[Federal Register Volume 61, Number 222 (Friday, November 15, 1996)]
[Proposed Rules]
[Pages 58493-58496]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-29216]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 61, No. 222 / Friday, November 15, 1996 / 
Proposed Rules  

[[Page 58493]]



DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 225

RIN 1510-AA36


Acceptance of Bonds Secured by Government Obligations in Lieu of 
Bonds With Sureties

AGENCY: Financial Management Service, Fiscal Service, Treasury.

ACTION: Proposed rule.

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SUMMARY: This rule proposes to revise its regulations which govern the 
acceptance of bonds secured by Government obligations in lieu of bonds 
with sureties. It specifically addresses the mechanics of pledging 
book-entry Government obligations, and clarifies existing requirements 
for accepting bonds secured with Government obligations. These 
revisions are intended to provide greater clarity and flexibility by 
replacing obsolete references and unnecessary requirements with current 
references and requirements. In addition, this rule proposes to expand 
the use to which the proceeds of the pledged Government obligations, in 
the event of a default in performance, may be applied.

DATES: Comments on this proposed rule must be received on or before 
December 16, 1996.

ADDRESSES: Comments or inquiries on this proposed rule may be addressed 
to Policy and Planning Division, Financial Management Service, Room 
403A, 401 14th St. S.W., Washington DC 20227, ATTN: Michael Dressler.

FOR FURTHER INFORMATION CONTACT: Michael Dressler, Financial Program 
Specialist, (202) 874-7106, or Cynthia L. Johnson, Director, (202) 874-
6657, Cash Management Policy & Planning Division, 401 14th Street, SW., 
Washington, DC 20227.

SUPPLEMENTARY INFORMATION:

Background

    Persons required by Federal law to give an agency a surety bond for 
the purpose of guaranteeing performance may give in lieu thereof a bond 
secured by Government obligations. To assist agencies in reviewing and 
accepting such bonds, the Secretary of the Treasury (the Secretary) 
promulgated regulations codified at 31 CFR part 225, which set forth 
requirements applicable to bonds secured by Government obligations. 
These regulations currently contemplate bonds secured by Government 
obligations in definitive or printed form.
    However, since these regulations were last significantly revised in 
1969, the form of newly issued Government obligations pledged under 
this Part has changed from definitive to book-entry. Because of this 
change, many questions have arisen under this Part regarding book-entry 
Government obligations. The purpose of this Notice of Proposed 
Rulemaking is to update, clarify, and simplify the requirements 
governing the acceptance of bonds secured by Government obligations in 
both definitive and book-entry form.
    In addition, this proposed rule provides that in the event of a 
default, the proceeds from the sale of the pledged Government 
obligations, will be available to satisfy any claim of the United 
States. The reference to any claim of the United States is an expansion 
of the current rule which limits the application of the proceeds to 
damages arising out of the default.

Summary of Changes

Book-Entry Government Obligations

    The current regulation does not distinguish between definitive and 
book-entry Government obligations. Because the mechanics of pledging 
book-entry obligations are different than those for definitive 
obligations, the proposed rule contains two sections to address the 
pledging of book-entry (Sec. 225.4) and definitive (Sec. 225.5) 
obligations. These discrete sections are proposed in response to 
numerous questions raised by Federal agencies regarding the pledge of 
book-entry versus definitive obligations.
    Currently, the Bureau of Public Debt is in the process of revising 
the regulations governing book-entry Treasury bonds, notes and bills 
held in the commercial book-entry system. 61 FR 8420 (March 4, 1996). 
The revised regulations, known as the Treasury/Reserve Automated Debt 
Entry System (TRADES), will incorporate recent changes in commercial 
and property law addressing the holdings of securities through 
financial intermediaries. It is contemplated that TRADES will apply to 
outstanding securities currently governed by 31 CFR part 306, Subpart 
O. Conforming changes to part 306 will be made with the publication of 
TRADES in final form.

