94-2

September 7, 1994

Re: Alleged Violations of Financial Code Section 33723

Dear M ________:

This is in reply to your letter of June 14, 1994. Your letter takes issue with the aspect of our report of examination of ________ (“________”) as of September 20,1993, in which we cite as a violation of Financial Code Section 33723 the commingling by California agents of funds (less fees) received from the sale of payment instruments (“sale funds”) with other funds in the California agents’ bank accounts. Your letter points out that California agents deposit sale funds in such commingled accounts for the purpose of facilitating remittance of the sale funds to ________. Upon further consideration, we do not consider such commingling to be a violation of Financial Code Section 33723.

The reasons for this determination are as follows: In our view, the first portion of Financial Code Section of 33723 (i.e., the portion before the proviso clause) contains two prohibitions relating to a California agent’s handling of sale funds; namely, (1) a California agent may not commingle sale funds with any other property owned or controlled by it, and (2) a California agent may not use sale funds for any purpose other than to remit the funds to the licensee. The proviso clause sets forth two exceptions to the prohibitions. The first exception, which applies to the first prohibition, permits a California agent, before remitting sale funds, to commingle the funds with any other funds owned or controlled by it. The second exception, which applies to the second prohibition, permits a California agent, before remitting sale funds, to use the funds in the ordinary course of its business for the purpose of making change or cashing payment instruments, checks, or drafts believed by it to collectible (collectively, “cashing instruments”).

The two exceptions are separate and distinct, and the first is not limited by the second. Thus, the permission in the first exception for a California agent to commingle sale funds with other funds is not limited to situations where the commingling is for the purpose of making change or cashing instruments. Accordingly, a California agent may deposit sale funds along with other funds in a general bank account.

Of course, even if a California agent commingles sale funds with other funds, the restrictions on use of sale funds continue to apply. Thus, the California agent may not use the sale funds for any purposes other than to remit the funds to the licensee, to make change, or to cash instruments. Accordingly, the commingling by an California agent of sale funds with other funds of the agent in the California agent’s general bank account for the purpose of remitting the sale funds to does not violate Section 33723.

If you have any questions regarding this matter, please feel free to call me.

Very truly yours,

JAMES E GILLERAN
Superintendent of Banks

By

THOMAS M. LOUGHRAN
Senior Counsel

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