This section of the FEDERAL REGISTER

contains regulatory documents having general

applicability and legal effect, most of which

are keyed to and codified in the Code of

Federal Regulations, which is published under

50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by

the Superintendent of Documents. Prices of

new books are listed in the first FEDERAL

REGISTER issue of each week.

Rules and Regulations Federal Register

62553

Vol. 69, No. 207

Wednesday, October 27, 2004

1See 69 FR 47290, Aug. 4, 2004. The Reserve 

Banks will amend OC 3 to address the details of 

their new check processing services following the 

Board’s adoption of final amendments to Regulation 

J.

2Regulation CC provides that the warranties and 

indemnity flow with the transfer, presentment, or 

return of a substitute check ‘‘or a paper or electronic 

representation of a substitute check.’’ In this 

preamble, the term ‘‘substitute check’’ includes a 

paper or electronic representation of that substitute 

check, unless the context indicates that the 

reference is to the actual substitute check.

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: Final rule.

SUMMARY: The Board of Governors is 

publishing final amendments to 

Regulation J to provide for the rights 

and obligations of banks and Reserve 

Banks relating to electronic items 

handled by Reserve Banks. These 

amendments ensure that Regulation J 

covers the electronic check processing 

service options that the Reserve Banks 

will offer when the Check Clearing for 

the 21st Century Act takes effect on 

October 28, 2004. The final amendments 

also clarify some existing provisions of 

Regulation J.

DATES: This rule is effective on October 

28, 2004.

FOR FURTHER INFORMATION CONTACT:

Adrianne G. Threatt, Counsel (202–452–

3554), Legal Division; or 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; for users of 

Telecommunication Devices for the Deaf 

(TDD) only, contact 202–263–4869.

SUPPLEMENTARY INFORMATION: 

Background 

Regulation J governs the collection of 

checks and other items by the Reserve 

Banks. Under existing Regulation J, the 

term ‘‘item’’ is understood to mean a 

negotiable instrument in paper form. 

Regulation J includes the warranties and 

indemnities that senders and Reserve 

Banks give for items that are collected 

or returned through the Federal Reserve 

Banks. 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 their losses associated 

with collection and return of items. 

Regulation J 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 persons interested 

in an item handled by a Reserve Bank. 

Although the Reserve Banks in some 

cases handle items electronically today, 

the rights and obligations associated 

with electronic items are not set forth in 

Regulation J but rather are addressed by 

the Reserve Banks’ Operating Circular 

No. 3, ‘‘Collection of Cash Items and 

Returned Checks’’ (OC 3). 

The Check 21 Act and the Board’s 

implementing amendments, contained 

in a new subpart D of Regulation CC, 

take effect on October 28, 2004.1 These 

provisions are designed to facilitate 

banks’ ability to process checks 

electronically. Today, a bank that 

accepts a check for collection must 

collect the original paper check unless 

the bank to which it sends the check has 

agreed to receive the check 

electronically. It is difficult, if not 

impossible, for a bank to obtain 

electronic check exchange agreements 

with all other banks to which it sends 

checks. If the paying bank demands 

presentment of the original check, the 

banks in the collection process for that 

check must process the original check 

even if their agreements with one 

another would allow them to handle the 

check electronically among themselves. 

The Check 21 Act addresses this 

inefficiency by allowing banks to create 

a new negotiable instrument called a 

‘‘substitute check’’ that, when properly 

prepared, is the legal equivalent of the 

original check. Under the Check 21 Act, 

banks can remove the original check 

from the collection process, handle the 

check electronically by agreement, and 

later create a legally equivalent 

substitute check when and where an 

original check is required.

A bank that creates a substitute check 

is known as the ‘‘reconverting bank.’’ 

The reconverting bank makes two new 

warranties and an indemnity designed 

to protect substitute check recipients 

against losses associated with the check 

substitution process. These warranties 

are made, in turn, by each bank that 

subsequently handles the substitute 

check, whether it remains in paper form 

or is converted to electronic form.2

Under this chain of warranties and 

indemnities, losses generally will be 

borne under the Check 21 Act by the 

reconverting bank, although the Act 

contains comparative negligence 

provisions to protect the reconverting 

bank from losses attributable to another 

person’s fault.

The Check 21 Act allocates losses 

only among parties that handle a 

substitute check. However, it is possible 

that the problem giving rise to liability 

under the Check 21 Act was the fault of 

the bank that sent electronic 

information derived directly from the 

original check to the reconverting bank. 

For example, the bank that converted 

the original check to electronic form and 

sent it to the reconverting bank might 

have taken a poor image of the original 

check, which would preclude the 

reconverting bank from creating a 

legally equivalent substitute check and 

cause it to breach a substitute check 

warranty. The Check 21 Act does not by 

its terms give the reconverting bank 

recourse against its sender in that case. 

However, the reconverting bank may, by 

agreement, further allocate losses that it 

incurs under the Check 21 Act. For 

example, a bank that plans to create 

substitute checks could require the bank 

from which it electronically receives the 

original check to warrant the accuracy 

of the image of the original check. 

After the Check 21 Act takes effect on 

October 28, 2004, the Reserve Banks 

will offer a wider variety of electronic 

check processing services, including 

accepting items in electronic form for 

collection and return. In some cases, an 

electronic item received by a Reserve 

62554 Federal Register / Vol. 69, No. 207 / Wednesday, October 27, 2004 / Rules and Regulations 

3 69 FR 34086, June 18, 2004.

4One commenter requested clarification about 

the application of Regulation E to electronic items. 

Because Regulation E explicitly excludes 

transactions originated by check from its coverage, 

an electronic item under Regulation J does not 

include an electronic fund transfer subject to 

Regulation E.

Bank will be an electronic 

representation of a substitute check for 

which the Reserve Banks will receive 

Check 21 Act warranty and indemnity 

protections from the sender and give 

those protections to subsequent 

transferees. However, the Reserve Banks 

anticipate that most of the items that 

they will receive in electronic form will 

be derived directly from the original 

check and thus will not be subject to the 

substitute check warranties and 

indemnity. (Unless specifically 

indicated otherwise, in the remainder of 

this preamble the term ‘‘electronic item’’

refers to an electronic item derived 

directly from the original check and 

does not refer to an electronic 

representation of a substitute check.) A 

Reserve Bank in some cases will use an 

electronic item to create a substitute 

check for which it must make the Check 

21 Act warranties and indemnity. In 

other cases, the Reserve Bank may 

transfer or present the electronic item to 

a subsequent party that creates a 

substitute check. 

Overview of Proposed Rule

The Board in June 2004 published 

proposed amendments to subpart A of 

Regulation J that were designed 

primarily to bring the Reserve Banks’

handling of electronic items within the 

coverage of Regulation J, acknowledge 

the requirements of Regulation CC for 

substitute checks, and add new 

warranties and an indemnity that would 

apply when a sender sends an electronic 

item that is not subject to subpart D 

Regulation CC.3 The proposed 

supplemental warranties and indemnity 

were intended to allow a recipient of an 

electronic item to pass back subsequent 

Check 21-related liability to the sender 

of that item where appropriate. The 

proposed supplemental warranties and 

indemnity therefore closely tracked the 

warranties and indemnity in subpart D 

of Regulation CC.

