[House Report 113-462]
[From the U.S. Government Publishing Office]


113th Congress                                            Rept. 113-462
                        HOUSE OF REPRESENTATIVES
 2d Session                                                      Part 1

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



 
                    SECURITY IN BONDING ACT OF 2014

                                _______
                                

  May 20, 2014.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

   Mr. Goodlatte, from the Committee on the Judiciary, submitted the 
                               following

                              R E P O R T

                             together with

      [Including cost estimate of the Congressional Budget Office]

    The Committee on the Judiciary, to whom was referred the 
bill (H.R. 776) 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..........................     3
Hearings.........................................................     5
Committee Consideration..........................................     5
Committee Votes..................................................     5
Committee Oversight Findings.....................................     5
New Budget Authority and Tax Expenditures........................     5
Congressional Budget Office Cost Estimate........................     6
Duplication of Federal Programs..................................     7
Disclosure of Directed Rule Makings..............................     7
Performance Goals and Objectives.................................     7
Advisory on Earmarks.............................................     7
Section-by-Section Analysis......................................     7
Changes in Existing Law Made by the Bill, as Reported............     8

                             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 2014''.

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. SBA SURETY BOND GUARANTEE.

  Section 411(c)(1) of the Small Business Investment Act of 1958 (15 
U.S.C. 694b(c)(1)) is amended by striking ``70'' and inserting ``90''.

SEC. 4. 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 enactment of the 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 new startup businesses (including new startup 
        businesses that are small disadvantaged businesses or 
        disadvantaged business enterprises), small disadvantaged 
        businesses, and disadvantaged business enterprises 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).
  (c)  Definitions.--For purposes of this section:
          (1) Disadvantaged business enterprise.--The term 
        ``disadvantaged business enterprise'' has the meaning given 
        that term under section 26.5 of title 49, Code of Federal 
        Regulations.
          (2) New startup business.--The term ``new startup business'' 
        means a business that was formed in the 2-year period ending on 
        the date on which the business bids on a Federal contract that 
        requires giving a surety bond.
          (3) Small disadvantaged business.--The term ``small 
        disadvantaged business'' has the meaning given that term under 
        section 124.1002(b) of title 13, Code of Federal Regulations.

                          Purpose and Summary

    H.R. 776, the ``Security in Bonding Act of 2014,'' amends 
the requirements that a prospective bidder for a Federal 
project must satisfy in order to bid on or perform work for the 
United States government under a Federal contract. 
Specifically, the bill requires individual sureties to submit 
their proposed collateral for review by government officials to 
ensure the collateral is of sufficient value, and requires that 
the collateral be deposited with the government to allow the 
government to control the collateral during the course of the 
bidding and performance periods. Such heightened collateral 
requirements will ensure that taxpayers, subcontractors and 
suppliers will be better protected. The bill also requires the 
Government Accountability Office (``GAO'') to conduct a study 
on the impact of individual sureties on Federal contracts and 
H.R. 776's impact on the ability of emerging businesses, 
including disadvantaged business enterprises (``DBEs''), to bid 
successfully for Federal Government contracts.

                Background and Need for the Legislation

    The Federal Government requires prospective bidders for 
Federal construction projects to support their bid with a 
variety of bonds, including:

        a ``bid bond,'' guaranteeing the bid and that the 
        bidder will furnish the necessary bonds upon 
        acceptance;

        a ``performance bond,'' guaranteeing completion of the 
        project; and

        a ``payment bond,'' guaranteeing payment to all of the 
        bidders' subcontractors.\1\
---------------------------------------------------------------------------
    \1\40 U.S.C. Sec. Sec. 3131-34.

