TandaPay Cannot Be Regulated—4

Analysis of Legal Precedent as it Applies to Payments in Discretionary Mutuals — Kurt Mattson

TandaPay is a new type of platform that allows communities to self-insure to provide policyholders with supplemental coverage. It is an architecture for insurance with zero excess reserves. However, TandaPay isn’t insurance in the traditional sense. TandaPay is speech, which is protected by the First Amendment. Or thought of in a different light, TandaPay is protected by the First Amendment’s freedom of association.

As protected speech, it cannot be regulated by anyone. If restricted, the government would have to “radically curtail First Amendment freedoms in a way that violates all previous precedent in Citizens United v. FEC or the recent case with Janus vs. AFSCME, and they are not going to do that.”

And similar to the context of a labor association, the freedom of an individual to associate for the purpose of advancing beliefs and ideas is protected by the First and Fourteenth Amendments. Abood v. Detroit Bd. of Educ., 431 U.S. 209, 233, 97 S. Ct. 1782, 1798 (1977) (forced membership and forced contributions impinge on free speech and associational rights), overruled on other grounds, Janus v. AFSCME, Council 31, 138 S. Ct. 2448, 201 L. Ed. 2d 924, 2018 U.S. LEXIS 4028, 86 U.S.L.W. 4663 (2018). See Knox v. SEIU, Local 1000, 567 U.S. 298, 314 n.3, 132 S. Ct. 2277, 2291 (2012), citing Roberts v. United States Jaycees, 468 U.S. 609, 623, 104 S. Ct. 3244, 82 L. Ed. 2d 462 (1984)

“Infringements on freedom of association ‘may be justified by regulations adopted to serve compelling state interests, unrelated to the suppression of ideas, that cannot be achieved through means significantly less restrictive of associational freedoms.’”

“TandaPay gives people the power to speak with their money,” as TandaPay’s founder Joshua Davis explains. The author further explains that these groups are centered around politically motivated speech,

TandaPay can begin to provide marginalized communities with a voice. Giving these communities a voice is the first step to combating class inequality and social injustice.”

To that end, this research will examine how court decisions have treated payments and specifically those in discretionary mutuals.

I. FINANCIAL REGULATION EXISTS PRIMARILY TO REGULATE CUSTODIANS WHO HOLD FUNDS AND NOT THE PAYMENTS THEMSELVES.

Federal agencies regulate custodians who hold funds and not the payments themselves. Federal regulations are promulgated to govern those who control money and their activities. For example, this includes rules for banks (31 C.F.R. Subpart F) and procedures for monitoring compliance with certain statutes (12 C.F.R. § 21.21: BSA and money laundering). Likewise, SEC Rule 206(4)-2 regulates the custody practices of advisers registered under the Advisers Act, which says that an adviser has custody of client assets, and therefore must comply with the rule, when it holds, “directly or indirectly, client funds or securities or [has] any authority to obtain possession of them.” However, funds and payments per se are not the subject of any regulation or oversight.

A. PAYMENT OF INSURANCE

In examining federal statutes concerning the payment of life insurance, laws regulate only the schedule of payments or the process of payment — not the payment itself. For instance, United States Government life insurance, except as provided in 38 U.S.C. §§ 1940 et seq. shall be payable in 240 equal monthly installments. 38 U.S.C. § 1951. See Tex. Children’s Hosp. v. Burwell, 76 F. Supp. 3d 224, 236 (D.D.C. 2014) (“At most, the statute might have delegated to the Secretary the ability to determine by regulation that additional payments should be considered.”); United States v. Joash, №1:17cr145, 2018 U.S. Dist. LEXIS 64408, at *5 (S.D. Ohio Apr. 17, 2018) (“…there are federal regulations governing the payment of social security funds.”), citing 42 U.S.C. § 402(a)(3)(B) and 20 C.F.R. § 404.311(b)). See also Int’l Ass’n v. Allen, №17–1178, 2018 U.S. App. LEXIS 25968, at *48 n.5 (7th Cir. Sep. 13, 2018) (“Section 302 is primarily a prohibition of employer payments to unions, not a regulation of the collective bargaining process.”); Tabacos De Wilson, Inc. v. United States, №18–00059, 2018 Ct. Intl. Trade LEXIS 97, at *12 (Ct. Int’l Trade June 29, 2018) (19 C.F.R. § 191.92 is the regulation governing accelerated payment of drawback claims); 12 U.S.C. § 2277a-4(6)(D) (distribution of payments received in farm credit insurance system); 42 U.S.C. § 405(q)(1) (expedited Social Security benefit payments).

