[Federal Register Volume 79, Number 200 (Thursday, October 16, 2014)]
[Rules and Regulations]
[Pages 61992-62003]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-24460]


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DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 223

RIN 1510-AB27


Surety Companies Doing Business With the United States

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

ACTION: Final rule.

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SUMMARY: The Department of the Treasury, Bureau of the Fiscal Service 
(Treasury) administers the Federal corporate surety program. Treasury 
issues certificates of authority to qualified sureties to underwrite 
and reinsure Federal bond obligations. Bonds underwritten by Treasury-
certified sureties satisfy bonding requirements, provided such bonds 
are accepted by the agency bond-approving official. Treasury is 
amending its regulation to expressly provide that an agency may decline 
to accept a bond underwritten by a Treasury-certified surety for cause, 
provided the agency satisfies the requirements specified in the final 
rule. Treasury is also revising the procedures it uses to adjudicate 
any complaint received from an agency requesting that a surety's 
certificate of authority be revoked.

DATES: This rule is effective December 15, 2014.

ADDRESSES: You can download this rule at the following Web site: http://www.fiscal.treasury.gov/fsreports/ref/suretyBnd/surety_home.htm. You 
may also inspect and copy this rule at: Treasury Department Library, 
1500 Pennsylvania Avenue NW., Washington, DC 20220.
    Before visiting, you must call (202) 622-0990 for an appointment.
    In accordance with the federal eRulemaking Initiative, the Bureau 
of the Fiscal Service publishes rulemaking information on http://www.regulations.gov.
    Regulations.gov offers the public the ability to comment on, 
search, and view publicly available rulemaking materials, including 
comments received on rules.

FOR FURTHER INFORMATION CONTACT: Melvin Saunders, Manager, Surety Bond 
Branch, Bureau of the Fiscal Service, at (202) 874-6850 or 
[email protected], or James J. Regan, Senior Counsel, 
Bureau of the Fiscal Service, at (202) 874-6680 or 
[email protected].

SUPPLEMENTARY INFORMATION: On March 17, 2011, Treasury published a 
notice of proposed rulemaking (NPRM) at 76 FR 14592, requesting comment 
on a proposed amendment to 31 CFR part 223 (Part 223), which implements 
the requirements of 31 U.S.C. 9304-9308.
    The NPRM proposed two main amendments to Part 223. First, under 
NPRM Sec.  223.17, Treasury proposed to clarify the circumstances under 
which a Federal agency bond-approving official could decline to accept 
a bond underwritten by a Treasury-certified surety. Second, under NPRM 
Sec.  223.20, Treasury proposed to clarify the procedures and standard 
of review to be used by Treasury in adjudicating any complaint 
submitted by an agency to Treasury requesting that a surety's 
certificate be revoked.
    After consideration of the comments received, Treasury is amending 
its

[[Page 61993]]

regulation to expressly provide that an agency has discretion to 
decline to accept a bond underwritten by a Treasury-certified surety 
for cause, provided the agency satisfies the requirements specified in 
the final rule. Treasury is also revising the procedures it uses to 
adjudicate any complaint received from an agency requesting that a 
surety's certificate of authority be revoked.

I. Summary of Comments Received and Treasury's Responses

    Treasury sought comments on all aspects of the proposed rule. 
Treasury received 14 comment letters from a cross-section of entities 
and individuals associated with the surety industry. Five of these 
comment letters were submitted by surety companies, four by surety 
trade associations, three by law firms, and two by individuals. The two 
individuals work for immigration bonding companies or bonding agencies, 
but the letters were submitted in their individual capacities.
    Thirteen of the commenters submitted comments that were opposed to 
the NPRM, as written, with several commenters suggesting the NPRM be 
withdrawn. The commenters who suggested the NPRM be withdrawn expressed 
the opinion that the current statutes and regulations are adequate to 
address the collection and performance issues that are of concern to 
Treasury.
    One comment from a national trade association representing 
construction subcontractors, specialty trade contractors, and 
suppliers, supported the NPRM. This commenter emphasized that 
subcontractors working on Federal construction projects ``rely on the 
payment bonds'' underwritten by Treasury-certified sureties to ensure 
their final payment. This commenter emphasized that the Federal 
Government's extra oversight of this issue ``will increase the value of 
this important payment assurance to subcontractors.''

A. Comments on Proposed Sec.  223.17 and Treasury's Responses

    1. Several commenters expressed the opinion that proposed Sec.  
223.17 conflicts with 31 U.S.C. 9305(e). Section 9305(e) provides that: 
``A surety corporation providing a surety bond under section 9304 of 
this title [31 U.S.C. 9304] may not provide any additional bond under 
that section if--(1) the corporation does not pay a final judgment or 
order against it on the bond; and (2) no appeal or stay of the judgment 
or order is pending 30 days after the judgment or order is entered.'' 
These commenters suggest that section 9305(e) provides the only 
circumstances under which an agency can decline to accept a bond from a 
surety.
    Section 223.17 does not conflict with section 9305(e). Section 
9305(e) sets the statutory standard under which a surety's certificate 
of authority to write any additional bond for any agency is revoked by 
operation of law for failure to pay a final court judgment or order. In 
contrast, Sec.  223.17, as articulated in the final rule, clarifies the 
scope of an agency's existing authority to decline to accept a 
particular bond or bonds from a surety.
    Under 31 U.S.C. 9304(b), and its predecessor derivations, Congress 
expressly conditioned acceptance of a bond on the approval of a Federal 
agency bond-approving official. This provision authorizes agencies to 
decline to accept bonds underwritten by Treasury-certified sureties. In 
enacting this provision, Congress expressed the general intent that 
Treasury-certification status does not provide a guarantee to a surety 
that its bonds will be accepted by an agency in all cases. Federal 
courts have also recognized that agencies have the discretion to 
decline acceptance of bonds from Treasury-certified sureties. See, 
e.g., Concord Casualty & Surety Co. v. United States, 69 F.2d 78 (2d 
Cir. 1934); American Druggists Ins. Co. v. Bogart, 707 F.2d 1229 (11th 
Cir. 1983).
    Several commenters appeared to suggest that a certificate, once 
granted, gives a surety the right to have its bonds approved in all 
cases, unless the surety's authority to write bonds is revoked by court 
order or judgment under 31 U.S.C. 9305(e). This view is incorrect as it 
fails to give effect to the intent of Congress under section 9304(b).
    Moreover, a court judgment or order meeting the requirements of 
section 9305(e) precludes the surety from writing any Federal bond for 
any agency. In contrast, Sec.  223.17 authorizes an agency official to 
decline bonds presented by a Treasury-certified surety to that agency 
for cause. The Treasury-certified surety is still authorized to present 
additional bonds to other agencies.
    2. Several commenters expressed the view that Federal agencies 
often err in making administrative determinations that bond obligations 
are due and owing. These commenters believe that a court is the proper 
arbiter of bond disputes because agency administrative practices are 
allegedly deficient.
    Treasury recognizes the importance of fair and accurate 
administrative processes. However, Treasury does not believe it is 
necessary or appropriate to require an agency to reduce every surety 
claim to judgment, or submit a surety revocation complaint to Treasury 
in every instance, in order to facilitate equitable and efficient 
resolution of surety performance and collection concerns at the agency 
level.
    Under final rule Sec.  223.17(b), a surety company is provided a 
series of protections before an agency can decline to accept its bonds. 
First, the agency must provide advance written notice to the surety and 
provide the surety with the opportunity to rebut the agency's reasons 
for declination and the opportunity to cure. Second, the agency must 
consider any submission by the surety and issue a written determination 
that the bonds should not be accepted. Third, the agency must issue a 
regulation pursuant to notice and comment rulemaking that articulates 
the agency's procedures and for cause standards for declining bonds. 
Treasury believes that these requirements will improve any agency 
practices that are allegedly deficient and will provide certified 
surety companies with adequate due process protections before their 
bonds can be declined by a particular agency.
    If a surety is not satisfied with the agency bond-approving 
official's decision to decline bonds, the surety may petition a court 
of competent jurisdiction to stay or enjoin the agency's written 
determination to decline additional bonds from that surety. Sec.  
223.17(b)(5)(i).
    3. Several commenters expressed concern that ``administratively 
final bond obligation'' was not defined in the NPRM for purposes of 
governing the exercise of agency discretion under Sec.  223.17. One 
commenter suggested this lack of definition could lead to inconsistent 
definitions, procedures, and decisions across agencies.
    Treasury believes that this determination should be left to the 
agency that is requiring the bond. Accordingly, final rule Sec.  
223.17(b)(3) requires the agency to define in its regulation when a 
bond obligation becomes administratively final under the agency's 
procedures.
    4. Several commenters expressed concern that an agency bond-
approving official could decline additional bonds based on a single 
bond obligation. One commenter stated the standard was coercive because 
it could force a surety to capitulate to the agency's demand for 
payment even if the surety has a good defense on a bond claim. One 
commenter expressed concern that the proposed rule would allow an 
agency to decline bonds for a ``single, immaterial, or insignificant 
delinquency'' rather than requiring that the declination be

