[Federal Register Volume 60, Number 161 (Monday, August 21, 1995)]
[Proposed Rules]
[Pages 43411-43413]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-20492]




-----------------------------------------------------------------------


DEPARTMENT OF AGRICULTURE
Grain Inspection, Packers and Stockyards Administration

9 CFR Part 201

RIN 0580-AA45


Regulations Issued Under the Packers and Stockyards Act: 
Registration, General Bonding Provisions

AGENCY: Grain Inspection, Packers and Stockyards Administration, USDA.

ACTION: Proposed rule; review of existing regulations.

-----------------------------------------------------------------------

SUMMARY: The Agency is currently reviewing all regulations and 
statements of general policy issued under the provisions of the Packers 
and Stockyards (P&S) Act. Review of nine regulations, which have been 
identified as Group III, has been completed. As a result of the review, 
this document proposes to modify two regulations to provide uniform 
termination procedures for all bonds and bond equivalents and to change 
the requirement that funds pledged to secure bond equivalents be 
maintained in FDIC insured accounts to permit their deposit in any 
federally-insured account. It also proposes to retain seven regulations 
in their present form.

DATES: Comments must be submitted on or before October 20, 1995.

ADDRESSES: Comments may be mailed to the Deputy Administrator, Packers 
and Stockyards Programs, Room 3039, South Building, U.S. Department of 
Agriculture, Washington, D.C. 20250. Comments received may be inspected 
during normal business hours in the Office of the Deputy Administrator, 
Packers and Stockyards Programs.

FOR FURTHER INFORMATION CONTACT: Daniel Van Ackeren, Director, 
Livestock Marketing Division, (202) 720-6951, or Tommy Morris, 
Director, Packer and Poultry Division, (202) 720-7363.

SUPPLEMENTARY INFORMATION: Advance Notice of Proposed Rulemaking was 
published in the Federal Register (57 FR 42515) on September 15, 1992. 
Comments were solicited at that time concerning the relevance and 
importance of each regulation and statement of general policy to 
today's livestock, meat, and poultry industries, and which sections 
should be retained, modified or removed. The Agency specifically asked 
for comments on three regulations included in this group, Sec. 201.10, 
Sec. 201.29, and Sec. 201.30. The Agency was particularly interested in 
comments that addressed concerns or recommendations relating to bonding 
levels.
    To complete the review process, the rules covered by the Advance 
Notice of Proposed Rulemaking were divided into three groupings and 
this document relates to those rules identified as Group III.
    In response to a request for comments in the Advance Notice of 
Proposed Rulemaking, the Agency received a total of 10 comments 
relating to the rules in Group III. Comments were received from five 
livestock producer associations, three trade associations, and two 
selling agencies.
    No comments were received concerning the modification of 
Sec. 201.27. This regulation provides for approved sureties, authorizes 
bond equivalents, and requires bond or bond equivalents to be on forms 
approved by the Administrator.
    The Agency proposes to modify Sec. 201.27 (b)(1) and (b)(2) to 
broaden these subsections to permit funds pledged under bond 
equivalents to be on deposit or in accounts that are Federally insured 
and not limited to only deposits or accounts insured by the Federal 
Deposit Insurance Corporation (FDIC). This modification would also 
permit all Federally insured banks or other institutions to issue 
letters of credit and not just those banks or institutions insured by 
FDIC. The primary benefit accrues to persons choosing to meet bonding 
requirements with bond equivalents by permitting all Federally insured 
deposits and letters of credit (not just FDIC) and would expand the 
number of banks or other institutions available to those seeking bond 
equivalents without increasing the risk to livestock sellers.
    No comments were received concerning Sec. 201.34. This regulation 
sets forth termination of market agency, dealer, and packer bonds and 
trust fund agreements. The Agency proposes to modify Sec. 201.34(c) to 
include termination procedures for trust agreements. This would provide 
uniform termination for all bonds and bond equivalents.
    A review of the following regulations has been completed and the 
Agency proposes to retain each in its present form:

Sec. 201.10  Requirements and procedures for registration.
Sec. 201.28  Duplicates of bonds or equivalents to be filed with 
regional supervisor.
Sec. 201.29  Market agencies, packers and dealers required to file and 
maintain bonds.
Sec. 201.30  Amount of market agency, dealer and packer bonds.
Sec. 201.31  Conditions in market agency, dealer and packer bonds.
Sec. 201.32  Trustee in market agency, dealer and packer bonds.
Sec. 201.33  Persons damaged may maintain suit; filing and notification 
of claims; time limitation; legal expenses.