The other proposed amendments 

generally were technical in nature, such 

as supplementing existing definitions in 

Regulation J to correspond to 

definitional changes in Regulation CC 

and reorganizing and revising some 

existing regulatory text for greater 

clarity. 

Overview of Comments on the Proposed 

Rule 

The Board received comments on the 

proposed rule from 41 commenters, 

including 32 depository institutions and 

organizations representing depository 

institutions, six consumers and 

consumer groups, and three other 

organizations. The vast majority of 

commenters agreed that it was 

appropriate for Regulation J to contain 

a Check 21-like liability structure for 

electronic items that would allow 

Reserve Banks and other recipients of 

such items to pass back liabilities 

subsequently incurred under the Check 

21 Act. However, commenters expressed 

concerns about specific aspects of the 

Board’s proposed liability structure and 

made suggestions for how the Board 

could make that structure more 

equitable. Commenters also encouraged 

the Board to clarify that the new 

supplemental warranties and indemnity 

for electronic items would not alter the 

liability structure for substitute checks 

in the Check 21 Act and subpart D of 

Regulation CC. Specific substantive 

comments are discussed in more detail 

in the Section-by-Section Analysis. 

Overview of the Board’s Final Rule 

The Board’s final rule is similar to the 

rule that the Board proposed for 

comment. However, the Board has made 

a number of clarifying changes in 

response to the comments received and 

its own further analysis. These changes 

include adjustments to the definition of 

electronic item and to the liability 

structure applicable to an electronic 

item. These changes also state more 

directly that Regulation J does not alter 

the liability structure for substitute 

checks and paper and electronic 

representations of substitute checks set 

forth in Regulation CC. Moreover, the 

final rule provides that a sender of an 

electronic item makes the Uniform 

Commercial Code (U.C.C.) transfer 

warranties for an electronic item as if it 

were an item subject to the U.C.C. and 

makes the warranties of § 229.34 of 

Regulation CC as if the electronic item 

were a check subject to that section. 

Section-by-Section Analysis 

This section-by-section analysis 

focuses on the provisions of the existing 

or proposed rule that the Board changed 

or that were the subject of comments or 

the Board’s own further analysis. For all 

other provisions, the Board’s reasoning 

in the section-by-section analysis of the 

Board’s proposed rule is incorporated 

by reference. 

Section 210.2 Definitions 

A. In General. One commenter 

suggested that the final rule should use 

the terms ‘‘person’’ and ‘‘party’’ in a 

manner consistent with the U.C.C.’s 

usage of those terms. The Board agrees 

that Regulation J’s word usage should be 

consistent with the U.C.C. and has made 

revisions accordingly. 

Some commenters asked the Board to 

clarify that when Regulation J uses the 

term ‘‘handle’’ with respect to a 

substitute check, that term refers to a 

transfer, presentment, or return of a 

substitute check. These commenters 

sought clarification that by ‘‘handling’’

a substitute check under Regulation J, 

the sender would make the substitute 

check warranties and indemnity 

described in subpart D of Regulation CC. 

Regulation J generally uses the term 

‘‘handle’’ to refer to a transfer, 

presentment, or return, as the context 

requires. However, the substitute check 

warranties and indemnity are made 

directly under Regulation CC according 

to the terms of that regulation, which 

Regulation J does not alter. The Board’s 

amendments to §§ 210.5 and 210.6, 

which are discussed in detail in the 

analysis of those sections, further clarify 

the interaction between Regulation CC 

and Regulation J. 

B. Item and electronic item. To bring 

electronic items under the coverage of 

Regulation J, the Board proposed to 

amend Regulation J’s definition of the 

term ‘‘item’’ to include an electronic 

item. Some commenters requested that 

the Board ensure that its definition of 

the term ‘‘item’’ would not affect the 

U.C.C.’s definition of that term. All the 

definitions in § 210.2 of Regulation J are 

prefaced by the phrase ‘‘as used in this 

subpart’’ and do not apply to any other 

law or regulation. Thus, the 

modification of the definition of the 

term ‘‘item’’ for purposes of Regulation 

J does not alter the meaning of that term 

under the U.C.C or the meaning of the 

term ‘‘check’’ under Regulation CC.4

The proposed rule stated that an 

electronic image of a paper item 

‘‘together with information describing 

that item’’ was an electronic item 

(emphasis added). The Reserve Banks in 

some cases will handle in separate files 

the image portion of an electronic item 

and the information portion of the item, 

which would include a record of the 

magnetic ink character recognition 

(MICR) line data from the paper item 

and of any indorsements applied to the 

item electronically. The final rule 

therefore changes the phrase ‘‘together 

with’’ to ‘‘and.’’ The Board also has 

amended the electronic item definition 

so that electronic check-related 

information will not constitute an 

electronic item unless it is the type of 

electronic file that a Reserve Bank has 

Federal Register / Vol. 69, No. 207 / Wednesday, October 27, 2004 / Rules and Regulations 62555

5See 69 FR 47290, Aug. 4, 2004, at 47310 and 

47318.

agreed to handle as an item. This 

revision addresses the fact that some 

check-related information that the 

Reserve Banks handle electronically is 

for information purposes only and is not 

intended for collection as an item or 

reconversion to a substitute check. 

Section 210.3 General Provisions 

Some commenters recommended that 

the Board clarify in § 210.3(f) that 

nothing in Regulation J alters the 

liabilities of persons interested in a 

substitute check or a paper or electronic 

representation of a substitute check, as 

established by the Check 21 Act and 

subpart D of Regulation CC. As 

discussed in more detail in the analysis 

of §§ 210.5 and 210.6, the amendments 

to Regulation J are not intended to alter 

the application of the liability 

provisions of subpart D of Regulation 

CC. Although the Board has not 

amended § 210.3 as suggested, the final 

rule makes the clarification requested by 

commenters in several other places by 

indicating that Reserve Banks can be 

held liable under subpart D (see, e.g.,

§§ 210.6(a)(2)(iii), 210.6(c), 

210.12(e)(2)(iii)), by specifically 

acknowledging the applicability of 

Regulation CC to items collected 

through Reserve Banks (see, e.g.,

§§ 210.5(a)(5)(i)(C), 210.5(b), 

210.12(c)(5)(i)(C), and 210.12(d)), and by 

stating that nothing in Regulation J 

alters the liability that senders of 

substitute checks (or representations 

thereof) bear under subpart D (see, e.g.,

§§ 210.5(a)(5)(ii)(B), 210.12(c)(5)(ii)(B)). 

Section 210.4 Sending Items to 

Reserve Banks 

The Board proposed to amend 

§ 210.4(b)(1) to clarify that the 

Administrative Reserve Bank of the 

paying bank was deemed to have 

handled an item sent to a Reserve Bank 

for collection. On further reflection, the 

Board has deemed that this clarification 

is not necessary. 

