United States Treasury Certificates of Indebtedness, Treasury Notes, and Treasury BondsState and Local Government Series

DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 344

[Department of the Treasury Circular, Public Debt Series No. 3-72]

United States Treasury Certificates of Indebtedness, Treasury

Notes, and Treasury Bonds--State and Local Government Series

AGENCY: Bureau of the Public Debt, Fiscal Service, Department of the

Treasury.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: The Department of the Treasury hereby publishes, for comment,

a proposed rule governing United States Treasury Certificates of

Indebtedness, Notes, and Bonds of the State and Local Government

Series. These securities are available for purchase, as provided in

this offering, by State and local governments and certain other

entities with proceeds (or amounts treated as proceeds) which are

subject to yield restrictions or arbitrage rebate requirements under

the Internal Revenue Code. The securities are characterized in the

regulations as time deposit, demand deposit, and special zero interest.

This proposed rulemaking sets out the regulatory requirements which

stem from the Department of the Treasury's new processing environment

for United States Treasury Certificates of Indebtedness, Notes, and

Bonds of the State and Local Government Series (SLGS).

The Bureau of the Public Debt is implementing operational and

regulatory changes expected to benefit investors by providing

streamlined procedures, a centralized processing facility, and improved

customer services.

DATES: Comments must be received on or before October 21, 1994.

ADDRESSES: Comments should be sent to: Division of Special Investments,

Bureau of the Public Debt, 200 Third Street, P.O. Box 1328,

Parkersburg, West Virginia 26106-1328. Comments received will be

available for public inspection and copying at the Treasury Department

Library, FOIA Collection, Room 5030, Main Treasury Building, 1500

Pennsylvania Avenue, NW., Washington, DC 20220. Persons wishing to

visit the library should call (202) 622-0990 for an appointment.

FOR FURTHER INFORMATION CONTACT: Fred Pyatt, Director, Division of

Special Investments, Bureau of the Public Debt (304) 480-7752, Ed

Gronseth, Deputy Chief Counsel, or Jim Kramer-Wilt, Attorney-Adviser,

Office of the Chief Counsel, Bureau of the Public Debt (304) 480-5190.

SUPPLEMENTARY INFORMATION:

I. Background

The proposed rule is a revision of existing regulations codified at

31 CFR part 344, published on July 7, 1989, at 54 FR 28752, with

technical corrections published July 7, 1993, at 58 FR 31908.

In 1992, the Bureau of the Public Debt established the Division of

Special Investments at its offices in Parkersburg, West Virginia (WV).

The primary mission of the Division of Special Investments has been to

provide policy guidance and direction for the State and Local

Government Series securities program. The Division has reviewed the

current processing environment and is implementing operational and

regulatory changes which are expected to benefit investors in United

States Treasury securities of the State and Local Government Series by

providing streamlined procedures, a centralized processing facility,

and improved customer services.

In the current processing environment for State and Local

Government Series securities, the Bureau of the Public Debt has

authorized selected Federal Reserve Banks or Branches, acting as fiscal

agents of the United States, to provide services in connection with the

purchase of, transactions involving, and redemption of, the securities.

Subscriptions for the purchase of State and Local Government Series

securities are accepted at designated Federal Reserve Banks or

Branches, subject to verification by the Bureau of the Public Debt.

Full payment for each subscription must be available in an account for

debit by the Federal Reserve Bank or Branch on or before the date of

issue.

The current processing environment requires that staffing and

technical expertise be maintained at 12 designated Federal Reserve

Banks or Branches to provide unique services in connection with State

and Local Government Series securities. The Bureau of the Public Debt,

Office of Securities and Accounting Services, Division of Special

Investments (hereafter referred to as the Division of Special

Investments) has determined that the volume of transactions in this

securities program does not merit the expense of maintaining technical

expertise at 12 different locations.

The Bureau of the Public Debt has decided to centralize all

issuance, funds collection, and accounting functions for the State and

Local Government Series securities program in the Division of Special

Investments. The responsibility for these functions will be withdrawn

from the designated Federal Reserve Banks beginning on a specific issue

date which will be announced in the final rule. It is anticipated that

this date will be January 3, 1995.

After centralization, Federal Reserve Bank or Branch involvement in

this program will be limited to processing interest and redemption

payments made through reserve account credits for a very small number

of existing securities accounts. This method of payment is limited to

securities for which subscriptions were submitted prior to February 1,

1987. More than 98% of all interest and redemption payments for State

and Local Government Series securities are made by the Automated

Clearing House method (ACH), with credit directed to the owner's

account at a financial institution.

Beginning on the effective date of the final rule, subscriptions

for the purchase of State and Local Government Series securities which

request issuance on or after a designated date will only be accepted by

the Division of Special Investments. Full payment for each subscription

will be submitted by the investor's financial institution on or before

the issue date utilizing the Fedwire funds transfer system which is

available throughout the commercial banking industry. It will no longer

be necessary for investors to deposit the funds in an account subject

to debit by a Federal Reserve Bank or Branch on or before the date of

issue.

This proposed rule change is expected to provide investors in State

and Local Government Series securities with several benefits. Investors

will enjoy a higher level of customer service and more consistent

application of the regulations pertaining to this securities program.

Investors will be dealing directly with staff in the Division of

Special Investments who are trained and skilled in the many unique

aspects of this securities program and whose principal responsibility

it is to manage the State and Local Government Series securities

program.

In addition, United States taxpayers will benefit in terms of the

reduced costs of operating this securities program which will be

realized by centralizing operations within the Division of Special

Investments.

Because the responsibility for all issuance, funds collection, and

accounting functions for the State and Local Government Series

securities program will be withdrawn from the designated Federal

Reserve Banks and because the Division of Special Investments must

assume these operations on or about January 3, 1995, the Bureau of the

Public Debt has determined that a comment period of 15 days is

necessary. This will allow time for comments to be incorporated in a

final rule within operational time constraints. Although most of the

changes in this proposed rule are ministerial in nature (for example,

changes to increase the use of facsimile transmittals and to provide

new addresses), proposed changes concerning amending subscriptions

(Sec. 344.3(b)(3)(iv) and Sec. 344.7(b)) and concerning waivers and

fees associated with the failure to settle subscriptions (Sec. 344.4(b)

and Sec. 344.8(b)) merit special attention.

The Department of the Treasury is also in the process of

considering the revision of the regulations governing the State and

Local Government Series securities program, with a view to increasing

the flexibility of the program. The proposed rule does not include

these types of changes due to the need to adopt the proposed rule very

quickly. Changes to the State and Local Government Series securities

program could include changes in the certification requirements and in

the rules relating to the redemption of SLGS securities before

maturity.

II. Section By Section Summary

Subpart A--General Information

Provisions included in the general information section apply to

time deposit, demand deposit, and special zero interest State and Local

Government Series securities. Proposed changes from the 1989

regulations are as follows:

(1) Section 344.0--The term ``date telecopied'' for material sent

by facsimile equipment is defined as the date transmitted as it appears

on the document received. In the case of other carrier services, the

term ``date-stamp'' is defined as the date affixed by the carrier

service upon the carrier's taking receipt of the material.

(2)-(3) Section 344.1(a) and Section 344.1(b)--The agency's

Parkersburg, WV, address is substituted for its former Washington, DC,

address.

Subpart B--Time Deposit Securities

Time deposit Treasury securities are offered to State and local

government investors to enable these investors to satisfy yield

restrictions prescribed by the Internal Revenue Code and regulations.

