal judgment will be taken against us. Are these types of arrangements legal?

A In my opinion, they are not. A so-called bank trust agreement (Form BMC-84) is an alternative way to comply with the broker financial security requirements. Unlike a surety bond, which must be written by a licensed insurance company, any state or federally licensed bank may post a bank trust agreement.

The terms of the bank trust agreement are very specific, however. The financial institution, called the trustee, must represent that it has “receipt of the sum of $10,000 to be held in trust.” It must warrant that it exclusively manages the security and the trust fund and that it has the sole discretion to invest the funds.

The financial institution cannot have any interest — financial or otherwise — in the broker. It must make a good faith determination that a broker has failed to pay and would be legally liable to carrier claimants on a case-by-case basis. Under the situation you describe, the alleged financial institution cannot begin to meet the broker trust fund agreement requirements. It does not actually have the funds on deposit and apparently advertises its bias in not paying claims without the broker’s approval.

In addition, the fact that the financial institution may have a security interest in the broker’s receivables does not satisfy the trust agreement requirements or offer any reasonable certainty that there’s even $10,000 available to claimants.

If a broker does not wish to post a $10,000 cash collateral, its recourse is to file a surety bond through a licensed insurance company. If a financial institution — however that’s defined — files broker trust agreements with the FMCSA on Form BMC-84 without requiring the posting of a $10,000 CD or cash collateral in trust, it could be violating state insurance laws and federal transportation regulations.

As you have described it, I do not believe the proposed broker’s trust fund agreement complies with the law or that the federal regulators, if asked, would approve the arrangement you described. I certainly would not recommend my clients use a broker that relies on such an agreement.
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