[Federal Register Volume 65, Number 251 (Friday, December 29, 2000)]
[Rules and Regulations]
[Pages 83248-83289]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-33111]



[[Page 83247]]

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

Part VI





Department of Agriculture





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



Food and Nutrition Service



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



7 CFR Part 246



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

  Federal Register / Vol. 65 , No. 251 / Friday, December 29, 2000 / 
Rules and Regulations  

[[Page 83248]]


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

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: Final rule.

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

SUMMARY: This final rule amends the regulations governing the Special 
Supplemental Nutrition Program for Women, Infants and Children. It 
strengthens vendor management in retail food delivery systems by 
establishing mandatory selection criteria, training requirements, 
criteria to be used to identify high-risk vendors, and monitoring 
requirements, including compliance investigations. In addition, the 
rule strengthens food instrument accountability and sanctions for 
participants who violate program requirements. It also streamlines the 
vendor appeals process. The rule will increase program accountability 
and efficiency in food delivery and related areas and decrease vendor 
violations of program requirements and loss of program funds.

DATES: This rule is effective February 27, 2001. State agencies must 
implement the provisions of this rule no later than February 27, 2002.

FOR FURTHER INFORMATION CONTACT: Debra Whitford, Branch Chief, 
Supplemental Food Programs Division, Food and Nutrition Service, USDA, 
3101 Park Center Drive, Room 542, Alexandria, Virginia 22302, (703) 
305-2730.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    This final 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 amends 
vendor selection, training, monitoring, and appeal procedures and/or 
systems. The effect of these changes falls primarily on State agencies. 
Local agencies and vendors will also be affected, some of which are 
small entities. However, the impact on small entities is not expected 
to be significant.
    Whereas extensive data is collected regarding program participants, 
the WIC Program does not collect data on the size of businesses that 
are authorized as vendors. Of the 45,000 authorized vendors, it is 
estimated that approximately 20,000 of them may be small businesses. 
Stores choose whether to apply for program authorization. All 
authorized vendors, regardless of their size, agree to comply with the 
program requirements. Although this rule strengthens some of the 
program requirements regarding vendors, many State agencies have 
already implemented similar provisions using their current authority. 
For example, although specific selection criteria are now mandated, 
most State agencies already use the noted criteria. As such, we do not 
foresee dramatic future decreases in the number of smaller vendors. 
Likewise, training is routinely provided to vendors. This final rule 
allows such training to be provided on-site at the vendor, off-site 
classroom style, or via a training video or newsletter. In addition, 
although the State agency is responsible for designating the date, 
time, and location of the training, the State agency must offer the 
vendor at least one alternative date on which to attend the training.

Executive Order 12372

    The Special Supplemental Nutrition Program for Women, Infants and 
Children (WIC) 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 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 final 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 DATES paragraph of this preamble. 
Prior to any judicial challenge to the application of the provisions of 
this rule, all applicable administrative procedures must be exhausted.

Executive Order 13132

    Executive Order 13132 requires Federal agencies to consider the 
impact of their regulatory actions on State and local governments. 
Although the proposed rule was published before the Executive Order was 
issued, we considered the impact on State agencies when we developed 
both the proposed and final rules.
    Before drafting both the proposed and final rules, we received 
input from State agencies at various times. Because the Program is a 
State-administered, federally funded program, our regional offices have 
formal and informal discussions with State and local officials on an 
ongoing basis. These discussions involve implementation and policy 
issues. This arrangement allows State agencies to provide feedback that 
forms the basis for many discretionary decisions in this and other 
Program rules. In addition, FNS officials attend regional, national, 
and professional conferences to discuss issues and receive feedback 
from State officials at all levels.
    Lastly, the comments on the proposed rule from State officials were 
carefully considered in drafting this final rule. For example, in 
response to comments from State agencies we revised the proposed rule 
to leave the following areas to State agency discretion: (1) Use of 
limiting criteria, (2) use of training receipts, (3) development of 
alternative criteria for identifying high-risk vendors, and (4) use of 
abbreviated rather than full administrative review procedures. The 
preamble below contains a more detailed discussion of our response to 
all the comments received on the rule.

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

[[Page 83249]]

reasonable number of regulatory alternatives and adopt the most cost-
effective or least burdensome alternative that achieves the objectives 
of the rule.
    This final 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 reporting and recordkeeping requirements associated with this 
final rule have been submitted for approval to the Office of Management 
and Budget (OMB) under OMB No. 0584-0043. This submission includes a 
revised reporting requirement for State Plan submissions (Section 
246.4) and new reporting requirements for vendor training (Section 
246.12(i)(1)), vendor monitoring (Section 246.12(j)(4)), food 
instrument disposition (Section 246.12(q)), and targeted local agency 
reviews (Section 246.19(b)(5)). In addition, the submission includes 
new recordkeeping requirements for vendor training (Section 
246.12(i)(4)), vendor monitoring (Section 246.12(j)(6)), and 
participant claims disposition (Section 246.23(c)(1)). These new 
requirements will be effective upon OMB approval.

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 that could result in the loss of WIC 
Program funds. Both the National Vendor Audit issued by our Office of 
Inspector General in 1988 and the WIC Vendor Issues Study in 1993 
indicated that significant levels of vendor violations persisted. (See 
section 21 of this preamble for the full citations to the reference 
materials mentioned in the preamble.)
    In response to the National Vendor Audit, we 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. We 
provided a 120-day comment period that closed on April 29, 1991. During 
the comment period, we received 1,066 comments 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, we proposed a new food delivery rule on June 16, 1999 
at 64 FR 32308. We subsequently extended the comment period from 90 
days to 120 days after receiving requests to do so from several 
potential commenters. We proposed to amend the WIC regulations to 
address the original OIG audit recommendations by strengthening vendor 
management systems. We also proposed to implement three provisions of 
the William F. Goodling Child Nutrition Reauthorization Act of 1998, 
P.L. 105-336 (Goodling Act), which amended the Child Nutrition Act of 
1966, 42 U.S.C. 1771-1791 (Child Nutrition Act). These provisions 
require the State agency to: (1) Identify high-risk vendors, (2) 
conduct compliance buys on high-risk vendors, and (3) consider prices 
in the selection of vendors.
    We received 4,601 comment letters, including three form letters 
from 4,481 participants in California, 22 WIC-only stores in 
California, and 7 food store owners in California. This resulted in 94 
distinct comment letters, which fell into the following categories: 
State agencies (28), local agencies (13), State agency staff (2), 
Federal agencies (2), industry groups (23), vendors (7), public 
interest groups (7), general public (2), and participants (1). After 
the end of the comment period, several members of Congress wrote us to 
express their concern about certain aspects of the proposal. We 
thoroughly analyzed the comments and made revisions to the proposal 
consistent with the mission of the WIC Program.
a. Summary of This Preamble
    This preamble addresses our response to the comments. In general, 
we only discuss the comments that opposed proposed provisions and the 
areas of the proposal that are changed by this final rule. We organized 
the preamble by topic rather than the order in which provisions appear 
in the final rule. The headings in the preamble identify the sections 
of the final rule that are discussed in that part of the preamble. To 
help in using the preamble, we included an outline of the areas covered 
in the preamble below.

1. Background
2. Definitions of ``Vendor'' and ``Vendor Authorization'' and General 
Provisions for Vendor Authorization and Agreements
3. Vendor Limiting Criteria
4. Vendor Selection Criteria
5. Food Instrument Requirements
6. Vendor Violations, Vendor Overcharges, and Vendor Claims
7. Miscellaneous Vendor Agreement Specifications
8. Vendor Training
9. Vendor Monitoring and Identifying High-Risk Vendors
10. Vendor Administrative Review Procedures
11.Vendor Authorization and Local Agency Selection Subject to 
Procurement Procedures
12. Preventing and Identifying Dual Participation
13. Participant Provisions
14. Home Food Delivery Systems and Direct Distribution Food Delivery 
Systems
15. General Requirements for Food Delivery Systems
16. Vendor Management Staffing
17. Participant Access Criteria in State Plan
18. Management Evaluations and Monitoring Reviews
19. Conflict of Interest
20. Confidentiality
21. References
b. Plain Language
    In addition to the changes we made in response to the comments, we 
made changes throughout the proposed regulatory language to make the 
rule easier to read. We added paragraph headings and made other changes 
to use plain language. Eventually, the entire WIC regulations at 7 CFR 
Part 246 will be revised similarly.
c. Implementation of This Rule
    One commenter requested that we provide State agencies with at 
least one year to implement this final rule. Another commenter 
suggested that the implementation period for the final rule provide for 
the gradual implementation of the provisions to avoid disruption in 
State agency vendor services. In their comment letters, many commenters 
indicated that their State agencies had already implemented a number of 
the provisions in response to our December 28, 1990 proposal, because 
they had anticipated that we would finalize that rule. Consequently, 
State agencies will vary in the amount of effort necessary to implement 
this final rule. We made this rule effective 60 days after publication 
and require State agencies to fully implement its provisions no later 
than one year after the effective date.
    The one-year implementation period recognizes the variations among 
State agency operations and provides adequate time for State agencies 
to incorporate these changes into their

[[Page 83250]]

food delivery systems. Not all provisions from this final rule must be 
implemented at the same time. For example, a State agency that enters 
into vendor agreements on a rolling basis may decide to amend the 
agreements as new ones are entered into, provided that agreements 
reflecting the new requirements are in place for all vendors prior to 
the end of the implementation period. Many State agencies have 
established vendor councils to facilitate communication between the 
State agency and its vendor community. We have found that such councils 
can be helpful as State agencies implement changes to their food 
delivery systems. We recommend that State agencies either establish 
vendor councils or use existing ones to ensure the timely 
implementation of this rule.

2. Definitions of ``Vendor'' and ``Vendor Authorization'' and General 
Provisions for Vendor Authorization and Vendor Agreements

a. Definition of ``Vendor'' (Section 246.2)
    Commenters generally supported the proposed definition of 
``vendor.'' However, thirteen commenters suggested that we modify the 
definition to use the term ``retailer'' instead of ``vendor,'' because 
the term retailer is used by vendors, State governments, and the Food 
Stamp Program. Although we acknowledge the two terms are often used 
interchangeably, the fact remains that the requirements for WIC vendors 
and Food Stamp Program retailers differ in several basic ways. The term 
vendor uniquely identifies stores authorized for the WIC Program. 
Therefore, we did not make this modification.
    Seven commenters noted that the definition of vendor did not 
include several types of business entities that may operate stores, 
such as limited liability companies, limited partnerships, and 
franchisers/franchisees. Rather than attempt to list all types of 
business entities in the definition, we decided to specify the more 
common types of business entities and include a reference to ``or other 
business entity'' to cover all other business entities. This approach 
also will accommodate any new types of business entities that may be 
created in the future.
    Several commenters requested that we distinguish between the 
concept of vendor as a business entity and the concept of vendor as the 
location of the business (i.e., the store itself). One commenter 
asserted that this change is necessary to make the definition of vendor 
consistent with the definition of ``vendor violation,'' because a 
vendor violation requires an intentional or unintentional action by the 
vendor, which cannot be committed by a store. Another commenter noted 
that requiring the State agency to enter into separate agreements with 
each store, instead of entering into one agreement to cover multiple 
stores operated by the same business entity, would triple the State 
agency's administrative burden of contracting with its vendors.
    Once again, we believe the commenters' suggestions and concerns 
have merit, but we believe for a number of reasons that the concept of 
``vendor'' must refer to a single store operated by a business entity. 
For instance, if the concept of vendor only referred to the business 
entity, including a corporation operating multiple stores, what would 
happen if one manager at one store of the largest chain in the State is 
convicted of trafficking? Similarly, what would happen if one store of 
the largest chain is disqualified for three years from the Food Stamp 
Program (FSP)? Would such sanctions require the State agency to 
disqualify the business entity, including all of its stores, from the 
WIC Program? If so, would business entities operating multiple stores 
always receive civil money penalties in lieu of disqualification 
because their disqualification would always result in inadequate 
participant access?
    We believe that the State agency should be able to disqualify a 
single store of a large chain, provided that participants have adequate 
access to other vendors operating in the same area. Consequently, we 
revised the definition of vendor to clarify that each store operated by 
a single business entity must be authorized separately. However, 
Section 246.12(h)(1) of this final rule continues to permit the State 
agency to use a single agreement to cover multiple vendors (i.e., 
multiple authorized stores) operated by the same business entity. Under 
this approach, the State agency will still be able to sanction multiple 
vendors for a vendor violation committed by owners, officers, or 
managers of a single business entity, if the State agency determines 
that the vendor violation involves multiple vendors.
    One commenter suggested that the term vendor refer to the business 
entity only so that the State agency must authorize all of a business 
entity's stores and not arbitrarily authorize some of the business 
entity's stores while denying authorization to some of its other 
stores. As discussed below in section 4 of this preamble, vendor 
authorization is not an arbitrary process. To be authorized, each 
vendor applicant must meet or exceed the State agency's selection 
criteria, unless the State agency allows for exceptions, such as for 
mobile stores or for pharmacies that provide only exempt infant formula 
and/or WIC-eligible medical foods. The State agency's authorization 
decisions must balance its need to provide adequate participant access 
with its need to ensure effective vendor management, oversight, and 
review. Chain stores must apply for vendor authorization in the same 
manner as any other store, and the State agency is not obligated to 
authorize all stores operated by a business entity.
    One commenter suggested that we delete the reference to mobile 
stores from the definition of vendor, because such stores create 
opportunities for fraud and abuse and can be difficult to monitor. The 
State agency may only authorize mobile stores when they are necessary 
to ensure adequate participant access. Although we understand the 
commenter's concerns, these stores, when authorized, must fall under 
the definition of a vendor to be held accountable for compliance with 
the Program's vendor requirements. For this reason, we did not accept 
the commenter's suggestion.
b. Definition of ``Vendor Authorization'' (Section 246.2)
    In response to the proposed definition of the term ``vendor 
authorization,'' one commenter noted that the definition improperly 
uses the term ``vendor'' when referring to a store that has not yet 
been authorized as a vendor. We revised the definition to use ``store'' 
rather than ``vendor.'' We made conforming changes throughout the rule 
to use ``store'' or ``vendor applicant'' when referring to a store that 
is not yet authorized.
c. Entering into Vendor Agreements (Sections 246.12(h)(1) and 
246.4(a)(14)(iii))
    To become a vendor, a store must apply for program authorization, 
meet or exceed the State agency's selection criteria, and enter into an 
agreement with the State agency. In Section 246.12(h)(1), we proposed 
to require vendor agreements to be signed by ``a representative who has 
legal authority to obligate the vendor and a representative of the 
State agency.'' We proposed this change to ensure that vendors are 
authorized consistently statewide. Fifteen commenters opposed this 
proposed change for a variety of reasons, including: local agencies 
need to sign vendor agreements to establish authority over and 
communication with vendors as well as to be accountable to the State 
agency for vendor oversight;

[[Page 83251]]

local agencies can use a standard agreement and carry out this activity 
using the State agency's procedures and guidance; and requiring the 
State agency to enter into all vendor agreements would increase costs, 
may cause such agreements to fall under the State's procurement 
procedures, and may expose the State agency to additional financial 
liability. To address the commenters' concerns, the final rule adds 
Section 246.12(h)(1)(ii) to allow the State agency to delegate the 
signing of vendor agreements to local agencies as long as such 
delegation authority is indicated in its State Plan (Section 
246.4(a)(14)(iii)) and the State agency provides supervision and 
instruction to ensure the uniformity and quality of local agency 
activities. Although the State agency may delegate certain vendor 
authorization and management activities to its local agencies, it is 
the State agency that is ultimately responsible for such activities and 
the language in this final rule reflects that responsibility.
d. Length of Vendor Agreements (Sec. 246.12(h)(1)) and Limiting Periods 
for Vendor Applications (Sec. 246.12(g)(7))
    In Section 246.12(h)(1), we also proposed to limit the length of 
vendor agreements to a period not to exceed three years. Under this 
proposed requirement, to continue as an authorized vendor, a store 
periodically would need to reapply for program authorization. Whereas 
eleven commenters supported this proposed provision, sixteen opposed 
the three-year limit on vendor agreements for a variety of reasons, 
including: the provision would be counter-productive to State agencies 
that use more resource-efficient, automatic renewal or annual renewal 
systems; the provision would discourage stores from applying for 
authorization; and the provision would result in stores exiting and re-
entering the Program, causing confusion for participants.
    One commenter suggested that, rather than requiring stores to 
reapply every three years, the State agency be permitted to 
automatically renew vendor agreements if there are no vendor 
violations. Although we understand the commenter's viewpoint, we 
believe only stores that can demonstrate they continue to meet or 
exceed the State agency's current selection criteria should continue to 
be authorized. Requiring vendors to reapply for authorization at least 
every three years does not preclude the State agency from developing a 
streamlined system for accepting reapplication information from current 
vendors. However, such systems must ensure that the store provides 
updated information regarding all of the selection criteria, including 
information regarding its current prices, quantities and varieties of 
the supplemental foods it stocks, and business integrity, as well as 
updated information regarding the store's ownership and management. 
Regardless of whether a store is applying for reauthorization or 
initial authorization, the State agency must select vendors based on 
its current selection criteria. For these reasons, we retained the 
three-year limit on vendor agreements.
    A majority of commenters opposed the portion of the provision in 
proposed Section 246.12(g)(6) that provides that the State agency may 
limit the periods during which it will accept and process applications 
for vendor authorization, except that applications must be accepted and 
processed at least once every three years. Many commenters 
misunderstood this provision as requiring all State agencies to only 
accept applications once every three years. The commenters noted a wide 
variety of arguments against such limited application periods. However, 
the State agency has always had the discretion to restrict its 
timeframes for accepting and processing vendor applications. Some State 
agencies have found such restrictions very useful in establishing 
annual workplans for their limited staffs. The proposal would only have 
specifically incorporated this discretion in the program regulations 
and clarified that if the State agency chose this approach, 
applications must be accepted ``at least once every three years.'' The 
proposal also would have required the State agency to develop 
procedures for processing vendor applications outside of its timeframes 
when it determines there will be inadequate participant access unless 
additional vendors are authorized. This provision is consistent with 
the three-year limit on vendor agreements and is adopted in Section 
246.12(g)(7) of the final rule.
e. Vendor Reassessment (Secs. 246.12(g)(3) and (h)(3)(xxiv))
    One commenter suggested that, rather than requiring vendors to 
reapply every three years, the State agency should be permitted to 
conduct annual reviews of vendor qualifications. The requirement for 
three-year agreements is not inconsistent with a State agency's 
periodic review of vendor qualifications. In Section 246.12(g)(3), we 
proposed to authorize the State agency to reassess any authorized 
vendor at any time during the vendor's agreement period using the 
vendor selection criteria in effect at that time. One commenter 
suggested that we modify the provision so that a vendor that fails to 
meet a selection criterion during a reassessment be given the 
opportunity to correct the deficiency. The State agency may include as 
part of both its vendor selection process and its reassessment process 
an opportunity to correct any deficiency that would otherwise lead to 
nonselection or termination of the vendor agreement. However, this is 
at the discretion of the State agency, and the State agency must make 
this clear in its procedures for implementing its vendor selection 
criteria.
    Another commenter pointed out that the vendor agreement section of 
the proposal did not clearly reflect the requirement in this section 
that specifies that the State agency must terminate the agreements with 
vendors that no longer meet its selection criteria. In addition, we 
noticed that the vendor agreement section did not make clear that 
vendors must comply with the vendor selection criteria throughout the 
agreement period. We agree with the commenter and added Section 
246.12(h)(3)(xxiv) in the final rule to make these clarifications.
f. Vendor Agreement Not a License or Property Interest 
(Sec. 246.12(h)(3)(xxi))
    We proposed in Section 246.12(h)(3)(xxi) to clarify that the vendor 
agreement does not constitute a license or a property interest and if 
the vendor wishes to continue to be authorized beyond the period of its 
current agreement, the vendor must reapply for authorization. Although 
commenters overwhelmingly supported this provision, fourteen commenters 
questioned whether a vendor that has been disqualified for a period of 
time that is less than the remaining term of its agreement should be 
allowed to resume its authorization without reapplying. Commenters 
indicated that when a vendor is disqualified, its slot may need to be 
filled immediately to ensure adequate participant access. In addition, 
they also noted that this is inconsistent with the State agency's 
authority to reassess a vendor at any time during the agreement period 
and terminate the vendor's agreement if it no longer meets the 
selection criteria. In response to the commenters' concern, we revised 
Section 246.12(h)(3)(xxi) to notify vendors that the State agency will 
terminate the agreements of vendors that are disqualified. A store may 
reapply for vendor authorization after the expiration of its 
disqualification period.

[[Page 83252]]

g. Compliance with Applicable Statutes, Regulations, Policies, and 
Procedures (Sec. 246.12(h)(3)(xxii)) and Notifying Vendors of Changes 
(Sec. 246.12(h)(7))
    All five commenters supported our proposal to require vendor 
agreements to make clear that vendors must comply with any changes to 
the Program statute and regulations and State policies and procedures. 
One commenter pointed out that we needed to reference State laws and 
regulations as well as State policies and procedures. We revised this 
provision to clarify that vendors must comply with the vendor agreement 
and Federal and State statutes, regulations, policies, and procedures 
governing the Program, including any changes made during the agreement 
period. To ensure that vendors are notified of such changes, we also 
added Section 246.12(h)(7) in the final rule to require the State 
agency to provide vendors with notice of changes to Federal or State 
statutes, regulations, policies, and procedures governing the Program 
at the time they are implemented by the State agency. We encourage the 
State agency to provide as much advance notice of such changes as 
possible. In addition, the State agency is required by Section 
246.12(i)(2) to include changes to program requirements in their annual 
vendor training.
h. Notification of Changes in Vendor Ownership, Store Location, or 
Cessation of Operations (Sec. 246.12(h)(3)(xvii))
    In Section 246.12(h)(3)(xvii), we proposed to require vendors to 
provide the State agency with at least 45 days advance notification in 
writing of a change in vendor ownership, store location, or cessation 
of operations. A majority of commenters opposed the 45-day advance 
notification and recommended a variety of alternative timeframes, 
including 30 days, 21 days, 15 days, promptly, as soon as practicable, 
and a number of days specified by the State agency in the vendor 
agreement. Two commenters noted that the proposed 45-day notice is 
unenforceable because in most situations the vendor allows its 
agreement to expire. Several commenters noted that a 45-day notice is 
impractical because businesses cease operations, buy and sell stores, 
and change ownership on short notice. In addition, many business 
transactions, such as a change in ownership, contain confidentiality 
requirements that prohibit the disclosure of information until the deal 
is consummated in order to maintain employees and customers.
    Several commenters requested that we delete the last sentence of 
the provision regarding changes in business structure. One commenter 
noted that vendor agreements are nontransferable; therefore, a transfer 
of a majority interest in a store renders the agreement null and void. 
Another commenter warned that phrases like ``changes in business 
structure'' and ``corporate reorganization'' open the door for hidden 
ownership changes. Another commenter indicated that the State agency 
must verify changes in business structure through its Secretary of 
State's business division, because past experience has shown that some 
corporations will call a change in ownership a restructuring in order 
to maintain their WIC authorization.
    Several commenters asked that we either delete or clarify the 
exception for the State agency to ``permit vendors to move short 
distances without voiding the agreement.'' One commenter suggested that 
we delete the exception to send a clear message to vendors that if a 
store changes location, then the vendor must reapply to be a vendor at 
the new location. Another commenter indicated that in an urban area a 
move across the street may result in a change in zip code, and allowing 
a vendor to move into another zip code without voiding its agreement 
may result in denial of another vendor in that same zip code without 
providing equal review of both potential locations.
    In response to commenters' concerns, we modified Section 
246.12(h)(3)(xvii) in the final rule to remove the specific length of 
advance notice required and to clarify that it is within the State 
agency's discretion to determine: the length of advance notice required 
for vendors reporting changes under this provision, whether a change in 
location qualifies as a short distance, and whether a change in 
business structure constitutes a change in ownership. In addition, we 
clarified that the notice must be in writing and revised this provision 
to use the term ``terminated,'' instead of the term ``voided,'' when 
referring to vendor agreements.
i. Sale of Store to Circumvent a WIC Sanction (Sec. 246.12(g)(5))
    In Section 246.12(g)(4), we proposed to prohibit the State agency 
from authorizing a vendor applicant when it determines that the store 
has been sold (i.e., a change in ownership) to circumvent a WIC 
sanction. Seventeen commenters supported this provision. One commenter 
suggested we modify the provision to prohibit authorization of a store 
that has been sold until the disqualification period is over, because 
this would be easier for the State agency to implement. We did not 
accept this comment because it could impair the owner from selling the 
store to a legitimate buyer for its fair market value. One commenter 
indicated that a denial of authorization based on this provision would 
be difficult to uphold on appeal. Another commenter suggested that a 
new owner could be required to sign an affidavit during the application 
process stating that the previous owner has no interest and is not 
involved in the business. We believe that through its application and 
selection process the State agency will be able to prevent and detect 
situations in which owners sell stores to circumvent WIC sanctions. 
Consequently, we retained this provision in Section 246.12(g)(5) of the 
final rule.
j. Data Collection at Authorization (Sec. 246.12(g)(8))
    The proposal included a provision that would require the State 
agency to collect a vendor applicant's shelf prices and its FSP 
authorization number if it participates in that program. One commenter 
asked that we clarify whether a vendor applicant had to be authorized 
by the FSP to be selected for WIC authorization and whether a WIC 
application should be delayed until the vendor applicant provides its 
FSP authorization number. Another commenter suggested that we require 
vendor applicants to be authorized by the FSP in order to be WIC 
authorized. We proposed this requirement in part to improve the State 
agency's coordination with the FSP in the reciprocity of sanctions, as 
required by the WIC/Food Stamp Program Vendor Disqualification final 
rule published on March 18, 1999 at 64 FR 13311 (Vendor 
Disqualification final rule). If a vendor applicant that is authorized 
in the FSP fails to provide its FSP authorization number, the State 
agency must delay or deny authorization, because this provision 
requires the State agency to collect this information at the time of 
application. Although some State agencies may require FSP authorization 
as a condition of WIC authorization, Federal regulations do not include 
such a requirement.
    In this provision, we also proposed that the State agency collect 
the vendor applicant's shelf prices, ``unless the State agency uses 
competitive bidding to set vendor prices for such foods.'' In 
retrospect, we believe that the exception is inappropriate because a 
State agency that uses a competitive bidding system needs the vendor 
applicant's shelf prices to ensure that the vendor applicant's bid 
prices do not exceed its shelf prices. For this reason, we deleted

[[Page 83253]]

the exception. We added a heading to this provision, ``Data collection 
at authorization,'' and retained it in Section 246.12(g)(8) of the 
final rule.