    In the process of reviewing these regulations, it was determined 
that they were necessary to the efficient and effective enforcement of 
the P&S Act and to the orderly conduct of the marketing system. The 
absence of any of the regulations would be detrimental to the industry 
and could result in increased litigation.
    Two comments were received concerning Sec. 201.10. This regulation 
specifies the requirements and procedures for registration for those 
persons desiring to operate as market agencies or dealers as defined in 
Sec. 301 of the Act. Both comments were from producer associations and 
suggested Sec. 201.10 be amended to deny registration to any applicant 
for registration with a prior conviction for fraud, theft, or 
embezzlement.
    The Agency believes this concern is sufficiently addressed in 
Sec. 201.10(b) which specifies that if the Administrator has reason to 
believe the applicant is unfit to engage in the activity for which 
application has been made, the applicant will be afforded an 
opportunity for a full hearing for the purpose of showing cause why the 
application should not be denied. This subsection gives the Agency 
authority to review each application and to deny registration to those 
believed unfit to engage in the business of a market agency or dealer. 
Therefore, the Agency proposes to retain this regulation in its present 
form.
    No comments were received concerning Secs. 201.28, 201.29, 201.31, 
and 201.33.
    Regulation Sec. 201.30 sets forth the formulae for computing bonds 
for market agencies, dealers, and packers. It also provides the 
Administrator authority to adjust the level of bond required whenever 
he determines a bond is not adequate to secure the 

