[Federal Register Volume 76, Number 52 (Thursday, March 17, 2011)]
[Proposed Rules]
[Pages 14592-14600]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-6277]
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DEPARTMENT OF THE TREASURY
Fiscal Service
31 CFR Part 223
RIN 1510-AB27
Surety Companies Doing Business With the United States
AGENCY: Financial Management Service, Fiscal Service, Treasury.
ACTION: Notice of proposed rulemaking with request for comment.
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SUMMARY: The Department of the Treasury, Financial Management Service
(Treasury), administers the Federal corporate surety program. Treasury
issues certificates of authority to qualified sureties to underwrite
and reinsure Federal bond obligations. We are proposing to amend our
regulation to clarify the circumstances when an agency bond-approving
official can decline to accept a bond underwritten by a Treasury-
certified surety. We are
[[Page 14593]]
also proposing to amend the procedures to be used by Treasury in
adjudicating any complaint received from an agency requesting that a
surety's certificate be revoked for failure to satisfy an
administratively final bond obligation due the agency.
DATES: Comments on the proposed rule must be received by May 16, 2011.
ADDRESSES: The Financial Management Service participates in the U.S.
government's eRulemaking Initiative by publishing rulemaking
information on http://www.regulations.gov. Regulations.gov offers the
public the ability to comment on, search, and view publicly available
rulemaking materials, including comments received on rules.
Comments on this rule, identified by docket FISCAL-FMS-2010-0001,
should only be submitted using the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions on the Web site for submitting comments.
Mail: Rose Miller, Manager, Surety Bond Branch, Financial
Management Service, 3700 East-West Highway, Room 6F01, Hyattsville, MD
20782.
The fax and e-mail methods of submitting comments on rules to FMS
have been retired.
Instructions: All submissions received must include the agency name
(``Financial Management Service'') and docket number FISCAL-FMS-2010-
0001 for this rulemaking. In general, comments will be published on
Regulations.gov without change, including any business or personal
information provided. Comments received, including attachments and
other supporting materials, are part of the public record and subject
to public disclosure. Do not enclose any information in your comment or
supporting materials that you consider confidential or inappropriate
for public disclosure.
FOR FURTHER INFORMATION CONTACT: Rose Miller, Manager, Surety Bond
Branch, Financial Management Service, at (202) 874-6850 or
[email protected], or James J. Regan, Senior Counsel, Financial
Management Service, at (202) 874-6680 or [email protected].
SUPPLEMENTARY INFORMATION:
I. Background
Treasury is responsible for administering the corporate Federal
surety bond program under the authority of 31 U.S.C. 9304-9308 and 31
CFR part 223 (part 223). Congress delegated to Treasury the discretion
to issue a certificate if Treasury decides the surety's articles of
incorporation authorize it to engage in the business of surety, the
corporation has the requisite paid-up capital, cash, or equivalent
assets, and the corporation is able to carry out its contracts.
Treasury evaluates the qualifications of sureties to write Federal
bonds and issues certificates of authority to those sureties that meet
the specified corporate and financial standards. Treasury publishes the
list of certified sureties in Department Circular 570 which is
available online at http://www.fms.treas.gov/c570. Federal bond-
approving officials consult and rely on this list whenever a corporate
surety bond is presented to an agency because bonds underwritten by
Treasury-certified sureties satisfy bonding requirements, provided such
bonds are accepted by agency bond-approving officials.
Treasury finds it necessary to clarify the circumstances under
which a Federal agency bond-approving official can decline to accept a
bond underwritten by a Treasury-certified surety. Federal agencies have
sometimes continued to accept bonds from a certified surety, even when
the surety owes the agency an administratively final bond obligation,
believing that Treasury certification mandates such acceptance in all
cases. This is not the case.
The proposed rule would clarify that Treasury certification does
not insulate a surety from the requirement to satisfy administratively
final bond obligations in order to ensure that its bonds will be
accepted by agencies in all cases. Specifically, under the proposed
rule, an agency bond-approving official would have the discretion to
decline to accept bonds underwritten by a Treasury-certified surety for
cause, such as when the surety owes the agency an unpaid or unsatisfied
bond obligation that is administratively final under agency procedures.
This discretion is not without limit. Before declining to accept bonds
from a Treasury-certified surety, an agency must provide the surety
advance written notice stating: (i) The intention of the agency to
decline bonds underwritten by the surety, (ii) the reasons for or cause
of the proposed non-acceptance of such bonds, (iii) the opportunity for
the surety to rebut the stated reasons or cause, and (iv) the surety's
opportunity to cure the stated reasons or cause. Under the proposed
rule, the agency may decline the bonds underwritten by the certified
surety if, after consideration of any submission by the surety, the
agency issues a written determination that the bonds should be
declined. The agency is required to articulate standards for exercising
its discretion to decline bonds from Treasury-certified sureties in an
agency rule or regulation prior to declining any bonds in specific
cases.
The proposed rule is consistent with the general and permanent
surety laws that were enacted by Congress and later codified, without
substantive change, as 31 U.S.C. 9304(b). The surety statutory
framework is derived from public laws enacted in 1894 and 1910. The Act
of August 13, 1894, 28 Stat. 279, as amended by The Act of March 23,
1910, 36 Stat. 241, provided that a bond underwritten by a Treasury-
certified surety satisfied bonding requirements ``Provided, That such
recognizance, stipulation, bond, or undertaking be approved by the head
of department, court, judge, officer, board, or body executive,
legislative, or judicial required to approve or accept the same.'' This
proviso conditioned acceptance of a bond on the approval by an agency.
