WACHOVIA CORPORATION July 15, 2004 Mr. Robert E. Feldman, Executive Secretary RE: Notice of Proposed Rulemaking: Definition of “Deposit”; Stored Value Cards Dear Mr. Feldman: This letter is submitted on behalf of Wachovia Corporation and its subsidiary companies, including Wachovia Bank, National Association, and Wachovia Bank of Delaware, National Association (collectively referred to as “Wachovia”).Wachovia respectfully submits these comments regarding the FDIC’s Notice of Proposed Rulemaking (“NPR”) that proposes to clarify the meaning of “deposit” as that term relates to funds underlying stored value cards. Wachovia appreciates this opportunity to comment. Wachovia offers a number of products that appear to fall under the definitions that the FDIC has addressed in the NPR. While Wachovia agrees with the FDIC that many types of stored value cards have appeared in the marketplace in recent years, Wachovia is concerned that the proposed rules may have significant negative implications for financial institutions, as explained herein, and for that reason requests that the proposed rules be withdrawn for further consideration and study in concert with the other regulatory agencies. On July 16, 1996, the FDIC promulgated General Counsel’s Opinion No. 8 (“GC8”), which set forth the FDIC’s position that, with limited exceptions, the funds underlying stored value cards did not meet the statutory definition of a “deposit,” and thus were not insured by the FDIC. The NPR states that it proposes “to retain the basic principles set forth in GC8 and extend these principles to new types of stored value card systems” (emphasis added). Wachovia submits, however, that in proposing to afford more expansive insured-deposit treatment to certain classes of such funds, the NPR departs substantially from the position taken in GC8. Wachovia further believes that the position taken in GC8 adequately addresses issues related to the new types of stored value cards, with the possible exception of payroll cards, and that no further definition is necessary at this time. Payment Systems Approach GC8 takes the position that the issue of deposit insurance is related directly to whether the underlying funds are held for a special or specific purpose, that is, to be credited to or obligated to be credited to a specific depositary account. Likewise, in the case of a company-issued card, described as Example A in the NPR, the underlying funds are insured deposits while the funds remain in the issuing company’s account, regardless of whether the account is designated as a “reserve account.” The financial institution’s obligation to identify deposits protected by FDIC insurance arises from its obligation under 12 U.S.C.1813(m) for “money received or held by a bank . . .in the usual course of business for a special or specific purpose . . .” The “reserve account” deposit is insured until all funds are expended through the use of the stored value cards. However, insurance does not “flow through” to the user of the card whose identity may not be known. Wachovia believes that GC8 addresses this type of account and that no further clarification is necessary. In Example B, Wachovia submits that unless there is a traditional deposit, that is, “the unpaid balance of money . . . for which (a bank) has given or is obligated to give credit to . . .(an) account,” insurance on these funds should not be required and would not flow through to the beneficiary. In many of the types of payment systems described in Example B, the customer who originally purchases the card may immediately fund a reserve account or may be conditionally obligated to fund the account upon use of the card. Moreover, the person obligated to fund the account may not be the cardholder and may not be a depositor in the financial institution issuing the card. This example differs significantly from the obligations arising from a commingled trust or escrow account where records are maintained to indicate the identity of the legal owner. Wachovia submits that these accounts described in Example B do not constitute insured deposits. Notwithstanding the above, Wachovia agrees with the FDIC that payroll cards may well represent insured deposits under the same principles that trust accounts are held in the name of a third party for a beneficiary. There are several scenarios under which payroll cards are issued. In some cases, the employer meets its payroll obligation by depositing payroll funds into an account in the name of the employer. The amount of the pay is loaded onto the employee’s payroll card. In other instances, the funds are withdrawn from the employer’s account as the employee uses the card. More frequently, the funds are transferred into the employee’s account in similar fashion to a debit card. In either case, the funds in the employer’s account are insured under existing regulations, and because the pay is a legal obligation of the employer to the employee, there is a legal argument that the employee is a beneficiary of the funds in the employer’s account, and thus the deposit insurance on the account. The NPR states in Footnote 1 that the proposal does not apply to" 'gift cards’ offered by retailers