# Special Supplemental Nutrition Program for Women, Infants and Children (WIC): Food Delivery Systems > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A00-33111 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** December 29, 2000 - **Citation:** 65 FR 83248 ## Text DEPARTMENT OF AGRICULTURE Food and Nutrition Service 7 CFR Part 246 RIN 0584-AA80 Special Supplemental Nutrition Program for Women, Infants and Children (WIC): Food Delivery Systems AGENCY: Food and Nutrition Service, USDA ACTION: Final rule. SUMMARY: This final rule amends the regulations governing the Special Supplemental Nutrition Program for Women, Infants and Children. It strengthens vendor management in retail food delivery systems by establishing mandatory selection criteria, training requirements, criteria to be used to identify high-risk vendors, and monitoring requirements, including compliance investigations. In addition, the rule strengthens food instrument accountability and sanctions for participants who violate program requirements. It also streamlines the vendor appeals process. The rule will increase program accountability and efficiency in food delivery and related areas and decrease vendor violations of program requirements and loss of program funds. DATES: This rule is effective February 27, 2001. State agencies must implement the provisions of this rule no later than February 27, 2002. FOR FURTHER INFORMATION CONTACT: Debra Whitford, Branch Chief, Supplemental Food Programs Division, Food and Nutrition Service, USDA, 3101 Park Center Drive, Room 542, Alexandria, Virginia 22302, (703) 305-2730. SUPPLEMENTARY INFORMATION: Executive Order 12866 This final rule has been determined to be “significant” and was reviewed by the Office of Management and Budget (OMB) under Executive Order 12866. Regulatory Flexibility Act This rule has been reviewed with regard to the requirements of the Regulatory Flexibility Act (5 U.S.C. 601-612). Pursuant to that review, Shirley R. Watkins, Under Secretary, Food, Nutrition, and Consumer Services, has certified that this rule would not have a significant impact on a substantial number of small entities. This rule amends vendor selection, training, monitoring, and appeal procedures and/or systems. The effect of these changes falls primarily on State agencies. Local agencies and vendors will also be affected, some of which are small entities. However, the impact on small entities is not expected to be significant. Whereas extensive data is collected regarding program participants, the WIC Program does not collect data on the size of businesses that are authorized as vendors. Of the 45,000 authorized vendors, it is estimated that approximately 20,000 of them may be small businesses. Stores choose whether to apply for program authorization. All authorized vendors, regardless of their size, agree to comply with the program requirements. Although this rule strengthens some of the program requirements regarding vendors, many State agencies have already implemented similar provisions using their current authority. For example, although specific selection criteria are now mandated, most State agencies already use the noted criteria. As such, we do not foresee dramatic future decreases in the number of smaller vendors. Likewise, training is routinely provided to vendors. This final rule allows such training to be provided on-site at the vendor, off-site classroom style, or via a training video or newsletter. In addition, although the State agency is responsible for designating the date, time, and location of the training, the State agency must offer the vendor at least one alternative date on which to attend the training. Executive Order 12372 The Special Supplemental Nutrition Program for Women, Infants and Children (WIC) is listed in the Catalog of Federal Domestic Assistance Programs under 10.557. For the reasons set forth in the final rule in 7 CFR 3015, Subpart V, and related Notice (48 FR 29115), this program is included in the scope of Executive Order 12372 which requires intergovernmental consultation with State and local officials. Executive Order 12988 This final rule has been reviewed under Executive Order 12988, Civil Justice Reform. This proposed rule is intended to have preemptive effect with respect to any State or local laws, regulations or policies which conflict with its provisions or which would otherwise impede its full implementation. This rule is not intended to have retroactive effect unless so specified in the DATES paragraph of this preamble. Prior to any judicial challenge to the application of the provisions of this rule, all applicable administrative procedures must be exhausted. Executive Order 13132 Executive Order 13132 requires Federal agencies to consider the impact of their regulatory actions on State and local governments. Although the proposed rule was published before the Executive Order was issued, we considered the impact on State agencies when we developed both the proposed and final rules. Before drafting both the proposed and final rules, we received input from State agencies at various times. Because the Program is a State-administered, federally funded program, our regional offices have formal and informal discussions with State and local officials on an ongoing basis. These discussions involve implementation and policy issues. This arrangement allows State agencies to provide feedback that forms the basis for many discretionary decisions in this and other Program rules. In addition, FNS officials attend regional, national, and professional conferences to discuss issues and receive feedback from State officials at all levels. Lastly, the comments on the proposed rule from State officials were carefully considered in drafting this final rule. For example, in response to comments from State agencies we revised the proposed rule to leave the following areas to State agency discretion: (1) Use of limiting criteria, (2) use of training receipts, (3) development of alternative criteria for identifying high-risk vendors, and (4) use of abbreviated rather than full administrative review procedures. The preamble below contains a more detailed discussion of our response to all the comments received on the rule. Unfunded Mandates Reform Act of 1995 Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1531-38) establishes requirements for Federal agencies to assess the effects of their regulatory actions on State, local and tribal governments and the private sector. Under section 202 of the UMRA, the Food and Nutrition Service (FNS) generally must prepare a written statement, including a cost benefit analysis, for proposed and final rules with “Federal mandates” that may result in expenditures to State, local or tribal governments, in the aggregate, or the private sector, of $100 million or more in any one year. When such a statement is needed for a rule, section 205 of the UMRA generally requires FNS to identify and consider a reasonable number of regulatory alternatives and adopt the most cost-effective or least burdensome alternative that achieves the objectives of the rule. This final rule contains no Federal mandates (under the regulatory provisions of Title II of the UMRA) for State, local and tribal governments or the private sector of $100 million or more in any one year. Thus, the rule is not subject to the requirements of sections 202 and 205 of the UMRA. Paperwork Reduction Act of 1995 The reporting and recordkeeping requirements associated with this final rule have been submitted for approval to the Office of Management and Budget (OMB) under OMB No. 0584-0043. This submission includes a revised reporting requirement for State Plan submissions (Section 246.4) and new reporting requirements for vendor training (Section 246.12(i)(1)), vendor monitoring (Section 246.12(j)(4)), food instrument disposition (Section 246.12(q)), and targeted local agency reviews (Section 246.19(b)(5)). In addition, the submission includes new recordkeeping requirements for vendor training (Section 246.12(i)(4)), vendor monitoring (Section 246.12(j)(6)), and participant claims disposition (Section 246.23(c)(1)). These new requirements will be effective upon OMB approval. 1. Background Major final amendments to the WIC Program regulations regarding food delivery systems were last published on May 28, 1982 at 47 FR 23626 in response to audits and management evaluations disclosing problems in the food delivery area that could result in the loss of WIC Program funds. Both the National Vendor Audit issued by our Office of Inspector General in 1988 and the WIC Vendor Issues Study in 1993 indicated that significant levels of vendor violations persisted. (See section 21 of this preamble for the full citations to the reference materials mentioned in the preamble.) In response to the National Vendor Audit, we published a proposed rule on December 28, 1990 at 55 FR 53446 to strengthen State agency operations in vendor management and related food delivery areas. We provided a 120-day comment period that closed on April 29, 1991. During the comment period, we received 1,066 comments from State and local agencies, vendors and associated groups, public interest groups, members of Congress, members of the public, and WIC participants. They indicated that significant modifications to the December 1990 proposed rulemaking were still required, and that the extent of such modifications would warrant another opportunity for public input. In addition, several members of Congress requested that the rule be proposed again in light of its potential impact on certain State agency food delivery systems. In response, we proposed a new food delivery rule on June 16, 1999 at 64 FR 32308. We subsequently extended the comment period from 90 days to 120 days after receiving requests to do so from several potential commenters. We proposed to amend the WIC regulations to address the original OIG audit recommendations by strengthening vendor management systems. We also proposed to implement three provisions of the William F. Goodling Child Nutrition Reauthorization Act of 1998, P.L. 105-336 (Goodling Act), which amended the Child Nutrition Act of 1966, 42 U.S.C. 1771-1791 (Child Nutrition Act). These provisions require the State agency to: (1) Identify high-risk vendors, (2) conduct compliance buys on high-risk vendors, and (3) consider prices in the selection of vendors. We received 4,601 comment letters, including three form letters from 4,481 participants in California, 22 WIC-only stores in California, and 7 food store owners in California. This resulted in 94 distinct comment letters, which fell into the following categories: State agencies (28), local agencies (13), State agency staff (2), Federal agencies (2), industry groups (23), vendors (7), public interest groups (7), general public (2), and participants (1). After the end of the comment period, several members of Congress wrote us to express their concern about certain aspects of the proposal. We thoroughly analyzed the comments and made revisions to the proposal consistent with the mission of the WIC Program. a. Summary of This Preamble This preamble addresses our response to the comments. In general, we only discuss the comments that opposed proposed provisions and the areas of the proposal that are changed by this final rule. We organized the preamble by topic rather than the order in which provisions appear in the final rule. The headings in the preamble identify the sections of the final rule that are discussed in that part of the preamble. To help in using the preamble, we included an outline of the areas covered in the preamble below. 1. Background 2. Definitions of “Vendor” and “Vendor Authorization” and General Provisions for Vendor Authorization and Agreements 3. Vendor Limiting Criteria 4. Vendor Selection Criteria 5. Food Instrument Requirements 6. Vendor Violations, Vendor Overcharges, and Vendor Claims 7. Miscellaneous Vendor Agreement Specifications 8. Vendor Training 9. Vendor Monitoring and Identifying High-Risk Vendors 10. Vendor Administrative Review Procedures 11.Vendor Authorization and Local Agency Selection Subject to Procurement Procedures 12. Preventing and Identifying Dual Participation 13. Participant Provisions 14. Home Food Delivery Systems and Direct Distribution Food Delivery Systems 15. General Requirements for Food Delivery Systems 16. Vendor Management Staffing 17. Participant Access Criteria in State Plan 18. Management Evaluations and Monitoring Reviews 19. Conflict of Interest 20. Confidentiality 21. References b. Plain Language In addition to the changes we made in response to the comments, we made changes throughout the proposed regulatory language to make the rule easier to read. We added paragraph headings and made other changes to use plain language. Eventually, the entire WIC regulations at 7 CFR Part 246 will be revised similarly. c. Implementation of This Rule One commenter requested that we provide State agencies with at least one year to implement this final rule. Another commenter suggested that the implementation period for the final rule provide for the gradual implementation of the provisions to avoid disruption in State agency vendor services. In their comment letters, many commenters indicated that their State agencies had already implemented a number of the provisions in response to our December 28, 1990 proposal, because they had anticipated that we would finalize that rule. Consequently, State agencies will vary in the amount of effort necessary to implement this final rule. We made this rule effective 60 days after publication and require State agencies to fully implement its provisions no later than one year after the effective date. The one-year implementation period recognizes the variations among State agency operations and provides adequate time for State agencies to incorporate these changes into their food delivery systems. Not all provisions from this final rule must be implemented at the same time. For example, a State agency that enters into vendor agreements on a rolling basis may decide to amend the agreements as new ones are entered into, provided that agreements reflecting the new requirements are in place for all vendors prior to the end of the implementation period. Many State agencies have established vendor councils to facilitate communication between the State agency and its vendor community. We have found that such councils can be helpful as State agencies implement changes to their food delivery systems. We recommend that State agencies either establish vendor councils or use existing ones to ensure the timely implementation of this rule. 2. Definitions of “Vendor” and “Vendor Authorization” and General Provisions for Vendor Authorization and Vendor Agreements a. Definition of “Vendor” (Section 246.2) Commenters generally supported the proposed definition of “vendor.” However, thirteen commenters