[[Page 61994]]

limited to a situation where the surety is ``significantly delinquent 
either in the number of outstanding bills or dollar amounts thereof.''
    Treasury expects that agencies will act in good faith when 
exercising their authority to decline bonds. The agency must provide 
the Treasury-certified surety with extensive administrative due process 
protections, as specified in Sec.  223.17(b), prior to declining bonds 
from that surety.
    5. Several commenters engaged in one agency's immigration surety 
bond business alleged that the agency does not afford sureties with 
adequate due process in determining when a bond obligation is 
administratively final and that the agency has a high administrative 
error rate in declaring bond obligations due. One commenter stated that 
giving that agency's bond-approving official the discretion not to 
accept additional bonds under the standards articulated in the proposed 
rule would give the agency unfettered discretion.
    Treasury does not believe it would be appropriate to comment 
specifically on the allegations made by these commenters on a 
particular agency's alleged internal processes. We do emphasize, 
however, that Treasury believes that a fair and equitable 
administrative process is essential.
    Our response to Comment #2 summarizes the due process protections 
afforded to sureties under the final rule. The final rule ensures a 
fair and equitable administrative process, and expressly provides that 
each agency may exercise the discretion to decline additional bonds 
under Sec.  223.17(b), only in accordance with the specified 
requirements.
    6. One commenter raised a concern that permitting agencies to 
define additional ``for cause'' reasons to decline bonds in agency-
specific regulations, as provided in proposed Sec.  223.17, would 
provide extraordinary leverage to agencies that already have allegedly 
flawed administrative processes. Another commenter raised a concern 
with the proposed ``for cause'' provision because of its inherent 
``lack of specificity and consistency, as well as the potential for 
misapplication and mis-implementation'' across disparate agencies.
    ``For cause'' includes circumstances when a surety has failed to 
pay or satisfy an administratively final bond obligation due the 
agency. Other ``for cause'' reasons for declining bonds will depend on 
the particular needs and concerns of each agency. The final rule under 
Sec.  223.17(b)(3) requires an agency to issue a regulation subject to 
notice and comment rulemaking before declining any bonds. This 
requirement will ensure that surety companies have the opportunity to 
comment on the ``for cause'' reasons proposed by each agency.
    7. Two commenters suggested the proposed rule would upset, or 
undermine, the surety bond contract tripartite relationship in which 
the surety (secondary obligor) agrees to be answerable to the obligee 
(Federal agency) for the debt or default of the principal (primary 
obligor). One of these commenters expressed concern that the proposed 
rule focuses on the obligation of the secondary obligor (the surety) 
without first affording the primary obligor (the principal) the right 
to have its position adjudicated. The commenter suggested this focus 
could yield inconsistent results if the surety satisfies the Federal 
agency's bond demand and the principal is required to indemnify the 
surety, but the principal later defeats the Federal agency's default 
claim in court.
    The final rule in Sec.  223.17(b)(3) requires the agency to 
articulate its procedures and for cause standards for declining bonds 
in a regulation subject to notice and comment rulemaking before it can 
decline bonds from a particular surety. That agency regulation must 
define when a bond obligation is administratively final. The terms of 
the final rule do not alter existing tripartite bond contract 
obligations, but reasonably balance the interests of the parties in 
determining when additional bonds presented to an agency may be 
declined.
    8. As stated in the NPRM, Federal courts have affirmed that section 
9304(b) affords agency bond-approving officials discretion to decline 
to accept a bond underwritten by a Treasury-certified surety, 
consistent with the due process standards articulated in the proposed 
rule. See, e.g., Concord Casualty & Surety Co. v. United States, 69 
F.2d 78 (2d Cir. 1934); American Druggists Ins. Co. v. Bogart, 707 F.2d 
1229 (11th Cir. 1983). One commenter stated that these cases, in dicta, 
merely stand for the proposition that a bond-approving official could 
disapprove a particular undertaking in a particular case. One commenter 
stated this authority is not a basis for the NPRM to authorize agencies 
to bar a surety on a blanket basis.
    Treasury has broad administrative authority over certificate of 
authority matters. See Concord, 69 F.2d at 80-81 (The ``supervision, 
conduct, and responsibility'' of sureties operating under Treasury-
issued certificates of authority is placed with Treasury). In the final 
rule, Treasury, in the exercise of its discretion, has decided that 
agency bond-approving officials may decline bonds from a Treasury-
certified surety under section 9304(b) for cause. The agency must issue 
a regulation specifying the procedures and for cause standards for 
declining bonds. The Concord and American Druggists cases provide 
roadmaps for agencies to decline bonds in particular cases, in the 
absence of specific Treasury guidance. These cases do not limit, and in 
fact expressly recognize, Treasury's plenary authority to regulate 
certificates of authority that it issues.
    9. One commenter stated that 31 U.S.C. 9305(d)(1) clearly and 
unambiguously provides that Treasury may revoke the authority of a 
surety corporation to do new business if the Secretary decides the 
corporation is insolvent or is in violation of sections 9304, 9305, 
9306. The commenter stated that none of these three sections 
``authorize a Government agency to reject a bond issued by a surety who 
has an outstanding unpaid bond obligation that the agency contends is 
due and owing.''
    As explained in the discussion under Comment #1, the discretion of 
a Federal agency to decline additional bonds underwritten by a 
Treasury-certified surety, consistent with the requirements of 
Sec. Sec.  223.16 and 223.17 in the final rule, is authorized under 31 
U.S.C. 9304(b).
    10. Several commenters expressed the view that the proposed 
amendment to part 223 is not necessary as Treasury, in the NPRM, stated 
it has only recognized a problem with sureties in ``anomalous and 
rare'' cases. One commenter expressed the view that the proposed 
changes are excessive and punitive to sureties. Another commenter 
suggested the proposed changes would create more strife by compelling 
litigation and parallel administrative practices. This commenter stated 
``if the surety has independently investigated the merits of a claim 
and proceeded in a manner consistent with the outcome of its 
investigation [e.g., denied the agency's claim], it has acted 
responsibly and properly, even if it is ultimately determined in 
subsequent litigation that the surety's decision was incorrect.'' In 
general, these commenters suggested that the government has adequate 
recourse against sureties, as sureties are precluded from writing 
additional bonds if they have not paid a final judgment under the 
standards of 31 U.S.C. 9305(e).
    In the NPRM Treasury stated that the regulatory amendment was 
necessary to facilitate the prompt resolution of bond disputes between 
Federal agencies and

[[Page 61995]]