Changes from the 1989 regulations are as follows:

(1) Section 344.2(b)--This section would delete reference to the

Federal Reserve Banks as a receiving point for initial subscriptions to

reflect the consolidation of program administration in Parkersburg, WV,

and would expressly allow for sending of initial subscriptions by

facsimile equipment (FAX) or other carriers, in addition to postal

delivery.

(2) Section 344.2(c)(2)--This section would clarify the authority

governing Automated Clearing House payments on account of United States

securities.

(3) Section 344.2(c)(2)(iii)--This section would clarify that

fiscal agency checks, rather than Treasury checks, are an alternative

payment mechanism for securities for which subscriptions were submitted

prior to February 1, 1987.

(4) Section 344.3(a)--This section would delete reference to the

Federal Reserve Banks as the receiving point for subscriptions for

purchase of securities under this offering, as well as the reference to

in person delivery to such Banks, to reflect the consolidation of

program administration in Parkersburg, WV. In addition, this section

would expressly allow for sending of initial subscriptions by facsimile

equipment. Whether subscriptions are sent by FAX, mail or other

carrier, subscribers are encouraged to expedite delivery.

(5) Section 344.3(b)(1)--This section would permit sending of

initial subscriptions by facsimile and other carriers. The Bureau of

the Public Debt is substituted for the Federal Reserve Banks to reflect

the consolidation of program administration in Parkersburg, WV.

(6) Section 344.3(b)(3)--The current rule requires that amendments

to initial subscriptions be filed on or before the issue date. As

proposed, this section would add a 3 p.m., Eastern time, submission

deadline. In addition, this section would permit sending of amendments

to initial subscriptions by facsimile, provided the notification is

clearly identified as an amendment and is immediately followed by the

submission by mail or other carrier of written notification of the

amendment.

(7) Section 344.3(b)(3)(i)--This section would clarify that an

amendment to an initial subscription may not change the issue date to

require issuance earlier than the issue date originally specified. In

this section, the Bureau of the Public Debt is substituted for the

Federal Reserve Banks to reflect the consolidation of program

administration in Parkersburg, WV. The current regulation requires that

changes under this section be submitted no later than one business day

before the originally specified issue date. As proposed, this section

would add a 3 p.m., Eastern time, submission deadline.

(8) Section 344.3(b)(3)(ii) and (iii)--This section would make

technical changes required by the addition of new section

344.3(b)(3)(iv).

(9) Section 344.3(b)(3)(iv)--This new section would govern

amendments to initial subscriptions which are not submitted timely.

Under this proposed new section, where an amendment is not submitted

timely, the Division of Special Investments may determine, pursuant to

the provisions governing waiver of regulations set forth under 31 CFR

306.126, that such an amendment is acceptable on an exception basis.

Where an amendment is determined to be acceptable on an exception

basis, the amended information shall be used as the basis for issuing

the securities, and an administrative fee of $100 per subscription will

be assessed. The Secretary reserves the right to reject amendments

which are not submitted timely.

(10) Section 344.3(c)--In this section, the Bureau of the Public

Debt is substituted for the Federal Reserve Banks to reflect the

consolidation of program administration in Parkersburg, WV. The current

rule requires that a final subscription must be submitted on or before

the issue date. As proposed, this section would add a 3 p.m., Eastern

time, submission deadline. In addition, this proposed section is

updated to reflect sending of a final subscription by facsimile

equipment.

(11) Section 344.3(c)(1)--A typographical error in the current

regulation is corrected.

(12) Section 344.4--The current section is divided into two parts,

(a) and (b).

(13) Section 344.4(a)--This section would require that the issue

date selected by the subscriber must be a business day and would allow

for the sending of initial subscriptions by facsimile or other carrier.

In this section, the Bureau of the Public Debt is substituted for the

Federal Reserve Banks. The current rule requires investors to make

payment by having their financial institution deposit funds in a

reserve account for debit by a Federal Reserve Bank or Branch on or

before the date of issue. Under the proposed section, full payment for

each subscription must be submitted utilizing the Fedwire funds

transfer system.

(14) Section 344.4(b)--The current regulation provides that any

subscriber which fails to make settlement on a subscription once

submitted is ineligible thereafter to subscribe for securities under

this offering for a period of six months. Under the current regulation,

the Commissioner of the Public Debt may determine, given the

circumstances of the case, that the six month penalty need not apply.

As proposed, the Division of Special Investments may determine to waive

the six month penalty, pursuant to the provisions governing waiver of

regulations set forth under 31 CFR 306.126. Where settlement occurs

after the proposed issue date and the Division of Special Investments

determines, pursuant to 31 CFR 306.126, that settlement is acceptable

on an exception basis, the six month penalty will be waived, and the

subscriber shall be subject to a late payment assessment. The

assessment will include payment of an amount equal to the amount of

interest that would have accrued on the securities from the proposed

issue date to the date of settlement, as well as an administrative fee

of $100 per subscription. Assessments under this subsection are due on

demand. Failure to pay an assessment shall render the subscriber

ineligible thereafter to subscribe for securities under this offering

until the assessment is paid.

(15) Section 344.5(b)(2)--This section would add a reference to a

designated Treasury form and delete a reference to wire as an

authorized means of submitting notice for redemption prior to maturity.

The agency's Parkersburg, WV, address is substituted for its former

Washington, DC, address. This proposed section would allow the notice

of redemption to be sent by facsimile or by other carriers. The current

regulation provides that notice of redemption must be received no less

than 15 calendar days before the requested redemption date. However,

owners are encouraged to provide as much notice of redemption as

possible to assure that payment can be timely made. As proposed, this

section would provide that notice be submitted no less than 15 calendar

days and no more than 60 calendar days before the requested redemption

date.

(16) Section 344.5(b)(3)(ii)--The current regulation states that

the applicable rate table for determining the ``current borrowing

rate'' is the one in effect on the day the request for early redemption

is received or, where mailed, the postmark date. This section would

clarify that the applicable rate table is the one in effect on the day

the request for early redemption is telecopied, postmarked, or where

delivered by other carrier, date-stamped.

Subpart C--Demand Deposit Securities

The Tax Reform Act of 1986 imposed arbitrage rebate requirements on

issuers of tax-exempt bonds and directed the Department of the Treasury

to accommodate such requirements by enabling entities to invest

qualifying funds in a Treasury money-market type investment vehicle.

Accordingly, the Department expanded the State and Local Government

Series program, beginning with its 1986 regulations, to include a

demand deposit security offering. This security is not treated as

investment property for purposes of sections 143(g)(3) and 148 of the

Internal Revenue Code and, therefore, enables eligible entities to

invest proceeds of tax-exempt bonds in an obligation which avoids the

earning of arbitrage subject to rebate. Proposed changes from the

current rule are as follows:

(1) Section 344.6(c)--A typographical error in the current

regulation is corrected.

(2) Section 344.7(a)--A typographical error in the current

regulation is corrected, and the Bureau of the Public Debt is

substituted for the Federal Reserve Banks to reflect the consolidation

of program activities in Parkersburg, WV. The current regulation

provides that subscriptions must be received under this section at

least three business days before the issue date, by a 1 p.m., Eastern

time, deadline. The proposed section would clarify that subscriptions

may be submitted by certified or registered mail, or by other carrier.

