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

15083

Vol. 62, No. 61

Monday, March 31, 1997

DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 46

[Docket Number FV96–351]

RIN 0581–AB41

Amendments to the Perishable

Agricultural Commodities Act (PACA)

AGENCY: Agricultural Marketing Service,

USDA.

ACTION: Final rule.

SUMMARY: The Department of

Agriculture (USDA) is revising the

regulations (other than Rules of

Practice) under the Perishable

Agricultural Commodities Act (PACA)

in order to implement legislative

changes signed into law by President

Clinton. Specifically, the legislative

changes grant USDA the authority to

adjust future license fees through

‘‘notice and comment’’ rulemaking;

eliminate the requirement of filing

notice of intent to preserve trust benefits

with USDA in the PACA trust; require

USDA to receive a written complaint

before initiating an investigation;

require additional USDA investigation

notification procedures; increase

administrative penalties; establish civil

penalties as an alternative to revocation

or suspension of license; continue

current filing fees for formal and

informal reparation complaints;

explicitly address the status of collateral

fees and expenses; clarify misbranding

prohibitions; and amend the provisions

of PACA regarding the determination of

responsibly connected individuals.

EFFECTIVE DATE: April 30, 1997.

FOR FURTHER INFORMATION CONTACT:

James R. Frazier, Chief, PACA Branch,

Room 2095—So. Bldg., Fruit and

Vegetable Division, AMS, USDA, 1400

Independence Avenue, SW.,

Washington, DC 20250, Phone (202)

720–2272.

SUPPLEMENTARY INFORMATION:

Background

The PACA establishes a code of fair

trading practices covering the marketing

of fresh and frozen fruits and vegetables

in interstate and foreign commerce. The

PACA protects growers, shippers,

distributors, and retailers dealing in

those commodities by prohibiting unfair

and fraudulent practices. In this way,

the law fosters an efficient nationwide

distribution system for fresh and frozen

fruits and vegetables, benefiting the

whole marketing chain from farmer to

consumer. USDA’s Agricultural

Marketing Service (AMS) administers

and enforces the PACA.

The PACA was amended by the

Perishable Agricultural Commodities

Act Amendments of 1995 (P.L. 104–48).

The regulations implementing the

PACA (other than the Rules of Practice)

are published in the Code of Federal

Regulations at Title 7, Part 46 (7 CFR

Part 46). A proposed rule to amend the

regulations to implement Public Law

104–48 was published in the Federal

Register on September 10, 1996.

Comments on the proposed rule were to

be submitted by November 12, 1996.

Twelve comments were received from

four trade associations representing

growers and shippers, three trade

groups representing retailers and

grocery wholesalers, three law firms,

one association representing the frozen

food industry, and one fruit and

vegetable broker.

Of the twelve comments received,

three addressed the collection of

renewal fees paid by grocery

wholesalers and retailers licensed by

USDA after enactment of Public Law

104–48. The three commentors write

that USDA is incorrectly proposing that

first-time licensed retailers and grocery

wholesalers pay renewal fees. They refer

to section 499(c)(3) of the statute

designated, ‘‘ONE-TIME FEE FOR

RETAILERS AND GROCERY

WHOLESALERS THAT ARE

DEALERS’’, which specifies the fees to

be paid by a retailer or a grocery

wholesaler making an initial application

during the phase-out period and after

such period ends. The commentors

emphasize the statutory language at the

end of section 499(c)(3) which states:

‘‘* * * a retailer or grocery wholesaler

paying a fee under this paragraph shall

not be required to pay any fee for

renewal of the license for subsequent

years.’’ Since the commentors’

interpretation of the legislative

amendment is substantially different

from USDA’s view but appears to be

plausible, USDA is separating section

46.6 License Fees from the rest of the

proposed regulations, and is addressing

the issue independently from this final

rule to allow other interested parties to

comment. In the meantime, USDA will

continue to assess license renewal fees

as provided in 7 CFR Part 46.6. Should

USDA, after notice and comment,

conclude that the law excludes certain

categories of licensees from the

requirement to pay regular renewal fees

during the three-year phase-out period,

all such fees paid by those firms or

individuals shall be refunded with

interest.

Aside from removing section 46.6

from the final rule, other changes have

been made to the regulations. The

definition of ‘‘grocery wholesaler’’ has

been edited to make it more concise;

however, the meaning of the term has

not been substantively changed. In

addition, the regulatory language in

section 46.45 as proposed goes beyond

the explicit language provided in

section 2(5) of the PACA; section 46.45

has been corrected to comply with the

statute. A change to the proposed

definition of ‘‘good faith,’’ and a few

other minor editorial changes have been

incorporated into the final rule for

clarity. The provisions of the proposed

rule are otherwise adopted for the

reasons given in the proposal and in this

document.

Comments

One commentor objects to the five

percent limit on wholesale sales that a

retailer may have in a year and still be

considered a retailer under the proposed

definition of a ‘‘retailer’’ in section

46.2(j). The commentor suggests that

USDA increase the limit but offered no

limit alternative.

