View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Federal R eserve Bank
OF DALLAS
W ILLIAM H. W ALLACE

DALLAS, TEXAS 7 5 2 2 2

f i r s t v ic e p r e s i d e n t

J u l y 15, 1986
C i r c u l a r 86-62

TO:

The Chief Executive O f f i c e r o f a l l
d e p o s it o r y i n s t i t u t i o n s in t he
Eleventh Federal Reserve D i s t r i c t

SUBJECT
Amendments to Regulation J —
and Wire Transfer of Funds

Collection of Checks and Other Items

DETAILS
The Board of Governors o f t he Federal Reserve System has adopted nine
amendments to Regulation J .
In a d d i t i o n , t he Board has modified i t s automated
c l e a r i n g house (ACH) procedures and has adopted a s t a n d a rd h o l i d ay s chedule
f o r Reserve Banks.
One amendment to Re gul at i on J , e f f e c t i v e J anuary 1, 1987, r e q u i r e s
paying banks t h a t v o l u n t a r i l y c l o s e on nons tandard h o l i d ay s t o pay f o r checks
made a v a i l a b l e to them on those days or t o pay t he Reserve Bank f o r t he value
of f l o a t t h a t oc c urs.
Another change to Regul at i on J would permit Reserve Banks t o c o l l e c t
checks drawn on banks lo c a te d in fo r e i g n c o u n t r i e s . This s e r v i c e wi ll be
provided on a l i m i t e d b a s is and a l l Reserve Banks may not p a r t i c i p a t e .
Other t e c h n ic a l changes r e l a t e p r i m a r i l y t o a Reserve Bank's
l i a b i l i t i e s re g a rd in g check c o l l e c t i o n and wire t r a n s f e r s o f funds.
To reduce and r e a l l o c a t e ACH f l o a t g en er at ed from nonstandard
h o l i d a y s , the Board adopted m o d i f i c a t i o n s t o Reserve Bank automated c l e a r i n g
house p r oc ed ure s, e f f e c t i v e April 1, 1987. In a d d i t i o n , t he Board approved a
s ta nd a r d holi da y schedule f o r Reserve Banks t o fo l l o w. E f f e c t i v e J an uary 1,
1987, a l l Reserve Banks w ill be cl o s ed on s t a n d a rd h o l i d ay s - - t h e 10 n a t i o n a l
h o li d a y s . I f a f ix e d ho lid ay (such as Christmas) f a l l s on a Sunday, t he
holida y w ill be observed the foll o wi n g Monday.

ATTACHMENTS
The B oard's press r e l e a s e and Federal R e g i s t e r documents are
attached.

For additional copies of any circular please contact the Public Affairs Department at (214) 651-6289. Banks and others are
encouraged to use the following incoming WATS numbers in contacting this Bank (800) 442-7140 (intrastate) and (800)
527-9200 (interstate).

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

- 2 -

MORE INFORMATION
For f u r t h e r in fo r m a ti o n , p l e a s e c o n t a c t t h e fo l l o wi n g i n d i v i d u a l s :
Robert L. Whitman, (214) 698-4357, o f t he Payments Mechanism Department a t t he
Head O f f i c e ; John Rogers, (214) 651-6228, o f t he Legal Department; Robert W
.
S c h u l t z , (915) 544-4370, a t the El Paso Branch; Vernon L. B ar t e e, (713)
659-4433 a t the Houston Branch; o r John A. B u l lo ck, (512) 224-2141 a t t h e San
Antonio Branch.
S i n c e r e l y yours

The Federa l Reserve Board has adopted amendments t o i t s R eg u l at i o n J - Check C o l l e c t i o n and T r a n s f e r s of Fun d s --co n cern i n g t h e re d u c t i o n and r e a l l o c a t i o n
of check f l o a t and t h e c o l l e c t i o n of fo r e i g n checks as well as some t e c h n i c a l
changes.

In a d d i t i o n , t h e Board modified i t s automated c l e a r i n g house (ACH)

p r o cedures and adopted a s ta n d a rd h o l i d ay s ch edu le f o r Reserve Banks.
One amendment t o R egula tio n J , e f f e c t i v e J an uary 1, 1987, r e q u i r e s
paying banks t h a t v o l u n t a r i l y c lo s e on n on st an dard h o l i d a y s t o pay f o r checks
made a v a i l a b l e t o them on th o s e days or t h e paying banks may e l e c t t o pay t h e
Reserve Bank f o r t h e value of t h e f l o a t t h a t o c cu rs .
Other changes t o t h e R egul at i o n would p erm i t Reserve Banks t o c o l l e c t
checks drawn on banks lo c a te d in fo r e i g n c o u n t r i e s .
on a l i m i t e d b a s i s .

This s e r v i c e w i l l be provided

The t e c h n i c a l changes r e l a t e p r i m a r i l y t o a Reserve Bank's

l i a b i l i t i e s r e ga rd in g check c o l l e c t i o n and wi re t r a n s f e r s of fun ds .
To reduce and r e a l l o c a t e ACH f l o a t g en er at ed from n on st an dard h o l i d a y s ,
t h e Board adopted m o d if ic a ti o n s t o Reserve Bank automated c l e a r i n g house p ro ce d u r e s ,
e f f e c t i v e April 1, 1987.

