[Federal Register Volume 61, Number 133 (Wednesday, July 10, 1996)]
[Rules and Regulations]
[Pages 36277-36279]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-17358]



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Rules and Regulations
                                                Federal Register
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Federal Register / Vol. 61, No. 133 / Wednesday, July 10, 1996 / 
Rules and Regulations

[[Page 36277]]



DEPARTMENT OF AGRICULTURE

Grain Inspection, Packers and Stockyards Administration

9 CFR Part 201

RIN 0580-AA45


Regulations Issued Under the Packers and Stockyards Act

AGENCY: Grain Inspection, Packers and Stockyards Administration 
(GIPSA), USDA.

ACTION: Final rule.

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SUMMARY: As part of GIPSA's efforts to review and streamline its 
regulations, proposed amendments to rules issued under the Packers and 
Stockyards (P&S) Act were published in the Federal Register on August 
21, 1995, and identified as Group III. This document adopts proposed 
changes which modify two regulations, to provide uniform termination 
procedures for all bonds and bond equivalents and to change the 
requirement that funds pledged to secure bond equivalents be maintained 
in FDIC-insured accounts to permit their deposit in any Federally-
insured account, and retains seven regulations in their present form.

EFFECTIVE DATE: August 9, 1996.

FOR FURTHER INFORMATION CONTACT: Dan Van Ackeren, Director, Livestock 
Marketing Division, 202-720-6951, or Tommy Morris, Director, Packer and 
Poultry Division, 202-720-7363.

SUPPLEMENTARY INFORMATION: In response to the proposed rule published 
in the Federal Register (60 FR 43411), the Agency received comments 
from two marketing associations, one livestock selling agency, a State 
department of agriculture, and a law firm representing livestock 
marketing interests.
    Two comments were received regarding the modification of 
Sec. 201.27. This regulation provides for approved sureties, authorizes 
bond equivalents, and requires bond or bond equivalents to be on forms 
approved by the Administrator. Both comments generally supported the 
proposed modification of Sec. 201.27(b)(1) and (b)(2), but urged the 
Agency to assure that funds pledged under bond equivalents be provided 
the same degree of protection as those insured by the Federal Deposit 
Insurance Corporation (FDIC). As long as funds are actually deposited 
or invested in fully negotiable obligations of the United States, 
deposited in Federally-insured accounts, or letters of credit are 
issued by Federally-insured institutions, then bond equivalents will 
continue to have the same degree of protection as those insured by the 
FDIC.
    As proposed, Sec. 201.27(b)(1) and (b)(2) will be modified to 
broaden these subsections to permit funds pledged under bond 
equivalents to be on deposit or in accounts that are Federally-insured 
and not limited to only deposits or accounts insured by the FDIC. This 
modification would also permit all Federally-insured banks or other 
institutions to issue letters of credit, not just those banks or 
institutions insured by FDIC. The primary benefit accrues to persons 
choosing to meet bonding requirements with bond equivalents by 
permitting all Federally-insured deposits and letters of credit (not 
just FDIC) and would expand the number of banks or other institutions 
available to those seeking bond equivalents without increasing the risk 
to livestock sellers.
    No comments were received concerning Sec. 201.34. This regulation 
sets forth procedures for termination of market agency, dealer, and 
packer bonds and trust fund agreements. As proposed, the Agency will 
amend Sec. 201.34(c) to include termination procedures for trust 
agreements. This will provide uniform termination for all bonds and 
bond equivalents.
    As proposed, each of the following regulations will be retained in 
its present form:
    Sec. 201.10 Requirements and procedures for registration.
    Sec. 201.28 Duplicates of bonds or equivalents to be filed with 
regional supervisor.
    Sec. 201.29 Market agencies, packers and dealers required to file 
and maintain bonds.
    Sec. 201.30 Amount of market agency, dealer and packer bonds.
    Sec. 201.31 Conditions in market agency, dealer and packer bonds.
    Sec. 201.32 Trustee in market agency, dealer and packer bonds.
    Sec. 201.33 Persons damaged may maintain suit; filing and 
notification of claims; time limitation; legal expenses.
    In the process of reviewing these regulations, it was determined 
that they were necessary to the efficient and effective enforcement of 
the P&S Act and to the orderly conduct of the marketing system. The 
absence of any of the regulations would result in increased litigation.
    Three comments were received concerning Sec. 201.10, which 
specifies the requirements and procedures for registration for those 
persons desiring to operate as market agencies or dealers as defined in 
Sec. 301 of the P&S Act. One comment suggested modifying Sec. 201.10 by 
prohibiting market agencies, dealers, and packers from operating 
subject to the P&S Act, under their bond or anyone else's bond, until 
all debts owed approved livestock auction markets had been paid, 
regardless of whether such debt had been dismissed in bankruptcy. The 
Agency believes that such a modification would not be in the best 
interest of all livestock sellers since the comment referred to only 
debts owed to approved livestock auction markets. The Agency could also 
be in conflict with Federal bankruptcy statutes if a registration was 
denied based on a debt dismissed in bankruptcy. Under the provisions of 
the P&S Act, all market agencies and dealers are required, as a 
condition for registration, to be solvent. That is, current assets must 
be equal to or exceed current liabilities.
    Two other comments received regarding Sec. 201.10 suggested the 
regulation lacks specificity as to what circumstances or past 
activities are deemed actionable in denying the registration of an 
applicant. They also suggested serious violations of the Act, such as 
fraud, theft, and embezzlement, should warrant denial of registration 
unless the applicant can show just cause why registration should not be 
denied. The Agency believes this concern is sufficiently addressed in 
Sec. 201.10(b) which specifies that if the Administrator has reason to 
believe the applicant is unfit to engage in the activity for which 
application has been made, the applicant will be afforded an 
opportunity for a full hearing for the

