[Federal Register Volume 69, Number 117 (Friday, June 18, 2004)]
[Proposed Rules]
[Pages 34086-34091]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-13147]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 69, No. 117 / Friday, June 18, 2004 / 
Proposed Rules  

[[Page 34086]]



FEDERAL RESERVE SYSTEM

12 CFR Part 210

[Regulation J; Docket No. R-1202]


Collection of Checks and Other Items by Federal Reserve Banks and 
Funds Transfers Through Fedwire

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule.

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

SUMMARY: The Board of Governors is publishing for comment a proposed 
rule that would amend subpart A of Regulation J to provide for the 
rights and obligations of sending banks, paying banks, returning banks, 
and Reserve Banks in connection with collection of substitute checks 
and items that have been converted to electronic form. The proposed 
changes would ensure that Regulation J covers the new check processing 
service options that the Reserve Banks plan to offer when the Check 
Clearing for the 21st Century Act becomes effective on October 28, 
2004.

DATES: Comments on the proposed rule must be received on or before July 
26, 2004.

ADDRESSES: You may submit comments, identified by Docket No. R-1202, by 
any of the following methods:
     Agency Web site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: [email protected]. Include docket 
number in the subject line of the message.
     FAX: 202/452-3819 or 202/452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    All public comments are available from the Board's Web site at 
www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, 
except as necessary for technical reasons. Accordingly, your comments 
will not be edited to remove any identifying or contact information. 
Public comments may also be viewed electronically or in paper in Room 
MP-500 of the Board's Martin Building (20th and C Streets, NW.) between 
9 a.m. and 5 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Jack K. Walton, II, Assistant Director 
(202/452-2660), or Joseph P. Baressi, Senior Financial Services Analyst 
(202/452-3959), Division of Reserve Bank Operations and Payment 
Systems; or Adrianne G. Threatt, Counsel (202/452-3554), Legal 
Division; for users of Telecommunication Devices for the Deaf (TDD) 
only, contact 202/263-4869.

SUPPLEMENTARY INFORMATION:

Background

    Subpart A of Regulation J governs collection of checks and other 
items by the Reserve Banks. This subpart includes the warranties and 
indemnities that are given to the Reserve Banks by parties that send 
items to the Reserve Banks for collection and return, as well as the 
warranties and indemnities for which the Reserve Banks are responsible 
in connection with the items they handle. Subpart A of Regulation J 
also describes the Reserve Banks' security interest in the assets of 
banks for which they collect items, as well as the amounts and methods 
by which the Reserve Banks may recover for losses associated with their 
collection of items. Subpart A authorizes the Reserve Banks to issue 
operating circulars governing the details of the collection of checks 
and other items and provides that such operating circulars have binding 
effect on all parties interested in an item handled by a Reserve Bank. 
The Reserve Banks' Operating Circular No. 3, ``Collection of Cash Items 
and Returned Checks'' (OC 3), is the operating circular that is most 
relevant to the Reserve Banks' check collection activities.
    Under existing Regulation J, the term ``item'' is understood to 
mean a paper instrument. Although Reserve Banks in some cases accept, 
transfer, present, or return items in electronic form, the rights and 
obligations associated with handling items electronically currently are 
specified in OC 3 and the appendices thereto, rather than in Regulation 
J.
    Once the Check Clearing for the 21st Century Act (the Check 21 Act) 
takes effect on October 28, 2004, the Board expects that the Reserve 
Banks will offer a wider variety of services that involve handling 
items electronically. In addition, the Board expects that the Reserve 
Banks in some cases will act as ``reconverting banks'' that create 
substitute checks and provide the associated substitute check 
warranties and indemnity in accordance with the Check 21 Act and 
subpart D of the Board's Regulation CC.\1\
---------------------------------------------------------------------------

    \1\ The Board has proposed to implement the Check 21 Act by 
adding a new subpart D to existing Regulation CC (69 FR 1470, Jan. 
8, 2004). The comment period for this proposed rule expired on March 
12, 2004, and the Board intends to finalize subpart D no later than 
July of this year.
---------------------------------------------------------------------------

    The proposed amendments to Regulation J primarily are designed (1) 
to cover the Reserve Banks' handling of electronic items explicitly 
under Regulation J, (2) to acknowledge the substitute check warranties 
and indemnity that Reserve Banks and other banks will make under the 
Check 21 Act and subpart D when handling a substitute check or a paper 
or electronic representation of a substitute check, and (3) to include 
new warranties and indemnities that will apply when Reserve Banks and 
other banks send an electronic item that is not otherwise covered by 
the Check 21 Act and subpart D.\2\
---------------------------------------------------------------------------

    \2\ The Board expects that the Reserve Banks will amend OC 3 to 
address the operational details associated with new check processing 
services following the Board's adoption of final amendments to 
Regulation CC and Regulation J.
---------------------------------------------------------------------------

Section-by-Section Analysis

Section 210.1 Authority, Purpose, and Scope

    The Board proposes to amend this section to acknowledge the Check 
21 Act as a source of authority.