These bonds, referred to as surety bonds, allow the 
counterparty (either the Federal Government or the 
subcontractors) to look to the surety, rather than the winning 
bidder (or ``prime contractor''), for payment to the extent the 
winning bidder fails to perform its contractual obligations.
    Under existing regulations, a prospective bidder or prime 
contractor may access surety bonds from two sources: corporate 
sureties and individual sureties. Corporate sureties are 
incorporated entities (often subsidiaries of insurance 
companies) that are certified by one or more states, licensed 
and regulated by the state(s) where the surety does business, 
and approved by the Department of Treasury in a system designed 
to ensure that the surety has sufficient assets to satisfy its 
bonds.\2\ Individual sureties are not incorporated, licensed, 
regulated or approved by the Department of Treasury. Further, 
the current regulations do not require individual sureties to 
transfer their collateral to the Federal Government to hold 
during the tenure of the project and allow individual sureties 
to pledge more volatile assets such as stocks or interests in 
real property. If a prospective bidder does not wish to use a 
surety bond to support its bid, the bidder may reinforce the 
bid with its own assets by providing 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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    Whereas the government and subcontractors have substantial 
security when they have recourse to a corporate surety bond or 
to low-risk collateral posted by an individual bidder, the 
classes of qualifying collateral permitted under current law 
for individual sureties provide relatively little security. 
First, an individual surety does not need to provide a 
possessory security interest in the underlying collateral. 
Under Uniform Commercial Code Articles 8 and 9, a nonpossessory 
security interest in investment and other intangible property 
may be trumped by a possessory security interest or by a sale 
to a bona fide purchaser. The government or a subcontractor 
therefore may stand behind other creditors if the assets 
underlying an individual surety bond are pledged to another 
creditor with a security interest in the collateral, or the 
assets are sold following the initial pledge. Moreover, the 
current regulations permit an individual surety to post any 
exchange-traded security or even real property as collateral. 
These classes of collateral are far less secure and potentially 
less liquid than low risk cash equivalents such as Treasury 
bills required to be furnished by individual contractors.
    As illustrated through testimony before the House Judiciary 
Subcommittee on Courts, Commercial and Administrative Law 
during the 112th Congress, the more flexible regulations 
applied to individual sureties have caused financial harm to 
the Federal Government and subcontractors when certain 
individual sureties failed to fulfill their obligations.\4\ For 
example, a contractor was able to submit individual surety 
bonds purporting to have $126 million in value when in fact the 
contractor had a pending cease-and-desist letter against him 
for insurance related activities.\5\ Despite not placing any 
assets in escrow for the benefit of the Federal Government, the 
surety bond was accepted.\6\ When the project was unperformed, 
one of the subcontractors was nearly forced to declare 
bankruptcy as a result of not receiving payment for its work 
and a lack of recourse to the surety bond for backup 
payment.\7\ In another instance, Federal agents arrested a man 
in Fort Worth, Texas, in connection with the sale of worthless 
surety bonds through his company.\8\ ``According to allegations 
in the complaint, these bonds were used to insure various 
multi-million dollar construction project[s] and were 
purportedly backed up by a single family residence in Tarrant 
County with a 2008 tax appraisal value of $130,700.''\9\
---------------------------------------------------------------------------
    \4\Security in Bonding Act of 2011: Hearing on H.R. 3534 Before the 
Subcomm. on Courts, Comm. and Admin. Law of the H. Comm. on the 
Judiciary, 112th Cong. (2012).
    \5\Id., at 13 (testimony of Mark H. McCallum).
    \6\Id.
    \7\Id.
    \8\Press Release, United States Department of Justice, Fort Worth 
Man Arrested and Charged in Alleged $25 Million Nationwide Scheme to 
Sell Fraudulent Securities, Mar. 26, 2010.
    \9\Id.
---------------------------------------------------------------------------
    Rather than eliminating the individual surety market 
altogether, the Security in Bonding Act 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. Specifically, the legislation requires individual 
sureties to submit their proposed collateral for review by 
government officials to ensure it possesses sufficient value, 
and requires that the collateral be deposited with the 
government to allow the government to control the asset should 
the prime contractor breach its obligations. H.R. 776 will 
prevent sureties from pledging assets of dubious or speculative 
value, or from pledging the same assets numerous times.
    Some small contractors, and particularly DBEs and others 
seeking to enter the Federal contracting industry, may raise 
some concerns regarding H.R. 776. While DBEs who serve as 
subcontractors can benefit from the enhanced collateral 
requirements for individual sureties provided for by the 
legislation, those seeking to be prime contractors may have 
concerns to the extent that the bill makes obtaining bonds more 
difficult, as the enhanced collateral requirements for 
individual sureties may prompt some individual sureties to 
reduce their bonding activity or leave 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 in 
which 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. 776 may have the unintentional effect of 
making their already difficult bonding situation worse by 
reducing the number of individual sureties available. To 
address these concerns, an amendment was adopted by the 
Committee to require the GAO to review whether the legislation 
impacts the ability of emerging businesses, including DBEs, to 
bid successfully for Federal Government contracts.

                                Hearings

    The Committee on the Judiciary held no hearings on H.R. 
776. During the 112th Congress, the House Judiciary 
Subcommittee on Courts, Commercial and Administrative Law 
conducted a hearing on a substantially similar bill designated 
as H.R. 3534.

