Using Electronic Cotton Warehouse ReceiptsAmendment to the United States Warehouse Act Regulations

SUMMARY: This final rule revises the regulations under the United

States Warehouse Act (USWA) for cotton warehouses. This final rule

permits the use of automated electronic data (electronic warehouse

receipts (EWRs)) through a provider for the purpose of establishing

rights to cotton held in storage by licensed warehousemen. The intent

of these changes is to maintain the integrity of USWA cotton warehouse

receipts, while permitting licensed warehousemen to use electronic

information management systems in place of negotiable paper receipts.

EFFECTIVE DATE: May 2, 1994.

FOR FURTHER INFORMATION CONTACT: Lynda Moore or Steve Mikkelsen,

Agricultural Marketing Specialists, United States Department of

Agriculture (USDA), Agricultural Stabilization and Conservation Service

(ASCS), PO Box 2415, Washington, DC 20013-2415, telephone 202-720-2121,

FAX 202-690-0014.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

This final rule is issued in conformance with Executive Order

12866. Based on information compiled by the USDA, it has been

determined that this final rule:

(1) Would not have an annual effect on the economy of $100 million

or more or adversely affect in a material way the economy, a sector of

the economy, productivity, competition, jobs, the environment, public

health or safety, or State, local, or tribal governments or

communities;

(2) Would not create a serious inconsistency or otherwise interfere

with an action taken or planned by another agency;

(3) Would not materially alter the budgetary impact of

entitlements, grants, user fees, or loan programs or the rights and

obligations of recipients thereof; or

(4) Would not raise novel legal or policy issues arising out of

legal mandates, the President's priorities, or the principles set forth

in this Executive Order.

No Significant Impact

The Administrator of ASCS certifies that this action will not have

a significant economic impact on a substantial number of participating

individuals or entities because the procedure set out in this rule

would not increase, but would rather decrease, the time and paperwork

necessary to process an administrative review.

Executive Order 12612

Executive Order 12612 of October 26, 1987, entitled ``Federalism'',

requires that Executive departments and agencies shall, to the extent

permitted by law, adhere to certain principles of federalism. The

Administrator of ASCS has determined that this program will not have a

substantial direct effect on the States, on the relationship between

the national government and the States, or on the distribution of power

and responsibilities among the various levels of government.

Environmental Evaluation

It has been determined by an environmental evaluation that this

action would have no significant impact on the quality of the human

environment. Therefore, neither an Environmental Assessment nor an

Environmental Impact Statement is needed.

Executive Order 12372

This program is not subject to the provisions of Executive Order

12372 which requires intergovernmental consultation with State and

local officials. See the notice related to 7 CFR part 3015, subpart V,

published at 48 FR 29115 (June 24, 1983).

Executive Order 12778

This final rule has been reviewed in accordance with Executive

Order 12778. This final rule does not have any preemptive effect with

respect to State laws with the exception that for State law purposes an

EWR on cotton stored in a federally licensed warehouse shall have the

same effect as a paper warehouse receipt issued by the same warehouse.

Regulatory Flexibility Act

It has been determined that the Regulatory Flexibility Act is not

applicable to this final rule because it has been determined that this

rule will not have a significant effect on a substantial number of

small businesses. This rule will substantially reduce the paperwork for

those warehousemen participating in the EWR program. However, these

warehousemen have the option of participating and may choose which

system they prefer to use.

Paperwork Reduction Act

This final rule contains new recordkeeping requirements for

warehousemen that elect to participate. However, since this procedure

is voluntary, not mandatory, all additional workload and time will not

affect licensed warehousemen who do not participate in the EWR system.

Background

Pursuant to the provisions of the USWA, the Secretary has the

authority to license public warehousemen of cotton (7 U.S.C. 241 et

seq.). As a part of this licensing authority, the Secretary has the

responsibility to regulate the issuance of warehouse receipts by the

cotton warehousemen it licenses (7 U.S.C. 260). Currently, the

provisions of section 18 of the USWA and 7 CFR part 735 of the

regulations prescribe the content and the issuance of cotton warehouse

receipts.

The USWA was amended twice to provide the Secretary (through ASCS)

with the discretionary authority to allow the cotton warehousemen it

licenses to issue cotton warehouse receipts in electronic format

(EWRs). This final rule implements this discretionary authority.

