Lottery-linked Savings Client Problem

Client Problem A partner comes to you and says that a depository institution client wants to offer lottery based savings accounts in the United States. Unfortunately, the partner is from litigation and forgot to find out what kind of depository institution the client is. All he knows is that the client is all hot under the collar because credit unions are already doing it. He tells you to research all options and to get him a response as soon as possible. He also says the system works by a consumer depositing money each week (say $25) with no interest payment but the chance to participate in a lottery.

Participation by National Banks in Lotteries and Related Activities 12 U.S.C. § 25a (2008) (a) Prohibited activities: A national bank may not — (1) deal in lottery tickets; (2) deal in bets used as a means or substitute for participation in a lottery; (3) announce, advertise, or publicize the existence of any lottery; (4) announce, advertise, or publicize the existence or identity of any participant or winner, as such, in a lottery.

Definition of Lottery (2) The term “lottery” includes any arrangement whereby three or more persons (the “participants”) advance money or credit to another in exchange for the possibility or expectation that one or more but not all of the participants (the “winners”) will receive by reason of their advances more than the amounts they have advanced, the identity of the winners being determined by any means which includes — (A) a random selection; (B) a game, race, or contest; or (C) any record or tabulation of the result of one or more events in which any participant has no interest except for its bearing upon the possibility that he may become a winner. Elements: Offering of Prize; Awarded by Chance; & Giving of consideration. 4

Permitted Activities for FDIC-Insured State Banks 12 U.S.C. § 1831a (2009) (a) Permissible activities: (1) In general: After the end of the 1-year period beginning on December 19, 1991, an insured State bank may not engage as principal in any type of activity that is not permissible for a national bank unless— (A) the Corporation has determined that the activity would pose no significant risk to the Deposit Insurance Fund; and (B) the State bank is, and continues to be, in compliance with applicable capital standards prescribed by the appropriate Federal banking agency.

Legal Considerations in Charter Choice for Lottery-linked Savings National Bank State Bank Credit Unions Affirmative Authority to Engage Perhaps, 12 U.S.C. 24 (Seventh) Depends on State Law Depends on Chartering Authority Federal Limitations on Lotteries 12 U.S.C. 25a Restriction on Lotteries Similar Restrictions on Lotteries under 12 U.S.C. 1829a (perhaps FDIC support) None State Law Restrictions on Lotteries Likely Preempted Unclear Preemption of State Law Not as Strong Other Restrictions 12 U.S.C. 1831a

Source:

Definition of Lottery after the American Savings Promotion Act 12 U.S.C. § 25a (2014) (2) The term “lottery” includes any arrangement, other than a savings promotion raffle whereby three or more persons (the “participants”) advance money or credit to another in exchange for the possibility or expectation that one or more but not all of the participants (the “winners”) will receive by reason of their advances more than the amounts they have advanced, the identity of the winners being determined by any means which includes— (A) a random selection; (B) a game, race, or contest; or (C) any record or tabulation of the result of one or more events in which any participant has no interest except for its bearing upon the possibility that he may become a winner.

Definition of Savings Promotion Raffle 12 U.S.C. § 25a (2014) (4) The term “savings promotion raffle” means a contest in which the sole consideration required for a chance of winning designated prizes is obtained by the deposit of a specified amount of money in a savings account or other savings program, where each ticket or entry has an equal chance of being drawn, such contest being subject to regulations that may from time to time be promulgated by the appropriate prudential regulator (as defined in 12 U.S.C. § 5481).

Updated Legal Considerations National Bank State Bank Credit Unions Affirmative Authority to Engage Perhaps, 12 U.S.C. 24 (Seventh) Depends on State Law; Perhaps Depends on Chartering Authority Limitations on Lotteries 12 U.S.C. 25a Restriction on Lotteries, Exceptions for savings promotion raffles Exceptions for savings promotion raffles None State Law Restrictions on Lotteries Likely Preempted Unclear Preemption of State Law Not as Strong Other Restrictions 12 U.S.C. 1831a 10