Source: https://www.federalregister.gov/documents/2011/03/17/2011-6277/surety-companies-doing-business-with-the-united-states
Timestamp: 2018-07-21 23:34:32
Document Index: 127933800

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Federal Register :: Surety Companies Doing Business With the United States
A Proposed Rule by the Fiscal Service on 03/17/2011
14592-14600 (9 pages)
https://www.federalregister.gov/d/2011-6277 https://www.federalregister.gov/d/2011-6277
The Department of the Treasury, Financial Management Service (Treasury), administers the Federal corporate surety program. Treasury issues certificates of authority to qualified sureties to underwrite and reinsure Federal bond obligations. We are proposing to amend our regulation to clarify the circumstances when an agency bond-approving official can decline to accept a bond underwritten by a Treasury-certified surety. We are Start Printed Page 14593also proposing to amend the procedures to be used by Treasury in adjudicating any complaint received from an agency requesting that a surety's certificate be revoked for failure to satisfy an administratively final bond obligation due the agency.
Treasury is responsible for administering the corporate Federal surety bond program under the authority of 31 U.S.C. 9304-9308 and 31 CFR part 223 (part 223). Congress delegated to Treasury the discretion to issue a certificate if Treasury decides the surety's articles of incorporation authorize it to engage in the business of surety, the corporation has the requisite paid-up capital, cash, or equivalent assets, and the corporation is able to carry out its contracts. Treasury evaluates the qualifications of sureties to write Federal bonds and issues certificates of authority to those sureties that meet the specified corporate and financial standards. Treasury publishes the list of certified sureties in Department Circular 570 which is available online at http://www.fms.treas.gov/​c570. Federal bond-approving officials consult and rely on this list whenever a corporate surety bond is presented to an agency because bonds underwritten by Treasury-certified sureties satisfy bonding requirements, provided such bonds are accepted by agency bond-approving officials.
The proposed rule is consistent with the general and permanent surety laws that were enacted by Congress and later codified, without substantive change, as 31 U.S.C. 9304(b). The surety statutory framework is derived from public laws enacted in 1894 and 1910. The Act of August 13, 1894, 28 Stat. 279, as amended by The Act of March 23, 1910, 36 Stat. 241, provided that a bond underwritten by a Treasury-certified surety satisfied bonding requirements “Provided, That such recognizance, stipulation, bond, or undertaking be approved by the head of department, court, judge, officer, board, or body executive, legislative, or judicial required to approve or accept the same.” This proviso conditioned acceptance of a bond on the approval by an agency. This language was first codified in 1925 as 6 U.S.C. 6, and codified again in 1982 as 31 U.S.C. 9304(b), without substantive change. See, e.g., The Code of the Laws of the United States of America, December 7, 1925, Preface Statement (The codification is the official restatement of the general and permanent laws of the United States, and under the codification “No new law is enacted and no law repealed”); Public Law 97-258 (1982), 96 Stat. 877, 1047 (Codification enacted “without substantive change”).
Federal courts have affirmed that Section 9304(b), and its predecessor derivations, afford agency bond-approving officials discretion to decline the acceptance of a bond underwritten by a Treasury-certified surety, consistent with the due process standards articulated in the proposed rule. See Concord Casualty & Surety Co. v. United States, 69 F.2d 78, 81 (2d Cir. 1934)(The bond-approval official's approval of a bond underwritten by a Treasury-certified surety “is not mandatory” but calls for the exercise of wise discretion); American Druggists Ins. Co. v. Bogart, 707 F.2d 1229, 1233 (11th Cir. 1983)(“The surety's approval by the Secretary of the Treasury * * * does not preclude the district court from exercising its discretion to approve only those [bail] bonds which it feels confident will result in the defendant's presence at trial” and “Section 9304(b) impliedly authorizes this discretion in its provision that ‘each surety bond shall be approved by the official of the Government required to approve or accept the bond.’ ”).
