19–006 

112TH CONGRESS REPORT " ! HOUSE OF REPRESENTATIVES 2d Session 112–460 

SECURITY IN BONDING ACT OF 2012 

APRIL 27, 2012.—Committed to the Committee of the Whole House on the State of 

the Union and ordered to be printed 

Mr. SMITH of Texas, from the Committee on the Judiciary, 

submitted the following 

R E P O R T 

[To accompany H.R. 3534] 

[Including cost estimate of the Congressional Budget Office] 

The Committee on the Judiciary, to whom was referred the bill 

(H.R. 3534) to amend title 31, United States Code, to revise requirements related to assets pledged by a surety, and for other purposes, having considered the same, reports favorably thereon with 

an amendment and recommends that the bill as amended do pass. 

CONTENTS 

Page 

The Amendment ...................................................................................................... 1 

Purpose and Summary ............................................................................................ 2 

Background and Need for the Legislation ............................................................. 2 

Hearings ................................................................................................................... 4 

Committee Consideration ........................................................................................ 4 

Committee Votes ...................................................................................................... 4 

Committee Oversight Findings ............................................................................... 5 

New Budget Authority and Tax Expenditures ...................................................... 5 

Congressional Budget Office Cost Estimate .......................................................... 5 

Performance Goals and Objectives ......................................................................... 6 

Advisory on Earmarks ............................................................................................. 6 

Section-by-Section Analysis .................................................................................... 6 

Changes in Existing Law Made by the Bill, as Reported ..................................... 7 

The Amendment 

The amendment is as follows: 

Strike all after the enacting clause and insert the following: 

SECTION 1. SHORT TITLE. 

This Act may be cited as the ‘‘Security in Bonding Act of 2012’’. 

SEC. 2. SURETY BOND REQUIREMENTS. 

Chapter 93 of subtitle VI of title 31, United States Code, is amended— 

(1) by adding at the end the following: 


jbell on DSK7SPTVN1PROD with REPORTS
2 

‘‘§ 9310. Individual sureties 

‘‘If another applicable law or regulation permits the acceptance of a bond from a 

surety that is not subject to sections 9305 and 9306 and is based on a pledge of 

assets by the surety, the assets pledged by such surety shall— 

‘‘(1) consist of eligible obligations described under section 9303(a); and 

‘‘(2) be submitted to the official of the Government required to approve or accept the bond, who shall deposit the assets with a depository described under 

section 9303(b).’’; and 

(2) in the table of contents for such chapter, by adding at the end the following: 

‘‘9310. Individual sureties.’’. 

SEC. 3. GAO STUDY. 

(a) STUDY.—The Comptroller General of the United States shall carry out a study 

on the following: 

(1) All instances during the 10-year period prior to the date of the enactment 

of this Act in which a surety bond proposed or issued by a surety in connection 

with a Federal project was— 

(A) rejected by a Federal contracting officer; or 

(B) accepted by a Federal contracting officer, but was later found to have 

been backed by insufficient collateral or to be otherwise deficient or with 

respect to which the surety did not perform. 

(2) The consequences to the Federal Government, subcontractors, and suppliers of the instances described under paragraph (1). 

(3) The percentages of all Federal contracts that were awarded to small disadvantaged businesses (as defined under section 124.1002(b) of title 13, Code 

of Federal Regulations) and disadvantaged business enterprises (as defined 

under section 26.5 of title 49, Code of Federal Regulations) as prime contractors 

in the 2-year period prior to and the 2-year period following the date of enactment of this Act, and an assessment of the impact of this Act and the amendments made by this Act upon such percentages. 

(b) REPORT.—Not later than the end of the 3-year period beginning on the date 

of the enactment of this Act, the Comptroller General shall issue a report to the 

Committee on the Judiciary of the House of Representatives and the Committee on 

Homeland Security and Government Affairs of the Senate containing all findings 

and determinations made in carrying out the study required under subsection (a). 

Purpose and Summary 

H.R. 3534, the Security in Bonding Act of 2011, amends the requirements that an entity must satisfy in order to bid on or perform work for the United States government under a Federal contract. Specifically, the bill requires that, to secure a contractor’s obligation to complete a project, an individual surety must post collateral in a manner and of a nature that is consistent with what 

would be required of a contractor electing to bypass the requirement that it secure a surety bond from an entity approved by the 

U.S. Department of Treasury. Such heightened collateral requirements will ensure that taxpayers, subcontractors, and suppliers 

will be better protected. 