suggested that we modify the definition to use the term “retailer” instead of “vendor,” because the term retailer is used by vendors, State governments, and the Food Stamp Program. Although we acknowledge the two terms are often used interchangeably, the fact remains that the requirements for WIC vendors and Food Stamp Program retailers differ in several basic ways. The term vendor uniquely identifies stores authorized for the WIC Program. Therefore, we did not make this modification. Seven commenters noted that the definition of vendor did not include several types of business entities that may operate stores, such as limited liability companies, limited partnerships, and franchisers/franchisees. Rather than attempt to list all types of business entities in the definition, we decided to specify the more common types of business entities and include a reference to “or other business entity” to cover all other business entities. This approach also will accommodate any new types of business entities that may be created in the future. Several commenters requested that we distinguish between the concept of vendor as a business entity and the concept of vendor as the location of the business (i.e., the store itself). One commenter asserted that this change is necessary to make the definition of vendor consistent with the definition of “vendor violation,” because a vendor violation requires an intentional or unintentional action by the vendor, which cannot be committed by a store. Another commenter noted that requiring the State agency to enter into separate agreements with each store, instead of entering into one agreement to cover multiple stores operated by the same business entity, would triple the State agency's administrative burden of contracting with its vendors. Once again, we believe the commenters' suggestions and concerns have merit, but we believe for a number of reasons that the concept of “vendor” must refer to a single store operated by a business entity. For instance, if the concept of vendor only referred to the business entity, including a corporation operating multiple stores, what would happen if one manager at one store of the largest chain in the State is convicted of trafficking? Similarly, what would happen if one store of the largest chain is disqualified for three years from the Food Stamp Program (FSP)? Would such sanctions require the State agency to disqualify the business entity, including all of its stores, from the WIC Program? If so, would business entities operating multiple stores always receive civil money penalties in lieu of disqualification because their disqualification would always result in inadequate participant access? We believe that the State agency should be able to disqualify a single store of a large chain, provided that participants have adequate access to other vendors operating in the same area. Consequently, we revised the definition of vendor to clarify that each store operated by a single business entity must be authorized separately. However, Section 246.12(h)(1) of this final rule continues to permit the State agency to use a single agreement to cover multiple vendors (i.e., multiple authorized stores) operated by the same business entity. Under this approach, the State agency will still be able to sanction multiple vendors for a vendor violation committed by owners, officers, or managers of a single business entity, if the State agency determines that the vendor violation involves multiple vendors. One commenter suggested that the term vendor refer to the business entity only so that the State agency must authorize all of a business entity's stores and not arbitrarily authorize some of the business entity's stores while denying authorization to some of its other stores. As discussed below in section 4 of this preamble, vendor authorization is not an arbitrary process. To be authorized, each vendor applicant must meet or exceed the State agency's selection criteria, unless the State agency allows for exceptions, such as for mobile stores or for pharmacies that provide only exempt infant formula and/or WIC-eligible medical foods. The State agency's authorization decisions must balance its need to provide adequate participant access with its need to ensure effective vendor management, oversight, and review. Chain stores must apply for vendor authorization in the same manner as any other store, and the State agency is not obligated to authorize all stores operated by a business entity. One commenter suggested that we delete the reference to mobile stores from the definition of vendor, because such stores create opportunities for fraud and abuse and can be difficult to monitor. The State agency may only authorize mobile stores when they are necessary to ensure adequate participant access. Although we understand the commenter's concerns, these stores, when authorized, must fall under the definition of a vendor to be held accountable for compliance with the Program's vendor requirements. For this reason, we did not accept the commenter's suggestion. b. Definition of “Vendor Authorization” (Section 246.2) In response to the proposed definition of the term “vendor authorization,” one commenter noted that the definition improperly uses the term “vendor” when referring to a store that has not yet been authorized as a vendor. We revised the definition to use “store” rather than “vendor.” We made conforming changes throughout the rule to use “store” or “vendor applicant” when referring to a store that is not yet authorized. c. Entering into Vendor Agreements (Sections 246.12(h)(1) and 246.4(a)(14)(iii)) To become a vendor, a store must apply for program authorization, meet or exceed the State agency's selection criteria, and enter into an agreement with the State agency. In Section 246.12(h)(1), we proposed to require vendor agreements to be signed by “a representative who has legal authority to obligate the vendor and a representative of the State agency.” We proposed this change to ensure that vendors are authorized consistently statewide. Fifteen commenters opposed this proposed change for a variety of reasons, including: local agencies need to sign vendor agreements to establish authority over and communication with vendors as well as to be accountable to the State agency for vendor oversight; local agencies can use a standard agreement and carry out this activity using the State agency's procedures and guidance; and requiring the State agency to enter into all vendor agreements would increase costs, may cause such agreements to fall under the State's procurement procedures, and may expose the State agency to additional financial liability. To address the commenters' concerns, the final rule adds Section 246.12(h)(1)(ii) to allow the State agency to delegate the signing of vendor agreements to local agencies as long as such delegation authority is indicated in its State Plan (Section 246.4(a)(14)(iii)) and the State agency provides supervision and instruction to ensure the uniformity and quality of local agency activities. Although the State agency may delegate certain vendor authorization and management activities to its local agencies, it is the State agency that is ultimately responsible for such activities and the language in this final rule reflects that responsibility. d. Length of Vendor Agreements (§ 246.12(h)(1)) and Limiting Periods for Vendor Applications (§ 246.12(g)(7)) In Section 246.12(h)(1), we also proposed to limit the length of vendor agreements to a period not to exceed three years. Under this proposed requirement, to continue as an authorized vendor, a store periodically would need to reapply for program authorization. Whereas eleven commenters supported this proposed provision, sixteen opposed the three-year limit on vendor agreements for a variety of reasons, including: the provision would be counter-productive to State agencies that use more resource-efficient, automatic renewal or annual renewal systems; the provision would discourage stores from applying for authorization; and the provision would result in stores exiting and re-entering the Program, causing confusion for participants. One commenter suggested that, rather than requiring stores to reapply every three years, the State agency be permitted to automatically renew vendor agreements if there are no vendor violations. Although we understand the commenter's viewpoint, we believe only stores that can demonstrate they continue to meet or exceed the State agency's current selection criteria should continue to be authorized. Requiring vendors to reapply for authorization at least every three years does not preclude the State agency from developing a streamlined system for accepting reapplication information from current vendors. However, such systems must ensure that the store provides updated information regarding all of the selection criteria, including information regarding its current prices, quantities and varieties of the supplemental foods it stocks, and business integrity, as well as updated information regarding the store's ownership and management. Regardless of whether a store is applying for reauthorization or initial authorization, the State agency must select vendors based on its current selection criteria. For these reasons, we retained the three-year limit on vendor agreements. A majority of commenters opposed the portion of the provision in proposed Section 246.12(g)(6) that provides that the State agency may limit the periods during which it will accept and process applications for vendor authorization, except that applications must be accepted and processed at least once every three years. Many commenters misunderstood this provision as requiring all State agencies to only accept applications once every three years. The commenters noted a wide variety of arguments against such limited application periods. However, the State agency has always had the discretion to restrict its timeframes for accepting and processing vendor applications. Some State agencies have found such restrictions very useful in establishing annual workplans for their limited staffs. The proposal would only have specifically incorporated this discretion in the program regulations and clarified that if the State agency chose this approach, applications must be accepted “at least once every three years.” The proposal also would have required the State agency to develop procedures for processing vendor applications outside of its timeframes when it determines there will be inadequate participant access unless additional vendors are authorized. This provision is consistent with the three-year limit on vendor agreements and is adopted in Section 246.12(g)(7) of the final rule. e. Vendor Reassessment (§§ 246.12(g)(3) and (h)(3)(xxiv)) One commenter suggested that, rather than requiring vendors to reapply every three years, the State agency should be permitted to conduct annual reviews of vendor qualifications. The requirement for three-year agreements is not inconsistent with a State agency's periodic review of vendor qualifications. In Section 246.12(g)(3), we proposed to authorize the State agency to reassess any authorized vendor at any time during the vendor's agreement period using the vendor selection criteria in effect at that time. One commenter suggested that we modify the provision so that a vendor that fails to meet a selection criterion during a reassessment be given the opportunity to correct the deficiency. The State agency may include as part of both its vendor selection process and its reassessment process an opportunity to correct any deficiency that would otherwise lead to nonselection or termination of the vendor agreement. However, this is at the discretion of the State agency, and the State agency must make this clear in its procedures for implementing its vendor selection criteria. Another commenter pointed out that the vendor agreement section of the proposal did not clearly reflect the requirement in this section that specifies that the State agency must terminate the agreements with vendors that no longer meet its selection criteria. In addition, we noticed that the vendor agreement section did not make clear that vendors must comply with the vendor selection criteria throughout the agreement period. We agree with the commenter and added Section 246.12(h)(3)(xxiv) in the final rule to make these clarifications. f. Vendor Agreement Not a License or Property Interest (§ 246.12(h)(3)(xxi)) We proposed in Section 246.12(h)(3)(xxi) to clarify that the vendor agreement does not constitute a license or a property interest and if the vendor wishes to continue to be authorized beyond the period of its current agreement, the vendor must reapply for authorization. Although commenters overwhelmingly supported this provision, fourteen commenters questioned whether a vendor that has been disqualified for a period of time that is less than the remaining term of its agreement should be allowed to resume its authorization without reapplying. Commenters indicated that when a vendor is disqualified, its slot may need to be filled immediately to ensure adequate participant access. In addition, they also noted that this is inconsistent with the State agency's authority to reassess a vendor at any time during the agreement period and terminate the vendor's agreement if it no longer meets the selection criteria. In response to the commenters' concern, we revised Section 246.12(h)(3)(xxi) to notify vendors that the State agency will terminate the agreements of vendors that are disqualified. A store may reapply for vendor authorization after the expiration of its disqualification period. g. Compliance with Applicable Statutes, Regulations, Policies, and Procedures (§ 246.12(h)(3)(xxii)) and Notifying Vendors of Changes (§ 246.12(h)(7)) All five commenters supported our proposal to require vendor agreements to make clear that vendors must comply with any changes to the Program statute and regulations and State policies and procedures. One commenter pointed out that we needed to reference State laws and regulations as well as State policies and procedures. We revised this provision to clarify that vendors must comply with the vendor agreement and Federal and State statutes, regulations, policies, and procedures governing the Program, including any changes made during the agreement period. To ensure that vendors are notified of such changes, we also added Section 246.12(h)(7) in the final rule to require the State agency to provide vendors with notice of changes to Federal or State statutes, regulations, policies, and procedures governing the Program at the time they are implemented by the State agency. We encourage the State agency to provide as much advance notice of such changes as possible. In addition, the State agency is required by Section 246.12(i)(2) to include changes to program requirements in their annual