Sale and Issue of Marketable Book-Entry Treasury Bills, Notes, and Bonds (Department of the Treasury Circular, Public Debt Series No. 1-93)

DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 356

Sale and Issue of Marketable Book-Entry Treasury Bills, Notes,

and Bonds (Department of the Treasury Circular, Public Debt Series No.

1-93)

AGENCY: Bureau of the Public Debt, Fiscal Service, Treasury.

ACTION: Final rule.

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SUMMARY: The Department of the Treasury (``Department'') is issuing an

amendment to its regulations governing the sale and issue of marketable

book-entry Treasury securities (Uniform Offering Circular for the Sale

and Issue of Marketable Book-Entry Treasury Bills, Notes, and Bonds).

The amendment defines the term ``investment adviser'' and contains a

new section on bidding through investment advisers. The amendment also

makes certain technical and clarifying changes.

EFFECTIVE DATE: The amendment is effective on September 16, 1996.

FOR FURTHER INFORMATION CONTACT: Donald V. Hammond, Assistant Director,

Government Securities Regulations Staff, Bureau of the Public Debt

(202) 219-3632; or Margaret Marquette, Attorney-Adviser, Office of the

Chief Counsel, Bureau of the Public Debt (202) 219-3320.

SUPPLEMENTARY INFORMATION:

I. Background

31 CFR part 356, also referred to as the uniform offering circular,

sets out the terms and conditions for the sale and issuance by the

Department of the Treasury to the public of marketable book-entry

Treasury bills, notes, and bonds. The uniform offering circular was

originally published on January 5, 1993 (58 FR 412), as a comprehensive

statement of those terms and conditions. Amendments to the circular

were published on June 3, 1994 (59 FR 28773), and March 15, 1995 (60 FR

13906). In the time since the rule was

[[Page 37008]]

first published, several questions have arisen about the application of

the circular in situations where an investment adviser formulates a bid

or otherwise makes bidding decisions for a managed or controlled

account. In response, the Department is defining the term ``investment

adviser'' and is setting out the specific terms and conditions for

bidding through investment advisers.

Previously, the treatment of investment advisers was found in a

discussion in the preamble to the January 5, 1993, publication. The

preamble and rule did not specify how the various provisions of the

rule should be applied with respect to accounts that participate in

auctions through investment advisers, leaving ambiguous the answers to

a number of technical questions. Accordingly, the Department published

a proposed amendment on January 5, 1996,1 which provided a

definition of the term ``investment adviser'' and clarified how the

provisions of the uniform offering circular would be applied to bids

submitted for accounts that are managed by investment advisers

(controlled accounts). Additionally, the existing exclusion for certain

controlled accounts on whose behalf an investment adviser is not

bidding in an auction was proposed to be substantially modified. The

proposed modification would have reduced from $500 million to $10

million the dollar threshold applied to the position of a non-

participating controlled account in determining eligibility for the

exclusion.

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\1\ 61 FR 402 (January 5, 1996).

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Though not required to, the Department published the clarifications

and changes in proposed form in order to receive the full benefit of

input from affected auction participants. The comment period closed on

March 5, 1996.

II. Comments Received in Response to the Proposed Rule

The Department received one comment letter, from the Public

Securities Association (PSA), in response to the proposed

amendment.2 The PSA letter strongly supported the clarifications

and guidance that the proposed amendment provided but expressed

significant objections to the proposed modification of the exclusion

available for non-participating controlled accounts.

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\2\ March 4, 1996, letter from Stephanie Wolf, Assistant General

Counsel, Public Securities Association, to Kenneth R. Papaj,

Director, Government Securities Regulations Staff, Bureau of the

Public Debt.

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A. Definition of Investment Adviser

The PSA supported the definition for the term ``investment

adviser,'' which also describes what is meant by the phrase

``investment discretion.'' However, the PSA stated that the phrase ``or

otherwise exercises control,'' describing investment discretion in the

proposed definition, introduces an element of ambiguity. It was noted

that the current net long position reporting requirement, which the

definition seeks to clarify, uses the phrase ``exercising control''

which has been understood to mean the exercise of investment

discretion. With the addition of the definition of the term

``investment adviser,'' the commenter believes that inclusion of a

general provision such as ``or otherwise exercises control'' raises the

question as to what other types of control might exist and is contrary

to the intent behind the amendment. The Department agrees and has

deleted the phrase from the final definition.

