[House Report 112-460]
[From the U.S. Government Publishing Office]


112th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 2d Session                                                     112-460

======================================================================



 
                    SECURITY IN BONDING ACT OF 2012
                                _______
                                

 April 27, 2012.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

Mr. Smith of Texas, from the Committee on the Judiciary, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 3534]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on the Judiciary, to whom was referred the 
bill (H.R. 3534) to amend title 31, United States Code, to 
revise requirements related to assets pledged by a surety, and 
for other purposes, having considered the same, reports 
favorably thereon with an amendment and recommends that the 
bill as amended do pass.

                                CONTENTS

                                                                   Page
The Amendment....................................................     1
Purpose and Summary..............................................     2
Background and Need for the Legislation..........................     2
Hearings.........................................................     4
Committee Consideration..........................................     4
Committee Votes..................................................     4
Committee Oversight Findings.....................................     5
New Budget Authority and Tax Expenditures........................     5
Congressional Budget Office Cost Estimate........................     5
Performance Goals and Objectives.................................     6
Advisory on Earmarks.............................................     6
Section-by-Section Analysis......................................     6
Changes in Existing Law Made by the Bill, as Reported............     7

                             The Amendment

    The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Security in Bonding Act of 2012''.

SEC. 2. SURETY BOND REQUIREMENTS.

  Chapter 93 of subtitle VI of title 31, United States Code, is 
amended--
          (1) by adding at the end the following:

``Sec. 9310. Individual sureties

  ``If another applicable law or regulation permits the acceptance of a 
bond from a surety that is not subject to sections 9305 and 9306 and is 
based on a pledge of assets by the surety, the assets pledged by such 
surety shall--
          ``(1) consist of eligible obligations described under section 
        9303(a); and
          ``(2) be submitted to the official of the Government required 
        to approve or accept the bond, who shall deposit the assets 
        with a depository described under section 9303(b).''; and
          (2) in the table of contents for such chapter, by adding at 
        the end the following:

``9310. Individual sureties.''.

SEC. 3. GAO STUDY.

  (a) Study.--The Comptroller General of the United States shall carry 
out a study on the following:
          (1) All instances during the 10-year period prior to the date 
        of the enactment of this Act in which a surety bond proposed or 
        issued by a surety in connection with a Federal project was--
                  (A) rejected by a Federal contracting officer; or
                  (B) accepted by a Federal contracting officer, but 
                was later found to have been backed by insufficient 
                collateral or to be otherwise deficient or with respect 
                to which the surety did not perform.
          (2) The consequences to the Federal Government, 
        subcontractors, and suppliers of the instances described under 
        paragraph (1).
          (3) The percentages of all Federal contracts that were 
        awarded to small disadvantaged businesses (as defined under 
        section 124.1002(b) of title 13, Code of Federal Regulations) 
        and disadvantaged business enterprises (as defined under 
        section 26.5 of title 49, Code of Federal Regulations) as prime 
        contractors in the 2-year period prior to and the 2-year period 
        following the date of enactment of this Act, and an assessment 
        of the impact of this Act and the amendments made by this Act 
        upon such percentages.
  (b) Report.--Not later than the end of the 3-year period beginning on 
the date of the enactment of this Act, the Comptroller General shall 
issue a report to the Committee on the Judiciary of the House of 
Representatives and the Committee on Homeland Security and Government 
Affairs of the Senate containing all findings and determinations made 
in carrying out the study required under subsection (a).

                          Purpose and Summary

    H.R. 3534, the Security in Bonding Act of 2011, amends the 
requirements that an entity must satisfy in order to bid on or 
perform work for the United States government under a Federal 
contract. Specifically, the bill requires that, to secure a 
contractor's obligation to complete a project, an individual 
surety must post collateral in a manner and of a nature that is 
consistent with what would be required of a contractor electing 
to bypass the requirement that it secure a surety bond from an 
entity approved by the U.S. Department of Treasury. Such 
heightened collateral requirements will ensure that taxpayers, 
subcontractors, and suppliers will be better protected.

