[Federal Register Volume 64, Number 115 (Wednesday, June 16, 1999)]
[Proposed Rules]
[Pages 32308-32343]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-14953]



[[Page 32307]]

_______________________________________________________________________

Part II





Department of Agriculture





_______________________________________________________________________



Food and Nutrition Service



_______________________________________________________________________



7 CFR Part 246



Special Supplemental Nutrition Program for Women, Infants and Children 
(WIC): Food Delivery Systems; Proposed Rule

  Federal Register / Vol. 64, No. 115 / Wednesday, June 16, 1999 / 
Proposed Rules  

[[Page 32308]]



DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR PART 246

RIN 0584-AA80


Special Supplemental Nutrition Program for Women, Infants and 
Children (WIC): Food Delivery Systems

AGENCY: Food and Nutrition Service, USDA

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: This proposed rule would amend the regulations governing the 
Special Supplemental Nutrition Program for Women, Infants and Children. 
It would strengthen the requirements for operation of vendor management 
systems by establishing mandatory selection criteria; limitation of 
vendors; training requirements; criteria to be used to identify high-
risk vendors; and monitoring requirements, including compliance buys. 
In addition, the rule would strengthen food instrument accountability 
and sanctions for participants who violate program regulations. It 
would also streamline the vendor appeals process. The rule is intended 
to ensure greater program accountability and efficiency in food 
delivery and related areas, and to promote a decrease in vendor 
violation of program requirements and loss of program funds.

DATES: To be assured of consideration, written comments must be 
postmarked on or before September 14, 1999. Since comments are being 
accepted simultaneously on several separate rulemakings, commenters on 
this proposed rule are asked to label their comments ``Food Delivery 
Systems.'' In addition, due to the inherent problems associated with 
the large volume of comments this rule is expected to generate, 
electronic transmissions, including data faxes, will not be accepted.

ADDRESSES: Comments may be mailed to Patricia Daniels, Director, 
Supplemental Food Programs Division, Food and Nutrition Service, USDA, 
3101 Park Center Drive, Room 540, Alexandria, Virginia 22302, (703) 
305-2746. All written submissions will be available for public 
inspection at this address during regular business hours (8:30 a.m. to 
5:00 p.m.) Monday through Friday.

FOR FURTHER INFORMATION CONTACT: Barbara Hallman, at (703) 305-2730.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    This proposed rule has been determined to be ``significant'' and 
was reviewed by the Office of Management and Budget (OMB) under 
Executive Order 12866.

Regulatory Flexibility Act

    This rule has been reviewed with regard to the requirements of the 
Regulatory Flexibility Act (5 U.S.C. 601-612). Pursuant to that review, 
Shirley R. Watkins, Under Secretary, Food, Nutrition and Consumer 
Services, has certified that this rule would not have a significant 
impact on a substantial number of small entities. This rule would 
modify vendor selection, training, monitoring, sanction and appeal 
procedures and/or systems. The effect of these changes would fall 
primarily on State agencies. Local agencies and vendors would also be 
affected, some of which are small entities. However, the impact on 
small entities is not expected to be significant.

Executive Order 12372

    The WIC Program is listed in the Catalog of Federal Domestic 
Assistance Programs under 10.557. For the reasons set forth in the 
final rule in 7 CFR part 3015, Subpart V, and related Notice (48 FR 
29115), this program is included in the scope of Executive Order 12372 
which requires intergovernmental consultation with State and local 
officials.

Executive Order 12988

    This proposed rule has been reviewed under Executive Order 12988, 
Civil Justice Reform. This proposed rule is intended to have preemptive 
effect with respect to any State or local laws, regulations or policies 
which conflict with its provisions or which would otherwise impede its 
full implementation. This rule is not intended to have retroactive 
effect unless so specified in the EFFECTIVE DATE paragraph of the 
preamble of the final rule. Prior to any judicial challenge to the 
application of the provisions of the final rule, all applicable 
administrative procedures must be exhausted.

Unfunded Mandates Reform Act of 1995

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) (2 
U.S.C. 1531-38) establishes requirements for Federal agencies to assess 
the effects of their regulatory actions on State, local and tribal 
governments and the private sector. Under section 202 of the UMRA, the 
Food and Nutrition Service (FNS) generally must prepare a written 
statement, including a cost benefit analysis, for proposed and final 
rules with ``Federal mandates'' that may result in expenditures to 
State, local or tribal governments, in the aggregate, or the private 
sector, of $100 million or more in any one year. When such a statement 
is needed for a rule, section 205 of the UMRA generally requires FNS to 
identify and consider a reasonable number of regulatory alternatives 
and adopt the most cost-effective or least burdensome alternative that 
achieves the objectives of the rule.
    This proposed rule contains no Federal mandates (under the 
regulatory provisions of Title II of the UMRA) for State, local and 
tribal governments or the private sector of $100 million or more in any 
one year. Thus, the rule is not subject to the requirements of sections 
202 and 205 of the UMRA.

Paperwork Reduction Act of 1995

    The following constitutes a 60-day notice issued by FNS.
    Send comments and requests for copies of this information 
collection to Lori Schack, Desk Officer, Office of Information and 
Regulatory Affairs, Office of Management and Budget (OMB), Washington, 
DC 20503. A copy may be sent to Barbara Hallman, Branch Chief, 
Supplemental Food Programs Division, Food and Nutrition Service, USDA, 
3101 Park Center Drive, Room 540, Alexandria, Virginia 22302, (703) 
305-2746.
    Comments and recommendations on the proposed information collection 
must be received by August 16, 1999. A comment to OMB is best assured 
of having its full effect if OMB receives it within 30 days of 
publication.
    OMB Number: 0584-0043.
    Expiration Date: 05/31/99.
    Type of Request: Revision of a currently approved reporting and 
recordkeeping requirements.
    Abstract: In accordance with the Paperwork Reduction Act of 1995 
(44 U.S.C. 3501-20) (Paperwork Reduction Act), the reporting and 
recordkeeping burden associated with this proposed rule will be used by 
FNS as a principal source of information about how each State agency's 
food delivery system operates. This proposed rule would primarily 
strengthen and improve vendor management, food instrument 
accountability, and participant sanctions in the WIC Program. It 
addresses vendor selection, training, monitoring and high-risk 
identification and food instrument reconciliation and security. The 
collection and recordkeeping of this information is necessary to 
determine compliance with Federal regulations.
    Section 246.4(a) currently requires State agencies to submit 
changes to State Plans annually as a prerequisite to

[[Page 32309]]

receipt of funds from FNS. State Plans address specific State agency 
program operations such as: a description of the food delivery system, 
including the system for the monitoring; the system for the control and 
reconciliation of food instruments; State agency efforts to identify 
the disposition of food instruments; and efforts to identify dual 
participation. FNS estimates that addressing the additional State plan 
requirements that would be required by this proposal will take each 
State agency 3 hours annually, for a total of 264 personhours (88 State 
agencies  x  3 personhours per State agency) for this provision 
annually.
    Proposed section 246.12(i)(1) and (4) would require State agencies 
to conduct annual vendor training and to document the contents and 
receipt of vendor training, in part to assure that vendors have 
knowledge of program rules and procedures. FNS estimates that 
developing the content of vendor training materials will take each 
State agency an average of 8 personhours per State agency or 704 total 
personhours annually (8 hours  x  88 State agencies). FNS further 
estimates that participation in the annual training will take each 
State agency and vendor an average of 2 hours for a total of 90,176 
personhours annually (2 hours  x  88 State agencies plus 2 hours  x  
45,000 vendors). Finally, FNS estimates that it will take each State 
agency and each vendor approximately 15 minutes to document receipt of 
the training for a total estimated annual burden of 11,272 (.25 hours 
x  88 State agencies plus .25 hours  x  45,000 vendors).
    Proposed section 246.12(j)(3) would require State agencies to 
monitor 10 percent of its vendor population each year. The monitoring 
would be required to be targeted to high-risk vendors. Proposed section 
246.12(j)(3)(i) would require the State agency to document the reason 
why it has granted a waiver from compliance buys or inventory audits 
for vendors identified as high risk. This will allow FNS to identify 
whether a State agency has taken appropriate monitoring action against 
high-risk vendors, thus enabling FNS to better evaluate State agency 
compliance with high-risk monitoring requirements. FNS estimates that 
10 percent of the total vendor population, or 4,500 vendors, will be 
identified as high-risk and that of those, 5 percent or 225 vendors 
will require a waiver from compliance buys or audits. FNS estimates it 
will take 2 personhours for the State agency to document each waiver, 
resulting in a national total of 450 personhours (225 waivers  x  2 
hours per waiver) required for this provision annually.
    Proposed section 246.12(j)(4) would require that State agencies 
provide documentation for all monitoring visits, including compliance 
buys, inventory audits, and routine monitoring visits. FNS estimates 
that 10 percent or 4,500 vendors will receive compliance buys. FNS 
estimates that the average State agency will perform three compliance 
buys per vendor for a total of 13,500 compliance buys annually (4,500 
vendors  x  3 compliance buys per vendor). FNS further estimates that 
each buy will require 2 hours to document, for a national total of 
27,000 personhours (13,500 compliance buys  x  2 hours of documentation 
for each buy) spent on this provision annually.
    Section 246.12(q) would require State agencies to identify the 
disposition of all food instruments as issued or voided, and as 
redeemed or unredeemed. Section 246.23(a)(4) would be amended to make 
State agencies liable for all redeemed food instruments that are 
unaccounted for, unless the State agency could demonstrate the reasons 
for the failure to fully account for them. For example, a State agency 
may not be able to account for food instruments damaged in computerized 
processing, or by water damage. FNS estimates that each State agency 
will spend 40 hours a year completing this task and that a total of 
3,520 personhours will be required for this provision annually (88 
reports  x  40 hours per report).
    The proposed reporting requirement in section 246.19(b)(5) would 
mandate that State agencies target areas specified by FNS during local 
agency reviews. This would allow FNS to effectively focus State agency 
attention on problem areas of program management needing intensive 
review and correction. State agencies review all of their local 
agencies once every 2 years. This means that half (1000) of all (2000) 
local agencies will be reviewed annually. FNS estimates that State 
agencies will be required to address targeted areas during local agency 
reviews once every 4 years. This means that an average of 250 (1000  x  
\1/4\) targeted reviews will be performed annually. FNS further 
estimates that it will take 2 hours for the State agency to address 
targeted areas during management evaluations and report the results of 
the targeted reviews to FNS. Therefore, 500 total personhours (250 
targeted reviews per year  x  2 hours per review) is estimated for this 
provision.
    The proposed amendments to section 246.23(c)(1) would require State 
agencies to maintain on file documentation of the disposition of cases 
involving improperly obtained benefits. FNS estimates that this effort 
will take each of the 88 State agencies an average of 5 personhours per 
year, for a national total of 440 personhours (5 hours of recordkeeping 
a year  x  88 State agencies) estimated for this provision annually.
    Respondents: State agencies and vendors.
    Estimated Number Respondents: State Agencies: 88 and Vendors: 
45,000.
    Estimate of Burden: The proposed estimates of the reporting burden 
by this rule are detailed below.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                          Estimated avg.     Estimated
           Proposed section and title                Estimated number of respondents       Reports filed   Total annual      number of     total person-
                                                                                             annually        responses     person-hours        hours
--------------------------------------------------------------------------------------------------------------------------------------------------------
246.4(a) State Plan............................  88.....................................               1              88            3                264
246.12(i)(1) Development of Vendor Training....  88.....................................               1              88            8                704
246.12(i)(1) Actual Vendor Training............  88--State..............................                              88            2                176
                                                 45,000--Vendors........................                          45,000            2             90,000
246.12(i)(4) Documenting Training Receipt......  88.....................................               1              88             .25              22
                                                 45,000.................................                          45,000             .25          11,250
246.12(j)(3) Waiver from Compliance Buys/Audits  88.....................................               1             225            2                450
246.12(j)(4) Documenting Monitoring Visits.....  88.....................................               1          13,500            2             27,000
246.12(q) Disposition of Food Instruments......  88.....................................               1               8           40              3,520

[[Page 32310]]

 
246.19(b)(5) Targeted Reviews of Local Agencies  88.....................................               1             250            2                500
246.23(c)(1) Disposition of Participant Claims.  88.....................................               1              88            5                440
                                                --------------------------------------------------------------------------------------------------------
    Total......................................  90,792.................................  ..............         104,503  ..............         134,326
--------------------------------------------------------------------------------------------------------------------------------------------------------

    In accordance with the Paperwork Reduction Act, this proposed 
regulation invites the general public and other public agencies to 
comment on the information collection burdens that would result from 
the adoption of the proposals in the rule.
    Comments are invited on: (a) Whether the proposed collection of 
information is necessary for the proper performance of the functions of 
the agency, including whether the information will have practical 
utility; (b) the accuracy of the agency's estimate of the burden of the 
proposed collection of information including the validity of the 
methodology and assumptions used; (c)ways to enhance the quality, 
utility and clarity of the information to be collected; and (d) ways to 
minimize the burden of the collection of information on those who 
respond, including through the use of appropriate automated, 
electronic, mechanical, or other technological collection techniques or 
other forms of information technology.
    All responses to this proposed rule will be summarized and included 
in the request for OMB approval. All comments will also become a matter 
of public record.
    This proposed rule contains information collection requirements 
which are subject to review by OMB under the Paperwork Reduction Act. 
The reporting and recordkeeping requirements established by this 
rulemaking in sections 246.4(a), 246.12(i)(1), 246.12(i)(4), 
246.12(j)(3), 246.12(j)(4), 246.12(q), 246.19(b)(5), 246.23(c)(1), and 
246.25(c) are pending review by OMB.

References

    (1) WIC State Agency Guide to Vendor Monitoring and Fraud and 
Abuse Control: Grant No. FNS-59-3198-0-96 (April 1982). Prepared by 
Arthur W. Burger and Steven Stollmack, ANALOGS, Incorporated. This 
study identifies methods for reducing vendor fraud and abuse in the 
WIC Program.
    (2) Applied Research on Vendor Abuse: Grant No. FNS-59-3198-1-
117 (June 1985). Produced by David Kornetsky, Nancy Wogman, and the 
Massachusetts WIC Program. This study worked with a consortium of 
ten State agencies to design a high-risk vendor identification 
system.
    (3) WIC Compliance Buy Handbook: produced by USDA (June 1985). 
This handbook provides guidance for State agencies in conducting WIC 
compliance investigations.
    (4) National Vendor Audit: Audit Report 27661-2-Ch, Special 
Supplemental Food Program for Women, Infants and Children--Vendor 
Monitoring and Food Instrument Delivery Systems (June 15, 1988). 
Conducted by the Office of Inspector General (OIG), USDA.
    (5) Vendor Management Study (1990): Contract No. 53-3198-5-33 
(December 1990). Conducted for FNS by Professional Management 
Associates. This study surveyed the 50 geographic WIC State agencies 
and the District of Columbia, excluding Vermont and Mississippi, 
which provide benefits exclusively through home food delivery and 
direct distribution, respectively.
    (6) WIC Vendor Issues Study: Contract No. 53-3198-9-53 (May 
1991). Conducted for FNS by Aspen Systems Corporation. This study 
investigated the extent of program losses due to fraud and program 
noncompliance from vendor overcharging in the WIC Program.
    (7) The WIC Files: Case Studies of Vendor Audits and 
Investigations in the WIC Program (June 1991). Produced by the 
vendor managers of Southeast Region in cooperation with the Florida 
WIC Program.
    (8) National Association of WIC Directors (NAWD) National Vendor 
Management Roundup Survey (1995). This survey, designed by FNS and 
the NAWD Vendor Committee representatives, provided profile date on 
State agency vendor management information systems.
    (9) Vendor Activity Monitoring Profile (VAMP, 1996): Produced 
annually by the USDA. This report analyzes WIC State agency vendor 
monitoring activities. The report discusses the safeguards that 
exist to prevent vendor fraud and program noncompliance from 
occurring.

1. Background

    Major final amendments to the WIC Program regulations regarding 
food delivery systems were last published on May 28, 1982 at 47 FR 
23626 in response to audits and management evaluations disclosing 
problems in the food delivery area which could result in loss of WIC 
Program funds. The May 1982 regulations have not brought about an 
acceptable level of improvement in vendor management. Since 1982, the 
Program has grown in size and complexity. The Fiscal Year 1983 
appropriation for the WIC Program was approximately $1.16 billion 
dollars. The appropriation has grown to $3.9 billion dollars in Fiscal 
Year 1999. As the Program has expanded, so has the potential for loss 
through misuse of program funds and violation of program regulations. 
State agencies have responded to this need with varying levels of 
effort and success. Both the OIG's National Vendor Audit in 1988 and 
the WIC Vendor Issues Study in 1993 indicated that significant levels 
of vendor violations continue to persist.
    In response to the National Vendor Audit, the Department published 
a proposed rule on December 28, 1990 at 55 FR 53446 to strengthen State 
agency operations in vendor management and related food delivery areas. 
The Department provided a 120-day comment period that closed on April 
29, 1991. During the comment period, 1,066 comments were received from 
State and local agencies, vendors and associated groups, public 
interest groups, members of Congress, members of the public, and WIC 
participants. They indicated that significant modifications to the 
December 1990 proposed rulemaking were still required, and that the 
extent of such modifications would warrant another opportunity for 
public input. In addition, several members of Congress requested that 
the rule be proposed again in light of its potential impact on certain 
State agency food delivery systems.
    In response to the commenters' requests, the Department's intent is 
to propose new food delivery regulations once more. The Department has 
made changes to the 1990 proposal based on suggestions of commenters 
and subsequent State agency vendor experiences and the 1990 Vendor 
Management Study, ``The WIC Files'' and the WIC Vendor Issues Study.

a. Characteristics of This Proposal

    This proposal would provide State agencies with detailed design 
standards for effective vendor management systems, as opposed to the 
more generally worded requirements and emphasis on broad goals which 
characterize current WIC food delivery

[[Page 32311]]

regulations. The emphasis in current regulations on general objectives 
has not yielded the necessary improvements in vendor management. In 
March 1988, the House Surveys and Investigations Staff released a 
report on the WIC Program. In that report, they stated that 
``knowledgeable fraud investigators believe, at a minimum, the program 
needs more stringent regulations and penalties to deter fraud by 
vendors. * * *'' In addition, in May 1988 the General Accounting Office 
initiated a review of efforts to minimize fraud and abuse in the WIC 
Program. The scope of that review includes identification of efforts 
that the Department of Agriculture and State and local WIC agencies are 
taking to detect and prevent fraud and abuse in the WIC Program. 
Therefore, this proposal would mandate procedures and criteria by which 
State agencies must manage vendors to effectively control fraud and 
program noncompliance. It would define critical vendor management 
terms; establish staffing requirements for vendor management; and 
strengthen vendor authorization, agreements, training, monitoring, and 
high-risk identification. Related food delivery areas such as food 
instrument disposition and security, and State agency corrective action 
plans are also addressed. This proposal stresses the interaction and 
continuity between various food delivery areas. It not only would 
strengthen the individual steps in the process of vendor management--
selection, training, monitoring, and high-risk identification, but also 
would increase overall system effectiveness by meaningfully tying these 
steps together. It would allow State agencies as much flexibility as 
possible within the framework of the mandated standards to take into 
account the distinct individual characteristics of each State agency's 
management system and to facilitate further experimentation and 
innovation.
    In addition, the proposal recognizes the emergence of technology in 
the retail food delivery area relative to electronic benefits transfer 
(EBT). An EBT system for WIC, as demonstrated in the Wyoming Pay West 
System, can contribute to improved accountability. Some of the 
vulnerabilities for fraud and program noncompliance inherent with 
printed food instruments can be reduced by the food-item-based type EBT 
system used in WIC. With an EBT system, food package benefits are 
issued and redeemed through a computer chip on the EBT card or a 
computerized account accessed with the card. The participant is issued 
an EBT card at the local level instead of paper checks or vouchers. The 
EBT card or computerized account contains the participant's Personal 
Identification Number (PIN) and lists the authorized supplemental 
foods. The PIN ensures that only the participant or proxy uses the card 
to obtain the authorized supplemental foods.
    At the vendor, the participant selects the authorized supplemental 
foods just as she would if paper checks or vouchers were used. At the 
check-out counter, the participant enters the PIN into the Point of 
Sale terminal located at the counter. A proper PIN alerts the computer 
and the store that the participant is authorized to access the food 
benefits. The cashier then scans each of the selected food items. The 
Universal Product Code (UPC) listed on the food item is checked against 
the authorized supplemental foods listed in the participant's account 
to determine if that food item is allowable. If the computer indicates 
that the food item is allowable, the item is automatically subtracted 
from the participant's list of food items. At the same time, the 
vendor's bank account is automatically credited for the amount of the 
purchase.
    Through the use of the UPC, the opportunity for overcharging, 
substitution, and charging for food items not received is substantially 
reduced in an EBT environment. If, when the food item's UPC is scanned, 
the computer does not accept it as an authorized supplemental food for 
the participant, the food item will not be accepted as part of the WIC 
transaction.
    Another benefit of using an EBT system is greater assurance that 
only participants receive WIC foods. Since the proper PIN must be 
entered in order to initiate the transaction at the check-out counter, 
there is added assurance, through the computer's verification of the 
PIN, that the individual is a participant or her proxy.
    Because EBT and scanning substantially reduce program violations 
both for vendors and participants, proposed section 246.12(a) would 
provide FNS discretion on a case-by-case basis to modify regulatory 
provisions which FNS determines unnecessarily duplicate the 
accountability capabilities inherent in the particular EBT system. In 
addition, this proposal would amend certain regulatory requirements to 
recognize the different operations of EBT. For example, proposed 
section 246.12(q) would be amended to clarify that a PIN rather than a 
redeemed food instrument may be matched to a valid issuance and 
enrollment record (see section 19 of this preamble); and proposed 
section 246.12(h)(3)(iv) would clarify that a PIN may be used in lieu 
of a signature on the food instrument at the time it is exchanged for 
authorized foods (section 12 of this preamble).
    Readers should note that as part of the March 18, 1999 final rule 
regarding vendor sanctions (64 FR 13311), the definition of food 
instrument was amended to include EBT cards.

b. Comments on the December 28, 1990 Proposal

    Many commenters expressed general agreement or disagreement with 
the Department's decision to strengthen food delivery and related areas 
through the rule. General supporters of the December 1990 proposal 
commented that it would make positive improvements in vendor management 
and related areas. They stated that existing State agency food delivery 
systems need standardization, and that much of the proposal would serve 
to formalize systems that exist in many State agencies. Those in 
general opposition to the proposal believed that it: (1) failed to take 
into account the diversity of State agency vendor management systems, 
and (2) inappropriately promoted a ``one size fits all'' approach to 
vendor management.
    Many opponents thought that WIC food delivery regulations should 
continue to outline broad vendor management goals, rather than detailed 
standards. Commenters were concerned about the resource implications of 
the proposal. In particular, some State agencies felt that the 
proposal's requirements would overburden their administrative 
resources. Vendors expressed concern about the resource burden 
associated with the training requirement. They also commented that the 
proposal unfairly punished all vendors for the program noncompliance of 
a few, and that the current system works well for the most part, and 
should not be changed.
    The Department acknowledges the commenters' general concerns 
regarding the December 1990 proposal and agrees that any 
standardization of State vendor management practices must take into 
account the current diversity and needs of existing State agency 
systems. In designing this current proposal, the Department has 
attempted to acknowledge these differences, while at the same time 
addressing the fundamental need for a more effective approach to State 
agency vendor management.
    The Department still firmly believes in the need for a system of 
more standardized vendor management practices than currently exists.