vendor training. h. Notification of Changes in Vendor Ownership, Store Location, or Cessation of Operations (§ 246.12(h)(3)(xvii)) In Section 246.12(h)(3)(xvii), we proposed to require vendors to provide the State agency with at least 45 days advance notification in writing of a change in vendor ownership, store location, or cessation of operations. A majority of commenters opposed the 45-day advance notification and recommended a variety of alternative timeframes, including 30 days, 21 days, 15 days, promptly, as soon as practicable, and a number of days specified by the State agency in the vendor agreement. Two commenters noted that the proposed 45-day notice is unenforceable because in most situations the vendor allows its agreement to expire. Several commenters noted that a 45-day notice is impractical because businesses cease operations, buy and sell stores, and change ownership on short notice. In addition, many business transactions, such as a change in ownership, contain confidentiality requirements that prohibit the disclosure of information until the deal is consummated in order to maintain employees and customers. Several commenters requested that we delete the last sentence of the provision regarding changes in business structure. One commenter noted that vendor agreements are nontransferable; therefore, a transfer of a majority interest in a store renders the agreement null and void. Another commenter warned that phrases like “changes in business structure” and “corporate reorganization” open the door for hidden ownership changes. Another commenter indicated that the State agency must verify changes in business structure through its Secretary of State's business division, because past experience has shown that some corporations will call a change in ownership a restructuring in order to maintain their WIC authorization. Several commenters asked that we either delete or clarify the exception for the State agency to “permit vendors to move short distances without voiding the agreement.” One commenter suggested that we delete the exception to send a clear message to vendors that if a store changes location, then the vendor must reapply to be a vendor at the new location. Another commenter indicated that in an urban area a move across the street may result in a change in zip code, and allowing a vendor to move into another zip code without voiding its agreement may result in denial of another vendor in that same zip code without providing equal review of both potential locations. In response to commenters' concerns, we modified Section 246.12(h)(3)(xvii) in the final rule to remove the specific length of advance notice required and to clarify that it is within the State agency's discretion to determine: the length of advance notice required for vendors reporting changes under this provision, whether a change in location qualifies as a short distance, and whether a change in business structure constitutes a change in ownership. In addition, we clarified that the notice must be in writing and revised this provision to use the term “terminated,” instead of the term “voided,” when referring to vendor agreements. i. Sale of Store to Circumvent a WIC Sanction (§ 246.12(g)(5)) In Section 246.12(g)(4), we proposed to prohibit the State agency from authorizing a vendor applicant when it determines that the store has been sold (i.e., a change in ownership) to circumvent a WIC sanction. Seventeen commenters supported this provision. One commenter suggested we modify the provision to prohibit authorization of a store that has been sold until the disqualification period is over, because this would be easier for the State agency to implement. We did not accept this comment because it could impair the owner from selling the store to a legitimate buyer for its fair market value. One commenter indicated that a denial of authorization based on this provision would be difficult to uphold on appeal. Another commenter suggested that a new owner could be required to sign an affidavit during the application process stating that the previous owner has no interest and is not involved in the business. We believe that through its application and selection process the State agency will be able to prevent and detect situations in which owners sell stores to circumvent WIC sanctions. Consequently, we retained this provision in Section 246.12(g)(5) of the final rule. j. Data Collection at Authorization (§ 246.12(g)(8)) The proposal included a provision that would require the State agency to collect a vendor applicant's shelf prices and its FSP authorization number if it participates in that program. One commenter asked that we clarify whether a vendor applicant had to be authorized by the FSP to be selected for WIC authorization and whether a WIC application should be delayed until the vendor applicant provides its FSP authorization number. Another commenter suggested that we require vendor applicants to be authorized by the FSP in order to be WIC authorized. We proposed this requirement in part to improve the State agency's coordination with the FSP in the reciprocity of sanctions, as required by the WIC/Food Stamp Program Vendor Disqualification final rule published on March 18, 1999 at 64 FR 13311 (Vendor Disqualification final rule). If a vendor applicant that is authorized in the FSP fails to provide its FSP authorization number, the State agency must delay or deny authorization, because this provision requires the State agency to collect this information at the time of application. Although some State agencies may require FSP authorization as a condition of WIC authorization, Federal regulations do not include such a requirement. In this provision, we also proposed that the State agency collect the vendor applicant's shelf prices, “unless the State agency uses competitive bidding to set vendor prices for such foods.” In retrospect, we believe that the exception is inappropriate because a State agency that uses a competitive bidding system needs the vendor applicant's shelf prices to ensure that the vendor applicant's bid prices do not exceed its shelf prices. For this reason, we deleted the exception. We added a heading to this provision, “Data collection at authorization,” and retained it in Section 246.12(g)(8) of the final rule. 3. Vendor Limiting Criteria (§§ 246.12(g)(2) and 246.4(a)(14)(ii)) We proposed to require the State agency to limit the number of vendors it authorizes to a level that ensures adequate participant access as well as effective State agency management, oversight, and review of authorized vendors. Although current regulations permit the State agency to limit its number of authorized vendors, commenters overwhelmingly opposed the proposed provision to require vendor limitation. Commenters stated that mandatory limitation would be impossible to implement consistently throughout the State agency's jurisdiction, add another layer to the authorization process, be an unnecessary administrative burden, be costly to implement, create access problems for participants, impede the State agency's ability to adapt to growth during agreement cycles, result in more appeals and litigation, and create ill will among cooperating vendors. A majority of those who opposed mandatory limitation suggested that Federal rules focus on selection rather than limitation and that limitation should remain at the State agency's discretion. The rationale for this compromise is that strong selection criteria limit the number of authorized vendors without the problems associated with limiting criteria. The General Accounting Office (GAO) study (“Efforts to Control Fraud and Abuse in the WIC Program Can Be Strengthened”) released in August 1999 states that “42 of the 51 State agencies [surveyed] reported making some effort to limit the number of authorized vendors.” However, more State agencies reported using strong selection criteria to limit their number of authorized vendors than reported using limiting criteria. The GAO recommended that we “[a]mend the regulations on vendor management to ensure that the States limit their authorized vendors to a number they can effectively manage and issue guidance to States on the specific criteria we will use to assess their compliance with the regulations and the actions they would need to take if we determine that they have authorized more vendors than they can effectively manage.” We believe the compromise noted above, to require strong selection criteria and retain limitation at the State agency's discretion, will achieve our goal of reducing vendor fraud and abuse and still address the GAO's recommendation. Through the management evaluation process, we assess whether the State agency effectively manages its vendors and requires the corrective actions when necessary. For these reasons, we adopted strong selection criteria, as discussed below, and retained the State agency's authority to establish criteria to limit the number of vendors it authorizes. We also made a conforming change to Section 246.4(a)(14)(ii) to clarify that the State agency is only required to include limiting criteria in its State Plan if the State agency opts to use such criteria. 4. Vendor Selection Criteria A substantial majority of the comments we received on the use of mandatory vendor selection criteria supported the provision as proposed. Commenters pointed out that making vendors meet or exceed strong selection criteria in order to be authorized is more effective than conducting compliance investigations on vendors after they have been authorized. One commenter noted that selection criteria will keep vendors honest and may improve vendors' attitudes toward participants, because vendors will not take for granted that they automatically qualify for WIC authorization. Those few commenters opposing mandatory selection criteria asserted that the State agency should have the discretion to establish the selection criteria and that the proposed mandatory selection criteria were too stringent and would impair the viability of some vendors. As noted in the preamble to the proposed rule and by those who commented on the proposal, State agency experience has shown that strong selection criteria can provide a cost-effective means of both cost containment and prevention of vendor violations. Therefore, this final rule retains the requirement for mandatory vendor selection criteria. We discuss the comments and changes to the individual selection criteria below. a. Competitive Price and Price Limitations (§§ Sections 246.12(g)(3)(i) and 246.14(b)(2)) A majority of the commenters supported the competitive price selection criterion, although a number of those commenters suggested modifications. Some commenters recommended that we either delete the competitive price criterion or make it a State agency option. Others indicated that we should allow the marketplace to establish the prices of supplemental foods. As noted in the preamble to the proposed rule, section 17(h)(11) of the Child Nutrition Act (42 U.S.C. 1786(h)(11)) requires the State agency to take into consideration the prices a store charges for supplemental foods compared to other stores when selecting stores for program authorization. This section also requires the State agency to establish procedures to ensure that authorized stores do not subsequently raise their prices for supplemental foods to levels that would otherwise make them ineligible for authorization. Therefore, we retained the competitive price selection criterion in the final rule. However, we revised this provision to address commenters' concerns and to clarify the requirements for this criterion. First, we clarified the distinction between the “competitive price selection criterion” and “price limitations.” The competitive price selection criterion is the process of considering, at the time of vendor authorization, the prices a vendor applicant charges for supplemental foods as compared to the prices charged by other vendor applicants and authorized vendors. The State agency may evaluate a vendor applicant based on its shelf prices or on the prices it bids for supplemental foods, which may not exceed its shelf prices. The State agency also must establish price limitations that the authorized vendor may not exceed during its agreement period. The price limitations must be designed to ensure that the State agency does not pay a vendor at a level that would otherwise make the vendor ineligible for authorization. This term is also used in the vendor agreement section in connection with the provision in Section 246.12(h)(4) that requires the State agency's redemption procedures ensure that the vendor is not paid more than the price limitations applicable to that vendor and in Section 246.12(k)(1) in the context of the requirements for State agency review of food instruments (and discussed further in section 6.d of the preamble). We also made a conforming change to Section 246.14(b)(2) to make clear that for food costs to be allowable, they may not exceed the price limitations applicable to the vendor. Several commenters noted the importance of giving the State agency the flexibility to determine the best method to implement the competitive price criterion. In response, we included a description of this requirement in the final rule to clarify the range of flexibility the State agency has in implementing the competitive price criterion. In response to a number of questions from commenters, the final rule also clarifies that the State agency may establish competitive price criteria and price limitations for different vendor peer groups. Another commenter suggested that we permit the State agency to except pharmacies that only provide exempt infant formula and/or WIC-eligible medical foods from the competitive price criterion and price limitations because pharmacies often do not know the price of exempt infant formula and/or WIC-eligible medical foods until they order it. This final rule authorizes such an exception. Several commenters indicated that the competitive price criterion would have a negative effect on smaller stores that may have higher operating costs or that may be unable to offer supplemental foods at prices below their costs. As noted in the preamble to the proposed rule, in many areas smaller vendors are essential to ensuring participant access. As with all aspects of its food delivery system, the State agency must ensure adequate participant access when it establishes its competitive price criterion and price limitations. Developing appropriate vendor peer groups is one way the State agency can both ensure adequate participant access and consider prices during the vendor selection process. Contrary to one commenter's suggestion, the State agency continues to retain the discretion to decide whether and how to establish its vendor peer groups. Both supporting and opposing commenters questioned how to handle price