                Background and Need for the Legislation

    A surety bond refers generically to any one of the bonds 
that provides security to another party in a contracting 
relationship. When the Federal Government needs construction 
services, it solicits bids from contractors. Each bidding 
contractor posts a bid bond to assure the government that the 
contractor is willing to accept the bid if it is the winning 
bidder. Without skin in the game, a bidder may be inclined to 
lowball several government contracts, get one or two, and walk 
away from the others, leaving the government to re-budget or 
look again for another contractor to perform the job. Once a 
bid is won, the contractor posts a payment bond to guarantee 
payment to downstream subcontractors, and a performance bond to 
assure the United States that it will perform the contract 
according to its terms. Without a performance bond, the 
contractor could, for example, perform half the project and 
then take up another more lucrative project, leaving the 
government in the lurch.
    The Miller Act, 40 U.S.C. Sec. Sec. 3131-34, requires 
contractors on Federal projects to give security to 
subcontractors and to the Federal Government in connection with 
a Federal contract. Under the Federal Acquisition Regulation, 
there are three methods by which security can be furnished. A 
contractor may supply a bond by a reliable corporate surety.\1\ 
Corporate sureties are vetted by the Treasury Department to 
ensure they are sufficiently capitalized and are listed on 
Treasury Circular 570.\2\ Alternatively, a contractor may 
individually provide to the government a possessory security 
interest in low-risk assets, such as U.S. bonds or notes, or 
furnish to the government a letter of credit or other right to 
draw on cash or cash equivalents upon default.\3\ Finally, a 
contractor may secure a bond from an individual surety.\4\ 
Individual sureties are not listed on Circular 570 and are not 
vetted by the Treasury Department.
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    \1\Federal Acquisition Regulation (hereinafter F.A.R.) 28.201.
    \2\United States Department of Treasury, Circular 570 (updated Feb. 
17, 2012), available at http://www.fms.treas.gov/c570/index.html.
    \3\F.A.R. 204-204.4.
    \4\F.A.R. 203.
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    Whereas the government and subcontractors have substantial 
security when they have recourse to a corporate surety bond or 
to low-risk collateral posted by a contractor individually, the 
classes of qualifying collateral permitted under the F.A.R. for 
individual sureties provide relatively little security. First, 
an individual surety need not provide a possessory security 
interest in collateral. Under Uniform Commercial Code Articles 
8 and 9, a nonpossessory security interested in investment and 
other intangible property may be trumped by a possessory 
security interest or by sale to a bona fide purchaser. The 
government therefore stands to get primed if these assets are 
pledged subsequent to their use to support an individual surety 
bond. Moreover, F.A.R. 28.203-2 permits an individual surety to 
post any exchange-traded security as collateral; F.A.R. 28.203-
3 even allows for the pledge of real property. These classes of 
collateral are far less secure than low risk cash equivalents 
like T-bills required to be furnished by individual 
contractors.
    The lack of Treasury Department oversight over individual 
sureties and the relatively relaxed collateral requirements for 
individual surety bonds has led to some notable instances in 
which the United States and/or subcontractors on Federal 
projects have been left without recourse. For example, in March 
2010, Federal agents arrested a man in Fort Worth, Texas, in 
connection with the sale of worthless surety bonds through his 
company, Infinity Surety. ``According to allegations in the 
complaint, these bonds were used to insure various multi-
million dollar construction project [sic] and were purportedly 
backed up by a single family residence in Tarrant County with a 
2008 tax appraisal value of $130,700.''\5\ In other cases, the 
Federal Government has had the foresight to reject bonds backed 
by insufficient security.\6\
---------------------------------------------------------------------------
    \5\Press Release, United States Department of Justice, Forth Worth 
Man Arrested and Charged in Alleged $25 Million Nationwide Scheme to 
Sell Fraudulent Securities, Mar. 26, 2010.
    \6\See, e.g., Tip Top Constr. v. U.S., 563 F.3d 1338 (D.C. Cir. 
2009) (approving Federal Government's rejection of individual surety 
bond backed by an ``allocated portion of $191,350,000.00 of previously 
mined, extracted, stockpiled and marketable coal, located on the 
property of E.C. Scarborough'' because asset was not readily marketable 
as required by the F.A.R.).
---------------------------------------------------------------------------
    One legislative solution to improve the security of the 
United States and subcontractors on Federal jobs would be to 
eliminate the individual surety market altogether. With a 
lighter touch, the Security in Bonding Act of 2011 simply 
requires individual sureties to post collateral of equal 
security to the collateral that an individual contractor would 
have to pledge if he or she chose to secure payment or 
performance individually.
    Some small contractors, and particularly disadvantaged 
business enterprises\7\ (DBE's) and others seeking to enter the 
Federal contracting industry, may raise some concern about H.R. 
3534. While DBE's who serve as subcontractors can benefit from 
the enhanced collateral requirements for individual sureties 
contemplated by H.R. 3534, those seeking to be prime 
contractors may be wary to the extent that the bill makes 
obtaining bonds more difficult, as the enhanced collateral 
requirements for individual sureties may drive some individual 
sureties out of the bonding industry. Emerging contractors 
already face difficulty in obtaining the necessary surety bonds 
to bid for and perform Federal contracts because of their lack 
of sufficient assets, causing a cycle where a lack of assets 
leads to an inability to obtain bonding, which, in turn, 
prevents them from obtaining work that allows them to build up 
their assets. Some emerging contractors are concerned that H.R. 
3534 may have the unintentional effect of making their already 
difficult bonding situation worse by reducing the number of 
individual sureties available.
---------------------------------------------------------------------------
    \7\``Disadvantaged business entities'' are for-profit small 
business concerns where socially and economically disadvantaged 
individuals own at least a 51% interest and also control management and 
daily business operations. 49 C.F.R. Sec. 26.5African Americans, 
Hispanics, Native Americans, Asian-Pacific and Subcontinent Asian 
Americans, and women are presumed to be socially and economically 
disadvantaged. United States Dep't of Transp., Office of Small and 
Disadvantaged Utilization, Definition of a DBE, available at http://
osdbu.dot.gov/DBEProgram/definitions.cfm.
---------------------------------------------------------------------------

