[Federal Register Volume 59, Number 62 (Thursday, March 31, 1994)] [Unknown Section] [Page 0] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 94-7691] Federal Register / Vol. 59, No. 62 / Thursday, March 31, 1994 / [[Page Unknown]] [Federal Register: March 31, 1994] VOL. 59, NO. 62 Thursday, March 31, 1994 DEPARTMENT OF AGRICULTURE Agricultural Stabilization and Conservation Service 7 CFR Part 735 RIN 0560-AD14 Using Electronic Cotton Warehouse Receipts--Amendment to the United States Warehouse Act Regulations AGENCY: Agricultural Stabilization and Conservation Service, USDA. ACTION: Final rule. ----------------------------------------------------------------------- SUMMARY: This final rule revises the regulations under the United States Warehouse Act (USWA) for cotton warehouses. This final rule permits the use of automated electronic data (electronic warehouse receipts (EWRs)) through a provider for the purpose of establishing rights to cotton held in storage by licensed warehousemen. The intent of these changes is to maintain the integrity of USWA cotton warehouse receipts, while permitting licensed warehousemen to use electronic information management systems in place of negotiable paper receipts. EFFECTIVE DATE: May 2, 1994. FOR FURTHER INFORMATION CONTACT: Lynda Moore or Steve Mikkelsen, Agricultural Marketing Specialists, United States Department of Agriculture (USDA), Agricultural Stabilization and Conservation Service (ASCS), PO Box 2415, Washington, DC 20013-2415, telephone 202-720-2121, FAX 202-690-0014. SUPPLEMENTARY INFORMATION: Executive Order 12866 This final rule is issued in conformance with Executive Order 12866. Based on information compiled by the USDA, it has been determined that this final rule: (1) Would not have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities; (2) Would not create a serious inconsistency or otherwise interfere with an action taken or planned by another agency; (3) Would not materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) Would not raise novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in this Executive Order. No Significant Impact The Administrator of ASCS certifies that this action will not have a significant economic impact on a substantial number of participating individuals or entities because the procedure set out in this rule would not increase, but would rather decrease, the time and paperwork necessary to process an administrative review. Executive Order 12612 Executive Order 12612 of October 26, 1987, entitled ``Federalism'', requires that Executive departments and agencies shall, to the extent permitted by law, adhere to certain principles of federalism. The Administrator of ASCS has determined that this program will not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. Environmental Evaluation It has been determined by an environmental evaluation that this action would have no significant impact on the quality of the human environment. Therefore, neither an Environmental Assessment nor an Environmental Impact Statement is needed. Executive Order 12372 This program is not subject to the provisions of Executive Order 12372 which requires intergovernmental consultation with State and local officials. See the notice related to 7 CFR part 3015, subpart V, published at 48 FR 29115 (June 24, 1983). Executive Order 12778 This final rule has been reviewed in accordance with Executive Order 12778. This final rule does not have any preemptive effect with respect to State laws with the exception that for State law purposes an EWR on cotton stored in a federally licensed warehouse shall have the same effect as a paper warehouse receipt issued by the same warehouse. Regulatory Flexibility Act It has been determined that the Regulatory Flexibility Act is not applicable to this final rule because it has been determined that this rule will not have a significant effect on a substantial number of small businesses. This rule will substantially reduce the paperwork for those warehousemen participating in the EWR program. However, these warehousemen have the option of participating and may choose which system they prefer to use. Paperwork Reduction Act This final rule contains new recordkeeping requirements for warehousemen that elect to participate. However, since this procedure is voluntary, not mandatory, all additional workload and time will not affect licensed warehousemen who do not participate in the EWR system. Background Pursuant to the provisions of the USWA, the Secretary has the authority to license public warehousemen of cotton (7 U.S.C. 241 et seq.). As a part of this licensing authority, the Secretary has the responsibility to regulate the issuance of warehouse receipts by the cotton warehousemen it licenses (7 U.S.C. 260). Currently, the provisions of section 18 of the USWA and 7 CFR part 735 of the regulations prescribe the content and the issuance of cotton warehouse receipts. The USWA was amended twice to provide the Secretary (through ASCS) with the discretionary authority to allow the cotton warehousemen it licenses to issue cotton warehouse receipts in electronic format (EWRs). This final rule implements this discretionary authority. Licensed cotton warehousemen may issue EWRs for bales of cotton stored in their warehouses. The system which contains these EWRs will be maintained by private providers. Providers used by licensed warehousemen must be approved by and have an Agreement with ASCS. EWRs issued under the authority of the USWA will be considered equal to, and have the same legal effect as, paper warehouse receipts. The USWA was enacted in 1916 to improve this country's agricultural warehousing industry and establish warehouse receipts that are uniformly dependable