[Federal Register Volume 64, Number 19 (Friday, January 29, 1999)]
[Rules and Regulations]
[Pages 4762-4765]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-2165]



[[Page 4761]]

_______________________________________________________________________

Part IV





Department of the Treasury





_______________________________________________________________________



Fiscal Service



_______________________________________________________________________



31 CFR Part 225



Acceptance of Bonds Secured By Government Obligations in Lieu of Bonds 
With Sureties; Final Rule

  Federal Register / Vol. 64, No. 19 / Friday, January 29, 1999 / Rules 
and Regulations  

[[Page 4762]]



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: Final rule.

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

SUMMARY: The Financial Management Service (Service) is issuing this 
final rule to revise 31 CFR Part 225, which governs the acceptance of 
bonds secured by Government obligations in lieu of bonds with sureties. 
This final rule 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, the rule expands the use to 
which the proceeds of pledged Government obligations may be applied in 
the event of a default in performance.

EFFECTIVE DATE: March 1, 1999.

ADDRESSES: Cash Management Policy and Planning Division, Financial 
Management Service, Room 420, 401 14th St., S.W., Washington, D.C. 
20227.

FOR FURTHER INFORMATION CONTACT: Mary Bailey, Financial Program 
Specialist, at (202) 874-6749; Cynthia L. Johnson, Director, Cash 
Management Policy and Planning Division, at (202) 874-6590; or Marc I. 
Seldin, Principal Attorney, at (202) 874-6680. A copy of this final 
rule is available on the Service's web site at the following address: 
http://www.fms.treas.gov/regs.html.

SUPPLEMENTARY INFORMATION:

Background

    Persons required by Federal law to give an agency a surety bond 
instead may provide 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.
    The regulations originally covered bonds secured by Government 
obligations in definitive (paper) form. However, since the regulations 
were last revised, the form of newly issued Government obligations 
pledged under this part has changed from definitive to book-entry. This 
revision covers these newly issued book-entry Government obligations 
and updates, clarifies and simplifies the requirements dealing with 
existing definitive Government obligations.
    In addition, this revision provides that in the event of a default, 
the proceeds from the sale of pledged Government obligations generally 
will be available to satisfy any claim of the United States. The 
current rule limits the application of the proceeds to damages arising 
out of the default.
    On November 15, 1996, the Service published in the Federal Register 
a notice of proposed rulemaking (NPRM) addressing these changes (61 FR 
58493). This final rule was delayed to allow coordination and ensure 
consistency with other provisions of Title 31, some of which were in 
the process of being revised.
    In addition, the Bureau of the Public Debt (Public Debt), a 
component of the Department of the Treasury's Fiscal Service, has the 
regulatory and procedural responsibility for establishing acceptable 
collateral and determining the collateral valuation for all Fiscal 
Service collateral programs, including collateral acceptability and 
valuation for this part. Public Debt intends to issue a regulation as a 
new part in Title 31 addressing collateral eligibility and valuation 
matters which will directly impact the Government obligations eligible 
for use under this part. A subsection in this part (Sec. 225.3(e)) has 
been reserved to insert the appropriate references to the new Public 
Debt Part.

Comments on the Proposed Rule

    The Service received one comment letter on the NPRM from a 
component of a Federal agency questioning the NPRM's provision that in 
the event of a default, the proceeds from the sale of pledged 
Government obligations will be available to satisfy any claim of the 
United States against the obligor. The commenter stated that such a 
policy would conflict with its agency's authorities.
    The NPRM provision is an expansion of the current rule, which 
limits the application of such proceeds to damages arising out of the 
default. The expansion is supported by Federal common law, the Debt 
Collection Act of 1982, as amended, and the Federal Claims Collection 
Standards, which provide the Government a right of offset. For example, 
upon default, in the event the bond official receives excess proceeds 
from the sale of pledged Government obligations, remittance of such 
proceeds to the obligor would constitute a Federal payment subject to 
administrative offset. In response to the commenter's concerns, 
however, the provision has been modified to apply only when not 
otherwise provided by law.