We disagree with the commentor’s

assertion that the five percent limit be

increased to allow for additional

wholesale transactions. The statute

defines a retailer as a person who is a

dealer engaged in the business of selling

any perishable agricultural commodity

at retail. A retailer is not subject to a

license under PACA until the invoice
15084 Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Rules and Regulations

cost of its produce purchases exceeds

$230,000 in a calendar year. A question

may obviously be raised regarding how

much non-retail business a firm may do

and still be considered a retailer under

the PACA. USDA realizes that a retailer

may occasionally engage in a wholesale

transaction by making a sale to another

business, and USDA believes that when

such wholesale transactions comprise a

very small portion of a retailer’s

business, that business should continue

to be classified, for purposes of the

PACA, as a retailer. When wholesale

transactions exceed five percent,

however, they constitute a substantial

business activity, and it would no

longer be appropriate to consider firms

with such levels of wholesale business

as being retailers. For this reason, we are

not changing the final rule based on the

above comment.

One comment received suggests that

the definition of ‘‘dealer’’ in the

regulations does not accurately reflect

the term as defined in the statute. The

commentor stated that the regulations,

as proposed, would define a ‘‘retailer’’

as a ‘‘dealer,’’ and a ‘‘dealer’’ would be

defined to include a ‘‘retailer,’’ resulting

in total circularity. USDA believes that

this analysis is not correct. Both the

statute and the proposed regulations

define ‘‘retailer’’ as a dealer engaged in

the business of selling any perishable

agricultural commodity at retail. That is

to say, ‘‘retailers’’ are a subset of the

broader category of ‘‘dealers.’’ This

distinction is important because, unlike

other types of dealers, retailers must

meet the $230,000 threshold before they

are subject to the PACA. This is the

meaning of the term ‘‘retailer’’ as

provided in the proposed rule. In

addition, the definition of ‘‘dealer’’ in

the regulations was not addressed in the

proposed rule. For this reason, we are

not changing the final rule based on the

above comment.

Two commentors express concern

that the regulations should define

‘‘collateral fees’’ and outline the

responsibilities governing their use. One

of the commentors, Food Distributors

International (FDI), a trade association

formerly known as National-American

Wholesale Grocers’ Association

(NAWGA)—and its foodservice partner

organization—International Foodservice

Distributors Association (IFDA),

includes a petition dated April 26, 1994,

to USDA requesting that a notice and

comment proceeding be undertaken in

order to formulate a statement of general

policy regarding the disclosure to

customers of promotional allowances,

rebates, and collateral fees. FDI

expressed concern that USDA left its

petition unanswered.

At the time FDI submitted its petition,

a USDA investigation was underway

involving an association member which

allegedly failed to disclose promotional

allowances and rebates, which it termed

collateral fees in its cost-plus contracts.

During this same period, efforts were

also underway to amend or repeal the

statute. USDA concluded at the time

that any policy statement would be

inappropriate.

Since then, a definition of the term

‘‘collateral fees and expenses’’ has been

added to the statute. USDA therefore

believes that no further definition of the

term is warranted. Moreover, the

amendment to section 2(4) of the PACA,

which states that ‘‘* * * the good faith

offer, solicitation, payment, or receipt of

collateral fees and expenses, in and of

itself, shall not be considered unlawful’’

under the PACA, codifies USDA’s

longstanding position on the lawfulness

of such fees under the PACA. It is the

failure to disclose collateral fees and

expenses that constitutes a violation of

section 2(4) of the PACA. The ‘‘policy

statement’’ or additional clarification

sought by FDI appears in this final rule

at section 46.2(hh), the definition of

‘‘good faith,’’ that requires the

disclosure of such fees when they affect

a material term of the agreement. Since

the issues raised by the two commentors

have been addressed, both in the

statutory amendment and in this notice

and comment rulemaking process, we

are making no change to the final rule.

Two other commentors expressed

their concern that the proposed

regulations do not specify the method of

disclosing collateral fees and expenses

between the parties to a transaction. We

agree that the regulations should specify

the method for disclosing collateral fees

and expenses. Therefore, we are

changing section 46.2(hh) to reflect that

a party to a transaction disclose in

writing the existence of any collateral

fees and expenses to all other parties to

the transaction where the collateral fees

and expenses affect a material term of

the agreement.

Five commentors raised objections to

USDA’s definition of ‘‘good faith’’ in the

proposed regulations. One of the

commentors stated that the definition

goes far beyond the statutory language

by including as an element of ‘‘good

faith,’’ the requirement that a party to a

transaction disclose the existence of

collateral fees to all other parties where

the collateral fees and expenses affect a

material term of the agreement. The

other four commentors stated that

USDA not only was exceeding its

authority under the PACA, but also was

going beyond the definition of ‘‘good

faith’’ as provided in Uniform

Commercial Code (UCC) section 2–

103(b), by adding that the principal of

good faith requires affirmative

disclosure.

USDA disagrees with the

commentors’ objections. The PACA

amendments provide that the good faith

offer, solicitation, payment, or receipt of

collateral fees and expenses, is not, in

itself, unlawful. The term ‘‘good faith’’

is new to the PACA and is not defined

in the statute. It was left, then, to USDA

to provide the interpretation of the term

as it is used in the PACA. Although

USDA is not bound by the use of the

term ‘‘good faith’’ as it appears in other

broad, general contexts, the definition of

‘‘good faith’’ found in the UCC provides

the foundation for the definition in the

proposed regulations. USDA, with its

definition of ‘‘good faith’’ in the

regulations, clarifies what that term

means in the PACA as it relates to the

offer, solicitation, payment, or receipt of

collateral fees and expenses. The

definition puts all regulated entities on

notice of what action needs to be taken

so that the receipt of payments or

credits of collateral fees and expenses

complies with the prohibition against

false and misleading statements in

section 2(4) of the PACA. The proposed

definition does not impose any

additional obligation on regulated

entities that is not already imposed

under section 2(4). For these reasons, no

change to the final rule is being made

based on the five comments.