Section 210.2 Definitions

    A. Check. The Board proposes to amend the definition of check by 
adding a cross-reference to new subpart D of Regulation CC.
    B. Item. To bring electronic items under the coverage of Regulation 
J, the Board proposes to amend the definition of item to include an 
electronic image of

[[Page 34087]]

a paper item, together with information describing that item, that a 
Reserve Bank handles pursuant to an operating circular. This type of 
item would be defined as an electronic item.
    C. Paying bank. Regulation J currently defines a bank whose routing 
number appears on the check ``in magnetic characters or fractional 
form'' as a paying bank. The electronic items that would be covered by 
the proposed expansion of the definition of item would contain MICR-
line information but would not contain characters encoded in magnetic 
ink. The Board therefore proposes to replace the reference to 
``magnetic characters'' with a reference to the information in the 
item's magnetic ink character recognition (MICR) line or in fractional 
form on the front of the check, or in the MICR-line information that 
accompanies an electronic item.
    D. Sender. To further clarify the entities that are senders, the 
Board proposes to add Federal Reserve Banks and U.S. branches and 
agencies of foreign banks as entities listed in that definition. The 
Board also proposes technical amendments to streamline the definition.
    E. Undefined terms. The Board proposes to reformat existing 
language explaining that terms that are not directly defined in Sec.  
210.2 of Regulation J have the meanings set forth in Regulation CC or 
the UCC and to add a cross-reference to new subpart D of Regulation CC. 
This reformatted language would be in a new paragraph (s).

Section 210.3 General Provisions

    The Board proposes to amend paragraph (b) of this section to state 
explicitly that new subpart D of Regulation CC would be binding on all 
parties interested in an item handled by a Reserve Bank. Although 
subpart D would apply even in the absence of this reference, the Board 
believes that an explicit statement in Regulation J promotes clarity.

Section 210.4 Sending Items to Reserve Banks

    Section 210.4(b) lists the parties that are deemed to have handled 
an item that is sent to a Reserve Bank in the order in which they are 
deemed to have handled it. The Board proposes to add at the end of that 
list the Administrative Reserve Bank of the bank to which a Reserve 
Bank sends or presents the item. This addition clarifies the chain of 
parties deemed to have handled an item.

