[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.
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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.
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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.
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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.
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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