On November 16, 2023, the Federal Motor Carrier Safety Administration (FMCSA) promulgated a long-awaited set of rules to implement and enforce uniform limits and sanctions to the financial security and responsibility requirements for property brokers, surface freight forwarders and their sureties, as mandated by Congress in a federal transportation law known as the Moving Ahead for Progress in the 21st Century Act (MAP-21).[1]
The intent is ostensibly to better protect Motor Carriers and Shippers from contract defaults resulting in claims arising out of transportation operations subject to FMCSA’s jurisdiction for property Broker or Freight Forwarder non-payment of freight charges.
Takeaways
For Brokers and Freight Forwarders currently using loan and finance companies for BMC-85 filings, be proactive. They will be prohibited and ineligible from making such filings on and after January 16, 2026. Waiting until the last minute to change financial institutions may prove to be perilous for a number of reasons.
For Motor Carriers, be on the lookout for a new (as of yet to be released) IT system managed by FMCSA which is intended to timely address Broker/Freight Forwarder suspensions and hence give the Motor Carrier greater certainty in being paid for brokered loads.
The Problem To Be Solved – Asymmetry Of Information
The Final Rule’s objective is to reduce fraud by limiting the time transportation intermediaries can continue to accrue claims while experiencing financial failure, insolvency or after drawdown of the security before their operating authority registration is suspended due to cancellation of the financial security filing or drawdown from the security limit. It effectuates the desire of Congress to expeditiously suspend those regulated entities who are accruing claims against their surety bonds or trust funds.
FMCSA frames the problem as the ability of a relatively small number of unscrupulous transportation intermediaries’ duping Motor Carriers into taking loads resulting in non-payment claims (what an independent driver organization characterizes as “stealing transportation services”) because of “information asymmetry” in Broker and Motor Carrier transactions – a regulatory void which the Final Rule aims to correct.
By withholding payment from the Motor Carrier for services rendered, the transportation intermediary leaves the Motor Carrier with the cost of moving the freight (e.g., fuel, maintenance, insurance, etc.). Currently, a Motor Carrier is not able to ascertain in advance if the transportation intermediary will uphold the terms of the transportation agreement or retain payment from the Shipper instead of passing the agreed fee on to the Motor Carrier. It is this “asymmetric information” leading to a significant cost burden for Motor Carriers that the Final Rule is said to address.
A critical piece of FMCSA’s plan to solve the problem is to stand up a new management information system identified as “the BMC-84/85 Filing Management System” in FMCSA’s Unified Registration System (URS).[2]
Under this new system, FMCSA will require surety and trust fund providers (collectively referred to here as the “Financial Providers”) to rapidly submit by electronic means, claim data, notice of a drawdown on a bond or trust fund and notice of insolvency or financial failure, among other data submissions. The notices will automatically alert FMCSA and trigger the system to issue a letter to the Broker/Freight Forwarder summarizing requirements that must be met to maintain operating authority registration. Before accepting any load, FMCSA says Motor Carriers will be able to query the system to determine if a Broker/Freight Forwarder has active operating authority registration.
FMCSA expects this new information technology will result in efficient exchanges of information between Motor Carriers, Brokers, Freight Forwarders, their Financial Providers and FMCSA, thereby reducing the information asymmetry concerns, and closing the window during which transportation intermediaries can run up claims.
A Broker for the transportation of property or surface Freight Forwarder must have a surety bond or trust fund containing assets aggregating to $75,000 in effect at all times to be in compliance with the financial security requirements, among other registration requirements for obtaining and maintaining licensure. FMCSA will not register a Property Broker/Freight Forwarder until a surety bond or trust fund for the full limits is in effect.
The requirement to have financial security with a limit of $75,000 is per licensee, regardless of the licensee’s number of branch offices or sales agents.
Timeline
The effective dates of the Final Rule roll out in phases over two years. Until January 16, 2025, the existing Broker/Freight Forwarder financial security rules remain in effect.
First Phase – effective January 16, 2025, Brokers, Freight Forwarders and the Financial Providers must comply with provisions to effectuate immediate suspension of the operating authority registration; cancellation of the BMC-84 Broker’s or Freight Forwarder’s Surety Bond or BMC-85 Broker’s or Freight Forwarder’s Trust Fund Agreement filing with the FMCSA when a Broker/Freight Forwarder experiences financial failure or insolvency and, as to the Financial Providers, procedure for government enforcement authority to impose civil penalties and suspensions.