in ‘closed systems’." Wachovia agrees that closed system gift cards do not constitute deposits, although these often are funded with commercial deposits in the name of the retailer in financial institutions. FDIC insurance applies to these funds while the funds remain on deposit in the financial institution. However, financial institutions also issue “gift cards” which are funded in cash, or through deposit accounts and/or credit card debits. The financial institution may imprint the name of the recipient of the card on the card, or may leave it blank, or may issue the card directly in the name of the purchaser. These stored value cards may be used as retail purchase cards, and in some cases, as ATM cards. They represent funds that constitute the obligation of the financial institution to pay a merchant or the cardholder as the card is used. The NPR describes these cards as “hybrids” to which FDIC insurance would apply. Wachovia does not agree that these funds are deposits, or that there is a customer expectation of insurance on these funds. The customer agreements that accompany “bank-issued gift cards” vary, but many contain expiration dates after which the funds are reclaimed by the financial institution. If the underlying funds represent deposits, and thus obligate the financial institution to pay the funds as the card is used, the financial institution would be obligated to hold the funds, regardless of balance, for extended periods of time. Moreover, the financial institution would be required, under FDIC regulations, to maintain detailed records about the purchaser and the beneficiary of the card. The expense of operating a stored value card under the “hybrid” definition would increase significantly. Wachovia submits that the existing statutes, regulations and legal opinions adequately address FDIC insurance issues related to stored value cards. Moreover, the payments industry continues to develop new access and payment device methodology. As different access methods and type of stored value cards proliferate, financial institutions would find themselves attempting to apply deposit insurance regulations to payment systems methodologies. In the event of the failure of a financial institution, the FDIC would find it difficult to determine which deposits were insured and how to effect payment to the “owner” of the deposit. For this reason, and for the others reasons stated below, Wachovia recommends that the FDIC withdraw its proposed rule. Disclosure of Insurance Coverage The FDIC has requested that financial institutions offer comments on the disclosure of FDIC insurance. Wachovia strongly opposes any amendment to the regulations that would require financial institutions to identify whether the underlying value of stored value cards is insured. Wachovia agrees with the FDIC that, for some types of cards and at certain points in card transactions, underlying funds may be insured as deposits. However, as discussed above, in some cases, the insurance runs to the card issuer or sponsor and not the ultimate cardholder, who also may not have been the purchaser. A notation on the stored value card or on any accompanying document that the card was “FDIC insured” because the underlying deposit is insured may be misleading to the last holder of the card. While cardholders may presume that the FDIC logo assures that underlying funds in the card are available in perpetuity, many cards have expiration dates after which the remaining funds are reclaimed by the issuer. Further, cardholders may misconstrue the meaning of the FDIC logo and presume that the card is replaceable if lost or stolen, which is not the case in many instances. Finally, issuers of cards traditionally order large quantities of cards for multiple programs, some insured and some not. The additional expense of ordering special cards or “hot stamping” the FDIC logo on the cards which represent insurance deposits far exceeds the benefit of informing customers that the deposit is or may be insured. Wachovia urges the FDIC to withdraw any requirement that stored value card issuers be required to place the FDIC logo on the card or on accompanying documents. Other Regulatory Issues While the NPR directly addresses only issues related to the definition of deposit for insurance purposes, the FDIC notes in Footnote 2 “there are a number of other issues, not addressed in this proposed rulemaking, which are of great importance to the FDIC…” Wachovia agrees and is concerned that the new definition may create new requirements, or set precedents for them, under other laws and regulations. Escheatment Statutes State escheatment laws require financial institutions to remit to the state treasurers or other designated departments funds that have remained on deposit without customer activity for a designated number of years. If the FDIC should determine that the underlying value of stored value cards are deposits, financial institutions may be required to comply with state escheat laws and remit unclaimed amounts. Financial institutions would be hard pressed to identify the actual owner of the deposit(s), particularly in cases where the purchaser may not be the cardholder. Further, the