Ocean transportation intermediaries question FMC’s push for new regulations.
The U.S. Federal Maritime Commission is continuing its review of proposed changes for regulating ocean freight forwarders and non-vessel-operating common carriers, also known collectively as ocean transportation intermediaries (OTIs).
The FMC said there are about 5,900 licensed OTIs and foreign-based NVOCCs within its records.
OTIs are key players in the international transportation industry, with the Transportation Intermediaries Association noting that “every Fortune 100 company now has at least one third party logistics company (3PL) as one of its core carriers.”
The changes, which are outlined in an advance notice of proposed rulemaking published in the Federal Register late May last year, has raised the hackles of both individual OTIs, dozens of which responded to a request for comments last year, and the trade organizations that represent them.
Discussed last September during a hearing on maritime regulation held by the House Transportation and Infrastructure Committee’s Coast Guard and marine transportation subcommittee, the rules were also the subject of a follow-up exchange of letters in December and January between Subcommittee Chairman Rep. Duncan Hunter, R-Calif., and FMC Chairman Mario Cordero.
Hunter has said he’s “concerned the proposed rules by the FMC are misguided and will do little to further consumer protections, but will impose enormous regulatory burdens and costs on business. If these and other rules are not written and executed in a common sense manner, I am concerned they could make it financially impossible for the U.S. maritime sector to grow jobs.”
TIA expressed concern about the “stovepipe manner” in which the FMC is proposing to regulate OTIs, without regard to other agencies regulating transportation. The trade group noted most 3PLs are multimodal.
Cordero said the agency is reviewing the comments it has received and will take them into account as it continues to develop the proposed rules. He added the commission “remains open to suggestions from the public.”
FMC Commissioner Michael Khouri said he’s continuing to seek additional input from the industry. In January, for example, he met with members of the New York/New Jersey Foreign Freight Forwarders & Brokers Association.
“Clearly, business is really, really tough out there,” Khouri said. He said he voted against the advance notice of proposed rulemaking, “because basically the substantial weight of the rules I did not support. It’s such a big rulemaking you can’t say, ‘I’m against every word, comma and period in the whole thing,’ but I only get one thumb in—either an up or a down direction—that’s all I get to do, so I voted no.”
He said there might be portions of the rules that he could support if they were properly tweaked.
FMC Commissioner Rebecca Dye, like Khouri a Republican, (Cordero and Commissioners Richard Lidinsky and William Doyle are Democrats) said she’s also “strongly opposed” to the advance notice of proposed rulemaking, adding more than 80 public comments to the FMC that she reviewed were “overwhelmingly negative.”
In testimony before the House subcommittee last September, Cordero said the FMC has “not substantially revisited the rules governing licensing, financial responsibility or general duties of OTIs” created in response to the 1998 Ocean Shipping Reform Act (OSRA). He said in addition to the OTI rules, the FMC has developed a plan for retrospective review of existing rules with respect to its regulations.
But Geoffrey Powell, vice president for the National Customs Brokers and Forwarders Association of America (NCBFAA), said the rules grew out of the FMC’s Fact-Finding Investigation No. 27 (FF27) concluded in April 2011, which was led by Khouri. That inquiry “focused almost exclusively on the movement of household goods for individuals and had nothing to do with the movement of commercial cargo by OTIs.”
FF27 looked at the international movement of household goods by persons relocating abroad, as well as the so-called "barrel trade" where individuals, primarily immigrants, send small shipments of personal goods to relatives or friends back home, for example in the Philippines, Latin America and the Caribbean.
Powell said the FMC has not implemented any of the recommendations in FF27, but instead “over the objection of Commissioner Khouri—used the fact-finding investigation as a springboard to initiate a proposed rulemaking that had nothing to do with the problems discussed there.”
In a filing with the FMC, the NCBFAA urged the agency not to pursue the advance notice of proposed rulemaking, and instead focus on the issues raised in the household goods investigation.
Bonding. One of the FMC’s objectives is to increase bonding minimums for ocean freight forwarders from $50,000 to $75,000; for NVOs from $75,000 to $100,000, and for foreign NVOs registered to do business in the U.S. trades from $150,000 to $200,000.
