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How States Might Challenge The OCC's Fintech Charter
Law360, New York (February 24, 2017, 12:17 PM EST) -- The Office of the
Comptroller of the Currency is considering allowing financial technology
(fintech) companies to be chartered as special-purpose national banks.
Although the planning is still at a preliminary stage, the OCC’s Dec. 2, 2016,
white paper makes clear that chartered companies would face the same
regulatory scrutiny, and enjoy the same preemption privileges, as full-service
national banks.[1] The December white paper follows a March 2016 white
paper[2] published by the OCC on the same subject and, in October 2016, the
OCC announced the establishment of an Office of Innovation to serve as a
“clearinghouse for requests and information related to innovation.”[3] The
OCC did not specify when it would start accepting applications for fintech
charters except to say that it would be after the agency publishes a formal
application evaluation policy, which is still forthcoming.
As technology companies have entered parts of a financial services landscape
traditionally occupied by banks, U.S. regulators are positioning themselves to
play an integral role in regulating and supervising fintech companies. The OCC
has, for example, framed its fintech charter proposal as a modernizing move
made necessary by the changing financial services market. The OCC claims in
the December white paper that “there is no legal limitation on the type of
‘special purpose’ for which a national bank charter may be granted, so long as
the entity engages in fiduciary activities or in activities that include receiving
deposits, paying checks, or lending money.”[4]
Brian G. Barrett
Robert J. Pile
On the other hand, some state banking regulators as well as the Conference of
State Bank Supervisors (CSBS) see the OCC’s initiative as a direct threat to their existing regulatory and
supervisory authority with respect to certain nondepository fintech companies. These regulators have
responded by challenging the OCC’s statutory authority to issue a fintech charter and claiming that the
preemptive effect of the charter would nullify the ability of states to protect consumers.
In the current evolving regulatory environment, the optimal structure for a payments or nondepository
business has become a complex question for many fintech companies. There may be opportunities for
nondepository fintech companies to take advantage of the new fintech charter and operate under
national rules across state lines. However, if a nondepository fintech firm is successful in obtaining a
fintech charter from the OCC —

The firm might as a result of the Dodd-Frank Act need to take into account state consumer
protection laws if the firm’s business involves consumers, and

The firm will need to take into account other state laws that the OCC acknowledges are not
preempted by the National Banking Act (NBA) or the rules thereunder.
Litigation challenging the preemptive effect of the fintech charter would likely involve an interpretation
of the limitations on the OCC’s statutory preemptive power imposed by the Dodd-Frank Act (so long as
those limitations are not repealed or amended). This article will focus briefly on two approaches that
states might take to challenge the OCC’s statutory authority to charter nondepository banks under the
NBA. Some states may assert that:
1. The minimum banking activities necessary to serve as the basis for the OCC’s chartering
authority must include deposit-taking, or
2. The OCC’s interpretation of its statutory preemption power is inconsistent with the authority
retained by the states with respect to state consumer protection laws.
The OCC derives its chartering authority from the NBA, which describes that authority in the following
broad terms:
If, upon a careful examination of the facts ... it appears that [the applicant] is lawfully entitled to
commence the business of banking, the Comptroller shall give to such association a certificate ... But the
Comptroller may withhold [the charter] whenever he has reason to suppose that the shareholders have
formed the same for any other than the legitimate objects contemplated by [the NBA].[5]
The statute does not define the “business of banking” or “legitimate objects,” nor does it otherwise expressly
prohibit the OCC from granting a charter to any particular type of institution. The NBA was amended in 1978
and 1982 to give the OCC express authority to charter trust banks and bankers’ banks, respectively.[6]
The OCC articulated the current formulation of its chartering authority for the first time in 2003 with a rule
that interpreted the NBA to allow issuance of a special-purpose charter to any bank engaged either in
fiduciary activities or any activity comprising “the business of banking,” provided that a bank not engaged in
fiduciary activities must engage in deposit-taking, lending or “paying checks.”[7] The OCC did not receive
significant public comment on the new rule, and prior to the OCC’s fintech charter proposal the OCC did not
use it as a basis for any significant expansion of its chartering activities. It is unclear how the OCC will
interpret the operative language of the rule, including the phrase of particular interest to payments
businesses — “paying checks.” In the white paper, the OCC indicated that it views “facilitating payments
electronically” as the “modern equivalent of paying checks” and that the scope of qualifying activities would
be determined on a case-by-case basis.[8]
Two judicial decisions address the minimum “banking” activities required to confer chartering authority on
the OCC with respect to nondepository institutions. Although the cases predate significant federal banking
law developments, including the current OCC regulations on the issuance of special-purpose charters
(discussed above), they provide useful textual analysis of the NBA provisions on which the OCC is basing its
current proposal. In both cases, a district court held that the OCC had exceeded its authority in chartering a
nondepository institution.