B. THE UNIFORM COMMERCIAL CODE

Article 4-A of the Uniform Commercial Code sets out specific rules for the regulation of funds transfers. Mfrs. Int’l Ltda v. Mfrs. Hanover Trust Co., 792 F. Supp. 180, 194 (E.D.N.Y. 1992). Under Article 4-A, “an order of attachment is entirely appropriate . . . where a bank is acting as the receiving bank [of an EFT], and no further transfer is contemplated.” Weston Compagnie de Finance et D’Investissement, S.A. v. La Republica Del Ecuador, №93 Civ. 2698 (LMM), 1993 U.S. Dist. LEXIS 9531, 1993 WL 267282, at *3 (S.D.N.Y. July 14, 1993) (citing N.Y.U.C.C. Law § 4-A-503).

Article 4A of the UCC regulates payment orders (or wire transfers) to standardize the risk and establish operational and security procedures for those engaged in such transfers. Patrick Finn & Lighthouse Mgmt. Grp., Inc. v. Peoples Bank of Wis., №11-cv-322-wmc, 2012 U.S. Dist. LEXIS 130863, at *54 (W.D. Wis. Aug. 22, 2012).

Likewise, the District Court of Connecticut held in USAA Inv. Mgmt. Co. v. Fed. Res. Bank of Bos., 906 F. Supp. 770, 777 (D. Conn. 1995) that Regulation J, 12 C.F.R. § 210.6, Regulation CC, 12 C.F.R. § 229.38(a), and New York’s Uniform Commercial Code, NY UCC § 4–202 (1), set forth a standard of ordinary care to which the banks must adhere in the handling of checks for collection, including the handling of returned checks. Id., citing 12 C.F.R. § 229.38(a) (1994).

As such, the UCC and similar regulations regulate banking activity and individuals, not payments.

C. REGULATION OF CURRENCY

The Constitution commits to Congress the regulation of currency. Schroder v. Bush, 263 F.3d 1169, 1174 (10th Cir. 2001). Pursuant to 12 U.S.C. § 1, the Office of the Comptroller of the Currency has the duty to execute all laws relating to issuance and regulation of currency and supervision of national banks. Adams v. Bd. of Governors of Fed. Res. Bd., 659 F. Supp. 948, 953 (D. Minn. 1987). The OCC supervises almost 1,400 national banks, federal savings associations, and federal branches and agencies of foreign banks operating in the U.S. Its mission is to ensure that national banks and federal savings associations operate in “a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations.” This supervision does not mention the oversight of funds, payments, or the money itself.

See Norman v. Baltimore & Ohio R.R. Co., 294 U.S. 240, 55 S.Ct. 407, 79 L.Ed. 885 (1935), where the Supreme Court ruled that Congressional regulation of currency was subject to judicial review only as to whether Congress had acted arbitrarily or capriciously — if the action has a reasonable relation to a legitimate end. If Congress’ action were an appropriate means to a legitimate end, the decision of Congress as to the degree of the necessity for the adoption of that means would be deemed final. See also Herald v. State, 107 Idaho 640, 642, 691 P.2d 1255, 1257 (Ct. App. 1984), citing Norman, at 311 (internal citations omitted).

D. CASELAW

The Southern District of New York held that Prudential was not a fiduciary but “a mere custodian” of a client’s funds. As a result, the Court said it had no power to restrain the account absent a Court order. Prudential Inv. Mgmt. Servs. LLC v. Forde, 2013 U.S. Dist. LEXIS 89190, at *25 (S.D.N.Y. June 24, 2013) (“While it is arguable that Prudential may have had authority to restrain the account as a fiduciary, as a custodian it surely did not.”). The Court found that the procedures employed by Prudential were “in violation of its own policies and possibly financial regulations governing the conduct of custodians.” Id. (emphasis added). In that case, Prudential had no authority to regulate the money in the account.

