[Federal Register Volume 69, Number 173 (Wednesday, September 8, 2004)]
[Proposed Rules]
[Pages 54251-54254]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-20189]


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DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 356

[Docket No. BPD GSRS 04-01]


Sale and Issue of Marketable Book-Entry Treasury Bills, Notes, 
and Bonds--Bidder Definitions

AGENCY: Bureau of the Public Debt, Fiscal Service, Treasury.

ACTION: Proposed rule.

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SUMMARY: The Department of the Treasury (``Treasury,'' ``We,'' or 
``Us'') proposes to amend 31 CFR Part 356 (Uniform Offering Circular 
for the Sale and Issue of Marketable Book-Entry Treasury Bills, Notes, 
and Bonds) by modifying its definitions of different types of bidders 
in Treasury marketable securities auctions. We are proposing this 
amendment to allow a certain business relationship between two entities 
that currently would be treated as a single bidder under the auction 
rules to be treated as separate bidders. Specifically, the proposed 
amendment would state that an entity that is more than 50-percent-owned 
by a corporation or partnership is not deemed to be an affiliate of the 
corporation or partnership if the ownership is for investment purposes 
only. The amendment would update the auction rules to acknowledge a 
business practice that currently is not accommodated in the rules.

DATES: Send your comments to reach us on or before November 8, 2004.

ADDRESSES: You may send comments to: Bureau of the Public Debt, 
Government Securities Regulations Staff, 799 9th Street NW., 
Washington, DC 20239-0001. You also may e-mail us comments at either 
[email protected], or through the federal eRulemaking portal at 
http://www.regulations.gov and following the instructions for 
submitting comments. When sending comments by e-mail, please provide 
your full name, mailing address, and docket number BPD GSRS 04-01. You 
may download this proposed amendment from http://www.regulations.gov or 
from the Bureau of the Public Debt's Web site at http://www.publicdebt.treas.gov. The comments we receive will be available 
from Public Debt's website. The proposed amendment and comments will 
also be available for public inspection and copying at the Treasury 
Department Library, Room 1428, Main Treasury Building, 1500 
Pennsylvania Avenue, NW., Washington, DC 20220. To visit the library, 
call (202) 622-0990 for an appointment.

FOR FURTHER INFORMATION CONTACT: Lori Santamorena (Executive Director) 
or Chuck Andreatta (Associate Director), Bureau of the Public Debt, 
Government Securities Regulations Staff, (202) 504-3632 or e-mail us at 
[email protected].

SUPPLEMENTARY INFORMATION:

I. Background

    The Uniform Offering Circular (UOC), in conjunction with the 
announcement for each auction, provides the terms and conditions for 
the sale and issuance in an auction to the public of marketable 
Treasury bills, notes and bonds.\1\ For the most part, these terms and 
conditions