sureties. Treasury noted that, in a limited number of cases, sureties 
appear to have simply ignored agency final decisions for extended 
periods of time. Treasury stated these ``anomalous and rare'' cases 
represented an unwelcome burden on the Treasury and the public fisc.
    The NPRM proposed to address this concern. Treasury is particularly 
concerned with situations where a surety underwrites high-volume, low-
dollar bonds, and hundreds, even thousands, of bond cases remain 
unresolved for extended periods of time. The commenters appear to 
suggest that a Treasury certificate, once granted, gives a surety the 
unilateral authority to decline every agency bond demand with impunity 
based on the surety's own internal investigations. These commenters 
suggest that the agency's recourse is to reduce each bond claim to a 
judgment; otherwise, the agency is compelled to continue doing business 
with that surety in all cases.
    We disagree with this position. In our view, permitting an agency 
to decline additional bonds under certain circumstances, as provided in 
the final rule, may reduce litigation as the agency and surety will 
have the proper incentive to resolve disputes at the administrative 
level. Moreover, the discretion afforded to agencies under Sec.  
223.17(b) is consistent with, and gives effect to, 31 U.S.C. 9304(b).
    11. One commenter expressed concern that the proposed rule would 
enable an agency to reject bonds from a Treasury-certified surety in 
accordance with standards in an agency-specific rule or regulation. 
Another commenter expressed concern that agency-specific standards 
could lead to inconsistent definitions, procedures, and decisions 
across agencies.
    The agency regulations on declining bonds will be subject to notice 
and comment rulemaking. Surety companies will have the opportunity to 
express their concerns directly to the agencies during this process.
    12. One commenter expressed concern that an agency's decision to 
decline payment and performance bonds on a project under proposed Sec.  
223.17, after the agency has already accepted a project bid bond 
underwritten by that same surety, could present contract complications, 
including a claim on the bid bond, because the principal may not be 
able to obtain a replacement surety in time.
    We agree with the commenter that this sequence of events could 
present unintended contract complications. The final rule has been 
amended under Sec.  223.17(b)(5)(ii) to provide that an agency's 
authority to decline bonds does not apply to otherwise acceptable 
payment and performance contract bonds, when the agency has already 
accepted a bid bond from the same surety on the particular project.
    13. One commenter recommended proposed Sec.  223.17(b)(3) be 
amended to require that an agency post notice of any proposed 
declination of bonds in the Federal Register within five days of the 
date the agency gives the surety written notice of its intention to 
decline bonds. This commenter also recommended that the proposed 
declination by the agency be posted by Treasury as an on-line 
supplement to Department Circular 570.
    Section 223.17(b)(4), as provided in the final rule, encourages 
agencies ``to use best efforts to ensure that persons conducting 
business with the agency are aware that bonds underwritten by the 
particular certified company will not be accepted.'' Treasury believes 
each agency is in the best position to determine how this information 
should be provided to principals who may be seeking to do business with 
the agency. We do not believe it is appropriate to publish this 
information in Department Circular 570, as the surety will still be 
certified by Treasury to write bonds for any other agency.
    14. One commenter asked whether the scope of an agency's authority 
to decline additional bonds under proposed Sec.  223.17 is intended to 
permit the agency to also require the replacement of bonds previously 
accepted by that agency.
    Section 223.17, in the final rule, is prospective and is not 
intended to require a principal to obtain replacement bonds that have 
already been accepted. In contrast, when Treasury revokes the authority 
of a surety to underwrite bonds for any agency, under 31 U.S.C. 
9305(b)-(d) and 31 CFR 223.18-223.20, agencies are advised that they 
should secure new bonds for bonds currently in force if a significant 
amount of liability remains outstanding, and that continuous bonds 
should not be renewed.
    15. Several commenters expressed concern that the proposed rule 
would require a surety to obtain injunctive relief in court in order to 
prevent the agency from declining additional bonds under the authority 
of Sec.  223.17. One of these commenters expressed concern that this 
standard would permit an agency to impose sanctions which eliminate the 
obligation of the agency to prove its claim in court, i.e., reduce the 
claim to final judgment. Another commenter recommended that the agency 
not be permitted to decline additional bonds until the time to seek 
judicial review has expired or the judicial review has been completed. 
Another commenter noted that the injunctive relief requirement would 
result in a need to file and engage in inefficient fast-track 
litigation.
    As noted above in our response to Comment #10, Treasury is of the 
view that permitting an agency to decline additional bonds, subject to 
a court of competent jurisdiction granting the surety injunctive 
relief, as provided in the final rule, may reduce litigation as the 
agency and surety will have the proper incentive to resolve disputes at 
the administrative level.
    16. One commenter expressed concern that the ``willful conduct'' 
exception in the proposed rule would provide an agency too much 
discretion in deciding whether to permit the surety to cure its 
noncompliance to avoid non-acceptance of its bonds by the agency.
    Under Sec.  223.17(b)(1)(iv), as provided in the final rule, a 
surety has the opportunity to cure its noncompliance to avoid non-
acceptance of its bonds by the agency. The ``willful conduct'' 
exception under Sec.  223.20(g), as proposed and in the final rule, 
whereby a surety does not have the opportunity to cure its 
noncompliance in specified circumstances, only applies to Treasury 
revocation actions. Agencies do not have authority to exercise the 
``willful conduct'' cure exception.
    17. One commenter suggested that an agency's proposed decision to 
decline bonds should be submitted to an independent Administrative Law 
Judge under 5 U.S.C. 556, due to what the commenter describes as the 
serious nature of the action, the impact on the principal and surety, 
costs, and potential delays.
    The formal adjudication requirements under the Administrative 
Procedure Act only apply in cases ``required by statute to be 
determined on the record after an opportunity for an agency hearing.'' 
5 U.S.C. 554(a) and 556(a). The authority for an agency to decline 
additional bonds is established under 31 U.S.C. 9304(b) and 31 CFR 
223.17(b). Section 556 procedures are not required because the surety 
statutes, 31 U.S.C. 9304-9308, do not require a formal adjudication to 
be determined on the record after an opportunity for a hearing.
    18. One commenter suggested the proposed rule should be amended to 
provide guidance on Treasury's role in assuring that the standards in 
the rule and in an agency's rules and processes, meet minimum due 
process standards.
    Treasury's final rule establishes requirements that apply to all 
agencies that exercise discretion under

[[Page 61996]]

Sec.  223.17(b) to decline bonds from Treasury-certified sureties.

B. Comments on Proposed Sec.  223.20 and Treasury's Responses

    19. Several commenters expressed concern that under proposed Sec.  
223.20 Treasury would not conduct a de novo review of an agency's 
administratively final decision (that the surety owes a past-due bond 
obligation) when adjudicating the agency's complaint requesting that 
the surety's certificate be revoked. The NPRM specified that Treasury 
would review whether the agency's administratively final decision (that 
the surety owes a past-due bond obligation) was reasonable, based on a 
consideration of relevant factors, and did not involve a clear error of 
judgment. The commenters expressed concern this standard of review 
would not provide sufficient opportunity for the surety to present its 
case to Treasury.
    Treasury has amended Sec.  223.20(f) in the final rule to provide 
that revocation complaints submitted to Treasury will be adjudicated by 
determining whether the default is clear and whether the company's 
failure to pay or satisfy the bonds is based on inadequate grounds. 
This standard of review retains, in large part, the existing standard 
under current 31 CFR 223.18. This change addresses the concerns raised 
by these commenters, and ensures that each surety has a meaningful 
opportunity to present its position to Treasury before a revocation is 
made. Matthews v. Eldridge, 424 U.S. 319, 333 (1976) (Fundamental due 
process is satisfied when an individual is given the opportunity to be 
heard at a ``meaningful time and in a meaningful manner'').
    The final rule under Sec.  223.20(a)(1) requires that an agency 
submitting a revocation complaint to Treasury certify that the bond 
obligation that is the subject of the complaint is administratively 
final under the agency's regulations or other authorities. In contrast 
to Sec.  223.17 (which requires an agency to publish a regulation), 
this means that an agency has the discretion to submit a revocation 
complaint to Treasury without promulgating a regulation, as long as the 
bond obligation is administratively final under agency authorities and 
practices. This flexibility is appropriate due, in part, to the array 
of due process protections afforded to sureties by Treasury under Sec.  
223.20.
    Treasury anticipates that its revocation decisions under Sec.  
223.20(f) will be subject to judicial review under the ``arbitrary, 
capricious, an abuse of discretion, or otherwise not in accordance with 
law'' standard set forth in 5 U.S.C. 706(2)(A). This is the judicial 
review standard of informal agency actions, including agency 
adjudications where no hearing or formal evidentiary standard is 
required by statute. Camp v. Pitts, 411 U.S. 138, 142 (1973); Castillo 
v. Army & Air Force Exchange Serv., 849 F.2d 199, 203, n. 1 (5th Cir. 
1988) (reasoning that the arbitrary and capricious test of section 
706(2)(A) is the appropriate standard for review of an administrative 
decision when an informal hearing is held or required, but not pursuant 
to statute).
    20. Several commenters stated Treasury can only revoke a surety's 
certificate of authority to write Federal bonds if the surety fails to 
pay a final judgment on a bond that has not been stayed or appealed 
under 31 U.S.C. 9305(e). One commenter stated that proposed Sec.  
223.20 was an impermissible attempt to amend 31 U.S.C. 9305(e).
    As detailed above in our responses to Comments #1 and #8, Congress 
granted to Treasury the administrative authority and responsibility to 
issue, regulate, and revoke certificates of authority to write Federal 
bonds. This broad authority is codified in 31 U.S.C. 9305(a)-(d). 
Section 9305(e) sets a statutory revocation standard that applies by 
operation of law when a surety fails to pay a final court judgment or 
order, without substantive review of the underlying dispute by 
Treasury. It does not preclude Treasury, as licensor, from establishing 
an administrative revocation standard based on its independent 
authority to do so under section 9305(a)-(d). Treasury's existing 
administrative revocation standards have been codified in regulations 
for many decades. For example, the source authorities for current 31 
CFR 223.18-223.20 were published in the Federal Register as early as 
1969, 1973, and 1977. Here, Treasury, in the reasonable exercise of its 
administrative discretion, has decided to update its existing 
administrative revocation standard under 31 CFR 223.20, as provided in 
the final rule.
    21. Proposed Sec.  223.20(c) provided that Treasury, on receipt of 
an agency complaint meeting the stated requirements, will notify the 
surety that its certificate ``will'' be revoked in the absence of a 
satisfactory explanation. One commenter suggested this provision should 
be amended to provided that Treasury ``may'' revoke the certificate, 
which is the standard provided in the current regulation.
    The final rule has been amended under Sec.  223.20(c) to provide 
that Treasury will notify the surety of the agency complaint, and the 
notice will afford the surety the opportunity to address the complaint 
and demonstrate its qualifications to retain its certificate. The 
resolution of the complaint by Treasury is governed by Sec.  223.20.
    22. One commenter expressed concern that the formal rules of 
evidence and the formal adjudication standards provided by the 
Administrative Procedure Act would not apply to the informal hearing 
afforded to a surety under proposed Sec.  223.20(f) and (h)(6) and (7).
    The formal adjudication standards under the Administrative 
Procedure Act only apply in cases ``required by statute to be 
determined on the record after an opportunity for an agency hearing.'' 
5 U.S.C. 554(a). As discussed in our response to Comment #17, the 
surety statutes, 31 U.S.C. 9304-9308, do not require a formal 
adjudication to be determined on the record after an opportunity for a 
hearing.
    23. Several commenters suggested that the administrative revocation 
standards under proposed Sec.  223.20 should be amended to provide a 
surety more due process before Treasury makes a revocation decision. 
Some commenters suggested the final rule be amended to provide the 
surety an opportunity for a trial-like evidentiary hearing in Sec.  
223.20 revocation actions.
    Fundamental due process is satisfied when an individual is given 
notice and the opportunity to be heard at a ``meaningful time and in a 
meaningful manner.'' Matthews v. Eldridge, 424 U.S. 319, 333 (1976). 
Section 223.20 in the final rule provides a panoply of due process 
protections to ensure compliance with this standard. Before Treasury 
commences a revocation action, the agency must certify to Treasury that 
the bond obligations that are the subject of the complaint are 
administratively final under the agency's regulations or other 
authorities. Sec.  223.20(a)(1). The agency must submit documentation 
to Treasury supporting the complaint. Sec.  223.20(b). In addition, the 
agency must certify that the surety's obligation to pay the bonds has 
not been stayed or enjoined by a court of competent jurisdiction. Sec.  
223.20(a)(3).
    Upon receipt of the complaint, Treasury notifies the surety of the 
facts and conduct referenced in the complaint, and provides the surety 
the opportunity to demonstrate its qualifications to retain its 
certificate. Sec.  223.20(c). Treasury affords the surety the 
opportunity to request an informal hearing. Sec.  223.20(h)(1). If an 
informal hearing is requested, Treasury provides the surety with 
written notice of the time and place of the hearing, directs