B. Bidding Through Investment Advisers

The PSA expressed support for the codification and clarification of

the manner in which investment advisers may bid for their controlled

accounts. The commenter requested that the application of the

restriction against noncompetitive and competitive bidding in the same

auction be addressed for the situation in which an investment adviser

bids both competitively for its own proprietary account and

noncompetitively for its controlled accounts in the names of those

accounts. As stated in Sec. 356.15(a) of the proposed rule, an

investment adviser may bid for a controlled account either in the name

of the investment adviser, in which case the adviser is considered the

bidder, or in the name of the account, in which case the account is

considered the bidder. This means that, for purposes of bidding

noncompetitively, an investment adviser that bids for its controlled

accounts in the name of the adviser is limited to the maximum allowed

bid and award amount for a noncompetitive bid for that auction, e.g.,

$1 million total in a bill auction. An investment adviser that bids

noncompetitively for its controlled accounts in the names of the

accounts may bid for each account for the maximum allowed

noncompetitive amount, e.g., $1 million for each account in a bill

auction. Additionally, the investment adviser may not bid for the

controlled account both competitively and noncompetitively in the same

auction, regardless of whether the bidding is in the name of the

adviser or in the name of the controlled account.

The proposed rule did not specifically address, with respect to the

restriction against bidding both competitively and noncompetitively in

the same auction, the situation in which an investment adviser is

bidding for its own account in the same auction that it is bidding for

controlled accounts. It is the Department's intention that the

proprietary account of an investment adviser be treated in the same

manner as that of any other bidder.3 In other words, an investment

adviser may bid competitively in its own name for its proprietary

account so long as it is also not bidding noncompetitively in its own

name. Therefore, if a controlled account is being bid for

noncompetitively in the name of the account, the investment adviser may

bid competitively in its own name for its proprietary account. It may

also bid competitively, in the name of the investment adviser or the

account, for any controlled accounts that are not being bid for

noncompetitively. However, the investment adviser may NOT bid both

competitively and noncompetitively in its own name in the same auction,

regardless of whether the bids represent its own account or controlled

accounts. Also the investment adviser may not bid both competitively

and noncompetitively in the same auction for any one controlled

account, regardless of whether the bid is in the name of the investment

adviser or in the name of the account.

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\3\ An investment adviser, under the bidder definitions, may

itself need to be aggregated with its affiliates as part of a larger

bidder. The restriction against bidding both noncompetitively and

competitively in the same auction is applicable to all the

affiliates that are required to be aggregated since they form a

single bidder, i.e., if an entity is bidding competitively in an

auction, an affiliate of that entity may not bid noncompetitively in

the same auction, unless that affiliate has received recognition as

a separate bidder.

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C. Reporting Net Long Positions

The proposed rule stated that, in determining if it has reached the

$2 billion net long position reporting threshold, an investment adviser

must include in its calculation those bids and positions it controls in

addition to bids and positions it would otherwise have to include as a

bidder. This provision clarified the existing requirement for the

calculation of a net long position. The proposal also contained a

significant change from the current rule in the amount of a controlled

account's position that may be excluded from the investment adviser's

net long position calculation. The rule currently allows the adviser to

exclude net long positions

[[Page 37009]]

less than $500 million for certain controlled accounts that are not bid

for in an auction. The proposal provided for a similar type of

exclusion but decreased the amount to $10 million per controlled

account.

The PSA strongly objected to the proposed change. While

understanding the Department's objective of obtaining more information

than is currently provided about the positions that an investment

adviser may control, the commenter believed that this objective could

not justify the cost to auction participants of reporting on controlled

accounts at the significantly reduced amount. It was the commenter's

opinion that in order to include controlled accounts at a $10 million

threshold within the current net long position reporting timeframes,

auction participants would have to develop automated systems to track

the information. The PSA represented that the cost to develop such

systems would be prohibitive and might adversely affect investment

advisers' participation in auctions. Accordingly, the PSA recommended

that the Department retain the current exclusionary amount or set a

lower amount that would not impose such significant costs. The letter

did not provide any suggestions for an appropriate alternative amount.

Additionally, the commenter did not address the alternative approach

for an exclusion discussed in the proposal or offer any other

approaches for providing Treasury with better information about the

size of a position that an investment adviser might control.

The reduction in the exclusionary amount was proposed because the

Department believes that a lower amount is necessary to give a more

accurate picture of the amount of a security controlled by an

investment adviser. The Department is sensitive to the concerns of

auction participants about the cost of compliance with the auction

rules and recognizes, in particular, that the net long position

reporting provisions are costly because of the scope of the aggregation

provisions and the short reporting timeframe. Balanced against this

compliance cost is the Department's goal of avoiding undue

concentrations of ownership or control upon original issue. The net

long position report is an essential tool in achieving this goal.