See generally, Henderson v. United States, 612 F. App’x 578, 578 (11th Cir. 2015) (plaintiff claimed that disbursement violated several statutory and regulatory provisions governing the selection of legal custodians and fiduciaries for receipt of benefits payments).

II. FEDERAL AGENCIES REGULATE CUSTODIANS WHO HOLD FUNDS AND NOT THE PAYMENTS THEMSELVES.

A. FEDERAL RESERVE SYSTEM

The Federal Reserve System is the central bank of the U.S. The Fed performs five primary functions to promote the effective operation of the U.S. economy and the public interest. The Federal Reserve:

  • conducts the nation’s monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy;
  • promotes the stability of the financial system and seeks to minimize and contain systemic risks through active monitoring and engagement in the U.S. and abroad;
  • promotes the safety and soundness of individual financial institutions and monitors their impact on the financial system as a whole;
  • fosters payment and settlement system safety and efficiency through services to the banking industry and the U.S. government that facilitate U.S.-dollar transactions and payments; and
  • promotes consumer protection and community development through consumer-focused supervision and examination, research and analysis of emerging consumer issues and trends, community economic development activities, and the administration of consumer laws and regulations.

Similar to the function of the OCC, nowhere in the central bank’s description of its purposes does it describe the regulation or oversight of payments or money itself.

B. FINCEN

Likewise, the Financial Crimes Enforcement Network (FinCEN) issued FIN-2013-G001 in 2013, which was titled, The Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies. The guidance refers to the participants in generic virtual currency arrangements, using the terms “user,” “exchanger,” and “administrator.” The Financial Crimes Enforcement Network (“FinCEN”) issued the interpretive guidance to clarify the applicability of the regulations implementing the Bank Secrecy Act (“BSA”) to persons creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies.

Again, the agency does not attempt to regulate or govern the money or payments — only those actors who are using cryptocurrency.

C. INTERNATIONAL

To look elsewhere, in Australia, for example, a Discretionary Mutual Fund (DMF) is not legally a contract of insurance. Thus, it avoids major insurance laws in that country, such as the Insurance Act 1973 and Insurance Contracts Act 1984 — both of which both provide protection for consumers including solvency and reinsurance requirements.

III. PAYMENTS OF PREMIUMS AND CLAIMS WHICH PASS DIRECTLY BETWEEN POLICYHOLDERS AND CLAIMANTS ARE NOT SUBJECT TO REGULATION BECAUSE THERE IS NO CUSTODIAN TO REGULATE.

In this argument, caselaw shows instances of custodians of claim information, but not of the exchange or the direct transaction. The Central District of California held that there was a group of “agreed custodians” who were that the parties mutually agreed would likely possess information relevant to the insurance claim, and there was also a group of “disputed custodians” that plaintiff asserted were not key personnel with respect to the insurance claim. Northrop Grumman Corp. v. Factory Mut. Ins. Co., No. CV 05–8444-DDP (PLAx), 2012 U.S. Dist. LEXIS 198171, at *8–9 (C.D. Cal. Aug. 29, 2012).

One state court found a duty to timely process insurance applications. In finding that duty, the Arizona Court of Appeals considered the duty of fair dealing imposed on insurance companies, the acceptance of premium payments, the regulatory scheme applicable to insurance companies because they are part of an industry affecting the public interest, and consumer protection principles. In Life & Accident Ins. Co. v. Songer, 124 Ariz. 294, 603 P.2d 921 (Ariz. Ct. App. 1979). The court held that an insurance company that accepts an application and premium payment for insurance must act within a reasonable time to either accept or reject the application and may be liable in tort for damages caused by unreasonable delay. See Francois v. United States, No. CV-16–02936-PHX-BSB, 2017 U.S. Dist. LEXIS 15477, at *11–12 (D. Ariz. Feb. 3, 2017).