Licensed cotton warehousemen may issue EWRs for bales of cotton

stored in their warehouses. The system which contains these EWRs will

be maintained by private providers. Providers used by licensed

warehousemen must be approved by and have an Agreement with ASCS. EWRs

issued under the authority of the USWA will be considered equal to, and

have the same legal effect as, paper warehouse receipts. The USWA was

enacted in 1916 to improve this country's agricultural warehousing

industry and establish warehouse receipts that are uniformly dependable

and acceptable in financial circles and represent a commodity serving

as reliable collateral for loans through a voluntary warehouse

licensing program. USWA paper warehouse receipts have consistently

maintained high integrity.

With the advent of safe, reliable, and secure electronic storage

and processing of data, the use of paper warehouse receipts may become

obsolete. The introduction of USWA EWRs will serve the warehousing

industry and its customers by allowing cotton warehouses to take

advantage of today's electronic data storage and transmission systems.

To ensure the continuation of the integrity and respect of USWA

warehouse receipts, ASCS expects high standards of approved providers.

Approved providers must have an Agreement with ASCS; comply with the

terms of that Agreement; maintain specific financial and bonding

requirements; pay user fees established by ASCS; establish and retain

contemporaneous records of each EWR entry and access; and be liable to

the Secretary for issues associated with system failure or malfunction.

Additionally, providers must furnish annual audit level financial

statements and submit to electronic data processing audits. Providers,

at all times, must grant the Secretary, or his designee, free access to

all records pertaining in any way to the USWA or the system.

The proposed rule contained new requirements regarding additional

information required to be contained in EWRs that are not currently in

section 18 of the USWA or 7 CFR 735.16. Some of the proposed

requirements have not been adopted in this final rule. The primary

requirement eliminated is that EWRs must designate the names of the

current owners. Section 735.16 has been amended allowing additional

information, such as, classing data; quality factors; and other items

pertinent to the transfer of EWRs from one holder to another.

General Summary of Comments

A proposed rule was published in the Federal Register (58 FR 43298)

on August 16, 1993. Comments from interested parties were due on or

before October 15, 1993. Twenty-four letters were received after the

close of the comment period and were not considered.

One hundred and twenty-seven letters from 130 individuals and

entities were received during the comment period. Of the 127 letters,

112 were identical, and appeared to be part of an organized campaign.

These comments will be weighed appropriately. These 112 covered three

topics: provider restrictions, State-licensed warehouses, and fees. The

130 individuals and entities are comprised of: 94 individuals, 9 cotton

gins, 5 co-ops, 8 warehousemen, 4 Members of Congress, 4 Associations,

4 cotton merchants, and 2 millers. Because most of the letters contain

more than one comment, the total number of comments received was 423.

Discussion of Comments

In general the comments were supportive of the concepts behind the

proposed rule. However, many of the comments suggested that the final

rule should contain more specific regulations defining how EWR records

should be maintained and how they should be transferred, as well as

more regulations regarding providers and their relationship with ASCS

and the users. In short, these commenters saw ASCS as having a

substantial regulatory role by controlling every detail of this

process.

The final rule did adopt some of the changes suggested. The final

rule does include more detail regarding the financial and insurance

requirements for providers. However, in most cases it does not include

the detailed regulations regarding specific operations, such as, the

manner in which backup files should be maintained or what specific

security measures must be taken to protect the central filing system.

The approach taken in the final rule is that this regulation addresses

issues that will advance and grow substantially over the next few

years. As a result, technology and experience will lead to an evolution

of how these matters should be resolved. Thus, any regulation that

provides details suggested would soon become obsolete. Therefore, these

regulations were drafted with the intent of establishing and defining

responsibilities among ASCS, warehousemen, providers, and users. The

affected parties will be required to determine how best to satisfy

these responsibilities now, and they will be allowed to improve these

solutions in the future without first seeking an amendment to this

regulation.

Because many sections of this regulation are interrelated, the

individual comments received were applicable to different sections of

the regulation. As a result, ASCS will discuss the comments and the

changes to the regulation they produced on a topical, as opposed to

section by section, basis. The comments have been divided into the

following categories: Providers, State-Licensed Warehouses, Fees,

Warehouse Receipt Conversion, Cotton Ownership, and Central Filing

System.

1. Providers

Two issues were discussed involving providers: the restrictions on

who can be a provider and the qualifications of a provider.

A. Restrictions

A total of 119 comments were received regarding the limitations

contained in the proposed rule on who could act as a provider (112 of

these were identical). 117 comments expressed concern that these

regulations would discriminate against entities in the cotton industry

providing this service. Further, the 112 identical comments stated that

Plains Cotton Cooperative Association has provided an electronic system

for the past four years and should be allowed to continue. One comment

questioned whether the proposed rule language would limit providers to

USWA warehouses. One comment suggested that the restrictions on

providers listed in the proposed rule were not strict enough. This

commenter indicated that providers should be involved in no

``activities associated with marketing cotton''.