Section 210.5 Sender's Agreement; Recovery by Reserve Bank

    In paragraph (a), the Board proposes adding to the list of 
warranties made to each Reserve Bank a new warranty that the item bears 
all indorsements applied by previous parties that handled the item for 
forward collection or return. This amendment would facilitate 
compliance with the requirement under the Check 21 Act that a 
reconverting bank preserve all previously-applied indorsements. This 
new warranty does not require senders to obtain missing indorsements, 
but rather parallels the Check 21 Act's requirement that a reconverting 
bank preserve the indorsements applied by all parties that previously 
handled a check in any form. The proposed new warranty would be of 
particular relevance for items that have been indorsed in electronic 
form, because a Reserve Bank (or other collecting bank) that handles 
such an item might convert it to a substitute check and thus have a 
duty under the Check 21 Act to preserve all previously-applied 
indorsements.
    The Board also proposes that paragraph (a) explicitly acknowledge 
the warranties and indemnities that a sending bank makes under 
Regulation CC subject to the terms of that regulation. Proposed 
paragraph (a)(3)(i) would list the settlement, encoding, and offset 
warranties in Sec.  229.34(c)(2)-(4) of Regulation CC. Proposed 
paragraph (a)(3)(ii) would acknowledge explicitly that a sender makes 
the warranties and indemnity specified in subpart D of Regulation CC 
(which implements the Check 21 Act) when sending an item in the form of 
a substitute check or a paper or electronic representation of a 
substitute check. Although senders would make each of these warranties 
as provided in Regulation CC even if the warranties were not listed in 
paragraph (a), the Board believes that the meaning of the rule is 
clearer if paragraph (a) specifically acknowledges these warranties. 
These changes also conform the list of senders' warranties in Sec.  
210.5(a) of Regulation J to the list of the Reserve Banks' warranties 
in Sec.  210.6(b) of the regulation.
    Proposed paragraph (a) would supplement the warranties that are 
given under other law by including new warranties that a sender would 
give only under Regulation J to each Reserve Bank that handles an 
electronic item that is not a representation of a substitute check and 
thus is not subject to the Check 21 Act warranties. The Reserve Banks 
anticipate that most electronic items they will receive will fall into 
this category and that the Reserve Banks or subsequent parties might 
later use such electronic items to create substitute checks. A 
recipient of an electronic item that is not subject to the Check 21 Act 
(i.e., an electronic item created directly from an original check) 
would not receive the Check 21 Act warranties from the sending bank. 
However, that recipient would itself make the Check 21 Act warranties 
if it subsequently used the electronic item to create a substitute 
check that it transferred for value. The proposed new warranties in 
Regulation J thus are designed to allow the recipient of an electronic 
item to pass back liabilities incurred under the Check 21 Act but for 
which the recipient did not receive corresponding Check 21 Act 
protections. The proposed new electronic item warranties therefore 
closely track the substitute check warranties contained in the Check 21 
Act.
    The amendments described in the analysis of Sec.  210.6(b) would 
explicitly acknowledge the Reserve Banks' responsibility for the new 
Check 21 Act indemnity to be implemented in Sec.  229.53 of Regulation 
CC and would add a new indemnity that Reserve Banks would give for 
electronic items that are not subject Sec.  229.53. The Board therefore 
proposes to add two new paragraphs to newly-redesignated Sec.  
210.5(a)(5) that would allow the Reserve Bank in certain circumstances 
to pass back to the sender losses the Reserve Bank incurs in connection 
with these indemnities. Specifically, new Sec.  210.5(a)(5)(iv) would 
require a sender who sent a substitute check (or a paper or electronic 
representation of a substitute check) to indemnify the Reserve Bank for 
losses that the Reserve Bank incurred as a result of an indemnity that 
it made under Sec. Sec.  210.6(b)(2) and 229.53. Similarly, new Sec.  
210.5(a)(5)(v) would require a sender who sent an electronic item to 
indemnify the Reserve Bank for losses that the Reserve Bank incurred 
because it made an indemnity for that electronic item under Sec.  
210.6(b)(3). The Board also proposes that newly-redesignated Sec.  
210.5(c)(3) (currently Sec.  210.5(b)(3)) specify that the Reserve 
Banks' recovery rights under newly-redesignated Sec.  210.5(c) extend 
to any indemnity that the Reserve Banks provide under Sec.  210.6(b).
    An undesignated phrase after existing paragraph (a)(2) currently 
specifies that the warranties listed in paragraph (a) do not limit 
warranties that a sender gives under other law. The Board proposes to 
move this text to a new paragraph (b) and to amend the text to cover 
both warranties and indemnities provided

[[Page 34088]]

under other law. The remaining paragraphs of Sec.  210.5 would be 
redesignated, and where necessary cross-references would be amended, to 
reflect the inclusion of new paragraph (b).

Section 210.6 Status, Warranties, and Liability of Reserve Bank

    The Board proposes to amend Sec.  210.6 regarding the warranty and 
other liabilities of Reserve Banks for items that they handle.
    The Board proposes to amend paragraph (a) to acknowledge explicitly 
the Reserve Banks' status and liability when handling substitute checks 
under the Check 21 Act and subpart D of Regulation CC. The Board also 
proposes to redesignate existing text from paragraph (b)(2) regarding 
the limitations on a Reserve Bank's liability as a new paragraph (c) 
and to redesignate existing paragraph (c) as paragraph (d). 
Redesignated paragraph (d) would be amended to include a one-year 
statute of limitations for claims relating to the new supplemental 
warranty in paragraph (b)(4) (which specifies warranties made when 
handling electronic items that are not subject to the Check 21 Act or 
Regulation CC) and to specify that paragraph (d) does not extend the 
time for bringing claims under subpart D of Regulation CC.
    The Board proposes to amend paragraph (b) along the same lines as 
Sec.  210.5(a) so that the protections that the Reserve Banks give when 
they handle an item for forward collection parallel the protections 
that the Reserve Banks receive from senders. Specifically, the Board 
proposes to add a new paragraph (b)(1)(iii), to provide that Reserve 
Banks handling an item for forward collection would make the same 
warranty regarding preservation of previously-applied endorsements that 
a sender would give under proposed Sec.  210.5(a)(2)(iii). Similarly, 
paragraph (b)(2) would parallel Sec.  210.5(a)(3) by explicitly 
acknowledging the Reserve Banks' responsibilities under subparts C and 
D of Regulation CC, including the warranties and indemnity that Reserve 
Banks would give when handling a substitute check or a paper or 
electronic representation of a substitute check. Paragraph (b)(3) would 
parallel the new warranties in Sec.  210.5(a)(4) that flow with the 
transfer of an electronic item that is not subject to the Regulation CC 
warranties. Paragraph (b)(3) also would add a new indemnity that 
Reserve Banks would make if an electronic item they sent later were 
converted to a substitute check that was subject to an indemnity claim 
under Sec.  229.53 of Regulation CC.

