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Title Headline

Tribal Nations and the Global Secured Transactions Reform Movement ~~~ Encouraging Capital Flows into your Economies with a UCC AIBA Conference Bismarck, ND | November 3-4, 2016 Presented by Sue Woodrow Center for Indian Country Development Federal Reserve Bank of Minneapolis Disclaimer The views expressed in this presentation represent the presenters views and not

necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System 2 Agenda The Importance of Legal Infrastructure Development to Support Sustained Economic Development Uniform Commercial Code (UCC) and Secured Transactions Model Tribal Secured Transactions Act Impact of Successful Implementation Filing Systems Other Issues

3 Legal Infrastructure Development Why is it important for sustained economic development? There is a difference between economic activity and sustained development Inward and outward focused laws: what is the difference? Inward focused

Outward focused When is uniformity important? 4 What is the UCC? Uniform Commercial Code Drafted by the Uniform Law Commission (ULC) in partnership with the American Law Institute during the 1940s and 1950s and continually updated a set of model codes addressing a wide range of commercial transactions A set of template codes developed as a resource for use and enactment by state legislatures to help establish a reasonably consistent commercial law environment within and across the

United States Enacted by all 50 states and some U.S. territories - not exactly uniform but substantially uniform enactment 5 What is a UCC? A collection of template codes governing commercial transactions of various kinds

Article 1 Article 2 Article 2A Article 2B Article 3 Article 4 Article 4A Article 5

Article 6 Article 7 Article 8 Article 9 Definitions and General Rules Sales Leases Licenses Negotiable Instruments Bank Collections Funds Transfers Letters of Credit

Bulk Sales Documents of Title Investment Securities Secured Transactions 6 Why did all the States adopt the UCC? Economic development: Non-uniformity among state laws was hindering cross-border commerce, thus interfering with economic development

Sovereignty: Concern by states of federal legislative intervention/preemption if states did not act to address the non-uniformity issue Now, substantial uniformity among the states commercial laws, including those governing secured lending, permits ease of transactions across state lines, enabling efficient cross border commerce 7 Why did all the States adopt the UCC? QUESTION: With regard to economic development and

sovereignty, are there similar concerns about economic development and sovereignty in Indian Country? 8 Secured Transactions Article 9 governing secured transactions is far and away the most important of the commercial topics addressed in the UCC Article 9 provides a unified structure covering an immense array of financing transactions At least tens of thousands of secured transactions occur every day

A secured transactions code is the single most important legal infrastructure for promoting access 9 to credit What is a Secured Transaction? A loan or credit extended by a seller of goods Using personal property, which is everything other than real property, as collateral securing the loan or extension of credit A security interest in personal property operates like a mortgage on land 10

What is Personal Property? Tangible property such as equipment, inventory, crops, standing timber, livestock, minerals/gas/oil removed from the ground Intangible property such as accounts receivable, bank accounts, and intellectual property 11 Secured Transaction Example: Possessory Security Interest Bill gives Sam a loan of $100

Sam gives Bill his leather jacket (approx. value $100) to hold on to until Sam repays the loan as assurance that Sam will repay (the jacket is the collateral) 12 Secured Transaction Example: Possessory Security Interest When Sam fully repays Bill, Bill returns the jacket If Sam fails to repay Bill, Bill may sell the jacket to pay off the loan balance Bill would have to give Sam any extra proceeds from the sale

13 Secured Transaction Example: Non-possessory Security Interest Bill gives Sam a loan of $100 Sam signs a security agreement (contract) giving Bill a security interest in Sams leather jacket Bill now has a nonpossessory security interest in the jacket (the collateral) Sam may continue to use his jacket 14 Secured Transaction Example:

Non-possessory Security Interest Upon repayment, Bill no longer has a security interest in the jacket If Sam fails to repay Bill, Bill may repossess and sell the jacket to pay off the loan balance Bill would have to give Sam any extra proceeds from the sale 15 Non-Possessory Security Interests Common Examples:

Inventory for sale Equipment (e.g. combine) needed to run a business Consumer items (e.g. car purchased on credit) Non-possessory security interests are very important They allow borrowers to continue to use collateral Facilitating non-possessory security interests is one way that secured transactions laws improve access to credit 16 What is a Secured Transactions Law? Set of contract and property-based rules governing secured transactions

Secured Transaction: A loan that uses personal property as collateral Secured transactions laws govern: How a borrower gives a security interest in collateral Lenders rights relative to third parties (e.g. other lenders) Remedies available to lenders if a borrower defaults

Protections available for borrowers to make sure that lenders remedies are fairly applied 17 The Secured Transactions Global Reform Movement Most, if not all, free market economies around the world have secured transactions laws, or have initiatives to enact or modernize them, in order to facilitate the flow of credit for business development and some consumer purposes Because access to credit is absolutely necessary for sustained business development, developing and emerging nations have made adoption of secured transactions laws a priority