This language was first codified in 1925 as 6 U.S.C. 6, and codified
again in 1982 as 31 U.S.C. 9304(b), without substantive change. See,
e.g., The Code of the Laws of the United States of America, December 7,
1925, Preface Statement (The codification is the official restatement
of the general and permanent laws of the United States, and under the
codification ``No new law is enacted and no law repealed''); Public Law
97-258 (1982), 96 Stat. 877, 1047 (Codification enacted ``without
substantive change'').
Federal courts have affirmed that Section 9304(b), and its
predecessor derivations, afford agency bond-approving officials
discretion to decline the acceptance of a bond underwritten by a
Treasury-certified surety, consistent with the due process standards
articulated in the proposed rule. See Concord Casualty & Surety Co. v.
United States, 69 F.2d 78, 81 (2d Cir. 1934)(The bond-approval
official's approval of a bond underwritten by a Treasury-certified
surety ``is not mandatory'' but calls for the exercise of wise
discretion); American Druggists Ins. Co. v. Bogart, 707 F.2d 1229, 1233
(11th Cir. 1983)(``The surety's approval by the Secretary of the
Treasury * * * does not preclude the district court from exercising its
discretion to approve only those [bail] bonds which it feels confident
will result in the defendant's presence at trial'' and ``Section
9304(b) impliedly authorizes this discretion in its provision that
`each surety bond shall be approved by the official of the Government
required to approve or accept the bond.' '').
The proposed text is also consistent with 31 U.S.C. 9305(d)(3)
which authorizes Treasury to require
[[Page 14594]]
additional security in circumstances when the surety is no longer
sufficient. Specifically, Treasury believes the discretion afforded to
agency bond-approving officials under the proposed text is appropriate
because a surety that has not paid an administratively final bond
obligation to an agency, even after due process has been afforded, is
no longer providing sufficient security vis-[agrave]-vis the agency.
The proposed rule is necessary to better facilitate the prompt
resolution of bond disputes between Federal agencies and sureties.
Under the current rule, the status of Treasury certification has had
the unintended consequence of inhibiting the proper adherence to agency
administrative processes in bond dispute matters. In practice, this has
negatively impacted the ability to resolve administratively final bond
obligation disputes at the agency level. In a limited number of cases,
sureties appear to have simply ignored agency final decisions for
extended periods of time. While these cases are anomalous and rare,
they represent an unwelcome burden on the Treasury and the public fisc
because the administratively final bond obligations at issue were not
paid, or resolved, promptly.
Thus, the proposed rule would clarify that agencies have two
options when experiencing surety performance and collection problems.
First, an agency owed an administratively final bond obligation by a
certified surety has the discretion to decline acceptance of additional
bonds underwritten by such surety, provided the due process standards
articulated in the rule are satisfied. Second, an agency owed an
administratively final bond obligation by a certified surety can submit
a complaint to Treasury requesting that the surety's certificate be
revoked.
With regard to this second option, the proposed rule would clarify
the procedures and standard of review that will be used by Treasury to
adjudicate any complaint submitted by an agency to Treasury requesting
that a surety's certificate be revoked for failure to satisfy an
administratively final bond obligation. Under the proposed rule,
Treasury will not conduct a de novo review of the administratively
final agency determination that a bond obligation is past due because
substantive agency bond obligation determinations are based, in large
part, on the interpretation and application of laws that the agency,
rather than Treasury, has been tasked by Congress with administering.
Treasury will not substitute its judgment for that of the agency in
determining whether a bond obligation is owed under agency authorities.
Rather, in considering whether the surety's certificate should be
revoked, Treasury will review whether the agency's administratively
final decision (that the surety owes a past-due bond obligation) was
reasonable, based on a consideration of relevant factors, and did not
involve a clear error of judgment.
To the extent that a surety requests Treasury to conduct an
informal hearing before reaching its decision on whether the surety's
certificate should be revoked, the proposed rule clarifies that the
formal adjudication standards under the Administrative Procedures Act,
5 U.S.C. 554, 556, and 557, do not apply to the conduct of such an
informal hearing. This is appropriate because Treasury's surety
statutes, 31 U.S.C. 9304-9308, do not require a formal adjudication to
be determined on the record after an opportunity for a hearing. See,
e.g., 5 U.S.C. 554(a)(formal adjudication procedures only apply in
cases ``required by statute to be determined on the record after an
opportunity for an agency hearing''). Moreover, a surety's property
interest in its certificate is narrow. American Druggists Ins. Co. v.
Bogart, 707 F.2d 1229, 1235 (11th Cir. 1983)(``The scope of the
surety's protected interest arising from the federal regulatory scheme
is indeed narrow.''). Given this narrow interest, the opportunity for a
surety to request an informal hearing under the standards articulated
in the proposed rule is consistent with due process requirements that
the surety be given an opportunity to be heard ``at a meaningful time
and in a meaningful manner.'' See, e.g., Matthews v. Eldridge, 424 U.S.
319, 333 (1976)(Fundamental due process satisfied if the individual is
given an opportunity to be heard ``at a meaningful time and in a
meaningful manner'').
In addition, Treasury is proposing to make certain technical
amendments to part 223 to update statutory citations and to provide
current Treasury point of contact information.
II. Section-by-Section Analysis
Section 223.1
We are proposing to amend Sec. 223.1 by stating, in plain
language, that part 223 governs the issuance and revocation of
certificates of authority of surety companies to do business with the
United States as sureties on, or reinsurers of, Federal surety bond
obligations, and the acceptance of such obligations. The proposed rule
deletes archaic language and clarifies that the U.S. Department of the
Treasury, Financial Management Service (Treasury), acts on behalf of
the Secretary of the Treasury in performing these duties.
Section 223.2
We are proposing to amend Sec. 223.2 to clarify that applications
for certificates of authority should be submitted to Treasury at the
location, and in the manner, specified online at http://www.fms.treas.gov/c570, as amended from time to time.