In a d d i t i o n , t h e Board approved a s t a n d a rd h o l i day

sch edule f o r t h e Reserve Banks t o fo l l o w.

E f f e c t i v e J an uary 1, 1987, a l l Reserve

Banks w i l l be c lo se d on s ta n d a rd h o l i d a y s - - t h e 10 n a t i o n a l h o l i d a y s .
The B oar d' s n o t i c e i s a t t a c h e d .

-

Attachment

0-

21740

Federal Register / Vol. 51, No. 115 / Monday, June 16, 1986 / Rules and Regulations

FEDERAL RESERVE SYSTEM
12 CFR Part 210
[Docket Nos. 0544, R-0552, and R-0558]

Collection of Checks and Other Items
and Wire Transfers of Funds;
Regulation J

notification of nonpayment
requirements of subpart A;
(3) Permit Reserve Banks to require
any prior indorser to defend a breach of
indorsement warranty suit even if the
Reserve Bank has not been sued
directly;
(4) Authorize Reserve Banks to collect
instruments drawn on payors located in
foreign countries;
(5) Clarify that Reserve Banks are not
liable for consequential damages in
handling wire transfers of funds;
(6) Add the Commonwealth of the
Northern Mariana Islands to the Twelfth
District for collection purposes;
(7) Adopt the definitions of the
Uniform Commercial Code for terms
that are used but not defined in
Regulation J;
(8) Effective January 1,1987, require
paying banks that close voluntarily on
days that are banking days for their
Reserve Banks to pay on such days for
cash items that Reserve Banks make
available to them on such days;
(9) Make permanent in slightly
modified form the temporary
amendment adopted on October 3.1985,
creating a standard holiday schedule to
be applied to Regulation J’s notification
of nonpayment provision.
Items 1 through 7 were proposed for
comments on March 22,1985, 50 FR
12310 (Mar. 28,1985); item 8 was
proposed on November 18,1985, 50 FR
47772 (Nov. 20,1985); and item 9’s
temporary rule became effective on
October 3,1985, 50 FR 41335 (Oct. 10,
1985).
The amendments are
effective on the following dates.
January 1,1987: § 210.9(a)
January 1,1990: §§ 210.6(c) and
210.38(b)(2)
All other amendments take effect on
August 1,1986.
The amended rules will apply to
checks and other items (for amendments
to subpart A) or transfer items or
requests (for amendments to subpart B)
received by a Reserve Bank on or after
the applicable effective date.

EFFECTIVE OATES:

Board of Governors of the
Federal Reserve System.
a c tio n : Final rule.

AGENCY:

The Board has adopted nine
amendments to Regulation J. These
amendments will:
(1) Permit the owner of a check or
other item who is allegedly injured by a
Reserve Bank’s alleged failure to
exercise ordinary care or act in good
faith in collecting an item to bring an
action against the Reserve Bank,
regardless of whether that person is a
"sender” as defined in Regulation J;
(2) Establish, beginning on January 1,
1990, a two-year limitation period for
actions against a Reserve Bank for
alleged mishandling of items under
subpart A or wire transfer items or
requests under subpart B, and, beginning
August 1,1986, a two-year limitation
period for actions against paying banks
for failure to comply with the

SUMMARY:

FOR FURTHER INFORMATION CONTACT:

Earl G. Hamilton, Assistant Director,
Division of Federal Reserve Bank
Operations (202/452-3879); Joseph R.
Alexander, Attorney, Legal Division
(202/452-2489); or Earnestine Hill or
Dorothea Thompson,
Telecommunications Device for ihe Deaf
(TDD) (202/452-3544).

Federal Register / Vol. 51, No. 115 / Monday, June 16, 1986 / Rules and Regulations
SUPPLEMENTARY INFORMATION:

1. Reserve Bank Liability To Remote
Parties
Section 210.6(a) of Regulation J
presently provides that in collecting
items a Reserve Bank acts only as the
agent of its sender (i.e., the depository
institution that forwards an item to a
Reserve Bank for collection) and is not
an agent for any other party in the
transaction. This rule is referred to as
the “sender rule". Because the liability
of a collecting bank, such as a Reserve
Bank, is predicated upon its status as
agent, this provision has the effect of
insulating a Reserve Bank from liability
in collection cases from all parties
except the sender. Accordingly, a third
party that does not immediately precede
a Reserve Bank in the collection process
cannot bring an action against the
Reserve Bank, even if it is able to
demonstrate that is has been injured by
the Reserve Bank’s failure to exercise
ordinary care in handling an item. This
provision has been upheld by several
courts. See, e.g., Childs v. Federal
Reserve Bank, 719 F.2d 812 (5th Cir.
1983).
Under section 4-201(a) of the Uniform
Commercial Code (“U.C.C."), a
collecting bank other than a Reserve
Bank is an agent or subagent of the
owner of an item. Accordingly, the
collecting bank may be held liable to
parties other than the immediately
preceding party if its improper handling
of an item causes them harm.
The sender rule dates from the 1920s,
before the state laws on check collection
were standardized. At that time, the
sender rule was in effect in a number of
states, and the U.S. Supreme Court had
previously approved the sender rule in
cases w'here federal law was to be
applied. See, Exchange National Bank v.
Third National Bank, 112 U.S. 276 (1884);
see also, Federal Reserve Bank v.
Malloy, 264 U.S. 160,164 (1924). The
U.C.C., however, adopted a different
rule, and it is the U.C.C. rule that is now
almost universal.
The Board proposed to amend
Regulation J to delete the sender rule so
that Reserve Banks are subject to suit by
the same parties that may bring actions
against collecting banks, and to make it
clear that warranties made by collecting
banks and other prior parties under
state law run to Reserve Banks as well
as other collecting banks. All of the
commenters supported the Board’s
proposal, and the Board has adopted the
amendment as proposed.
2. Limitation Period