3. Vendor Limiting Criteria (Secs. 246.12(g)(2) and 246.4(a)(14)(ii))

    We proposed to require the State agency to limit the number of 
vendors it authorizes to a level that ensures adequate participant 
access as well as effective State agency management, oversight, and 
review of authorized vendors. Although current regulations permit the 
State agency to limit its number of authorized vendors, commenters 
overwhelmingly opposed the proposed provision to require vendor 
limitation. Commenters stated that mandatory limitation would be 
impossible to implement consistently throughout the State agency's 
jurisdiction, add another layer to the authorization process, be an 
unnecessary administrative burden, be costly to implement, create 
access problems for participants, impede the State agency's ability to 
adapt to growth during agreement cycles, result in more appeals and 
litigation, and create ill will among cooperating vendors.
    A majority of those who opposed mandatory limitation suggested that 
Federal rules focus on selection rather than limitation and that 
limitation should remain at the State agency's discretion. The 
rationale for this compromise is that strong selection criteria limit 
the number of authorized vendors without the problems associated with 
limiting criteria. The General Accounting Office (GAO) study (``Efforts 
to Control Fraud and Abuse in the WIC Program Can Be Strengthened'') 
released in August 1999 states that ``42 of the 51 State agencies 
[surveyed] reported making some effort to limit the number of 
authorized vendors.'' However, more State agencies reported using 
strong selection criteria to limit their number of authorized vendors 
than reported using limiting criteria. The GAO recommended that we 
``[a]mend the regulations on vendor management to ensure that the 
States limit their authorized vendors to a number they can effectively 
manage and issue guidance to States on the specific criteria we will 
use to assess their compliance with the regulations and the actions 
they would need to take if we determine that they have authorized more 
vendors than they can effectively manage.''
    We believe the compromise noted above, to require strong selection 
criteria and retain limitation at the State agency's discretion, will 
achieve our goal of reducing vendor fraud and abuse and still address 
the GAO's recommendation. Through the management evaluation process, we 
assess whether the State agency effectively manages its vendors and 
requires the corrective actions when necessary. For these reasons, we 
adopted strong selection criteria, as discussed below, and retained the 
State agency's authority to establish criteria to limit the number of 
vendors it authorizes. We also made a conforming change to Section 
246.4(a)(14)(ii) to clarify that the State agency is only required to 
include limiting criteria in its State Plan if the State agency opts to 
use such criteria.

4. Vendor Selection Criteria

    A substantial majority of the comments we received on the use of 
mandatory vendor selection criteria supported the provision as 
proposed. Commenters pointed out that making vendors meet or exceed 
strong selection criteria in order to be authorized is more effective 
than conducting compliance investigations on vendors after they have 
been authorized. One commenter noted that selection criteria will keep 
vendors honest and may improve vendors' attitudes toward participants, 
because vendors will not take for granted that they automatically 
qualify for WIC authorization. Those few commenters opposing mandatory 
selection criteria asserted that the State agency should have the 
discretion to establish the selection criteria and that the proposed 
mandatory selection criteria were too stringent and would impair the 
viability of some vendors.
    As noted in the preamble to the proposed rule and by those who 
commented on the proposal, State agency experience has shown that 
strong selection criteria can provide a cost-effective means of both 
cost containment and prevention of vendor violations. Therefore, this 
final rule retains the requirement for mandatory vendor selection 
criteria. We discuss the comments and changes to the individual 
selection criteria below.
a. Competitive Price and Price Limitations (Secs. Sections 
246.12(g)(3)(i) and 246.14(b)(2))
    A majority of the commenters supported the competitive price 
selection criterion, although a number of those commenters suggested 
modifications. Some commenters recommended that we either delete the 
competitive price criterion or make it a State agency option. Others 
indicated that we should allow the marketplace to establish the prices 
of supplemental foods.
    As noted in the preamble to the proposed rule, section 17(h)(11) of 
the Child Nutrition Act (42 U.S.C. 1786(h)(11)) requires the State 
agency to take into consideration the prices a store charges for 
supplemental foods compared to other stores when selecting stores for 
program authorization. This section also requires the State agency to 
establish procedures to ensure that authorized stores do not 
subsequently raise their prices for supplemental foods to levels that 
would otherwise make them ineligible for authorization. Therefore, we 
retained the competitive price selection criterion in the final rule. 
However, we revised this provision to address commenters' concerns and 
to clarify the requirements for this criterion.
    First, we clarified the distinction between the ``competitive price 
selection criterion'' and ``price limitations.'' The competitive price 
selection criterion is the process of considering, at the time of 
vendor authorization, the prices a vendor applicant charges for 
supplemental foods as compared to the prices charged by other vendor 
applicants and authorized vendors. The State agency may evaluate a 
vendor applicant based on its shelf prices or on the prices it bids for 
supplemental foods, which may not exceed its shelf prices.
    The State agency also must establish price limitations that the 
authorized vendor may not exceed during its agreement period. The price 
limitations must be designed to ensure that the State agency does not 
pay a vendor at a level that would otherwise make the vendor ineligible 
for authorization. This term is also used in the vendor agreement 
section in connection with the provision in Section 246.12(h)(4) that 
requires the State agency's redemption procedures ensure that the 
vendor is not paid more than the price limitations applicable to that 
vendor and in Section 246.12(k)(1) in the context of the requirements 
for State agency review of food instruments (and discussed further in 
section 6.d of the preamble). We also made a conforming change to 
Section 246.14(b)(2) to make clear that for food costs to be allowable, 
they may not exceed the price limitations applicable to the vendor.
    Several commenters noted the importance of giving the State agency 
the flexibility to determine the best method to implement the 
competitive price criterion. In response, we included a description of 
this requirement in the final rule to clarify the range of flexibility 
the State agency has in implementing the competitive price criterion. 
In response to a number of

[[Page 83254]]

questions from commenters, the final rule also clarifies that the State 
agency may establish competitive price criteria and price limitations 
for different vendor peer groups.
    Another commenter suggested that we permit the State agency to 
except pharmacies that only provide exempt infant formula and/or WIC-
eligible medical foods from the competitive price criterion and price 
limitations because pharmacies often do not know the price of exempt 
infant formula and/or WIC-eligible medical foods until they order it. 
This final rule authorizes such an exception.
    Several commenters indicated that the competitive price criterion 
would have a negative effect on smaller stores that may have higher 
operating costs or that may be unable to offer supplemental foods at 
prices below their costs. As noted in the preamble to the proposed 
rule, in many areas smaller vendors are essential to ensuring 
participant access. As with all aspects of its food delivery system, 
the State agency must ensure adequate participant access when it 
establishes its competitive price criterion and price limitations. 
Developing appropriate vendor peer groups is one way the State agency 
can both ensure adequate participant access and consider prices during 
the vendor selection process. Contrary to one commenter's suggestion, 
the State agency continues to retain the discretion to decide whether 
and how to establish its vendor peer groups.
    Both supporting and opposing commenters questioned how to handle 
price fluctuations that may occur during the agreement period due to 
government and market forces beyond a vendor's control. We clarified in 
the final rule that the State agency may include a factor in its price 
limitations to account for fluctuations in wholesale prices. For 
example, the State agency could include an inflation factor in its 
price limitations.
    Commenters also asked us whether certain scenarios would satisfy 
the requirement to ensure compliance with the price limitations 
throughout the agreement period. The following scenarios would satisfy 
the requirement:
    Scenario 1: The State agency assigns vendors to peer groups upon 
authorization and then makes price adjustments to its payments to 
vendors based on the price limitations applicable to the vendor's peer 
group.
    Scenario 2: The State agency compares the prices a vendor applicant 
charges for supplemental foods with those charged by other vendor 
applicants and authorized vendors to determine which vendors to 
authorize and then periodically conducts a reassessment of the vendor's 
prices to ensure they meet the applicable price limitations.
    Scenario 3: The State agency establishes a maximum price it will 
pay for each type of food instrument and then includes a provision in 
the vendor agreement that the State agency will not pay vendors in 
excess of the maximum price established for each food instrument.
b. Minimum Variety and Quantity of Supplemental Foods 
(Sec. 246.12(g)(3)(ii))
    Almost all of the commenters supported the requirement to consider 
as part of the selection process whether vendor applicants stock a 
minimum variety and quantity of supplemental foods. Commenters noted 
that the minimum variety/quantity requirement is one of the best 
selection criteria and is more effective at limiting the number of 
vendors the State agency authorizes than using limiting criteria. One 
commenter noted that the proposed rule did not make clear that 
authorized vendors must maintain the minimum variety and quantity of 
supplemental foods at all times, not just at the time of authorization. 
As discussed in section 2.e of this preamble, Section 
246.12(h)(3)(xxiv) of this final rule puts vendors on notice that they 
must comply with all the vendor selection criteria, including this one, 
throughout the vendor agreement period.
    Four commenters suggested that we adopt the same criterion for 
minimum variety and quantity as the FSP has proposed to establish for 
its authorized retailers. The FSP proposal would require retailers to 
offer for sale at least three varieties of staple food intended for 
home preparation and consumption in each of four categories of staple 
foods (meat, poultry, or fish; bread or cereals; vegetables or fruit; 
and dairy products). The inherent differences in the types of food that 
program participants may obtain with food stamps versus WIC food 
instruments makes this definition inappropriate for the WIC Program. 
Furthermore, the variations in the supplemental foods approved by each 
State agency make it difficult to establish a standard definition for 
the WIC Program. Therefore, this final rule does not adopt a standard 
definition of the minimum variety and quantity of supplemental foods 
that vendor applicants must stock. Rather, such decisions are left to 
State agency discretion.
    Several commenters suggested that we establish some flexibility or 
tolerance in this requirement or consider supplemental foods that a 
vendor can document it has ordered. Two commenters suggested that the 
State agency be permitted to authorize stores that do not stock infant 
formula or to authorize pharmacies that only provide exempt infant 
formula and/or WIC-eligible medical foods to participants. The State 
agency may accommodate such stores when it determines that they are 
necessary to ensure adequate participant access. As with the 
competitive price criterion, it is critical that the State agency 
clearly incorporate any necessary flexibility in its selection criteria 
at the time the criteria are established so that all vendor applicants 
are held to the same standards. In recognition of the wide range of 
stores that serve as vendors, this rule clarifies that the State agency 
may establish different minimum variety and quantity standards for 
different vendor peer groups. However, we must emphasize the importance 
of establishing appropriate minimums so that participants are able to 
obtain all of the authorized supplemental foods on their food 
instruments. Vendors may not provide substitutions, cash, or credit 
(including rainchecks) if the authorized supplemental foods are not 
available. Authorizing vendors that do not maintain the required 
minimum stocks of supplemental foods undermines the nutritional goals 
of the Program.
c. Business Integrity (Sec. 246.12(g)(3)(iii))
    Although a majority of commenters supported the proposal to require 
the State agency to consider the business integrity of vendors in the 
selection process, many commenters suggested modifications to the 
business integrity criteria. We proposed three criteria in this 
category: (1) Lack of a record of criminal conviction or civil judgment 
for certain offenses that indicate a lack of business integrity; (2) 
lack of a history of serious vendor violations; and (3) lack of a 
history of serious FSP violations.
    Even those commenters who agreed with the substance of these 
criteria found them confusing. We completely rewrote this section to 
clarify the requirements. In addition, we strengthened the regulatory 
language to emphasize that the State agency may rely solely on facts 
already known to it and representations made by vendor applicants on 
their vendor applications. This change responds to the many commenters 
who asked whether costly background checks were required and whether 
the State agency would be held accountable for authorizing vendors 
whose criminal records were not known to the State agency.

[[Page 83255]]

    Several commenters indicated that the proposal did not make clear 
what would happen if the State agency discovered that a vendor had lied 
on its application. This final rule adds a sentence to the termination 
provision in Section 246.12(h)(3)(xvi) notifying the vendor that the 
State agency will terminate its agreement if the State agency 
determines that it has provided false information in connection with 
its application. Two commenters questioned the value of vendor self-
declarations on applications. We believe that adding a requirement to 
terminate the vendor agreement when a vendor is found to have provided 
false information will deter such behavior among vendor applicants.
    Several commenters questioned the people covered by the business 
integrity criteria. One commenter suggested that the criteria include 
immediate family members of the owners, officers or partners, managers, 
and any stockholders who have a substantial role in the operation of a 
store. Two other commenters questioned who would be covered in a 
publicly traded company. The proposed rule would have applied the 
business integrity criteria to the business entity itself and its 
current owners, officers, directors, or partners. We revised this 
provision in the final rule to cover only the vendor's current owners, 
officers, and managers. This change conforms the coverage to parallel 
the FSP rule and recognizes the important role managers play with 
respect to a vendor applicant's business integrity.
i. No Criminal Conviction or Civil Judgment
    We also had a number of questions and suggestions about the 
specific business integrity criteria. With respect to the criteria 
requiring a lack of a record of a criminal conviction or civil judgment 
for certain offenses that indicate a lack of business integrity, 
commenters wanted to know whether the State agency would be limited to 
the listed activities, whether to consider felonies or misdemeanors or 
both, and what is meant by ``business integrity'' and ``business 
honesty.'' Four commenters opposed this provision on the grounds that 
once a person has served a criminal sentence, that person should not be 
further penalized through denial of authorization. Two other commenters 
suggested that rather than denying authorization for such offenses, 
stores that cannot meet this selection criterion should be authorized 
and then identified as high-risk vendors subject to compliance 
investigations. Another commenter opposed this selection criterion 
because it would be difficult for the State agency to apply in a fair 
and consistent manner. Two commenters requested that we clarify the 
number of years that constitutes a vendor applicant's ``history.''
    Vendors play a valuable role in most State agencies' food delivery 
systems. We believe it is critical that the State agency consider 
business integrity in the selection of its vendors, because the 
integrity of vendors reflects on the integrity of the WIC Program. 
Congress made clear its concern about the integrity of vendors when it 
required: high-risk identification and compliance investigations of 
vendors; permanent disqualification for vendors convicted of 
trafficking; and disqualification of vendors that have been 
disqualified as retailers in the FSP. We substantially revised the 
business integrity criterion in the final rule to clarify that only 
criminal convictions and civil judgments imposed in the six years prior 
to the application must be considered and to clarify the areas of this 
criterion in which the State agency has discretion. We have not 
distinguished between felonies and misdemeanors because of the wide 
variation among States in designating these criminal offenses as 
felonies vs. misdemeanors.
ii. No Serious WIC Program Vendor Violations and No Serious Food Stamp 
Program Violations
    Commenters were divided on the merits of the proposed selection 
criteria for a lack of a history of serious WIC violations and a lack 
of a history of serious FSP violations. Many commenters believed that 
both criteria went too far because serious WIC and FSP violations are 
those that give rise to a disqualification, criminal conviction, or 
civil judgment. Furthermore, if violations do not rise to such a level, 
then they should not be used as a basis to deny authorization. Two 
commenters noted that this criterion could effectively extend a one-
year disqualification for up to six more years. Other opposing 
commenters reiterated their views that the business integrity criteria 
are confusing and bureaucratic and that vendor integrity is better 
handled through vendor monitoring. On the other hand, one commenter 
suggested that we permit the State agency to set a timeframe of longer 
than the proposed six years for cases of particularly egregious 
violations.
    We did not include these two criteria in the final rule, even 
though we believe serious WIC and FSP violations do reflect on the 
business integrity of vendor applicants. Rather than make such 
violations mandatory vendor selection criteria, we decided to give the 
State agency the discretion to establish selection criteria for serious 
WIC and FSP violations or use such vendor information to identify high-
risk vendors.
    We want to point out that we proposed to make failure to 
participate in the annual vendor training a basis for nonselection. 
Although this is not required by the selection criteria in the final 
rule, many State agencies have found this to be an effective means of 
vendor management. The State agency continues to have the authority to 
establish failure to attend vendor training as a selection criterion.
iii. Sanctions Imposed by Another WIC State Agency 
(Sec. 246.12(l)(2)(iii))
    A number of commenters responded to our request for comments on 
whether to make mandatory vendor sanctions imposed by another WIC State 
agency a mandatory selection criterion. Almost all commenters supported 
this idea, although most suggested various modifications. Three 
commenters requested that, if established, the selection criterion 
should permit the State agency to rely on the representations made by 
vendor applicants on their vendor applications. Other commenters 
suggested that we maintain a database for State agencies to use for 
this purpose. Under the final rule, the State agency has the discretion 
to establish a selection criterion to consider WIC sanctions imposed by 
another State agency.
    Two commenters asked how the State agency would be able to uphold a 
denial of authorization on appeal if it denied authorization to a 
vendor based on a WIC sanction imposed by another State agency or based 
on a FSP sanction. These commenters suggested that information about 
WIC sanctions imposed by other State agencies be used to identify high-
risk vendors rather than as a selection criterion. Three commenters 
believed that only the mandatory sanctions, not State agency-
established sanctions, imposed by another State agency should result in 
nonselection. Whereas one commenter raised concerns about the time and 
costs of denying authorization based on WIC sanctions imposed by 
another State agency, another commenter asserted that if a vendor 
commits vendor violations in one State agency's WIC Program, the vendor 
is likely to commit such violations in another State agency's WIC 
Program.
    For a State agency that opts to deny authorization based a prior 
WIC sanction, a WIC sanction by another

[[Page 83256]]

State agency, or a FSP withdrawal of authorization or prior FSP 
disqualification, we made a corresponding change to the administrative 
review procedures. This change specifies that if the State agency 
denies authorization to a vendor applicant based on a WIC sanction 
(regardless of which State agency imposed the sanction) or a FSP 
withdrawal of authorization or disqualification, the State agency is 
only required to provide the vendor applicant with an abbreviated 
administrative review. We made this change because the vendor applicant 
already had an opportunity to appeal the facts underlying the WIC 
sanction or FSP withdrawal/disqualification; therefore, it is not 
necessary to provide a second review of these facts. An abbreviated 
administrative review provides the vendor applicant with the 
opportunity to appeal such narrow factual issues as whether its store 
is the same one that received the sanction and whether the sanction 
occurred during the applicable period.
    One commenter questioned the appropriateness of denying 
authorization of a vendor applicant for a vendor violation that did not 
result in a sanction. The commenter indicated that the vendor applicant 
would be denied authorization based on information that it did not have 
an opportunity to examine or refute. If a State agency denies 
authorization on this basis, the State agency must include a 
description of the vendor violation in the notice of adverse action and 
must give the vendor an opportunity to appeal the adverse action.
d. No Current Food Stamp Program Disqualification or Civil Money 
Penalty for Hardship (Sec. 246.12(g)(3)(iv))
    Twenty-four of the twenty-six commenters supported the proposed 
requirement to deny authorization to vendor applicants that are 
currently disqualified from the FSP or that have received a FSP civil 
money penalty for hardship and the period for the FSP disqualification 
that would otherwise have been imposed has not expired. Three 
supporting commenters suggested that we require FSP authorization as a 
prerequisite for WIC authorization. We did not make this change because 
of the differences in the populations served and the benefits provided 
under the two programs.
e. Considering Participant Access in Authorization Determinations
    In drafting the final rule, we noticed that it was not clear 
whether the State agency would be required to deny authorization to a 
vendor applicant that did not meet one or more of the selection 
criteria. We clarified in the final rule that a vendor applicant that 
does not meet the competitive price and minimum variety/quantity 
criteria may not be authorized, even if such denial of authorization 
would result in inadequate participant access. For the competitive 
price criterion, the State agency must compare the prices of the vendor 
applicant against those of other vendor applicants and authorized 
vendors. Consequently, the State agency is able to adjust its 
competitive price criterion to select enough vendors to ensure adequate 
participant access. As for the minimum quantity/variety criterion, we 
believe that a vendor applicant that does not meet or exceed this 
criterion must be denied authorization because such a store cannot 
provide participants all the authorized supplemental foods on their 
food instruments.
    We clarified that the remaining two vendor selection criteria, 
business integrity and a current disqualification/civil money penalty 
for hardship in the FSP, that the State agency may authorize a vendor 
applicant that fails to meet these criteria if necessary to ensure 
adequate participant access. We believe this requirement strikes the 
necessary balance between program integrity and participant access, 
similar to that balance struck when a State agency decides to impose a 
civil money penalty in lieu of a disqualification in order to ensure 
adequate participant access.

5. Food Instrument Requirements

    No commenters opposed the food instrument requirements in proposed 
Sections 246.12(f)(1), (f)(2)(i), (f)(2)(iv), (f)(2)(v), (f)(2)(vi), 
and (f)(3). Consequently, we adopted these provisions as proposed with 
minor revisions to conform to language used throughout the final rule. 
Below are separate discussions of the food instrument proposals that 
received opposing comments.
a. Printed Food Instrument Requirements (Secs. 246.12(f)(2)(ii), 
(f)(2)(iii), (f)(2)(vii), and (r)(5))
    One commenter opposed the proposed provisions in Sections 
246.12(f)(2)(ii) and (f)(2)(iii), requiring the ``first date of use'' 
and the ``last date of use'' to be printed on food instruments, because 
vendors are often penalized when they accept food instruments either 
before or after the specified dates. The commenter indicated that the 
State agency issues food instruments too far ahead of the ``first date 
of use'' and suggested that food instruments be more specific and to 
the point. A major responsibility of vendors is to make sure that they 
accept food instruments only during their valid dates. This requirement 
is similar to accepting manufacturers' coupons, which are for specific 
food items and contain expiration dates. Cashiers must be familiar 
enough with the food instruments used by the State agency to identify 
whether or not a food instrument is valid for transaction. We believe 
the requirements as adopted in Sections 246.12(f)(2)(i) through 
(f)(2)(vii) of the final rule address the commenter's concerns in that 
they require ``[e]ach printed food instrument must clearly bear on its 
face'' the authorized supplemental foods, the first date of use, the 
last date of use, the redemption period, the serial number, and spaces 
for the purchase price and the signature.
    In response to the commenter's concern about issuing food 
instruments too far in advance, program regulations that require the 
State agency to issue no more than a three-month supply of food 
instruments at any one time have been in place since 1982 and were 
included in the proposal. No other opposing comments were received on 
these regulations. Cashiers need to examine the dates on a food 
instrument to ensure it is valid, regardless of when the food 
instrument was issued. Requiring shorter issuance cycles would neither 
eliminate the need for such an examination nor be a cost-effective 
solution to the commenter's concern. However, in our review of this 
provision, we did note that although a three-month supply of food 
instruments is acceptable, a three-month supply of supplemental foods 
is not. Consequently, we modified this provision in Section 
246.12(r)(5) so that ``no more than a * * * one-month supply of 
authorized supplemental foods is issued at any one time. * * *''
b. Electronic Benefits Transfer (EBT) (Secs. 246.12(a) and (h)(3)(iv))
    In the Vendor Disqualification final rule, we amended the 
definition of ``food instrument'' to include an electronic benefits 
transfer card (EBT). We made this change to recognize that some State 
agencies are using EBT cards in place of printed food instruments. For 
the same reason, we proposed to include a statement in Section 
246.12(a) to acknowledge that the current regulations do not specify 
separate requirements or exceptions for EBT systems and that the 
operation of EBT systems may require modifications of some regulatory 
provisions.

[[Page 83257]]

    One commenter suggested that we delete the reference to EBT systems 
in Section 246.12(a). Another commenter opposed our ``piecemeal and 
potentially premature approach toward WIC EBT.'' This commenter 
suggested that we implement a new series of EBT pilot programs and 
evaluate them in public forums before we make modifications to the 
regulations regarding EBT systems. In addition, three commenters 
requested that we clarify the purpose of this proposed change and 
suggested that we wait until EBT is fully implemented and then issue a 
more practical final rule.
    The EBT provision in Section 246.12(a) is intended to recognize the 
emergence of EBT systems in the WIC Program and acknowledge that these 
systems will not always conform with current regulatory provisions that 
apply to printed food instruments. We believe that this authority is a 
necessary first step toward the further development of EBT systems in 
the WIC Program.
    The suggestion that we wait until EBT is fully implemented before 
issuing a final rule is unworkable. We do not have separate authority 
to modify regulatory requirements for pilot projects. Further, some of 
the provisions in this rulemaking are in response to statutory 
deadlines, most of the new requirements in this rulemaking will be 
unaffected by EBT implementation, and EBT may not be implemented for 
decades in areas where it is not a cost-effective alternative to 
printed food instruments. Nevertheless, we revised this provision to 
clarify the situations in which we will modify a regulatory provision 
to accommodate a particular EBT system.
c. Food Instrument Issuance and Security (Secs. 246.12(r)(1) through 
(r)(5) and (p) and 246.4(a)(14)(xii))
    We received only one comment regarding the proposed provisions in 
Sections 246.12(r)(1) through (r)(4), which concern food instrument 
issuance. The commenter supported the proposed amendments except for 
the use of the term ``proxy.'' The commenter's concern is addressed 
below in our discussion of the definition of proxy in section 13.a of 
this preamble. We made minor changes to the provisions in Sections 
246.12(r)(1) through (r)(5) to incorporate ``parents or caretakers of 
infant and child participants'' and to make these provisions conform to 
language used throughout the final rule.
    Ten commenters expressed various concerns about the food instrument 
security requirements in Section 246.12(p) of the proposal. Three 
commenters asked that we clarify how this provision applies to State 
agencies with print-on-demand technology. Another commenter asked that 
we clarify what the term ``perpetual inventory'' means and whether a 
system that maintains inventory and receipt of food instruments would 
be sufficient to meet this regulatory requirement.
    A perpetual inventory refers to an ongoing record maintained by 
local agencies and, if applicable, clinics of the food instruments 
received from the State agency and the food instruments issued to 
participants. The perpetual inventory is a running inventory of a local 
agency or clinic's supply of food instruments, and the monthly physical 
inventory is used to reconcile the perpetual inventory with the supply 
of food instruments on hand. For local agencies and clinics that use a 
print-on-demand technology to produce their food instruments, this 
requirement would apply only to their supplies of special check stock, 
if used, and, if applicable, to their supply of emergency, back-up, 
pre-printed food instruments. For local agencies and clinics that issue 
EBT cards, this requirement would only apply to the supplies of EBT 
cards maintained on premises.
    One commenter indicated that monthly physical inventories would be 
administratively burdensome for integrated local agencies and were 
unnecessary due to the State agency's use of electronic acknowledgment 
of receipts of food instruments by local agencies. Three commenters 
suggested that the physical inventory be conducted on a quarterly 
rather than on a monthly basis; however, one commenter suggested that 
monthly inventories are preferable to quarterly inventories because 
they become part of the local agency's monthly routine. Another 
commenter indicated that monthly inventories are unnecessary because 
the State agency uses a one-to-one reconciliation of food instruments, 
which is a better and more cost-effective control.
    As noted in the preamble to the proposed rule, the purpose of 
perpetual and physical inventories is to prevent and detect employee 
fraud. Neither an electronic acknowledgment of receipt of food 
instruments nor a one-to-one reconciliation of food instruments after 
redemption provides for the accountability and security of a local 
agency or clinic's food instruments on hand. We believe the most 
effective means to prevent employee fraud is to have controls in place 
to account for and limit the access to food instruments from the time 
they are created or received until the time they are issued to 
participants. A monthly reconciliation of perpetual and physical 
inventories provides local agencies and clinics with a method to detect 
when food instruments are missing from their inventories.
    One commenter requested that we modify this provision so that local 
agencies are only required to maintain perpetual inventory records for 
seven years, because record retention is both expensive and time-
consuming. We did not specify a time limit for the retention of such 
records and do not expect that the records be retained beyond the State 
agency's current record retention schedule for other WIC records.
    Two commenters opposed the proposed provision in Section 
246.4(a)(14)(xii), which would require the State agency to include a 
description of its system for ensuring food instrument security in its 
State Plan. As noted above, we believe that such a system provides a 
necessary protection against employee fraud. In addition, we believe 
that inclusion of a description of the State agency's system in its 
State Plan is essential to ensuring that the system is put into place 
in the local agencies and clinics under the State agency's 
jurisdiction. One commenter recommended that State agencies currently 
designing data systems include a food instrument inventory component in 
their data systems that is automated at the local agency as well as at 
the State agency level. We agree that automation of the local agency or 
clinic's perpetual inventory of food instruments on hand would be a 
worthwhile component of any data system.
d. Definition of ``Authorized Supplemental Foods'' (Sec. 246.2)
    In Section 246.2, we proposed to define the term ``authorized 
supplemental foods.'' One commenter suggested that we delete the phrase 
``for a particular participant'' from the definition, so that this term 
will not be confused with the existing term ``supplemental foods.'' The 
commenter did not understand our need to narrow the definition to ``a 
particular participant.'' Current regulations at 7 CFR 246.2 state: 
``Supplemental foods means those foods containing nutrients determined 
to be beneficial for pregnant, breastfeeding, and postpartum women, 
infants and children, as prescribed by the Secretary in Sec. 246.10.'' 
The proposed definition of authorized supplemental foods was intended 
to distinguish between the general categories of supplemental foods 
contained in Section 246.10 from the specific supplemental foods 
authorized