In addition, the proposed section provides that a subscription may be

submitted by facsimile equipment, at least three business days before

the issue date, provided that the original subscription form is

submitted by mail, or other carrier, and is received by the Bureau of

the Public Debt by 3 p.m., Eastern time, on the issue date.

(3) Section 344.7(b)--Current Sec. 344.7(b) is redesignated

Sec. 344.7(c) and a new Sec. 344.7(b) is added. The current regulation

provides that the principal amount to be invested may be changed

without penalty so long as notice is provided by 1 p.m., Eastern time,

at least one business day before the issue date. The proposed section

provides that the principal amount to be invested may be changed

without penalty on or before the issue date, but no later than 1 p.m.,

Eastern time, on the issue date. This section would allow for sending

of amendments to original subscriptions by facsimile, provided the

notification is clearly identified as an amendment and is immediately

followed by the submission, by mail or other carrier, of written

notification of the amendment. In addition, this section would provide

that, where an amendment is not submitted timely, the Division of

Special Investments may determine, pursuant to the provisions governing

waiver of regulations set forth under 31 CFR 306.126, that such an

amendment is acceptable on an exception basis. Where an amendment is

determined to be acceptable on an exception basis, the amended

information shall be used as the basis for issuing the securities, and

an administrative fee of $100 per subscription will be assessed. The

Secretary reserves the right to reject amendments which are not

submitted timely.

(4) Section 344.7(c)--Current Sec. 344.7(b) is redesignated as

Sec. 344.7(c). A typographical error in current Sec. 344.7(b)(5)(vii)

is corrected.

(5) Section 344.8--The current section is divided into two parts,

(a) and (b).

(6) Section 344.8(a)--In this section, the Bureau of the Public

Debt is substituted for the Federal Reserve Banks to reflect the

consolidation of program activities in Parkersburg, WV. The current

rule requires investors to deposit funds in an account for debit by a

Federal Reserve Bank or Branch on or before the date of issue. As

proposed, this section would require that full payment for each

subscription be submitted utilizing the Fedwire funds transfer system.

(7) Section 344.8(b)--The current regulation provides that any

subscriber which fails to make settlement on a subscription once

submitted is ineligible thereafter to subscribe for securities under

this offering for a period of six months. Under the current regulation,

the Commissioner of the Public Debt may determine, given the

circumstances of the case, that the six month penalty need not apply.

As proposed, the Division of Special Investments may determine to waive

the six month penalty, pursuant to the provisions governing waiver of

regulations set forth under 31 CFR 306.126. Where settlement occurs

after the proposed issue date and the Division of Special Investments

determines, pursuant to 31 CFR 306.126, that such settlement is

acceptable on an exception basis, the six month penalty will be waived,

and the subscriber shall be subject to a late payment assessment. The

assessment will include payment of an amount equal to the amount of

interest that would have accrued on the securities from the proposed

issue date to the date of settlement, as well as an administrative fee

of $100 per subscription. Assessments under this subsection are due on

demand. Failure to pay an assessment shall render the subscriber

ineligible thereafter to subscribe for securities under this offering

until the assessment is paid.

(8) Section 344.9(b)--The Bureau of the Public Debt is substituted

for the Federal Reserve Banks to reflect the consolidation of program

activities in Parkersburg, WV. This section would allow for sending of

the notice of redemption by facsimile or by other carriers. The notice

must show the account number and the tax identification number of the

subscriber. Under this proposed section, the notice must be received at

the Bureau of the Public Debt by 1 p.m., Eastern time, one business day

prior to the requested redemption date.

Subpart D--Special Zero Interest Securities

To give investors flexibility in investing certain proceeds that

may become subject to yield restrictions, a new special zero interest

security was offered for the first time with the 1989 rule. Under the

terms of this offering, subscribers are not required to certify that as

of the date of investment all the proceeds subject to yield

restrictions are being invested in State and Local Government

securities. With exceptions, this offering is the same as that for time

deposit securities. Proposed changes from the 1989 rule are as follows:

(1) Section 344.13--This section would add a reference to a

designated Treasury form and delete a reference to wire as an

authorized means of submitting notice for redemption prior to maturity.

The agency's Parkersburg, WV, address is substituted for its former

Washington, DC, address. In addition, the section would allow for

sending of the notice for redemption by facsimile or by other carriers.

The current regulation provides that notice of redemption must be

received no less than 15 calendar days before the requested redemption

date. However, owners are encouraged to provide as much notice of

redemption as possible to assure that payment can be timely made. Under

this proposed section, notice is to be submitted no less than 15

calendar days and no more than 60 calendar days before the requested

redemption date.

Procedural Requirements

It has been determined that this proposed rule is not a significant

regulatory action as defined in Executive Order 12866. Therefore, an

assessment of anticipated benefits, costs and regulatory alternatives

is not required.

Although this rule is being issued in proposed form to secure the

benefit of public comment, the rule relates to matters of public

contract, as well as the borrowing power and fiscal authority of the

United States. The notice and public procedures requirements of the

Administrative Procedure Act are inapplicable, pursuant to 5 U.S.C.

553(a)(2). As no notice of proposed rulemaking is required, the

provisions of the Regulatory Flexibility Act (5 U.S.C. 601, et seq.) do

not apply.

The collections of information contained in this regulation have

been previously reviewed and approved by the Office of Management and

Budget, in accordance with the requirements of the Paperwork Reduction

Act (44 U.S.C. 3507) under control number 1535-0091. The principal

purpose of the proposed rule is to change the address of the receiving

entity. The revision would not impose a new collection of information

requirement.

List of Subjects in 31 CFR Part 344

Bonds, Government securities, Securities.

Dated: September 30, 1994.

Gerald Murphy,

Fiscal Assistant Secretary.

For the reasons set out in the preamble, 31 CFR Chapter II,

Subchapter B, Part 344 is proposed to be revised to read as follows:

PART 344--REGULATIONS GOVERNING UNITED STATES TREASURY CERTIFICATES

OF INDEBTEDNESS--STATE AND LOCAL GOVERNMENT SERIES, UNITED STATES

TREASURY NOTES--STATE AND LOCAL GOVERNMENT SERIES, AND UNITED

STATES TREASURY BONDS--STATE AND LOCAL GOVERNMENT SERIES

Subpart A--General Information

Sec.

344.0 Offering of securities.

344.1 General provisions.

Subpart B--Time Deposit Securities

344.2 Description of securities.

344.3 Subscription for purchase.

344.4 Issue date and payment.

344.5 Redemption.

Subpart C--Demand Deposit Securities

344.6 Description of Securities.

344.7 Subscription for purchase.

344.8 Issue date and payment.

344.9 Redemption.

Subpart D--Special Zero Interest Securities

344.10 General.

344.11 Description of securities.

344.12 Subscription for purchase.

344.13 Redemption.

Appendix A to Part 344--Early Redemption Market Change Formulas and

Examples

Authority: 31 U.S.C. 3102, et seq.

Subpart A--General Information

Sec. 344.0 Offering of securities.

(a) In order to provide issuers of tax exempt securities with

investments which allow them to comply with yield restriction and

arbitrage rebate provisions of the Internal Revenue Code, the Secretary

of the Treasury offers for sale the following State and Local

Government Series securities:

(1) Time deposit securities:

(i) United States Treasury Certificates of Indebtedness,

(ii) United States Treasury Notes, and

(iii) United States Treasury Bonds.