Section-by-Section Analysis

    Editorial changes have been made throughout the part. Substantive 
changes that were made to portions of Secs. 225.2, 225.3, 225.4, and 
225.5 are explained below.

Section 225.2--Definitions

    Changes have been made in the Definitions section to standardize 
terms used throughout Title 31 of the Code of Federal Regulations.
    In the definitions of ``Bearer'' and ``Definitive,'' the term 
``Government'' has been inserted before the term ``obligation'' to 
mirror the underlying statutory definition contained in 31 U.S.C. 9301, 
as amended.
    The definition for ``Book-entry'' now mirrors the definition of the 
same term in 31 CFR Part 356 at Sec. 356.2 since the term is used in 
the same sense in both parts.
    A definition for ``Depositary'' has been added since the term is 
used in this part.
    The definition for ``Government obligation'' now mirrors the 
underlying statutory definition contained in 31 U.S.C. 9301, as 
amended.
    A definition for ``Person'' has been added which mirrors the 
definition in the underlying statute, 31 U.S.C. 9301, as amended.
    The definition for ``Pledge'' has been updated to be consistent 
with related regulations, such as Public Debt's TRADES (Treasury/
Reserve Automated Debt Entry System) regulations codified at 31 CFR 
Part 357.

Section 225.3--Pledge of Government obligations in lieu of a bond with 
surety or sureties

    The first sentence of Sec. 225.3(a) now refers to the underlying 
statute defining the term ``Government obligation,'' 31 U.S.C. 9301, as 
amended.
    The statutes underlying this rule, 31 U.S.C. 9301 and 9303, as 
amended, define the characteristics of acceptable Government 
obligations without providing additional information. Further 
clarification has been added to the end of Sec. 225.3(a) stating that 
the Secretary will designate classes of acceptable Government 
obligations. Such designation will occur in a

[[Page 4763]]

rulemaking to be published by Public Debt in a new part to Title 31.
    The term ``par'' has been replaced in Sec. 225.3(c) by a reference 
to the underlying statute, 31 U.S.C. 9303, as amended.
    Subsection 225.3(e) has been reserved for reference to the new 
Public Debt regulations regarding collateral valuation.

Section 225.4--Pledge of book-entry Government obligations

    The first sentence of Sec. 225.4(a) has been modified for 
consistency with the Public Debt's TRADES regulations (see 31 CFR Part 
357). Clarification is added by referring to a depositary (defined in 
Sec. 225.2) since it is generally only depositaries that may have 
Government obligation accounts on the books of a Federal Reserve Bank.
    In Sec. 225.4(a), a phrase, ``or the bond official,'' has been 
added to the list of who shall arrange a pledge. This has been done to 
reflect account structures at the Federal Reserve. Section 225.4(b) has 
been modified for the same reason with the addition of the phrase ``or 
a depositary acting as agent or sub-agent for the obligor.''
    In Secs. 225.4(a), (b), and (c), the phrase ``make an appropriate 
entry in the records'' and similar phrases has been replaced with 
``transfer Government obligations to an account for the benefit of the 
bond official'' and similar phrases. This change is made to reflect the 
operations of the Federal Reserve's Book-Entry System.
    The reference in Sec. 225.4(c) has been revised for consistency 
with Public Debt's TRADES regulations (see, e.g., 31 CFR Sec. 357.12).

Section 225.5--Pledge of definitive Government obligations

    In Sec. 225.5(e), the reference to the Public Debt regulation, Part 
306, has been updated consistent with other conforming changes related 
to Public Debt's TRADES 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 entities. These regulations authorize 
persons to pledge bonds secured by Government obligations in lieu of 
bonds with sureties. Consequently, these regulations provide additional 
options to persons pledging collateral, as well as a flexible 
regulatory scheme. Accordingly, a Regulatory Flexibility Act analysis 
is not required.

List of Subjects in 31 CFR Part 225

    Fiscal Service, Government obligations, Surety bonds.

