Discussion on Maintaining Loyalty & Promotional Exemptions & Best Practices

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1 Discussion on Maintaining Loyalty & Promotional Exemptions & Best Practices Wednesday, January 30, :00pm EST Presented by: Elish A. Meyers, Esq. Adrienne Strecker, Esq.

2 Overview Many loyalty, award, and promotional (LAP) gift card products are exempt from state and federal laws governing gift cards However, some ILAP products may not fall under these exemptions Non-exempt ILAP products still need to comply with gift card laws, including unclaimed property and federal and state consumer protection regulations 2

3 Introduction Applicable Gift Card Laws Depends on card type and features Federal, State and Unclaimed Property Regulations Exemptions exist under most regulations for ILAP cards e.g., incentive, loyalty, awards and promotional 3

4 Regulation Complexity Escheat Statutes: Consumer Statutes: Privacy: AML: Licenses: Income Tax: Income Tax: Activity Taxes: GAAP: SEC: E-Funds: Bank Reform Laws: RAAP: Network Rules: Bank Rules: 50 States Federal and 50 States Federal and some States Federal Anti-Money Laundering Rules, OFAC Federal (FinCEN) and States (Money Transmitter) Special IRS Rules on Tax Recognition Special IRS 1099 Requirements 5 States US and International Standards Earnings Recognition Rules Federal Dodd-Frank-Durbin, Interchange, etc. Bank Regulation Accounting MasterCard & Visa Operating Regulations Bank Internal Operating Rules The Feds The States FED FTC CFPB IRS Attorney General Treasurer FinCEN OCC OTC Banking / Financial Services 4

5 Exemptions for ILAP Generally Expiration Dates restrictions Cash Back requirements Escheat Fee restrictions Packaging 1800 # 5

6 How an ILAP Qualifies for Exemptions Proper disclosures-different requirements for some states and federal laws No consideration given or other thing of value for certain states Consumers should not pay for an ILAP card or give other thing of value to get an ILAP card -giving an address, purchase of another card required to received an ILAP card, joining a loyalty or reward program in exchange for an ILAP card 6

7 Problematic Regulations of ILAP Some states do not have exemptions for ILAP cards To the extent a consumer pays money for an ILAP, the card is subject to state unclaimed property laws requiring escheat of gift cards Proper disclosures to maintain exemptions are very specific and sometimes inconsistent Disclosures apply to chain of distribution Gift certificates and cards are broadly definednot just activated cards via a processor 7

8 Gift cards are broadly defined to include a wide variety of payment instruments A gift certificate is a card, code, or device Credit CARD Act of 2009, 12 C.F.R (a)(1) Gift certificate means a record, including a gift card or stored value card by means of a microprocessor chip, magnetic stripe, bar code, or other electronic information storage device Montana Code Annotated (5)(a) Stored value card includes a record that contains a microprocessor chip, magnetic strip, or other means of storing information Texas Business & Commercial Code

9 State Consumer Protection 37 states have gift card consumer protection laws In most of these 37 states, to the extent a consumer pays money for an ILAP card then it is subject to state consumer protection laws governing gift cards In some states a consumer giving other thing of value for an ILAP card subjects the card to state consumer protection laws governing gift cards 9

10 State Consumer Protection Expiration date restrictions A few states have restrictive laws prohibiting expiration dates in general Approx. one third of states may prohibit expiration dates to the extent the consumer has paid any money; however, the law in this area is unsettled Cash back requirements Varying requirements in California, Colorado, Maine, Massachusetts, Montana, Rhode Island, Vermont, and Washington 10

11 Credit CARD Act of 2009 Which parties are subject to the CARD Act? Distributor/Reseller Redeeming entity Issuer (third party or subsidiary) ILAP gift cards are exempt from the CARD Act s provisions, so long as proper disclosures are made 11

12 Credit CARD Act of 2009 Disclosures required to qualify for loyalty, award, or promotional exemption: A statement indicating the card, code, or other device is issued for loyalty, award, or promotional purposes, which must be included on the front of the card, code, or other device; The expiration date for the underlying funds, which must be included on the front of the card, code, or other device; The amount of any fees that may be imposed ; If any fees are imposed, a toll-free number and, if one is maintained, a Web site, that a consumer may use to obtain fee information. 12 C.F.R (a)(4)(iii) If these disclosures are not properly made, the gift card (or daily deal voucher) is subject to the CARD Act s expiration date restrictions, which means the card, code, or device cannot expire within 5 years 12