fluctuations that may occur during the agreement period due to government and market forces beyond a vendor's control. We clarified in the final rule that the State agency may include a factor in its price limitations to account for fluctuations in wholesale prices. For example, the State agency could include an inflation factor in its price limitations. Commenters also asked us whether certain scenarios would satisfy the requirement to ensure compliance with the price limitations throughout the agreement period. The following scenarios would satisfy the requirement: Scenario 1: The State agency assigns vendors to peer groups upon authorization and then makes price adjustments to its payments to vendors based on the price limitations applicable to the vendor's peer group. Scenario 2: The State agency compares the prices a vendor applicant charges for supplemental foods with those charged by other vendor applicants and authorized vendors to determine which vendors to authorize and then periodically conducts a reassessment of the vendor's prices to ensure they meet the applicable price limitations. Scenario 3: The State agency establishes a maximum price it will pay for each type of food instrument and then includes a provision in the vendor agreement that the State agency will not pay vendors in excess of the maximum price established for each food instrument. b. Minimum Variety and Quantity of Supplemental Foods (§ 246.12(g)(3)(ii)) Almost all of the commenters supported the requirement to consider as part of the selection process whether vendor applicants stock a minimum variety and quantity of supplemental foods. Commenters noted that the minimum variety/quantity requirement is one of the best selection criteria and is more effective at limiting the number of vendors the State agency authorizes than using limiting criteria. One commenter noted that the proposed rule did not make clear that authorized vendors must maintain the minimum variety and quantity of supplemental foods at all times, not just at the time of authorization. As discussed in section 2.e of this preamble, Section 246.12(h)(3)(xxiv) of this final rule puts vendors on notice that they must comply with all the vendor selection criteria, including this one, throughout the vendor agreement period. Four commenters suggested that we adopt the same criterion for minimum variety and quantity as the FSP has proposed to establish for its authorized retailers. The FSP proposal would require retailers to offer for sale at least three varieties of staple food intended for home preparation and consumption in each of four categories of staple foods (meat, poultry, or fish; bread or cereals; vegetables or fruit; and dairy products). The inherent differences in the types of food that program participants may obtain with food stamps versus WIC food instruments makes this definition inappropriate for the WIC Program. Furthermore, the variations in the supplemental foods approved by each State agency make it difficult to establish a standard definition for the WIC Program. Therefore, this final rule does not adopt a standard definition of the minimum variety and quantity of supplemental foods that vendor applicants must stock. Rather, such decisions are left to State agency discretion. Several commenters suggested that we establish some flexibility or tolerance in this requirement or consider supplemental foods that a vendor can document it has ordered. Two commenters suggested that the State agency be permitted to authorize stores that do not stock infant formula or to authorize pharmacies that only provide exempt infant formula and/or WIC-eligible medical foods to participants. The State agency may accommodate such stores when it determines that they are necessary to ensure adequate participant access. As with the competitive price criterion, it is critical that the State agency clearly incorporate any necessary flexibility in its selection criteria at the time the criteria are established so that all vendor applicants are held to the same standards. In recognition of the wide range of stores that serve as vendors, this rule clarifies that the State agency may establish different minimum variety and quantity standards for different vendor peer groups. However, we must emphasize the importance of establishing appropriate minimums so that participants are able to obtain all of the authorized supplemental foods on their food instruments. Vendors may not provide substitutions, cash, or credit (including rainchecks) if the authorized supplemental foods are not available. Authorizing vendors that do not maintain the required minimum stocks of supplemental foods undermines the nutritional goals of the Program. c. Business Integrity (§ 246.12(g)(3)(iii)) Although a majority of commenters supported the proposal to require the State agency to consider the business integrity of vendors in the selection process, many commenters suggested modifications to the business integrity criteria. We proposed three criteria in this category: (1) Lack of a record of criminal conviction or civil judgment for certain offenses that indicate a lack of business integrity; (2) lack of a history of serious vendor violations; and (3) lack of a history of serious FSP violations. Even those commenters who agreed with the substance of these criteria found them confusing. We completely rewrote this section to clarify the requirements. In addition, we strengthened the regulatory language to emphasize that the State agency may rely solely on facts already known to it and representations made by vendor applicants on their vendor applications. This change responds to the many commenters who asked whether costly background checks were required and whether the State agency would be held accountable for authorizing vendors whose criminal records were not known to the State agency. Several commenters indicated that the proposal did not make clear what would happen if the State agency discovered that a vendor had lied on its application. This final rule adds a sentence to the termination provision in Section 246.12(h)(3)(xvi) notifying the vendor that the State agency will terminate its agreement if the State agency determines that it has provided false information in connection with its application. Two commenters questioned the value of vendor self-declarations on applications. We believe that adding a requirement to terminate the vendor agreement when a vendor is found to have provided false information will deter such behavior among vendor applicants. Several commenters questioned the people covered by the business integrity criteria. One commenter suggested that the criteria include immediate family members of the owners, officers or partners, managers, and any stockholders who have a substantial role in the operation of a store. Two other commenters questioned who would be covered in a publicly traded company. The proposed rule would have applied the business integrity criteria to the business entity itself and its current owners, officers, directors, or partners. We revised this provision in the final rule to cover only the vendor's current owners, officers, and managers. This change conforms the coverage to parallel the FSP rule and recognizes the important role managers play with respect to a vendor applicant's business integrity. i. No Criminal Conviction or Civil Judgment We also had a number of questions and suggestions about the specific business integrity criteria. With respect to the criteria requiring a lack of a record of a criminal conviction or civil judgment for certain offenses that indicate a lack of business integrity, commenters wanted to know whether the State agency would be limited to the listed activities, whether to consider felonies or misdemeanors or both, and what is meant by “business integrity” and “business honesty.” Four commenters opposed this provision on the grounds that once a person has served a criminal sentence, that person should not be further penalized through denial of authorization. Two other commenters suggested that rather than denying authorization for such offenses, stores that cannot meet this selection criterion should be authorized and then identified as high-risk vendors subject to compliance investigations. Another commenter opposed this selection criterion because it would be difficult for the State agency to apply in a fair and consistent manner. Two commenters requested that we clarify the number of years that constitutes a vendor applicant's “history.” Vendors play a valuable role in most State agencies’ food delivery systems. We believe it is critical that the State agency consider business integrity in the selection of its vendors, because the integrity of vendors reflects on the integrity of the WIC Program. Congress made clear its concern about the integrity of vendors when it required: high-risk identification and compliance investigations of vendors; permanent disqualification for vendors convicted of trafficking; and disqualification of vendors that have been disqualified as retailers in the FSP. We substantially revised the business integrity criterion in the final rule to clarify that only criminal convictions and civil judgments imposed in the six years prior to the application must be considered and to clarify the areas of this criterion in which the State agency has discretion. We have not distinguished between felonies and misdemeanors because of the wide variation among States in designating these criminal offenses as felonies vs. misdemeanors. ii. No Serious WIC Program Vendor Violations and No Serious Food Stamp Program Violations Commenters were divided on the merits of the proposed selection criteria for a lack of a history of serious WIC violations and a lack of a history of serious FSP violations. Many commenters believed that both criteria went too far because serious WIC and FSP violations are those that give rise to a disqualification, criminal conviction, or civil judgment. Furthermore, if violations do not rise to such a level, then they should not be used as a basis to deny authorization. Two commenters noted that this criterion could effectively extend a one-year disqualification for up to six more years. Other opposing commenters reiterated their views that the business integrity criteria are confusing and bureaucratic and that vendor integrity is better handled through vendor monitoring. On the other hand, one commenter suggested that we permit the State agency to set a timeframe of longer than the proposed six years for cases of particularly egregious violations. We did not include these two criteria in the final rule, even though we believe serious WIC and FSP violations do reflect on the business integrity of vendor applicants. Rather than make such violations mandatory vendor selection criteria, we decided to give the State agency the discretion to establish selection criteria for serious WIC and FSP violations or use such vendor information to identify high-risk vendors. We want to point out that we proposed to make failure to participate in the annual vendor training a basis for nonselection. Although this is not required by the selection criteria in the final rule, many State agencies have found this to be an effective means of vendor management. The State agency continues to have the authority to establish failure to attend vendor training as a selection criterion. iii. Sanctions Imposed by Another WIC State Agency (§ 246.12(l)(2)(iii)) A number of commenters responded to our request for comments on whether to make mandatory vendor sanctions imposed by another WIC State agency a mandatory selection criterion. Almost all commenters supported this idea, although most suggested various modifications. Three commenters requested that, if established, the selection criterion should permit the State agency to rely on the representations made by vendor applicants on their vendor applications. Other commenters suggested that we maintain a database for State agencies to use for this purpose. Under the final rule, the State agency has the discretion to establish a selection criterion to consider WIC sanctions imposed by another State agency. Two commenters asked how the State agency would be able to uphold a denial of authorization on appeal if it denied authorization to a vendor based on a WIC sanction imposed by another State agency or based on a FSP sanction. These commenters suggested that information about WIC sanctions imposed by other State agencies be used to identify high-risk vendors rather than as a selection criterion. Three commenters believed that only the mandatory sanctions, not State agency-established sanctions, imposed by another State agency should result in nonselection. Whereas one commenter raised concerns about the time and costs of denying authorization based on WIC sanctions imposed by another State agency, another commenter asserted that if a vendor commits vendor violations in one State agency's WIC Program, the vendor is likely to commit such violations in another State agency's WIC Program. For a State agency that opts to deny authorization based a prior WIC sanction, a WIC sanction by another State agency, or a FSP withdrawal of authorization or prior FSP disqualification, we made a corresponding change to the administrative review procedures. This change specifies that if the State agency denies authorization to a vendor applicant based on a WIC sanction (regardless of which State agency imposed the sanction) or a FSP withdrawal of authorization or disqualification, the State agency is only required to provide the vendor applicant with an abbreviated administrative review. We made this change because the vendor applicant already had an opportunity to appeal the facts underlying the WIC sanction or FSP withdrawal/disqualification; therefore, it is not necessary to provide a second review of these facts. An abbreviated administrative review provides the vendor applicant with the opportunity to appeal such narrow factual issues as whether its store is the same one that received the sanction and whether the sanction occurred during the applicable period. One commenter questioned the appropriateness of denying authorization of a vendor applicant for a vendor violation that did not result in a sanction. The commenter indicated that the vendor applicant would be denied authorization based on information that it did not have an opportunity to examine or refute. If a State agency denies authorization on this basis, the State agency must include a description of the vendor violation in the notice of adverse action and must give the vendor an opportunity to appeal the adverse action. d. No Current Food Stamp Program Disqualification or Civil Money Penalty for Hardship (§ 246.12(g)(3)(iv)) Twenty-four of the twenty-six commenters supported the proposed requirement to deny authorization to vendor applicants that are currently disqualified from the FSP or that have received a FSP civil money penalty for hardship and the period for the FSP disqualification that would otherwise have been imposed has not expired. Three supporting commenters suggested that we require FSP authorization as a prerequisite for WIC authorization. We did not make this change because of the differences in the populations served and the benefits provided under the two programs. e. Considering Participant Access in Authorization Determinations In drafting the final rule, we noticed that it was not clear whether the State agency would be required to deny authorization to a vendor applicant that did not meet one or more of the selection criteria. We clarified in the final rule that a vendor applicant that does not meet the competitive price and minimum variety/quantity criteria may not be authorized, even if such denial of authorization would result in inadequate participant access. For the competitive price criterion, the State agency must compare the prices of the vendor applicant against those of other vendor applicants and authorized vendors. Consequently, the State agency is able to adjust its competitive price criterion to select enough vendors to ensure adequate participant access. As for the minimum quantity/variety criterion, we believe that a vendor applicant that does not meet or exceed this criterion must be denied authorization because such a store cannot provide participants all the authorized supplemental foods on their food instruments. We clarified that the remaining two vendor selection criteria, business integrity and a current disqualification/civil money penalty for hardship in the FSP, that the State agency may authorize a vendor applicant that fails to meet these criteria if necessary to ensure adequate participant access. We believe this requirement strikes the necessary balance between program integrity and participant access, similar to that balance struck when a State agency decides to impose a civil money penalty in lieu of a disqualification in order to ensure adequate participant access. 