In the 1977 case of National State Bank of Elizabeth, N.J. v. Smith, a New Jersey district court held that the
OCC lacked chartering authority with respect to a bank that would engage solely in trust activities because
such activities were not a “legitimate object” contemplated by the NBA.[9] The decision was appealed, but
the U.S. Court of Appeals for the Third Circuit declined to issue a ruling after Congress retroactively validated
the charter in question by passing the Financial Institutions Regulatory and Interest Rate Control Act of
1978.[10] The OCC referred to the Smith case in a 1996 interpretive ruling, noting that it was “uncertain how
much weight should be accorded the decision” but that, in any case, the charter applications before it would
meet the district court’s standards because they were to “have full charters and be full service
institutions.”[11] The 1996 ruling suggests that the Smith decision, though mooted by intervening legislation,
caused some uncertainty among OCC lawyers on whether the agency had authority to charter a limitedservice bank organized to engage solely in activities contemplated by the NBA.
In the 1985 case of Conover v. Independent Bankers’ Association, a Florida district court held that the NBA
did not confer chartering authority on the OCC with respect to institutions that were not “banks” as defined
in the Bank Holding Company Act (BHCA).[12] To be classified as a “bank” under the BHCA, an institution
must both accept demand deposits and make commercial loans. Much of the criticism of the current fintech
charter proposal has been based on the same argument — often couched as the observation that deposittaking is the defining characteristic of a bank.[13]
The Conover court’s starting point was a determination that the NBA and the BHCA were interdependent and
should be read consistently as part of a “joint regulatory scheme.”[14] From there, the court reasoned that
the BHCA’s definition of “bank” served to establish not only the entities subject to the BHCA, but also the
minimum activities required for an institution to be engaged in “the business of banking” under the NBA.
Thus, an entity that was not a “bank” under the BHCA was not engaged in the “business of banking” under
the NBA and did not fall within the NBA’s grant of chartering authority to the OCC. As some commentators
observed at the time,[15] it was not clear whether Congress intended the BHCA’s “bank” definition to so limit
the OCC’s chartering authority. The NBA and the BHCA were enacted, and developed over time, to address
different concerns.
The Conover plaintiffs argued, and the court agreed, that the fact that Congress thought it necessary to
expand the OCC’s chartering authority to trust banks and bankers’ banks by specific amendment to the NBA
meant that the statute had not granted that authority previously. That argument is based on a fundamental
principle of statutory construction. The granting phrase of the NBA, however, is permissive rather that
prescriptive, providing that national banks “shall have power” to engage in certain activities.[16]
In a Jan. 13, 2017, letter, the CSBS pressed the same argument — that the OCC’s chartering authority is
limited to national banks engaged in deposit-taking and special-purpose banks expressly authorized by
Congress, namely, trust banks, bankers’ banks and credit card banks. The New York Department of Financial
Services took a similar position in its Jan. 17, 2017, letter: to propose disrupting the existing state regulatory
scheme “without clear and concrete legislative authorization would risk significant disruption to the
regulatory oversight of financial institutions and tread on state sovereignty.”[17]
The CSBS opposed the issuance of a fintech charter for other reasons as well. First, according to the CSBS and
some of its members, the OCC’s chartering regime would likely favor large incumbent actors, a result
contrary to the OCC’s stated goal of fostering responsible innovation. According to the NYDFS, it would not
be in the public interest “to have a small number of technology-savvy firms dominate different types of
financial services because they were able to get a national charter.” Second, according to the CSBS, the
issuance of such a charter creates uncertainty and risks pertaining to access to the payments system and the
federal safety net. Finally, the CSBS argued that the preemptive effect of the charter would nullify the ability
of states to protect consumers, since the issuance of a fintech charter would result in broad preemption with
respect to state consumer protection laws.