and acceptable in financial circles and represent a commodity serving as reliable collateral for loans through a voluntary warehouse licensing program. USWA paper warehouse receipts have consistently maintained high integrity. With the advent of safe, reliable, and secure electronic storage and processing of data, the use of paper warehouse receipts may become obsolete. The introduction of USWA EWRs will serve the warehousing industry and its customers by allowing cotton warehouses to take advantage of today's electronic data storage and transmission systems. To ensure the continuation of the integrity and respect of USWA warehouse receipts, ASCS expects high standards of approved providers. Approved providers must have an Agreement with ASCS; comply with the terms of that Agreement; maintain specific financial and bonding requirements; pay user fees established by ASCS; establish and retain contemporaneous records of each EWR entry and access; and be liable to the Secretary for issues associated with system failure or malfunction. Additionally, providers must furnish annual audit level financial statements and submit to electronic data processing audits. Providers, at all times, must grant the Secretary, or his designee, free access to all records pertaining in any way to the USWA or the system. The proposed rule contained new requirements regarding additional information required to be contained in EWRs that are not currently in section 18 of the USWA or 7 CFR 735.16. Some of the proposed requirements have not been adopted in this final rule. The primary requirement eliminated is that EWRs must designate the names of the current owners. Section 735.16 has been amended allowing additional information, such as, classing data; quality factors; and other items pertinent to the transfer of EWRs from one holder to another. General Summary of Comments A proposed rule was published in the Federal Register (58 FR 43298) on August 16, 1993. Comments from interested parties were due on or before October 15, 1993. Twenty-four letters were received after the close of the comment period and were not considered. One hundred and twenty-seven letters from 130 individuals and entities were received during the comment period. Of the 127 letters, 112 were identical, and appeared to be part of an organized campaign. These comments will be weighed appropriately. These 112 covered three topics: provider restrictions, State-licensed warehouses, and fees. The 130 individuals and entities are comprised of: 94 individuals, 9 cotton gins, 5 co-ops, 8 warehousemen, 4 Members of Congress, 4 Associations, 4 cotton merchants, and 2 millers. Because most of the letters contain more than one comment, the total number of comments received was 423. Discussion of Comments In general the comments were supportive of the concepts behind the proposed rule. However, many of the comments suggested that the final rule should contain more specific regulations defining how EWR records should be maintained and how they should be transferred, as well as more regulations regarding providers and their relationship with ASCS and the users. In short, these commenters saw ASCS as having a substantial regulatory role by controlling every detail of this process. The final rule did adopt some of the changes suggested. The final rule does include more detail regarding the financial and insurance requirements for providers. However, in most cases it does not include the detailed regulations regarding specific operations, such as, the manner in which backup files should be maintained or what specific security measures must be taken to protect the central filing system. The approach taken in the final rule is that this regulation addresses issues that will advance and grow substantially over the next few years. As a result, technology and experience will lead to an evolution of how these matters should be resolved. Thus, any regulation that provides details suggested would soon become obsolete. Therefore, these regulations were drafted with the intent of establishing and defining responsibilities among ASCS, warehousemen, providers, and users. The affected parties will be required to determine how best to satisfy these responsibilities now, and they will be allowed to improve these solutions in the future without first seeking an amendment to this regulation. Because many sections of this regulation are interrelated, the individual comments received were applicable to different sections of the regulation. As a result, ASCS will discuss the comments and the changes to the regulation they produced on a topical, as opposed to section by section, basis. The comments have been divided into the following categories: Providers, State-Licensed Warehouses, Fees, Warehouse Receipt Conversion, Cotton Ownership, and Central Filing System. 1. Providers Two issues were discussed involving providers: the restrictions on who can be a provider and the qualifications of a provider. A. Restrictions A total of 119 comments were received regarding the limitations contained in the proposed rule on who could act as a provider (112 of these were identical). 