(2) Demand deposit securities--United States Treasury Certificates

of Indebtedness.

(3) Special zero interest securities:

(i) United States Treasury Certificates of Indebtedness.

(ii) United States Treasury Notes.

(b) As appropriate, the definitions of terms used in this Part 344

are those found in the relevant portions of the Internal Revenue Code

and regulations. The term ``government body'' refers to issuers of

State or local government bonds described in section 103 of the

Internal Revenue Code, as well as to any other entity subject to the

yield restrictions in sections 141-150 of the Internal Revenue Code, or

the arbitrage rebate requirements in section 143(g)(3) or 148 of the

Internal Revenue Code. The term ``postmark date'' refers to the date

affixed by the U.S. Postal Service, not to a postage meter date. The

``date telecopied'' for material sent by facsimile equipment is the

date transmitted as it appears on the document received. The term

``date-stamp'' refers to the date affixed by the carrier service upon

the carrier's taking receipt of the material.

(c) This offering will continue until terminated by the Secretary

of the Treasury.

Sec. 344.1 General provisions.

(a) Regulations. United States Treasury State and Local Government

Series securities shall be subject to the general regulations with

respect to United States securities, which are set forth in the

Department of the Treasury Circular No. 300 (31 CFR part 306), to the

extent applicable. Copies of the circular may be obtained from the

Bureau of the Public Debt, Forms Management--Room 301, 200 Third

Street, PO Box 396, Parkersburg, WV 26102-0396, or a Federal Reserve

Bank or Branch.

(b) Issuance. The securities will be issued in book-entry form on

the books of the Department of the Treasury, Bureau of the Public Debt,

Parkersburg, WV 26102-0396. Transfer of securities by sale, exchange,

assignment or pledge, or otherwise will not be permitted.

(c) Transfers. Securities held in an account of any one type, i.e.,

time deposit, demand deposit, or special zero interest, may not be

transferred within that account or to an account of any other type.

(d) Fiscal agents. Selected Federal Reserve Banks and Branches, as

fiscal agents of the United States, may be designated to perform such

services as may be requested of them by the Secretary of the Treasury

in connection with the purchase of, transactions involving, and

redemption of, the securities.

(e) Authority of subscriber. Where a commercial bank submits an

initial or final subscription on behalf of a government body, it must

certify that it is acting under the latter's specific authorization;

ordinarily, evidence of such authority will not be required.

Subscriptions submitted by an agent other than a commercial bank must

be accompanied by evidence of the agent's authority to act. Such

evidence must describe the nature and scope of the agent's

authorization, must specify the legal authority under which the agent

was designated, and must relate by its terms to the investment action

being undertaken. Subscriptions unsupported by such evidence will not

be accepted.

(f) Reservations. Transaction requests, including requests for

subscription and redemption, will not be accepted if unsigned,

inappropriately completed, or not timely submitted. The Secretary of

the Treasury reserves the right:

(1) To reject any application for the purchase of securities under

this offering;

(2) To refuse to issue any such securities in any case or any

class(es) of cases; and

(3) To revoke the issuance of any security, and to declare the

subscriber ineligible thereafter to subscribe for securities under this

offering, if any security is issued on the basis of an improper

certification or other misrepresentation by the subscriber, other than

as the result of an inadvertent error, if the Secretary deems such

action to be in the public interest.

(4) Any of these actions shall be final. The authority of the

Secretary to waive regulations under 31 CFR 306.126 applies to this

Part 344.

(g) Debt limit contingency. The Department of the Treasury reserves

the right to change or suspend the terms and conditions of this

offering, including provisions relating to subscriptions for, and

issuance of, securities, interest payments, redemptions, and rollovers,

as well as notices relating hereto, at any time the Secretary

determines that issuance of obligations sufficient to conduct the

orderly financing operations of the United States cannot be made

without exceeding the statutory debt limit. Announcement of such

changes shall be provided by such means as the Department deems

appropriate.

(Approved by the Office of Management and Budget under control

number 1535-0091)

Subpart B--Time Deposit Securities

Sec. 344.2 Description of securities.

(a) Terms.

(1) Certificates of Indebtedness. The certificates will be issued

in a minimum amount of $1,000, or in any larger amount, in multiples of

$100, with maturity periods fixed by the government body, from 30

calendar days up to and including one year, or for any intervening

period.

(2) Notes. The notes will be issued in a minimum amount of $1,000,

or in any larger amount, in multiples of $100, with maturity periods

fixed by the government body, from one year and one day up to and

including 10 years, or for any intervening period.

(3) Bonds. The bonds will be issued in a minimum amount of $1,000,

or in any larger amount, in multiples of $100, with maturity periods

fixed by the government body, from 10 years and one day up to and

including 30 years, or for any intervening period.

(b) Interest rate. Each security shall bear such rate of interest

as the government body shall designate, but the rate shall not exceed

the maximum interest rate. The applicable maximum interest rates for

each day shall equal rates shown in a table (Form PD 4262), which will

be released to the public by 10 a.m., Eastern time, each business day.

If the Treasury finds that due to circumstances beyond its control the

rates will not be available to the public by 10 a.m., Eastern time, on

any given business day, it will provide an immediate announcement of

that fact and advise that the applicable interest for the last

preceding business day shall apply. The applicable rate table for any

subscription is the one in effect on the date the initial subscription

is telecopied, if transmitted by facsimile equipment, postmarked, if

mailed, or carrier date-stamped, if the initial subscription is

delivered by other carrier. Subscriptions telecopied, postmarked, or

date-stamped on a non-business day will be subject to those interest

rates which are in effect for the next business day. The rates

specified in the tables are one-eighth of one percent below the then

current estimated Treasury borrowing rate for a security of comparable

maturity.

(c) Payment.

(1) Interest computation and payment dates. Interest on a

certificate will be computed on an annual basis and will be paid at

maturity with the principal. Interest on a note or bond will be paid

semiannually. The subscriber will specify the first interest payment

date, which must occur any time between 30 days and one year of the

date of issue, and the final interest payment date must coincide with

the maturity date of the security. Interest for other than a full

semiannual interest period is computed on the basis of a 365-day or

366-day year (for certificates) and on the basis of the exact number of

days in the half-year (for notes and bonds). See appendix to subpart E

of part 306 of this chapter for rules regarding computation of

interest.

(2) Method of payment. For securities for which subscriptions are

submitted on or after February 1, 1987, payment will only be made by

the Automated Clearing House method (ACH) for the owner's account at a

financial institution designated by the owner. To the extent

applicable, provisions of Sec. 357.26 on ``Payments,'' as set forth in

31 CFR part 357 and provisions of 31 CFR part 370, shall govern ACH

payments made under this offering. For securities for which

subscriptions were submitted prior to February 1, 1987, payment will be

made:

(i) By a direct credit to a Federal Reserve Bank or Branch for the

account of the financial institution servicing the investor; or

(ii) By ACH for the owner's account at a financial institution; or

(iii) By fiscal agency check; or

(iv) In accordance with other prior arrangements made by the

subscriber with the Bureau of the Public Debt.

Sec. 344.3 Subscription for purchase.

(a) Subscription requirements. Subscriptions for purchase of

securities under this offering must be submitted to the Division of

Special Investments, Bureau of the Public Debt, 200 Third Street, PO

Box 396, Parkersburg, WV 26102-0396. Initial and final subscriptions

may be submitted by facsimile equipment at (304) 480-6818, by mail, or

by other carrier. All subscriptions submitted by mail, whether initial

or final, should be sent by certified or registered mail.