a. Action Against a Reserve Bank
Regulation J is silent as to the time
limits in which a person may bring

action against a Reserve Bank for
mishandling checks or other items (in
subpart A) and vfrire transfer items or
requests (in subpart B). Consequently,
courts may apply state law. This has
resulted in a lack of uniform treatment
among Reserve Banks, since applicable
laws vary from state to state,1 and it is
often unclear even within a state which
limitation period applies. See Bank of
America N. T. & S.A. v. Security Pacific
National Bank, 23 Cal. App. 3d 638,100
Cal. Rep. 438 (1972); First State Bank v.
Tanner, 495 S.W.2d 267 (Tex. Civ. App.
1973). Given the identical functions
performed by Reserve Banks and their
offices in collecting checks and handling
wire transfers, the Board proposed to
establish a uniform two-year limitation
period for the commencement of actions
against Reserve Banks for mishandling
check collections and wire transfers.
Forty-one commenters responded to
this proposal: 18 of them (44 percent)
supported it; 23 (56 percent) opposed it.
Opposing commenters based their
opposition largely on their belief that
this proposal represents an abuse of the
Federal Reserve's regulatory authority
by creating an advantage for Reserve
Banks which is not enjoyed by their
private sector counterparts. Opposing
commenters pointed out that private
sector collecting banks would not
receive any benefit from this rule, and
would still be subject to liability for up
to six years. Nevertheless, most of the
commenters, even those opposed to this
proposal, supported the concept of a
uniform statute of limitations for all
depository institutions involved in check
collection and wire transfer cases. This
is especially important in light of the
increasing importance of interstate
banking.
This proposal, like all the proposals
the Board is here adopting, was not
intended to give a competitive
advantage for Federal Reserve Banks
vis-a-vis private sector institutions.
Rather, the Board believes that the
present state of the law, as regards both
Reserve Banks and private sector
institutions, is unsatisfactory. While the
Uniform Commercial Code has
standardized the responsibilities and
1 While state statutes of limitations sometimes
provide for specific limitations periods arising out of
specific kinds of actions (see e.g.. Cal. Civ. Pro.
Code § 340.5 (West 1982). which provides that, with
certain exceptions, an action for professional
negligence against a health care provider must be
commenced within the shorter of three years after
the da te of the injury, or one year after the plaintiff
either discovers the injury or should have
discovere d it through the use of reasonable
diligence), such statutes generally do not address
actions arising out of the collection of checks or the
transferring of funds by wire. Rather, such actions
are covered by more general statutes.

21741

liability of collecting banks throughout
the nation, there has as yet been no
attempt to standardize the time for
which institutions may be held liable for
mishandling checks. Thus, a collecting
bank in Massachusetts may be held
liable for three years, while one in
illinois id held liable for five years and
one in California is held liable for four
years,2 even though the plaintiffs’
actions against them may arise from
exactly the same kinds of actions.
This problem will intensify as
interstate banking becomes more of a
reality, and it could result in
inefficiencies in the check clearing
process if banks shift their clearing
operations to states with the most
favorable laws. The Board believes that
collecting banks, whether they are
Reserve Banks or private sector
correspondents, perform nearly identical
functions regardless of where they are
located, and should not be subject to
differing periods of liability merely
because of their location.
If a Reserve Bank does mishandle a
check or wire transfer, the results of the
mishandling should be apparent almost
immediately. Requiring the injured party
to sue within two years after the injury
occurs does not appear to impose any
significant hardship on any affected
parties. A two-year period provides an
adequate time for the institution
involved to identify the problem, and if
it cannot be resolved through
discussions with its Reserve Bank, to
bring an appropriate action against the
Reserve Bank. The Board further
believes that establishement of a twoyear limitation on actions ag&inst
Reserve Banks may serve as a model to
encourage state legislatures to enact
similar limitation periods.
In order to address the issues of
comparability between Reserve Banks
and collecting banks, one commenter
suggested that the Board delay the
effectiveness of this amendment until
January 1,1988, to give the states time to
adopt similar legislation. The Board
believes that this is a useful approach—
it allows the Federal Reserve to
encourage an improvement in payments
law, while at the same time avoiding the
appearance of the Federal Reserve’s
abusing its regulatory authority for
competitive gain that some may see in
this action. The Board believes,
however, that a January, 1988,- effective
date would not give the states sufficient
time to act, given the usual time for
changes in uniform laws, and, therefore,
2 See. Mass. Gen. Laws Ann . ch. 20, § 2A (West
Supp. 1984): III. Stat. Ann. ch. 110, § 13-205 (SmithHurd 1982); Cal. Civ. Proc. Code § 343 (West 1982).