117 comments expressed concern that these regulations would discriminate against entities in the cotton industry providing this service. Further, the 112 identical comments stated that Plains Cotton Cooperative Association has provided an electronic system for the past four years and should be allowed to continue. One comment questioned whether the proposed rule language would limit providers to USWA warehouses. One comment suggested that the restrictions on providers listed in the proposed rule were not strict enough. This commenter indicated that providers should be involved in no ``activities associated with marketing cotton''. After reviewing these comments, the final rule modified the proposed rule to allow any individual or entity that meets the financial and security requirements of this regulation to be a provider. The financial and security requirements of these regulations will provide users with sufficient protection against the potential failure of a provider. ASCS did consider the risk that a provider may attempt to use information in its central filing system to its advantage, which is why ASCS included strict conflict of interest provisions in the proposed rule. However, after further review, it was determined that such restrictions would unduly limit the number of providers and potentially jeopardize the program. Since use of the system is voluntary, those participating should be aware that the provider may have a conflict of interest and those participants should act accordingly. These regulations do not require that a holder of a USWA warehouse receipt have an EWR issued or retained electronically. A holder who has concerns regarding EWRs has the right to require that the receipt be reissued as a paper receipt. While ASCS does not believe that the proposed rule limited providers to USWA warehousemen, ASCS has clarified this section of the final rule to clearly indicate that providers may be any individual or entity, including USWA warehousemen. B. Qualifications A total of four comments were received regarding the qualifications of a provider. One comment indicated that the provisions of the proposed rule were not specific enough regarding the financial standards that must be met. The commenter suggested that high dollar capitalization and insurance amounts (unspecified) should be required. One comment suggested a very specific list of insurance ($2 million), bond ($300,000 to $750,000), and net worth (up to $1 millon) requirements. One comment suggested that a sizable bonding requirement be imposed. One comment suggested that strict financial and technical requirements, unspecified, be imposed. After consideration of these comments, ASCS added to the final rule a list of very specific financial and insurance requirements for providers in Sec. 735.102(a) and believes that the financial requirements, performance security, and suspension terms provide adequate protection to users and providers. 2. State-Licensed Warehouses One-hundred and fourteen comments (112 of which were identical) were received regarding State-licensed warehousemen. All commenters indicated that State-licensed warehouses should be included under these regulations. It was determined that it was not necessary to amend this portion of the proposed rule. The background information provided in the proposed rule discussed this issue. It stated that this regulatory change would allow providers to accept EWRs from warehousemen not licensed by the Secretary. However, the Secretary would not regulate or take any responsibility for such warehousemen, the content of such warehouse receipts, or the manner in which such warehouse receipts are issued. Such matters must be governed by applicable State laws. The final rule does not include any regulation of State-licensed warehouses or their receipts. However, the definition of ``user'' in these regulations and in the provider agreements that will be executed will include any individual or entity that uses the services of the provider to file or access warehouse receipt information. Therefore, nothing in this regulation prohibits a provider from accepting EWRs from non-federally licensed warehousemen. 3. Fees One-hundred and twenty comments were received on the subject of fees (112 of these were identical). All commenters question the per bale fee of $0.10 to $1.00 to administer and supervise the EWR system. The commenters suggested that if the fee set by ASCS was too high, it would render the program uneconomical. ASCS considered these comments and understands that the level of fees could affect the use of this program. When the proposed rule was written, the fees quoted were nothing more than conjecture, since it is unknown exactly what fees will be charged. These regulations and the provider agreement will state that the provider's fees will be announced and assessed by ASCS annually prior to April 30th of each year. The Secretary is obligated by law to ``* * * charge and provide for the collection of reasonable fees to cover the estimated costs to the Department of Agriculture incident to the functioning and maintenance of any central filing system * * *'' The Secretary will not operate and regulate such a system for a profit. If fees set are determined to be excessive, they will be adjusted. 4. Warehouse Receipt Conversion Eight comments were received that addressed the conversion from paper warehouse receipts to electronic and vise versa. One comment indicated that the right to have an EWR converted to a paper receipt be limited to the first three crop seasons after the final rule is promulgated so as to reduce costs and encourage the phasing out of paper warehouse receipts. Three comments indicated that a user must have an unlimited right to convert an EWR to a paper warehouse receipt. One comment indicated that the conversion of EWRs to paper should be done in such a way to prevent the need to retag bales. One comment indicated that by adopting a proposal of universal tag numbers for bales of cotton, the conversion of warehouse receipts between the paper and electronic systems would be smoother. One comment indicated that the final rule should contain more specific procedures describing the conversion of receipts between the paper and electronic systems. One comment indicated that providers should issue paper warehouse