31 CFR Part 357 — Regulations Governing Book-Entry Treasury Bonds, Notes and Bills Held in Treasury/Reserve Automated Debt Entry System (TRADES) and Legacy Treasury Direct

PART 357—REGULATIONS GOVERNING BOOK-ENTRY TREASURY BONDS, NOTES AND BILLS HELD IN TREASURY/RESERVE AUTOMATED DEBT ENTRY SYSTEM (TRADES) AND LEGACY TREASURY DIRECT Authority: 31 U.S.C. chapter 31; 5 U.S.C. 301; 12 U.S.C. 391. Source: 51 FR 18265, May 16, 1986, unless otherwise noted. Editorial Note: Nomenclature changes to part 357 appear at 70 FR 57431, Sept. 30, 2005. Subpart A—General Information § 357.0 Book-entry systems. (a) Treasury securities. (1) Commercial book-entry system. (2) Legacy Treasury Direct (3) TreasuryDirect (b) Transferability between Legacy Treasury Direct and other systems. [67 FR 64278, Oct. 17, 2002, as amended at 70 FR 57431, Sept. 30, 2005; 70 FR 57441, Sept. 30, 2005; 76 FR 18063, Apr. 1, 2011] § 357.1 Effective date. Subpart B of this part, the definitions of Adverse Claim, Book-entry Security, Entitlement Holder, Federal Reserve Bank Operating Circular, Funds Account, Issue, Participant, Participant's Securities Account, Person, Revised Article 8, Securities Intermediary, Security Entitlement, State, Transfer Message Security TRADES, [61 FR 43628, Aug. 23, 1996] § 357.2 Definitions. In this part, unless the context indicates otherwise: Adverse claim Bill Bond Book-entry security Business day Department Depository institution depository institution (1) Any insured bank as defined in 12 U.S.C. 1813 or any bank which is eligible to make application to become an insured bank under 12 U.S.C. 1815; (2) Any mutual savings bank as defined in 12 U.S.C. 1813 or any bank which is eligible to make application to become an insured bank under 12 U.S.C. 1815; (3) Any savings bank as defined in 12 U.S.C. 1813 or any bank which is eligible to make application to become an insured bank under 12 U.S.C. 1815; (4) Any insured credit union as defined in 12 U.S.C. 1752 or any credit union which is eligible to make application to become an insured credit union under 12 U.S.C. 1781; (5) Any member as defined in 12 U.S.C. 1422; and (6) Any savings association (as defined in 12 U.S.C. 1813) which is an insured depository institution, as defined in the Federal Deposit Insurance Act, 12 U.S.C. 1811, et seq., Entitlement holder Federal Reserve Bank Reserve Bank Federal Reserve Bank Operating Circular Financial institution Funds account Incompetent Issue Legacy Treasury Direct Maturity value Minor Note Original issue Owner, owner Participant Participant's Securities Account Person Redemption Representative Revised Article 8 http://www.archives.gov/federal_register/code_of_federal_regulations/ibr_locations.html. Revised Article 9 http://www.archives.gov/federal_register/code_of_federal_regulations/ibr_locations.html. Securities Intermediary (1) A Person that is registered as a “clearing agency” under the federal securities laws; a Federal Reserve Bank; any other person that provides clearance or settlement services with respect to a Book-entry Security that would require it to register as a clearing agency under the federal securities laws but for an exclusion or exemption from the registration requirement, if its activities as a clearing corporation, including promulgation of rules, are subject to regulation by a federal or state governmental authority; or (2) A Person (other than an individual, unless such individual is registered as a broker or dealer under the federal securities laws) including a bank or broker, that in the ordinary course of its business maintains securities accounts for others and is acting in that capacity. Security (1) The interest and principal components of a security eligible for Separate Trading of Registered Interest and Principal of Securities (“STRIPS”), if such security has been divided into such components as authorized by the express terms of the offering circular under which the security was issued and the components are maintained separately on the books of one or more Federal Reserve Banks; and (2) The interest coupons that have been converted to book-entry form under the Treasury's Coupons Under Book-Entry Safekeeping Program (“CUBES”), pursuant to agreement and the regulations in 31 CFR part 358. Security Entitlement Signature guarantee program State Taxpayer identifying number TIN TRADES Transaction request Transaction request form Transfer Message Voluntary representative [51 FR 18265, May 16, 1986, as amended at 59 FR 59038, Nov. 15, 1994. Redesignated and amended at 61 FR 43628, Aug. 23, 1996; 62 FR 18694, Apr. 16, 1997; 62 FR 33548, June 20, 1997; 67 FR 7079, Feb. 15, 2002; 69 FR 18803, Apr. 9, 2004; 70 FR 57431, Sept. 30, 2005; 70 FR 57441, Sept. 30, 2005; 76 FR 18063, Apr. 1, 2011] Subpart B—Treasury/Reserve Automated Debt Entry System (TRADES) Source: 67 FR 