BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                            



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                                    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  :    
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          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  

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                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  

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             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  

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             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  

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             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.  


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          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  

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          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

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          NOES:  Allen
          NO VOTE RECORDED:  Donnelly, Grove, Holden, Jones, Waldron,  
            Vacancy, Vacancy


          MW:k  8/27/13   Senate Floor Analyses 

                           SUPPORT/OPPOSITION:  SEE ABOVE

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