[[Page 43412]]
obligations of the person or firm. Eight comments were received from 
producer associations, trade associations, and selling agencies 
concerning the level of bonds.
    Two comments recommended bonds be maintained at current levels for 
auction markets and dealers. One comment suggests Grain Inspection, 
Packers and Stockyards Administration study the potential of developing 
alternative means of providing financial protection. One comment 
suggested registrants or packers who do a good job and are financially 
sound should not be penalized and bear additional costs for the actions 
of the marginal and bad operators in the industry and suggests the 
Administrator use his authority to require higher bonds for the 
marginal or bad operator. One comment recommended re-evaluating the 
formula used to establish bond levels for video auctions and suggested 
the bonds of video auctions be based on number of sale days and not 
delivery days. Three comments recommended bonding requirements be 
retained but should be continually reviewed to ensure adequate 
protection. One comment recommended bonding regulations be strengthened 
to provide legitimate protection, but gave no specific recommendation.
    The Agency analyzed Clause 1 (selling agency) and Clause 2 (dealer/
buying agency) bond claims on those persons who failed financially 
during the period 1984 through 1991. Sixty-eight market agencies 
selling on commission failed financially during the 4-year period 1984 
to 1987, with 11 of these firms having inadequate bond coverage. These 
financial failures were reduced significantly from 1988 to 1991, during 
which period 22 selling agencies failed, but only 4 had inadequate bond 
coverage. There has been a significant decline in financial failures of 
auction markets since the Agency expanded its custodial account audit 
program. Therefore, we do not believe it is necessary, at this time, to 
adjust the level of bonds for market agencies selling on commission.
    During the period of 1984 through 1991, a total of 236 dealers and 
market agencies buying on commission failed financially with claims of 
over $24.7 million filed against $7 million in bond coverage. This 
resulted in losses to livestock sellers of over $17.5 million. Most of 
the claim activity took place on bonds under $25,000, with 157 or 65 
percent of the claims filed on bonds of $25,000 or less. However, 35 
percent of all losses (approximately $6 million) occurred on bonds 
$25,000 or less and 14 percent of the losses (approximately $2.5 
million) occurred on $10,000 bonds.
    Since the highest number of claims occurred in the $10,000 to 
$25,000 range, two alternative bond minimums were examined to determine 
if raising the minimum bond level would significantly reduce the number 
of inadequate bonds. The two alternatives were to raise the minimum 
bond to $20,000 or to $25,000.
    Approximately 3,600 bonds in the amounts of $10,000 and $15,000 and 
about 500 bonds in the amount of $20,000 would be affected by raising 
minimum bond levels. The average loss reduction per year at the minimum 
$20,000 level would have been $84,375 compared to an estimated industry 
annual cost of $249,000. When the minimum is set at the $25,000 level, 
the average 8-year loss reduction would have been $118,000, compared to 
an estimated industry annual cost of $402,000. Neither alternative 
eliminates all losses to sellers and the additional recovery is deemed 
not significant when compared to the average annual loss of $2.5 
million. This study also disclosed that 77 percent of registrants with 
$10,000 bond coverage made livestock purchases of $500,000 or less 
annually.
    In addition to reviewing financial failures over the 8-year period 
covered by the bond study, the Agency also reviewed financial failures 
of registrants with bonds over $75,000 for the period 1987 through 
1994, to determine what affect the removal of the 10 percent threshold 
would have on bond payouts to claimants.
    Registrants are required to bond for the full amount up to a 
``break point'' or threshold and only 10 percent of the excess above 
this threshold. Bonds of dealers and market agencies buying on 
commission (Clause 2) are capped at $75,000 plus 10 percent of the 
excess required over the $75,000 threshold. Removal of the threshold 
would increase total 1994 Clause 2 bond coverage from the current 
$159.5 million to $269.1 million. This increase would affect 
approximately 540 registrants, costing dealers and market agencies an 
estimated $822,000 per year for the additional coverage.
    Since 1987 twenty-three dealers or market agencies with bonds in 
excess of $75,000 have failed financially, owing livestock sellers in 
excess of $13.9 million. Only 2 registrant bonds were adequate to cover 
all claims and 21 bonds were inadequate, leaving a shortage owed 
claimants of $11.7 million. If the 10 percent threshold on bonds over 
$75,000 had been removed, the bonds for 18 registrants would still have 
been inadequate but the shortage due livestock sellers would have been 
reduced by $3.7 million to $8.0 million. The average loss would have 
been reduced by $462,500 per year compared to an annual industry cost 
of $822,000. However, the study also indicated that for 5 of the 8 
years reviewed, the average recovery would have been only $102,000. 
Further, the recovery would have been insignificant compared to the 
losses for each of these 5 years and would have been less than 35 
percent for 1 of the other 3 years.
    The Agency does not believe it is advisable to increase the minimum 
bond level of Clause 2 bonds or to remove the threshold on bonds over 
$75,000 at this time. The cost to the industry for increasing minimum 
bond levels would far outweigh the increased protection. Small dealers 
and market agencies buying on commission, which include 48 percent of 
all dealers or market agencies, would be hardest hit by an increase in 
bond levels and may find it difficult to remain in business. The Agency 
also believes that the cost to the industry of removing the 10 percent 
threshold on Clause 2 bonds over $75,000 would far outweigh the benefit 
to livestock sellers and cause an undue hardship on larger dealers and 
market agencies buying on commission since many would likely be unable 
to obtain the required bond coverage. The Agency will continue to 
review the levels of bonds and to study alternative methods of 
providing financial protection to livestock sellers.
    The proposed changes in Sec. 201.27 (b)(1) and (b)(2) and in 
Sec. 201.34(c) do not impose or change any recordkeeping or information 
collection requirements. Existing requirements in these regulations 
have been previously approved by OMB under Control No. 0590-0001.
    As provided by the Regulatory Flexibility Act, it is hereby 
certified that these proposed amended rules will not have a significant 
economic impact on a substantial number of small entities and a 
statement explaining the reasons for the certification is set forth in 
the following paragraph and is being provided to the Chief Counsel for 
Advocacy of the Small Business Administration.
    While these proposed amended rules impact small entities, they will 
not have a significant economic impact on any entity, large or small. 
The primary effect of the changes in rules Sec. 201.27 (b)(1) and 
(b)(2) is to permit funds pledged under bond equivalents to be on 
deposit or in accounts that are Federally insured and to permit 
Federally insured banks or other institutions to issue letters of 
credit. Eligible institutions would no 