receipts and that these receipts could be issued in blank. Based on a review of these comments, it was determined to retain the rights for holders to convert receipts between the paper and electronic systems with the exception that such conversions do not need to be approved by the owner of the cotton. ASCS believes the convertibility of these receipts is necessary until electronic receipts are fully accepted by the industry as a replacement for paper receipts and to serve as a backup for situations when a warehouse may be having difficulties with the provider. While some in the cotton industry believe that eventually electronic receipts will replace paper receipts, ASCS could not determine whether such a total conversion is appropriate, or even feasible, in the foreseeable future. As supported by other comments received, the convertibility of receipts is necessary to provide the industry with the confidence that if problems should develop with the electronic receipt system, ASCS has a viable paper system as a backup. As noted previously, any system which allows the provider to operate with a built-in conflict of interest must give users an alternative opportunity. Providers do not have the authority to issue any warehouse receipt, either paper or electronic. They provide the recordkeeping system for warehouse receipts issued by the warehousemen. Pursuant to the provisions of the USWA, warehousemen are responsible for the issuance of all warehouse receipts. Therefore, ASCS cannot authorize providers to issue paper receipts. 5. Cotton Ownership Four comments were received regarding the listing of the ownership of cotton on the EWR. All comments indicated that it was inappropriate to have owners of cotton listed on the receipt. They believed that such a listing was not necessary and would cause an undue burden and expense. After considering these comments, ASCS has removed the requirement for listing owners on EWRs. 6. Central Filing System Fifty comments were received regarding the central filing system. These comments can be grouped into the following subjects: security of the system, management of central filing system, providers agreement, bale numbers, and system access. A. Security of the System Seven comments were received regarding the provisions that address the security of the system. Three comments indicated that the proposed rule did not provide standards to determine whether the security measures for a central filing system are adequate. One comment indicated that ASCS' financial statement auditing requirements should be strengthened to require that all audits be done at the audited level. One comment indicated that the requirement for a ``statement of changes in financial position'' should be changed to a requirement for a ``statement of cash flow.'' One comment indicated that the proposed rule should be changed to eliminate the requirement that the accountants provide certifications or comments on financial statements. Under the applicable standards of accounting, certifications or comments to a financial statement are not required. One comment indicated under current procedures, before an accountant can express an opinion regarding the status of an electronic data processing system, the provider must be required to make certain assertions regarding the system which then can be audited. There has not been developed an independent set of data processing security standards that have been accepted by the accounting community. It has been determined that the security provisions of the proposed rule will be retained in the final rule with the exception that ASCS has eliminated the need for an electronic data processing audit performed in accordance with the standards of the American Institute of Certified Public Accountants. The reason for this change is that appropriate standards that may be adapted for our use do not appear to exist. It has been determined that holders should not be allowed to unilaterally move a warehouse receipt from one provider to another. In order to maintain the integrity of the system and to require that licensed warehousemen be responsible for the receipts they issue, ASCS must require that warehousemen be in control over the provider that retains their warehouse receipts. Otherwise, any one warehouseman's receipts could be spread out among several providers which would make it impossible to audit the warehouseman's inventory. Even the warehousemen may not know where all of their receipts are retained. The final rule does not provide more specifics regarding the security measures that must be imposed by the provider to protect the system for two reasons. First, ASCS anticipates that providers would separately develop systems around their efficiencies. Limiting providers to one particular system would not promote such efficiencies. Second, it is impossible to foresee all of the potential problems that could arise in a central filing system. Therefore, the final rule places the responsibility for security on the provider. However, should ASCS determine that a provider's security system is inadequate for any reason, ASCS has the authority to immediately shut down that system to protect the integrity of the program. B. Management of Central Filing System Twenty-two comments were received regarding the regulation and management of the central filing systems. One comment indicated that the Secretary should approve providers, as opposed to, licensing them. One comment indicated that prior approval should not be required before the transfer of EWRs from one provider to another. Two comments indicated that warehousemen should be able to freely change from one provider to another within the 12-month agreement cycle indicated in the