Section 210.12 Return of Cash Items and Handling of Returned Checks

    The Board proposes to amend paragraph (b) to parallel the proposed 
amendments to Sec.  210.4 by including the Administrative Reserve Bank 
of the bank to which a Reserve Bank returns a check in the chain of 
parties deemed to have handled a check. Proposed amendments to 
paragraphs (c) and (d) parallel the proposed amendments to Sec. Sec.  
210.5 and 210.6 by making the return warranties and indemnities given 
by paying and returning banks and Reserve Banks correspond to the 
forward-side warranties given by senders and Reserve Banks, 
respectively, and by including a returning or paying bank's 
responsibility for indemnifying a Reserve Bank for indemnities it pays 
for returned checks. The proposed amendments also would move existing 
language from Sec.  210.12(c)(2) about preservation of other warranties 
and liabilities to a separate paragraph (d), paralleling the creation 
of new Sec.  210.5(b) with respect to preservation of forward 
warranties and indemnities.

Regulatory Flexibility Act

    In accordance with section 3 of the Regulatory Flexibility Act (12 
U.S.C. 605) and for the reasons stated below, the Board certifies that 
the proposed amendments to Regulation J if promulgated would not have a 
significant economic impact on a substantial number of small entities.
    Under section 3 of the Small Business Act, as implemented at 13 CFR 
part 121, subpart A, a bank is considered a ``small entity'' or ``small 
bank'' if it has $150 million or less in assets. Based on December 2003 
call report data, the Board estimates that there are approximately 
14,335 depository institutions with assets of $150 million or less. The 
proposed amendments simply would provide that each bank that sends an 
electronic item to a Reserve Bank for forward collection or return 
would make warranties and an indemnity for that item. The proposed new 
warranties and indemnity in Regulation J are similar to the warranties 
and indemnity that apply to substitute checks under the Check 21 Act. 
The proposed amendments would apply to all banks, regardless of size, 
that collect checks through a Federal Reserve Bank but the Board does 
not expect these amendments to impose economic costs on any such bank.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR 1320 Appendix A.1), the Board has reviewed the final rule 
under the authority delegated to the Board by the Office of Management 
and Budget. The final rule contains no new collections of information 
and proposes no substantive changes to existing collections of 
information pursuant to the Paperwork Reduction Act.

12 CFR Chapter II

List of Subjects in 12 CFR Part 210

    Banks, banking.

Authority and Issuance

    For the reasons set forth in the preamble, the Board proposes to 
amend 12 CFR part 210 to read as follows:

PART 210--COLLECTION OF CHECKS AND OTHER ITEMS BY FEDERAL RESERVE 
BANKS AND FUNDS TRANSFERS THROUGH FEDWIRE (REGULATION J)

    1. The authority citation for part 210 is revised to read as 
follows:

    Authority: 12 U.S.C. 248(i), (j), and (o), 342, 360, 464, 4001-
4010, and 5001-5018.


Sec.  210.1  [Amended]

    2. In Sec.  210.1, add the phrase ``the Check Clearing for the 21st 
Century Act (12 U.S.C. 5001-5018);'' between the phrases ``the 
Expedited Funds Availability Act (12 U.S.C. 4001 et seq.);'' and ``and 
other laws'' in the first sentence.