Section 223.3
Section 223.3(a) establishes the requirements that must be met by
an applicant company in order to be issued a certificate of authority
by Treasury. Proposed Sec. 223.3(a) restates such requirements in
plain language. In addition, the proposed regulation clarifies that any
certificate issued by Treasury is expressly subject to the continuing
compliance by the surety with all statutory requirements and the other
conditions referenced in this part.
Section 223.4
Section 223.4 provides that no company will be issued a certificate
of authority by Treasury unless it maintains on deposit with the
insurance commissioner of the State in which it is incorporated, or
other specified State official, legal investments having a current
market value of not less than $100,000, for the protection of
claimants, including the surety's policyholders in the United States.
Proposed Sec. 223.4 would add a sentence requiring a company to submit
to Treasury with its initial application for a certificate of
authority, and annually thereafter, a written statement signed by the
State official attesting to the current market value of the deposit
(not less than $100,000) and that the legal investments remain on
deposit with the State.
Section 223.8
Section 223.8 requires Treasury-certified sureties to file annual
and quarterly financial reports to Treasury for review. Proposed Sec.
223.8(a) updates the specified Treasury official to whom these reports
should be submitted.
Section 223.9
Section 223.9 establishes the criteria by which Treasury values the
assets and liabilities of a company for certificate of authority
purposes. Section 223.9 provides that Treasury will allow credit for
reinsurance in all classes of risk if the reinsuring company holds a
certificate of authority from Treasury, or has been recognized as an
admitted reinsurer by Treasury. Proposed Sec. 223.9 clarifies that
this credit for reinsurance
[[Page 14595]]
will be allowed only if the reinsurer is in continuing compliance with
all certificate of authority requirements.
Section 223.11
Section 223.11(b) provides that a surety can underwrite a Federal
bond in excess of its underwriting limitation if the excess amount is
reinsured by a company holding a certificate of authority issued by
Treasury, provided the specified reinsurance requirements are met.
Proposed Sec. 223.11(b) clarifies that the requisite reinsurance bond
forms are available on the General Services Administration Web site at
http://www.gsa.gov.
Section 223.12
Section 223.12 establishes the application requirements and
standards for a company to be recognized by Treasury as an admitted
reinsurer (except on excess risks running to the United States) for
surety companies doing business with the United States. When a
Treasury-certified surety cedes non-Federal risks to an admitted
reinsurer, Treasury will credit the surety for the ceded reinsurance
when valuing its assets and liabilities, provided applicable
requirements are met. Proposed Sec. 223.12 updates the specified
Treasury official to whom applications and reports pertaining to
admitted reinsurer status should be submitted.
Section 223.16
Proposed Sec. 223.16, List of certificate holding companies, adds
a new fourth sentence to this subpart providing: ``Bonds underwritten
by certified companies on the Department Circular No. 570 list may be
presented to an agency bond-approving official for acceptance.''
Proposed Sec. 223.16 adds a final sentence to this subpart providing:
``Selection of a particular qualified company from among all companies
holding certificates of authority is discretionary with the principal
required to furnish the bond, but the acceptance of a bond by an agency
bond-approving official is subject to Sec. 223.17.''
This proposed text clarifies that Treasury-certified sureties have
the opportunity to present their bonds to an agency bond-approving
official for acceptance, but that the actual acceptance of a bond by an
agency bond-approving official is subject to proposed Sec. 223.17.
Section 223.17
Proposed Sec. 223.17, Acceptance and non-acceptance of bonds,
clarifies that every surety holding a Treasury-issued certificate of
authority has the opportunity to present its bonds to an agency bond-
approving official for acceptance, and that such bond-approving
official may accept such proffered bonds in all cases. It also
clarifies, however, that an agency bond-approving official has the
discretion to decline bonds underwritten by a Treasury-certified surety
for cause, provided the specified due process protections are
satisfied. The agency is required to articulate standards for
exercising its discretion not to accept bonds from Treasury-certified
sureties in an agency rule or regulation prior to declining any bonds
in specific cases. Existing agency rules or regulations that
substantially comply with, or that are consistent with, the requirement
to articulate standards in advance meet the requirements of this
paragraph.
Under proposed Sec. 223.17, for cause is primarily defined to mean
that a surety has not paid or satisfied an administratively final bond
obligation due the agency. The articulation of this primary definition
is not intended to preclude an agency from articulating additional
``for cause'' reasons, provided such reasons are defined in an agency
rule or regulation in advance, and such additional reasons are
otherwise consistent with an agency's own authorities. See, e.g., 27
CFR 25.101 (Existing Treasury Tax and Trade Bureau (TTTB) regulation
authorizing rejection of a bond for substantive reason consistent with
that agency's mission; under Sec. 25.101, TTTB can disapprove a bond
if the surety has been convicted of any fraudulent noncompliance with
any provision of law of the United States related to internal revenue
or customs taxation of distilled spirits, wines, or beer).
The authority of an agency to decline the acceptance of bonds ``for
cause'' under this proposed paragraph would not apply when the for
cause basis, e.g., the obligation of the surety to satisfy
administratively final bond obligations owed the agency, has been
stayed or enjoined by a court of competent jurisdiction.
Section 223.18
Proposed Sec. 223.18, Revocation, clarifies that revocation of a
surety's certificate of authority by Treasury can occur in two ways.
First, Treasury can initiate a revocation proceeding on its own
initiative under proposed Sec. 223.19, Treasury initiated revocation
proceedings, when it has reason to believe that a surety is not
complying with 31 U.S.C. 9304-9308 and/or the regulations under part
223. Second, Treasury can initiate a revocation proceeding under
proposed Sec. 223.20, Revocation proceedings initiated by Treasury
upon receipt of an agency complaint, upon receipt of a complaint from
an agency that a surety has not satisfied an administratively final
bond obligation.
