[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 /
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[[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