21742

Federal Register / Vol. 51, No. 115 / Monday, June 16, 1986 / Rules and Regulations

the Board is delaying the effective date
of this amendment until January 1,1990.
Accordingly, the Board has
determined to adopt a two-year
limitation, period for actions against a
Reserve Bank for alleged mishandling of
items under subpart A or wire transfer
items or requests under subpart B. This
amendment will take effect on January
1,1990.

b. Action Against a Paying Bank for
Failure To Give Notice of Nonpayment
In February,1985, the Board adopted
an amendment to Regulation J requiring
paying banks to provide notice to
depositary banks when they return
unpaid large-dollar items presented by
Reserve Banks. This amendment took
effect on October 1,1985. In responding
to the Board’s proposal, one commenter
asked what statute of limitations
applied to the depositary bank’s claim
against the paying bank for failure to
comply with the notification
requirement. As is the case with actions
against a Reserve Bank, the limitations
period of the state in which the paying
bank is located would ordinarily be
applied.
The Board sought comment on
whether it would be appropriate to
establish a two-year limitation period
applicable to actions against a paying
bank for failing to make the required
notice of nonpayment. In the absence of
such a rule, the application of different
state limitation statutes could result in a
paying bank in one state being in
jeopardy for a longer period than a
paying bank in another state even
though both would be alleged to have
violated a uniform requirement of a
federal regulation in exactly the same
way.
The commenters overwhelmingly
supported the proposal. Of the 32
respondents commenting on this issue,
26 (81 percent) supported it.
Those commenters opposing the
proposal generally believed that the
limitation period for the notice of
nonpayment requirement should be
consistent with the limitation period for
actions against Reserve Banks, and that
both should be consistent with state
law.
The Board believes the notification
requirement should be applied
uniformly, and that it should not work in
conjunction with varying state laws to
subject some persons to liability longer
than others. Accordingly, the Board has
adopted the proposed amendment.
3. Tender of Defense
Section 210.5 of Regulation J
establishes a procedure that allows a
Reserve Bank, when sued by a

subsequent collecting or paying bank, to
demand that the sender undertake
defense of the action. This “tender of
defense” provision simplifies forged
indorsement cases by requiring the
party that should have obtained a
proper indorsement to come into the
action and defend.3 This provision,
however, applies only when the action
has been brought directly against a
Reserve Bank. Litigation may be
reduced by eliminating the requirement
that an action must be brought against a
Reserve Bank before defense is tendered
by a Reserve Bank to a prior party.
Accordingly, the Board sought comment
on a proposed amendment that would
accomplish this result.
The proposed amendment also
incorporated a provision found in the
uniform provisions of the Reserve
Banks’ operating circulars on the
collection of cash items that provides
that if a Reserve Bank tenders defense
of an action to a prior party, the Reserve
Bank is not responsible for defending
the action.
Thirty-six comments were received on
the proposal; 28 (78 percent) of them
supported the proposal as eliminating
multiple lawsuits. The eight comments
opposing the proposal generally thought
that Reserve Banks would be given an
unfair advantage over private sector
banks because of their ability to recover
the amount of their liability by charging
the sender’s account.
The Board believes that the proposal
will provide a more efficient way of
handling forged indorsement cases.
Further, the Board also believes that
adoption of the proposal will not result
in a significant increased advantage for
Reserve Banks over competing private
sector banks. The Reserve Banks
already have the right to charge back
under present procedures; this
amendment would merely add a
relatively limited class of cases to those
instances when the charge-back would
be applied under the current regulation.
Further, many private sector institutions
would be collecting checks only for
parties that have accounts with them
(e.g. other banks or individuals or
corporate depositors), and could
exercise a banker’s right of set-off to
recover amounts that they had been
held liable for, thus approximating the
Reserve Banks' right to charge back.
3 A similar provision is found in U.C.C. § 3-803.
The U.C.C. provision differs from the Regulation |
tender provision in that the U.C.C. allows the
person te ndered defense to require other prior
parties to defe nd the action. The U.C.C. provision
also does not clearly permit the person tendering
defense to recover the amount of the judgment and
e xp enses of litigation by charging the prior
indorser's account.