Second Phase – effective January 16, 2026, Brokers, Freight Forwarders and trust fund providers (defined as a “financial institution”), must comply with provisions limiting the type of assets deemed “readily available” to pay claims out of BMC-85 trust fund accounts and, as to Brokers/Freight Forwarders, the trust fund provider cannot be a loan or finance company. Instead, the permitted roster of financial institutions include only highly regulated depository institutions, insurance companies, or equivalent entities.
What follows is a summary of some of the more significant aspects of the Final Rule. The reader is cautioned that when it comes to applicability of the financial security and responsibility law over regulated entities such as Property Brokers and Freight Forwarders, there is no substitute for a review of the statute – in this case 49 U.S.C. § 13906 – and related rules governing such operations.[3]
“Immediate” Suspension of Broker/Freight Forwarder Operating Authority After Notice
Summary of new process –
Step 1: Within two (2) business days of any of the events that follow, the Financial Provider is required to notify the FMCSA when:
| ⇒ | It pays a claim with the consent of the Property Broker/Freight Forwarder, causing the surety bond or trust fund to fall below $75,000; |
| ⇒ | It pays a claim after the Property Broker/Freight Forwarder does not respond within seven (7) business days to the Financial Provider’s notification to it of a claim, causing the surety bond or trust fund to fall below $75,000; |
| ⇒ | It pays a claim because of a judgment against the Property Broker/Freight Forwarder, causing the surety bond or trust fund to fall below $75,000; or |
| ⇒ | Determines that the Property Broker/Freight Forwarder has experienced financial failure or insolvency because the Financial Provider will be required to pay one or more claims resulting in the surety bond or trust fund to fall below $75,000, after having notified the Property Broker/Freight Forwarder of such claim(s) and provided seven (7) business days to respond and the Property Broker/Freight Forwarder has failed to respond, or provides a response which the Financial Provider is unmoved by because it “nevertheless” determines that the claim is legitimate and expects to make one or more payments on the pending claim(s). |
Step 2: FMCSA required notify the Property Broker/Freight Forwarder in writing that its operating authority (also referred to in the rules as the “license”) will be suspended within seven (7) business days from the date of the notice, unless it provides written notice to FMCSA that: (1) the notice was erroneously sent; (2) the surety bond or trust fund has been restored to $75,000; or (3) that the pending claims have been satisfied without the use of the surety bond or trust fund assets.
Step 3: If the Property Broker/Freight Forwarder fails to respond to the FMCSA’s notice within seven (7) business days, FMCSA will enter a suspension of the Broker/Freight Forwarder’s operating authority in URS and will provide a second written notice to the Broker/Freight Forwarder that the suspension is in effect.
After suspension, a Broker/Freight Forwarder’s recourse will be to request FMCSA to lift it by providing written evidence to substantiate the lifting on the same grounds stated in Step 2.
Implementation timeline: Jan. 16, 2025.[4]
Cancellation Of Surety Or Trust Financial Responsibility In Case Of Broker/Freight Forwarder Financial Failure Or Insolvency
In a reversal from what FMCSA proposed in the run-up to the Final Rule, FMCSA removed Federal bankruptcy filing pursuant to Title 11 of the United States Code or a filing related to the Broker/Freight Forwarder under an insolvency or similar proceeding under State law as a predicate fact the Financial Provider may cite as the basis for claiming “financial failure or insolvency” of its Broker or Freight Forwarder client to initiate cancellation of the BMC-84/85.[5] The Final Rule explicitly states that a filing pursuant to Title 11 of the United States Code does not constitute financial failure or insolvency. It is unclear whether this means the Financial Provider may cite a State law insolvency proceeding against a Broker/Freight Forwarder as justifying cancellation on such grounds. The Final Rule’s regulations are silent on this question.
Under the Final Rule, the Financial Provider, in its discretion, will have flexibility to exercise their “judgment and expertise” in making a determination that the Broker/Freight Forwarder has experienced financial failure or insolvency.
The Final Rule provides, the Financial Provider may cite financial failure or insolvency of the Broker/Freight Forwarder as grounds for cancellation of a Form BMC-84 surety bond or BMC-85 trust agreement when it either makes a payment against the bond or trust fund that is not cured because the Broker/Freight Forwarder fails to timely reply to FMCSA’s notice of suspension with written evidence the notice was sent in error, or surety bond or trust fund has been restored to $75,000, or pending claims have been satisfied without the use of surety bond or trust fund assets and FMCSA has entered a suspension of the Broker/Freight Forwarder’s authority and provided written notice of same to Broker/Freight Forwarder that the suspension is in effect.