Thus, the ruling concerns the timing of the action by the insurance company. Without an insurance company involved, there would not be any duty to impose.

A. DIRECT PAYMENTS OF MONEY BETWEEN TWO PARTIES ARE SPEECH AND CANNOT BE REGULATED.

Recent decisions by the United States Supreme Court support the contention that direct payments — in which there is no regulated action or actor, such as a custodian — are speech and therefore, cannot be regulated. The Court in Citizens United spoke of chilling protected speech by making distinctions and redefining the First Amendment based on a particular medium or technology:

Courts, too, are bound by the First Amendment. We must decline to draw, and then redraw, constitutional lines based on the particular media or technology used to disseminate political speech from a particular speaker. It must be noted, moreover, that this undertaking would require substantial litigation over an extended time, all to interpret a law that beyond doubt discloses serious First Amendment flaws. The interpretive process itself would create an inevitable, pervasive, and serious risk of chilling protected speech pending the drawing of fine distinctions that, in the end, would themselves be questionable. First Amendment standards, however, “must give the benefit of any doubt to protecting rather than stifling speech.”

Citizens United v. FEC, 558 U.S. 310, 326–27, 130 S. Ct. 876, 891 (2010) (citations omitted). The Court noted that:

“the ongoing chill upon speech that is beyond all doubt protected makes it necessary in this case to invoke the earlier precedents that a statute which chills speech can and must be invalidated where its facial invalidity has been demonstrated.

Further, the Court in Citizens United stated that:

“ideas ‘may compete’ in this marketplace ‘without government interference.’”

Id. (quoting New York State Bd. of Elections v. Lopez Torres, 552 U.S. 196, 208, 128 S. Ct. 791, 169 L. Ed. 2d 665 (2008)). See Del. Strong Families v. Denn, 136 S. Ct. 2376, 2376 (2016) (Thomas, J., dissenting)

“First Amendment rights are all too often sacrificed for the sake of transparency in federal and state elections.”

B. DUE PROCESS

Due process requires that laws give persons of ordinary intelligence fair notice of what is prohibited. Grayned v. City of Rockford, 408 U.S. 104, 108, 92 S. Ct. 2294, 33 L. Ed. 2d 222 (1972). The lack of this notice in a law that regulates expression “raises special First Amendment concerns because of its obvious chilling effect on free speech.” Reno v. American Civil Liberties Union, 521 U.S. 844, 871–872, 117 S. Ct. 2329, 138 L. Ed. 2d 874 (1997).

Further, the Supreme Court in Brown v. Entm’t Merchs. Ass’n, 564 U.S. 786, 807, 131 S. Ct. 2729, 2743 (2011) noted that vague laws force potential speakers to “ ‘steer far wider of the unlawful zone’ . . . than if the boundaries of the forbidden areas were clearly marked.” Id., citing Baggett v. Bullitt, 377 U.S. 360, 372, 84 S. Ct. 1316, 12 L. Ed. 2d 377 (1964) (quoting Speiser v. Randall, 357 U.S. 513, 526, 78 S. Ct. 1332, 2 L. Ed. 2d 1460 (1958)). Although “perfect clarity and precise guidance have never been required even of regulations that restrict expressive activity,” Ward v. Rock Against Racism, 491 U.S. 781, 794, 109 S. Ct. 2746, 105 L. Ed. 2d 661 (1989), “government may regulate in the area” of First Amendment freedoms “only with narrow specificity.” Id. (quoting NAACP v. Button, 371 U.S. 415, 433, 83 S. Ct. 328, 9 L. Ed. 2d 405 (1963)) (emphasis added).

Justice Kennedy (the author of the Citizens United majority opinion) wrote in his opinion of the Court in FCC v. Fox TV Stations, Inc., 567 U.S. 239, 253–54, 132 S. Ct. 2307, 2317 (2012):

“Even when speech is not at issue, the void for vagueness doctrine addresses at least two connected but discrete due process concerns: first, that regulated parties should know what is required of them so they may act accordingly; second, precision and guidance are necessary so that those enforcing the law do not act in an arbitrary or discriminatory way. When speech is involved, rigorous adherence to those requirements is necessary to ensure that ambiguity does not chill protected speech.”

