[Federal Register Volume 61, Number 222 (Friday, November 15, 1996)]
[Proposed Rules]
[Pages 58493-58496]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-29216]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 61, No. 222 / Friday, November 15, 1996 /
Proposed Rules
[[Page 58493]]
DEPARTMENT OF THE TREASURY
Fiscal Service
31 CFR Part 225
RIN 1510-AA36
Acceptance of Bonds Secured by Government Obligations in Lieu of
Bonds With Sureties
AGENCY: Financial Management Service, Fiscal Service, Treasury.
ACTION: Proposed rule.
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SUMMARY: This rule proposes to revise its regulations which govern the
acceptance of bonds secured by Government obligations in lieu of bonds
with sureties. It specifically addresses the mechanics of pledging
book-entry Government obligations, and clarifies existing requirements
for accepting bonds secured with Government obligations. These
revisions are intended to provide greater clarity and flexibility by
replacing obsolete references and unnecessary requirements with current
references and requirements. In addition, this rule proposes to expand
the use to which the proceeds of the pledged Government obligations, in
the event of a default in performance, may be applied.
DATES: Comments on this proposed rule must be received on or before
December 16, 1996.
ADDRESSES: Comments or inquiries on this proposed rule may be addressed
to Policy and Planning Division, Financial Management Service, Room
403A, 401 14th St. S.W., Washington DC 20227, ATTN: Michael Dressler.
FOR FURTHER INFORMATION CONTACT: Michael Dressler, Financial Program
Specialist, (202) 874-7106, or Cynthia L. Johnson, Director, (202) 874-
6657, Cash Management Policy & Planning Division, 401 14th Street, SW.,
Washington, DC 20227.
SUPPLEMENTARY INFORMATION:
Background
Persons required by Federal law to give an agency a surety bond for
the purpose of guaranteeing performance may give in lieu thereof a bond
secured by Government obligations. To assist agencies in reviewing and
accepting such bonds, the Secretary of the Treasury (the Secretary)
promulgated regulations codified at 31 CFR part 225, which set forth
requirements applicable to bonds secured by Government obligations.
These regulations currently contemplate bonds secured by Government
obligations in definitive or printed form.
However, since these regulations were last significantly revised in
1969, the form of newly issued Government obligations pledged under
this Part has changed from definitive to book-entry. Because of this
change, many questions have arisen under this Part regarding book-entry
Government obligations. The purpose of this Notice of Proposed
Rulemaking is to update, clarify, and simplify the requirements
governing the acceptance of bonds secured by Government obligations in
both definitive and book-entry form.
In addition, this proposed rule provides that in the event of a
default, the proceeds from the sale of the pledged Government
obligations, will be available to satisfy any claim of the United
States. The reference to any claim of the United States is an expansion
of the current rule which limits the application of the proceeds to
damages arising out of the default.
Summary of Changes
Book-Entry Government Obligations
The current regulation does not distinguish between definitive and
book-entry Government obligations. Because the mechanics of pledging
book-entry obligations are different than those for definitive
obligations, the proposed rule contains two sections to address the
pledging of book-entry (Sec. 225.4) and definitive (Sec. 225.5)
obligations. These discrete sections are proposed in response to
numerous questions raised by Federal agencies regarding the pledge of
book-entry versus definitive obligations.
Currently, the Bureau of Public Debt is in the process of revising
the regulations governing book-entry Treasury bonds, notes and bills
held in the commercial book-entry system. 61 FR 8420 (March 4, 1996).
The revised regulations, known as the Treasury/Reserve Automated Debt
Entry System (TRADES), will incorporate recent changes in commercial
and property law addressing the holdings of securities through
financial intermediaries. It is contemplated that TRADES will apply to
outstanding securities currently governed by 31 CFR part 306, Subpart
O. Conforming changes to part 306 will be made with the publication of
TRADES in final form.
Forms
The current rule requires that the bond, which is referred to as an
agreement and power of attorney, be in a prescribed format. Because a
survey revealed that each agency has varying needs and requirements,
the proposed rule (Sec. 225.3) deletes this prescriptive requirement so
as to afford agencies greater flexibility in tailoring bonds to fit
their needs. However, the proposed rule (Sec. 225.3) still requires an
agency to ensure that the bonds irrevocably authorize it to: (1) Sell
the Government obligations in the event of a default in performance;
and (2) apply the proceeds therefrom to satisfy any claim of the United
States Government. The reference to any claim of the United States
(Sec. 225.3) is an expansion of the current rule (Sec. 225.5) which
limits the application of the proceeds to damages arising out of the
default.
