On February 9, 2012, the Federal Aviation Administration (the FAA) published its Proposed Policy Clarification (the PPC) regarding the use of non-citizen trusts (NCTs) to effect registration of an aircraft on the FAA registry.1 The PPC is a draft, prepared and published by the FAA for public comment, which includes its justifications for seeking to impose changes to the NCT registration process, and explanations and descriptions of those proposed changes, including a sample trust agreement revised to reflect the same.2 The PPC was issued after being reviewed and approved by officials of the FAA and DOT, as well as the Transportation Secretary.
The PPC includes the FAA’s general recognition of NCTs, which is a positive development. However, the PPC imposes new, and not insignificant, conditions on the use of NCTs including the allocation to the trustees of primary responsibility for certain matters as the “owner” of the aircraft. This Bulletin briefly describes the FAA’s purpose for publishing this PPC, the matters addressed in the PPC, and its likely implications.
FAA’s Compliance Concerns
The PPC repeated the concerns raised by the FAA in previous reviews of NCTs.3 Many of those concerns are not exclusive to the use of NCTs, despite the recent scrutiny. However, the use of NCTs is of particular concern because NCT-registered aircraft are frequently based, operated and maintained outside of the US and, per the FAA, impeding its national and international responsibilities to monitor, enforce and ensure compliance with the airworthiness and operational standards required of FAA-registered aircraft.4
Proposed NCT Requirements
The PPC NCT-related requirements are intended to address the FAA’s compliance concerns by requiring NCT trustees to facilitate periodic or urgent efforts by the FAA to find or verify information with respect to the “identity and whereabouts of the actual operators of aircraft and the location and nature of operation.” For that purpose, the PPC proposes revisions in the form trust agreement requiring that NCT trustees furnish the following to the FAA upon its demand:
Within 2 business days:
- the identity of the person normally operating, or managing the operations of, the aircraft;
- where that person currently resides or has its principal place of business;
- the location of maintenance and other aircraft records; and
- where the aircraft is normally based and operated.
Within 5 business days:
- information about the operator, crew, and aircraft operations on specific dates;
- maintenance and other aircraft records; and
- the current airworthiness status of the aircraft.
The PPC further provides that the trustees may be required to produce the foregoing information more quickly “in the event of an emergency.”
In addition to the reporting obligations, the FAA has clarified its position regarding documents to be filed with trust agreements, and proposed new requirements related to trustee removal or resignation. In particular, the FAA notes that parties to NCTs often enter into, but do not file with the FAA, an operating agreement, pursuant to which the non-citizen beneficiary or trustor is given significant operational control over the aircraft. The FAA has proposed that these operating agreements must be submitted to the ACC with the trust agreements, but has not specified whether these agreements would be filed in the FAA ancillary files, or recorded with the FAA registry.
The trust agreement attached as an exhibit to the PPC includes suggested revisions by the FAA intended to further limit non-citizens from influencing the trustee’s control over certain aircraft matters, as well as clarifying certain perceived ambiguities in current “market” trust agreement forms. With respect to trustee resignation and removal, the FAA has proposed additional terms to be included in trust agreements. The FAA found that current NCT trust agreements give the non-citizen trustors too much discretion in removing trustees. Consequently, the FAA has proposed new terms that will limit the non-citizen trustors’ ability to remove trustees in the absence of “cause” as well as clarify the grounds that will constitute “cause” for removal. Pursuant to the PPC, trustees will be allowed to resign if the trustor is uncooperative. Parties to transactions involving NCT-registered aircraft, especially financing parties, are likely to further address the impact of any such trustee resignation or removal in the transaction documents.