Sec.  210.2  [Amended]

    3. In Sec.  210.2(h), in the second sentence remove the phrase 
``subpart C'' and add the phrase ``subparts C and D'' in its place.
    4. In Sec.  210.2(i):
    A. Redesignate paragraphs (i)(1), (i)(2), and (i)(3), as paragraphs 
(i)(1)(i), (i)(1)(ii), and (i)(1)(iii), respectively, and designate the 
text after the phrase ``Item means'' as paragraph (i)(1);
    B. Remove the period at the end of newly-redesignated paragraph 
(i)(1)(iii) and add a semicolon followed by the word ``and'' in its 
place; and
    C. After newly-redesignated paragraph (i)(1)(iii), add a new 
paragraph (i)(2) to read as follows:
* * * * *
    (i) Item means--
* * * * *
    (2) An electronic image of an item described in paragraph (i)(1) of 
this section, together with information describing that item, that a 
Reserve Bank handles pursuant to an operating

[[Page 34089]]

circular. This type of item is referred to in this subpart as an 
electronic item.
* * * * *
    5. In Sec.  210.2(i), after paragraph (2), designate the 
undesignated paragraph with the word ``Note'' followed by a colon.
    6. In Sec.  210.2(l), revise paragraph (3) to read as follows:
* * * * *
    (l) Paying bank means--
* * * * *
    (3) The bank whose routing number appears on a check in the MICR 
line or in fractional form (or in the MICR-line information that 
accompanies an electronic item) and to which the check is sent for 
payment or collection.
* * * * *
    7. Revise Sec.  210.2(n) to read as follows:
* * * * *
    (n) Sender means any of the following entities that sends an item 
to a Reserve Bank for forward collection--
    (1) A depository institution, as defined in section 19(b) of the 
Federal Reserve Act (12 U.S.C. 461(b));
    (2) A clearing institution, defined as--
    (i) An institution that is not a depository institution but that 
maintains with a Reserve Bank the balance referred to in the first 
paragraph of section 13 of the Federal Reserve Act (12 U.S.C. 342); or
    (ii) A corporation that maintains an account with a Reserve Bank in 
conformity with Sec.  211.4 of this chapter (Regulation K);
    (3) Another Reserve Bank;
    (4) An international organization for which a Reserve Bank is 
empowered to act as depositary or fiscal agent and maintains an 
account;
    (5) A foreign correspondent, defined as any of the following 
entities for which a Reserve Bank maintains an account: A foreign bank 
or banker, a foreign state as defined in section 25(B) of the Federal 
Reserve Act (12 U.S.C. 632), or a foreign correspondent or agency 
referred to in section 14(e) of that act (12 U.S.C. 358); or
    (6) A branch or agency of a foreign bank maintaining reserves under 
section 7 of the International Banking Act of 1978 (12 U.S.C. 347d, 
3105).
* * * * *
    8. Remove the undesignated paragraph after Sec.  210.2(o).
    9. In Sec.  210.2, add a new paragraphs (s) to read as follows:
* * * * *
    (s) Unless the context otherwise requires--
    (1) The terms not defined herein have the meanings set forth in 
Sec.  229.2 of this chapter applicable to part 229, subpart C or D of 
this chapter, as appropriate; and
    (2) The terms not defined herein or in Sec.  229.2 of this chapter 
have the meanings set forth in the Uniform Commercial Code.


Sec.  210.3  [Amended]

    10. In Sec.  210.3(b) remove the phrase ``subpart C'' and add the 
phrase ``subparts C and D'' in its place; and


Sec.  210.4  [Amended]

    11. In Sec.  210.4(b)(1), remove the word ``and'' at the end of 
paragraph (iii), remove the period and add a semicolon followed by the 
word ``and'' at the end of paragraph (iv), and add a new paragraph (v) 
to read as follows:
    (b) Handling of items.
    (1) * * *
    (v) The Administrative Reserve Bank of the bank to which a Reserve 
Bank sends or presents the item.
* * * * *


Sec.  210.5  [Amended]