Section 210.5 Sender’s Agreement; 

Recovery by Reserve Bank; Section 

210.6 Status, Warranties and Liability 

of Reserve Bank 

A. Addition of U.C.C. transfer 

warranties and Regulation CC § 229.34 

warranties for all electronic items. The 

U.C.C. generally is understood to apply 

to items in paper form, although it 

allows a paying bank to agree to receive 

electronic presentment of an item. 

When presentment is made 

electronically by agreement, U.C.C. 4–

110 treats the presentment notice as an 

item or a check as those terms are 

defined in the U.C.C., and the 

presenting bank therefore makes the 

presentment warranties in U.C.C. 4–208 

to the paying bank. However, electronic 

items as defined in Regulation J that are 

handled for collection rather than 

presentment might not be items or 

checks under the U.C.C. and are not 

checks under Regulation CC. As a result, 

electronic items sent for collection 

might not be subject to the transfer 

warranties in U.C.C. 4–207 and are not 

subject the check collection warranties 

in § 229.34(c) of Regulation CC.

To ensure a full chain of U.C.C. 

transfer warranties and Regulation CC 

§ 229.34(c) warranties for an item that a 

Reserve Bank receives or sends in 

electronic form, the Board’s final rule 

adds a paragraph to § 210.5(a) that 

provides that by sending an electronic 

item a sender makes all the warranties 

set forth in and subject to the terms of 

U.C.C. 4–207 as if the electronic item 

were an item subject to the U.C.C. and 

makes the warranties set forth in 

§ 229.34(c) of Regulation CC as if the 

electronic item were a check subject to 

that section. Section 210.6(b) contains 

corresponding Reserve Bank warranties. 

These new warranties apply to all 

electronic items, regardless of whether 

they are derived directly from an 

original check or from a substitute 

check. Because senders and Reserve 

Banks must make these new warranties 

for an electronic item subject to the 

terms of U.C.C. 4–207 and § 229.34(c) of 

Regulation CC, they must make these 

warranties to all the parties described in 

U.C.C. 4–207 and § 229.34(c) of 

Regulation CC. 

B. Content of supplemental warranties 

for electronic items that are not 

representations of substitute checks.

Under proposed § 210.5(a)(4)(i) and 

§ 210.6(b)(3)(i), the sender of an 

electronic item would warrant, among 

other things, that 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’’ and ‘‘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.’’ Several commenters 

expressed concern about the use of the 

word ‘‘replicate’’ when describing the 

MICR-line content portion of the 

warranty. These commenters thought 

that the warranty should distinguish 

more clearly between the MICR line that 

appears in the image of the front of the 

original check and the separate MICRline information that must accompany 

that image. These commenters also 

noted that the word ‘‘replicate’’ might 

not adequately convey the idea that, 

when creating the electronic item, the 

truncating bank would transfer the 

MICR-line information that appeared on 

the original check to a different format. 

Several commenters concerned with 

the MICR-line component of the 

warranty also suggested that a sender of 

an electronic item should warrant that 

the electronic item contains a record of 

the MICR line as it appeared on the 

original check at the time of truncation. 

This suggestion, however, would mean 

that if the check contained a MICR-line 

strip that omitted information 

previously encoded on the original 

check, only the information contained 

on the strip would be needed to satisfy 

the warranty. These comments were 

submitted prior to the Board’s issuance 

of the final rule amending Regulation 

CC to implement the Check 21 Act, 

which requires the substitute check to 

contain information in all fields of the 

MICR-line that were encoded on the 

original check prior to truncation.5 The 

purpose of the MICR-line content 

warranty for an electronic item derived 

directly from an original check is to 

ensure that the electronic item contains 

all the information necessary for the 

recipient to create a substitute check 

that is the legal equivalent of the 

original check. The Board therefore 

believes that it is appropriate for a bank 

to warrant that electronic item contains 

all the information required for a 

substitute check.

To address the foregoing issues with 

respect to the MICR line portion of the 

warranties made for electronic items, 

§§ 210.5(a)(4)(i) and 210.6(b)(3)(i) of the 

final rule state that the sender warrants 

that ‘‘the electronic image portion of 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 is truncated’’ and ‘‘the 

information portion of the item contains 

a record of all MICR-line information 

required for a substitute check under 

§ 229.2(aaa) of this chapter.’’

C. Scope of recipients of warranties 

and indemnity for electronic items.

Several commenters expressed concern 

that a Reserve Bank makes the 

warranties in existing and proposed 

§ 210.6(b)(1) to a subsequent collecting 

bank, the paying bank, and any other 

payor, yet would make the new 

warranties and indemnity for electronic 

items in proposed § 210.6(b)(3) only to 

the bank to which the Reserve Bank 

transfers or presents the item. The Board 

notes that the scope of the supplemental 

warranties given by senders to Reserve 

Banks under § 210.5(a)(4) of the final 

rule is similarly limited. Commenters 

opined that the Reserve Banks should 

62556 Federal Register / Vol. 69, No. 207 / Wednesday, October 27, 2004 / Rules and Regulations 

6The supplemental warranties in Regulation J 

that apply the U.C.C. 4–207 warranties and 

Regulation CC § 229.34(c) warranties to electronic 

items are made to all the parties listed in the U.C.C. 

and § 229.34(c) of Regulation CC, respectively, 

which includes all subsequent collecting banks. 

The broader warrantee scope is appropriate for 

these supplemental warranties because they are 

designed to ensure that the existing U.C.C. and 

Regulation CC warranties continue to flow to all 

warrantees listed in those provisions regardless of 

whether the check changes form.

7One commenter suggested that a Reserve Bank 

should indemnify its transferee for losses associated 

with an electronic item that is never reconverted 

into a substitute check. However, the purpose of the 

new warranties and indemnity for electronic items 

in Regulation J is to allocate losses incurred when 

an electronic item that is not subject to the Check 

21 Act is used to create a substitute check.

8Although the warranties and indemnity in 

§§ 229.52 and 229.53 are not by their terms faultbased, the amount for which an indemnifying bank 

ultimately is liable is governed by the comparative 

negligence provisions of §§ 229.53(b)(2) and 

229.56(a)(3).

9A sender that designates certain original checks 

for accelerated processing could, for example, by 

the terms of an operating circular agree to 

indemnify the Reserve Bank for subsequent losses 

under subpart D of Regulation CC.

10Some commenters suggested that the sender of 

a substitute check should be required to indemnify 

a Reserve Bank only if the Reserve Bank 

subsequently transferred a substitute check. The 

Board notes that the loss allocation for substitute 

checks in §§ 229.52 and 229.53 of Regulation CC 

provide that, once a substitute check is created, the 

warranties and indemnity flow with that item and 

with any paper or electronic representation of it.

make the supplemental warranties and 

indemnity in § 210.6(b)(3) to the same 

parties that receive the warranties in 

§ 210.6(b)(1). 