After reviewing these comments, the final rule modified the

proposed rule to allow any individual or entity that meets the

financial and security requirements of this regulation to be a

provider. The financial and security requirements of these regulations

will provide users with sufficient protection against the potential

failure of a provider. ASCS did consider the risk that a provider may

attempt to use information in its central filing system to its

advantage, which is why ASCS included strict conflict of interest

provisions in the proposed rule. However, after further review, it was

determined that such restrictions would unduly limit the number of

providers and potentially jeopardize the program. Since use of the

system is voluntary, those participating should be aware that the

provider may have a conflict of interest and those participants should

act accordingly. These regulations do not require that a holder of a

USWA warehouse receipt have an EWR issued or retained electronically. A

holder who has concerns regarding EWRs has the right to require that

the receipt be reissued as a paper receipt.

While ASCS does not believe that the proposed rule limited

providers to USWA warehousemen, ASCS has clarified this section of the

final rule to clearly indicate that providers may be any individual or

entity, including USWA warehousemen.

B. Qualifications

A total of four comments were received regarding the qualifications

of a provider. One comment indicated that the provisions of the

proposed rule were not specific enough regarding the financial

standards that must be met. The commenter suggested that high dollar

capitalization and insurance amounts (unspecified) should be required.

One comment suggested a very specific list of insurance ($2 million),

bond ($300,000 to $750,000), and net worth (up to $1 millon)

requirements. One comment suggested that a sizable bonding requirement

be imposed. One comment suggested that strict financial and technical

requirements, unspecified, be imposed.

After consideration of these comments, ASCS added to the final rule

a list of very specific financial and insurance requirements for

providers in Sec. 735.102(a) and believes that the financial

requirements, performance security, and suspension terms provide

adequate protection to users and providers.

2. State-Licensed Warehouses

One-hundred and fourteen comments (112 of which were identical)

were received regarding State-licensed warehousemen. All commenters

indicated that State-licensed warehouses should be included under these

regulations.

It was determined that it was not necessary to amend this portion

of the proposed rule. The background information provided in the

proposed rule discussed this issue. It stated that this regulatory

change would allow providers to accept EWRs from warehousemen not

licensed by the Secretary. However, the Secretary would not regulate or

take any responsibility for such warehousemen, the content of such

warehouse receipts, or the manner in which such warehouse receipts are

issued. Such matters must be governed by applicable State laws.

The final rule does not include any regulation of State-licensed

warehouses or their receipts. However, the definition of ``user'' in

these regulations and in the provider agreements that will be executed

will include any individual or entity that uses the services of the

provider to file or access warehouse receipt information. Therefore,

nothing in this regulation prohibits a provider from accepting EWRs

from non-federally licensed warehousemen.

3. Fees

One-hundred and twenty comments were received on the subject of

fees (112 of these were identical). All commenters question the per

bale fee of $0.10 to $1.00 to administer and supervise the EWR system.

The commenters suggested that if the fee set by ASCS was too high, it

would render the program uneconomical.

ASCS considered these comments and understands that the level of

fees could affect the use of this program. When the proposed rule was

written, the fees quoted were nothing more than conjecture, since it is

unknown exactly what fees will be charged. These regulations and the

provider agreement will state that the provider's fees will be

announced and assessed by ASCS annually prior to April 30th of each

year. The Secretary is obligated by law to ``* * * charge and provide

for the collection of reasonable fees to cover the estimated costs to

the Department of Agriculture incident to the functioning and

maintenance of any central filing system * * *'' The Secretary will not

operate and regulate such a system for a profit. If fees set are

determined to be excessive, they will be adjusted.

4. Warehouse Receipt Conversion

Eight comments were received that addressed the conversion from

paper warehouse receipts to electronic and vise versa. One comment

indicated that the right to have an EWR converted to a paper receipt be

limited to the first three crop seasons after the final rule is

promulgated so as to reduce costs and encourage the phasing out of

paper warehouse receipts. Three comments indicated that a user must

have an unlimited right to convert an EWR to a paper warehouse receipt.

One comment indicated that the conversion of EWRs to paper should be

done in such a way to prevent the need to retag bales. One comment

indicated that by adopting a proposal of universal tag numbers for

bales of cotton, the conversion of warehouse receipts between the paper

and electronic systems would be smoother. One comment indicated that

the final rule should contain more specific procedures describing the

conversion of receipts between the paper and electronic systems. One

comment indicated that providers should issue paper warehouse receipts

and that these receipts could be issued in blank.

