BILL ANALYSIS Ó
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Lou Correa, Chair
2013-2014 Regular Session
AB 786 (Dickinson) Hearing Date: July 3, 2013
As Amended: June 20, 2013
Fiscal: Yes
Urgency: No
SUMMARY Would make numerous changes to the Money Transmission
Act (MTA), including, among others, granting a limited exemption
for payroll processing firms, reducing minimum net worth
requirements, authorizing the Commissioner of Financial
Institutions (commissioner) to grant partial exemptions from the
MTA, revising what constitutes an eligible security for purposes
of the MTA, and requiring the issuance of specified regulations
by the commissioner.
DESCRIPTION
1. Would revise the definition of "agent" under the MTA to
clarify that an agent is a person that is not itself
licensed as a money transmitter in California.
2. Would exempt from the MTA a person or entity that delivers
wages on behalf of employers to employees or facilitates the
payment of payroll taxes to state and federal agencies,
makes payments relating to employee benefit plans, makes
distributions of other authorized deductions from employees'
wages or salary, or transmits other funds on behalf of an
employer in connection with transactions related to
employees. Would clarify that, notwithstanding the
foregoing, a person or entity described immediately above,
which offers money transmission services directly to
individual consumers or stored value cards directly to
individual consumers must comply with the MTA to the extent
of such activity.
3. Would authorize the commissioner to exempt from all or part
of the MTA any person or transaction or class of persons or
transactions, if the commissioner finds such action to be in
the public interest and finds that the regulation of such
persons or transactions is not necessary for the purposes of
the MTA. Would require the commissioner to post on his or
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her Internet web site a list of all persons, transactions,
or classes of persons or transactions exempted by the
commissioner, and the part or parts of the MTA from which
they are exempt.
4. Would require an applicant for an MTA license to possess
and maintain at all times tangible shareholder's equity of
between $250,000 and $500,000 (down from "no less than
$500,000," under current law), depending on estimated or
actual transaction volume, as determined by the
commissioner. Would authorize the commissioner to increase
the amount of net worth required of an applicant or
licensee, if the commissioner determines that a higher net
worth is necessary to achieve the purposes of the MTA, based
on a variety of factors specific to each licensee, which the
bill would specify in statute, and which the commissioner
would be required to clarify through regulations.
5. Would authorize the commissioner to offer guidance to any
prospective applicant for an MTA license regarding the
conditions of licensure that may be applied to that person.
Would require the commissioner to inform any applicant that
requests such guidance of the minimum net worth that will be
required of that applicant and the factors used to make that
determination.
6. Would authorize the commissioner to prepare written
decisions, opinion letters, and other formal written
guidance to persons seeking clarification regarding the
requirements of the MTA, and would require the commissioner
to make public on his or her Internet web site all written
decisions, opinion letters, and other formal written
guidance issued to persons seeking clarification regarding
the requirements of the MTA. Would authorize the
commissioner, at his or her discretion or upon request by an
applicant or licensee, to redact proprietary or other
confidential information regarding an applicant or licensee
from any decision, letter, or other guidance made public.
7. Would add to the definition of an eligible security any
receivable owed by a bank and resulting from an automated
clearinghouse or credit-funded transmission.
8. Would state that when a licensee holds funds in a custodial
capacity as an agent of its customers, in a pooled account
titled in the name of the licensee for the benefit of its
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customers, such a circumstance does not automatically
invalidate those funds as being owned by an MTA licensee for
purposes of the eligible security requirements of the MTA;
instead, the bill would give the commissioner authority to
rule on whether such funds meet the definition of an
eligible security, and would prescribe the factors to be
considered by the commissioner, when making this
determination.
9. Would provide that money transmission which involves
payment for goods or services is exempt from the following
requirements:
a. The requirement that every licensee or its agent
forward all money received for transmission or give
instructions committing equivalent money to the person
designated by the customer within ten days after
receiving that money.
b. The requirement that the receipt provided to a
customer inform them of their right to a refund.
EXISTING LAW
10. Pursuant to AB 2789 (Committee on Banking and Finance),
Chapter 612, Statutes of 2010; effective July 1, 2011),
provides for the MTA (Financial Code Section 2000 et seq.).