[[Page 83258]]

for a particular participant, which are listed on the participant's 
food instruments.
    The commenter further indicated that her State agency uses to term 
``authorized supplemental foods'' to refer to the supplemental foods 
approved by the State agency for use in the WIC Program. We are aware 
that State agencies use various terms for the supplemental foods 
approved by the State agency for program use, including the term ``WIC-
approved foods.'' We did not propose to define a term for those foods 
approved by the State agency for program use, so we do not believe it 
would be appropriate to include such a definition in this final rule. 
However, we adopted the definition for authorized supplemental foods as 
proposed because the definition provides us with a concise term to 
refer to the specific supplemental food items authorized by the State 
agency for a particular participant and listed on that participant's 
food instruments. The term authorized supplemental foods captures both 
the type and quantities of the supplemental foods, which we believe is 
essential to understanding other regulatory provisions. For example, in 
this final rule, Section 246.12(l)(1)(iv) states: ``The State agency 
must disqualify a vendor for one year for a pattern of providing 
unauthorized food items in exchange for food instruments, including 
charging for supplemental foods provided in excess of those listed on 
the food instrument.'' In this provision, ``unauthorized food items'' 
not only refers to any type of food item not listed on the food 
instrument, such as an unauthorized brand of cereal, but also refers a 
quantity of supplemental food item in excess of those listed on the 
food instrument, such as an extra box of an authorized brand of cereal.
e. No Substitutions, Cash, Credit, Refunds, or Exchanges 
(Sec. 246.12(h)(3)(ii))
    In Section 246.12(h)(3)(ii), we proposed to expand the regulatory 
language that ``vendors shall only provide the supplemental foods 
specified on the food instrument'' to specify that vendors must not 
provide unauthorized or non-food items, cash, credit, rainchecks, or 
refunds in exchange for food instruments. We proposed only one 
exception to this provision, to permit exchanges of ``identical 
supplemental foods.'' The only opposition to this proposed provision 
concerned the exception. Two commenters asked that we clarify the 
circumstances under which an exchange may be permitted. One commenter 
requested that we delete the exception because it would be the same 
thing as offering a raincheck or credit. We clarified in the final rule 
that exchanges are only permitted for ``an identical authorized 
supplemental food item when the original authorized supplemental food 
item is defective, spoiled, or has exceeded its `sell by' or `best if 
used by' date.''
    Another commenter requested that we delete the exception because 
the State agency has found that during administrative reviews an 
exchange for a ``similar'' food item is considered to be an exchange 
for an ``identical'' supplemental food item. The commenter warned that 
State agencies would lose administrative reviews regarding the 
substitution of non-rebate infant formulas for the authorized infant 
formula because preamble language is not considered part of the 
regulation. We believe there is a clear distinction between the words 
``similar'' and ``identical.'' Nonetheless, we added a sentence to this 
provision in the final rule to clarify that an ``identical authorized 
supplemental food item means the exact brand and size as the original 
authorized supplemental food item obtained and returned by the 
participant.''
f. Food Instrument Transaction and Redemption (Secs. 246.12(h)(3)(iv) 
through (h)(3)(vi), (h)(3)(viii), and (h)(4))
    In the final rule, we added headings to all the paragraphs in 
Section 246.12(h) and reordered some of the paragraphs in Section 
246.12(h)(3). In addition to making the information in this section 
more accessible to readers, we made these changes to help readers 
understand the distinction between the concepts of ``transaction'' and 
``redemption'' as they apply to food instruments. Food instrument 
transaction refers to the process in which a participant, parent/
caretaker, or proxy tenders a food instrument to a vendor in exchange 
for authorized supplemental foods. Food instrument redemption refers to 
the process in which a vendor submits food instruments for redemption 
and the State agency (or its financial agent) makes payment to the 
vendor for the food instruments.
    The proposed rule contained a single paragraph that addressed the 
procedures for entering both the purchase price and the signature on 
food instruments. Three commenters requested that we delete the 
provision because vendors will be penalized for not following the 
requirements. Vendors should not be paid for food instruments that lack 
purchase prices or signatures. This provision is necessary so vendors 
understand these requirements.
    Another commenter requested that we delete the preamble language 
that discusses allowing the participant to enter the purchase price on 
food instruments, because errors made by the participant when entering 
the purchase price, which may result in vendor overcharges or 
undercharges, would be attributed to the vendor. Another commenter 
suggested that we clarify that the participant or proxy must sign the 
food instrument ``in the presence of the cashier'' and that the 
purchase price must be entered before the ``food instrument is 
tendered.'' In Sections 246.12(h)(3)(v) and (h)(3)(vi) of the final 
rule, we clarify that: (1) It is the vendor's responsibility to ensure 
that a purchase price is entered on the food instrument in accordance 
with the State agency's procedures; (2) the State agency has the 
discretion to determine whether the vendor or the participant enters 
the purchase price; (3) the purchase price must be entered before the 
food instrument is signed; and (4) the participant, parent/caretaker, 
or proxy must sign the food instrument in the presence of the cashier.
    As discussed below in section 6.b of this preamble, the variety of 
redemption systems employed by State agencies combined with the 
proliferation of various cost containment measures has made a concise 
definition of a ``vendor overcharge'' that is applicable to all State 
agencies impossible. In recognition of this, we revised the definition 
of vendor overcharge to mean intentionally or unintentionally charging 
the State agency more for supplemental foods than is permitted under 
the vendor agreement. This approach provides the needed flexibility to 
accommodate the wide variety of systems that State agencies have 
developed for entering purchase prices and redeeming food instruments. 
We made a corresponding change to the vendor agreement provisions to 
require in Section 246.12(h)(4) that the State agency describe in the 
vendor agreement its purchase price and redemption procedures.
    These changes also necessitated a change to the proposed 
requirement in Sec. 246.12(h)(3)(viii) that vendors may 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, the contract price. Whereas the proposed provision 
focused on the amount a vendor may ``charge'' the State agency, in the 
final rule the provision focuses on the State agency's procedures for 
submitting food instruments for

[[Page 83259]]

redemption. The provision also puts the vendor on notice that the State 
agency may make price adjustments to the purchase price on food 
instruments to ensure compliance with the price limitations applicable 
to the vendor.
g. Food Instrument Disposition (Sec. 246.12(q)) and Adjustments to 
Expenditures (Sec. 246.13(h))
    We proposed to replace the heading of Section 246.12(n), 
``Reconciliation of food instruments,'' with the heading, ``Food 
instrument disposition,'' and to move this provision to Section 
246.12(q). We also proposed to amend the language in this paragraph to 
clarify the food instrument disposition process and to include language 
regarding the food disposition process in EBT systems. One commenter 
requested that we clarify the meaning of the terms used in this 
provision, including the terms ``redeemed,'' ``expired,'' 
``duplicate,'' and ``enrollment record.'' Although we made a few 
changes to the terminology used in the proposed provision, most of the 
terms are unchanged. Nevertheless, we believe a review of the meanings 
of the terminology used in this provision may be helpful for many 
readers.
    The term ``issued'' refers to food instruments that have been 
issued to a participant. The term ``voided'' refers to food instruments 
that have been invalidated by the State or local agency or clinic, 
including food instruments that were voided after they were issued. All 
food instruments that are no longer on hand (i.e., those food 
instruments that were received/created that are no longer in inventory) 
must be identified as either issued or voided, and as either 
``redeemed'' (i.e., submitted for redemption by a vendor and payment 
has been made by the State agency) or ``unredeemed'' (i.e., no payment 
was has been made by the State agency).
    All redeemed food instruments must be identified as falling into 
one of the following categories: (1) ``validly issued'' (i.e., the food 
instrument matches a participant's enrollment and issuance record); (2) 
``lost'' (i.e., the food instrument was reported lost by a participant 
or by the State or local agency or clinic); (3) ``stolen'' (i.e., the 
food instrument was reported stolen by a participant or by the State or 
local agency or clinic); (4) ``expired'' (i.e., the food instrument was 
submitted by the vendor after the specified period for redemption and 
the State agency provided payment to the vendor in accordance with 
Section 246.12(k)(5)); (5) ``duplicate'' (i.e., the food instrument was 
issued to a participant to replace a lost, stolen, or voided food 
instrument); or (6) ``not matching valid enrollment and issuance 
records'' (i.e., the food instrument does not match a participant's 
enrollment and issuance record).
    One commenter characterized accounting for voided, lost, and stolen 
food instruments as not beneficial, unnecessary, and overly burdensome. 
We disagree. It is necessary to account for voided food instruments 
because otherwise such food instruments would seem to be missing when 
the State or local agency or clinic reconciles its perpetual inventory 
with its monthly physical inventory. When the State agency makes 
payment on a voided, lost, or stolen food instrument, there is evidence 
of fraud or abuse. It is the State agency's responsibility to 
investigate such incidences to determine if the fraud or abuse was 
committed by a participant, an employee, a vendor, or an unauthorized 
person. If the State agency detects criminal activity, it must report 
it to the proper authorities for investigation.
    The commenter also characterized accounting for unredeemed food 
instruments as solving a problem that does not exist, because such food 
instruments do not represent an expenditure of grant funds. We 
disagree. In Sec. 246.13(h), we proposed to require the State agency to 
``adjust projected expenditures to account for redeemed food 
instruments and other changes as appropriate.'' This provision, which 
received no negative comments and has been adopted as proposed, 
requires the State agency to adjust its obligations to account for food 
instruments that have been paid (i.e., issued and redeemed) as well as 
those that have been deobligated (i.e., voided or unredeemed). 
Consequently, the State agency needs to account for both voided and 
unredeemed food instruments in order to remove them from its 
obligations. In addition, we would like to point out that anytime a 
food instrument is issued there is an associated nutrition services and 
administration cost, regardless of whether the food instrument is 
redeemed. An examination of unredeemed food instruments may reveal 
irregularities or waste, such as instances of dual enrollment.
    One commenter suggested that we modify Sec. 246.12(q) to 
differentiate between accounting for automated food instruments and 
accounting for manual food instruments that contain no participant 
data. The commenter noted that: manual food instruments represent 11.2% 
of the State agency's total redemptions, only 0.57% of these manual 
food instruments are recorded without participant data, and the State 
agency has never uncovered an instance of fraud in its investigations 
of such food instruments. The commenter recommended that we permit the 
reconciliation of a sample of manual food instruments that contain no 
participant data to ensure ``with reasonable statistical certainty'' 
that they were issued as a result of human error rather than as a 
result of fraud.
    Although we understand the commenter's concern about the effort 
involved in the reconciliation of manual food instruments without 
participant data, we believe the fact that a manual food instrument 
lacks participant data represents a lapse in program integrity that 
should be addressed by the State agency. Such instances should be 
investigated, and procedures should be put in place to ensure that all 
manual food instruments contain participant data, which allows them to 
be reconciled without excessive effort. In addition, we believe that as 
State agencies employ new technologies, such as print-on-demand food 
instruments and EBT, to issue food instruments, the use of manual food 
instruments should decline steadily until there is no longer a need for 
them. For these reasons, we did not accept the commenter's 
recommendation.
    Whereas two commenters supported the proposed amendments to 
Sec. 246.12(q) because their systems currently meet these requirements, 
three commenters asked that we acknowledge the additional costs for 
some State agencies to the implement this provision. We realize that 
some State agencies will incur significant costs to reprogram their 
systems in order to link participant enrollment records with food 
instrument issuance and redemption data. However, we believe this step 
is necessary to provide a level of accountability that ensures the 
integrity of the Program.
    One commenter noted that in Sec. 246.12(q) of the proposal we use 
the term ``PIN'' (Personal Identification Number) when we mean ``PAN'' 
(Primary Account Number). The proposed provision reads: ``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.'' In this instance, the correct term is PAN, 
which is a standard term used in the banking industry for the account 
number embossed on credit and bank cards. In an EBT system, the PAN is 
used to link redemption data to enrollment and issuance records; the 
PIN refers to the number entered by the participant at the point-of-
sale device to

[[Page 83260]]

access and transact program benefits. Consequently, we amended the 
proposal to reflect this correction.
h. Claims Against the State Agency (Sec. 246.23(a)(4))
    One commenter asked that we clarify whether all three conditions 
listed in Secs. 246.23(a)(4)(i) through (a)(4)(iii) must be satisfied 
to avoid a claim against the State agency for failing to account for 
the disposition of all redeemed food instruments. To avoid a claim, the 
State agency must satisfy all three conditions, which make up a three-
step process in which the State agency has: (1) ``Made every reasonable 
effort to comply with the requirement;'' (2) ``Identified the reasons 
for its inability to account for the disposition of each redeemed food 
instrument; and'' (3) ``Provided assurances that, to the extent 
considered necessary by FNS, it will take appropriate actions to 
improve its procedures'' (emphasis added).
    One commenter was concerned that the term ``reasonable effort'' is 
subjective and open to various interpretations by Federal and State 
auditors. Another commenter requested that we clarify what is meant by 
``made every reasonable effort.'' We believe that what constitutes 
``every reasonable effort'' will vary based on the specific situation 
and cannot be defined in such a manner that could be applied to all 
situations. Because all three conditions of this provision must be met, 
what constitutes every reasonable effort will be driven by whether the 
State agency's efforts result in both the identification of the source 
of the problem and the State agency's assurance that improvements will 
be made to its procedures to correct the problem. For example, in the 
situation described above regarding the inability of the State agency 
to reconcile its manual food instruments that lack participant data, if 
the State agency were to investigate a sample of such food instruments, 
identify that the problem is due to local agency staff inadvertently 
omitting the participant data, and implement a procedure that requires 
local agency staff to use a checklist, which includes entering 
participant data, when issuing manual food instruments, then the State 
agency would satisfy the conditions of Sec. 246.23(a)(4) and avoid a 
claim. If the State agency is unable to satisfy the conditions in 
Sec. 246.23(a)(4) and we recommend additional efforts that the State 
agency could undertake to identify and correct its accounting problem 
and the State agency refuses to make such efforts, then the State 
agency has failed to make every reasonable effort and will be subject 
to a claim.
    One State agency recommended that we establish an unbiased 
mediation process to review cases in which our determination of what 
constitutes ``every reasonable effort'' is in question. We did not 
propose an unbiased mediation process be established for vendor or 
State agency claims and do not believe that such a process is necessary 
in either case. Similar to the provision in Sec. 246.18(a)(1)(iii)(F) 
that prohibits the administrative review of vendor claims, current 
regulations at 7 CFR 246.22(a) make clear that we will not provide a 
hearing or review for claims against the State agency arising under 
Sec. 246.23(a). In addition, similar to the requirements in Section 
246.12(k)(3), which provide vendors with ``an opportunity to justify or 
correct'' a food instrument error that results in a claim, we provide 
the State agency with an opportunity to justify or correct the 
situation that results in its inability to reconcile all of its food 
instruments and believe this is sufficient.
    One commenter suggested that we allow for the withholding of a 
portion of the State agency's next year's grant, until the issue is 
resolved, rather than withholding up to 100% of the State agency's 
current funding, which could result in participants not being served. 
Section 246.23(a)(4) sets forth the requirements for establishing a 
claim against the State agency for failing to account for the 
disposition of all of its redeemed food instruments and for failing to 
take appropriate actions to correct its accounting problems. This 
provision does not address withholding nutrition services and 
administration funds but rather establishing a claim for an amount that 
corresponds to the State agency's unreconciled food instruments. Such 
claims are not allowable nutrition services and administration costs 
for the State agency and must be paid with State funds.

6. Vendor Violations, Vendor Overcharges, and Vendor Claims

a. Definition of ``Vendor Violation'' (Sec. 246.2) and Vendor 
Responsibility for Employee Actions (Sec. 246.12(h)(3)(xiii))
    Seventeen of the nineteen commenters on the proposed definition of 
``vendor violation'' supported the definition. Commenters did suggest a 
number of modifications. Seven commenters indicated that focusing on 
the acts of the vendor did not make sense, in light of the definition 
of vendor as a business entity that operates a store. We revised the 
definition to state that a vendor violation is an action of a vendor's 
current owners, officers, manager, or employees. Another commenter 
recommended that we add ``agents'' to the definition to cover 
situations in which friends or relatives are asked by owners to act as 
substitute cashiers. We accepted the commenter's recommendation and 
revised the definition accordingly.
    Another commenter focused on the part of the definition that refers 
to actions that violate the Program statute or regulations or State 
agency policies or procedures. The commenter recommended that the 
definition include actions that violate State law, rules, and 
regulations as well. We accepted this recommendation and revised the 
definition to include actions that violate ``the vendor agreement or 
Federal or State statutes, regulations, policies, or procedures 
governing the Program.''
    The two commenters who opposed the definition unless we modified it 
focused on the inclusion of unintentional actions in the definition. As 
noted in the discussion of the definition of vendor violation in the 
proposed rule, we believe vendors should be held accountable for all 
violations, whether they are deliberate attempts to violate program 
requirements or inadvertent errors, because both ultimately result in 
increased food costs and fewer participants being served. We 
acknowledged the complexity of WIC transactions and noted that even 
with training and supervision, cashiers may occasionally make 
unintentional errors. We also stated that the State agency has a wide 
range of actions that it 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 compliance investigation, 
and imposing a sanction. One supporting commenter questioned whether 
this statement is contrary to the mandatory vendor sanctions required 
by the Vendor Disqualification final rule. We want to emphasize that 
not all vendor violations will give rise to a vendor sanction. For 
example, even though an inadvertent mistake in entering the purchase 
price on a food instrument may constitute both a vendor violation and a 
vendor overcharge, it would not necessarily trigger a sanction. Only a 
pattern of vendor overcharges triggers the mandatory sanction. 
Consequently, we retained the ``unintentional action'' language in the 
vendor violation definition, as well as the State agency's discretion 
to take a variety of actions against a vendor when vendor violations do 
not rise to a level that triggers a sanction.

[[Page 83261]]

    One commenter suggested that the provision in proposed 
Sec. 246.12(h)(3)(xiii) provide an exception similar to the one in 
Sec. 246.12(l)(1)(i)(B), which provides the State agency with an option 
to impose a civil money penalty in lieu of permanent disqualification 
when the vendor had, at the time of the violation, an effective program 
and policy 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. Another commenter asserted that if a 
vendor is doing everything it can to comply with program requirements 
and fires the employee who committed the vendor violations, the vendor 
should be able to retain its authorization. Otherwise, when a vendor is 
disqualified, participants are forced to go to a less convenient store 
or even drop off the Program completely.
    For the same reasons we did not remove unintentional actions from 
the definition of vendor violation, we retained in 
Sec. 246.12(h)(3)(xiii) of the final rule the requirement that vendor 
agreements include a statement concerning the responsibility of the 
vendor for the actions of its employees. To be consistent with the 
definition of vendor violation, we included a reference in this 
provision to the vendor's accountability for the actions of its owners, 
officers, and managers. Also, rather than limiting this provision to 
actions relating to the ``handling of food instruments,'' we revised 
the provision to require accountability for ``vendor violations.'' As 
we noted above, not every vendor violation results in a sanction. 
Furthermore, for most mandatory sanctions, if the State agency 
determines that disqualification of the vendor would result in 
inadequate participant access, the State agency must impose a civil 
money penalty, except in the case of third or subsequent mandatory 
sanctions.
b. Definitions of ``Vendor Overcharge'' and ``Price Adjustment'' 
(Sec. 246.2)
    Nineteen of the twenty-one commenters supported the proposed 
definition of ``vendor overcharge.'' Two commenters suggested removing 
the word ``pattern,'' noting that although a pattern of overcharging is 
required to trigger the mandatory sanction for vendor overcharges, it 
is unnecessarily limiting to include the pattern requirement in the 
definition itself. We agree and made this change in the final rule.
    Two commenters objected to the word ``unintentional.'' As noted in 
the discussion of the definition of vendor violation above and the 
discussion of vendor overcharges in the preamble to the Vendor 
Disqualification final rule, we believe that limiting the scope of 
vendor overcharges only to those that are intentional or fraudulent 
would undermine the integrity of the WIC Program. It also puts an 
additional burden on the State agency to prove the intent of the person 
who commits the vendor overcharge. Funds lost due to vendor 
overcharges, whether intentional or inadvertent, are not available to 
serve program participants. Therefore, we did not remove the word 
``unintentional.''
    Five of the supporting commenters and one opposing commenter 
pointed out that the proposed definition of vendor overcharge did not 
adequately distinguish between a vendor overcharge and what they termed 
an ``overpriced food instrument'' or ``overage.'' The commenters 
described an overpriced food instrument as a food instrument on which 
the vendor properly entered purchase price but due to a pre- or post-
payment edit is paid by the State agency an amount lower than the 
purchase price.
    We agree with the commenters and, in the final rule, added a new 
definition of ``price adjustment,'' which is defined as ``an adjustment 
made by the State agency, in accordance with the vendor agreement, to 
the purchase price on a food instrument after it has been submitted by 
a vendor for redemption to ensure that the payment to the vendor for 
the food instrument complies with the State agency's price 
limitations.'' We made a conforming change to the definition of vendor 
overcharge to clarify that a vendor overcharge does not occur when the 
State agency makes a price adjustment to the purchase price of a food 
instrument in accordance with the procedures outlined in the vendor 
agreement.
    The definition of price adjustment recognizes the increasing number 
of State agency systems under which adjustments routinely are made to 
the purchase price on food instruments after they have been submitted 
for redemption. For example, in one State agency, prices are 
established for supplemental foods through competitive bids. The 
purchase price entered by the vendor on the food instrument corresponds 
to the current shelf prices for the authorized supplemental food items 
provided to the participant. The State agency bills the vendor at the 
end of each month for the difference between the purchase prices on its 
food instruments and the vendor's contract prices for the supplemental 
foods. These adjustments are not made to account for errors but as a 
regular part of the State agency's system for redeeming food 
instruments. Another State agency may have a system under which the 
State agency has established maximum prices for each type of food 
instrument and does not pay vendors in excess of that amount, 
regardless of their shelf prices for the supplemental foods. These 
situations are not properly categorized as overcharges, because the 
price adjustments are a regular part of the State agency's redemption 
system.
    We also recognize that sometimes the price adjustments are not made 
directly by State agencies, but rather by the banks they contract with 
to redeem food instruments. In these cases, the banks, acting as 
financial agents of the State agency, redeem the food instruments and 
make price adjustments pursuant to their contracts with the State 
agency. Thus, the price adjustments made by contractors of the State 
agency would be considered to be price adjustments made by the State 
agency and would not be considered vendor overcharges.
    A vendor still could commit a vendor overcharge in a system that 
uses price adjustments. For example, a vendor agreement may establish a 
maximum price by food instrument type but still requires the vendor to 
enter a purchase price that corresponds to its shelf prices. Under this 
arrangement, anytime the vendor enters a purchase price that exceeds 
its shelf prices, the vendor has committed an overcharge. A pattern of 
such vendor overcharges would trigger a mandatory sanction under 
Sec. 246.12(k)(1)(iii)(C).
    We also revised the definition of vendor overcharge to replace the 
reference to charging participants more than non-WIC customers or the 
shelf or contract price with ``charging the State agency more for 
authorized supplemental foods than is permitted under the vendor 
agreement.'' We made this modification to recognize the wide variety of 
State agency redemption systems. In most cases, the vendor will be 
required to enter the purchase price corresponding to the shelf prices 
or prices charged non-WIC customers, whichever is less. However, in 
some cases the vendor may be required to enter a purchase price that 
does not exceed the food instrument's maximum price before submitting 
it to the State agency for redemption.
    Two commenters suggested incorporating a dollar threshold in the 
definition of vendor overcharge. As we have discussed in our guidance 
on the mandatory sanction for vendor overcharges, the severity of an 
overcharge should be taken into account in establishing a pattern of 
vendor overcharges. However, we believe it is

[[Page 83262]]

important to have a firm definition of what constitutes a vendor 
overcharge and then for the State agency to establish a threshold for 
imposing a sanction or other action according to the number and 
severity of the vendor overcharges.
    Another commenter recommended that we limit vendor overcharges to 
actions that are proven through compliance buys. Most vendor 
overcharges will be established through compliance buys. However, State 
agencies may be able to develop edits or other means to detect vendor 
overcharges that provide sufficient evidence to support their sanction 
actions.
    We made a conforming change to the mandatory sanction in 
Sec. 246.12(k)(1)(iii)(C) to use the defined term ``vendor overcharge'' 
rather than repeating the substance of the definition within the 
sanction provision. Finally, one opposing commenter noted that the 
definition should not reference ``charging participants'' because the 
State agency, not the participant, is charged for authorized 
supplemental foods obtained from a vendor. We agree with commenter and 
made this change.
c. Review of Food Instruments (Sec. 246.12(k)(1))
    Thirteen of the fifteen commenters on Sec. 246.12(k)(1) supported 
the proposal to require the State agency to have systems to identify 
vendor overcharges and other errors on redeemed food instruments not 
less frequently than quarterly, although a number of the supporting 
commenters recommended that we modify the provision. Several commenters 
questioned how a State agency could have a system to detect vendor 
overcharges because they thought that compliance buys are the only way 
to establish vendor overcharges. We agree that compliance buys are the 
best way to support sanctioning a vendor for vendor overcharge 
violations. These comments pointed out that our reference to a system 
to ``identify'' vendor overcharges and other errors needed modification 
to apply to all State agencies.
    We revised this provision to clarify that the State agency must 
have a system to detect ``questionable food instruments, suspected 
vendor overcharges, and other errors. * * *'' This language both 
responds to the concern that in most instances a review of food 
instruments will not be able to identify an actual vendor overcharge, 
just a suspected vendor overcharge, and parallels the current language 
in 7 CFR 246.12(r)(5)(i) on this point. This revision also takes into 
account the need to detect other food instruments that may contain 
something questionable, but not clearly an error, that requires follow 
up.
    We also revised this provision to require that the system ensure 
compliance with the applicable price limitations. As discussed in 
section 4.a of this preamble, section 17(h)(11) of the Child Nutrition 
Act (42 U.S.C. 1786(h)(11)) now requires that the State agency 
establish procedures to ensure that authorized stores do not raise 
their prices after authorized, to levels that would otherwise make them 
ineligible for authorization. As a result, we required in 
Sec. 246.12(g)(3)(i) that the State agency establish price limitations 
and in Sec. 246.12(h)(4) that the State agency's redemption procedures 
must ensure that it does not pay a vendor more than the applicable 
price limitations. To further implement this statutory mandate, we 
revised the requirement for the review of food instruments to ensure 
compliance with the applicable price limitation. The final rule also 
makes clear that the review must include a price comparison or other 
edit designed to ensure compliance with the applicable price 
limitations and to detect suspected vendor overcharges.
    Two commenters asked that we clarify whether this requirement could 
be satisfied by inspecting a representative sample of food instruments. 
It was always our intention to permit the State agency to review only a 
representative sample of the food instruments submitted for redemption. 
We revised this provision to clarify that the State agency may review 
either all or a representative sample of food instruments and that the 
review may be done either before or after the State agency makes 
payment to the vendor on the food instruments. However, as State 
agencies continue to automate their food instrument redemption systems, 
they should design their systems to include a review of all food 
instruments before they make payment on them.
    One commenter suggested that we modify the requirement to detect 
``redemption of expired food instruments'' to read ``food instruments 
redeemed outside of valid dates.'' We revised this provision to read 
``transacted or redeemed after the specified date'' to capture both 
food instruments that vendors accept after the date for transacting 
them and food instruments submitted for redemption after the specified 
date.
    Finally, we clarified what we meant when we proposed that the 
system must detect vendor overcharges and other errors at least 
quarterly. We did not mean that the review was to be conducted 
quarterly. Instead, we were trying to establish a timeframe for follow-
up action on any suspected vendor overcharges and other errors. In the 
final rule, we specify that the State agency must take follow-up action 
within 120 days of detecting any questionable food instruments, 
suspected vendor overcharges, or other errors. The review itself must 
be done on a continuing basis.
d. Delaying Payment and Establishing Claims (Secs. 246.12(k)(2) and 
246.12(h)(3)(ix))
    The majority of the commenters supported the proposed requirement 
that the State agency assess claims resulting from vendor violations 
identified during inventory audits or other reviews. However, in 
reviewing the proposed rule, we noted that we did not clearly establish 
a general requirement to establish claims against vendors that have 
committed vendor violations that affect the payment to the vendor. The 
final rule makes this clear in Secs. 246.12(k)(2) and 246.12(h)(3)(ix) 
and also clarifies that the State agency may delay payment in cases in 
which the vendor violation is discovered before payment has been made.
    In response to proposed Sec. 246.12(h)(3)(ix), a number of 
commenters asserted that an ``overpriced food instrument'' should give 
rise to a claim and a ``vendor overcharge'' should give rise to a 
sanction. As noted above, a price adjustment is not a vendor overcharge 
and does not trigger a claim. Price adjustments, which must be 
described in the vendor agreement, are part of the method used by the 
State agency to determine the amount a vendor is paid for a food 
instrument.
    We want to make clear that claims and sanctions are not mutually 
exclusive. Claims arise in situations in which the vendor has not 
complied with the requirements for food instrument redemption, such as 
recording the wrong price or accepting food instruments without 
signatures. In these cases, the State agency must either deny payment 
of the food instrument or assert a claim. Sanctions arise as a result 
of vendor violations, such as a pattern of vendor overcharges.
    One commenter requested that we clarify that in addition to 
assessing claims, the State agency may sanction vendors for a pattern 
of vendor overcharges. The commenter indicated this clarification is 
necessary to avoid dealing with vendor assertions that as long as they 
paid claims resulting from vendor overcharges, they cannot be