The current amounts were set in 1999, and Cordero testified to House lawmakers the adjustment “would not, for the most part, fully reflect an inflation-adjusted increase. (For example, the NVOCC bond adjusted for inflation would be calculated at $105,000).”
He added “commercial disruption [has] occurred with the failures of well-known NVOCCs and the inadequacy of the financial instruments intended to protect market participants against such failures,” he said. “In the past three years alone, there have been over 40 federal lawsuits against OTIs, of which nearly 20 cases involved claims where the bond amount did not approximate the claims that would have been covered by the bond.”
At the same hearing, Powell told the House subcommittee the increases will come “despite the fact that the commission was able to cite only two instances in which a bond was insufficient to cover outstanding claims.
“Yet this proposed increase would not dramatically increase any potential claimant’s level of protection, since the proposed increased bond would still fall far short of the amounts that were cited in the two examples relied upon by the commission,” he said.
Rep. Hunter, in a letter to Cordero, said in the MAP-21 transportation bill, “Congress intended to harmonize federal transportation security levels, setting a level of $75,000 at the Federal Motor Carrier Safety Administration so that it coincided with FMC levels. Why has the FMC seemingly broken ranks with this congressional intent?” He also asked if the FMC had taken into account the effect of new businesses that must post a surety as they enter the industry.
Khouri, in an interview, sounded some of the same concerns, stating he did not think there was any rationale for raising bonding and questioned the wisdom of “putting additional direct dollar regulatory burden on an industry when we’re four years past the end of a recession… We’re still trying to get enough oxygen to get up and start running again.”
Powell said the NCBFAA, with 800 member companies and 28 affiliated regional associations among its ranks, felt the FMC was taking steps “inconsistent with the important goals of job creation, improving the national economy, and reducing—not increasing—the burdens of unnecessary regulation.”
But other OTI’s had no objection to the proposed increase. Klaus Jepsen, chief executive officer of Hoboken, N.J.-based NVO Shipco Transport, said he concurs with the recommendation. “We believe that it would further assist in edifying the public’s perception of OTIs and our industry in general,” he said.
The FMC proposes to eliminate the additional $10,000 bond amount currently required for each of a licensed OTI’s branch offices, but Powell said this was “notwithstanding the fact that they would presumably be conducting more business and perhaps become exposed to greater risk.”
A recommendation in FF27 that a “new NVOCC license category for those operating in the barrel trade with a lower bond and tailored standards could enhance public consumer protection in the barrel trade and bring currently unlicensed operators within the system and improve overall standards in this part of the industry” was specifically opposed by many OTIs who commented on the FMC’s advanced notice of proposed rulemaking.
License Renewal. Today, there is no requirement for OTIs to renew their licenses. The FMC has proposed that licensed or registered OTIs be required to renew their licenses every two years.
The aim, in part, Cordero told Rep. Hunter is to protect “the public from fraudulent and unscrupulous actors who have taken advantage of the indefinite nature of the existing license scheme.”
OTIs would be able to do this by submitting an updated renewal form online, he said.
“What we are talking about essentially is a two-page form,” Cordero explained in testimony before the House subcommittee. OTIs would answer nine questions, six by checking off boxes, and the whole process should take no more than five minutes.
“This is simple data which is required by the Shipping Act and required for regulatory effectiveness,” he said.
Cordero said the FMC needs updated OTI information, because a recent audit of 2.5 percent of the approximate 6,000 OTIs found almost 25 percent failed to comply with rules to update information with the FMC.
“The commission’s experience has shown that too many OTIs cannot be found at the address of record, operate without a current qualifying individual, with new or different branch offices, new or different officers, or with previously unknown or unregistered trade names. Out-of-date information has resulted in futile attempts to locate licensed OTIs in investigations, enforcement actions and private complaints,” Cordero said.
Powell painted a very different picture, stating license renewal will be a “burdensome, time-consuming, and expensive proposition, as the commission also proposes to require parties to pay as yet undetermined filing fees.”
He said the FMC today “cannot effectively meet the challenge of issuing new licenses under existing regulations, a process which often takes two-three months or more. Adding this additional renewal requirement would inundate FMC and grind the process to a halt.”
