October 2016

A number of professionals in the financial field across the U.S. undergo their required licensing procedure via the National Multistate Licensing System and Registry (NMLS). As the NMLS is introducing a new system for submitting and managing surety bond requirements, it’s important for businesses to get acquainted with the electronic surety bond (ESB). The new method for collecting and storing surety bonds is effective for licensees as of September 12, 2016. The first phase was rolled out in January 2016 and affected surety bond producers and surety companies. By using electronic surety bonds, the NMLS aims to make the licensing and bonding process smoother for all parties involved. The new system allows for online submission of required bonds by licensees and their surety providers, plus electronic bond issuance and monitoring for relevant authorities. The rationale for electronic surety bonds Let’s look at the basics of the new ESB system and the changes that licensees should be aware of. The NMLS manages the licensing procedure for a number of professions across the country. In many cases, state authorities ask licensees to obtain surety bonds in order to be granted the right to operate. As of 2014, 177 licensing bodies required bonding. The new electronic system for submission and management of NMLS surety bonds aims to speed up the process for licensees, surety underwriters, and state authorities alike. By being able to submit and track all bonding online, all parties would have easier access and better information. The NMLS also seeks to serve as a complete database for all licensing information, so electronic management of surety bonds is a step in this direction. States and industries affected by the change Until now, nine states have moved to the ESB system, including Texas, Washington, Idaho, Wyoming, Iowa, Wisconsin, Vermont, Massachusetts and Indiana. While the idea is to convert all states, it is not yet clear whether and when this would be realized. In Idaho, collection agencies need to start using the new system by March 15, 2017. Debt management companies, exempt companies, first lien mortgage lenders, money transmitters, and subordinate lien mortgage lenders in Indiana have to comply with the changes by the end of 2016. The same deadline applies for closing agents, debt management companies, exempt companies, money servicers, mortgage bankers, and mortgage brokers in Iowa. In Massachusetts, check sellers, debt collectors, and foreign transmittal agencies have to convert to ESB by December 15, 2016. Mortgage brokers, mortgage lenders and exempt companies have to comply by the end of 2016. All new licensees had to meet the NMLS surety bond requirements via the electronic system as of September 12. Money transmitters in Texas do not have an obligation to use ESBs, but are encouraged to do so. In Vermont, debt adjusters, money transmitters, and litigation funding companies need to adopt the new system by November 1, 2016. Lenders, loan servicers, and mortgage brokers have to move to ESBs by June 30, 2017. All types of new licensees have started using the online system as of September 12. Mortgage brokers in Washington will need to adopt ESBs by the end of 2017. As for mortgage brokers and mortgage bankers in Wisconsin, the deadline is September 1, 2017. Finally, in Wyoming, by June 30, 2017, all exempt companies, money transmitters, mortgage brokers, and mortgage lenders will have to use ESBs. What’s changing for you as a licensee While the NMLS surety bond requirements are not changing, complying with licensing rules for certain licensees in the above-mentioned states and license types will happen by using ESBs. In essence, this means the next time you obtain or renew your surety bond you will have to submit it online via the NMLS website. Surety bonds on paper will not be accepted, so you won’t need to print your bond and send it to the state authority via post. Instead, bonds will be uploaded to the online NMLS system, where all involved parties would be able to track deadlines and monitor compliance. Reposted from http://www.econotimes.com/what-you-need-to-know-about-nmlss-electronic-surety-bonds-365894