The proposed text is also consistent with 31 U.S.C. 9305(d)(3) which authorizes Treasury to require Start Printed Page 14594additional security in circumstances when the surety is no longer sufficient. Specifically, Treasury believes the discretion afforded to agency bond-approving officials under the proposed text is appropriate because a surety that has not paid an administratively final bond obligation to an agency, even after due process has been afforded, is no longer providing sufficient security vis-à-vis the agency.
To the extent that a surety requests Treasury to conduct an informal hearing before reaching its decision on whether the surety's certificate should be revoked, the proposed rule clarifies that the formal adjudication standards under the Administrative Procedures Act, 5 U.S.C. 554, 556, and 557, do not apply to the conduct of such an informal hearing. This is appropriate because Treasury's 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. See, e.g., 5 U.S.C. 554(a)(formal adjudication procedures only apply in cases “required by statute to be determined on the record after an opportunity for an agency hearing”). Moreover, a surety's property interest in its certificate is narrow. American Druggists Ins. Co. v. Bogart, 707 F.2d 1229, 1235 (11th Cir. 1983)(“The scope of the surety's protected interest arising from the federal regulatory scheme is indeed narrow.”). Given this narrow interest, the opportunity for a surety to request an informal hearing under the standards articulated in the proposed rule is consistent with due process requirements that the surety be given an opportunity to be heard “at a meaningful time and in a meaningful manner.” See, e.g., Matthews v. Eldridge, 424 U.S. 319, 333 (1976)(Fundamental due process satisfied if the individual is given an opportunity to be heard “at a meaningful time and in a meaningful manner”).
We are proposing to amend § 223.1 by stating, 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 proposed rule deletes archaic language and clarifies that the U.S. Department of the Treasury, Financial Management Service (Treasury), acts on behalf of the Secretary of the Treasury in performing these duties.
We are proposing to amend § 223.2 to clarify that applications for certificates of authority should be submitted to Treasury at the location, and in the manner, specified online at http://www.fms.treas.gov/​c570, as amended from time to time.
Section 223.3(a) establishes the requirements that must be met by an applicant company in order to be issued a certificate of authority by Treasury. Proposed § 223.3(a) restates such requirements in plain language. In addition, the proposed regulation clarifies that any certificate issued by Treasury is expressly subject to the continuing compliance by the surety with all statutory requirements and the other conditions referenced in this part.
Section 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 not less than $100,000, for the protection of claimants, including the surety's policyholders in the United States. Proposed § 223.4 would add 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 (not less than $100,000) and that the legal investments remain on deposit with the State.
Section 223.8 requires Treasury-certified sureties to file annual and quarterly financial reports to Treasury for review. Proposed § 223.8(a) updates the specified Treasury official to whom these reports should be submitted.
Section 223.9 establishes the criteria by which Treasury values the assets and liabilities of a company for certificate of authority purposes. Section 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. Proposed § 223.9 clarifies that this credit for reinsurance Start Printed Page 14595will be allowed only if the reinsurer is in continuing compliance with all certificate of authority requirements.
Section 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. Proposed § 223.11(b) clarifies that the requisite reinsurance bond forms are available on the General Services Administration Web site at http://www.gsa.gov.
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. Proposed § 223.12 updates the specified Treasury official to whom applications and reports pertaining to admitted reinsurer status should be submitted.
Proposed § 223.16, List of certificate holding companies, adds a new fourth sentence to this subpart providing: “Bonds underwritten by certified companies on the Department Circular No. 570 list may be presented to an agency bond-approving official for acceptance.” Proposed § 223.16 adds a final sentence to this subpart providing: “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 § 223.17.”
This proposed text clarifies that Treasury-certified sureties 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 proposed § 223.17.