proposed rule. One comment indicated that the word ``its'' was missing from Sec. 735.105(b). One comment questioned the meaning of the term ``valid contract'' in Sec. 735.105(d). Two comments suggested that the provision in the proposed rule that gives the Secretary the authority to suspend a provider agreement if the provider fails to maintain ``control'' over its central filing system, is too vague. One comment questioned whether a suspended provider could accept warehouse receipts from warehousemen who are not licensed by the Secretary. Two comments questioned the meaning of the term ``central filing system'' in the context of the use of the term in the Food and Security Act of 1985 regarding liens. Two comments suggested that the final rule should delete the provision requiring written permission to agree to the transfer of receipts between providers. One of these comments recommended that the best way to handle this is to simply allow the creation of a paper warehouse receipt as a means of transferring receipts between providers. One comment suggested that the final rule should contain more regulations regarding the transfer of warehouse receipt records between providers. One comment suggested that there are several provisions of the proposed rule that are contradictory regarding the transfer of warehouse receipts between providers. One comment suggested the Secretary regulate the relationship between the users and the providers. One comment indicated that the use of the word ``on'' in the definition ``central filing system'' makes the meaning of the term too restrictive and should be replaced with either ``concerning'' or ``relating to.'' One comment suggested that the proposed rule failed to identify any additional recordkeeping requirements for warehousemen who issue EWRs. One comment suggested that the final rule should allow for additional information to be on the EWRs, especially for ``certificated bales of cotton.'' One comment sought clarification to be sure that only one active warehouse receipt record should exist at a time for any bale of cotton. One comment recommended that the USWA warehousemen should not be required to notify the Secretary 60 calendar days in advance of the use of the provider they have selected before they can issue EWRs. One comment suggested that the provisions of Sec. 735.17 regarding the need for backup information is inconsistent with the creation of EWRs. Based on the comments received, the final rule modified the proposed rule in the following ways: (1) ASCS will not license providers, it will approve them through agreements; (2) technical changes were made to the definition of the EWRs and other provisions to make them clearer; (3) warehousemen will be allowed to change providers at will so long as they inform the Secretary of such change at least 60 calendar days prior to making such a change, unless otherwise indicated by the Secretary. This will allow warehousemen to change providers during the 12-month agreement cycle but will also allow the Secretary to keep track of these changes for the purposes of auditing the warehousemen as necessary; and (4) the proposed rule provision that allows warehousemen and providers to retain other data associated with the cotton not otherwise required was clarified. Under the final rule, warehousemen and providers may retain other data in addition to the USWA required warehouse receipt information, including cotton classing information, other bale numbers, etc. Provisions in the proposed rule concerning suspension or revocation of providers were not significantly changed for the final rule. The word ``revoked'' was replaced with ``terminated''. ASCS choose to adopt the statement ``for cause'' in the final rule, rather than specify individual circumstances where ASCS would unfortunately have to suspend or terminate a provider. In the comments, a question was raised regarding how a suspension would affect the ability of a provider to accept warehouse receipts from a non-federally licensed warehouse. Neither these regulations nor the legislation authorizes the Secretary to regulate a provider's activities with State licensed warehouses. Therefore, a suspended provider is only prohibited from accepting warehouse receipts from USWA warehouses. The suggested changes regarding the use of the term ``central filing system'' were not adopted. ASCS understands that this term is used to describe a vehicle for recording liens in the 1985 Food and Security Act. However, this is the term used to describe the system for retaining EWRs in the legislation that authorized this regulation. Therefore, it was determined that this term should be retained. However, ASCS has clearly defined this term in the final rule to avoid any confusion. The suggested changes regarding the transfer of EWR records from one provider to another were not adopted. Under the final rule, the only regulation regarding the transfer of records between providers is that the new provider have an agreement with the Secretary and the Secretary be notified 60 calendar days prior to the transfer. It was determined that additional regulations were not needed and that the provisions contained in the proposed rule are not inconsistent with the final rule. Furthermore, ASCS does not believe additional regulations are needed regarding these transfers. It will be the responsibility of the warehouseman to ensure that all applicable receipts are properly transferred. The suggestion to increase the regulation of the agreements between users and providers was not adopted. It was determined that any additional regulation is not necessary, because a holder may request a paper warehouse receipt at any time. Several comments were received regarding