[[Page 32312]]

Differences in State agency vendor management systems have resulted in 
inconsistent treatment of vendors across State agencies and within 
State agencies, as well as unacceptable levels of vendor fraud and 
program noncompliance. The variations in vendor management practices 
are significant. Some State agencies have established very specific 
criteria for vendor selection which allow them to authorize only the 
best qualified vendors by excluding those which have indicators of high 
risk for fraud or program error. Vendor selection criteria in other 
State agencies are weak and ineffective, resulting in the authorization 
of more vendors than are needed to adequately ensure participant 
access, reasonable food costs, and effective management. Some State 
agencies have established strong training programs for authorized 
vendors that require annual face-to-face contact with each vendor. 
Other State agencies provide no periodic training for their vendors. 
For these State agencies, face-to-face training is often limited to an 
initial authorization visit, and vendors may operate for years before 
they receive additional training. Some State agencies have aggressively 
pursued covert compliance investigations as a method of identifying 
abusive vendor practices. Other State agencies do not perform 
compliance investigations at all, or perform them only nominally.
    The Department recognizes the concerns expressed by commenters that 
any effort toward standardization must provide State agencies with the 
flexibility to pursue innovation. The Department is convinced, however, 
that because the Program has increased in size and in complexity, 
standardization and strengthening of basic vendor management practices 
must occur in order to address current food delivery problems and 
ensure that the WIC Program operates effectively in the future.
    Many commenters objected to the December 1990 rulemaking's emphasis 
on detailed design standards for vendor management versus the goal 
oriented standards that exist in current regulations. They stated that 
currently mandated regulatory standards adequately address State agency 
vendor management needs. It should be noted that more specific design 
standards for vendor management were proposed in the past. On January 
23, 1981 (46 FR 7846), the Department published a proposed food 
delivery regulation in response to OIG audits of WIC food delivery 
systems conducted in 1979 and 1980. These audits identified problems 
with State agency food delivery systems, including deficiencies in the 
areas of vendor monitoring, overcharge detection, and vendor sanctions. 
The January 23, 1981 rule proposed a number of design standards for 
State agency food delivery systems including: specific selection 
criteria for vendor authorization; limited timeframes for vendor 
agreements; periodic mandatory training of all authorized vendors; and 
mandatory compliance investigations of a specific percentage of each 
State agency's authorized vendor population. Comments received on the 
January 23, 1981 rule expressed concerns much like those expressed 
almost a decade later in the December 1990 proposal: that the proposal 
was overly detailed, not cost-effective, and could adversely affect 
participants. Commenters urged the Department to outline food delivery 
requirements in terms of broad goals rather than specific design 
standards. In response, the Department dropped its detailed design 
proposals, and in May 1982, published a final food delivery rule which 
instead focused on a few carefully selected cost-effective procedures, 
and outlined the remaining vendor management requirements as broad 
State agency goals.
    In the intervening sixteen years since the publication of the May 
1982 final food delivery rule, State agencies have had ample 
opportunity to develop and implement effective systems for vendor 
management within the framework of the current food delivery 
regulations. However, the 1988 National Vendor audit and, to a lesser 
extent, the 1991 Vendor Issues Study, indicate that many State agencies 
have continued to experience the same problems identified earlier. As 
such, the Department must conclude that the current approach leaves 
much room for improvement. In light of this experience, this proposal, 
like the December 1990 proposal, would mandate more detailed design 
standards for State agency food delivery systems.
    Many commenters stated that the provisions outlined in the December 
1990 proposal were too resource-intensive for State agencies. The 
Department acknowledges that the December 1990 proposal, as well as 
this one, would require some State agencies to devote additional 
resources to vendor management, although it is possible that some State 
agencies could actually experience a decreased burden. Nevertheless, 
the need for State agencies to address problems in this area of 
greatest program vulnerability continues to be imperative. As with the 
December 1990 proposal, this rule would not propose simply to add new 
requirements. Rather, it would replace many current requirements with 
more effective procedures. For example, State agencies would no longer 
be required to do representative monitoring, that is, on-site 
monitoring visits to at least 10 percent of all authorized vendors. 
Instead, the Department proposes that State agencies perform either 
covert compliance buys or inventory audits focused on their high-risk 
vendors (up to 10 percent of all authorized vendors), a potentially 
more focused way of detecting vendor noncompliance than the current 
representative monitoring requirement. Compliance buys have been shown 
to be the most effective means of detecting and minimizing vendor 
noncompliance. The 1988 National Vendor audit of WIC vendor management 
referenced the need to require compliance buys in WIC regulations. In 
this report, the Inspector General stated that ``We believe that 
compliance purchases are the most effective method to identify that a 
vendor is abusing the WIC Program''. While a shift in resources may be 
necessary to address the proposed compliance buy and inventory audit 
requirements, such a shift may be accomplished by reducing their 
routine monitoring efforts, which frequently include annual 
representative monitoring visits to all authorized vendors. The 1996 
VAMP Report indicated that out of a universe of 45,397 vendors, 51 
percent received on-site monitoring visits annually.
    The Department has addressed the resource concerns expressed by 
commenters by lessening some of the requirements proposed in the 
December 1990 rule. The requirement for annual face-to-face vendor 
training in the December 1990 proposal would be reduced to one face-to-
face training session each agreement period, which could run for a time 
period up to 3 years. Requirements for food instrument disposition and 
security and many reporting requirements would also be clarified and/or 
reduced.
    Like the December 1990 proposal, this proposal would not only 
establish additional specific vendor management requirements, but would 
also strengthen the State agencies' ability to take successful action 
against violative vendors, possibly reducing the long-term 
administrative burdens. For example, the proposed selection criteria 
would help to prevent the authorization of vendors with a past history 
of noncompliance. The proposed mandatory training would help lower the 
frequency of cashier errors and reduce the level of improperly redeemed 
food instruments. The

[[Page 32313]]

Department also proposes to place limits on appeal rights and 
procedures.
    Although vendor sanctions were addressed in the December 1990 
proposed rule, they are not included in this proposal. On March 18, 
1999, the Department published a final rule at 64 FR 13311 establishing 
mandatory uniform sanctions across WIC State agencies for the most 
serious WIC violations, including specific WIC violations that result 
in disqualification from the Food Stamp Program (FSP) in addition to 
the WIC Program. That rule also allows State agencies to establish 
State agency sanctions in addition to the mandated WIC sanctions. 
Finally, that rule mandates the disqualification of any WIC vendor who 
has been disqualified from the FSP. This proposal would make a number 
of other changes to conform the sanction requirements to other changes 
proposed in this rule.

c. Comments Solicited

    The Department encourages comments on this proposal and would like 
to know which provisions have support, as well as which cause concern. 
This proposal has been modified from the December 1990 proposal. Only 
those timely comments in response to this second proposal will be 
considered in the development of a final rule. Commenters are asked to 
indicate at the outset that they are commenting on the Food Delivery 
Systems rule and to cite the section number (e.g., 246.12(g)(2)(iv)) of 
each provision addressed. Comments prove most helpful when they are 
specific, stating the reasons for support or opposition, suggesting 
modifications which would resolve a commenter's concerns, and providing 
relevant background information and State agency-specific data as 
appropriate. Due to the inherent problems associated with the large 
volume of comments this rule is expected to generate, electronic 
transmissions, including data faxes, will not be accepted. All comments 
postmarked during the comment period will be carefully considered.
    Specific changes are discussed in the following sections of this 
preamble. While provisions are generally addressed in their order of 
appearance in the regulatory text, considerable cross-referencing and 
occasional repetition have proven necessary due to the close 
interrelationship between areas of the vendor management and food 
delivery processes.
    Most of the regulatory provisions relative to food delivery systems 
appear in section 246.12 of the regulations. The rulemaking proposes 
numerous significant changes to this section. The standard procedure 
would be to print only the proposed amendments to this section. 
However, each of the steps in the management process addressed in 
section 246.12 are thoroughly integrated. Proposed changes cannot be 
fully understood and meaningfully assessed except in the context of the 
management function to which they apply. In addition, section 246.12 
has been completely reorganized. The preamble will indicate both the 
current cites and the new cites for changed provisions. Therefore, the 
Department is printing section 246.12 in its entirety. However, 
comments are solicited only on the substantive changes and deletions to 
the text; these are discussed in the preamble.

d. Impact of this proposal on affected entities

    The following chart summarizes the effect of this proposal on 
vendors, participants and State agencies. The chart also provides an 
estimate of the costs and benefits associated with this proposal. It is 
estimated that the proposal would reduce waste, fraud and program 
noncompliance by 50 percent, resulting in savings of approximately $25 
to $50 million. The savings would allow more participants to be served.

BILLING CODE 3410-30-P

[[Page 32314]]

[GRAPHIC] [TIFF OMITTED] TP16JN99.000



BILLING CODE 3410-30-C

[[Page 32315]]

2. Definitions (Section 246.2)

    Food delivery systems vary significantly in structure from State 
agency to State agency. However, the discussion of issues must be based 
on a common understanding of key terms. In order to clarify some 
frequently used terms, the Department is proposing definitions for 14 
terms related to vendor management.
    ``Authorized supplemental foods'' would be defined as those 
supplemental foods authorized by the State or local agency for a 
particular participant.
    ``Compliance buy'' is proposed to be defined as a covert, on-site 
investigation in which a representative of the Program poses as a 
participant, transacts one or more food instruments, and does not 
reveal his or her identity during the visit. This definition would 
exclude on-site buys used by some State agencies in which WIC staff or 
their agents pose as participants, purchase foods, and then introduce 
themselves to the vendor at the end of the transaction to discuss the 
results as a training mechanism.
    A ``high-risk vendor'' would be defined as a vendor identified as 
having a high probability of violating program requirements through 
application of criteria mandated by the Department and any additional 
criteria the State agency may choose to establish. This definition 
would allow State agencies the flexibility to continue identifying 
high-risk vendors using their own criteria, in addition to the criteria 
that would be mandated by the Department by this rule. Criteria 
developed by the State agency are subject to approval by FNS through 
the State Plan process.
    A ``home food delivery contractor'' would be defined to mean a sole 
proprietorship, a partnership, a cooperative association, or a 
corporation that contracts with a State agency to deliver authorized 
supplemental foods to the residences of participants under a home food 
delivery system. Adding this definition is necessary to accommodate the 
proposal to limit the term ``vendor'' to retail food delivery systems 
(see further discussion under the definition of ``vendor'').
    This proposal would define ``inventory audit'' as an examination of 
food invoices or other proofs of vendor purchases to determine if the 
vendor purchased sufficient quantities of authorized supplemental foods 
to have sold the amounts of such foods to WIC participants for which 
the vendor has requested payment from the State agency during a given 
period of time. These audits are useful for identifying vendors who: 
buy food instruments from unauthorized vendors or from participants and 
submit them to the State agency for payment, without having provided to 
participants the quantities of authorized supplemental foods prescribed 
on the food instruments; and/or exchange food instruments for non-food 
items, or unauthorized foods.
    This proposed rule would also define ``proxy'' to mean any person 
designated by a participant to act on her behalf and, in the case of an 
infant or child, the parent or caretaker who applies on behalf of the 
infant or child. Traditionally, proxy has been used in program 
regulations only to refer to a person designated by a participant to 
transact food instruments. This definition would make clear that when 
proxies are referred to in program regulations that parents and 
caretakers applying on behalf of infants and children are also 
included.
    ``Routine monitoring'' would mean overt, on-site monitoring during 
which program representatives identify themselves to vendor personnel. 
Such monitoring is used for technical assistance purposes.
    Routine monitoring contrasts with compliance buys, which are 
defined as covert investigations, and with inventory audits, which 
entail a review of specific records. The proposed requirements for a 
specific number of compliance buys or inventory audits (see section 14 
of this preamble) necessitates a clear distinction between these 
activities and all other forms of monitoring, which would be 
encompassed by the term ``routine monitoring.'' This term would replace 
the term ``representative monitoring,'' which is used in current 
regulations and has proven to be confusing because it implies a method 
for selecting vendors to be reviewed (i.e., random selection) that 
yields a representative sample.
    The term ``vendor'' would be defined as a sole proprietorship, a 
partnership, a cooperative association, or a corporation operating an 
individual retail site authorized to provide supplemental foods to 
participants under a retail food delivery system. Under this 
definition, each individual retail site would still be considered a 
separate vendor. The Department proposes to use the term ``vendor'' 
only in retail food delivery systems. Currently, the term also applies 
in home food delivery and direct distribution food delivery systems. 
However, experience has shown that most of the vendor requirements are 
inappropriate in those systems. Rather than create numerous exceptions 
to the vendor requirements, this proposed rule would limit the use of 
``vendor'' to retail food delivery systems.
    Although mobile vendors can be problematic, they may be the only 
means to ensure services to WIC participants in outlying areas, or to 
homeless persons. The proposed definition would permit State agencies 
to authorize mobile stores when necessary to meet the special needs 
established in their State Plan. The definition is meant to preclude 
the general use of temporary food stands and trucks, or other mobile 
food sales operations without fixed locations, from consideration for 
routine authorization because their mobility makes it impracticable to 
monitor them adequately; because their sanitation and refrigeration 
capabilities are generally limited and problematic; and, because it is 
difficult to limit their areas of operation. State agencies must 
present clear rationales for the specific areas or locales proposed for 
mobile store service coverage in their State Plans.
    The term ``vendor authorization'' would be defined as the process 
by which vendors who initially apply for authorization or subsequently 
apply for reauthorization are assessed, selected, and enter into an 
agreement with the State agency. This definition is proposed to clarify 
that the regulatory requirements for authorization apply equally to 
both new and reapplying vendors.
    ``Vendor limiting criteria'' would be defined as those criteria 
established by the State agency and approved by FNS as part of the 
State Plan process to determine the maximum number and distribution of 
vendors to be authorized in its jurisdiction. These criteria must be 
designed to result in a number and geographical distribution of 
authorized vendors that ensures adequate participant access, and allows 
for effective State agency management. Limiting criteria establish the 
number and distribution of vendors to be authorized and are not 
intended to have any bearing on which specific vendors will be 
authorized.
    This proposal would define ``vendor overcharge'' as a pattern of 
intentionally or unintentionally charging participants more for 
authorized supplemental foods than non-WIC customers or charging more 
than the current shelf price or contract price. The definition would 
clarify that inadvertent mistakes that result in excess charges to the 
Program are considered overcharges; that is, the State agency would not 
have to establish that the vendor intended to overcharge in order to 
determine that this form of program noncompliance has taken place. It 
would also take into account

[[Page 32316]]

State agencies which contract for a set price for supplemental foods 
with vendors during the life of the agreement.
    The term ``vendor selection criteria'' would be defined as the 
criteria mandated by the Department in section 246.12(g)(3), and any 
additional criteria established by the State agency and approved by FNS 
as part of the State Plan process, to select individual vendors for WIC 
authorization. Application of these criteria is meant to ensure 
systematic selection of only vendors who are best qualified to provide 
food benefits to participants in a manner consistent with the WIC 
Program's mission and effective program operations. While selection 
criteria may have the incidental effect of limiting the number of 
vendors who are authorized, their primary purpose is to determine the 
best qualified vendors, not the number, of such vendors.
    ``Vendor violation'' is proposed to be defined as any intentional 
or unintentional action of a vendor (with or without management 
knowledge) which violates the Program statute or regulations or State 
agency policies or procedures. This definition would clarify that 
vendors should be held accountable for violations, whether they are 
deliberate attempts to violate program regulations, or inadvertent 
errors, since both ultimately result in increased food costs and fewer 
participants being served. This definition clarifies that it would not 
be necessary for the State agency to ascertain the intent behind an 
action which, whether inadvertent or deliberate, has the same negative 
effect on the Program. The Department acknowledges that the inherent 
complexity of the WIC transaction is such that, even with training and 
supervision, cashiers may occasionally make unintentional errors. While 
this definition would include both intentional and unintentional 
actions (with or without management knowledge), this does not mean that 
a minor unintentional action by a cashier without management knowledge 
would result in disqualification. State agencies have a wide range of 
actions that they may take as a result of a vendor violation, including 
assessing a claim, requiring increased training, identifying the vendor 
as a high-risk vendor subject to monitoring, assessing administrative 
fines, and imposing a sanction.
    The Department believes that a vendor is not relieved of the 
responsibility for an employee's continuing noncompliant actions just 
because the vendor's management was unaware of the violations. Allowing 
vendors with continuing violations to sustain their authorization by 
simply permitting them to remove an employee who violates program 
regulations would result in few disqualifications, since the claim that 
the violation was caused by a dishonest employee, who has since been 
fired, is one of the most common defenses used during vendor appeals 
(see ``The WIC Files''). Removing such an employee does not mitigate 
the effects of chronic vendor error and mismanagement on program costs, 
nor does it lessen the vendor's responsibility to provide effective 
oversight and appropriate employee training.
    ``WIC'' would be defined as the Special Supplemental Nutrition 
Program for Women, Infants and Children authorized by section 17 of the 
Child Nutrition Act of 1966.

3. Vendor Management Staffing (Section 246.3(e)(5))

    Proposed section 246.3(e)(5) would require that State agencies 
which anticipate 50 or more authorized vendors as of October 1 of each 
fiscal year devote a full-time staff year to vendor management. State 
agencies would have the option of designating a single full-time vendor 
management specialist or to assign vendor management duties to more 
than one staff person, provided the total time spent on vendor 
management is equivalent to one staff year. The State agency would 
identify these positions as part of the staffing pattern already 
required by section 246.4(a)(4). State agencies which anticipate fewer 
than 50 vendors as of October 1 of each fiscal year would be required 
by this proposal to designate a staff person responsible for vendor 
management. No standards for the amount of time this person would 
devote to these duties are proposed in this rulemaking.
    The requirements for staffing of vendor management are being 
proposed because, although, according to the 1990 WIC Vendor Management 
Study, at least 37 percent of geographical State agencies had a 
designated full-time vendor management position, a wide range exists in 
State agency staff devoted to vendor management. In some State 
agencies, vendor management responsibilities are not clearly assigned 
to specific staff, resulting in the increased possibility of vendor 
noncompliance due to insufficient resource allocation, imprecisely 
fixed management responsibility, and the lack of an expert in this 
highly technical area of program management. The results of the 1988 
National Vendor Audit and the requirements proposed elsewhere in this 
rulemaking make it necessary for State agencies to focus increased 
attention on vendor management. The Department is, therefore, proposing 
this minimum vendor management staffing requirement to promote 
assignment of adequate resources to, as well as to assign specific 
responsibility for, vendor management functions, particularly among 
State agencies with 50 or more vendors.

4. State Plan Requirements (Section 246.4)

    Section 246.4(a)(14)(ii) is proposed to be amended to require the 
State agency to describe its vendor limiting criteria. Limiting 
criteria are discussed in more detail in section 8 of this preamble. 
Section 246.4(a)(14)(iv) would be amended to require State agencies 
which choose to delegate any aspect of vendor monitoring to describe 
their system of quality control to ensure uniformity and quality of 
local agency or contractor efforts. In addition, section 
246.4(a)(14)(iv) requires State agencies to include in their State Plan 
the criteria used to determine which vendors will receive routine 
monitoring visits. Section 246.4(a)(14)(vi) would be amended to require 
a description of the system the State agency will use to account for 
the disposition of food instruments, in accordance with section 
246.12(q), rather than the current requirement of a description of the 
State agency's system for reconciliation of food instruments in section 
246.14(a)(14)(vi). This change is discussed further in section 19 of 
the preamble.
    Two paragraphs are proposed to be added to the section of the State 
Plan that addresses food delivery systems in recognition of the 
emphasis this rule would place on vendor training and food instrument 
security. These provisions would require descriptions of the State 
agency's vendor training procedures (section 246.4(a)(14)(xii) and 
section 12 of this preamble) and the system for ensuring the security 
of food instruments (section 246.4(a)(14)(xiii) and section 18 of this 
preamble). The provision on food instrument security would replace the 
current requirement concerning food instrument control in section 
246.4(a)(14)(vi).
    State agencies would be required by proposed section 
246.4(a)(14)(xiv) to include in their State Plans a description of 
their criteria for making participant access findings. In addition, 
proposed section 246.4(a)(14)(xv) would require State agencies wishing 
to authorize mobile stores to include in their State Plans the special 
needs necessitating this action.

[[Page 32317]]

    Finally, proposed section 246.4(a)(15) would be amended to require 
a description of the State agency's system to prevent and identify dual 
participation as required by section 246.7(l)(1)(i) and (ii), including 
the amendments proposed to be made to that section and discussed in 
section 5 of this preamble.

5. Prevention and Identification of Dual Participation (Section 
246.7(l))

    This rulemaking proposes to amend section 246.7(l)(1) to strengthen 
intra-State agency and inter-State agency dual participation detection 
efforts within the WIC Program, and between WIC and the Commodity 
Supplemental Food Program (CSFP) (7 U.S.C. 612c note), by requiring the 
identification of all suspected dual participants at least quarterly. 
In addition, in cases of dual participation resulting from intentional 
misrepresentations, State agencies would be required to pursue the 
collection of improperly obtained benefits in accordance with proposed 
section 246.23(c)(1). If the participant failed to make full 
restitution, the State agency would be required to disqualify the 
participant from both programs for one year in accordance with proposed 
section 246.12(u)(2). If full restitution is made prior to the end of 
the disqualification period, the State agency may permit the 
participant to reapply for the Program. Proposed changes to the 
participant claims and disqualification procedures are discussed in 
section 22 of this preamble.
    Dual participants are persons simultaneously participating in the 
Program in one or more WIC clinics or persons participating in the 
Program and CSFP during the same period of time. The Department's 
Office of Inspector General recommended at least quarterly reporting 
after finding in the 1988 National Vendor Audit that some State 
agencies have inadequate systems for preventing and detecting dual 
participation and sometimes fail to take action against possible dual 
participants whom they have identified. This proposal would further 
strengthen integrity by requiring State agencies to work together to 
attempt to identify dual participation between contiguous local service 
areas located across State agency borders if geographical and other 
factors make it likely that participants travel regularly between such 
locations.
    The Department also wishes to clarify that dual enrollment does not 
necessarily constitute dual participation. However, as a sound 
management practice, State agencies should create accountability 
systems to identify and correct situations in which a participant is 
enrolled and receiving benefits from one WIC or CSFP agency, but 
continues to be enrolled (but not receiving benefits) in another. 
Although such a participant may not technically be receiving dual 
benefits, the potential for dual participation exists and should be 
eliminated by removing the participant from one of the enrollment 
rosters. The Department is not addressing controls on enrollment in 
this proposal.
    Nor does this proposal mandate that specific minimum data matching 
criteria be used to identify dual participants. Because the Department 
has limited evidence of the effectiveness of the various criteria 
currently used by State agencies, the Department is not mandating 
specific matching criteria. It seems likely, however, that social 
security numbers are the most effective and readily available personal 
identifiers. State agencies have long had authority to require social 
security numbers as a condition of participation, pursuant to the Tax 
Reform Act of 1976 (codified at section 205(c)(2)(C)(i) of the Social 
Security Act, 42 U.S.C. 405(c)(2)(C)(i)). The Department recommends but 
does not require that social security numbers be used whenever possible 
to identify dual participation. However, section 7(b) of the Privacy 
Act of 1974 (5 U.S.C. 552a note) requires that notice be given of the 
planned use of social security numbers by State agencies. Therefore, 
State agencies should consult with their State's attorneys before using 
social security numbers to identify dual participation.
    Section 246.23(c)(2) of this proposal includes a new provision that 
would authorize FNS to establish a claim against State agencies when 
they have not complied with the requirements to identify dual 
participants, if the State agency has not taken steps to recover funds 
from or disqualify certain dual participants.

6. General Food Delivery System Requirements (Sections 246.12(a) 
Through 246.12(d))

    The Department proposes to reorganize the food delivery system 
requirements in section 246.12 in recognition of the new definition of 
vendor that applies only in the retail food delivery system context. 
Under the proposal, the general requirements for food delivery systems 
would be grouped in section 246.12(a)-(d). The special requirements for 
retail food delivery systems would be in section 246.12(e)-(l), the 
home food delivery system requirements in section 246.12(m), the direct 
distribution food delivery system requirements in section 246.12(n), 
and the remaining general requirements in section 246.12(o)-(v). The 
Department is only seeking comments within Section 246.12 on those 
areas where substantive changes have been made. These areas include: 
paragraph (f) (food instrument requirements); paragraph (g) (vendor 
authorization); paragraph (h) (vendor agreements); paragraph (i) 
(vendor training); paragraph (j) (monitoring vendors and identifying 
high-risk vendors); paragraph (k) (vendor claims); paragraph (q) (food 
instrument disposition); paragraph (t) (conflict of interest); and 
paragraph (u) (participant violations and sanctions). The specific 
proposed changes within this reorganized structure follow.
    As discussed in section 1.a of this preamble, proposed section 
246.12(a) would be amended to give FNS the authority to modify program 
regulations for EBT systems. In addition, the current requirement in 
section 246.12(e) that only food vendors authorized by the State agency 
may redeem food instruments would be moved to section 246.12(b) and 
revised to make clear that it applies whenever food instruments are 
redeemed under any of the food delivery systems. Finally, proposed 
section 246.12(b) would make clear that each system must ensure 
adequate participant access to supplemental foods.

7. Retail Food Delivery Systems: Food Instrument Requirements 
(Section 246.12(f))

    The current food instrument requirements in sections 246.12(r) that 
have relevance only in retail food delivery systems would be moved to 
section 246.12(f). Proposed section 246.12(f)(1) would make clear that 
food instruments must be used in retail food delivery systems. As 
proposed, section 246.12(f)(2) would make clear which food instrument 
requirements are applicable only to printed food instruments. This 
change is necessary in recognition of the March 18, 1999 final rule 
concerning vendor sanctions that amended the definition of food 
instruments in section 246.2 to include EBT cards.
    In addition, new provisions would be added in section 
246.12(f)(2)(i) and (vii) to require printed food instruments to 
provide: (1) a list of the supplemental foods authorized to be obtained 
with the food instrument, and (2) a signature space in which the 
participant or proxy must sign at the time the supplemental foods are 
obtained.

