[Federal Register Volume 67, Number 189 (Monday, September 30, 2002)]
[Rules and Regulations]
[Pages 61280-61282]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-24695]


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DEPARTMENT OF TRANSPORTATION

Maritime Administration

46 CFR Part 298

[Docket No. MARAD-2002-12425]
RIN 2133-AB47


Amendment of MARAD's Regulations Establishing and Administering 
Deposit Funds Authorized by Section 1109 of the Merchant Marine Act, 
1936, as Amended

AGENCY: Maritime Administration, Transportation.

ACTION: Final rule.

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SUMMARY: Recent legislation modified the Merchant Marine Act, 1936, as 
amended, by adding a new Section 1109, which authorizes the Secretary 
of Transportation to hold funds from Title XI obligors as collateral by 
depositing them with the United States Treasury and investing them in 
Treasury obligations. As a consequence, these funds need no longer be 
deposited in private banks. This final rule changes existing procedures 
to simplify, reduce costs of, and expedite Title XI closings.

DATES: The effective date of this final rule is October 30, 2002.

FOR FURTHER INFORMATION CONTACT: Mr. Richard M. Lorr, Assistant Chief 
Counsel for Ship Financing, at (202) 366-5882. You may send mail to Mr. 
Lorr at Maritime Administration, Office of Chief Counsel, Room 7228, 
400 Seventh Street, SW., Washington, DC 20590. You may also e-mail Mr. 
Lorr at [email protected].

SUPPLEMENTARY INFORMATION:

Background

    On June 12, 2002, we published a notice of proposed rulemaking 
(NPRM) at 67 FR 40260 soliciting public comment on proposed changes to 
administering Title XI deposit funds. In the NPRM, we explained the 
Title XI program deposit funds and the need for the amendments. We 
received one public comment regarding our proposal. We will address the 
public comment under the section heading ``Response to Public 
Comment.''
    The Title XI Program is a loan guarantee program which was 
established under Title XI of the Merchant Marine Act, 1936, as amended 
(the ``Act''). The Secretary of Transportation (Secretary) acting by 
and through the Maritime Administrator administers the Title XI 
Program.
    Title XI provides for the full faith and credit of the United 
States for the payment of debt obligations for: (1) U.S. or foreign 
shipowners for the purpose of financing or refinancing either U.S. flag 
vessels or eligible export vessels constructed, reconstructed, or 
reconditioned in U.S. shipyards and (2) U.S. shipyards for the purpose 
of financing advanced shipbuilding technology and modern shipbuilding 
technology of a privately owned general shipyard facility located in 
the U.S.
    The guaranteed obligations (i.e., notes and bonds) are sold in the 
private sector. The main purchasers of the obligations include banks, 
pension funds, life insurance companies, and the general public.
    In those instances where the Secretary guarantees obligations under 
Title XI and where the proceeds of the sale of the obligations are to 
be used for the construction, reconstruction, or reconditioning of a 
vessel or for a shipyard improvement, all such proceeds constitute 
security for the Secretary's risks in extending the guarantees, and are 
to be under the control of the Secretary as governed by applicable 
agreements between the Secretary and the Title XI debtor. In addition, 
the documentation of a Title XI transaction requires the Title XI 
debtor, under certain circumstances, to make deposits into the Title XI 
Reserve Fund as additional security for the Secretary.
    Prior to the enactment of Section 1109, section 1108 authorized the 
Secretary to hold only a percentage of obligation proceeds in an escrow 
account (the ``Escrow Fund'') with the Treasury. The remaining 
percentage was deposited with a commercial bank in what has become to 
be known as the ``Construction Fund.'' In addition, the Secretary had 
no authority under the Act to accept or hold Title XI Reserve Fund 
deposits. Currently, such deposits, like the Construction Fund, are 
placed with and held by a commercial bank. The Depository Agreement 
among the Title XI debtor, the Secretary, and the commercial bank sets 
forth the terms and conditions under which the funds may be invested, 
withdrawn, or otherwise paid to the Secretary or the Title XI debtor. 
The Title XI debtor granted to the Secretary security interests in 
these accounts and their contents (the ``Collateral''), and provided 
the Secretary an opinion of counsel on the perfection and first 
priority of these security interests.
    The Uniform Commercial Code (the ``UCC'') of the various states, 
for the most part, governs the perfection and priority of the 
Secretary's security interests in the Collateral. At its financial 
closings, MARAD's experience has been that, given the provisions of the 
UCC and especially the recent changes to the UCC, even the most 
knowledgeable of legal counsel have had difficulty drafting clean legal 
opinions about the perfection and enforceability of MARAD's security 
interest in the Collateral held by commercial depositories. As a result 
of these factors, opinions of counsel have, over time, become 
increasingly time consuming and costly. On the other hand, there has 
never been any question about the perfection and enforceability of 
MARAD's security interest in funds held in the Escrow Fund by the 
Treasury under MARAD's normal security agreements.
    In an effort to ameliorate the situation and to streamline the 
Title XI closing process, the Secretary determined that an alternate 
means for holding and investing the proceeds of the obligations was 
necessary. Since the Escrow Fund was already in place, it seemed only 
logical to use it for not just a percentage of the proceeds, but for 
all the proceeds. Accordingly, the Secretary sought the enabling 
legislation, and section 1109 is the result. The Secretary believes 
this authority will reduce the cost of obtaining Title XI benefits by 
simplifying the opinions of counsel and eliminating the costs of 
engaging commercial banks to hold and invest the proceeds. In addition, 
it is anticipated that closing documentation will be reduced or 
simplified.

