(Dow Jones) South Dakota is trying to tighten the reins on its growing business in trusts without stopping that growth.

In July, a new law will raise the barrier to entry for some trusts and impose a tighter regulatory regime overall. There will also be a clearer legal distinction between public and private trust companies. Trust companies that do a lot of business in the state say the changes may actually help them.

Some trusts may have to put up more capital to maintain themselves and deposit more with the state for insurance, trust officers will go through more intense background checks, including fingerprinting for public trust company officers, and trust companies will have to have more in-state staff.

South Dakota began making a push to attract trust business with a key statute it put on the books in 1995. It now ranks with Delaware, Nevada and Alaska as one of the most popular places to set up a trust company.

South Dakota historically has attracted an especially large number of private trust companies, which are run by family members. About five years ago, though, more public companies began coming in, according to Bret Afdahl, division counsel at the South Dakota Division of Banking.

The state updates its trust law annually, through a governor's task force on trust administration co-chaired by Sen. Dave Knudson (R., S.D.) and Lt. Governor Dennis Daugaard, both of whom are currently running for governor. This year's changes are considered among the most significant; the task force decided that because of the state's trust-company boom, some of its requirements might no "longer be up to snuff," said Afdahl.

In 1996, the state had one trust company. By 2001, that number had grown to a total of 13 private and public companies with about $13 billion under management or administration; in 2006, it had 20 companies with $33 billion. Last year, South Dakota had 39 trust companies with $57 billion in assets.

That growth has been fueled by the ease with which companies can set up shop in the state and the various tax, and trust law advantages found in South Dakota.

Right now, South Dakota requires only $200,000 in capital for trust companies, a lower bar than for other leading trust centers. That is the amount the trust company must maintain at all times. Delaware, for example, requires that a trust company have at least $1 million in equity capital to start; as it grows, it must maintain the greater of that amount or 25 basis points on fiduciary assets for which it has investment discretion, according to Mark Purpura, a director at Delaware law firm Richards Layton & Finger, and an expert on trusts. (That $1 million paid in equity capital is considered an asset of the trust company, and may be invested.)

The South Dakota capital requirement will be $200,000 under the new rules, but regulators will have the discretion to raise it for a given trust company based on its risk profile. That could happen, said Afdahl, in cases where, after a safety and soundness review that is done every 18 months for public companies and every 36 months for private companies, regulators discover the trust company has grown dramatically or has high-risk business practices.

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