One commentor suggested that a new

term, ‘‘purchaser’s agent,’’ and an

associated definition be added to the

regulations to draw distinctions among

various types of broker operations.

USDA believes that this term and

definition would be redundant. The

existing regulations distinguish between

two types of broker operations. In the

first type of operation, outlined in

section 46.27(a), the broker acts as a

neutral third party, conveying offers,

counter offers, and acceptances between

the parties. Once the contract is formed,

and a confirmation is issued by the

broker to the parties in the transaction,

the broker’s duties are usually fulfilled.

The second type of broker operation,

commonly referred to as a ‘‘buying’’

broker, is outlined in section 46.27(b) of

the existing regulations. A buying

broker negotiates purchases at shipping

point, terminal markets, or intermediate

points, on behalf of the buyer on the

buyer’s instructions and authorization.

Generally, a purchase is made in the

buyer’s name and the seller directly

invoices the buyer. Given authorization

from the buyer, the broker may purchase

the product in his or her own name,

make the loading and shipping
Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Rules and Regulations 15085

arrangements, and directly bill the

buyer for the cost of the product plus a

brokerage fee and any other agreed upon

service charges. Since the regulations

already include ‘‘buying brokers,’’ we

believe that adding an additional term

and definition of a ‘‘purchaser’s agent’’

as described by the commentor would

be confusing since such a definition

would also apply to a buying broker

operation.

In addition, USDA believes that the

commentor’s concerns are addressed in

the proposed revision to section 46.28

which requires that a broker identify on

the confirmation or memorandum of

sale the party who engaged the broker

in the transaction. As we stated in the

preamble to the proposed rule, this

change is intended to recognize that a

broker may not be a neutral party when

he or she is engaged by, and thus, may

have a closer relationship with, one of

the parties to the contract. Under the

above circumstances, we are making no

change to the final rule based on this

comment.

A commentor opposed as unfair the

proposed revision to section 46.27

which states that the broker is not the

proper party to whom notice of a breach

or of a rejection should be directed. In

response, we note that the proposed

language does not specify that the

broker to a transaction is not to be

notified of a breach or of a rejection. We

merely point out that the broker is not

to be the primary party to whom such

notice should be given. Under usual

circumstances, a broker negotiates a

contract as a third party and once a

contract is formed has no authority to

modify that contract. Since time is

critical when dealing in perishable

agricultural commodities, the parties to

the contract, that is, the seller and the

purchaser, should be in direct

communication regarding any breach or

rejection. If, however, a party does

notify the broker of a breach or

rejection, the broker must notify the

other party to the contract. We are

making no change to the final rule based

on this comment.

The same commentor also opposed

the proposed revision to section 46.28

which establishes the presumption that

a broker is acting on behalf of the buyer

if the confirmation or memorandum of

sale fails to disclose the party who

engaged the broker in the transaction.

The commentor stated that the

presumption is not logical, and

furthermore, there is no basis for this

change in the 1995 PACA amendments

or in the PACA Industry Advisory

Committee Reports. The commentor

further argues that if any presumption is

to be made, it should be presumed that

the broker acts on behalf of the seller

since any payment to the broker by

necessity reduces the net return to the

seller, thus, the seller pays the

brokerage.

The House of Representatives

Agriculture Committee suggested that

USDA revise the regulations which

cover the duties and responsibilities of

fruit and vegetable brokers to accurately

reflect the increased role of brokers as

agents of purchasers. The proposed

revision to the regulation reflects the

reality that increasingly the broker is

engaged by the buyer to locate product

or products and facilitate their

purchase. As we stated in the preamble

to the proposed rule, this change is

intended to recognize that a broker may

not be a neutral party when he or she

is engaged by, and thus, may have a

closer relationship with, one of the

parties to the contract. The

presumption, of course, would no

longer apply in those instances when

the broker identifies in the confirmation

or memorandum of sale or other

document the party on whose behalf it

is negotiating. Even when there is no

such declaration, the presumption that

the broker was acting on behalf of the

buyer, may be rebutted by proof that the

broker was engaged by the shipper or

other entity. For this reason, we are

making no change to the final rule based

on this comment.

We received two comments

addressing the proposed revision to the

paragraph of section 46.45 regarding the

misrepresentation and/or misbranding

of produce. The commentors stated that

in some instances the first licensed

handler may not be in a position to

determine that the produce at issue was

misbranded or misrepresented. They

requested that the rule be modified to

allow the first licensed handler of

misbranded or misrepresented produce

the opportunity to provide evidence of

lack of knowledge of a misbranding

violation to prevent any instances where

the first licensed handler could be put

in a competitive disadvantage in the

marketplace.

The statute states that it is unlawful

for any person to misrepresent product

that is received, shipped, sold, or

offered to be sold in interstate or foreign

commerce. The statute and the proposed

regulation state that a person other than

the first licensee handling misbranded

perishable agricultural commodities

shall not be held liable for a violation

of the PACA by reason of the conduct

of another party if the person did not

know of the violation or lacked the

ability to correct the violation. The law

assigns misbranding liability to the first

licensed entity in the transaction to

ensure that some licensed entity will be

accountable. Hence, the first licensee

handling the product is responsible for

identifying any misbranding problem

with the product in question, and for

ensuring that the produce is brought

into compliance before being shipped,

sold, or offered for sale to another party.