That measure consolidated the Transmission of Money Abroad
Law, Travelers Checks Act, and the Payment Instruments Law
into a single Money Transmission Act, administered by DFI.
11. The MTA:
a. Provides that no person may engage in the business
of money transmission in this state, or advertise,
solicit, or hold itself out as providing money
transmission in this state, unless the person is licensed
or exempt from licensure under the MTA or is an agent of
a person licensed or exempt from licensure under the MTA
(Section 2030).
b. Requires every licensee to maintain cash or
securities on deposit, or a surety bond, as follows
(Section 2037):
i. Licensees that sell or issue payment
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instruments or stored value must maintain securities
on deposit or a surety bond of at least $500,000 or
50 percent of their average daily outstanding payment
instrument and stored value obligations in
California, whichever is greater, capped at
$2,000,000.
ii. Licensees that receive money for
transmission must maintain securities on deposit or a
surety bond in an amount greater than the average
daily outstanding obligations for money received for
transmission in California. The required amount may
be no less than $250,000 and no greater than
$7,000,000.
c. Additionally requires licensees to maintain tangible
shareholders' equity in an amount determined to be
adequate by the commissioner, but in no event less than
five hundred thousand dollars $500,000 (Section 2040).
d. Additionally requires licensees to, at all times,
own eligible securities having an aggregate market value
at least equal to the aggregate amount of all of their
outstanding payment instruments and stored value
obligations issued or sold in the United States, and all
outstanding money received for transmission in the United
States (Section 2081). Provides that a variety of
different monetary instruments meet the definition of
eligible security in the MTA, including, among others,
cash, bonds, money market deposits, and commercial paper
(Section 2082).
COMMENTS
1. Purpose: AB 786 is sponsored by the author to reform the
MTA, clarify which activities should be licensed and exempt,
and improve the transparency of the Act for licensees and
applicants, while maintaining the safety and soundness of
licensees.
2. Background: The MTA that is the subject of this bill has
been operative in California since July, 2011. In 2010,
California combined three separate, related laws into a
single MTA, and provided for a delayed operative date of
July, 2011, to allow persons not previously subject to
licensure, but required to be licensed by AB 2789,
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additional time to apply for and obtain licenses. The MTA
enacted by AB 2789 preserved all of the substantive
provisions of each of the three, previously separate laws,
and added a handful of new, substantive provisions. The
most important of those new, substantive provisions:
a. Regulated the issuance of open loop, stored
value cards by nondepository institutions: Stored
value cards may be either closed loop (redeemable by
the issuer for goods or services provided by the issuer
or its affiliate; e.g., a Starbucks card) or open loop
(redeemable for goods or services at multiple vendors;
e.g., a Visa gift card).
b. Regulated domestic (intra-U.S.) money
transmission: Prior to enactment of AB 2789,
international money transmission by nondepository
institutions was regulated under California's
Transmission of Money Abroad Law, but domestic money
transmission by nondepository institutions was not. AB
2789 required nondepository institutions that transmit
money domestically, or abroad, or both, to obtain an
MTA license.
c. Brought some previously unlicensed money
transmitters into California's regulatory scheme:
Prior to enactment of AB 2789, California's
Transmission of Money Abroad Law did not have a
physical presence requirement (thus, certain
Internet-based money transmitters could legally operate
in California without a license). Under AB 2789, any
money transmitter that does business with a person
located in California requires a license.
Many of the changes proposed in AB 786 are intended to
ameliorate unintended consequences resulting from inclusion
of the three provisions listed immediately above into AB
2789.
As described in detail below, and as discussed during a
March, 2013 informational hearing convened by the Assembly
Banking and Finance Committee to discuss reforming the MTA,
several businesses have approached the Legislature and DFI
with concerns about elements of AB 2789. Some applicants,
including one notable individual who sued DFI, expressed
frustration with their inability to gain a clear
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understanding of the net worth requirements that would be
applied to them as a condition of licensure. Other
applicants, when advised of the net worth requirements they
would need to meet, felt that those net worth requirements
constituted a barrier to entry for start-ups.