WASHINGTON, D.C. — A surety company is not bound by an arbitration provision in a subcontract because the provision clearly only encompassed claims between the engineering company and its subcontractor, a District of Columbia federal judge has ruled. In applying a heightened standard of “clear and unmistakable evidence,” Judge Tanya S. Chutkan of the U.S. District Court for the District of Columbia concluded in the Sept. 30 order that the surety company did not agree to arbitrate. On January 25, 2012, Turner Construction retained U.S. Engineering to perform construction and renovation work at the South African Embassy in Washington, D.C. In turn, U.S. Engineering awarded a subcontract for sheet metal work on the project to United Sheet Metal Inc. The subcontract included an arbitration clause. After entering into the subcontract with U.S. Engineering, United Sheet Metal negotiated with Western Surety Co. to issue a surety bond for $585,000. The surety bond provided that “the contractor [United Sheet Metal] and surety bind themselves, their heirs, executors, administrators, successors and assigns to the owner [U.S. Engineering] for the performance of the construction contract, which is incorporated herein by reference.” In addition, the surety bond stated that “any proceeding, legal or equitable, under this Bond may be instituted in any court of competent jurisdiction in the location in which the work or part of the work is located.” In early 2013, a dispute over the performance of the subcontract arose between U.S. Engineering and United Sheet Metal, which led to U.S. Engineering terminating the subcontract. U.S. Engineering hired a replacement subcontractor to finish the sheet metal work, and United Sheet Metal sought to compel arbitration, seeking $331,242 in damages. U.S. Engineering filed a counterclaim for $417,379 in damages. That arbitration is currently ongoing. On June 9, 2014, Western Surety received a letter from U.S. Engineering stating that it had terminated United Sheet Metal’s performance of the subcontract, and that U.S. Engineering intended to make a claim under the surety bond. U.S. Engineering subsequently sought to join Western Surety as a party in U.S. Engineering’s arbitration proceedings with United Sheet Metal. Western Surety refused to consent to the joinder, however, and filed the instant action, seeking to enjoin U.S. Engineering from compelling arbitration. U.S. Engineering moved to dismiss the action, arguing that the parties are bound by the subcontract’s arbitration clause to arbitrate their dispute over the bond. In response, Western Surety moved for partial summary judgment on the issue of whether it must arbitrate its dispute with U.S. Engineering. Judge Chutkan concluded that Western Surety is not bound by the subcontract’s arbitration clause, which provides that “any controversy or claim of Contractor [U.S. Engineering] against Subcontractor [United Sheet Metal] or Subcontractor against Contractor shall be resolved by arbitration.” The judge agreed with Western Surety that the “of Contractor against Subcontractor” language is a limiting clause that means only those two parties are bound by the arbitration agreement, and not outside parties. “Not only are the cases cited by U.S. Engineering unpersuasive because they contained broad arbitration clauses, they are also unpersuasive because the parties objecting to arbitration in both cases only challenged whether their contracts incorporated by reference the terms of the contracts that contained the arbitration clauses,” Judge Chutkan ruled. “None of the parties who challenged arbitration contested whether the actual language of the arbitration clause was broad enough to include their particular type of dispute.” Moreover, the law is clear that “when a contract incorporates another writing, the two must be read together as the contract between the parties,” the judge added. The bond agreement includes a judicial resolution provision stating that “any proceeding, legal or equitable, under this Bond may be instituted in any court of competent jurisdiction,” Judge Chutkan noted. “While the judicial resolution clause in a vacuum could be construed as merely declaring ‘ground rules’ under which any formal litigation in a judicial forum must proceed, if the court is to give every provision in the surety agreement meaning, it cannot ignore that there is a provision which calls for filing suit, not merely accepting arbitration as the sole avenue of recourse,” the judge reasoned. Finally, to the extent there is any uncertainty about the scope of the arbitration clause, the clause must be interpreted against the drafter, U.S. Engineering, Judge Chutkan held. Counsel for Western Surety are Thomas Moran and Richard Pledger of Setliff & Holland in Glen Allen, Va. U.S. Engineering is represented by Adam Caldwell of Davis Wright Tremaine in Washington, D.C., and Matt R. Hubbard and Stephen Sutton of Lathrop & Gage in Kansas City. Western Surety Co. v. U.S. Engineering Co., No. 15-327 (D. D.C.) http://harrismartin.com/article/21473/ Document Is Available Call (800) 496-4319 or Search www.harrismartin.com Order Ref# REI-1610-16