[[Page 32318]]

8. Vendor Limiting Criteria (Section 246.12(e)(2))

    Under this proposed rule, the vendor authorization requirements 
currently found in section 246.12(e) would be moved to proposed section 
246.12(g). In addition, the Department proposes to mandate limiting 
criteria as described in section 246.12(g)(2). Limiting criteria permit 
State agencies to authorize only a sufficient number of vendors in an 
area to ensure adequate participant access and effective program 
oversight.
    There are also other benefits to implementing limiting criteria. 
The State agency must apply a significant amount of resources to the 
management of each authorized vendor. A case file must be established 
and data collected and entered. Each vendor must be visited on-site at 
initial authorization. Training would have to be provided annually, as 
proposed in section 246.12(i) of this rulemaking. Other costs also 
increase with the number of authorized vendors. Compliance buys and 
other forms of monitoring would have to be performed as outlined in 
proposed section 246.12(j). Reports must be produced and analyzed, 
mailings initiated, sanctions applied and tracked, and appeals held as 
appropriate. If the State agency authorizes more vendors than necessary 
to ensure adequate participant access, the administrative resources 
available to manage vendors may not be sufficient to ensure effective 
oversight, thus increasing the possibility that program noncompliance 
will be undetected and/or forcing curtailment of other critical State 
and local agency activities.
    Proposed section 246.12(g)(2) mandates that the State agency 
establish and implement criteria to limit the number and specify the 
distribution of vendors to be authorized. The State agency would not be 
required to use specific criteria when limiting vendor numbers. It 
would however, be required when developing the criteria to at least 
consider the establishment of participant-to-vendor ratios for sub-
areas of its jurisdiction based on factors such as population density, 
distribution of participants, location of local agencies and clinics, 
and availability of public transportation and road systems to the WIC 
population.
    The vendor limiting process must balance the need to provide 
adequate participant access to authorized vendors and the need for a 
vendor population that State agencies can effectively manage given the 
administrative resources available to them. Weighing these concerns, 
State agencies might, for example, develop one or more participant-to-
vendor ratios. Typically, the State agency would first establish sub-
areas within its jurisdiction based on such factors as the distribution 
of caseload, the location of local agencies and clinics, availability 
of public transportation and road systems to the WIC population, and 
the supply of prospective WIC vendors. Each type of sub-area, in turn, 
would be assigned an appropriate participant to vendor ratio. 
Theoretically, a State agency with a highly refined methodology might 
assign a different ratio to each individual sub-area, but State 
agencies will more likely limit themselves to a small set of ratios 
capable of addressing the differing needs of particular areas.
    Limiting criteria would be required to be implemented consistently 
throughout the State agency's jurisdiction, with due consideration for 
the varying geographic and other characteristics within the 
jurisdiction. The important point in establishing limiting criteria is 
that State agencies apply them fairly and with clear rationales 
throughout their jurisdictions. The State agency would be required to 
establish system to revise and/or reapplying its limitation criteria 
whenever it determines that relevant demographic shifts or significant 
changes in local caseload allocation, growth, or decline make such 
action necessary.
    Most State agencies agree that limiting the number and distribution 
of vendors is of benefit to the Program. However, some have pointed out 
that the resources required to establish limiting criteria and manage 
the resultant appeals if a vendor is denied authorization would be 
overly burdensome. Moreover, many State agencies do not distinguish 
between limiting criteria and selection criteria. Through limiting 
criteria, the State agency first decides how many vendors should be 
authorized and where, in general terms, they should be located. 
Limiting criteria are applied before selection criteria. Only after 
these decisions have been made can the State agency apply selection 
criteria to determine which specific vendors will be authorized. Many 
State agencies believe that vendor numbers can be effectively 
controlled through the application of strong selection criteria. This 
is true. While selection criteria may have the incidental effect of 
limiting vendor numbers and determining vendor distribution, such 
criteria establish the number and distribution of vendors which is 
based on vendor ability to meet basic authorization qualifications 
rather than the need for a vendor in the area.
    Many vendors believe that limiting the number and distribution of 
authorized vendors is anti-competitive. They feel that any vendor who 
meets basic authorization qualifications should be authorized. Vendors 
have also expressed concern that implementation of limiting criteria 
would not allow smaller stores to effectively compete with the larger 
chains for WIC authorization.
    The Department does not believe that every vendor who meets basic 
authorization qualifications should necessarily be authorized to accept 
WIC food instruments. Authorization to accept WIC food instruments must 
be governed by the access needs of participants and the qualifications 
of the vendor. It must be remembered that, in a few State agencies, 
retail stores play little or no role in their WIC food delivery 
systems. Those State agencies either purchase all WIC foods through 
large-scale competitive procurement and distribute them directly to 
participants or contract with home food delivery contractors. On the 
other hand, the majority of State agencies deliver WIC benefits through 
retail stores, and their cooperation and service contribute 
significantly to program operations. The Department gratefully 
acknowledges their contributions, in exchange for which vendors benefit 
from the considerable volume of food purchases made through WIC in the 
retail marketplace, and the additional non-WIC purchases that 
participants often make while in the store. The Department also 
acknowledges the critical importance of small non-chain stores in 
assuring adequate participant access.
    Congress established the WIC Program as a preventive nutrition and 
health program for pregnant women, infants and young children. The 
Program receives annual appropriations from Congress. WIC is not an 
entitlement program, with unlimited resources to accommodate changes in 
the economy or to serve all eligible persons. Rather, WIC's funding is 
discretionary, meaning it is provided a set amount of funding and can 
serve only as many participants as this funding allows. Hence, the 
Department pursues policies which enhance serving the maximum number of 
eligible women, infants, and children with this limited funding. 
Vendors are a critically important service component of the Program. 
They provide the foods needed by the participants and in turn receive 
payment for the foods.
    The Department's view is that, in order to use both nutrition 
services and administration funds and food dollars effectively and 
efficiently for the benefit

[[Page 32319]]

of participants, the State agency must first have the right and 
authority to limit the number and determine the geographical 
distribution of vendors to be authorized in accordance with its 
analysis of how to ensure adequate participant access to the Program. 
Second, the State agency must be able to select individual vendors in a 
way that will promote efficient use of its food grant through both 
reasonable food prices and the reduced possibility of vendor 
noncompliance.
    State agencies are reminded that they must develop and implement 
vendor selection and limitation criteria consistent with the anti-
discrimination provisions of civil rights legislation. However, 
Congress has enacted legislation, Public Law 105-336, which requires 
that the price a vendor charges for WIC foods be a key factor in 
selecting a vendors for authorization. In implementing this 
requirement, State agencies may evaluate the food costs of small 
vendors on the basis of food cost among peers--other small vendors--
when small vendors are vital to participant access. The use of peer 
group cost comparisons mitigate any negative impact on small vendors of 
the legislative requirement to select vendors on the basis of cost.
    In summary, while any vendor may apply to be authorized as a WIC 
vendor, State agencies have the right and the authority to establish 
vendor selection and limitation criteria which ensure:
     Adequate participant access to the Program;
     Maximum usage of funds;
     Minimum possibility of vendor misuse or mismanagement of 
funds, or fraud;
     Consistency with civil rights legislation.
    While this approach to vendor authorization may restrict the 
ability of a particular retail store to secure or retain WIC 
authorization, the Department believes that it is ultimately in the 
best interests of the Program.
    The smaller vendors who are concerned that their authorization 
could be adversely affected by limiting or selection criteria should be 
aware that the Department does not foresee dramatic future decreases in 
the number of authorized smaller WIC vendors. Smaller vendors will 
always be needed to ensure adequate participant access, particularly in 
areas where there is a lack of larger chain stores and areas where the 
number of vendors is small and transportation is difficult. In these 
cases, it should be reiterated that small vendors will compete for WIC 
authorization on the basis of their costs relative to other small 
vendors serving the same area.
    A number of vendors have also expressed concern that limiting 
criteria would adversely affect participant access. Section 246.12(b) 
would continue to require that all food delivery systems ensure 
adequate participant access and proposed section 246.12(g)(1) would 
require State agencies to authorize an appropriate number and 
distribution of vendors to ensure adequate participant access (as is 
currently required in section 246.12(e)(2)). Again, it is important to 
stress that smaller vendors are critical to the Program, and where 
instrumental in ensuring adequate participant access, will have equal 
opportunity to compete for WIC business.
    As proposed in section 246.4(a)(14)(ii), the State agency's 
limiting criteria would be a mandatory component of the food delivery 
system description in its State Plan. The State agency's limitation 
system would be subject to public scrutiny and comment as part of the 
State Plan development process as is currently required by section 
246.4(b). The Department believes that it is at this stage where there 
is an opportunity for dialogue between State agencies and their vendor 
communities about proposed changes to the State Plan that might affect 
them. While the limiting criteria themselves would not be subject to 
administrative review, vendors would be able to appeal a denial of 
authorization resulting from application of the limiting criteria. For 
example, where the limiting criteria provided for four vendors within a 
zip code area, a vendor within that zip code area could file an appeal 
alleging the State agency incorrectly determined it to be outside that 
zip code area. However, the State agency's decision to use zip code 
areas as the basis for the limiting criterion or the number of vendors 
the State agency determined to be necessary for that area would not be 
subject to administrative review. In most cases, though, vendor appeals 
will be based on the application of the selection criteria. In general, 
the limiting process will be irrelevant to denial of authorization of a 
particular vendor because it is a systematic process that establishes 
only the desired number of vendors and does not consider the 
qualifications of a specific vendor. These qualifications are 
considered during the selection process. Denial of an application for 
authorization may be appealed by a vendor.
    The Department is particularly interested in receiving comments on 
the proposed limitation provision. Comments are most helpful when they 
are specific, stating the reasons for support or opposition, suggesting 
modifications that would resolve commenter's concerns, and providing 
relevant background information and State agency-specific data as 
appropriate.

9. Retail Food Delivery Systems: Vendor Selection Criteria (Section 
246.12(g)(3))

    State agency experience (see ``The WIC Files'') has shown that 
development and application of good vendor selection criteria during 
the authorization process can provide a very cost-effective method of 
cost containment and prevention of program noncompliance. Current 
regulations do not specifically address the establishment of vendor 
selection criteria. They only require vendors to be evaluated in 
connection with the biennial assessment of vendor qualifications 
mandated by Section 246.12(g). Selection criteria have sometimes been 
confused with limiting criteria, because selection criteria may have 
the incidental effect of limiting the number of vendors authorized. The 
Department wishes to reiterate that, while limiting criteria determine 
a specific number and distribution of vendors for an area, selection 
criteria determine which vendors meet basic yes/no eligibility 
criteria, such as adequate stock and inventory, and prices below a 
specified maximum amount.
    The Department is proposing in section 246.12(g)(3) to require 
State agencies to implement six specific selection criteria. State 
agencies would be permitted to supplement the mandatory criteria with 
criteria of their own choice. Such State agency-established criteria 
must be approved by FNS as part of the State Plan process. The six 
proposed mandatory selection criteria are: (1) Competitive price; (2) 
minimum variety and quantity of authorized supplemental foods; (3) lack 
of a record of a criminal conviction or civil judgment for specified 
activities; (4) lack of a history of serious vendor violations; (5) 
lack of a history of serious FSP violations; and (6) not currently 
disqualified from the FSP or, if subject to a FSP civil money penalty 
for hardship, the period of the disqualification that otherwise would 
have been imposed has expired.
    Competitive pricing (section 246.12(g)(3)(i)) is widely accepted as 
a successful cost containment mechanism, facilitating service to 
greater numbers of eligible participants. Section 203(l) of Public Law 
105-336 now requires all State agencies to

[[Page 32320]]

consider, in selecting retail stores for authorization, the prices the 
store charges for WIC foods as compared to other stores' prices for 
such foods. The law further provides that State agencies must establish 
procedures to ensure that selected stores do not subsequently raise 
prices to a level that would make them ineligible for authorization.
    The price criterion may consist of assessing applicants based on 
either their shelf prices for supplemental foods or their price bids 
for supplemental foods, which may be lower than their shelf prices. 
Dollar limits could be developed based on historical data such as 
average redeemed prices for food instruments or on shelf prices. The 
limit calculated for each food package could be a statewide average, or 
could vary by area and/or vendor type. For example, a State agency may 
decide to establish a higher competitive price in an area in which the 
only reasonably located stores have higher prices than the surrounding 
areas in order to ensure adequate participant access for that area. The 
stores in that area would thus not be penalized for their higher prices 
that may be the result of the higher costs of doing business in that 
area. As with all limiting and selection criteria, State agencies may 
not adopt criteria that will result in inadequate participant access, 
such as a competitive price limitation that results in an insufficient 
number of vendors located where participants can reasonably be expected 
to shop.
    Proposed section 246.12(h)(3)(viii) would require that vendor 
agreements contain a provision limiting vendors to charging no more 
than the competitive price limitation. This change is necessary to 
comply with section 203(l) of Public Law 105-336 and to make the use of 
competitive price as a selection criterion effective.
    State agencies would then need to have a procedure to ensure 
authorized vendors comply with the competitive price limitation. Such 
procedures could include setting a not-to-exceed limit for the food 
instrument (either by printing it directly on the food instrument or 
through a bank or system edit), collection of periodic price survey 
data from vendors, or surveying price data during monitoring visits.
    Some vendors have commented that the ``free market'' approach in 
which the ``market'' dictates prices works best and that basing 
authorization on competitive price is exclusionary, unfair, and 
``against the free enterprise system.'' Some also feel that predatory 
pricing of supplemental foods to gain authorization by larger stores 
would result in a smaller market share for smaller independent grocers. 
Vendors should be aware that this proposal would not result in State 
agencies dictating the prices for authorized supplemental foods. 
Competitive pricing is already used by most State agencies as a 
selection criterion in retail food delivery systems. Prices of 
authorized foods are based on the current shelf or ``market'' price 
that is charged to non-WIC customers. This price is established by the 
vendor. In home food delivery systems and some retail food delivery 
systems, prices are based on the lowest ``contract'' or ``bid'' price. 
Again, these prices are established by the vendor and based on market 
conditions, not WIC Program dictates. Although competitive price has 
been used as a selection criterion by most State agencies since the 
Program's inception, this has not generally resulted in a lessening of 
the market share for smaller independent vendors. It is important, 
then, to note that any vendor can improve its position in the vendor 
selection process by decreasing prices of its WIC-eligible foods. In 
addition, as mentioned earlier in the discussion of limiting criteria, 
smaller vendors will always continue to be authorized because they are 
needed to ensure adequate participant access, particularly in urban 
areas where large chain stores are less likely to be located, and in 
rural areas where transportation is difficult.
    Finally, the Department has recently noticed a significant increase 
in the number of ``WIC-only'' stores authorized under the Program. WIC-
only stores are stores which may only serve WIC participants and are 
sustained through their WIC business. While the free market environment 
allows establishment of such entities, the Department is concerned that 
such stores may profit through use of unreasonably high prices of the 
foods charged to the WIC Program. Congress has expressed its concern 
regarding the costs of foods under the Program by requiring all State 
agencies to consider price when selecting vendors. As such, the 
Department will pay particularly close attention to implementation of 
the competitive price requirement in States where ``WIC-only'' stores 
exist.
    The second selection criterion (section 246.12(g)(3)(ii)), minimum 
variety and quantity of authorized supplemental foods, would require 
the vendor to have supplies of such foods that are adequate, as 
quantitatively defined by the State agency, to ensure that participants 
can receive the prescribed amounts and types of foods. Minimum variety 
requirements refer to the minimum types and brands of authorized 
supplemental foods, e.g., two types of milk (whole and low fat) or two 
types of cheese (American and Swiss), that a vendor would be required 
by the State agency to keep on the shelf at all times. Minimum quantity 
refers to keeping a minimum number of each type or brand of food, e.g., 
three containers for each type of milk or three packages of each type 
of cheese, on the shelves at all times. In addition, if the State 
agency mandates specific package sizes, the State agency could require 
that the vendor stock the required package sizes. The Department 
encourages State agencies to take into account the availability of 
various package sizes and the shelf space of the whole range of their 
vendors in establishing the minimum variety and quantity requirements.
    The third selection criterion (section 246.12(g)(3)(iii)) is lack 
of a record of certain business-related criminal convictions or civil 
judgments, on the part of the vendor itself, or any of its current 
owners, officers, directors, or partners. Covered criminal convictions 
and civil judgments would include offenses such as fraud, violations of 
Federal anti-trust statutes, embezzlement, theft, forgery, and bribery.
    The fourth selection criterion (section 246.12(g)(3)(iv)) would 
require the lack of a history of serious vendor violations during a 
period set by the State agency, but not less than one year and not more 
than six years prior to the date of application, resulting from the 
acts or omissions of any persons currently associated with the vendor 
as an owner, officer, director, or partner. If the vendor violation 
also resulted in one of the convictions or civil judgments specified in 
section 246.12(g)(3)(iii), the vendor would not be eligible for 
authorization as required in section 246.12(g)(3)(iii), and the six-
year cap on considering past WIC history would not apply. In 
determining what constitutes ``serious vendor violations,'' the State 
agency would be required to include whether the vendor has been subject 
to any of the mandatory vendor sanctions established under proposed 
section 246.12(l)(1) (current section 246.12(k)(1)) and whether the 
vendor has failed to participate in the annual training required by 
proposed section 246.12(h)(3)(xi). These are minimum criteria. State 
agencies may include other violations under the heading of serious 
vendor violations such as failure to provide restitution to the State 
agency for overcharge claims, repeated failure to take requested 
corrective actions, failure to provide requested data or records to the 
State agency, failure to allow monitoring by program personnel,

[[Page 32321]]

and other similar violations. The State agency would also have the 
discretion to define how many instances of a violation constitute a 
``history of'' serious vendor violations both for the mandatory and 
State agency-developed criteria. Some types of violations could be so 
serious or so blatant that one instance would warrant nonselection. For 
others, the State agency could require a series of repeated instances 
or combinations of violations before it decides nonselection is 
warranted. The Department would like comments on whether to make 
mandatory vendor sanctions imposed by another WIC State agency a 
mandatory criterion for nonselection.
    The fifth selection criterion would mandate the lack of a history 
of serious FSP violations (section 246.12(g)(3)(v)). The State agency 
would be required to establish a period of consideration for this 
criterion of not less than one year and not more than six years prior 
to the date of application unless the FSP offense also resulted in a 
conviction or civil judgment outlined in section 246.12(g)(3)(iii), in 
which case the provisions in section 246.12(g)(3)(iii) would apply and 
the six-year maximum period for consideration of past FSP history would 
not apply. The State agency would be required to deny the application 
of any vendor when the vendor, or any individual who at the time of 
application is associated with the vendor as an owner, officer, 
director, or partner, has a history of serious FSP violations during 
the period of consideration. The State agency would be permitted to 
define serious FSP violations, except that such definition would be 
required to include withdrawal of FSP authorization for program 
noncompliance, a FSP disqualification which is in effect at any time 
during this period, or receipt of a FSP civil money penalty for 
hardship during this period. The Department wishes to point out that 
the State agency would also have the option to consider FSP violations 
which did not result in any of these actions. As with the fourth 
criterion, State agencies would also have the discretion to determine 
what constitutes a ``history'' of serious FSP violations.
    The fourth and fifth criteria would not require that the vendor or 
someone associated with the vendor be the subject of a criminal 
conviction or civil judgment. Serious vendor violations and serious FSP 
violations may include actions that are documented in a monitoring 
visit or other review or investigation even if a conviction or judgment 
did not result from the investigation. The violation would have to fall 
within those defined by the State agency as constituting a history of 
serious vendor or FSP violations and the State agency would need to 
document the basis and defend its determination in the event the vendor 
decides to appeal its nonselection. The sixth criterion (section 
246.12(g)(3)(vi)) would require that the vendor currently not be 
disqualified from the FSP or, if subject to a FSP civil money penalty 
for participant hardship, the period of the disqualification that would 
otherwise have been imposed has expired.
    The third, fourth, fifth, and sixth selection criteria are intended 
to ensure that only vendors with business integrity are authorized to 
participate in the Program. Proposed section 246.12(g)(3) would make 
clear that State agencies do not have to create an elaborate system of 
background checks to identify criminal convictions, civil judgments, or 
WIC or FSP violations. They may rely on facts known to them and 
representations made by applicant vendors on the vendor application. 
State agencies are encouraged to make an effort to check with 
appropriate State and Federal authorities to ensure that a record of 
the specified criminal convictions, civil judgments, or WIC or FSP 
violations does not exist. However, they are not expected to do so on a 
routine basis. State agencies would be routinely expected to rely upon 
the applicant vendors' responses to questions regarding their records, 
and if a State agency had reason to doubt the veracity of such 
responses, the State agency would be expected to follow up on the 
information.
    These selection criteria address the Department's growing awareness 
of unauthorized vendors involved in defrauding or abusing the WIC 
Program. During investigations, State agencies have sometimes found 
unauthorized vendors colluding with authorized vendors to defraud the 
WIC Program. For example, one or several unauthorized vendors may 
accept WIC food instruments at their store(s) and ``launder'' or pass 
them through an authorized WIC vendor in exchange for a portion of 
their value. These actions are unlawful and the Department believes 
that the responsible vendors should not only be prosecuted under 
Federal, State and local law, but that the violations preclude the 
vendor from consideration in the vendor authorization process.
    Local agencies would not be excluded from providing input into the 
selection process. The Department recognizes that local agencies can 
provide the State agency with valuable input regarding areas of 
participant concentration, vendor reputation in the community, and the 
quality of service which vendors provide WIC participants. While 
encouraging the State agency to receive input from its local agencies 
during the selection process in areas the State agency considers 
appropriate, the Department wishes to stress that the State agency must 
itself have the documentation necessary to make the final decision 
regarding fulfillment of all selection criteria.
    ``The WIC Files'' indicate that high-risk vendors who are 
sanctioned often attempt to circumvent the sanctions by selling their 
stores for a nominal fee to a relative or associate who then reapplies 
for authorization while the persons responsible at the time of the 
sanctions actually maintain control of the stores and their profits. 
The Department believes that such vendors should not be authorized. As 
such, proposed section 246.12(g)(4) would prohibit authorization of a 
vendor if the State agency determines the store has been sold by its 
previous owner in an attempt to circumvent a WIC sanction. In 
determining whether an owner has attempted to circumvent a sanction, 
the State agency may consider whether the applicant store was sold to a 
relative by blood or marriage, or was sold for less than its fair 
market value. This does not mean the State agency must develop a 
comprehensive system for routinely tracking the fair market value and 
the family relationships for all vendors. The purpose of the provision 
is only to provide State agencies with guidelines to define 
``circumvention'' of a sanction and respond accordingly.

10. Retail Food Delivery Systems: Timeframes for Accepting and 
Processing Vendor Applications and Collection of FSP Authorization 
Numbers (Sections 246.12(g)(6) and 246.12(g)(7))

    The Department is proposing in section 246.12(g)(6) to allow State 
agencies to limit the time frames for accepting and processing vendor 
applications. The Department considers limiting the periods of time 
during which applications for authorization will be accepted and 
processed preferable to accepting and processing applications on a 
continuous basis during the entire year. Limiting periods for 
acceptance and processing of vendor applications allows the State 
agency to use staff resources during the authorization process most 
efficiently since training, collection of price data, and evaluation of 
selection criteria can be clustered for more efficient execution. These 
advantages far outweigh the disadvantages associated

[[Page 32322]]

with the delay before a vendor may apply. The Department considers that 
State agencies have always had the authority to limit application 
periods as part of their general responsibility for, and control over, 
vendor selection. However, data from the 1995 NAWD National Vendor 
Management Roundup Survey indicate that of the 75 WIC State agencies 
who responded, only 22 State agencies reported they accepted 
applications during a set time of the year.
    To emphasize this authority, this proposed rule would expressly 
give State agencies the option of limiting their vendor authorization 
periods, with the condition that vendor applications must be accepted 
and processed at least once every three years. A State agency that 
chooses to exercise this option would be required in section 
246.12(g)(6) to develop procedures for accepting and processing 
individual vendor applications outside of its established periods when 
it determines there would be inadequate participant access unless 
additional vendors are authorized.
    Section 246.12(g)(7), as amended by this proposal, would also 
require that the State agency collect the FSP authorization number of 
all applicant vendors that participate in the FSP and, except when the 
State agency uses a competitive bidding procedure in which vendors bid 
on prices for authorized supplemental foods, the current shelf prices 
for such foods. The FSP authorization number facilitates the receipt of 
information on vendor history from the FSP. Although State agencies are 
not required to contact the FSP before authorizing vendors, the 
Department strongly encourages State agencies to do so and make use of 
this valuable information. Shelf price data provide the State agency 
with information it needs to establish whether the prices of authorized 
supplemental foods are competitive. Shelf price data can also be used 
by the State agency to develop and/or update its competitive price 
selection criteria, and to update price data used to identify 
overcharging.