Proposed § 223.17, Acceptance and non-acceptance of bonds, clarifies that every surety holding a Treasury-issued certificate of authority has the opportunity to present its bonds to an agency bond-approving official for acceptance, and that such bond-approving official may accept such proffered bonds in all cases. It also clarifies, however, that an agency bond-approving official has the discretion to decline bonds underwritten by a Treasury-certified surety for cause, provided the specified due process protections are satisfied. The agency is required to articulate standards for exercising its discretion not to accept bonds from Treasury-certified sureties in an agency rule or regulation prior to declining any bonds in specific cases. Existing agency rules or regulations that substantially comply with, or that are consistent with, the requirement to articulate standards in advance meet the requirements of this paragraph.
Under proposed § 223.17, for cause is primarily defined to mean that a surety has not paid or satisfied an administratively final bond obligation due the agency. The articulation of this primary definition is not intended to preclude an agency from articulating additional “for cause” reasons, provided such reasons are defined in an agency rule or regulation in advance, and such additional reasons are otherwise consistent with an agency's own authorities. See, e.g., 27 CFR 25.101 (Existing Treasury Tax and Trade Bureau (TTTB) regulation authorizing rejection of a bond for substantive reason consistent with that agency's mission; under § 25.101, TTTB can disapprove a bond if the surety has been convicted of any fraudulent noncompliance with any provision of law of the United States related to internal revenue or customs taxation of distilled spirits, wines, or beer).
Proposed § 223.18, Revocation, clarifies 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 proposed § 223.19, Treasury initiated revocation proceedings, when it has reason to believe that a surety is not complying with 31 U.S.C. 9304-9308 and/or the regulations under part 223. Second, Treasury can initiate a revocation proceeding under proposed § 223.20, Revocation proceedings initiated by Treasury upon receipt of an agency complaint, upon receipt of a complaint from an agency that a surety has not satisfied an administratively final bond obligation.
Proposed § 223.19, Treasury initiated revocation proceedings, outlines 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. These proceedings can be initiated due to a failure to meet financial strength requirements or any other requirement.
Proposed § 223.20, Revocation proceedings initiated by Treasury upon receipt of an agency complaint, 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 satisfy an administratively final bond obligation. Proposed § 223.20 affords the surety the opportunity to demonstrate its qualifications to retain its certificate, establishes the roles of the Treasury Reviewing Official and the Treasury Deciding Official in the adjudicative process, and establishes the standard of review to be used by the Reviewing and Deciding Officials in reaching a decision.
As a general rule, proposed § 223.20 anticipates that Treasury will adjudicate agency complaints without an informal oral hearing. Proposed § 223.20(c) ensures that the surety is afforded a fair opportunity to demonstrate, in writing, its qualifications to retain its certificate before a decision is reached. Nevertheless, in the event a surety Start Printed Page 14596believes the opportunity to make known its views is inadequate, it may request that Treasury convene an informal hearing before reaching a decision under the timeframes established in the proposed rule. Proposed § 223.20(h) specifies the procedures under which such an informal hearing would be conducted.
In the event that the Treasury Deciding Official sustains the agency's complaint and makes a decision that the surety's certificate should be revoked, proposed § 223.20 clarifies that a surety will be afforded an opportunity to cure the noncompliance to avoid decertification, unless its noncompliance is “willful.” Proposed § 223.20(g) articulates the scope and application of the willful exception to the cure opportunity.
Proposed § 223.21, Reinstatement, 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 proposed § 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.
— 223.17
223.17 223.18
— 223.19
223.18 223.20
223.19 223.20
223.21 223.21
223.22 223.22
2. Revise § 223.1 to read as follows:
3. Revise § 223.2 to read as follows:
Every company wishing to apply for a certificate of authority shall submit an application to the Financial Management Service, U.S. Department of the Treasury, c/o Surety Bond Branch, to the location, and in the manner, specified online at http://www.fms.treas./​c570, as amended from time to time. In accordance with 31 U.S.C. 9305(a), the data will include a copy of the applicant's charter or articles of incorporation and a 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 § 223.22(a)(i).
4. In § 223.3, revise paragraph (a) to read as follows:
Issuance of certificates of authority.