[[Page 61997]]

the surety to bring all documents necessary and relevant to support its 
position, offers the surety the opportunity to be represented by 
counsel at the hearing, and affords the surety the opportunity to 
present any relevant material and to examine the administrative record. 
Sec.  223.20(h)(2), (3) and (4). The complaining agency may be 
requested to send a representative to the hearing to present any 
relevant material. Sec.  223.20(h)(5). The Treasury Reviewing Official 
is authorized to require the submission of additional documentation 
from the complaining agency and the surety to ensure appropriate 
consideration of relevant factual or legal issues. Sec.  223.20(h)(6). 
The Treasury Reviewing Official prepares a written recommendation to 
the Treasury Deciding Official setting forth findings and a recommended 
disposition. Sec.  223.20(h)(10). The Treasury Deciding Official makes 
the final decision based on the specified administrative record, which 
includes documentation submitted by the surety. Sec.  223.20(h)(10).
    Due process is flexible ``and calls for such procedural protections 
as the particular situation demands.'' Matthews, 424 U.S. at 334 
(internal citations omitted). A surety's protected interest in its 
certificate of authority to write Federal bonds ``is indeed narrow.'' 
American Druggists Ins. Co. v. Bogart, 707 F.2d 1229, 1235 (11th Cir. 
1983). Given this narrow interest, rudimentary due process requires 
``notice reasonably calculated to apprise the surety of the charge of 
unreliability, and an opportunity to rebut that charge.'' Id. at 1237. 
The protections in Sec.  223.20, as provided in the final rule, are 
more than adequate to satisfy the process required.

C. General Comments on the NPRM and Treasury's Responses

    24. One trade association, whose members underwrite Federal bonds 
on which the Customs and Border Protection (CBP) agency is the obligee, 
expressed the opinion that CBP-specific authorities set a higher 
standard for actionable surety delinquency and due process standards 
than the proposed rule. The commenter suggested that Treasury should 
adopt the CBP standards, or clarify that the Treasury final rule does 
not take precedence over CBP standards in the context of customs bonds.
    CBP has promulgated, under its own specific authority, a regulation 
that governs when CBP is authorized to decline additional customs bonds 
from a surety when a surety is in default on a customs bond. See, e.g., 
19 U.S.C. 66, 1623, 1624; 19 CFR 113.38. Given the CBP specific 
authority, the Treasury final rule under Sec.  223.17(b) does not 
supersede or take precedence over the CBP regulation. However, Treasury 
declines to accept the CBP standards for government-wide application; 
therefore, CBP surety bond regulations do not apply to surety bonds 
presented to, or accepted by, other agencies.
    25. The trade association whose members write Federal customs bonds 
on which the CBP agency is the obligee, recommended that the final rule 
enhance the CBP-specific regulation in several ways.
    Treasury is not in a position to amend a CBP-specific regulation, 
and declines to do so. Instead, Treasury has considered whether the 
suggestions made by this commenter are appropriate for the Treasury 
regulation and has amended the final rule, as appropriate.
    26. Two commenters suggested the proposed rule was a ``significant 
regulatory action'' which should be subject to additional regulatory 
review procedures under Executive Order 12866. One of these commenters 
suggested if an agency declines to accept bonds from a Treasury-
certified surety, or if Treasury revokes a surety's certificate, it 
will have an effect on the economy of $100 million or more, depending 
on which surety is involved.
    Treasury has determined that the proposed regulation will not have 
an effect on the economy of $100 million or more because of the rule's 
limited scope. Federal bond-approving officials already have statutory 
authority under 31 U.S.C. 9304(b) to determine which bonds proffered by 
Treasury-certified sureties are acceptable. Section 223.17(b) of the 
final rule provides that an agency bond-approving official may decline 
bonds from a Treasury-certified surety for cause, provided the due 
process standards are met. This provision does not impact a Treasury-
certified surety's authority to underwrite bonds that are presented to 
other Federal agencies for acceptance. Under final rule 31 CFR 
223.17(b)(5)(i), the agency declination authority does not apply when 
the ``for cause'' basis or reason has been stayed or enjoined by a 
court of competent jurisdiction. In addition, Treasury already has 
existing authority under current 31 CFR 223.18 to revoke a surety's 
certificate of authority based on a complaint received from an agency; 
see also 31 U.S.C. 9305(d)(1) (example of Treasury's revocation 
authority). The final rule under 31 CFR 223.20 updates the procedures 
used by Treasury to adjudicate agency revocation complaints. Final rule 
31 CFR 223.20(a)(3) requires an agency submitting a revocation 
complaint to Treasury to certify that the bond obligations which are 
the subject of the complaint have not been stayed or enjoined by a 
court of competent jurisdiction.
    27. One commenter suggested that the NPRM 60-day comment period 
should be extended to ensure a sufficient number of responses are 
received.
    The publication of the NPRM in the Federal Register, including the 
60-day notice and comment period, resulted in the submission of 14 
comment letters to Treasury. These letters, which were submitted by 
individuals and a cross-section of the industry, included substantive 
and thorough comments on a broad range of issues associated with the 
proposed rule. The 60-day notice and comment period gave interested 
parties the opportunity to participate in the rulemaking, consistent 
with 5 U.S.C. 553(b)(c).
    28. One commenter expressed concern that Federal contractors would 
be impacted by the revocation of surety certificates of authority under 
the NPRM. This commenter emphasized that it takes time for a 
contractor, particularly a small and emerging contractor, to develop a 
relationship with a surety, and if a surety's certificate is revoked 
under the terms of the proposed rule, such a contractor may not be able 
to find a replacement in time to qualify for Federal work. This 
commenter noted this could cause the contractor to fail and may have 
the effect of lessening competition on agency contracts.
    Treasury certifies sureties for the primary purpose of ensuring 
that a Federal agency's position is protected in the event of a default 
by a principal. This purpose is not furthered by a surety that fails to 
satisfy bond obligation(s), or whose certificate of authority is 
revoked by Treasury, as provided in Sec.  223.20. Section 
223.17(b)(5)(ii) of the final rule mitigates against undue impact on 
Federal contractors by providing that an agency's authority to decline 
additional bonds does not apply to proffered payment and performance 
contract bonds, when the agency has already accepted a bid bond from 
the principal on the same project. Moreover, the surety is given the 
right to cure to avoid agency declination of bonds under Sec.  
223.17(b)(1)(iv), and, in general, is given the right to cure to avoid 
revocation of its certificate by Treasury under Sec.  223.20(e)(2).
    29. One commenter requested the opportunity to provide testimony on 
the NPRM if Treasury conducts hearings on the proposed revisions.