4. Deposit of Foreign Items
Regulation J defines the term “item” to
include only instruments payable within
a Federal Reserve District. Federal
Reserve Districts include the United
States, Puerto Rico, the U.S. Virgin
Islands, Guam, and American Samoa.4
This definition effectively excludes from
the coverage of Regulation J instruments
drawn on payors located outside the
United States, and consequently
Reserve Banks do not collect such
instruments. Many smaller institutions
have indicated that this restriction
imposes substantial hardships on them,
because it requires them to maintain a
separate relationship with a
correspondent bank that would handle
foreign items, and because foreign items
inadvertently sent to a Reserve Bank are
returned by the Reserve Bank, causing
undue delay. Consequently, they have
requested that Reserve Banks collect
such items in order to reduce the
operating burden the current limitation
imposes.
Accordingly, the Board proposed an
amendment to Regulation J that would
allow depository institutions to deposit
with their Reserve Banks items payable
in foreign countries. At the time the
Board proposed the amendment, Board
and Reserve Bank staffs had not
developed a proposal that would add
the collection of foreign items to the
priced services offered by the Reserve
Banks. Thus, the proposed amendment
did not specify a particular service
arrangement, but would merely clear the
regulatory obstacle to the service’s
implementation.
Forty-seven commenters addressed
this proposal, 26 (55 per cent) opposed it,
while 21 (45 per cent) supported it.
The negative commenters generally
argued that, contrary to the Board’s
criteria for the introduction of new
services; the Federal Reserve had not
demonstrated any need for a foreign
collection service, and that the Federal
Reserve was using foreign collections as
a means of gaining market share.
Consequently, if the Board adopted the
new service it would be abusing its
regulatory power in order to advance
the Reserve Banks’ business interests.
Several commenters also said that the
Board had not provided sufficient detail
in its proposal regarding such issues as
operational procedures and prices.
After reviewing the comments, Board
and Reserve Bank staffs undertook an
effort to define the proposed service
further in light of the commenters
4 After Board action today, the Northern M ariana
Islands also are within a Federal Reserve District.

Federal Register / Vol. 51, No. 115 / Monday, June 16, 1986 / Rules and Regulations
concerns. The Board believes that a
limited service will meet the objections
to a more comprehensive Federal
Reserve foreign collection service.
Accordingly, the Board has approved
the proposed amendment to Regulation
J, and is simultaneously adopting a
policy applicable to Federal Reserve
Banks under which the collection of
foreign items will be an incidental
service oriented toward existing
depositors. Under this policy:
1. Each Reserve Bank will have the
option to offer the service, and will
determine which foreign items it will
collect for its depositors.
2. Foreign items will be accepted only
as an incidental service from regular
depositors of domestic items. Further,
Reserve Banks will not promote this
service independently o f regular check
collection services.
3. Each Reserve Bank offering the
service will solicit written proposals
from depository institutions interested
in collecting foreign items for the
Reserve Bank.
The depository institutions should be
asked to specify the terms for their
service, including per item fees,
availability, exchange rates, and other
factors deemed important by the
Reserve Bank. The Reserve Bank will
then select an institution based upon the
Reserve Bank’s determination of the
best combination of terms available
among the proposals. No contract with a
correspondent institution for foreign
collections will be for a period of more
than two years, after which time the
Reserve Bank will solicit new proposals.
4. Reserve Bank prices will be based
on the prices and terms obtained from
the solicitation process. A Reserve
Bank’s price will include the fees paid to
the correspondent and the Reserve
Bank’s full costs for handling the item.
The PSAF will be applied to the
appropriate Reserve Bank costs; it need
not be applied to the correspondent's
fees, which already will include the
costs (such as taxes and return on
capital) imputed with the PSAF.
Because of the limited nature of this
new service, the Board does not expect
that it will have any significant long-run
effects on the nation's payments system,
and accordingly it is not necessary
under the Board’s pricing principles to
publish for public comment the prices
and service arrangements.

liable only for direct damages and is not
liable for consequential damages.
The Board proposed to amend
Regulation J to limit a Reserve Bank’s
liability for mishandling wire transfer
items and requests to damage that is
directly and immediately attributable to
the mishandling and to make it clear
that a Reserve Bank will not be liable
for consequential damages.
Of the 38 comments received on this
proposal, 25 (66 per cent) supported it,
while 13 (34 per cent) were opposed.
Those opposing the proposal generally
acknowledged that institutions have
amended their contracts with customers
to avoid liability for consequential
damages, but said that contractual
arrangements could not provide them
with the same level of security that a
federal regulation would provide to the
Reserve Banks. Therefore, adoption of
the amendment would give an
advantage to the Reserve Banks that
results from the exercise of regulatory
authority and not the competitive merits
of the Fedwire service.
The Board believes that these
objections are not well founded. Even
those that opposed this amendment
generally acknowledged that the
standard that the proposal seeks to
achieve for the Reserve Banks is the
standard of the industry, and the Board
does not believe that it would be
appropriate for Reserve Banks to bear a
substantially greater risk of liability
than the rest of the banking industry.
Although it may be true that a federal
regulation would provide more
protection to a Reserve Bank than a
similar provision in a wire transfer
agreement would provide to private
sector institutions, the Board does not
believe that this is sufficient reason for
not going forward with a desirable
change to Regulation J. As with the
proposal regarding the period during
which actions may be commenced
against a Reserve Bank for mishandling
checks and wire transfers, the Board
believes that this concept is a desirable
one for the industry as a whole, and, to
the extent that institutions transmitting
wire transfers on the behalf of
customers cannot protect themselves
through agreements, state laws should
be amended to insulate transmitting
banks from liability for consequential
damages in the area of wire transfers.5