the records required by this regulation. The final rule does not include any additional recordkeeping requirements, because ASCS does not believe that any additional requirements are needed, since nearly all additional records required by this regulation are retained with the provider. Finally, ASCS received a comment regarding the application of the regulations concerning backups to EWRs. For the purposes of these regulations, any backup files will be considered equivalent to the backup files otherwise required by these regulations. C. Providers Agreement Eight comments were received regarding the terms of the provider agreement with the Secretary. One comment suggested that the regulation should contain more information regarding the terms of the provider agreement. This comment suggested that the final rule and the provider agreement should specify in detail the financial requirements and the system backup records that must be maintained. One comment indicates that a provider agreement should be in effect for more than one year. One comment indicated that providers should not be strictly liable to the Secretary or users for costs associated with lost or destroyed receipts. One comment suggested that in addition to being strictly liable, the provider must also be required to have the financial resources to compensate users for such losses. One comment indicated that providers should not be required to store records for a period of six years. Currently, the Secretary only requires that paper receipt records be retained for only two years. One comment suggested that the Secretary should require more financial and background information be supplied before the Secretary approves the application of a provider. One comment indicated that when a provider agreement is suspended the Secretary should make every effort to get the affected warehouses on another approved provider system. One comment suggested that the provider agreement contain a provision that all security measures must meet the requirements of the American Institute of Certified Public Accountants. Based on a review of these comments, ASCS made the following changes to the proposed rule: (1) Providers will be only strictly liable for costs incurred by the Secretary associated with lost or improperly destroyed EWRs; (2) the final rule restructured the provisions affecting providers to more clearly identify their responsibilities; and (3) the final rule more clearly identifies the financial and insurance requirements for providers that would be available to settle claims by users against providers. The suggestion that the provider agreement should be in effect for a period of more than one year was not adopted. ASCS could not agree that the one year agreement cycle would cause problems for providers. Currently, warehouse licenses are issued for a period of no more than one year. One year agreement cycles will ensure that ASCS has current financial and other related information regarding the providers. However, the final rule clarifies that these agreements will automatically renew, unless there is a problem. The comment to change record retention for providers from six to two years was not adopted. Given the fact that the records in question are electronic records which can be stored easier than paper records, ASCS does not believe that a six-year retention period is too burdensome. Unlike the current paper system, providers will be storing records for more than one warehouse. Thus, ASCS believes that these records should be retained for a longer period of time. The comment that suggested more detailed information should be required of providers before they are approved was not adopted. ASCS believes that the information requirements specified in the proposed rule will provide enough information, in most cases, for a determination to be made on a provider application. However, on a case- by-case basis, should more information be needed, it will be required. It is agreed that in cases where a provider is suspended, the Secretary should give the affected warehousemen assistance to enable them to issue electronic receipts through another provider. However, ASCS does not believe that the proposed rule prohibited such assistance. Finally, a comment suggested that the final rule should require that all data security systems of providers meet the requirements of American Institute of Certified Public Accountants. As explained previously, it appears that such a standard does not currently exist. Therefore, ASCS could not adopt the comment. D. Bale Numbers Five comments were received that suggested a system of warehouse receipt numbers and a uniform bale numbering system be merged into one number system. This would eliminate the need to retag bales as they move through the marketing process. ASCS is not able to adopt these comments. The USWA requires that each federally licensed warehouse assign warehouse receipt numbers on a consecutive basis. The proposed universal bale numbering system is not consistent with the statute. Thus, the USWA prohibits the adoption of these comments. E. System Access Eight comments were received addressing system access. Five of these comments discuss unlimited free access to the Secretary. One comment opposes such access by stating that such broad access could compromise the integrity of the electronic system. The same commenter also states that the Secretary does not have similar information available to him now. Another commenter stated that the only party that should have unlimited access for audit requirements would be USDA. A third comment on this subject is that the Commodity Credit Corporation should have the right at any time to audit the system and the system provider. The