Treasury Department Issues Part 223 Amendment Final Rule On Surety Companies Doing Business with the United States

On October 16, 2014, the U.S. Department of the Treasury, Bureau of the Fiscal Service (Treasury) published in the Federal Register an Amendment Final Rule (Final Rule) that is a significant revision to 31 CFR part 223 (Part 223). 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.

This Amendment Final Rule, which is effective on December 15, 2014, can be reviewed at the following site: http://www.fiscal.treasury.gov/fsreports/ref/suretyBnd/surety_home.htm.
The Final Rule amends Part 223 to, among other things: (1) “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;” and (2) to revise “the procedures [Treasury] uses to adjudicate any complaint received from an agency requesting that a surety’s certificate of authority be revoked.”

After Treasury published a notice of proposed rulemaking to amend Part 223 on March 17, 2011, NASBP, among others, provided Treasury with a comment letter. To review NASBP’s May 12, 2011, comment letter, click here. And while Treasury did make a few emendations in the Final Rule predicated on the comments, in the main, Treasury has published a Final Rule that may make life in the federal bond arena more difficult for surety companies.

Final Rule Gives Discretion to Agencies to Decline to Accept a Bond from a Treasury–Certified Surety for Cause

Pursuant to revised section 223.17, a Treasury-certified surety company may present its bonds to any agency bond-approving official for acceptance, and that official may accept such bonds. An agency may decline bonds after consideration of any submission by the surety company and after a written determination by the agency to decline the bonds that is consistent with agency authorities.

Revised section 223.17 requires the agency to issue a regulation articulating the agency’s procedures and “for cause” standards for declining to accept bonds. An agency is required to issue a regulation subject to notice and comment rulemaking before declining any bonds. The surety industry will thus have the opportunity to comment on the “for cause” reasons proposed by each agency. This regulation must also define when a bond obligation becomes “administratively final” under the agency’s procedures.

It should be noted 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 bonds when the agency has already accepted a bid bond from the surety on a particular project.

Final Rule Revises Treasury Procedures to Adjudicate Agency Requests to Revoke a Surety’s Certificate of Authority

Revised section 223.20 specifies the process by which an agency submits a complaint to Treasury requesting that a certified surety’s certificate of authority be revoked for failure to pay or to satisfy one or more administratively final bond obligations. An agency submitting a complaint to Treasury must certify that the bond obligations are administratively final under the agency’s regulations or other authorities. The agency must also certify that the obligation to pay or satisfy the bond obligations has not been stayed or enjoined by a court.

Without question, this new authority given to agencies will be a detriment to sureties when an agency official can prohibit a particular surety from providing bonds to the agency simply because the surety is in a justifiable dispute with the contracting agency.

Revised section 223.20 affords the surety the opportunity to demonstrate its qualifications to retain its certificate and establishes the role of the Treasury Reviewing Official and the Treasury Deciding Official in the adjudicative process. Treasury will adjudicate the revocation complaint 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.

The revised rule retains the right of a surety to request an informal hearing before Treasury makes its revocation decision. If Treasury sustains the agency’s complaint and determines that the surety’s certificate should be revoked, the rule provides that a surety will be afforded an opportunity to cure the non-compliance to avoid decertification, unless its non-compliance is “willful.”

Revised section 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 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 has been eliminated. The determination of whether the basis for non-renewal or revocation has been eliminated or effectively cured will be made by Treasury in its discretion.