BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 786
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          ASSEMBLY THIRD READING
          AB 786 (Dickinson)
          As Introduced  February 21, 2013
          Majority vote 

           BANKING & FINANCE   12-0        APPROPRIATIONS      16-0        
           
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          |Ayes:|Dickinson, Morrell,       |Ayes:|Gatto, Harkey, Bigelow,   |
          |     |Achadjian, Blumenfield,   |     |Bocanegra, Bradford, Ian  |
          |     |Bonta, Chau, Gatto,       |     |Calderon, Campos, Eggman, |
          |     |Hagman, Linder, Perea,    |     |Gomez, Hall, Rendon,      |
          |     |Torres, Weber             |     |Linder, Pan, Quirk,       |
          |     |                          |     |Wagner, Weber             |
          |-----+--------------------------+-----+--------------------------|
          |     |                          |     |                          |
           ----------------------------------------------------------------- 
           SUMMARY  :  Makes various changes to the Money Transmission Act  
          (MTA).  Specifically,  this bill  :  

          1)Exempts from the MTA a person that delivers payroll money on  
            behalf of an employer to employees.

          2)Revises the minimum net worth requirements so that an  
            applicant or licensee must maintain minimum net worth ranging  
            from $100,000 to $500,000 depending on the estimated or actual  
            transaction volume, as determined by the commissioner of the  
            Department of Business Oversight (commissioner).  

          3)Provides the commissioner with authority to increase net worth  
            up to $2 million if the commissioner determines that the  
            higher net worth is necessary to achieve specified purposes.

          4)Provides that a licensee may use funds held in a custodial  
            capacity as an agent of its customers to fulfill the eligible  
            securities requirement when those eligible securities that are  
            held in a custodial capacity as an agent of the customer. 

          5)Requires the commissioner to make a determination on the use  
            of custodial accounts to fulfill eligible security  
            requirements on a case-by-case basis.

          6)Enhances enforcement of the MTA by providing the commissioner  
            the authority to bring an action to enjoin a person from  








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            violating the MTA.  Additionally, allows the commissioner to  
            seek ancillary relief, including, but not limited to, a claim  
            for restitution, disgorgement, or damages on behalf of the  
            persons injured by the act or practice.

           EXISTING LAW  establishes the MTA which provides for the  
          following:

          1)Defines "payment instrument" as a check, draft, money order,  
            traveler's check, or other instrument for the transmission or  
            payment of money or monetary value, whether or not negotiable.  
            The term does not include a credit card voucher, letter of  
            credit, or any instrument that is redeemable by the issuer for  
            goods or services provided by the issuer or its affiliates.

          2)Defines "receiving money for transmission" or "money received  
            for transmission" as receiving money or monetary value in the  
            United States for transmission within or outside the United  
            States by electronic or other means. The term does not include  
            sale or issuance of payment instruments and stored value.

          3)Defines "stored value" as monetary value representing a claim  
            against the issuer that is stored on an electronic or digital  
            medium and evidenced by an electronic or digital record, and  
            that is intended and accepted for use as a means of redemption  
            for money or monetary value or payment for goods or services.  
            The term does not include a credit card voucher, letter of  
            credit, or any stored value that is only redeemable by the  
            issuer for goods or services provided by the issuer or its  
            affiliates, except to the extent required by applicable law to  
            be redeemable in cash for its cash value.

          4)Requires licensing for domestic money transmittal services.  

          5)Provides for regulation of non-bank issued stored value cards  
            that may be offered by licensees.  

          6)Prohibits a person from engaging in the business of money  
            transmission in California or advertising, soliciting, or  
            holding itself out as providing money transmission unless  
            licensed.

          7)Requires specified information to be included in an  
            application for a license which shall be in the form  








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            proscribed by the commissioner of the Department of Financial  
            Institutions. 

