BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | AB 786| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: AB 786 Author: Dickinson (D) Amended: 8/26/13 in Senate Vote: 21 SENATE BANKING & FINANCIAL INST. COMMITTEE : 6-0, 7/3/13 AYES: Correa, Berryhill, Beall, Hill, Hueso, Roth NO VOTE RECORDED: Calderon, Torres, Walters SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8 ASSEMBLY FLOOR : 72-1, 5/23/13 - See last page for vote SUBJECT : Money transmissions SOURCE : Author DIGEST : This bill makes 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 the Department of Financial Institutions (DFI) 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. Senate Floor Amendments of 8/26/13 make minor and technical changes. ANALYSIS : CONTINUED AB 786 Page 2 Existing law: 1. Provides for the MTA, pursuant to AB 2789 (Assembly Banking and Finance Committee, Chapter 612, Statutes of 2010; effective July 1, 2011). The bill consolidated the Transmission of Money Abroad Law, Travelers Checks Act, and the Payment Instruments Law into a single MTA, administered by DFI. 2. Under 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. B. Requires every licensee to maintain cash or securities on deposit, or a surety bond, as follows: (1) Licensees that sell or issue payment instruments or stored value must maintain securities on deposit or a surety bond of at least $500,000 or 50% of their average daily outstanding payment instrument and stored value obligations in California, whichever is greater, capped at $2,000,000. (2) 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 $500,000. 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 CONTINUED AB 786 Page 3 outstanding payment instruments and stored value obligations issued or sold in the United States, and all outstanding money received for transmission in the U.S. 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. This bill: 1. Revises 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. Exempts 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. Clarifies 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. Authorizes 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. Requires the Commissioner to post on his/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. Requires 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 existing law), depending on estimated or actual transaction volume, as determined by the Commissioner. Authorizes the Commissioner to increase the amount of net CONTINUED AB 786 Page 4 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 this bill specifies in statute, and which the Commissioner will be required to clarify through regulations. 5. Authorizes 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. Requires 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. Authorizes the Commissioner to prepare written decisions, opinion letters, and other formal written guidance to persons seeking clarification regarding the requirements of the MTA, and requires the Commissioner to make public on his/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. Authorizes the Commissioner, at his/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. Adds to the definition of an eligible security any receivable owed by a bank and resulting from an automated clearinghouse or credit-funded transmission. 8. States 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 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, this bill gives the Commissioner authority to rule on whether such funds meet the definition of an eligible security, and prescribes the factors to be considered by the Commissioner, when making this determination. 9. Provides that money transmission which involves payment for CONTINUED AB 786 Page 5 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 10 days after receiving that money. B. The requirement that the receipt provided to a customer inform them of their right to a refund. 10.Makes minor and technical changes. Background The MTA 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, 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: 1. 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). 2. 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. 3. Brought some previously unlicensed money transmitters into California's regulatory scheme . Prior to enactment of AB CONTINUED AB 786 Page 6 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 this bill are intended to ameliorate unintended consequences resulting from inclusion of the three provisions listed immediately above into AB 2789. Penalties for unlicensed MTA activity . 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 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. CONTINUED AB 786 Page 7 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. FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: No SUPPORT : (Verified 8/27/13) eBay, Inc. National Payroll Reporting Consortium PayPal OPPOSITION : (Verified 8/27/13) Consumers Union Think Computer ARGUMENTS IN SUPPORT : According to the author's office, the purpose of this bill is to reform the MTA, clarify which activities should be licensed and exempt, and improve the transparency of the MTA for licensees and applicants, while maintaining the safety and soundness of licensees. On behalf of its subsidiary PayPal, eBay, Inc. supports this bill citing that provisions of this bill 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, 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 CONTINUED AB 786 Page 8 the author's efforts to modernize this important regulatory framework aimed at enhancing consumer protections while promoting growth and further innovation within the industry." The National Payroll Reporting Consortium (NPRC), which represents the payroll services industry, supports this 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. ARGUMENTS IN OPPOSITION : Consumers Union (CU) opposes this bill, 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. ASSEMBLY FLOOR : 72-1, 5/23/13 AYES: Achadjian, Alejo, Ammiano, Atkins, Bigelow, Bloom, Blumenfield, Bocanegra, Bonilla, Bonta, Bradford, Brown, Buchanan, Ian Calderon, Campos, Chau, Chávez, Chesbro, Conway, Cooley, Dahle, Daly, Dickinson, Eggman, Fong, Fox, Frazier, Beth Gaines, Garcia, Gatto, Gomez, Gordon, Gorell, Gray, Hagman, Hall, Harkey, Roger Hernández, Jones-Sawyer, Levine, Linder, Logue, Lowenthal, Maienschein, Mansoor, Medina, Melendez, Mitchell, Morrell, Mullin, Muratsuchi, Nazarian, Nestande, Olsen, Pan, Patterson, Perea, V. Manuel Pérez, Quirk, Quirk-Silva, Rendon, Salas, Skinner, Stone, Ting, Wagner, Weber, Wieckowski, Wilk, Williams, Yamada, John A. Pérez CONTINUED AB 786 Page 9 NOES: Allen NO VOTE RECORDED: Donnelly, Grove, Holden, Jones, Waldron, Vacancy, Vacancy MW:k 8/27/13 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END **** CONTINUED