                        Committee Consideration

    On April 30, 2014, the Committee met in open session and 
ordered the bill H.R. 776 favorably reported with an amendment, 
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. 776. Mr. Johnson (D-GA) offered an amendment requiring GAO 
to conduct a study on the impact of the bill on the ability of 
emerging businesses, including disadvantaged businesses, to bid 
successfully for Federal Government contracts. 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. 776, 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, May 9, 2014.
Hon. Bob Goodlatte, 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. 776, the 
``Security in Bonding Act of 2013.''
    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. 776--Security in Bonding Act of 2013.

      As ordered reported by the House Committee on the Judiciary 
                           on April 30, 2014.




    H.R. 776 would amend Federal laws related to surety bonds. 
Surety bonds provide financial guarantees that contracts will 
be completed according to mutual terms; if a contract is not 
completed the bond covers the losses. The legislation would 
affect surety activities in two ways. First, the bill would 
change collateral requirements for individual sureties who 
provide bonds for contractors on Federal construction projects. 
Second, H.R. 776 would allow the Small Business Administration 
(SBA) to guarantee a larger portion of certain bonds, which can 
be obtained for Federal and non-Federal contracts, under the 
Surety Bond Guarantee Program. Finally, the legislation would 
require the Government Accountability Office (GAO) to prepare a 
report on the use of surety bonds by Federal contractors over 
the past 10 years.
    CBO estimates that implementing H.R. 776 would cost less 
than $500,000, 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 
construction projects are required to insure their performance 
using surety bonds. Based on information from the General 
Services Administration, private contractors, and bond 
providers, CBO expects that provisions of H.R. 776 that would 
change some collateral requirements for surety bonds would not 
affect the cost of procuring construction services.
    In addition, CBO estimates that provisions of the bill that 
would raise the portion of certain surety bonds that the SBA 
can guarantee from 70 percent to 90 percent would not have a 
significant effect on discretionary spending because we expect 
the agency would increase fees to cover any additional costs.
    H.R. 776 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act and 
would impose no costs on State, local, or tribal governments.
    On April 15, 2014, CBO provided a cost estimate for H.R. 
776, as ordered reported by the House Committee on Small 
Business on March 5, 2014. Both versions of the bill contain 
similar provisions regarding increasing the value of the bond 
guarantee, but H.R. 776 as ordered reported by the House 
Committee on the Judiciary has an additional provision 
regarding collateral requirements. The estimated costs of the 
two versions of H.R. 776 are the same.
    The CBO staff contacts for this estimate are Matthew 
Pickford and Susan Willie. This estimate was approved by 
Theresa Gullo, Deputy Assistant Director for Budget Analysis.

                    Duplication of Federal Programs

    No provision of H.R. 776 establishes or reauthorizes a 
program of the Federal Government known to be duplicative of 
another Federal program, a program that was included in any 
report from GAO to Congress pursuant to section 21 of Public 
Law 111-139, or a program related to a program identified in 
the most recent Catalog of Federal Domestic Assistance.

                  Disclosure of Directed Rule Makings

    The Committee estimates that H.R. 776 specifically directs 
to be completed no specific rule makings within the meaning of 
5 U.S.C. 551.

                    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. 
776 amends title 31, United States Code, to improve the 
financial security of the United States when it contracts for 
Federal projects.

                          Advisory on Earmarks

    In accordance with clause 9 of rule XXI of the Rules of the 
House of Representatives, H.R. 776 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

    The following discussion describes the bill as reported by 
the Committee.
Section 1. Short Title.
    Provides the bill may be referred to as the Security in 
Bonding Act of 2014.
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. Small Business Administration Guarantee.
    Increases the percentage of total value that the Small 
Business Administration will provide a guarantee for with 
respect to certain sureties from 70% to 90%.
Section 4. GAO Report.
    Requires the GAO to conduct a study to determine the impact 
of surety bonds on Federal projects over the past 10 years. 
Additionally, requires the GAO to conduct a study on the 
impacts of H.R. 776 on the ability of emerging businesses, 
including disadvantaged businesses, to bid successfully for 
Federal Government contracts.

         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 (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italics, 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).

           *       *       *       *       *       *       *

                              ----------                              


                 SMALL BUSINESS INVESTMENT ACT OF 1958



           *       *       *       *       *       *       *
TITLE IV--GUARANTEES

           *       *       *       *       *       *       *


Part B--Surety Bond Guarantees

           *       *       *       *       *       *       *


                    authority of the administration

    Sec. 411. (a) * * *

           *       *       *       *       *       *       *

    (c) Any guarantee or agreement to indemnify under this 
section shall obligate the Administration to pay to the surety 
a sum--
            (1) not to exceed [70] 90 per centum of the loss 
        incurred and paid by a surety authorized to issue bonds 
        subject to the Administration's guarantee under 
        subsection (a)(3);

           *       *       *       *       *       *       *


                                  
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