NMLS Licensing Form Updates and Enhancements for 2014 and Beyond

1. NMLS Licensing Form Updates and Enhancements for 2014 and Beyond NMLS Annual Conference & Training: February 19, 2014 Haydn J. Richards, Jr.

2. Goals • Update the Group concerning changes to Control and Control Person definitions through the NMLS Rulemaking Process • Provide an update concerning what Licensees are doing in order to help “jump start” the discussion concerning control and control persons • Discuss how Licensees are navigating control and control person challenges, including how differing state interpretations impact daily life of licensing personnel

3. Who is in Control? What does Control mean? • Prior to 2008, licensees generally were asked to identify their key executive officers, directors, and 10% or more direct and indirect owners • General expectation was that licensees would identify the following executive officers: President, key Vice Presidents, Treasurer, and Secretary • Variance between state regulatory agencies existed (e.g., Virginia) • Differing approaches to disclosure of key persons meant that many licensees disclosed different individuals to different regulatory agencies (i.e., core set of individuals to each state, supplemented by additional individuals)

4. Historical Background: 2008 – 2010 • With the advent of the NMLS, standardization of disclosure of control persons moved forward • NMLS requests that entities disclose their “Control Persons” • Original forms requested disclosure of the Chief Executive Officer, Chief Financial Officer, Chief Legal Officer, Chief Operations Officer, and individuals in similar capacities • Also requested disclosure of “control persons” (i.e., individuals that have “control” over an entity • Control previously was defined as “the power, directly or indirectly, to direct the management or policies of a company, whether through ownership of securities, by contract, or otherwise.”

5. Current NMLS Definitions Relating to Control • Development and Release of NMLS Policy Guidebook provides further instruction to licensees • Immediately past release augmented and clarified who regulators expect to be disclosed • The power, directly or indirectly, to direct the management or policies of a company, whether through ownership of securities, by contract, or otherwise. Any person that (i) is a general partner or executive officer, including Chief Executive Officer, Chief Financial Officer, Chief Operations Officer, Chief Legal Officer, Chief Credit Officer, Chief Compliance Officer, director, and individuals occupying similar positions or performing similar functions; (ii) directly or indirectly has the right to vote 10% or more of a class of a voting security or has the power to sell or direct the sale of 10% or more of a class of voting securities; (iii) in the case of an LLC, Managing Member; or (iv) in the case of a partnership, has the right to receive upon dissolution, or has contributed, 10% or more of the capital, is presumed to control that company. • State laws also changed around this time to require prior approval in connection with control person changes • Nebraska, North Carolina, etc.

6. NMLS Request for Comment & Result • Commenters expressed concerns over the definition of “control,” determining individuals who meet this definition, and the resulting obligations imposed upon those individuals • These comments were not new to the regulatory agencies; such comments have been voiced previously • NMLS Policy Committee acknowledged that there can be fundamental disagreements between regulatory agencies and licensees concerning which owners are in “control” and which key personnel constitute “control persons” that require disclosure on the NMLS

7. NMLS Request for Comment & Result • NMLS Policy Committee will work with state regulators and industry participants to develop a definition, guidance and functionality for the term “control” in NMLS that: • Generally satisfies state reporting requirements in a uniform manner; and • Allows state regulators to obtain information through NMLS without imposing burdens for other state reporting requirements • Issues raised around “control” will be separately considered in 2014 with possible changes to the Forms and guidance implemented after review and adoption

8. What Does this Mean? Why is this Relevant? • No Changes Made to Control or Control Person as a result of Request for Comment • Regulatory agencies will actively consider input from Industry concerning control and its impact to licensees

9. What Has Industry Done in the Past? • Very little. A small number of participants sent in comments. • Generally, Industry response involved complaining and voicing general discontent

10. What has Industry done? Why the Change? • Industry is embracing its opportunity to provide feedback to State Regulatory Agencies and achieve a successful refinement of what constitutes “control” and “control persons” • Compliance burden on industry has grown significantly; being proactive allows industry to better manage compliance

11. Steps to Success (2013 - Present) • Industry established an informal group of participants after the 2013 AARMR Conference • Industry members provided feedback concerning the control person disclosure process and its difficulties • Certain industry members have taken the lead in the control person evaluation process • Opportunities to participate still exist • Update regarding Industry Efforts