Background and Need for the Legislation 

A surety bond refers generically to any one of the bonds that provides security to another party in a contracting relationship. When 

the Federal Government needs construction services, it solicits bids 

from contractors. Each bidding contractor posts a bid bond to assure the government that the contractor is willing to accept the bid 

if it is the winning bidder. Without skin in the game, a bidder may 

be inclined to lowball several government contracts, get one or two, 

and walk away from the others, leaving the government to re-budget or look again for another contractor to perform the job. Once a 

bid is won, the contractor posts a payment bond to guarantee payVerDate Mar 15 2010 04:42 Apr 28, 2012 Jkt 019006 PO 00000 Frm 00002 Fmt 6659 Sfmt 6601 E:\HR\OC\HR460.XXX HR460

jbell on DSK7SPTVN1PROD with REPORTS
3 

1Federal Acquisition Regulation (hereinafter F.A.R.) 28.201. 2 UNITED STATES DEPARTMENT OF TREASURY, Circular 570 (updated Feb. 17, 2012), available 

at http://www.fms.treas.gov/c570/index.html. 

3F.A.R. 204–204.4. 

4F.A.R. 203. 

5Press Release, United States Department of Justice, Forth Worth Man Arrested and Charged 

in Alleged $25 Million Nationwide Scheme to Sell Fraudulent Securities, Mar. 26, 2010. 

ment to downstream subcontractors, and a performance bond to assure the United States that it will perform the contract according 

to its terms. Without a performance bond, the contractor could, for 

example, perform half the project and then take up another more 

lucrative project, leaving the government in the lurch. 

The Miller Act, 40 U.S.C. §§ 3131–34, requires contractors on 

Federal projects to give security to subcontractors and to the Federal Government in connection with a Federal contract. Under the 

Federal Acquisition Regulation, there are three methods by which 

security can be furnished. A contractor may supply a bond by a reliable corporate surety.1 Corporate sureties are vetted by the Treasury Department to ensure they are sufficiently capitalized and are 

listed on Treasury Circular 570.2 Alternatively, a contractor may 

individually provide to the government a possessory security interest in low-risk assets, such as U.S. bonds or notes, or furnish to 

the government a letter of credit or other right to draw on cash or 

cash equivalents upon default.3 Finally, a contractor may secure a 

bond from an individual surety.4 Individual sureties are not listed 

on Circular 570 and are not vetted by the Treasury Department. 

Whereas the government and subcontractors have substantial security when they have recourse to a corporate surety bond or to 

low-risk collateral posted by a contractor individually, the classes 

of qualifying collateral permitted under the F.A.R. for individual 

sureties provide relatively little security. First, an individual surety 

need not provide a possessory security interest in collateral. Under 

Uniform Commercial Code Articles 8 and 9, a nonpossessory security interested in investment and other intangible property may be 

trumped by a possessory security interest or by sale to a bona fide 

purchaser. The government therefore stands to get primed if these 

assets are pledged subsequent to their use to support an individual 

surety bond. Moreover, F.A.R. 28.203–2 permits an individual surety to post any exchange-traded security as collateral; F.A.R. 

28.203–3 even allows for the pledge of real property. These classes 

of collateral are far less secure than low risk cash equivalents like 

T-bills required to be furnished by individual contractors. 

The lack of Treasury Department oversight over individual sureties and the relatively relaxed collateral requirements for individual surety bonds has led to some notable instances in which the 

United States and/or subcontractors on Federal projects have been 

left without recourse. For example, in March 2010, Federal agents 

arrested a man in Fort Worth, Texas, in connection with the sale 

of worthless surety bonds through his company, Infinity Surety. 

‘‘According to allegations in the complaint, these bonds were used 

to insure various multi-million dollar construction project [sic] and 

were purportedly backed up by a single family residence in Tarrant 

County with a 2008 tax appraisal value of $130,700.’’ 5 In other 


jbell on DSK7SPTVN1PROD with REPORTS
4 

6See, e.g., Tip Top Constr. v. U.S., 563 F.3d 1338 (D.C. Cir. 2009) (approving Federal Govern- ment’s rejection of individual surety bond backed by an ‘‘allocated portion of $191,350,000.00 of 

previously mined, extracted, stockpiled and marketable coal, located on the property of E.C. 