In developing the proposal, the Department considered and rejected

alternatives, such as providing investment advisers an exclusion based

on an aggregate amount rather than separate position amounts in

specific accounts, because of a concern that they would be more

burdensome or costly for advisers. Nothing in the comment letter would

lead the Department to a different conclusion. Therefore, the approach

outlined in the proposal is believed to be the best approach for

excluding non-participating accounts.

However, a cost-effective exclusion threshold needs to be

determined. A tradeoff exists between the time and cost necessary for

an investment adviser to determine the holdings of non-participating

controlled accounts and the meaningfulness of the net long position

information submitted with the bid. The higher the exclusion amount the

less costly compliance is for the investment adviser, but also the less

useful the information is to the Department. The higher the threshold

the fewer number of nonparticipating controlled accounts that would be

needed to control a significant undisclosed position in the auctioned

security. After due consideration of the potential compliance costs

versus the usefulness of the net long position report, the Department

has determined that an exclusion threshold of $100 million is

appropriate. A $100 million threshold is at a high enough level that

relatively few managed accounts should be affected, thus minimizing

systems and compliance costs, and yet is low enough that Treasury will

receive useful information on the control of the security.

D. Other Comments

The PSA letter briefly discussed the modification that would allow

investment advisers to submit bids for their controlled accounts

directly to a Federal Reserve Bank or to the Bureau of the Public Debt.

The PSA did not object to the proposed change but observed that it had

no impact on its membership since its members are all either banks or

broker-dealers who are already authorized to submit bids for others

directly. The provision allowing an adviser to submit or forward bids

in the names of its controlled accounts is an exception to the

restriction against anyone other than a depository institution or

dealer submitting or forwarding bids for others. The Department

reiterates that it is not its intent to authorize an investment adviser

that does not also meet the definition of a depository institution or

dealer to submit or forward bids for customers. A controlled account is

not the same as a customer since, unlike a customer, the beneficial

owner of a controlled account is not involved in determining the terms

of the auction bid and is generally not aware of the bid until after

the fact. (See the definition of ``customer'' in Sec. 356.2 which

refers to directing a depository institution or dealer to bid for a

specified amount of securities in a specific auction.)

III. Changes from the Proposed Rule

In Sec. 356.2, the definition of ``investment adviser'' has been

modified to delete the phrase ``or otherwise exercises control'' in

response to a comment from the PSA. The Department believes that this

deletion does not affect the intended meaning of the definition and

that the change reduces possible confusion.

The language of Sec. 356.15(b) regarding competitive and

noncompetitive bidding has not been changed. However, the Department is

clarifying that the provision permits an investment adviser to bid

competitively for its proprietary account and noncompetitively for one

or more controlled accounts in the same auction provided that the

noncompetitive bids are in the names of the controlled accounts. The

investment adviser would not be permitted to bid both competitively and

noncompetitively in the adviser's name in the same auction, regardless

of which accounts the bids are for; nor would the adviser be allowed to

bid both competitively and noncompetitively for a controlled account.

(See Discussion in Section II.B. of this release.)

The only change to proposed Sec. 356.15(c) is the dollar level of

the exclusion threshold. The $10 million threshold proposed was

strongly criticized by auction participants as being at a level so low

as to cause them to incur substantial compliance costs which they

believed could not be justified by the benefits received by Treasury.

Upon due consideration of this comment and further discussions with the

commenter, the Department has concluded that a threshold of $100

million would be more appropriate. This revised threshold provides

sufficient additional information about the size of positions

controlled by an investment adviser while not imposing unreasonable

costs on affected entities. (See Discussion in Section II.C. of this

release.)

The proposed changes in Secs. 356.11, 356.13, 356.21, and 356.22,

as well as appendix A to part 356, are being adopted as proposed. Other

sections have been renumbered as a result of adding new Sec. 356.15.

Additionally, Sec. 356.36 has been amended to reflect approval under

the Paperwork Reduction Act of the new information collections in

Sec. 356.15.

[[Page 37010]]

IV. Procedural Requirements

The rule does not meet the criteria for a ``significant regulatory

action'' pursuant to Executive Order 12866.

Although the rule was published in proposed form to secure the

benefit of public comment, 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 collection of information contained in this rule, in

Sec. 356.15, has been reviewed and approved by the Office of Management

and Budget under section 3507(d) of the Paperwork Reduction Act of 1995

(44 U.S.C. Chapter 35) under Control Number 1535-0112. Under the Act,

an agency may not conduct or sponsor, and a person is not required to

respond to, a collection of information unless it displays a valid OMB

control number.