          8)Authorizes the commissioner to conduct an examination of an  
            applicant, at the applicant's expense, and would require the  
            commissioner to approve an application for a license if the  
            commissioner makes specified findings, including that the  
            applicant has adequate net worth and is competent to engage in  
            the business of receiving money for transmission.  In order to  
            meet the net worth requirements a licensee that sells or  
            issues payment instruments or stored value must maintain  
            securities on deposit on a surety bond of no less than  
            $500,000 or 50% of the average daily balance of outstanding  
            payment instruments and stored value in California.  A  
            licensee engaged in money transmission must either maintain  
            securities or a surety bond not less than $250,000 and no more  
            than $2 million.

          9)Requires licensees to file audit reports with the commissioner  
            within 90 days after the end of each fiscal year. 

          10)Imposes various fees and would require the commissioner to  
            levy assessments on licensees for the purposes of  
            administering these provisions regulating money transmission  
            including:

             a)   A $5,000 application fee;

             b)   An annual license fee of $2,500;

             c)   An annual branch office fee of $125 per branch office; 

             d)   An annual $25 fee for each branch employee; and,

             e)   For licensees that sell or issue payment instruments, an  
               annual assessment based on the volume and aggregate face  
               amounts of payment instruments and stored value issued or  
               sold in California.

          11)A licensee must maintain specified eligible securities  
            including a surety bond and maintain $500,000 in net-worth.

          12)Requires a licensee to provide specified notices and  
            disclosures to customers, including a notice relative to a  








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            customer's right to a refund, disclosures relating to rates of  
            exchange, a notice indicating that payment instruments are not  
            insured, and a notice providing information on making  
            complaints to the commissioner against a licensee. 

          13)Requires licensees to maintain financial records for a  
            three-year period.

          14)Mandates each licensee to file with the commissioner a  
            certified copy of every receipt form used by it or by its  
            agent for receiving money for transmission prior to its first  
            use.

          15)Authorizes the commissioner to suspend or revoke a license if  
            the commissioner finds that a licensee or agent of a licensee  
            has, among other things, violated the provisions of the MTA or  
            engaged in fraud or unsound practices and would authorize the  
            commissioner to assess specified civil penalties against a  
            person that violates these provisions. 

          16)Makes it a crime for a person to engage in the business of  
            money transmission without a license or for a person to  
            intentionally make a false statement, misrepresentation, or  
            false certification in a record filed or required to be  
            maintained under these provisions. 

          17)Exempts from licensing:

             a)   The United States or a department, agency, or  
               instrumentality thereof, including any federal reserve bank  
               and any federal home loan bank.

             b)   Money transmission by the United States Postal Service  
               or by a contractor on behalf of the United States Postal  
               Service.

             c)   A state, county, city, or any other governmental agency  
               or governmental subdivision of a state.

             d)   A commercial bank or industrial bank, the deposits of  
               which are insured by the Federal Deposit Insurance  
               Corporation or its successor, or any foreign (other nation)  
               bank.









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             e)   Electronic funds transfer of governmental benefits for a  
               federal, state, county, or local governmental agency.

             f)   A board of trade designated as a contract market under  
               the federal Commodity Exchange Act (7 United States Code  
               (U.S.C.) Sections 1-25, inclusive) or a person that, in the  
               ordinary course of business, provides clearance and  
               settlement services for a board of trade to the extent of  
               its operation as or for such a board.

             g)   A person that provides clearance or settlement services  
               pursuant to a registration as a clearing agency or an  
               exemption from registration granted under the federal  
               securities laws to the extent of its operation as such a  
               provider.

             h)   An operator of a payment system to the extent that it  
               provides processing, clearing, or settlement services,  
               between or among persons excluded by this section, in  
               connection with wire transfers, credit card transactions,  
               debit card transactions, stored value transactions,  
               automated clearing house transfers, or similar funds  
               transfers, to the extent of its operation as such a  
               provider.

             i)   A person registered as a securities broker-dealer under  
               federal or state securities laws to the extent of its  
               operation as a broker-dealer.