Scarborough’’ because asset was not readily marketable as required by the F.A.R.). 7 ‘‘Disadvantaged business entities’’ are for-profit small business concerns where socially and 

economically disadvantaged individuals own at least a 51% interest and also control management and daily business operations. 49 C.F.R. § 26.5African Americans, Hispanics, Native Americans, Asian-Pacific and Subcontinent Asian Americans, and women are presumed to be socially 

and economically disadvantaged. United States Dep’t of Transp., Office of Small and Disadvantaged Utilization, Definition of a DBE, available at http://osdbu.dot.gov/DBEProgram/definitions.cfm. 

cases, the Federal Government has had the foresight to reject 

bonds backed by insufficient security.6

One legislative solution to improve the security of the United 

States and subcontractors on Federal jobs would be to eliminate 

the individual surety market altogether. With a lighter touch, the 

Security in Bonding Act of 2011 simply requires individual sureties 

to post collateral of equal security to the collateral that an individual contractor would have to pledge if he or she chose to secure 

payment or performance individually. 

Some small contractors, and particularly disadvantaged business 

enterprises 7 (DBE’s) and others seeking to enter the Federal contracting industry, may raise some concern about H.R. 3534. While 

DBE’s who serve as subcontractors can benefit from the enhanced 

collateral requirements for individual sureties contemplated by 

H.R. 3534, those seeking to be prime contractors may be wary to 

the extent that the bill makes obtaining bonds more difficult, as 

the enhanced collateral requirements for individual sureties may 

drive some individual sureties out of the bonding industry. Emerging contractors already face difficulty in obtaining the necessary 

surety bonds to bid for and perform Federal contracts because of 

their lack of sufficient assets, causing a cycle where a lack of assets 

leads to an inability to obtain bonding, which, in turn, prevents 

them from obtaining work that allows them to build up their assets. Some emerging contractors are concerned that H.R. 3534 may 

have the unintentional effect of making their already difficult bonding situation worse by reducing the number of individual sureties 

available. 

Hearings 

On March 5, 2012, the Subcommittee on Courts, Commercial and 

Administrative Law held a legislative hearing on H.R. 3534 and 

heard testimony from: Mark McCallum, the CEO of the National 

Association of Surety Bond Producers; Jeanette Wellers, the President and CFO of JBlanco Enterprises, Inc.; Robert Little, Jr., a 

former government contracting officer; and Karen Barbour, President of The Barbour Group, LLC. 

Committee Consideration 

On March 20, 2012, the Committee met in open session and ordered the bill H.R. 3534, as amended, favorably reported by voice 

vote, a quorum being present. 

Committee Votes 

In compliance with clause 3(b) of rule XIII of the Rules of the 

House of Representatives, the Committee advises that there were 


jbell on DSK7SPTVN1PROD with REPORTS
5 

no recorded votes during the Committee’s consideration of H.R. 

3534. Mr. Cohen offered an amendment striking a provision that 

would have given contracting officers discretion to require the use 

of a corporate surety and adding a GAO study requirement. The 

Committee adopted the amendment by voice vote. 

Committee Oversight Findings 

In compliance with clause 3(c)(1) of rule XIII of the Rules of the 

House of Representatives, the Committee advises that the findings 

and recommendations of the Committee, based on oversight activities under clause 2(b)(1) of rule X of the Rules of the House of Representatives, are incorporated in the descriptive portions of this report. 

New Budget Authority and Tax Expenditures 

Clause 3(c)(2) of rule XIII of the Rules of the House of Representatives is inapplicable because this legislation does not provide new 

budgetary authority or increased tax expenditures. 

Congressional Budget Office Cost Estimate 

In compliance with clause 3(c)(3) of rule XIII of the Rules of the 

House of Representatives, the Committee sets forth, with respect to 

the bill, H.R. 3534, the following estimate and comparison prepared 

by the Director of the Congressional Budget Office under section 

402 of the Congressional Budget Act of 1974: 

U.S. CONGRESS, 

CONGRESSIONAL BUDGET OFFICE, 

Washington, DC, April 16, 2012. 

Hon. LAMAR SMITH, CHAIRMAN, 

Committee on the Judiciary, 

House of Representatives, Washington, DC. 

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 3534, the ‘‘Security in 

Bonding Act of 2011.’’ 

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contact is Matthew Pickford, who 

can be reached at 226–2860. 