Alternatively, the Financial Provider may cite financial failure or insolvency of the Broker/Freight Forwarder as grounds for cancellation of a Form BMC-84 surety bond or BMC-85 trust agreement when it expects to make a payment after aggregating multiple claims.
Implementation timeline: Jan. 16, 2025.[6]
Enforcement Authority Over Surety Company or Trust Fund Providers
After notice to the Financial Provider and opportunity to reply and contest the proposed action, FMCSA may suspend a Financial Provider for 3 years and impose civil monetary penalties for violations of the new regulations and statutory requirements. Suspending a Financial Provider under this enforcement authority means the entity is no longer authorized to serve as a surety company or financial institution for Broker/Freight Forwarders and as such, is ineligible to have its instruments (i.e., BMC-84 or BMC-85) filed with the FMCSA as evidence of financial responsibility.
Implementation timeline: Jan. 16, 2025.
Assets Readily Available Limited To Cash, Irrevocable Letters of Credit Or U.S. Treasury Bonds
In a reversal from what FMCSA proposed in the run-up to the Final Rule, assets deemed readily available to pay claims without resort to personal guarantees or collection of pledged accounts receivable must be assets aggregating to $75,000, can be liquidated to cash within 7 calendar days and consist of cash, irrevocable letters of credit (ILC) issued by a Federally insured (FDIC or NCUA) depository institution, or U. S. Treasury bonds. FMCSA had proposed enumerating prohibited asset types based on lack of liquidity, imposition of undue administrative burdens on the FMCSA to monitor for sufficiency and diversion of resources from the FMCSA’s primary mission of safety oversight. FMCSA explained in making the change, the Broker/Freight Forwarders may find it easier to comply where the specific asset types are deemed acceptable.
Implementation timeline: Jan. 16, 2026. FMCSA justifies 2-year delay so that Broker/Freight Forwarders utilizing BMC-85 trust funds will have time to increase their capitalization during the 2-year compliance period.
Entities Eligible To Provide Trust Funds For Form BMC-85 Trust Fund Filings
Loan and finance companies will be removed from list of financial institutions able offer Broker/Freight Forwarder financial responsibility services and will be ineligible to make BMC-85 trust fund agreement filings with the FMCSA. FMCSA concluded that financial institutions can only be highly regulated depository institutions, insurance companies, or equivalent entities. Because assets readily available are limited to cash, ILCs issued by Federally insured depository institutions and U.S. Treasury bonds, FMCSA believes loan and finance companies are unlikely to be able to comply with these regulatory requirements and as such, to permit companies not part of highly regulated industries to administer BMC-85 trusts would be incompatible with MAP-21s requirement that the trust fund consist of assets readily available to pay claims without resort to personal guarantees or collection of pledged accounts receivable.
Implementation timeline: Jan. 16, 2026.
Noteworthy Areas Of Inaction
Moving fraud involving Individual Shippers. The proposed rule does not tackle moving fraud. The financial responsibility rules treat household goods brokers and forwarders in the same way and subject to the same requirements as Property Brokers and Freight Forwarders.
In 2018, the FMCSA had announced an intention to promulgate financial responsibility rules specific to Household Goods Brokers and Freight Forwarders. The justification at that time for considering financial responsibility rules specific to Brokers of household goods was based on earlier Congressional legislation which among other things authorized FMCSA to require household goods brokers to adhere to certain household goods consumer protection regulations protecting Individual Shippers and requiring maintaining bond/trust funds at limits 2.5 times higher than for general commodities brokers.
FMCSA believes that it is most useful to address moving fraud through other means and has decided not to propose regulations dealing specifically with HHG brokerage or freight forwarding in this rulemaking.
Trust company licensure under State law. FMCSA is not requiring BMC-85 trustees to be licensed as trust companies under State law because of the enhanced asset quality requirements, and the remaining BMC-85 entities on the list of financial institutions are “robustly monitored by financial regulators.”
Group Surety Bonds/Trust Funds. FMCSA will continue to prohibit group surety bonds or group trust funds. FMCSA states such arrangements would not provide cost savings and are otherwise difficult and costly to administer.
Closing Thoughts
Motor carriers, brokers and freight forwarders subject to jurisdiction of the FMCSA and STB are cautioned not to be lulled into the mantra one tends to hear that trucking is a “deregulated” industry. The Final Rule demonstrates how the regulated – in this case Property Brokers and Freight Forwarders – really are.
Monitoring and tracking regulated entities through the FMCSA’s publicly available databases is an easy thing to do.
It is more important than ever to be aware of the applicable rules governing your operations.