Section 223.19
Proposed Sec. 223.19, Treasury initiated revocation proceedings,
outlines the process by which Treasury initiates proceedings on its own
accord to revoke a surety's certificate of authority for failure to
meet the requirements of 31 U.S.C. 9304-9308 and/or part 223. These
proceedings can be initiated due to a failure to meet financial
strength requirements or any other requirement.
Section 223.20
Proposed Sec. 223.20, Revocation proceedings initiated by Treasury
upon receipt of an agency complaint, specifies the process for an
agency to submit a complaint to Treasury requesting that a certified
surety's certificate of authority be revoked for failure to satisfy an
administratively final bond obligation. Proposed Sec. 223.20 affords
the surety the opportunity to demonstrate its qualifications to retain
its certificate, establishes the roles of the Treasury Reviewing
Official and the Treasury Deciding Official in the adjudicative
process, and establishes the standard of review to be used by the
Reviewing and Deciding Officials in reaching a decision.
The Treasury Reviewing and Deciding Officials will not conduct a de
novo review of the agency's administratively final determination that a
bond obligation is past due because substantive agency bond obligation
determinations are based, in large part, on the interpretation and
application of laws that the complaining agency, rather than Treasury,
has been tasked by Congress with administering. The Treasury Reviewing
and Deciding Officials will not substitute their judgment for that of
the agency. Rather, in reviewing whether revocation is justified,
Treasury will consider whether the agency's final decision (that the
surety owes a past-due bond obligation) was reasonable, based on a
consideration of relevant factors, and did not involve a clear error of
judgment.
As a general rule, proposed Sec. 223.20 anticipates that Treasury
will adjudicate agency complaints without an informal oral hearing.
Proposed Sec. 223.20(c) ensures that the surety is afforded a fair
opportunity to demonstrate, in writing, its qualifications to retain
its certificate before a decision is reached. Nevertheless, in the
event a surety
[[Page 14596]]
believes the opportunity to make known its views is inadequate, it may
request that Treasury convene an informal hearing before reaching a
decision under the timeframes established in the proposed rule.
Proposed Sec. 223.20(h) specifies the procedures under which such an
informal hearing would be conducted.
In the event that the Treasury Deciding Official sustains the
agency's complaint and makes a decision that the surety's certificate
should be revoked, proposed Sec. 223.20 clarifies that a surety will
be afforded an opportunity to cure the noncompliance to avoid
decertification, unless its noncompliance is ``willful.'' Proposed
Sec. 223.20(g) articulates the scope and application of the willful
exception to the cure opportunity.
Section 223.21
Proposed Sec. 223.21, Reinstatement, provides that a surety whose
certificate of authority has been revoked, or not renewed, by Treasury
can apply for reissuance of a certificate of authority after one year.
Among other things, such a surety must demonstrate as a condition of
reinstatement that the basis for the non-renewal or revocation of its
certificate has been eliminated. Under proposed Sec. 223.21 the
determination of whether the basis for the non-renewal or revocation
has been eliminated or effectively cured will be made by Treasury in
its discretion.
Derivation Chart for Revised Part 223
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Old section New section
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-- 223.17
223.17 223.18
-- 223.19
223.18 223.20
223.19 223.20
223.20 223.20
223.21 223.21
223.22 223.22
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III. Procedural Analyses
Request for Comment on Plain Language
Executive Order 12866 requires each agency in the Executive branch
to write regulations that are simple and easy to understand. We invite
comment on how to make the proposed rule clearer. For example, you may
wish to discuss: (1) Whether we have organized the material to suit
your needs; (2) whether the requirements of the rules are clear; or (3)
whether there is something else we could do to make these rules easier
to understand.
Regulatory Planning and Review
The proposed rule does not meet the criteria for a ``significant
regulatory action'' as defined in Executive Order 12866. Therefore, the
regulatory review procedures contained therein do not apply.
Regulatory Flexibility Act Analysis
It is hereby certified that the proposed rule will not have a
significant economic impact on a substantial number of small entities.
Treasury-certified sureties already have an existing obligation to make
payment on bond obligations to ensure acceptance of their bonds by
agency bond-approving officials under 31 U.S.C. 9304(b). The proposed
rule merely codifies this existing obligation in the regulation and
clarifies that Federal agencies can decline to accept bonds
underwritten by Treasury-certified sureties in limited circumstances,
primarily when the surety owes the agency an administratively final
bond obligation. In addition, Treasury-certified sureties have an
existing obligation to make payment on bond obligations or be subject
to Treasury certificate revocation proceedings. The proposed rule
merely clarifies the procedures and standard of review that will be
used by Treasury in adjudicating revocation complaints submitted by
agencies. Payment disputes involving Treasury-certified sureties are
anomalous and rare. The proposed rule will not have a significant
economic impact on a substantial number of small entities. Accordingly,
a regulatory flexibility analysis under the Regulatory Flexibility Act
(5 U.S.C. 601 et seq.) is not required.
Unfunded Mandates Act of 1995
Section 202 of the Unfunded Mandates Reform Act of 1995, 2 U.S.C.
1532 (Unfunded Mandates Act), requires that the agency prepare a
budgetary impact statement before promulgating any rule likely to
result in a Federal mandate that may result in the expenditure by
State, local, and tribal governments, in the aggregate, or by the
private sector, of $100 million or more in any one year. If a budgetary
impact statement is required, section 205 of the Unfunded Mandates Act
also requires the agency to identify and consider a reasonable number
of regulatory alternatives before promulgating the rule. We have
determined that the proposed rule will not result in expenditures by
State, local, and tribal governments, or by the private sector, of $100
million or more in any one year. Accordingly, we have not prepared a
budgetary impact statement or specifically addressed any regulatory
alternatives.