If the relevant Dodd-Frank amendments to the NBA remain intact, the OCC’s power to preempt state
consumer protection laws is limited. Under the Dodd-Frank Act, such laws may be preempted only if: (1)
application of the law would have a “discriminatory effect” on national banks compared with state-chartered
banks in the relevant state; (2) “in accordance with the legal standard for preemption in the decision of the
Supreme Court in Barnett Bank of Marion County, N.A. v. Nelson,” the state law “prevents or significantly
interferes with the exercise by the national bank of its powers”; or (3) the state law is preempted by a
provision of federal law outside of the Dodd-Frank Act.[18] According to the OCC’s 2011 rule implementing
the Dodd-Frank Act (2011 preemption rule), the act incorporates both the conflict preemption legal standard
and the reasoning that supports it in Barnett Bank and preserves “precedents consistent with that analysis —
which may include regulations adopted consistent with such a conflict preemption justification ...”[19]
If a state challenges the preemptive effect of a fintech charter, the state may assert claims similar to those
raised by some states that opposed the 2011 preemption rule. Some states claimed, for example, that the
Dodd-Frank Act adopted a new preemption standard, narrower than the Barnett decision’s “conflict”
preemption analysis. Some states also argued that since the “obstruct, impair, or condition” language used in
the OCC’s pre-Dodd-Frank preemption rule is inconsistent with Barnett and with the “prevent or significantly
interfere” preemption standard, pre-Dodd-Frank rules and precedents based on those rules should not apply.
—By Brian G. Barrett, Robert J. Pile and Hannah Winiarski, Eversheds Sutherland (US) LLP
Brian Barrett is a partner in Eversheds Sutherland's New York office. Prior to joining the firm, Barrett was vice
president for global liquidity products at Goldman Sachs. He is also a former managing director of secured
credit products at HSBC Bank USA.
Robert Pile is a partner in the firm's Atlanta office and leads the firm's payments and digital commerce team.
Hanna Winiarski is an attorney in the firm’s Atlanta office.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its
clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information
purposes and is not intended to be and should not be taken as legal advice.
[1] See OCC, Exploring Special Purpose National Bank Charters (Dec. 2016) (December Paper).
[2] OCC, Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective.
[3] See OCC, Exploring Special Purpose National Bank Charters (Dec. 2016) at 2.
[4] Id. at 3-4.
[5] 12 U.S.C. § 27(a) (2012).
[6] See Financial Institutions Regulatory and Interest Rate Control Act of 1978, Pub. L. No. 95-630, § 1504, 92
Stat. 3641 (1978) (codified at 12 U.S.C. § 27(a) (national trust banks); Garn-St. Germain Depository
Institutions Act of 1982, Pub. L. No. 97-320, § 404, 96 Stat. 1511 (1982) (codified at 12 U.S.C. § 27(b)(1))
(bankers’ banks).
[7] 12 C.F.R. § 5.20(e)(1).
[8] See OCC, Exploring Special Purpose National Bank Charters (Dec. 2016) at 4.
[9] National State Bank of Elizabeth v. Smith, No. 76-1479 (D.N.J. September 16, 1977), rev’d on other
grounds, 591 F.2d 223 (3d Cir. 1979). The provision under which the bank was to provide fiduciary services,
12 U.S.C. § 92a, was not part of the National Bank Act at the time of the decision.
[10] Id.
[11] OCC, Corporate Decision 96-37 (July 18, 1996).
[12] Independent Bankers Ass’n of America v. Conover [1984-1985 Transfer Binder] Fed. Banking L. Rep.
(CCH) ¶ 86,178 at 90,537 (M.D. Fla. Feb. 15, 1985).
[13] See, e.g. Letter from Conference of State Bank Supervisors to Thomas J. Curry, Comptroller of the
Currency (Jan. 13, 2017).
[14] See Independent Bankers Ass’n of America v. Conover at 90,536.
[15] See, e.g., Carol Conjura, Independent Bankers Association v. Conover: Nonbank Banks Are Not in the
Business of Banking, 35 AM. U. L. REV. 429 (1986).
[16] 12 U.S.C. 24 (seventh) (2012).
[17] Letter, New York Department of Financial Services to Thomas J. Curry, Comptroller of the Currency (Jan.
17, 2017).
[18] 12 U.S.C. § 5136C (2012).
[19] Office of Thrift Supervision Integration; Dodd Frank Act Implementation, 76 Fed. Reg. 43,549, 43,556
(July 21, 2011) (codified at 12 C.F.R. Parts 4, 5, 7, 8, 28 and 34).
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