When viewing this passage through the lens of discretionary mutual funds, again, it is the parties that are to be regulated rather than the funds, along with specific guidance to those enforcing such provisions.

IV. FREEDOM OF ASSOCIATION

The Supreme Court stated in Knox v. SEIU, Local 1000, 567 U.S. 298, 309, 132 S. Ct. 2277, 2288 (2012) that the First Amendment creates:

“an open marketplace (in which) differing ideas about political, economic, and social issues can compete freely for public acceptance without improper government interference.”

Id., citing New York State Bd. of Elections v. Lopez Torres, 552 U.S. 196, 208, 128 S. Ct. 791, 169 L. Ed. 2d 665 (2008) (emphasis added). See Riley v. National Federation of Blind of N. C., Inc., 487 U.S. 781, 797, 108 S. Ct. 2667, 101 L. Ed. 2d 669 (1988) (The First Amendment protects “the decision of both what to say and what not to say” (emphasis deleted)). And the ability of like-minded individuals to associate for the purpose of expressing commonly held views may not be curtailed. Knox, supra. See Roberts v. United States Jaycees, 468 U.S. 609, 623, 104 S. Ct. 3244, 82 L. Ed. 2d 462 (1984)

“Freedom of association . . . plainly presupposes a freedom not to associate.”

The Janus Court stated that the First Amendment, made applicable to the States by the Fourteenth Amendment, forbids abridgment of the freedom of speech. Janus v. AFSCME, Council 31, 138 S. Ct. 2448, 2463 (2018). Justice Alito went on to explain that:

“We have held time and again that freedom of speech ‘includes both the right to speak freely and the right to refrain from speaking at all.’”

Id. (quoting Wooley v. Maynard, 430 U. S. 705, 714, 97 S. Ct. 1428, 51 L. Ed. 2d 752 (1977). Justice Alito also noted that “[t]he right to eschew association for expressive purposes is likewise protected.” Id., citing Roberts v. United States Jaycees, 468 U. S. 609, 623, 104 S. Ct. 3244, 82 L. Ed. 2d 462 (1984); Pacific Gas & Elec. Co. v. Public Util. Comm’n of Cal., 475 U. S. 1, 12, 106 S. Ct. 903, 89 L. Ed. 2d 1 (1986) (plurality opinion)

“Forced associations that burden protected speech are impermissible.”

See Buckley v. Valeo, 424 U. S. 1, 24–25, 96 S. Ct. 612, 46 L. Ed. 2d 659 (1976) (per curiam) (campaign contribution limits violated a contributor’s “freedom of political association.”).

The Court explained in McCutcheon v. FEC, 572 U.S. 185, 197, 134 S. Ct. 1434, 1444 (2014) that in Buckley it concluded that contribution limits impose a lesser restraint on political speech because they “permit[ ] the symbolic expression of support evidenced by a contribution but do[ ] not in any way infringe the contributor’s freedom to discuss candidates and issues.” Buckley, at 21. As a result, the Court focused on the effect of the contribution limits on the freedom of political association and applied a lesser but still “rigorous standard of review.” Id., at 29. Under that standard, “[e]ven a ‘ “significant interference” with protected rights of political association’ may be sustained if the State demonstrates a sufficiently important interest and employs means closely drawn to avoid unnecessary abridgement of associational freedoms.” Id., at 25 (quoting Cousins v. Wigoda, 419 U.S. 477, 488, 95 S. Ct. 541, 42 L. Ed. 2d 595 (1975)).

See also Williams-Yulee v. Fla. Bar, 135 S. Ct. 1656, 1665 (2015) (“Here, Yulee does not claim that Canon 7C(1) violates her right to free association; she argues that it violates her right to free speech.”).

A discretionary mutual create a peer-to-peer community where members join together for a common purpose. That freedom to associate should not be abridged. TandaPay can be used as a tool for social reform. As such, it is speech.

CONCLUSION

Statutes, regulations, and court precedent support the argument that a discretionary mutual is speech that is not regulated under current law. Further, those participating in such a group are guaranteed that freedom of association by the First Amendment.