Guidelines for Transfer of Control and Material Event Reporting for Licensed Money Transmitters

State money transmitter license holders, which are generally supervised by the state banking commissioners, are typically required to inform their respective regulators about material events and changes in their business within a certain period of time. When, what and how material changes need to be reported is complex and differs from state to state. The most significant changes – transfer of controls – can require months of lead time for planning, submission of documentation to regulators and obtaining approvals. Transfers of control entail extraordinary regulatory procedures, such as the need to file applications for pre-approval of a deal in many states, that go beyond typical material events.

This article provides an overview of the most common material event situations, with a focus on transfers of control. It provides general guidance on the process and requirements associated with transfers of control, as well as suggestions for dealing with common conundrums one may encounter along the way. It identifies certain false assumptions parties make in deal-making, such as that licenses are transferable and that obtaining regulator approvals is a straightforward formality.

Popularity of Payment Services Leading to More Licensed Money Transmitters and Material Event Circumstances

Companies and investors from all lines of industries are getting engaged in designing, facilitating, acquiring or investing in payments operations. Mobile, online and prepaid payment services are especially en vogue.  Regulators have, in tandem, been expanding the scope of what kinds of companies are subject to state money transmitter licensure. As a general rule of thumb, a company that takes possession of customer funds before settlement with the beneficiary may be deemed to be providing money transmission services by most state regulators unless that company is taking instructions from an already chartered or licensed entity on the origination end of the transaction. Google, Amazon, PayPal and NetSpend are examples of companies which are licensed as money transmitters nationwide. Even ADP Payroll Services holds licenses in multiple states.

The high rate of innovation, consolidation and investment in the payments space has not only triggered new applicants for money transmitter licensure. It has also made it more important that existing licensees, and those which seek deals with the licensees, understand material event reporting, and, in particular, transfers of control. (A prior Compass article in June 2012 reviewed the step by step requirements for obtaining money transmitter licensure. You may read the archived version.

Common Types of Material Events

Many states oblige licensees to report significant changes soon after or even before such events occur, outside of normal license renewal and periodic reporting filings. Although each state has a different definition, typical kinds of material events include:

Establishing Pre-Defined Policies and Procedures for Material Event Reporting

The individual responsible for state regulatory relationships for the licensee should maintain a list of what constitutes a material change and how and when to report one in the states in which they are licensed. The rules will differ from one state to another. Such preparedness will help a company avoid a frustrating loss of time in critical situations like obtaining prior regulatory approval for a transfer of control or having a new officer or director join the company. The checklist of material event reporting procedures should be updated at least once per year as states revise their rules and requirements. For example, many states are presently converting to the Nationwide Mortgage Licensing System & Registry (“NMLS”) electronic license application filing system which may impact how application forms must be submitted (as well as the length of time for material event processing and approvals, since some new NMLS states are backlogged).

Defining Transfers of Control and Timing the Reporting to Regulators

A transfer of control is a form of material event in a company’s life – a unique type that requires an application process and pre-approval from a regulator before a deal can be consummated in many states – that occurs when a licensee has a significant new shareholder, a merger or an acquisition. Transfers of control entail the licensee giving another person the power to direct the management and policies of a licensee, or the ownership or power to vote of 10 to 25 percent (depending on the state) of any class of the outstanding voting securities of the licensee.

State money transmitters licenses are generally non-transferable and non-assignable. This is a point sometimes overlooked that should be remembered early on in structuring deals. A company seeking to ‘buy’ a license portfolio in most states cannot transfer the licenses to the parent organization; the acquired firm therefore needs to be maintained as a stand-alone legal entity such as a wholly-owned subsidiary. The acquired entity can appoint as an agent other legal entities in the company which seek to benefit from the licenses. In cases when a licensee and the new owner both have pre-existing licenses in the same state, neither side should surrender its license if both entities intend to continue separately being a principal licensee; however, if the new owner or controlling party wishes to consolidate licensed money transmitter activities in the acquiree, it should relinquish its license.

