InfoBytes Blog
California Eliminates Passive Investor Self-Certification From Finance Lenders Law License Application
Recently, the California Department of Business Oversight (DBO) made a number of changes to the application for a California Finance Lenders Law (CFLL) license that is completed by persons engaged in non-residential lending or brokering. The changes were made following a 45-day notice and comment period. (Presumably, these changes also apply, where applicable, to persons engaged in residential lending or brokering and who are thus required to submit applications via the Nationwide Mortgage Licensing System.)
One of the most significant changes to the application relates to which individuals associated with the owners of an applicant are required to submit a Statement of Identity and Questionnaire and fingerprints to the DBO for investigative purposes. Since 2007, the application specified as follows:
If an entity owns or controls 10% or more of the applicant, a Statement of Identity and Questionnaire and fingerprints must be submitted for each officer, director, general partner, or managing member, as applicable, unless the applicant or entity can make the following representation in a separate cover letter that is incorporated by reference into the CFLL application:
1. [(Name of entity)] is a passive investor and is not responsible in any way for the conduct of the applicant’s lending activities in California. Therefore, it is unnecessary to investigate any individuals managing or controlling [(name of entity)].
2. Describe whether the entity has engaged in any act that would constitute a reason for the California Corporations Commissioner to deny a license under Financial Code Section 22109 and if so, fully disclose the acts.
A public company may submit fingerprints only for persons not included on the public company’s Form 10-K, Form 10-Q or other similar document filed with the Securities and Exchange Commission. The applicant must submit a copy of Form 10-K, Form 10-Q, or other similar document that includes the name of the individuals not submitting fingerprints. Statement of Identity and Questionnaires must still be completed for all individuals. For purposes of this paragraph, “public company” means a company whose securities are listed or designated on a national securities exchange certified by the California Corporations Commissioner under Subdivision (o) of Section 25100 of the California Corporations Code.
But now the application no longer provides an option for the applicant to include a self-certification for passive investors concerning investigations. Instead, the application now specifies as follows:
If an entity owns or controls 10% or more of the applicant, a Statement of Identity and Questionnaire and fingerprints must be submitted for each officer, director, general partner, or managing member, as applicable. The Commissioner may waive this requirement if it is determined that further investigation is not necessary for public protection.
A public company may submit fingerprints only for persons not included on the public company’s Form 10-K, Form 10-Q or other similar document filed with the Securities and Exchange Commission. The applicant must submit a copy of Form 10-K, Form 10-Q, or other similar document that includes the name of the individuals not submitting fingerprints. Statement of Identity and Questionnaires must still be completed for all individuals. For purposes of this paragraph, “public company” means a company whose securities are listed or designated on a national securities exchange certified by the Commissioner of Business Oversight under subdivision (o) of Section 25100 of the California Corporations Code.
In its Final Statement of Reasons for the Adoption of Rules, the DBO acknowledged that not all owners of an applicant may be responsible for the applicant’s lending activities (e.g., pension plans) and that investigating such owners may be burdensome, costly, and unnecessary. But the DBO explained that it chose to remove the self-certification for passive investors because it “has been subject to abuse by some applicants attempting to use it to evade background investigations or to hide the true identity of the owner(s).” At the same time, the DBO emphasized that it still retains authority to forego the investigation of passive investors when doing so is consistent with the CFLL.
As a result of this change, CFLL license applicants (and CFLL licensees whose ownership may change as a result of, for example, an acquisition or internal restructuring) should be prepared for the principal officers, directors, general partners, and managing members, as applicable, of their 10% owners and control affiliates to submit Statements of Identity and Questionnaires and fingerprints, unless they are able to persuade the DBO that investigation of these individuals is not necessary for public protection. It is our understanding from DBO personnel that one way that this may be accomplished is by providing sufficient evidence that these individuals have been investigated and vetted by another governmental or regulatory agency.