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[Federal Register Volume 79, Number 198 (Tuesday, October 14, 2014)]
[Rules and Regulations]
[Pages 61743-61745]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-24239]

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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 1, 28, and 52

[FAC 2005-77; FAR Case 2011-023; Item II; Docket 2011-0023, Sequence 1]
RIN 9000-AM53

Federal Acquisition Regulation; Irrevocable Letters of Credit

AGENCY: Department of Defense (DoD), General Services Administration 
(GSA), and National Aeronautics and Space Administration (NASA).

ACTION: Final rule.

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SUMMARY: DoD, GSA, and NASA are issuing a final rule amending the 
Federal Acquisition Regulation (FAR) to remove all references to Office 
of Federal Procurement Policy (OFPP) Pamphlet No. 7, Use of Irrevocable 
Letters of Credit, and also provide updated sources of data required to 
verify the credit worthiness of a financial entity issuing or 
confirming an irrevocable letter of credit (ILC).

DATES: Effective: November 13, 2014.

FOR FURTHER INFORMATION CONTACT: Ms. Cecelia L. Davis, Procurement 
Analyst, at 202-219-0202, for clarification of content. For information 
pertaining to status or publication schedules, contact the Regulatory 
Secretariat at 202-501-

[[Page 61744]]

4755. Please cite FAC 2005-77, FAR Case 2011-023.

SUPPLEMENTARY INFORMATION:

I. Background

    DoD, GSA, and NASA published a proposed rule in the Federal 
Register at 78 FR 26573 on May 7, 2013, to remove all references to 
OFPP Pamphlet No. 7, Use of Irrevocable Letters of Credit, and provide 
updated sources of data required to verify the credit worthiness of a 
financial entity issuing or confirming an ILC.
    OFPP Pamphlet No. 7 provided detailed guidance for implementing 
policy letter 91-4, Use of Irrevocable Letters of Credit, for 
Government contracts. A prior FAR final rule (FAR Case 2000-605, 
Rescission of Office of Federal Procurement Policy Letters, 65 FR 
36014) removed the FAR references to OFPP Policy Letter 91-4 along with 
several other policy letters that were rescinded by OFPP, effective 
March 30, 2000 (see 65 FR 16968). However, the reference to OFPP 
Pamphlet No. 7 remained in FAR part 28 because the information was 
considered relevant and provided, among other information, a listing of 
available quantitative and qualitative credit rating institutions and 
resources, formats for ILCs, and other useful data.
    FAR 28.204-3 currently cites OFPP Pamphlet No. 7 at paragraphs 
(g)(1) and (h)(1) as an available resource that may be used to obtain 
information on credit rating services or investment grade ratings of 
financial entities issuing or confirming ILCs because it provides 
overarching policy and specific guidance on the use of ILCs, but some 
of the information is outdated. Therefore, instead of referencing the 
OFPP Pamphlet, this rule--
    (1) Extracts from the OFPP Pamphlet the relevant and current 
information for inclusion in the FAR; and
    (2) Provides additional sources of data required to verify the 
credit worthiness of a financial entity issuing or confirming an ILC, 
as summarized on the Web sites of the Federal Deposit Insurance 
Corporation (http://www2.fdic.gov/idasp/index.asp) and Securities and 
Exchange Commission http://www.sec.gov/answers/nrsro.htm).
    Five respondents submitted comments on the proposed rule.

II. Discussion and Analysis

    The Civilian Agency Acquisition Council and the Defense Acquisition 
Regulations Council (the Councils) reviewed the comments in the 
development of the final rule. A discussion of the comments is provided 
as follows:

A. Summary of Significant Changes

    This final rule reflects no change to the proposed rule.

B. Analysis of Public Comments

    The Regulatory Secretariat received public comments from five 
entities in response to the proposed rule. A discussion of these 
comments is provided as follows:
1. Support for the Proposed Rule
    Comment: Two respondents expressed support for the rule.
    Response: The Councils acknowledge the public support for this 
rule.
2. Standby Letters of Credit
    Comment: Five respondents recommended that the proposed rule 
recognize and permit the use of standby letters of credit, in 
accordance with International Standby Practices (ISP 98), as described 
in International Chamber of Commerce Publication No. 590.
    Response: The intent of the proposed rule, as stated in the 
published preamble is as follows: ``. . . to remove all references to 
the Office of Federal Procurement Policy (OFPP) Pamphlet No. 7, Use of 
Irrevocable Letters of Credit (ILC), and also provide updated sources 
of data required to verify the credit worthiness of a financial entity 
issuing or confirming an ILC.'' As a result, the inclusion of ISP 98 is 
considered to be a substantive change and thus beyond the scope of this 
case.

