Summary of FMCSA Proposed Rule on Broker/Freight Forwarder Financial Responsibility And Evidence of Security On File With FMCSA – The BMC-84 and BMC-85

By:      Gerald D. Borovick

The Federal Motor Carrier Safety Administration has proposed changes to the financial responsibility requirements for brokers, freight forwarders and their sureties in In Matter Broker and Freight Forwarder Financial Responsibility, Dock. No. FMCSA-2016-0102 (Notice of proposed rulemaking), 88 Federal Register 830 (January 5, 2023).

The proposed rule on broker/freight forwarder financial responsibility implements certain Congressional mandates in a federal law commonly known as MAP-21 to expand uniform limits and sanctions in ways ostensibly to better protect motor carriers and shippers from contract defaults involving transportation operations subject to FMCSA’s jurisdiction where the Property Broker or Freight Forwarder fails to pay freight charges.[1]

Significance of Registration

In order to become and maintain operating authority registration with the FMCSA, a Property Broker or Freight Forwarder must be in compliance with the financial security requirements, among other requirements.

A Property Broker or Freight Forwarder who knowingly engages in interstate brokerage or freight forwarding operations without the required operating authority is liable to the United States for a civil penalty not to exceed $12,882 and can be liable to any injured third party for all valid claims regardless of the amount.  The penalties and liability to injured parties apply jointly and severally to all corporations or partnerships involved in the transportation and individually to all officers, directors and principals of these business forms.  A Household Goods Broker who engages in interstate operations without the required operating authority is liable to the United States for a civil penalty of not less than $37,400 for each violation.

What follows is a summary of some of the more significant aspects of the proposed rule.  The reader is cautioned that when it comes to applicability of the financial 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.

For example, reading the rules governing surety bonds or trust funds of brokers in 49 CFR 387.307 (including revisions as proposed in this rulemaking), an uniformed reader would not know that such rules (and revisions as proposed in this rulemaking) apply equally to freight forwarders subject to the DOT’s jurisdiction.  This is because the financial responsibility rule covering freight forwarders incorporates the broker rule by referenceSee 49 CFR 387.403T(c).

FMCSA Proposes Defining “Assets Readily Available” To Pay Claims From The Financial Security Backed By Trust Fund Agreements In The Negative And Available Amount of $75,000 Convertible To Cash Within Seven Business Days Of Event Triggering Liquidation

FMCSA proposes allowing Property Brokers and Freight Forwarders to meet MAP-21’s “assets readily available” – meaning assets that can be liquidated within seven (7) business days of the event that triggers a payment – through trust fund agreements funded by assets as certified on a BMC-85, and that do not contain the following assets:

►        interests in real estate (because difficult to liquidate and value fluctuations);

►        intercorporate agreements or guarantees (because dependent on financial health of guarantor and administratively difficult for FMCSA to monitor);

►        internal letters of credit (because FMCSA is not convinced the issuer will be able to pay in the event triggering a drawdown);

►        second trust deeds, personal property and vehicles (because at least two States have determined such assets are illiquid);

►        bonds that do not receive the highest rating from a credit rating agency (a nationally recognized statistical rating organization registered with the Securities and Exchange Commission); and

►        any other asset that Property Broker or Freight Forwarder cannot certify under the penalties of perjury will be available and convertible to cash within 7 business days of the event triggering liquidation.

FMCSA asks for public comment on other types of assets that should not be considered “assets readily available” and, whether a comprehensive list of appropriate assets is possible or desirable.

Following A Brief Notice And Opportunity To Cure, FMCSA Will “Immediately” Suspend The License of Property Broker/Freight Forwarder After FMCSA Has Been Notified By Surety Company Or Financial Institution Of Actual Drawdown From The $75,000 Surety Bond Or Trust Fund

Summary of new process, as proposed –

Step 1: If a claim is paid by a surety company or a financial institution:

►        with the consent of the Property Broker or Freight Forwarder; or

►        after the Property Broker or Freight Forwarder fails to respond to the surety company or financial institution’s notification of a claim within 14 calendar days; or

►        because of a judgment against the Property Broker or Freight Forwarder;

the surety company or financial institution is required to notify FMCSA of the occurrence.

