OCC Approves National Bank Investment in Fraud Prevention Company
Posted by Peter Mucklestone and Jim Young
The Office of the Comptroller of the Currency (OCC) recently issued an Interpretive Letter (the “Letter”), which concludes that national banks have the authority under 12 U.S.C. § 24(Seventh) to make a noncontrolling investment in a certain limited liability company (the “Investee LLC”) that sells fraud prevention, identity verification, credential validation and payment/deposit risk services (the “Investee Activities”) to financial institutions, credit card issuers, check acceptance companies, brokerage firms, mutual fund companies, retailers, governmental agencies and others. 12 U.S.C. § 24(Seventh) contains a broad grant of authority allowing national banks to engage activities that are incidental to the "business of banking."
According to the Letter, a national bank will be permitted to make non-controlling investments in an enterprise if each of the following standards is met:
(1) The activities of the enterprise in which the investment is made must be limited to activities that are part of, or incidental to, the business of banking (or otherwise authorized for a national bank);
(2) The bank must be able to prevent the enterprise from engaging in activities that do not meet the foregoing standard, or be able to withdraw its investment;
(3) The bank's loss exposure must be limited, as a legal and accounting matter, and the bank must not have open-ended liability for the obligations of the enterprise; and
(4) The investment must be convenient or useful to the bank in carrying out its business and not a mere passive investment unrelated to that bank's banking business.
Business of banking and the corresponding incidental activities
OCC suggested that, based on 12 CFR § 7.5006(a), “the business of banking includes the distribution of data, generation of reports, and keeping of records related to data derived from . . . banking or financial data . . . .” Together with its corresponding incidental activities, a national bank may “collect, process, transcribe, analyze, and store banking, financial, and economic data for itself and others as part of the business of banking.” "[W]hat matters . . . is the nature of the data being processed, not whether the entity receiving the processing also receives other banking services from the bank." Since the Investee Activities fall within the aforementioned scope of business of banking, OCC concluded that the first standard is satisfied.
Mechanisms to maintain compliance
In addition to meeting the standard set forth in Part 1, supra, national banks shall ensure that their investee will continue compliance with such standard. In the case at issue, OCC concluded that this second standard is also met because: (i) the banks have gained effective control and monitoring power by holding four seats on the Investee LLC’s management committee, and (ii) in the relating LLC agreement, banks’ pre-approval is required before the Investee LLC can engage in any activity not permissible for national banks.
Limitation on and reporting of loss exposure
The primary concern of OCC, under this third standard, is that “banks should not be subjected to undue risk” and that all risks shall be properly reported. OCC held that this standard is met for the case at issue because: (i) the Investee LLC is a limited liability entity under state statute; (ii) the banks have not agreed to be “obligated for any or all of the debts, obligations and liabilities” of the Investee LLC; and (iii) the banks have agreed to report its investment interest in the Investee LLC using equity/cost method of accounting.
Investment useful to the operation of banks
To meet the fourth standard, “the investment must benefit or facilitate [a bank’s] business and cannot be a mere passive or speculative investment.” OCC held that this standard is met as well because the banks have been and will continue to use the services of the Investee LLC. “In addition, the banks' investment in [the Investee LLC] will facilitate and enhance their ability to conduct banking operations in additional ways. The banks' stake . . . will allow them to influence and supervise the company's activities to ensure that they are aligned with the needs and responsibilities of the banks.”
Copy of Letter
A copy of the Interpretive Letter can be found on the OCC's website.