California appears poised to enact legislation that would
dramatically increase the regulatory burden facing firms in the
electronic payment and stored value industries. At present,
California regulates firms that help consumers transmit money
overseas through the Transmission of Money Abroad Law (Cal. Fin.
Code §§ 1800 et seq.), the issuance of travelers checks
through the Travelers Checks Act (Cal. Fin. Code §§ 1851
et seq.), and the issuance of payment instruments through the
Payment Instruments Law (Cal. Fin. Code §§ 33000 et
seq.). If enacted, the California Money Transmission Act, AB 2789
("the Act"), would consolidate the regulation of money
transmission into one single law and, in the process, would expand
the reach of California law to a number of additional firms in the
electronic payment and stored value industries, including firms
that simply enable consumers and merchants to exchange value for
purely domestic transactions. The Act currently sits before the
California Senate, having passed the California Assembly by a 65-4
vote and the Senate Finance Committee by a 10-1 vote. Given the
Act's broad language and onerous licensing provisions, the Act
is of interest to virtually every firm that accepts, issues or
facilitates the electronic exchange of value.
What is a 'Money Transmission'
Business?
The Money Transmission Act, if enacted, will significantly expand
the reach of California law. As noted above, the reach of
California's current money transmission statute is limited to
firms that "receive[] money for transmission" overseas.
California regulates travelers checks and other payment instruments
such as money orders separately through two separate provisions. If
the proposed legislation becomes law the three current laws will be
consolidated and the reach of money transmission will be expanded.
"Money transmission" will mean "any of the
following: (1) selling or issuing stored value; (2) receiving money
for transmission; or (3) selling or issuing payment
instruments." The proposed law consolidates instruments
currently regulated by California's money transmission statute
along with the sale of money orders, travelers checks, and a
handful of related payment devices under the category of
"payment instruments." And it subjects two additional
categories of financial services to regulation: "selling or
issuing stored value" and "receiving money for
transmission."
Stored Value
If AB 2789 becomes law, the most significant changes will occur in
the area of stored value transmissions. Stored value transmissions
are not currently subject to California's existing licensing
and regulatory requirements. The Money Transmission Act will impose
significant new regulatory requirements on firms in the stored
value business.
The Act defines "stored value" as monetary value that is
stored on an electronic or digital medium and that is intended as a
means of payment for goods or services. The Act provides a
significant exception to this definition for stored value
instruments that are redeemable for a fixed amount of goods or
services from a specific entity. The Act's provisions appear to
apply only to more open-ended vehicles for payment. Thus, a $25
gift card to purchase textbooks from a particular website will
escape regulation while a card that allows the purchase of goods or
services from any general provider will be subject to state
approval.
Even with this exception, however, the Act's licensing
requirements will apply broadly. The language of the Act appears to
apply to any entity that distributes stored value that is accepted
as a form of payment by multiple merchants. Moreover, other states
that have enacted language similar to that contained in AB 2789
have struggled to distinguish open loop stored value cards from
closed loop cards. In such states, the regulatory landscape is
characterized by governmental discretion over enforcement and
resulting uncertainty regarding the application of statutory
provisions.
If an entity meets the above definition and thus transmits stored
value in California, it will be subject to onerous licensing and
bonding requirements. Firms in the stored value business will be
required to submit to an examination by the Commissioner of the
Department of Financial Institutions. Firms will subject to a broad
net worth, safety, and soundness review at their own expense.
Transmitters of stored value will also be subject to a significant
bonding requirement. Such firms will be required to submit as
deposit to the Commissioner no less than $500,000 or 50% of their
average daily outstanding stored value obligations in California,
whichever is greater. The maximum deposit is $2,000,000.
Receiving Money for Transmission
The Act's second category, "receiving money for
transmission," also represents a significant expansion of
California's regulatory authority. As noted above,
California's current money transmission statute only applies to
entities that receive money in order to transmit it from California
to a foreign country. The Act would expand these regulations to
include domestic transmissions as well.
The licensing requirements applicable to entities receiving money
for transmission are largely the same as those that are imposed on
entities that engage in stored value transactions. Each entity will
be required to submit to an examination by the Commissioner of the
Department of Financial Institutions. As with firms in the stored
value business, entities that "receive money for
transmission" will be examined, at their own expense, on net
worth, safety and soundness grounds. Firms that receive money for
transmission will also be required to place funds on deposit with
Commissioner that exceed their average daily outstanding
obligations in California. The minimum deposit is $250,000 and the
maximum is $7,000,000.
Payment Instruments
The Act also seeks to expand the types of instruments regulated by
California law. California's existing law excludes money orders
and travelers checks from its definition of money transmission
because these instruments are currently covered by separate
statutes as noted above. The Act specifically consolidates the
regulation of these instruments into the money transmission law and
expands the scope of the regulation.
Businesses currently subject to regulation as money transmission
businesses will see relatively few changes, though the Act may
reduce their regulatory burden in one respect. Existing California
law imposes liquidity requirements on some money transmission
businesses. They are required to maintain ownership of eligible
securities that are equal in value to the company's outstanding
obligations. The Money Transmission Act changes the requirement. If
enacted, sellers will be required to maintain either securities or
surety bonds in an amount of at least $500,000 or 50% of their
daily outstanding obligations in California, whichever is greater.
The maximum deposit would be $2,000,000.
The "Catch-all"
Exception:
Article 2 § 1806 of the Act gives the Commissioner the
authority to exempt any person or transaction from these provisions
if the Commissioner finds such action to be in the public interest
and if the regulation of such persons or transactions is not
necessary to fulfill the purposes of the Act. This provision may
offer the sole mechanism by which smaller entities that would
otherwise be faced with onerous licensing and bonding requirements
can continue to operate, but this depends on the manner in which
the Commissioner elects to exercise this exemptive authority.
O'Melveny & Myers LLP routinely provides advice to clients on complex transactions in which these issues may arise, including finance, mergers and acquisitions, and licensing arrangements. If you have any questions about the operation of the applicable statutory provisions or the case law interpreting these provisions, please contact any of the attorneys listed on this alert.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