11. Retail Food Delivery Systems: Time Limit on Vendor Agreements 
(Section 246.12(h)(1))

    Current food delivery regulations at section 246.12(g) require that 
the State agency perform a review of each vendor's qualifications once 
every two years, but do not limit the period of the agreement. Proposed 
section 246.12(h)(1) would limit vendor agreements to not more than 
three years, and would delete the regulatory requirement for periodic 
reviews of vendor qualifications since fixed-period agreements would 
render this requirement superfluous. The Department believes that fixed 
period agreements enable the State agency to manage its vendor 
population on a periodic basis more easily and allows it to be more 
responsive to changing program conditions and needs than is the case 
with open-ended agreements. According to the 1990 Vendor Management 
Study, 78 percent of the geographic State agencies already authorize 
vendors for three years or less, making fixed-period agreements the 
norm. A vendor would need to reapply at the expiration of each 
agreement and would have to meet the selection criteria and the 
limiting criteria in effect at the time of reapplication.
    In addition, current section 246.12(f) allows local agencies to 
establish agreements with vendors. Proposed section 246.12(h)(1) would 
require that all vendor agreements be established by the State agency. 
The Department believes that all vendor agreements should be executed 
by the State agency, rather than local agencies, to ensure consistent 
application of vendor authorization standards statewide. Conforming 
amendments would also be made to sections 246.4(a)(14)(iii) and 
246.12(f) (which would be redesignated as section 246.12(h)).

12. Retail Food Delivery Systems: Vendor Agreement Specifications 
(Sections 246.12(h)(2) Through 246.12(h)(4))

    This proposed rule would revise current section 246.12(f)(1) to 
make clear that State agencies may make exceptions to their standard 
vendor agreements only when necessary to meet unique circumstances and 
must document the reasons for any exception. One such legitimate reason 
would be adjustments to accommodate a State agency's EBT system. The 
proposed rule would move this requirement to section 246.12(h)(2).
    The Department proposes to reorganize and modify a number of the 
requirements for vendor agreements. A few new provisions are proposed. 
The provisions that would be changed or added are discussed below in 
the order in which they appear in the proposed rule.
    Proposed section 246.12(h)(3)(i) would make clear that vendors may 
accept food instruments only from participants or their proxies. This 
does not represent a change from current program operations.
    The Department also proposes to change the provision currently at 
section 246.12(f)(2)(i) to address concerns raised by State agencies 
about problems with substitutions for supplemental foods designated on 
the food instrument. A sentence would be added to prohibit vendors from 
substituting other foods, non-food items or cash in lieu of 
supplemental food listed on the food instrument. The vendor would also 
be prohibited from giving credit, refunds, or exchanges (except for 
identical supplemental foods). Credit or rainchecks offered to 
participants are usually given because vendors have inadequate WIC food 
stocks on hand. Participants should not be inconvenienced by vendors 
who do not honor their contractual obligation to maintain adequate WIC 
food stocks in their stores. Ultimately, it is the participants who 
suffer nutritionally from an incomplete food package. In addition, many 
commenters expressed concern about the increased opportunity for 
program noncompliance when vendors allow refunds for foods purchased 
with WIC food instruments. The rule would permit vendors to exchange a 
supplemental food with an identical item. This should address instances 
of defective supplemental foods without compromising the nutritional 
benefit of the participant's food package. These revisions appear in 
proposed section 246.12(h)(3)(ii) and are included in this rulemaking 
so as to reflect longstanding WIC policy in program regulations.
    This proposed rule would add a new section 246.12(h)(3)(iv) 
requiring that the vendor ensure the actual purchase price be entered 
on the food instrument prior to the signature by the participant or 
proxy. Many State agencies require the vendor to enter the purchase 
price prior to participant signature. However, a few State agencies 
require the participant to enter the purchase price, citing the 
educational value for participants. The proposed language would 
accommodate either situation. In addition, this provision would make 
clear that the provision applies to printed food instruments only. 
Thus, where an EBT system is used and the purchase price is scanned and 
entered electronically, rather than entered directly on the food 
instrument, the provision would not apply. Proposed section 
246.12(h)(3)(iv) would also make clear a PIN may be used in EBT systems 
in lieu of the signature requirement.
    Current section 246.12(f)(2)(ii) would be moved to section 
246.12(h)(3)(viii) and would require vendors to charge State agencies 
no more than the price charged other customers (i.e. no surcharge may 
be imposed for WIC

[[Page 32323]]

purchases) or the current shelf price, whichever is less. Vendors 
subject to contract prices would be able to charge no more than the 
contract prices. This proposal would modify the current language to 
account for competitively bid vendor selection systems being used by 
some State agencies in which vendors are selected on the basis of 
specific prices they submit in response to a competitive procurement. 
This proposal would also make clear that in no case may the vendor 
charge the State agency more than the competitive price limitation.
    Proposed section 246.12(h)(3)(ix) would clarify current section 
246.12(f)(2)(v) concerning claims collection. Under this new section, 
the vendor would be required to reimburse the State agency upon demand, 
or have its payment from the State agency reduced, for the value of 
each vendor overcharge or other error. It would also allow the State 
agency to withhold or collect the entire redemption value of a food 
instrument containing an overcharge or other error, rather than just 
the amount of the error. Finally, it would permit the State agency to 
offset any amount owed by the vendor against subsequent amounts to be 
paid to the vendor.
    Current regulations at section 246.12(f)(2)(vi) prohibit the vendor 
from seeking restitution from participants for food instruments not 
paid by the State or local agency. The Department proposes to clarify 
in proposed section 246.12(h)(3)(x) that the prohibition would also 
apply to any food instrument partially paid by the State agency and to 
remove the reference to the local agency in order to conform to the 
requirement at proposed section 246.12(h)(1) that only State agencies 
may enter into vendor agreements.
    Current section 246.12(f)(2)(vii) requires the manager or an 
authorized representative of the store (such as a head cashier) to 
accept training on program procedures. This proposal would move this 
provision to section 246.12(h)(3)(xi) and modify it by requiring 
participation in training prior to, or at the time of, the vendor's 
initial authorization and at least once annually thereafter. The 
initial training of a new vendor would be required to take place at the 
site of the vendor (see proposed section 246.12(i)(1)). The proposal 
would also make clear that the training after the initial authorization 
training is to take place at a time and location designated by the 
State agency. However, State agencies would be required to provide 
vendors at least one opportunity to attend training on an alternative 
date and may offer additional alternative training dates. The 
Department encourages State agencies to be understanding of the 
particular scheduling limitations of vendors with small staffs when 
scheduling training.
    The reference to ``head cashier'' would be removed and replaced by 
language requiring that a member of management participate in the 
training, because a head cashier may not be a store management official 
and thus may not possess the necessary authority to accept training 
responsibilities for the vendor. Further details on the proposed 
training requirements may be found in section 13 of this preamble and 
proposed section 246.12(i). Section 246.12(h)(3)(xi) would further 
require a vendor agreement provision putting the vendor on notice of 
the mandatory selection criterion in section 246.12(g)(3)(iv) making a 
history of failing to participate in the annual training a condition of 
authorization in the next authorization cycle.
    This proposal has made one change to current section 
246.12(f)(2)(ix). In proposed section 246.12(h)(3)(xiii), the term 
``utilization'' of food instruments would be replaced with the term 
``handling'' of food instruments as a clarification for the vendor.
    The Department proposes to modify section 246.12(f)(2)(xiii) to 
require vendors to retain inventory records that are used for State or 
Federal tax reporting purposes, and other records as the State agency 
may require. State agencies would have the flexibility to determine 
both the length of time for retention of the inventory records and 
additional records that must be retained. Vendors would be required to 
allow access to these records by representatives of the State agency, 
the Department, and the Comptroller General of the United States for 
inspection and audit. Vendors must make these records available at any 
reasonable time and place. The requirement in current section 
246.12(f)(2)(xii), concerning access to food instruments during 
monitoring visits, would be included in this access requirement. These 
changes would appear in section 246.12(h)(3)(xv).
    Currently, section 246.12(f)(2)(xxiii) requires the vendor to 
notify the State agency when the vendor ceases operations or ownership 
changes and the agreement to be voided in cases of change of ownership. 
Strict interpretation of the current section 246.12(f)(2)(xxiii) has 
resulted in some State agencies treating corporate reorganizations as 
changes in ownership. Such an interpretation has resulted in 
terminating agreements with vendors that have undergone corporate 
reorganizations even though they did not affect the ownership of the 
corporation. This rule would make clear in section 246.12(h)(3)(xvii) 
that a change in business structure that does not result in a change in 
ownership would not trigger this provision. State agencies should focus 
on the substance of the transaction rather than the form of the 
transaction. The State agency should ensure that the vendor agreement 
is amended to reflect the change in business structure.
    This rule would also require vendors to give notice of any change 
in a vendor's location. This notice is necessary in light of the role 
that location plays in vendor selection and limiting criteria.
    In order to give State agencies sufficient time to analyze any 
change in ownership, location, or cessation of operations, this rule 
would require that vendors give 45 days notice in writing prior to the 
effective date of the change. In cases in which the change will trigger 
termination of the agreement, the lead time also would give State 
agencies time to seek a new vendor when necessary to ensure adequate 
participant access.
    Proposed section 246.12(h)(3)(xviii) would specify that a vendor 
may be sanctioned for vendor violations in addition to claims 
collection. Such sanctions would be required to be in accordance with 
the State agency's sanction schedule.
    The Department also proposes to add in section 246.12(h)(3)(xix) a 
provision notifying the vendor that the State agency will terminate the 
vendor's agreement if the State agency determines that a conflict of 
interest exists between the vendor and the WIC Program, at either the 
State or the local level. This change reflects the requirement at 
section 246.12(q) of the current regulations (redesignated as section 
246.12(t) in the proposed rule) with the addition of a reference to 
conflicts with the State agency given their role in vendor 
authorization.
    The current requirement in section 246.12(f)(2)(xiv) would be 
redesignated as section 246.12(h)(3)(xx) and amended to revise the 
reference to current section 246.23(d) regarding criminal penalties for 
program noncompliance.
    Proposed section 246.12(h)(3)(xxi) would specify that WIC 
authorization is not a license, and that it does not convey property 
rights. Vendors would also be put on notice that in order to continue 
to be authorized beyond their current agreement periods they must 
reapply for authorization. Further, vendors would be notified that if a 
vendor has been disqualified for a

[[Page 32324]]

period of time less than the remaining term of its vendor agreement, 
participation in the WIC Program may be resumed upon completion of its 
disqualification period for the duration of the agreement without 
reapplying. If the vendor agreement expires before the vendor has 
served out the full disqualification period, and the vendor wishes to 
again participate in the Program after serving the disqualification, 
the vendor must apply to be authorized. In all cases, the vendor's new 
application would be subject to the State agency's selection and 
limiting criteria in effect at the time of the reapplication.
    Proposed section 246.12(h)(4) would require that the State agency 
include the sanction schedule in the vendor agreement. The sanction 
schedule must be consistent with the current vendor sanction 
requirements, which would be redesignated as Section 246.12(l), and 
include both the mandatory vendor sanctions and any State agency vendor 
sanctions. This addition was made to consolidate several paragraphs 
that required that specific vendor sanction provisions be included in 
the vendor agreement. The Department recommends that State agencies 
include the sanction schedule as an addendum to the vendor agreement, 
so that it may be amended during the agreement period without having to 
amend the entire agreement.
    The Department proposes a new section 246.12(h)(5) that would 
require State agencies to provide vendors a list of the actions subject 
to administrative review and a copy of the State agency's 
administrative review procedures. Proposed revisions to vendor appeals 
are discussed in section 22 of this preamble.

13. Retail Food Delivery Systems: Vendor Training (Section 
246.12(i))

    The December 1990 WIC Vendor Management Study indicated that 
training is the most frequently used non-investigative method for 
ensuring the integrity of the Program. ``The WIC Files,'' a summary of 
case studies of vendor investigations produced by the vendor managers 
of State agencies in the Southeast Region, found that vendor training 
is one of the most effective controls on vendor noncompliance that a 
State agency can implement.
    The Department proposes in section 246.12(i) to strengthen the 
training requirements by requiring annual training for all vendors. 
Such training would be required to be face-to-face at least once during 
the vendor's agreement period, that is, once every three years or more 
frequently in State agencies using shorter agreements. The face-to-face 
training could be conducted at any time during the agreement period 
except that, in instances where a vendor is new to the WIC Program, the 
training would be required to be provided prior to, or at the time of, 
initial authorization, and at the site of the new vendor.
    The face-to-face training could count towards fulfillment of the 
annual training requirement for all vendors. In other years of the 
agreement period, the annual training could, for example, consist of a 
training video, written material such as a handbook update, or verbal 
instructions relayed by audiotape.
    The vendor's requirements for both annual and face-to-face training 
would be required to be outlined in the vendor agreement (section 
246.12(h)(3)(xi)), including the stipulation that a history of 
noncompliance with these requirements would bar reauthorization (see 
proposed section 246.12(g)(3)(iv)). The vendor agreement would be 
required to make clear that the State agency has the sole discretion to 
determine the date, time, and place of all training, except that the 
vendor would have to be given at least one opportunity to reschedule. 
Vendors would be required to sign a receipt that they have received 
training. Training could take the form of individual or group sessions 
and could be conducted on the vendor's premises or at a State agency-
selected location, except for the initial training, which would be 
required to be given at the vendor's site.
    The Department believes that it is important that certain basic 
topics be covered in the annual training sessions, whether the training 
is provided face-to-face or is included in some other form of 
presentation, such as a film or printed material. As such, the 
Department is proposing in section 246.12(i)(2) that the following 
topics must be covered annually: the purpose of the WIC Program; the 
varieties of supplemental food authorized by the State agency; the 
minimum varieties and quantities of authorized supplemental foods that 
must be stocked; the procedures for transacting and submitting food 
instruments; the vendor sanction system; the vendor complaint process; 
the terms of the vendor agreement; and the State agency's claims 
collection procedures. The primary difference between the face-to-face 
training that would occur once during the agreement period and the 
training that would occur during each of the other years of the 
agreement period is how the training is delivered. The content would 
remain the same.
    At the discretion of the State agency, section 246.12(i)(3) would 
permit training to be conducted by a local agency, a contractor, or a 
vendor representative. The State agency would be required to provide 
supervision and instruction to ensure the uniformity and quality of the 
training. Proposed section 246.4(a)(xii) would require that the 
oversight system be described in the State Plan.
    Proposed section 246.12(i)(4) would require State agencies to 
document the content of the annual training, including the vendor 
receipts required by section 246.12(h)(3)(xi). By requiring an 
acknowledgment of the receipt and understanding of training, the State 
agency retains evidence of awareness of program rules and procedures by 
vendors. Thus, violative vendors cannot successfully argue during 
administrative reviews that they were not appropriately trained on 
their responsibilities.

14. Retail Food Delivery Systems: Monitoring Vendors and 
Identifying High-Risk Vendors (Section 246.12(j))

    The 1988 National Vendor Audit, while not nationally 
representative, is consistent with the conclusion that current 
regulatory requirements for representative monitoring have not been 
effective in controlling program noncompliance. In addition, VAMP data 
and findings of the WIC Vendor Issues Study indicate the need to focus 
more attention on high-risk vendors. Therefore, this proposed 
rulemaking would shift emphasis away from the less effective 
representative monitoring and toward high-risk monitoring. This would 
concentrate resources on a subset of vendors which have been identified 
as having a high probability of abusing the Program and is likely to be 
more effective in combating program noncompliance.
    As discussed in section 2 of this preamble, the term 
``representative monitoring'' has proven to be misleading. It describes 
the method by which vendors are selected to be monitored rather than 
the type of monitoring actually conducted (see section 246.12(i)(2) of 
the current regulations). Representative, or random, selection for 
monitoring is intended to yield a sample of vendors that is generally 
representative of vendors authorized by the State agency. Because 
vendors are selected at random rather than targeted as potential high-
risk vendors, the monitoring technique generally considered to be most 
appropriate is routine monitoring, i.e., overt monitoring in which WIC 
staff identify themselves to vendor personnel. Routine monitoring 
provides

[[Page 32325]]

the State agency with an overview of vendors statewide. It also has 
program noncompliance-deterrent and educational functions, and can 
adequately address inventory, sanitation, and processing of food 
instruments available on the premises for inspection. For these 
reasons, the Department proposes to replace the term ``representative 
monitoring'' with the term ``routine monitoring'' in the regulations.
    Section 246.12(i)(2) of the current regulations requires that the 
State agency implement a system to conduct representative monitoring on 
at least 10 percent of its authorized vendors each year. The current 
section 246.12(i)(1) requires that the State agency also establish a 
system for identifying high-risk vendors and take effective action to 
follow up on vendors so identified, including monitoring, further 
investigation, and sanctioning, as appropriate. Current regulations do 
not mandate high-risk identification criteria, a specific technique for 
monitoring high-risk vendors, or a specific number of high-risk vendor 
that must be monitored. The result of these deficiencies has been 
uneven implementation of high-risk identification and monitoring 
systems with often limited effectiveness in terms of investigating 
high-risk vendors and taking appropriate actions based on the findings.
    Given that resources available for monitoring are finite, it is 
more logical to concentrate on vendors with a high probability of 
program noncompliance than on randomly selected vendors. This is also 
consistent with the requirement in section 203(f) of Public Law 105-
336, which requires State agencies to identify vendors that have a high 
probability of program noncompliance and to conduct compliance 
investigations of these vendors. In order to ensure effective 
deployment of monitoring resources for high-risk monitoring, effective 
high-risk criteria must be used. This proposal would help ensure that 
such criteria are used by State agencies by requiring them to use new 
high-risk criteria. Under proposed section 246.12(j)(1), State agencies 
would continue to be required to monitor vendors. State agencies would 
be permitted to delegate the monitoring to a local agency or 
contractor, but would be required to provide supervision and training 
to ensure the quality and uniformity of the monitoring.
    Under this proposal, State agencies would also be required to 
implement high-risk vendor identification criteria specified by FNS 
(proposed section 246.12(j)(2)). State agencies could employ indicators 
of their own choice in addition to those required by FNS, and this is 
highly recommended. Such State-established criteria would be subject to 
FNS approval through the State Plan process, and such approval would 
involve a review of the civil rights implications of the criteria.
    Much has been learned over the years about high-risk vendor 
identification through innovation and experimentation by State 
agencies; two studies, (the WIC State Agency Guide to Vendor Monitoring 
and the Applied Research on Vendor Abuse); the investigative activities 
of the Office of Inspector General in connection with the National 
Vendor Audit; and the data reported by State agencies through the VAMP 
system. While much remains to be learned about high-risk vendor 
identification, it is now possible to specify some basic criteria that 
are strongly associated with documented vendor noncompliance. For 
example, a vendor may routinely submit food instruments at or around 
their maximum possible dollar value, or at the same set value for every 
food instrument. Given the variation in the types and brands of 
authorized supplemental foods that a participant may choose, a small or 
no cost variation among a vendor's food instrument claims signals a 
possible problem meriting further review. Indicators used in the WIC 
Program to detect potentially high-risk vendors may not violate civil 
rights laws by classifying vendors as potentially high-risk solely on 
the basis of their minority status.
    Section 246.12(j)(2) of this proposal establishes FNS's authority 
to mandate minimum criteria. However, the criteria themselves would not 
be included in the regulations. Public disclosure of the high-risk 
criteria would undermine their usefulness in identifying high-risk 
vendors and would interfere with timely changes to the criteria as 
knowledge about the effectiveness of various criteria increases. This 
flexibility also ensures that State agencies are not required to use 
criteria that subsequent analysis reveals to be ineffective or 
obsolete. The Department will inform the State agencies of changes in 
the minimum mandated high-risk criteria through its announcement of 
requirements for the annual summary of the results of vendor 
monitoring, which has been mandated by the WIC Program regulations 
since 1982 and would continue to be required by section 246.12(j)(4).
    While there is a need for flexibility in establishing criteria to 
be used as part of high-risk identification systems, the Department 
also recognizes the State agencies' operational need for a certain 
level of stability in required high-risk identification criteria. 
Changes in criteria inevitably require modification of data collection 
procedures and management information systems. Therefore, the required 
criteria would not be changed more frequently than once every two 
years, and State agencies would be informed one year in advance of all 
such changes. The Department does not envision a proliferation of 
mandatory criteria over time or the frequent replacement of criteria. 
The more likely event is greater specificity in established criteria as 
experience indicates how they can be most effectively employed.
    The Department wishes to stress that the mandated criteria would 
represent the minimum number of criteria a State agency must utilize in 
its high-risk identification system. State agencies would continue to 
have flexibility to use criteria which they have found to be effective 
in addition to those criteria established by the Department.
    In this proposal, State agencies would be required by section 
246.12(j)(3)(i) to annually conduct compliance buys or inventory audits 
on at least 10 percent of the number of vendors authorized by the State 
agency as of October 1 of each fiscal year. The number would not need 
to be adjusted based on fluctuations in the vendor population during 
the fiscal year. State agencies would be required to conduct buys or 
audits for all high-risk vendors up to the 10 percent minimum. Under 
proposed section 246.12(j)(3)(i), a State agency would be allowed to 
waive the investigation of a high-risk vendor if it documents that the 
vendor is under investigation by a Federal, State, or local enforcement 
agency or that another compelling reason based on good program 
management exists for not conducting a compliance buy or inventory 
audit. This would include investigations by the Department's Office of 
Inspector General and FSP investigations by FNS, but not a routine 
action like a health inspection.
    If fewer than 10 percent of the State agency's total vendor 
population is identified as high-risk and are not exempted from 
monitoring, section 246.12(j)(3)(ii) would require the difference to be 
made up with vendors not so identified. These vendors would have to be 
selected at random as a means of testing the effectiveness of the State 
agency's high-risk identification system. Random selection also should 
result in a cross-section of all vendors being reviewed, thereby 
precluding a disparate over-selection of small and

[[Page 32326]]

minority-owned vendors. Conducting compliance buys or inventory audits 
on the population the State agency has identified as high-risk should 
result in detection of a higher percentage of violative vendors than 
those performed on a random sample of the entire vendor population. If 
the random sample and the high-risk population yield similar 
percentages of violative vendors and the State agency has used a large 
enough random sample to be statistically valid, the State agency should 
reassess its high-risk detection system.
    When more than 10 percent of the total vendor population has been 
identified as high-risk, section 246.12(j)(3)(iii) would require the 
State agency that elects not to exceed the 10 percent minimum to 
prioritize vendors in order to review those with the greatest potential 
for program noncompliance and loss. Factors such as degree of risk of 
program noncompliance (e.g., point systems), location of the vendor 
relative to other high-risk vendors and likelihood of successful buys 
or audits based on past experience could be considered in establishing 
priorities.
    The Department chose not to propose that compliance buys or 
inventory audits be performed on all high-risk vendors. Since high-risk 
identifiers can be manipulated, the high-risk identification process 
could be driven by the objective of minimizing compliance buy and audit 
activity rather than the need to identify vendors with a high 
probability of program noncompliance. Conversely, the identification of 
too many vendors as high-risk could impose an unreasonable monitoring 
burden on the State agency. Finally, as the WIC Program continues to 
grow, so will the need for compliance monitoring and accountability. 
Given these facts, the Department chose to propose that State agencies 
conduct compliance buys on at least 10 percent of their vendors. The 10 
percent requirement ensures a minimum presence each year of monitoring 
staff as a means of deterrence, as well as detection, of program 
violations. When the use of percentages in setting minimum requirements 
for compliance buys and inventory audits results in fractional numbers, 
State agencies should round upward to the nearest whole number.
    This proposal would no longer require State agencies to conduct any 
routine monitoring (currently set at a minimum of 10 percent of 
authorized vendors annually). The Department strongly recommends that 
State agencies continue to conduct routine monitoring to the extent 
that resources permit, but recognizes that the routine monitoring 
requirement must be relaxed so that State agencies can shift resources 
as necessary to meet the proposed high-risk monitoring requirements.
    VAMP data show that one-buy investigations are not generally 
successful in revealing program violations such as overcharging, and 
that State agencies that conduct, on average, three or more compliance 
buys per vendor are much more likely to find occurrences of 
overcharging. Therefore, the Department also proposes a new requirement 
in section 246.12(j)(3)(i) of this rule. For investigations of high-
risk vendors which result in negative compliance buys (i.e. buys in 
which no violations occur), the State agency would be allowed to close 
the investigation only after three negative compliance buys have 
occurred within a 12-month period. These negative compliance buys would 
not have to be consecutive in order for the State agency to close the 
investigation. For instance, the first buy could be negative, the 
second positive, and the third and fourth negative, which would lead to 
closing the investigation. Investigations containing a mix of positive 
and negative buys could be closed by the State agency after the third 
negative buy if the State agency determines that the number of positive 
buys was not sufficient to provide evidence of program noncompliance. 
An investigation of a high-risk vendor would also be considered to be 
complete when the State agency determines that: a sufficient number of 
buys has been conducted to provide evidence of program noncompliance or 
when an inventory audit has been completed. Investigations on randomly 
selected vendors would be considered complete when the State agency 
determines there is sufficient evidence to conclude whether the vendor 
is in compliance with program requirements.
    Proposed section 246.12(j)(5) would establish documentation 
requirements for monitoring visits, including compliance buys, 
inventory audits, and routine monitoring visits. These are: the 
vendor's name and address; the date of the visit; the name(s) and 
signature(s) of the reviewer(s); the nature of the problem(s) detected 
or the observation that the vendor appears to be in compliance with 
program requirements. For compliance buys, State agencies would also be 
required to document: the date of the buy; a description of the cashier 
involved in each transaction; the types and quantities of items 
purchased; and, if available, the shelf price or contract price, and 
the price charged for each item purchased; and the final disposition of 
all items as either destroyed, donated, provided to other authorities, 
or kept as evidence. Recognizing that shelf prices or contract prices 
are sometimes difficult to obtain during a compliance buy, proposed 
section 246.12(j)(5) would permit the collection of shelf price or 
contract price data before or after the compliance buy visit. State 
agencies are encouraged, however, to collect shelf prices the same day 
as the compliance buy whenever possible to ensure that the State agency 
cannot be challenged during an administrative review that the prices 
are not truly reflective of shelf prices on the day of the compliance 
buy. This defense has been used by vendors during previous 
administrative reviews (see ``The WIC Files'').
    The current requirement in section 246.12(i)(4) of documenting how 
the vendor plans to correct any detected deficiencies would be dropped. 
The Department believes that the requirements that State agencies 
assess claims and sanction vendors when appropriate adequately address 
the need to follow up on deficiencies noted in monitoring visits and 
that to require documentation of the follow-up in the monitoring report 
is duplicative and unnecessary. However, since the report will form the 
basis for any sanction, it is important that the report clearly 
document any deficiencies found. Thus, this proposed rule would retain 
that requirement.

a. Compliance Buy Techniques

    Compliance buys are usually the best method of high-risk monitoring 
because they can identify and document a broad range of major program 
noncompliance. The fact that the program noncompliance is identified 
on-site and witnessed by the compliance monitor provides a strong case 
which can withstand the challenges of vendor appeal. As discussed in 
section 2 of this preamble, a compliance buy is an undercover visit to 
a vendor in which a person acting on behalf of the Program poses as a 
WIC participant and transacts food instruments in order to determine 
whether program noncompliance is taking place. The rationale and 
methodology for different types of compliance buys are outlined in the 
WIC Compliance Handbook issued in June, 1985. The most common type of 
buy is a ``safe buy,'' in which only allowed foods, either in the 
authorized quantities or in lesser quantities, are purchased. Once the 
food instrument is redeemed by the vendor, it is reviewed to see if the 
vendor has made the appropriate charge, based on the foods actually 
purchased and their prices.