5. Damages for Wire Transfers
Regulation J currently provides that a
Reserve Bank may be liable for damages
if it fails to exercise ordinary care or act
in good faith in handling a wire transfer
of funds. Regulation J, however, does not
clearly specify that a Reserve Bank is

5 While the law has not been completely settled
on this point, a leading case holds that
consequential damages may not be a w a r d e d unless
the transmitting bank is put on notice of the special
circumstances giving rise to them. Evro Corp. v.
Sw iss Bank Corp.. 673 F.2d 951 (7th Cir. 1982). The
Board, however, does not believe that this is a
practical solution. It is not clear w hat kind of
information would have to be available to the

21743

The Board believes that it can best
induce these changes by taking the lead
and adopting this proposal.
6. Northern Mariana Islands
The San Francisco Reserve Bank had
received a request from a bank in the
Northern Mariana Islands for a routing
number so that collecting banks could
automatically process checks drawn on
it. Because the Northern Marianas are
not now located in any Federal Reserve
District for collection purposes,
Regulation J would have to be amended.
Because of precedent in amendments to
Regulation J that redefined the Twelfth
District to include Guam and American
Samoa, the Board proposed to include
the Northern Mariana Islands within the
Twelfth District.
There was no opposition to the
proposal in the public comments, and
the Board has adopted it.
7. Incorporating U.C.C. Definitions
Regulation J defines several terms
used in the regulation. For the most part,
these definitions define terms that are
not found in the U.C.C. (e.g., "paying
bank” and “sender”) or define terms
differently than the U.C.C. does (e.g.,
“bank”). Other terms, however, are not
defined in Regulation J, such as “good
faith,” “presentment,” and "holder." As
these terms are used without explicit
definition, the Board proposed to amend
Regulation J to adopt the terminology of
the U.C.C. where it is not inconsistent
with the definitions specifically
provided in the regulation or where the
context does not require a different
interpretation.
There was no significant opposition to
this proposal in the public comments,
and the Board has adopted it.
8. Holiday Schedule for Notice of
Nonpayment Provision
In October, 1985, the Board adopted
as an interim rule an amendment to
Regulation J that defined a holiday
schedule for purposes of the requirement
that paying institutions give notice of
nonpayment for large-dollar checks
directly to the depositary bank. The
holidays adopted by the Board include
all Saturdays and Sundays and the ten
Reserve Bank, or how the Reserve Bank would have
to be informed; nor is it clear whether the Reserve
Bank would be in a position to evaluate the
information that the customer provided Rather, the
Board believes that the customer originating the
transfer is in the best position to know of the
consequences of a failure to make a timely payment,
and that customer should be required to take
prudent steps to avoid these consequences and
should b e ar the risks if those steps prove to be
inadequate.

21744

Federal Register / Vol. 51, No. 115 / Monday, June 16, 1986 / Rules and Regulations

holidays observed by the federal
government.6
One significant issue that was raised
by the commenters concerned the
treatment of fixed-date holidays (such
as July 4) falling on Saturday or Sunday.
Under the temporary rule, a holiday
falling on a Sunday would be observed
on the following Monday, and one
falling on a Saturday would be observed
on the previous Friday. The commenters
agreed with the treatment of holidays
falling on Sundays, but several said that
usual banking industry practice was not
to close on the previous Friday if the
holiday falls on a Saturday. They also
pointed out that, for example, Friday,
December 31, would probably be an
important business day for customers,
and that it would be useful to get
notification of nonpayment on such
days.
The Board agrees with these
comments, and, in making the temporary
rule final, it has amended the rule by
deleting the clause that provides that a
fixed-date holiday falling on a Saturday
will be observed on the previous
Friday.7
9. Nonstandard Holiday Float
In November, 1985, the Board
proposed that Regulation J be modified
so that a paying institution electing to
close on a voluntary nonstandard
holiday would be given the option of
accepting the debit for checks that
would have been presented to it if it
were open for business or paying for the
value of the float.8 The Board noted that
the increasing prevalence of interstate
banking created the potential for
increases in such float, and that current
procedures for deferring credit to
senders for nonstandard holiday float
are generally limited to those instances
where all banks in a state are closed.9
6 In a related action today, the Board approved a
Reserve Bank proposal to adopt a stand a rd holiday
schedule beginning in 1987.
7 This treatm ent conforms to the s tand ard
Reserve Bank holiday schedule referred to in note 7.
8 Daily average non stand ard holiday float in cash
item collection services is now approxim ately $5
million.
8 The Board noted in its original proposal, 50 FR
47,772 (Nov. 20,1985), that the D elaw are State Bank
Com missioner permits b ank s located in that state to
close on any day they choose, provided they give
the public adv anced notice. Banks with affiliates in
other states may take ad van tage of this fact to close
on days that their out-of-state affiliates are closed,
regardless of w hether other banks in D elaw are are
closed, a nd regardless of wheth er the Philadelphia
Reserve Bank is observing the holiday. The Board
note d that this situation creates the potential for
substa ntial incre ases in no nstan da rd holiday float,
a nd that cases like this a re likely to increase as
intefstate banking becomes more prevalent.