[[Page 43413]]
longer be restricted to those banks or institutions insured by FDIC. 
The primary effect of the rule change in Sec. 201.34(c) is to include 
the termination of trust agreements.
    These rules have been determined to be not significant for purposes 
of Executive Order 12866 and therefore have not been reviewed by OMB. 
These amendments do not impose any new paperwork requirements and do 
not have implications for Federalism under the criteria of E.O. 12612.
    These rules have been reviewed under E.O. 12778, Civil Justice 
Reform. If these rules are adopted: (1) State and local laws and 
regulations will not be preempted unless they present an irreconcilable 
conflict with these rules; (2) no retroactive effect will be given to 
these rules; and (3) administrative proceedings will not be required 
before parties may file suit in court challenging these rules.

List of Subjects in 9 CFR Part 201

    Bonding, Dealer, Market Agency, Packer, Registration.

    Done at Washington, DC, this 14th day of August 1995.
Calvin W. Watkins,
Acting Administrator, Grain Inspection, Packers and Stockyards 
Administration.

    For the reasons set forth in the preamble, the Grain Inspection, 
Packers and Stockyards Administration proposes to amend 9 CFR part 201 
as follows:

PART 201--[AMENDED]

    1. The authority citation for part 201 continues to read as 
follows:

    Authority: 7 U.S.C. 204, 228: 7 CFR 2.17(e), 2.56.

    2. Revise Sec. 201.27(b) as follows:


Sec. 201.27  Underwriter: equivalent in lieu of bonds; standard forms.

* * * * *
    (b) Any packer, market agency, or dealer required to maintain a 
surety bond under these regulations may elect to maintain, in whole or 
partial substitution for such surety bond, a bond equivalent as 
provided below. The total amount of any such surety bond, equivalent, 
or combination thereof, must be the total amount of the surety bond 
otherwise required under these regulations. Any such bond equivalent 
must be in the form of:
    (1) A trust fund agreement governing funds actually deposited or 
invested in fully negotiable obligations of the United States or 
Federally insured deposits or accounts in the name of and readily 
convertible to currency by a trustee as provided in Sec. 201.32 or
    (2) A trust agreement governing funds which may be drawn by a 
trustee as provided in Sec. 201.32, under one or more irrevocable, 
transferable, standby letters of credit, issued by a Federally insured 
bank or institution and physically received and retained by such 
trustee.
* * * * *
(Approved by the Office of Management and Budget under control 
number 0590-0001)

    3. Revise Sec. 201.34(c) as follows:


Sec. 201.34  Termination of market agency, dealer and packer bonds.

* * * * *
    (c) Each trust fund agreement and trust agreement shall contain a 
provision requiring that, prior to terminating such agreement, at least 
30 days notice in writing shall be given to the Administrator, Grain 
Inspection, Packers and Stockyards Administration, U.S. Department of 
Agriculture, Washington, DC 20250, by the party terminating the 
agreement. Such provision shall state that in the event the principal 
named therein files an acceptable bond or bond equivalent to replace 
the agreement, the 30-day notice requirement may be waived and the 
agreement will be terminated as of the effective date of the 
replacement bond or bond equivalent.

(Approved by the Office of Management and Budget under control 
number 0590-0001)

[FR Doc. 95-20492 Filed 8-18-95; 8:45 am]
BILLING CODE 3410-KD-P