Section 210.6(b)(1) generally restates 

existing warranties that Reserve Banks 

make under the U.C.C., which by the 

terms of that law flow to subsequent 

banks in the collection process. 

Proposed § 210.6(b)(3), by contrast, 

contains new warranties and an 

indemnity that Reserve Banks would 

not otherwise make under the U.C.C. or 

other law. The Board has retained the 

more limited scope of warrantees that 

receive the supplemental warranties for 

electronic items in § 210.6(b)(3).6 A 

person that receives an electronic item 

derived directly from an original check 

from a person other than a Reserve Bank 

can further protect itself by an 

agreement with its sender.

D. Scope of sender and Reserve Bank 

warranties and indemnity for substitute 

checks and electronic items. To clarify 

the full range of warranties and 

indemnities that apply to items 

collected by Reserve Banks, the 

proposed rule listed the check 

collection warranties in § 229.34(c) of 

Regulation CC and the substitute check 

warranties and indemnity in subpart D 

of Regulation CC. The proposed 

amendments did not list other liabilityrelated provisions of Regulation CC, 

such as the general liability provision 

and the interbank expedited recredit 

procedure that apply to substitute 

checks. Several commenters indicated 

that having a separate regulatory list of 

warranties and indemnities in 

Regulation J could cause confusion 

about how Regulation CC applies to 

checks handled by Reserve Banks or 

could suggest that the substitute checkrelated liability provisions that were not 

listed would not apply at all. 

Many commenters expressed concern 

that proposed § 210.5(a)(5)(iv)-(v), by 

which the sender would agree to 

indemnify the Reserve Bank for losses 

associated with substitute checks (and 

representations thereof) and electronic 

items, respectively, inappropriately 

would allow a Reserve Bank to pass 

back losses for which the Reserve Bank 

was responsible. Commenters 

particularly were concerned that a 

Reserve Bank should not be allowed to 

pass back to a sender any losses that 

were attributable to the Reserve Bank’s 

fault. The Board believes that the 

existing liability provisions of 

Regulation J, which hold a Reserve Bank 

liable for its own failure to use ordinary 

care, would have prevented this result. 

However, the Board notes that 

§ 210.6(b)(3)(ii) of the proposed rule was 

overbroad because it would have 

required a Reserve Bank to indemnify 

the recipient for all its losses regardless 

of the recipient’s fault.

Some of the commenters that were 

concerned about the equity of the 

liability structure in the proposed 

amendments suggested that a sender 

should not be liable for losses associated 

with electronic items that were later 

used to create substitute checks unless 

the sender breached one of the new 

warranties in Regulation J. Other 

commenters thought that any loss 

attributable to a problem with an 

electronic item should be passed back to 

the person that created the electronic 

item, regardless of whether that person 

or a subsequent bank in the collection 

process sent the electronic item to the 

Reserve Bank.7

The Board intends that Regulation J 

acknowledge, but in no way alter, a 

bank’s responsibilities under subpart D 

of Regulation CC for substitute checks 

and under § 229.34(c) for all checks. The 

Board further intends the liability for 

losses associated with electronic items 

to parallel the liability structure for 

substitute checks in Regulation CC as 

closely as possible, both for senders and 

for Reserve Banks, and to prevent any 

person from passing back losses 

attributable to its own fault.8 The Board 

therefore has significantly reorganized 

the warranty and indemnity provisions 

in §§ 210.5 and 210.6 to address the 

comments on these topics and clarify 

the rule.

The final rule omits the proposed 

provisions that restated the existing 

Regulation CC liability structure and 

incorporates into other paragraphs of 

§§ 210.5(a) and 210.6(b) the concept that 

the Regulation CC warranty and 

indemnity provisions apply according 

to their terms. Specifically, 

§ 210.5(a)(5)(ii)(A) provides that senders 

of original checks are not liable for any 

amount that the Reserve Bank pays 

under subpart D of Regulation CC for a 

subsequently created substitute check or 

under § 210.6(b) for an electronic item, 

absent the sender’s agreement to the 

contrary.9 Section 210.5(a)(5)(ii)(B) 

provides that nothing in Regulation J 

alters the liability structure that applies 

to substitute checks and paper or 

electronic representations of substitute 

checks under subpart D of Regulation 

CC.10 Section 210.5(a)(5)(ii)(C) provides 

that a sender of an electronic item is not 

liable for any amount a Reserve Bank 

pays under § 210.6(b)(3) or subpart D of 

Regulation CC that is attributable to the 

Reserve Bank’s own lack of good faith 

or failure to exercise ordinary care. 

Section 210.6(b)(3)(ii)(B) contains 

substantially similar limitations to those 

in § 210.5(a)(5)(ii)(C) so that Reserve 

Banks that handle an electronic item 

also will not bear substitute checkrelated losses that are attributable to the 

fault of a subsequent person in the 

collection process. The final rule also 

specifically states that Reserve Banks 

are subject to subpart D of Regulation 

CC.

The Board has not, as requested by 

commenters, amended the indemnity 

provisions to hold a sender of an 

electronic item liable for a loss 

associated with a later substitute check 

only if the sender breached a Regulation 

J warranty. The indemnity in subpart D 

of Regulation CC covers a loss due to the 

receipt of a substitute check even in the 

absence of a warranty breach. For 

example, a substitute check that 

contains a complete and accurate image 

of the original check may be insufficient 

to prove a forgery claim because only 

the original check could be used for 

handwriting analysis. Subpart D of 

Regulation CC would allocate that loss 

to the reconverting bank. Sections 

210.5(a)(5) and 210.6(b)(3) of the final 

rule further allocate that loss to the first 

party subject to Regulation J that sent 

the electronic item, which could be the 

bank that sent the electronic item to the 

Reserve Bank or the Reserve Bank itself. 

Federal Register / Vol. 69, No. 207 / Wednesday, October 27, 2004 / Rules and Regulations 62557

Thus, Regulation J places the loss with 

the bank whose choice to handle an 

item electronically necessitated the later 

creation of a substitute check. 

The final rule also does not, as 

requested by commenters, allocate 

losses associated with an electronic item 

to a person that handled the item prior 

to the Reserve Bank’s sender. The 

warranties and indemnity in existing 

and proposed Regulation J are first made 

by the sender of the item to a Reserve 

Bank because Regulation J only governs 

items that are collected by the Reserve 

Banks. The Board believes that 

allocating liability for any item in 

Regulation J to a person prior to the 

Reserve Bank’s sender would be 

inappropriate, because that person may 

have no control over whether the item 

was handled by a Reserve Bank. 

However, a Reserve Bank’s sender that 

received an electronic item from another 

person could protect itself through its 

agreement with that person. 

E. Procedures for claims against 

Reserve Banks. Several commenters 

opined that the standard for accrual of 

a claim for an electronic item that is not 

a representation of a substitute check in 

§ 210.6(d)(2) should be the same as the 

accrual standard for substitute check 

claims in § 229.56(c) of Regulation CC. 