Concerns about certain elements of AB 2789 were not limited
to license applicants. In at least three cases (two
internet-based companies and one payroll processor),
existing businesses were frustrated by the inflexibility of
the MTA rules being applied to them. These businesses
claimed that the manner in which DFI was enforcing the MTA
made it much harder for them to do business, yet failed to
provide additional consumer protections.
3. Penalties For Unlicensed MTA Activity: While concerns by
members of a regulated community toward their regulations
and their regulator are not unheard of, the concerns
expressed about the MTA are proving particularly
troublesome, because of what some view as a double standard.
Some of the companies seeking to operate in accordance with
the MTA are encountering significant licensing costs and
compliance hurdles, while some of their peers, who are
opting to avoid licensure in California, do so without fear
of civil prosecution by DFI or the Attorney General.
DFI does issue cease and desist warning letters to companies
believed to be operating in an unlicensed manner. At
present, DFI licenses 73 companies under the MTA. From
January 2010 through mid-June 2013, DFI issued 50 cease and
desist warning letters to 36 companies, informing those
companies that they may be engaged in the business of money
transmission without having obtained the license required to
legally do so. All of the letters included warnings,
ordering the companies to cease and desist from conducting
the business of money transmission in California, and
providing the companies up to 20 days in which to respond to
DFI with information establishing that they do not require a
license.
According to DFI, these cease and desist warning letters
typically lead to further correspondence, meetings, and/or
discussions with the companies or their counsel. Some
companies that have received cease and desist warning
letters subsequently applied for licenses, others ceased
engaging in money transmission in California, some
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restructured their businesses in order to receive the
benefits of exemptions under the MTA, some were found not to
require an MTA license, and others remain in discussions
with DFI regarding licenses or exemptions. A few companies
could not be located by DFI or failed to respond to their
initial cease and desist warning letters; DFI sent multiple
warning letters to 11 companies over several years.
A list of the companies to which cease and desist warning
letters have been issued is held confidential by DFI. The
existing law requirement that DFI make public its final,
formal enforcement orders does not apply to these warning
letters, because they are not formal cease and desist
orders, but are, instead, initial correspondence requesting
information, and warning that formal enforcement action may
be taken, if a response is not provided. To date, DFI has
not taken any further action against any of the companies to
which it issued cease and desist warning letters.
4. Discussion: The rationale behind each of this bill's
provisions is as follows:
a. Payroll Provider Exemption: AB 786 proposes to
exempt payroll providers from the MTA, except when they
issue stored value cards or offer money transmission
services directly to individual consumers. Payroll
providers would require MTA licenses to engage in those
activities, but would only be regulated under the MTA to
the extent of those activities. The author notes that
the MTA was designed to regulate the transfer of money
between individual consumers; it was not contemplated as
a regulatory regime for business-to-business
transactions. Many states have exempted payroll
processing activity from their definitions of money
transmission, while other states have chosen not to
interpret their respective MTA's as applying to payroll
processing. This provision of AB 786 would more closely
align California's treatment of payroll processors with
the approach taken by other states.
b. Net Worth Requirements: AB 786 would make several
changes to the MTA rules for net worth, by: 1) lowering
the minimum "tangible shareholder equity" requirement
from $500,000 to $250,000, 2) requiring the commissioner
to use specified criteria, which this bill would add to
statute, when establishing net worth requirements for
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applicants and licensees, 3) requiring the commissioner
to promulgate regulations governing the application of
those criteria to applicants and licensees, and 4)
requiring the commissioner to inform applicants who
request meetings with the commissioner prior to
submitting their applications what net worth the
commissioner will require, as a condition of approving
their license applications.
These proposed changes are an outgrowth of communications
received by legislative staff from frustrated MTA
applicants, who felt they could not obtain clear guidance
from DFI regarding the net worth requirements that would
be applied to them. These changes also reflect testimony
offered during a March, 2013 informational hearing
convened by the Assembly Banking and Finance Committee to
discuss possible reforms of the MTA. According to this
bill's author, the net worth changes, when taken
together, are intended to ensure that the factors used to
establish applicant and licensee net worth requirements
are transparent, and to lower the barriers to entry for
start-up companies. The author notes that small
start-ups can often meet bonding requirements, and have
sufficient net worth to back their (relatively low,
early-stage) transaction volumes; requiring these
companies to demonstrate high levels of net worth may
prevent them from becoming licensed.
