Unprepared to supervise the trust activities of major financial services firms, the Office of Thrift Supervision has stopped processing charter applications from at least four large nonbanks.

The unidentified securities firms and insurance companies want thrift charters to offer customers trust services nationwide.

Ironically, trust charters were once considered the least controversial of all unitary thrift holding company applications. But today the companies seeking the charters are larger, and the operations they are proposing are more complicated.

For example, these companies want to manage many of the functions typically handled by thrifts themselves, ranging from administrative functions to investment planning, explained Scott M. Albinson, managing director of the OTS' office of supervision.

Specifically, the OTS is concerned about whether assets that are held in trust are being invested in funds operated by the parent company or its affiliates. If so, the agency wants to ensure that the investments are being made in the best interests of the beneficiary-not to serve the interests of the parent company.

"We are moving carefully and cautiously," Mr. Albinson said. "We're looking at methods to ensure that strong internal controls exist."

Though these applications are officially still pending, they are essentially in limbo because the OTS has given itself an unlimited amount of time to make a ruling. More applications could be suspended.

Mr. Albinson said the agency may resolve specific issues by imposing conditions on approvals granted to individual companies. Longer term, he said, the agency may restructure its exams or issue new rules.

Over the last several years, interest in the thrift charter has increased sharply. Many insurance companies and securities firms began flocking to the thrift charter after the OTS ruled in 1996 that trust companies could market trust services nationwide and would not be limited by the state laws where they were headquartered.

At yearend 1998, 100 thrifts with $108 billion of assets specialized in trust activities, according to the OTS.

The agency approved 27 applications for trust powers last year, including charters for Allstate Corp., Northbrook, Ill.; Nationwide Financial Services Inc., Columbus, Ohio; and A.G. Edwards & Sons Inc., St. Louis. Another 24 applications are pending.

Industry lawyers defended the applications.

The practice of housing many functions at the parent company "can be a very effective tool to provide cost-efficient services to the bank, ensure that the bank will be profitable, and keep the costs to the consumers low," said William S. Eckland, a partner at Sidley & Austin in Washington.

"We understand that the agency is rethinking its position," he said. "The OTS has to tell the industry, or potential applicants, what the rules are."

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