List of Subjects in 31 CFR Part 223
Administrative practice and procedure, Surety bonds.
For the reasons set out in the preamble, we propose to amend 31 CFR
part 223 as set forth below:
PART 223--SURETY COMPANIES DOING BUSINESS WITH THE UNITED STATES
1. Revise the authority citation for part 223 to read as follows:
Authority: 5 U.S.C. 301; 31 U.S.C. 9304-9308.
2. Revise Sec. 223.1 to read as follows:
Sec. 223.1 Certificate of authority.
The regulations in this part will govern the issuance by the
Secretary of the Treasury, acting through the U.S. Department of the
Treasury, Financial Management Service (Treasury), of certificates of
authority to bonding companies to do business with the United States as
sureties on, or reinsurers of, Federal surety bonds (hereinafter
``bonds'' or ``obligations'') under the authority of 31 U.S.C. 9304-
9308 and this part, and the acceptance of such obligations. The
regulations in this part also govern the revocation of certificates.
3. Revise Sec. 223.2 to read as follows:
Sec. 223.2 Application for certificate of authority.
Every company wishing to apply for a certificate of authority shall
submit an application to the Financial Management Service, U.S.
Department of the Treasury, c/o Surety Bond Branch, to the location,
and in the manner, specified online at http://www.fms.treas./c570, as
amended from time to time. In accordance with 31 U.S.C. 9305(a), the
data will include a copy of the applicant's charter or articles of
incorporation and a statement, signed and sworn to by its president and
secretary, showing its assets and liabilities. A fee shall be
transmitted with the application in accordance with the provisions of
Sec. 223.22(a)(i).
4. In Sec. 223.3, revise paragraph (a) to read as follows:
Sec. 223.3 Issuance of certificates of authority.
(a)(1) A company submitting an application to be issued a
certificate of authority by Treasury to underwrite and reinsure Federal
surety bonds must include all required data and information, as
determined by Treasury
[[Page 14597]]
in its discretion, for the application to be complete and ready for
review. Upon receipt of a complete application, Treasury will evaluate
the submission to determine whether the applicant company:
(i) Is duly authorized under its charter or articles of
incorporation to conduct the business referenced under 31 U.S.C.
9304(a)(2);
(ii) Has paid-up capital of at least $250,000 in cash or its
equivalent;
(iii) Is solvent and financially and otherwise qualified to conduct
the business referenced under 31 U.S.C. 9304(a)(2); and
(iv) Is able and willing to carry out its contracts. In making the
determination whether a company meets these requirements, Treasury will
evaluate the application as a whole, the required financial
statement(s) submitted by the company, the company's charter or
articles of incorporation, the past history of the company, and any
further evidence or information that Treasury may require the company
to submit (at the company's expense).
(2) If Treasury determines, in its discretion, that the applicant
company meets all of these requirements, Treasury will issue a
certificate of authority to the company authorizing it to underwrite
and reinsure Federal bonds. The certificate of authority will be
effective for a term that expires on the last day of the next June. All
such statutory requirements and regulatory requirements under this part
are continuing obligations, and any certificate is issued expressly
subject to continuing compliance with such requirements. The
certificate of authority will be renewed annually on the first day of
July, provided the company remains qualified under the law, the
regulations in this part, and other pertinent Treasury requirements,
and the company submits the fee required under Sec. 223.22 by March
1st of each year to the address and/or account specified by Treasury.
* * * * *
5. In Sec. 223.4, add a sentence to the end of the section to read
as follows:
Sec. 223.4 Deposits.
* * * The company shall submit to Treasury with its initial
application for a certificate of authority, and annually thereafter, a
written statement signed by such State official attesting to the
current market value of the deposit (not less than $100,000) and that
the legal investments remain on deposit with the State under the terms
specified.
6. In Sec. 223.8, revise paragraph (a) to read as follows:
Sec. 223.8 Financial reports.
(a) Every such company will be required to file with the Assistant
Commissioner, Management, or incumbent Treasury executive, on or before
the last day of January of each year, a statement of its financial
condition made up as of the close of the preceding calendar year upon
the annual statement blank adopted by the National Association of
Insurance Commissioners, signed and sworn to by its president and
secretary. On or before the last days of April, July and October of
each year, every such company shall file a financial statement with the
Assistant Commissioner, Management, or incumbent Treasury executive as
of the last day of the preceding month. A form is prescribed by the
Treasury for this purpose. The quarterly statement form of the National
Association of Insurance Commissioners when modified to conform to the
Treasury's requirements, may be substituted for the Treasury's form.
The quarterly statement will be signed and sworn to by the company's
president and secretary or their authorized designees.
* * * * *
7. In Sec. 223.9, revise the last sentence to read as follows:
Sec. 223.9 Valuation of assets and liabilities.
* * * Credit will be allowed for reinsurance in all classes of
risks if the reinsuring company holds a certificate of authority from
the Secretary of the Treasury, provided such reinsuring company is in
continuing compliance with all certificate of authority requirements,
or has been recognized as an admitted reinsurer in accord with Sec.
223.12.
8. In Sec. 223.11, revise paragraph (b)(1) to read as follows:
Sec. 223.11 Limitation of risk: Protective methods.