Forms

    The current rule requires that the bond, which is referred to as an 
agreement and power of attorney, be in a prescribed format. Because a 
survey revealed that each agency has varying needs and requirements, 
the proposed rule (Sec. 225.3) deletes this prescriptive requirement so 
as to afford agencies greater flexibility in tailoring bonds to fit 
their needs. However, the proposed rule (Sec. 225.3) still requires an 
agency to ensure that the bonds irrevocably authorize it to: (1) Sell 
the Government obligations in the event of a default in performance; 
and (2) apply the proceeds therefrom to satisfy any claim of the United 
States Government. The reference to any claim of the United States 
(Sec. 225.3) is an expansion of the current rule (Sec. 225.5) which 
limits the application of the proceeds to damages arising out of the 
default.

Payment of Interest

    The current rule provides that, in the absence of default, the 
obligor shall be entitled to receive interest accruing upon Government 
obligations deposited in accordance with the rule (Sec. 225.11), except 
that coupons on bearer Government obligations will be retained by the 
bond official in the absence of written application by the obligor. The 
proposed rule (Sec. 225.6) provides that interest for all forms of 
Government obligations will generally be paid to the obligor in the 
normal course without written application. The proposed rule 
(Sec. 225.6) also adds a provision permitting the bond official to 
require retention of accrued interest. This change clarifies the degree 
of agency flexibility in securing the performance of their obligors. 
The Secretary believes

[[Page 58494]]

these changes will facilitate uniform operational handling of interest 
payments, expedite the payment of interest to obligors, and further 
secure performance by obligors.

Custodian Duties and Responsibilities

    The proposed rule (Sec. 225.7) clarifies that agency custodians 
will act in strict accordance with authenticated agency instructions. 
This clarification stems from questions posed by the Federal Reserve 
regarding whether its duties and responsibilities under 31 U.S.C. 
9303(b)(1) require it to act in strict accordance with the 
authenticated agency instructions.

Role of Federal Reserve Banks

    In accordance with 31 CFR part 306, the Federal Reserve Banks will 
act as fiscal agents of the United States for the purposes of these 
regulations.

Rulemaking Analysis

    It has been determined that this regulation is not a significant 
regulatory action as defined in E.O. 12866. Therefore, a Regulatory 
Assessment is not required.
    It is hereby certified pursuant to the Regulatory Flexibility Act 
that this revision will not have a significant economic impact on a 
substantial number of small business entities. Accordingly, a 
Regulatory Flexibility Act analysis is not required. These regulations 
authorize persons, including small entities, to pledge bonds secured by 
Government obligations in lieu of bonds with sureties. Consequently, 
these regulations provide additional options to business entities 
pledging collateral, as well as a flexible regulatory scheme with no 
adverse economic impact on small entities.

Notice and Comment

    Public comment is solicited on all aspects of this proposed 
regulation. The Financial Management Service will consider all comments 
made on the substance of this proposed regulation, but does not intend 
to hold hearings.

List of Subjects in 31 CFR Part 225

    Fiscal Service, Government securities, Surety bonds.

    For the reasons set forth in the preamble, 31 CFR part 225 is 
proposed to be revised to read as follows:

PART 225--ACCEPTANCE OF BONDS SECURED BY GOVERNMENT OBLIGATIONS IN 
LIEU OF BONDS WITH SURETIES

Sec.
225.1  Scope.
225.2  Definitions.
225.3  Pledge of Government obligations in lieu of a bond with 
surety or sureties.
225.4  Pledge of book-entry Government obligations.
225.5  Pledge of definitive Government obligations.
225.6  Payment of interest.
225.7  Custodian duties and responsibilities.
225.8  Bond official duties and responsibilities.
225.9  Return of Government obligations to obligor.
225.10  Other agency practices and authorities.
225.11  Courts.

    Authority: 31 U.S.C. 321; 31 U.S.C. 9301; 31 U.S.C. 9303; 12 
U.S.C. 391.


Sec. 225.1  Scope.