Based on a review of these comments, it was determined to retain

the rights for holders to convert receipts between the paper and

electronic systems with the exception that such conversions do not need

to be approved by the owner of the cotton. ASCS believes the

convertibility of these receipts is necessary until electronic receipts

are fully accepted by the industry as a replacement for paper receipts

and to serve as a backup for situations when a warehouse may be having

difficulties with the provider.

While some in the cotton industry believe that eventually

electronic receipts will replace paper receipts, ASCS could not

determine whether such a total conversion is appropriate, or even

feasible, in the foreseeable future. As supported by other comments

received, the convertibility of receipts is necessary to provide the

industry with the confidence that if problems should develop with the

electronic receipt system, ASCS has a viable paper system as a backup.

As noted previously, any system which allows the provider to operate

with a built-in conflict of interest must give users an alternative

opportunity.

Providers do not have the authority to issue any warehouse receipt,

either paper or electronic. They provide the recordkeeping system for

warehouse receipts issued by the warehousemen. Pursuant to the

provisions of the USWA, warehousemen are responsible for the issuance

of all warehouse receipts. Therefore, ASCS cannot authorize providers

to issue paper receipts.

5. Cotton Ownership

Four comments were received regarding the listing of the ownership

of cotton on the EWR. All comments indicated that it was inappropriate

to have owners of cotton listed on the receipt. They believed that such

a listing was not necessary and would cause an undue burden and

expense.

After considering these comments, ASCS has removed the requirement

for listing owners on EWRs.

6. Central Filing System

Fifty comments were received regarding the central filing system.

These comments can be grouped into the following subjects: security of

the system, management of central filing system, providers agreement,

bale numbers, and system access.

A. Security of the System

Seven comments were received regarding the provisions that address

the security of the system. Three comments indicated that the proposed

rule did not provide standards to determine whether the security

measures for a central filing system are adequate. One comment

indicated that ASCS' financial statement auditing requirements should

be strengthened to require that all audits be done at the audited

level. One comment indicated that the requirement for a ``statement of

changes in financial position'' should be changed to a requirement for

a ``statement of cash flow.'' One comment indicated that the proposed

rule should be changed to eliminate the requirement that the

accountants provide certifications or comments on financial statements.

Under the applicable standards of accounting, certifications or

comments to a financial statement are not required. One comment

indicated under current procedures, before an accountant can express an

opinion regarding the status of an electronic data processing system,

the provider must be required to make certain assertions regarding the

system which then can be audited. There has not been developed an

independent set of data processing security standards that have been

accepted by the accounting community.

It has been determined that the security provisions of the proposed

rule will be retained in the final rule with the exception that ASCS

has eliminated the need for an electronic data processing audit

performed in accordance with the standards of the American Institute of

Certified Public Accountants. The reason for this change is that

appropriate standards that may be adapted for our use do not appear to

exist.

It has been determined that holders should not be allowed to

unilaterally move a warehouse receipt from one provider to another. In

order to maintain the integrity of the system and to require that

licensed warehousemen be responsible for the receipts they issue, ASCS

must require that warehousemen be in control over the provider that

retains their warehouse receipts. Otherwise, any one warehouseman's

receipts could be spread out among several providers which would make

it impossible to audit the warehouseman's inventory. Even the

warehousemen may not know where all of their receipts are retained.

The final rule does not provide more specifics regarding the

security measures that must be imposed by the provider to protect the

system for two reasons. First, ASCS anticipates that providers would

separately develop systems around their efficiencies. Limiting

providers to one particular system would not promote such efficiencies.

Second, it is impossible to foresee all of the potential problems that

could arise in a central filing system. Therefore, the final rule

places the responsibility for security on the provider. However, should

ASCS determine that a provider's security system is inadequate for any

reason, ASCS has the authority to immediately shut down that system to

protect the integrity of the program.

B. Management of Central Filing System

Twenty-two comments were received regarding the regulation and

management of the central filing systems. One comment indicated that

the Secretary should approve providers, as opposed to, licensing them.