5. Food Instrument Requirements No commenters opposed the food instrument requirements in proposed Sections 246.12(f)(1), (f)(2)(i), (f)(2)(iv), (f)(2)(v), (f)(2)(vi), and (f)(3). Consequently, we adopted these provisions as proposed with minor revisions to conform to language used throughout the final rule. Below are separate discussions of the food instrument proposals that received opposing comments. a. Printed Food Instrument Requirements (§§ 246.12(f)(2)(ii), (f)(2)(iii), (f)(2)(vii), and (r)(5)) One commenter opposed the proposed provisions in Sections 246.12(f)(2)(ii) and (f)(2)(iii), requiring the “first date of use” and the “last date of use” to be printed on food instruments, because vendors are often penalized when they accept food instruments either before or after the specified dates. The commenter indicated that the State agency issues food instruments too far ahead of the “first date of use” and suggested that food instruments be more specific and to the point. A major responsibility of vendors is to make sure that they accept food instruments only during their valid dates. This requirement is similar to accepting manufacturers' coupons, which are for specific food items and contain expiration dates. Cashiers must be familiar enough with the food instruments used by the State agency to identify whether or not a food instrument is valid for transaction. We believe the requirements as adopted in Sections 246.12(f)(2)(i) through (f)(2)(vii) of the final rule address the commenter's concerns in that they require “[e]ach printed food instrument must clearly bear on its face” the authorized supplemental foods, the first date of use, the last date of use, the redemption period, the serial number, and spaces for the purchase price and the signature. In response to the commenter's concern about issuing food instruments too far in advance, program regulations that require the State agency to issue no more than a three-month supply of food instruments at any one time have been in place since 1982 and were included in the proposal. No other opposing comments were received on these regulations. Cashiers need to examine the dates on a food instrument to ensure it is valid, regardless of when the food instrument was issued. Requiring shorter issuance cycles would neither eliminate the need for such an examination nor be a cost-effective solution to the commenter's concern. However, in our review of this provision, we did note that although a three-month supply of food instruments is acceptable, a three-month supply of supplemental foods is not. Consequently, we modified this provision in Section 246.12(r)(5) so that “no more than a * * * one-month supply of authorized supplemental foods is issued at any one time. * * *” b. Electronic Benefits Transfer (EBT) (§§ 246.12(a) and (h)(3)(iv)) In the Vendor Disqualification final rule, we amended the definition of “food instrument” to include an electronic benefits transfer card (EBT). We made this change to recognize that some State agencies are using EBT cards in place of printed food instruments. For the same reason, we proposed to include a statement in Section 246.12(a) to acknowledge that the current regulations do not specify separate requirements or exceptions for EBT systems and that the operation of EBT systems may require modifications of some regulatory provisions. One commenter suggested that we delete the reference to EBT systems in Section 246.12(a). Another commenter opposed our “piecemeal and potentially premature approach toward WIC EBT.” This commenter suggested that we implement a new series of EBT pilot programs and evaluate them in public forums before we make modifications to the regulations regarding EBT systems. In addition, three commenters requested that we clarify the purpose of this proposed change and suggested that we wait until EBT is fully implemented and then issue a more practical final rule. The EBT provision in Section 246.12(a) is intended to recognize the emergence of EBT systems in the WIC Program and acknowledge that these systems will not always conform with current regulatory provisions that apply to printed food instruments. We believe that this authority is a necessary first step toward the further development of EBT systems in the WIC Program. The suggestion that we wait until EBT is fully implemented before issuing a final rule is unworkable. We do not have separate authority to modify regulatory requirements for pilot projects. Further, some of the provisions in this rulemaking are in response to statutory deadlines, most of the new requirements in this rulemaking will be unaffected by EBT implementation, and EBT may not be implemented for decades in areas where it is not a cost-effective alternative to printed food instruments. Nevertheless, we revised this provision to clarify the situations in which we will modify a regulatory provision to accommodate a particular EBT system. c. Food Instrument Issuance and Security (§§ 246.12(r)(1) through (r)(5) and (p) and 246.4(a)(14)(xii)) We received only one comment regarding the proposed provisions in Sections 246.12(r)(1) through (r)(4), which concern food instrument issuance. The commenter supported the proposed amendments except for the use of the term “proxy.” The commenter's concern is addressed below in our discussion of the definition of proxy in section 13.a of this preamble. We made minor changes to the provisions in Sections 246.12(r)(1) through (r)(5) to incorporate “parents or caretakers of infant and child participants” and to make these provisions conform to language used throughout the final rule. Ten commenters expressed various concerns about the food instrument security requirements in Section 246.12(p) of the proposal. Three commenters asked that we clarify how this provision applies to State agencies with print-on-demand technology. Another commenter asked that we clarify what the term “perpetual inventory” means and whether a system that maintains inventory and receipt of food instruments would be sufficient to meet this regulatory requirement. A perpetual inventory refers to an ongoing record maintained by local agencies and, if applicable, clinics of the food instruments received from the State agency and the food instruments issued to participants. The perpetual inventory is a running inventory of a local agency or clinic's supply of food instruments, and the monthly physical inventory is used to reconcile the perpetual inventory with the supply of food instruments on hand. For local agencies and clinics that use a print-on-demand technology to produce their food instruments, this requirement would apply only to their supplies of special check stock, if used, and, if applicable, to their supply of emergency, back-up, pre-printed food instruments. For local agencies and clinics that issue EBT cards, this requirement would only apply to the supplies of EBT cards maintained on premises. One commenter indicated that monthly physical inventories would be administratively burdensome for integrated local agencies and were unnecessary due to the State agency's use of electronic acknowledgment of receipts of food instruments by local agencies. Three commenters suggested that the physical inventory be conducted on a quarterly rather than on a monthly basis; however, one commenter suggested that monthly inventories are preferable to quarterly inventories because they become part of the local agency's monthly routine. Another commenter indicated that monthly inventories are unnecessary because the State agency uses a one-to-one reconciliation of food instruments, which is a better and more cost-effective control. As noted in the preamble to the proposed rule, the purpose of perpetual and physical inventories is to prevent and detect employee fraud. Neither an electronic acknowledgment of receipt of food instruments nor a one-to-one reconciliation of food instruments after redemption provides for the accountability and security of a local agency or clinic's food instruments on hand. We believe the most effective means to prevent employee fraud is to have controls in place to account for and limit the access to food instruments from the time they are created or received until the time they are issued to participants. A monthly reconciliation of perpetual and physical inventories provides local agencies and clinics with a method to detect when food instruments are missing from their inventories. One commenter requested that we modify this provision so that local agencies are only required to maintain perpetual inventory records for seven years, because record retention is both expensive and time-consuming. We did not specify a time limit for the retention of such records and do not expect that the records be retained beyond the State agency's current record retention schedule for other WIC records. Two commenters opposed the proposed provision in Section 246.4(a)(14)(xii), which would require the State agency to include a description of its system for ensuring food instrument security in its State Plan. As noted above, we believe that such a system provides a necessary protection against employee fraud. In addition, we believe that inclusion of a description of the State agency's system in its State Plan is essential to ensuring that the system is put into place in the local agencies and clinics under the State agency's jurisdiction. One commenter recommended that State agencies currently designing data systems include a food instrument inventory component in their data systems that is automated at the local agency as well as at the State agency level. We agree that automation of the local agency or clinic's perpetual inventory of food instruments on hand would be a worthwhile component of any data system. d. Definition of “Authorized Supplemental Foods” (§ 246.2) In Section 246.2, we proposed to define the term “authorized supplemental foods.” One commenter suggested that we delete the phrase “for a particular participant” from the definition, so that this term will not be confused with the existing term “supplemental foods.” The commenter did not understand our need to narrow the definition to “a particular participant.” Current regulations at 7 CFR 246.2 state: “ Supplemental foods means those foods containing nutrients determined to be beneficial for pregnant, breastfeeding, and postpartum women, infants and children, as prescribed by the Secretary in § 246.10.” The proposed definition of authorized supplemental foods was intended to distinguish between the general categories of supplemental foods contained in Section 246.10 from the specific supplemental foods authorized for a particular participant, which are listed on the participant's food instruments. The commenter further indicated that her State agency uses to term “authorized supplemental foods” to refer to the supplemental foods approved by the State agency for use in the WIC Program. We are aware that State agencies use various terms for the supplemental foods approved by the State agency for program use, including the term “WIC-approved foods.” We did not propose to define a term for those foods approved by the State agency for program use, so we do not believe it would be appropriate to include such a definition in this final rule. However, we adopted the definition for authorized supplemental foods as proposed because the definition provides us with a concise term to refer to the specific supplemental food items authorized by the State agency for a particular participant and listed on that participant's food instruments. The term authorized supplemental foods captures both the type and quantities of the supplemental foods, which we believe is essential to understanding other regulatory provisions. For example, in this final rule, Section 246.12(l)(1)(iv) states: “The State agency must disqualify a vendor for one year for a pattern of providing unauthorized food items in exchange for food instruments, including charging for supplemental foods provided in excess of those listed on the food instrument.” In this provision, “unauthorized food items” not only refers to any type of food item not listed on the food instrument, such as an unauthorized brand of cereal, but also refers a quantity of supplemental food item in excess of those listed on the food instrument, such as an extra box of an authorized brand of cereal. e. No Substitutions, Cash, Credit, Refunds, or Exchanges (§ 246.12(h)(3)(ii)) In Section 246.12(h)(3)(ii), we proposed to expand the regulatory language that “vendors shall only provide the supplemental foods specified on the food instrument” to specify that vendors must not provide unauthorized or non-food items, cash, credit, rainchecks, or refunds in exchange for food instruments. We proposed only one exception to this provision, to