III. Executive Orders 12866 and 13563

    Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess 
all costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). E.O. 
13563 emphasizes the importance of quantifying both costs and benefits, 
of reducing costs, of harmonizing rules, and of promoting flexibility. 
This is not a significant regulatory action and, therefore, was not 
subject to review under section 6(b) of E.O. 12866, Regulatory Planning 
and Review, dated September 30, 1993. This rule is not a major rule 
under 5 U.S.C. 804.

IV. Regulatory Flexibility Act

    DoD, GSA, and NASA have prepared a Final Regulatory Flexibility 
Analysis (FRFA) consistent with the Regulatory Flexibility Act, 5 
U.S.C. 601, et seq. The FRFA is summarized as follows:

    This action is necessary to remove all references to OFPP 
Pamphlet No. 7, Use of Irrevocable Letters of Credit, and provide 
updated sources of data required to verify credit worthiness of a 
financial entity issuing or confirming an ILC.
    The objective of the rule is to provide up-to-date and readily 
available information on requirements regarding credit rating for 
the financial institution issuing or confirming an ILC.
    This will apply to all contracts for services, supplies, or 
construction, when a bid guarantee or performance and payment bonds 
are required. 40 U.S.C. 3131 requires performance and payment bonds 
for any construction contract exceeding $100,000; this was raised 
for inflation to $150,000 (see FAR 1.109). Any person required to 
furnish a bond has the option to furnish a bond secured by an ILC.
    For construction contracts valued at $30,000 to $150,000, 
alternative payment protection is required, which may involve an 
ILC. Generally, agencies do not require bonds for other than 
construction contracts. According to data from the Federal 
Procurement Data System, in FY 2011 there were about 58,000 new 
awards for construction and construction maintenance, of which 
41,000 were awarded to small businesses (about 70 percent). If we 
estimate that 10 percent of these awards involve an ILC, then this 
rule applies to approximately 4,100 small businesses.
    The rule only removes references to OFPP Pamphlet No. 7 and 
replaces these references with information relative to sources of 
data required to verify an ILC that generally replicates what was in 
the pamphlet. There are no new reporting, recordkeeping, or 
compliance requirements. The rule does not duplicate, overlap, or 
conflict with any other Federal rules.
    No significant alternatives to the rule were identified that 
would accomplish the objectives of the rule. We do not foresee any 
significant economic impact of the rule on small entities. The basic 
requirements remain unchanged; the requirements of the pamphlet are 
directly stated, some of the references have been updated, and a Web 
site provided for access to a list of Nationally Recognized 
Statistical Rating Organizations.
    There were no significant issues raised by the public in 
response to the Initial Regulatory Flexibility Analysis.

    Interested parties may obtain a copy of the FRFA from the 
Regulatory Secretariat. The Regulatory Secretariat has submitted a copy 
of the FRFA to the Chief Counsel for Advocacy of the Small Business 
Administration.

V. Paperwork Reduction Act

    The rule does not contain any new information collection 
requirements that require the approval of the Office of Management and 
Budget under the Paperwork Reduction Act (44 U.S.C. Chapter 35). 
However, there is a pre-existing requirement at FAR 52.228-14 for 
offerors/contractors to provide the contacting officer a credit rating 
that indicates the financial institutions have the required credit 
rating as of the date

[[Page 61745]]

of issuance of the ILC. OMB Control Number 9000-0045, titled: Bid 
Guarantees, Performance and Payment Bonds, and Alternative Payment 
Protections, covers the information collection requirements associated 
with alternative payment protections (including ILCs) and acceptable 
security for bonds (including ILCs). ILCs are seldom offered as 
alternative payment protection or security for a bid bond, performance 
bond, or payment bond. The negligible burden of providing a credit 
rating along with the required ILC is already sufficiently covered by 
the approved burden hours in 9000-0045.

List of Subjects in 48 CFR Parts 1, 28, and 52

    Government procurement.

    Dated: September 30, 2014.
William F. Clark,
Acting Director, Office of Government-Wide Acquisition Policy, Office 
of Acquisition Policy, Office of Government-Wide Policy.

    Therefore, DoD, GSA, and NASA amend 48 CFR parts 1, 28, and 52 as 
set forth below:

0
1. The authority citation for 48 CFR parts 1, 28, and 52 continues to 
read as follows:

    Authority: 40 U.S.C. 121(c); 10 U.S.C. chapter 137; and 51 
U.S.C. 20113.

PART 1--FEDERAL ACQUISITION REGULATIONS SYSTEM

1.106  [Amended]

0
2. Amend section 1.106, in the list following the introductory text, by 
adding in numerical sequence, FAR segment ``52.228-14'' and its 
corresponding OMB Control No. ``9000-0045''.

PART 28--BONDS AND INSURANCE

0
3. Amend section 28.204-3 by revising the section heading and 
paragraphs (a), (g), and (h) to read as follows:

28.204-3  Irrevocable letter of credit.