One comment indicated that prior approval should not be required before

the transfer of EWRs from one provider to another. Two comments

indicated that warehousemen should be able to freely change from one

provider to another within the 12-month agreement cycle indicated in

the proposed rule. One comment indicated that the word ``its'' was

missing from Sec. 735.105(b). One comment questioned the meaning of the

term ``valid contract'' in Sec. 735.105(d). Two comments suggested that

the provision in the proposed rule that gives the Secretary the

authority to suspend a provider agreement if the provider fails to

maintain ``control'' over its central filing system, is too vague. One

comment questioned whether a suspended provider could accept warehouse

receipts from warehousemen who are not licensed by the Secretary. Two

comments questioned the meaning of the term ``central filing system''

in the context of the use of the term in the Food and Security Act of

1985 regarding liens. Two comments suggested that the final rule should

delete the provision requiring written permission to agree to the

transfer of receipts between providers. One of these comments

recommended that the best way to handle this is to simply allow the

creation of a paper warehouse receipt as a means of transferring

receipts between providers. One comment suggested that the final rule

should contain more regulations regarding the transfer of warehouse

receipt records between providers. One comment suggested that there are

several provisions of the proposed rule that are contradictory

regarding the transfer of warehouse receipts between providers. One

comment suggested the Secretary regulate the relationship between the

users and the providers. One comment indicated that the use of the word

``on'' in the definition ``central filing system'' makes the meaning of

the term too restrictive and should be replaced with either

``concerning'' or ``relating to.'' One comment suggested that the

proposed rule failed to identify any additional recordkeeping

requirements for warehousemen who issue EWRs. One comment suggested

that the final rule should allow for additional information to be on

the EWRs, especially for ``certificated bales of cotton.'' One comment

sought clarification to be sure that only one active warehouse receipt

record should exist at a time for any bale of cotton. One comment

recommended that the USWA warehousemen should not be required to notify

the Secretary 60 calendar days in advance of the use of the provider

they have selected before they can issue EWRs. One comment suggested

that the provisions of Sec. 735.17 regarding the need for backup

information is inconsistent with the creation of EWRs.

Based on the comments received, the final rule modified the

proposed rule in the following ways: (1) ASCS will not license

providers, it will approve them through agreements; (2) technical

changes were made to the definition of the EWRs and other provisions to

make them clearer; (3) warehousemen will be allowed to change providers

at will so long as they inform the Secretary of such change at least 60

calendar days prior to making such a change, unless otherwise indicated

by the Secretary. This will allow warehousemen to change providers

during the 12-month agreement cycle but will also allow the Secretary

to keep track of these changes for the purposes of auditing the

warehousemen as necessary; and (4) the proposed rule provision that

allows warehousemen and providers to retain other data associated with

the cotton not otherwise required was clarified. Under the final rule,

warehousemen and providers may retain other data in addition to the

USWA required warehouse receipt information, including cotton classing

information, other bale numbers, etc.

Provisions in the proposed rule concerning suspension or revocation

of providers were not significantly changed for the final rule. The

word ``revoked'' was replaced with ``terminated''. ASCS choose to adopt

the statement ``for cause'' in the final rule, rather than specify

individual circumstances where ASCS would unfortunately have to suspend

or terminate a provider.

In the comments, a question was raised regarding how a suspension

would affect the ability of a provider to accept warehouse receipts

from a non-federally licensed warehouse. Neither these regulations nor

the legislation authorizes the Secretary to regulate a provider's

activities with State licensed warehouses. Therefore, a suspended

provider is only prohibited from accepting warehouse receipts from USWA

warehouses.

The suggested changes regarding the use of the term ``central

filing system'' were not adopted. ASCS understands that this term is

used to describe a vehicle for recording liens in the 1985 Food and

Security Act. However, this is the term used to describe the system for

retaining EWRs in the legislation that authorized this regulation.

Therefore, it was determined that this term should be retained.

However, ASCS has clearly defined this term in the final rule to avoid

any confusion.

The suggested changes regarding the transfer of EWR records from

one provider to another were not adopted. Under the final rule, the

only regulation regarding the transfer of records between providers is

that the new provider have an agreement with the Secretary and the

Secretary be notified 60 calendar days prior to the transfer. It was

determined that additional regulations were not needed and that the

provisions contained in the proposed rule are not inconsistent with the

final rule.

Furthermore, ASCS does not believe additional regulations are

needed regarding these transfers. It will be the responsibility of the

warehouseman to ensure that all applicable receipts are properly

transferred.

The suggestion to increase the regulation of the agreements between

users and providers was not adopted. It was determined that any

additional regulation is not necessary, because a holder may request a

paper warehouse receipt at any time.

Several comments were received regarding the records required by

this regulation. The final rule does not include any additional

recordkeeping requirements, because ASCS does not believe that any

additional requirements are needed, since nearly all additional records

required by this regulation are retained with the provider. Finally,

ASCS received a comment regarding the application of the regulations

concerning backups to EWRs. For the purposes of these regulations, any

backup files will be considered equivalent to the backup files

otherwise required by these regulations.