[[Page 61998]]

    The 60-day notice and comment period gave interested parties the 
opportunity to participate in the rulemaking, consistent with 5 U.S.C. 
553(b)(c). Treasury received 14 comment letters from individuals and a 
cross-section of the industry. These letters included substantive and 
thorough comments on a broad range of issues associated with the 
proposed rule. Treasury has considered and addressed these comments, as 
reflected in the final rule, and Treasury does not believe it would be 
further informed by conducting a hearing on the NPRM. A hearing is not 
required. 5 U.S.C. 553(b)(c).

II. Section-by-Section Analysis

Section 223.1

    Revised Sec.  223.1 states, in plain language, that Part 223 
governs the issuance and revocation of certificates of authority of 
surety companies to do business with the United States as sureties on, 
or reinsurers of, Federal surety bond obligations, and the acceptance 
of such obligations. The final rule deletes archaic language and 
clarifies that the U.S. Department of the Treasury, Bureau of the 
Fiscal Service (Treasury), acts on behalf of the Secretary of the 
Treasury in performing these duties.

Section 223.2

    Revised Sec.  223.2 provides that applications for certificates of 
authority should be submitted to Treasury at the location, and in the 
manner, specified online at http://www.fiscal.treasury.gov/fsreports/ref/suretyBnd/surety_home.htm, as amended from time to time.

Section 223.3

    Section 223.3(a) establishes, in part, the requirements that must 
be met by an applicant company in order to be issued a certificate of 
authority by Treasury. Revised Sec.  223.3(a) restates such 
requirements in plain language. In addition, the final rule clarifies 
that any certificate issued by Treasury is expressly subject to 
continued compliance by the surety with all statutory requirements and 
the other conditions referenced in this part.

Section 223.4

    Revised Sec.  223.4 provides that no company will be issued a 
certificate of authority by Treasury unless it maintains on deposit 
with the insurance commissioner of the State in which it is 
incorporated, or other specified State official, legal investments 
having a current market value of $100,000 or more, for the protection 
of claimants, including the surety's policyholders in the United 
States. Revised Sec.  223.4 adds a sentence requiring a company to 
submit to Treasury with its initial application for a certificate of 
authority, and annually thereafter, a written statement signed by the 
State official attesting to the current market value of the deposit and 
that the legal investments remain on deposit with the State.

Section 223.8

    Section 223.8 requires Treasury-certified sureties to file annual 
and quarterly financial reports to Treasury for review. Revised Sec.  
223.8(a) updates the specified Treasury official to whom these reports 
should be submitted. Revised Sec.  223.8(a) specifies that the reports 
must be submitted using the annual and quarterly statement blanks 
adopted by the National Association of Insurance Commissioners.

Section 223.9

    Section 223.9 establishes the criteria by which Treasury values the 
assets and liabilities of a company for certificate of authority 
purposes. Revised Sec.  223.9 provides that Treasury will allow credit 
for reinsurance in all classes of risk if the reinsuring company holds 
a certificate of authority from Treasury, or has been recognized as an 
admitted reinsurer by Treasury. Revised Sec.  223.9 clarifies that this 
credit for reinsurance will be allowed only if the reinsurer is in 
continued compliance with all certificate of authority requirements.

Section 223.11

    Revised Sec.  223.11(b) provides that a surety can underwrite a 
Federal bond in excess of its underwriting limitation if the excess 
amount is reinsured by a company holding a certificate of authority 
issued by Treasury, provided the specified reinsurance requirements are 
met. Revised Sec.  223.11(b) states that the requisite reinsurance bond 
forms are available on the General Services Administration Web site at 
www.gsa.gov.

Section 223.12

    Section 223.12 establishes the application requirements and 
standards for a company to be recognized by Treasury as an admitted 
reinsurer (except on excess risks running to the United States) for 
surety companies doing business with the United States. When a 
Treasury-certified surety cedes non-Federal risks to an admitted 
reinsurer, Treasury will credit the surety for the ceded reinsurance 
when valuing its assets and liabilities, provided applicable 
requirements are met. Revised Sec.  223.12 updates the specified 
Treasury official to whom applications and reports pertaining to 
admitted reinsurer status should be submitted.

Section 223.16

    Revised Sec.  223.16 adds two new sentences to the end of this 
subpart. These sentences clarify that Treasury-certified companies have 
the opportunity to present their bonds to an agency bond-approving 
official for acceptance, but that the actual acceptance of a bond by an 
agency bond-approving official is subject to revised Sec.  223.17.

Section 223.17

    Revised Sec.  223.17(a) provides that a Treasury-certified company 
may present its bonds to any agency bond-approving official for 
acceptance, and that such bond-approving official may accept such 
bonds.
    Revised Sec.  223.17(b)(1) provides that an agency bond-approving 
official may decline bonds from a Treasury-certified surety for cause, 
provided the agency gives advance written notice to the agency.
    Revised 223.17(b)(2) provides that the agency may decline bonds 
after consideration of any submission by the company and after a 
written determination by the agency to decline the bonds that is 
consistent with agency authorities.
    Revised Sec.  223.17(b)(3) requires the agency to issue a 
regulation articulating the agency's procedures and for cause standards 
for declining to accept bonds. The regulation should define when a bond 
obligation becomes administratively final under the agency's 
procedures.
    Revised Sec.  223.17(b)(4) encourages agencies to ensure that 
persons conducting business with the agency are aware that bonds from a 
particular certified company will not be accepted.
    Revised Sec.  223.17(b)(5) provides that the agency's authority to 
decline bonds does not apply to bonds where the underlying obligation 
or other for cause reason that forms the basis for the declination has 
been stayed or enjoined by a court of competent jurisdiction, or to 
payment and performance contract bonds when the agency has already 
accepted a bid bond from the company on a particular project.
    Revised Sec.  223.17(b)(6) provides that an agency bond-approving 
official may decline a bond from a Treasury-certified surety without 
advance notice to the surety if the bond is not executed in proper 
form, or is not in the correct penal sum amount, or is otherwise 
technically deficient.

[[Page 61999]]

Section 223.18

    Revised Sec.  223.18 states that revocation of a surety's 
certificate of authority by Treasury can occur in two ways. First, 
Treasury can initiate a revocation proceeding on its own initiative 
under final rule Sec.  223.19 when it has reason to believe that a 
surety is not complying with 31 U.S.C. 9304-9308 and/or Part 223. 
Second, Treasury can initiate a revocation proceeding under final rule 
Sec.  223.20 upon receipt of a complaint from an agency meeting the 
requirements of that section.

Section 223.19

    Revised Sec.  223.19 states the process by which Treasury initiates 
proceedings on its own accord to revoke a surety's certificate of 
authority for failure to meet the requirements of 31 U.S.C. 9304-9308 
and/or Part 223.

Section 223.20

    Revised Sec.  223.20 specifies the process for an agency to submit 
a complaint to Treasury requesting that a certified surety's 
certificate of authority be revoked for failure to pay or satisfy one 
or more administratively final bond obligations. Under revised Sec.  
223.20(a)(1), the agency submitting the complaint to Treasury must 
certify that the bond obligations that are the subject of the complaint 
are administratively final under the agency's regulations or other 
authorities. The agency must also certify to Treasury that the 
obligation to pay or satisfy the bond obligations has not been stayed 
or enjoined by a court. Sec.  223.20(a)(3).
    Revised Sec.  223.20(c) and (d) afford the surety the opportunity 
to demonstrate its qualifications to retain its certificate, and 
establish the role of the Treasury Reviewing Official and the Treasury 
Deciding Official in the adjudicative process.
    Revised Sec.  223.20(f) provides that revocation complaints will be 
adjudicated by Treasury based on a determination whether the default is 
clear and whether the surety's failure to pay or satisfy the bonds is 
based on inadequate grounds.
    Revised Sec.  223.20(h) retains the right of a surety to request an 
informal hearing before Treasury makes its revocation decision. The 
final rule specifies the procedures under which such an informal 
hearing would be conducted. Under the final rule, the formal 
adjudication standards of the Administrative Procedure Act (APA), 5 
U.S.C. 554, 556, 557 do not apply to the informal hearing or 
adjudication process.
    In the event that Treasury sustains the agency's complaint and 
makes a decision that the surety's certificate should be revoked, 
revised Sec.  223.20(e)(2) provides a surety will be afforded an 
opportunity to cure the noncompliance to avoid decertification, unless 
its noncompliance is ``willful.'' Revised Sec.  223.20(g) articulates 
the scope and application of the willful exception to the cure 
opportunity.

