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"Status Update of Current Issues"

MARCH QUARTER 2006 GOVERNMENT RELATIONS UPDATE

Overview

“During the first quarter 2006 Congress took action on three issues important to our members. In the House, the Subcommittee on Commerce, Trade and Consumer Protection held a hearing on card interchange fees, the House Financial Services Committee approved legislation to address data security and ID theft and the Senate Banking Committee held its third hearing on credit rating agency reform.

On February 15, 2006, President Bush signed legislation enacting deposit insurance reform. As directed in the new law, the FDIC recently approved final rules that will raise the deposit insurance coverage on certain retirement accounts to $250,000.

In financial accounting and reporting news, the SEC and PCAOB recently announced that they will be holding a roundtable meeting on May 10, 2006, to hear feedback on experiences with implementing Sec. 404 of the Sarbanes-Oxley Act. In advance of the meeting, the SEC and PCAOB are seeking written comments from auditors, investors, registrants and others.

LEGISLATIVE ISSUES

TREASURY AND FINANCE

03/06 Rating Agency Reform - On March 7, 2006, the Senate Banking Committee held its third hearing to assess the current oversight and operation of credit rating agencies(CRA). The SEC’s existing recognition process has created an artificial barrier to entry to the credit ratings market. This barrier has led to a concentration of market power with the recognized rating agencies and a lack of competition and innovation in the credit ratings market. Further, there is no effective SEC oversight mechanism. Legislation has already been introduced in the U.S. House of Representatives. The Credit Rating Agency Duopoly Relief Act of 2005 (H.R. 2990) would require credit rating agencies to register with the SEC. The proposed legislation eliminates the ambiguous Nationally Recognized Statistical Rating Organization (NRSRO) designation process in favor of a more transparent registration process, which will stimulate meaningful competition in the credit ratings market.

03/06 Data Protection/ID Theft – On March 16, 2006, the House Financial Services Committee approved its version of data security and ID theft legislation. The Data Protection Act (H.R. 3997) requires all businesses to maintain reasonable policies and procedures to protect the security and confidentiality of their sensitive financial personal information relating to any consumer. HR 3997 would preempt the developing patchwork of state laws, and allow victims of ID theft to place a ‘security freeze’ on their credit reports. The ‘freeze’ would prevent any new access to a consumer’s credit report unless the consumer revokes the freeze.

03/06 Interest on Business Checking/Regulation Q Repeal – Legislation repealing the Reg. Q continues to be held up due to the controversy surrounding Industrial Loan Companies (ILCs). In related news, the FDIC recently announced that it will hold public hearings on Wal-Mart’s application to acquire an ILC.

02/06 Taxation of Internet and Other Remote Sales - On December 20, 2005, Senators Enzi (R-WY) and Dorgan (D-ND) introduced separate bills (S. 2152 and S. 2153) allowing states to collect sales taxes on out of state transactions. Both bills give states that have enacted the Streamlined Sales and User Tax Agreement the authority to collect sales taxes from out of state retailers.

01/06 Regulation of Swaps and other Over-the-Counter Derivatives – On December 14, 2005, the House of Representatives approved the Commodity Futures Trading Commission (CFTC) Reauthorization Act of 2005 (H.R. 4473). The bill reauthorizes the Commodity Futures Trading Commission for another five years. The CFTC is the federal agency charged with overseeing the US derivatives markets.

REGULATORY ISSUES

TREASURY AND FINANCE

03/06 Payroll Cards – In a March 10, 2006, comment letter to the Federal Reserve Board, AFP supported the Fed’s proposal to cover payroll cards under Regulation E. AFP objected, however, to the Fed’s plan to make employers “financial institutions” under reg. E and subject to its requirements, regardless of how the payroll card program is structured. Defining employers as “financial institutions,” AFP advised, would create unnecessary complexity without advancing consumer protection and introduce legal barriers that might cause employers to terminate their payroll card programs.

02/06 Regulation E – The Federal Reserve Board announced on December 30, 2005, changes to Regulation E that affect the conversion of consumer checks to ACH debits. The Fed’s new rule permits payees to obtain authorization to use the consumer’s check to initiate an EFT or alternatively to process the transaction as a check. The rule requires that merchants and other payees that use information from a check to initiate a one-time electronic fund transfer (EFT) from a consumer’s account provide a notice to consumers in order to obtain the consumer’s authorization for the transfer.

01/06 Remotely Created Checks – On November 21, 2005, the Federal Reserve approved amendments to Regulation CC that shift liability for unauthorized remotely created checks from the paying bank to the depositary bank whose customer created and deposited the check.

PAYMENTS & STANDARDS

02/06 Card Interchange Fees – A House Energy and Commerce subcommittee held a hearing on February 10 on “The Law and Economics of Interchange Fees.” Witnesses from small business and consumer groups testified on the fees that retailers and consumers pay when using a credit or debit card. In the courts, fourteen interchange lawsuits filed by individual merchants and merchant associations against Visa, MasterCard and some of their member banks have been consolidated and will be heard in the U.S. District Court for the Eastern District of New York. Some of the lawsuits allege price fixing in the setting of interchange fees for credit card transactions. Others challenge the card associations’ “no-surcharge” rules barring merchants from charging consumers for paying with cards.

02/06 Back Office Conversion – NACHA’s proposed interim rule for back office conversion would allow organizations to accept checks at the point-of-purchase or at manned bill payment locations and convert the checks to ACH debits during processing in the back office. “Notice equals authorization provision,” whereby the organization converting the checks would be required to provide a notice to customers, posted at the point of purchase, that their checks will be converted. If customers go ahead with the transaction, it would be deemed their authorization to convert.

Subsequent to the NACHA request for comment, the Federal Reserve announced a new amendment to Regulation E that will permit payees to obtain authorization to use the consumer’s check to initiate an EFT or alternatively to process the transaction as a check. This processing flexibility has not previously been available to payees.

01/06 Cross-Border ACH – In a December 19 comment letter to NACHA, AFP supported proposed ACH rules changes that would enable compliance with U.S. sanctions policies and anti-terrorist controls. The U.S. Treasury Department’s Office of Financial Assets Control (OFAC) requested the changes because cross-border ACH transactions do not now contain sufficient information to permit screening for OFAC compliance. The format of an International ACH Transaction would be expanded to include seven mandatory addenda records.

Today, ACH transactions that involve non-U.S. parties are often identified as domestic ACH payments because they enter the U.S. payments system via proprietary banking systems or as SWIFT messages. In its letter to NACHA, AFP recommended an education campaign to alert corporate Originators to the impact of the proposed changes. AFP also proposed an implementation date no earlier than September 2007 to provide time for

01/06 Corporate Check Conversion – NACHA members approved an amendment to the NACHA rules that defines the business checks eligible for conversion to ACH debits and those that are ineligible. The new rules become effective September 15, 2006. Business checks will be ineligible for conversion at a lockbox (ARC) or at point-of purchase (POP) if they contain an auxiliary on-us field in the MICR line. The auxiliary on-us field is the furthest left field in the MICR line of a large-size check; it contains the check serial number. Small-size business checks without an auxiliary on-us field will be eligible for conversion to ACH debits. Checks greater than $25,000 will also be ineligible for conversion. Businesses that do not want to have their checks converted to ACH debits could change their check stock to include the auxiliary on-us field or notify payees that they do not want their checks converted. Receiving depository financial institutions may return improperly converted checks within 60 days if the receiving company completes a Written Statement Under Penalty of Perjury.”

(The preceding information is excerpted and summarized from the AFP’s Legislative and Regulatory Status Update March 2006, www.afponline.org).

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