A comment was received suggesting

that the definition of ‘‘reasonable time’’

in the regulations be revised so that

acceptance occurs when the seller

transfers custody and control to the

buyer. The commentor stated that

receivers are currently at no risk and

may have an incentive to delay calls for

inspections on products that were

within grade at arrival but deteriorate

between arrival time and the time of

inspection, outside of the custody and

control of the seller. Although this issue

was not addressed in the proposed rule

or the amended statute, USDA disagrees

with the commentor’s reasoning that a

receiver has an incentive to delay a call

for an inspection given the current

definition of ‘‘reasonable time’’ in the

regulations. In order to reject product

shipped by truck, the regulations at

section 46.2(cc) now require the receiver

to call for an inspection within eight

hours after being notified of the

product’s arrival and availability for

inspection. If the receiver delays calling

for the inspection, and the inspection

that is finally performed reflects

deterioration of the produce that

exceeds normal deterioration, the

receiver may be held liable for the full

contract price of the product as the

receiver has no proof of the condition of

the product when it was first delivered.

Given that the shipper of product in an

FOB sale is responsible for loading or

shipping product in suitable shipping

condition, USDA believes that the eight

hour window a receiver has to apply for

an inspection is reasonable.

Furthermore, this comment raises an

issue which was not addressed in the

proposed rule, and, therefore goes

beyond the scope of this rulemaking.

One commentor suggested that the

regulations be expanded to include

provisions to allow USDA to implement

procedures to prevent the dissipation of

assets. This comment raises an issue

which was not addressed in the

proposed rule, and, therefore goes

beyond the scope of this rulemaking.

One commentor suggested that USDA

use its rulemaking authority to

eliminate license fees for food service

distributors. Since USDA has no

authority to exempt by regulation any

segment of the industry from paying

license fees, we are making no changes

to the final rule based on this comment.
15086 Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Rules and Regulations

Another commentor recommended

that USDA use its rulemaking authority

and initiate multi-year licensing. The

amended statute directs the Secretary to

take into account savings to the program

when determining an appropriate

interval for the renewal of licenses.

USDA is currently studying the

administrative implications of such

changes and is not yet prepared to

initiate a multi-year licensing program.

We are therefore making no changes to

this final rule based on the above

comment.

In preparing to finalize the proposed

rule, USDA determined that changes to

the regulatory language in section

46.2(ii) and section 46.45 are needed.

USDA determined that the definition

of ‘‘grocery wholesaler’’ in section

46.2(ii) of the proposed rule could be

more succinctly stated without altering

the meaning. USDA concluded that

numbered paragraphs and some of the

wording were unnecessary to state the

criteria that a dealer must meet in order

to be considered a ‘‘grocery wholesaler.’’

USDA believes that the definition in the

final rule is clearer and more

straightforward, while it does not

change the substance of the definition.

USDA noticed that the regulatory

language in section 46.45 of the

proposed rule goes beyond the explicit

language of the amended statute. In part,

the proposed rule states the following:

‘‘* * * a person other than the first

licensee handling misbranded

perishable agricultural commodities

shall not be held liable for a violation

of the Act by reason of another if the

person did not have knowledge of the

violation or lacked the ability to correct

the violation.’’ However, the

amendment to Section 2(5) of the PACA

provides that ‘‘* * * a person other

than the first licensee handling

misbranded perishable agricultural

commodities shall not be held liable for

a violation of this paragraph by reason

of the conduct of another if the person

did not have knowledge of the violation

or lacked the ability to correct the

violation.’’ The proposed regulation

inadvertently broadened the scope of

the statutory language. Therefore, a

change in the final rule was required to

conform the regulatory language with

the statutory language. Section 46.45

has been amended to read as follows:

‘‘* * * a person other than the first

licensee handling misbranded

perishable agricultural commodities

shall not be held liable for a violation

of section 2(5) of the Act by reason of

the conduct of another if the person did

not have knowledge of the violation or

lacked the ability to correct the

violation.’’

In the final rule, USDA has deleted

the superfluous phrase ‘‘the term’’

which appeared at the beginning of each

definition in section 46.2 in the

proposed rule.

Executive Orders 12866 and 12988

This final rule is issued under the

Perishable Agricultural Commodities

Act (7 U.S.C. 499 et seq.), as amended.

USDA is issuing this final rule in

conformance with Executive Order

12866.

This final rule has been reviewed

under Executive Order 12988, Civil

Justice Reform. It is not intended to

have retroactive effect. The final rule

will not preempt any State or local laws,

regulations, or policies, unless they

present an irreconcilable conflict with

this rule. There are no administrative

procedures which must be exhausted

prior to any judicial challenge to the

provisions of this rule.