(b) Initial subscriptions. (1) An initial subscription, either on a

designated Treasury form or in letter form, stating the principal

amount to be invested and the issue date, must be telecopied,

postmarked, or where delivered by other carrier, must be date-stamped

at least 15 calendar days before issue date. For example, if the

securities are to be issued on March 16, the subscription must be

telecopied, postmarked, or date-stamped no later than March 1. If the

initial subscription is in letter form, it should read substantially as

follows:

To: Bureau of the Public Debt

Pursuant to the provisions of Department of the Treasury Circular,

Public Debt Series No. 3-72, current revision, the undersigned hereby

subscribes for United States Treasury Time Deposit Securities--State

and Local Government Series, to be issued as entries on the books of

the Bureau of the Public Debt, Department of the Treasury, in the total

amount and with the issue date shown below, which date is at least 15

calendar days after the date of this subscription:

Principal Amount

$---------------------------------------------------------------------

Issue Date

----------------------------------------------------------------------

The undersigned agrees that the final subscription and payment will

be submitted on or before the issue date.

(Tax I.D. Number of State or local government body or other entity

eligible to purchase State and Local Government Series securities)

(Name of State or local government body or other entity eligible to

purchase State and Local Government Series securities)

----------------------------------------------------------------------

(Date)

by---------------------------------------------------------------------

(Signature and Title)

(2) The provisions set out in paragraph (e) of Sec. 344.1, dealing

with the authority of the subscriber to act on behalf of a government

body, and in Sec. 344.4, relating to the failure to complete a

subscription, apply to initial, as well as final subscriptions.

(3) An initial subscription may be amended on or before the issue

date, but no later than 3 p.m., Eastern time, on the issue date.

Notification may be telecopied by facsimile equipment to the Bureau of

the Public Debt at (304) 480-6818 provided the request is clearly

identified as an amendment and is immediately followed by the

submission, by mail or other carrier, of written notification.

Amendments to initial subscriptions are acceptable with the following

exceptions:

(i) The issue date may not be changed to require issuance earlier

than the issue date originally specified or to require issuance more

than seven calendar days later than originally specified. If such

change is made, notification should be provided to the Bureau of the

Public Debt as soon as possible, but no later than 3 p.m., Eastern

time, one business day before the originally specified issue date;

(ii) The aggregate amount may not be changed by more than the ten

percent limitation set out in paragraph (c) of this section;

(iii) An interest rate may not be changed to a rate that exceeds

the maximum interest rate in the table that was in effect on the date

the initial subscription was submitted; and

(iv) Where an amendment is not submitted timely, the Division of

Special Investments may determine, pursuant to the provisions governing

waiver of regulations set forth under 31 CFR 306.126, that such an

amendment is acceptable on an exception basis. Where an amendment is

determined to be acceptable on an exception basis, the amended

information shall be used as the basis for issuing the securities, and

an administrative fee of $100 per subscription will be assessed. The

Secretary reserves the right to reject amendments which are not

submitted timely.

(4) No initial subscription will be required where a final

subscription is received or postmarked at least 15 calendar days before

the issue date. Such final subscription will be treated as the initial

subscription for purposes of determining the applicable interest rate

table (see Sec. 344.2(b)), and may be amended on or before the issue

date, subject to the exceptions in paragraph (b)(3) of this section.

(c) Final subscriptions. A final subscription must be received by

the Bureau of the Public Debt on or before the issue date, but no later

than 3 p.m., Eastern time, on the issue date. The final subscription

may be telecopied by facsimile equipment to the Bureau of the Public

Debt at (304) 480-6818 provided the facsimile is properly identified as

a final subscription and is immediately followed by the submission of

the original subscription form by mail or other carrier. The final

subscription must be for a total principal amount that is no more than

ten percent above or below the aggregate principal amount specified in

the initial subscription. The final subscription, dated and signed by

an official authorized to make the purchase and showing the taxpayer

identification number of the beneficial owner, must be accompanied by a

copy of the initial subscription, where applicable. The various

maturities, interest rates, and semiannual interest payment dates (in

the case of notes and bonds), must be specified in the final

subscription, as well as the title(s) of the designated official(s)

authorized to request early redemption. Final subscriptions submitted

for certificates, notes and bonds must separately itemize securities of

each maturity and each interest rate. The final subscription must

contain a certification by the subscriber that, as of the date of

investment (without regard to any temporary period of no longer than 30

days):

(1) The total investment consists only of proceeds (including

amounts treated as proceeds) of a tax-exempt bond issue which are

subject to yield restrictions under sections 141-150 of the Internal

Revenue Code during the entire period of investment;

(2) The total investment is not less than all of such proceeds

except for--

(i) An amount not to exceed $100, and

(ii) Amounts required for payment due less than 30 days from the

date of issue;

(3) None of the proceeds submitted in payment is derived (directly

or indirectly) from the redemption before maturity of other securities

of the State and Local Government Series; and

(4)(i) No portion of the investment is being made (directly or

indirectly) with amounts that are to be used to discharge a tax-exempt

bond issue and that are derived or are to be derived (directly or

indirectly) from the sale of escrowed open market securities, the

proceeds of which were to be used to discharge a tax-exempt bond issue;

or

(ii) Although a portion of the investment is being made (directly

or indirectly) with amounts that are to be used to discharge a tax-

exempt bond issue and that are derived or are to be derived (directly

or indirectly) from the sale of escrowed open market securities, the

proceeds of which were to be used to discharge a tax-exempt bond issue,

the composite yield to maturity of all investments being purchased with

such amounts does not exceed the composite yield to maturity of the

securities that were sold, based on the price at which they were sold.

(5) Where proceeds are subject to yield restrictions for a limited

period of time, under paragraph (c)(1) of this section, no investment

of such proceeds beyond such period may be made. For example, if a

reserve fund of a refunding issue is subject to yield restrictions for

a period of four years, the securities purchased as an investment of

the reserve fund may not have a maturity longer than four years. With

respect to obligations described in section 103 of the Internal Revenue

Code issued after January 31, 1987, paragraph (c)(2) of this section is

satisfied only if on the date of investment, all the proceeds of the

issue which are subject to yield restrictions are invested in State and

Local Government Series securities. Paragraph (c)(2) of this section

does not apply to purpose investments, such as mortgage notes or

student loan obligations. Transferred proceeds of the tax exempt bond

issue that were proceeds of another issue shall not be treated as

proceeds for purposes of paragraph (c)(2) of this section if no portion

of the total investment consists of such proceeds. See Sec. 344.1(f) as

to improper certifications.

(Approved by the Office of Management and Budget under control

number 1535-0091)

Sec. 344.4 Issue date and payment.

(a) General. The subscriber shall fix the issue date of each

security in the initial subscription. The issue date must be a business

day and may not exceed by more than 60 calendar days either the date

the initial subscription was telecopied to the Bureau of the Public

Debt or, where mailed, the postmark date, or where delivered by other

carrier, the carrier date-stamp thereof. Full payment for each

subscription must be submitted by the Fedwire funds transfer system

with credit directed to the Treasury's General Account. Full payment

should be submitted by 3 p.m., Eastern time, to ensure that settlement

on the securities occurs on the date of issue.