[[Page 32327]]

    In other types of buys, the buyer might, for example, attempt to 
purchase an ineligible food, purchase a non-food item, purchase less 
than the full food package, exchange food instruments for credit, or 
sell food instruments at a discount, i.e. trafficking.
    The State agency must decide what type(s) of compliance buys to 
employ. As stated above, in order for the State agency to conclude that 
a high-risk vendor is in compliance with program requirements, proposed 
regulations at section 246.12(j)(3)(i) would require three negative 
buys. However, it would be up to the State agency to decide how many 
positive buys must be conducted before instituting administrative 
action against the vendor, except in situations where one incidence of 
the violation (i.e. trafficking or the sale of alcohol or tobacco 
products) triggers a mandatory sanction.

b. Inventory Audit Techniques

    The inventory audit is a method for identifying program 
noncompliance in which a vendor's records of foods purchased for a set 
period of time, such as food invoices or receipts, are examined and 
compared to the amount of the same foods for which the WIC Program paid 
the vendor for that same period of time. Proposed section 246.12(k)(3) 
would require claims to be assessed when vendor violations are 
identified as a result of an inventory audit or other review. In 
addition, the March 18 vendor sanction rule requires State agencies to 
disqualify vendors for a pattern of claiming reimbursement for the sale 
of an amount of a specific supplemental food item which exceeds the 
store's documented inventory of that supplemental food item for a 
specific period of time.
    Inventory audits are usually more expensive to perform than 
compliance buys because they require staff with a higher level of 
training, and because the volume of information which must be reviewed 
in order to establish a claim may require considerably more time. Data 
from the 1996 VAMP report reveal that 15 State agencies conducted 
inventory audits during Fiscal Year 1996. These audits are useful for 
obtaining evidence against suspected vendors who traffic in food 
instruments, or otherwise request reimbursement for more food than 
inventory records can support, and who are not susceptible to 
compliance buys because they have a small clientele and will only 
commit violations with known customers. As a result, the Department 
expects inventory audits to be used in limited circumstances.

c. Workload Implications

    The proposed requirement for compliance buys and inventory audits 
exceeds the level of compliance buys currently conducted by a number of 
State agencies. The Department further acknowledges that replacement of 
the current requirement for 10 percent representative monitoring plus 
an unspecified level of high-risk monitoring with the proposed 10 
percent targeted monitoring requirement may not be an even exchange 
since both compliance buys (given the probable need for more than one 
at each vendor) and inventory audits are almost always more expensive 
than routine monitoring visits. Data from the 1996 VAMP report indicate 
that 33 percent of State agencies annually conducted routine monitoring 
at 100 percent of their authorized vendors. For some State agencies, 
such visits would appear to be of questionable value when compared to 
high-risk monitoring. The considerable resources which extensive 
routine monitoring consume could be focused much more effectively on 
the conduct of compliance buys and inventory audits. It should also be 
noted that some State agencies currently exceed the proposed 10 percent 
requirement, thus indicating that it can be met within current and 
anticipated levels of State administrative funding.

15. Retail Food Delivery Systems: Vendor Claims (Section 246.12(k))

    Current regulations at section 246.12(r)(5) require that the State 
agency establish procedures to ensure the propriety of redeemed food 
instruments. They require the State agency to design and implement a 
system of food instrument review to detect suspected overcharges and to 
identify vendors with high levels of suspected overcharges. The 1988 
National Vendor Audit demonstrated that these general regulatory 
requirements have been ineffective in detecting overcharges in some 
State agencies. Furthermore, current regulations do not explicitly 
require, and some State agencies do not always take, effective follow-
up action on suspected and documented overcharges. The 1991 Vendor 
Issues Study both accounted for over $39 million in vendor overcharges 
and found a close correlation between overcharging and other program 
violations. Consequently, the Department proposes to strengthen State 
agencies' general approach to overcharges.
    Two basic types of overcharge detection systems are currently in 
operation. Price-based systems use vendors' shelf or contract prices to 
develop edit levels that are applied to redeemed food instruments. 
Redemption-based systems use edit limits derived from the value of 
redeemed food instruments. Both systems can be designed in a number of 
different ways. Given the potential for significant variation in each 
type of system, it is not possible to make meaningful, practical 
comparisons between the two types, or to argue that one type will 
always and unconditionally be better than all varieties of the other.
    Redemption-based systems are used by more State agencies than 
price-based systems. The quality of redemption-based systems varies 
significantly according to such factors as whether and how the State 
agency establishes vendor peer groups in order to develop a statistical 
methodology sensitive to differences in redemption levels between peer 
groups; the tolerance levels that the State agency includes in its 
analysis in order to minimize the incidence of flagged food instruments 
that do not, in fact, include overcharges; and, the frequency with 
which its statistical tolerances are updated. Price-based systems also 
differ qualitatively according to how they address a number of 
variables. Because of the complexity and variability inherent in such 
systems, the Department believes that it would not be appropriate to 
attempt to govern them at this time through the regulatory process. 
Rather, State agencies can expect the effectiveness of whatever system 
they choose to be subjected to greater scrutiny by FNS Regional Offices 
in the future as part of their review of State Plans and management 
evaluations. Improvement in these systems can best be pursued through 
careful assessment of each individual system.
    The Department does, however, propose through regulation to 
strengthen State agencies' general approach to overcharges. First, the 
Department proposes at section 246.12(k)(1) to require that State 
agencies develop and implement a system to identify overcharges and 
other errors on redeemed food instruments at least quarterly. That 
section would also list the other types of errors the State agency's 
system must detect.
    Proposed section 246.12(k)(2) would confirm the State agency's 
authority to withhold or collect from vendors the entire redemption 
value of food instruments that include an overcharge, as opposed to the 
current practice in some State agencies of denying payment for, or 
collecting, only the amount of the overcharge itself. A parallel 
provision

[[Page 32328]]

would be required to be contained in the vendor agreement by proposed 
section 246.12(h)(3)(ix).
    Proposed section 246.12(k)(4) would require State agencies to 
initiate collection actions within 90 days of the date of detection of 
an overcharge or other error. The Department believes that timely 
claims assessment and collection will provide an incentive for vendors 
to correct problems within their organization in a more timely manner. 
While State agencies have a number of options in pursuing vendor 
claims, the Department encourages State agencies to exercise their 
authority to demand repayment of the entire redeemed value of each food 
instrument containing an overcharge or other error, to offset claims 
when possible, and to sanction vendors for chronic violations or for 
failure to pay claims without sufficient justification. These actions 
can act as powerful deterrents to overcharging.

16. Retail Food Delivery Systems: Vendor Sanctions (Section 
246.12(l))

    As discussed earlier in this preamble, on March 18, 1999, the 
Department published a final rule amending the vendor sanction 
provisions. Among other things, that rule establishes mandatory 
disqualification periods for certain vendor violations and requires any 
vendor disqualified from the FSP to be disqualified from WIC, unless 
such disqualification would result in inadequate participant access. 
That rule also establishes a formula for calculating civil money 
penalties in lieu of disqualification. These changes are reflected in 
the text of this rule for reference only.
    Vendor and participant sanctions are currently addressed in section 
246.12(k). This proposed rule would split these requirements into 
different paragraphs for clarity: Section 246.12(l) for vendor 
sanctions and section 246.12(u) for participant sanctions. Except for 
the deletion of the participant sanctions section, proposed section 
246.12(l) is only a redesignation, with no substantive changes, from 
section 246.12(k) as it appeared in the March 18 final rule. Prior to 
the publication of the final rule, the Department published a proposed 
rule on April 20, 1998, which provided the public with a 90-day comment 
period on the provisions in current 246.12(k). Consequently, the 
Department will not consider any comments at this time on proposed 
section 246.12(l).

17. Home Food Delivery Systems and Direct Distribution Food 
Delivery Systems (Sections 246.2, 246.12(m), 246.12(n), 246.12(o), 
and 246.12(s))

    The requirements for home food delivery and direct distribution 
food delivery systems currently found at section 246.12(s) and (t) 
would be moved to section 246.12(m) and (n). Both sections would be 
amended to delete the requirements concerning food instruments. The 
food instrument requirements that would apply to all food delivery 
systems have been grouped together in sections 246.12(p), (q), and (r); 
the current requirement for uniform food instruments continues to be 
found at section 246.12(b). The Department recognizes that food 
instruments are not used in all home food delivery and direct 
distribution food delivery systems. The food instrument provisions only 
apply to those food delivery systems using food instruments.
    Finally, the current requirement for participant and vendor 
complaints (section 246.12(j)) and prompt payment of vendors (section 
246.12(m)) would be moved to sections 246.12(o) and (s), respectively, 
and references would be added to home food delivery contractors.

18. Food Instrument Security (Section 246.12(p))

    The 1988 National Vendor Audit and management evaluations indicate 
that some local agencies fail to maintain adequate security for food 
instruments received from the State agency and fail to track the food 
instruments they distribute to clinics. Both of these problems increase 
the chance of theft and misuse. Examples of the kind of misuse that can 
occur are provided in ``The WIC Files.'' These include employee fraud 
and collusion. The Department believes that local agencies and clinics 
must take appropriate measures to keep food instruments (whether manual 
or computer-generated, and including on-line check stock or EBT cards) 
secure. In response to this concern, the Department is proposing to 
strengthen the current requirement at section 246.12(l) that State 
agencies control and provide accountability for the receipt and 
issuance of food instruments. Proposed section 246.12(p) would require 
the State agency to develop minimum standards for ensuring the security 
of food instruments, including: maintenance by the local agency of a 
perpetual inventory recording receipt of food instruments from the 
State agency and, if applicable, distribution to clinics; monthly 
physical inventory of food instruments on hand by the local agency and, 
if applicable, by clinics; reconciliation of perpetual and physical 
inventories of food instruments; and maintenance of all such food 
instruments under lock and key by the local agency and clinic, except 
for supplies needed for immediate use. State agencies should also be 
mindful of the various security risks associated with data files, such 
as fabrication of records and food instruments. The reference to the 
control of supplemental foods would be dropped as this is already 
covered in current section 246.12(t) (proposed section 246.12(n)).

19. Food Instrument Disposition (Sections 246.12(q), 246.13(h), and 
246.23(a)(4))

    Current regulations at section 246.12(n) require State agencies to 
identify disposition of all food instruments as validly redeemed, lost 
or stolen, expired, duplicate, voided, or not matching issuance 
records. State agencies are also required to be able to demonstrate the 
capability to match redeemed food instruments with valid certification 
records. As the 1988 National Vendor Audit observed, State agencies do 
not always attempt to account for all redeemed food instruments, and 
they sometimes fail to take effective follow-up action on instruments 
found not to have been validly redeemed. The reconciliation process as 
established in section 246.12(n) is itself deficient because it does 
not require that the accountability loop be completed by determining 
that all redeemed food instruments are supported by a valid 
certification record. This section also refers to ``reconciliation of 
each food instrument issued with food instruments redeemed and 
adjustment of previously reported financial obligations to account for 
actual redemptions and other changes in the status of food 
instruments.'' Finally, the term ``reconciliation'' itself has been the 
source of confusion among State agencies.
    First, these provisions would be moved to section 246.12(q) and the 
term ``reconciliation'' would be replaced by the more general phrase 
``accounting for the disposition of,'' which is generally applicable to 
all of the activities addressed in this paragraph of the regulations. 
State agencies would continue to be required to account for the 
disposition of all food instruments as either issued or voided, and as 
redeemed or unredeemed. The first two categories would allow the State 
agency to identify which food instruments are paid or deobligated. 
Instead of the

[[Page 32329]]

current requirement in section 246.12(n) that obligations be adjusted 
to account for actual redemptions, subsection (h) of the financial 
management system requirements in proposed section 246.13 would be 
amended to require the State agency to adjust projected expenditures to 
account for redeemed food instruments and other changes. The current 
food instrument reconciliation requirement in section 246.13(h) would 
be removed as duplicative. Second, proposed section 246.12(q) would 
require State agencies to match redeemed food instruments not only 
against issuance information, but also against a current masterfile of 
enrolled persons. Typically, the food instrument would contain a unique 
serial number, as currently required, and a participant identification 
number. A successful identification of the disposition of all food 
instruments would entail matching these numbers on the redeemed food 
instrument with their counterparts in the issuance report or file, and 
matching the participant identification number on the food instrument 
against the enrollment master file. Achieving a complete accounting for 
all food instruments is not expected to require State agencies to 
radically alter their current structure of reports. For most State 
agencies, it is the enrollee's certification record which triggers the 
production of each enrollee's food instruments and an issuance record. 
Other State agencies may find it necessary to reprogram their systems 
in order to link certification or enrollment records with food 
instrument issuance and redemption. In an EBT system, the PIN encoded 
on the card would be required to be linked to the issuance and 
enrollment record to indicate that a redemption was valid. Merely 
having the ``capability to reconcile'' redeemed food instruments 
against valid certifications, as current rules at section 246.12(n)(2) 
require, does not provide an adequate level of accountability. The 
Department believes that this final step must actually be carried out.
    In the past, some State agencies that do not attempt to account for 
the disposition of all redeemed food instruments have misinterpreted 
section 246.23(a)(4) in the current regulations, which allows the 
reconciliation process to be considered complete when ``all reasonable 
efforts have been devoted to reconciliation and 99 percent or more of 
the food instruments have been accounted for.'' This language has 
incorrectly been interpreted to mean that State agencies may stop their 
reconciliation efforts when they have reached the 99-percent level. The 
current regulatory language was meant only to acknowledge that 
accounting for 100 percent of redeemed food instruments may not be 
possible due to such factors as mutilation of food instruments and 
coding errors. The Department wishes to stress that State agencies' 
efforts to account for the disposition of food instruments have never 
been considered complete when 99 percent of food instruments had been 
accounted for through reconciliation. State agencies are expected to 
account for the disposition of 100 percent of their food instruments 
utilizing all reasonable management efforts. Therefore, proposed 
section 246.23(a)(4) would both continue to assert FNS's intention to 
establish claims against a State agency for all food instruments which 
have not been accounted for.
    In order to account for all food instruments, the State agency 
would be required in proposed section 246.12(q) to identify food 
instruments as either issued or voided, and as either redeemed or 
unredeemed. Redeemed food instruments would be required to be 
identified as validly issued, lost, stolen, expired, duplicate, or not 
matching valid issuance and enrollment records. FNS would consider the 
process of accounting for the disposition of food instruments complete 
only if the State agency can demonstrate that all reasonable management 
efforts have been made to account for the disposition of 100 percent of 
its food instruments.
    State agencies should be aware that FNS will carefully scrutinize 
their efforts to identify the disposition of food instruments and will 
establish a claim against any State agency, pursuant to section 
246.23(a)(4), which has not accounted for the disposition of all 
redeemed food instruments, including appropriate follow-up action on 
food instruments that cannot be matched against valid issuance or 
certification records, unless the State agency can demonstrate that it 
has: made every reasonable effort to meet this requirement; has 
identified the reasons for its inability to account for the disposition 
of each redeemed food instrument; and, to the extent considered 
necessary by FNS, has undertaken appropriate actions to improve its 
procedures.

20. Issuance of Food Instruments and Supplemental Foods (Section 
246.12(r))

    Proposed section 246.12(r) would consolidate the existing 
provisions in Sections 246.12 (o), (p), (r)(7), and (r)(8) concerning 
the issuance of food instruments and supplemental foods. The only 
change would be to add a reference to supplemental foods in the 
requirement that no more than a three-month supply of food instruments 
may be issued to any participant at one time.

21. Conflict of Interest (Section 246.12(t))

    Current regulations at section 246.12(q) require only that the 
State agency ensure the absence of conflict of interest between any 
local agency and the vendor(s) under the local agency's jurisdiction. 
Section 246.12(t) of this proposal would also require the absence of 
conflict of interest between the State agency and any vendor. Reference 
to the State agency would be added in recognition of the pivotal role 
the State agency plays in authorizing and monitoring vendors. While the 
State procurement rules governing home food delivery contracts likely 
include conflict of interest provisions, this provision would make 
explicit the conflict of interest prohibition for home food delivery 
contractors.
    In this context, a conflict of interest is generally where an 
individual employed by the State agency or local agency has an interest 
in a vendor. The interest may be financial, may relate to past, 
current, or future employment with the vendor, or may arise from a 
family relationship. Such circumstances create, at minimum, the 
appearance or potential that the employee's official actions on behalf 
of the WIC Program will be improperly influenced by the interest in the 
vendor. This discussion is provided for guidance purposes, and is in no 
way exclusive. The Department believes that this is an area which is 
based more appropriately on State laws or regulations governing 
conflict of interest.

22. Participant Violations and Sanctions (Section 246.12(u)) and 
Claims Against Participants (Section 246.23(c))

    Participant sanctions are currently found in section 246.12(k)(9) 
and would be moved to section 246.12(u)(2). The Department proposes to 
increase the maximum disqualification period for participant violations 
from 3 months to 1 year and to consider actions by proxies as 
participant violations. Current regulations require that State agencies 
establish a maximum disqualification period of 3 months for 
participants. Many State agencies believe this maximum is ineffective 
in deterring participant program noncompliance. In addition, the 
current regulations do not address program noncompliance by proxies. 
Some forms of participant violations require

[[Page 32330]]

collusion on the part of the proxy (which may include a parent, a 
caretaker, or another person designated to accept and redeem food 
instruments--see the discussion of the proposed definition of proxy in 
section 2 of this preamble). Examples of this kind of collusion are 
given in ``The WIC Files.''
    The Department acknowledges that some may view the proposed 1-year 
maximum as contrary to program goals because it could adversely affect 
the health of participants. However, the Department wishes to point out 
violative participants and proxies subvert the purpose of the Program 
so that it cannot achieve its objectives. Since WIC benefits diverted 
to other purposes do not benefit participants in the intended way, a 
longer disqualification cannot be expected to have additional serious 
negative consequences on a participant's nutritional status than 
continued program noncompliance would have. This is regrettably true 
whether the program noncompliance is by the participant (e.g., a 
pregnant woman trafficking food instruments), the participant's parent 
or caretaker in the case of an infant or child, or another type of 
proxy. WIC funds are better spent on participants whose health and 
well-being can be improved through the Program.
    The Department is also proposing to expand the list of participant 
violations in current section 246.12(k)(9) to include dual 
participation (now section 246.12(u)(1)). Dual participation, as 
defined in section 246.2 entails ``simultaneous participation in the 
Program in one or more than one WIC clinic, or participation in the 
Program and in the Commodity Supplemental Food Program (CSFP) during 
the same period of time.'' Dual participation is discussed in more 
detail in section 5 of this preamble.
    Section 17(f)(14) of the Child Nutrition Act (42 U.S.C. 
1786(f)(14)) requires the State agency to recover the value of benefits 
provided to participants who have defrauded the Program to the extent 
that recovery is cost-effective. This mandate is implemented in section 
246.23(c) of current regulations. However, the limit on participant 
disqualifications, be it the current three months or the proposed year, 
may hinder the State agencies' collection efforts because a person who 
subsequently becomes eligible may reenter the Program after having been 
disqualified for improper receipt of benefits without first making 
restitution. Proposed section 246.12(u)(2) would require State agencies 
to disqualify participants for one year in cases where a participant 
violation gives rise to a claim. In recognition of the hardship that 
such a disqualification could place on an infant or child participant, 
who could not have committed the violation, the proposed rule would 
require the State agency to permit another proxy to be designated 
before disqualifying an infant or child participant. In addition, under 
the proposal, the State agency could permit a disqualified participant 
to reapply if full restitution is made prior to the end of the 
disqualification period.
    The Department wishes to clarify the difference between a 
participant sanction and a participant claim. A participant sanction is 
an administrative action taken in response to program violations in 
order to protect the integrity of the Program. A participant claim is 
an assessment of financial liability for the value of improperly 
obtained program benefits. This proposal would also revise section 
246.23(c)(1) to require State agencies in all cases to send a letter to 
the participant requesting payment for improperly obtained program 
benefits and indicating that, if the request for repayment is not 
appealed or is unsuccessfully appealed, the participant must be 
disqualified for one year, unless the participant is an infant or child 
for whom an alternate proxy acceptable to the State agency is found. If 
full restitution is made prior to the end of the disqualification 
period, the State agency would be allowed to permit the participant to 
reapply for the Program. If the participant fails to make payment in 
response to this letter, the State agency would be required to assess 
the cost-effectiveness of each additional step in the collection 
process against the value of the benefits involved and to take such 
actions until the recovery process ceases to be cost-effective. To help 
facilitate resolution of such claims, the Department proposes to permit 
State agencies to allow participants for whom financial restitution 
would cause undue hardship to perform in-kind service, determined by 
the State agency, in lieu of monetary repayment. While the Department 
acknowledges that collection efforts could in many instances prove 
prohibitively expensive, it believes that at least an initial, low-cost 
effort would always be cost-effective. This paragraph would continue to 
permit the State agency to delegate the responsibility for the 
collection of participant claims to the local agency, though it would 
be moved to proposed section 246.23(c)(3).