C. Providers Agreement

Eight comments were received regarding the terms of the provider

agreement with the Secretary. One comment suggested that the regulation

should contain more information regarding the terms of the provider

agreement. This comment suggested that the final rule and the provider

agreement should specify in detail the financial requirements and the

system backup records that must be maintained. One comment indicates

that a provider agreement should be in effect for more than one year.

One comment indicated that providers should not be strictly liable to

the Secretary or users for costs associated with lost or destroyed

receipts. One comment suggested that in addition to being strictly

liable, the provider must also be required to have the financial

resources to compensate users for such losses. One comment indicated

that providers should not be required to store records for a period of

six years. Currently, the Secretary only requires that paper receipt

records be retained for only two years. One comment suggested that the

Secretary should require more financial and background information be

supplied before the Secretary approves the application of a provider.

One comment indicated that when a provider agreement is suspended the

Secretary should make every effort to get the affected warehouses on

another approved provider system. One comment suggested that the

provider agreement contain a provision that all security measures must

meet the requirements of the American Institute of Certified Public

Accountants.

Based on a review of these comments, ASCS made the following

changes to the proposed rule: (1) Providers will be only strictly

liable for costs incurred by the Secretary associated with lost or

improperly destroyed EWRs; (2) the final rule restructured the

provisions affecting providers to more clearly identify their

responsibilities; and (3) the final rule more clearly identifies the

financial and insurance requirements for providers that would be

available to settle claims by users against providers.

The suggestion that the provider agreement should be in effect for

a period of more than one year was not adopted. ASCS could not agree

that the one year agreement cycle would cause problems for providers.

Currently, warehouse licenses are issued for a period of no more than

one year. One year agreement cycles will ensure that ASCS has current

financial and other related information regarding the providers.

However, the final rule clarifies that these agreements will

automatically renew, unless there is a problem.

The comment to change record retention for providers from six to

two years was not adopted. Given the fact that the records in question

are electronic records which can be stored easier than paper records,

ASCS does not believe that a six-year retention period is too

burdensome. Unlike the current paper system, providers will be storing

records for more than one warehouse. Thus, ASCS believes that these

records should be retained for a longer period of time.

The comment that suggested more detailed information should be

required of providers before they are approved was not adopted. ASCS

believes that the information requirements specified in the proposed

rule will provide enough information, in most cases, for a

determination to be made on a provider application. However, on a case-

by-case basis, should more information be needed, it will be required.

It is agreed that in cases where a provider is suspended, the

Secretary should give the affected warehousemen assistance to enable

them to issue electronic receipts through another provider. However,

ASCS does not believe that the proposed rule prohibited such

assistance.

Finally, a comment suggested that the final rule should require

that all data security systems of providers meet the requirements of

American Institute of Certified Public Accountants. As explained

previously, it appears that such a standard does not currently exist.

Therefore, ASCS could not adopt the comment.

D. Bale Numbers

Five comments were received that suggested a system of warehouse

receipt numbers and a uniform bale numbering system be merged into one

number system. This would eliminate the need to retag bales as they

move through the marketing process.

ASCS is not able to adopt these comments. The USWA requires that

each federally licensed warehouse assign warehouse receipt numbers on a

consecutive basis. The proposed universal bale numbering system is not

consistent with the statute. Thus, the USWA prohibits the adoption of

these comments.

E. System Access

Eight comments were received addressing system access. Five of

these comments discuss unlimited free access to the Secretary. One

comment opposes such access by stating that such broad access could

compromise the integrity of the electronic system. The same commenter

also states that the Secretary does not have similar information

available to him now. Another commenter stated that the only party that

should have unlimited access for audit requirements would be USDA. A

third comment on this subject is that the Commodity Credit Corporation

should have the right at any time to audit the system and the system

provider. The fourth comment provides full support for the Secretary's

right to have full access to the system for audit and control purposes.

The fifth comment states that allowing the Secretary such access is

extremely broad and should be more tailored.

ASCS believes that unlimited, free access to the Secretary, for

audit purposes, is necessary to provide all interested parties with

protection. Therefore, the final rule contains this authority for the

Secretary. The three additional comments address access by other

interested parties. One comment states that there is strong opposition

to making electronic receipt system information available to any party

on a nondiscriminatory basis. Another comment states that it so

strongly opposes access to any party on a nondiscriminatory basis that

it will not use any EWR system so long as such access is provided. A

third comment states that only the holder, owner, or their authorized

agent should have access to the system. The final rule eliminates the

part of the proposed rule, Sec. 735.104(a), that stated that providers

must allow read only access, at no cost, to interested parties. The

providers agreement will allow system access to warehousemen to create,

amend, or cancel warehouse receipts only when they are the warehouse

receipt holder; and that ``read only'' access can be exercised by

licensed warehousemen with respect to warehouse receipts originated by

that warehouseman at any time, at no cost. All other access to the

central filing system will be determined between the providers and the

users as they see fit.

