[Federal Register Volume 70, Number 98 (Monday, May 23, 2005)]
[Rules and Regulations]
[Pages 29454-29456]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-10218]



[[Page 29454]]

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DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 356

[Docket No. BPD GSRS 05-02]


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

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

ACTION: Final rule.

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SUMMARY: The Department of the Treasury (``Treasury,'' ``We,'' or 
``Us'') is issuing in final form an amendment to 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. 
This final amendment allows 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 
amendment states 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 and certain other conditions are met. The amendment updates the 
auction rules to acknowledge a business practice that currently is not 
accommodated in the rules.

DATES: Effective July 22, 2005.

ADDRESSES: You may download this final rule from the Bureau of the 
Public Debt's Web site at http://www.publicdebt.treas.gov or from the 
Electronic Code of Federal Regulations (e-CFR) Web site at http://www.gpoaccess.gov/ecfr. It is also available for public inspection and 
copying at the Treasury Department Library, Room 1318, 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: 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 apply to ``bidders'' \2\ in an auction.\3\ In this 
document, we provide some background on the bidder definitions in 
Appendix A of the UOC. Then we discuss why certain ``merchant banking'' 
relationships should be excluded from the definition of an 
``affiliate'' in the ``Corporation'' and ``Partnership'' bidder 
categories. Next we discuss the public comment we received in response 
to a proposed rule amendment of the bidder definitions published on 
September 8, 2004.\4\ We then describe the final amendment.
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    \1\ The Uniform Offering Circular was published as a final rule 
on January 5, 1993 (58 FR 411). The circular, as amended, is 
codified at 31 CFR part 356. A final rule converting the UOC to 
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\ 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. See Sec.  356.22(b).
    \4\ 69 FR 54251 (September 8, 2004).
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I. Background

    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.'' \5\
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    \5\ 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.\6\
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    \6\ 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.\7\ 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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    \7\ 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

[[Page 29455]]

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.

III. Comments Received in Response to the Proposed Rule

    On September 8, 2004, we published a proposed rule amendment \8\ in 
which we proposed 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.
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    \8\ 69 FR 54251 (September 8, 2004).
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    Because majority ownership still carries the potential for the 
acquiring corporation or partnership to exercise management control of 
the acquired entity, we further proposed that any corporations or 
partnerships that intend to make use of this proposed change in the 
bidder definitions notify us in advance in writing. This written 
communication would have included a certification that the corporation 
or partnership does not exercise any 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 did not intend, however, to prevent a corporation or 
partnership from submitting bids on behalf of acquired entities, as 
long as the corporation or partnership met these certification 
requirements, and the transaction was otherwise in compliance with the 
regulations.
    We received one comment letter on the proposed rule amendment, from 
The Bond Market Association (``TBMA''), which supported the 
proposal.\9\ ``The Association fully supports the objective of the Rule 
Proposal because it makes the administrative burden of complying with 
the NLP reporting requirements much more reasonable for firms that 
engage in merchant banking or private equity investment activities,'' 
TBMA commented.
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    \9\ Treasury's proposed rule amendment and TBMA's comment 
letter, dated November 23, 2004, are available for downloading from 
http://www.publicdebt.treas.gov and for inspection and copying at 
the Treasury Department Library at the address provided earlier in 
this final rule.
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    TBMA asserted, however, that the proposed required certification 
was overly broad given the purpose of the rule. Specifically, TBMA said 
that it was concerned with the certification language that states that 
``the bidder does not exercise any control over or make operational or 
investment decisions for the entity (emphasis added).'' TBMA contended 
that this language was too broad given that the certification's purpose 
was to ensure that the entities involved will not act in concert with 
respect to a Treasury securities auction. Merchant-banking firms 
reserve the right, TBMA pointed out, ``to influence or control certain 
material operations and investment decisions of their merchant banking 
and private equity-type investments. These include occasionally firing 
senior management of the company, approving the purchase of another 
company by the investment and making a decision to sell the company or 
partnership to another company.'' \10\
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    \10\ Ibid.
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IV. Analysis

    We agree with TBMA's comment. We do not intend to restrict 
merchant-banking firms' ability to exercise non-routine influence or 
control over operational or management aspects of their investments, or 
even over investments that are not related to Treasury securities. 
After considering the comment letter received, we are amending the 
proposed certification to specify that the corporation or partnership 
does not routinely exercise operational or management control over 
entities acquired through merchant-banking activities. In addition, we 
are adding a new certification statement that the corporation or 
partnership does not exercise any control over investment decisions of 
such entities regarding U.S. Treasury securities.
    This final rule becomes effective July 22, 2005. This will provide 
sufficient time for corporations or partnerships that intend to make 
use of the change in the bidder definitions to notify us in writing and 
submit the required certifications. In the meantime, we do not expect 
any such corporations or partnerships to change their current practices 
regarding the reporting of positions of majority-owned entities.

Procedural Requirements

    This final rule is not a significant regulatory action for purposes 
of Executive Order 12866. Although we issued a proposed rule on 
September 8, 2004, 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 a notice of proposed rulemaking is not 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 final amendment in accordance with 
the Paperwork Reduction Act under control number 1535-0112. We are not 
making substantive changes to these requirements that would impose 
additional burdens on auction bidders.

List of Subjects in 31 CFR Part 356

    Bonds, Federal Reserve System, Government Securities, Securities.


0
For the reasons stated in the preamble, 31 CFR part 356 is amended 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)

0
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.


[[Page 29456]]



0
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 routinely exercise operational or 
management control over the entity;
     The owner does not exercise any control over investment 
decisions of the entity regarding U.S. Treasury securities;
     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 routinely exercise operational or management 
control over the entity;
     We do not exercise any control over investment 
decisions of the entity regarding U.S. Treasury securities;
     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 routinely exercise operational or 
management control over the entity;
     The owner does not exercise any control over investment 
decisions of the entity regarding U.S. Treasury securities;
     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 routinely exercise operational or management 
control over the entity;
     We do not exercise any control over investment 
decisions of the entity regarding U.S. Treasury securities;
     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.
* * * * *

    Dated: May 17, 2005.
Donald V. Hammond,
Fiscal Assistant Secretary.
[FR Doc. 05-10218 Filed 5-20-05; 8:45 am]
BILLING CODE 4810-39-P