* * * * *
(b) Reinsurance. (1) In respect to bonds running to the United
States, liability in excess of the underwriting limitation shall be
reinsured within 45 days from the date of execution and delivery of the
bond with one or more companies holding a certificate of authority from
the Secretary of the Treasury. Such reinsurance shall not be in excess
of the underwriting limitation of the reinsuring company. Where
reinsurance is contemplated, Federal agencies may accept a bond from
the direct writing company in satisfaction of the total bond
requirement even though it may exceed the direct writing company's
underwriting limitation. Within the 45 day period, the direct writing
company shall furnish to the Federal agency any necessary reinsurance
agreements. However, a Federal agency may, at its discretion, require
that reinsurance be obtained within a lesser period than 45 days, and
may require completely executed reinsurance agreements to be provided
before making a final determination that any bond is acceptable.
Reinsurance may protect bonds required to be furnished to the United
States by the Miller Act (40 U.S.C. 3131, as amended) covering
contracts for the construction, alteration, or repair of any public
building or public work of the United States, as well as other types of
Federal bonds. Use of reinsurance or coinsurance to protect such bonds
is at the discretion of the direct writing company. Reinsurance shall
be executed on reinsurance agreement forms: Standard Form 273
(Reinsurance Agreement for a Miller Act Performance Bond), Standard
Form 274 (Reinsurance Agreement for a Miller Act Payment Bond), and
Standard Form 275 (Reinsurance Agreement in Favor of the United States
for other types of Federal bonds). These Standard Forms are available
on the General Services Administration Web site at http://www.gsa.gov.
* * * * *
9. In Sec. 223.12, revise paragraph (a) introductory text,
paragraph (a)(5), paragraph (b) introductory text, and paragraph (c) to
read as follows:
Sec. 223.12 Recognition as reinsurer.
(a) Application by U.S. company. Any company organized under the
laws of the United States or of any State thereof, wishing to apply for
recognition as an admitted reinsurer (except on excess risks running to
the United States) of surety companies doing business with the United
States, shall file the following data with the Assistant Commissioner,
Management, or incumbent Treasury executive, and shall transmit
therewith the fee in accordance with the provisions of Sec. 223.22:
* * * * *
(5) Such other evidence as Treasury may determine is necessary to
establish that it is solvent and able to meet the continuing obligation
to carry out its contracts.
(b) Application by a U.S. branch. A U.S. branch of an alien company
applying for such recognition shall file the following data with the
Assistant Commissioner, Management, or incumbent Treasury executive,
and shall transmit therewith the fee in
[[Page 14598]]
accordance with the provisions of Sec. 223.22:
* * * * *
(c) Financial reports. Each company recognized as an admitted
reinsurer shall file with the Assistant Commissioner, Management, or
incumbent Treasury executive, on or before the first day of March of
each year its financial statement and such additional evidence as the
Secretary of the Treasury determines necessary to establish that the
requirements of this section are being met. A fee shall be transmitted
with the foregoing data, in accordance with the provisions of Sec.
223.22.
10. Revise Sec. 223.16 to read as follows:
Sec. 223.16 List of certificate holding companies.
A list of qualified companies is published annually as of July 1 in
Department Circular No. 570, Companies Holding Certificates of
Authority as Acceptable Sureties on Federal Bonds and as Acceptable
Reinsuring Companies, with information as to underwriting limitations,
areas in which listed sureties are licensed to transact surety business
and other details. If the Secretary of the Treasury shall take any
exceptions to the annual financial statement submitted by a company, he
or she shall, before issuing Department Circular 570, give a company
due notice of such exceptions. Copies of the Circular are available at
http://www.fms.treas.gov/c570, or from the Assistant Commissioner,
Management, or incumbent Treasury executive, upon request. Bonds
underwritten by certified companies on the Department Circular No. 570
list may be presented to an agency bond-approving official for
acceptance. Selection of a particular qualified company from among all
companies holding certificates of authority is discretionary with the
principal required to furnish the bond, but the acceptance of a bond by
an agency bond-approving official is subject to Sec. 223.17.
11. Revise Sec. 223.17 to read as follows:
Sec. 223.17 Acceptance and non-acceptance of bonds.
(a) Acceptance of bonds. A bond underwritten by a certified company
on the Sec. 223.16 Department Circular No. 570 list may be presented
to an agency-bond approving official for acceptance, and such agency
bond-approving official may accept such bonds.
(b) Non-acceptance of bonds. (1) An agency bond-approving official
has the discretion not to accept bond(s) underwritten by a certified
company on the Sec. 223.16 List of certificate holding companies,
Department Circular No. 570, for cause, but only if the certified
surety has been given advance written notice by such agency. The
advance written notice shall state:
(i) The intention of the agency to decline bond(s) underwritten by
the surety;
(ii) The reasons for or cause of the proposed non-acceptance of
such bond(s);
(iii) The opportunity for the surety to rebut the stated reasons or
cause; and
(iv) The surety's opportunity to cure the stated reasons or cause.
(2) The agency may decline to accept bond(s) underwritten by the
surety if, after consideration of any submission by the surety or
failure of the surety to respond to the agency notice, the agency
issues a written determination that the bond(s) should not be accepted,
consistent with agency standards. The agency shall articulate its
standards for exercising its discretion not to accept bonds under this
paragraph in an agency rule or regulation prior to declining any bonds
in specific cases. ``For cause'' is primarily defined to mean that a
surety has not paid or satisfied an administratively final bond
obligation due the agency. The articulation of this primary definition
is not intended to preclude an agency from articulating additional
``for cause'' reasons, providing such reasons are defined in an agency
rule or regulation in advance, and such additional reasons are
otherwise consistent with an agency's own authorities. Existing agency
rules or regulations that substantially comply with, or that are
consistent with, the requirement to articulate standards in advance
meet the requirements of this paragraph.
(3) Agencies that decline bonds under this paragraph are encouraged
to use best efforts to ensure that persons conducting business with the
agency are aware that bonds underwritten by the particular certified
surety will not be accepted.