[[Page 83263]]

sanctioned for vendor overcharge violations. We revised 
Sec. 246.12(h)(3)(ix) to clarify that: ``In addition to denying payment 
or assessing a claim, the State agency may sanction the vendor for 
vendor overcharges or other errors in accordance with the State 
agency's sanction schedule.''
    Three commenters suggested that a pattern of overcharges be used to 
identify high-risk vendors. Another commenter indicated that having a 
variable maximum price that is not printed on the food instrument 
eliminates the opportunity for systemic and excessive overcharging, 
lessening the need for pursuing claims, regardless of the cause or the 
size of vendor overcharges. Although we believe both of these 
approaches would improve program integrity, they should be used in 
addition to, and not in lieu of, strong requirements to pursue claims.
e. Collecting the Full Purchase Price of Food Instruments Containing 
Vendor Overcharges or Other Errors (Secs. 246.12(k)(2) and 
246.12(h)(3)(ix))
    Both Sections 246.12(k)(2) and 246.12(h)(3)(ix) in the proposed 
rule would have permitted, but not required, the State agency to 
withhold payment or collect from the vendor the full redeemed value of 
a food instrument containing a vendor overcharge or other error. Just 
under half of the commenters on each of these provisions opposed this 
authority for two reasons. First, they pointed out that it treated 
inadvertent cashier errors the same as intentional fraud. They asserted 
that there is no deterrent effect when human error is the cause. 
Second, they noted that establishing a claim for the full purchase 
price of the food instrument failed to compensate vendors for the 
amount of the supplemental foods that were properly provided to 
participants. One commenter suggested that we permit claim assessment 
for a percentage of the food instrument value rather than for the full 
amount. Another commenter was particularly concerned about this 
provision in light of the proposal to limit vendors' ability to appeal 
claims.
    The ability to establish a claim for the full purchase price of a 
food instrument can provide a powerful incentive for vendors to ensure 
that their cashiers are properly trained in order to reduce inadvertent 
errors during WIC transactions. As such, we retained this option for 
the State agency.
f. Opportunity to Justify or Correct Errors (Sec. 246.12(k)(3))
    Two commenters supported retaining the current provision requiring 
the State agency to give vendors the opportunity to justify or correct 
errors before denying payment or assessing a claim. One commenter 
indicated that our example was inadequate because some State agencies 
do not pay for food instruments with missing purchase prices or 
signatures and do not permit, under their vendor agreements, vendors to 
make these types of corrections after a food instrument has been 
submitted for redemption. We agree with the commenter and deleted this 
example.
    One commenter on the claims provision of the vendor agreement noted 
that we had removed the current provision requiring the State agency to 
give vendors an opportunity to justify or correct food instrument 
errors. To emphasize that vendors must still be provided this 
opportunity, we added a reference to this opportunity in the claims 
provision of the vendor agreement.
g. Timeframe for Initiating Claims (Sec. 246.12(k)(4))
    Two commenters pointed out that requiring the State agency to begin 
collection efforts before an investigation is complete could jeopardize 
the investigation. We agree and revised the requirement for initiating 
collection action to read ``the date of detection of the vendor 
violation or the completion of the review or investigation giving rise 
to the claim, whichever is later.'' We also reordered paragraph (k) to 
clarify that the opportunity to justify or correct must occur within 
the 90 days the State agency has to make a final decision to deny a 
payment or initiate claims collection action.
h. Food Instruments Redeemed after the Specified Period 
(Sec. 246.12(k)(5))
    Two commenters suggested that we raise the dollar limit for 
permitting the State agency to pay vendors for food instruments 
submitted for redemption after the specified date without our approval. 
They indicated that this dollar limit was outdated. We agree and raised 
the limit for prior FNS Regional Office approval from $200 to $500.

7. Miscellaneous Vendor Agreement Specifications

a. Recordkeeping (Sec. 246.12(h)(3)(xv))
    We proposed to require the vendor agreement to provide that vendors 
must 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. One commenter recommended that we set 
the length of time in the final rule, rather than defer to the State 
agency. Other commenters requested that we specify what records must be 
retained and that we require that shelf price records be maintained to 
facilitate follow-up on suspected vendor overcharges. Finally, one 
commenter questioned whether the records may be kept off-site.
    This rule adopts the provision largely as proposed. We left it to 
the State agency to specify the record retention period. We clarified 
that the time period must be specified by the State agency in the 
vendor agreement. The State agency has the discretion to require as 
part of the vendor agreement that the vendor maintain shelf price 
records. Finally, this rule retains the requirement that the records be 
available at any reasonable time and place. This means that records may 
be kept off-site as long as they are readily accessible.
b. Sanction Schedule (Sec. 246.12(h)(5))
    All commenters supported our proposal to require the State agency 
to include its sanction schedule as part of the vendor agreement. This 
provision would replace the current approach of separately listing in 
the program regulations the mandatory sanctions that the State agency 
must include in its vendor agreement. Several commenters suggested that 
we clarify that the sanction schedule may be included as an attachment 
to the vendor agreement. Another commenter requested that we permit 
cross-reference to State laws or regulations in areas in which the 
State agency's sanction schedule has been incorporated in State law or 
regulations. We made these changes and also revised the provision to 
clarify that the sanction schedule must include both the mandatory and 
State agency vendor sanctions.
    One commenter suggested that the required sanction schedule only 
include the mandatory sanctions, because the State agency needs some 
flexibility in assessing the State agency sanctions in order to take 
into account the nuances of each case. We disagree. A State agency may 
build some flexibility into its sanction schedule, such as factors that 
will be taken into account in determining the length of a 
disqualification. However, vendors need advance notice of the 
consequences of committing vendor violations. We believe that allowing 
the State agency to either attach the sanction schedule to or cross-
reference it in the vendor agreement provides the State agency with an 
efficient and effective means to provide vendors with such advance 
notice.
    Two commenters asked whether the State agency would be permitted to

[[Page 83264]]

continue to include its sanction schedules in the vendor handbook that 
is provided to vendors along with the vendor agreement. This practice 
is permissible only if the sanction schedule section of the vendor 
handbook is referenced in the vendor agreement. Providing vendors with 
advance notice of the sanction schedule through the vendor agreement 
prevents vendors from arguing during administrative reviews that they 
were unaware of the sanctions for various vendor violations.
c. Adverse Actions Subject to Administrative Review and Administrative 
Review Procedures (Sec. 246.12(h)(6))
    We proposed to require the State agency to include with the vendor 
agreement a list of the actions a vendor may appeal and a copy of the 
State agency's administrative review procedures. Commenters generally 
supported this provision, but suggested some modifications to provide 
the State agency with some flexibility in the implementation of this 
provision. One commenter asked that we clarify that such procedures may 
be included in a vendor handbook or as an attachment to the agreement. 
Another commenter suggested that when the procedures are included in 
State law or regulations, that the vendor agreement just cross-
reference those documents. Finally, one commenter asked whether this 
provision is necessary in light of the requirement that the State 
agency must provide such procedures to the vendor along with its notice 
of an adverse action that is subject to review.
    The final rule incorporates many of these suggestions. It permits 
the State agency to include the list of adverse actions and the 
administrative review procedures either in the agreement or as an 
attachment to it. If these items are included in State law or 
regulations or in another document, such as a vendor handbook, provided 
at the time the vendor is authorized, the State agency may simply 
include an appropriate cross-reference in the vendor agreement. As an 
alternative to these approaches for the administrative review 
procedures, the State agency may include a statement in the vendor 
agreement that the administrative review procedures are available upon 
request and applicable procedures will be provided along with a notice 
of adverse action that is subject to review.
    One commenter indicated that the vendor agreement should include a 
list of the adverse actions that are not subject to administrative 
review, rather than a list of the adverse actions that are subject to 
administrative review. The commenter asserted that an all-inclusive 
list of all actions that may be subject to administrative review is 
impossible. We did not intend the State agency to include a laundry 
list of all possible adverse actions. However, we also do not believe 
that simply providing a list of adverse actions not subject to 
administrative review is appropriate in light of the two categories of 
administrative reviews established under this rule (full and 
abbreviated administrative reviews). We expect the State agency to list 
the adverse actions in the same level of detail as they are described 
in Section 246.18. We revised this provision to require the State 
agency to list the adverse actions that are not subject to review as 
well. As with the sanction schedule, we believe it is critical that 
vendors receive advance notice of the consequences of their actions and 
whether they will be able to obtain administrative review in the event 
of an adverse action by the State agency.

8. Vendor Training

    The proposal included several provisions that would strengthen the 
vendor training requirements. The goal of these changes is to improve 
vendors' understanding of program rules and requirements in order to 
prevent program noncompliance and errors. The proposal specified where 
vendor training would take place, who would be required to attend 
training, how often training would take place, and what type of 
training would be provided. Commenters were primarily concerned about 
the costs associated with the proposed changes.
a. Location of Training (Sec. 246.12(i)(1)), Preauthorization Visits 
(Sec. 246.12(g)(4)), and Personnel Required to Attend Training 
(Secs. 246.12(h)(3)(xi) and (i)(1))
    The most common concern among commenters was the location of vendor 
training. The proposal would have required the State agency to provide 
training to new vendors ``on the site of the vendor.'' This provision 
was intended to combine the initial vendor training with the documented 
on-site visit that currently is required by Sec. 246.12(e)(1) prior to 
or at the time of initial authorization of a new vendor. Most of those 
who commented on this aspect of the provision indicated that on-site 
training was ineffective for a variety of reasons, including constant 
interruptions, inadequate space in stores for training, and 
inefficiency due to training vendors individually rather than training 
a large group of vendors at the same time. Three commenters preferred 
on-site training because off-site training creates a burden for small 
businesses with few employees. To address commenters' concerns, we 
decided to revise this provision to give the State agency discretion to 
determine the appropriate location for vendor training. When possible, 
we believe that the State agency should attempt to accommodate requests 
from small businesses to provide on-site vendor training. To 
accommodate this revision, we retained the current requirement that the 
State agency conduct an on-site visit prior to or at the time of a 
vendor's initial authorization. This requirement appears in 
Sec. 246.12(g)(4) of the final rule.
    Proposed Sec. 246.12(h)(3)(xi) would have required ``the manager of 
the vendor or other member of management'' to participate in vendor 
training. Commenters were divided on the issue of who should be 
required to attend training. One commenter suggested that we require 
store owners and/or general managers as well as key store personnel to 
participate in annual training. Another commenter indicated that 
requiring ``management'' to attend training was inappropriate. A third 
commenter asserted that, because the vendor is responsible for its 
employees' actions regardless of who commits violations or attends 
training, the vendor should have the discretion to determine who is in 
the best position to participate in the training and to provide 
training information and materials to other store employees. Based on 
the comments we received, it appears that there are a variety of 
successful formats for vendor training, ranging from large, off-site, 
train-the-trainer programs to on-site, cashier training programs. To 
allow for a variety in formats, we believe it is necessary to provide 
both the State agency and vendors with discretion regarding the 
appropriate audience for vendor training. Consequently, we revised both 
the vendor agreement and vendor training provisions to clarify that at 
least one representative from each vendor is required to participate in 
the training and that the State agency will designate the audience 
(e.g., managers, cashiers, etc.) to which the training is directed.
b. Frequency and Format of Training (Secs. 246.12(i)(1) and (h)(3)(xi))
    Of the seven commenters who requested that we delete the annual 
training requirement: two misunderstood the proposed provision and 
opposed it because attending off-site training on an annual basis would 
be a burden, three opposed it because they do not think it would be the 
best

[[Page 83265]]

use of limited resources, one opposed it because it would prohibit the 
State agency from directing its resources to vendors that need more 
training than others, and one commenter just opposed annual training. 
Due to the high turnover in vendor personnel, which was noted by a few 
commenters, and the complexities of and periodic changes in program 
requirements, we believe that an annual training requirement is both 
reasonable and necessary. Providing vendors with training materials on 
current program requirements on an annual basis is not overly 
burdensome for the State agency. Similarly, examining training 
materials provided by the State agency on an annual basis is not overly 
burdensome for the vendor. Consequently, we decided to adopt the annual 
training requirement as proposed.
    Several commenters opposed attaching the frequency of the required 
face-to-face training to the agreement period, especially for State 
agencies that use probationary or one-year agreement periods. One 
commenter indicated that State agencies would adopt longer agreement 
periods to avoid the costs of providing more frequent face-to-face 
training. Three commenters suggested that we modify the provision to 
require face-to-face training once every three years. We accepted this 
suggestion and made a corresponding change in the final rule because it 
creates a standard requirement for all State agencies irrespective of 
the length of their vendor agreements.
    Another area of commenter concern was the proposed requirement for 
``face-to-face'' training. Three commenters suggested that we use the 
term ``interactive'' instead of ``face-to-face'' because it would give 
the State agency the flexibility to use new technologies, such as video 
teleconferencing. Several commenters made a related point that group 
training is often more successful than on-site training because some 
group members ask questions that are informative to other trainees. Our 
rationale for requiring face-to-face training was to provide vendor 
representatives with the opportunity to ask questions in order to fully 
understand how the program requirements apply to their store 
operations. We agree with the commenters' suggestion that this goal can 
be achieved through other interactive formats. For this reason, we 
accepted the commenters' suggestion and revised the provision so that 
``interactive'' training is required prior to or at the time of a 
vendor's initial authorization and once every three years thereafter. 
We also added language to clarify that interactive training ``includes 
a contemporaneous opportunity for questions and answers.''
c. Training Content (Sec. 246.12(i)(2)) and Training Documentation 
(Sec. 246.12(i)(4))
    In Sec. 246.12(i)(2), we proposed to require that specific topics 
be covered by the annual training. One commenter indicated that the 
required subjects could not, as suggested in the preamble, be 
effectively communicated by simply revising the handbook or using audio 
tapes. The proposed provision states that the ``annual training shall 
include instruction'' on the required subjects. Whereas the vendor 
agreement must contain very specific information about the program 
requirements, annual training is intended to provide more general 
information about how these requirements apply to vendor operations. 
For instance, instruction on the vendor sanction system may reference 
where the sanction schedule is located in the vendor agreement and 
generally cover the process the State agency uses to impose sanctions 
and the procedures that vendors must follow to appeal sanctions. To 
clarify our intent, we revised this provision to delete the requirement 
that the training cover the vendor agreement in order to avoid the 
implication that the entire vendor agreement must be reviewed each 
year. Instead, Sec. 246.12(i)(2) requires the annual training to cover 
any changes to program requirements since the last training.
    Five commenters suggested that we delete the ``training receipt'' 
requirement in proposed Secs. 246.12(i)(4) and (h)(3)(xi) because they 
believe it is clear that the State agency will hold vendors responsible 
for violations regardless of whether they are intentional or 
inadvertent and regardless of who commits the violations or who attends 
vendor training. We proposed this requirement because some State 
agencies have indicated in the past that violative vendors have argued 
during administrative reviews that they were not appropriately trained 
on their program responsibilities. A signed receipt, acknowledging the 
vendor's receipt and understanding of training, would provide the State 
agency with evidence that vendors received training and understand 
program requirements. Nevertheless, we believe that by signing their 
agreements vendors have accepted the terms of the agreement and are 
legally responsible for understanding program requirements. Vendors 
should thoroughly read and understand their vendor agreements prior to 
signing them. Vendor training is not intended to educate vendors on 
every aspect of the vendor agreement; vendor training is provided by 
the State agency to assist vendors in understanding program 
requirements in order to reduce program errors, prevent program 
noncompliance, and improve program service. We accepted the commenters' 
suggestion and amended Sec. 246.12(i)(4) to require the State agency to 
document the content of its annual training but not to require vendor 
receipts. This change holds the State agency accountable for covering 
the training subjects required by Section 246.12(i)(2) and provides the 
State agency with the discretion of whether to require signed receipts 
for vendor training. Consequently, if the State agency finds such 
receipts helpful during administrative reviews, it has the option to 
require signed receipts for vendor training. We also made a conforming 
change to Sec. 246.12(h)(3)(xi).
d. Training of Staff by Vendor (Sec. 246.12(h)(3)(xii)) and Vendor 
Accountability (Sec. 246.12(h)(3)(xiii))
    We received no comments opposing proposed Section 
246.12(h)(3)(xii), which requires the vendor to inform and train 
cashiers and other staff on program requirements. This provision is 
related to Section 246.12(h)(3)(xiii), which establishes the vendor's 
accountability for the actions of its employees in the handling of food 
instruments. We adopted both of these provisions in the final rule with 
technical and conforming changes to make them consistent with language 
used throughout the final rule.

9. Vendor Monitoring and Identifying High-Risk Vendors

a. Definitions of ``High-Risk Vendor,'' ``Compliance Buy,'' ``Inventory 
Audit,'' and ``Routine Monitoring'' (Sec. 246.2)
    Ten commenters supported the proposed definition of ``high-risk 
vendor.'' One commenter opposed the proposed definition, unless it is 
modified to distinguish between intentional and unintentional conduct. 
As discussed in the preamble to the Vendor Disqualification final rule, 
the violations that trigger mandatory sanctions do not require the 
State agency to distinguish between fraudulent (intentional) and 
abusive (unintentional) vendor violations, because both types of vendor 
violations result in loss of program funds. The State agency is not 
required to demonstrate that a vendor intended to commit a vendor 
violation(s) to support its sanction. Instead, the State agency is 
required to provide evidence that the vendor committed the vendor 
violation(s) and that the evidence is

[[Page 83266]]

sufficient to support the sanction being imposed. For this reason, we 
did not accept the commenter's recommendation and adopted the 
definition with one revision to incorporate the defined term ``vendor 
violation.''
    Ten commenters also supported the proposed definition of 
``compliance buy.'' One commenter suggested that we modify the 
definition to cover situations in which an investigator poses as a 
proxy. We accepted this recommendation and also added language to the 
definition to cover situations in which an investigator poses as a 
``parent or caretaker of an infant or child participant.''
    Whereas ten commenters supported our proposed definition of 
``inventory audit,'' one commenter requested that we delete the 
definition because inventory audits rely on internal store records, 
which should not form the basis of a compliance investigation. We did 
not accept the commenter's request because inventory audits are useful 
in investigating vendors who may be, for example, redeeming food 
instruments for unauthorized stores, exchanging unauthorized food or 
non-food items for food instruments, or trafficking. Another commenter 
suggested that we modify the definition to include the ``examination of 
beginning and ending inventory levels and food invoices.'' We did not 
accept this commenter's suggestion because the meaning of the phrase 
``during a given period of time'' implies an examination that covers a 
specific period, which naturally must have a beginning and an ending 
point. We adopted the definition in the final rule with one 
modification to conform to language used throughout the final rule.
    Of the ten commenters who supported the definition of ``routine 
monitoring,'' one commenter noted that it was odd that in the proposal 
we replaced ``representative monitoring'' with routine monitoring and 
then dropped the requirement for routine monitoring. The routine 
monitoring requirement is discussed below in section 9.d of this 
preamble. We adopted the definition of routine monitoring as proposed.
b. Vendor Monitoring (Sec. 246.12(j)(1))
    Two commenters suggested that we add language to proposed 
Sec. 246.12(j)(1) to permit the State agency to delegate all of its 
vendor monitoring to another State agency by written agreement. We did 
not accept this comment for two reasons. First, if one State agency 
pays another State agency for compliance investigation services, then 
the State agency that conducts the investigations would be considered a 
contractor under this provision. No additional regulatory language is 
necessary to address this type of agreement. Second, even if one State 
agency chooses to meet its entire requirement for compliance 
investigations by counting the compliance investigations conducted by 
another State agency, the first State agency still will need to 
establish its own vendor monitoring system to address the monitoring 
activities that may not be delegated. Each State agency must conduct 
its own routine monitoring visits, identify its high-risk vendors, and 
track its progress toward meeting the thresholds for routine monitoring 
visits and compliance investigations. The circumstances under which a 
State agency may count the compliance investigations conducted by 
another State agency are discussed in Section 9.d of this preamble.
c. Identifying High-Risk Vendors (Sec. 246.12(j)(3))
    Of the forty-one commenters who addressed proposed 
Sec. 246.12(j)(2), which covers the requirements for the identification 
of high-risk vendors, thirty opposed it for a variety of reasons. Many 
opposed it because we did not include our high-risk criteria in the 
regulatory language or discuss the specifics of these criteria in the 
preamble. We believe that these criteria should not be included in the 
regulatory language because doing so would compromise State agency 
investigative techniques. Unscrupulous vendors may use this information 
to avoid being identified as high-risk vendors subject to compliance 
investigations. Although some stores post signs warning their customers 
that shoplifters will be subject to criminal prosecution, no stores 
post signs that specifically disclose the techniques they use to 
identify potential shoplifters. Most vendors, like most shoppers, are 
honest and have no reason to be concerned about investigative 
techniques.
    Several commenters criticized the provision as a ``one-size-fits-
all'' approach that would require all State agencies to use the same 
high-risk identification criteria and asserted that State agencies are 
in the best position to determine which criteria are most effective. 
Our experience with State agency-established criteria is mixed. 
According to The Integrity Profile (TIP) report for fiscal year 1998, 
the two most common indicators that State agencies use in their high-
risk systems were complaints from participants, local agencies, and 
other vendors and WIC business volume. Complaints do not take into 
account vendor redemption patterns, and WIC business volume simply 
identifies larger vendors. Of the seven most commonly used high-risk 
indicators reported by State agencies for the fiscal year 1989 through 
fiscal year 1994 Vendor Activity Monitoring Profile (VAMP) reports, 
complaints and WIC business volume ranked fifth and sixth at 
identifying vendors that subsequently committed overcharge violations 
during compliance buys.
    We believe there is sufficient data to support the effectiveness of 
particular high-risk identification criteria and that State agencies 
are not making the best use of these criteria. However, to address 
commenters' concerns about the potential ineffectiveness of our 
criteria, we revised the regulatory language to permit the State agency 
to use other statistically-based criteria we approve in lieu of the our 
criteria. This revision gives the State agency the flexibility to 
employ other criteria when it believes that our criteria are 
ineffective in its jurisdiction.
    Several commenters were concerned about the length of the advance 
notice we would provide to the State agency prior to changing our high-
risk identification criteria. One commenter suggested that we provide 
the State agency with a minimum of eighteen months advance notice, 
while another commenter suggested that we agree to use our criteria for 
five years prior to making changes. Commenters were concerned about the 
length of time it takes to make changes to their automated systems and 
the costs associated with frequent changes. Strengthening high-risk 
identification systems certainly will require a commitment of resources 
by State agencies. However, the result of this effort will be a more 
efficient compliance investigation system, which identifies and removes 
violative vendors from the Program. We will not change our high-risk 
identification criteria more frequently than once every two years and 
will change the criteria only when more effective criteria have been 
identified. To address commenter's concerns about the time required for 
implementing changes, we revised this provision to provide State 
agencies with ``adequate advance notice,'' which will allow for various 
implementation timeframes depending on the change.
    One commenter suggested that we modify the provision to specify the 
period for identifying high-risk vendors. We accepted this suggestion 
and revised the provision to require high-risk identification ``at 
least once a year.'' Establishing this as an annual requirement is 
consistent with the period during which the State agency