                                Hearings

    On March 5, 2012, the Subcommittee on Courts, Commercial 
and Administrative Law held a legislative hearing on H.R. 3534 
and heard testimony from: Mark McCallum, the CEO of the 
National Association of Surety Bond Producers; Jeanette 
Wellers, the President and CFO of JBlanco Enterprises, Inc.; 
Robert Little, Jr., a former government contracting officer; 
and Karen Barbour, President of The Barbour Group, LLC.

                        Committee Consideration

    On March 20, 2012, the Committee met in open session and 
ordered the bill H.R. 3534, as amended, favorably reported by 
voice vote, a quorum being present.

                            Committee Votes

    In compliance with clause 3(b) of rule XIII of the Rules of 
the House of Representatives, the Committee advises that there 
were no recorded votes during the Committee's consideration of 
H.R. 3534. Mr. Cohen offered an amendment striking a provision 
that would have given contracting officers discretion to 
require the use of a corporate surety and adding a GAO study 
requirement. The Committee adopted the amendment by voice vote.

                      Committee Oversight Findings

    In compliance with clause 3(c)(1) of rule XIII of the Rules 
of the House of Representatives, the Committee advises that the 
findings and recommendations of the Committee, based on 
oversight activities under clause 2(b)(1) of rule X of the 
Rules of the House of Representatives, are incorporated in the 
descriptive portions of this report.

               New Budget Authority and Tax Expenditures

    Clause 3(c)(2) of rule XIII of the Rules of the House of 
Representatives is inapplicable because this legislation does 
not provide new budgetary authority or increased tax 
expenditures.

               Congressional Budget Office Cost Estimate

    In compliance with clause 3(c)(3) of rule XIII of the Rules 
of the House of Representatives, the Committee sets forth, with 
respect to the bill, H.R. 3534, the following estimate and 
comparison prepared by the Director of the Congressional Budget 
Office under section 402 of the Congressional Budget Act of 
1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                    Washington, DC, April 16, 2012.
Hon. Lamar Smith, Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 3534, the 
``Security in Bonding Act of 2011.''
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Matthew 
Pickford, who can be reached at 226-2860.
            Sincerely,
                                      Douglas W. Elmendorf,
                                                  Director.

