BILL ANALYSIS Ó AB 786 Page 1 ASSEMBLY THIRD READING AB 786 (Dickinson) As Introduced February 21, 2013 Majority vote BANKING & FINANCE 12-0 APPROPRIATIONS 16-0 ----------------------------------------------------------------- |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 AB 786 Page 2 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 AB 786 Page 3 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 AB 786 Page 4 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. AB 786 Page 5 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 AB 786 Page 6 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? AB 786 Page 7 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 FN: 0000582 AB 786 Page 8