Will checks disappear in the clearing process in the United States 3

Once the Check 21 Act became effective, American banks can issue substitute checks, an instrument to replace the paper checks in the clearing process. The Check Clearing for the 21st Century Act (Check 21) was signed into law on October 28, 2003, and became effective on October 28, 2004. Check 21 is designed to foster innovation in the payments system and to enhance its efficiency by reducing some of the legal impediments of the check truncation. The laws facilitates check truncation by creating a new negotiable instrument called a substitute check, which allows electronically, and deliver substitute checks to banks that want to continue receiving paper checks. A substitute check is the legal equivalent of an original check 4 . It corresponds to a paper reproduction of the original check that contains a digital image of the front and back of it. The substitute check replaces the original check for all legal purposes, including the clearing process and any other procedure related to the canceling of the original check. The law does not require banks to accept checks in electronic form nor does it require banks to use the new authority granted by the act to create substitute checks. An example of a substitute checks is as follows:

Information obtained by express permission of the Federal Reserve Board of the United States of America. 4 Sec. 3. (16) The Check Clearing for the 21st Century Act.
3

This is a legal copy of your check. You can use it in the same way you would use the original check.

Electronic delivery means banks will no longer have to fly checks all over the country, and, consequently consumers may receive copies of their checks instead of cancelled paper checks. Check 21 also allows depositary banks to keep the paper checks, and even destroy them, avoiding all the costs and risks related to the conservation, custody, and physical transportation of them; amounts that represent important costs for American and Colombian banking. Any bank in the check clearing chain can initiate truncation and create a

substitute check. Whether the substitute check is then forwarded physically or whether it is transmitted electronically will be determined by the agreements between banks in the clearing system.

Banks and institutions will also make their own policies on how long to keep the original check. While the Act is voluntary, most banks are expected to take advantage of potentially significant cost savings, with the larger institutions leading the pack. It is expected that the process will take a number of years before it becomes widespread. A practical example of the situation is described as follows: A paper check is drawn against Bank A, and deposited by the beneficiary in Bank B. Bank B could keep the original paper check for archive or destruction-, and creates an digital image of the check. This truncation process allows the depositary bank, to continue the clearing process with the substitute check, which could be sent electronically or physically. We bring up the modifications in the American check compensation system because of its importance as an innovative option for Colombia, where just like in the US- the costs generated by the custody, conservation and transportation of paper checks, are significant, as is shown by the latest available information. Finally, we point out that, even though Check 21 is not too far from the current Colombian compensation process, its legal provisions related to substitute checks are pioneering, and it should be studied for incorporation in the near future into our legal system. Important legal modifications related to Investment Funds Securities Superintendence is studying a project that intends to modify

Resolution 400 of 1995, introducing new rules on capital distribution, valuation, and maximum subscription term for close-end funds, among others. Among the main modifications proposed, the project provides that close-end funds could distribute capital in some conditions determined by the Investment Analysis Committee, but only if the money that is being transferred was obtained from an authorized sale of liquid assets. The redistribution of the capital will consequently produce the reduction of the fund, in two different ways: (i) by means of the reduction of the value unit, or; (ii) through the anticipated redemption of units, in proportion to the reduction of the funds value. The Project states that the close-end funds will be able to receive resources after the additional period of 20% of the total length of the fund presently authorized-, using supplementary periods. The added terms cannot be extended more than 10% of the total duration of the respective fund. The Project contains a modification of the Article 2.4.7.4., eliminating the mandatory rating of open-end funds, and establishing new rules for the assessment of Investment and Securities Funds. The mentioned conditions are: (i) the ratings must show a scale that measures the operational and administrative risks, and a different scale to credit and market risks; (ii) the new ratings will be created every year; and (iii) the ratings will be disclosed in accordance with the respective contract. Finally, the project provides new formulas to determine the pre-closing value in closed funds, to be used in the net profit or capital distribution days. We will closely follow the Project, which could introduce significant

modifications related to the legislation of investment funds. Companies that cannot guarantee the payment of salaries and taxes would not accede to the new Insolvency Legislation Corporations Superintendence is drafting a new law project to replace Law 550 that suggests important differences with the current regime. Even though the Law 922, 2004, extended the application of Law 550 for two more years, several voices have expressed the urge of a complete new regime of insolvency in Colombia. The Corporations Superintendence, amongst other entities, has expressed its concern for the low efficacy of the Law 550; only 32 companies under Law 550 are indebted with Colombian State for more than 1.4 trillion pesos, for social security payments, taxes, and other related payments. Thus, the mentioned government entity decided to take the lead in the process of discussing the law project with the private entrepreneurs, universities, and governmental entities. The new Project seeks to give legal protection for insolvency, only to those companies that can assure the payment of the debts due to the government and their employees. The Project tries to determine if the company is not feasibly from an economic scope, helping the reintegration of the assets to the productive field. The project will unify all the legislation related to Insolvency in the Colombian system. Another important advance of the Project is that creditors will decide if the company should apply for the insolvency state, regardless of the debtors vote.

With the proposed changes, most companies are expected to resolve its applications in 5 months and its objections in 15 days or less. Participating in this issue: Sergio Rodrguez Azuero, Julio Csar Quintero, Daniel Rodrguez Bravo, Camilo Gantiva Hidalgo.

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This bulletin was made by the Editorial Board of Rodrguez-Azuero Asociados S.A. for an informative and academic value; therefore its content does not constitute legal advice. The publication of this bulletin is only authorized quoting the source.