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apply to ``bidders'' \2\ in an auction. For example, we will not award 
more than 35 percent of an auction's offering amount to any particular 
competitive bidder to help ensure broad distribution of Treasury 
securities at original issuance.\3\
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    \1\ The Uniform Offering Circular was published as a final rule 
on January 5, 1993 (58 FR 412). The circular, as amended, is 
codified at 31 CFR Part 356. A final rule revising the UOC in plain 
language and making certain other minor changes was published in the 
Federal Register on July 28, 2004 (69 FR 45202).
    \2\ See Sec.  356.2 and Appendix A of 31 CFR Part 356.
    \3\ See Sec.  356.22(b).
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    Appendix A of the UOC provides bidder definitions that describe the 
categories of bidders eligible to bid in Treasury auctions. We provide 
these definitions so that persons and entities can use them to 
determine whether they are considered to be one bidder or more than one 
bidder for the purpose of bidding in auctions, and for compliance 
purposes.
    Two of the bidder categories in Appendix A are ``Corporations'' and 
``Partnerships.'' We consider a corporation or partnership and all of 
its ``affiliates''--in other words, the entire corporate or partnership 
structure--collectively to be one bidder. Using the ``Corporation'' 
category as an example, Appendix A defines an ``affiliate'' as ``any:
     entity that is more than 50-percent owned, directly or 
indirectly, by the corporation;
     entity that is more than 50-percent owned, directly or 
indirectly, by any other affiliate of the corporation;
     Person or entity that owns, directly or indirectly, more 
than 50 percent of the corporation;
     Person or entity that owns, directly or indirectly, more 
than 50 percent of any other affiliate of the corporation; or
     Entity, a majority of whose board of directors or a 
majority of whose general partners are directors or officers of the 
corporation, or of any affiliate of the corporation.'' \4\
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    \4\ The ``Partnership'' category uses the same definition of 
``affiliate'' except that ``partnership'' is used in place of 
``corporation.''
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The more-than-50-percent ownership standard is an important part of the 
definition because it implies at least potential, if not actual, 
control of an entity.
    Appendix A also provides a mechanism by which a major 
organizational component (for example, a parent or a subsidiary), or 
group of components, in a corporate or partnership structure may obtain 
recognition by us as a bidder separate from the larger corporate or 
partnership structure. Separate-bidder status may be sought for a 
variety of reasons, the most common being that it simplifies the 
process of net long position reporting that applies to large 
competitive bidders.\5\
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    \5\ See Sec.  356.13. A bidder must report its net long position 
when the total of all of its bids in an auction plus its net long 
position in the security being auctioned equals or exceeds the net 
long position reporting threshold amount stated in the offering 
announcement, generally 35 percent of the offering amount.
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    To obtain recognition as a separate bidder, each component or group 
of components must request such recognition from us, provide a 
description of the component or group and its position within the 
corporate or partnership structure, meet certain criteria, and provide 
a certification that it has policies or procedures in place designed to 
prevent any improper exchanges of information about participation in an 
auction or in any way acting together with respect to participating in 
an auction.\6\ As previously noted, these requests for separate-bidder 
status come from the component or group of components seeking to be 
separated from the larger corporation or partnership structure. In 
general, these entities requesting separate-bidder status are financial 
in nature and are likely to participate in Treasury auctions.
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    \6\ See Appendix A, Section II.
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II. Discussion

    We have become aware that a business relationship, commonly 
referred to as ``merchant banking,'' can under certain circumstances 
make technical compliance with the auction rules impractical. In this 
business relationship, a corporation or partnership typically makes 
investments in other commercial enterprises, not for the purpose of 
actually engaging in the business of the enterprise, but rather to seek 
a return on the investment. Usually these other commercial enterprises 
are not financial in nature, although they may, on occasion, purchase 
and hold Treasury securities.
    It is during those instances when a corporation's or partnership's 
investment in another enterprise causes its ownership percentage to 
exceed 50 percent that the complications can arise. For example, if the 
corporation or partnership is a large enough bidder in Treasury 
securities auctions that it has to calculate and possibly report its 
net long position, under the auction rules it is supposed to contact 
the acquired enterprise and find out if it has any position in the 
security being auctioned. This can be impractical since the net long 
position must be calculated as of one-half hour prior to the deadline 
for competitive bidding and enterprises acquired through merchant 
banking activities generally do not participate in Treasury securities 
auctions.
    We believe entities acquired through merchant-banking activities 
pose much less potential for acting in concert with their acquiring 
corporation or partnership in regard to transactions in, and holdings 
of, Treasury securities. Corporations or partnerships invest in such 
entities generally to seek a return on investment and not to engage in 
the business of the entity, they do not exercise any control over or 
make operational or investment decisions for such entities and, in 
general, such entities are not engaged in the securities business and 
generally do not participate in Treasury securities auctions. 
Therefore, we believe the public interest is served by allowing the 
exclusion of merchant-banking activities from a corporate or 
partnership structure, as described below.
    We are proposing that an entity that is more than 50-percent-owned 
by a corporation or partnership be deemed not to be an affiliate of the 
corporation or partnership if the ownership is for investment purposes 
only. Such entities would be deemed to be separate bidders from the 
corporation or partnership that owns them.
    Because majority ownership still carries the potential for the 
acquiring corporation or partnership to exercise management control of 
the acquired entity, we are further proposing that any corporations or 
partnerships that intend to make use of this proposed change in the 
bidder definitions notify us in advance in writing. We do not intend to 
approve or formally acknowledge these letters, but submitters may 
contact us to determine whether the letters have been received.
    This written communication would include a certification that the 
corporation or partnership does not exercise control over or make 
operational or investment decisions for such acquired entities, and 
that it has written policies in place to prevent any inappropriate 
exchange of information concerning participation in Treasury marketable 
securities auctions. We do not intend, however, to prevent a 
corporation or partnership from submitting bids on behalf of acquired 
entities, as long as the corporation or partnership has not exercised 
any control over or made operational or investment decisions for the 
entity, and the transaction is otherwise in compliance with the 
regulations. Until we publish a final rule or issue other guidance on 
this matter, we do not expect any such corporations or partnerships to 
change their current

