Gift Cards - New Rules and Restrictions for Issuers

The Federal Reserve Board recently issued new rules that may affect the propriety of your company’s gift card and gift certificate programs. Fortunately, the new rules do not go into effect until August 22, so there is time to make any necessary changes so long as your company acts promptly.


What Products Are Governed By The New Rules?

The Federal Reserve’s new rules apply to three types of products: “store gift cards”; “gift certificates”; and “general-use prepaid cards.”

The definitions for these products are stated in such broad-brush terms that, as a practical matter, the new rules apply to practically any card, certificate, code or other device that is issued (1) on a pre-paid basis, (2) in a specified amount and (3) in exchange for payment. The new rules apply regardless of whether the value of the device may be increased or re-loaded, and regardless of whether the device is redeemable at one or multiple merchants.

Yet, the new rules also are subject to a number of generous exclusions. A device is excluded from regulation if it is: (1) useable solely for telephone services; (2) re-loadable and not marketed or labeled as a gift card or gift certificate; (3) a loyalty, award or promotional gift card; (4) not marketed to the general public; (5) issued in paper form only (unless the information necessary to redeem the value was initially issued in electronic form); or (6) redeemable solely for admission to events or venues, or to obtain goods or services in conjunction with admission to such events or venues (unless the device is redeemable for a specified monetary value).

The breadth of some of the exclusions is likely to evolve over time. Undoubtedly, this will be particularly true of the exclusion for devices that are “re-loadable and not marketed or labeled as a gift card or gift certificate.” At first blush, it appears that this exclusion might provide an easy basis for companies to side step the new rules entirely by simply adopting a carefully constructed branding and marketing campaign. However, the Federal Reserve has provided comments indicating its intent to interpret this exclusion narrowly. For example, this exclusion will not apply (and, thus, the restrictions of the new rule will apply) to any device that, notwithstanding nomenclature to the contrary, incorporates any gift-giving or celebratory imagery or motif.


What Restrictions Are Imposed By The New Rules?

The Federal Reserve’s new rules impose a number of significant restrictions upon regulated devices:

• No expiration date is permitted unless the expiration date of the funds underlying the device is at least five years after the date funds were loaded. Information regarding any expiration date must be clearly and conspicuously disclosed on the device and prior to purchase.
• Dormancy, inactivity and service fees may only be assessed if: the device has not been used for at least one year; no more than one such fee is imposed in any calendar month; and information regarding such fees is clearly and conspicuously disclosed on the device and prior to purchase.
• Replacement card fees may not be assessed if underlying funds remain valid.
• Other fees, such as initial-issuance fees and cash-out fees, are permitted but must be disclosed either on or with the device and prior to purchase.
• If any fees are imposed, the device must disclose a toll-free number and, if one is maintained, a web site, for the holder to use to obtain information about such fees.

How Do The New Rules Interact With Other Laws?

The Federal Reserve’s new rules add a significant layer of regulation to an already complex patchwork of forty-plus state laws that regulate gift cards and gift certificates. This is because the new rules generally do not preempt state laws, except to the extent the state laws are inconsistent (i.e., state laws will stand if they are more protective of consumers than the Federal Reserve’s new rules, but not if they are less so).

The Federal Reserve chose not to eliminate all inconsistencies between its new federal rules and state laws. Most notably, the Federal Reserve refused to regulate in any way how companies should deal with state unclaimed property laws that require the underlying funds for gift cards/certificates to escheat sooner than five years from the card/certificate issuance date. Some companies had asked the Federal Reserve during its rulemaking period to preempt such state escheat laws, arguing that the new rules could potentially require them to honor gift cards/certificates for five years even if the underlying funds had been turned over to the state. However, the Federal Reserve refused to preempt such state laws at this time (although it reserved the right to do so at some point in the future).


Final Thoughts

When enacted this summer, the Federal Reserve’s new rules will create nationwide minimum regulatory standards for expiration dates and fees that companies may apply to gift cards, gift certificates and similar devices. Note, however, that states will remain free to enact more restrictive laws provided that they operate to the benefit of consumers. For further information, please contact John Klevorn or any other member of the Firm’s Advertising Practice.