23. Vendor Appeals (Section 246.18)

    Current regulations at section 246.18 establish minimum 
requirements for vendor and local agency appeal rights and State agency 
administrative review procedures. The procedural requirements are 
intended to establish a simple and fair appeal process at a reasonable 
cost to State agencies. Some State agencies have significantly exceeded 
the regulatory procedural requirements, for example, by requiring that 
the decision makers be administrative law judges and providing for a 
verbatim transcription of their administrative review proceedings. In 
response to this situation, the Department's Office of Inspector 
General recommended in the 1988 National Vendor Audit that the 
Department mandate standard administrative review procedures in order 
to limit costs. This would prevent State agencies from exceeding the 
minimum procedures required by the current regulations. The Department 
continues to believe that the procedures mandated by program 
regulations are adequate. While the Department is not proposing to 
prohibit the use of more elaborate procedures, the Department does not 
consider such procedures to be an effective use of the limited 
nutrition services and administrative funds and encourages State 
agencies to develop administrative review procedures that stick to the 
minimum requirements in this section.
    To support State agency efforts to control appeal costs, make the 
process more manageable, and ensure fairness to vendors, the Department 
is proposing to: (1) Limit the types of State agency actions subject to 
administrative review; (2) establish abbreviated administrative review 
procedures for certain adverse actions; and (3) relax review procedure 
timeframes.
    Current regulations at section 246.18(a)(1) allow vendors and local 
agencies to appeal a denial of an application for authorization, a 
disqualification from the Program, and ``any other adverse action which 
affects participation.'' The Department considers the phrase ``any 
other adverse action which affects participation'' to be inappropriate 
for vendor appeals. A vendor could, for example, seek to appeal a State 
agency decision to authorize another vendor in the area on the grounds 
that the action would reduce the first vendor's volume of WIC business. 
In situations such as this, the State agency's responsibility is to 
ensure adequate participant access to the Program, not to protect the 
individual interests of a vendor. Thus, the

[[Page 32331]]

Department proposes to limit the State agency actions that are subject 
to administrative review. Except in certain circumstances discussed 
herein, these actions include: (1) A denial of authorization based on 
selection criteria or the State agency's determination in accordance 
with proposed section 246.12(g)(4) that the vendor is attempting to 
circumvent a sanction, (2) a termination of an agreement for cause, (3) 
a disqualification, and (4) the imposition of a fine or a civil money 
penalty in lieu of disqualification. Vendors that believe their civil 
rights have been violated in the authorization process may file 
complaints under the authority of civil rights legislation.
    Questions have also arisen about whether fines imposed by courts 
may be appealed to the State agency. Only those actions taken by the 
State agency are subject to administrative review by the State agency. 
Thus, any sentence or civil judgment imposed by a court may only be 
pursued in the courts. Conversely, fines or civil money penalties in 
lieu of disqualification imposed by a State agency are subject to 
review by the State agency.
    Readers should note, however, that to the extent that the amount of 
a fine or civil money penalty is precisely set in the State agency's 
sanction schedule, the decision maker would not have the authority to 
alter the amount of the fine or civil money penalty on appeal unless 
the decision maker found that either it had been incorrectly calculated 
or the vendor did not commit the cited violation.
    Proposed section 246.18(a)(1)(ii) would list the adverse actions 
that would receive an abbreviated administrative review: (1) A denial 
of authorization based on the selection criteria set out in proposed 
section 246.12(g)(3)(iii) or (vi), (2) a denial of authorization based 
on the State agency's limiting criteria or because the vendor submitted 
its application outside the timeframes during which applications are 
being accepted and processed as established by the State agency under 
section 246.12(g)(6), (3) a termination of an agreement because of a 
change in ownership or location or cessation of operations, and (4) a 
disqualification based on the imposition of an FSP civil money penalty 
for hardship.
    These actions each present circumstances in which the issue on 
appeal is a very narrow one. For example, the selection criterion at 
section 246.12(g)(3)(iii) would prohibit authorization of a vendor if 
the vendor or certain persons associated with the vendor had been 
convicted of the listed crimes. The only issue in such an appeal would 
be whether the vendor or a person currently associated with the vendor 
actually was convicted of the crime. Recognizing that errors can be 
made, this rule would require State agencies to provide such vendors an 
opportunity to point out, for example, that the conviction had been 
overturned or that the convicted person was no longer associated with 
the vendor. To reduce the costs of administrative reviews required by 
the regulations, this proposed rule would require State agencies to 
establish abbreviated administrative review procedures for such 
actions.
    Proposed section 246.18(c) would specify the procedures for 
abbreviated administrative reviews. As with the current procedures, the 
State agency would be required to provide the vendor written 
notification of the adverse action, the procedures to follow to appeal 
the action, and the cause(s) and effective date of the action. The 
State agency would also be required to provide the vendor an 
opportunity to provide a written response. The State agency would not 
be required to conduct a full administrative review where the vendor is 
provided with an opportunity to confront and cross-examine adverse 
witnesses. All that would be required is a review of the information 
given to the vendor forming the basis for the adverse action, the 
vendor's response, and relevant statutes, regulations, policies, and 
procedures. The decision maker would not have to be independent from 
the State agency. The decision maker would only have to be someone 
different from the person who made the initial decision. These 
abbreviated administrative review procedures would provide the vendor 
an opportunity to appeal actions in which the decision is largely 
systematic. At the same time, it would eliminate the need for the State 
agency to provide a more lengthy and costly full administrative review.
    Proposed section 246.18(a)(1)(iii) lists those actions that would 
not be subject to administrative review. As discussed in section 8 of 
this preamble and above in this section, while the validity or 
appropriateness of the limiting and selection criteria would not be 
subject to review, a decision to deny authorization would be subject to 
review. Similarly, the March 18 vendor sanction rule included a 
provision that participant access determinations are not subject to 
review. These provisions ensure that State agencies have the necessary 
discretion to establish program operating parameters. Limiting and 
selection criteria and the criteria for making participant access 
determinations would all be included in the State Plan. Concerns about 
these criteria are properly raised during the public comment phase of 
the State Plan process.
    Some State agencies are beginning to implement vendor selection 
procedures in which applicant vendors submit competitive bids for a 
specified number of authorizations in a particular geographical area. 
Under this proposed rule, any time a State agency's authorization 
determinations are subject to the State agency's procurement 
procedures, nonselection would not be subject to review. In this 
situation, a separate administrative review would be redundant and 
could disrupt the procurement procedures.
    Similarly, the Department proposes to eliminate administrative 
review of vendor claims given the requirement in current section 
246.12(r)(5)(iii) (redesignated as section 246.12(k)(5) in this 
proposal) that State agencies provide vendors an opportunity to correct 
or justify the error giving rise to a claim. An administrative review 
in this instance would be redundant.
    Under current sections 246.18(b)(1) and (9), timeframes are 
established for the advance notice of adverse action (15 days) and the 
notification of the appeal decision (within 60 days of the date of 
receipt of the vendor's request for administrative review). While the 
advance notice requirement is easily met, the 60-day timeframe for 
decisions has proven difficult for some State agencies, particularly 
those which must rely on a State board of appeals or other external 
organizational unit that is beyond the State agency's control. 
Therefore, the Department is proposing in section 246.18(b)(9) to 
extend the time limit for providing decisions on vendor--but not local 
agency--appeals to 90 days.
    While there is some doubt that 90 days still may not be sufficient 
in some State agencies to render decisions on vendor appeals, other 
State agencies have been clearly able to meet the timeframe. The 
Department does not believe that there is sufficient justification for 
extending the time period beyond 90 days, nor would lengthening the 
time period promote the goal of improving and streamlining the appeals 
process. Rather, State agencies that have problems in this area should 
work to improve the efficiency of their appeals system. The Department 
hopes that the proposed limitations on actions subject to 
administrative review and the new abbreviated administrative review 
procedures will help State agencies reduce their costs for 
administrative

[[Page 32332]]

reviews and better target their efforts and thus assist in timely 
decisions on vendor appeals.
    At proposed section 246.18(b)(5), the Department would provide 
State agencies the opportunity to conduct examinations in camera, i.e., 
behind a protective screen or other device, to protect the identity of 
WIC Program investigators. Protecting the identity of the investigator 
is paramount in conducting covert investigations and revealing the 
investigators identity during an administrative review would compromise 
future investigations.
    Proposed section 246.18(b)(7) would strengthen current language 
regarding the disclosure of information to appellants. Current 
regulations at section 246.18(b)(7) afford the appellant vendor or 
local agency ``the opportunity to review the case record prior to the 
hearing.'' The vendor's ``case record,'' or file, may contain 
investigative information, i.e. information regarding how the State 
agency established the vendor's high-risk status, which, if released, 
would jeopardize efforts to combat program noncompliance. Thus, 
proposed section 246.18(b)(7) would clarify that the appellant vendor 
or local agency is allowed to examine only ``the evidence upon which 
the State agency's action is based.'' This restriction is consistent 
with due process rights. Appellant vendors would, under the 
confidentiality provisions proposed in section 246.26(e)(2), have 
access to information otherwise protected by current section 246.26(d), 
to the extent that such information is part of the evidence upon which 
the action being appealed is based.
    The local agency adverse actions subject to administrative review 
are unchanged in this proposal, except they would be consolidated under 
246.18(a)(2) with the current provision regarding the effective date of 
local agency adverse actions. In addition, sections 246.18 would be 
revised throughout to differentiate between a vendor or local agency 
which ``appeals'' an action and the State agency which ``reviews'' an 
action.
    Finally, the current requirements in sections 246.18(c) and (d) 
would be redesignated as sections 246.18(d) and (f) and a new section 
246.18(e) would be added. Current section 246.18(d) requires State 
agencies to notify appellants of the availability of any further 
administrative review within the State agency. The Department believes 
that this requirement duplicates the current requirement in section 
246.18(b)(2) and proposed requirement in section 246.18(c) that the 
State agency inform vendors and local agencies of their opportunity to 
appeal the adverse action and could be viewed as encouraging State 
agencies to provide an additional level of administrative review. This 
section would be revised to make clear that the decisions rendered 
under both the full and abbreviated administrative review procedures 
are the final State agency action. If the action being appealed has not 
already taken effect, the appeal decision would be required to indicate 
the effective date of the action. The Department is also proposing to 
clarify the State agency requirements regarding judicial review. 
Instead of the current regulatory language that requires the State 
agency ``to explain'' the right to pursue judicial review, the 
Department proposes to require the State agency ``to inform'' 
appellants that they may be able to pursue judicial review. Review of 
State agency actions is a matter of State law and may vary depending on 
the action taken. The Department believes that the State agency should 
not be put in the position of determining the appropriate avenue of 
judicial review for an appellant vendor or local agency.

24. State Agency Corrective Action Plans and Delegation of 
Monitoring to Local Agencies (Sections 246.19(a)(2) and 
246.19(b)(2)).

    Under current regulations at section 246.19(a)(3)(ii), the State 
agency is required to submit a corrective action plan with 
implementation timeframes in response to management evaluations only 
when FNS has notified the State agency of its intention to impose a 
sanction. However, management evaluation findings may be significant 
and require timely corrective action even when they do not justify 
imposition of a sanction. As reported in the 1988 National Vendor 
Audit, some State agencies do not take timely action to correct 
deficiencies identified by FNS. Therefore, the Department is proposing 
in section 246.19(a)(2) that the State agency be required to submit a 
corrective action plan, including implementation timeframes, within 60 
days of receipt of a management evaluation report containing negative 
findings even where the findings do not justify a sanction. The 
Department believes 60 days should be sufficient time to develop a 
corrective action plan. Extending the timeframe would unnecessarily 
prolong the time before corrective action could be achieved.
    In addition, proposed section 246.19(b)(2) would require monitoring 
of local agencies to include, if the State agency delegates any vendor 
training or monitoring to local agencies, the local agency's 
effectiveness in carrying out these responsibilities.

25. Areas of Special Focus during Local Agency Reviews (Sections 
246.19(b)(5) and (6))

    Current regulatory requirements for coverage in local agency 
reviews at section 246.19(b)(2) are broad and very general in nature. 
State agencies are required, for example, to include ``certification'' 
and ``accountability'' in their local agency reviews. The Department 
believes that effective monitoring depends on comprehensive coverage. 
However, FNS may, from time to time, identify a problem in a more 
precisely defined aspect of local agency operations and may want State 
agencies to review this aspect intensively. For example, within the 
broad category of ``certification,'' there may be a need to focus 
attention on income eligibility determination procedures. Security of 
food instruments may be identified within the broader area of 
``accountability'' as requiring in-depth monitoring. These targeted 
areas would be areas identified through management evaluations, audits, 
or other means which document the need for intensified monitoring and 
corrective action, as appropriate. Therefore, the Department is 
proposing in section 246.19(b)(5) to require State agencies to conduct 
in-depth review of areas specified by FNS through FNS policy memoranda 
or other guidance. Under this proposal, FNS could also require State 
agencies to implement a standard form or protocol for such focus-area 
reviews and to report the results to FNS. No more than two such areas 
would be stipulated for any fiscal year, and they would be announced at 
least six months before the beginning of the fiscal year. This 
provision would reflect the current requirement that State agencies 
provide FNS special reports on program activities.
    The Department wishes to stress that this requirement does not mean 
that State agency reviews of local agencies should be less 
comprehensive than in the past. Full, comprehensive reviews of local 
agencies are necessary to identify deficiencies. This proposal simply 
enables FNS to gather information on areas of special emphasis in 
greater depth than might otherwise be possible. Areas of focus would 
change periodically, and there also could be fiscal years for which FNS 
does not identify any such areas.
    In addition, section 246.19(b)(6) would be amended to require that 
local agencies submit to State agencies, within 45 days of written 
notification of deficiencies, a written corrective action

[[Page 32333]]

plan which explains how all of the identified problems will be 
addressed and stipulates a timeframe for completion of each corrective 
action. It is important that when problems are identified that they be 
corrected in a timely manner. State agencies are expected to pursue 
timely follow-up action to assure that planned corrective actions are 
actually taken.

26. Confidentiality of Vendor Information (Section 246.26(e))

    The Department is proposing to add a new provision to section 
246.26 of the WIC regulations addressing the confidentiality of vendor 
information. Heretofore, the WIC Program regulations have been silent 
on the issue of the confidentiality of vendor information, and 
provisions protecting vendor information from disclosure are still 
needed. The purpose of protecting vendor information is two-fold: to 
gain vendor cooperation and to aid in the control and monitoring of 
vendors.
    Under this proposal, State agencies would be required to restrict 
the disclosure of information obtained from vendors or generated by the 
State agency on vendors (other than the vendor's name, address, and 
authorization status) to persons directly connected with the 
administration and enforcement of any Federal or State law, including 
the WIC Program and the FSP, and to the Comptroller General of the 
United States. While this would authorize local agencies under the 
State agency's jurisdiction, other WIC state and local agencies, and 
their contractors to receive vendor information, the proposed rule 
would require State agencies to enter into a written agreement with any 
non-Federal agency before disclosing any vendor information. The 
agreement would be required to specify that they will use or disclose 
such information only for authorized purposes directly connected with 
the administration or enforcement of a Federal or State law.
    In accordance with the requirements in current sections 
246.18(b)(1) and (7) that the State agency disclose to vendors the 
cause of the adverse action and provide them an opportunity to review 
the case record, proposed section 246.26(e)(2) would permit the 
disclosure to appellant vendors of information that forms the basis of 
an adverse action subject to administrative review. This would not 
include information concerning other vendors or information that would 
compromise the State agency's vendor monitoring system. While 
information about other vendors, such as average redemption data, might 
have been used to assist the State agency in targeting vendors for 
investigation, the Department does not consider such information as the 
basis for the State agency's action. Similarly, information that would 
compromise the State agency's monitoring system, such as the names of 
investigators, would not be considered to be information on which an 
action is based.
    Efforts to control program noncompliance in the WIC Program are 
significantly enhanced by the State agency's access to information on 
vendors who also participate in the FSP. Section 9(c) of the Food Stamp 
Act of 1977 (7 U.S.C. 2018(c)) permits the FSP to disclose information 
provided by retail food stores and wholesale food concerns in order to 
gain or maintain authorization in the FSP to WIC State agencies for 
purposes of administering the provisions of the Child Nutrition Act and 
its implementing regulations. Proposed Section 246.26(f) would reflect 
this limitation and make clear that ``administering the provisions of 
the Child Nutrition Act'' includes both administering and enforcing the 
WIC Program. Accordingly, this information could not be disclosed to 
other vendors or the general public.
    The FSP may share with WIC State agencies other information about 
authorized retailers that is not obtained from FSP retailer 
applications and is therefore not protected under section 9(c) of the 
Food Stamp Act. This information, e.g., results of investigations, 
along with information the WIC State agency collects directly from WIC 
vendors and its analysis of such material, contribute to the WIC State 
agency's vendor selection and high-risk detection systems. These 
systems can be effectively operated only if such data is protected from 
release to WIC vendors or other members of the public. State agency 
experience has shown that many vendors will commonly attempt to gain 
access to this information during the administrative review process. 
Such information must be kept confidential, so that vendors cannot 
secure unfair competitive advantages.

List of Subjects in 7 CFR Part 246

    Food assistance programs, Food donations, Grant programs--Social 
programs, Infants and children, Maternal and child health, Nutrition 
education, Public assistance programs, WIC, Women.
    For reasons set forth in the preamble, 7 CFR part 246 is proposed 
to be amended as follows:

PART 246--SPECIAL SUPPLEMENTAL NUTRITION PROGRAM FOR WOMEN, INFANTS 
AND CHILDREN

    1. The authority citation for Part 246 continues to read as 
follows:

    Authority: 42 U.S.C. 1786.

    2. In Sec. 246.2, the definitions of Authorized Supplemental foods, 
Compliance buy, High-risk vendor, Home food delivery contractor, 
Inventory audit, Proxy, Routine monitoring, Vendor, Vendor 
authorization, Vendor limiting criteria, Vendor overcharge, Vendor 
selection criteria, Vendor violations, and WIC are added in 
alphabetical order to read as follows:


Sec. 246.2  Definitions.

* * * * *
    Authorized supplemental foods means those supplemental foods 
authorized by the State or local agency for a particular participant.
* * * * *
    Compliance buy means a covert, on-site investigation in which a 
representative of the Program poses as a participant, transacts one or 
more food instruments, and does not reveal his or her identity during 
the visit.
* * * * *
    High-risk vendor means a vendor identified as having a high 
probability of violating program requirements through application of 
the criteria established in Sec. 246.12(j)(2) and any additional 
criteria established by the State agency.
    Home food delivery contractor means a sole proprietorship, a 
partnership, a cooperative association, or a corporation that contracts 
with a State agency to deliver authorized supplemental foods to the 
residences of participants under a home food delivery system.
* * * * *
    Inventory audit means the examination of food invoices or other 
proofs of purchase to determine whether a vendor has purchased 
sufficient quantities of authorized supplemental foods to provide 
participants the quantities specified on food instruments redeemed by 
the vendor during a given period of time.
* * * * *
    Proxy means any person designated by a participant to act on her 
behalf and, in the case of an infant or child, the parent or caretaker 
who applies on behalf of the infant or child.
* * * * *
    Routine monitoring means overt, on-site monitoring during which

[[Page 32334]]

representatives of the Program identify themselves to vendor personnel.
* * * * *
    Vendor means a sole proprietorship, a partnership, a cooperative 
association, or a corporation operating an individual retail site 
authorized to provide authorized supplemental foods to participants 
under a retail food delivery system. Each individual retail outlet 
under a business entity which operates more than one site constitutes a 
separate vendor. Each vendor must have a fixed location, except when 
the authorization of mobile stores is necessary to meet the special 
needs described in the State agency's State Plan in accordance with 
Sec. 246.4(a)(14)(xiv).
    Vendor authorization means the process by which vendors who apply 
or subsequently reapply for authorization are assessed, selected, and 
enter into an agreement with the State agency.
    Vendor limiting criteria means criteria established by the State 
agency to determine the maximum number and distribution of vendors to 
be authorized in its jurisdiction pursuant to Sec. 246.12(g)(2).
    Vendor overcharge means a pattern of intentionally or 
unintentionally charging participants more for authorized supplemental 
foods than non-WIC customers or charging participants more than the 
current shelf or contract price.
    Vendor selection criteria means the criteria in Sec. 246.12(g)(3) 
and any additional criteria established by the State agency to select 
individual vendors for program authorization.
    Vendor violation means any intentional or unintentional actions of 
a vendor (with or without the knowledge of management) which violate 
the Program statute or regulations or State agency policies or 
procedures.
    WIC means the Special Supplemental Nutrition Program for Women, 
Infants and Children authorized by section 17 of the Child Nutrition 
Act of 1966, 42 U.S.C. 1786.
    3. In Sec. 246.3:
    a. Paragraph (e)(5) is redesignated as paragraph (e)(6); and
    b. A new paragraph (e)(5) is added to read as follows:


Sec. 246.3  Administration.

* * * * *
    (e) * * *
    (5) For State agencies which anticipate 50 or more authorized 
vendors as of October 1 of each fiscal year, one full-time or 
equivalent vendor management specialist. State agencies which 
anticipate fewer than 50 authorized vendors as of that date shall 
designate a staff person responsible for vendor management.
* * * * *
    4. In Sec. 246.4:
    a. Paragraphs (a)(14)(ii), (a)(14)(iii), (a)(14)(iv), and 
(a)(14)(vi) are revised;
    b. In paragraphs (a)(14)(vii), (a)(14)(viii), and (a)(17) are 
amended by removing the words ``food vendors'' and adding in their 
place the word ``vendors'';
    c. In paragraph (a)(14)(ix) the word ``and'' at the end is removed;
    d. In paragraphs (a)(14)(x) and (xi) the periods at the end are 
removed and semicolons added in their place;
    e. New paragraphs (a)(14)(xii) through (a)(14)(xv) are added; and
    f. The first sentence of paragraph (a)(15) is revised.
    The revisions and additions read as follows:


Sec. 246.4   State plan.

    (a) * * *
    (14) * * *
    (ii) Vendor limiting criteria and any vendor selection criteria 
established by the State agency in addition to the selection criteria 
required by Sec. 246.12(g)(3);
    (iii) A sample vendor agreement, including the sanction schedule;
    (iv) The system for monitoring vendors to ensure compliance and 
prevent fraud, waste, and program noncompliance, and the State agency's 
plans for improvement in the coming year. The State agency shall also 
include the criteria it will use to determine which vendors will 
receive routine monitoring visits. State agencies which intend to 
delegate any aspect of vendor monitoring responsibilities to a local 
agency or contractor shall describe the State agency supervision and 
training which will be provided to ensure the uniformity and quality of 
vendor monitoring efforts;
* * * * *
    (vi) Where food instruments are used, a facsimile of the food 
instrument and a description of the system the State agency will use to 
account for the disposition of food instruments in accordance with 
Sec. 246.12(q);
* * * * *
    (xii) The procedures the State agency will use to train vendors in 
accordance with Sec. 246.12(i). State agencies which intend to delegate 
any aspect of training to a local agency, contractor, or vendor 
representative shall describe the State agency supervision and 
instruction which will be provided to ensure the uniformity and quality 
of vendor training;
    (xiii) A description of the State agency's system for ensuring food 
instrument security in accordance with Sec. 246.12(p);
    (xiv) A description of the State agency's participant access 
determination criteria consistent with Sec. 246.12(l)(8); and
    (xv) The special needs necessitating the authorization of mobile 
stores, if the State agency chooses to authorize such stores.
    (15) Plans to prevent and identify dual participation in accordance 
with Sec. 246.7(l)(1)(i) and (l)(1)(ii) * * *
* * * * *
    5. In Sec. 246.7:
    a. In paragraph (h)(1)(i), the reference to ``Sec. 246.12(k)(2)'' 
is removed, and a reference to ``Sec. 246.12(u)'' is added in its 
place; and
    b. Paragraph (l)(1)(i) through (l)(1)(iv) is revised.
    The revision reads as follows:


Sec. 246.7  Certification of participants.

* * * * *
    (l) * * *
    (1) * * *
    (i) In conjunction with WIC local agencies, the prevention and 
identification of dual participation within each local agency and 
between local agencies under the State agency's jurisdiction, including 
the quarterly identification of dual participation;
    (ii) In areas where a local agency serves the same population as an 
Indian State agency or a CSFP agency, and where geographical or other 
factors make it likely that participants travel regularly between 
contiguous local service areas located across State agency borders, 
entering into an agreement with the other agency for the detection and 
prevention of dual participation. The agreement must be made in writing 
and included in the State Plan;
    (iii) Immediate disqualification from one of the programs or 
clinics for participants found in violation due to dual participation;
    (iv) In cases of dual participation resulting from intentional 
misrepresentation, the collection of improperly issued benefits in 
accordance with Sec. 246.23(c)(1) and disqualification from both 
programs in accordance with Sec. 246.12(u)(2).
* * * * *
    6. Section 246.12 is revised to read as follows:


Sec. 246.12   Food delivery systems.