Payment of Interest
The current rule provides that, in the absence of default, the
obligor shall be entitled to receive interest accruing upon Government
obligations deposited in accordance with the rule (Sec. 225.11), except
that coupons on bearer Government obligations will be retained by the
bond official in the absence of written application by the obligor. The
proposed rule (Sec. 225.6) provides that interest for all forms of
Government obligations will generally be paid to the obligor in the
normal course without written application. The proposed rule
(Sec. 225.6) also adds a provision permitting the bond official to
require retention of accrued interest. This change clarifies the degree
of agency flexibility in securing the performance of their obligors.
The Secretary believes
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these changes will facilitate uniform operational handling of interest
payments, expedite the payment of interest to obligors, and further
secure performance by obligors.
Custodian Duties and Responsibilities
The proposed rule (Sec. 225.7) clarifies that agency custodians
will act in strict accordance with authenticated agency instructions.
This clarification stems from questions posed by the Federal Reserve
regarding whether its duties and responsibilities under 31 U.S.C.
9303(b)(1) require it to act in strict accordance with the
authenticated agency instructions.
Role of Federal Reserve Banks
In accordance with 31 CFR part 306, the Federal Reserve Banks will
act as fiscal agents of the United States for the purposes of these
regulations.
Rulemaking Analysis
It has been determined that this regulation is not a significant
regulatory action as defined in E.O. 12866. Therefore, a Regulatory
Assessment is not required.
It is hereby certified pursuant to the Regulatory Flexibility Act
that this revision will not have a significant economic impact on a
substantial number of small business entities. Accordingly, a
Regulatory Flexibility Act analysis is not required. These regulations
authorize persons, including small entities, to pledge bonds secured by
Government obligations in lieu of bonds with sureties. Consequently,
these regulations provide additional options to business entities
pledging collateral, as well as a flexible regulatory scheme with no
adverse economic impact on small entities.
Notice and Comment
Public comment is solicited on all aspects of this proposed
regulation. The Financial Management Service will consider all comments
made on the substance of this proposed regulation, but does not intend
to hold hearings.
List of Subjects in 31 CFR Part 225
Fiscal Service, Government securities, Surety bonds.
For the reasons set forth in the preamble, 31 CFR part 225 is
proposed to be revised to read as follows:
PART 225--ACCEPTANCE OF BONDS SECURED BY GOVERNMENT OBLIGATIONS IN
LIEU OF BONDS WITH SURETIES
Sec.
225.1 Scope.
225.2 Definitions.
225.3 Pledge of Government obligations in lieu of a bond with
surety or sureties.
225.4 Pledge of book-entry Government obligations.
225.5 Pledge of definitive Government obligations.
225.6 Payment of interest.
225.7 Custodian duties and responsibilities.
225.8 Bond official duties and responsibilities.
225.9 Return of Government obligations to obligor.
225.10 Other agency practices and authorities.
225.11 Courts.
Authority: 31 U.S.C. 321; 31 U.S.C. 9301; 31 U.S.C. 9303; 12
U.S.C. 391.
Sec. 225.1 Scope.
The regulation in this part applies to Government agencies that
accept bonds secured by Government obligations in lieu of bonds with
sureties. The Financial Management Service (FMS) is the Secretary of
the Treasury's (Secretary) representative in all matters concerning
this part unless otherwise specified. The Commissioner of the FMS may
issue procedural instructions implementing this regulation.
Sec. 225.2 Definitions.
For the purpose of this part:
Agency means a department, agency, or instrumentality of the United
States Government.
Authenticate instructions means to verify that the instructions
received are from a bond official.
Bearer means an obligation whose ownership is not recorded. Title
to such an obligation passes by delivery without endorsement and
without notice. A bearer obligation is payable on its face to the
holder at either maturity or call for redemption.
Bond means an executed written instrument, which guarantees the
fulfillment of an obligation to the United States and sets forth the
terms, conditions, and stipulations of the obligation. If the
obligation is not fulfilled, the bond assures payment, to the extent
stipulated, of any loss sustained by the United States.
Bond official means an agency official having authority under
Federal law or regulation to approve a bond with surety or sureties and
to approve a bond secured by Government obligations.
Book-entry means a computerized entry made on records of a Federal
Reserve Bank. (See part 306 of this title, Subpart O, Book-Entry
Procedure).
Custodian means a Federal Reserve Bank acting as fiscal agent of
the United States or a depositary specifically designated by the
Secretary for the purpose of this part.
Definitive means in engraved or printed form.
Federal Reserve Bank means a Federal Reserve Bank and its branches.
Government obligation means a public debt obligation of the United
States Government, and an obligation whose principal and interest are
unconditionally guaranteed by the Government.
Obligor includes, but is not limited to, an individual, a trust, an
estate, a partnership, a corporation, and a sole proprietor.
Officer authorized to certify assignment means the individual
identified in the regulation codified at Sec. 306.45 of this title.
Par value means the stated value of a Government obligation that
will be paid at maturity.
Payment bond means a bond which assures payment, as required by
law, to all persons supplying labor or material in the performance of
required work provided for in a contract.