Against this background, the Board
proposed to require paying banks that
voluntarily close on nonstandard
holidays to pay for cash items made
available to them on such days. If the
nonstandard holiday is mandatory, the
paying bank would not have to pay for
items made available by its Reserve
Bank.
Because it is difficult to distinguish
between mandatory and voluntary
holidays, a preliminary list of proposed
mandatory nonstandard holidays was
issued as part of the Board’s request for
public comment. In order to provide
sufficient time to identify all mandatory
holidays, an implementation date of
January 1,1987, was proposed.
Forty-three of the 45 commenters on
this proposal supported it. Two
comments opposed this proposal, albeit
for different reasons. One commenter
suggested that the proposal was unfair
to small, rural banks; the other
commenter suggested that the problem
of interstate banking, which increases
the potential for nonstandard holiday
float, is unique to Delaware and, as
such, the proposal should only apply to
institutions in that state.
The Board does not believe that the
proposal is unfair to small, rural banks
or other institutions. Some institutions
may observe more voluntary
nonstandard holidays than others, but
the Board believes that this is a
voluntary decision made by the
institutions, and it is reasonable that the
institutions be made responsible for the
float incurred by their actions. The
Board also believes that a national
policy to deal with float resulting from
the observance of voluntary
nonstandard holidays is appropriate
given the expansion of interstate
banking throughout the United States.
Accordingly, the Board has approved
the proposed amendment to Regulation J
that will give a paying bank electing to
close on a voluntary nonstandard
holiday the option of accepting the debit
for cash items that would have been
presented to it if it had been open for
business or of paying for the value of the
float.
Regarding the Board’s request for
comment on a preliminary list of
mandatory nonstandard holidays, a
number of commenters offered
suggestions for changing or adding to
the list. Suggestions were made to add
Patriot’s Day, Seward’s Day, Easter
Monday, Alaska Day, and the day after
Christmas to the list of mandatory
nonstandard holidays for various states.
The Board believes that some of the
holidays may in fact be mandatory, but
that these issues should be resolved

locally. Each Reserve Bank whose
District contains states observing
mandatory nonstandard holidays should
publish as an appendix to its operating
circular on the collection of cash items a
list of mandatory nonstandard holidays
observed in its District.
Regulatory Flexibility Analysis
The Board does not believe that these
amendments will have a significant
economic impact on a substantial
number of small businesses or
organizations.
List of Subjects in 12 CFR Part 210
Banks, banking, Federal Reserve
System.
PART 210—[AMENDED]
Pursuant to its authority under section
13 of the Federal Reserve Act, 12 U.S.C.
342; section 16 of the Federal Reserve
Act, 12 U.S.C. 248(o) and 360; section
ll(i) of the Fedeal Reserve Act, 12 U.S.C.
248(i); section 19(f), 12 U.S.C. 464; and
other provisions of law, the Board
hereby amends 12 CFR Part 210,
Regulation J, as set forth below:
1. The authority citation for Part 210
continues to read as follows:
Authority: Federal Reserve Act, sec. 1 3 , 12
U.S.C. 342; sec. ll(i), 12 U.S.C. 248(i) sec. 16,
12 U.S.C. 248(o) and 360; and sec. 19(f), 12
U.S.C. 464.

2. By adding a new undesignated
paragraph to the end of § 210.2, and by
revising footnote 1 to read as follows:
§210.2
*

*

Definitions.
*

*

*

Unless the context otherwise requires,
the terms not defined herein have the
meanings set forth in the Uniform
Commercial Code.
1 For purpose of this subpart, the Virgin
Islands and Puerto Rico are deem ed to be in
the Second District, and Guam, American
Samoa, and the Northern M ariana Islands in
the Twelfth District.

3. In § 210.3, new paragraph (e) is
added to read as follows:
§ 210.3 General provisions.
*

*

*

*

*

(e) Foreign items. A Reserve Bank
also may receive and handle certain
items payable outside a Federal Reserve
District, as provided in its operating
circulars. The handling of such items in
a state is governed by this subpart, and
the handling of such items outside a
state is governed by the local law.
4. In § 210.5, paragraphs (a) (2), (b),
and (c) are revised to read as follows:

Federal Register / Vol. 51, No. 115 / Monday, June 16, 1986 / Rules and Regulations
§ 210.5 Sender’s agreement; recovery by
Reserve Bank.

(a) * * *
(2) Warrants to each Reserve Bank
handling the item that: (f) The sender
has good tftle to the item or is
authorized to obtain payment on behalf
of one who has good title (whether or
not this warranty is evidenced by the
sender's express guaranty of prior
indorsements on the item); and
(ii) To the extent prescribed by state
law applicable to a Reserve Bank or
subsequent collecting bank handling the
item, the item has not been materially
altered; but this subparagraph (a)(2)
does not limit any warranty by a sender
or other prior party arising under state
law; and
*