    For the reasons set forth in the preamble, 31 CFR Part 225 is 
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: 12 U.S.C. 391; 31 U.S.C. 321; 31 U.S.C. 9301; 31 
U.S.C. 9303.


Sec. 225.1  Scope.

    The regulation in this part applies to Government agencies 
accepting bonds secured by Government obligations in lieu of bonds with 
sureties. The Financial Management Service (FMS) is the representative 
of the Secretary of the Treasury (Secretary) 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 purposes 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 that ownership of a Government obligation 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.
    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.
    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 that the issuance and maintenance of a Government 
obligation is represented by an accounting entry or electronic record 
and not by a certificate.
    Custodian means a Federal Reserve Bank or an entity within the 
United States designated by such Federal Reserve Bank under terms and 
conditions prescribed by such Federal Reserve Bank, a depositary 
specifically designated by the Secretary of the Treasury for purposes 
of this part, or such other entities as the Secretary of the Treasury 
may designate for purposes of this part.
    Definitive means that a Government obligation is issued in engraved 
or printed form.
    Depositary includes, but is not limited to:
    (1) Any insured bank as defined in section 3 of the Federal Deposit 
Insurance Act (12 U.S.C. 1813) or any bank which is eligible to make 
application to become an insured bank under section 5 of such Act (12 
U.S.C. 1815);
    (2) Any mutual savings bank as defined in section 3 of the Federal 
Deposit Insurance Act (12 U.S.C. 1813) or any bank which is eligible to 
make application to become an insured bank under section 5 of such Act 
(12 U.S.C. 1815);
    (3) Any savings bank as defined in section 3 of the Federal Deposit 
Insurance Act (12 U.S.C. 1813) or any bank which is eligible to make 
application to become an insured bank under section 5 of such Act (12 
U.S.C. 1815);
    (4) Any insured credit union as defined in section 101 of the 
Federal Credit Union Act (12 U.S.C. 1752) or any credit union which is 
eligible to make application to become an insured credit union under 
section 201 of such Act (12 U.S.C. 1781);
    (5) Any savings association as defined in section 3 of the Federal 
Deposit Insurance Act (12 U.S.C. 1813) which is an insured depository 
institution (as defined in such Act) (12 U.S.C. 1811 et seq.) or is 
eligible to apply to become an insured depository institution under the 
Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.); and
    (6) Any agency or branch of a foreign bank as defined in section 
1(b) of the International Banking Act, as amended (12 U.S.C. 3101).
    Federal Reserve means a Federal Reserve Bank and its branches.

[[Page 4764]]

    Government obligation means a public debt obligation of the United 
States Government and an obligation whose principal and interest is 
unconditionally guaranteed by the United States 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 as a certifying individual at part 306, subpart F of this 
title.
    Person means an individual, a trust, an estate, a partnership, and 
a corporation.
    Pledge means a transfer of 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, as 
amended, published by the Financial Management Service.
    Registered means that ownership of a definitive 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.
    Secretary means the Secretary of the Treasury.


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 to a 
bond official any security acceptable under 31 U.S.C. 9301, as amended. 
The Secretary will designate classes of Government obligations 
acceptable under this part.
    (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. Unless otherwise provided by law, the bond 
shall authorize the bond official to apply the proceeds from the sale, 
assignment, or transfer of such Government obligations, in whole or in 
part, to satisfy any costs incurred by the United States related to the 
default, and to apply any excess proceeds to satisfy any other claim of 
the United States against the obligor. The bond shall not include any 
obligations on custodians which are inconsistent with, or in addition 
to, the obligations in this part. The bond will 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) Amount of Government obligations. The obligor shall pledge to 
the bond official Government obligations valued as required by 31 
U.S.C. 9303, as amended.
    (d) Avoiding frequent substitutions. To avoid the frequent 
substitution of Government obligations, the bond official may reject 
Government obligations which mature, or are redeemable, within one year 
from the date they are pledged to the bond official.
    (e) Reserved. 


Sec. 225.4  Pledge of book-entry Government obligations.