    12. In Sec.  210.5(a):
    A. Remove the word ``and'' at the end of paragraph (a)(2)(i);
    B. Redesignate paragraph (3) as paragraph (5);
    C. Revise paragraph (a)(2)(ii) and add new paragraphs (a)(2)(iii) 
through (a)(4) to read as follows:
    (a) Sender's agreement. * * *
    (2) * * *
    (ii) The item has not been altered; and
    (iii) The item bears all indorsements applied by parties that 
previously handled the item for forward collection or return;
    (3) Subject to the terms of part 229 of this chapter--
    (i) Makes the applicable warranties set forth in Sec.  229.34(c) of 
this chapter; and
    (ii) If the item is a substitute check or a paper or electronic 
representation of a substitute check, makes the warranties and 
indemnity set forth in Sec. Sec.  229.52 and 229.53 of this chapter;
    (4) If the item is an electronic item that is not a representation 
of a substitute check, warrants to each Reserve Bank handling the item 
that--
    (i) The item accurately represents all of the information on the 
front and back of the original check as of the time that the original 
check was truncated; replicates the MICR line of the original check, 
except for any changes required or permitted by part 229, subpart D of 
this chapter for substitute checks; and meets the technical 
requirements for sending electronic items to a Reserve Bank as set 
forth in the operating circulars; and
    (ii) No party will receive a transfer, presentment, or return of, 
or otherwise be charged for, the electronic item, the original item, or 
a paper or electronic representation of the electronic item such that 
the party will be asked to make payment based on an item it already has 
paid; and
* * * * *
    13. In newly-redesignated Sec.  210.5(a)(5):
    A. In the first sentence remove the word ``of'' between the words 
``loss'' and ``expense'' and add the word ``or'' in its place; and
    B. Remove the word ``or'' between paragraphs (ii) and (iii);
    C. Remove the period at the end of paragraph (iii) and add a 
semicolon in its place; and
    D. Add two new paragraphs (5)(iv) and 5(v) to read as follows:
* * * * *
    (iv) Any indemnity made by the Reserve Bank under Sec.  229.53 of 
this chapter, as described in Sec.  210.6(b)(2)(ii) of this subpart, if 
the sender sent a substitute check or a paper or electronic 
representation of a substitute check to the Reserve Bank; and
    (v) Any indemnity made the Reserve Bank under Sec.  210.6(b)(3)(ii) 
of this subpart, if the sender sent an electronic item that was not a 
representation of a substitute check to the Reserve Bank.
* * * * *
    14. In Sec.  210.5, redesignate paragraphs (b), (c), and (d) as 
paragraphs (c), (d), and (e), respectively, and add a new paragraph (b) 
to read as follows:
* * * * *
    (b) Preservation of other warranties and indemnities. Nothing in 
paragraph (a) of this section limits any warranty or indemnity by a 
sender (or a party that handled an item prior to the sender) arising 
under state law or regulation or other federal law or regulation.
* * * * *
    15. In paragraph (3) of newly-redesignated Sec.  210.5(c), add the 
phrase ``or indemnity'' between the words ``warranty'' and ``made.''
    16. In newly-redesignated Sec.  210.5(d):
    A. In paragraph (1) remove the phrase ``paragraph (b)'' and add the 
phrase ``paragraph (c)'' in its place;
    B. Designate the last sentence of paragraph (d)(2) as newly 
designated paragraph (d)(3);
    C. In paragraph (d)(2) and newly-designated paragraph (d)(3), 
remove the phrase ``paragraph (c)'' wherever it appears and add the 
phrase ``paragraph (d)'' in its place; and
    D. In newly-designated paragraph (d)(3) remove the phrase 
``paragraph (a)(3)'' and add the phrase ``paragraph (a)(5)'' in its 
place.

[[Page 34090]]

Sec.  210.6  [Amended]