This information is being collected by the Department in order to

determine the amount of a Treasury security controlled by an investment

adviser bidding competitively in an auction for that security. The

information will be used for the purpose of determining the award to be

made as the result of a competitive bid for a security. Responses to

the collection of information are required in order for the potential

respondent to purchase securities. Information concerning securities

holdings and transactions is protected against disclosure under

Treasury regulations (31 CFR Part 323) and in certain instances, the

Privacy Act. The information may be disclosed only as authorized by

law.

The burden hours estimated in the notice of proposed rulemaking

have been reduced as a result of a change in the final rules that

increases the number of accounts that would be eligible for the

reporting exclusion. This change was made in response to a comment

received from the public.

Estimated total annual reporting burden: 100 hours.

Estimated average annual burden hours per respondent: 5 hours.

Estimated number of respondents: 20.

Estimated annual frequency of responses: on occasion.

Comments on the accuracy of the estimate for this collection of

information or suggestions to reduce the burden should be sent to the

Office of Information and Regulatory Affairs of the Office of

Management and Budget, Attention: Desk Officer for Department of the

Treasury/Bureau of the Public Debt, Washington, D.C. 20503, with copies

to the Government Securities Regulations Staff, Bureau of the Public

Debt, Room 515, 999 E Street, NW, Washington DC 20239-0001.

List of Subjects in 31 CFR Part 356

Bonds, Federal Reserve System, Government securities, Securities.

For the reasons set forth in the preamble, 31 CFR chapter II,

subchapter B, part 356, is amended as follows:

PART 356--SALE AND ISSUE OF MARKETABLE BOOK-ENTRY TREASURY BILLS,

NOTES, AND BONDS (DEPARTMENT OF THE TREASURY CIRCULAR, PUBLIC DEBT

SERIES NO. 1-93)

1. The authority citation for part 356 is revised to read as

follows:

Authority: 5 U.S.C. 301; 31 U.S.C. 3102, et seq.; 12 U.S.C. 391.

2. Section 356.2 is amended by adding in alphabetical order the

definition of ``investment adviser'' to read as follows:

Sec. 356.2 Definitions.

* * * * *

Investment adviser means any person or entity that has investment

discretion for the bids or positions of a person or entity not

considered part of the investment adviser under the bidder definitions

in Appendix A of this part. Investment discretion includes determining

what, how many, and when securities shall be purchased or sold. A

person or entity managing investments for itself is not considered an

investment adviser for such investments. Where a person is employed or

supervised by an entity in connection with his activities as an

investment adviser, such person is considered to be part of that

entity.

* * * * *

3. Section 356.11(a)(1) is amended by revising the second sentence

to read as follows:

Sec. 356.11 Submission of bids.

(a) General.

(1) * * * Except as otherwise provided, tenders must be submitted

in an approved format, including the use of preassigned identification

numbers, where applicable. * * *

* * * * *

4. Section 356.13 is amended by removing paragraph (a)(2) and

redesignating paragraph (a)(1) as paragraph (a). The last two sentences

of newly redesignated paragraph (a) are revised to read as follows:

Sec. 356.13 Net long position.

(a) Reporting net long positions. * * * In cases where a bidder

that is required to report the amount of its net long position has more

than one bid, the bidder's total net long position should be reported

in connection with only one bid. A bidder that is a customer must

report its reportable net long position through only one depository

institution or dealer. (See Sec. 356.14(c).)

* * * * *

5. Sections 356.15 and 356.16 are redesignated as Secs. 356.16 and

356.17 respectively and new Sec. 356.15 is added to read as follows:

Sec. 356.15 Bidding through investment advisers.

(a) General. Where bids or positions of a person or entity are

controlled by an investment adviser, such bids or positions are

considered to be a controlled account, separate from the bids and

positions of any person or entity with which they would otherwise be

associated under the bidder definitions in Appendix A of this part. The

investment adviser may bid for controlled accounts by including, in a

bid in the adviser's name, amounts that it is investing for the

controlled accounts. The investment adviser may also bid for controlled

accounts in the names of such accounts. Where bids are in an investment

adviser's name, the investment adviser is considered the bidder for

such bids and, where bids are in the name of a controlled account, the

named controlled account is considered the bidder, for all purposes of

this part 356, except as specified in this Sec. 356.15.

(b) Noncompetitive and competitive bidding. Regardless of whether

the bid for a controlled account is in the name of the investment

adviser or in the name of the controlled account, such account may not

be bid for both noncompetitively and competitively in the same auction.

In addition, such account is subject to the noncompetitive bidding

restrictions and award limitations contained in Secs. 356.12(b) and

356.22(a).