This is the result intended by the Board, 

and proposed § 210.6(d)(2) reached this 

result by using language identical to that 

in § 229.56(c). The final rule therefore 

retains the proposed accrual language. 

Some commenters expressed concern 

that the statement in § 210.6(d)(3) of the 

proposed rule that paragraph (d) ‘‘does 

not lengthen’’ the time for bringing a 

claim under Regulation CC implied that 

paragraph (d) could shorten the 

otherwise applicable timeframe. The 

final rule therefore states that § 210.6(d) 

‘‘does not alter’’ the time periods for 

bringing actions under the sections of 

Regulation CC that it references. 

Section 210.12 

Section 210.12 sets forth a liability 

structure for returned checks that is 

substantially similar to the liability 

structure in §§ 210.5 and 210.6 that 

applies to items handled for forward 

collection. The proposed amendments 

to § 210.12 therefore closely paralleled 

the proposed amendments to 

corresponding portions of §§ 210.5 and 

210.6. Accordingly, the final 

amendments to § 210.12 are identical or 

substantially similar to those discussed 

in the analysis §§ 210.5 and 210.6. 

Regulatory Flexibility Act 

The Board has reviewed the final 

rule’s impact on small banks in 

accordance with the final regulatory 

flexibility analysis requirements in the 

Regulatory Flexibility Act (12 U.S.C. 

604). 

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’’ for purposes of 

the Regulatory Flexibility Act if it has 

$150 million or less in assets. Based on 

June 2004 call report data, the Board 

estimates that there are approximately 

14,221 depository institutions with 

assets of $150 million or less. The final 

amendments will apply to all depository 

institutions, regardless of size, that 

obtain check collection services from a 

Reserve Bank.

As discussed in the preceding 

sections, the final amendments are 

necessary to facilitate the electronic 

collection of checks by Reserve Banks as 

contemplated by the Check 21 Act. 

Commenters generally supported the 

proposed amendments and did not 

submit comments on the Regulatory 

Flexibility Act section. The primary 

effect of the final amendments is to 

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 new warranties and 

indemnity in Regulation J are similar to 

the warranties and indemnity that apply 

to paper checks under existing 

Regulation J and other law. Although 

the Reserve Banks could protect 

themselves with respect to electronic 

items by agreement, the Board believes 

that it is appropriate at this time to bring 

electronic items within the coverage of 

Regulation J. The final amendments 

generally apply only to those banks that 

choose to send items to Reserve Banks 

electronically. These amendments do 

not require any bank to change the form 

in which it submits checks, nor do they 

require any bank to submit reports, 

maintain records, or provide notices or 

disclosures. 

Paperwork Reduction Act 

In accordance with the Paperwork 

Reduction Act of 1995 (44 U.S.C. 3506; 

5 CFR part 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. 

Administrative Procedure Act 

The Board has found good cause that 

the final amendments should take effect 

on October 28, 2004. The Check 21 Act 

takes effect on that date and is designed 

to facilitate the electronic processing of 

checks. Without a warranty and 

indemnity structure for electronic items 

derived directly from original checks, 

such as that in the final amendments, 

the Reserve Banks cannot offer a wider 

range of electronic check processing 

services as anticipated by the Check 21 

Act. To maximize banks’ ability to use 

the Federal Reserve’s new electronic 

check processing services facilitated by 

the Check 21 Act, the effective date of 

Regulation J should coincide with the 

effective date of the Act. Moreover, the 

Board notes that no bank is required to 

change its check processing procedures 

as a result of the rule and that the new 

provisions of the final rule generally 

apply only to those banks that choose to 

send items electronically to the Reserve 

Banks. The final rule also does not 

impose any reporting, recordkeeping, or 

reporting requirements for any bank. 

Accordingly, having the amendments 

take effect on October 28 should provide 

benefits to those banks that want to rely 

on the Check 21 Act to process checks 

electronically without any 

countervailing disadvantages to those or 

any other banks. For the foregoing 

reasons, the Board has determined that 

good cause exists for making the rule 

effective on October 28, 2004, to 

coincide with the effective date of the 

Check 21 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 is amending 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.

§ 210.1 [Amended]

■ 2. In § 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.

§ 210.2 [Amended]

■ 3. In § 210.2 make the following 

changes:

62558 Federal Register / Vol. 69, No. 207 / Wednesday, October 27, 2004 / Rules and Regulations 

1For purposes of this subpart, the Virgin Islands 

and Puerto Rico are deemed to be in the Second 

District, and Guam, American Samoa, and the 

Northern Mariana Islands in the Twelfth District.

■ (A) Revise the last sentence of 

paragraph (h);

■ (B) Revise paragraphs (i), (l)(3), and (n);

■ (C) Remove the undesignated 

paragraph after paragraph (o);

■ (D) Revise paragraph (r); and

■ (E) Add a new paragraph (s).

The revisions and addition read as 

follows:

§ 210.2 Definitions.

* * * * *

(h) * * * Check as defined in 12 CFR 

229.2(k) means an item defined as a 

check in 12 CFR 229.2(k) for purposes 

of subparts C and D of part 229. 

(i) Item and electronic item.

(1) Item means—

(i) An instrument or a promise or 

order to pay money, whether negotiable 

or not, that is—

(A) Payable in a Federal Reserve 

District 1 (District);

(B) Sent by a sender to a Reserve Bank 

for handling under this subpart; and 

(C) Collectible in funds acceptable to 

the Reserve Bank of the District in 

which the instrument is payable; and 

(ii) An electronic image of an item 

described in paragraph (i)(1)(i) of this 

section, and information describing that 

item, that a Reserve Bank agrees to 

handle as an item pursuant to an 

operating circular. 

(2) Electronic item means an item 

described in paragraph (i)(1)(ii) of this 

section.

Note: Unless otherwise indicated, item

includes both a cash and a noncash item, and 

includes a returned check sent by a paying 

or returning bank. Item does not include a 

check that cannot be collected at par, or a 

payment order as defined in § 210.26(i) and 

handled under subpart B of this part.

* * * * *

(1) * * * 

(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.

* * * * *

(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 § 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).

* * * * *

(r) Uniform Commercial Code and 

U.C.C. mean the Uniform Commercial 

Code as adopted in a state. 

(s) Terms not defined in this section.

Unless the context otherwise requires—

(1) The terms not defined herein have 

the meanings set forth in § 229.2 of this 

chapter applicable to subpart C or 

subpart D of part 229 of this chapter, as 

appropriate; and 

(2) The terms not defined herein or in 

§ 229.2 of this chapter have the 

meanings set forth in the Uniform 

Commercial Code.

§ 210.3 [Amended]

■ 4. In § 210.3(b) remove the phrase 

‘‘subpart C’’ and add the phrase 

‘‘subparts C and D’’ in its place.

§ 210.4 [Amended]

■ 5. In paragraph 210.4(b)(2), remove the 

word ‘‘party’’ and add the word ‘‘person’’

in its place.