18 The Secured Transactions Global Reform Movement Examples of the forty plus countries have recently developed, are currently developing, or are beginning to reform their secured transactions legal regimes: Middle East: Yemen, Jordan, Afghanistan, Palestine, Morocco, Egypt Asia: India, China, Sri Lanka, Lao PDR, Philippines, Indonesia, Viet Nam, Cambodia, Mongolia Africa: Ghana, Malawi, Nigeria, Burundi, Liberia, Sierra Leone, South Africa, Zambia, South Sudan, Uganda Central Asia: Azerbaijan, Belarus, Tajikistan, Uzbekistan, Pakistan Latin America: Columbia, Haiti, Peru, Nicaragua, Mexico, Belize, Chile,

Costa Rica, Dominican Republic, Trinidad, Tobago 19 The Secured Transactions Global Reform Movement Many other countries have expressed interest The development of modern, comprehensive secured transactions regimes has become a global movement to help facilitate development through improved access to business and consumer credit 20 The Secured Transactions Global

Reform Movement U.N. Commission on International Trade Law (UNCITRAL) Identified secured transactions law as a key foundational building block for economic development Developed a legislative guide to help nations develop such laws and registry (filing) systems Principles in the guide are highly consistent with Article 9 In the process of drafting a model secured transactions law Secured transactions legislative guide may be found at www.uncitral.org/uncitral/search.html?q=secured+transactions 21 The Secured Transactions Global Reform Movement

2010 World Bank Study Secured Transactions Systems and Collateral Registries at https://www.wbginvestmentclimate.org/uploads/SecuredTra nsactionsSystems.pdf 22 What is the Relevance for Tribes? Like other emerging economies around the world, Native nations in the United States have expressed the dire need for improved access to capital to spur economic development There are several reasons for the lack of adequate access to capital in tribal jurisdictions. The lack of legal certainty is one of the most significant

The need for this important legal infrastructure has been articulated in countless reports, studies, presentations, and articles typically as the need to adopt UCCs 23 What is the State of Secured Transactions Law in Indian Country Today? The state of secured transactions laws in Indian Country is very confusing, sometimes significantly different from tribe to tribe, and often non-existent Some tribes have no secured transactions law state law is the default (e.g., per boilerplate contract language) Some have comprehensive but unique secured transactions

laws Some have adopted the Official Text of UCC Article 9 Some have adopted Article 9 as enacted by the state in 24 which their Tribes jurisdiction is located What is the State of Secured Transactions Law in Indian Country Today? Some Tribes have adopted by resolution the version enacted by the state in which their jurisdictions are located for single transactions Some have only components, such as collection codes governing repossession

Some have adopted pre-revision model tribal versions or state versions (e.g., the Montana Tribal Secured Transactions Code drafted 1997) 25 What is the State of Secured Transactions Law in Indian Country Today? The environment for supporting secured lending in Indian Country is significantly non-uniform, with the majority of Tribes having no reliable legal infrastructure to support and promote secured financing for business development and consumer purposes.

26 What is the State of Secured Transactions Law in Indian Country Today? This confusing environment raises significant risk issues for lenders and other creditors that often result in what are perceived in Indian Country to be discriminatory lending practices (such as higher interest rates, shorter loan terms, or simply no deals), but which are more often than not risk mediation practices commonly and necessarily employed by

regulated lenders in high-risk credit transactions. 27 Recommendation for Tribes Similar to many emerging economies, Tribes should consider which fundamental economic development building blocks they need to establish Among these should be a secured transactions law that is both culturally appropriate and that is based on principals that will be understood by lenders and other credit providers 28

Common Myths Cultural mismatch Not true. Consider all the countries and many different cultures across the globe that have secured transactions laws and/or are engaging in initiatives to adopt them Favors creditors Not true. Secured transactions laws spell out the rules both the rights and responsibilities of creditors (lenders), debtors (borrowers), and possibly other parties (such as cosignors or good faith purchasers) Sovereignty Issues Sovereignty: self-governance, including making, executing and 29 applying laws . . .