    17. In Sec.  210.6(a):
    A. Redesignate paragraph (a)(2) as paragraph (a)(3);
    B. Designate the third sentence of paragraph (a)(1) as paragraph 
(a)(2) and add the heading Limitations on Reserve Bank liability.; and
    C. Redesignate paragraphs (a)(1)(i), (a)(1)(ii), and (a)(i)(iii) as 
paragraphs (a)(2)(i), (a)(2)(ii), and (a)(2)(iii), respectively;
    D. In newly-designated paragraph (a)(2)(iii), remove the phrase 
``subpart C'' and add the phrase ``subparts C and D'' in its place.
    18. Revise Sec.  210.6(b) to read as follows:
* * * * *
    (b) Warranties and liability. The following provisions apply when a 
Reserve Bank presents or sends an item--
    (1) The Reserve Bank warrants to a subsequent collecting bank and 
to the paying bank and any other payor that--
    (i) The Reserve Bank is a person entitled to enforce the item (or 
is authorized to obtain payment of the item on behalf of a person who 
is either entitled to enforce the item or authorized to obtain payment 
on behalf of a person entitled to enforce the item);
    (ii) The item has not been altered; and
    (iii) The item bears all indorsements applied by parties that 
previously handled the item for forward collection or return;
    (2) Subject to the terms of part 229 of this chapter, the Reserve 
Bank--
    (i) Makes the applicable warranties set forth in Sec.  229.34(c) of 
this chapter; and
    (ii) If the item is a substitute check or a paper or electronic 
representation of a substitute check, makes the warranties and 
indemnity set forth in Sec. Sec.  229.52 and 229.53 of this chapter; 
and
    (3) If the item is an electronic item that is not a representation 
of a substitute check, the Reserve Bank--
    (i) Warrants to the bank to which it transfers or presents the item 
that--
    (A) The item accurately represents all of the information on the 
front and back of the original check as of the time that the original 
check was truncated; replicates the MICR line of the original check, 
except for any changes required or permitted by part 229, subpart D of 
this chapter for substitute checks; and meets the technical 
requirements for sending electronic items to a Reserve Bank as set 
forth in the operating circulars; and
    (B) No party will receive a transfer, presentment, or return of, or 
otherwise be charged for, the electronic item, the original item, or a 
paper or electronic representation of the electronic item such that the 
party will be asked to make payment based on an item it already has 
paid; and
    (ii) Agrees to indemnify the bank to which it transfers or presents 
the item for the amount of any losses that the bank incurs under Sec.  
229.53 of this chapter for an indemnity that the bank was required to 
make under Sec.  229.53 in connection with a substitute check later 
created from the electronic item.
* * * * *
    19. In Sec.  210.6, redesignate paragraph (c) as paragraph (d) and 
add a new paragraph (c) to read as follows:
* * * * *
    (c) Limitation on Reserve Bank liability. A Reserve Bank shall not 
have or assume any liability to the paying bank or other payor, except 
as provided in paragraph (b) of this section or for the Reserve Bank's 
own lack of good faith or failure to exercise ordinary care.
* * * * *
    20. Revise newly-redesignated Sec.  210.6(d) to read as follows:
* * * * *
    (d) Time for commencing action against Reserve Bank. (1) A claim 
against a Reserve Bank for lack of good faith or failure to exercise 
ordinary care shall be barred unless the action on the claim is 
commenced within two years after the claim accrues. Such a claim 
accrues on the date when a Reserve Bank's alleged failure to exercise 
ordinary care or to act in good faith first results in damages to the 
claimant.
    (2) A claim that arises under paragraph (b)(3) of this section 
shall be barred unless the action on the claim is commenced within one 
year after the claim accrues. Such a claim accrues as of the date on 
which the claimant first learns, or by which the claimant reasonably 
should have learned, of the facts and circumstances giving rise to the 
claim.
    (3) This paragraph (d) does not lengthen the time limit for claims 
under section 229.38(g) (which include claims for breach of warranty 
under Sec.  229.34 of this chapter) or part 229, subpart D of this 
chapter.


Sec.  210.12  [Amended]

    21. In Sec.  210.12(b)(1), remove the word ``and'' at the end of 
paragraph (iii), remove the period and add a semicolon followed by the 
word ``and'' at the end of paragraph (iv), and add a new paragraph (v) 
to read as follows:
* * * * *
    (b) Handling of returned checks.
    (1) * * *
    (v) The Administrative Reserve Bank of the bank to which a Reserve 
Bank returns the returned check.
* * * * *
    22. In Sec.  210.12(c), redesignate paragraph (c)(3) as paragraph 
(c)(5), redesignate paragraph (c)(2) as paragraph (c)(3), revise newly-
redesignated paragraph (c)(3), and add new paragraphs (c)(2) and (c)(4) 
to read as follows:
* * * * *
    (c) Paying bank's and returning bank's agreement. * * *
    (2) Warrants to each Reserve Bank handling a returned check that 
the returned check bears all indorsements applied by parties that 
previously handled the returned check for forward collection or return;
    (3) Subject to the terms of part 229 of this chapter--
    (i) Makes the applicable warranties set forth in Sec.  229.34 of 
this chapter; and
    (ii) If the returned check is a substitute check or a paper or 
electronic representation of a substitute check, makes the warranties 
and indemnity set forth in Sec. Sec.  229.52 and 229.53 of this 
chapter; and
    (4) If the returned check is an electronic item that is not a 
representation of a substitute check, warrants to each Reserve Bank 
handling the item that--
    (i) The returned check accurately represents all of the information 
on the front and back of the original check as of the time that the 
original check was truncated; replicates the MICR line of the original 
check, except for any changes required or permitted by part 229, 
subpart D of this chapter for substitute checks; and meets the 
technical requirements for sending electronic items to a Reserve Bank 
as set forth in the operating circulars; and
    (ii) No party will receive a transfer, presentment, or return of, 
or otherwise be charged for, the electronic item, the original item, or 
a paper or electronic representation of the electronic item such that 
the party will be asked to make payment based on an item it already has 
paid; and
* * * * *
    23. In newly-redesignated Sec.  210.12(c)(5), revise paragraph 
(iii) and add new paragraphs (5)(iv) and (5)(v) to read as follows:
* * * * *
    (iii) Any warranty made by the Reserve Bank under paragraph (e) of 
this section;
    (iv) Any indemnity made by the Reserve Bank under Sec.  229.53 of 
this chapter, as described in Sec.  210.12(e)(1)(ii) of this subpart, 
if the returned check