7080, Feb. 15, 2002, unless otherwise noted. § 357.10 Laws governing a Treasury book-entry security, TRADES, and security interests or entitlements. (a) What law governs the rights and obligations of the United States and the Federal Reserve Banks; and the rights of any Person against the United States and the Federal Reserve Banks? (1) The rights and obligations of the United States and the Federal Reserve Banks with respect to a Book-entry Security or Security Entitlement and the operation of TRADES, and (2) The rights of any Person, including a Participant, against the United States and the Federal Reserve Banks with respect to a Book-entry Security or Security Entitlement and the operation of TRADES. (b) What law governs security interests in Security Entitlements that are not recorded on a Federal Reserve Bank's books? If a security interest in a security entitlement is— And it is— Then it is governed by— (1) in favor of a Federal Reserve Bank from a Participant not recorded on the books of a Federal Reserve Bank pursuant to § 357.12(e)(2) the law (not including the conflict-of-law rules) of the jurisdiction where the head office of the Federal Reserve Bank maintaining the Participant's Securities Account is located. (2) in favor of a Federal Reserve Bank from a Person that is not a Participant not recorded on the books of a Federal Reserve Bank pursuant to § 357.12(e)(2) the law determined in the manner specified in § 357.11. (c) What law governs if the jurisdiction in paragraph (b)(1) of this section did not adopt Revised Article 8, or Revised Article 8 as amended by Revised Article 9 (both incorporated by reference, see Sec. 357.2)? § 357.11 Laws governing other interests in Treasury securities. (a) What does the law (not including the conflict-of-law rules) of a Securities Intermediary's jurisdiction govern? (1) When a Person acquires a Security Entitlement from the Securities Intermediary; (2) The rights and duties of the Securities Intermediary and Entitlement Holder that arise out of a Security Entitlement; (3) Whether the Securities Intermediary owes any duties to an adverse claimant to a Security Entitlement; (4) Whether a Person may assert an Adverse Claim against a Person who acquires a Security Entitlement from the Securities Intermediary or against a Person who purchases a Security Entitlement or interest therein from an Entitlement Holder; and (5) The perfection, effect of perfection or non-perfection and priority of a security interest in a Security Entitlement (except as otherwise provided in paragraph (c) of this section). (b) What is the “Securities Intermediary's jurisdiction” for purposes of this section? If . . . Then the securities intermediary's jurisdiction is . . . (1) An agreement between the Securities Intermediary and its Entitlement Holder governing the securities account expressly provides that a particular jurisdiction is the Securities Intermediary's jurisdiction for purposes of Part 1 of Article 8 of the Uniform Commercial Code, Article 8 of the Uniform Commercial Code, or the Uniform Commercial Code the jurisdiction agreed upon. (2) An agreement between the Securities Intermediary and its Entitlement Holder governing the securities account expressly provides that it is governed by the law of a particular jurisdiction the jurisdiction agreed upon. (3) The statements in paragraphs (b)(1) and (2) of this table do not apply, but the agreement expressly specifies that the securities account is maintained at an office in a particular jurisdiction the jurisdiction where the office is located. (4) The statements in paragraphs (b)(1) through (3) of this table do not apply and an account statement identifies the office serving the Entitlement Holder's account the jurisdiction where the office is located. (5) None of the statements in paragraphs (b)(1) through (4) of this table apply the jurisdiction in which the chief executive office of the Securities Intermediary is located. (c) What law governs the perfection of a security interest automatically or by filing? (d) Where is a Person located, for purposes of paragraph (c) of this section? (e) What law governs if the jurisdiction in table (b) of this section did not adopt Revised Article 8 or Revised Article 8 as amended by Revised Article 9 (both incorporated by reference, see § 357.2)? (f) What other rules apply? § 357.12 A Participant's Security Entitlement. (a) How is a Participant's Security Entitlement created? (b) What else do I need to know about a Participant's Security Entitlement? If a security interest in a security entitlement of a participant . . . Then . . . (1) Meets all of the following criteria: (i) is in favor of the United States it is created; it is perfected; and it has priority over any other interest in the securities. (c) What is the effect of the marking of a security