§ 210.5 [Amended]

■ 6. In § 210.5 make the following 

changes:

■ (A) Revise paragraph (a);

■ (B) Redesignate paragraphs (b), (c), and 

(d) as paragraphs (c), (d), and (e), 

respectively and add a new paragraph 

(b);

■ (C) Revise newly designated paragraph 

(c)(3);

■ (D) In the first sentence of newly 

designated paragraph (d)(1), remove the 

phrase ‘‘paragraph (b)’’ and add the 

phrase ‘‘paragraph (c)’’ in its place;

■ (E) Redesignate the last sentence of 

newly designated paragraph (d)(2) as 

paragraph (d)(3); in newly designated 

paragraphs (d)(2) and (d)(3), remove the 

phrase ‘‘paragraph (c)’’ wherever it 

appears and add the phrase ‘‘paragraph 

(d)’’ in its place; and in newly designated 

paragraph (d)(3) remove the phrase 

‘‘paragraph (a)(3)’’ and add the phrase 

‘‘paragraph (a)(5)’’ in its place; and

■ (F) In the first sentence of newly 

designated paragraph (e), remove the 

phrase ‘‘subpart C of’’ between the word 

‘‘or’’ and the phrase ‘‘part 229.’’

The revisions and addition read as 

follows:

§ 210.5 Sender’s agreement; recovery by 

Reserve Bank. 

(a) Sender’s agreement. The 

warranties, authorizations, and 

agreements made pursuant to this 

paragraph may not be disclaimed and 

are made whether or not the item bears 

an indorsement of the sender. By 

sending an item to a Reserve Bank, the 

sender does all of the following. 

(1) Authorization to handle item. The 

sender authorizes the sender’s 

administrative Reserve Bank and any 

other Reserve Bank or collecting bank to 

which the item is sent to handle the 

item (and authorizes any Reserve Bank 

that handles settlement for the item to 

make accounting entries), subject to this 

subpart and to the Reserve Banks’

operating circulars, and warrants its 

authority to give this authorization. 

(2) Warranties for all items. The 

sender warrants to each Reserve Bank 

handling the item that—

(i) The sender is a person entitled to 

enforce the item or authorized to obtain 

payment of the item 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, in paper or electronic 

form, for forward collection or return. 

(3) Warranties for all electronic items.

The sender makes all the warranties set 

forth in and subject to the terms of 4–

207 of the U.C.C. for an electronic item 

as if it were an item subject to the U.C.C. 

and makes the warranties set forth in 

and subject to the terms of § 229.34(c) of 

this chapter for an electronic item as if 

it were a check subject to that section. 

(4) Warranties for electronic items 

that are not representations of substitute 

checks. If an electronic item is not a 

representation of a substitute check, the 

sender of that item warrants to each 

Reserve Bank handling the item that—

(i) The electronic image portion of 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; the 

information portion of the item contains 

a record of all MICR-line information 

required for a substitute check under 

Federal Register / Vol. 69, No. 207 / Wednesday, October 27, 2004 / Rules and Regulations 62559

§ 229.2(aaa) of this chapter; and the item 

conforms to the technical standards for 

an electronic item set forth in an 

operating circular; and 

(ii) No person 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 original item such 

that the person will be asked to make 

payment based on an item it already has 

paid. 

(5) Sender’s liability to Reserve Bank.

(i) Except as provided in paragraph 

(a)(5)(ii) of this section, the sender 

agrees to indemnify each Reserve Bank 

for any loss or expense sustained 

(including attorneys’ fees and expenses 

of litigation) resulting from—

(A) The sender’s lack of authority to 

make the warranty in paragraph (a)(1) of 

this section; 

(B) Any action taken by the Reserve 

Bank within the scope of its authority in 

handling the item; or 

(C) Any warranty or indemnity made 

by the Reserve Bank under § 210.6(b) of 

this subpart, part 229 of this chapter, or 

the U.C.C. 

(ii) A sender’s liability for warranties 

and indemnities that the Reserve Bank 

makes for a substitute check, a paper or 

electronic representation thereof, or any 

other electronic item is subject to the 

following conditions and limitations—

(A) A sender of an original check shall 

not be liable under paragraph (a)(5)(i) of 

this section for any amount that the 

Reserve Bank pays under subpart D of 

part 229 of this chapter or under 

§ 210.6(b)(3) of this subpart, absent the 

sender’s agreement to the contrary; 

(B) Nothing in this subpart alters the 

liability of a sender of a substitute check 

or paper or electronic representation of 

a substitute check under subpart D of 

part 229 of this chapter; and 

(C) A sender of an electronic item that 

is not a representation of a substitute 

check shall not be liable for any amount 

that the Reserve Bank pays under 

subpart D of part 229 of this chapter or 

§ 210.6(b)(3)(ii) of this subpart that is 

attributable to the Reserve Bank’s own 

lack of good faith or failure to exercise 

ordinary care.

(b) Sender’s liability under other law.

Nothing in paragraph (a) of this section 

limits any warranty or indemnity by a 

sender (or a person that handled an item 

prior to the sender) arising under state 

law or regulation (such as the U.C.C.), 

other federal law or regulation (such as 

part 229 of this chapter), or an 

agreement with a Reserve Bank. 

(c) * * *

(3) Any warranty or indemnity made 

by the Reserve Bank under section 

210.6(b) of this subpart, part 229 of this 

chapter, or the U.C.C.,

* * * * *

§ 210.6 [Amended]

■ 7. In § 210.6 make the following 

changes:

■ (A) Revise paragraphs (a) and (b); and

■ (B) Redesignate paragraph (c) as 

paragraph (d), add a new paragraph (c), 

and revise newly designated paragraph 

(d).

The revisions and additions read as 

follows:

§ 210.6 Status, warranties, and liability of 

Reserve Banks. 

(a)(1) Status. A Reserve Bank that 

handles an item shall act as agent or 

subagent of the owner with respect to 

the item. This agency terminates when 

a Reserve Bank receives final payment 

for the item in actually and finally 

collected funds, a Reserve Bank makes 

the proceeds available for use by the 

sender, and the time for commencing all 

actions against the Reserve Bank has 

expired. 

(2) Limitations on Reserve Bank 

liability. A Reserve Bank shall not have 

or assume any liability with respect to 

an item or its proceeds except—

(i) For the Reserve Bank’s own lack of 

good faith or failure to exercise ordinary 

care; 

(ii) As provided in paragraph (b) of 

this section; and 

(iii) As provided in subparts C and D 

of Regulation CC. 

(3) Reliance on routing designation 

appearing on item. A Reserve Bank may 

present or send an item based on the 

routing number or other designation of 

a paying bank or nonbank payor 

appearing in any form on the item when 

the Reserve Bank receives it. A Reserve 

Bank shall not be responsible for any 

delay resulting from its acting on any 

designation, whether inscribed by 

magnetic ink or by other means, and 

whether or not the designation acted on 

is consistent with any other designation 

appearing on the item. 