[[Page 83267]]

must conduct the specified number of compliance investigations. In 
addition, the commenter suggested that we specify that vendors 
appearing on multiple lists be given a higher priority for compliance 
investigations. This is a valid comment, but we believe that such 
direction should be provided to State agencies as part of the guidance 
that contains our high-risk criteria rather than be included in 
regulatory language.
d. Routine Monitoring (Sec. 246.12(j)(2)) and Compliance Investigations 
(Secs. 246.12(j)(4), 246.12(l)(2)(iii), and 246.18(a)(1)(ii)(H))
    Many of those who commented on the requirement in proposed Section 
246.12(j)(3)(i), which would require the State agency to conduct 
compliance investigations on ten percent of its vendors, were concerned 
that the ten percent level was too high, too expensive, a ``one-size-
fits-all'' approach, and would make routine monitoring prohibitive due 
to the cost of the required compliance investigations, and shift 
resources away from nutrition education and breastfeeding promotion. As 
noted in the Fiscal Year 1998 TIP report, State agencies vary widely in 
the areas of high-risk identification and compliance investigations. 
Whereas some State agencies reported identifying no high-risk vendors, 
others reported identifying over one third of their vendors as high-
risk. Similarly, some State agencies reported conducting no compliance 
investigations; others reported conducting compliance investigations on 
nearly all of their vendors. Currently, the State agency must design 
and implement a high-risk identification system and have the capability 
to conduct compliance buys. Some State agencies would need to do very 
little to implement this proposed provision; others would need to 
modify their systems to identify high-risk vendors to incorporate our 
criteria and begin conducting compliance buys on their vendors.
    Section 203(f) of the Goodling Act amended section 17(f)(24) of the 
Child Nutrition Act (42 U.S.C. 1786(f)(24)) to require each State 
agency to identify high-risk vendors and conduct compliance 
investigations of the vendors. A number of commenters indicated that 
their number of high-risk vendors is well below ten percent and 
suggested that we modify the provision to a lower percentage, such as 
three or five percent, or that the State agency be granted discretion 
to determine the percentage of vendors that should be monitored. Under 
the current regulations, which allow for State agency discretion, a 
number of State agencies neither identify high-risk vendors, nor 
conduct compliance investigations. To implement a provision consistent 
with the Goodling Act, we must require the State agency both to 
identify high-risk vendors and to conduct compliance investigations. 
Setting a minimum percentage for compliance investigations is the most 
effective means of ensuring that the legislative mandate is implemented 
consistently by State agencies.
    One suggested modification that was supported by ten commenters was 
to modify the provision so that the State agency must monitor ten 
percent of its vendors and conduct compliance investigations on half of 
those vendors subject to monitoring. This compromise would set a 
standard for compliance investigations, as we proposed, as well as 
retain a standard for routine monitoring, as recommended by thirteen 
commenters. The compromise would address the majority of commenters' 
concerns regarding this provision. Consequently, we adopted the 
compromise but clarified that the standards for routine monitoring and 
compliance investigations are separate standards--five percent routine 
monitoring and five percent compliance investigations. This compromise 
retains half of the current requirement for ten percent routine 
(representative) monitoring and reduces the proposed ten percent 
compliance investigations requirement by half, thereby reducing the 
amount of resources necessary to carry out this provision. To 
accommodate these changes, this rule reorganizes and renumbers the 
requirements for compliance investigations in proposed 
Sec. 246.12(j)(3) into two paragraphs, Sec. 246.12(j)(2), Routine 
monitoring, and Sec. 246.12(j)(4), Compliance investigations. 
Throughout this final rule, we used the term ``compliance 
investigations'' to refer to both inventory audits and compliance buys.
    Several commenters expressed concern that requiring compliance buys 
would set up an adversarial relationship with vendors. Others commented 
that the most effective vendor monitoring system is a preventive 
approach. Although we agree that vendor training and routine 
monitoring, including ``educational buys,'' are effective methods to 
curb vendor abuse by reducing cashier errors that result in the loss of 
program funds, preventive methods are ineffective at addressing vendor 
fraud, because vendors do not inadvertently commit fraud. By mandating 
that we require State agencies to conduct compliance investigations of 
high-risk vendors, Congress has directed that program resources be used 
to combat vendor fraud. In the final rule, we balanced our desire to 
continue to commit resources toward preventive methods, such as 
strengthening the vendor training requirements and retaining a routine 
monitoring requirement, with our responsibility to remove fraudulent 
vendors from the Program.
    Two commenters suggested that we modify this provision to require 
compliance investigators to notify vendors of violations detected 
during compliance buys in a timely manner. One of these commenters 
suggested that the required timely notification should be either when 
violations occur or within seven days of their occurrence. One 
commenter indicated that it is unfair to notify vendors of violations 
45-60 days after they were discovered, because such late notification 
may limit the vendor's ability to discipline cashiers under their labor 
agreements. Another commenter suggested that compliance investigators 
assist checkers with honest mistakes.
    Although we understand the concerns expressed by these commenters, 
we do not believe that corresponding modifications to the regulatory 
language are justified. As defined by this final rule, a compliance buy 
is ``a covert, on-site investigation in which a representative of the 
Program poses as a participant, parent or caretaker of an infant or 
child participant, or proxy, transacts one or more food instruments, 
and does not reveal his or her identity during the visit.'' Unlike 
personnel conducting a routine monitoring visit, compliance 
investigators must adhere to strict procedures in order for their 
compliance buys to be admissible as evidence in administrative reviews 
and, if necessary, judicial proceedings. These procedures prohibit 
investigators from revealing their identity and the fact that the 
vendor is under investigation, because revealing this type of 
information could compromise both current and on-going investigations. 
For the same reasons, we included a provision in the proposed rule and 
this final rule to protect the identity of compliance investigators 
when they testify in administrative reviews. Whereas timely feedback is 
essential to the effectiveness of monitoring visits, often it is 
contrary to the effectiveness of compliance investigations.
    Three commenters suggested that we modify this provision to permit 
the State agency to count toward the proposed ten percent standard 
compliance investigations conducted by another WIC State agency on 
vendors authorized by both State agencies,

[[Page 83268]]

especially in situations in which one of the State agencies is an 
Indian Tribal Organization. The proposed rule would have allowed the 
State agency to ``waive'' conducting a compliance investigation on a 
high-risk vendor if the State agency documented that the vendor was 
under investigation by a Federal, State, or local law enforcement 
agency or for some other such compelling reason. To clarify this 
provision, we revised it to allow the State agency to ``count'' toward 
this requirement investigations conducted by a Federal, State, or local 
law enforcement agency, provided that such investigations include the 
investigation of either WIC or FSP fraud or abuse. In addition, we 
accepted the commenter's suggestion and revised this provision so that 
the State agency may count compliance investigations conducted by 
another State agency on shared vendors, provided that certain 
conditions are met.
    In order for a State agency to count compliance investigations 
conducted by another WIC State agency on vendors shared by the two 
State agencies, the final rule requires the State agency to implement a 
system for reciprocal sanctions with the other WIC State agency. This 
means that the State agency counting the compliance investigations of 
another WIC State agency must take reciprocal action based on mandatory 
sanctions imposed by the other State agency. To take such reciprocal 
action, the State agency must include in its sanction schedule, which 
is a required part of the vendor agreement, a sanction that requires 
disqualification for any mandatory sanction imposed by the other State 
agency. This serves to put vendors on notice of the reciprocal effect 
of the mandatory sanctions imposed by the other WIC State agency. Prior 
to imposing a disqualification, the State agency must consider whether 
disqualification of the vendor would result in inadequate participant 
access. If disqualification of the vendor would result in inadequate 
participant access, then the State agency must impose a civil money 
penalty in lieu of disqualification. This provision does not permit the 
State agency to impose a civil money penalty in response to a civil 
money penalty for a mandatory sanction imposed by the other WIC State 
agency. Vendors that appeal a sanction based on another State agency's 
mandatory sanction must be provided an abbreviated administrative 
review in accordance with the procedures in Sec. 246.18(c). The areas 
subject to administrative review are limited to: (1) Whether the vendor 
received a disqualification for a mandatory sanction from the other WIC 
State agency and (2) whether the State agency's sanction schedule 
included a sanction based on a mandatory sanction imposed by the other 
WIC State agency.
    To incorporate this change, we made conforming changes to the 
sanction and administrative review sections of the regulations. We 
added Sec. 246.12(l)(2)(iii) to the final rule to clarify that the 
State agency has the option to establish a sanction based on a 
mandatory sanction imposed by another WIC State agency. We also added 
Sec. 246.18(a)(1)(ii)(H) to clarify that the State agency may provide 
abbreviated administrative reviews, rather than full administrative 
reviews, to vendors that appeal a ``disqualification or a civil money 
penalty imposed in lieu of disqualification based on a mandatory 
sanction imposed by another WIC State agency.'' In addition, we want to 
clarify that although compliance investigations conducted by other 
State agencies may be counted toward a State agency's five percent 
compliance investigations requirement, these activities should not be 
reported on the TIP report as compliance buys or inventory audits 
conducted by the State agency, because such double counting would lead 
to inflated numbers.
    Another area of concern was the number of compliance buys necessary 
to close a compliance investigation in which no vendor violations are 
found. The proposal would have established two separate standards: 
three negative compliance buys within a twelve-month period to close 
compliance investigations of high-risk vendors and State agency 
discretion to close compliance investigations of non-high-risk vendors. 
Several commenters recommended that we establish a single standard for 
all compliance investigations. As part of the compromise discussed 
above, ten commenters suggested that the State agency be provided with 
the discretion to determine when to close all compliance 
investigations. However, as noted in the WIC Vendor Issues Study, 
compliance investigations that consist of more than one compliance buy 
are more effective at uncovering vendor violations than compliance 
investigations consisting of a single compliance buy. In addition, 
conducting compliance investigations on non-high-risk vendors helps to 
verify the effectiveness of the high-risk identification criteria used 
by the State agency. If the same standard is not used to close 
compliance investigations of both high-risk and non-high-risk vendors, 
then the results of the two types of compliance investigations cannot 
be compared to verify the effectiveness of the high-risk criteria. For 
these reasons, we revised this provision to require at least two 
compliance buys be conducted before the State agency may close a 
compliance investigation in which no vendor violations are detected. 
The reduction in the number of negative compliance buys to close an 
investigation of a high-risk vendor should offset the corresponding 
increase in the number of negative buys necessary to close compliance 
investigations of non-high-risk vendors.
    One commenter recommended that we specify the time period during 
which compliance buys must be conducted. Another commenter suggested 
that we delete the twelve-month limit on compliance buys for compliance 
investigations and allow the State agency to conduct compliance 
investigations without a strict time limitation. Once again, rather 
than specifying such detail in regulations, we believe that the period 
of time a compliance investigation remains open depends on the type of 
investigation and should be based on the State agency's investigative 
techniques. We established above that high-risk identification must be 
done on an annual basis. Due to the time it takes to identify high-risk 
vendors, plan and conduct compliance buys, and examine redeemed food 
instruments used during compliance buys, we believe some 
investigations, especially those in which violations are detected, may 
take longer than twelve months. For this reason, we deleted the twelve-
month timeframe contained in the proposal. We still believe that a 
twelve-month timeframe is reasonable, but we want to ensure that the 
State agency has sufficient time to obtain the evidence necessary to 
support its sanctions and uphold them upon appeal.
    In situations in which the State agency is unable to establish the 
level of evidence necessary to support a sanction, we recommend that 
the State agency issue a warning to the vendor identifying the vendor 
violations found and recommending corrective actions, such as 
additional training. Providing the vendor with a warning that 
violations are occurring puts the vendor on notice and also provides 
support for sanctions in the event that additional violations are 
uncovered during future compliance investigations. One commenter 
suggested that the regulations include timeframes for follow-up 
compliance buys after warning letters are issued. Once again, we 
believe that such investigative

[[Page 83269]]

techniques should be discussed in guidance rather than being included 
in the regulations.
    As in the proposed rule, the final rule specifies that, when the 
number of vendors identified as high-risk is below five percent of the 
State agency's total number of vendors, the State agency must conduct 
compliance investigations of randomly selected non-high-risk vendors to 
reach the five-percent requirement. When the number of vendors 
identified as high-risk exceeds five percent, the State agency must 
conduct compliance investigations on the high-risk vendors it 
determines to have the greatest risk for program noncompliance and/or 
loss of program funds. Vendors identified as high-risk by multiple 
criteria should receive higher priority for compliance investigations. 
In the event they are subsequently identified as high-risk vendors, 
high-risk vendors not subject to compliance investigations due to the 
priority system should be subject to compliance investigations the 
following year. Over time, we anticipate that State agencies will be 
able to conduct thorough compliance investigations on all vendors 
identified as high-risk and that the percentage of high-risk vendors 
will decrease as noncompliant vendors are removed from the Program.
e. Report on Vendor Monitoring Results (Sec. 246.12(j)(5))
    One commenter requested that we clarify that the required report in 
proposed Sec. 246.12(j)(4) refers to the TIP report or replaces the TIP 
report, because the commenter opposes any additional reporting 
requirements. This provision does refer to submission of TIP report 
data to us. We did not specifically identify the TIP report in the 
regulatory language because the names of reports occasionally change 
when the reports are updated. For example, the TIP report was 
previously known as the VAMP report. For this reason, we adopted the 
regulatory language as proposed.
f. Documentation of Monitoring Visits (Sec. 246.12(j)(6))
    One commenter suggested that, instead of documenting the price 
charged for each item purchased during a compliance buy, investigators 
only document the price shown on the item, shelf, or sign. In order to 
determine whether a vendor has committed an overcharge violation, the 
investigator must document both the current shelf price, or price 
charged other customers, and the price the vendor actually charged for 
each item. Consequently, we did not accept the commenter's suggestion.
    Two commenters requested that we delete the requirement that 
reviewers or investigators document for all monitoring visits their 
``observation that the vendor appears to be in compliance with program 
requirements.'' One commenter noted that an investigator would not know 
if a food instrument being transacted contains an overcharge until 
after it is redeemed. The other commenter noted that a reviewer 
conducting a routine monitoring visit who makes this kind of judgment 
in writing can destroy the effectiveness of months of covert 
monitoring, because attorneys for vendors appealing sanctions have used 
this type of documentation to cast doubt on the findings of compliance 
investigations. To address the commenters' concerns, we deleted this 
requirement from the provision in the final rule.

10. Vendor Administrative Review Procedures

    We proposed to amend the procedures for administrative review of 
vendor appeals by limiting the types of actions subject to 
administrative review, establishing abbreviated administrative review 
procedures for certain adverse actions, and extending the timeframe for 
rendering a review decision. As part of limiting the types of actions 
subject to administrative review, we proposed to create three 
categories: (1) Adverse actions subject to full administrative reviews; 
(2) adverse actions subject to abbreviated administrative reviews; and 
(3) actions not subject to administrative review. Commenters were 
divided on the issue of limiting the types of actions subject to 
administrative reviews. Commenters were especially concerned about the 
proposal to eliminate administrative reviews of vendor claims. 
Regardless of whether they supported or opposed our efforts to 
streamline the administrative review process, commenters were concerned 
that limiting the administrative review of some actions may violate a 
vendor's due process protections.
    We have always held that authorization as a WIC vendor is not a 
license and does not convey property rights to a store or business 
entity. To clarify our position, we included a provision to this effect 
in the proposed rule, which we adopted in the final rule at 
Sec. 246.12(h)(3)(xxi). In any case, due process does not always 
include full trial-type hearings, and sometimes does not require 
hearings at all. We re-evaluated the three categories of adverse 
actions in the proposed rule and continue to believe that the proposed 
procedures do not present due process implications. With respect to 
claims, we want to point out that anytime the State agency delays 
payment to a vendor or establishes a claim the State agency must 
provide the vendor an opportunity to justify or correct a vendor 
overcharge or other error.
    However, in recognition of possible State procedures that require 
all administrative reviews to meet certain procedural requirements, the 
final rule provides the State agency with the option to provide full 
administrative reviews of the adverse actions listed in 
Sec. 246.18(a)(1)(ii) of the final rule, which covers the adverse 
actions subject to abbreviated administrative reviews. In addition, we 
want to emphasize that the procedural requirements set forth in the 
regulations for both full and abbreviated administrative reviews are 
minimum requirements. The State agency may include additional 
procedural requirements in its administrative review procedures.
a. Adverse Actions Subject to Abbreviated Administrative Reviews 
(Sec. 246.18(a)(1)(ii))
    Several commenters suggested that the termination of a vendor 
agreement based on changes in ownership or location or cessation of 
operations be moved to the category of actions receiving no 
administrative review. Another commenter made a similar suggestion with 
regard to the denial of authorization because the vendor submitted its 
application outside the timeframe for accepting applications. Although 
we agree that in most cases these determinations will be clear-cut, we 
believe that an abbreviated review provides an appropriate level of 
review in cases in which the vendor disputes the State agency's 
determination.
    Two commenters suggested we add permanent disqualifications based 
on trafficking convictions to the list of actions that are not subject 
to administrative review. We believe that a permanent disqualification 
based on a trafficking conviction presents a narrow factual question: 
Was the sanctioned vendor convicted of trafficking? Consequently, we 
added permanent disqualifications based on trafficking convictions to 
the list of adverse actions subject to abbreviated administrative 
reviews.
    We also want to point out that we retained the requirement that a 
denial of authorization based on vendor limiting criteria is subject to 
an abbreviated administrative review. This requirement only applies to 
those State agencies that choose to use vendor limiting criteria.

[[Page 83270]]

b. Actions Not Subject to Administrative Reviews 
(Sec. 246.18(a)(1)(iii))
    Several commenters asserted that eliminating or restricting the 
administrative review of certain actions would force vendors to seek 
judicial review of these actions, which in the long run would create an 
administrative burden on the State agency. Although we understand the 
commenters' concerns, we believe that, by carefully limiting the 
actions that are not subject to review, we can streamline the 
administrative review procedures without shifting these matters to the 
courts. Therefore, the final rule retains the proposed categories of 
actions that are not subject to administrative review. We did clarify 
in this final rule that, like the participant access determinations 
themselves, the validity and appropriateness of the participant access 
criteria are not subject to administrative review.
    In response to commenters, the final rule includes a cross-
reference to the requirement in Sec. 246.12(k)(3) that the State agency 
must provide vendors the opportunity to justify or correct vendor 
overcharges or other errors. In addition, we added to the list of 
actions not subject to administrative reviews the State agency's 
determinations of whether the vendor has an effective policy and 
program in effect to prevent trafficking. Both the statute (section 
17(o)(4)(A) of the Child Nutrition Act (42 U.S.C. 1786(o)(4)(A))) and 
the regulations (Sec. 246.12(l)(1)(i)) commit this determination to the 
sole discretion of the State agency.
c. Effective Date of Adverse Actions (Sec. 246.18(a)(2))
    Although they generally supported the effective date provision in 
proposed Sec. 246.18(a)(3), commenters raised a number of issues. One 
suggested that we set an effective date for all adverse actions against 
vendors, another asked that we clarify the standard for determining 
when to postpone the effective date. A third commenter noted the 
potential hardship on vendors when adverse actions are made effective 
after 15 days and review decisions are not rendered for 90 days. We 
believe that the State agency is in the best position to balance these 
competing concerns. In the final rule, Sec. 246.18(a)(2) provides the 
State agency with the discretion to make its adverse actions effective 
no earlier than 15 days after the date of the notice and no later than 
90 days after the date of the notice or, in the case of an adverse 
action that is subject to administrative review, the date the vendor 
receives the review decision. As always, the State agency should make 
adequate participant access the chief concern in determining the 
effective date of such actions.
d. Full Administrative Review Procedures (Sec. 246.18(b))
    We proposed in Sec. 246.18(b)(1) to require the State agency to 
notify a vendor receiving a mandatory disqualification that: ``This 
disqualification from WIC may result in a disqualification as a 
retailer from the Food Stamp Program.'' One commenter recommended that 
we modify the required statement to provide that the WIC 
disqualification ``will'' result in a FSP disqualification, rather than 
``may'' result in a FSP disqualification. Most, but not all, 
disqualifications that are mandatory vendor sanctions require 
reciprocal FSP disqualifications. Consequently, it is inappropriate to 
use ``will'' instead of ``may.'' The complete list of WIC 
disqualifications that give rise to reciprocal FSP disqualifications 
appears in the FSP regulations at 7 CFR 278.6(e)(8). Accordingly, we 
did not accept the commenter's recommendation.
    A number of comments concerned the proposed changes to the 
procedures for full administrative reviews. Five commenters indicated 
that the proposed provision permitting cross-examination of WIC program 
investigators ``in camera'' was confusing. We clarified this concept in 
Sec. 246.18(b)(5) of the final rule.
    Another commenter questioned whether the provision in 
Sec. 246.18(b)(7), which would give appellant vendors the opportunity 
to examine the evidence upon which an adverse action is based, would 
require the State agency to divulge its high-risk identification 
criteria. This provision does not require the State agency to turn over 
its complete vendor file. Only the documents, both pro and con, the 
State agency relied upon to take the adverse action under review must 
be provided. The State agency's high-risk identification criteria are 
only used to determine which vendors will be subject to compliance 
investigations. It is the information found as a result of a compliance 
investigation or periodic review of the vendor's qualifications that 
will normally form the basis for the adverse action.
    One commenter suggested that we retain the current provision in 7 
CFR 246.18(b)(8), which requires the decision-maker to make his or her 
decision based solely on the statutory and regulatory provisions 
governing the Program. We agree with the commenter that the proposed 
revision to this section did not fully convey our intent that the 
decision-maker for an administrative review must base his or her 
decision solely on applicable statutes, regulations, policies and 
procedures, including the policies and procedures established by the 
State agency. The decision-maker must then apply these standards to the 
factual evidence in the case at hand. The decision-maker should not, 
however, be in the position of determining the validity of Federal or 
State requirements. These are legal issues that should be reserved for 
the courts. We clarified this point in the final rule.
    Most commenters supported the proposal to increase from 60 to 90 
days the time for rendering a decision on a full administrative review. 
Five commenters suggested that we extend the timeframe to 120 days. 
Opposing commenters asserted that this provision violated due process 
requirements, citing the possibility that a State agency could make an 
adverse action effective 15 days after providing notice, leaving the 
vendor in an unauthorized status until the review decision is rendered. 
We acknowledge the competing needs of the State agency and needs of the 
vendor, and encourage the State agency to ensure that review decisions 
are made as quickly as possible. We believe that this final rule 
streamlines the administrative review process and assists the State 
agency in reducing the time it takes to render review decisions. 
However, as noted by several commenters, even with these changes some 
State agencies may not be able to consistently meet the current 60-day 
timeframe. Therefore, this final rule retains the proposed 90-day 
timeframe. We clarified in Sec. 246.18(b)(9) of the final rule that 
this timeframe is only an administrative requirement for the State 
agency and is not jurisdictional. This means that the failure of a 
decision-maker to render a decision within 90 days may not be cited as 
a basis for overturning a State agency adverse action.
e. Effective Date of Review Decisions (Sec. 246.18(e)) and Judicial 
Review (Sec. 246.18(f))
    One commenter suggested that the effective date of review decisions 
be left up to the decision-maker. We still believe that once a decision 
is rendered it must take effect immediately; therefore, we retained the 
proposed provision in Sec. 246.18(e) that requires decisions to take 
effect on the date of receipt of the review decision, if the adverse 
action has not previously taken effect.

[[Page 83271]]

    Three commenters objected to the proposed modification to the 
current provision requiring the State agency to explain the right to 
judicial review. As we noted in the preamble to the proposed rule, the 
availability and type of judicial review of State agency adverse 
actions is a matter of State law and may vary depending on the action 
taken. This change was not intended to preclude or discourage vendors 
from seeking judicial review, but to avoid putting the State agency in 
the position of determining the appropriate avenue of judicial review. 
Accordingly, this final rule adopts Sec. 246.18(f) as proposed. State 
agencies that have the ability to determine the details of available 
judicial review are free to provide this information to their vendors.

11. Vendor Authorization and Local Agency Selection Subject to 
Procurement Procedures (Sec. 246.18(a)(1)(iii)(D) and (a)(3)(ii)(B))

    We proposed in Sec. 246.18(a)(1)(iii)(D) to include in the category 
of actions not subject to administrative review those vendor 
authorization determinations that are subject to the procurement 
procedures of the State agency. We proposed this change in recognition 
of the procedural safeguards built into procurement requirements that 
would be duplicated if included in the administrative review 
requirements of the WIC regulations. The one commenter on this 
provision indicated that some State agencies select their local 
agencies using State procurement procedures as well. The commenter 
suggested that we modify the proposal so that local agency selection 
determinations that are subject to procurement procedures are not 
subject to administrative review. We accepted this comment and added a 
provision to this effect to Sec. 246.18(a)(3)(ii)(B). We clarified in 
both the vendor and local agency provisions that the exception from 
administrative review applies only to administrative reviews pursuant 
to section 246.18 and also made other revisions to clarify the coverage 
of these exceptions.

12. Preventing and Identifying Dual Participation (Secs. 246.4(a)(15), 
246.7(l), and 246.23(c)(2))

    Nine of the fifteen commenters supported the proposal to require 
the periodic identification of dual participation. However, two 
commenters recommended that the rule require semiannual, rather than 
quarterly detection. Those commenters noted that the six-month 
certification periods for most participants make quarterly detection 
unnecessary. They also cited their experience that the cost of 
detecting the dual participants far outweighed the improperly issued 
benefits. Commenters also noted that the new requirements for verifying 
identity and residency will assist in preventing dual participation. We 
agree that a balance must be struck between the goal of detecting and 
preventing program fraud and the cost of doing so. Accordingly, this 
rule requires dual participation detection semiannually, rather than 
quarterly, and that follow-up action must be taken within 120 days of 
detecting instances of suspected dual participation.
    Two of the opposing commenters objected to reporting on dual 
participation. The proposed changes to the requirements for detecting 
dual participation do not establish reporting requirements. However, as 
with all program operations the State agency must keep records of its 
efforts to identify and follow up on instances of dual participation. 
The State agency's compliance with these requirements will then be 
assessed during our management evaluations of the State agency.
    One commenter questioned whether a system designed to detect dual 
enrollment would meet the proposed requirement to detect dual 
participation. Dual enrollment occurs when a participant enrolls in 
more than one clinic or program, but actually receives benefits from 
only one of them. Dual participation is when benefits are actually 
obtained from more than one clinic or program. In order to receive 
benefits from more than one clinic or program, a participant would have 
to be enrolled in more than one. Therefore, a system to detect dual 
enrollment would satisfy the requirement to detect dual participation, 
provided the State agency takes appropriate follow-up action for 
persons identified as dual enrolled. Such action would include 
terminating the individuals from all clinics and programs, except the 
one in which they are currently participating.
    The majority of the commenters approved of the proposal to require 
interstate detection of dual participation where geographical or other 
factors make it likely that participants travel regularly between 
contiguous local service agencies located across State agency borders. 
However, both supporting and opposing commenters thought that this 
requirement could be costly, especially when the level of automation 
varies significantly between the adjoining State and for States that 
have a large number of bordering States. One commenter asked whether 
additional funds would be available and another thought we would need 
to provide significant assistance to State agencies as they implemented 
this requirement.
    The State agency is already required to coordinate dual 
participation detection efforts with Commodity Supplemental Food 
Program State agencies and WIC Indian State agencies. The State agency 
should be able to draw on this experience in expanding such efforts to 
adjoining States. In addition, we recognize that the methods for 
coordination may be limited by the systems used by the various State 
agencies. Finally, the State agency should remember that it needs to 
develop interstate systems only in areas where participants travel 
regularly across State lines.
    Commenters generally supported the proposed provisions requiring 
disqualification, and in some instances claims, for participants who 
are found to be participating in more than one program. Similarly, 
commenters also supported the proposal that FNS will assert a claim 
against the State agency if the State agency fails to take adequate 
steps to pursue participant disqualification and claims as a result of 
dual participation. The comments raised on these provisions mostly 
concerned larger issues relating to participant claims and sanctions 
and are discussed in section 13 of this preamble. We did notice that we 
inappropriately used the term ``disqualification'' in 
Sec. 246.7(l)(1)(iii) when referring to cases of dual participation 
that did not result from intentional misrepresentation. 
Disqualification means terminating the participation of a participant 
and prohibiting further participation for a specified period and is 
only used in cases of intentional misrepresentations. In all other 
situations, the appropriate action is to ``terminate'' the 
participation of the participant in one of the programs or clinics. We 
revised this provision accordingly.