[[Page 36278]]

purpose of showing cause why the application should not be denied. This 
paragraph gives the Agency authority to review each application and to 
deny registration to those believed unfit to engage in the business of 
a market agency or dealer. It is believed Sec. 201.10(b) can be 
enforced more effectively if this regulation is not narrowed to 
specified violations of the P&S Act. After considering the comments, 
the Agency has concluded this regulation should be retained in its 
present form.
    One comment was received regarding Sec. 201.29, which requires 
market agencies, packers and dealers to file and maintain bonds. The 
comment indicated no particular concern regarding the language in 
Sec. 201.29, but suggested the P&S Act should be changed to insure that 
all major buyers of livestock, including feedlots, be required to 
maintain a reasonable bond. Those feedlots operating as dealers or 
market agencies as defined under the P&S Act, are subject to the 
registration and bonding provisions. Broader coverage to all major 
buyers would require a change in the statute. Therefore, the Agency has 
concluded this regulation should be retained in its present form.
    All five comments to the proposal addressed Sec. 201.30. This 
regulation sets forth the formulae for computing bonds for market 
agencies, dealers, and packers. It also provides the Administrator the 
authority to adjust the level of bond required whenever he/she 
determines a bond is not adequate to secure the obligations of the 
person or firm.
    Two comments generally supported the Agency's proposal to retain 
Sec. 201.30 in its present form and believed that even a modest 
increase in bond levels would not appreciably improve the financial 
protection afforded livestock sellers and may exclude smaller reputable 
businesses from operating altogether. The Agency was also urged to give 
serious consideration to establishing alternatives to the current bonds 
and bond equivalents such as the financial security funds used in 
several Canadian provinces.
    One comment suggested changing the formulae for determining bond 
size for market agencies buying on commission and dealers (Clause 2 
bond) to one half of an average week's gross purchases from the prior 
year (52 weeks). Another comment suggested the Agency eliminate the 10 
percent threshold on dealer bonds over $75,000 because the threshold is 
unfair to smaller dealers and the default of a larger dealer could have 
a greater impact on the livestock industry than a smaller dealer. One 
comment recommended increasing the minimum requirement for dealers and 
market agencies buying on commission from the current $10,000 to 
$25,000. The comment also stated that an increase in the minimum bond 
from $10,000 to $25,000 may discourage potential dealers, who may not 
be financially secure or responsible, from becoming a livestock dealer.
    After considering these comments, the Agency has concluded 
Sec. 201.30 will be retained in its present form. The Agency does not 
believe it is necessary to increase the minimum bond level of Clause 2 
bonds or to remove the threshold on bonds over $75,000 at this time. 
The cost to the industry of increasing minimum bond levels would far 
outweigh the increased protection that would be gained by such an 
increase. Small dealers and market agencies buying on commission, which 
include 48 percent of all dealers or market agencies, would be hardest 
hit by an increase in bond levels and may find it difficult to remain 
in business. The Agency also believes that the cost to the industry of 
removing the 10 percent threshold on Clause 2 bonds over $75,000 would 
far outweigh the benefit to livestock sellers and cause an undue 
hardship on larger dealers and market agencies buying on commission 
since many would likely be unable to obtain the required bond coverage. 
