655 15TH ST, NW, SUITE 700 WASHINGTON, DC 20005 TELEPHONE: 202/452-8444 FAX: 202/429-4519

March 31, 2000

Ms. Jennifer J. Johnson, Secretary
Board of Governors of the Federal Reserve System
20th and C Streets, NW
Washington, DC 20551

Dear Ms. Johnson:

The Food Marketing Institute (FMI) respectfully submits the following comments in response to the notice of proposed rulemaking issued by the Board of Governors of the Federal Reserve System in order to implement the notice requirements and restrictions on the ability of financial institutions to disclose nonpublic personal information about consumers to nonaffiliated third parties pursuant to Title V of the Gramm-Leach-Bliley Act. 65 Fed. Reg. 8770 (Feb. 22, 2000).

FMI is a non-profit association conducting programs in research, education, industry relations and public affairs on behalf of its 1,500 members and their subsidiaries. Our membership includes food retailers and wholesalers, as well as their customers, in the United States and around the world. FMI's domestic member companies operate approximately 21,000 retail food stores with combined annual sales volume of $220 billion, which accounts for more than half of all grocery store sales in the United States. FMI's retail membership is composed of large multi-store chains, small regional firms and independent supermarkets. Our international membership includes 200 members from 60 countries.

FMI members have a strong commitment to privacy issues and, in this regard, have developed a policy statement for our industry regarding the use of consumer data, including guidelines on notice, choice, security and access. A copy of our statement is enclosed for your reference.

With specific regard to this proposal, our industry is concerned about hindering the development of future types of electronic payment instruments. Our industry currently accepts hundreds of millions of paper checks annually and the number is increasing each year. We appreciate the Federal Reserve’s commitment to finding less expensive, more efficient alternatives to the paper check and look forward to continuing to work with you in that regard.

One exciting new payment type is the electronically converted check. A converted check is a paper check that is presented by the customer to the retailer for payment and then converted to an Automated Clearing House (ACH) transaction at the point-of-sale (POS). The store’s POS equipment reads the magnetic ink character recognition (MICR) line on the customer’s check and initiates an ACH transaction for the amount of the customer’s order. The customer then signs a receipt authorizing the transaction amount to be debited electronically from the customer’s checking account via the ACH system. The paper check, which has now been voided so it cannot be used again, is then returned to the customer along with a copy of the signed authorization.

The concern we have with the potential application of this proposed rule is on the back end of the check conversion process. Currently, if an account has insufficient funds to cover the amount of a check at the time that the paper check is presented, the paper check is returned to the retailer by the financial institution. Using the name, address and telephone number on the face of the check, the retailer can contact the consumer to make other arrangements to collect payment for the order or to resubmit the paper check for payment. Similarly, supermarket retailers will need access to consumers’ identifying information (name, address, telephone number) from financial institutions in the case of electronically converted checks that were not collectable when presented through the ACH. The ability to retrieve identifying information from a financial institution in the case of an uncollected converted check is critical to the future growth of this form of payment and a reduction in paper checks. Accordingly, FMI encourages the Board to allow financial institutions to share identifying information under these circumstances as well as with other forms of payment processed through the ACH network and also to encourage and require the dissemination of this information.

Facilitating the electronic check conversion process will help achieve some of the most important goals of the financial privacy regulations. Specifically, the electronic check conversion process significantly reduces the amount of personally identifiable information that is held by an unaffiliated third party. Paper checks printed with name, address and telephone number are now no longer held by the retailer or the financial institution and instead are kept by the customer. Personally identifiable information would only be retrieved from the financial institution for the small number of converted checks that are returned electronically uncollected due to insufficient funds. Thus, encouraging electronic check conversion will further the overall goals of the financial privacy regulations.

Title V of the Gramm-Leach-Bliley Act contains several exclusions that should prevent the notice and non-disclosure requirements from applying in the case of converted checks that have been returned electronically due to insufficient funds (NSF). The statutory exclusions are reflected in proposed Section 216.10 "Exceptions to notice and opt out requirements for processing and servicing transactions." Specifically, proposed Section 216.10 states that the notice and opt out requirements would not apply to processing transactions at the consumer’s request or to effect, administer or enforce a transaction requested or authorized by the consumer. The converted check example highlighted above is clearly authorized by the consumer and the information requested of the financial institution is clearly necessary to administer and enforce the transaction, thereby seeming to fall within the outlined exclusions.

Nonetheless, we have two specific concerns in this area. First, financial institutions should not only be allowed to share identifying information with retailers in the case of NSF checks that have been submitted electronically, financial institutions should be required to share this information as a standard practice. Second, in spite of the exclusions in Section 216.10, we are concerned that, without further clarification, financial institutions will simply opt not to supply the information due to confusion surrounding what is allowed information sharing in this instance, thereby severely reducing the growth of electronically converted checks at the point-of-sale.

The proposed rule sets forth two alternative definitions of "publicly available information." Under Alternative "A," information will not be considered "publicly available" unless the information is obtained from one of the public sources listed in the proposed rule. In contrast, Alternative "B" treats information as publicly available if it could be obtained from one of the public sources listed in the rules. Proposed Section 216.3(p); 65 Fed. Reg. at 8774-75.

Although the financial privacy restrictions should not apply in the converted check situation described above, the Federal Reserve should adopt the Alternative "B" definition of "publicly available information" because it would be helpful in encouraging financial institutions to continue to provide retailers with name, address and telephone information for consumers whose electronically converted checks have been returned unpaid due to insufficient funds. Alternative "A," which would require the financial institution to look up the name, address and phone number of a consumer in a telephone directory or other publicly available information source rather than to retrieve the same information from the account, would effectively put an end to the information sharing necessary for this new technology to succeed.

We appreciate the opportunity to provide comments on this important issue. We applaud the direction the Board is taking in this proposed rule. However, we strongly encourage the Federal Reserve to not only allow, but to require as a standard business practice of financial institutions, the sharing of identifying information in the case of checks or other forms of payment processed through the ACH network that have been submitted electronically and then returned to the retailer due to insufficient funds. Our industry feels that this action would help us to reduce the increasing number of paper checks presented at retail stores and also the hundreds of millions of dollars in losses caused by returned checks at the retail level. Moreover, since retailers will not need to retain personally identifiable information for converted checks if this information can be readily obtained from the financial institution in those rare cases in which it will be necessary, the overall goals of the financial privacy regulations will be furthered by ready retailer access to this information on an "as necessary" basis.

Thank you for your consideration.

Sincerely,

George R. Green
Vice President
General Counsel