(B) Store Gift Cards – these types of cards are commonly known as “closed-loop cards”, and are essentially the same as Gift Certificates, but are reloadable or may be increased in value. The CARD Act specifically defines these cards as electronic promises, plastic cards, or other payment codes or devices that are: (i) redeemable at a single merchant or an affiliated group of merchants that share the same name, mark, or logo; (ii) issued in a specified amount, whether or not that amount may be increased in value or reloaded at the request of the holder; (iii) purchased on a prepaid basis in exchange for payment; and (iv) honored upon presentation by such single merchant or affiliated group of merchants for goods or services.

(C) General-Use Prepaid Cards – commonly referred to as “open-loop cards”, are defined in the CARD Act as cards or other payment codes or devices issued by any person that are: (i) redeemable at multiple, unaffiliated merchants or service providers, or automated teller machines; (ii) issued in a requested amount, whether or not that amount may, at the option of the issuer, be increased in value or reloaded if requested by the holder; (iii) purchased or loaded on a prepaid basis; and (iv) honored, upon presentation, by merchants for goods or services or at automated teller machines.

Exclusions

Gift Certificates, Store Gift Cards, and General-Use Prepaid Cards, do not include an electronic promise, plastic card, or payment code or device that is: (i) used solely for telephone services; (ii) reloadable and not marketed or labeled as a gift card or gift certificate; (iii) a loyalty, award, or promotional gift card, as defined by the Federal Reserve Board; (iv) not marketed to the general public; (v) issued in paper form only (including for tickets and events); or (vi) redeemable solely for admission to events or venues at a particular location or group of affiliated locations, including services or goods obtainable at the event/venue after admission or in conjunction with admission to such events/venues.

Fees

Under the rules to the CARD Act, no person may impose a dormancy, inactivity, or service fee with respect to Gift Certificates, Store Gift Cards, or General-Use Prepaid Cards unless all of the following occur:

1. No Activity for 1 Year – fees are only imposed if there has been no activity for 1 year prior to imposing the fee; and
   
2. 1 Fee Per Month – only 1 fee is imposed per calendar month; and
   
3. Disclosures – disclosures regarding fees must be clearly and conspicuously stated on gift cards, and disclosures must be provided to purchasers before issuance.

The rules additionally prohibit fees for replacing or reissuing an expired Gift Certificate, Store Gift Card, or General-Use Prepaid Card if the remaining funds remain valid. This is to ensure consumers may access and use the underlying funds for a full 5-year period.

Expiration

Expiration dates are also prohibited for Gift Certificates, Store Gift Cards, or General-Use Prepaid Cards except if:

1. Expiration of Funds from Date of Issuance – the expiration date of the funds underlying the Gift Certificate is 5 years or more from the Gift Certificate’s issuance date, or
   
2. Expiration of Funds from Date of Last Load – for Store Gift Cards or General- Use Prepaid Cards, the expiration date of the funds underlying the gift card is 5 years or more after the date of the last load of funds.

Disclosure Requirements

The rules to the CARD Act also require the disclosure of permitted expiration dates and of all other fees, such as initial issuance fees and cash-out fees. These disclosures must be provided on or with the Gift Certificate, Store Gift Card, or General-Use Prepaid Card prior to purchase. Additionally, a toll-free number and, if available, a web site – that a consumer may use to obtain fee information or to order a replacement – must be disclosed on the Gift Certificate, Store Gift Card, or General-Use Prepaid Card.

Information

Check back for future posts on further details of the rules, including posts specific to loyalty, award or promotional gift cards and preemption analysis for state gift cards laws.

Many of the regulatory details expected will emanate from the newly created Consumer Financial Protection Bureau. The Bureau will have independent authority but will be housed within the Federal Reserve system. It will serve as the primary regulator of financial products that reach consumers. Time magazine lists six consumer financial issues the Bureau could address first, including student loans, credit scores, and certain mortgages. However, there will be strong differing opinions on how, when, and in what areas the Bureau should focus its attention.

But before the Bureau can even begin to act, it needs to be created, staffed, and organized. The individual chosen to lead the Bureau out of the gate will have the opportunity to vastly influence the organization, culture, direction, scope and strength of the new regulator. The Washington Post reported today, following similar earlier reports, that Elizabeth Warren has emerged as an early leading candidate for the position. Ms. Warren is a professor at Harvard Law School and chairs the oversight panel created by Congress to monitor the Troubled Asset Relief Program. Consumer protection groups already are strongly supporting her nomination. Others fear, however, that Ms. Warren does not have the organizational experience to lead the newly-created office. Among others with greater institutional experience purportedly being considered for the position are current Assistant Treasury Secretary Michael Barr, and Eugene Kimmelman, a deputy assistant attorney general in the Justice Department's Antitrust Division and former lobbyist for Consumers Union.