(4) The authority to decline bonds under this paragraph does not
apply when the ``for cause'' basis, e.g., the obligation of the surety
to satisfy administratively final bond obligations, has been stayed or
enjoined by a court of competent jurisdiction.
Sec. Sec. 223.18 through 223.20 [Removed]
12. Remove Sec. Sec. 223.18, 223.19, and 223.20.
Sec. 223.17 [Redesignated as Sec. 223.18]
13. Redesignate Sec. 223.17 as Sec. 223.18.
14. Revise newly redesignated Sec. 223.18 to read as follows:
Sec. 223.18 Revocation.
(a) A certified surety's certificate of authority granting the
surety the opportunity to present its bonds for approval to an agency
bond-approving official, i.e., the surety's listing on Department
Circular 570, can be revoked by Treasury in two ways:
(1) Treasury, of its own accord, under Sec. 223.19, may initiate
revocation proceedings against the surety when it has reason to believe
that a company is not complying with 31 U.S.C. 9304-9308 and/or the
regulations under this part, or
(2) Treasury, under Sec. 223.20, may initiate revocation
proceedings against the surety upon receipt of a complaint from an
agency that the surety has not paid or satisfied an administratively
final bond obligation due the agency.
(b) A revocation of a surety's certificate of authority under Sec.
223.19 or Sec. 223.20 precludes the surety from underwriting or
reinsuring additional bonds for any agency, and therefore revokes the
surety's opportunity to have its bonds presented to any agency bond-
approving official for acceptance.
15. Add new Sec. 223.19 to read as follows:
Sec. 223.19 Treasury initiated revocation proceedings.
Whenever Treasury has reason to believe that a surety is not
complying with the requirements of 31 U.S.C. 9304-9308 and/or the
regulations in this part, including but not limited to a failure to
satisfy corporate and financial standards, Treasury shall:
(a) Notify the company of the facts or conduct which indicate such
failure, and provide opportunity to the company to respond, and
(b) Revoke a company's certificate of authority with advice to it
if:
(1) The company does not respond satisfactorily to its notification
of noncompliance, or
(2) The company, provided an opportunity to demonstrate or achieve
compliance, fails to do so.
16. Add new Sec. 223.20 to read as follows:
Sec. 223.20 Revocation proceedings initiated by Treasury upon receipt
of an agency complaint.
(a) Agency Complaint. If an agency determines that a surety has not
promptly made full payment or fully satisfied an administratively final
bond obligation naming the agency as obligee, the head of the agency,
or his or her designee, may submit a complaint to the Assistant
Commissioner, Management, or incumbent Treasury executive, requesting
that the surety's certificate of
[[Page 14599]]
authority be revoked for nonperformance of administratively final bond
obligations. Under such complaint, the agency shall certify that:
(1) The agency has made a determination, in accordance with
applicable agency procedures and standards, that a surety owes on a
bond obligation naming the agency as obligee;
(2) The agency has submitted a written demand on behalf of the
agency to the surety requesting payment or satisfaction on the bond
obligation;
(3) The surety was afforded the opportunity to request
administrative review within the agency of the determination that the
bond obligation was due, and the agency made a final administrative
determination that the bond obligation was due after the completion of
such administrative review, or the time period for the surety to
request administrative review within the agency has expired, i.e., the
bond obligation is administratively final;
(4) The agency provided the surety the opportunity to enter into a
written agreement to satisfy the obligation;
(5) The surety has not made full payment or fully satisfied the
obligation, and the obligation is past due; and
(6) The surety's obligation to make payment or satisfy the
obligation has not been stayed or enjoined by a court of competent
jurisdiction conducting judicial review of such obligation.
(b) Documentation of Complaint. The agency shall include in its
complaint a copy of the bond, written notice of the bond claim,
pertinent administrative agency decisions supporting the final agency
determination that a bond obligation is due, a copy of a written demand
letter supporting the determination that payment of the bond obligation
is past due, and documentation indicating the surety was afforded the
opportunity to enter into a written agreement to satisfy the bond
obligation.
(c) Notice to Surety. On receipt of a complaint meeting the
requirements of paragraphs (a) and (b) of this section, Treasury will
notify the surety that its certificate of authority to write additional
bonds for any agency will be revoked in the absence of a satisfactory
explanation. The notice will require the surety to submit a written
explanatory response to Treasury within 20 business days. The notice
will advise the surety of the facts and conduct referenced in the
complaint. The notice will afford the company the opportunity to
demonstrate its qualifications to retain its certificate of authority.
(d) Reviewing Official and Deciding Official. The Assistant
Commissioner, Management, or incumbent Treasury executive, will appoint
a Reviewing Official to conduct a paper review of the Federal agency
complaint referenced in paragraphs (a) and (b) of this section, and the
surety response referenced in paragraph (c) of this section, to
determine whether revocation of the surety's certificate of authority
is warranted. The Reviewing Official is authorized to require the
submission of additional documentation from the complaining agency and
the surety, to ensure appropriate consideration of relevant factual or
legal issues. Upon completion of such review, the Reviewing Official
shall prepare a written Recommendation Memorandum addressed to the
Assistant Commissioner, Management, or incumbent Treasury executive,
setting forth findings and a recommended disposition. The Assistant
Commissioner, Management, or incumbent Treasury executive with
executive oversight of the Treasury surety program, will be the
Deciding Official who will make the final decision whether the surety's
certificate of authority to write and reinsure bonds should be revoked
based on the administrative record. For these purposes, the
administrative record consists of the agency complaint referenced in
paragraphs (a) and (b) of this section, the surety response referenced
in paragraph (c) of this section, any other documentation submitted to,
or considered by, the Reviewing Official, and the Reviewing Official's
Recommendation Memorandum.