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practices regarding the reporting of positions of majority-owned 
entities.

Procedural Requirements

    It has been determined that this proposed rule is not a significant 
regulatory action for purposes of Executive Order 12866. Although we 
are issuing this proposed rule in proposed form to benefit from public 
comment, the notice and public procedures requirements of the 
Administrative Procedure Act do not apply, under 5 U.S.C. 553(a)(2).
    Since no notice of proposed rulemaking is required, the provisions 
of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) do not apply.
    The Office of Management and Budget previously approved the 
collections of information in this proposed amendment in accordance 
with the Paperwork Reduction Act under control number 1535-0112. We are 
not proposing changes that would impose additional burdens on auction 
bidders.

List of Subjects in 31 CFR Part 356

    Bonds, Federal Reserve System, Government Securities, Securities.

    For the reasons stated in the preamble, we propose to amend 31 CFR 
Part 356 as follows:

PART 356--SALE AND ISSUE OF MARKETABLE BOOK-ENTRY TREASURY BILLS, 
NOTES, AND BONDS (DEPARTMENT OF THE TREASURY CIRCULAR, PUBLIC DEBT 
SERIES NO. 1-93)

    1. The authority citation for Part 356 continues to read as 
follows:

    Authority: 5 U.S.C. 301; 31 U.S.C. 3102 et seq.; 12 U.S.C. 391.

    2. In Appendix A to Part 356, amend Section I by revising the 
introductory text and paragraphs (a) and (b) to read as follows:

Appendix A to Part 356--Bidder Categories

I. Categories of Eligible Bidders

    We describe below various categories of bidders eligible to bid 
in Treasury auctions. You may use them to determine whether we 
consider you and other persons or entities to be one bidder or more 
than one bidder for auction bidding and compliance purposes. For 
example, we use these definitions to apply the competitive and 
noncompetitive award limitations and for other requirements. 
Notwithstanding these definitions, we consider any persons or 
entities that intentionally act together with respect to bidding in 
a Treasury auction to collectively be one bidder. Even if an auction 
participant does not fall under any of the categories listed below, 
it is our intent that no auction participant receives a larger 
auction award by acquiring securities through others than it could 
have received had it been considered one of these types of bidders.
    (a) Corporation--We consider a corporation to be one bidder. A 
corporation includes all of its affiliates, which may be persons, 
partnerships, or other entities. We consider a business trust, such 
as a Massachusetts or Delaware business trust, to be a corporation. 
We use the term ``corporate structure'' to refer to the collection 
of affiliates that we consider collectively to be one bidder. An 
affiliate is any:
     Entity that is more than 50-percent owned, directly or 
indirectly, by the corporation;
     Entity that is more than 50-percent owned, directly or 
indirectly, by any other affiliate of the corporation;
     Person or entity that owns, directly or indirectly, 
more than 50 percent of the corporation;
     Person or entity that owns, directly or indirectly, 
more than 50 percent of any other affiliate of the corporation; or
     Entity, a majority of whose board of directors or a 
majority of whose general partners are directors or officers of the 
corporation, or of any affiliate of the corporation.
    An entity that is more than 50-percent owned as described in 
this definition is not an affiliate, however, if:
     The purpose of such ownership is to seek a return on 
investment and not to engage in the business of the entity;
     The owner does not exercise any control over or make 
operational or investment decisions for the entity;
     The corporation has written policies or procedures, 
including ongoing compliance monitoring processes, that are designed 
to prevent it from acting together with the entity regarding 
participation in Treasury auctions or investment strategies 
regarding Treasury securities being auctioned; and
     The corporation submits notice and certification to us, 
as provided in this Appendix A.
    A corporation that plans to make use of this exception to the 
definition of ``affiliate'' must inform us of this fact in writing 
and provide the following certification:
    [Name of corporation] hereby certifies that, with regard to any 
entity of which it owns more than 50 percent as defined in Appendix 
A to 31 CFR Part 356, but for which the purpose of such ownership is 
to seek a return on investment and not to engage in the business of 
the entity:
     We do not exercise any control over or make operational 
or investment decisions for the entity;
     We have written policies or procedures, including 
ongoing compliance monitoring processes, that are designed to 
prevent the corporation from acting together with the entity 
regarding participation in Treasury auctions or investment 
strategies regarding Treasury securities being auctioned; and
     We will continue to meet the terms of this 
certification until we notify the Treasury of a change.
    (b) Partnership--We consider a partnership to be one bidder if 
it is a partnership for which the Internal Revenue Service has 
assigned a tax-identification number. A partnership includes all of 
its affiliates, which may be persons, corporations, general partners 
acting on behalf of the partnership, or other entities. We use the 
term ``partnership structure'' to refer to the collection of 
affiliates that we consider collectively to be one bidder. We may 
consider a partnership structure that contains one or more 
corporations as a ``partnership'' or a ``corporation,'' but not 
both.
    An affiliate is any:
     Entity that is more than 50-percent owned, directly or 
indirectly, by the partnership;
     Entity that is more than 50-percent owned, directly or 
indirectly, by any other affiliate of the partnership;
     Person or entity that owns, directly or indirectly, 
more than 50 percent of the partnership;
     Person or entity that owns, directly or indirectly, 
more than 50 percent of any other affiliate of the partnership; or
     Entity, a majority of whose general partners or a 
majority of whose board of directors are general partners or 
directors of the partnership or of any affiliate of the partnership.
    An entity that is more than 50-percent owned as described in 
this definition is not an affiliate, however, if:
     The purpose of such ownership is to seek a return on 
investment and not to engage in the business of the entity;
     The owner does not exercise any control over or make 
operational or investment decisions for the entity;
     The partnership has written policies or procedures, 
including ongoing compliance monitoring processes, that are designed 
to prevent it from acting together with the entity regarding 
participation in Treasury auctions or investment strategies 
regarding Treasury securities being auctioned; and
     The partnership submits notice and certification to us, 
as provided in this Appendix A.
    A partnership that plans to make use of this exception to the 
definition of ``affiliate'' must inform us of this fact in writing 
and provide the following certification:
    [Name of partnership] hereby certifies that, with regard to any 
entity of which it owns more than 50 percent as defined in Appendix 
A to 31 CFR Part 356, but for which the purpose of such ownership is 
to seek a return on investment and not to engage in the business of 
the entity:
     We do not exercise any control over or make operational 
or investment decisions for the entity;
     We have written policies or procedures, including 
ongoing compliance monitoring processes, that are designed to 
prevent the partnership from acting together with the entity 
regarding participation in Treasury auctions or investment 
strategies regarding Treasury securities being auctioned; and
     We will continue to meet the terms of this 
certification until we notify the Treasury of a change.
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    Dated: August 30, 2004.
Donald V. Hammond,
Fiscal Assistant Secretary.

[FR Doc. 04-20189 Filed 9-7-04; 8:45 am]
BILLING CODE 4810-39-P