Regulatory Flexibility Act

Pursuant to requirements set forth in

the Regulatory Flexibility Act (RFA) (5

U.S.C. 601 et seq.), USDA has

considered the economic impact of this

proposed rule on small entities. The

purpose of the RFA is to fit regulatory

actions to the scale of businesses subject

to such actions in order that small

businesses will not be unduly or

disproportionately burdened. Small

agricultural service firms have been

defined by the Small Business

Administration (13 CFR 121.601) as

those whose annual receipts are less

than $5,000,000. The PACA requires

that wholesalers, processors, food

service companies, grocery wholesalers,

and truckers be considered dealers and

subject to a license when they buy or

sell more than 2,000 pounds of fresh

and/or frozen fruits and vegetables in

any given day. A retailer is considered

to be a dealer and subject to license

when the invoice cost of its perishable

agricultural commodities exceeds

$230,000 in a calendar year. Brokers

negotiating the sale of frozen fruits and

vegetables on behalf of the seller are

also exempt from licensing when the

invoice value of the transactions is

below $230,000 in any calendar year.

There are approximately 15,700

PACA licensees. Separating licensees by

the nature of business, there are

approximately 6,000 wholesalers, 4,750

retailers, 2,100 brokers, 1,200

processors, 550 commission merchants,

450 food service businesses, 150 grocery

wholesalers, and 50 truckers licensed

under PACA. The license is effective for

1 year unless suspended or revoked by

USDA for valid reasons [46.9 (a)–(h)],

and must be renewed annually by the

licensee. Many of the licensees may be

classified as small entities.

A compliance guide which highlights

the 1995 PACA legislation, and a

general compliance guide entitled

‘‘PACA Fact Finder’’ which explains the

rights and responsibilities of firms

operating subject to the provisions of

the PACA, are available to all licensees,

including small businesses. Beginning

in April 1997, USDA will send

information regarding the PACA to all

licensees when processing annual

license renewals.

Accordingly, based on the

information and the above discussion, it

is determined that the provisions of this

rule would not have a significant

economic impact on a substantial

number of small entities.

Paperwork Reduction Act

In compliance with Office of

Management and Budget (OMB)

regulations (5 CFR part 1320) which

implement the Paperwork Reduction

Act of 1995 (Pub. L. 104–13), the

information collection and

recordkeeping requirements covered by

this proposed rule were approved by

OMB on October 31, 1996, and expire

on October 31, 1999.

List of Subjects in 7 CFR Part 46

Agricultural commodities, Brokers,

Penalties, Reporting and recordkeeping

requirements.

For the reasons set forth in the

preamble, 7 CFR part 46 is amended as

follows:

PART 46—[AMENDED]

1. The authority citation for part 46

continues to read as follows:

Authority: Sec. 15, 46 Stat. 537; 7 U.S.C.

499o.

2. In § 46.2, paragraph (j) is revised

and two new paragraphs (hh) and (ii)

are added to read as follows:

§ 46.2 Definitions.

* * * * *

(j) Retailer is a dealer engaged in the

business of selling any perishable

agricultural commodity at retail;

Provided, That occasional sales at

wholesale shall not be deemed to

remove a dealer from the category of

retailer if less than 5 percent of annual

gross sales is derived from wholesale

transactions.

* * * * *

(hh) Good faith means honesty in fact

and the observance of reasonable

commercial standards of fair dealing in

the trade. The principle of good faith

requires that a party to a transaction

disclose in writing the existence of any
Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Rules and Regulations 15087

collateral fees and expenses to all other

parties to the transaction where the

collateral fees and expenses affect a

material term of the agreement.

(ii) Grocery wholesaler is a dealer

primarily engaged in the full-line

wholesale distribution and resale of

grocery and related nonfood items (such

as perishable agricultural commodities,

dry groceries, general merchandise,

meat, poultry, and seafood, and health

and beauty care items) to retailers. This

term does not include persons primarily

engaged in the wholesale distribution

and resale of perishable agricultural

commodities rather than other grocery

and related nonfood items. Specifically,

for an entity to be considered a grocery

wholesaler, 50 percent or more of its

annual gross sales must be from the fullline distribution and resale of grocery

and related nonfood items, and it cannot

have more than 50 percent of its sales

in perishable agricultural commodities.

‘‘Full line’’ means that an entity must be

supplying the retailer with a wide range

of products such as the grocery and

related nonfood items specified.

3. In § 46.9, paragraph (i) is revised to

read as follows:

§ 46.9 Termination, suspension,

revocation, cancellation of licenses;

notices; renewal.

* * * * *

(i) Under section 4(a) of the Act, at

least 30 days prior to the anniversary

date of a valid and effective license, the

Director shall mail a notice to the

licensee at the last known address

advising that the license will

automatically terminate on its

anniversary date unless an application

for renewal is filed supplying all

information requested on a form to be

supplied by the Division, and unless the

renewal fee (if any is applicable) is paid

on or before such date. If the renewal

application is not filed and/or the

renewal fee (if required) is not paid by

the anniversary date, the licensee may

obtain a renewal of that license at any

time within 30 days by submitting the

required renewal application and/or

paying the renewal fee (if required),

plus $50. Within 60 days after the

termination date of a valid and effective

license, the former licensee shall be

notified of such termination, unless a

new license has been obtained in the

meantime.

4. Section 46.10 is revised to read as

follows:

§ 46.10 Nonlicensed person; liability;

penalty.

Any commission merchant, dealer, or

broker who violates the Act by engaging

in business subject to the Act without a

license may settle its liability, if such

violation is found by the Director not to

have been willful but due to

inadvertence, by submitting the

required application and paying the

amount of fees that it would have paid

had it obtained and maintained a

license during the period that it engaged

in business subject to the Act, plus an

additional sum not in excess of two

hundred and fifty dollars ($250) as may

be determined by the Director.