interest in favor of the United States in a Security Entitlement of a Participant on the books of a Federal Reserve Bank? (d) Who is an authorized Representative of the United States, for purposes of paragraph (c) in this section? (e)(1) Must the United States and the Federal Reserve Banks agree to act on behalf of any Person or to recognize the interest of any transferee of a security interest or other limited interest in favor of any Person? (i) To the extent of any specific requirement of Federal law or regulation, or (ii) To the extent set forth in any specific agreement with the Federal Reserve Bank on whose books the interest of the Participant is recorded. (2) May a security interest be created and perfected by a Federal Reserve Bank marking its books? (3) Does this security interest have priority over other interests? (4) In addition to the method provided in paragraph (e)(2) of this section, may a security interest, including a security interest in favor of a Federal Reserve Bank, be perfected in another way? (i) The applicable law governs the perfection, effect of perfection or non-perfection and priority of a security interest. (ii) A security interest in favor of a Federal Reserve Bank shall be treated as a security interest in favor of a clearing corporation in all respects under that law. (iii) A Federal Reserve Bank Operating Circular shall be treated as a rule adopted by a clearing corporation for these purposes. § 357.13 Obligations of the United States and the Federal Reserve Banks with respect to Book-entry Securities and security interests. (a) Who is entitled to deal with an interest in a Book-entry Security that has been credited to a Participant's Security Account? (1) Issue a Transfer Message, (2) Receive interest and other payments with respect thereof, and (3) Exercise all the rights and powers with respect to the Security, (b) Are the Federal Reserve Banks and Treasury liable for Adverse Claims? (c) When is the obligation of the United States to pay interest and principal with respect to Book-entry Securities discharged? (1) A Federal Reserve Bank credits the appropriate amount of interest on Book-entry Securities to a Funds Account maintained at the Bank, or pays it as directed by the Participant. (2) Book-entry Securities are redeemed according to their terms, a Federal Reserve Bank withdraws the securities from the Participant's Securities Account in which they are maintained, and either: (i) Credits the amount of the Redemption proceeds, including both principal and interest, where applicable, to a Funds Account at the Bank, or (ii) Pays such principal and interest as directed by the Participant. (d) What does a Participant need to do in connection with the Redemption of a Book-entry Security? § 357.14 What authority does a Federal Reserve Bank have? (a) Each Federal Reserve Bank has the authority as fiscal agent of the United States to: (1) Perform functions with respect to the issuance of Book-entry Securities offered and sold by the Department to which this subpart applies, in accordance with the terms of the applicable offering circular and with procedures established by the Department; (2) Service and maintain Book-entry Securities in accounts established for such purposes; (3) Make payments of principal and interest, as directed by the Department; (4) Effect transfer of Book-entry Securities between Participants' Securities Accounts as directed by the Participants; and (5) Perform such other duties as fiscal agent that the Department may request. (b) Each Federal Reserve Bank may issue Operating Circulars that are consistent with this part, governing the details of its handling of Book-entry Securities, Security Entitlements, and the operation of the book-entry system under this part. § 357.15 How can a debtor's interest in a Security Entitlement be reached by creditors? (a) The interest of a debtor may be reached by creditors only by legal process upon the Securities Intermediary with whom the debtor's securities account is maintained. Exception: If a Security Entitlement is maintained in the name of a secured party, the debtor's interest may be reached by legal process upon the secured party. (b) These regulations do not state whether a Federal Reserve Bank is required to honor an order or other notice of attachment in any particular case or class of cases. Subpart C—Legacy Treasury Direct Book-Entry Securities System (Legacy Treasury Direct) § 357.20 Securities account in Legacy Treasury Direct ®. (a) Account. (1) An account master record, and (2) A securities portfolio. (b) Security. (c) Account master record. (1) The exact form of registration in which the securities are held; (2) The Legacy Treasury Direct account number; (3) The correspondence address for the account; (4) The TIN of the owner, or in the case of ownership by two individuals, of the first-named owner; and (5) Payment instructions. (See § 357.26.) (d) Securities portfolio. (e) Statement of account. (1) Upon the establishment of an account master record; (2) Upon a change in the securities portfolio; (3) At an owner's request; or (4) Upon the determination on December 31 that an owner has not received a statement of account for that current calendar year. The statement shall contain information regarding the account as of the date of such statement. The price associated with each security in the securities portfolio will also appear on the statement. 