13. Participant Provisions

a. Definition of ``Proxy'' (Sec. 246.2)
    Fifteen of twenty-three commenters supported the proposed 
definition of ``proxy.'' The most prevalent comment, made by both 
supporting and opposing commenters, concerned the inclusion in the 
proxy definition of parents or caretakers who apply for program 
benefits on behalf of infants or children. These commenters noted that 
this approach did not reflect the common usage of this term by their 
State agencies. One commenter asserted that the parent or caretaker 
applying on behalf of an infant or child participant

[[Page 83272]]

is actually the person authorized to designate a proxy. Another 
commenter noted that the proxy definition did not clearly permit a 
woman participant to designate a proxy. Finally, one commenter 
recommended that the proxy definition require proxies to be approved by 
the State or local agency.
    In response to commenters' concerns and recommendations, we revised 
the definition of proxy to clarify that a parent or caretaker applying 
on behalf of an infant or child participant is not a proxy and that 
such a parent/caretaker may designate another person, such as a spouse, 
other family member, or friend, as a proxy for an infant or child 
participant. We made conforming changes throughout this rule to 
incorporate this change and to clarify which persons are authorized to 
take certain actions. We also clarified in the definition of proxy that 
proxies must be designated consistent with the State agency's 
procedures established pursuant to Sec. 246.12(r)(1).
b. Definition of ``Participant Violation'' (Sec. 246.2)
    All ten commenters supported the inclusion of dual participation as 
a type of participant violation. In order to emphasize that participant 
violations include all intentional acts that violate Federal or State 
statutes, regulations, policies, or procedures governing the Program, 
we included a new definition of ``participant violation'' in 
Sec. 246.2, which includes the examples that were in Sec. 246.12(u)(1) 
of the proposed rule. The participant violation definition clarifies 
that a participant violation may be committed by a participant, a 
parent or caretaker of an infant or child participant, or a proxy.
c. Participant Sanctions (Sec. 246.12(u)(1) through (u)(4))
    Sixteen of the twenty commenters supported increasing the maximum 
disqualification period for a participant sanction to one year. 
Commenters generally supported requiring a disqualification for 
participant violations that give rise to a claim. However, a number of 
commenters suggested that State and local agencies be given the 
discretion to adjust the length of the mandatory disqualification to 
correspond to the period of the dual participation or the amount of the 
claim. Another commenter noted that claim amounts are normally small 
and that participants often make restitution quickly. The four opposing 
commenters objected to any action that affects benefits for infant and 
child participants.
    Participant claims are only imposed when a participant commits a 
participant violation. Participant violations must involve intentional 
actions by a participant, parent/caretaker, or proxy. Although we 
believe that these situations are generally serious enough to warrant a 
mandatory one-year disqualification, we agree with commenters that the 
State agency should have the flexibility to determine whether to 
disqualify a participant in cases of small claims. Therefore, this rule 
requires a one-year disqualification only in cases of claims of $100 or 
more, claims resulting from dual participation, or second or subsequent 
claims of any amount.
    One commenter thought that the determination of whether a 
participant (or parent/caretaker or proxy) intended to commit the 
action giving rise to disqualification or a claim should not be left to 
the judgment of a WIC eligibility worker or supervisor. We acknowledge 
that the decision to assert a claim or to disqualify a participant 
requires the exercise of discretion. However, this is but one of many 
decisions that WIC staff must make about program participation. In all 
cases, the State agency is responsible for ensuring that the decisions 
made by State and local agency staff are made in accordance with the 
regulatory requirements. In this instance, it means ensuring that the 
WIC staff knows the standards for determining when to assert a claim or 
disqualify a participant, and how to correctly apply those standards. 
If the State agency fails to do so, it will find that it is unable to 
sustain these determinations when participants appeal the decisions. 
This rule does not change the requirement in Sec. 246.9 that the State 
agency must have a hearing procedure under which participants may 
appeal claims of any amount and disqualifications of any length. 
Further, Secs. 246.12(u)(4) and 246.23(c)(1)(i) of this rule require 
the State agency to advise participants of the procedures to follow to 
obtain a fair hearing at the time they are notified of a claim or 
disqualification.
    Other commenters suggested that we permit a pregnant or 
breastfeeding woman to continue program participation if an acceptable 
proxy can be found, which would be consistent with the proposal to 
permit infant and children participants to avoid disqualification if a 
proxy is approved. If adopted, this change would extend the proxy 
exception to all program participants, except for postpartum women. We 
did not accept the commenters' suggestion. However, this rule does 
permit the State agency to approve proxies in lieu of disqualification 
for participants under age 18 in addition to infant and child 
participants.
    The final rule retains the proposed provision permitting the State 
agency to allow a disqualified participant to reapply to the Program if 
restitution is made. In response to a suggestion made by two 
commenters, we clarified in the final rule that if restitution is made 
or a repayment plan is agreed to within 30 days of the receipt of the 
letter demanding repayment of the claim, the State agency may permit 
the participant to continue participation without disqualification.
d. Participant Claims (Sec. 246.23(c)(1))
    Although only seven of the twenty-five commenters supported the 
proposed participant claims provisions, a majority of the objections 
reflected a misunderstanding of the provisions. First, many commenters 
objected to the provision concerning in-kind restitution. Those 
commenters indicated that this practice would not be cost-effective. 
One commenter was concerned about allowing participants who are being 
punished for program violations to work in a clinic setting. We want to 
emphasize that, like the proposal, the final rule makes in-kind 
restitution the option of the State agency, and not the participant.
    Second, commenters asserted that collection efforts should be 
pursued only to the extent that they are cost-effective. Again, we wish 
to emphasize that, like the proposal, the final rule requires the State 
agency to pursue claims collection after the initial letter demanding 
repayment only to the extent that it is cost-effective. To clarify this 
point, we added a sentence to require the State agency to establish 
standards, based on a cost benefit analysis, for determining when 
collection actions are not longer cost-effective. This provision is the 
same as in current 7 CFR 246.23(c). One commenter suggested that we 
establish a $500 threshold for pursuing claims. Although the final rule 
requires demand letters to be sent out for all claims, the State agency 
could include dollar thresholds for the subsequent steps in the 
collection process as part of its standards for claims collection.
    Six commenters indicated that establishing mandatory restitution 
for all claims would preclude the State agency from considering the 
family's ability to pay a claim. Two commenters opposed both requiring 
participant restitution in all cases and permitting the State agency to 
force participants to ``work off'' claims resulting from State

[[Page 83273]]

agency mistakes. This rule requires claims collection actions only in 
the case of intentional acts of the participant, parent/caretaker, or 
proxy. The State agency is not required to assess claims in cases of 
unintentional participant error or State agency error. Although we 
believe we need to protect the Program's integrity by pursuing claims 
resulting from participant violations, we also recognize the financial 
circumstances of program participants. In the final rule, we balance 
these considerations by requiring claims collection only in cases of 
intentional actions that qualify as participant violations and by 
providing the State agency with the discretion to enter into repayment 
schedules with participants and to allow in-kind restitution. The final 
rule also clarifies that the State agency must assess claims for both 
benefits that have been obtained improperly and disposed of improperly. 
Benefits that have been disposed of improperly include exchanging food 
instruments for cash or credit or selling supplemental foods that were 
obtained with food instruments.
    One of the supporting commenters suggested permitting collection 
through offset of future program benefits, provided that the 
participant agrees to this arrangement. Section 17(f)(14) of the CNA 
requires overissuances of food benefits resulting from intentional 
actions to be collected in cash. Therefore, this rule does not permit 
collection through offset.

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

    Only one commenter opposed our proposed amendments to the 
provisions concerning home food delivery and direct distribution food 
delivery systems. The commenter suggested that home food delivery 
systems be categorically banned and that we grandfather in State 
agencies that currently operate such systems. Although most State 
agencies currently operate retail food delivery systems and we 
encourage their use, we did not propose to eliminate home food delivery 
systems and do not want to limit the options available to the State 
agency at this time. For this reason, we adopted the proposed 
amendments to the home food delivery and direct distribution food 
delivery systems with minor revisions to make them consistent with 
changes made by this rule.

15. General Requirements for Food Delivery Systems

a. Food Delivery System Contracts Must Conform with 7 CFR Part 3016 
(Sec. 246.12(a)(4))
    We proposed to retain the requirement that all contracts or 
agreements entered into by the State or local agency for the management 
or operation of food delivery systems must be in conformance with the 
requirements of 7 CFR Part 3016. Part 3016 sets forth the general 
requirements applicable to grants to State and local governments. One 
of the three supporting commenters suggested that we delete the 
reference to contracts or agreements entered into by the local agency, 
in light of the requirement in Sec. 246.12(h)(1) that all vendor 
agreements must be entered into by the State agency. We retained the 
reference to local agencies because this provision covers home food 
delivery and direct distribution contracts as well as vendor 
agreements.
b. No Charge for Authorized Supplemental Foods (Sec. 246.12(c) and 
(h)(3)(x))
    Currently, 7 CFR 246.12(c) reads: ``Participants shall receive the 
Program's supplemental foods free of charge.'' We proposed to amend 
this provision to read: ``State and local agencies shall provide 
participants the Program's supplemental foods free of charge.'' Our 
intent with this change was to make clear that the burden was on State 
and local agencies to ensure that supplemental foods are provided to 
participants free of charge, regardless of whether they are provided 
through a home food delivery system, direct distribution food delivery 
system, or retail food delivery system.
    One commenter supported this proposed change, whereas another 
commenter indicated that the proposed language was confusing. Nine 
commenters opposed the proposed language and recommended that we either 
retain the language from the current rule or modify the proposed 
language, because the proposal makes it sound as if State and local 
agencies provide supplemental foods directly to participants. To 
address the commenters' concerns and to clarify our intent, we amended 
this provision to read: ``The State agency must ensure that 
participants receive their authorized supplemental foods free of 
charge.'' We also added a sentence to Sec. 246.12(h)(3)(x) to require 
the vendor agreement to include a provision that the vendor may not 
charge participants, parents or caretakers of infant and child 
participants, or proxies for authorized supplemental foods obtained 
with food instruments.

16. Vendor Management Staffing (Sec. 246.3(e)(5))

    Commenters were split about evenly on the merits of the proposed 
provision that would require State agencies with more than fifty 
vendors to employ one full-time or equivalent vendor management 
specialist. Supporters noted that the provision would ensure that 
resources are allocated to vendor management and that they would be 
surprised if there was any resistance to the provision. Those who 
opposed the proposed provision indicated that: there is no evidence 
that relates vendor staffing equivalents to desired outcomes; 
centralization of vendor management functions to one position is not 
cost-effective; the provision would create an inequitable burden on 
small State agencies; and the requirement would result in a diversion 
of resources from client services and local agencies. Two commenters 
noted that some State agencies might circumvent this staffing 
requirement either by limiting the number of vendors they authorize to 
fewer than fifty or by modifying their position descriptions to meet 
the requirement without making any meaningful change in 
responsibilities.
    As a compromise, two commenters suggested that we modify the 
provision to require the State agency to designate a staff person 
responsible for vendor management and place all vendor management 
functions under the direct supervision of this person. Another 
commenter noted that State agencies are responsive to our use of State 
Technical Assistance Review (STAR) findings to cite staffing needs, 
which allows for more flexibility in small State agencies. We believe 
it is essential that each State agency have at least one staff member 
who is knowledgeable about its entire food delivery system, who 
thoroughly understands the regulations and policies regarding vendor 
management, and who can be held accountable for resolving issues and 
problems involving the food delivery side of program operations. We 
accepted the suggested compromise and revised this provision to read: 
``A staff person designated for food delivery system management. The 
person to whom the State agency assigns this responsibility may perform 
other duties as well.''

17. Participant Access Criteria in State Plan (Sec. 246.4(a)(14)(xiv))

    The proposal contained a provision to require the State agency to 
include in its State Plan ``[a] description of the State

[[Page 83274]]

agency's participant access determination criteria consistent with 
Sec. 246.12(l)(8).'' Six commenters supported adopting this provision 
as proposed. One commenter suggested that we modify the provision to 
allow for some flexibility, because there is no single objective 
standard that could be applied and defended statewide. Another 
commenter opposed the provision, unless it is modified to read: ``A 
statement that the State agency uses or does not use a `participant 
access policy' to assist in the determination of vendor participation 
in the WIC Program.'' A third commenter opposed including the 
participant access determination criteria in the State Plan, because 
participant access must be determined on a case-by-case basis and each 
community requires different criteria. We believe it is necessary for 
the State agency to include its participant access determination 
criteria in its State Plan because the State agency's participant 
access determinations are not subject to administrative review. The 
State Plan approval process provides the public with an opportunity to 
comment on the criteria the State agency proposes to use to make these 
determinations. We also made a conforming change to Sec. 246.12(l)(8) 
to clarify the State agency's responsibility to establish participant 
access determination criteria.
    Section 246.12(l)(8) specifies that, when making participant access 
determinations, the State agency must consider ``the availability of 
other authorized vendors in the same area as the violative vendor and 
any geographic barriers to using such vendors.'' We understand that the 
various urban, suburban, and rural areas under a State agency's 
jurisdiction may require the use of different participant access 
criteria. We do not expect the State agency to be able to include every 
variation of its criteria in its State Plan. However, we do expect the 
State agency to include in its State Plan the general criteria that it 
uses to make its participant access determinations. For instance, a 
State agency may use such general criteria as: (1) A minimum vendor-to-
participant ratio in the local agency or clinic service area; (2) the 
number of other vendors within a specified distance of the violative 
vendor, where the distance used depends on whether the area is 
classified as urban, suburban, or rural; and (3) the existence of any 
geographical barriers to the other vendors, such as rivers or mountains 
that increase driving distances to other vendors. None of these 
criteria specify the actual ratios, numbers, or mileage used by the 
State agency to make its participant access determinations. However, 
the criteria do provide the public with some assurance that the State 
agency's participant access determinations rely on objective measures.

18. Management Evaluations and Monitoring Reviews

a. State Agency Corrective Action Plans (Sec. 246.19(a)(2))
    The majority of commenters supported the proposal to require the 
State agency to develop a corrective action plan if we make negative 
findings about its administration of the WIC Program. The specific 
objections to this provision were that ``negative findings'' is not a 
precise enough standard, 60 days are not long enough to develop a 
corrective action plan, and some negative findings may be too minor to 
warrant a corrective action plan.
    Although ``negative findings'' is a frequently used term in audits 
and evaluations, we revised this provision to say ``findings that the 
State agency did not comply with agency program requirements.'' With 
respect to the concern about the timeframe, we want to point out that 
the 60-day period is not the period during which corrective action must 
be taken, but just the period during which a corrective action plan, 
outlining the corrective action to be taken, must be developed and 
submitted. In addition, even findings that are easily corrected must be 
documented in the corrective action plan. In many cases, the State 
agency will be able to describe corrective action that it already took 
in response to such findings.
    Several commenters addressed the portion of this provision that is 
in current regulations concerning the withholding of nutrition services 
and administration funds for various types of program noncompliance. 
Those commenters indicated that there needs to be a better definition 
of the situations in which such withholding may occur and also specific 
remedial actions that must be taken before such withholding may occur. 
We do not think it is possible to list more specifically the situations 
that would trigger withholding. The specific remedial actions will 
generally be those agreed to in the State agency's corrective action 
plan.
b. Standard Areas of Review of Local Agencies (Sec. 246.19(b)(2))
    Five of the six commenters supported the minor revisions to the 
requirements for the areas of local agency activities that the State 
agency must review. One commenter questioned the meaning of the added 
area of ``participant services.'' We added this provision to make sure 
that the State agency evaluates not only certification and nutrition 
education, but also the many other contacts that local agencies have 
with participants, such as setting up appointments, issuing food 
instruments and explaining their use, and referring participants to 
other health and social services.
    Another commenter suggested that the State agency's review of 
vendor training conducted by its local agencies be limited to verifying 
whether the training was conducted, and not the effectiveness of the 
training. Although we agree that it can sometimes be difficult to 
determine the effectiveness of training, we believe it is critical that 
any State agency that delegates training activities look closely at the 
content of the training and any vendor feedback on the training. In 
recognition of the new provision in Sec. 246.12(h)(1)(ii) that permits 
the State agency to delegate signing of vendor agreements to its local 
agencies, we also added a provision to this section requiring the State 
agency to review the local agencies' effectiveness in conducting this 
activity.
c. Areas of In-Depth Review of Local Agencies (Sec. 246.19(b)(5))
    The majority of commenters opposed the proposal to require the 
State agency to conduct in-depth reviews of specified areas of local 
agency operations during monitoring reviews when requested to do so by 
us. Commenters both pro and con were confused about whether these 
focused reviews would be a part of, or in addition to, the currently 
required monitoring reviews. Three local agency commenters indicated 
that in-depth reviews are not necessary, because local agencies are 
already subject to State and Federal monitoring, almost to the point of 
over-evaluation.
    First, we want to clarify that the in-depth review of these areas 
would be a part of the regular monitoring reviews of local agencies and 
would be an area of focus within the standard areas required to be 
reviewed. Second, we do not expect that we would routinely specify 
focused areas for review. Instead, we would use this when necessary to 
get a better understanding of a particular aspect of local agency 
operations or to monitor compliance with a particular

[[Page 83275]]

program requirement that has been identified as a problem area 
nationally.
    Several commenters expressed concern that adding these areas of in-
depth review would further strain the limited State agency resources 
available for local agency reviews. To address this concern, one 
commenter suggested that we drop one area that would normally be 
required to be covered in the review in years in which an in-depth 
review is required. Another commenter suggested that we limit areas of 
in-depth review to no more than two areas every other year in order to 
limit the burden and to conform to the two-year cycle for local agency 
reviews. We recognize the additional work that may be required to 
conduct in-depth review of a particular area. As a result, we proposed 
to limit the number of areas to two in any fiscal year and to give at 
least six months' advance notice. We further revised this provision in 
the final rule to require that the areas not be added or changed more 
often than once every two fiscal years. We did not adopt the suggestion 
that we drop one of the standard areas of review in years in which we 
require an in-depth review of an area. The areas of in-depth review 
will be areas of focus within the standard review areas. Further, we 
believe that requiring review of the standard review areas is critical 
to ensuring the uniformity of local agency reviews and the 
effectiveness of program operations.
d. Local Agency Corrective Action Plans (Sec. 246.19(b)(4))
    The majority of the commenters supported the proposal to require 
local agencies to prepare corrective action plans to address 
deficiencies identified by the State agency during monitoring reviews. 
However, many of the commenters recommended that we increase the time 
for submitting the corrective action plan from 45 days to 60 days. We 
made this change. We also moved this provision to Sec. 246.19(b)(4) in 
order to integrate it better with the existing regulatory language 
requiring the State agency to establish a corrective action process for 
local agencies. Finally, we revised the wording to parallel the new 
requirements for State agency corrective action plans.

19. Conflict of Interest (Sec. 246.12(t) and 246.12(h)(3)(xix))

    All the comments on the conflict of interest provision supported 
the amendment, although some commenters suggested modifications. Most 
of these comments concerned the need to clarify what is meant by 
``conflict of interest.'' One commenter asked whether a conflict of 
interest exists when a person with a financial interest in a vendor is 
employed by the WIC Program, but has no involvement in vendor selection 
or vendor management.
    In the preamble to the proposed rule, we stated our view that this 
is an area which is based more appropriately on State laws or 
regulations governing conflict of interest. For that reason, we decided 
not to include a definition of ``conflict of interest'' in the WIC 
regulations. We continue to believe that the State agency is in the 
best position to make these determinations, based on its knowledge of 
the structure of the State agency and the responsibilities of its 
staff. We did not intend our discussion in the preamble to indicate 
that no one employed by the State agency could have any financial 
interest in a vendor. This determination must be made on a case-by-case 
basis taking into account State laws, regulations, and policies and the 
particular facts of the situation, such as the size of the financial 
interest and whether the employee has any responsibilities for vendor 
selection or management.
    One commenter suggested that the provision be amended to prohibit 
``known'' conflicts of interest. We did not make this change. This 
provision is designed to require the State agency to establish 
standards for avoiding conflicts of interest. These may be actual or 
apparent conflicts. Just because a State agency does not know of a 
conflict does not relieve the State agency from the burden of taking 
the necessary steps to ensure that it avoids such conflicts and to take 
action when a conflict is discovered.

20. Confidentiality

a. Vendor Information (Sec. 246.26(e))
    We proposed to restrict the use and disclosure of vendor 
information. The vast majority of the commenters supported the 
proposal, although several of those who supported the provision 
recommended modifications. Two commenters questioned how this provision 
would apply to information requested under State freedom of information 
acts or other open record laws. These commenters indicated that because 
the WIC regulations currently are silent on this point some State 
agencies have had to disclose vendor information under these laws. It 
is up to the State agency to make sure it complies with all WIC Program 
requirements and if there is a conflict with State law, to ensure that 
it takes the necessary steps to remove the conflict. Therefore, we urge 
the State agency to consult with its legal counsel on the effect of 
this provision on any State laws concerning public access to State 
records.
    One of the commenters who opposed this provision asserted that, 
unlike participants, vendors do not have comparable expectations of 
privacy that justify the creation of new privacy rights. The reason for 
limiting the use and disclosure of vendor information is two-fold--to 
encourage vendors to provide the information necessary to authorize and 
monitor vendors and to avoid compromising State agency investigative 
techniques. We believe that these benefits outweigh the commenter's 
concern.
    The other commenter who opposed this provision suggested that 
applicant vendors be allowed full access to information concerning an 
adverse action against them. In the proposal, we specified that the 
State agency could disclose confidential vendor information to 
appellant vendors to the extent that the information provided the basis 
of an action under review. However, this comment pointed out to us that 
we needed to broaden and clarify this category of disclosure in order 
to take into account those adverse actions that are not subject to 
administrative review, such as claims. The final rule permits 
disclosure of confidential vendor information to a vendor that is 
subject to an adverse action, including claims, to the extent that the 
information concerns the vendor subject to the adverse action and the 
information to be disclosed is related to the adverse action.
    Some commenters suggested we clarify that vendor information may be 
disclosed to other WIC State agencies. As noted in the preamble to the 
proposed rule, other WIC State agencies would be authorized to receive 
vendor information. They fall in the category of persons directly 
connected with the administration or enforcement of a Federal law 
(i.e., the Child Nutrition Act, which authorizes the WIC Program). In 
order to avoid confusion, we revised this provision to list separately 
the use and disclosure of confidential vendor information to personnel 
directly connected with the administration and the enforcement of the 
WIC Program and Food Stamp Program who the State determines have a need 
to know for the purposes of these programs. In addition, we listed 
personnel from WIC local agencies and other WIC Sate agencies and 
persons investigating or prosecuting WIC Program or FSP violations as 
examples of the persons who fall in this category.
    One commenter objected to the requirement for a written agreement 
as administratively unworkable,

[[Page 83276]]

particularly within the short timeframes for vendor administrative 
reviews. We assume the commenter was referring to situations in which 
the administrative reviews are conducted for the WIC State agency by 
another agency of the State and the commenter's perception that a 
written agreement would be required before disclosing vendor 
information to the agency providing the administrative review. We 
revised this provision to clarify that written agreements are not 
required prior to disclosing confidential vendor information for 
purposes of WIC Program and Food Stamp Program administration, which 
includes administrative reviews.
    Further, in any situations in which the State agency needs to 
disclose confidential vendor information on a regular basis for other 
permitted purposes, the State agency may enter into a single written 
agreement that generically covers the disclosure and use of 
confidential vendor information for such activities. Individual 
agreements for each disclosure of information are not necessary.
    One commenter suggested that we give the State agency the 
discretion to release non-proprietary vendor information to the extent 
that the State agency determines the disclosure to be for the benefit 
of the Program. We think that this approach is overly complicated and 
did not accept this suggestion.
    We did revise this provision in the final rule to clarify that only 
information that individually identifies a vendor (other than its name, 
address, and authorization status) is considered confidential. 
Aggregate data about vendors and other data that does not individually 
identify a vendor are not subject to these limitations on use and 
disclosure. This change addresses a commenter who requested that we 
permit redemption data to be used in community meetings as part of 
program outreach and expansion. Putting this data in aggregate or other 
forms that does not identify the vendor should serve this purpose.
b. Food Stamp Program Retailer Information (Sec. 246.26(f))
    Commenters generally supported the proposal to restrict the use and 
disclosure of FSP retailer information to persons directly connected 
with the administration or enforcement of the WIC Program. The one 
opposing comment questioned whether vendor information should be 
afforded any confidentiality. As noted in the preamble to the proposed 
rule, section 9(c) of the Food Stamp Act of 1977, as amended, 7 U.S.C. 
2011-2036 (Food Stamp Act) (7 U.S.C. 2018(c)) specifically restricts 
the use and disclosure of information obtained from FSP retailers to 
two areas: (1) Federal and State law enforcement and investigative 
agencies for the purposes of administering or enforcing any Federal or 
State law or implementing regulations; and (2) WIC State agencies for 
the purposes of administering the Child Nutrition Act and implementing 
regulations. Therefore, we must retain the proposed restriction on the 
use of information obtained from FSP retailers. The preamble to the 
proposed rule also discussed the need to restrict the use of 
information obtained from the FSP even when it is not protected under 
section 9(c) of the Food Stamp Act. Subsequently, we realized that the 
regulatory language in the proposed rule was not clear on this point. 
This final rule revises proposed Sec. 246.26(f) to clarify that all 
information obtained from the FSP may be used only in the 
administration or enforcement of the WIC Program.
c. Access by USDA and Comptroller General of the United States 
(Sec. 246.26(g))
    This final rule also clarifies that the confidentiality provisions 
do not relieve the State agency of its responsibility to provide USDA 
and the Comptroller General of the United States access to all program 
records pursuant to Sec. 246.25(a)(4). We added a new paragraph (g) to 
Sec. 246.26 to this effect.

21. 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 
States to design a high-risk vendor identification system.
    (3) WIC Compliance Buy Handbook: produced by the 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), U.S. Department of 
Agriculture.
    (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 regulatory 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 
vendor management information systems.
    (9) Vendor Activity Monitoring Profile (VAMP) and The Integrity 
Profile (TIP): VAMP reports produced annually by USDA through 1997 and 
TIP reports annually thereafter. These reports analyze WIC State agency 
vendor monitoring activities.
    (10) Efforts to Control Fraud and Abuse Can Be Strengthened: GAO/
RCED-99-224 (August 1999). Report to Congressional Committees by the 
United States General Accounting Office (GAO). For its review, GAO 
collected information, through surveys and interviews, from FNS and 
State and local WIC agencies on the extent of fraud and abuse in the 
Program.

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 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.

[[Page 83277]]


    2. In Section 246.2, add in alphabetical order the definitions of 
Authorized supplemental foods, Compliance buy, High-risk vendor, Home 
food delivery contractor, Inventory audit, Participant violation, Price 
adjustment, Proxy, Routine monitoring, Vendor, Vendor authorization, 
Vendor limiting criteria, Vendor overcharge, Vendor selection criteria, 
Vendor violation, and WIC to read as follows:


Sec. 246.2  Definitions.

* * * * *
    Authorized supplemental foods means those supplemental foods 
authorized by the State or local agency for issuance to a particular 
participant.
* * * * *
    Compliance buy means a covert, on-site investigation in which a 
representative of the Program poses as a participant, parent or 
caretaker of an infant or child participant, or proxy, transacts one or 
more food instruments, and does not reveal during the visit that he or 
she is a program representative.
* * * * *
    High-risk vendor means a vendor identified as having a high 
probability of committing a vendor violation through application of the 
criteria established in Sec. 246.12(j)(3) and any additional criteria 
established by the State agency.
    Home food delivery contractor means a sole proprietorship, 
partnership, cooperative association, corporation, or other business 
entity 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 supplemental foods to provide participants the 
quantities specified on food instruments redeemed by the vendor during 
a given period of time.
* * * * *
    Participant violation means any intentional action of a 
participant, parent or caretaker of an infant or child participant, or 
proxy that violates Federal or State statutes, regulations, policies, 
or procedures governing the Program. Participant violations include 
intentionally making false or misleading statements or intentionally 
misrepresenting, concealing, or withholding facts to obtain benefits; 
exchanging food instruments or supplemental foods for cash, credit, 
non-food items, or unauthorized food items, including supplemental 
foods in excess of those listed on the participant's food instrument; 
threatening to harm or physically harming clinic or vendor staff; and 
dual participation.
* * * * *
    Price adjustment means an adjustment made by the State agency, in 
accordance with the vendor agreement, to the purchase price on a food 
instrument after it has been submitted by a vendor for redemption to 
ensure that the payment to the vendor for the food instrument complies 
with the State agency's price limitations.
* * * * *
    Proxy means any person designated by a woman participant, or by a 
parent or caretaker of an infant or child participant, to obtain and 
transact food instruments or to obtain supplemental foods on behalf of 
a participant. The proxy must be designated consistent with the State 
agency's procedures established pursuant to Sec. 246.12(r)(1). Parents 
or caretakers applying on behalf of child and infant participants are 
not proxies.
* * * * *
    Routine monitoring means overt, on-site monitoring during which 
program representatives identify themselves to vendor personnel.
* * * * *
    Vendor means a sole proprietorship, partnership, cooperative 
association, corporation, or other business entity operating one or 
more stores authorized by the State agency to provide authorized 
supplemental foods to participants under a retail food delivery system. 
Each store operated by a business entity constitutes a separate vendor 
and must be authorized separately from other stores operated by the 
business entity. Each store must have a single, 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 the State agency 
assesses, selects, and enters into agreements with stores that apply or 
subsequently reapply to be authorized as vendors.
    Vendor limiting criteria means criteria established by the State 
agency to determine the maximum number and distribution of vendors it 
authorizes pursuant to Sec. 246.12(g)(2).
    Vendor overcharge means intentionally or unintentionally charging 
the State agency more for authorized supplemental foods than is 
permitted under the vendor agreement. It is not a vendor overcharge 
when a vendor submits a food instrument for redemption and the State 
agency makes a price adjustment to the food instrument.
    Vendor selection criteria means the criteria established by the 
State agency to select individual vendors for authorization consistent 
with the requirements in Sec. 246.12(g)(3).
    Vendor violation means any intentional or unintentional action of a 
vendor's current owners, officers, managers, agents, or employees (with 
or without the knowledge of management) that violates the vendor 
agreement or Federal or State statutes, regulations, policies, or 
procedures governing the Program.
    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 Section 246.3:
    a. Redesignate paragraph (e)(5) as paragraph (e)(6); and
    b. Add a new paragraph (e)(5).
    The addition reads as follows:


Sec. 246.3  Administration.