    The regulation in this part applies to Government agencies that 
accept bonds secured by Government obligations in lieu of bonds with 
sureties. The Financial Management Service (FMS) is the Secretary of 
the Treasury's (Secretary) representative in all matters concerning 
this part unless otherwise specified. The Commissioner of the FMS may 
issue procedural instructions implementing this regulation.


Sec. 225.2  Definitions.

    For the purpose of this part:
    Agency means a department, agency, or instrumentality of the United 
States Government.
    Authenticate instructions means to verify that the instructions 
received are from a bond official.
    Bearer means an obligation whose ownership is not recorded. Title 
to such an obligation passes by delivery without endorsement and 
without notice. A bearer obligation is payable on its face to the 
holder at either maturity or call for redemption.
    Bond means an executed written instrument, which guarantees the 
fulfillment of an obligation to the United States and sets forth the 
terms, conditions, and stipulations of the obligation. If the 
obligation is not fulfilled, the bond assures payment, to the extent 
stipulated, of any loss sustained by the United States.
    Bond official means an agency official having authority under 
Federal law or regulation to approve a bond with surety or sureties and 
to approve a bond secured by Government obligations.
    Book-entry means a computerized entry made on records of a Federal 
Reserve Bank. (See part 306 of this title, Subpart O, Book-Entry 
Procedure).
    Custodian means a Federal Reserve Bank acting as fiscal agent of 
the United States or a depositary specifically designated by the 
Secretary for the purpose of this part.
    Definitive means in engraved or printed form.
    Federal Reserve Bank means a Federal Reserve Bank and its branches.
    Government obligation means a public debt obligation of the United 
States Government, and an obligation whose principal and interest are 
unconditionally guaranteed by the Government.
    Obligor includes, but is not limited to, an individual, a trust, an 
estate, a partnership, a corporation, and a sole proprietor.
    Officer authorized to certify assignment means the individual 
identified in the regulation codified at Sec. 306.45 of this title.
    Par value means the stated value of a Government obligation that 
will be paid at maturity.
    Payment bond means a bond which assures payment, as required by 
law, to all persons supplying labor or material in the performance of 
required work provided for in a contract.
    Pledge means a pledge of, or transfer of a security interest in, a 
Government obligation to a bond official's agency as collateral in lieu 
of a bond with a surety or sureties.
    Procedural Instructions means the Treasury Financial Manual 
published by the Financial Management Service.
    Registered means that ownership of the Government obligation is 
listed in the issuer's records, and that the obligation is payable at 
maturity or call to the person in whose name the obligation is 
inscribed or to that person's assignee.


Sec. 225.3  Pledge of Government obligations in lieu of a bond with 
surety or sureties.

    (a) General. An obligor required by Federal law or regulation to 
furnish a bond with surety or sureties may give in lieu thereof a bond 
secured by Government obligations to a bond official.
    (b) Bond. The bond, at a minimum, shall irrevocably authorize the 
bond official to collect, sell, assign, or transfer such Government 
obligations and any interest retained therefrom in the event of the 
obligor's default in performing any of the terms, conditions, or 
stipulations of such bond, and shall authorize the bond official to 
apply the proceeds therefrom, in whole or in part, to satisfy any claim 
of the United States Government against the obligor.
    (c) Amount of Government obligations. The obligor shall pledge to 
the bond official Government obligations whose par value is at least 
equal to the face amount of the required bond with surety or sureties.
    (d) Avoiding frequent substitutions. To avoid the frequent 
substitution of Government obligations, the bond

[[Page 58495]]

official may reject Government obligations which mature, or are 
redeemable, within one year from the date they are pledged to the bond 
official.


Sec. 225.4  Pledge of book-entry Government obligations.

    (a) General. An obligor, or an obligor's financial institution, 
acting as agent for the obligor, shall arrange a pledge pursuant to the 
prior agreement and approval of the bond official, of book-entry 
Government obligations by authorizing a Federal Reserve Bank to make an 
appropriate entry in its records. The Federal Reserve Bank is not 
required to establish that the agreement and approval of the bond 
official has been obtained prior to the making of such entry.
    (b) Receipt. Upon the making of the entry in the records of a 
Federal Reserve Bank, such Bank will promptly issue a receipt or an 
activity statement, or both, to the bond official and to the obligor.
    (c) Effect of entry. The making of such an entry in the records of 
a Federal Reserve Bank shall have the effect as provided in 
Sec. 306.118(a) of this title, or other applicable regulations.