1 1 (1) If the security is a bill, the price information will be used to comply with this requirement. The earnings reported to IRS for the year of a bill's maturity will be the difference between the par value of the bill and its price. (a) If a bill was deposited in Legacy Treasury Direct at original issue, the price shown will be the issue price. (b) If a bill was transferred to Legacy Treasury Direct from TRADES, the price shown will be that included in the transfer wire or supplied subsequently by the bill owner. If a price was not furnished, the price shown will be the weighted average price of the bill of the longest maturity having the identical CUSIP number. (c) If a bill is transferred from one Legacy Treasury Direct account to another, the price shown in the receiving (transferee's) account will be that shown on the transfer instructions or supplied subsequently by the transferee. If a price is not furnished, the price shown will be the weighted average price at original issue of the bill of the longest maturity having the identical CUSIP number, unless the term of the bill can be determined from the account record in which case the price shown will be the weighted average price at original issue of the bill with that term. (2) If the security is a note or bond, the earnings reported to IRS for a year will be the periodic interest payments made during that year. If a note or bond is transferred to a Legacy Treasury Direct account between interest payment dates, the earnings reported to IRS for the transferee will show the interest for the entire interest payment period. The price for notes and bonds will be shown on the statement of account for the account owner's information. The price shown will be determined following the procedures described above for bills. (3) The security owner should report directly to the IRS (a) adjustments to annual earnings amounts arising from acquisition of notes and bonds between interest payment periods and (b) price corrections for bills reported after preparation of the reports to the IRS. (f) Confirmation notice. (1) Upon a change in an account master record; (2) Upon scheduling or canceling a reinvestment; or (3) To confirm the interest earned on a Treasury Inflation Indexed Security. The notice shall contain information regarding the account as of the date of such confirmation. The notice may be sent to the correspondence address designated in the account master record, or may be sent by electronic means. All changes reflected in paragraph (f) (1) and (2) of this section will be included in the next regularly scheduled statement of account. See paragraph (e) of this section for the statement schedule. (g) Account maintenance fees. Federal Register. (h) Closing an account. (Approved by the Office of Management and Budget under control number 1535-0068) [51 FR 18265, May 16, 1986, as amended at 60 FR 4377, Jan. 23, 1995; 62 FR 18004, Apr. 11, 1997; 62 FR 32033, June 12, 1997; 76 FR 18063, Apr. 1, 2011] § 357.21 Registration. (a) General. (2) The registration of all securities held by an owner should be uniform with respect to the owner's name. An owner must be identified by the name by which the owner is ordinarily known, preferably including at least one full given name. A suffix, such as Sr. Jr., (3) If an additional security is deposited in an existing account, the security will be registered in the same name and form of registration that appears in the designated account master record. One who holds a security as John Allen Doe J. Allen Doe, John A. Doe'. Minor variations in names used in acquiring a security to be deposited in an established account may be resolved by the Department. (b) Natural persons. (1) Single ownership. Example: Robert W. Woods An individual who is sole proprietor of a business conducted under a trade name may include a reference to the trade name. Example: John A. Doe, doing business as Doe's Home Appliance Store. (2) Ownership by two individuals “And” form—Joint Ownership Without right of survivorship. Example: Elizabeth Black and Jane Brown, without right of survivorship. Any registration which purports, by its terms, to preclude the right of survivorship, or any registration in the names of two persons without