WACHOVIA CORPORATION
July 15, 2004
Mr. Robert E. Feldman, Executive Secretary
Attention: Comments/Legal ESS
Federal Deposit Insurance Corporation
550 17th Street NW
Washington, DC 20249
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
FDICs 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withdrawn for further consideration and study in concert with the other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 Counsels Opinion No. 8
(GC8), which set forth the FDICs 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 companys account, regardless of
whether the account is designated as a reserve account. The financial
institutions 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 employees payroll card. In other instances, the funds are
withdrawn from the employers account as the employee uses the card. More
frequently, the funds are transferred into the employees account in similar
fashion to a debit card. In either case, the funds in the employers 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 employers 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 arms length.
Yet, deposit insurance presumes that there is an asset of an identified
depositor to insure. Wachovia fears that the FDICs 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
Senior Vice President and Deputy General Counsel
1 12 CFR 204.2(b)(1)(viii).
2 12 CFR 204.2(e)(5) defines transaction accounts as deposits or
accounts maintained in connection with an arrangement that permits the
depositor to obtain credit directly or indirectly through the drawing of a
negotiable or non-negotiable check, , , or other similar device. . .that can
be used for the purpose of making payments to third persons or others. . .
.
3 The Board noted that the benefits that would result from
applying . . .[Regulation E] to regulation of electronic stored-value
products are unclear at this time. . . . Report to Congress on the
Application of the Electronic Funds Transfer Act to Electronic Stored-Value
Products, Board of Governors of the Federal Reserve System, March 1997,
p.75.