Yankee CDs are certificates of deposit issued by U.S. branches of non-U.S. banks. Some Yankee CDs are issued by a federally licensed branch that is subject to regulation by the Office of the Comptroller of the Currency (the "OCC"). Other Yankee CDs are issued by a branch that is regulated at the state level. These instruments may be sold through one or more registered broker-dealers, which may or not be affiliated with the issuer. A Yankee CD may be a "plain vanilla" instrument with a fixed or floating rate of interest, or it may be a structured CD that is linked to one more underlying assets.
While these instruments typically do not have the benefit of FDIC insurance, they are designed to have the preferences for deposits that apply under applicable banking laws.
In this article, we discuss a few recurring issues that arise in connection with the structuring and offering of these instruments.2
Are Yankee CDs Securities?
An issuer will want to consider whether the proposed Yankee CDs are "securities" under the U.S. Securities Act of 1933 (the "Securities Act") or the U.S. Securities Exchange Act of 1934 (the "Exchange Act"). If issued by a regulated branch and considered securities within the meaning of the Securities Act, they would still qualify for the exemption from registration provided by Section 3(a)(2) of the Securities Act. However, if the issuer is a federally licensed branch regulated by the OCC, and the instruments are deemed to be securities, then even if exempt from SEC registration under the Securities Act, they would need to be registered with the OCC under Part 16 of the OCC’s securities offering rules, or they would need to be issued under an exemption from those rules. In addition, whether these are securities may affect the degree to which FINRA’s rules and regulations apply to any offering of the instruments. For example, although FINRA’s conduct rules and communications rules would apply to Yankee CDs, if they are not securities, other FINRA regulations, such as the Corporate Financing Rule (and any related filing requirements arising from that rule), would not apply.
Factors that may affect this determination will include:
- whether the Yankee CDs are "principal protected," or whether they may pay less than principal;
- how the Yankee CDs are marketed;
- the extent to which the CDs are transferable; and
- how the CDs are recorded on the issuer’s own books and records.
Issuers of Yankee CDs are likely to avoid the types of activities that resulted in the determination that a certificate of deposit was a security in cases such as "Gary Plastics."3 These activities would include, for example, representing to investors that a secondary market will always be maintained for them.
There is only a limited amount of authority from the OCC and banking regulators that addresses whether a Yankee CD is a security. Depending on the facts, different counsel may reach different conclusions, and with different degrees of certainty. However, in practice, these instruments are typically offered in large denominations,4 in transactions that are privately negotiated with sophisticated investors. As a result, they can typically be offered within the parameters of one or more of the existing exemptions from the OCC’s registration requirements,5 where sufficient uncertainty exists as to their proper characterization.
There is no single set of regulations that cover the necessary disclosures for Yankee CDs. Accordingly, disclosure practices vary in this area. However, because Yankee CDs tend to be sold to institutional and other accredited investors, they tend to involve shorter "disclosure packages" than instruments such as retail structured products tend to have. And of course, the amount of disclosure will depend in part on the complexity of the instrument’s terms, and the nature of any underlying asset.
Key disclosure issues tend to involve:
- the absence of FDIC insurance;
- the risk factors that arise from the terms of the instrument, including their limited liquidity; and
- the availability of public information about the issuer and its finances, so that an investor may make an appropriate determination about the issuer’s creditworthiness.
The Federal Reserve Board’s Regulation DD, which implements the Truth in Savings Act, contains disclosure and advertising requirements for deposit accounts that are offered to "consumers." For purposes of Regulation DD, the term "consumers" is defined as natural persons "who hold an account primarily for personal, family or household purposes, or to whom such an account is offered."
As discussed above, these types of CDs are generally not offered to "consumers." Accordingly, although any disclosure documents obviously should accurately reflect the terms of the instrument and any related risks, the specific disclosure requirements of Regulation DD will not generally apply.
Deposits made with a branch of this kind are not typically insured by the FDIC. Accordingly, they are subject to the International Banking Act, which restricts the offering of "retail deposits", in which the initial deposit is less than $250,000, the current FDIC insurance limitation. As a result, in order to avoid the classification as a retail deposit, these instruments are subject to a minimum deposit amount of $250,000.
Blue Sky Regulation
Even if the Yankee CDs are deemed to be "securities" for state blue sky purposes, an exemption from state filings will typically exist. For example, most states have an exemption for bank-issued securities that is similar to the exemption found in the Securities Act.