* * * * *
    (e) * * *
    (5) A staff person designated for food delivery system management. 
The person to whom the State agency assigns this responsibility may 
perform other duties as well.
* * * * *
    4. In Sec. 246.4:

    a. Add a heading to paragraph (a)(14)(i);
    b. In paragraph (a)(14)(v), add a heading and remove the reference 
to ``Sec. 246.12(k)(1)(i)'' and add a reference to 
``Sec. 246.12(l)(1)(i)'' in its place;
    c. Revise paragraphs (a)(14)(ii), (a)(14)(iii), (a)(14)(iv), and 
(a)(14)(vi);
    d. Remove paragraph (a)(14)(vii) and redesignate paragraphs 
(a)(14)(viii) through (a)(14)(xi) as paragraphs (a)(14)(vii) through 
(a)(14)(x), respectively;
    e. In newly redesignated paragraph (a)(14)(vii), add a heading and 
remove the words ``food vendors'' and add ``vendors'' in its place;
    f. In newly redesignated paragraph (a)(14)(viii), add a heading;
    g. In newly redesignated paragraphs (a)(14)(ix) and (a)(14)(x), add 
headings and remove the periods at the end and add semicolons in their 
place;
    h. Add new paragraphs (a)(14)(xi) through (a)(14)(xiv);

[[Page 83278]]

    i. Revise the first sentence of paragraph (a)(15); and
    j. In paragraph (a)(21), remove the reference to 
``Sec. 246.12(r)(8)'' and add a reference to ``Sec. 246.12(r)(4)'' in 
its place.
    The revisions and additions read as follows:


Sec. 246.4  State plan.

    (a) * * *
    (14) * * *
    (i) Type of system. * * *
    (ii) Vendor limiting and selection criteria. Vendor limiting 
criteria, if used by the State agency, and the vendor selection 
criteria established by the State agency consistent with the 
requirements in Sec. 246.12(g)(3);
    (iii) Vendor agreement. A sample vendor agreement, including the 
sanction schedule, which may be incorporated as an attachment or, if 
the sanction schedule is in the State agency's regulations, through 
citation to the regulations. State agencies that intend to delegate 
signing of vendor agreements to local agencies must describe the State 
agency supervision and instruction that will be provided to ensure the 
uniformity and quality of local agency activities;
    (iv) Vendor monitoring. 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 in accordance 
with Sec. 246.12(j). The State agency must also include the criteria it 
will use to determine which vendors will receive routine monitoring 
visits. State agencies that intend to delegate any aspect of vendor 
monitoring responsibilities to a local agency or contractor must 
describe the State agency supervision and instruction that will be 
provided to ensure the uniformity and quality of vendor monitoring;
    (v) Options regarding trafficking convictions. * * *
    (vi) Food instruments. A facsimile of the food instrument, if used, 
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);
    (vii) Names of contractors. * * *
    (viii)Nutrition services and administration funds conversion. * * *
    (ix) Homeless participants. * * *
    (x) Cost containment systems. * * *
    (xi) Vendor training. The procedures the State agency will use to 
train vendors in accordance with Sec. 246.12(i). State agencies that 
intend to delegate any aspect of training to a local agency, 
contractor, or vendor representative must describe the State agency 
supervision and instruction that will be provided to ensure the 
uniformity and quality of vendor training;
    (xii) Food instrument security. A description of the State agency's 
system for ensuring food instrument security in accordance with 
Sec. 246.12(p);
    (xiii) Participant access determination criteria. A description of 
the State agency's participant access determination criteria consistent 
with Sec. 246.12(l); and
    (xiv) Mobile stores. The special needs necessitating the 
authorization of mobile stores, if the State agency chooses to 
authorize such stores.
    (15) The State agency's 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 (f)(2)(iv), remove the reference to 
``Sec. 246.12(r)(8)'' and add a reference to ``Sec. 246.12(r)(4)'' in 
its place;
    b. In paragraph (h)(1)(i), remove the reference to 
``Sec. 246.12(k)(2)'' and add the words ``the definition of Participant 
violation in Sec. 246.2'' in its place; and
    c. Revise paragraph (l)(1).
    The revision reads as follows:


Sec. 246.7  Certification of participants.

* * * * *
    (l) * * *
    (1) The State agency is responsible for the following:
    (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 
actions to identify suspected instances of dual participation at least 
semiannually. The State or local agency must take follow-up action 
within 120 days of detecting instances of suspected dual participation;
    (ii) In areas where a local agency serves the same population as an 
Indian State agency or a CSFP agency, and in areas 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 termination from participation in one of the 
programs or clinics for participants found in violation due to dual 
participation; and
    (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. Revise Sec. 246.12 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 to the extent FNS determines 
the particular EBT system provides adequate safeguards that serve the 
purpose of the provisions being modified.
    (1) Management. The State agency is responsible for the fiscal 
management of, and accountability for, food delivery systems under its 
jurisdiction. The State agency may permit only authorized vendors, home 
food delivery contractors, and direct distribution sites to accept food 
instruments.
    (2) Design. The State agency must design all food delivery systems 
to be used by its local agencies.
    (3) FNS oversight. 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) Part 3016. All contracts or agreements entered into by the 
State or local agency for the management or operation of food delivery 
systems must conform to 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 under its jurisdiction--retail, 
home delivery, or direct distribution. Each system must be procedurally 
uniform throughout the jurisdiction of the State agency and must ensure 
adequate participant access to supplemental foods. When used, food 
instruments must be uniform within each type of system.
    (c) No charge for authorized supplemental foods. The State agency 
must ensure that participants receive their authorized supplemental 
foods free of charge.
    (d) Compatibility of food delivery system. The State agency must 
ensure that the food delivery system(s) selected is compatible with the 
delivery of health and nutrition education services to participants.
    (e) Retail food delivery systems: General. Retail food delivery 
systems are systems in which participants, parents or caretakers of 
infant and child

[[Page 83279]]

participants, and proxies obtain authorized supplemental foods by 
submitting a food instrument to an authorized vendor.
    (f) Retail food delivery systems: Food instrument requirements. (1) 
General. State agencies using retail food delivery systems must use 
food instruments that comply with the requirements of paragraph (f)(2) 
of this section.
    (2) Printed food instruments. Each printed food instrument must 
clearly bear on its face the following information:
    (i) Authorized supplemental foods. The supplemental foods 
authorized to be obtained with the food instrument;
    (ii) First date of use. The first date on which the food instrument 
may be used to obtain supplemental foods;
    (iii) Last date of use. The last date on which the food instrument 
may be used to obtain authorized supplemental foods. This date must be 
a minimum of 30 days from the first date on which it may be used, 
except for the participant's first month of issuance, when it may be 
the end of the month or cycle for which the food instrument is valid. 
Rather than entering a specific last date of use 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) Redemption period. The date by which the vendor must submit 
the food instrument for redemption. This date must 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 must ensure that 
the allotted time provides the vendor sufficient time to submit the 
food instrument for redemption without undue burden;
    (v) Serial number. A unique and sequential serial number;
    (vi) Purchase price. A space for the purchase price to be entered. 
At the discretion of the State agency, a maximum price may be printed 
on the food instrument that is higher than the expected purchase price 
of the authorized supplemental foods for which it will be used, but 
that is low enough to protect against potential loss of funds. When a 
maximum price is printed on the food instrument, the space for the 
purchase price must be clearly distinguishable from the maximum price. 
For example, the words ``purchase price'' or ``actual amount of sale'' 
could be printed larger and in a different area of the food instrument 
than the maximum price; and
    (vii) Signature space. A space where participants, parents or 
caretakers of infant or child participants, or proxies must sign.
    (3) Vendor identification. The State agency must implement 
procedures to ensure each food instrument submitted for redemption can 
be identified by the vendor that submitted the food instrument. Each 
vendor operated by a single business entity must be identified 
separately. The State agency may identify vendors by requiring that all 
authorized vendors stamp their names and/or enter a vendor 
identification number on all food instruments prior to submitting them 
for redemption.
    (g) Retail food delivery systems: Vendor authorization. (1) 
General. The State agency must 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 its authorized vendors.
    (2) Vendor limiting criteria. The State agency may establish 
criteria to limit the number of stores it authorizes. The State agency 
must apply its limiting criteria consistently throughout its 
jurisdiction. Any vendor limiting criteria used by the State agency 
must be included in the State Plan in accordance with 
Sec. 246.4(a)(14)(ii).
    (3) Vendor selection criteria. The State agency must develop and 
implement criteria to select stores for authorization. The State agency 
must apply its selection criteria consistently throughout its 
jurisdiction. The State agency may reassess any authorized vendor at 
any time during the vendor's agreement period using the vendor 
selection criteria in effect at the time of the reassessment and must 
terminate the agreements with those vendors that fail to meet them. The 
vendor selection criteria must include the following categories and 
requirements and must be included in the State Plan in accordance with 
Sec. 246.4(a)(14)(ii).
    (i) Competitive price and price limitations. The State agency must 
consider the prices a vendor applicant charges for supplemental foods 
as compared to the prices charged by other vendor applicants and 
authorized vendors. The State agency may evaluate a vendor applicant 
based on its shelf prices or on the prices it bids for supplemental 
foods, which may not exceed its shelf prices. The State agency must 
also establish price limitations on the amount that it will pay 
vendors. The price limitations must be designed to ensure that the 
State agency does not pay a vendor at a level that would otherwise make 
the vendor ineligible for authorization. The State agency may establish 
different competitive price requirements and price limitations for 
different vendor peer groups, may include a factor to reflect 
fluctuations in wholesale prices in its price limitations, and may 
except pharmacy vendors that supply only exempt infant formula and/or 
WIC-eligible medical foods from both the competitive price selection 
criterion and the price limitations.
    (ii) Minimum variety and quantity of supplemental foods. The State 
agency must establish minimum requirements for the variety and quantity 
of supplemental foods that a vendor applicant must stock to be 
authorized. The State agency may not authorize a vendor applicant 
unless it determines that the vendor applicant meets these minimums. 
The State agency may establish different minimums for different vendor 
peer groups.
    (iii) Business integrity. The State agency must consider the 
business integrity of a vendor applicant. In determining the business 
integrity of a vendor applicant, the State agency may rely solely on 
facts already known to it and representations made by the vendor 
applicant on its vendor application. The State agency is not required 
to establish a formal system of background checks for vendor 
applicants. Unless denying authorization of a vendor applicant would 
result in inadequate participant access, the State agency may not 
authorize a vendor applicant if during the last six years the vendor 
applicant or any of the vendor applicant's current owners, officers, or 
managers have been convicted of or had a civil judgment entered against 
them for any activity indicating a lack of business integrity. 
Activities indicating a lack of business integrity include fraud, 
antitrust violations, embezzlement, theft, forgery, bribery, 
falsification or destruction of records, making false statements, 
receiving stolen property, making false claims, and obstruction of 
justice. The State agency may add other types of convictions or civil 
judgments to this list.
    (iv) Current Food Stamp Program disqualification or civil money 
penalty for hardship. Unless denying authorization of a vendor 
applicant would result in inadequate participant access, the State 
agency may not authorize a vendor applicant that is currently 
disqualified from the Food Stamp Program or that has been assessed a 
Food Stamp Program civil money penalty for hardship and the 
disqualification period that would otherwise have been imposed has not 
expired.
    (4) On-site preauthorization visit. The State agency must conduct 
an on-site

[[Page 83280]]

visit prior to or at the time of a vendor's initial authorization.
    (5) Sale of store to circumvent WIC sanction. The State agency may 
not authorize a vendor applicant 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 
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.
    (6) Impact on small businesses. The State agency is encouraged to 
consider the impact of authorization decisions on small businesses.
    (7) Application periods. The State agency may limit the periods 
during which applications for vendor authorization will be accepted and 
processed, except that applications must be accepted and processed at 
least once every three years. The State agency must develop procedures 
for processing vendor applications outside of its timeframes when it 
determines there will be inadequate participant access unless 
additional vendors are authorized.
    (8) Data collection at authorization. At the time of application, 
the State agency must collect the vendor applicant's Food Stamp Program 
authorization number if the vendor applicant is authorized in that 
program. In addition, the State agency must collect the vendor 
applicant's current shelf prices for supplemental foods.
    (h) Retail food delivery systems: Vendor agreements. (1) General. 
(i) Entering into agreements. The State agency must enter into written 
agreements with all authorized vendors. The agreements must be for a 
period not to exceed three years. The agreement must 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, the agreement must specify all vendors 
covered by the agreement. When more than one vendor is specified in the 
agreement, the State agency may add or delete an individual vendor 
without affecting the remaining vendors. The State agency must require 
vendors to reapply at the expiration of their agreements and must 
provide vendors with not less than 15 days advance written notice of 
the expiration of their agreements.
    (ii) Delegation to local agencies. The State agency may delegate to 
its local agencies the authority to sign vendor agreements if the State 
agency indicates its intention to do so in its State Plan in accordance 
with Sec. 246.4(a)(14)(iii). In such cases, the State agency must 
provide supervision and instruction to ensure the uniformity and 
quality of local agency activities.
    (2) Standard vendor agreement. The State agency must use a standard 
vendor agreement throughout its jurisdiction, although the State agency 
may make exceptions to meet unique circumstances provided that it 
documents the reasons for such exceptions.
    (3) Vendor agreement provisions. The vendor agreement must contain 
the following specifications, although the State agency may determine 
the exact wording to be used:
    (i) Acceptance of food instruments. The vendor may accept food 
instruments only from participants, parents or caretakers of infant and 
child participants, or proxies.
    (ii) No substitutions, cash, credit, refunds, or exchanges. The 
vendor may provide only the authorized supplemental foods listed on the 
food instrument. The vendor may not provide unauthorized food items, 
non-food items, cash, or credit (including rainchecks) in exchange for 
food instruments. The vendor may not provide refunds or permit 
exchanges for authorized supplemental foods obtained with food 
instruments, except for exchanges of an identical authorized 
supplemental food item when the original authorized supplemental food 
item is defective, spoiled, or has exceeded its ``sell by,'' ``best if 
used by,'' or other date limiting the sale or use of the food item. An 
identical authorized supplemental food item means the exact brand and 
size as the original authorized supplemental food item obtained and 
returned by the participant.
    (iii) Treatment of participants, parents/caretakers, and proxies. 
The vendor must offer program participants, parents or caretakers of 
infant of child participants, and proxies the same courtesies offered 
to other customers.
    (iv) Time periods for transacting food instruments. The vendor may 
accept a food instrument only within the specified time period.
    (v) Purchase price on food instruments. The vendor must ensure that 
the purchase price is entered on food instruments in accordance with 
the procedures described in the vendor agreement. The State agency has 
the discretion to determine whether the vendor or the participant 
enters the purchase price. The purchase price must include only the 
authorized supplemental food items actually provided and must be 
entered on the food instrument before it is signed.
    (vi) Signature on food instruments. For printed food instruments, 
the vendor must ensure the participant, parent or caretaker of an 
infant or child participant, or proxy signs the food instrument in the 
presence of the cashier. In EBT systems, a Personal Identification 
Number (PIN) may be used in lieu of a signature.
    (vii) Sales tax prohibition. The vendor may not collect sales tax 
on authorized supplemental foods obtained with food instruments.
    (viii) Food instrument redemption. The vendor must submit food 
instruments for redemption in accordance with the redemption procedures 
described in the vendor agreement. The vendor may redeem a food 
instrument only within the specified time period. As part of the 
redemption procedures, the State agency may make price adjustments to 
the purchase price on food instruments submitted by the vendor for 
redemption to ensure compliance with the price limitations applicable 
to the vendor.
    (ix) Vendor claims. When the State agency determines the vendor has 
committed a vendor violation that affects the payment to the vendor, 
the State agency will delay payment or establish a claim. The State 
agency may delay payment or establish a claim in the amount of the full 
purchase price of each food instrument that contained the vendor 
overcharge or other error. The State agency will provide the vendor 
with an opportunity to justify or correct a vendor overcharge or other 
error. The vendor must pay any claim assessed by the State agency. In 
collecting a claim, the State agency may offset the claim against 
current and subsequent amounts to be paid to the vendor. In addition to 
denying payment or assessing a claim, the State agency may sanction the 
vendor for vendor overcharges or other errors in accordance with the 
State agency's sanction schedule.
    (x) No charge for authorized supplemental foods or restitution from 
participants. The vendor may not charge participants, parents or 
caretakers of infant and child participants, or proxies for authorized 
supplemental foods obtained with food instruments. In addition, the 
vendor may not seek restitution from these individuals for food 
instruments not paid or partially paid by the State agency.
    (xi) Training. At least one representative of the vendor must 
participate in training annually. Annual vendor training may be 
provided by the State agency in a variety of formats, including 
newsletters, videos, and

[[Page 83281]]

interactive training. The State agency will have sole discretion to 
designate the date, time, and location of all interactive training, 
except that the State agency will provide the vendor with at least one 
alternative date on which to attend such training.
    (xii) Vendor training of staff. The vendor must inform and train 
cashiers and other staff on program requirements.
    (xiii) Accountability for owners, officers, managers, and 
employees. The vendor is accountable for its owners, officers, 
managers, agents, and employees who commit vendor violations.
    (xiv) Monitoring. The vendor may be monitored for compliance with 
program requirements.
    (xv) Recordkeeping. The vendor must maintain inventory records used 
for Federal tax reporting purposes and other records the State agency 
may require for the period of time specified by the State agency in the 
vendor agreement. Upon request, the vendor must 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) Termination. The State agency will immediately terminate the 
agreement if it determines that the vendor has provided false 
information in connection with its application for authorization. 
Either the State agency or the vendor may terminate the agreement for 
cause after providing advance written notice of a period of not less 
than 15 days to be specified by the State agency.
    (xvii) Change in ownership or location or cessation of operations. 
The vendor must provide the State agency advance written notification 
of any change in vendor ownership, store location, or cessation of 
operations. In such instances, the State agency will terminate the 
vendor agreement, except that the State agency may permit vendors to 
move short distances without terminating the agreement. The State 
agency has the discretion to determine the length of advance notice 
required for vendors reporting changes under this provision, whether a 
change in location qualifies as a short distance, and whether a change 
in business structure constitutes a change in ownership.
    (xviii) Sanctions. In addition to claims collection, the vendor may 
be sanctioned for vendor violations in accordance with the State 
agency's sanction schedule. Sanctions may include administrative fines, 
disqualification, and civil money penalties in lieu of 
disqualification. The State agency does not have to provide the vendor 
with prior warning that violations were occurring before imposing such 
sanctions.
    (xix) Conflict of interest. The State agency will terminate the 
agreement if the State agency identifies a conflict of interest, as 
defined by applicable State laws, regulations, and policies, between 
the vendor and the State agency or its local agencies.
    (xx) Criminal penalties. A vendor who commits fraud or abuse in the 
Program is liable to prosecution under applicable Federal, State or 
local laws. Those who have willfully misapplied, stolen or fraudulently 
obtained program funds will 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) Not a license/property interest. 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. If a vendor is 
disqualified, the State agency will terminate the vendor's agreement, 
and the vendor will have to reapply in order to be authorized after the 
disqualification period is over. In all cases, the vendor's new 
application will be subject to the State agency's vendor selection 
criteria and any vendor limiting criteria in effect at the time of the 
reapplication.
    (xxii) Compliance with vendor agreement, statutes, regulations, 
policies, and procedures. The vendor must comply with the vendor 
agreement and Federal and State statutes, regulations, policies, and 
procedures governing the Program, including any changes made during the 
agreement period.
    (xxiii) Nondiscrimination regulations. The vendor must comply with 
the nondiscrimination provisions of Departmental regulations (Parts 15, 
15a and 15b of this title).
    (xxiv) Compliance with vendor selection criteria. The vendor must 
comply with the vendor selection criteria throughout the agreement 
period, including any changes to the criteria. Using the current vendor 
selection criteria, the State agency may reassess the vendor at any 
time during the agreement period. The State agency will terminate the 
vendor agreement if the vendor fails to meet the current vendor 
selection criteria.
    (xxv) Reciprocal Food Stamp Program disqualification for WIC 
Program disqualifications. 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) Purchase price and redemption procedures. The State agency must 
describe in the vendor agreement its purchase price and redemption 
procedures. The redemption procedures must ensure that the State agency 
does not pay a vendor more than the price limitations applicable to the 
vendor.
    (5) Sanction schedule. The State agency must include its sanction 
schedule in the vendor agreement or as an attachment to it. The 
sanction schedule must include all mandatory and State agency vendor 
sanctions and must be consistent with paragraph (l) of this section. If 
the sanction schedule is in State law or regulations or in a document 
provided to the vendor at the time of authorization, the State agency 
instead may include an appropriate cross-reference in the vendor 
agreement.
    (6) Actions subject to administrative review and review procedures. 
The State agency must include the adverse actions a vendor may appeal 
and those adverse actions that are not subject to administrative 
review. The State agency also must include a copy of the State agency's 
administrative review procedures in the vendor agreement or as an 
attachment to it or must include a statement that the review procedures 
are available upon request and the applicable review procedures will be 
provided along with an adverse action subject to administrative review. 
These items must be consistent with Sec. 246.18. If these items are in 
State law or regulations or in a document provided to the vendor at the 
time of authorization, the State agency instead may include an 
appropriate cross-reference in the vendor agreement.
    (7) Notification of program changes. The State agency must notify 
vendors of changes to Federal or State statutes, regulations, policies, 
or procedures governing the Program before the changes are implemented. 
The State agency should give as much advance notice as possible.
    (i) Retail food delivery systems: Vendor training. (1) General 
requirements. The State agency must provide training annually to at 
least one representative of each vendor. Prior to or at the time of a 
vendor's initial authorization, and at least once every

[[Page 83282]]

three years thereafter, the training must be in an interactive format 
that includes a contemporaneous opportunity for questions and answers. 
The State agency must designate the date, time, and location of the 
interactive training and the audience (e.g., managers, cashiers, etc.) 
to which the training is directed. The State agency must provide 
vendors with at least one alternative date on which to attend 
interactive training. Examples of acceptable vendor training include 
on-site cashier training, off-site classroom-style train-the-trainer or 
manager training, a training video, and a training newsletter. All 
vendor training must be designed to prevent program errors and 
noncompliance and improve program service.
    (2) Content. The annual training must include instruction on the 
purpose of the Program, the 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 
and redeeming food instruments, the vendor sanction system, the vendor 
complaint process, the claims procedures, and any changes to program 
requirements since the last training.
    (3) Delegation. The State agency may delegate vendor 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)(xi). In such cases, the State agency must 
provide supervision and instruction to ensure the uniformity and 
quality of vendor training.
    (4) Documentation. The State agency must document the content of 
and vendor participation in vendor training.
    (j) Retail food delivery systems: Monitoring vendors and 
identifying high-risk vendors. (1) General requirements. The State 
agency must design and implement a system for monitoring its vendors 
for compliance with program requirements. The State agency may delegate 
vendor monitoring to a local agency or 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 must provide 
supervision and instruction to ensure the uniformity and quality of 
vendor monitoring.
    (2) Routine monitoring. The State agency must conduct routine 
monitoring visits on a minimum of five percent of the number of vendors 
authorized by the State agency as of October 1 of each fiscal year in 
order to survey the types and levels of abuse and errors among 
authorized vendors and to take corrective actions, as appropriate. The 
State agency must develop criteria to determine which vendors will 
receive routine monitoring visits and must include such criteria in its 
State Plan in accordance with Sec. 246.4(a)(14)(iv).
    (3) Identifying high-risk vendors. The State agency must identify 
high-risk vendors at least once a year using criteria developed by FNS 
and/or other statistically-based criteria developed by the State 
agency. FNS will not change its criteria more frequently than once 
every two years and will provide adequate advance notification of 
changes prior to implementation. The State agency may develop and 
implement additional criteria. All State agency-developed criteria must 
be approved by FNS.
    (4) Compliance investigations. (i) High-risk vendors. The State 
agency must conduct compliance investigations of a minimum of five 
percent of the number of vendors authorized by the State agency as of 
October 1 of each fiscal year. The State agency must conduct compliance 
investigations on all high-risk vendors up to the five percent minimum. 
The State agency may count toward this requirement a compliance 
investigation of a high-risk vendor conducted by a Federal, State, or 
local law enforcement agency. The State agency also may count toward 
this requirement a compliance investigation conducted by another WIC 
State agency provided that the State agency implements the option to 
establish State agency sanctions based on mandatory sanctions imposed 
by the other WIC State agency, as specified in paragraph (l)(2)(iii) of 
this section. A compliance investigation of a high-risk vendor may be 
considered complete when the State agency determines that a sufficient 
number of compliance buys have been conducted to provide evidence of 
program noncompliance, when two compliance buys have been conducted in 
which no program violations are found, or when an inventory audit has 
been completed.
    (ii) Randomly selected vendors. If fewer than five percent of the 
State agency's authorized vendors are identified as high-risk, the 
State agency must randomly select additional vendors on which to 
conduct compliance investigations sufficient to meet the five-percent 
requirement. A compliance investigation of a randomly selected vendor 
may be considered complete when the State agency determines that a 
sufficient number of compliance buys have been conducted to provide 
evidence of program noncompliance, when two compliance buys are 
conducted in which no program violations are found, or when an 
inventory audit has been completed.
    (iii) Prioritization. If more than five percent of the State 
agency's vendors are identified as high-risk, the State agency must 
prioritize such vendors so as to perform compliance investigations of 
those determined to have the greatest potential for program 
noncompliance and/or loss of funds.
    (5) Monitoring report. For each fiscal year, the State agency must 
send FNS a summary of the results of its vendor monitoring containing 
information stipulated by FNS. The report must be sent by February 1 of 
the following fiscal year. Plans for improvement in the coming year 
must be included in the State Plan in accordance with 
Sec. 246.4(a)(14)(iv).
    (6) Documentation.
    (i) Monitoring visits. The State agency must document the following 
information for all monitoring visits, including routine monitoring 
visits, inventory audits, and compliance buys:
    (A) the date of the monitoring visit, inventory audit, or 
compliance buy;
    (B) the name(s) and signature(s) of the reviewer(s); and
    (C) the nature of any problem(s) detected.
    (ii) Compliance buys. For compliance buys, the State agency must 
also document:
    (A) the date of the buy;
    (B) a description of the cashier involved in each transaction;
    (C) the types and quantities of items purchased, current shelf 
prices or prices charged other customers, and price charged for each 
item purchased, if available. Price information may be obtained prior 
to, during, or subsequent to the compliance buy; and
    (D) the final disposition of all items as destroyed, donated, 
provided to other authorities, or kept as evidence.
    (k) Retail food delivery systems: Vendor claims. (1) System to 
review food instruments. The State agency must design and implement a 
system to review food instruments submitted by vendors for redemption 
to ensure compliance with the applicable price limitations and to 
detect questionable food instruments, suspected vendor overcharges, and 
other errors. This review must examine either all or a representative 
sample of the food instruments and may be done either before or after 
the State agency makes payments on the food instruments. The review 
must include a price comparison or other edit designed to ensure 
compliance with the applicable price limitations and to assist in 
detecting vendor overcharges. For printed food instruments, the system 
also must detect