Pledge means a pledge of, or transfer of a security interest in, a
Government obligation to a bond official's agency as collateral in lieu
of a bond with a surety or sureties.
Procedural Instructions means the Treasury Financial Manual
published by the Financial Management Service.
Registered means that ownership of the Government obligation is
listed in the issuer's records, and that the obligation is payable at
maturity or call to the person in whose name the obligation is
inscribed or to that person's assignee.
Sec. 225.3 Pledge of Government obligations in lieu of a bond with
surety or sureties.
(a) General. An obligor required by Federal law or regulation to
furnish a bond with surety or sureties may give in lieu thereof a bond
secured by Government obligations to a bond official.
(b) Bond. The bond, at a minimum, shall irrevocably authorize the
bond official to collect, sell, assign, or transfer such Government
obligations and any interest retained therefrom in the event of the
obligor's default in performing any of the terms, conditions, or
stipulations of such bond, and shall authorize the bond official to
apply the proceeds therefrom, in whole or in part, to satisfy any claim
of the United States Government against the obligor.
(c) Amount of Government obligations. The obligor shall pledge to
the bond official Government obligations whose par value is at least
equal to the face amount of the required bond with surety or sureties.
(d) Avoiding frequent substitutions. To avoid the frequent
substitution of Government obligations, the bond
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official may reject Government obligations which mature, or are
redeemable, within one year from the date they are pledged to the bond
official.
Sec. 225.4 Pledge of book-entry Government obligations.
(a) General. An obligor, or an obligor's financial institution,
acting as agent for the obligor, shall arrange a pledge pursuant to the
prior agreement and approval of the bond official, of book-entry
Government obligations by authorizing a Federal Reserve Bank to make an
appropriate entry in its records. The Federal Reserve Bank is not
required to establish that the agreement and approval of the bond
official has been obtained prior to the making of such entry.
(b) Receipt. Upon the making of the entry in the records of a
Federal Reserve Bank, such Bank will promptly issue a receipt or an
activity statement, or both, to the bond official and to the obligor.
(c) Effect of entry. The making of such an entry in the records of
a Federal Reserve Bank shall have the effect as provided in
Sec. 306.118(a) of this title, or other applicable regulations.
Sec. 225.5 Pledge of definitive Government obligations.
(a) Type and assignment. Definitive Government obligations may be
in bearer or registered form, and shall be owned by the obligor.
(1) Bearer Government obligations. The obligor shall pledge bearer
Government obligations to the bond official with all unmatured interest
coupons attached.
(2) Registered Government obligations; assignment. The obligor
shall pledge Government obligations registered in the obligor's name to
the bond official by assignment in accordance with subpart F of part
306 of this title (31 CFR 306.40 et seq.) and other codified procedures
for issuers that apply to assignment of the registered Government
obligations, except that, when so authorized under such procedures, all
assignments shall be made in blank.
(b) Delivery to bond official; receipt. All deliveries of
definitive Government obligations from the obligor to the bond official
under this part shall be made at the risk and expense of the obligor.
Upon receipt of definitive Government obligations, the bond official
will issue the obligor a receipt.
(c) Risk of loss; safekeeping. All definitive Government
obligations held by the bond official will be held at the risk of the
bond official. The bond official will keep safe all definitive
Government obligations.
(d) Deposit. The bond official is strongly encouraged to ensure
that definitive Government obligations are deposited with either of the
following custodians:
(1) A Federal Reserve Bank, having the requisite facilities; or,
(2) A depositary specifically designated for that purpose by the
Secretary.
(e) Delivery to custodian; receipt. If the bond official is in
receipt of definitive Government obligations, and thereafter deposits
those obligations with a custodian, the expense and risk of loss in
delivery will rest with the bond official. Upon the deposit of
definitive Government obligations, the custodian will issue the bond
official a receipt. All definitive Government obligations held by the
custodian will be held at the risk of the custodian.
(f) Conversion to book-entry. When converting definitive Government
obligations to book-entry form, a Federal Reserve Bank will act
pursuant to and in accordance with codified book-entry procedures for
issuers that apply to the definitive Government obligations pledged to
the bond official's agency, including the book-entry procedures for
Treasury securities set forth in subpart O of part 306 of this title
(31 CFR 306.115 et seq.).
Sec. 225.6 Payment of interest.
(a) General. Except as otherwise provided in this section, and
Sec. 225.7(b), interest accruing upon Government obligations pledged to
a bond official's agency in accordance with this part will be remitted
to the obligor.
(b) Bond requirements. The bond official will require that the bond
provide that the bond official may retain any interest accruing upon
any Government obligations, or direct that such interest be retained by
the custodian.