Response to Public Comment

    One comment was received concerning the NPRM. The commenter states 
that, in his opinion, Section 1109 of the Act ``was intended to solve 
certain technical problems of the Construction Fund arrangements and 
legal opinions concerning those arrangements.'' It is true that one of 
the purposes of Section 1109 is to permit the agency to abolish the 
Construction Fund. However, the enactment of Section 1109 was not 
merely intended to solve problems related to that fund. Section 1109 
also permits the Secretary to hold in a Treasury account money in the 
Title XI Reserve Funds of obligors (which are established for the 
purpose of holding a portion of an obligor's net operating income in a 
secured account for the benefit of the Secretary) as well as any other 
liquid assets that are

[[Page 61281]]

pledged to the Secretary as collateral for a guarantee. In addition, 
the same commenter makes three requests concerning the proposed 
regulations. First, the commenter requests that drafts of any 
agreements that the Secretary intends to use to administer the 
provisions of Section 1109 be made available to commenters for their 
comments before the final regulation is promulgated. Second, the 
commenter expresses a concern that nothing in the NPRM requires the 
Secretary to pay the obligor interest on cash balances of the deposit 
fund as required by Sections 1109(c) and 1109(d)(2) and that if the 
final rule does not address the issues the agency's agreements should 
be amended to do so. Finally, the commenter states that the Secretary's 
authority to retain and offset amounts in the Treasury account does not 
arise until the obligor has defaulted on the obligations. The commenter 
believes that the regulations should not extend retention and offset to 
pre-default circumstances contrary to Section 1109(d)(3).
    It is well established that MARAD does not publish the forms of its 
Title XI documents for review under the Administrative Procedure Act. 
MARAD's forms are traditionally provided to shipowning companies and to 
attorneys who practice ship finance law. Copies of the documents are on 
the agency's Web site, http://www.marad.dot.gov. A copy of the 
Depository Agreement, modified to reflect the provisions of Section 
1109, is already publicly available and has been used in recent 
transactions, although it is not yet on the agency's Web site. 
Commenters may provide the agency with their views on these agreements 
at any time. Moreover, these documents are negotiated on a case-by-case 
basis to the extent warranted by the particularities of each 
transaction and the questions that are raised concerning the agency's 
policies by the parties to a closing. Accordingly, there is no reason 
for MARAD to postpone the effective date of this rule.
    With respect to the commenter's second specific concern, that the 
NPRM does not address the payment of interest on cash balances of the 
deposit fund, we direct the commenter to the provisions of 46 CFR 
298.33(c), (d) and (e) of the agency's regulations, which provisions 
will apply to the deposit fund, upon adoption of the final rule, and 
which adequately address the commenter's concerns. These issues are 
also addressed by Sections 5.04, 5.05, and 5.06 of the General 
Provisions of the Security Agreement and Section 2 of the Depository 
Agreement. As to the commenter's third point, neither MARAD's 
regulations nor its agreements have extended retention and offset to 
pre-default circumstances. The pertinent regulations and documentation 
state that the right arises upon the occurrence of an obligor's 
default.
    With one addition, the rule will be adopted in the form proposed. 
The NPRM deleted the reference to Construction Fund in 46 CFR 
298.33(b)(2)(i), but inadvertently neglected to delete Sec.  298.34, 
entitled Construction Fund. Hence, the final rule will abolish the 
provisions of Sec.  298.34 and substitute the words ``Removed and 
Reserved.''

Rulemaking Analyses and Notices

Executive Order 12866 and DOT Regulatory Policies and Procedures

    We have reviewed this final rule under Executive Order 12866 and 
have determined that it is not a significant regulatory action under 
section 3(f). It is also not significant under DOT Regulatory Policies 
and Procedures (44 FR 11034; February 26, 1979). Due to the limited 
economic impact of this final rule, no further analysis is necessary. 
This final rule is intended only to change the location of the 
Secretary's collateral, previously deposited in commercial banks to an 
account held at the Treasury. The intended effect is to encourage the 
construction of ships in U.S. shipyards both for the domestic and the 
Eligible Export Vessel programs and the modernization and improvement 
of U.S. general shipyard facilities by improving Title XI program 
administration.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires 
MARAD to determine whether this final rule will have a significant 
economic impact on a substantial number of small entities. Although a 
substantial number of Title XI applicants may meet the United States 
Small Business Administration's criteria for small entity, this final 
rule will not have a significant economic impact because it merely 
authorizes a change in the location of the Secretary's collateral, 
previously deposited in commercial banks, which charge depository fees, 
to an account held at the Treasury. Section 1279b of 46 App. U.S.C. 
authorizes the deposit of these funds. By changing the location of the 
account to the Treasury, this final rule will eliminate depository 
fees. We do not believe that this final rule will have a significant 
economic impact on a substantial number of small entities.

