Changes Affecting the Bonding and Regulation of Property Brokers and Surface Freight Forwarders

1. Changes Affecting the Bonding and Regulation of Property Brokers and Surface Freight Forwarders Presented by: Colleen Clarke and Matt Zehner Roanoke Underwriting, a division of Roanoke Insurance Group Inc.

2. About Us Colleen Clarke,Vice President, Surety for Roanoke Underwriting, a division of Roanoke Insurance Group, Inc. Colleen focuses on the review and analysis of CBP policy including new issues from the perspective of the surety underwriting group as well as the client services team. She manages the Roanoke Trade independent agent unit for U.S. Customs bonds. In 2008, Ms. Clarke was appointed to the 11th term of the Commercial Operations Advisory Committee (COAC) where she participates in several subcommittees. She serves as co-chair of the Surety Account Subcommittee within the Trade Support Network (TSN) and works closely with CBP as a representative on the Customs/Surety Executive Committee (C/SEC).

3. About Us Matt Zehner, Vice President, Surety Information & Communication for Roanoke Trade, a division of Roanoke Insurance Group Inc. Matt has worked in the international trade segment of the insurance field since 1990 and has held upper management positions in both agency and insurance company operations. Mr. Zehner’s work in Roanoke’s surety product line includes monitoring current events for changes in the legal and regulatory environment and working closely with federal agencies and industry trade associations concerning changes impacting the international trade industry and its surety products. He is a frequent presenter for a number of organizations nationally and internationally.

4. What We Will Cover • Overview of MAP-21 changes affecting logistics intermediaries • Overview of MAP-21 changes affecting handling of claims against bonds/trusts • Planning for the changes 4

5. MAP-21 and Brokers/FFs • In general – new registration requirements • All who broker motor freight or perform surface freight forwarding – including IACs and motor carriers – will have to register as brokers or freight forwarders with FMCSA • Each category of authority will have a unique registration number assigned by FMCSA • Those already with authority will need to register within 4 years • Must renew registration every 5 years • Brokers and FFs must hire a qualified officer (3 years or more experience) 5

6. MAP-21 and Brokers/FFs • Big Penalties • $10,000 per violation – can be imposed against “officers, directors and principals” when illegal brokerage occurs • Effective Dates • Many provisions effective October 1, 2012 • Bonding provisions effective October 1, 2013 • All rulemaking must be complete by October 1, 2013 6

7. Now vs. New 7

8. Scope of Regulating Authorities • FMCSA focuses on commercial motor vehicle safety • Includes regulating interstate commerce – transportation crossing, or intending to cross, a state boundary • A part of the Department of Transportation • FMC focuses on international ocean transportation • Includes regulating vessels, cruise ships, and intermediaries (NVOCCs and ocean freight forwarders) • An independent commission 8

9. Definitions • Broker – a person other than a motor carrier, or an employee or agent of a motor carrier, that as a principal or agent sells, offers for sale, negotiates for, or holds itself out by solicitation, advertisement or otherwise as selling, providing, or arranging for, transportation by a motor carrier for compensation. 9

10. Definitions • Freight forwarder – a person holding itself out to the general public (other than as a pipeline, rail motor, or water carrier) to provide transportation of property for compensation in the ordinary course of its business: • Assembles and consolidates shipments (or provides for it); and • Performs break bulk and distribution of the shipments (or provides for it); and • Assumes responsibility for the transportation from the place of receipt to the place of destination; and • Uses for any part of the transportation a motor carrier 10

11. Carriers Brokering Freight(MAP-21, §32915) Effective October 1, 2012 • Carriers may not arrange transportation (by another carrier) without appropriate broker or freight forwarder authority 11

12. Unlawful Brokerage (New Law)(MAP-21, §32919) Effective October 1, 2012 • Carriers (including IACs) who broker freight need Broker Authority (and a $10,000 bond/trust until the increase goes into effect) • Consequences: Civil penalties and private causes of action • Up to $10,000 penalty, and • Liable to injured party for all valid claims incurred without regard to amount, and • Liability is joint and several for the entity and its individual officers, directors and principals 12

