Pub. 10 2015-2016 Issue 4

www.nebankers.org 14 Extraordinary Service for Extraordinary Members. to enter is also offered that does not require consideration. An argument might be made that PLS is not covered since themoney that one “pays” in order to receive an entry into the prize draw- ing is deposited into one’s own savings account. Arguably there is no real sur- rendering of consideration or net loss to the entrant. The counterargument, how- ever, is that a deposit into an account to participate in PLS could be treated as “consideration” thus rendering PLS an illegal lottery. The recently enacted federal Ameri- can Savings Promotion Act 4 changed federal law, which prevented banks from offering PLS products. Federal statutes expressly prohibited banks fromoperating a lottery (although credit unions were exempt). 5 This legislation narrowly amends federal law to legal- ize the use of PLS products by banks by exempting such products from the definition of a lottery. With the removal of this federal obstacle, only state law potentially stands in the way of banks wanting to use PLS. At the state level, authorizing legis- lation typically refers to PLS programs as “savings promotions raffles” and focuses on adjustments in gaming and finance laws. In 2011, Nebraska lawwas amended to enable credit unions to con- duct savings promotions by exempting such promotions from state antigam- bling laws. 6 Nebraska inserts “savings promotion raffles” into the definition of a “gift enterprise,” which is exempt from the prohibition on gambling. 7 In 2015, Nebraska LB 160 was signed into law expanding the exemption to banks. 8 Although PLS products are now di- rectly authorized for banks, Nebraska and other states impose certain require- ments on their operation. Nebraska’s enabling statute narrowly defines the term “savings promotion raffle” as a “contest conducted by a financial in- stitution or credit union . . . in which a chance of winning a designated prize is obtained by the deposit of a specified amount of money in a savings account.” 9 In addition, Nebraska requires that (1) no additional fees may be charged for COUNSELOR’S CORNER Should Lotto Be Your Motto? Incentivizing Deposits in a Markedly Different Way Jeff Makovicka, Kutak Rock LLP C REDIT UNIONS HAVE BEEN DOING it. Banks can do it, too, now. Should you? For more than 300 years around the world (except in the U.S.), people have been purchasing savings products that incorporate lottery ele- ments. 1 Instead of paying traditional interest to all depositors proportional to their balances, Prize Linked Savings (PLS) accounts pay certain depositors using a lottery-like drawing where a depositor’s chances of winning are proportional to their account balances. Credit unions in the U.S. have been offering these accounts in select states since 2009. The idea is to leverage the appeal of lottery-type winnings to induce people to invest in savings products offering a positive expected return. There is evi- dence suggesting that it works; a paper published in March by University of Maryland economists found what its authors called “strong evidence” that PLS leads participants to set aside more cash than traditional savings accounts. 2 TheWall Street Journal also reported on another study: “A new working paper published by the National Bureau of Economic Re- search explores the possibility of using lotteries to induce savings behavior. . . . [T]hey found that participants were more likely to save when offered the pos- sibility of winning a prize. ‘To the best of our knowledge, this is the first evidence showing that PLS products are more ef- fective at inducing savings as compared to a standard interest bearing account offering the same expected return,’ write the authors.” The Wall Street Journal, June 21, 2013. PLS accounts usually follow a format where each amount (say $25) deposited into a savings account counts as an “entry” into the monthly lottery. 3 In this format a pool of combined interest (say $25,000) is raffled off each month. Im- portantly, even if a depositor technically “loses” that month’s lottery, the deposi- tor still keeps the principal amount that he/she deposited into savings. Until recently, PLS accounts were illegal in most states and banks were explicitly prohibited from participating in lotteries under federal law. In recent years, however, several states, includ- ing Nebraska, have changed their laws. In December 2014, President Obama signed a law that allows banks to create such accounts. Are They Legal? Typically, under state lottery and gambling laws, a sweepstakes in which consumers are required to pay a sum of money or purchase a product to receive an entry is illegal unless a “free” way