    (a) General. Except as otherwise provided by the Secretary in 
procedural instructions, an obligor, or a depositary acting as agent or 
sub-agent for the obligor, or the bond official, shall arrange a pledge 
pursuant to the prior agreement and approval of the bond official, of 
book-entry Government obligations. The Government obligations must be 
transferred to an account for the benefit of the bond official. The 
custodian holding the Government obligations is not required to 
establish that the agreement and approval of the bond official has been 
obtained prior to such a transfer.
    (b) Receipt. Upon the transfer of Government obligations to an 
account for the benefit of the bond official, the custodian will 
promptly issue a receipt or an activity statement, or both, to the bond 
official and to the obligor or a depositary acting as agent or sub-
agent for the obligor.
    (c) Effect of the transfer. Book-entry Government obligations 
credited to an account for the benefit of the bond official shall have 
the effect as provided in part 357 of this title, or in 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 registered Government obligations in the obligor's name to 
the bond official by assignment in accordance with subpart F of part 
306 of this title 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 and may place them with a custodian.
    (d) Delivery to custodian; receipt. If the bond official is in 
receipt of definitive Government obligations, and then places those 
obligations with a custodian, the expense and risk of loss in delivery 
will rest with the bond official. Upon the placement of definitive 
Government obligations with a custodian, 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.
    (e) Conversion to book-entry. (1) Treasury bonds, notes, 
certificates of indebtedness, or bills deposited with a Federal Reserve 
Bank under this part may be converted into book-entry Treasury 
obligations in accordance with part 306 of this title, and the 
pertinent provisions of that part shall apply to such Treasury 
obligations.
    (2) When converting definitive Government obligations to book-entry 
form, a Federal Reserve Bank will act pursuant to, and in accordance 
with, book-entry procedures for issuers that apply to the definitive 
Government obligations pledged to the bond official's agency, including 
those set forth in part 306 of this title.


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 or a depositary acting as agent or sub-agent for the 
obligor.
    (b) Default. If the bond official determines that the obligor has 
defaulted, 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 this part, to retain such interest. 
Unless otherwise

[[Page 4765]]

provided by law, such interest will be available to satisfy any costs 
incurred by the United States related to the default, and any excess 
proceeds will be available to satisfy any other claim of the United 
States against the obligor.


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 or to a depositary acting as agent or sub-agent 
for the obligor.
    (c) Principal. Absent authenticated instructions from the bond 
official to retain the proceeds of matured Government obligations, a 
custodian will release to the obligor proceeds from matured Government 
obligations only if the obligor has deposited Government obligations 
acceptable under 31 U.S.C. 9301, as amended, in substitution for those 
which have matured.
    (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 of liquidated Government obligations. 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.

    The bond official's duties and responsibilities are as follows:
    (a) Approving the bond secured by Government obligations after 
determining its sufficiency;
    (b) Verifying ownership of any registered definitive Government 
obligations given, and ensuring that those Government obligations are 
properly assigned;
    (c) Approving establishment of a book-entry account for the benefit 
of the bond official;
    (d) Providing the custodian, when appropriate, with clear and 
concise instructions;
    (e) Taking all reasonable and appropriate steps to ensure that all 
procedures or transactions conform with the provisions of this part; 
and
    (f) Notifying the Secretary of the Treasury, or his designee, upon 
an obligor's default, and, unless otherwise provided by law, applying 
any part of the proceeds in excess of the amount required to assure 
payment of any costs incurred by the United States related to the 
default to satisfy any claim of the United States against the obligor.


Sec. 225.9  Return of Government obligations to obligor.

    (a) General. Except as provided in paragraph (b) of this section or 
as otherwise provided in this part, 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 United States Government 
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 it 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 instructions.


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.

    Nothing contained in this part shall affect the authority of a 
court over a Government obligation given as security in a civil action.

    Dated: January 26, 1999.
Richard L. Gregg,
Commissioner.
[FR Doc. 99-2165 Filed 1-28-99; 8:45 am]
BILLING CODE 4810-35-U