5. § 46.17 is revised to read as follows:

§ 46.17 Inspection of records.

(a) Each licensee shall, during

ordinary business hours, promptly upon

request, permit any duly authorized

representative of USDA to enter its

place of business and inspect such

accounts, records, and memoranda as

may be material:

(1) In the investigation of complaints

under the Act, including any petition,

written notification, or complaint under

section 6 of the Act,

(2) To the determination of

ownership, control, packer, or State,

country, or region of origin in

connection with commodity

inspections,

(3) To ascertain whether there is

compliance with section 9 of the Act,

(4) In administering the licensing and

bonding provisions of the Act,

(5) If the licensee has been

determined in a formal disciplinary

proceeding to have violated the prompt

payment provision of section 2(4) of the

Act, to determine whether, at the time

of the inspection, there is compliance

with that section.

(b) Any necessary facilities for such

inspection shall be extended to such

representative by the licensee, its

agents, and employees.

6. In § 46.27, paragraph (a) is revised

to read as follows:

§ 46.27 Types of broker operations.

(a) Brokers carry on their business

operations in several different ways and

are generally classified by their method

of operation. The following are some of

the broad groupings by method of

operation. The usual operation of

brokers consists of the negotiation of the

purchase and sale of produce either of

one commodity or of several

commodities. A broker is usually

engaged by only one of the parties, but

in negotiating a contract the broker acts

as a special agent of first one and then

the other party in conveying offers,

counter offers, and acceptances between

the parties. Once the contract is formed,

and the confirmation issued, the

broker’s duties are usually ended, and

the broker is not the proper party to

whom notice of breach or of rejection

should be directed. However, a broker

receiving notice has a duty to promptly

convey the notice to the proper party.

Frequently, brokers never see the

produce they are quoting for sale or

negotiating for purchase by the buyer,

and they carry out their duties by

conveying information received from

the parties between the buyer and seller

until a contract is effected. Generally,

the seller of the produce invoices the

buyer, however, when there is a specific

agreement between the broker and its

principal, the seller invoices the broker

who, in turn, invoices the buyer,

collects, and remits to the seller. Under

other types of agreements, the seller

ships the produce to pool buyers, and

the broker as an accommodation to the

seller invoices the buyers, collects, and

remits to the seller. Also, there are times

when the broker is authorized by the

seller to act much like a commission

merchant, being given blanket authority

to dispose of the produce for the seller’s

account either by negotiation of sales to

buyers not known to the seller or by

placing the produce for sale on

consignment with receivers in the

terminal markets.

* * * * *

7. In section 46.28, paragraph (a) is

revised to read as follows:

§ 46.28 Duties of brokers.

(a) General. The function of a broker

is to facilitate good faith negotiations

between parties which lead to valid and

binding contracts. A broker who fails to

perform any specification or duty,

express or implied, in connection with

any transaction is in violation of the

Act, is subject to the penalties specified

in the Act, and may be held liable for

damages which accrue as a result of the

violation. It shall be the duty of the

broker to fully inform the parties

concerning all proposed terms and

conditions of the proposed contract.

After all parties agree on the terms and

the contract is effected, the broker shall

prepare in writing and deliver promptly

to all parties a properly executed

confirmation or memorandum of sale

setting forth truly and correctly all of

the essential details of the agreement

between the parties, including any

express agreement as to the time when

payment is due. The confirmation or

memorandum of sale shall also identify

the party who engaged the broker to act

in the negotiations. If the confirmation

or memorandum of sale does not

contain such information, the broker

shall be presumed to have been engaged

by the buyer. Brokers do not normally

act as general agents of either party, and

will not be presumed to have so acted.
15088 Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Rules and Regulations

Unless otherwise agreed and confirmed,

the broker will be entitled to payment

of brokerage fees from the party by

whom it was engaged to act as broker.

The broker shall retain a copy of such

confirmations or memoranda as part of

its accounts and records. The broker

who does not prepare these documents

and retain copies in its files is failing to

prepare and maintain complete and

correct records as required by the Act.

The broker who does not deliver copies

of these documents to all parties

involved in the transaction is failing to

perform its duties as a broker. A broker

who issues a confirmation or

memorandum of sale containing false or

misleading statements shall be deemed

to have committed a violation of section

2 of the Act. If the broker’s records do

not support its contentions that a

binding contract was made with proper

notice to the parties, the broker may be

held liable for any loss or damage

resulting from such negligence, or for

other penalties provided by the Act for

failing to perform its express or implied

duties. The broker shall take into

consideration the time of delivery of the

shipment involved in the contract, and

all other circumstances of the

transaction, in selecting the proper

method for transmitting the written

confirmation or memorandum of sale to

the parties. A buying broker is required

to truly and correctly account to its

principal in accordance with

§ 46.2(y)(3). The broker should advise

the appropriate party promptly when

any notice of rejection or breach is

received, or of any other unforeseen

development of which it is informed.

* * * * *

8. In § 46.45, the introductory text is

revised to read as follows:

§ 46.45 Procedures in administering

section 2(5) of the Act.