c. Revised Definition of Agent: This bill would
clarify that an agent of a licensee is a person not
otherwise licensed under the MTA. This clarification is
intended to ensure that licensee partnerships and
business relationships with agents do not result in those
agents needing to become licensed under the MTA.
d. Use of "For Benefit Of" (FBO) Accounts to Satisfy
Eligible Security Requirements: FBO accounts, also known
as custodial accounts, are held by one party for the
benefit of another party - thus, for example, PayPal can
establish an FBO account for the benefit of an individual
who is owed money sent through PayPal to that person by
another individual. As discussed above, the MTA
requires each licensee to hold eligible securities in an
amount that is at least equal to the amount of funds that
licensee has received for transmission. A question has
arisen as to whether FBO monies can qualify as eligible
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securities. To date, DFI has not considered FBO monies
to be eligible securities.
This bill would allow monies held in FBO accounts to be
considered eligible securities, if, upon review by the
commissioner, based on several factors this bill would
add to the MTA, the commissioner determines that those
monies should be considered eligible securities.
e. Authority to Issue Partial Exemptions: Existing law
authorizes DFI to exempt from the MTA any person or
transaction or class of persons or transactions, either
unconditionally or upon specified terms and conditions or
for specified periods. However, existing law is silent
on the ability of DFI to exempt persons, transactions, or
classes of persons or transactions from part of the MTA.
This bill would expressly authorize both full and partial
exemptions, and would, in the interest of transparency,
require the commissioner to post on his or her web site a
list of exemptions granted.
f. Requirement For The Commissioner To Post Written
Decisions, Opinion Letters, and Other Written Guidance on
the Web: Under existing law, the commissioner has the
authority to issue written decisions, opinion letters,
and guidance to applicants and licensees who seek such
guidance from the commissioner. However, existing law
lacks a requirement for this information to be posted on
DFI's Internet Web site, which makes it difficult for
persons to gain a clear understanding of how DFI
interprets aspects of the law for which there are no
regulations. The author also observes that lack of
written guidance makes it difficult for the recipients of
such guidance to dispute its contents with DFI. These
changes are intended to improve transparency and inform
the Legislature and interested parties about relevant
interpretations issued by DFI.
g. Addition of Automated Clearinghouse (ACH)
Receivables to the Definition of Eligible Securities: AB
786 would add to the definition of eligible security any
receivable owed by a bank and resulting from an ACH or
credit-funded transmission. This change is intended to
improve the parity in treatment of receivables by
international and domestic money transmitters. The
existing MTA allows a licensee to include as an eligible
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security "any account due to any licensee from any agent
in the United States on account of the receipt of money
on behalf of the licensee for money transmission by the
agent, if the account is current and not past due or
otherwise doubtful of collection." This essentially
means that an international money transmitter like
Western Union may count all receivables owed to them from
all of the cash accepted through all of their thousands
of agents in the United States as eligible securities.
Domestic money transmitters seldom accept cash; instead,
their receivables are largely comprised of ACH and credit
card-funded payments, which, the author asserts, are very
secure, and should be placed on equal footing/considered
eligible securities to the same extent as the receivables
of international money transmitters.
h. Exemptions in Connection With Payments for Goods or
Services: Virtually all of the requirements of the MTA
were in place when the only forms of money transmission
regulated by California were international. The
application of some of those requirements to domestic
money transmitters has created challenges, particularly
when domestic money transmission involves payment for
goods or services. This bill contains two provisions
intended to eliminate requirements that are illogical and
confusing, when applied to money transmission for goods
and services: 1) a requirement that money be transferred
to the recipient within ten days (which can hamper
efforts to prevent fraudulent transactions from being
consummated) and 2) notice of a right to a refund (which
can suggest that a consumer is entitled to a refund from
a retailer, even when that retailer does not offer
refunds).