(b) Noncompliance. The penalty imposed on any subscriber which

fails to make settlement on a subscription once submitted shall be to

render the subscriber ineligible thereafter to subscribe for securities

under this offering for a period of six months, beginning on the date

the subscription is withdrawn or the proposed issue date, whichever

occurs first. The Division of Special Investments may determine to

waive the six month penalty, pursuant to the provisions governing

waiver of regulations set forth under 31 CFR 306.126. Where settlement

occurs after the proposed issue date and the Division of Special

Investments determines, pursuant to 31 CFR 306.126, that settlement is

acceptable on an exception basis, the six month penalty will be waived,

and the subscriber shall be subject to a late payment assessment. The

assessment will include payment of an amount equal to the amount of

interest that would have accrued on the securities from the proposed

issue date to the date of settlement, as well as an administrative fee

of $100 per subscription. Assessments under this subsection are due on

demand. Failure to pay an assessment shall render the subscriber

ineligible thereafter to subscribe for securities under this offering

until the assessment is paid.

(Approved by the Office of Management and Budget under control

number 1535-0091)

Sec. 344.5 Redemption.

(a) General. A security may not be called for redemption by the

Secretary of the Treasury prior to maturity. Upon the maturity of a

security, the Department will make payment of the principal amount and

interest due to the owner thereof. A security scheduled for redemption

on a non-business day will be redeemed on the next business day.

(b) Before maturity.

(1) In general. A security may be redeemed at the owner's option no

earlier than 25 calendar days after the issue date in the case of a

certificate, and one year after the issue date in the case of a note or

bond. Partial redemptions may be requested in multiples of $100;

however, an account balance of less than $1,000 will be redeemed in

total.

(2) Notice. Notice of redemption prior to maturity must be

submitted, either on a designated Treasury form or by letter, by the

official(s) authorized to redeem the securities, as shown on the final

subscription form, to the Division of Special Investments, Bureau of

the Public Debt, 200 Third Street, PO Box 396, Parkersburg, WV 26102-

0396. The notice may be submitted by facsimile equipment to the Bureau

of the Public Debt at (304) 480-6818, by mail, or by other carrier. The

notice must show the account number, the maturities of the securities

to be redeemed, and the tax identification number of the subscriber.

The notice of redemption must be telecopied, postmarked, or where

delivered by other carrier, must be date-stamped no less than 15

calendar days before the requested redemption date, but no more than 60

calendar days before the requested redemption date. A notice of

redemption prior to maturity may not be cancelled.

(3) Redemption proceeds--Subscriptions on or after September 1,

1989. For securities subscribed for on or after September 1, 1989, the

amount of the redemption proceeds is calculated as follows:

(i) Interest. If a security is redeemed before maturity on a date

other than a scheduled interest payment date, interest will be paid for

the fractional interest period since the last interest payment date.

(ii) Market charge. An amount shall be deducted from the redemption

proceeds in all cases where the current borrowing rate of the

Department of the Treasury for the remaining period to original

maturity of the security prematurely redeemed exceeds the rate of

interest originally fixed for such security. The amount shall be the

present value of the future increased borrowing cost to the Treasury.

The annual increased borrowing cost for each interest period is

determined by multiplying the principal by the difference between the

two rates. For notes and bonds, the increased borrowing cost for each

remaining interest period to original maturity is determined by

dividing the annual cost by two. For certificates, the increased

borrowing cost for the remaining period to original maturity is

determined by multiplying the annual cost by the number of days

remaining until original maturity divided by the number of days in the

calendar year. Present value shall be determined by using the current

borrowing rate as the discount factor. The term ``current borrowing

rate'' means the applicable rate shown in the table of maximum interest

rates payable on United States Treasury securities--State and Local

Government Series--for the day the request for early redemption is

telecopied, postmarked, or where delivered by other carrier, date-

stamped, plus one-eighth of one percentage point. Where redemption is

requested as of a date less than 30 calendar days before the original

maturity date, such applicable rate is the rate shown for a security

with a maturity of 30 days. The market charge for bonds, notes, and

certificates of indebtedness can be computed by use of the formulas in

Appendix A to this part.

(4) Redemption proceeds--Subscriptions from December 28, 1976

through August 31, 1989. For securities subscribed for from December

28, 1976 through August 31, 1989, the amount of the redemption proceeds

is calculated as follows:

(i) Interest. Interest for the entire period the security was

outstanding shall be recalculated on the basis of the lesser of the

original interest rate at which the security was issued, or the

interest rate that would have been set at the time of the initial

subscription had the term for the security been for the shorter period.

If a note or bond is redeemed before maturity on a date other than a

scheduled interest payment date, no interest will be paid for the

fractional interest period since the last interest payment date.

(ii) Overpayment of interest. If there have been overpayments of

interest, as determined under paragraph (b)(4)(i) of this section,

there shall be deducted from the redemption proceeds the aggregate

amount of such overpayments, plus interest, compounded semiannually,

thereon from the date of each overpayment to the date of redemption.

The interest rate to be used in calculating the interest on the

overpayment shall be one-eighth of one percent above the maximum rate

that would have applied to the initial subscription had the term of the

security been for the shorter period.

(iii) Market charge. An amount shall be deducted from the

redemption proceeds in all cases where the current borrowing rate of

the Department of the Treasury for the remaining period to original

maturity of the security prematurely redeemed exceeds the rate of

interest originally fixed for such security. The amount shall be

calculated using the formula in paragraph (b)(3)(ii) of this section.

(5) Redemption proceeds--Subscriptions on or before December 27,

1976. (i) For securities subscribed for on or before December 27, 1976,

the amount of the redemption proceeds is calculated as follows.

(ii) The interest for the entire period the security was

outstanding shall be recalculated on the basis of the lesser of the

original interest rate at which the security was issued, or an adjusted

interest rate reflecting both the shorter period during which the

security was actually outstanding and a penalty. The adjusted interest

rate is the Treasury rate which would have been in effect on the date

of issuance for a marketable Treasury certificate, note, or bond

maturing on the quarterly maturity date prior to redemption (in the

case of certificates), or on the semiannual maturity period prior to

redemption (in the case of notes and bonds), reduced in either case by

a penalty which shall be the lesser of:

(A) One-eighth of one percent times the number of months from the

date of issuance to original maturity, divided by the number of full

months elapsed from the date of issue to redemption, or

(B) One-fourth of one percent.

There shall be deducted from the redemption proceeds, if necessary, any

overpayment of interest resulting from previous payments made at a

higher rate based on the original longer period to maturity.

(Approved by the Office of Management and Budget under control

number 1535-0091)

Subpart C--Demand Deposit Securities

Sec. 344.6 Description of securities.

(a) Terms. The securities are defined as one-day certificates of

indebtedness. The securities will be issued in a minimum of $1,000 and

any increment above that amount. Each subscription will be established

as a unique account. Securities will be automatically rolled over each

day unless redemption is requested.

(b) Interest rate. (1) Each security shall bear a variable rate of

interest based on an adjustment of the average yield for three-month

Treasury bills at the most recent auction. A new rate will be effective

on the first business day following the regular auction of three-month

Treasury bills and will be shown in the table (Form PD 4262), available

to the public on such business day. Interest will be accrued and added

to the principal daily. Interest will be computed on the balance of the

principal, plus interest accrued through the immediately preceding day.