Executive Order 13132

    We have analyzed this rulemaking in accordance with the principles 
and criteria contained in Executive Order 13132 (``Federalism'') and 
have determined that it does not have sufficient federalism 
implications to warrant the preparation of a federalism summary impact 
statement. These regulations will have no substantial effects on the 
States, or on the current Federal-State relationship, or on the current 
distribution of power and responsibilities among the various local 
officials. Therefore, consultation with State and local officials was 
not necessary.

Executive Order 13175

    We do not believe that this final rule will significantly or 
uniquely affect the communities of Indian tribal governments when 
analyzed under the principles and criteria contained in Executive Order 
13175 (``Consultation and Coordination with Indian Tribal 
Governments''). Therefore, the funding and consultation requirements of 
this Executive Order would not apply.

Paperwork Reduction Act

    This rulemaking contains requirements that have been approved 
previously by the Office of Management and Budget (Approval No. 2133-
0018).

Unfunded Mandates Reform Act

    This final rule does not impose unfunded mandates under the 
Unfunded Mandates Reform Act of 1995. It does not result in costs of 
$100 million or more to either State, local, or tribal governments, in 
the aggregate, or to the private sector, and is the least burdensome 
alternative that achieves the objectives of the rule.

Regulation Identifier Number (RIN)

    The Department of Transportation assigns a regulation identifier 
number (RIN) to each regulatory action listed in the Unified Agenda of 
Federal Regulations. The Regulatory Information Service Center 
publishes the Unified Agenda in April and October of each year. You may 
use the RIN contained in the heading of this document to cross-
reference this action with the Unified Agenda.

List of Subjects in 46 CFR Part 298

    Loan programs--transportation, Maritime carriers, Reporting and 
recordkeeping requirements.

    Accordingly, we amend 46 CFR part 298 as follows:

[[Page 61282]]

PART 298--OBLIGATION GUARANTEES

    1. The authority citation for part 298 continues to read as 
follows:

    Authority: 46 App. U.S.C. 1114(b), 1271 et seq.; 49 CFR 1.66.


Sec.  298.2  [Amended]

    2. In Sec.  298.2, the definition of Depository is amended by 
removing all words after ``Depository means'' and adding in their place 
``the U.S. Department of Treasury, acting in its capacity under Section 
1109 of the Act.''


Sec.  298.21  [Amended]

    3. In Sec.  298.21 revise paragraph (f)(2) to read as follows:


Sec.  298.21  Limits.

* * * * *
    (f) * * *
    (2) As long as we have not paid the Guarantees, you or other 
recipient shall promptly deposit these moneys with us to be held by the 
Depository in accordance with the Depository Agreement.
* * * * *


Sec.  298.22  [Amended]

    4. In Sec.  298.22 revise paragraph (b)(2) to read as follows:


Sec.  298.22  Amortization of Obligations.

* * * * *
    (b) * * *
    (2) You establish a fund with the Depository in which you deposit 
an equal annual amount necessary to redeem the outstanding Obligations 
at maturity; or
* * * * *


Sec.  298.33  [Amended]

    5. Section 298.33 is amended as follows:
    a. In paragraph (a), by removing the word ``us'' and adding the 
words ``the Depository'' in its place.
    b. By removing paragraph (b)(2)(i) and redesignating paragraphs 
(b)(2) (ii) through (iv) as paragraphs (b)(2) (i) through (iii).


Sec.  298.34  [Removed and Reserved]


Sec.  298.35  [Amended]

    6. Section 298.35(d) introductory text is revised to read as 
follows:


Sec.  298.35  Title XI Reserve Fund and Financial Agreement.

* * * * *
    (d) Deposits. Unless the Company, as of the close of its accounting 
year, was subject to and in compliance with the financial requirements 
set forth in paragraph (b)(2) of this section, the Company shall make 
one or more deposits to us to be held by the Depository (the Title XI 
Reserve Fund), as further provided for in the Depository Agreement. The 
amount of deposit as to any year, or period less than a full year, 
where applicable, will be determined as follows:
* * * * *

    Dated: September 24, 2002.

    By Order of the Maritime Administrator.
Murray A. Bloom,
Acting Secretary, Maritime Administration.
[FR Doc. 02-24695 Filed 9-27-02; 8:45 am]
BILLING CODE 4910-81-P