[[Page 83283]]

the following errors: purchase price missing; participant, parent/
caretaker, or proxy signature missing; vendor identification missing; 
food instruments transacted or redeemed after the specified time 
periods; and, as appropriate, altered purchase price. The State agency 
must take follow-up action within 120 days of detecting any 
questionable food instruments, suspected vendor overcharges, and other 
errors and must implement procedures to reduce the number of errors 
when possible.
    (2) Delaying payment and establishing a claim. When the State 
agency determines the vendor has committed a vendor violation that 
affects the payment to the vendor, the State agency must delay payment 
or establish a claim. Such vendor violations may be detected through 
compliance investigations, food instrument reviews, or other reviews or 
investigations of a vendor's operations. The State agency may delay 
payment or establish a claim in the amount of the full purchase price 
of each food instrument that contained the vendor overcharge or other 
error.
    (3) Opportunity to justify or correct. When payment for a food 
instrument is delayed or a claim is established, the State agency must 
provide the vendor with an opportunity to justify or correct the vendor 
overcharge or other error. If satisfied with the justification or 
correction, the State agency must provide payment or adjust the 
proposed claim accordingly.
    (4) Timeframe and offset. The State agency must deny payment or 
initiate claims collection action within 90 days of either the date of 
detection of the vendor violation or the completion of the review or 
investigation giving rise to the claim, whichever is later. Claims 
collection action may include offset against current and subsequent 
amounts owed to the vendor.
    (5) Food instruments redeemed after the specified period. With 
justification and documentation, the State agency may pay vendors for 
food instruments submitted for redemption after the specified period 
for redemption. If the total value of such food instruments submitted 
at one time exceeds $500.00, the State agency must obtain the approval 
of the FNS Regional Office before payment.
    (l) Retail food delivery systems: Vendor sanctions--(1) Mandatory 
vendor sanctions--(i) Permanent disqualification. The State agency must 
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 is not 
entitled to receive any compensation for revenues lost as a result of 
such violation. If reflected in its State Plan, the State agency may 
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 must disqualify a 
vendor for six years for:
    (A) One incidence of buying or selling food instruments for cash 
(trafficking); or
    (B) 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 must 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;
    (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;
    (C) A pattern of vendor overcharges;
    (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;
    (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 must disqualify a 
vendor for one year for a pattern of providing unauthorized food items 
in exchange for food instruments, including charging for supplemental 
foods 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 must double the 
second sanction. Civil money penalties may only be doubled up to the 
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 must double the third sanction and all subsequent 
sanctions. The State agency may 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 must disqualify a vendor who has 
been disqualified from the Food Stamp Program. The disqualification 
must 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 is not subject to administrative or judicial 
review under the WIC Program.
    (viii) Voluntary withdrawal or nonrenewal of agreement. The State 
agency may 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 must 
enter the disqualification on the record. In addition, the State agency 
may 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 must determine if disqualification of the vendor would result in 
inadequate participant access. The State agency must make the 
participant access determination 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 must impose a civil money penalty in lieu of disqualification. 
However, as provided in paragraph (l)(1)(vi) of this section, the State 
agency may not impose a civil money penalty in lieu of

[[Page 83284]]

disqualification for third or subsequent sanctions for violations in 
paragraphs (l)(1)(ii) through (l)(1)(iv) of this section. The State 
agency must 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 must 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 adverse 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 must impose a CMP 
for each violation. The total amount of civil money penalties imposed 
for violations investigated as part of a single investigation may not 
exceed $40,000.
    (xi) Notification to FNS. The State agency must provide the 
appropriate FNS office with a copy of the notice of adverse 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 must 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 must 
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 must 
disqualify the vendor for the period corresponding to the most serious 
mandatory violation. However, the State agency must 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) General requirements. The 
State agency may impose sanctions for vendor violations that are not 
specified in paragraphs (l)(1)(i) through (l)(1)(iv) of this section as 
long as such vendor violations and sanctions are included in the State 
agency's sanction schedule. State agency sanctions may include 
disqualifications, civil money penalties assessed in lieu of 
disqualification, and administrative 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 may not exceed $10,000 for each violation. The total 
amount of civil money penalties and administrative fines imposed for 
violations investigated as part of a single investigation may not 
exceed $40,000.
    (ii) Food Stamp Program civil money penalty for hardship. The State 
agency may disqualify a vendor that 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 must 
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 must:
    (A) Include notification that it will take such disqualification 
action in its sanction schedule; 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 may not disqualify the vendor or impose a civil money penalty in 
lieu of disqualification. The State agency must include documentation 
of its participant access determination and any supporting 
documentation in each vendor's file.
    (iii) A mandatory sanction by another WIC State agency. The State 
agency may disqualify a vendor that has been disqualified or assessed a 
civil money penalty in lieu of disqualification by another WIC State 
agency for a mandatory vendor sanction. The length of the 
disqualification must be for the same length of time as the 
disqualification by the other WIC State agency or, in the case of a 
civil money penalty in lieu of disqualification assessed by the other 
WIC State agency, for the same length of time for which the vendor 
would otherwise have been disqualified. The disqualification may begin 
at a later date than the sanction imposed by the other WIC State 
agency. If a State agency decides to exercise this option, the State 
agency must:
    (A) Include notification that it will take such action in its 
sanction schedule; 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 must impose a civil money penalty in lieu of disqualification, 
except that the State agency may not impose a civil money penalty in 
situations in which the vendor has been assessed a civil money penalty 
in lieu of disqualification by the other WIC State agency. Any civil 
money penalty in lieu of disqualification must be calculated in 
accordance with paragraph (l)(2)(x) of this section. The State agency 
must 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 paragraph (l) of this section.
    (4) Administrative reviews. The State agency must provide 
administrative reviews of sanctions to the extent required by 
Sec. 246.18.
    (5) Installment plans. The State agency may use installment plans 
for the collection of civil money penalties and administrative fines.
    (6) Failure to pay a civil money penalty. If a vendor does not pay, 
only partially pays, or fails to timely pay a civil money penalty 
assessed in lieu of disqualification, the State agency must 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

[[Page 83285]]

addition to the sanctions in this section, such as claims pursuant to 
paragraph (k) of this section and the penalties set forth in 
Sec. 246.23(c) in the case of deliberate fraud.
    (8) Participant access determination criteria. The State agency 
must develop participant access criteria. When making participant 
access determinations, the State agency must consider the availability 
of other authorized vendors in the same area as the violative vendor 
and any geographic barriers to using such vendors.
    (9) Termination of agreement. When the State agency disqualifies a 
vendor, the State agency must also terminate the vendor agreement.
    (m) Home food delivery systems. Home food delivery systems are 
systems in which authorized supplemental foods are delivered to the 
participant's home. Home food delivery systems must provide for:
    (1) Procurement. 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) Accountability. The accountable delivery of authorized 
supplemental foods to participants. The State agency must ensure that:
    (i) Home food delivery contractors are paid only after the delivery 
of authorized supplemental foods to participants;
    (ii) A routine procedure exists to verify the correct delivery of 
authorized supplemental foods to participants, and, at a minimum, such 
verification occurs at least once a month after delivery; and
    (iii) Records of delivery of supplemental foods and bills sent or 
payments received for such supplemental foods are retained for at least 
three years. Federal, State, and local authorities must have access to 
such records.
    (n) Direct distribution food delivery systems. Direct distribution 
food delivery systems are systems in which participants, parents or 
caretakers of infant or child participants, or proxies pick up 
authorized supplemental foods from storage facilities operated by the 
State agency or its local agencies. Direct distribution food delivery 
systems must provide for:
    (1) Storage and insurance. Adequate storage and insurance coverage 
that minimizes the danger of loss due to theft, infestation, fire, 
spoilage, or other causes;
    (2) Inventory. Adequate inventory control of supplemental foods 
received, in stock, and issued;
    (3) Procurement. 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) Availability. The availability of program benefits to 
participants and potential participants who live at great distance from 
storage facilities; and
    (5) Accountability. The accountable delivery of authorized 
supplemental foods to participants.
    (o) Participant, parent/caretaker, proxy, vendor, and home food 
delivery contractor complaints. The State agency must have procedures 
to document the handling of complaints by participants, parents or 
caretakers of infant or child participants, proxies, vendors, home food 
delivery contractors, and direct distribution contractors. Complaints 
of civil rights discrimination must be handled in accordance with 
Sec. 246.8(b).
    (p) Food instrument security. The State agency must develop 
standards for ensuring the security of food instruments from the time 
the food instruments are created to the time they are issued to 
participants, parents/caretakers, or proxies. For pre-printed food 
instruments, these standards must include maintenance of perpetual 
inventory records of food instruments throughout the State agency's 
jurisdiction; monthly physical inventory of food instruments on hand 
throughout the State agency's jurisdiction; reconciliation of perpetual 
and physical inventories of food instruments; and maintenance of all 
food instruments under lock and key, except for supplies needed for 
immediate use. For EBT and print-on-demand food instruments, the 
standards must provide for the accountability and security of the means 
to manufacture and issue such food instruments.
    (q) Food instrument disposition. The State agency must account for 
the disposition of all food instruments as either issued or voided, and 
as either redeemed or unredeemed. Redeemed food instruments must be 
identified as validly issued, lost, stolen, expired, duplicate, or not 
matching valid enrollment and issuance records. In an EBT system, 
evidence of matching redeemed food instruments to valid enrollment and 
issuance records may be satisfied through the linking of the Primary 
Account Number (PAN) associated with the electronic transaction to 
valid enrollment and issuance records. This process must be performed 
within 150 days of the first valid date for participant use of the food 
instruments and must be conducted in accordance with the financial 
management requirements of Sec. 246.13. The State agency will be 
subject to claims as outlined in Sec. 246.23(a)(4) for redeemed food 
instruments that do not meet the conditions established in paragraph 
(q) of this section.
    (r) Issuance of food instruments and authorized supplemental foods. 
The State agency must:
    (1) Parents/caretakers and proxies. Establish uniform procedures 
that allow parents and caretakers of infant and child participants and 
proxies to obtain and transact food instruments or obtain authorized 
supplemental foods on behalf of a participant. In determining whether a 
particular participant or parent/caretaker should be allowed to 
designate a proxy or proxies, the State agency must 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 or, in the case of an infant or child participant, to 
the participant's parent or caretaker;
    (2) Signature requirement. Ensure that the participant, parent or 
caretaker of an infant or child participant, or proxy signs for receipt 
of food instruments or authorized supplemental foods, except as 
provided in paragraph (r)(4) of this section;
    (3) Instructions. Ensure that participants, parents or caretakers 
of infant and child participants, and proxies receive instructions on 
the proper use of food instruments, or on the procedures for obtaining 
authorized supplemental foods when food instruments are not used. The 
State agency must also ensure that participants, parents or caretakers 
of infant and child participants, and proxies are notified that they 
have the right to complain about improper vendor and home food delivery 
contractor practices with regard to program responsibilities;
    (4) Food instrument pick up. Require participants, parents and 
caretakers of infant and child participants, and 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

[[Page 83286]]

required in Sec. 246.4(a)(21), for mailing food instruments to areas 
where food stamps are not mailed. State agencies that opt to mail food 
instruments must establish and implement a system that ensures the 
return of food instruments to the State or local agency if a 
participant no longer resides or receives mail at the address to which 
the food instruments were mailed; and
    (5) Maximum issuance of food instruments. Ensure that no more than 
a three-month supply of food instruments or a one-month supply of 
authorized supplemental foods is issued at any one time to any 
participant, parent or caretaker of an infant or child participant, or 
proxy.
    (s) Payment to vendors and home food delivery contractors. The 
State agency must ensure that vendors and home food delivery 
contractors are paid promptly. Payment must be made within 60 days 
after valid food instruments are submitted for redemption. Actual 
payment to vendors and home food delivery contractors may be made by 
local agencies.
    (t) Conflict of interest. The State agency must ensure that no 
conflict of interest exists, as defined by applicable State laws, 
regulations, and policies, 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) General requirements. 
The State agency must establish procedures designed to control 
participant violations. The State agency also must establish sanctions 
for participant violations. Participant sanctions may include 
disqualification from the Program for a period of up to one year.
    (2) Mandatory disqualification. (i) General. Except as provided in 
paragraphs (u)(2)(ii) and (u)(2)(iii) of this section, whenever the 
State agency assesses a claim of $100 or more, assesses a claim for 
dual participation, or assess a second or subsequent claim of any 
amount, the State agency must disqualify the participant for one year.
    (ii) Exceptions to mandatory disqualification. The State agency may 
decide not to impose a mandatory disqualification if, within 30 days of 
receipt of the letter demanding repayment, full restitution is made or 
a repayment schedule is agreed on, or, in the case of a participant who 
is an infant, child, or under age 18, the State or local agency 
approves the designation of a proxy.
    (iii) Terminating a mandatory disqualification. The State agency 
may permit a participant to reapply for the Program before the end of a 
mandatory disqualification period if full restitution is made or a 
repayment schedule is agreed upon or, in the case of a participant who 
is an infant, child, or under age 18, the State or local agency 
approves the designation of a proxy.
    (3) Warnings before sanctions. The State agency may provide 
warnings before imposing participant sanctions.
    (4) Fair hearings. At the time the State agency notifies a 
participant of a disqualification, the State agency must advise the 
participant of the procedures to follow to obtain a fair hearing 
pursuant to Sec. 246.9.
    (5) Referral to law enforcement authorities. When appropriate, the 
State agency must refer vendors, home food delivery contractors, and 
participants who violate program requirements to Federal, State, or 
local authorities for prosecution under applicable statutes.

    7. Revise Sec. 246.13(h) to read as follows:


Sec. 246.13  Financial management system.

* * * * *
    (h) Adjustment of expenditures. The State agency must adjust 
projected expenditures to account for redeemed food instruments and for 
other changes as appropriate.
* * * * *

    8. In Sec. 246.14:
    a. Revise paragraph (b)(2); and
    b. In paragraph (e)(3)(i), remove the reference to 
``Sec. 246.12(r)(5)(iii)'' and add a reference to ``Sec. 246.12(k)(3)'' 
in its place.
    The revision reads as follows:


Sec. 246.14  Program costs.

* * * * *
    (b) * * *
    (2) For costs to be allowable, the State agency must ensure that 
food costs do not exceed the customary sales price charged by the 
vendor, home food delivery contractor, or supplier in a direct 
distribution food delivery system. In addition, food costs may not 
exceed the price limitations applicable to the vendor.
* * * * *
    9. Revise Sec. 246.18 to read as follows:


Sec. 246.18  Administrative review of State agency actions.

    (a) Adverse actions subject to administrative reviews. (1) Vendor 
appeals. (i) Adverse actions subject to full administrative reviews. 
Except as provided elsewhere in paragraph (a)(1) of this section, the 
State agency must provide full administrative reviews to vendors that 
appeal the following adverse actions:
    (A) denial of authorization based on the vendor selection criteria 
for competitive price or for minimum variety and quantity of authorized 
supplemental foods (Sec. 246.12(g)(3)(i) and (g)(3)(ii)) or on a 
determination that the vendor is attempting to circumvent a sanction 
(Sec. 246.12(g)(4));
    (B) termination of an agreement for cause;
    (C) disqualification; and
    (D) imposition of a fine or a civil money penalty in lieu of 
disqualification.
    (ii) Adverse actions subject to abbreviated administrative reviews. 
The State agency must provide abbreviated administrative reviews to 
vendors that appeal the following adverse actions, unless the State 
agency decides to provide full administrative reviews for any of these 
types of adverse actions:
    (A) denial of authorization based on the vendor selection criteria 
for business integrity or for a current Food Stamp Program 
disqualification or civil money penalty for hardship 
(Sec. 246.12(g)(3)(iii) and (g)(3)(iv));
    (B) denial of authorization based on a State agency-established 
vendor selection criterion if the basis of the denial is a WIC vendor 
sanction or a Food Stamp Program withdrawal of authorization or 
disqualification;
    (C) denial of authorization based on the State agency's vendor 
limiting criteria (Sec. 246.12(g)(2));
    (D) denial of authorization because a 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)(7);
    (E) termination of an agreement because of a change in ownership or 
location or cessation of operations (Sec. 246.12(h)(3)(xvii));
    (F) disqualification based on a trafficking conviction 
(Sec. 246.12(l)(1)(i));
    (G) disqualification based on the imposition of a Food Stamp 
Program civil money penalty for hardship (Sec. 246.12(l)(2)(ii)); and
    (H) disqualification or a civil money penalty imposed in lieu of 
disqualification based on a mandatory sanction imposed by another WIC 
State agency (Sec. 246.12(l)(2)(iii)).
    (iii) Actions not subject to administrative reviews. The State 
agency may not provide administrative reviews pursuant to this section 
to vendors that appeal the following actions:
    (A) the validity or appropriateness of the State agency's vendor 
limiting or selection criteria (Sec. 246.12(g)(2) and (g)(3));

[[Page 83287]]

    (B) the validity or appropriateness of the State agency's 
participant access criteria and the State agency's participant access 
determinations;
    (C) the State agency's determination whether a vendor had an 
effective policy and program in effect to prevent trafficking and that 
the ownership of the vendor was not aware of, did not approve of, and 
was not involved in the conduct of the violation 
(Sec. 246.12(l)(1)(i)(B));
    (D) denial of authorization if the State agency's vendor 
authorization is subject to the procurement procedures applicable to 
the State agency;
    (E) the expiration of a vendor's agreement;
    (F) disputes regarding food instrument payments and vendor claims 
(other than the opportunity to justify or correct a vendor overcharge 
or other error, as permitted by Sec. 246.12(k)(3); and
    (G) disqualification of a vendor as a result of disqualification 
from the Food Stamp Program (Sec. 246.12(l)(1)(vii)).
    (2) Effective date of adverse actions against vendors. The State 
agency must make denials of authorization and disqualifications imposed 
under Sec. 246.12(l)(1)(i) effective on the date of receipt of the 
notice of adverse action. The State agency must make all other adverse 
actions effective no earlier than 15 days after the date of the notice 
of the adverse action and no later than 90 days after the date of the 
notice of adverse action or, in the case of an adverse action that is 
subject to administrative review, no later than the date the vendor 
receives the review decision.
    (3) Local agency appeals. (i) Adverse actions subject to full 
administrative reviews. Except as provided in paragraph (a)(3)(ii) of 
this section, the State agency must provide full administrative reviews 
to local agencies that appeal the following adverse actions:
    (A) denial of a local agency's application;
    (B) disqualification of a local agency; and
    (C) any other adverse action that affects a local agency's 
participation.
    (ii) Actions not subject to administrative reviews. The State 
agency may not provide administrative reviews pursuant to this section 
to local agencies that appeal the following actions:
    (A) expiration of the local agency's agreement; and
    (B) denial of a local agency's application if the State agency's 
local agency selection is subject to the procurement procedures 
applicable to the State agency;
    (iii) Effective date of adverse actions against local agencies. The 
State agency must make denials of local agency applications effective 
immediately. The State agency must make all other adverse actions 
effective no earlier than 60 days after the date of the notice of the 
adverse action and no later than 90 days after the date of the notice 
of adverse action or, in the case of an adverse action that is subject 
to administrative review, no later than the date the local agency 
receives the review decision.
    (b) Full administrative review procedures. The State agency must 
develop procedures for a full administrative review of the adverse 
actions listed in paragraphs (a)(1)(i) and (a)(3) of this section. At a 
minimum, these procedures must provide the vendor or local agency with 
the following:
    (1) Written notification of the adverse action, the procedures to 
follow to obtain a full administrative review and the cause(s) for and 
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 
must include the following statement: ``This disqualification from WIC 
may result in disqualification as a retailer in the Food Stamp Program. 
Such disqualification is not subject to administrative or judicial 
review under the Food Stamp Program.''
    (2) The opportunity to appeal the adverse action within a time 
period 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. When 
necessary to protect the identity of WIC Program investigators, such 
examination may be conducted behind a protective screen or other device 
(also referred to as an ``in camera'' examination).
    (6) The opportunity to be represented by counsel.
    (7) The opportunity to examine prior to the review the evidence 
upon which the State agency's action is based.
    (8) An impartial decision-maker, whose determination is based 
solely on whether the State agency has correctly applied Federal and 
State statutes, regulations, policies, and procedures governing the 
Program, according to the evidence presented at the review. The State 
agency 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 review decision, 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. These timeframes are only administrative requirements for the 
State agency and do not provide a basis for overturning the State 
agency's adverse action if a decision is not made within the specified 
timeframe.
    (c) Abbreviated administrative review procedures. Except when the 
State agency decides to provide full administrative reviews for the 
adverse actions listed in paragraph (a)(1)(ii) of this section, the 
State agency must develop procedures for an abbreviated administrative 
review of the adverse actions listed in paragraph (a)(1)(ii) of this 
section. At a minimum, these procedures must provide the vendor with 
the following:
    (1) Written notification of the adverse action, the procedures to 
follow to obtain an abbreviated administrative review, the cause(s) for 
and the effective date of the action, and an opportunity to provide a 
written response; and
    (2) A decision-maker who is someone other than the person who 
rendered the initial decision on the action and whose determination is 
based solely on whether the State agency has correctly applied Federal 
and State statutes, regulations, policies, and procedures governing the 
Program, according to the information provided to the vendor concerning 
the cause(s) for the adverse action and the vendor's response; and
    (3) Written notification of the review decision, including the 
basis for the decision, within 90 days of the date of receipt of the 
request for an administrative review. This timeframe is only an 
administrative requirement for the State agency and does not provide a 
basis for overturning the State agency's adverse action if a decision 
is not made within the specified timeframe.
    (d) Continuing responsibilities. Appealing an action does not 
relieve a local agency or a vendor that is permitted to continue 
program operations while its appeal is in process from the 
responsibility of continued compliance with the terms of any written 
agreement with the State agency.

[[Page 83288]]

    (e) Finality and effective date of decisions. The State agency 
procedures must provide that review decisions rendered under both the 
full and abbreviated review procedures are the final State agency 
action. If the adverse action under review has not already taken 
effect, the State agency must make the action effective on the date of 
receipt of the review decision by the vendor or the local agency.
    (f) Judicial review. If the review decision upholds the adverse 
action against the vendor or local agency, the State agency must inform 
the vendor or local agency that it may be able to pursue judicial 
review of the decision.

    10. In Sec. 246.19, revise the section heading and revise 
paragraphs (a)(2), (b)(2), (b)(4), and (b)(5) to read as follows:


Sec. 246.19  Management evaluation and monitoring reviews.

    (a) * * *
    (2) The State agency must submit a corrective action plan, 
including implementation timeframes, within 60 days of receipt of an 
FNS management evaluation report containing a finding that the State 
agency did not comply with program requirements. 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 must encompass evaluation of 
management, certification, nutrition education, participant services, 
civil rights compliance, accountability, financial management systems, 
and food delivery systems. If the State agency delegates the signing of 
vendor agreements, vendor training, or vendor monitoring to a local 
agency, it must evaluate the local agency's effectiveness in carrying 
out these responsibilities.
* * * * *
    (4) The State agency must promptly notify a local agency of any 
finding in a monitoring review that the local agency did not comply 
with program requirements. The State agency must require the local 
agency to submit a corrective action plan, including implementation 
timeframes, within 60 days of receipt of a State agency report of a 
monitoring review containing a finding of program noncompliance. The 
State agency must monitor local agency implementation of corrective 
action plans.
    (5) As part of the regular monitoring reviews, 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 and the areas will not be 
added or changed more often than once every two fiscal years. These 
areas will be announced by FNS at least six months before the beginning 
of the fiscal year.
* * * * *

    11. In Sec. 246.23, revise paragraphs (a)(4) and (c) to read as 
follows:


Sec. 246.23  Claims and penalties.

    (a) * * *
    (4) FNS will establish a claim against any State agency that has 
not accounted for the disposition of all redeemed food instruments and 
taken appropriate follow-up action on all redeemed food instruments 
that cannot be matched against valid enrollment and issuance records, 
including cases that 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. (1) Claims against participants. (i) Procedures. If the 
State agency determines that program benefits have been obtained or 
disposed of improperly as the result of a participant violation, the 
State agency must establish a claim against the participant for the 
full value of such benefits. For all claims, the State agency must 
issue a letter demanding repayment. If full restitution is not made or 
a repayment schedule is not agreed on within 30 days of receipt of the 
letter, the State agency must take additional collection actions until 
restitution is made or a repayment schedule is agreed on, unless the 
State agency determines that further collection actions would not be 
cost-effective. The State agency must establish standards, based on a 
cost benefit analysis, for determining when collection actions are no 
longer cost-effective. At the time the State agency issues the demand 
letter, the State agency must advise the participant of the procedures 
to follow to obtain a fair hearing pursuant to Sec. 246.9 and that 
failure to pay the claim may result in disqualification. In addition to 
establishing a claim, the State agency must determine whether 
disqualification is required by Sec. 246.12(u)(2).
    (ii) Types of restitution. In lieu of financial restitution, the 
State agency may allow participants or parents or caretakers of infant 
or child participants for whom financial restitution would cause undue 
hardship to provide restitution by performing in-kind services 
determined by the State agency. Restitution may not include offsetting 
the claim against future program benefits, even if agreed to by the 
participant or the parent or caretaker of an infant or child 
participant.
    (iii) Disposition of claims. The State agency must document the 
disposition of all participant claims.
    (2) Claims against the State agency. 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. 246.7(l)(1).
    (3) Delegation of claims responsibility. The State agency may 
delegate to its local agencies the responsibility for collecting 
participant claims.
* * * * *

    12. In Sec. 246.26, revise the heading of paragraph (d), and add 
new paragraphs (e), (f), and (g) to read as follows.


Sec. 246.26  Other provisions.

* * * * *
    (d) Confidentiality of applicant and participant information. * * *
    (e) Confidentiality of vendor information. Confidential vendor 
information is any information about a vendor (whether it is obtained 
from the vendor or another source) that individually identifies the 
vendor, except for vendor's name, address and authorization status. 
Except as otherwise permitted by this section, the State agency must 
restrict the use or disclosure of confidential vendor information to:
    (1) Persons directly connected with the administration or 
enforcement of the WIC Program or the Food Stamp Program who the State 
agency determines have a need to know the information for purposes of 
these programs. These persons may include personnel from its local 
agencies and other WIC State and local agencies and

[[Page 83289]]

persons investigating or prosecuting WIC or Food Stamp Program 
violations under Federal, State, or local law;
    (2) Persons directly connected with the administration or 
enforcement of any Federal or State law. Prior to releasing the 
information to one of these parties (other than a Federal agency), the 
State agency must 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
    (3) A vendor that is subject to an adverse action, including a 
claim, to the extent that the confidential information concerns the 
vendor subject to the adverse action and is related to the adverse 
action.
    (f) Confidentiality of Food Stamp Program retailer information. 
Except as otherwise provided in this section, the State agency must 
restrict the use or disclosure of information about Food Stamp Program 
retailers obtained from the Food Stamp Program, including information 
provided pursuant to Section 9(c) of the Food Stamp Act of 1977 (7 
U.S.C. 2018(c)) and Sec. 278.1(q) of this chapter, to persons directly 
connected with the administration or enforcement of the WIC Program.
    (g) USDA and the Comptroller General. The State agency must provide 
the Department and the Comptroller General of the United States access 
to all WIC Program records, including confidential vendor information, 
pursuant to Sec. 246.25(a)(4).

    Dated: December 21, 2000.
Shirley R. Watkins,
Under Secretary, Food, Nutrition, and Consumer Services.
[FR Doc. 00-33111 Filed 12-28-00; 8:45 am]
BILLING CODE 3410-30-P