permit exchanges of “identical supplemental foods.” The only opposition to this proposed provision concerned the exception. Two commenters asked that we clarify the circumstances under which an exchange may be permitted. One commenter requested that we delete the exception because it would be the same thing as offering a raincheck or credit. We clarified in the final rule that exchanges are only permitted for “an identical authorized supplemental food item when the original authorized supplemental food item is defective, spoiled, or has exceeded its ‘sell by’ or ‘best if used by’ date.” Another commenter requested that we delete the exception because the State agency has found that during administrative reviews an exchange for a “similar” food item is considered to be an exchange for an “identical” supplemental food item. The commenter warned that State agencies would lose administrative reviews regarding the substitution of non-rebate infant formulas for the authorized infant formula because preamble language is not considered part of the regulation. We believe there is a clear distinction between the words “similar” and “identical.” Nonetheless, we added a sentence to this provision in the final rule to clarify that an “identical authorized supplemental food item means the exact brand and size as the original authorized supplemental food item obtained and returned by the participant.” f. Food Instrument Transaction and Redemption (§§ 246.12(h)(3)(iv) through (h)(3)(vi), (h)(3)(viii), and (h)(4)) In the final rule, we added headings to all the paragraphs in Section 246.12(h) and reordered some of the paragraphs in Section 246.12(h)(3). In addition to making the information in this section more accessible to readers, we made these changes to help readers understand the distinction between the concepts of “transaction” and “redemption” as they apply to food instruments. Food instrument transaction refers to the process in which a participant, parent/caretaker, or proxy tenders a food instrument to a vendor in exchange for authorized supplemental foods. Food instrument redemption refers to the process in which a vendor submits food instruments for redemption and the State agency (or its financial agent) makes payment to the vendor for the food instruments. The proposed rule contained a single paragraph that addressed the procedures for entering both the purchase price and the signature on food instruments. Three commenters requested that we delete the provision because vendors will be penalized for not following the requirements. Vendors should not be paid for food instruments that lack purchase prices or signatures. This provision is necessary so vendors understand these requirements. Another commenter requested that we delete the preamble language that discusses allowing the participant to enter the purchase price on food instruments, because errors made by the participant when entering the purchase price, which may result in vendor overcharges or undercharges, would be attributed to the vendor. Another commenter suggested that we clarify that the participant or proxy must sign the food instrument “in the presence of the cashier” and that the purchase price must be entered before the “food instrument is tendered.” In Sections 246.12(h)(3)(v) and (h)(3)(vi) of the final rule, we clarify that: (1) It is the vendor's responsibility to ensure that a purchase price is entered on the food instrument in accordance with the State agency's procedures; (2) the State agency has the discretion to determine whether the vendor or the participant enters the purchase price; (3) the purchase price must be entered before the food instrument is signed; and (4) the participant, parent/caretaker, or proxy must sign the food instrument in the presence of the cashier. As discussed below in section 6.b of this preamble, the variety of redemption systems employed by State agencies combined with the proliferation of various cost containment measures has made a concise definition of a “vendor overcharge” that is applicable to all State agencies impossible. In recognition of this, we revised the definition of vendor overcharge to mean intentionally or unintentionally charging the State agency more for supplemental foods than is permitted under the vendor agreement. This approach provides the needed flexibility to accommodate the wide variety of systems that State agencies have developed for entering purchase prices and redeeming food instruments. We made a corresponding change to the vendor agreement provisions to require in Section 246.12(h)(4) that the State agency describe in the vendor agreement its purchase price and redemption procedures. These changes also necessitated a change to the proposed requirement in § 246.12(h)(3)(viii) that vendors may not charge the State agency more than the price charged other customers or the current shelf price, whichever is less, or, when the State agency uses competitive bidding, the contract price. Whereas the proposed provision focused on the amount a vendor may “charge” the State agency, in the final rule the provision focuses on the State agency's procedures for submitting food instruments for redemption. The provision also puts the vendor on notice that the State agency may make price adjustments to the purchase price on food instruments to ensure compliance with the price limitations applicable to the vendor. g. Food Instrument Disposition (§ 246.12(q)) and Adjustments to Expenditures (§ 246.13(h)) We proposed to replace the heading of Section 246.12(n), “Reconciliation of food instruments,” with the heading, “Food instrument disposition,” and to move this provision to Section 246.12(q). We also proposed to amend the language in this paragraph to clarify the food instrument disposition process and to include language regarding the food disposition process in EBT systems. One commenter requested that we clarify the meaning of the terms used in this provision, including the terms “redeemed,” “expired,” “duplicate,” and “enrollment record.” Although we made a few changes to the terminology used in the proposed provision, most of the terms are unchanged. Nevertheless, we believe a review of the meanings of the terminology used in this provision may be helpful for many readers. The term “issued” refers to food instruments that have been issued to a participant. The term “voided” refers to food instruments that have been invalidated by the State or local agency or clinic, including food instruments that were voided after they were issued. All food instruments that are no longer on hand (i.e., those food instruments that were received/created that are no longer in inventory) must be identified as either issued or voided, and as either “redeemed” (i.e., submitted for redemption by a vendor and payment has been made by the State agency) or “unredeemed” (i.e., no payment was has been made by the State agency). All redeemed food instruments must be identified as falling into one of the following categories: (1) “validly issued” (i.e., the food instrument matches a participant's enrollment and issuance record); (2) “lost” (i.e., the food instrument was reported lost by a participant or by the State or local agency or clinic); (3) “stolen” (i.e., the food instrument was reported stolen by a participant or by the State or local agency or clinic); (4) “expired” (i.e., the food instrument was submitted by the vendor after the specified period for redemption and the State agency provided payment to the vendor in accordance with Section 246.12(k)(5)); (5) “duplicate” (i.e., the food instrument was issued to a participant to replace a lost, stolen, or voided food instrument); or (6) “not matching valid enrollment and issuance records” (i.e., the food instrument does not match a participant's enrollment and issuance record). One commenter characterized accounting for voided, lost, and stolen food instruments as not beneficial, unnecessary, and overly burdensome. We disagree. It is necessary to account for voided food instruments because otherwise such food instruments would seem to be missing when the State or local agency or clinic reconciles its perpetual inventory with its monthly physical inventory. When the State agency makes payment on a voided, lost, or stolen food instrument, there is evidence of fraud or abuse. It is the State agency's responsibility to investigate such incidences to determine if the fraud or abuse was committed by a participant, an employee, a vendor, or an unauthorized person. If the State agency detects criminal activity, it must report it to the proper authorities for investigation. The commenter also characterized accounting for unredeemed food instruments as solving a problem that does not exist, because such food instruments do not represent an expenditure of grant funds. We disagree. In § 246.13(h), we proposed to require the State agency to “adjust projected expenditures to account for redeemed food instruments and other changes as appropriate.” This provision, which received no negative comments and has been adopted as proposed, requires the State agency to adjust its obligations to account for food instruments that have been paid (i.e., issued and redeemed) as well as those that have been deobligated (i.e., voided or unredeemed). Consequently, the State agency needs to account for both voided and unredeemed food instruments in order to remove them from its obligations. In addition, we would like to point out that anytime a food instrument is issued there is an associated nutrition services and administration cost, regardless of whether the food instrument is redeemed. An examination of unredeemed food instruments may reveal irregularities or waste, such as instances of dual enrollment. One commenter suggested that we modify § 246.12(q) to differentiate between accounting for automated food instruments and accounting for manual food instruments that contain no participant data. The commenter noted that: manual food instruments represent 11.2% of the State agency's total redemptions, only 0.57% of these manual food instruments are recorded without participant data, and the State agency has never uncovered an instance of fraud in its investigations of such food instruments. The commenter recommended that we permit the reconciliation of a sample of manual food instruments that contain no participant data to ensure “with reasonable statistical certainty” that they were issued as a result of human error rather than as a result of fraud. Although we understand the commenter's concern about the effort involved in the reconciliation of manual food instruments without participant data, we believe the fact that a manual food instrument lacks participant data represents a lapse in program integrity that should be addressed by the State agency. Such instances should be investigated, and procedures should be put in place to ensure that all manual food instruments contain participant data, which allows them to be reconciled without excessive effort. In addition, we believe that as State agencies employ new technologies, such as print-on-demand food instruments and EBT, to issue food instruments, the use of manual food instruments should decline steadily until there is no longer a need for them. For these reasons, we did not accept the commenter's recommendation. Whereas two commenters supported the proposed amendments to § 246.12(q) because their systems currently meet these requirements, three commenters asked that we acknowledge the additional costs for some State agencies to the implement this provision. We realize that some State agencies will incur significant costs to reprogram their systems in order to link participant enrollment records with food instrument issuance and redemption data. However, we believe this step is necessary to provide a level of accountability that ensures the integrity of the Program. One commenter noted that in § 246.12(q) of the proposal we use the term “PIN” (Personal Identification Number) when we mean “PAN” (Primary Account Number). The proposed provision reads: “In an EBT system, evidence of matching redeemed food instruments to a valid issuance and enrollment record may be satisfied through the linking of the PIN associated with the electronic transaction to a valid issuance and enrollment record.” In this instance, the correct term is PAN, which is a standard term used in the banking industry for the account number embossed on credit and bank cards. In an EBT system, the PAN is used to link redemption data to enrollment and issuance records; the PIN refers to the number entered by the participant at the point-of-sale device to access and transact program benefits. Consequently, we amended the proposal to reflect this correction. h. Claims Against the State Agency (§ 246.23(a)(4)) One commenter asked that we clarify whether all three conditions listed in §§ 246.23(a)(4)(i) through (a)(4)(iii) must be satisfied to avoid a claim against the State agency for failing to account for the disposition of all redeemed food instruments. To avoid a claim, the State agency must satisfy all three conditions, which make up a three-step process in which the State agency has: (1) “Made every reasonable effort to comply with the requirement;” (2) “Identified the reasons for its inability to account for the disposition of each redeemed food instrument; and” (3) “Provided assurances that, to the extent considered necessary by FNS, it will take appropriate actions to improve its procedures” (emphasis added). One commenter was concerned that the term “reasonable effort” is subjective and open to various interpretations by Federal and State auditors. Another commenter requested that we clarify what is meant by “made every reasonable effort.” We believe that what constitutes “every reasonable effort” will vary based on the specific situation and cannot be defined in such a manner that could be applied to all situations. Because all three conditions of this provision must be met, what constitutes every reasonable effort will be driven by whether the State agency's efforts result in both the identification of the source of the problem and the State agency's assurance that improvements will be made to its procedures to correct the problem. For example, in the situation described above regarding the inability of the State agency to reconcile its manual food instruments that lack participant data, if the State agency were to investigate a sample of such food instruments, identify that the problem is due to local agency staff inadvertently omitting the participant data, and implement a procedure that requires local agency staff to use a checklist, which includes entering participant data, when issuing manual food instruments, then the State agency would satisfy the conditions of § 246.23(a)(4) and avoid a claim. If the State agency is unable to satisfy the conditions in § 246.23(a)(4) and we recommend additional efforts that the State agency could undertake to identify and correct its accounting problem and the State agency refuses to make such efforts, then the State agency has failed to make every reasonable effort and will be subject to a claim. One State agency recommended that we establish an unbiased mediation process to review cases in which our determination of what constitutes “every reasonable effort” is in question. We did not propose an unbiased mediation process be established for vendor or State agency claims and do not believe that such a process is necessary in either case. Similar to the provision in § 246.18(a)(1)(iii)(F) that prohibits the administrative review of vendor claims, current regulations at 7 CFR 246.22(a) make clear that we will not provide a hearing or review for claims against the State agency arising under § 246.23(a). In addition, similar to the requirements in Section 246.12(k)(3), which provide vendors with “an opportunity to justify or correct” a food instrument error that results in a claim, we provide the State agency with an opportunity to justify or correct the situation that results in its inability to reconcile all of its food instruments and believe this is sufficient. One commenter suggested that we allow for the withholding of a portion of the State agency's next year's grant, until the issue is resolved, rather than withholding up to 100% of the State agency's current funding, which could result in participants not being served. Section 246.23(a)(4) sets forth the requirements for establishing a claim against the State agency for failing to account for the disposition of all of its redeemed food instruments and for failing to take appropriate actions to correct its accounting problems. This provision does not address withholding nutrition services and administration funds but rather establishing a claim for an amount that corresponds to the State agency's unreconciled food instruments. Such claims are not allowable nutrition services and administration costs for the State agency and must be paid with State funds. 