Enclosure

cc:
        Honorable John Conyers, Jr.
        Ranking Member




              H.R. 3534--Security in Bonding Act of 2011.

    As ordered reported by the House Committee on the Judiciary on 
                            March 20, 2012.




    H.R. 3534 would amend Federal law regarding the use of 
certain surety bonds by the private sector for work on Federal 
construction projects. Specifically, the legislation would 
strengthen the collateral requirements for individual sureties. 
H.R. 3534 also would require a report by the Government 
Accountability Office (GAO) on the use of surety bonds by 
Federal contractors over the past 10 years.
    CBO estimates that implementing H.R. 3534 would cost less 
than $500,000 a year, subject to the availability of 
appropriated funds for GAO to produce the required report. 
Enacting the bill would not affect direct spending or revenues; 
therefore, pay-as-you-go procedures do not apply.
    Under current law and regulation, contractors on Federal 
projects are required to insure their performance to 
subcontractors and the Federal Government in connection with 
Federal construction projects using surety bonds. Surety bonds 
provide financial guarantees that contracts will be completed 
according to mutual terms; if a contract is not completed, the 
bonds are available to cover the losses. Based on information 
from the General Services Administration, private contractors, 
and bond providers, CBO expects that agencies would continue to 
receive contracts at the lowest price available and the 
proposed changes to some collateral requirements under H.R. 
3534 would not affect the cost of procuring construction 
services.
    H.R. 3534 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act and 
would not affect the budgets of State, local, or tribal 
governments.
    The CBO staff contact for this estimate is Matthew 
Pickford. This estimate was approved by Peter H. Fontaine, 
Assistant Director for Budget Analysis.

                    Performance Goals and Objectives

    The Committee states that pursuant to clause 3(c)(4) of 
rule XIII of the Rules of the House of Representatives, H.R. 
3534 amends title 31, United States Code, to improve the 
financial security of the United States when it contracts on 
Federal projects.

                          Advisory on Earmarks

    In accordance with clause 9 of rule XXI of the Rules of the 
House of Representatives, H.R. 3534 does not contain any 
congressional earmarks, limited tax benefits, or limited tariff 
benefits as defined in clause 9(e), 9(f), or 9(g) of Rule XXI.

                      Section-by-Section Analysis

Section 1. Short Title.
    Provides the bill may be referred to as the Security in 
Bonding Act of 2011.
Section 2. Surety Bond Requirements.
    Adds new 31 U.S.C. Sec. 9310, requiring that, when Federal 
law permits acceptance of a surety bond from a producer not 
subject to Federal oversight, the producer give a possessory 
security interest in low-risk assets to the Federal Government 
to provide such security.
Section 3. GAO Study.
    Requires GAO to study the instances in which an individual 
surety has been rejected by the U.S. government or accepted and 
later found to be deficient; the impact of the bill on the 
Federal Government, subcontractors, and suppliers; and the 
percentage of Federal contracts awarded to small disadvantaged 
businesses and disadvantaged business enterprises.

         Changes in Existing Law Made by the Bill, as Reported

      In compliance with clause 3(e) of rule XIII of the Rules 
of the House of Representatives, changes in existing law made 
by the bill, as reported, are shown as follows (new matter is 
printed in italics and existing law in which no change is 
proposed is shown in roman):

                      TITLE 31, UNITED STATES CODE



           *       *       *       *       *       *       *
SUBTITLE VI--MISCELLANEOUS

           *       *       *       *       *       *       *


                 CHAPTER 93--SURETIES AND SURETY BONDS

Sec.
9301. Definitions.
     * * * * * * *
9310. Individual sureties.

           *       *       *       *       *       *       *


Sec. 9310. Individual sureties

  If another applicable law or regulation permits the 
acceptance of a bond from a surety that is not subject to 
sections 9305 and 9306 and is based on a pledge of assets by 
the surety, the assets pledged by such surety shall--
          (1) consist of eligible obligations described under 
        section 9303(a); and
          (2) be submitted to the official of the Government 
        required to approve or accept the bond, who shall 
        deposit the assets with a depository described under 
        section 9303(b).

           *       *       *       *       *       *       *


                                  
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