fourth comment provides full support for the Secretary's right to have full access to the system for audit and control purposes. The fifth comment states that allowing the Secretary such access is extremely broad and should be more tailored. ASCS believes that unlimited, free access to the Secretary, for audit purposes, is necessary to provide all interested parties with protection. Therefore, the final rule contains this authority for the Secretary. The three additional comments address access by other interested parties. One comment states that there is strong opposition to making electronic receipt system information available to any party on a nondiscriminatory basis. Another comment states that it so strongly opposes access to any party on a nondiscriminatory basis that it will not use any EWR system so long as such access is provided. A third comment states that only the holder, owner, or their authorized agent should have access to the system. The final rule eliminates the part of the proposed rule, Sec. 735.104(a), that stated that providers must allow read only access, at no cost, to interested parties. The providers agreement will allow system access to warehousemen to create, amend, or cancel warehouse receipts only when they are the warehouse receipt holder; and that ``read only'' access can be exercised by licensed warehousemen with respect to warehouse receipts originated by that warehouseman at any time, at no cost. All other access to the central filing system will be determined between the providers and the users as they see fit. In addition to the previously listed comments, four general comments were received. These comments indicated their support to a proposal regarding EWRs prepared by the National Cotton Council (NCC). ASCS had difficulty addressing these comments, because ASCS received a different set of comments from NCC. In general, the NCC proposal is consistent with the current final rule, but NCC would establish more regulation over the details of the transactions among providers, users, and warehouses. As previously indicated, the intent of these regulations is not to have ASCS micro-manage the issuance and use of EWRs. These regulations assign the responsibilities among the parties and allow them to determine how to satisfy these responsibilities. List of Subjects in 7 CFR Part 735 Administrative practice and procedure, Cotton, Reporting and recordkeeping requirements, Surety bonds, Warehouses. Accordingly, 7 CFR part 735 is amended as follows: PART 735--COTTON WAREHOUSES 1. The authority citation for 7 CFR part 735 is revised to read as follows: Authority: 7 U.S.C. 268. 2. Section 735.2 is amended by adding paragraphs (bb) through (ii) to read as follows: Sec. 735.2 Terms defined. * * * * * (bb) Access. The ability when authorized, to read, change, and transfer warehouse receipt information retained in the central filing system. (cc) Central filing system (CFS). An electronic computer system operated and maintained by an approved provider where the information relating to warehouse receipts is recorded. (dd) Electronic warehouse receipt (EWR). An electronic file in the CFS that contains at the least information required to be included in a warehouse receipt by section 18 of the Act, and Sec. 735.16, regarding a bale of cotton and has been identified to a holder. (ee) Holder. An individual or entity in possession, in fact, or by operation of law, of a receipt and by extension, of the cotton represented thereby. (ff) Issue. EWRs are considered issued when a licensed warehouseman has transmitted all necessary information to an approved provider, and when such information is entered into the provider's CFS. (gg) Provider. An individual or entity that maintains EWRs in a CFS, meets the requirements of this part, and has a Provider Agreement with ASCS. (hh) Provider Agreement. An agreement entered into between the Secretary and a provider that delineates the provider's responsibilities and defines the relationship between the provider and ASCS regarding the provider's maintenance and security of EWRs in the CFS and other requirements of this part. (ii) User. An individual or entity that uses the provider's CFS but shall not include ASCS in its regulatory capacity. 3. Section 735.16(h) is added to read as follows: Sec. 735.16 Form. * * * * * (h) A warehouse receipt may contain additional information; Provided that such information does not interfere with the information required by this part. Secs. 735.94, 735.95, 735.96, 735.97, 735.98, 735.99 [Added and Reserved] 4. Sections 735.94 through 735.99 are added and reserved. 5. An undesignated centerheading entitled, ``Electronic Warehouse Receipts'' (Secs. 735.100 through 735.105), is added to read as follows: Electronic Warehouse Receipts Sec. 735.100 General statement. 735.101 Electronic warehouse receipts. 735.102 Provider requirements and standards for applicants. 735.103 Audits. 735.104 Provider-user relationship. 