6. Vendor Violations, Vendor Overcharges, and Vendor Claims a. Definition of “Vendor Violation” (§ 246.2) and Vendor Responsibility for Employee Actions (§ 246.12(h)(3)(xiii)) Seventeen of the nineteen commenters on the proposed definition of “vendor violation” supported the definition. Commenters did suggest a number of modifications. Seven commenters indicated that focusing on the acts of the vendor did not make sense, in light of the definition of vendor as a business entity that operates a store. We revised the definition to state that a vendor violation is an action of a vendor's current owners, officers, manager, or employees. Another commenter recommended that we add “agents” to the definition to cover situations in which friends or relatives are asked by owners to act as substitute cashiers. We accepted the commenter's recommendation and revised the definition accordingly. Another commenter focused on the part of the definition that refers to actions that violate the Program statute or regulations or State agency policies or procedures. The commenter recommended that the definition include actions that violate State law, rules, and regulations as well. We accepted this recommendation and revised the definition to include actions that violate “the vendor agreement or Federal or State statutes, regulations, policies, or procedures governing the Program.” The two commenters who opposed the definition unless we modified it focused on the inclusion of unintentional actions in the definition. As noted in the discussion of the definition of vendor violation in the proposed rule, we believe vendors should be held accountable for all violations, whether they are deliberate attempts to violate program requirements or inadvertent errors, because both ultimately result in increased food costs and fewer participants being served. We acknowledged the complexity of WIC transactions and noted that even with training and supervision, cashiers may occasionally make unintentional errors. We also stated that the State agency has a wide range of actions that it may take as a result of a vendor violation, including assessing a claim, requiring increased training, identifying the vendor as a high-risk vendor subject to compliance investigation, and imposing a sanction. One supporting commenter questioned whether this statement is contrary to the mandatory vendor sanctions required by the Vendor Disqualification final rule. We want to emphasize that not all vendor violations will give rise to a vendor sanction. For example, even though an inadvertent mistake in entering the purchase price on a food instrument may constitute both a vendor violation and a vendor overcharge, it would not necessarily trigger a sanction. Only a pattern of vendor overcharges triggers the mandatory sanction. Consequently, we retained the “unintentional action” language in the vendor violation definition, as well as the State agency's discretion to take a variety of actions against a vendor when vendor violations do not rise to a level that triggers a sanction. One commenter suggested that the provision in proposed § 246.12(h)(3)(xiii) provide an exception similar to the one in § 246.12(l)(1)(i)(B), which provides the State agency with an option to impose a civil money penalty in lieu of permanent disqualification when the vendor had, at the time of the violation, an effective program and policy in effect to prevent trafficking and the ownership of the vendor was not aware of, did not approve of, and was not involved in the conduct of the violation. Another commenter asserted that if a vendor is doing everything it can to comply with program requirements and fires the employee who committed the vendor violations, the vendor should be able to retain its authorization. Otherwise, when a vendor is disqualified, participants are forced to go to a less convenient store or even drop off the Program completely. For the same reasons we did not remove unintentional actions from the definition of vendor violation, we retained in § 246.12(h)(3)(xiii) of the final rule the requirement that vendor agreements include a statement concerning the responsibility of the vendor for the actions of its employees. To be consistent with the definition of vendor violation, we included a reference in this provision to the vendor's accountability for the actions of its owners, officers, and managers. Also, rather than limiting this provision to actions relating to the “handling of food instruments,” we revised the provision to require accountability for “vendor violations.” As we noted above, not every vendor violation results in a sanction. Furthermore, for most mandatory sanctions, if the State agency determines that disqualification of the vendor would result in inadequate participant access, the State agency must impose a civil money penalty, except in the case of third or subsequent mandatory sanctions. b. Definitions of “Vendor Overcharge” and “Price Adjustment” (§ 246.2) Nineteen of the twenty-one commenters supported the proposed definition of “vendor overcharge.” Two commenters suggested removing the word “pattern,” noting that although a pattern of overcharging is required to trigger the mandatory sanction for vendor overcharges, it is unnecessarily limiting to include the pattern requirement in the definition itself. We agree and made this change in the final rule. Two commenters objected to the word “unintentional.” As noted in the discussion of the definition of vendor violation above and the discussion of vendor overcharges in the preamble to the Vendor Disqualification final rule, we believe that limiting the scope of vendor overcharges only to those that are intentional or fraudulent would undermine the integrity of the WIC Program. It also puts an additional burden on the State agency to prove the intent of the person who commits the vendor overcharge. Funds lost due to vendor overcharges, whether intentional or inadvertent, are not available to serve program participants. Therefore, we did not remove the word “unintentional.” Five of the supporting commenters and one opposing commenter pointed out that the proposed definition of vendor overcharge did not adequately distinguish between a vendor overcharge and what they termed an “overpriced food instrument” or “overage.” The commenters described an overpriced food instrument as a food instrument on which the vendor properly entered purchase price but due to a pre- or post-payment edit is paid by the State agency an amount lower than the purchase price. We agree with the commenters and, in the final rule, added a new definition of “price adjustment,” which is defined as “an adjustment made by the State agency, in accordance with the vendor agreement, to the purchase price on a food instrument after it has been submitted by a vendor for redemption to ensure that the payment to the vendor for the food instrument complies with the State agency's price limitations.” We made a conforming change to the definition of vendor overcharge to clarify that a vendor overcharge does not occur when the State agency makes a price adjustment to the purchase price of a food instrument in accordance with the procedures outlined in the vendor agreement. The definition of price adjustment recognizes the increasing number of State agency systems under which adjustments routinely are made to the purchase price on food instruments after they have been submitted for redemption. For example, in one State agency, prices are established for supplemental foods through competitive bids. The purchase price entered by the vendor on the food instrument corresponds to the current shelf prices for the authorized supplemental food items provided to the participant. The State agency bills the vendor at the end of each month for the difference between the purchase prices on its food instruments and the vendor's contract prices for the supplemental foods. These adjustments are not made to account for errors but as a regular part of the State agency's system for redeeming food instruments. Another State agency may have a system under which the State agency has established maximum prices for each type of food instrument and does not pay vendors in excess of that amount, regardless of their shelf prices for the supplemental foods. These situations are not properly categorized as overcharges, because the price adjustments are a regular part of the State agency's redemption system. We also recognize that sometimes the price adjustments are not made directly by State agencies, but rather by the banks they contract with to redeem food instruments. In these cases, the banks, acting as financial agents of the State agency, redeem the food instruments and make price adjustments pursuant to their contracts with the State agency. Thus, the price adjustments made by contractors of the State agency would be considered to be price adjustments made by the State agency and would not be considered vendor overcharges. A vendor still could commit a vendor overcharge in a system that uses price adjustments. For example, a vendor agreement may establish a maximum price by food instrument type but still requires the vendor to enter a purchase price that corresponds to its shelf prices. Under this arrangement, anytime the vendor enters a purchase price that exceeds its shelf prices, the vendor has committed an overcharge. A pattern of such vendor overcharges would trigger a mandatory sanction under § 246.12(k)(1)(iii)(C). We also revised the definition of vendor overcharge to replace the reference to charging participants more than non-WIC customers or the shelf or contract price with “charging the State agency more for authorized supplemental foods than is permitted under the vendor agreement.” We made this modification to recognize the wide variety of State agency redemption systems. In most cases, the vendor will be required to enter the purchase price corresponding to the shelf prices or prices charged non-WIC customers, whichever is less. However, in some cases the vendor may be required to enter a purchase price that does not exceed the food instrument's maximum price before submitting it to the State agency for redemption. Two commenters suggested incorporating a dollar threshold in the definition of vendor overcharge. As we have discussed in our guidance on the mandatory sanction for vendor overcharges, the severity of an overcharge should be taken into account in establishing a pattern of vendor overcharges. However, we believe it is important to have a firm definition of what constitutes a vendor overcharge and then for the State agency to establish a threshold for imposing a sanction or other action according to the number and severity of the vendor overcharges. Another commenter recommended that we limit vendor overcharges to actions that are proven through compliance buys. Most vendor overcharges will be established through compliance buys. However, State agencies may be able to develop edits or other means to detect vendor overcharges that provide sufficient evidence to support their sanction actions. We made a conforming change to the mandatory sanction in § 246.12(k)(1)(iii)(C) to use the defined term “vendor overcharge” rather than repeating the substance of the definition within the sanction provision. Finally, one opposing commenter noted that the definition should not reference “charging participants” because the State agency, not the participant, is charged for authorized supplemental foods obtained from a vendor. We agree with commenter and made this change. c. Review of Food Instruments (§ 246.12(k)(1)) Thirteen of the fifteen commenters on § 246.12(k)(1) supported the proposal to require the State agency to have systems to identify vendor overcharges and other errors on redeemed food instruments not less frequently than quarterly, although a number of the supporting commenters recommended that we modify the provision. Several commenters questioned how a State agency could have a system to detect vendor overcharges because they thought that compliance buys are the only way to establish vendor overcharges. We agree that compliance buys are the best way to support sanctioning a vendor for vendor overcharge violations. These comments pointed out that our reference to a system to “identify” vendor overcharges and other errors needed modification to apply to all State agencies. We revised this provision to clarify that the State agency must have a system to detect “questionable food instruments, suspected vendor overcharges, and other errors. * * *” This language both responds to the concern that in most instances a review of food instruments will not be able to identify an actual vendor overcharge, just a suspected vendor overcharge, and parallels the current language in 7 CFR 246.12(r)(5)(i) on this