(a)(1) 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 Start Printed Page 14597in 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:
(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 § 223.22 by March 1st of each year to the address and/or account specified by Treasury.
5. In § 223.4, add a sentence to the end of the section to read as follows:
6. In § 223.8, revise paragraph (a) to read as follows:
§ 223.8
7. In § 223.9, revise the last sentence to read as follows:
§ 223.9
* * * 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 § 223.12.
8. In § 223.11, revise paragraph (b)(1) to read as follows:
Limitation of risk: Protective methods.
9. In § 223.12, revise paragraph (a) introductory text, paragraph (a)(5), paragraph (b) introductory text, and paragraph (c) to read as follows:
§ 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 Assistant Commissioner, Management, or incumbent Treasury executive, and shall transmit therewith the fee in accordance with the provisions of § 223.22:
(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 Assistant Commissioner, Management, or incumbent Treasury executive, and shall transmit therewith the fee in Start Printed Page 14598accordance with the provisions of § 223.22:
(c) Financial reports. Each company recognized as an admitted reinsurer shall file with the Assistant Commissioner, Management, or incumbent Treasury executive, 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 § 223.22.
10. Revise § 223.16 to read as follows:
§ 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 annual financial statement 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.fms.treas.gov/​c570, or from the Assistant Commissioner, Management, or incumbent Treasury executive, 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 § 223.17.
11. Revise § 223.17 to read as follows:
Acceptance and non-acceptance of bonds.
(a) Acceptance of bonds. A bond underwritten by a certified company on the § 223.16 Department Circular No. 570 list may be presented to an 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 has the discretion not to accept bond(s) underwritten by a certified company on the § 223.16 List of certificate holding companies, Department Circular No. 570, for cause, but only if the certified surety has been given advance written notice by such agency. The advance written notice shall state:
§§ 223.18 through 223.20
12. Remove §§ 223.18, 223.19, and 223.20.
[Redesignated as § 223.18]
13. Redesignate § 223.17 as § 223.18.
14. Revise newly redesignated § 223.18 to read as follows:
§ 223.18
(1) Treasury, of its own accord, under § 223.19, may initiate revocation proceedings against the surety when it has reason to believe that a company is not complying with 31 U.S.C. 9304-9308 and/or the regulations under this part, or
(2) Treasury, under § 223.20, may initiate revocation proceedings against the surety upon receipt of a complaint from an agency that the surety has not paid or satisfied an administratively final bond obligation due the agency.
(b) A revocation of a surety's certificate of authority under § 223.19 or § 223.20 precludes the surety from underwriting or reinsuring additional bonds for any agency, and therefore revokes the surety's opportunity to have its bonds presented to any agency bond-approving official for acceptance.
15. Add new § 223.19 to read as follows:
§ 223.19
Treasury initiated revocation proceedings.
16. Add new § 223.20 to read as follows:
§ 223.20
Revocation proceedings initiated by Treasury upon receipt of an agency complaint.
(a) Agency Complaint. If an agency determines that a surety has not promptly made full payment or fully satisfied an administratively final bond obligation naming the agency as obligee, the head of the agency, or his or her designee, may submit a complaint to the Assistant Commissioner, Management, or incumbent Treasury executive, requesting that the surety's certificate of Start Printed Page 14599authority be revoked for nonperformance of administratively final bond obligations. Under such complaint, the agency shall certify that:
(h) Informal Hearing. (1) If a surety that is the subject of a paragraphs (a) and (b) of this section complaint believes the opportunity to make known 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.
(3) The surety shall be advised, in writing, of the time and place of the informal hearing and shall be directed Start Printed Page 14600to bring all documents, records and other information as it may find necessary and relevant to support its position.
17. Revise § 223.21 to read as follows:
18. In § 223.22, revise paragraph (c) to read as follows:
Fees for services of the Treasury Department.
(c) Specific fee information may be obtained from the Assistant Commissioner, Management, or incumbent Treasury executive, or online at http://www.fms.treas.gov/​c570. 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.