(2)(i) The annualized effective demand deposit rate in decimals,

designated ``I'' in Equation 1 is calculated as:

I=[(100/P)Y/DTM-1] (1-MTR)-TAC

(Equation 1)

where

P=The average auction price for the Treasury bill, per hundred, to

three decimal places.

Y=365 if the year following issue date does not contain a leap year day

and 366 if it does contain a leap year day.

DTM=The number of days from date of issue to maturity for the auctioned

Treasury bill.

MTR=Estimated average marginal tax rate, in decimals, of purchasers of

short-term tax exempt bonds.

TAC=Treasury administrative costs, in decimals.

(ii) The daily factor for the demand deposit rate is then

calculated as:

DDR=(1+I)1/Y-1

(Equation 2)

(3) Information as to the estimated average marginal tax rate and

costs for administering the demand deposit State and Local Government

Series securities program, both to be determined by Treasury from time

to time, will be published in the Federal Register.

(c) Payment. Interest earned on the securities will be added to the

principal and will be reinvested daily until redemption. At any time

the Secretary determines that issuance of obligations sufficient to

conduct the orderly financing operations of the United States cannot be

made without exceeding the statutory debt limit, the Department will

invest any unredeemed demand deposit securities in special 90-day

certificates of indebtedness. These 90-day certificates will be payable

at maturity, but redeemable before maturity, provided funds are

available for redemption, or reinvested in demand deposit securities

when regular Treasury borrowing operations resume, both at the owner's

option. Funds invested in the 90-day certificates of indebtedness will

earn simple interest equal to the daily factor in effect at the time

demand deposit security issuance is suspended, multiplied by the number

of days outstanding.

Sec. 344.7 Subscription for purchase.

(a) Subscription requirements. Subscriptions for purchase of

securities under this offering must be submitted to the Division of

Special Investments, Bureau of the Public Debt, 200 Third Street, PO

Box 396, Parkersburg, WV 26102-0396. Subscriptions must be submitted on

a designated Treasury form, must specify the principal amount to be

invested and the issue date, and must be signed by an official

authorized to make the purchase. The Bureau of the Public Debt must

receive the subscription at least three business days before the issue

date. The subscription may be submitted by certified or registered

mail, or by other carrier. The subscription may also be submitted by

facsimile equipment at (304) 480-6818, at least three business days

before the issue date, provided that the original subscription form is

submitted by mail, or by other carrier, and is received by the Division

of Special Investments by 3 p.m., Eastern time, on the issue date.

(b) Amending subscriptions. The principal amount to be invested may

be changed without penalty on or before the issue date, but no later

than 1 p.m. Eastern time, on the issue date. Notification may be

telecopied by facsimile equipment to the Division of Special

Investments at (304) 480-6818, provided the request is clearly

identified as an amendment and is immediately followed by the

submission, by mail or other carrier, of written notification. Where an

amendment is not submitted timely, the Division of Special Investments

may determine, pursuant to the provisions governing waiver of

regulations set forth under 31 CFR 306.126, that such an amendment is

acceptable on an exception basis. Where an amendment is determined to

be acceptable on an exception basis, the amended information shall be

used as the basis for issuing the securities, and an administrative fee

of $100 per subscription will be assessed. The Secretary reserves the

right to reject amendments which are not submitted timely.

(c) Certification. By completing the subscription form, subscribers

certify to the following:

(1) Neither the aggregate issue price nor the stated redemption

price at maturity of the bonds that are part of the tax-exempt issue

exceeds $35 million. Issue price and stated redemption price at

maturity have the meanings given such terms in sections 1273 and 1274

of the Internal Revenue Code;

(2) No portion of the tax-exempt bond issue has been or will be

issued or permitted to remain outstanding, and the expenditure of gross

proceeds of the tax-exempt bond issue has not and will not be delayed,

for the principal purpose of investing in demand deposit securities;

(3) Only eligible gross proceeds of the tax-exempt bond issue have

been and will be submitted in payment for demand deposit securities.

Eligible gross proceeds are all gross proceeds of the tax-exempt bond

issue except--

(i) Gross proceeds of an advance refunding issue to be used to

discharge another issue;

(ii) Gross proceeds accumulated in a reserve or replacement fund

(other than a bona fide debt service or reasonably required reserve or

replacement fund); and

(iii) Solely for purposes of this paragraph (c)(3), gross proceeds

previously invested at any time pursuant to any exception in paragraph

(c)(5) of this section, other than paragraph (c)(5)(vi) (Exception 6)

(relating to amounts of less than $25,000) and paragraph (c)(5)(viii)

(Exception 8) (relating to inadvertent error).

(4) At least 25 percent of the eligible gross proceeds received

from the sale of the tax-exempt bond issue have been or will be

invested in demand deposit securities within three business days of the

date of receipt thereof;

(5) All eligible gross proceeds of the tax-exempt bond issue have

been and will be invested within four business days of the date of

receipt thereof in demand deposit securities (principal repayments on

purpose investments are treated as gross proceeds received on the date

of repayment). This paragraph (c)(5) shall not apply to gross proceeds

that are at all times (prior to the date of expenditure thereof)

invested pursuant to one of the exceptions:

(i) Exception 1. Gross proceeds that are invested solely in

investments the earnings on which are not subject to rebate under

section 148(f) or 143(g)(3) of the Internal Revenue Code (whichever

applies).

(ii) Exception 2. Gross proceeds that are invested in obligations

the earnings on which are not reasonably expected to be subject to

rebate by reason of section 148(f)(4)(A)(ii) (relating to certain bona

fide debt service funds) of the Internal Revenue Code or section

148(f)(4)(B) (relating to exception for temporary investments) of the

Internal Revenue Code.

(iii) Exception 3. Gross proceeds that are not reasonably expected

to be gross proceeds of the tax-exempt bond issue for more than seven

business days.

(iv) Exception 4. Gross proceeds that are part of a reasonably

required reserve or replacement fund (other than a bona fide debt

service fund) for the tax-exempt bond issue.

(v) Exception 5. Gross proceeds that are invested in taxable

obligations, but only if the yield on each obligation (computed

separately and on the basis of an arm's length purchase price) is no

higher than the yield on the tax-exempt bond issue.

(vi) Exception 6. Eligible gross proceeds that are not invested in

one-day certificates of indebtedness or pursuant to paragraphs

(c)(5)(i-v) (Exceptions 1 through 5), but only if the total amount of

such eligible gross proceeds on any particular day is less than

$25,000. This paragraph (c)(5)(vi) (Exception 6) shall not apply to

gross proceeds that are part of a reasonably required reserve or

replacement fund (other than a bona fide debt service fund).

(vii) Exception 7. Gross proceeds that are not invested pursuant to

paragraph (c)(5)(iv) (Exception 4) or paragraph (c)(5)(vi) (Exception

6), and that are invested in any taxable obligation the yield on which

is higher than the yield on the tax-exempt bond issue, but only if

taxable obligations described in paragraph (c)(5)(v) (Exception 5), and

the tax-exempt obligations described in (c)(5)(i) (Exception 1) are not

available for investment (for example, because market interest rates

are too high and statutory or indenture restrictions prevent

investments in tax-exempt obligations).

(viii) Exception 8. Gross proceeds that are not invested in demand

deposit securities due to an inadvertent error.

(6) See Sec. 344.1(f) as to improper certifications.

Sec. 344.8 Issue date and payment.