[[Page 34091]]

sent to the Reserve Bank was a substitute check or a paper or 
electronic representation of a substitute check; and
    (v) Any indemnity made the Reserve Bank under Sec.  
210.12(e)(1)(iii) of this subpart, if the returned check sent to the 
Reserve Bank was an electronic item that was not a representation of a 
substitute check.
* * * * *
    24. In Sec.  210.12, redesignate paragraphs (d) through (i) as 
paragraphs (e) through (j), respectively, and add a new paragraph (d) 
to read as follows:
* * * * *
    (d) Preservation of other warranties and indemnities. Nothing in 
paragraph (c) of this section limits any warranty or indemnity by a 
returning bank or paying bank (or a party that handled an item prior to 
that bank) arising under state law or regulation or other federal law 
or regulation.
* * * * *
    25. Revise newly-redesignated Sec.  210.12(e) to read as follows:
* * * * *
    (e) Warranties by Reserve Bank. (1) The following provisions apply 
when a Reserve Bank handles a returned check under this subpart--
    (i) The Reserve Bank warrants to the bank to which it sends the 
returned check that the returned check bears all indorsements applied 
by parties that previously handled the returned check for forward 
collection or return;
    (ii) Subject to the terms of part 229 of this chapter, the Reserve 
Bank--
    (A) Makes the returning-bank warranties in Sec.  229.34 of this 
chapter; and
    (B) If the returned check is a substitute check or a paper or 
electronic representation of a substitute check, makes the warranties 
and indemnity set forth in Sec. Sec.  229.52 and 229.53 of this 
chapter; and
    (iii) If the returned check is an electronic item that is not a 
representation of a substitute check, the Reserve Bank--
    (A) Warrants to the bank to which it sends the returned check 
that--
    (1) The item accurately represents all of the information on the 
front and back of the original check as of the time that the original 
check was truncated; replicates the MICR line of the original check, 
except for any changes required or permitted by part 229, subpart D of 
this chapter for substitute checks; and meets the technical 
requirements for sending electronic items to a Reserve Bank as set 
forth in the operating circulars; and
    (2) No party will receive a transfer, presentment, or return of, or 
otherwise be charged for, the electronic item, the original item, or a 
paper or electronic representation of the electronic item such that the 
party will be asked to make payment based on an item it already has 
paid; and
    (B) Agrees to indemnify the bank to which it sends the returned 
check for the amount of any losses that the bank incurs under Sec.  
229.53 of this chapter for an indemnity that the bank was required to 
make under Sec.  229.53 in connection with a substitute check later 
created from the returned check.
    (2) A Reserve Bank shall not have or assume any other liability to 
any person with respect to a returned check except--
    (i) As provided in paragraph (e)(1) of this section;
    (ii) For the Reserve Bank's own lack of good faith or failure to 
exercise ordinary care as provided in subpart C of part 229 of this 
chapter; or
    (iii) As provided in part 229, subpart D of this chapter.
* * * * *
    26. In newly-redesignated Sec.  210.12(f)(3), remove the phrase 
``Any warranty made by the Reserve Bank under 12 CFR 229.34,'' and add 
the phrase ``Any warranty or indemnity made by the Reserve Bank under 
paragraph (e) of this section,'' in its place.
    27. In newly-redesignated Sec.  210.12(g):
    A. In paragraph (g)(1) introductory text, remove the phrase 
``paragraph (d)'' and add the phrase ``paragraph (e)'' in its place; 
and
    B. Designate the last sentence of paragraph (g)(2) as paragraph 
(g)(3);
    C. In paragraph (g)(2) and newly-designated paragraph (g)(3), 
remove the phrase ``paragraph (f)'' wherever it appears and add the 
phrase ``paragraph (g)'' in its place;
    D. In newly-designated paragraph (g)(3), remove the phrase 
``paragraph (c)(3)'' and add the phrase ``paragraph (c)(5)'' in its 
place.


Sec.  210.13  [Amended]

    28. In Sec.  210.13(b), remove the citation ``Sec.  210.9(a)(5)'' 
and add the citation ``Sec.  210.9(b)(5)'' in its place.

    By order of the Board of Governors of the Federal Reserve 
System, June 4, 2004.
Robert deV. Frierson,
Deputy Secretary of the Board.
[FR Doc. 04-13147 Filed 6-17-04; 8:45 am]
BILLING CODE 6210-01-P