(e) Final Decision. (1) If the Deciding Official's final decision
is that revocation is not warranted, the surety and the agency will be
notified of the basis of this decision and the complaint against the
surety will be dismissed.
(2) If the Deciding Official's final decision is that the surety's
certificate of authority shall be revoked, the Deciding Official will
notify the surety and the agency of the revocation decision and the
basis for such decision. Except as provided in paragraph (g) of this
section, the notice will afford the surety an opportunity to
demonstrate or achieve compliance, i.e., cure its noncompliance, by
satisfying the bond obligations forming the basis of the final decision
within 20 business days. If the surety cures its noncompliance within
20 business days, the complaint against the surety will be deemed moot
and the surety will retain its certificate of authority to write
Federal bonds. If the surety does not cure its noncompliance within 20
business days, the surety's certificate of authority shall be revoked
by Treasury without further notice.
(f) Standard of Review. (1) In reviewing whether the revocation of
the surety's certificate of authority is warranted under this section,
the Reviewing Official and the Deciding Official will determine whether
the agency's administratively final decision that the surety owes a
past-due bond obligation:
(i) Was reasonable;
(ii) Was based on a consideration of relevant factors; and
(iii) Did not involve a clear error of judgment.
(2) The Reviewing Official and the Deciding Official will not
conduct a de novo review of the agency determination, and will not
substitute their judgment for that of the agency.
(g) Consideration of Willful Conduct. The surety is not entitled to
an opportunity to demonstrate or achieve compliance, i.e., cure its
noncompliance, if its conduct in failing to carry out its contracts is
willful. For purposes of this regulation, ``willful'' means a careless
or reckless disregard of a known legal obligation to satisfy a past due
bond obligation. In considering whether a surety's conduct is willful,
the Deciding Official may consider whether:
(1) An agency has filed a prior complaint with Treasury requesting
that the surety's certificate be revoked for a substantially similar
past-due bond obligation;
(2) The surety asserted substantially similar defenses to such bond
obligation;
(3) Such defenses were considered by the agency under pertinent
authorities and dismissed;
(4) Treasury made a final decision that revocation of the surety's
certificate was justified; and
(5) Other pertinent factors.
(h) Informal Hearing. (1) If a surety that is the subject of a
paragraphs (a) and (b) of this section complaint believes the
opportunity to make known its views, as provided for under Sec.
paragraph (c) of this section, is inadequate, it may, within 20
business days of the date of the notice required by paragraph (c),
request, in writing, that an informal hearing be convened.
(2) As soon as possible after a written request for an informal
hearing is received, the Reviewing Official shall convene an informal
hearing, at such time and place as he or she deems appropriate, for the
purpose of determining whether the surety's certificate of authority
should be revoked.
(3) The surety shall be advised, in writing, of the time and place
of the informal hearing and shall be directed
[[Page 14600]]
to bring all documents, records and other information as it may find
necessary and relevant to support its position.
(4) The surety may be represented by counsel and shall have a fair
opportunity to present any relevant material and to examine the
administrative record.
(5) The complaining agency may be requested by the Reviewing
Official to send a representative to the hearing to present any
relevant material, and the agency representative may examine the
administrative record.
(6) Formal rules of evidence will not apply at the informal
hearing.
(7) The formal adjudication standards under the Administrative
Procedures Act, 5 U.S.C. 554, 556, 557 do not apply to the informal
hearing or adjudication process.
(8) Treasury may promulgate additional procedural guidance
governing the conduct of informal hearings. This additional procedural
guidance may be contained in the Annual Letter to Executive Heads of
Surety Companies referenced in 31 CFR 223.9, the Treasury Financial
Manual, or other Treasury publication or correspondence.
(9) Upon completion of the informal hearing, the Reviewing Official
shall prepare a written Recommendation Memorandum addressed to the
Assistant Commissioner, Management, or incumbent Treasury executive,
setting forth findings and a recommended disposition. The Assistant
Commissioner, Management, or incumbent Treasury executive, will be the
Deciding Official who will make the final decision whether the surety's
certificate of authority to write and reinsure Federal bonds should be
revoked based on the administrative record. For these purposes, the
administrative record consists of the Federal agency complaint
referenced in paragraphs (a) and (b) of this section, the surety
response referenced in paragraph (c), any other documentation submitted
to, or considered by, or entered into the administrative record by the
Reviewing Official, the hearing transcript, and the Reviewing
Official's Recommendation Memorandum.
(10) The provisions of paragraphs (e), (f), and (g) of this section
shall apply to the adjudication of the agency complaint when an
informal hearing is conducted.
17. Revise Sec. 223.21 to read as follows:
Sec. 223.21 Reinstatement.
If, after one year from the date of the expiration or the
revocation of its certificate of authority under this part, a company
can demonstrate that the basis for the non-renewal or revocation has
been eliminated or effectively cured, as determined by Treasury in its
discretion, and that it can comply with, and does meet, all continuing
requirements for certification under 31 U.S.C. 9304-9308 and this part,
the company may submit an application to Treasury for reinstatement or
reissuance of a certificate of authority, which will be granted without
prejudice, provided all such requirements are met.
18. In Sec. 223.22, revise paragraph (c) to read as follows:
Sec. 223.22 Fees for services of the Treasury Department.
* * * * *
(c) Specific fee information may be obtained from the Assistant
Commissioner, Management, or incumbent Treasury executive, or online at
http://www.fms.treas.gov/c570. In addition, a notice of the amount of a
fee referred to in paragraphs (a)(1) through (4) of this section will
be published in the Federal Register as each change in such fee is
made.
Dated: March 11, 2011.
Richard L. Gregg,
Fiscal Assistant Secretary.
[FR Doc. 2011-6277 Filed 3-16-11; 8:45 am]
BILLING CODE P