Sincerely, 

DOUGLAS W. ELMENDORF, 

DIRECTOR. 

Enclosure 

cc: Honorable John Conyers, Jr. 

Ranking Member 

H.R. 3534—Security in Bonding Act of 2011. 

As ordered reported by the House Committee on the Judiciary on 

March 20, 2012. 

H.R. 3534 would amend Federal law regarding the use of certain 

surety bonds by the private sector for work on Federal construction 


jbell on DSK7SPTVN1PROD with REPORTS
6 

projects. Specifically, the legislation would strengthen the collateral 

requirements for individual sureties. H.R. 3534 also would require 

a report by the Government Accountability Office (GAO) on the use 

of surety bonds by Federal contractors over the past 10 years. 

CBO estimates that implementing H.R. 3534 would cost less 

than $500,000 a year, subject to the availability of appropriated 

funds for GAO to produce the required report. Enacting the bill 

would not affect direct spending or revenues; therefore, pay-as-yougo procedures do not apply. 

Under current law and regulation, contractors on Federal 

projects are required to insure their performance to subcontractors 

and the Federal Government in connection with Federal construction projects using surety bonds. Surety bonds provide financial 

guarantees that contracts will be completed according to mutual 

terms; if a contract is not completed, the bonds are available to 

cover the losses. Based on information from the General Services 

Administration, private contractors, and bond providers, CBO expects that agencies would continue to receive contracts at the lowest price available and the proposed changes to some collateral requirements under H.R. 3534 would not affect the cost of procuring 

construction services. 

H.R. 3534 contains no intergovernmental or private-sector mandates as defined in the Unfunded Mandates Reform Act and would 

not affect the budgets of State, local, or tribal governments. 

The CBO staff contact for this estimate is Matthew Pickford. 

This estimate was approved by Peter H. Fontaine, Assistant Director for Budget Analysis. 

Performance Goals and Objectives 

The Committee states that pursuant to clause 3(c)(4) of rule XIII 

of the Rules of the House of Representatives, H.R. 3534 amends 

title 31, United States Code, to improve the financial security of 

the United States when it contracts on Federal projects. 

Advisory on Earmarks 

In accordance with clause 9 of rule XXI of the Rules of the House 

of Representatives, H.R. 3534 does not contain any congressional 

earmarks, limited tax benefits, or limited tariff benefits as defined 

in clause 9(e), 9(f), or 9(g) of Rule XXI. 

Section-by-Section Analysis 

Section 1. Short Title. 

Provides the bill may be referred to as the Security in Bonding 

Act of 2011. 

Section 2. Surety Bond Requirements. 

Adds new 31 U.S.C. § 9310, requiring that, when Federal law 

permits acceptance of a surety bond from a producer not subject to 

Federal oversight, the producer give a possessory security interest 

in low-risk assets to the Federal Government to provide such security. 


jbell on DSK7SPTVN1PROD with REPORTS
7 

Section 3. GAO Study. 

Requires GAO to study the instances in which an individual surety has been rejected by the U.S. government or accepted and later 

found to be deficient; the impact of the bill on the Federal Government, subcontractors, and suppliers; and the percentage of Federal 

contracts awarded to small disadvantaged businesses and disadvantaged business enterprises. 

Changes in Existing Law Made by the Bill, as Reported 

In compliance with clause 3(e) of rule XIII of the Rules of the 

House of Representatives, changes in existing law made by the bill, 

as reported, are shown as follows (new matter is printed in italics 

and existing law in which no change is proposed is shown in 

roman): 

TITLE 31, UNITED STATES CODE 

* * * * * * * 

SUBTITLE VI—MISCELLANEOUS 

* * * * * * * 

CHAPTER 93—SURETIES AND SURETY BONDS 

Sec. 

9301. Definitions. 

* * * * * * * 

9310. Individual sureties. 

* * * * * * * 

§ 9310. Individual sureties 

If another applicable law or regulation permits the acceptance of 

a bond from a surety that is not subject to sections 9305 and 9306 

and is based on a pledge of assets by the surety, the assets pledged 

by such surety shall— 

(1) consist of eligible obligations described under section 

9303(a); and 

(2) be submitted to the official of the Government required to 

approve or accept the bond, who shall deposit the assets with 

a depository described under section 9303(b). 

* * * * * * * 

Æ 


jbell on DSK7SPTVN1PROD with REPORTS