    (a) General. This section sets forth design and operational 
requirements for food delivery systems. In recognition of emergent 
electronic benefits transfer (EBT) technology, FNS may, on a case-by-
case basis, modify regulatory provisions which FNS determines

[[Page 32335]]

unnecessarily duplicate the accountability capabilities inherent in the 
particular EBT system.
    (1) The State agency is responsible for the fiscal management of, 
and accountability for, food delivery systems under its jurisdiction.
    (2) The State agency shall design all food delivery systems to be 
used by local agencies under its jurisdiction.
    (3) FNS may, for a stated cause and by written notice, require 
revision of a proposed or operating food delivery system and will allow 
a reasonable time for the State agency to effect such a revision.
    (4) All contracts or agreements entered into by the State or local 
agency for the management or operation of food delivery systems shall 
be in conformance with the requirements of Part 3016 of this title.
    (b) Uniform food delivery systems. The State agency may operate up 
to three types of food delivery systems within its jurisdiction--
retail, home delivery, or direct distribution. Each system shall be 
procedurally uniform within the jurisdiction of the State agency and 
shall ensure adequate participant access to supplemental foods. When 
used, food instruments shall be uniform within each type of system. The 
State agency shall permit only authorized vendors, home food delivery 
contractors, and direct distribution sites to redeem food instruments.
    (c) Free of charge. State and local agencies shall provide 
participants the Program's supplemental foods free of charge.
    (d) Compatibility of food delivery system. The State agency shall 
ensure that the food delivery system(s) selected is compatible with 
delivery of health and nutrition education services to participants.
    (e) Retail food delivery systems: General. Retail food delivery 
systems are systems in which participants obtain supplemental foods by 
submitting a food instrument to an authorized vendor.
    (f) Retail food delivery systems: Food instrument requirements. (1) 
State agencies using retail food delivery systems shall use food 
instruments and the food instruments shall comply with the requirements 
of this paragraph (f).
    (2) Each printed food instrument shall clearly bear on its face the 
following information:
    (i) The supplemental foods authorized to be obtained with the food 
instrument;
    (ii) The first date on which the food instrument may be used by the 
participant to obtain supplemental foods.
    (iii) The last date by which the participant may use the food 
instrument to obtain supplemental foods. This date shall be a minimum 
of 30 days from the first date on which it may be used, or, for the 
participant's first month of issuance, it may be the end of the month 
or cycle for which the food instrument is valid. Rather than entering a 
specific expiration date on each instrument, all instruments may be 
printed with a notice that the participant must transact them within a 
specified number of days after the first date on which the food 
instrument may be used.
    (iv) The date by which the vendor must redeem the food instrument. 
This date shall be no more than 90 days from the first date on which 
the food instrument may be used. If the date is fewer than 90 days, 
then the State agency shall ensure that the time allotted provides the 
vendor sufficient time to redeem the food instruments without undue 
burden.
    (v) A unique and sequential serial number.
    (vi) At the discretion of the State agency, a maximum purchase 
price which is higher than the price of the supplemental food for which 
it will be used, but low enough to be a reasonable protection against 
potential loss of funds. When the maximum value is shown, the space for 
the actual value of the supplemental foods obtained shall be clearly 
distinguishable. For example, the words ``actual amount of sale'' could 
be printed larger and in a different area of the food instrument than 
the maximum value.
    (vii) A signature space in which the participant or proxy must sign 
at the time the supplemental foods are obtained.
    (3) The State agency shall implement procedures to ensure every 
redeemed food instrument can be identified by the vendor which redeemed 
the food instrument. Each individual vendor in a chain participating in 
the Program shall be separately identified. The State agency may 
identify vendors by requiring that all authorized vendors stamp their 
names and/or enter a vendor identification number on all redeemed food 
instruments prior to submission.
    (g) Retail food delivery systems: Vendor authorization. (1) The 
State agency shall authorize an appropriate number and distribution of 
vendors in order to ensure adequate participant access to supplemental 
foods and to ensure effective State agency management, oversight, and 
review of authorized vendors in its jurisdiction.
    (2) The State agency shall develop and implement criteria to limit 
the number of vendors to be authorized and establish their 
distribution. This system shall ensure adequate participant access and 
effective management, oversight, and review of authorized vendors in 
their jurisdiction. When developing limiting criteria, the State agency 
shall consider, at a minimum, participant access in terms of 
participant-to-vendor ratios based on population density, distribution 
of participants, location of local agencies and clinics, and 
availability of public transportation and road systems to the WIC 
population. The State agency shall apply its limiting criteria 
consistently throughout its jurisdiction taking into account varying 
geographic and other characteristics within the jurisdiction. The State 
agency shall establish a system for revising and/or reapplying its 
limiting criteria whenever it determines that relevant demographic 
shifts or significant changes in caseload allocation make such action 
necessary.
    (3) The State agency shall develop and implement criteria to select 
vendors. The State agency shall apply its selection criteria 
consistently throughout its jurisdiction. The State agency may reassess 
any authorized vendor using these criteria at any time during the 
vendor's agreement period and shall terminate the agreements with those 
vendors that fail to meet them. In applying the criteria set forth in 
paragraphs (g)(3)(iii) through (g)(3)(vi) of this section, the State 
agency may rely on facts already known to it and representations made 
by applicant vendors; the State agency is not required to establish a 
formal system of background checks for applicant vendors. The selection 
criteria shall include:
    (i) Competitive price;
    (ii) Minimum variety and quantity of authorized supplemental foods;
    (iii) Lack of a record of a criminal conviction or civil judgment 
of the applicant vendor or any person currently associated with the 
vendor as an owner, officer, director, or partner for: commission of 
fraud or a criminal offense in connection with obtaining, attempting to 
obtain, or performing a public or private agreement or transaction; 
violation of Federal or State antitrust statutes, including those 
proscribing price fixing between competitors, allocation of customers 
between competitors, and bid rigging; commission of embezzlement, 
theft, forgery, bribery, falsification or destruction of records, 
making false statements, receiving stolen property, making false 
claims, or obstruction of justice; or, commission of any other offense 
indicating a lack of business integrity or business honesty of the

[[Page 32336]]

vendor or its owner, officer, director, or partner;
    (iv) Lack of a history, during a period preceding the date of 
application specified by the State agency (but not less than one year 
and not more than six years), of serious vendor violations resulting 
from the acts of omissions by the applicant vendor or any person 
currently associated with the vendor as an owner, officer, director, or 
partner, except that the time limit established by the State agency 
shall not apply to a vendor violation which results in a criminal 
conviction or civil judgment described in paragraph (e)(3)(iii) of this 
section. Serious vendor violations include: being subject to any of the 
vendor sanctions established in paragraph (l)(1) of this section and 
failure to participate in the annual training required by paragraph (i) 
of this section;
    (v) Lack of a history, during a period preceding the date of 
application specified by the State agency (but not less than one year 
and not more than six years), of serious Food Stamp Program violations 
by the applicant vendor or any person currently associated with the 
vendor as an owner, officer, director, or partner, except that the time 
limit established by the State agency shall not apply to a Food Stamp 
Program violation which results in a criminal conviction or civil 
judgment described in paragraph (g)(3)(iii) of this section. Serious 
Food Stamp Program violations include: withdrawal of Food Stamp Program 
authorization for reasons of program noncompliance; a Food Stamp 
Program disqualification which is in effect at any time during this 
period; and assessment of a Food Stamp Program civil money penalty for 
hardship during this period; and
    (vi) Not being currently disqualified from participation in the 
Food Stamp Program or, if a Food Stamp Program civil money penalty for 
hardship has been assessed, the period of the disqualification that 
would otherwise have been imposed has expired.
    (4) The State agency shall not authorize an applicant vendor if the 
State agency determines the store has been sold by its previous owner 
in an attempt to circumvent a WIC sanction. The State agency may 
consider such factors as whether the applicant store was sold to a 
relative by blood or marriage of the previous owner(s) or sold to any 
individual or organization for less than its fair market value.
    (5) The State agency is encouraged to consider the impact of 
authorization decisions on small businesses.
    (6) The State agency may limit the periods during which 
applications for authorization from vendors will be accepted and 
processed, except that applications shall be accepted and processed at 
least once every three years. The State agency shall develop procedures 
for processing individual vendor applications outside of its timeframes 
for use when it determines there will be inadequate participant access 
unless additional vendors are authorized.
    (7) At the time a vendor applies for authorization, the State 
agency shall collect the vendor's Food Stamp Program authorization 
number if the applicant vendor participates in that program. In 
addition, the State agency also shall collect the vendor's current 
shelf prices of authorized supplemental foods, unless the State agency 
uses competitive bidding to set vendor prices for such foods.
    (h) Retail food delivery systems: Vendor agreements. (1) The State 
agency shall enter into written agreements with all authorized vendors. 
The agreements shall be for a period not to exceed three years. The 
agreement shall be signed by a representative who has legal authority 
to obligate the vendor and a representative of the State agency. When 
the vendor representative is obligating more than one vendor, all 
vendors shall be specified in the agreement. When more than one vendor 
is specified in the agreement, an individual vendor may be added or 
deleted without affecting the remaining vendors. The State agency shall 
require vendors to reapply at the expiration of their agreements and 
shall provide vendors with not less than 15 days advance written notice 
of the expiration of their agreements.
    (2) The State agency shall use a standard vendor agreement 
throughout its jurisdiction, though the State agency may make 
exceptions to meet unique circumstances and must document the reasons.
    (3) The vendor agreement shall contain the following 
specifications, although the State agency may determine the exact 
wording to be used:
    (i) The vendor shall accept food instruments only from participants 
or their proxies.
    (ii) The vendor shall provide participants only the supplemental 
foods listed on the food instrument. The vendor shall not substitute 
other foods or non-food items not listed on the food instrument, or 
provide cash in lieu of the listed supplemental foods. The vendor shall 
not give credit, including rainchecks, for supplemental foods listed on 
the food instruments, give refunds for supplemental foods obtained by 
participants with food instruments, or permit exchanges for 
supplemental foods obtained by participants except for identical 
supplemental foods.
    (iii) The vendor shall accept food instruments from a participant 
only within the allowed time period, and submit them for payment within 
the allowed time period.
    (iv) For printed food instruments, the vendor shall ensure the 
participant or proxy signs the food instrument and that the purchase 
price is entered on the food instrument before the participant or proxy 
signs it. In EBT systems, a Personal Identification Number (PIN) may be 
used in lieu of a signature.
    (v) The vendor shall offer program participants the same courtesies 
as offered to other customers.
    (vi) The vendor shall comply with the nondiscrimination provisions 
of Departmental regulations (Parts 15, 15a and 15b of this title).
    (vii) The vendor shall not collect sales tax on WIC food purchases.
    (viii) The vendor shall not charge the State agency more than the 
price charged other customers or the current shelf price, whichever is 
less, or, when the State agency uses competitive bidding to set vendor 
prices, the contract price. In no case may the vendor charge the State 
agency more than the competitive price limitation applicable to the 
area in which the vendor is located.
    (ix) The vendor shall reimburse the State agency upon demand, or 
will have its payment from the State agency reduced, for the value of 
each vendor overcharge or other error. The State agency may collect the 
full redeemed value for each food instrument that contained a vendor 
overcharge or other error. The State agency may offset any amount owed 
by the vendor to the State agency against subsequent amounts to be paid 
to the vendor.
    (x) The vendor shall not seek restitution from participants for 
food instruments not paid or partially paid by the State agency.
    (xi) The manager of the vendor or other member of management shall 
participate in training prior to, or at the time of, the vendor's first 
authorization and annually thereafter, and sign and date a receipt 
acknowledging understanding of the training given. At least once during 
the agreement period such training will be face-to-face. Failure to 
participate in the annual training is a serious vendor violation that 
precludes subsequent authorization of the vendor. The State agency 
shall have sole discretion to determine the date, time, and place of 
all training, except that the vendor shall have at least one 
opportunity to attend annual

[[Page 32337]]

training on an alternative date established by the State agency. The 
State agency may, at its discretion, offer additional alternative 
training dates.
    (xii) The vendor shall inform and train cashiers and other staff on 
program requirements.
    (xiii) The vendor shall be accountable for actions of employees in 
the handling of food instruments.
    (xiv) The vendor may be monitored for compliance with program 
rules.
    (xv) The vendor shall maintain inventory records used for Federal 
tax reporting purposes and other records the State agency may require, 
for a period of time specified by the State agency. Upon request, the 
vendor shall make available to representatives of the State agency, the 
Department, and the Comptroller General of the United States, at any 
reasonable time and place for inspection and audit, all food 
instruments in the vendor's possession and all program-related records.
    (xvi) Either the State agency or the vendor may terminate the 
agreement for cause after providing advance written notice within a 
timeframe established by the State agency, which may not be less than 
15 days.
    (xvii) The vendor shall give the State agency at least 45 days 
advance notification, in writing, of a change in vendor ownership, 
store location, or cessation of operations. In such instances, the 
vendor agreement shall be terminated, except that the State agency may 
permit vendors to move short distances without voiding the agreement. 
Changes in business structure (such as a corporate reorganization) 
without any change in ownership do not constitute a change of 
ownership.
    (xviii) In addition to claims collection, the vendor may be 
sanctioned for vendor violations in accordance with the State agency's 
sanction schedule.
    (xix) The vendor's agreement will be terminated if a conflict of 
interest is identified between the vendor and the State or local 
agencies.
    (xx) A vendor who commits fraud or abuse in the Program is liable 
to prosecution under applicable Federal, State or local laws. Under 
Sec. 246.23(d) of the regulations, those who have willfully misapplied, 
stolen or fraudulently obtained program funds shall be subject to a 
fine of not more than $10,000 or imprisonment for not more than five 
years or both, if the value of the funds is $100 or more. If the value 
is less than $100, the penalties are a fine of not more than $1,000 or 
imprisonment for not more than one year or both.
    (xxi) The vendor agreement does not constitute a license or a 
property interest. If the vendor wishes to continue to be authorized 
beyond the period of its current agreement, the vendor must reapply for 
authorization. A vendor that has been disqualified for a period of time 
less than the remaining term of its vendor agreement may resume 
participation in the WIC Program upon completion of its 
disqualification period for the duration of the agreement without 
reapplying. If the vendor agreement expires before the vendor has 
served out the full disqualification period, and the vendor wishes to 
again participate in the Program, the vendor must apply to be 
authorized. In all cases, the vendor's new application will be subject 
to the State agency's selection and limiting criteria in effect at the 
time of the reapplication.
    (xxii) The vendor shall be bound by any changes in the Program 
statute and regulations and State policies and procedures, including 
changes in selection criteria if the State agency chooses to reassess 
the vendor during the agreement period.
    (xxiii) Disqualification from the WIC Program may result in 
disqualification as a retailer in the Food Stamp Program. Such 
disqualification may not be subject to administrative or judicial 
review under the Food Stamp Program.
    (4) The State agency shall include in the vendor agreement the 
sanction schedule, which must be consistent with paragraph (l) of this 
section.
    (5) The State agency shall include in the vendor agreement a list 
of the actions a vendor may appeal and a copy of the State agency's 
administrative review procedures, which are consistent with 
Sec. 246.18.
    (i) Retail food delivery systems: Vendor training. (1) The State 
agency shall provide training to all vendors prior to, or at the time 
of, initial authorization of a vendor, and annually thereafter. The 
training shall be designed to prevent program noncompliance and errors 
to improve program service. At the initial authorization of a new 
vendor, the training provided shall be face-to-face and on the site of 
the vendor. At least once during each subsequent agreement period, the 
State agency shall require that vendors attend face-to-face training at 
the site of the vendor or at another location. Both the initial 
training of a new vendor and the subsequent face-to-face training may 
fulfill the annual training requirement for the year in which it is 
given.
    (2) The annual training shall include instruction in the purpose of 
the WIC Program; the varieties of supplemental foods authorized by the 
State agency; the minimum varieties and quantities of authorized 
supplemental foods that must be stocked by vendors; the procedures for 
transacting food instruments at the time of purchase and submitting 
food instruments for payment; the vendor sanction system; the vendor 
complaint process; the terms of the vendor agreement; and the claims 
collection procedures.
    (3) The State agency may delegate the training to a local agency, a 
contractor, or a vendor representative if the State agency indicates 
its intention to do so in its State Plan in accordance with 
Sec. 246.4(a)(14)(xii). In such cases, the State agency shall provide 
supervision and instruction to ensure the uniformity and quality of 
vendor training.
    (4) The State agency shall ensure that the content of annual 
training is documented, including the signed vendor receipts required 
in paragraph (h)(3)(xi) of this section, and that each vendor signs and 
dates a receipt for annual training.
    (j) Retail food delivery systems: Monitoring vendors and 
identifying high-risk vendors. (1) The State agency shall design and 
implement a system for monitoring vendors within its jurisdiction. The 
State agency may delegate the monitoring to a local agency or a 
contractor if the State agency indicates its intention to do so in its 
State Plan in accordance with Sec. 246.4(a)(14)(iv). In such cases, the 
State agency shall provide supervision and training to ensure the 
uniformity and quality of the monitoring.
    (2) The State agency shall identify high-risk vendors using 
criteria developed by FNS. FNS will not change these criteria more 
frequently than once every 2 years and will provide advance 
notification of changes 1 year prior to implementation. The State 
agency may develop and implement additional criteria.
    (3)(i) The State agency shall conduct compliance buys or inventory 
audits on a minimum of 10 percent of the number of vendors authorized 
by the State agency as of October l of each fiscal year. The State 
agency shall conduct compliance buys or inventory audits on all high-
risk vendors up to the 10 percent minimum, except that the State agency 
may waive a compliance buy or inventory audit on a high-risk vendor if 
it documents that the vendor is under investigation by a Federal, State 
or local law enforcement agency or that some other compelling reason 
exists for not conducting a compliance buy or inventory audit. An 
investigation of a high-risk vendor shall be considered

[[Page 32338]]

complete when the State agency determines that a sufficient number of 
compliance buys have been conducted to provide evidence of program 
noncompliance; when three compliance buys are conducted in which no 
program violations are found within a 12-month period; or when an 
inventory audit has been completed.
    (ii) If fewer that 10 percent of the State agency's authorized 
vendors are identified as high-risk and not exempted from monitoring 
under paragraph (j)(2) of this section, the State agency shall randomly 
select additional vendors upon which to conduct compliance buys or 
inventory audits sufficient to meet the 10-percent minimum. An 
investigation of a randomly selected vendor shall be considered 
complete when, in the judgment of the State agency, sufficient evidence 
exists to determine whether or not the vendor is complying with program 
requirements.
    (iii) If more than 10 percent of the State agency's authorized 
vendors are identified as high-risk and not exempted from monitoring 
under paragraph (j)(2) of this section, the State agency shall 
prioritize such vendors so as to perform compliance buys or inventory 
audits on those determined to have the greatest potential for program 
noncompliance and loss.
    (4) For each fiscal year, the State agency shall send to FNS a 
summary of the results of vendor monitoring containing information 
stipulated by FNS. The report shall be sent by February 1 of the 
following fiscal year. Plans for improvement in the coming year shall 
be included in the State Plan, in accordance with the requirements of 
Sec. 246.4(a)(14)(iv).
    (5) The State agency shall document the following information for 
all monitoring visits, including compliance buys, inventory audits, and 
routine monitoring visits: the vendor's name and address; the date of 
the visit or inventory audit; the name(s) and signature(s) of the 
reviewer(s); and the nature of the problem(s) detected or the 
observation that the vendor appears to be in compliance with program 
requirements. For compliance buys, the State agency shall also 
document: the date of the buy; a description of the cashier involved in 
each transaction; the types and quantities of items purchased, shelf 
prices or contract prices, and price charged for each item purchased, 
if available; and the final disposition of all items as either 
destroyed, donated, provided to other authorities, or kept as evidence. 
Shelf or contract price information may be obtained prior to, during, 
or subsequent to the compliance buy.
    (k) Retail food delivery systems: Vendor claims. (1) The State 
agency shall design and implement a system to identify vendor 
overcharges and other errors on redeemed food instruments not less 
frequently than quarterly. For printed food instruments, this system 
shall detect the following errors: purchase price missing, participant 
or proxy signature missing, vendor identification missing, redemption 
of expired food instruments, and, as appropriate, altered prices. The 
State agency shall implement procedures to reduce the number of errors 
where possible.
    (2) The State agency may withhold or collect from the vendor the 
entire redeemed value of food instruments identified as containing a 
vendor overcharge or other error.
    (3) The State agency shall also assess claims resulting from vendor 
violations identified in inventory audits or other reviews.
    (4) The State agency shall initiate collection action within 90 
days of the date of detection. Collection action may include offset.
    (5) When payment for a food instrument is denied or delayed, or a 
claim for reimbursement is assessed, the State agency shall provide the 
vendor an opportunity to provide justification or correction. For 
example, if the actual price is missing, the vendor may demonstrate 
what price should have been included. If the State agency is satisfied 
with the correction or justification, it shall provide payment or 
adjust the claim accordingly.
    (6) With justification and documentation, the State agency may pay 
vendors for food instruments redeemed after the expiration date. If the 
total value of the food instruments submitted at one time exceeds 
$200.00, payment may not be made without the approval of the FNS 
Regional Office.
    (l) Retail food delivery systems: Vendor sanctions--(1) Mandatory 
vendor sanctions.
    (i) Permanent disqualification. The State agency shall permanently 
disqualify a vendor convicted of trafficking in food instruments or 
selling firearms, ammunition, explosives, or controlled substances (as 
defined in section 102 of the Controlled Substances Act (21 U.S.C. 
802)) in exchange for food instruments. A vendor shall not be entitled 
to receive any compensation for revenues lost as a result of such 
violation. If reflected in its State Plan, the State agency shall 
impose a civil money penalty in lieu of a disqualification for this 
violation when it determines, in its sole discretion, and documents 
that--
    (A) Disqualification of the vendor would result in inadequate 
participant access; or
    (B) The vendor had, at the time of the violation, an effective 
policy and program in effect to prevent trafficking; and the ownership 
of the vendor was not aware of, did not approve of, and was not 
involved in the conduct of the violation.
    (ii) Six-year disqualification. The State agency shall disqualify a 
vendor for six years for: one incidence of buying or selling food 
instruments for cash (trafficking); or one incidence of selling 
firearms, ammunition, explosives, or controlled substances as defined 
in 21 U.S.C. 802, in exchange for food instruments.
    (iii) Three-year disqualification. The State agency shall 
disqualify a vendor for three years for:
    (A) One incidence of the sale of alcohol or alcoholic beverages or 
tobacco products in exchange for food instruments; or
    (B) A pattern of claiming reimbursement for the sale of an amount 
of a specific supplemental food item which exceeds the store's 
documented inventory of that supplemental food item for a specific 
period of time; or
    (C) A pattern of charging participants more for supplemental food 
than non-WIC customers or charging participants more than the current 
shelf or contract price; or
    (D) A pattern of receiving, transacting and/or redeeming food 
instruments outside of authorized channels, including the use of an 
unauthorized vendor and/or an unauthorized person; or
    (E) A pattern of charging for supplemental food not received by the 
participant; or
    (F) A pattern of providing credit or non-food items, other than 
alcohol, alcoholic beverages, tobacco products, cash, firearms, 
ammunition, explosives, or controlled substances as defined in 21 
U.S.C. 802, in exchange for food instruments.
    (iv) One-year disqualification. The State agency shall disqualify a 
vendor for one year for a pattern of providing unauthorized food items 
in exchange for food instruments, including charging for supplemental 
food provided in excess of those listed on the food instrument.
    (v) Second mandatory sanction. When a vendor, who previously has 
been assessed a sanction for any of the violations in paragraphs 
(l)(1)(ii) through (l)(1)(iv) of this section, receives another 
sanction for any of these violations, the State agency shall double the 
second sanction. Civil money penalties may only be doubled up to the