point. This revision also takes into account the need to detect other food instruments that may contain something questionable, but not clearly an error, that requires follow up. We also revised this provision to require that the system ensure compliance with the applicable price limitations. As discussed in section 4.a of this preamble, section 17(h)(11) of the Child Nutrition Act (42 U.S.C. 1786(h)(11)) now requires that the State agency establish procedures to ensure that authorized stores do not raise their prices after authorized, to levels that would otherwise make them ineligible for authorization. As a result, we required in § 246.12(g)(3)(i) that the State agency establish price limitations and in § 246.12(h)(4) that the State agency's redemption procedures must ensure that it does not pay a vendor more than the applicable price limitations. To further implement this statutory mandate, we revised the requirement for the review of food instruments to ensure compliance with the applicable price limitation. The final rule also makes clear that the review must include a price comparison or other edit designed to ensure compliance with the applicable price limitations and to detect suspected vendor overcharges. Two commenters asked that we clarify whether this requirement could be satisfied by inspecting a representative sample of food instruments. It was always our intention to permit the State agency to review only a representative sample of the food instruments submitted for redemption. We revised this provision to clarify that the State agency may review either all or a representative sample of food instruments and that the review may be done either before or after the State agency makes payment to the vendor on the food instruments. However, as State agencies continue to automate their food instrument redemption systems, they should design their systems to include a review of all food instruments before they make payment on them. One commenter suggested that we modify the requirement to detect “redemption of expired food instruments” to read “food instruments redeemed outside of valid dates.” We revised this provision to read “transacted or redeemed after the specified date” to capture both food instruments that vendors accept after the date for transacting them and food instruments submitted for redemption after the specified date. Finally, we clarified what we meant when we proposed that the system must detect vendor overcharges and other errors at least quarterly. We did not mean that the review was to be conducted quarterly. Instead, we were trying to establish a timeframe for follow-up action on any suspected vendor overcharges and other errors. In the final rule, we specify that the State agency must take follow-up action within 120 days of detecting any questionable food instruments, suspected vendor overcharges, or other errors. The review itself must be done on a continuing basis. d. Delaying Payment and Establishing Claims (§§ 246.12(k)(2) and 246.12(h)(3)(ix)) The majority of the commenters supported the proposed requirement that the State agency assess claims resulting from vendor violations identified during inventory audits or other reviews. However, in reviewing the proposed rule, we noted that we did not clearly establish a general requirement to establish claims against vendors that have committed vendor violations that affect the payment to the vendor. The final rule makes this clear in §§ 246.12(k)(2) and 246.12(h)(3)(ix) and also clarifies that the State agency may delay payment in cases in which the vendor violation is discovered before payment has been made. In response to proposed § 246.12(h)(3)(ix), a number of commenters asserted that an “overpriced food instrument” should give rise to a claim and a “vendor overcharge” should give rise to a sanction. As noted above, a price adjustment is not a vendor overcharge and does not trigger a claim. Price adjustments, which must be described in the vendor agreement, are part of the method used by the State agency to determine the amount a vendor is paid for a food instrument. We want to make clear that claims and sanctions are not mutually exclusive. Claims arise in situations in which the vendor has not complied with the requirements for food instrument redemption, such as recording the wrong price or accepting food instruments without signatures. In these cases, the State agency must either deny payment of the food instrument or assert a claim. Sanctions arise as a result of vendor violations, such as a pattern of vendor overcharges. One commenter requested that we clarify that in addition to assessing claims, the State agency may sanction vendors for a pattern of vendor overcharges. The commenter indicated this clarification is necessary to avoid dealing with vendor assertions that as long as they paid claims resulting from vendor overcharges, they cannot be sanctioned for vendor overcharge violations. We revised § 246.12(h)(3)(ix) to clarify that: “In addition to denying payment or assessing a claim, the State agency may sanction the vendor for vendor overcharges or other errors in accordance with the State agency's sanction schedule.” Three commenters suggested that a pattern of overcharges be used to identify high-risk vendors. Another commenter indicated that having a variable maximum price that is not printed on the food instrument eliminates the opportunity for systemic and excessive overcharging, lessening the need for pursuing claims, regardless of the cause or the size of vendor overcharges. Although we believe both of these approaches would improve program integrity, they should be used in addition to, and not in lieu of, strong requirements to pursue claims. e. Collecting the Full Purchase Price of Food Instruments Containing Vendor Overcharges or Other Errors (§§ 246.12(k)(2) and 246.12(h)(3)(ix)) Both Sections 246.12(k)(2) and 246.12(h)(3)(ix) in the proposed rule would have permitted, but not required, the State agency to withhold payment or collect from the vendor the full redeemed value of a food instrument containing a vendor overcharge or other error. Just under half of the commenters on each of these provisions opposed this authority for two reasons. First, they pointed out that it treated inadvertent cashier errors the same as intentional fraud. They asserted that there is no deterrent effect when human error is the cause. Second, they noted that establishing a claim for the full purchase price of the food instrument failed to compensate vendors for the amount of the supplemental foods that were properly provided to participants. One commenter suggested that we permit claim assessment for a percentage of the food instrument value rather than for the full amount. Another commenter was particularly concerned about this provision in light of the proposal to limit vendors' ability to appeal claims. The ability to establish a claim for the full purchase price of a food instrument can provide a powerful incentive for vendors to ensure that their cashiers are properly trained in order to reduce inadvertent errors during WIC transactions. As such, we retained this option for the State agency. f. Opportunity to Justify or Correct Errors (§ 246.12(k)(3)) Two commenters supported retaining the current provision requiring the State agency to give vendors the opportunity to justify or correct errors before denying payment or assessing a claim. One commenter indicated that our example was inadequate because some State agencies do not pay for food instruments with missing purchase prices or signatures and do not permit, under their vendor agreements, vendors to make these types of corrections after a food instrument has been submitted for redemption. We agree with the commenter and deleted this example. One commenter on the claims provision of the vendor agreement noted that we had removed the current provision requiring the State agency to give vendors an opportunity to justify or correct food instrument errors. To emphasize that vendors must still be provided this opportunity, we added a reference to this opportunity in the claims provision of the vendor agreement. g. Timeframe for Initiating Claims (§ 246.12(k)(4)) Two commenters pointed out that requiring the State agency to begin collection efforts before an investigation is complete could jeopardize the investigation. We agree and revised the requirement for initiating collection action to read “the date of detection of the vendor violation or the completion of the review or investigation giving rise to the claim, whichever is later.” We also reordered paragraph (k) to clarify that the opportunity to justify or correct must occur within the 90 days the State agency has to make a final decision to deny a payment or initiate claims collection action. h. Food Instruments Redeemed after the Specified Period (§ 246.12(k)(5)) Two commenters suggested that we raise the dollar limit for permitting the State agency to pay vendors for food instruments submitted for redemption after the specified date without our approval. They indicated that this dollar limit was outdated. We agree and raised the limit for prior FNS Regional Office approval from $200 to $500. 7. Miscellaneous Vendor Agreement Specifications a. Recordkeeping (§ 246.12(h)(3)(xv)) We proposed to require the vendor agreement to provide that vendors must maintain inventory records used for Federal tax reporting purposes and other records the State agency may require for a period of time specified by the State agency. One commenter recommended that we set the length of time in the final rule, rather than defer to the State agency. Other commenters requested that we specify what records must be retained and that we require that shelf price records be maintained to facilitate follow-up on suspected vendor overcharges. Finally, one commenter questioned whether the records may be kept off-site. This rule adopts the provision largely as proposed. We left it to the State agency to specify the record retention period. We clarified that the time period must be specified by the State agency in the vendor agreement. The State agency has the discretion to require as part of the vendor agreement that the vendor maintain shelf price records. Finally, this rule retains the requirement that the records be available at any reasonable time and place. This means that records may be kept off-site as long as they are readily accessible. b. Sanction Schedule (§ 246.12(h)(5)) All commenters supported our proposal to require the State agency to include its sanction schedule as part of the vendor agreement. This provision would replace the current approach of separately listing in the program regulations the mandatory sanctions that the State agency must include in its vendor agreement. Several commenters suggested that we clarify that the sanction schedule may be included as an attachment to the vendor agreement. Another commenter requested that we permit cross-reference to State laws or regulations in areas in which the State agency's sanction schedule has been incorporated in State law or regulations. We made these changes and also revised the provision to clarify that the sanction schedule must include both the mandatory and State agency vendor sanctions. One commenter suggested that the required sanction schedule only include the mandatory sanctions, because the State agency needs some flexibility in assessing the State agency sanctions in order to take into account the nuances of each case. We disagree. A State agency may build some flexibility into its sanction schedule, such as factors that will be taken into account in determining the length of a disqualification. However, vendors need advance notice of the consequences of committing vendor violations. We believe that allowing the State agency to either attach the sanction schedule to or cross-reference it in the vendor agreement provides the State agency with an efficient and effective means to provide vendors with such advance notice. Two commenters asked whether the State agency would be permitted to continue to include its sanction schedules in the vendor handbook that is provided to vendors along with the vendor agreement. This practice is permissible only if the sanction schedule section of the vendor handbook is referenced in the vendor agreement. Providing vendors with advance notice of the sanction schedule through the vendor agreement prevents vendors from arguing during administrative reviews that they were unaware of the sanctions for various vendor violations. c. Adverse Actions Subject to Administrative Review and Administrative Review Procedures (§ 246.12(h)(6)) We proposed to require the State agency to include with the vendor agreement a list of the actions a vendor may appeal and a copy of the State agency's administrative review procedures. Commenters generally supported this provision, but suggested some modifications to provide the State agency with some flexibility in the implementation of this provision. One commenter asked that we clarify that such procedures may be included in a vendor handbook or as an attachment to the agreement. Another commenter suggested that when the procedures are included in State law or regulations, that the vendor agreement just cross-reference those documents. Finally, one commenter asked whether this provision is necessary in light of the requirement that the State agency must provide such procedures to the vendor along with its notice of an adverse action that is subject to review. The final rule incorporates many of these suggestions. It permits the State agency to include the list of adverse actions and the administrative review procedures either in the agreement or as an attachment to it. If these items are included in State law or regulations or in another document, such as a vendor handbook, provided at the time the vendor is authorized, the State agency may simply include an appropriate cross-reference in the vendor agreement. As an alternative to these approaches for the administrative review procedures, the State agency may include a statement in the vendor agreement that the administrative review procedures are available upon request and applicable procedures will be provided along with a notice of adverse action that is subject to review. One commenter indicated that the vendor agreement should include a list of the adverse actions that are not subject to administrative review, rather than a list of the adverse actions that are subject to administrative review. The commenter asserted that an all-inclusive list of all actions that may be subject to administrative review is impossible. We did not intend the State agency to include a laundry list of all possible adverse actions. However, we also do not believe that simply providing a list o [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A00-33111. Public record. Not legal advice.