12. Steps to Success (Current and Future) • NMLS Conference: Delivery of First Reports • On or around April 4, 2014: All State Reports Delivered to Regulatory Agencies • On or around April 21, 2014: Summary of Overall Findings Delivered to CSBS and State Regulatory Agencies • Joint Industry and Regulatory Agency Working Group to commence meetings. Group to have multiple collaborative functions and goals: • Re-evaluation of Review Process: • Industry Process has identified “choke points” and challenges that interfere with daily life as it pertains to control persons • Working group to collectively work to streamline diligence processes of various states

13. Steps to Success (Current and Future) • Industry Members have taken the lead on identifying states that impose burdensome requirements • Comprehensive report to be submitted on or around April 21, 2014 will include requests for reconsideration of state processes • Regulatory Agencies will identify essential information that is needed to ensure consumer safeguards, with individual NMLS questions assumed to be a floor (but also subject to consideration for review) • Industry members to provide comprehensive report on successes achieved in streamlining processes in the various states

14. Steps to Success • Discussion to expand to “control”/ownership • Industry to provide practical discussion for what “control” through ownership means in daily life • Provides Regulatory Agencies with a liaison to Industry Members vis-à-vis control person trends, etc.

15. Report on Industry’s Actions To Date • Comprehensive, state-specific analysis of control person disclosure process • Regulatory Agencies are receiving a comprehensive report, on a rolling basis, summarizing the information that is required as part of their disclosure process • Rating Scale: • Burden Consistent with Common Practices of State Regulatory Agencies • Burden Exceeds Common Practices of State Regulatory Agencies • Burden Significantly Exceeds Common Practices of State Regulatory Agencies • Burden Significantly Exceeds Common Practices of State Regulatory Agencies and Burden Impacts Licensee Behavior

16. Report on Industry’s Actions To Date • At least 115 Fields of note on NMLS Individual Form • Form served as the baseline/floor for Industry Review

17. Report on Industry’s Actions To Date Sample State Report with Walkthrough

18. Report on Industry’s Actions To Date Sample State Findings Summary

19. What Constitutes “Control” through Ownership of a Licensee? • With respect to ownership, control is defined as: • The power, directly or indirectly, to direct the management or policies of a company, whether through ownership of securities, by contract, or otherwise. Any person that . . . (ii) directly or indirectly has the right to vote 10% or more of a class of a voting security or has the power to sell or direct the sale of 10% or more of a class of voting securities; (iii) in the case of an LLC, Managing Member; or (iv) in the case of a partnership, has the right to receive upon dissolution, or has contributed, 10% or more of the capital, is presumed to control that company • In the NMLS, at the Indirect Owner stage, licensees are instructed to disclose: • When the owner is a corporation, each shareholder that beneficially owns, has the right to vote, or has the power to sell or direct the sale of, 25% or more of a class of voting security of that corporation • When the owner is a partnership, all general partners and those limited and special partners that have the right to receive upon dissolution, or have contributed, 25% or more of the partnership’s capital • When the owners is a LLC, (1) those members that have the right to receive upon dissolution, or have contributed, 25% or more of the LLC’s capital; and (2) if managed by elected or appointed managers, all elected or appointed managers

20. What Constitutes “Control” through Ownership of a Licensee? • Licensees are instructed to continue through the chain of ownership and list all 25% or more owners at each level of ownership unless and until the licensee reaches: • A company whose shares are publicly traded • A natural person • A Credit Union regulated by an appropriate regulatory agency • A bank or bank holding company regulated by an appropriate regulatory agency • In many instances, tracing ownership through to such an extent is not relevant to the “control” of a licensee

21. When Control Disclosure Requirements Do Not Make Sense – Scenario 1 Various Independent Owners (Not Holding 10% or More Ultimate Ownership) Indirect Ultimate Owner (43.875% Indirect Ownership) Various Independent Owners (Not Holding 10% or More Ultimate Ownership) Natural Person (.75% Indirect Ownership; Disclosure Required) 35% 30% 70% 100% 65% Indirect Owner (Corporation) Indirect Owner (Corporation) Indirect Owner (Corporation) Indirect Owner (67.5% Indirect Ownership) 75% 25% 25% 75% Direct Owner (Corporation) Direct Owner (Corporation) Licensee (Corporation) 10% 90%

22. When Control Disclosure Requirements Do Not Make Sense – Scenario 2 President, CEO & 100% Owner Employee 2 Employee 6 Employee 4 Employee 1 Employee 3 Employee 5 Employee 7

23. Questions? Questions? Haydn Richards Dykema Gossett PLLC 1300 I Street, N.W. Suite 300 West Washington, DC 20005 hrichards@dykema.com (202) 906-8602