In addition to the previously listed comments, four general

comments were received. These comments indicated their support to a

proposal regarding EWRs prepared by the National Cotton Council (NCC).

ASCS had difficulty addressing these comments, because ASCS

received a different set of comments from NCC. In general, the NCC

proposal is consistent with the current final rule, but NCC would

establish more regulation over the details of the transactions among

providers, users, and warehouses. As previously indicated, the intent

of these regulations is not to have ASCS micro-manage the issuance and

use of EWRs. These regulations assign the responsibilities among the

parties and allow them to determine how to satisfy these

responsibilities.

List of Subjects in 7 CFR Part 735

Administrative practice and procedure, Cotton, Reporting and

recordkeeping requirements, Surety bonds, Warehouses.

Accordingly, 7 CFR part 735 is amended as follows:

PART 735--COTTON WAREHOUSES

1. The authority citation for 7 CFR part 735 is revised to read as

follows:

Authority: 7 U.S.C. 268.

2. Section 735.2 is amended by adding paragraphs (bb) through (ii)

to read as follows:

Sec. 735.2 Terms defined.

* * * * *

(bb) Access. The ability when authorized, to read, change, and

transfer warehouse receipt information retained in the central filing

system.

(cc) Central filing system (CFS). An electronic computer system

operated and maintained by an approved provider where the information

relating to warehouse receipts is recorded.

(dd) Electronic warehouse receipt (EWR). An electronic file in the

CFS that contains at the least information required to be included in a

warehouse receipt by section 18 of the Act, and Sec. 735.16, regarding

a bale of cotton and has been identified to a holder.

(ee) Holder. An individual or entity in possession, in fact, or by

operation of law, of a receipt and by extension, of the cotton

represented thereby.

(ff) Issue. EWRs are considered issued when a licensed warehouseman

has transmitted all necessary information to an approved provider, and

when such information is entered into the provider's CFS.

(gg) Provider. An individual or entity that maintains EWRs in a

CFS, meets the requirements of this part, and has a Provider Agreement

with ASCS.

(hh) Provider Agreement. An agreement entered into between the

Secretary and a provider that delineates the provider's

responsibilities and defines the relationship between the provider and

ASCS regarding the provider's maintenance and security of EWRs in the

CFS and other requirements of this part.

(ii) User. An individual or entity that uses the provider's CFS but

shall not include ASCS in its regulatory capacity.

3. Section 735.16(h) is added to read as follows:

Sec. 735.16 Form.

* * * * *

(h) A warehouse receipt may contain additional information;

Provided that such information does not interfere with the information

required by this part.

Secs. 735.94, 735.95, 735.96, 735.97, 735.98, 735.99 [Added and

Reserved]

4. Sections 735.94 through 735.99 are added and reserved.

5. An undesignated centerheading entitled, ``Electronic Warehouse

Receipts'' (Secs. 735.100 through 735.105), is added to read as

follows:

Electronic Warehouse Receipts

Sec.

735.100 General statement.

735.101 Electronic warehouse receipts.

735.102 Provider requirements and standards for applicants.

735.103 Audits.

735.104 Provider-user relationship.

735.105 Security.

Electronic Warehouse Receipts

Sec. 735.100 General statement.

The regulations in Secs. 735.100 through 735.105 give a USWA

licensed warehouseman the option of issuing EWRs instead of paper

warehouse receipts for the cotton stored in its facility. EWRs may only

be created through a provider who is approved by ASCS.

Sec. 735.101 Electronic warehouse receipts.

(a) EWRs issued pursuant to this part establish the same rights and

obligations with respect to a bale of cotton as a paper receipt. With

the exception of the requirement that warehouse receipts be issued on

paper (Sec. 735.19), all other requirements applicable to paper

warehouse receipts shall apply to EWRs, unless otherwise specified. The

person identified as the ``holder'' of an EWR shall be entitled to the

same rights and privileges as the holder of a paper warehouse receipt.

(b) EWRs must be issued as single bale receipts.

(c) EWRs may only be issued through a provider.

(d) Warehousemen must notify all holders of cotton receipted by

inclusion in the CFS at least 30 calendar days before changing

providers, unless otherwise required or allowed by the Secretary.

(e) Licensed warehousemen may cancel EWRs only when they are the

holder of such receipts.

(f) Licensed warehousemen, only as holder, may correct information

on the EWR.