Section 223.21

    Revised Sec.  223.21 provides that a surety whose certificate of 
authority has been revoked or not renewed by Treasury can apply for 
reissuance of a certificate of authority after one year. Among other 
things, such a surety must demonstrate as a condition of reinstatement 
that the basis for the non-renewal or revocation of its certificate has 
been eliminated. Under revised Sec.  223.21 the determination of 
whether the basis for the non-renewal or revocation has been eliminated 
or effectively cured will be made by Treasury in its discretion.

                  Derivation Chart for Revised Part 223
------------------------------------------------------------------------
                       Old section                          New section
------------------------------------------------------------------------
                                                                  223.17
223.17..................................................          223.18
                                                                  223.19
223.18..................................................          223.20
223.19..................................................          223.20
223.20..................................................          223.20
223.21..................................................          223.21
223.22..................................................          223.22
------------------------------------------------------------------------

III. Procedural Analysis

Regulatory Planning and Review

    The final rule does not meet the criteria for a ``significant 
regulatory action'' as defined in Executive Order 12866. Therefore, the 
regulatory review procedures contained therein do not apply.

Regulatory Flexibility Act Analysis

    It is hereby certified that the final rule will not have a 
significant economic impact on a substantial number of small entities. 
Treasury-certified sureties have an existing obligation to make payment 
on bond obligations to ensure acceptance of their bonds by agency bond-
approving officials under 31 U.S.C. 9304(b). The rule merely codifies 
this existing obligation in the regulation and clarifies that Federal 
agencies can decline to accept bonds underwritten by Treasury-certified 
sureties for cause. In addition, the final rule revises the existing 
procedures and standard of review that will be used by Treasury in 
adjudicating revocation complaints submitted by agencies. Accordingly, 
a regulatory flexibility analysis under the Regulatory Flexibility Act 
(5 U.S.C. 601 et seq.) is not required.

Unfunded Mandates Act of 1995

    Section 202 of the Unfunded Mandates Reform Act of 1995, 2 U.S.C. 
1532 (Unfunded Mandates Act), requires that the agency prepare a 
budgetary impact statement before promulgating any rule likely to 
result in a Federal mandate that may result in the expenditure by 
State, local, and tribal governments, in the aggregate, or by the 
private sector, of $100 million or more in any one year. If a budgetary 
impact statement is required, section 205 of the Unfunded Mandates Act 
also requires the agency to identify and consider a reasonable number 
of regulatory alternatives before promulgating the rule. We have 
determined that the final rule will not result in expenditures by 
State, local, and tribal governments, or by the private sector, of $100 
million or more in any one year. Accordingly, we have not prepared a 
budgetary impact statement or specifically addressed any regulatory 
alternatives.

List of Subjects in 31 CFR Part 223

    Administrative practice and procedure, Surety bonds.

    For the reasons set out in the preamble, 31 CFR part 223 is amended 
to read as follows:

PART 223--SURETY COMPANIES DOING BUSINESS WITH THE UNITED STATES

0
1. Revise the authority citation for part 223 to read as follows:

    Authority:  5 U.S.C. 301; 31 U.S.C. 9304-9308.


0
2. Revise Sec.  223.1 to read as follows:


Sec.  223.1  Certificate of authority.

    The regulations in this part will govern the issuance by the 
Secretary of the Treasury, acting through the U.S. Department of the 
Treasury, Bureau of the Fiscal Service (Treasury), of certificates of 
authority to bonding companies to do business with the United States as 
sureties on, or reinsurers of, Federal surety bonds (hereinafter 
``bonds'' or ``obligations'') under the authority of 31 U.S.C. 9304-
9308 and this part, and the acceptance of such obligations. The 
regulations in this part also govern the revocation of certificates.

0
3. Revise Sec.  223.2 to read as follows:


Sec.  223.2  Application for certificate of authority.

    Every company wishing to apply for a certificate of authority shall 
submit an

[[Page 62000]]

application to the Bureau of the Fiscal Service, U.S. Department of the 
Treasury, c/o Surety Bond Branch, to the location, and in the manner, 
specified online at http://www.fiscal.treasury.gov/fsreports/ref/suretyBnd/surety_home.htm, as amended from time to time. In accordance 
with 31 U.S.C. 9305(a), the application will include a copy of the 
applicant's charter or articles of incorporation and a financial 
statement, signed and sworn to by its president and secretary, showing 
its assets and liabilities. A fee shall be transmitted with the 
application in accordance with the provisions of Sec.  223.22(a)(i).

0
4. In Sec.  223.3, revise paragraph (a) to read as follows:


Sec.  223.3  Issuance of certificates of authority.

    (a)(1)(i) A company submitting an application to be issued a 
certificate of authority by Treasury to underwrite and reinsure Federal 
surety bonds must include all required data and information, as 
determined by Treasury in its discretion, for the application to be 
complete and ready for review. Upon receipt of a complete application, 
Treasury will evaluate the submission to determine whether the 
applicant company:
    (A) Is duly authorized under its charter or articles of 
incorporation to conduct the business referenced under 31 U.S.C. 
9304(a)(2);
    (B) Has paid-up capital of at least $250,000 in cash or its 
equivalent;
    (C) Is solvent and financially and otherwise qualified to conduct 
the business referenced under 31 U.S.C. 9304(a)(2); and
    (D) Is able and willing to carry out its contracts.
    (ii) In making the determination whether a company meets these 
requirements, Treasury will evaluate the application as a whole, the 
required financial statement(s) submitted by the company, the company's 
charter or articles of incorporation, the past history of the company, 
and any further evidence or information that Treasury may require the 
company to submit (at the company's expense).
    (2) If Treasury determines, in its discretion, that the applicant 
company meets all of these requirements, Treasury will issue a 
certificate of authority to the company authorizing it to underwrite 
and reinsure Federal bonds. The certificate of authority will be 
effective for a term that expires on the last day of the next June. All 
such statutory requirements and regulatory requirements under this part 
are continuing obligations, and any certificate is issued expressly 
subject to continuing compliance with such requirements. The 
certificate of authority will be renewed annually on the first day of 
July, provided the company remains qualified under the law, the 
regulations in this part, and other pertinent Treasury requirements, 
and the company submits the fee required under Sec.  223.22 by March 
1st of each year to the address and/or account specified by Treasury.
* * * * *

0
5. In Sec.  223.4, add a sentence to the end of the section to read as 
follows:


Sec.  223.4  Deposits.

    * * * The company shall submit to Treasury with its initial 
application for a certificate of authority, and annually thereafter, a 
written statement signed by such State official attesting to the 
current market value of the deposit (not less than $100,000) and that 
the legal investments remain on deposit with the State under the terms 
specified.

0
6. In Sec.  223.8, revise paragraph (a) to read as follows:


Sec.  223.8  Financial reports.

    (a) Every company certified under this part will be required to 
file with the designated Treasury official annual and quarterly 
statements of its financial condition using the annual and quarterly 
statement form blanks adopted by the National Association of Insurance 
Commissioners. The annual and quarterly statements will be signed and 
sworn to by the company president and secretary. The timeframes and 
process for submitting the required annual and quarterly statements to 
Treasury are provided in Treasury's current Annual Letter to Executive 
Heads of Surety Companies.
* * * * *

0
7. In Sec.  223.9, revise the last sentence to read as follows:


Sec.  223.9  Valuation of assets and liabilities.

    * * * Credit will be allowed for reinsurance in all classes of 
risks if the reinsuring company holds a certificate of authority from 
the Secretary of the Treasury, provided such reinsuring company is in 
continuing compliance with all certificate of authority requirements, 
or has been recognized as an admitted reinsurer in accord with Sec.  
223.12.

0
8. In Sec.  223.11, revise paragraph (b)(1) to read as follows:


Sec.  223.11  Limitation of risk: protective methods.