(b) Warranties and liability. The 

following provisions apply when a 

Reserve Bank presents or sends an item. 

(1) Warranties for all items. 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 that 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, in paper or electronic 

form, for forward collection or return. 

(2) Warranties for all electronic items.

The Reserve Bank makes all the 

warranties set forth in and subject to the 

terms of 4–207 of the U.C.C. for an 

electronic item as if it were an item 

subject to the U.C.C. and makes the 

warranties set forth in and subject to the 

terms of § 229.34(c) of this chapter for 

an electronic item as if it were a check 

subject to that section. 

(3) Warranties and indemnity for 

electronic items that are not 

representations of substitute checks. (i) 

If the electronic item is not a 

representation of a substitute check, the 

Reserve Bank warrants to the bank to 

which it transfers or presents that item 

that—

(A) The electronic image portion of 

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; the 

information portion of the item contains 

a record of all MICR-line information 

required for a substitute check under 

§ 229.2(aaa) of this chapter; and the item 

conforms to the technical standards for 

an electronic item set forth in an 

operating circular; and 

(B) No person 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 original item such 

that the person will be asked to make 

payment based on an item it already has 

paid. 

(ii) If the item is an electronic item 

that is not a representation of a 

substitute check—

(A) Except as provided in paragraph 

(b)(3)(ii)(B) of this section, the Reserve 

Bank agrees to indemnify the bank to 

which it transfers or presents the 

electronic item (the recipient bank) for 

the amount of any losses that the 

recipient bank incurs under subpart D of 

part 229 of this chapter for an indemnity 

that the recipient bank was required to 

make under subpart D of part 229 of this 

chapter in connection with a substitute 

check later created from the electronic 

item. 

(B) The Reserve Bank shall not be 

liable under paragraph (b)(3)(ii)(A) of 

this section for any amount that the 

recipient bank pays under subpart D of 

part 229 of this chapter that is 

attributable to the lack of good faith or 

failure to exercise ordinary care of the 

recipient bank or a person that handled 

the item, in any form, after the recipient 

bank. 

(c) Limitation on liability. A Reserve 

Bank shall not have or assume any 

liability to the paying bank or other 

62560 Federal Register / Vol. 69, No. 207 / Wednesday, October 27, 2004 / Rules and Regulations 

payor, except as provided in paragraph 

(b) of this section, § 229.34(c) or subpart 

D of part 229 of this chapter, or for the 

Reserve Bank’s own lack of good faith 

or failure to exercise ordinary care. 

(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 alter 

the time limit for claims under section 

229.38(g) of this chapter (which include 

claims for breach of warranty under 

§ 229.34 of this chapter) or subpart D of 

part 229 of this chapter.

§ 210.12 [Amended]

■ 8. In § 210.12 make the following 

changes:

■ (A) In paragraph (b)(2), remove the 

word ‘‘party’’ and add the word ‘‘person’’

in its place;

■ (B) Revise paragraph (c);

■ (C) Redesignate paragraphs (d), (e), (f), 

(g), (h), and (i) as paragraphs (e), (f), (g), 

(h), (i), and (j), respectively, and add a 

new paragraph (d);

■ (D) Revise newly designated 

paragraphs (e) and (f)(3);

■ (E) In newly designated paragraph (g), 

remove the phrase ‘‘paragraph (d)’’ and 

add the phrase ‘‘paragraph (e)’’ in its 

place; remove the phrase ‘‘paragraph (f)’’

wherever it appears and add the phrase 

‘‘paragraph (g)’’ in its place; and remove 

the phrase ‘‘paragraph (c)(3)’’ and add 

the phrase ‘‘paragraph (c)(5)’’ in its place.

The revisions and addition read as 

follows:

§ 210.12 Return of cash items and 

handling of returned checks.

* * * * *

(c) Paying bank’s and returning 

bank’s agreement. The warranties, 

authorizations, and agreements made 

pursuant to this paragraph may not be 

disclaimed and are made whether or not 

the returned check bears an 

indorsement of the paying bank or 

returning bank. By sending a returned 

check to a Reserve Bank, the paying 

bank or returning bank does all of the 

following. 

(1) Authorization to handled returned 

check. The paying bank or returning 

bank authorizes the paying bank’s or 

returning bank’s administrative Reserve 

Bank, and any other Reserve Bank or 

returning bank to which the returned 

check is sent, to handle the returned 

check (and authorizes any Reserve Bank 

that handles settlement for the returned 

check to make accounting entries) 

subject to this subpart and to the 

Reserve Banks’ operating circulars. 

(2) Warranties for all returned checks.

The paying bank or returning bank 

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, in paper or electronic 

form, for forward collection or return. 

(3) Warranties for all returned checks 

that are electronic items. A paying bank 

or returning bank that sends a returned 

check that is an electronic item makes 

the returning bank warranties set forth 

in and subject to the terms of § 229.34 

of this chapter for the electronic item as 

if it were a check subject to that section. 

(4) Warranties for returned checks 

that are electronic items that are not 

representations of substitute checks. If 

the returned check is an electronic item 

that is not a representation of a 

substitute check, the paying bank or 

returning bank warrants to each Reserve 

Bank handling the returned check that—

(i) The electronic image portion of 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; the 

information portion of the item contains 

a record of all MICR-line information 

required for a substitute check under 

§ 229.2(aaa) of this chapter; and the item 

conforms to the technical standards for 

an electronic item set forth in an 

operating circular; and 

(ii) No person 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 original item such 

that the person will be asked to make 

payment based on an item it already has 

paid. 

(5) Paying bank or returning bank’s 

liability to Reserve Bank. (i) Except as 

provided in paragraph (c)(5)(ii) of this 

section, a paying bank or returning bank 

agrees to indemnify each Reserve Bank 

for any loss or expense (including 

attorneys’ fees and expenses of 

litigation) resulting from—

(A) The paying or returning bank’s 

lack of authority to give the 

authorization in paragraph (c)(1) of this 

section; 

(B) Any action taken by a Reserve 

Bank within the scope of its authority in 

handling the returned check; or 

(C) Any warranty or indemnity made 

by the Reserve Bank under paragraph (e) 

of this section or part 229 of this 

chapter. 

(ii) A paying bank’s or returning 

bank’s liability for warranties and 

indemnities that a Reserve Bank makes 

for a returned check that is a substitute 

check, a paper or electronic 

representation thereof, or any other 

electronic item is subject to the 

following conditions and limitations—

(A) A paying bank or returning bank 

that sent an original check shall not be 

liable for any amount that a Reserve 

Bank pays under subpart D of part 229 

of this chapter or under 

§ 210.12(e)(1)(iii) of this subpart, absent 

the paying bank’s or returning bank’s 

agreement to the contrary; 

(B) Nothing in this subpart alters the 

liability under subpart D of part 229 of 

this chapter of a paying bank or 

returning bank that sent a substitute 

check or a paper or electronic 

representation of a substitute check; and

(C) A paying bank or returning bank 

that sent an electronic item that is not 

a representation of a substitute check 

shall not be liable under paragraph 

(c)(5)(i) of this section for any amount 

that the Reserve Bank pays under 

subpart D of part 229 of this chapter or 

paragraph (e)(1)(iii) of this section that 

is attributable to the Reserve Bank’s own 

lack of good faith or failure to exercise 

ordinary care. 