13. Unlawful Brokerage (New Law)(MAP-21, §32919) • Exceptions to Unlawful Brokerage Regulation • NVOCC/Ocean FF performing specific and limited functions • Through ocean b/l covering inland movement • Customs brokers performing specific and limited functions • Arranging for ITs, IEs and T&Es • A transaction involving “customs business” • IACs performing specific and limited functions • Engaged in activities as an air carrier as defined in 49 U.S.C. §40102(2) or in activities defined in §40102(3) 13

14. Broker / FF Bonds(MAP-21, §32919) • Available to pay claims arising from a failure to pay freight charges to the carrier • Amount increases to $75,000 • Provision for various ways to provide the $75,000: • Surety Bond • Group Surety Bond • Trust Fund • Other Financial Security 14

15. Property Broker Bond: Surety’s View • Historically, sureties moved away from $10,000 bond, allowing trust funds to be favored • Higher bond limit may reverse that, but … • MAP-21 has formalized many claims handling practices – added new obligations on the surety (and trust provider) 15

16. New Requirements • Sureties / trust providers: • Respond to claimants within 30 days • If claim is to be denied, set forth in writing the grounds • In a suit against surety/trust provider, loser pays attorney fees • No deduction of costs before paying claims • Use of assets readily available to pay claims without resort to personal guarantees or collection of pledged accounts receivables (applicable to trust or other financial security) • FMCSA • Post notice of any termination of financial security • Immediate suspension of registration if amount of security falls below minimum ($75,000)

17. New Requirements Here’s one that should have rulemaking clarification — 49 USC §13906(b)(6) (similar language for freight forwarder) (6) PAYMENT OF CLAIMS IN CASES OF FINANCIAL FAILURE OR INSOLVENCY. If a brokerregistered under this chapter experiences financial failure or insolvency, the surety provider of the broker shall • submit a notice to cancel the financial security to the Administrator in accordance with paragraph (4); • publicly advertise for claims for 60 days beginning on the date of publication by the Secretary of the notice to cancel the financial security; and • pay, not later than 30 days after the expiration of the 60-day period for submission of claims i. all uncontested claims received during such period; or • a pro rata share of such claims if the total amount of such claims exceeds the financial security available ____________________________ Insolvency: (from Black’s Law Dictionary [http://thelawdictionary.org/insolvency/]) : …Inability to pay one’s debts; lack of means to pay one’s debts…

18. New Requirements 49 USC §13906(b)(7) contains: (similar language for freight forwarder) • A provision for civil actions and penalties against bond/trust providers • Penalty not to exceed $10,000 • Lose eligibility to provide bonds/trusts for 3 years if found to have violated any law or regulation on handling claims 18

19. Summary • Is your client subject to FMCSA regulation? • Is it a property broker? A freight forwarder? A carrier? Maybe it is more than one, depending on a given transaction. • Understand the definitions and rules, and be prepared to discuss with your clients • Bond or Trust Fund? • If bond, encourage the client to begin preparations for underwriting requirements • If a Trust Fund, the client needs to prepare to increase his security backing the trust 19

20. Surety Underwriting–Prepare The Business • Demonstrate it won’t cause claims • Financial Statements (have current one ready) • Audit vs. Review vs. Compilation vs. Internal • History of profitability; positive operating cash flow • Retain sufficient profits in the business • Positive working capital; don’t be over leveraged with debt • Receivables and payables ratios • Adequate transfer of risk (insurance / deductibles) • Pay bills on time • Communicate with surety when there are bond claims 20

21. Questions 21

22. We hope that you found this webinar productive, practical and useful! Thank you for your time and attention. Roanoke is here to help you! To learn more about Roanoke’s result-driven insurance and surety solutions for global trade and transportation, contact us today at 1-800-ROANOKE www.roanoketrade.com | info@roanoketrade.com Colleen.Clarke@RoanokeTrade.com | Matt.Zehner@RoanokeTrade.com Thanks 22