Model Tribal Secured Transactions Act ULC Committee on Liaison with American Indian Tribes and Nations Drafting committee comprised of more than a dozen commissioners, including several that worked on 1999 revisions to Article 9 (adopted by all states), representatives from ten Tribes, other advisors with experience in Indian Country legal/development issues 30

Model Tribal Secured Transactions Act Drafting effort took four years; completed in August 2005 Largely based on revised Article 9, with key components of Articles 1, 2 and 8 (where UCC Article 9 incorporates provisions from these Articles by reference) Purpose: to draft a stand-alone code that will, if other Articles are subsequently adopted, still harmonize (or blend) with those Articles 31

Model Tribal Secured Transactions Act MTSTA was drafted to provide a wide range of protections for Tribes, Native-owned businesses and consumers, but also for ease of use by lenders and other creditors who will be familiar with the core rules Intended to help reduce cross-border transaction concerns 32 Model Tribal Secured Transactions

Act A few of the special considerations in the MTSTA: No affect on sovereign immunity

Fixtures attached to trust land Possible exemptions from covered property Consumer protections limitation on choice of law Manufactured homes interim financing Coordination with other Tribal law Tribal customs and traditions Treatment of self-help remedies Choice of law and venue issues Implication of tribal liens 33 Revised MTSTA ULC began MTSTA revision initiative in 2015

Consideration of 2010 revisions to Article 9 what is relevant in these revisions to the MTSTA? From comments, concerns and developments over the last ten years of experience with the MTSTA, what other provisions need to be revised, changed, added? Draft law is complete; will be published on the ULC website soon 34 Revised MTSTA Implementation Guide is also being revised Will contain specific guidance for tribes that have already enacted the MTSTA to assist in reviewing and

adopting the revisions Will also contain guidance for tribes that are reviewing for enactment for the first time 35 Filing Systems: The Heart and Soul of ST Laws SO, a good model secured transactions law for tribes is available, and successful implementation can have great results, but implementing the law also requires a means by which a creditor can publicize a notice of its interest in a borrowers asset.

36 Filing Systems: The Heart and Soul of ST Laws If a creditor has a security interest (lien) in a borrowers asset, and that asset is left in the borrowers hands, it appears to the world that the borrower still owns the asset free and clear Who would want to know if the asset is encumbered by a lien or liens? Prospective buyers of the asset and subsequent lenders who want to use the asset as collateral 37

Filing Systems: The Heart and Soul of ST Laws A filing system (sometimes called a registry or central indexing system) is a system for giving public notice of security interests Enables creditors and others to search for existing security interests in a debtors asset before agreeing to take the asset as collateral or to otherwise acquire the asset Provides a way to determine priority between creditors (borrowers may give security interests in the same collateral to multiple creditors) 38

Filing System Example Sam signs a security agreement (contract) giving Bill a security interest in Sams jacket to secure a loan A month later, Sam also gives Joe a security interest in the jacket secure a loan from Joe Sam fails to pay back both Bill and Sam Who gets to repossess and sell Sams jacket? Filing systems provide a means to determine the answer Creditor priority is often governed by which creditor filed the first financing statement 39 Filing System Recap Purposes of filing systems:

Give notice to potential creditors when collateral is subject to security interests Determine the priority of various creditors NOT to derive fee income for the filing system administrator Without a reliable and accessible filing system, secured transactions laws are not effective 40 Impact of ST Reform/Filing Systems on Credit Access World Bank Study, June 2013

Variable Effect Access to finance 8 percentage points Access to a loan 7 percentage points

% of working capital financed by banks 1 percentage points up Interest rates 3 percentage points

Loan maturity 6 months *Collateral Registries for Movable Assets: Does their Introduction Spur Firms Access to Finance? by Inessa Love, Sole Martnez, and Sandeep Singh; World Bank Development Research Group, June 2013 Study also provides evidence that the impact of the introduction of movable registries (UCC filing systems) on businesses access to credit is larger among smaller businesses who also report a reduction in subjective, perceptionbased measures of finance obstacles. Collateral Registries for Movable Assets: Does their Introduction Spur Firms Access to Finance? 41

by Inessa Love, Sole Martnez, and Sandeep Singh; World Bank Development Research Group, June 2013 Impact of Collateral Registries Example: In Columbia, a new ST law in 2013 and new centralized collateral registry in March 2014 Impact: In 3 months after the system went into effect, more loans were registered than in the 30 years prior. More than 16,000 loans were registered for a value of US$6 billion 42 Filing Systems in Indian Country In Indian Country, lack of comprehensive, accurate

and trusted public filing systems is a significant and all-too-common issue for Tribes that have adopted a secured transactions law For these Tribes, their secured transactions laws are essentially ineffective 43 Filing Systems in Indian Country Options available to tribes: Develop and self-administer own filing system Multiple tribes develop and maintain a filing system as a consortium (multi-jurisdictional) Enter into compacts with a state to use the states filing

system (e.g. Crow Nation/Montana; Oglala Sioux (Pine Ridge)/South Dakota; Leech Lake Band of Ojibwe/Minnesota; Chippewa Cree (Rocky Boys)/Montana); Standing Rock Sioux/North Dakota Potential pitfalls described in the next two slides 44 Self-administer a Tribal Filing System Tribal secured transactions laws often specify clerk of tribal court or other tribal office as the place to

file. Paper-based systems/non-electronic PROBLEM: Often, the clerk of the court or other staff are not aware of filing or search procedures and/or there are no specified means of actually filing or searching. OR, even if there is a way to file, creditors do not trust that the Tribes system is reliable and/or 45 timely (may be perceived or real) Informally use a State Filing System Some Tribes utilize a states UCC filing system, but do so informally without a compact or other type

of agreement 46 Informally use a State Filing System PROBLEM: Filing system and tribal law are not legally integrated. State filing systems depend on the use of standard forms, and the contents of those forms are dictated by the state's version of UCC Article 9. Because Article 9 has been significantly revised in recent years (most recently in 2010), its standard filing forms are likely to require information either not required by tribal law or in a different format