*

*

*

*

(b) Recovery by Reserve Bank. If an
action or proceeding is brought against
(or if defense is tendered to) a Reserve
Bank that has handled an item, based
on:
(1) The alleged failure of the sender to
h^/e the authority to make the warranty
and agreement in paragraph (a)(1) of
this section;
(2) Any action by the Reserve Bank
within the scope of its authority in
handling the item; or
(3) Any warranty made by the
Reserve Bank under § 210.6(b) of this
subpart, the Reserve Bank may, upon
entry of a final judgment or decree,
recover from the sender the amount of
attorneys’ fees and other expenses of
litigation incurred, as well as any
amount the Reserve Bank is required to
pay because of the judgment or decree
of the tender of defense, together with
interest thereon.
(c) Methods o f recovery. The Reserve
Bank may recover the amount stated in
paragraph (b) of this section by charging
any account on its books that is
maintained or used by the sender (or if
the sender is another Reserve Bank, by
entering a charge against the other
Reserve Bank through the Interdistrict
Settlement Fund), if:
(1) The Reserve Bank made
seasonable written demand on the
sender to assume defense of the action
or proceeding; and
(2) The sender has not made any other
arrangement for payment that is
acceptable to the Reserve Bank.
The Reserve Bank is not responsible for
defending the action or proceeding
before using this method of recovery. A
Reserve Bank that has been charged
through the Interdistrict Settlement Fund
may recover from its sender in the
manner and under the circumstances set
forth in this paragraph. A Reserve
Bank's failure to avail itself of the

remedy provided in this paragraph does
not prejudice its enforcement in any
other manner of the indemnity
agreement referred to in paragraph (a)(3)
of this section.
*

*

*

*

*

5. In § 210.6, paragraph (a)(1) is
revised, and, effective January 1,1990,
new paragraph (c) is added as set forth
below:
§210.6 Status, warranties, and liability of
Reserve Bank.

(a)(1) Status and liability. A Reserve
Bank shall act only as agent or subagent
of the owner in respect of an item. This
agency terminates not later than the
time the Reserve Bank receives payment
for the item in actually and finally
collected funds and makes the proceeds
available for use by the sender. A
Reserve Bank shall not have or assume
any liability in respect of an item or its
proceeds expect for the Reserve Bank’s
own lack of good faith or failure to
exercise ordinary care and except as
provided in paragraph (b) of this section.
*

*

*

*

*

(c) Time for commencing action
against Reserve Bank. 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. 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.
6. Effective January 1,1987, the last
sentence of § 210.9(a)(2) is revised to
read as follows:
§210.9
*

*

Payment.
*

*

*

(a) * * *
(2) * * * A paying bank that closes
voluntarily on a day that is a banking
day for the Reserve Bank shall either
pay on that day by the close of the
Reserve Bank’s banking day for cash
items that the Reserve Bank makes
available to the paying bank on that
day, or compensate the Reserve Bank
for the value of the float associated with
the items in accordance with procedures
provided in its Reserve Bank’s operating
circular; in such circumstances, the
paying bank is not considered to receive
the item until its next banking day.
7. In § 210.12, paragraph (c)(10) is
revised and new paragraph (c)(ll) is
added as set forth below:
§210.12

Return of cash items.

(c) * * *
(10) The following days shall not be
considered banking days for purposes of
the deadline for notice of nonpayment:

21745

Saturdays and Sundays, January 1. the
third Monday in January, the third
Monday in February, the last Monday m
May, July 4, the first Monday in
September, the second Monday in
October, November 11, the fourth
Thursday in November, and December
25. If January 1, July 4, November 11, or
December 25 fall on a Sunday, the next
following Monday shall not be
considered a banking day for purposes
of this subsection.
(11) A claim for failure to comply with
the requirements of this paragraph (c) is
barred unless the action on the claim is
commenced within two years after the
date upon which the notice was required
to be received by the depositary bank.
8. In § 210.38, paragraph (b) is revised
to read as follows:
§ 210.38 Reserve Bank liability.

*

*

*

*

*

(b) Damages. A Reserve Bank is liable
to its immediate transferor for a failure
to credit the amount of a transfer item or
request to the transferee’s account
caused by a Reserve Bank’s failure to
exercise ordinary care or act in good
faith. A Reserve Bank’s liability for such
a failure to credit is limited to damages
that are attributable directly and
immediately to the failure to credit, but
does not include damages that are
attributable to the consequences of the
failure to credit, even if such
consequences were foreseeable at the
time of such failure.
* * * * *
9. Effective January 1,1990, in
§ 210.38, paragraph (b) is redesignated
paragraph (b)(1), and new paragraph
(b)(2) is added as follows:
§ 210.38 Reserve Bank liability.
*

*

*

*

*

(b) * * *
(2) A claim against a Reserve Bank for
failure to exercise ordinary care or to
act in good faith shall be barred unless
the action on the claim is commenced
within two years after the claim accrues.
A claim accrues on the date a Reserve
Bank’s alleged failure to exercise
ordinary care or to act in good faith first
results in damages to the claimant.
* * * * *
By order of the Board of Governors, June 6,
1986.
William W. Wiles,

Secretary of the Board.
[FR Doc. 86-13219 Filed 6-13-86; 8:45 am]
BILLING CODE 6210-01-M

FEDERAL RESERVE BANK OF DALLAS
STATION K, DALLAS, TEXAS 7 5 2 2 2

BULK RATE
U.S. POSTAGE

PAID
PERMIT NO. 151