record keeping burden of maintaining proper records, contacting customers and reporting funds to the state would increase the cost of the stored value program. It may also require a financial institution to change its contracts with its customers with respect to maturity dates and reclamation by the issuing financial institution. Reserve Requirements/Regulation D 12 CFR 204.2(b)(1) defines a demand deposit as “a deposit that is payable on demand . . . includes “an obligation to pay on demand or within six days, a check (or other instrument, device, or arrangement for the transfer of funds . . .”1 This definition is substantially similar to the definition of deposit in 12 U.S.C. 1813(l)(1). If the underlying value of stored value cards is deemed to be a deposit for insurance purposes, there may follow a reasonable presumption that the underlying value may also be deemed to be transaction accounts under Regulation D and subject to reserve requirements.2 Wachovia is concerned that the actions of the FDIC under the NPR may give rise to additional expense and record keeping related to reserve requirements. Even in those instances where the expense is not significant, the additional compliance costs to the financial institution will increase the overall costs of the stored value program. Ultimately, the consumer will bear that cost. Electronic Funds Transfer Act/Regulation E The Board of Governors of the Federal Reserve has refrained from defining the transfers of funds from stored value cards as “electronic funds transfers” under 12 CFR 205.3. In 1997, in a report to the U.S. Congress, the Board considered the many types of stored value cards to be a deterrent to a comprehensive set of regulations dealing with electronic transfers.3 The Board expressed concern about the operating costs of applying all or some of Regulation E to stored value cards when weighed against the consumer benefits of the products. Wachovia believes that the proliferation of stored value card systems has not mitigated the complexity of these issues. However, Wachovia fears that the application of the definition of “deposit” to stored value systems may cause the Board to re-evaluate its position with respect to Regulation E. USA PATRIOT Act/Bank Secrecy Act Wachovia is concerned that defining stored value cards as a “deposit” under FDIC insurance regulations may give rise to additional compliance requirements under the USA PATRIOT Act and the Bank Secrecy Act. For example, if, in the event of bank failure, the FDIC is required to establish the identity of the owner of the “deposit” underlying stored value cards, it stands to reason that the financial institution would also be required to record this identity. § 326 of the USA PATRIOT Act requires financial institutions to obtain information on and verify the identity of a new customer who has an account, that is a formal banking relationship established to provide or engage in services, dealings or other ongoing financial transactions. The statute does not impose requirements on financial institutions that engage in sporadic transactions with consumers, such as check cashing. Wachovia fears that defining the stored value card as a “deposit” could lead to consideration of the underlying value of the card as an “account” and its purchaser or holder, who may not be the same person, as a “customer” under § 326. Doing so would place the financial institution in an untenable position. In many cases involving stored value card programs, the financial institution is not in sufficient proximity to the purchaser to obtain and verify identity information. It may never be so for the ultimate cardholder, often an unknown third party. There could be similar implications for the Bank Secrecy Act, and other related anti-money laundering and anti-terrorist laws and regulations. With the possible exception of those payroll cards where the financial institution knows the identity of the depositing and withdrawing customers, it is unreasonable to expect financial institutions to be able to comply with the requirements of these laws and regulations for stored value products. In almost every case, transactions are performed at arm’s length. Yet, deposit insurance presumes that there is an asset of an identified depositor to insure. Wachovia fears that the FDIC’s proposal may lead to unexpected and significant regulatory compliance burdens on financial institutions that issue stored value products. Conclusion Wachovia believes that the existing statutes and GC8 adequately address issues related to the various types of stored value cards currently in use. Wachovia urges the FDIC to withdraw the proposed regulation until such time that the FDIC has the opportunity to enter into meaningful discussions with the other regulatory agencies about the impact of the proposed regulation on other statutes and regulations. Wachovia appreciates the opportunity to respond to the proposed changes and hopes that the FDIC finds them helpful. For additional clarification of the points included in this letter, please contact me at 704-715-2489. Very truly yours, Michael A. Watkins 1 12 CFR 204.2(b)(1)(viii). |
| Last Updated 07/19/2004 | regs@fdic.gov |