(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 person that handled an item 

prior to that bank) arising under state 

law or regulation (such as the U.C.C.), 

other federal law or regulation (such as 

part 229 of this chapter), or an 

agreement with a Reserve Bank. 

(e) Warranties by and liability of 

Reserve Bank. (1) The following 

provisions apply when a Reserve Bank 

handles a returned check under this 

subpart. 

(i) Warranties for all items. 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, 

in paper or electronic form, for forward 

collection or return. 

(ii) Warranties for all returned checks 

that are electronic items. A Reserve 

Bank that sends a returned check that is 

an electronic item makes the returning 

Federal Register / Vol. 69, No. 207 / Wednesday, October 27, 2004 / Rules and Regulations 62561

bank warranties set forth in and subject 

to the terms of § 229.34 of this chapter 

as if the electronic item were a check 

subject to that section. 

(iii) Warranties and indemnity for 

returned checks that are electronic 

items that are not representations of 

substitute checks.

(A) If the returned check is an 

electronic item that is not a 

representation of a substitute check, the 

Reserve Bank warrants to the bank to 

which it sends the returned check that—

(1) The electronic image portion of 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; the 

information portion of the item contains 

a record of all MICR-line information 

required for a substitute check under 

§ 229.2(aaa) of this chapter; and the item 

conforms with the technical standards 

for an electronic item set forth in an 

operating circular; and 

(2) No person 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 original item such 

that the person will be asked to make 

payment based on an item it already has 

paid. 

(B) If the returned check is an 

electronic item that is not a 

representation of a substitute check—

(1) Except as provided in paragraph 

(e)(1)(iii)(B)(2) of this section, the 

Reserve Bank agrees to indemnify the 

bank to which it sends the returned 

check (the recipient bank) for the 

amount of any losses that the bank 

incurs under subpart D of part 229 of 

this chapter for an indemnity that the 

bank was required to make under 

subpart D of part 229 of this chapter in 

connection with a substitute check later 

created from the returned check. 

(2) A Reserve Bank shall not be liable 

under paragraph (e)(1)(iii)(B)(1) of this 

section for any amount that the 

recipient bank pays under subpart D of 

part 229 of this chapter that is 

attributable to the lack of good faith or 

failure to exercise ordinary care of the 

recipient bank or a person that handled 

the item, in any form, after the recipient 

bank. 

(2) A Reserve Bank shall not have or 

assume any other liability to any person 

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 subpart D of part 

229 of this chapter. 

(f) * * * 

(3) Any warranty or indemnity made 

by the Reserve Bank under paragraph (e) 

of this section or part 229 of this 

chapter,

* * * * *

§ 210.13 [Amended]

■ 9. In § 210.13, remove the word 

‘‘party’’ wherever it appears and add the 

word ‘‘person’’ in its place, and remove 

the citation ‘‘§ 210.9(a)(5)’’ and add the 

citation ‘‘§ 210.9(b)(5)’’ in its place.

By order of the Board of Governors of the 

Federal Reserve System, October 22, 2004. 

Robert deV. Frierson, 

Deputy Secretary of the Board.

[FR Doc. 04–24049 Filed 10–26–04; 8:45 am] 

BILLING CODE 6210–01–P

NATIONAL CREDIT UNION 

ADMINISTRATION 

12 CFR Part 701 

Change in Official or Senior Executive 

Officer in Credit Unions That Are 

Newly Chartered or Are in Troubled 

Condition

AGENCY: National Credit Union 

Administration (NCUA).

ACTION: Final rule.

SUMMARY: NCUA is amending its rule 

concerning the requirement that 

federally-insured credit unions that are 

newly chartered or troubled file notice 

with NCUA before adding or replacing 

a board or committee member or 

employing or changing the duties of a 

senior executive officer. The 

amendments clarify the relationship 

between the prior notice provision and 

the commencement of service provision, 

so as to eliminate any potential 

confusion. In addition, the amendments 

reorganize the requirements in the 

current rule to make it easier to 

understand.

DATES: This rule is effective on 

November 26, 2004.

FOR FURTHER INFORMATION CONTACT: Ross 

P. Kendall, Staff Attorney, Division of 

Operations, Office of General Counsel, 

at telephone: (703) 518–6562.

SUPPLEMENTARY INFORMATION:

Background 

On June 24, 2004, the NCUA Board 

requested comment on proposed 

changes to § 701.14 of its regulations, 

clarifying the procedures that newly 

chartered or troubled federally-insured 

credit unions must follow to obtain 

NCUA approval before adding or 

replacing board or committee members 

or changing the duties of a senior 

executive officer. 69 FR 39871 (July 1, 

2004). The proposed amendments 

clarify the relationship between the 

prior notice provision and the 

commencement of service provision in 

the current rule to eliminate confusion 

and reorganize the requirements to 

make the rule easier to understand. 

NCUA received comments regarding 

the proposed changes from two federal 

credit unions, two national credit union 

trade associations, one state credit 

union trade association and one state 

credit union supervisory association, for 

a total of six comments. 

Summary of Comments 

The comments were generally 

favorable and supportive of the 

amendments, and all but one 

commenter supported the efforts to 

clarify and reorganize the provisions of 

the rule. Two commenters supported 

the proposal as published without 

recommending any changes. 

One commenter recommended that 

the revised rule include a specific 

reference to the role of the state 

supervisory authority (SSA) in cases 

involving state-chartered credit unions. 

The rule, however, implements 

authority in the Federal Credit Union 

Act specifically authorizing the NCUA 

to review and approve of the service of 

certain senior credit union officials and 

employees of federally-insured credit 

unions, including credit unions that are 

state-chartered. 12 U.S.C. 1790a. While 

the NCUA is the decision maker in these 

cases, the current rule does require a 

state-chartered, federally-insured credit 

union to provide a copy of the NCUA 

notice to its SSA. 12 CFR 701.14(d)(1). 

In addition, the Board notes that another 

provision of our regulations also 

requires NCUA to consult with the 

appropriate SSA and provide it with 

notice concerning NCUA’s decision. 12 

CFR 741.205. The Board has not 

adopted this recommendation to 

otherwise reference the role of SSAs. 

Another commenter suggested that 

the rule provide that a request for 

approval of an official’s or employee’s 

service to be deemed complete unless 

the regional office specifically requires 

additional information within ten days 

of its receipt of the request.

The current rule provides that the 

appropriate NCUA regional office will 

notify the credit union within ten days 

of its receipt of the request for approval 

either that the request is complete or 

that additional information is required 

and the Board is not aware of any 

instances of problems with the current 

procedure. The final rule retains this 

provision. The rule already calls for the