Appointment of any of these candidates would send a clear message from the Obama administration that it intends to fully pursue the goal of an active consumer protection regulator. Financial service providers will have an opportunity to voice their concerns and opposition through the Senate confirmation process.

Recaps of the long day and night of negotiations and the final bill are available from Poltico, the Wall Street Journal, and American Banker, among many others.

With regard to certain of the issues we have been following closely here, in the end, auto dealers will be exempt from the purview of the new Consumer Financial Protection Bureau, but payday lenders and other non-bank financial service providers will be subject to the new regulator. In addition, the Federal Reserve will be permitted to cap interchange fees, except for those on cards issued by governments.

The bill includes myriad other important provisions related to mortgage lending, the activities of banks, insurance regulation, corporate governance, and more. The Wall Street Journal provides an overview of some of the “major” provisions. Over the coming weeks and months we will be taking a closer look at certain aspects of the final bill and their implications, for example, increased litigation risk for financial service providers, including merchants and retailers.

Under U.S. rules, bank regulators look to the ratio of a financial institution’s Tier 1 capital to total risk-adjusted assets as a key indicator of financial health. Tier 1 capital, which includes common stock and some preferred stock, serves to cushion banks in the event of potential loss. The language in Senator Collins’ amendment apparently orders federal bank regulators to set minimum leverage and risk-based capital requirements for all banks, implies that trust-preferred securities will no longer be included within the definition of Tier 1 capital, and implies that all banks would need to comply with this new rule immediately. In an interview with the American Banker, however, Senator Collins said that what’s intended is that the new measure would apply only to “systemically important firms,” would be phased in over time, and that the language of the amendment will be changed before the bill is passed to reflect these intentions.

While supporters of the Collins amendment contend that trust-preferred securities are debt and don’t offer much protection when trouble hits, financial institutions who issue these securities stand to have their Tier 1 capital ratios significantly diminished, making them appear less healthy almost overnight. According to Jaret Seiberg of Washington Research Group, a division of Concept Capital, publicly owned bank holding companies’ capital ratios would fall by more than 2 percentage points on average. Some financial institutions have openly criticized the amendment and hope that should the amendment be passed that there would be a transition period before it would be effective.

One possible effect of this amendment being passed is that banks may need to either raise additional capital or divest assets in order to maintain the minimum Tier 1 capital ratio.

We plan to track events related to this amendment.

Scope

Generally, the rules restrict fees, expiration dates, and impose certain disclosure requirements for (1) gift certificates, (2) store gift cards, and (3) general-use prepaid cards, as these terms (collectively, “gift cards”) are defined in the CARD Act. The rules state that the CARD Act’s scope is intended to extend to gift cards that are sold or issued to consumers primarily for personal, family, or household purposes. Gift cards which qualify under the rules as loyalty, award, or promotional gift cards are exempt from the fee and expiration date rules but must still follow strict disclosure requirements.

Exclusions

The rules also provide specific exclusions, meaning none of its provisions apply to gift cards used solely for telephone services, cards that are reloadable and not marketed or labeled as a gift card or certificate, cards not marketed to the general public, cards issued in paper form only, or cards redeemable solely for admission to specific events or venues. Although the rules exclude several categories of gift cards, the exclusions should be interpreted narrowly to ensure that consumers receive the full protection contemplated by the CARD Act.

Preemption

The lingering issue of how the CARD Act should be treated along with the patch-work of state gift card laws that regulate dormancy fees, inactivity charges or fees, service fees, expiration dates, or escheatment is addressed in the rules as well. State laws that provide greater protection for consumers than the CARD Act, are not preempted according to the rules. Because the question of what is meant by “greater protection” is still unclear, the rules provide a mechanism by which parties may request a preemption determination by the Board with respect to a particular state’s escheat law. Due to the ambiguity surrounding state gift card law preemption, gift card issuers and sellers should continue to track or consult legal counsel regarding current state gift card laws and pending legislation in all states.

Information

Check back for future posts on the details of the rules, including posts specific to loyalty, award or promotional gift cards, fee and expiration date restrictions, disclosure requirements, and preemption analysis for state gift cards laws.

Kelley Drye Partner David Ervin contributed to this post. Click here for a post from the Kelley Drye Advertising Group's "Ad Law Access Blog" for further information regarding the Federal Reserve gift card rules.