However, the Agency will continue to review the levels of bonds and to 
study alternative methods of providing financial protection to 
livestock sellers. In addition, the Department is supporting proposed 
legislation to amend the P&S Act to establish a dealer trust for the 
benefit of sellers of livestock to dealers and market agencies buying 
on commission. If the proposed legislation is passed, livestock sellers 
will benefit from additional protection under the Act.
    Two comments were received regarding Sec. 201.32 which refers to 
trustees named in market agency, dealer, and packer bonds. Both 
comments suggested Sec. 201.32 be amended to show that whenever 
multiple trustees are listed on a bond, the Agency should designate a 
``lead'' trustee to represent those who filed claims against the bond. 
Both comments further suggested that whenever trust agreements or trust 
fund agreements (bond equivalents) are used in lieu of a bond, the bank 
issuing collateral for a trust fund agreement or an irrevocable letter 
of credit should not be permitted to act as trustee. They believe an 
inherent conflict of interest exists whenever the bank holding the 
collateral for a bond equivalent (or issued a letter of credit) is also 
named as trustee.
    After reviewing these comments, the Agency has decided to retain 
Sec. 201.32 in its present form. The Agency does not accept bonds or 
bond equivalents with multiple trustees listed, therefore, does not 
believe it is necessary to amend the regulation to designate a ``lead'' 
trustee. Trustees on bond equivalents have a fiduciary responsibility 
to carry out their duty as trustee when bond claims are filed. Whenever 
a trustee fails to carry out their fiduciary responsibility on behalf 
of the claimants, the Agency has the authority to appoint a new trustee 
to carry out the trustee's responsibility.
    Three comments were received concerning Sec. 201.33, which pertains 
to filing and notification of bond claims, time limitations, and the 
filing of civil suit to recover on the bond or bond equivalent.
    One comment suggested the number of days to file a claim stay at 60 
days, but to pay only those claims that are filed within 21 days of the 
first unpaid debt. The comment further stated that this is sufficient 
time for those following the prompt pay laws and they should not be 
penalized by dividing bond proceeds with those who have given buyers 
credit. The Agency believes this suggestion would give livestock 
sellers insufficient time to file the bond claims. Some sellers of 
livestock may not have specifically extended credit to the buyer, yet 
may be classified as a credit seller if a bond claim is not filed 
within 21 days of the date of the transaction and therefore, not 
included in the payout of bond proceeds. We believe there is 
insufficient basis to warrant this change in the bond requirements at 
this time.
    Two other comments suggested two changes to this regulation. They 
suggested that the Agency clarify the term ``date of transaction.'' 
They state that it has been assumed for years that the term ``date of 
transaction'' meant the date of the sale or, at most, the date payment 
was due after the sale. The comment also accurately states that 
Sec. 201.33(d) requires that a claim must be filed within 60 days from 
the date of the transaction on which the claim is based and, if for 
some reason the claim is not paid or acknowledged as a valid claim, the 
claimant can then file suit on that claim alleging as a cause of action 
that the claimant has a valid claim but the surety has denied liability 
or failed to pay the claim. In other words, filing a claim within 60 
days from the date of the transaction is a condition precedent which 
must be met in order to file suit. They believe this paragraph should 
be