5. Summary of Arguments in Support:
a. On behalf of its subsidiary PayPal, eBay, Inc.
supports AB 786. Provisions of AB 786 that would help
PayPal include the bill's language regarding FBO
accounts, the revised definition of "agent," language
authorizing the use of ACH and credit-funded receivables
as eligible securities, and revisions to the sections of
the MTA regarding the provision of receipts in connection
with money transmission for goods and services. "In the
short time since the Money Transmission Act has been law,
AB 786 (Dickinson), Page 11
numerous technological innovations and advancements
continue to occur throughout the payments industry that
have enhanced the consumer experience along the
way...[this has] unfortunately led to certain unintended
consequences of ambiguity and lack of certainty within
the law. We appreciate the author's efforts to modernize
this important regulatory framework aimed at enhancing
consumer protections while promoting growth and further
innovation within the industry."
b. The National Payroll Reporting Consortium (NPRC),
which represents the payroll services industry, supports
the bill, because of the provision granting certain
payroll providers an exemption from the MTA, under
certain circumstances. The NPRC observes that payroll
providers do not sell anything directly to employees.
The MTA is appropriately focused on consumer
transactions. Broad application of the MTA to human
capital management solution providers (including payroll
services companies) will impose substantial new costs on
these service providers and on California employers, and
will significantly disrupt the smooth functioning of
payroll and benefit services arrangements that have been
in place for decades. Moreover, the broad application of
the MTA to payroll providers is unnecessarily duplicative
of other laws that protect workers' rights to payment of
wages and employee benefits in California, including
ERISA and the California Labor Code.
6. Summary of Arguments in Opposition:
a. Consumers Union (CU) opposes AB 786, unless it is
amended to delete the broad exemption language for
payroll processors. CU is concerned that the exemption
for payroll providers would exempt from the law entities
that actually or constructively receive, take possession
or custody of, or otherwise hold any money or monetary
value for transmission. CU believes that the MTA should
apply to these entities.
As a condition of removing its opposition, CU is also
seeking an amendment to delete the suggested changes to
net worth requirements. Net worth is one of the MTA's
important safety and soundness provisions, and should not
be diminished or lowered, as proposed in AB 786.
AB 786 (Dickinson), Page 12
Despite its opposition to the bill, CU does support some of
its provisions, including the provisions which update
receipt language in connection with the provision of
goods and services, include ACH receivables within the
definition of eligible securities, and provide the
commissioner with additional authority to issue
regulations and orders to execute the MTA.
b. Aaron Greenspan, founder and CEO of Think Computer,
and plaintiff in a lawsuit filed against DFI over the
MTA, opposes the bill. Mr. Greenspan would prefer to see
AB 2789 repealed. If the Legislature chooses to retain
the MTA, Mr. Greenspan would like to register the
following concerns with AB 786: First, he asks why the
bill exempts payroll companies from the MTA, and doesn't
contain exemptions for other entities like law firms,
private universities, delivery firms that routinely
transmit cash in envelopes between private parties,
retail payment processors, and marketplaces for goods and
services like Apple's iTunes App Store.
Second (and as much a concern with existing law as with
this bill), he believes that the law and this bill lack
the necessary reasoning to substantiate their minimum net
worth requirements.
Third, he is concerned about the vagueness of criteria that
this bill would add to statute, as the basis for the
commissioner's determination of an applicant's or
licensee's minimum net worth. He also believes that the
final criterion ("any other factor the commissioner
considers relevant") is unconstitutional, because it
places too much discretion in the hands of the
commissioner. He cites Plain Dealer Pub. Co. v. City of
Lakewood, 794 F. 2d 1139 (1986) as the basis for his
assertion of unconstitutionality.
Finally, he believes that the provision of this bill, which
allows applicants to request information about their
likely conditions of licensure prior to applying, is
insufficient to address what he views as the
inappropriate application of arbitrary, case-by-case
licensing requirements by the commissioner to different
applicants.
7. Prior and Related Legislation:
AB 786 (Dickinson), Page 13
a. AB 2789 (Committee on Banking and Finance), Chapter
612, Statutes of 2010. Consolidated the Transmission of
Money Abroad Law, Travelers Checks Act, and the Payment
Instruments Law into a single Money Transmission Act,
administered by DFI; effective July 1, 2011.
AB 786 (Dickinson), Page 14
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
National Payroll Reporting Consortium
PayPal
Opposition
Aaron Greenspan, President and CEO of Think Computer
Consumers Union
Consultant: Eileen Newhall (916) 651-4102