Step 2: FMCSA notifies 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.

Step 3: Within such period, unless the Property Broker/Freight Forwarder provides written evidence to FMCSA that the surety bond or trust fund has been restored to $75,000, FMCSA will provide a second written notice of immediate suspension of operating authority registration.

FMCSA is not proposing a specific time for Property Brokers or Freight Forwarders to respond to claims made to surety companies or financial institutions.  Parties will be able to freely negotiate appropriate time periods under their private contracts.

FMCSA Proposes Publishing Website Notification Of Cancellation Of BMC-84 or BMC-85 In FMCSA Register Upon Notice Of “Financial Failure Or Insolvency” Of Property Broker Or Freight Forwarder

Summary of new process, as proposed –

FMCSA proposes to adopt an objective test for declaring the regulated entity financially failed or insolvent, thus triggering the right of a surety or trust provider to initiate the notice and cancellation process to withdraw from backing the financial responsibility of the regulated entity by requiring notice of either an occurrence of a formal Federal bankruptcy or State insolvency filing.

Upon the occurrence of a financial failure or insolvency of a Property Broker or Freight Forwarder and where the surety company or trust provider is notified of a Federal bankruptcy or State insolvency filing, the surety or trust provider must notify FMCSA of the filing and initiate the process of cancellation of the BMC-84 or 85, as the case may be.

Once a surety company or trust provider has notified FMCSA of the financial failure or insolvency of the Property Broker or Freight Forwarder, it will have met MAP-21’s requirement to “publicly advertise” for claims.  FMCSA will help to ensure that claimants are aware of the claims filing period on the FMCSA Register on its website.

All such claims will need to be filed directly with the surety company or financial institution.

FMCSA Proposes Removing “Loan” and “Finance Company” From List of Financial Institutions Authorized To Provide Security To Satisfy Property Broker And Freight Forwarder’s Financial Responsibility Requirements

FMCSA proposes removing loan and finance companies from the list of entities authorized to serve as BMC-85 trustees because “robust feedback” after outreach to financial regulators, established to FMCSA’s satisfaction, loan and finance companies are not adequately regulated.  FMCSA justifies the decision on the grounds that it does not have the regulatory expertise and is concerned that by becoming a regulator of such entities FMCSA would be taking resources away from its primary mission – motor vehicle safety.

FMCSA invites comment from BMC-85 providers and others as to why loan and finance companies are adequately regulated for the purpose of issuing BMC-85s, as opposed to being regulated by a State for other purposes.

Noteworthy Areas Of Inaction

Moving fraud involving Individual Shippers.  The proposed rule does not tackle moving fraud.  The proposed financial responsibility rules will treat household goods brokers and forwarders in the same way and subject to the same requirements as Property Brokers and Freight Forwarders.[2]

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 proposing to require BMC-85 trustees to be licensed as trust companies under State law because of the proposed 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.  This proposed 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

January 20, 2023

Andresen & Borovick, LLP

323 Boston Post Road
Sudbury, Massachusetts 01776
www.abmasslaw.com
Tel:  (978) 443-6868
borovick@abmasslaw.com

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 © 2022 Andresen & Borovick, LLP.  All rights reserved.

[1] As used in this alert, unless specifically noted, the term “property broker” means a general commodities broker or household goods broker within the meaning of 49 C.F.R. part 365 and subparts A and B of part 371.

[2] Unlike Property Brokers, current rules require Household Goods Freight Forwarders to obtain and provide evidence of financial security for loss of or damage to household goods (typically cargo insurance).  Freight Forwarders, other than Household Goods Freight Forwarders, are not required to obtain and maintain evidence of such financial security.  Unlike Brokers (household goods and/or general commodities), absent an approved waiver, Freight Forwarders (household goods and/or general commodities) are required to obtain and provide evidence of security for the public liability, including bodily injury/property damage/environmental restoration.  Details on FMCSA’s current insurance filing requirements for new operating authority registration can be found here (checked 1/20/2032).