indicating whether survivorship rights attach (other than a registration under paragraph (b)(2)(ii) of this section), will be presumed to be ownership without right of survivorship. If a security is registered in this form, a transaction request, other than a request by one owner to transfer the security to the other owner, and other than a request for reinvestment, must be executed by both owners. (B) With right of survivorship. Example: Mark A. Doe and Mary B. Doe, with right of survivorship. If a security is registered in this form, a transaction request, other than a request by one owner to transfer the security to the other owner, and other than a request for reinvestment, must be executed by both owners. (ii) “Or” form—“Coownership”. Example: Robert Woods or Laura Woods. If a security is registered in this form, either coowner may make a transaction request, but if the Department receives conflicting requests at or about the same time, it may refuse to process them. (iii) Beneficiary. Example: Jack S. Jones, payable on death to Marie Jones. If a minor or an incompetent is named as a beneficiary, the status of the beneficiary must be identified in the registration. A minor or an incompetent may not be designated as an owner. See paragraphs (b)(3) and (4) of this section. Example: John Perry, P.O.D. John Perry, Jr., a minor. Registration in this form shall create ownership rights in the beneficiary only if the beneficiary survives the owner. During an owner's lifetime, a transaction request may be executed by the owner without the consent of the beneficiary. If the beneficiary dies before the owner, the security will be deemed to be registered in the owner's name alone. (3) Minors General. (ii) Natural guardians of minors. Examples: Michael Jones, as natural guardian of Alice Jones, a minor. Michael Jones and Evelyn Jones, as natural guardians of Alice Jones, a minor. The security may also be registered in one of the forms authorized under paragraph (b)(2) of this section. Examples: James Green, as natural guardian of William Green, a minor, and Anne Green, without right of survivorship. James Green, as natural guardian of William Green, a minor, POD Lynne Green. (iii) Custodian under statute authorizing gifts to minors. Example: Virginia McDonald, as custodian for Lynne Gorman, under the New York Uniform Gifts to Minors Act. Any request to alter the rights of ownership of the security must be made as provided in the applicable statute. (4) Incompetents General. (ii) Voluntary guardian of incompetent. Example: Richard Melrose, as voluntary guardian for James W. Brundige. (c) Representatives. Examples: ABC National Bank of Chicago, Illinois and Harold Smith, co-executors of the will (or administrators of the estate) of Charles Johnson, deceased. William Brown, guardian of the estate of Henry Jones, a minor. Robert Smith, Richard Smith, et al., If the representative is a trustee, the form of registration must identify specifically the authority or document creating the trust. Examples: Sarah Jones and XYZ Trust Co., trustees under the will of Matthew Smith, deceased. Cynthia Doe and Margaret Jones, trustees under agreement with Martha Roe, dated April 13, 1979. Cynthia Doe, trustee under declaration of trust, dated April 13, 1979. Richard Smith, James Jones, and Frank Brown, trustees under the will of Henry K. James, deceased. ABC Corporation, Myrna Banker, et al., If there are several trustees designated as a board or authorized to act as a unit, their names should be omitted and the words, “Board of Trustees” substituted. Example: Board of Trustees of Super Co. Retirement Fund, under collective bargaining agreement, dated March 18, 1969. An organization (other than a bank) or individual seeking to act as trustee or custodian of an Individual Retirement Account (“IRA”), must be authorized to so act by the Internal Revenue Service. As appropriate, registration of the security should be in the form shown below: Examples: ABC Bank, trustee for John Doe IRA, under agreement dated December 21, 1990. EFG Broker, Inc., custodian for Mary Smith IRA, under agreement dated September 4, 1991. (d) Private organizations (corporations, unincorporated associations and partnerships). (1) A corporation. corporation Inc. Examples: Brown Manufacturing Co., a corporation (Education Fund). The Apex Manufacturing Corporation. XYZ National Bank of El Paso, TX. Goodworks, Unlimited, a not-for-profit corporation. (2) An unincorporated association. an unincorporated association, unincorporated association Examples: Local Union No. 13, Brotherhood of Operating Engineers, an unincorporated association. The Simpson Society, an unincorporated association. (3) Partnership. partnership, Examples: Red & Blue, a partnership. Abco and Co., a nominee partnership. (e) Governmental entities and officers. Examples: Laura Woods, Treasurer, City of Twin Falls, Mo. State of Michigan. Village of Gaithersburg, Md. Pennsylvania State Highway Administration (Highway Road Repair Fund). Insurance Commissioner of Florida, trustee for benefit of policy holders of Sunshine Insurance Co. under F.S.A. Sec. 629.104. Commonwealth of Virginia, in trust for Virginia Surplus Property Agency. Gleason County Cemetery Commission, trustee under Md. Code Ann. Sec. 310.29. (f) The United States Treasury. Example: John S. Green, payable on death [or P.O.D.] to U.S. Treasury to reduce the public debt (31 U.S.C. 3113). (Approved by the Office of Management and Budget under control number 1535-0068) [51 FR 18265, May 16, 1986, as amended at 57 FR 38774, Aug. 27, 1992; 76 FR 18063, Apr. 1, 2011] § 357.22 Transfers. (a) General. Legacy Treasury Direct. (1) Identification of securities to be transferred. (2) Denominational amounts. (3) When transfer effective Transfer within Legacy Treasury Direct. (ii) Transfer from Legacy Treasury Direct to the commercial book-entry system. (iii) Transfer from Legacy Treasury Direct to TreasuryDirect. (b) Transfer upon death of an owner Right of survivorship. (2) Succession under law of domicile. (c) Representative succession. (d) Organizational succession Corporation and unincorporated association. (2) Partnership. (e) Succession of governmental officer. (Approved by the Office of Management and Budget under control number 1535-0068) [51 FR 18265, May 16, 1986; 51 FR 18884, May 23, 1986, as amended at 53 FR 10074, Mar. 29, 1988; 62 FR 46861, Sept. 4, 1997; 64 FR 6527, Feb. 10, 1999; 70 FR 57441, Sept. 30, 2005; 75 FR 78901, Dec. 17, 2010; 76 FR 18064, Apr. 1, 2011] § 357.23 Judicial proceedings—sovereign immunity. (a) Department and Federal Reserve Banks not proper parties. (b) Orders Ownership rights. (i) The order is consistent with the provisions of this subpart and the terms and conditions of the security; and (ii) The Department has received evidence of the order, as provided in paragraph (c) of this section. (2) Transaction request. (i) The ordered disposition of the security or payments with respect thereto is consistent with the provisions of this subpart and the terms and conditions of the security; and (ii) The Department has received evidence of the appointment and order, as provided in paragraph (c) of this section. (c) Evidence required. (Approved by the Office of Management and Budget under control number 1535-0068) § 357.24 Availability and disclosure of Legacy Treasury Direct ® records. (a) General. (1) As provided in these regulations; (2) As provided in Treasury regulations contained in 31 CFR part 323; or (3) As otherwise provided by law. (b) Inquiries by owners. (1) Sufficient information is provided to identify the owner; and (2) Sufficient information is provided to identify the Legacy Treasury Direct account. (c) Conditions for release. [51 FR 18265, May 16, 1986; 51 FR 18884, May 23, 1986] § 357.25 Security interests. (a) General. (b) Security for the performance of duty or obligation under Federal law. § 357.26 Direct Deposit. (a) General. (b) Names on account. (c) Inquiry to financial institution. (d) Payments to master account. (e) Deposit account. (Approved by the Office of Management and Budget under control number 1535-0068) [51 FR 18265, May 16, 1986, as amended at 57 FR 38774, Aug. 27, 1992; 61 FR 6113, Feb. 16, 1996; 64 FR 40487, July 26, 1999] § 357.27 Reinvestment. (a) General. (b) Treasury bills. (c) Issue date not coincidental with maturity date. (Approved by the Office of Management and Budget under control number 1535-0068) [51 FR 18265, May 16, 1986, as amended at 62 FR 18694, Apr. 16, 1997] § 357.28 Transaction requests. (a) General. (b) Individuals General. Witness to signature by mark Signature of witness Address of witness (2) Change of name. Example: Deborah L. Gains, changed by order of court from Deborah G. O'Brien. The individual must provide evidence, such as a certified copy of a court order, which confirms the change, unless it is indicated that the change of name resulted from marriage. Example: Catherine M. Cole, changed by marriage from Catherine T. Murray. (3) Natural guardians. (i) Which would transfer the security to a natural guardian in his or her own right; or (ii) After the Department receives notice of the minor's attainment of majority, the qualification of a legal guardian or similar representative, or the death of the minor. (4) Voluntary guardians. (i) Which would transfer the security to a voluntary guardian in his or her own right; or (ii) After the Department receives notice of the ward's restoration to competency, the qualification of a legal guardian or similar representative, or the death of the ward. See § 357.21(b)(4). (c) Representatives General. (2) Decedent's estate has been settled