(e.g., form of name) than is required by tribal law. This practice is messy at best and should not be considered a permanent solution by Tribes to support their secured 47 transactions laws Formally Use a State System Several tribes have entered into (or are in the process of doing so) compacts, memoranda of understanding, or joint powers agreement with applicable state divisions, typically Secretary of States Offices, to utilize state UCC filing systems to support the tribes secured transactions laws (the states recognize the Tribes laws, and agree that use of the state filing system does not infringe on the tribes sovereignty or jurisdiction)

These arrangements are working well, and are likely the best option currently available to most tribes Examples: Crow and Chippewa Cree/MT; Oglala Sioux and Cheyenne River Sioux/SD; Leech Lake/MN; and Standing Rock 48 Sioux/ND Proprietary Multi-jurisdictional Tribal Filing System Concept is under development Would be privately managed on behalf of participating tribes Not under federal management or oversight

State-of-the-art all-electronic system 49 Other Issues: Law and Filing System Implementation When implementing a filing system, it is important to: Consider what may be the most appropriate filing system option for your tribe, an implementation plan for the filing system, and a maintenance plan (funding, trained staff, public search capabilities, etc.) does your Tribe have the capacity to host its own robust filing system? Avoid adopting another Tribes law without careful

consideration of cultural issues, date of enactment, and 50 Other Issues: Law and Filing System Implementation When implementing a filing system, it is important to: Avoid conflicts of interest in drafting , e.g. having a tribal judge who may have to determine a future legal dispute draft the secured transactions law (potential separation of powers issue) 51 Other Issues:

Regional Uniformity Benefits of UCC/MTSTA-based secured transactions laws include: Substantial uniformity among jurisdictions Certainty in the lending/borrowing relationship Low transaction costs Lack of regional uniformity can limit effectiveness of secured transaction laws Lack of certainty in lending/borrowing relationship High transaction costs 52

Other Issues: Courts and Enforcement Three main components to successful secured transactions law: The law itself Filing system Enforcement Mechanism(s): Court system Self-help repossession OR a process that works effectively in lieu of self-help 53 Other Issues: Courts and Enforcement

Successful enforcement mechanisms must be: Timely Consistent Accessible Alternatives to tribal court system 54 A Final Note There is a difference between economic activity and economic development A nation may experience economic activity without a comprehensive legal infrastructure and

supporting institutions in place, but experience shows it will likely not experience sustainable and robust economic development without it 55 MTSTA Resources For the Model Tribal Secured Transactions Act, go to www.uniformlaws.org Click on Acts, then Find an Act in the drop down box Go to Model Tribal Secured Transactions Act for downloadable WORD and PDF versions of: Model Act (Revised Act to be published soon) Implementation Guide for comprehensive information about secured transactions laws, filing systems,

legislative and judicial guidance (Revised Guide to be published soon) Crow-Montana Filing System Compact 56 Other related information Other Resources Minneapolis Feds Center for Indian Country Development website: www.minneapolisfed.org/indiancountry/ for related articles and working papers

2010 World Bank Study: Secured Transactions Systems and Collateral Registries at www.wbginvestmentclimate.org/uploads/SecuredTransactions Systems.pdf 2013 World Bank Study: Collateral Registries for Movable Assets: Does Their Introduction Spur Firms Access to Bank Finance? http://elibrary.worldbank.org/doi/book/10.1596/1813-945057 6477 Other Resources

For Montana Secretary of State/Tribal UCC filing compacts, see http://sos.mt.gov/Business/UCCTribalNations/index. asp For South Dakota Secretary of State/Tribal UCC filing system memoranda of understanding, see https://sdsos.gov/business-services/uniformcommercial-code/ucc-efs-information/oglala-siouxtribe-compact.aspx 58 Contact Information Sue Woodrow Branch Executive & Assistant Vice President

and Co-Director, Center for Indian Country Development Federal Reserve Bank of Minneapolis/Helena, Montana Branch [email protected]; (406) 447-3806 Steve Powell Attorney, Federal Reserve Bank of Minneapolis [email protected]; (612) 204-5019 Patrice Kunesh Assistant Vice President and Co-Director, Center for Indian Country Development Federal Reserve Bank of Minneapolis [email protected]; (612) 204-5815 59

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