It is a violation of section 2(5) for a

commission merchant, dealer, or broker

to misrepresent by word, act, mark,

stencil, label, statement, or deed, the

character, kind, grade, quality, quantity,

size, pack, weight, condition, degree, or

maturity, or State, country, region of

origin of any perishable agricultural

commodity received, shipped, sold, or

offered to be sold in interstate or foreign

commerce. However, a person other

than the first licensee handling

misbranded perishable agricultural

commodities shall not be held liable for

a violation of section 2(5) of the Act by

reason of the conduct of another if the

person did not have knowledge of the

violation or lacked the ability to correct

the violation.

* * * * *

9. In § 46.46, paragraph (a) is

removed, paragraphs (b) through (g) are

redesignated as paragraphs (a) through

(f), and newly designated paragraphs (c),

(e)(2), and (f) are revised to read as

follows:

§ 46.46 Statutory trust.

* * * * *

(c) Trust benefits. (1) When a seller,

supplier or agent who has met the

eligibility requirements of paragraphs

(e) (1) and (2) of this section, transfers

ownership, possession, or control of

goods to a commission merchant,

dealer, or broker, it automatically

becomes eligible to participate in the

trust. Participants who preserve their

rights to benefits in accordance with

paragraph (f) of this section remain

beneficiaries until they are paid in full.

(2) Any licensee, or person subject to

license, who has a fiduciary duty to

collect funds resulting from the sale or

consignment of produce, and remit such

funds to its principal, also has the duty

to preserve its principal’s rights to trust

benefits in accordance with paragraph

(f) of this section. The responsibility for

filing the notice to preserve the

principal’s rights is obligatory and

cannot be avoided by the agent by

means of a contract provision. Persons

acting as agents also have the

responsibility to negotiate contracts

which entitle their principals to the

protection of the trust provisions:

Provided, That a principal may elect to

waive its right to trust protection. To be

effective, the waiver must be in writing

and separate and distinct from any

agency contract, must be signed by the

principal prior to the time affected

transactions occur, must clearly state

the principal’s intent to waive its right

to become a trust beneficiary on a given

transaction, or a series of transactions,

and must include the date the agent’s

authority to act on the principal’s behalf

expires. In the event an agent having a

fiduciary duty to collect funds resulting

from the sale or consignment of produce

and remit such funds to its principal

fails to perform the duty of preserving

its principal’s rights to trust benefits, it

may be held liable to the principal for

damages. A principal employing a

collect and remit agent must preserve its

rights to trust benefits against such

agent by filing appropriate notices with

the agent.

(e) Prompt payment and eligibility for

trust benefits.

* * * * *

(2) The maximum time for payment

for a shipment to which a seller,

supplier, or agent can agree and still

qualify for coverage under the trust is 30

days after receipt and acceptance of the

commodities as defined in § 46.2(dd)

and paragraph (a)(1) of this section.

* * * * *

(f) Filing notice of intent to preserve

trust benefits. (1) Notice of intent to

preserve benefits under the trust must

be in writing, must include the

statement that it is a notice of intent to

preserve trust benefits and must include

information which establishes for each

shipment:

(i) The names and addresses of the

trust beneficiary, seller-supplier,

commission merchant, or agent and the

debtor, as applicable,

(ii) The date of the transaction,

commodity, invoice price, and terms of

payment (if appropriate),

(iii) The date of receipt of notice that

a payment instrument has been

dishonored (if appropriate), and

(iv) The amount past due and unpaid.

(2) Timely filing of a notice of intent

to preserve benefits under the trust will

be considered to have been made if

written notice is given to the debtor

within 30 calendar days:

(i) After expiration of the time

prescribed by which payment must be

made pursuant to regulation,

(ii) After expiration of such other time

by which payment must be made as the

parties have expressly agreed to in

writing before entering into the

transaction, but not longer than the time

prescribed in paragraph (e)(2) of this

section, or

(iii) After the time the supplier, seller

or agent has received notice that a

payment instrument promptly presented

for payment has been dishonored.

Failures to pay within the time periods

set forth in paragraphs (f)(2)(i) and (ii)

of this section constitute defaults.

(3) Licensees may chose an alternate

method of preserving trust benefits from

the requirements described in

paragraphs (f) (1) and (2) of this section.

Licensees may use their invoice or other

billing statement to preserve trust

benefits. The alternative method

requires that the licensee’s invoice or

other billing statement, given to the

debtor, contain:

(i) The statement: ‘‘The perishable

agricultural commodities listed on this

invoice are sold subject to the statutory

trust authorized by section 5(c) of the

Perishable Agricultural Commodities

Act, 1930 (7 U.S.C. 499e(c)). The seller

of these commodities retains a trust

claim over these commodities, all

inventories of food or other products

derived from these commodities, and

any receivables or proceeds from the

sale of these commodities until full

payment is received.’’; and
Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Rules and Regulations 15089

1 See 61 FR 53331, October 11, 1996.

2 Pub. L. 104–105, 110 Stat. 162 (Feb. 10, 1996).

Section 211 of the 1996 Act provides that ‘‘the

requirements of the Farm Credit Administration

governing the dissemination to stockholders of

quarterly reports of System institutions may not be

more burdensome or costly than the requirements

applicable to national banks.’’ Section 211 applies

only to dissemination requirements and does not

affect the requirement that FCS institutions

continue to prepare and file quarterly reports with

the FCA in accordance with the quarterly report

filing and content requirements of part 620.

(ii) The terms of payment if they differ

from prompt payment set out in section

46.2(z) and (aa) of this part, and the

parties have expressly agreed to such

terms in writing before the affected

transactions occur.

