Permissible Investments by State
Money transmitter statutes require that customer funds held in trust be invested in specified, safe investment vehicles. The purpose is to prevent MSBs from using customer funds for operational expenses or risky ventures. This appendix covers the permissible investments for key states. Every state has slightly different requirements, so verify with your specific regulator before investing.
Federal Requirements
The Gramm-Leach-Bliley Act and its implementing regulations require that financial institutions maintain adequate capital and liquidity. For money transmitters, the practical requirement is that you cannot invest customer funds aggressively. Customer funds must be readily accessible.
FinCEN provides no specific guidance on permissible investments. The agency defers to state regulators. This creates variation across states.
General Principles
Most states allow investments in: - Cash in segregated trust accounts - US Treasury securities (bonds, bills, notes) - Insured deposits in other FDIC-insured banks or credit unions - Certificates of Deposit (CDs) in FDIC-insured institutions - Money market funds maintained in trust - Repurchase agreements with major banks - Surety bonds held in trust to back customer fund liability
Most states prohibit: - Stocks or equity investments - Corporate bonds or junk bonds - Real estate or real estate investment trusts - Derivatives or complex securities - Commodities - Cryptocurrency or digital assets - Loans to the MSB or related entities - Investments in the MSB's own business
State-Specific Requirements
California: Customer funds must be held in segregated trust accounts. Permissible investments: cash, US Treasury securities, FDIC-insured deposits, money market funds, repurchase agreements with major institutions. Cannot invest in corporate bonds, stocks, or real estate. Surety bond alternative is not accepted—California requires actual cash/securities deposits.
New York: Customer funds must be held in segregated trust accounts in New York-based banks. Permissible investments: US Treasury securities, FDIC-insured deposits, money market funds. More restrictive than most states. Surety bond alternative not accepted.
Texas: Permissible investments include: cash, US Treasury securities, FDIC-insured deposits, CDs, money market funds, repurchase agreements, and surety bonds held in trust. Relatively permissive compared to California and New York. You can use surety bonds to back a portion of customer fund liability.
Florida: Permissible investments: cash, US Treasury securities, FDIC-insured deposits, money market funds, repurchase agreements. Surety bond alternative available.
Illinois: Permissible investments: cash, US Treasury securities (up to 50% of required reserve), FDIC-insured deposits, money market funds, repurchase agreements. Surety bonds allowed for up to 50% of requirement.
Arizona: Permissible investments: cash, US Treasury securities, FDIC-insured deposits, money market funds, repurchase agreements. Surety bonds allowed.
Georgia: Permissible investments: cash, US Treasury securities, FDIC-insured deposits, money market funds, repurchase agreements, surety bonds. Relatively permissive.
Nevada: Permissible investments: cash, US Treasury securities, FDIC-insured deposits, money market funds, repurchase agreements, surety bonds. Flexible approach.
Wyoming: Wyoming (the most operator-friendly state) allows: cash, US Treasury securities, FDIC-insured deposits, money market funds, repurchase agreements, and surety bonds. Most flexible of major states.
Practical Implications
Most money transmitters use a combination of cash (held in segregated trust accounts at FDIC-insured banks) and US Treasury securities (typically short-term Treasury bills that mature regularly). This approach provides: - Immediate liquidity (cash is always available) - Safety (FDIC insurance on deposits, US government backing on Treasuries) - Compliance with most state requirements - Reasonable return (Treasury bills yield above savings account rates)
A typical structure for a $10 million operator might be: - $7 million in segregated trust accounts at multiple FDIC-insured banks - $2 million in short-term Treasury bills (rolling maturity) - $1 million in surety bond (for states that allow it)
This structure ensures customer funds are accessible and protected while earning a modest return.
Surety Bond Alternatives
Many states allow you to reduce your cash deposit requirement by obtaining a surety bond. Instead of holding $1 million in customer funds as a cash deposit, you might hold $500,000 in cash and post a $500,000 surety bond. The surety (an insurance company) agrees to pay the difference if you fail to return customer funds.
Surety bond costs typically range from 1.5-3% annually of the bond amount. For a $500,000 bond, you'd pay $7,500-$15,000 annually. This is cheaper than holding the full $1 million in cash (which you can invest at 4-5% but still ties up capital). However, not all states accept surety bonds. California, for instance, requires actual deposits only.
Compliance Monitoring
Your financial statements should show: - Trust accounts established and segregated - Specific investments held - Fair value of investments - Maturity dates for time-based investments - Verification that investments are permissible under your state's rules
If you're audited, your auditor will verify that customer fund investments comply with your state's requirements.