* * * * *
    (b) Reinsurance. (1) In respect to bonds running to the United 
States, liability in excess of the underwriting limitation shall be 
reinsured within 45 days from the date of execution and delivery of the 
bond with one or more companies holding a certificate of authority from 
the Secretary of the Treasury. Such reinsurance shall not be in excess 
of the underwriting limitation of the reinsuring company. Where 
reinsurance is contemplated, Federal agencies may accept a bond from 
the direct writing company in satisfaction of the total bond 
requirement even though it may exceed the direct writing company's 
underwriting limitation. Within the 45 day period, the direct writing 
company shall furnish to the Federal agency any necessary reinsurance 
agreements. However, a Federal agency may, at its discretion, require 
that reinsurance be obtained within a lesser period than 45 days, and 
may require completely executed reinsurance agreements to be provided 
before making a final determination that any bond is acceptable. 
Reinsurance may protect bonds required to be furnished to the United 
States by the Miller Act (40 U.S.C. 3131, as amended) covering 
contracts for the construction, alteration, or repair of any public 
building or public work of the United States, as well as other types of 
Federal bonds. Use of reinsurance or coinsurance to protect such bonds 
is at the discretion of the direct writing company. Reinsurance shall 
be executed on reinsurance agreement forms: Standard Form 273 
(Reinsurance Agreement for a Miller Act Performance Bond), Standard 
Form 274 (Reinsurance Agreement for a Miller Act Payment Bond), and 
Standard Form 275 (Reinsurance Agreement in Favor of the United States 
for other types of Federal bonds). These Standard Forms are available 
on the General Services Administration Web site at www.gsa.gov.
* * * * *

0
9. In Sec.  223.12, revise paragraph (a) introductory text, paragraph 
(a)(5), paragraph (b) introductory text, and paragraph (c) to read as 
follows:


Sec.  223.12  Recognition as reinsurer.

    (a) Application by U.S. company. Any company organized under the 
laws of the United States or of any State thereof, wishing to apply for 
recognition as an admitted reinsurer (except on excess risks running to 
the United States) of surety companies doing business with the United 
States, shall file the following data with the designated Treasury 
official, and shall transmit

[[Page 62001]]

therewith the fee in accordance with the provisions of Sec.  223.22:
* * * * *
    (5) Such other evidence as Treasury may determine is necessary to 
establish that the company is solvent and able to meet the continuing 
obligation to carry out its contracts.
    (b) Application by a U.S. branch. A U.S. branch of an alien company 
applying for such recognition shall file the following data with the 
designated Treasury official, and shall transmit therewith the fee in 
accordance with the provisions of Sec.  223.22:
* * * * *
    (c) Financial reports. Each company recognized as an admitted 
reinsurer shall file with the designated Treasury official, on or 
before the first day of March of each year, its financial statement and 
such additional evidence as the Secretary of the Treasury determines 
necessary to establish that the requirements of this section are being 
met. A fee shall be transmitted with the foregoing data, in accordance 
with the provisions of Sec.  223.22.

0
10. Revise Sec.  223.16 to read as follows:


Sec.  223.16  List of certificate holding companies.

    A list of qualified companies is published annually as of July 1 in 
Department Circular No. 570, Companies Holding Certificates of 
Authority as Acceptable Sureties on Federal Bonds and as Acceptable 
Reinsuring Companies, with information as to underwriting limitations, 
areas in which listed sureties are licensed to transact surety business 
and other details. If the Secretary of the Treasury shall take any 
exceptions to the financial statements submitted by a company, he or 
she shall, before issuing Department Circular 570, give a company due 
notice of such exceptions. Copies of the Circular are available at 
http://www.fiscal.treasury.gov/fsreports/ref/suretyBnd/c570.htm, or 
from the designated Treasury official, upon request. Bonds underwritten 
by certified companies on the Department Circular No. 570 list may be 
presented to an agency bond-approving official for acceptance. 
Selection of a particular qualified company from among all companies 
holding certificates of authority is discretionary with the principal 
required to furnish the bond, but the acceptance of a bond by an agency 
bond-approving official is subject to Sec.  223.17.


Sec. Sec.  223.18 through 223.20  [Removed]

0
11. Remove Sec. Sec.  223.18, 223.19, and 223.20.


Sec.  223.17  [Redesignated as Sec.  223.18]

0
12. Redesignate Sec.  223.17 as Sec.  223.18.

0
13. Add a new Sec.  223.17 to read as follows:


Sec.  223.17  Acceptance and non-acceptance of bonds.

    (a) Acceptance of bonds. A bond underwritten by a certified company 
on the Sec.  223.16 Department Circular No. 570 list may be presented 
to any agency-bond approving official for acceptance, and such agency 
bond-approving official may accept such bonds.
    (b) Non-acceptance of bonds. (1) An agency bond-approving official 
may decline to accept bonds underwritten by a certified company for 
cause, but only if the company has been given advance written notice by 
such agency. The advance written notice shall:
    (i) State the intention of the agency to decline bonds underwritten 
by the company;
    (ii) State the reasons for or cause of the proposed declination of 
such bonds;
    (iii) Provide the opportunity for the company to rebut the stated 
reasons or cause; and
    (iv) Provide the company the opportunity to cure the stated reasons 
or cause.
    (2) The agency may decline to accept bonds underwritten by the 
company if, after consideration of any submission by the company or 
failure of the company to respond to the agency's notice, the agency 
issues a written determination that the bonds should not be accepted, 
consistent with agency authorities.
    (3) The agency shall articulate its procedures and for cause 
standards for declining to accept bonds in an agency regulation prior 
to declining any bonds in specific cases. The agency regulation should 
be subject to notice and comment rulemaking. ``For cause'' includes, 
but is not limited to, circumstances when a surety has not paid or 
satisfied an administratively final bond obligation due the agency. The 
agency regulation should define when a bond obligation becomes 
administratively final under the agency's procedures. Existing agency 
rules or regulations that substantially comply with, or that are 
consistent with, the requirement to articulate procedures and standards 
in advance meet the requirements of this paragraph.
    (4) Agencies that decline bonds under this section are encouraged 
to use best efforts to ensure that persons conducting business with the 
agency are aware that bonds underwritten by the particular certified 
company will not be accepted.
    (5) The agency's authority to decline bonds under this section does 
not apply:
    (i) When the underlying obligation or other for cause reason that 
forms the basis for the agency's written determination to decline bonds 
under paragraph (b)(2) of this section, or the agency written 
determination to decline bonds, has been stayed or enjoined by a court 
of competent jurisdiction, or
    (ii) To otherwise acceptable payment and performance contract 
bonds, when the agency has already accepted a project bid bond on a 
contract before making the written determination under paragraph (b)(2) 
of this section.
    (6) Notwithstanding any provision of this section, an agency bond-
approving official may decline a bond from a Treasury-certified surety 
without advance notice if the bond is not executed in proper form, or 
is not in the correct penal sum amount, or is otherwise technically 
deficient on its face.

0
14. Revise newly redesignated Sec.  223.18 to read as follows:


Sec.  223.18  Revocation.

    (a) A revocation proceeding against a Treasury-certified company 
can be initiated by Treasury in either of two ways:
    (1) Treasury, of its own accord, under Sec.  223.19, may initiate 
revocation proceedings against the company when it has reason to 
believe that the company is not complying with 31 U.S.C. 9304-9308 and/
or the regulations under this part, or
    (2) Treasury, under Sec.  223.20, may initiate revocation 
proceedings against the company upon receipt of a complaint from an 
agency that the company has not paid or satisfied one or more 
administratively final bond obligations due the agency.
    (b) A revocation of a company's certificate of authority under 
Sec.  223.19 or Sec.  223.20 precludes the company from underwriting or 
reinsuring additional bonds for any agency, and therefore revokes the 
company's opportunity to have its bonds presented to any agency bond-
approving official for acceptance.

0
15. Add new Sec.  223.19 to read as follows:


Sec.  223.19  Treasury-initiated revocation proceedings.

    Whenever Treasury has reason to believe that a company is not 
complying with the requirements of 31 U.S.C. 9304-9308 and/or the 
regulations under this part, including but not limited to a failure to 
satisfy corporate and financial standards, Treasury shall:
    (a) Notify the company of the facts or conduct which indicate such 
non-compliance, and provide the company an opportunity to respond, and

[[Page 62002]]

    (b) Revoke a company's certificate of authority after providing 
notice to the company if:
    (1) The company does not respond satisfactorily to Treasury's 
notification of non-compliance, or
    (2) The company, provided an opportunity to demonstrate or achieve 
compliance, fails to do so.

0
16. Add new Sec.  223.20 to read as follows:


Sec.  223.20  Revocation proceedings initiated by Treasury upon receipt 
of an agency complaint.