Sec. 225.5  Pledge of definitive Government obligations.

    (a) Type and assignment. Definitive Government obligations may be 
in bearer or registered form, and shall be owned by the obligor.
    (1) Bearer Government obligations. The obligor shall pledge bearer 
Government obligations to the bond official with all unmatured interest 
coupons attached.
    (2) Registered Government obligations; assignment. The obligor 
shall pledge Government obligations registered in the obligor's name to 
the bond official by assignment in accordance with subpart F of part 
306 of this title (31 CFR 306.40 et seq.) and other codified procedures 
for issuers that apply to assignment of the registered Government 
obligations, except that, when so authorized under such procedures, all 
assignments shall be made in blank.
    (b) Delivery to bond official; receipt. All deliveries of 
definitive Government obligations from the obligor to the bond official 
under this part shall be made at the risk and expense of the obligor. 
Upon receipt of definitive Government obligations, the bond official 
will issue the obligor a receipt.
    (c) Risk of loss; safekeeping. All definitive Government 
obligations held by the bond official will be held at the risk of the 
bond official. The bond official will keep safe all definitive 
Government obligations.
    (d) Deposit. The bond official is strongly encouraged to ensure 
that definitive Government obligations are deposited with either of the 
following custodians:
    (1) A Federal Reserve Bank, having the requisite facilities; or,
    (2) A depositary specifically designated for that purpose by the 
Secretary.
    (e) Delivery to custodian; receipt. If the bond official is in 
receipt of definitive Government obligations, and thereafter deposits 
those obligations with a custodian, the expense and risk of loss in 
delivery will rest with the bond official. Upon the deposit of 
definitive Government obligations, the custodian will issue the bond 
official a receipt. All definitive Government obligations held by the 
custodian will be held at the risk of the custodian.
    (f) Conversion to book-entry. When converting definitive Government 
obligations to book-entry form, a Federal Reserve Bank will act 
pursuant to and in accordance with codified book-entry procedures for 
issuers that apply to the definitive Government obligations pledged to 
the bond official's agency, including the book-entry procedures for 
Treasury securities set forth in subpart O of part 306 of this title 
(31 CFR 306.115 et seq.).


Sec. 225.6  Payment of interest.

    (a) General. Except as otherwise provided in this section, and 
Sec. 225.7(b), interest accruing upon Government obligations pledged to 
a bond official's agency in accordance with this part will be remitted 
to the obligor.
    (b) Bond requirements. The bond official will require that the bond 
provide that the bond official may retain any interest accruing upon 
any Government obligations, or direct that such interest be retained by 
the custodian.
    (c) Default. If the bond official determines that the obligor has 
defaulted in the performance of any of the terms, conditions, or 
stipulations of the bond, the bond official will retain any interest 
accruing upon Government obligations pledged to the bond official's 
agency or direct the custodian, in accordance with Sec. 225.7(b) and 
other relevant provisions of this part, to retain such interest.


Sec. 225.7  Custodian duties and responsibilities.

    (a) General. A custodian shall authenticate instructions received 
from a bond official and shall act in accordance with such 
authenticated instructions. The custodian assumes no liability and is 
without liability of any kind for acting in accordance with such 
authenticated instructions, except for the custodian's failure to 
exercise ordinary care. By providing a bond secured by Government 
obligations in lieu of a bond with surety or sureties, an obligor 
agrees not to hold either the custodian or the Secretary liable or 
responsible for the actions or inactions of a bond official or for 
carrying out a bond official's authenticated instructions.
    (b) Interest. Absent authenticated instructions from the bond 
official to retain interest, interest received by the custodian on 
Government obligations pledged to the bond official's agency in 
accordance with this part will be remitted in the regular course of 
business to the obligor.
    (c) Release and substitution of Government obligations. A custodian 
will only release or substitute Government obligations or the proceeds 
from Government obligations, including any retained interest, in 
accordance with a bond official's authenticated instructions.
    (d) Liquidation of Government obligations. A custodian will 
collect, sell, assign, or transfer Government obligations, including 
any interest therefrom, only in accordance with a bond official's 
authenticated instructions.
    (e) Application of proceeds. A custodian will apply the proceeds 
from the collection, sale, assignment, or transfer of Government 
obligations only in accordance with a bond official's authenticated 
instructions.