(g) Only the holder of the receipt may transfer the receipt to a

new holder.

(h) The identity of the holder must be included as additional

information for every EWR.

(i) An EWR shall only designate one entity as a holder at any one

time.

(j) An EWR shall not be issued for a bale of cotton if another

receipt, paper or electronic, on such bale is outstanding. No two

warehouse receipts issued by a licensed warehouse may have the same

receipt number.

(k) Prior to issuing EWRs, each warehouseman shall request and

receive from ASCS a range of consecutive warehouse receipt numbers

which the warehouseman shall use for the EWRs it issues.

(l) If a warehouseman has a contract with a provider, all warehouse

receipts issued by the warehouseman shall initially be issued as EWRs.

(m) An EWR may only be issued to replace a paper receipt if the

current holder of the warehouse receipt agrees.

(n) EWRs shall not be issued for defective cotton as defined in

Sec. 735.70.

(o) Licensed warehousemen must inform the Secretary of the identity

of their approved provider 60 calendar days in advance of issuing

warehouse receipts through that provider. The Secretary may waive or

modify this 60 day requirement.

(p) Holders and licensed warehousemen may authorize any other user

of a provider to act on their behalf with respect to their activities

with such provider. Such authorization must be in writing,

acknowledged, and retained by the provider.

(q) Provisions of Sec. 735.18 shall be applicable to lost or

destroyed EWRs.

Sec. 735.102 Provider requirements and standards for applicants.

(a) Financial requirements. All providers to be approved under this

part must meet the following requirements:

(1) Have a net worth of at least $25,000, and

(2) Maintain two insurance policies; one for ``errors and

omissions'' and another for ``fraud and dishonesty''. Each policy must

have a minimum coverage of $2 million.

(b) User fee charges. Providers shall pay to ASCS user fees set by

ASCS and announced annually prior to April of each calendar year.

(c) Provider agreement. The provider agreement shall contain, but

not be limited to, the following basic elements:

(1) Records. The retention period for records.

(2) Liability. The liability of the provider.

(3) Transfer of records. The requirements for transferring EWRs to

another provider.

(d) Suspension and termination. (1) The Secretary may suspend or

terminate a provider's agreement for cause at any time.

(2) Hearings and appeals will be conducted in accordance with

procedures that are contained in Secs. 735.7 and 735.89.

(3) Without specific written authority by the Secretary, suspended

or terminated providers may not accept, transfer, or execute any other

function pertaining to EWRs during the pendency of any appeal or

subsequent to such appeal if the appeal is denied.

(4) The provider or ASCS may terminate the provider agreement

without cause solely by giving the other party written notice 60

calendar days prior to the termination.

(e) Renewal. Each provider agreement will be automatically renewed

annually on April 30th as long as the provider complies with the terms

contained in the provider agreement, the regulations in Secs. 735.100

through 735.105 and the Act.

(f) Application form. Application for a provider agreement shall be

made to the Secretary upon forms prescribed and furnished by ASCS.

Sec. 735.103 Audits.

(a) The provider must submit to the Secretary an annual audit level

financial statement that meets the requirements of Sec. 735.5 with the

exception of Secs. 735.5(d)(1), (e), (g), and (h); and an electronic

data processing audit. These audits shall encompass the provider's

fiscal year. The completed audits shall be submitted to the Secretary

no later than four calendar months following the end of the provider's

fiscal year. The electronic data processing audit shall result in an

evaluation as to current computer operations, security, disaster

recovery capabilities of the system, and other systems.

(b) The provider will grant the Secretary or his designees

unlimited, free access at any time to all records under the provider's

control relating to activities conducted under this part and as

specified in the provider agreement.

Sec. 735.104 Provider-user relationship.

(a) The provider shall not discriminate among its users regarding

use of and access to its CFS and must charge fees on an equal basis to

all users for its services.

(b) The provider must furnish the Secretary with copies of its

current schedule of fees for all services and charges as they become

effective.

(c) Fees charged any user by the provider must be in effect for a

minimum period of one year.

(d) Providers must furnish the Secretary and all users a 60

calendar day advance notice of their intent to change any fee.

Sec. 735.105 Security.

(a) Security must be in accordance with the standards set out in

the provider agreement.

(b) Security copies of the system are to be maintained off-site.

Both on-site and off-site record security must be maintained.

Signed at Washington, DC, on March 28, 1994.

Bruce R. Weber,

Acting Administrator, Agricultural Stabilization and Conservation

Service.

[FR Doc. 94-7691 Filed 3-30-94; 8:45 am]

BILLING CODE 3410-05-P