[[Page 32339]]

limits allowed under paragraph (l)(1)(x)(C) of this section.
    (vi) Third or subsequent mandatory sanction. When a vendor, who 
previously has been assessed two or more sanctions for any of the 
violations listed in paragraphs (l)(1)(ii) through (l)(1)(iv) of this 
section, receives another sanction for any of these violations, the 
State agency shall double the third sanction and all subsequent 
sanctions. The State agency shall not impose civil money penalties in 
lieu of disqualification for third or subsequent sanctions for 
violations listed in paragraphs (l)(1)(ii) through (l)(1)(iv) of this 
section.
    (vii) Disqualification based on a Food Stamp Program 
disqualification. The State agency shall disqualify a vendor who has 
been disqualified from the Food Stamp Program. The disqualification 
shall be for the same length of time as the Food Stamp Program 
disqualification, may begin at a later date than the Food Stamp Program 
disqualification, and shall not be subject to administrative or 
judicial review under the WIC Program.
    (viii) Voluntary withdrawal or nonrenewal of agreement. The State 
agency shall not accept voluntary withdrawal of the vendor from the 
Program as an alternative to disqualification for the violations listed 
in paragraphs (l)(1)(i) through (l)(1)(iv) of this section, but shall 
enter the disqualification on the record. In addition, the State agency 
shall not use nonrenewal of the vendor agreement as an alternative to 
disqualification.
    (ix) Participant access determinations. Prior to disqualifying a 
vendor for a Food Stamp Program disqualification pursuant to paragraph 
(l)(1)(vii) of this section or for any of the violations listed in 
paragraphs (l)(1)(ii) through (l)(1)(iv) of this section, the State 
agency shall determine if disqualification of the vendor would result 
in inadequate participant access. If the State agency determines that 
disqualification of the vendor would result in inadequate participant 
access, the State agency shall impose a civil money penalty in lieu of 
disqualification. However, as provided in paragraph (l)(1)(vi) of this 
section, the State agency shall not impose a civil money penalty in 
lieu of disqualification for third or subsequent sanctions for 
violations in paragraphs (l)(1)(ii) through (l)(1)(iv) of this section. 
The State agency shall include documentation of its participant access 
determination and any supporting documentation in the file of each 
vendor who is disqualified or receives a civil money penalty in lieu of 
disqualification.
    (x) Civil money penalty formula. For each violation subject to a 
mandatory sanction, the State agency shall use the following formula to 
calculate a civil money penalty imposed in lieu of disqualification:
    (A) Determine the vendor's average monthly redemptions for at least 
the 6-month period ending with the month immediately preceding the 
month during which the notice of administrative action is dated;
    (B) Multiply the average monthly redemptions figure by 10 percent 
(.10);
    (C) Multiply the product from paragraph (l)(1)(x)(B) of this 
section by the number of months for which the store would have been 
disqualified. This is the amount of the civil money penalty, provided 
that the civil money penalty shall not exceed $10,000 for each 
violation. For a violation that warrants permanent disqualification, 
the amount of the civil money penalty shall be $10,000. When during the 
course of a single investigation the State agency determines a vendor 
has committed multiple violations, the State agency shall impose a CMP 
for each violation. The total amount of civil money penalties imposed 
for violations investigated as part of a single investigation shall not 
exceed $40,000.
    (xi) Notification to FNS. The State agency shall provide the 
appropriate FNS office with a copy of the notice of administrative 
action and information on vendors it has either disqualified or imposed 
a civil money penalty in lieu of disqualification for any of the 
violations listed in paragraphs (l)(1)(i) through (l)(1)(iv) of this 
section. This information shall include the name of the vendor, 
address, identification number, the type of violation(s), and the 
length of disqualification or the length of the disqualification 
corresponding to the violation for which the civil money penalty was 
assessed, and shall be provided within 15 days after the vendor's 
opportunity to file for a WIC administrative review has expired or all 
of the vendor's WIC administrative reviews have been completed.
    (xii) Multiple violations during a single investigation. When 
during the course of a single investigation the State agency determines 
a vendor has committed multiple violations (which may include 
violations subject to State agency sanctions), the State agency shall 
disqualify the vendor for the period corresponding to the most serious 
mandatory violation. However, the State agency shall include all 
violations in the notice of administration action. If a mandatory 
sanction is not upheld on appeal, then the State agency may impose a 
State agency-established sanction.
    (2) State agency vendor sanctions. (i) The State agency may impose 
sanctions for violations that are not specified in paragraphs (l)(1)(i) 
through (l)(1)(iv) of this section as long as such violations and 
sanctions are included in the vendor agreement. State agency sanctions 
may include disqualifications, civil money penalties assessed in lieu 
of disqualification, and fines. The total period of disqualification 
imposed for State agency violations investigated as part of a single 
investigation may not exceed one year. A civil money penalty or fine 
shall not exceed $10,000 for each violation. The total amount of civil 
money penalties imposed for violations investigated as part of a single 
investigation shall not exceed $40,000.
    (ii) The State agency may disqualify a vendor who has been assessed 
a civil money penalty for hardship in the Food Stamp Program, as 
provided under Sec. 278.6 of this chapter. The length of such 
disqualification shall correspond to the period for which the vendor 
would otherwise have been disqualified in the Food Stamp Program. If a 
State agency decides to exercise this option, the State agency shall:
    (A) Include notification that it will take such disqualification 
action in its vendor agreement, in accordance with paragraph (f)(4) of 
this section; and
    (B) Determine if disqualification of the vendor would result in 
inadequate participant access in accordance with paragraph (l)(8) of 
this section. If the State agency determines that disqualification of 
the vendor would result in inadequate participant access, the State 
agency shall not disqualify the vendor or impose a civil money penalty 
in lieu of disqualification. The State agency shall include 
documentation of its participant access determination and any 
supporting documentation in each vendor's file.
    (3) Prior warning. The State agency does not have to provide the 
vendor with prior warning that violations were occurring before 
imposing any of the sanctions in this paragraph (l).
    (4) Appeal procedures. The State agency shall provide adequate 
procedures for vendors to appeal a disqualification from participation 
under the Program as specified in Sec. 246.18.
    (5) Installment plans. The State agency may use installment plans 
for the collection of civil money penalties and fines.
    (6) Failure to pay a civil money penalty. If a vendor does not pay, 
only partially pays, or fails to timely pay a

[[Page 32340]]

civil money penalty assessed in lieu of disqualification, the State 
agency shall disqualify the vendor for the length of the 
disqualification corresponding to the violation for which the civil 
money penalty was assessed (for a period corresponding to the most 
serious violation in cases where a mandatory sanction included the 
imposition of multiple civil money penalties as a result of a single 
investigation).
    (7) Actions in addition to sanctions. Vendors may be subject to 
actions in addition to the sanctions in this section, such as claims 
for improper or overcharged food instruments and penalties outlined in 
Sec. 246.23, in the case of deliberate fraud.
    (8) Participant access determination criteria. When making 
participant access determinations, the State agency shall consider, at 
a minimum, the availability of other authorized vendors in the same 
area as the violative vendor and any geographic barriers to using such 
vendors.
    (m) Home food delivery systems. Home food delivery systems are 
systems in which food is delivered to the participant's home. Systems 
for home delivery of food shall provide for:
    (1) Procurement of supplemental foods in accordance with 
Sec. 246.24, which may entail measures such as the purchase of food in 
bulk lots by the State agency and the use of discounts that are 
available to States.
    (2) The accountable delivery of supplemental foods to participants. 
The State agency shall ensure that:
    (i) Home food delivery contractors are paid only after the delivery 
of supplemental foods to participants;
    (ii) There exists a routine procedure to verify the correct 
delivery of prescribed supplemental foods to participants, and, at a 
minimum, such verification occurs at least once a month after delivery; 
and
    (iii) There is retention of records of delivery of supplemental 
foods and bills sent or payments received for such supplemental foods 
for at least three years and access of State, local and/or Federal 
authorities to such records.
    (n) Direct distribution food delivery systems. Direct distribution 
food delivery systems are systems in which participants or their 
proxies pick up food from storage facilities operated by the State or 
local agency. Systems for direct distribution of food shall provide 
for:
    (1) Adequate storage and insurance coverage that minimizes the 
danger of loss to theft, infestation, fire, spoilage, or other causes;
    (2) Adequate inventory control of food received, in stock, and 
issued;
    (3) Procurement of supplemental foods, in accordance with 
Sec. 246.24, which may entail measures such as purchase of food in bulk 
lots by the State agency and the use of discounts that are available to 
States;
    (4) The availability of program benefits to participants and 
potential participants who live at great distance from storage 
facilities; and
    (5) The accountable delivery of supplemental foods to participants.
    (o) Participant, vendor, and home food delivery contractor 
complaints. The State agency shall have procedures that document the 
handling of complaints by participants, vendors, and home food delivery 
contractors. Complaints of civil rights discrimination shall be handled 
in accordance with Sec. 246.8(b).
    (p) Food instrument security. The State agency shall develop 
minimum standards for ensuring the security of food instruments from 
the time the food instruments are created or received by the State 
agency to the time of issuance to participants at local agencies and 
clinics. These standards shall include maintenance by the local agency 
of perpetual inventory records of receipt of food instruments from the 
State agency and, if applicable, distribution to clinics; monthly 
physical inventory of food instruments on hand by the local agency and, 
if applicable, clinics; reconciliation of perpetual and physical 
inventories of food instruments; and, maintenance of all food 
instruments under lock and key by the State agency, local agencies and 
clinics, except for supplies needed for immediate use.
    (q) Food instrument disposition. The State agency shall account for 
the disposition of all food instruments as issued or voided, and as 
redeemed or unredeemed. Redeemed food instruments shall be identified 
as validly issued, lost, stolen, expired, duplicate, or not matching 
valid issuance and enrollment records. In an EBT system, evidence of 
matching redeemed food instruments to a valid issuance and enrollment 
record may be satisfied through the linking of the PIN associated with 
the electronic transaction to a valid issuance and enrollment record. 
This process shall be performed within 150 days of the first valid date 
for participant use of the food instruments and shall be conducted in 
accordance with the financial management requirements of Sec. 246.13. 
The State agency shall be subject to claims as outlined in 
Sec. 246.23(a)(4) for redeemed food instruments that do not meet the 
conditions established in this paragraph (q).
    (r) Issuance of food instruments and supplemental foods. The State 
agency shall:
    (1) Establish uniform procedures which allow proxies designated by 
participants to act on their behalf. In determining whether a 
particular participant should be allowed to designate a proxy or 
proxies, the State agency shall require the local agency or clinic to 
consider whether adequate measures can be implemented to provide 
nutrition education and health care referrals to that participant;
    (2) Ensure that the participant or proxy signs for receipt of food 
instruments or supplemental foods, except as established in paragraph 
(r)(4) of this section;
    (3) Ensure that participants and their proxies receive instructions 
on the proper use of food instruments, or on the procedures for 
receiving supplemental foods when food instruments are not used. 
Participants and their proxies shall also be notified that they have 
the right to complain about improper vendor and home food delivery 
contractor practices with regard to program responsibilities;
    (4) Require participants or their proxies to pick up food 
instruments in person when scheduled for nutrition education or for an 
appointment to determine whether participants are eligible for a second 
or subsequent certification period. However, in all other circumstances 
the State agency may provide for issuance through an alternative means 
such as EBT or mailing, unless FNS determines that such actions would 
jeopardize the integrity of program services or program accountability. 
If a State agency opts to mail food instruments, it must provide 
justification, as part of its alternative issuance system in its State 
Plan, as required in Sec. 246.4(a)(21), for mailing food instruments to 
areas where food stamps are not mailed. State agencies which opt to 
mail food instruments must establish and implement a system which 
ensures the return of food instruments to the State or local agency if 
the participants no longer resides or receives mail at the address to 
which the food instruments were mailed; and
    (5) Ensure that no more than a three-month supply of food 
instruments or supplemental foods is issued to any participant at one 
time.
    (s) Payment to vendors and home food delivery contractors. The 
State agency shall ensure that vendors and home food delivery 
contractors are promptly paid for food costs. Payment for valid food 
instruments redeemed shall be made within 60 days after receipt of the 
food instruments. Actual

[[Page 32341]]

payment to vendors and home food delivery contractors may be made by 
local agencies.
    (t) Conflict of interest. The State agency shall ensure that no 
conflict of interest exists between the State agency and any vendor or 
home food delivery contractor, or between any local agency and any 
vendor or home food delivery contractor under its jurisdiction.
    (u) Participant violations and sanctions.--(1) Participant 
violations. The State agency shall establish procedures designed to 
control participant violations of program requirements. Participant 
violations include the following actions by a participant or a proxy: 
intentionally making false or misleading statements or intentionally 
misrepresenting, concealing, or withholding facts to obtain benefits; 
sale of supplemental foods or food instruments to, or exchange with, 
other individuals or entities; receipt from food vendors of cash or 
credit toward purchase of unauthorized food or other items of value in 
lieu of authorized supplemental foods; physical abuse, or threat of 
physical abuse, of clinic or vendor staff; and dual participation.
    (2) Participant sanctions. The State agency shall establish 
sanctions for participant violations. Such sanctions may include 
disqualification from the Program for a period up to one year. In cases 
in which the participant violation gives rise to a claim (including 
dual participation), the participant shall be disqualified for one 
year, except if the participant is an infant or child. In those cases, 
the State agency may permit another proxy to be designated. If an 
alternate proxy acceptable to the State agency cannot be found, the 
infant or child shall be disqualified for one year. However, if full 
restitution is made prior to the end of the disqualification period, 
the State agency may permit the participant to reapply for the Program. 
Warnings may be given prior to the imposition of sanctions. Before a 
participant is disqualified from the Program for an alleged violation, 
that participant shall be given full opportunity to appeal the 
disqualification as set forth in Sec. 246.9.
    (v) Referral to law enforcement authorities. The State agency shall 
refer vendors, home food delivery contractors, and participants who 
violate the Program to Federal, State or local authorities for 
prosecution under applicable statutes, where appropriate.
    7. In Sec. 246.13, paragraph (h) is revised to read as follows:


Sec. 246.13  Financial management system.

* * * * *
    (h) Adjustment of expenditures. The State agency shall adjust 
projected expenditures to account for redeemed food instruments and for 
other changes as appropriate.
* * * * *
    8. In Sec. 246.18:
    a. The section heading is revised;
    b. Paragraphs (a) and (b) are revised; and
    c. Paragraphs (c) and (d) are redesignated as paragraphs (d) and 
(f), respectively, and are revised, and new paragraphs (c) and (e) are 
added.
    The revisions and additions read as follows:


Sec. 246.18  Administrative review of State agency actions.

    (a)(1) Vendor appeals.--(i) Actions receiving full administrative 
reviews. Except as provided elsewhere in this paragraph (a)(1), the 
State agency shall provide a full administrative review to vendors that 
appeal the following actions: a denial of authorization based on the 
selection criteria or on a determination that the vendor is attempting 
to circumvent a sanction, a termination of an agreement for cause, a 
disqualification, and the imposition of a fine or a civil money penalty 
in lieu of disqualification.
    (ii) Actions receiving abbreviated administrative reviews. Except 
as provided elsewhere in this paragraph (a)(1), the State agency shall 
provide an abbreviated administrative review to vendors that appeal the 
following actions: a denial of authorization based on the selection 
criteria in Sec. 246.12(g)(3)(iii) or (g)(3)(vi), the State agency's 
limiting criteria, or because the vendor submitted its application 
outside the timeframes during which applications are being accepted and 
processed as established by the State agency under Sec. 246.12(g)(6); 
termination of an agreement because of a change in ownership or 
location or cessation of operations; and a disqualification based on 
the imposition of a Food Stamp Program civil money penalty for 
hardship.
    (iii) Actions not subject to administrative review. The State 
agency shall not review a vendor's appeal of the following: the 
validity or appropriateness of the State agency's limiting or selection 
criteria as defined in Sec. 246.2, the State agency's participant 
access determinations, authorization determinations subject to the 
State agency's procurement procedures, the expiration of the vendor's 
agreement, disputes regarding food instrument payments, vendor claims, 
and disqualification of a vendor as a result of disqualification from 
the Food Stamp Program.
    (2) Local agency appeals. The State agency shall grant a full 
administrative review to local agencies that appeal the following 
actions: a denial of a local agency's application to participate, a 
local agency's disqualification, or any other adverse action that 
affects a local agency's participation. Expiration of an agreement with 
a local agency shall not be subject to review. The State agency shall 
postpone the effective date of adverse actions that are subject to 
review (except denials of applications to participate) until a decision 
is made on the local agency's appeal.
    (3) Effective dates of actions against vendors. Denials of vendor 
authorization and disqualifications imposed under Sec. 246.12(l)(1)(i) 
shall be made effective on the date of receipt of the notice of 
administrative action. All other adverse actions subject to 
administrative review shall be effective no earlier than 15 days after 
the date of the notice of the action. A State agency may postpone the 
effective date of an adverse action subject to administrative review 
(except for denials of authorization and disqualifications imposed 
under Sec. 246.12(l)(1)(i)) until a decision is made on the vendor's 
appeal, only if the State agency determines that the delay is necessary 
to ensure either adequate participant access or the effective and 
efficient operation of the Program.
    (b) Full administrative review procedure. The State agency shall 
develop procedures for a full administrative review of the actions 
listed in Sec. 246.18(a)(1)(i) and (a)(2). The procedures shall provide 
the local agency or vendor with the following:
    (1) Written notification of the administrative action, the 
procedures to file for an administrative review, if any, and the 
cause(s) for and the effective date of the action. Such notification 
shall be provided to participating vendors not less than 15 days in 
advance of the effective date of the action. When a vendor is 
disqualified due in whole or in part to violations in 
Sec. 246.12(l)(1), such notification shall include the following 
statement: ``This disqualification from WIC may result in 
disqualification as a retailer in the Food Stamp Program. Such 
disqualification may not be subject to administrative or judicial 
review under the Food Stamp Program.'' In the disqualification of local 
agencies, the State agency shall provide not less than 60 days advance 
notice of pending action.
    (2) The opportunity to appeal the adverse action within a time 
period

[[Page 32342]]

specified by the State agency in its notification of adverse action.
    (3) Adequate advance notice of the time and place of the 
administrative review to provide all parties involved sufficient time 
to prepare for the review.
    (4) The opportunity to present its case and at least one 
opportunity to reschedule the administrative review date upon specific 
request. The State agency may set standards on how many review dates 
can be scheduled, provided that a minimum of two review dates is 
allowed.
    (5) The opportunity to cross-examine adverse witnesses. Where 
necessary to protect the identity of WIC Program investigators, such 
examination may be conducted in camera.
    (6) The opportunity to be represented by counsel, if desired.
    (7) The opportunity to examine the evidence upon which the State 
agency's action is based prior to the review.
    (8) An impartial decision-maker, whose determination is based 
solely on whether the State agency has correctly applied its policies 
and procedures, according to the evidence presented at the review and 
the statutory and regulatory provisions governing the Program. State 
agencies may appoint a reviewing official, such as a chief hearing 
officer or judicial officer, to review appeal decisions to ensure that 
they conform to approved policies and procedures.
    (9) Written notification of the decision on the appeal, including 
the basis for the decision, within 90 days from the date of receipt of 
a vendor's request for an administrative review, and within 60 days 
from the date of receipt of a local agency's request for an 
administrative review.
    (c) Abbreviated administrative review procedures. The State agency 
shall develop procedures for an abbreviated administrative review of 
the actions listed in Sec. 246.18(a)(1)(ii). These procedures shall 
provide the vendor written notification of the adverse action, the 
procedures to follow for an abbreviated administrative review, the 
cause(s) and the effective date of the action, and an opportunity to 
provide a written response. The State agency shall render a decision 
based on the information provided to the vendor, the vendor's response, 
and relevant statutes, regulations, policies and procedures. The 
decision maker shall be someone other than the person who rendered the 
initial decision on the action. The decision maker shall provide the 
vendor a written decision on the appeal, including the basis for the 
decision.
    (d) Continuing responsibilities. Appealing an action does not 
relieve a local agency, or a vendor permitted to continue in the 
Program while its appeal is in process, from the responsibility of 
continued compliance with the terms of any written agreement with the 
State or local agency.
    (e) Finality and effective date of decisions. The State agency 
procedures shall provide that the decisions rendered under both the 
full and abbreviated review procedures are the final State agency 
action. If the action under appeal has not already taken effect, the 
action shall take effect on the date of receipt of the decision.
    (f) Judicial review. If the decision on the appeal is rendered 
against the local agency or vendor, the State agency shall inform the 
appellant that it may be able to pursue judicial review of the 
decision.
    12. In Sec. 246.19, paragraphs (a)(2), (b)(2), (b)(5) and (b)(6) 
are revised to read as follows:


Sec. 246.19  Management evaluation and reviews.

    (a) * * *
    (2) The State agency shall submit a corrective action plan, 
including implementation timeframes, within 60 days of receipt of an 
FNS management evaluation report containing negative findings. If FNS 
determines through a management evaluation or other means that during a 
fiscal year the State agency has failed, without good cause, to 
demonstrate efficient and effective administration of its program, or 
has failed to comply with its corrective action plan, or any other 
requirements contained in this part or the State Plan, FNS may withhold 
an amount up to 100 percent of the State agency's nutrition services 
and administration funds, for that year.
* * * * *
    (b) * * *
    (2) Monitoring of local agencies shall encompass, but need not be 
limited to, evaluation of management, certification, nutrition 
education, participant services, civil rights compliance, 
accountability, financial management systems, and food delivery 
systems. If the State agency delegates vendor training or monitoring to 
the local agency, it shall evaluate the local agency's effectiveness in 
carrying out these responsibilities.
* * * * *
    (5) FNS may require the State agency to conduct in-depth reviews of 
specified areas of local agency operations, to implement a standard 
form or protocol for such reviews, and to report the results to FNS. No 
more than two such areas will be stipulated by FNS for any fiscal year. 
These areas will be announced by FNS at least six months before the 
beginning of the fiscal year.
    (6) The State agency shall require local agencies to establish 
management evaluation systems to review their operations and those of 
associated clinics or contractors and shall require, within 45 days of 
written notification of deficiencies, a written corrective action plan 
which explains how all of the identified problems will be addressed and 
stipulates timeframes for completion of each corrective action.
    13. In Sec. 246.23, paragraphs (a)(4) and (c) are revised to read 
as follows:


Sec. 246.23  Claims and penalties.

    (a) * * *
    (4) FNS will establish a claim against any State agency which has 
not accounted for the disposition of all redeemed food instruments and 
taken appropriate follow-up action on all redeemed food instruments 
which cannot be matched against valid issuance and certification 
records, including cases which may involve fraud, unless the State 
agency has demonstrated to the satisfaction of FNS that it has:
    (i) Made every reasonable effort to comply with this requirement;
    (ii) Identified the reasons for its inability to account for the 
disposition of each redeemed food instrument; and
    (iii) Provided assurances that, to the extent considered necessary 
by FNS, it will take appropriate actions to improve its procedures.
* * * * *
    (c) Claims against participants. (1) If the State agency determines 
that program benefits have been improperly obtained as the result of a 
participant or proxy intentionally making a false or misleading 
statement or intentionally misrepresenting, concealing, or withholding 
facts, the State agency shall issue a letter requesting repayment and 
indicating that, if the request for repayment is not appealed or is 
unsuccessfully appealed, the participant must be disqualified in 
accordance with Sec. 246.12(u)(2). If the participant does not make 
full restitution in response to this letter, the State agency shall 
weigh the cost of each subsequent action in the collection process 
against the amount to be recovered and take such action until recovery 
is achieved or until the recovery process ceases to be cost-effective. 
The State agency may allow participants for whom financial restitution 
would cause undue hardship to perform in-kind service determined by the 
State agency in lieu of restitution. If full restitution is made prior 
to the end of the disqualification period, the State agency may permit 
the participant

[[Page 32343]]

to reapply for the Program. The State agency shall maintain on file 
documentation of the disposition of all cases of improperly obtained 
program benefits covered by this paragraph (c).
    (2) FNS will assert a claim against the State agency for losses 
resulting from program funds improperly spent as a result of dual 
participation, if FNS determines that the State agency has not complied 
with the requirements in Sec. 246.12(u)(2) concerning participant 
sanctions or the requirements in paragraph (c)(2) of this section 
concerning participant claims.
    (3) The State agency may delegate to its local agencies the 
responsibility for the collection of participant claims.
* * * * *
    14. In Sec. 246.26, the heading of paragraph (d) is revised, and 
paragraphs (e) and (f) are added to read as follows.


Sec. 246.26  Other provisions.

* * * * *
    (d) Confidentiality of applicant and participant information. * * *
* * * * *
    (e) Confidentiality of vendor information. Except for vendor name, 
address and authorization status, the State agency shall restrict the 
use or disclosure of information obtained from vendors, or generated by 
the State agency concerning vendors, to:
    (1) Persons directly connected with the administration or 
enforcement of any Federal or State law, including the WIC Program or 
the Food Stamp Program, and the Comptroller General of the United 
States. Prior to releasing the information to a party other than a 
Federal agency, the State agency shall enter into a written agreement 
with the requesting party specifying that such information may not be 
used or redisclosed except for purposes directly connected to the 
administration or enforcement of a Federal or State law; and
    (2) Appellant vendors, to the extent that the information to be 
disclosed is a basis of the action under review as set forth in 
Sec. 246.18(b)(1), (b)(7), and (c).
    (f) Confidentiality of Food Stamp Program retailer information. The 
State agency shall restrict the use or disclosure of Food Stamp Program 
retailer information furnished to it, pursuant to Section 9(c) of the 
Food Stamp Act of 1977 (7 U.S.C. 2018(c)) and Sec. 278.1(r) of this 
chapter to persons directly connected with the administration or 
enforcement of the WIC Program.

    Dated: June 7, 1999.
Shirley R. Watkins,
Under Secretary for Food, Nutrition and Consumer Services.
[FR Doc. 99-14953 Filed 6-15-99; 8:45 am]
BILLING CODE 3410-30-P