UPS suggested the renewal period be set at four or five years rather than every two years.
Powell raised a number of concerns about “due process issues” having to do with OTI licensing, adding the advance notice of proposed rulemaking “proposes to put all licensees at risk of suspension or revocation of their licenses.”
While the FMC should properly police the industry, and there may be a problem in the small segment of the industry dealing with household goods, he said it’s inappropriate for the FMC to “short-circuit due process rights that threaten the livelihood of reputable licensees that provide an important service to exporters and importers alike.
“It appears that the commission feels—without any foundation—that there is an endemic problem in the OTI industry by which non-compliant companies somehow need to be culled out,” Powell said. “Whatever the commission’s motivation, this proposal puts every licensee’s ability to remain in business at risk. Further, it now establishes grounds for suspension or revocation that are vague, overbroad and, in some instances, unreasonable.
“Without any apparent supporting rationale, the proposal would now authorize suspension or revocation of a license: (1) for doing business in any manner with a company that is not licensed, bonded or tariffed; (2) if the commission somehow deems the licensee ‘not qualified’ to provide service; or (3) for ‘any act, omission or matter that would provide the basis for denial of a licenses to a new applicant.’”
Tropical Shipping, a container carrier that specializes in the movement of freight to the Bahamas and Caribbean, objected to a proposal in the advance notice of proposed rulemaking that would place burden on ocean common carriers to determine whether a customer is a non-tariffed or non-bonded OTI.
The World Shipping Council (WSC) said if the FMC wants carriers to be part of its enforcement regime for NVO regulations it “should post a clear ‘go/no-go’ status message for each NVOCC listed on its Website.”
Filing Claims. Cordero said the FMC also seeks comments on “filing and payment of claims, priorities for claims and methods of improving reporting provisions by surety companies to promote faster and fairer allocation to claimants.”
WSC, as well as Tropical, objected to a FMC proposal for a priority system for claims against OTI bonds. The FMC “is proposing that the surety posted by OTIs with the FMC not be available to satisfy the claims of common carriers until all claims of shippers and consignees are first satisfied,” Tropical said.
“Effectively, the commission is proposing a rule that has no factual or legal support and which would place Tropical and other ocean common carriers in a secondary position with respect to claims against surety bonds,” the carrier added.
WSC said “with respect to the suggestion that common carriers may be in a better position to protect themselves against OTI-related losses by restricting credit to OTIs, certainly the option of placing OTIs on a pre-paid cash basis exists.” But the group noted that “could in turn affect the credit terms offered by OTIs to their customers” and asked if that would be preferable to the status quo.
WSC also cautioned that if it was more difficult for carriers to claim against OTI bonds, they may be more likely to resort to cargo liens as security.
In addition, the FMC proposed that if an agent prepares or issues a shipping document on behalf of an OTI that the agent includes the principal’s name, address, and license number.
The FMC said this would provide transparency and clarity on the relationship between the agent and principal and help address harmful shipping practices such as failure to deliver cargo, refusal to return pre-paid ocean freight, loss of cargo, significant delay in delivery, and charges to the shipper for marine insurance that was never obtained.
Advertising. The NCBFAA said while it “recognizes and agrees that the commission should implement a number of the recommendations from the FF27 Report pertaining to advertising and agents in the household goods industry, there is no need for the commission to carry those recommendations forward into the mainstream commercial OTI industry.”
Commercial shippers “do not require government supervision over the selection of their service providers. Most of them carefully select their business partners,” the association said.
UPS noted its advertising “includes television, radio, newspaper, magazine, on-line and other media presentations” and the requirements would be “awkward at best, and would impose cost and compliance monitoring requirements.”
The NCBFAA made several suggestions in its comments on the advance notice of proposed rulemaking, including eliminating procedural requirements for negotiated rate agreements (NRAs) stating that a requirement for a “writings” is “largely unnecessary and too complex.”
It also said the FMC should “eliminate the need for NVOCCs to file NVOCC Service Agreements (NSAs) or publish their essential terms.”
Speaking to the NCBFAA last fall, Commissioner Dye agreed “the best way to help your industry would be to exempt NVOCCs from the requirement to publish and adhere to rates.”