(c) Reporting net long positions. In calculating the amount of its

bids and positions for purposes of the net long position reporting

requirement found in Sec. 356.13(a), the investment adviser must

include, in addition to what would otherwise be included for the

investment adviser as a bidder under the bidder definitions, all other

competitive bids and positions controlled by the investment adviser.

The investment adviser may exclude any net long position less than $100

million of any nonproprietary controlled account unless the adviser is

[[Page 37011]]

placing a competitive bid for that account either in the name of the

investment adviser or in the name of the account. However, if any net

long position less than $100 million of any nonproprietary account not

being bid for is excluded, then all net short positions less than $100

million of nonproprietary accounts not being bid for must also be

excluded. Regardless of whether the investment adviser bids in its own

name or in the name of its controlled accounts, if the net long

position is reportable, it must be reported as a total in connection

with only one bid in accordance with Sec. 356.13(a).

(d) Submitting bids for controlled accounts. Notwithstanding the

definition of submitter found in Sec. 356.2, and the restriction

against submitting bids for others found in Sec. 356.14, an investment

adviser may submit bids, whether in the adviser's own name or in the

names of its controlled accounts, directly to a Federal Reserve Bank or

the Bureau of the Public Debt, in which case the investment adviser is

considered a submitter. In the alternative, the investment adviser may

forward such bids to a depository institution or dealer.

(e) Certifications. By bidding for a controlled account, an

investment adviser is deemed to have certified that it is in compliance

with this part and the offering announcement governing the sale and

issue of the security. Further, the investment adviser is deemed to

have certified that the information provided on the tender or provided

to a submitter or intermediary with regard to bids for controlled

accounts is accurate and complete.

(f) Proration of awards. In auctions where bids at the highest

accepted yield or discount rate are prorated under Sec. 356.20(a)(2) of

this part, investment advisers that submit bids for controlled accounts

in the names of such accounts are responsible for prorating awards for

their controlled accounts at the same percentage as that announced by

the Department. The same prorating rules apply to controlled accounts

as apply to submitters. See Sec. 356.21 of this part.

6. Section 356.21 is amended by revising paragraph (a) to read as

follows:

Sec. 356.21 Proration of awards.

(a) Awards to submitters. In auctions where bids at the highest

accepted yield or discount rate are prorated under Sec. 356.20(a)(2) of

this part, the Federal Reserve Banks are responsible for prorating

awards for submitters at the percentage announced by the Department.

For example, if 80% is the announced percentage at the highest yield or

discount rate, then each bid at that rate or yield shall be awarded 80%

of the amount bid. Hence, a bid for $100,000 at the highest accepted

yield or discount rate would be awarded $80,000. In all cases, awards

will be for, at least, the minimum to hold, and awards must be in an

appropriate multiple to hold. Awards at the highest accepted yield or

rate are adjusted upwards, if necessary, to an appropriate multiple to

hold. For example, Treasury bills may be issued with a minimum to hold

of $10,000 and multiples of $1,000. Where an $18,000 bid is accepted at

the high discount rate, and the percent awarded at the high discount

rate was 88%, the award to that bidder would be $16,000, representing

an upward adjustment from $15,840 ($18,000 x .88) to an appropriate

multiple to hold. If tenders at the highest accepted rate were prorated

at, for example, a rate of 4%, the award for a $100,000 bid would be

$10,000, instead of $4,000, in order to meet the minimum to hold for a

bill issue.

* * * * *

7. Section 356.22(b) is amended by revising the last sentence to

read as follows:

Sec. 356.22 Limitation on auction awards.

* * * * *

(b) Awards to competitive bidders. * * * When the bids and net long

positions of more than one person or entity must be combined as

required by Sec. 356.15(c), such combined amount will be used for the

purpose of this award limitation.

8. Section 356.36 is revised to read as follows:

Sec. 356.36 Paperwork Reduction Act approval.

The collections of information contained in Secs. 356.11, 356.12,

356.13, 356.14, and 356.15 and in appendix A of this part have been

approved by the Office of Management and Budget under control number

1535-0112.

9. Appendix A to Part 356 is amended by adding to section (a) a new

paragraph between the second and third paragraphs of the introductory

text to read as follows:

Appendix A To Part 356--Bidder Definitions

* * * * *

(a) Corporation--* * *

For the purpose of this part, a business trust, such as a

Massachusetts business trust or a Delaware business trust, is

considered to be a corporation.

* * * * *

Dated: July 9, 1996.

John A. Kilcoyne,

Acting Fiscal Assistant Secretary.

[FR Doc. 96-17896 Filed 7-15-96; 8:45 am]

BILLING CODE 4810-39-P