[Federal Register Volume 61, Number 137 (Tuesday, July 16, 1996)]
[Rules and Regulations]
[Pages 37007-37011]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-17896]
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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