          18)Provides, if the commissioner finds all of the following with  
            respect to an application for a license, the commissioner  
            shall approve the application:

             a)   The applicant has adequate tangible shareholders'  
               equity, as specified in Financial Code Section 2040 to  
               engage in the business of money transmission and the  
               financial condition of the applicant is otherwise such that  
               it will be safe and sound for the applicant to engage in  
               the business of money transmission.

             b)   The applicant, the directors and officers of the  
               applicant, any person that controls the applicant, and the  
               directors and officers of any person that controls the  
               applicant are of good character and sound financial  








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               standing.

             c)   The applicant is competent to engage in the business of  
               money transmission.

             d)   The applicant's plan for engaging in the business of  
               money transmission affords reasonable promise of successful  
               operation.

             e)   It is reasonable to believe that the applicant, if  
               licensed, will engage in the business of money transmission  
               and will comply with all applicable provisions of this  
               chapter and of any regulation or order issued under this  
               chapter.

           FISCAL EFFECT  :  According to the Assembly Appropriations  
          Committee, minor and absorbable costs to the Department of  
          Business Oversight.

           COMMENTS  :  This bill represents efforts to revise and update  
          provisions of the MTA to address emerging technologies that are  
          changing money transmission and to provide clarity for existing  
          and future licensees.  On March 11, 2013, the Assembly Banking  
          and Finance Committee convened an oversight hearing to review  
          the MTA.  Almost one year prior to the convening of the hearing,  
          committee staff had been contacted by numerous parties raising  
          concerns about the MTA and potential unintended consequences of  
          its application.  In the brief time since the MTA became law,  
          technological innovation in the payments industry has exploded  
          as money transmission has transcended into mobile applications  
          and new point of sale (POS) devices.  Whereas, five years ago  
          the bulk of money transmission activity involved international  
          remittances where the customer would go to a brick and mortar  
          location to send money to friends or family in other countries,  
          now mobile phone users can use apps to pay for goods and  
          services where the customers payment method (credit card or bank  
          account) sends money to the third party provider and then that  
          provider sends payment to the provider of goods and services.   
          The definition of "money transmission" does not provide the  
          answer to these issues, as it is defined, as the transmission of  
          money from one party to another.  This could include a host of  
          various activities, though it is relevant to ask if the original  
          intent of the MTA was to cover any and all instances when money  
          is sent from one party to another via a third party? 








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          This bill is drafted to address various issues in the MTA that  
          require clarification, due to application of the MTA in cases  
          where it may not fit.  While stakeholders continue to meet to  
          seek consensus on various issues, this bill does the following:

          1)Clarification of net worth requirements.  Ensuring that  
            entities that engage in money transmission have adequate net  
            worth can be a vital measure of safety and soundness for the  
            long-term future of the entity.  This bill provides greater  
            clarification on net worth will be determined and gives the  
            commissioner a range of factors to consider.

          2)Payroll processing.  This bill provides that an entity that  
            engages in the processing of payroll on behalf of employers to  
            employees is not a money transmitter.  Modern payroll  
            processing can involve numerous activities, such as payment of  
            taxes and benefits, the management of employee withholdings  
            and authorized deductions and the garnishment of wages based  
            on court orders.  The activities typically fall under the  
            umbrella of payroll processing.  Staff believes that naming  
            payroll processing as an exempted activity includes the subset  
            of activities that a payroll processor might engage in.

          3)For the benefit of accounts.  Provides that a licensee may use  
            funds held in a custodial capacity as an agent of its  
            customers to fulfill the eligible securities requirement when  
            those eligible securities that are held in a custodial  
            capacity as an agent of the customer.  The commissioner has  
            authority to make a case-by-case determination.

          4)Enhanced enforcement.  Provides the commissioner the authority  
            to bring an action to enjoin a person from violating the MTA.   
            Additionally, allows the commissioner to seek ancillary  
            relief, including, but not limited to, a claim for  
            restitution, disgorgement, or damages on behalf of the persons  
            injured by the act or practice.
           

          Analysis Prepared by  :    Mark Farouk / B. & F. / (916) 319-3081 


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