    (a) Any person required to furnish a bond has the option to furnish 
a bond secured by an irrevocable letter of credit (ILC) in an amount 
equal to the penal sum required to be secured (see 28.204). A separate 
ILC is required for each bond.
* * * * *
    (g) Only federally insured financial institutions rated investment 
grade shall issue or confirm the ILC. Unless the financial institution 
issuing the ILC had letter of credit business of at least $25 million 
in the past year, ILCs over $5 million must be confirmed by another 
acceptable financial institution that had letter of credit business of 
at least $25 million in the past year.
    (1) The offeror/contractor is required by paragraph (d) of the 
clause at 52.228-14, Irrevocable Letter of Credit, to provide the 
contracting officer a credit rating from a recognized commercial rating 
service that indicates the financial institution has the required 
rating(s) as of the date of issuance of the ILC.
    (2) To support the credit rating of the financial institution(s) 
issuing or confirming the ILC, the contracting officer shall verify the 
following information:
    (i) Federal insurance: Each financial institution is federally 
insured. Verification of federal insurance is available through the 
Federal Deposit Insurance Corporation (FDIC) institution directory at 
the Web site http://www2.fdic.gov/idasp/index.asp.
    (ii) Current credit rating. The current credit rating for each 
financial institution is investment grade and that the credit rating is 
from a Nationally Recognized Statistical Rating Organization (NRSRO). 
NRSROs can be located at the Web site http://www.sec.gov/answers/nrsro.htm maintained by the SEC.
    (3) The rating services listed in the Web site http://www.sec.gov/answers/nrsro.htm use different rating scales (e.g., AAA, AA, A, BBB, 
BB, B, CCC, CC, C, and D; or Aaa, Aa, A, Baa, Ba, B, Caa, Ca, and C) to 
provide evaluations of institutional credit risk; however, all such 
systems specify the range of investment grade ratings (e.g., BBB-AAA or 
Baa-Aaa in the examples in this section) and permit evaluation of the 
relative risk associated with a specific institution. If the 
contracting officer learns that a financial institution's rating has 
dropped below investment grade level, the contracting officer shall 
give the contractor 30 days to substitute an acceptable ILC or shall 
draw on the ILC using the sight draft in paragraph (g) of the clause at 
52.228-14.
    (h) A copy of the Uniform Customs and Practice (UCP) for 
Documentary Credits, 2006 Edition, International Chamber of Commerce 
Publication No. 600, is available from: ICC Books USA, 1212 Avenue of 
the Americas, 21st Floor, New York, NY 10036; Phone: 212-703-5066; Fax: 
212-391-6568; E-Mail: [email protected]; Via the Internet at: http://store.iccbooksusa.net.

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

0
5. Amend section 52.228-14 by revising the date of the clause and 
paragraphs (d), (e)5, and (f)5 to read as follows:

52.228-14  Irrevocable Letter of Credit.

* * * * *

IRREVOCABLE LETTER OF CREDIT (Nov 2014)

* * * * *
    (d)(1) Only federally insured financial institutions rated 
investment grade by a commercial rating service shall issue or 
confirm the ILC.
    (2) Unless the financial institution issuing the ILC had letter 
of credit business of at least $25 million in the past year, ILCs 
over $5 million must be confirmed by another acceptable financial 
institution that had letter of credit business of at least $25 
million in the past year.
    (3) The Offeror/Contractor shall provide the Contracting Officer 
a credit rating that indicates the financial institutions have the 
required credit rating as of the date of issuance of the ILC.
    (4) The current rating for a financial institution is available 
through any of the following rating services registered with the 
U.S. Securities and Exchange Commission (SEC) as a Nationally 
Recognized Statistical Rating Organization (NRSRO). NRSRO's can be 
located at the Web site http://www.sec.gov/answers/nrsro.htm 
maintained by the SEC.
    (e) * * *
    5. This Letter of Credit is subject to the Uniform Customs and 
Practice (UCP) for Documentary Credits, International Chamber of 
Commerce Publication No.__-- (Insert version in effect at the time 
of ILC issuance, e.g., ``Publication 600, 2006 edition'') and to the 
extent not inconsistent therewith, to the laws of __--[State of 
confirming financial institution, if any, otherwise State of issuing 
financial institution].
* * * * *
    (f) * * *
    5. This confirmation is subject to the Uniform Customs and 
Practice (UCP) for Documentary Credits, International Chamber of 
Commerce Publication No.__-- (Insert version in effect at the time 
of ILC issuance, e.g., ``Publication 600, 2006 edition'') and to the 
extent not inconsistent therewith, to the laws of__--[State of 
confirming financial institution].
* * * * *

[FR Doc. 2014-24239 Filed 10-10-14; 8:45 am]
BILLING CODE 6820-EP-P
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