10. A new § 46.49 is added to read as

follows:

§ 46.49 Written notifications and

complaints.

(a) Written notification, as used in

section 6(b) of the Act, means:

(1) Any written statement reporting or

complaining of a PACA violation(s)

filed by any officer or agency of any

State or Territory having jurisdiction

over licensees or persons subject to

license, or any other interested person

who has knowledge of or information

regarding a possible violation, other

than an employee of an agency of USDA

administering this Act or a person filing

a complaint under Section 6(c);

(2) Any written notice of intent to

preserve the benefits of the trust

established under section 5 of this Act;

or

(3) Any official certificate(s) of the

United States Government or States or

Territories of the United States.

(b) Any written notification may be

filed by delivering it to any office of

USDA or any official thereof responsible

for administering the Act. A written

notification which is so filed, or any

expansion of an investigation resulting

from any indication of additional

further violations of the Act found as a

consequence of an investigation based

on written notification or complaint,

shall also be deemed to constitute a

complaint under section 13(a) of this

Act.

(c) Upon becoming aware of a

complaint under Section 6(a) or 6(b) of

this Act, the Secretary will determine if

reasonable grounds exist for an

investigation of such complaint for

disciplinary action. If the investigation

substantiates the existence of violations,

a formal disciplinary complaint may be

filed by the Secretary as described

under Section 6(c)(2) of the Act.

(d) Whenever an investigation,

initiated as a result of a written

notification or complaint under Section

6(b) of the Act, is commenced, or

expanded to include new violations,

notice shall be given by the Secretary to

the subject of the investigation within

thirty (30) days of the commencement or

expansion of the investigation. Within

one hundred and eighty (180) days after

giving initial notice, the Secretary shall

provide the subject of the investigation

with notice of the status of the

investigation, including whether the

Secretary intends to issue a complaint

under Section 6(c)(2) of this Act,

terminate the investigation, or continue

or expand the investigation. Thereafter,

the subject of the investigation may

request in writing, no more frequently

than every ninety (90) days, a status

report from the Chief of the PACA

Branch who shall respond thereto

within fourteen (14) days of receiving

the request. When an investigation is

terminated, the Secretary shall, within

fourteen (14) days, notify the subject of

the investigation of the termination. In

every case in which notice or response

is required under this subsection such

notice or response shall be

accomplished by personal service or by

posting the notice or response by

certified mail to the last known address

of the subject of the investigation.

Dated: March 21, 1997.

Eric M. Forman,

Acting Director, Fruit and Vegetable Division.

[FR Doc. 97–7807 Filed 3–28–97; 8:45 am]

BILLING CODE 3410–02–P

FARM CREDIT ADMINISTRATION

12 CFR Parts 620 and 630

RIN 3052–AB62

Disclosure to Shareholders;

Disclosure to Investors in Systemwide

and Consolidated Bank Debt

Obligations of the Farm Credit System;

Quarterly Report

AGENCY: Farm Credit Administration.

ACTION: Final rule.

SUMMARY: The Farm Credit

Administration (FCA or Agency) adopts

final amendments to its regulations

governing the preparation, filing, and

distribution of Farm Credit System (FCS

or System) bank and association reports

to shareholders and investors. The rule

implements a statutory amendment that

supersedes the regulatory requirement

that FCS institutions disseminate

quarterly reports to shareholders.

The rule also imposes a new notice

requirement designed to improve

shareholder access to timely

information and disclosure regarding

adverse events affecting their

institutions. Under the new regulations,

FCS institutions must prepare and

distribute a notice to shareholders when

their permanent capital falls below the

regulatory minimum standard.

To facilitate the presentation of

financial statements by FCS institutions

in a manner that conforms with

generally accepted accounting

principles (GAAP), the rule removes the

requirement that banks must present

their financial statements on a

combined basis with their related

associations.

The rule also makes other technical

changes to FCA regulations governing

disclosure to shareholders and

investors.

DATES: The final rule shall become

effective upon the expiration of 30 days

after this publication during which

either or both Houses of Congress are in

session. Notice of the effective date will

be published in the Federal Register.

FOR FURTHER INFORMATION CONTACT:

Laurie A. Rea, Policy Analyst, Policy

Development and Risk Control, Farm

Credit Administration, McLean, VA

22102–5090, (703) 883–4498;

or

William L. Larsen, Senior Attorney,

Office of General Counsel, Farm

Credit Administration, McLean, VA

22102–5090, (703) 883–4020, TDD

(703) 883–4444.

SUPPLEMENTARY INFORMATION:

I. Background

On August 28, 1996, the FCA

proposed amendments to its regulations

governing disclosure to shareholders

and investors.1 The rulemaking

implements section 211 of the Farm

Credit System Reform Act of 1996 (1996

Act),2 addresses two regulatory petitions

received by the Agency, and takes other

related actions. To conform with the

1996 Act, the FCA proposed amending

subpart C of part 620 to eliminate

existing regulatory requirements for

distribution of quarterly reports to

shareholders. To improve shareholder

access to timely information and

disclosure regarding adverse events

affecting their institutions, the FCA

proposed a new requirement that

System institutions provide notice to

shareholders in the event of

noncompliance with regulatory

permanent capital requirements,

followed by subsequent notices in

situations of continued deterioration in

permanent capital. The FCA also

responded to petitions of System

institutions by proposing to remove the

requirement that banks present their