(a) General. The subscriber shall fix the issue date on the

subscription, the issue date to be a business day at least three

business days after receipt of the subscription by the Division of

Special Investments. Full payment for each subscription must be

submitted by the Fedwire funds transfer system with credit directed to

the Treasury's General Account. Full payment should be submitted by 3

p.m., Eastern time, to ensure that settlement on the securities occurs

on the date of issue.

(b) Noncompliance. The penalty imposed on any subscriber which

fails to make settlement on a subscription once submitted shall be to

render the subscriber ineligible thereafter to subscribe for securities

under this offering for a period of six months, beginning on the date

the subscription is withdrawn or the proposed issue date, whichever

occurs first. The Division of Special Investments may determine to

waive the six month penalty, pursuant to the provisions governing

waiver of regulations set forth under 31 CFR 306.126. Where settlement

occurs after the proposed issue date and the Division of Special

Investments determines, pursuant to 31 CFR 306.126, that settlement is

acceptable on an exception basis, the six month penalty will be waived,

and the subscriber shall be subject to a late payment assessment. The

assessment will include payment of an amount equal to the amount of

interest that would have accrued on the securities from the proposed

issue date to the date of settlement, as well as an administrative fee

of $100 per subscription. Assessments under this subsection are due on

demand. Failure to pay an assessment shall render the subscriber

ineligible thereafter to subscribe for securities under this offering

until the assessment is paid.

(Approved by the Office of Management and Budget under control

number 1535-0091)

Sec. 344.9 Redemption.

(a) General. A security may be redeemed at the owner's option,

provided a request for redemption is received not less than one

business day prior to the requested redemption date. Partial

redemptions may be requested; however, an account balance of less than

$1,000 will be redeemed in total. Payment will be made by crediting the

reserve account maintained at the Federal Reserve Bank or Branch by the

financial institution servicing the account owner.

(b) Notice. Notice of redemption must be submitted, either on a

designated Treasury form or by letter, by the official(s) authorized to

redeem the securities, as shown on the subscription form, to the

Division of Special Investments, Bureau of the Public Debt, 200 Third

Street, PO Box 396, Parkersburg, WV 26102-0396. The notice may be

submitted by facsimile equipment to the Bureau of the Public Debt at

(304) 480-6818, by mail, or by other carrier. The notice must show the

account number and the tax identification number of the subscriber. The

notice of redemption must be received at the Bureau of the Public Debt

by 1 p.m., Eastern time, one business day prior to the requested

redemption date.

(c) Certification. By completing the redemption form, subscribers

certify to the fact that the proceeds to be received will be expended

within one day of receipt thereof for the purpose for which the tax-

exempt bond was issued.

Subpart D--Special Zero Interest Securities

Sec. 344.10 General.

Provisions of subpart B of this part (Time Deposit Securities)

apply except as specified in subpart D of this part.

Sec. 344.11 Description of securities.

(a) Terms. Only certificates of indebtedness and notes are offered.

(1) Certificates of Indebtedness. The certificates will be issued

in a minimum amount of $1,000, or in any larger amount, in multiples of

$100, with maturity periods fixed by the government body, from 30

calendar days up to and including one year, or for any intervening

period.

(2) Notes. The notes will be issued in a minimum amount of $1,000,

or in any larger amount, in multiples of $100, with maturity periods

fixed by the government body, from one year and one day up to and

including 10 years, or for any intervening period.

(b) Interest rate. Each security shall bear no interest.

Sec. 344.12 Subscription for purchase.

In lieu of the certification under Sec. 344.3(c), the final

subscription must contain a certification by the subscriber that:

(a) The total investment consists only of original or investment

proceeds of a tax-exempt bond issue that are subject to yield

restrictions under sections 141-150 of the Internal Revenue Code;

(b) None of the original proceeds of the tax-exempt bond issue were

subject to arbitrage yield restrictions under section 148 of the

Internal Revenue Code on the date of receipt thereof; and

(c) None of the proceeds submitted in payment are proceeds of an

advance refunding issue to be used to discharge another issue or part

of a reserve or replacement fund for the advance refunding issue.

Sec. 344.13 Redemption.

(a) General. Provisions of Sec. 344.5(a) apply.

(b) Before maturity.

(1) In general. A security may be redeemed at the owner's option no

earlier than 25 calendar days after the issue date in the case of a

certificate and one year after the issue date in the case of a note. No

market charge or penalty shall apply in the case of the redemption of a

special zero interest security before maturity.

(2) Notice. Notice of redemption prior to maturity must be

submitted, either on a designated Treasury form or by letter, by the

official(s) authorized to redeem the securities, as shown on the final

subscription form, to the Division of Special Investments, Bureau of

the Public Debt, 200 Third Street, PO Box 396, Parkersburg, WV 26102-

0396. The notice may be submitted by facsimile equipment to the Bureau

of the Public Debt at (304) 480-6818, by mail, or by other carrier. The

notice must show the account number, the maturities of the securities

to be redeemed, and the tax identification number of the subscriber.

The notice of redemption must be telecopied, postmarked, or where

delivered by other carrier, must be date-stamped no less than 15

calendar days before the requested redemption date, but no more than 60

calendar days before the requested redemption date. A notice of

redemption prior to maturity cannot be cancelled.

(Approved by the Office of Management and Budget under control

number 1535-0091)

Appendix A to Part 344--Early Redemption Market Change Formulas and

Examples

A. The amount of the market charge for bonds and notes can be

determined through use of the following formula:

TP06OC94.000

where

M=market charge

b=increased annual borrowing cost (i.e., principal multiplied by the

excess of the current borrowing rate for the period from redemption

to original maturity of note or bond over the rate for the security)

r=number of days from redemption to beginning of next semiannual

interest period

s=number of days in current semiannual period

i=current borrowing rate for period from redemption to maturity

(expressed in decimals)

n=number of remaining full semiannual periods to the original

maturity date

TP06OC94.001

TP06OC94.002

B. The application of this formula may be illustrated by the

following example:

(1) Assume that a $600,000 note is issued on July 1, 1985, to

mature on July 1, 1995. Interest is payable at a rate of 8% on

January 1 and July 1.

(2) Assume that the note is redeemed on February 1, 1989, and

that the current borrowing rate for Treasury at that time for the

remaining period of 6 years and 150 days is 11%.

(3) The increased annual borrowing cost is $18,000.

($600,000)x(11%-8%)

(4) The market charge is computed as follows:

TP06OC94.003

TP06OC94.004

TP06OC94.005

TP06OC94.006

TP06OC94.007

TP06OC94.008

C. The amount of the market charge for certificates can be

determined through use of the following formula:

TP06OC94.009

where

M=market charge

b=increased borrowing cost for full period

r=number of days from redemption date to original maturity date

s=number of days in current annual period (365 or 366)

i=current borrowing rate expressed in decimals (discount factor)

D. The application of this formula may be illustrated by the

following example:

(1) Assume that a $50,000 certificate is issued on March 1,

1987, to mature on November 1, 1987. Interest is payable at a rate

of 10%.

(2) Assume that the certificate is redeemed on July 1, 1987, and

that the current borrowing cost to Treasury for the 123-day period

from July 1, 1987, to November 1, 1987, is 11.8%.

(3) The increased annual borrowing cost is $900. ($50,000-11.8%-

10%)

(4) The market charge is computed as follows:

TP06OC94.010

TP06OC94.011

TP06OC94.012

[FR Doc. 94-24682 Filed 10-5-94; 8:45 am]

BILLING CODE 4810-39-P