(c) Default. If the bond official determines that the obligor has
defaulted in the performance of any of the terms, conditions, or
stipulations of the bond, the bond official will retain any interest
accruing upon Government obligations pledged to the bond official's
agency or direct the custodian, in accordance with Sec. 225.7(b) and
other relevant provisions of this part, to retain such interest.
Sec. 225.7 Custodian duties and responsibilities.
(a) General. A custodian shall authenticate instructions received
from a bond official and shall act in accordance with such
authenticated instructions. The custodian assumes no liability and is
without liability of any kind for acting in accordance with such
authenticated instructions, except for the custodian's failure to
exercise ordinary care. By providing a bond secured by Government
obligations in lieu of a bond with surety or sureties, an obligor
agrees not to hold either the custodian or the Secretary liable or
responsible for the actions or inactions of a bond official or for
carrying out a bond official's authenticated instructions.
(b) Interest. Absent authenticated instructions from the bond
official to retain interest, interest received by the custodian on
Government obligations pledged to the bond official's agency in
accordance with this part will be remitted in the regular course of
business to the obligor.
(c) Release and substitution of Government obligations. A custodian
will only release or substitute Government obligations or the proceeds
from Government obligations, including any retained interest, in
accordance with a bond official's authenticated instructions.
(d) Liquidation of Government obligations. A custodian will
collect, sell, assign, or transfer Government obligations, including
any interest therefrom, only in accordance with a bond official's
authenticated instructions.
(e) Application of proceeds. A custodian will apply the proceeds
from the collection, sale, assignment, or transfer of Government
obligations only in accordance with a bond official's authenticated
instructions.
Sec. 225.8 Bond official duties and responsibilities.
(a) Duties and responsibilities. The bond official's duties and
responsibilities are as follows:
(1) Approving the bond secured by Government obligations after
determining its sufficiency;
(2) Verifying ownership of any definitive Government obligations
given, and ensuring that any registered Government obligations are
properly assigned;
(3) Approving the delivery of book-entry Government obligations
after determining their sufficiency;
(4) Providing the custodian, when appropriate, with clear and
concise instructions;
(5) Taking all reasonable and appropriate steps to ensure that all
procedures or transactions conform with the provisions of this part;
and,
(6) Notifying the Secretary of the Treasury, or designee, upon an
obligor's default in performing any of the terms, conditions, or
stipulations of a bond and
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applying any part of the proceeds therefrom that is in excess of the
amount required to assure payment of any loss sustained by the United
States related to the purpose of the bond to satisfy any claim of the
United States Government against the obligor.
(b) [Reserved]
Sec. 225.9 Return of Government obligations to obligor.
(a) General. Except as provided in subsection (b) of this section,
the bond official will return the Government obligations, and any
interest retained therefrom, to the obligor, without written
application from the obligor, when the bond official determines that
the Government obligations are no longer required under the terms of
the bond.
(b) Miller Act Payment Bonds. The bond official will not return
Government obligations to an obligor who has furnished to the bond
official a payment bond, if:
(1) A person, who supplied the obligor with labor or materials and
whom the obligor has not paid, files with the agency head the
application and affidavit provided for in the Miller Act (Act), as
amended (40 U.S.C. 270a-270d), and the time provided in the Act for the
person to commence suit against the obligor on the payment bond has not
expired; or
(2) A person commences a suit against the obligor within the time
provided for in the Act, in which case the bond official will hold the
Government obligations subject to the order of the court having
jurisdiction of the suit; or
(3) The bond official has actual knowledge of a claim against the
obligor on the basis of the payment bond, in which case the bond
official may return the Government obligations to the obligor when the
bond official deems appropriate.
(c) Claim of the United States unaffected. Nothing in this section
shall affect or impair the priority of any claim of the United States
against Government obligations, or any right or remedy granted by the
Miller Act or by this part to the United States in the event of an
obligor's default on any term, condition, or stipulation of a bond.
(d) Return of definitive Government obligations; risk of loss.
Definitive Government obligations to be returned to the obligor will be
forwarded at the obligor's risk and expense, either by the bond
official, or by a custodian upon receipt of a bond official's
authenticated instruction.
Sec. 225.10 Other agency practices and authorities.
(a) Agency practices. Nothing in this part shall be construed as
modifying the existing practices or duties of agencies in handling
bonds, except to the extent made necessary under the terms of this part
by reason of the acceptance of bonds secured by Government obligations.
(b) Agency authorities. Nothing contained in this part shall affect
the authority of agencies to receive Government obligations for
security in cases authorized by other provisions of law.
Sec. 225.11 Courts.
(a) General. Nothing contained in this part shall affect the
authority of a court over a Government obligation given as security in
a civil action.
(b) [Reserved]
Dated: November 7, 1996.
Russell D. Morris,
Commissioner.
[FR Doc. 96-29216 Filed 11-14-96; 8:45 am]
BILLING CODE 4810-35-P