The sequencing of whether to report a transfer of control before, during or after a transfer of control varies across the country. Some states require that a transaction must be approved prior to its consummation. If a licensee wishes to execute a deal ahead of obtaining regulatory approval with the person to whom control is being transferred, a condition precedent clause should be incorporated into the agreement stating that final consummation of the transaction is contingent upon obtaining all regulatory approvals. This will avoid pre-empting the regulators. However, if either of the parties involved requires notification to the public or to their shareholders about major deals concluded – for instance, because one or the other is a listed company – it may be advisable to have a non-binding term sheet signed in lieu of a formal agreement prior to obtaining regulatory approval. Otherwise, the applicants risk loss of face if the transaction is ultimately not approved on a timely basis or at all by regulators having been publicly announced (akin to AT&T’s failed takeover attempt of T-Mobile USA last year).

Common Materials Needed for Transfer of Control Approvals

States also differ on whether a formal application or a simple courtesy notification is required for a transfer of control. The licensee and the prospective controlling party will usually both have responsibilities in the process. The parties may have joint consultative calls with the state regulators to keep everyone on the same page and show unity of purpose. The entity holding the license may have to take the lead in reporting the transfer of control, while the new owner or controlling group will likely separately need to submit information about their backgrounds, financial fitness and business intentions. Some states have formal application forms for reporting transfers of control, while others require a written notification from the company containing background on the deal and the prospective new control party. Some states are silent about what is required for transfers of control and thus must be consulted one by one. In many cases, states are likely to request information about financial history and pro formas; business plans; and background, experience and activities of the new owner or controlling party and of any proposed new directors, senior officers, principals or members of the licensee. They may also ask to review a copy of the proposed deal terms or agreement.

Lead Time Required for Transfer of Control Reporting

A transfer of control request may require a regulator 60-90 days to review, as a rough average. Some states may take just a few weeks while others can take several months, particularly in the larger market states (which tend to have more stringent requirements) and states with application backlogs. Preparation time by the transfer of control parties for submitting requests for regulatory approvals can be significant in states which have extensive application checklists or require third party personal background checks, or if the new owner or controlling party has a complex organizational structure. Parties to a transfer of control should factor in time to inform and work with their bankers; insurance providers; surety bond issuers; the Secretaries of State; Financial Crimes Enforcement Network (FinCEN); existing investors and debt providers; and other key stakeholders which may seek to vet the control party as well as update documentation. As a result of these new relationships, the prospective control party or owner may have to develop and implement certain new infrastructure, such as a compliance program. The parties may need to update payment instruments terms and conditions, contracts, websites and other materials to reflect any changes in name, legal relationships, agency, addresses or pricing.

If the parties to a multi-state transfer of control are held up in consummating their deal by a state’s slow or less favorable decision-making, they can – as a last resort – surrender the license in said state and apply again later. At the cost of losing the ability to transact business in the state, this will allow the broader deal to get done.

Given the divergent and not always well-codified requirements for transfers of control, it is best that one’s mantra be to directly contact the regulators when in doubt for guidance.

For More Information

For more information about material events and transfers of control, consult the state banking commissioner websites and the respective state money transmitter regulations. However, be advised that many states are either silent or inadequately descriptive about defining and explaining the requirements for transfers of control.

Chartwell Compliance has assisted money transmitter licensees and the entities which seek to buy them (both financial service operators and investors) with planning for and executing material event and transfer of control reporting.

Daniel A. Weiss is President and CEO of Chartwell Compliance. He has nearly a decade of experience in the money transmitter industry as a licensing, compliance and strategy officer for a multi-state money transmitter and as a consultant. He has helped coordinate and develop the game plans for material event and transfer of control reporting on several occasions for money transmission, bill payment and foreign exchange businesses. Mr. Weiss has presented twice before the Money Transmitter Regulators Association (MTRA) and was an attendee at the October 2012 MTRA Conference. Please feel free to contact Daniel Weiss.


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