Examining new BOEM supplemental bonding requirements for OCS decommissioning obligations: Part 4 In context of the Bureau of Ocean Energy Management’s new NTL 2016-N01, the recently in force Notice to Lessees and Operators in the outer continental shelf (OCS) laying out strict new financial demands of operators and leaseholders to cover decommissioning liability on the OCS, Oil & Gas 360® took a call from the Surety & Fidelity Association taking issue with the idea that the capacity of the surety industry to cover the Gulf of Mexico OCS liability is limited. “As a simple economic fact, there is not sufficient capacity in the entire bonding industry to issue the bonds needed to cover the current cumulative P&A and Decommissioning liabilities that BOEM has estimated at $40 billion,” was the quote in a previous Oil & Gas 360® story about the new requirements. Robert J. Duke is the general counsel for the Surety & Fidelity Association of America, a surety industry trade association that has been in force since 1908. Oil & Gas 360® spoke with Duke and others in the surety industry about the changing requirements for supplemental security for operators on the OCS. Duke said his organization’s membership is about 400 underwriting companies, which includes multiple companies under about 150-200 parent companies. Those are the companies that collectively write the majority of surety and fidelity bonds in the United States. Duke said he estimates that the number of sureties that work in the energy and mineral space is probably somewhere between a dozen and 20. Surety basics in the context of federal leaseholders and operators operating on the OCS “A surety provides a bond—it’s guaranteeing an obligation. In this case, the payment of and meeting of your decommissioning obligation,” Duke explained. “A surety will provide a bond only to those entities through its financial and operational review that it determines through its assessment can perform that obligation. They want to avoid the loss. The underwriting is more akin to a credit product than an insurance product. So just like you would provide a loan only to those you think could repay you, it’s the same with a bond. You’re going to provide a bond only to those you think can meet the decommissioning obligation. “That’s why I was alluding to credit quality. If an operator comes to a surety and says ‘we just got this letter from BOEM, and our supplemental requirement is $5 million’, a surety is going to review the operator’s financial wherewithal, it’s going to review the economics of the particular lease and well operation, and the surety will make a determination as to if it believes the operator can meet the $5 million obligation down the road? “If they believe they can, they will provide the bond, and if they believe they can’t [meet the obligation], they likely won’t provide the bond. If it’s a gray area they may require some collateral. Collateral certainly is an option [to the surety], I just don’t think it’s an across the board option.” Oil & Gas 360® also spoke to Adam S. Pessin, President and CEO of Tokio Marine HCC – Surety Group, one of the larger carriers in the class. Pessin’s group works with OCS oil and gas operators. “If you have appropriate and competent management, if you have appropriate capital structure, and if the asset quality is appropriate, the surety markets are very much open on an unsecured basis for these operators,” Pessin said. “It’s your parties that have problems in one or more of those three areas that wind up in a situation where security might be required by the surety providers.” Is there enough capacity within the surety universe to provide bonding for the estimated decom liability? Duke said in the industry overall there is plenty of capacity to cover the BOEM’s estimated $40 billion in decommissioning liability in the Gulf of Mexico. “There’s enough capacity in the surety market to absorb that,” he said, “but it comes down to the credit quality of the bond principal—that’s the operators themselves and the economics of the particular well. “So of that $40 billion that the industry has available to extend, the question is: are they willing to extend it? When you look at the available capacity, the more important issue is: will the operators qualify for it?” Dual obligee scenario could relieve some pressure “I think that BOEM has to some degree recognized this issue, because they are considering this idea of ‘dual obligee.’ Particularly in instances where a major operator—a Chevron or a Shell, for example—has conveyed an interest to an independent, and there is already an existing private bond. Not a bond to BOEM, but a bond from the independent to the major operator,” Duke said. “I know the independents have expressed concern that if they have to also provide a bond to BOEM, that would be double bonding. And BOEM seemed willing to say that ‘if somehow we can get onto the private bond, then that may be sufficient to meeting the additional security requirement’.” Duke said his association has been providing suggestions to BOEM as to what would be workable language in that scenario. “If we can get language that all parties like, then that will alleviate some of the need to provide supplemental security up to $40 billion.” http://www.oilandgas360.com/surety-industry-weighs-new-ocs-supplemental-bonding-requirements/