[[Page 36279]]

clarified to avoid confusion and keep persons from filing suit against 
a surety company 15 or 18 months after a transaction when no claim was 
ever filed against the bond.
    The Agency believes that the language in Sec. 201.33 is 
sufficiently clear and does not believe it is necessary to define 
``date of transaction'' or to modify paragraph (d). In addition, 
Sec. 409 of the P&S Act provides a basis for when payment is due in 
subject transactions. Under Sec. 409, payment must be made by the close 
of the next business day following the purchase of livestock and 
transfer of possession thereof. After considering these comments, the 
Agency has decided to retain Sec. 201.33 in its present form.
    The proposed changes in Sec. 201.27(b)(1) and (b)(2) and in 
Sec. 201.34(c) do not impose or change any recordkeeping or information 
collection requirements. Existing requirements in these regulations 
have been previously approved by OMB under control No. 0590-0001.
    As provided by the Regulatory Flexibility Act, it is hereby 
certified that these amended rules will not have significant economic 
impact on a substantial number of small entities and a statement 
explaining the reasons for the certification is set forth in the 
following paragraph and is being provided to the Chief Counsel for 
Advocacy of the Small Business Administration.
    While these proposed amended rules impact small entities, they will 
not have a significant economic impact on any entity, large or small. 
The primary effect of the changes in rules Sec. 201.27(b)(1) and (b)(2) 
is to permit funds pledged under bond equivalents to be on deposit or 
in accounts that are Federally insured and to permit Federally-insured 
banks and other institutions to issue letters of credit. Eligible 
institutions would no longer be restricted to those banks or 
institutions insured by FDIC. The primary effect of the rule change in 
Sec. 201.34(c) is to include the termination of trust agreements.
    These rules have been determined to be not significant for purposes 
of Executive Order 12866 and, therefore, have not been reviewed by OMB. 
These amendments do not impose any new paperwork requirements and do 
not have implications for Federalism under the criteria for E.O. 12612.
    This final rule has been reviewed under E.O. 12778, Civil Justice 
Reform. This action is not intended to have retroactive effect. This 
rule does not preempt any State or local laws, regulations, or 
policies, unless they present an irreconcilable conflict with this 
rule. There are no administrative procedures which must be exhausted 
prior to any judicial challenge to the provisions of this rule.

List of Subjects in 9 CFR Part 201

    Bonding, Dealer, Market Agency, Packer, Registration.

    Done at Washington, D.C., on this 1st day of July 1996.
James R. Baker,
Administrator, Grain Inspection, Packers and Stockyards Administration.
    For the reasons set forth in the preamble, the Grain Inspection, 
Packers and Stockyards Administration will amend 9 CFR part 201 as 
follows:

PART 201--[AMENDED]

    1. The authority citation for part 201 continues to read as 
follows:

    Authority: 7 U.S.C. 204, 228: 7 CFR 2.17(e), 2.56.

    2. Revise Sec. 201.27(b) to read as follows:


Sec. 201.27   Underwriter: equivalent in lieu of bonds; standard forms.

* * * * *
    (b) Any packer, market agency, or dealer required to maintain a 
surety bond under these regulations may elect to maintain, in whole or 
partial substitution for such surety bond, a bond equivalent, or 
combination thereof, must be the total amount of the surety bond 
otherwise required under these regulations. Any such bond equivalent 
must be in the form of:
    (1) A trust fund agreement governing funds actually deposited or 
invested in fully negotiable obligations of the United States or 
Federally-insured deposits or accounts in the name of and readily 
convertible to currency by a trustee as provided in Sec. 201.32, or
    (2) A trust agreement governing funds which may be drawn by a 
trustee as provided in Sec. 201.32, under one or more irrevocable, 
transferrable, standby letters of credit, issued by a Federally-insured 
bank or institution and physically received and retained by such 
trustee.
* * * * *
    3. Revise Sec. 201.34(c) as follows:


Sec. 201.34   Termination of market agency, dealer and packer bonds.

* * * * *
    (c) Each trust fund agreement and trust agreement shall contain a 
provision requiring that, prior to terminating such agreement, at least 
30 days notice in writing shall be given to the Administrator, Grain 
Inspection, Packers and Stockyards Administration, U.S. Department of 
Agriculture, Washington, D.C. 20250, by the party terminating the 
agreement. Such provision shall state that in the event the principal 
named therein files an acceptable bond or bond equivalent to replace 
the agreement, the 30-day notice requirement may be waived and the 
agreement will be terminated as of the effective date of the 
replacement bond or bond equivalent.
* * * * *
[FR Doc. 96-17358 Filed 7-9-96; 8:45 am]
BILLING CODE 3410-EN-P