    (a) Agency complaint. If an agency determines that a company has 
not promptly made full payment or fully satisfied one or more bond 
obligations naming the agency as obligee, the head of the agency, or 
his or her designee, may submit a written complaint to the designated 
Treasury official (with executive oversight over the Treasury surety 
program, at the Assistant Commissioner level or equivalent), requesting 
that the company's certificate of authority be revoked for 
nonperformance. Under such complaint, the agency shall certify that:
    (1) The bond obligations that are the subject of the complaint are 
administratively final under the agency's regulations or other 
authorities;
    (2) The company has not paid or satisfied those bond obligations; 
and
    (3) The company's obligation to pay or satisfy the bond obligations 
has not been stayed or enjoined by a court of competent jurisdiction.
    (b) Documentation of complaint. The agency shall include in its 
complaint copies of the bonds, and documentation indicating that, for 
each such bond provided:
    (1) The agency has determined the principal is in default on the 
obligation covered by the bond, consistent with agency authorities, or 
if the default has been litigated, documentation indicating a court of 
competent jurisdiction has determined the principal is in default;
    (2) The agency made a written demand with the company on the bond 
requesting payment or satisfaction on its own behalf, consistent with 
agency authorities, or on behalf of laborers, materialmen, or suppliers 
(on payment bonds), based on the default status of the principal;
    (3) The agency afforded the company the opportunity to request 
administrative review within the agency contesting the agency's demand 
on the bond;
    (4) The agency made a final administrative determination that the 
bond obligation was due after the completion of such administrative 
review, or after the time period for the company to request 
administrative review within the agency has expired;
    (5) The agency provided the company the opportunity to enter into a 
written agreement to pay or satisfy the bond; and
    (6) The company has not made full payment or fully satisfied the 
demand, and the claim on the bond is past due.
    (c) Notice to company. On receipt of a complaint meeting the 
requirements of paragraphs (a) and (b) of this section, Treasury will 
notify the company of the agency complaint. The notice will require the 
company to submit a written explanatory response to Treasury within 20 
business days of the date of the notice. The notice will advise the 
company of the facts and conduct referenced in the complaint. Treasury 
will attach a copy of the incoming complaint to the notice. The notice 
will afford the company the opportunity to address the complaint and 
demonstrate its qualifications to retain its certificate of authority.
    (d) Reviewing official and deciding official. The designated 
Treasury official (with executive oversight over the Treasury surety 
program, at the Assistant Commissioner level or equivalent) will 
appoint a Treasury Reviewing Official to conduct a review of the agency 
complaint referenced in paragraphs (a) and (b) of this section, and the 
company response referenced in paragraph (c) of this section, to 
determine whether revocation of the company's certificate of authority 
is warranted. To ensure appropriate consideration of relevant factual 
or legal issues, the Reviewing Official is authorized to require the 
submission of additional documentation from the complaining agency and 
the company. Upon completion of such review, the Reviewing Official 
shall prepare a written Recommendation Memorandum addressed to the 
designated Treasury official setting forth findings and a recommended 
disposition. The designated Treasury official will be the Deciding 
Official who will make the final decision whether the company's 
certificate of authority to write and reinsure bonds should be revoked 
based on the administrative record. The administrative record consists 
of the agency complaint referenced in paragraphs (a) and (b) of this 
section, the company response referenced in paragraph (c) of this 
section, any other documentation submitted to, or considered by, the 
Reviewing Official, and the Reviewing Official's Recommendation 
Memorandum.
    (e) Final decision. (1) If the Deciding Official's final decision 
is that revocation is not warranted, the company and the agency will be 
notified of the basis of this decision and the complaint against the 
company will be dismissed.
    (2) If the Deciding Official's final decision is that the company's 
certificate of authority shall be revoked, the Deciding Official will 
notify the company and the agency of the revocation decision and the 
basis for such decision. Except as provided in paragraph (g) of this 
section, the notice will afford the company an opportunity to cure its 
noncompliance by paying or satisfying the bonds (including payment of 
any interest, penalties, and fees) forming the basis of the final 
decision within 20 business days. If the company cures its 
noncompliance within 20 business days, the complaint against the 
company will be deemed moot and the company will retain its certificate 
of authority to write Federal bonds. If the company does not cure its 
noncompliance within 20 business days, the company's certificate of 
authority shall be revoked by Treasury without further notice.
    (f) Standard of review. In reviewing whether the revocation of the 
company's certificate of authority is warranted under this section, the 
Reviewing Official will recommend, and the Deciding Official will 
determine, whether the default is clear and whether the company's 
failure to pay or satisfy the bonds is based on inadequate grounds.
    (g) Consideration of willful conduct. The company is not entitled 
to an opportunity to cure its noncompliance if its conduct in failing 
to carry out its contracts is willful. For purposes of this regulation, 
``willful'' means a careless or reckless disregard of a known legal 
obligation to satisfy an administratively final bond obligation. In 
considering whether a company's conduct is willful, the Deciding 
Official may consider whether:
    (1) An agency has filed a prior complaint with Treasury requesting 
that the company's certificate be revoked for a substantially similar 
bond obligation;
    (2) The company asserted substantially similar defenses to such 
bond obligation;
    (3) Such defenses were considered by the agency under pertinent 
authorities and dismissed;
    (4) Treasury made a final decision that revocation of the company's 
certificate was justified; and
    (5) Other pertinent factors.
    (h) Informal hearing. (1) If a company that is the subject of a 
complaint under paragraph (a) and (b) of this section believes the 
opportunity to make known

[[Page 62003]]

its views, as provided for under paragraph (c) of this section, is 
inadequate, it may, within 20 business days of the date of the notice 
required by paragraph (c), request, in writing, that an informal 
hearing be convened.
    (2) As soon as possible after a written request for an informal 
hearing is received, the Reviewing Official shall convene an informal 
hearing, at such time and place as he or she deems appropriate, for the 
purpose of determining whether the company's certificate of authority 
should be revoked.
    (3) The company shall be advised, in writing, of the time and place 
of the informal hearing and shall be directed to bring all documents, 
records and other information as it may find necessary and relevant to 
support its position.
    (4) The company may be represented by counsel and shall have a fair 
opportunity to present any relevant material and to examine the 
administrative record.
    (5) The complaining agency may be requested by the Reviewing 
Official to send a representative to the hearing to present any 
relevant material, and the agency representative may examine the 
administrative record.
    (6) The Reviewing Official is authorized to require the submission 
of additional documentation from the complaining agency and the company 
to ensure appropriate consideration of relevant factual or legal 
issues.
    (7) Formal rules of evidence will not apply at the informal 
hearing.
    (8) The formal adjudication standards under the Administrative 
Procedure Act, 5 U.S.C. 554, 556, 557 do not apply to the informal 
hearing or adjudication process.
    (9) Treasury may promulgate additional procedural guidance 
governing the conduct of informal hearings. This additional procedural 
guidance may be contained in the Annual Letter to Executive Heads of 
Surety Companies referenced in Sec.  223.9, the Treasury Financial 
Manual, or other Treasury publication or correspondence.
    (10) Upon completion of the informal hearing, the Reviewing 
Official shall prepare a written Recommendation Memorandum addressed to 
the Deciding Official setting forth findings and a recommended 
disposition. The Deciding Official will make the final decision whether 
the company's certificate of authority to write and reinsure Federal 
bonds should be revoked based on the administrative record. The 
administrative record consists of the Federal agency complaint 
referenced in paragraphs (a) and (b) of this section, the company 
response referenced in paragraph (c), any other documentation submitted 
to, considered by, or entered into the administrative record by the 
Reviewing Official, the hearing transcript, and the Reviewing 
Official's Recommendation Memorandum.
    (11) The provisions of paragraphs (e), (f), and (g) of this section 
shall apply to the adjudication of the agency complaint when an 
informal hearing is conducted.

0
17. Revise Sec.  223.21 to read as follows:


Sec.  223.21  Reinstatement.

    If, after one year from the date of the non-renewal or the 
revocation of its certificate of authority under this part, a company 
can demonstrate that the basis for the non-renewal or revocation has 
been cured, as determined by Treasury in its discretion, and that it 
can comply with, and does meet, all continuing requirements for 
certification under 31 U.S.C. 9304-9308 and this part, the company may 
submit an application to Treasury for reinstatement or reissuance of a 
certificate of authority, which will be granted without prejudice, 
provided all such requirements are met.

0
18. In Sec.  223.22, revise paragraph (c) to read as follows:


Sec.  223.22  Fees for services of the Treasury Department.

* * * * *
    (c) Specific fee information may be obtained from the designated 
Treasury official, or online at http://www.fiscal.treasury.gov/fsreports/ref/suretyBnd/surety_home.htm. In addition, a notice of the 
amount of a fee referred to in paragraphs (a)(1) through (4) of this 
section will be published in the Federal Register as each change in 
such fee is made.

    Dated: October 2, 2014.
David A. Lebryk,
Fiscal Assistant Secretary.
[FR Doc. 2014-24460 Filed 10-15-14; 8:45 am]
BILLING CODE P