13 Program Considerations to Maintain Exemptions Gift cards which are sold or distributed as part of a LAP program and through retail channels should each look different to a consumer. The separate version of promotional cards should include the proper disclosures in order to maintain exemptions under the state s law and under the CARD Act. A review of agreements in the distribution channel is recommended to be sure that all parties continue to maintain the proper disclosures in packaging and marketing materials and the use of the cards in the distribution channel ultimately ends in consumer s hands at no cost. Collection of consumer personal information or offering an additional card for free with the purchase of one could be considered other thing of value and should be carefully considered and planned to minimize impact. 13

14 Program Considerations to Maintain Exemptions Hybrid cards (part heavily discounted or free and part payment by consumer) should contain dual disclosures, in the proper places, so that the promotional nature of the card may still receive exemption status under some state laws and federal law. Restrictions on the resale of LAP cards should exist in vendor agreements. Holiday promotions should be reviewed each season for law changes. Collective assessment of LAP program to be sure no other conflicts exist. Whether or not a processor tracks or activates cards, types of electronic, paper and virtual cards may still be subject to state and federal laws. 14

15 Douthit Frets Rouse Gentile & Rhodes Prepaid Services The payment instrument and prepaid card attorneys at Douthit Frets Rouse Gentile & Rhodes, LLC have extensive experience with regulatory compliance of payment instruments and prepaid cards. Our experience encompasses all aspects of the implementation and management of payment and prepaid card programs, including federal and state regulatory compliance, federal and state lobbying and legislative efforts, consumer protection, unclaimed property, anti-money laundering, money transmission, privacy, electronic funds, virtual payment and prepaid cards, management of breakage and slippage, legal related accounting matters, vendor contracts, bank sponsor agreements, third-party distributor contracts, and related business transactions. Our attorneys have represented all segments of the industry, including state and federal banks and financial institutions, national, regional, and local retail chains, online and web-based retailers, and industry organizations. Our expertise enables our clients to navigate an increasingly complex array of state and federal regulations and incorporate compliance management techniques into their payment instrument and prepaid card programs. 15

16 Douthit Frets Rouse Gentile & Rhodes Prepaid Services Below are examples of the projects undertaken by the payments and prepaid card group of the law firm: Program Regulatory Management: Our lawyers have designed and managed regulatory compliance systems for over 500 programs in the United States, Canada, and Europe. Industry Innovation: Our lawyers have served as attorneys for industry innovators. Legislative Projects: Our lawyers have been retained to present information or comment upon numerous proposed statutes and regulations, such as the Credit CARD Act of 2009, the Durbin Amendment, FinCEN regulations, and numerous state and provincial regulations. Industry Standards: Our lawyers have worked on several standards used in the payment and prepaid card industries, such as the standards for derecognizing prepaid card and payment liabilities set by the Financial Accounting Standards Board and the International Accounting Standards Board. Litigation Support: Our lawyers have served as direct and special counsel with respect to litigation matters in the payments and prepaid card industry. 16

17 Elish A. Meyers, Esq. Elish has extensive transactional experience in the areas of regulatory compliance for stored value card products and unclaimed property analysis. Her client base consists of an international network of over 2000 individuals and companies. She has taken on the role of Vice-President at Card Compliant, LLC. Card Compliant is a compliance specialty company serving the prepaid and stored value card industry by providing technology supported and processed solutions to regulatory compliance challenges encountered in administering card programs. Elish also works in the government sector on behalf of the prepaid and gift card industry. Contact at: [email protected] 17

18 Adrienne E. Strecker, Esq. Adrienne primarily focuses her practice on payment instruments and prepaid cards and business transactions. She is experienced in regulatory compliance of prepaid cards and other payment instruments, including state and federal consumer protection, escheat and unclaimed property, antimoney laundering, privacy, breakage, and related business transactions. Prior to joining the firm, Adrienne was a Director of Sales at Card Compliant, LLC where she helped develop an anti-money laundering product and worked with many national retailers and restaurants on AML and escheat compliance. Contact at: [email protected] 18

19 This publication is issued to keep the IGCC and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The comments contained herein do not constitute legal opinion and should not be regarded as a substitute for legal advice. 19