735.105 Security. Electronic Warehouse Receipts Sec. 735.100 General statement. The regulations in Secs. 735.100 through 735.105 give a USWA licensed warehouseman the option of issuing EWRs instead of paper warehouse receipts for the cotton stored in its facility. EWRs may only be created through a provider who is approved by ASCS. Sec. 735.101 Electronic warehouse receipts. (a) EWRs issued pursuant to this part establish the same rights and obligations with respect to a bale of cotton as a paper receipt. With the exception of the requirement that warehouse receipts be issued on paper (Sec. 735.19), all other requirements applicable to paper warehouse receipts shall apply to EWRs, unless otherwise specified. The person identified as the ``holder'' of an EWR shall be entitled to the same rights and privileges as the holder of a paper warehouse receipt. (b) EWRs must be issued as single bale receipts. (c) EWRs may only be issued through a provider. (d) Warehousemen must notify all holders of cotton receipted by inclusion in the CFS at least 30 calendar days before changing providers, unless otherwise required or allowed by the Secretary. (e) Licensed warehousemen may cancel EWRs only when they are the holder of such receipts. (f) Licensed warehousemen, only as holder, may correct information on the EWR. (g) Only the holder of the receipt may transfer the receipt to a new holder. (h) The identity of the holder must be included as additional information for every EWR. (i) An EWR shall only designate one entity as a holder at any one time. (j) An EWR shall not be issued for a bale of cotton if another receipt, paper or electronic, on such bale is outstanding. No two warehouse receipts issued by a licensed warehouse may have the same receipt number. (k) Prior to issuing EWRs, each warehouseman shall request and receive from ASCS a range of consecutive warehouse receipt numbers which the warehouseman shall use for the EWRs it issues. (l) If a warehouseman has a contract with a provider, all warehouse receipts issued by the warehouseman shall initially be issued as EWRs. (m) An EWR may only be issued to replace a paper receipt if the current holder of the warehouse receipt agrees. (n) EWRs shall not be issued for defective cotton as defined in Sec. 735.70. (o) Licensed warehousemen must inform the Secretary of the identity of their approved provider 60 calendar days in advance of issuing warehouse receipts through that provider. The Secretary may waive or modify this 60 day requirement. (p) Holders and licensed warehousemen may authorize any other user of a provider to act on their behalf with respect to their activities with such provider. Such authorization must be in writing, acknowledged, and retained by the provider. (q) Provisions of Sec. 735.18 shall be applicable to lost or destroyed EWRs. Sec. 735.102 Provider requirements and standards for applicants. (a) Financial requirements. All providers to be approved under this part must meet the following requirements: (1) Have a net worth of at least $25,000, and (2) Maintain two insurance policies; one for ``errors and omissions'' and another for ``fraud and dishonesty''. Each policy must have a minimum coverage of $2 million. (b) User fee charges. Providers shall pay to ASCS user fees set by ASCS and announced annually prior to April of each calendar year. (c) Provider agreement. The provider agreement shall contain, but not be limited to, the following basic elements: (1) Records. The retention period for records. (2) Liability. The liability of the provider. (3) Transfer of records. The requirements for transferring EWRs to another provider. (d) Suspension and termination. (1) The Secretary may suspend or terminate a provider's agreement for cause at any time. (2) Hearings and appeals will be conducted in accordance with procedures that are contained in Secs. 735.7 and 735.89. (3) Without specific written authority by the Secretary, suspended or terminated providers may not accept, transfer, or execute any other function pertaining to EWRs during the pendency of any appeal or subsequent to such appeal if the appeal is denied. (4) The provider or ASCS may terminate the provider agreement without cause solely by giving the other party written notice 60 calendar days prior to the termination. (e) Renewal. Each provider agreement will be automatically renewed annually on April 30th as long as the provider complies with the terms contained in the provider agreement, the regulations in Secs. 735.100 through 735.105 and the Act. (f) Application form. Application for a provider agreement shall be made to the Secretary upon forms prescribed and furnished by ASCS. Sec. 735.103 Audits. (a) The provider must submit to the Secretary an annual audit level financial statement that meets the requirements of Sec. 735.5 with the exception of Secs. 735.5(d)(1), (e), (g), and (h); and an electronic data processing audit. These audits shall encompass the provider's fiscal year. The completed audits shall be submitted to the Secretary no later than four calendar months following the end of the provider's fiscal year. The electronic data processing audit shall result in an evaluation as to current computer operations, security, disaster recovery capabilities of the system, and other systems. (b) The provider will grant the Secretary or his designees unlimited, free access at any time to all records under the provider's control relating to activities conducted under this part and as specified in the provider agreement. Sec. 735.104 Provider-user relationship. (a) The provider shall not discriminate among its users regarding use of and access to its CFS and must charge fees on an equal basis to all users for its services. (b) The provider must furnish the Secretary with copies of its current schedule of fees for all services and charges as they become effective. (c) Fees charged any user by the provider must be in effect for a minimum period of one year. (d) Providers must furnish the Secretary and all users a 60 calendar day advance notice of their intent to change any fee. Sec. 735.105 Security. (a) Security must be in accordance with the standards set out in the provider agreement. (b) Security copies of the system are to be maintained off-site. Both on-site and off-site record security must be maintained. Signed at Washington, DC, on March 28, 1994. Bruce R. Weber, Acting Administrator, Agricultural Stabilization and Conservation Service. [FR Doc. 94-7691 Filed 3-30-94; 8:45 am] BILLING CODE 3410-05-P