Dated: Sudbury, MA
February 22, 2024
Andresen & Borovick, LLP
323 Boston Post Road
Sudbury, Massachusetts 01776
www.abmasslaw.com
Tel: (978) 443-6868
The foregoing is designed to provide general information based on a summary of legal principles for clients and friends of the firm. It is not intended to be construed as legal advice, or legal opinion on any specific facts or circumstances. Companies and individuals should consult with legal counsel before taking any action based on these principles to ensure their applicability in a given situation. The information presented here and on our website should not be construed to be legal advice or the formation of a lawyer/client relationship. Copyright © 2024 Andresen & Borovick, LLP. All rights reserved.
[1] In Matter Broker and Freight Forwarder Financial Responsibility, Dock. No. FMCSA-2016-0102-0436 (Final Rule) 88 Fed. Reg. 78656-74 (Nov. 16, 2023) (hereinafter “Final Rule”).
[2] The FMCSA’s regulatory impact analysis in the rulemaking identifies the new, as yet to be established system as “the BMC-84/85 Filing and Management IT System” In Matter Broker and Freight Forwarder Financial Responsibility, Dock. No. FMCSA-2016-0102-0132 (Regulatory impact analysis), at 8, posted to DOCKETS 2-2-23.
[3] For example, reading the Federal regulations governing surety bonds or trust funds of brokers (including the new obligations, restrictions and limitations in the Final Rule), the uniformed reader would not know that such rules (and revisions as finalized in this rulemaking) apply equally to freight forwarders subject to the DOT’s jurisdiction. This is because the financial security rule covering freight forwarders incorporates the broker rule by reference.
[4] This writer believes there will be more to be said concerning immediate suspensions and financial failure or insolvency, in part because the Final Rule revisions to the regulations contain mis-citations creating uncertainty. For example, new 49 CFR 387.307(e) – immediate suspension, incorporates by reference subsections which do not exist in the rules. See 387.307(e)(1)(iv)(C) referencing non-existent “(e)(1)(D)(ii)” and (e)(3)(ii) referencing non-existent “(e)(1)(D)”.
[5] FMCSA proposed to adopt an “objective test” for declaring a regulated entity financially failed or insolvent, thus triggering a Financial Provider’s right to initiate the notice and cancellation process to withdraw from backing the financial responsibility of the Broker/Freight Forwarder by requiring notice of either an occurrence of a formal Federal bankruptcy or State insolvency filing. In Matter Broker and Freight Forwarder Financial Responsibility, Dock. No. FMCSA-2016-0102 (Proposed Rule) 88 Fed. Reg. 830-854, at 847, 848 (Jan. 5, 2023) (hereinafter “Proposed Rule”). Upon the occurrence of a financial failure or insolvency of a Broker/Freight Forwarder where the Financial Provider is notified of a Federal bankruptcy or State insolvency filing, the Financial Provider was required to notify FMCSA of the filing and initiate the process of cancellation of the BMC-84 or -85, as the case may be. Id. at 847. As proposed, the amended rule provided, in pertinent part: “(f) Financial failure or insolvency of the broker. (1) If a surety company or financial institution is notified of the financial failure or insolvency of a broker, such surety company or financial institution shall initiate cancellation of the Form BMC-84 or Form BMC-85 . . . . A financial failure or insolvency of a broker is defined as a filing related to the broker pursuant to Title 11 of the United States Code or a filing related to the broker under an insolvency or similar proceeding under State law.” Proposed Rule at 854 (emphasis, citing proposed new rule 49 CFR 387.307(f)). FMCSA removed the italicized sentence from 49 CFR 387.307(f) in the Final Rule. FMCSA credits commenters concerns that use of a bankruptcy proceeding as evidence of financial failure or insolvency would violate the antidiscrimination provisions of 11 U.S.C. § 525. Other commentators expressed concern that such a red line “would likely worsen the problem, as a significant period often elapses between the time a broker ceases paying motor carriers and the time a bankruptcy or insolvency proceeding commences.” And, “in some instances a broker will simply move on and never make such as filing, and [as such] the surety or financial institution would be prevented from initiating the . . . cancellation process despite knowing the broker is not paying motor carriers.” Final Rule at 78662.
[6] This writer believes there will be more to be said concerning immediate suspensions and financial failure or insolvency, in part because the Final Rule revisions to the regulations contain mis-citations creating uncertainty. For example, new 49 CFR 387.307(e) – immediate suspension, incorporates by reference subsections which do not exist in the rules. See 387.307(e)(1)(iv)(C) referencing non-existent “(e)(1)(D)(ii)” and (e)(3)(ii) referencing non-existent “(e)(1)(D)”.