Sec. 225.8  Bond official duties and responsibilities.

    (a) Duties and responsibilities. The bond official's duties and 
responsibilities are as follows:
    (1) Approving the bond secured by Government obligations after 
determining its sufficiency;
    (2) Verifying ownership of any definitive Government obligations 
given, and ensuring that any registered Government obligations are 
properly assigned;
    (3) Approving the delivery of book-entry Government obligations 
after determining their sufficiency;
    (4) Providing the custodian, when appropriate, with clear and 
concise instructions;
    (5) Taking all reasonable and appropriate steps to ensure that all 
procedures or transactions conform with the provisions of this part; 
and,
    (6) Notifying the Secretary of the Treasury, or designee, upon an 
obligor's default in performing any of the terms, conditions, or 
stipulations of a bond and

[[Page 58496]]

applying any part of the proceeds therefrom that is in excess of the 
amount required to assure payment of any loss sustained by the United 
States related to the purpose of the bond to satisfy any claim of the 
United States Government against the obligor.
    (b) [Reserved]


Sec. 225.9  Return of Government obligations to obligor.

    (a) General. Except as provided in subsection (b) of this section, 
the bond official will return the Government obligations, and any 
interest retained therefrom, to the obligor, without written 
application from the obligor, when the bond official determines that 
the Government obligations are no longer required under the terms of 
the bond.
    (b) Miller Act Payment Bonds. The bond official will not return 
Government obligations to an obligor who has furnished to the bond 
official a payment bond, if:
    (1) A person, who supplied the obligor with labor or materials and 
whom the obligor has not paid, files with the agency head the 
application and affidavit provided for in the Miller Act (Act), as 
amended (40 U.S.C. 270a-270d), and the time provided in the Act for the 
person to commence suit against the obligor on the payment bond has not 
expired; or
    (2) A person commences a suit against the obligor within the time 
provided for in the Act, in which case the bond official will hold the 
Government obligations subject to the order of the court having 
jurisdiction of the suit; or
    (3) The bond official has actual knowledge of a claim against the 
obligor on the basis of the payment bond, in which case the bond 
official may return the Government obligations to the obligor when the 
bond official deems appropriate.
    (c) Claim of the United States unaffected. Nothing in this section 
shall affect or impair the priority of any claim of the United States 
against Government obligations, or any right or remedy granted by the 
Miller Act or by this part to the United States in the event of an 
obligor's default on any term, condition, or stipulation of a bond.
    (d) Return of definitive Government obligations; risk of loss. 
Definitive Government obligations to be returned to the obligor will be 
forwarded at the obligor's risk and expense, either by the bond 
official, or by a custodian upon receipt of a bond official's 
authenticated instruction.


Sec. 225.10  Other agency practices and authorities.

    (a) Agency practices. Nothing in this part shall be construed as 
modifying the existing practices or duties of agencies in handling 
bonds, except to the extent made necessary under the terms of this part 
by reason of the acceptance of bonds secured by Government obligations.
    (b) Agency authorities. Nothing contained in this part shall affect 
the authority of agencies to receive Government obligations for 
security in cases authorized by other provisions of law.


Sec. 225.11  Courts.

    (a) General. Nothing contained in this part shall affect the 
authority of a court over a Government obligation given as security in 
a civil action.
    (b) [Reserved]

    Dated: November 7, 1996.
Russell D. Morris,
Commissioner.
[FR Doc. 96-29216 Filed 11-14-96; 8:45 am]
BILLING CODE 4810-35-P