previously. (3) Special provisions under the law of the jurisdiction of the decedent's domicile. (4) When administration is required. (5) Voluntary representative for small estates of decedents that are not being otherwise administered General. (A) There has been no administration, no administration is contemplated, and no summary or small estate procedures under applicable local law have been used; (B) The total redemption value of the Treasury securities and held payments, if any, that are the property of the decedent's estate is $100,000 or less as of the date of death; and (C) There is a person eligible to serve as the voluntary representative according to paragraph (c)(5)(iii) of this section. (ii) Authority of voluntary representative. (iii) Order of precedence for voluntary representative. (iv) Liability. (v) Creditor. (d) Private organizations Corporations and unincorporated associations. (2) Partnerships. (e) Government entities. (f) Public officers. (g) Attorneys-in-fact. (Approved by the Office of Management and Budget under control number 1535-0068) [51 FR 18265, May 16, 1986; 51 FR 18884, May 23, 1986, as amended at 70 FR 57431, Sept. 30, 2006] § 357.29 Time required for processing transaction request. For purposes of a transaction request affecting payment instructions with respect to a security, a proper request must be received not less than ten (10) business days preceding the next payment date. If a transaction request is received less than ten (10) business days preceding a payment date, the Department may in its discretion act on such request if sufficient time remains for processing. If a transaction request is received too late for completion of the requested transaction, the transaction request will be acted upon with respect to future payments only. (Approved by the Office of Management and Budget under control number 1535-0068) [51 FR 18265, May 16, 1986, as amended at 62 FR 18694, Apr. 16, 1997] § 357.30 Cases of delay or suspension of payment. If evidence required by the Department in support of a transaction request is not received by the Department at least ten (10) business days before the maturity date of the security, or if payment at maturity has been suspended pursuant to 31 CFR 370.10, in cases of reinvestment, the Department will redeem the security and hold the redemption proceeds in the same form of registration as the security redeemed, pending further disposition. No other interest shall accrue or be paid on such proceeds after the security is redeemed. [64 FR 40487, July 26, 1999] § 357.31 Certifying individuals. (a) General. (1) Officers and employees of depository institutions, corporate central credit unions, and institutions that are members of Treasury-recognized signature guarantee programs who have been authorized: (i) Generally to bind their respective institutions by their acts; (ii) Unqualifiedly to guarantee signatures to assignments of securities; or (iii) To certify assignments of securities. (2) Officers and authorized employees of Federal Reserve Banks. (3) Officers of Federal Land Banks, Federal Intermediate Credit Banks and Banks for Cooperatives, the Central Bank for Cooperatives, and Federal Home Loan Banks. (4) Commissioned officers and warrant officers of the Armed Forces of the United States but only with respect to signatures executed by Armed Forces personnel, civilian field employees, and members of their families. (5) Such other persons as the Commissioner of the Fiscal Service or his designee may authorize. (b) Foreign countries. (1) United States diplomatic or consular officials. (2) Managers and officers of foreign branches of depository institutions and institutions that are members of Treasury-recognized signature guarantee programs. (3) Notaries public and other officers authorized to administer oaths, provided their official position and authority are certified by a United States diplomatic or consular official under seal of the office. (c) Duties and liabilities of certifying individuals General. (2) Signature guaranteed. (3) Absence of signature guaranteed by depository institution. (d) Evidence of certifying individual's authority. (1) Officers and employees of depository institutions. (2) Officers and authorized employees of institutions that are members of Treasury-recognized signature guarantee programs. (3) Officers and authorized employees of Federal Reserve Banks. (4) Officers and employees of corporate central credit unions and other entities listed in paragraph (a)(3) of this section. (5) Notaries public, diplomatic or consular officials. (6) Commissioned or warrant officers of the United States Armed Forces. (7) Such other persons as the Commissioner of the Fiscal Service or his designee may authorize. (e) Interested persons not to act as certifying individual. [59 FR 59038, Nov. 15, 1994] § 357.32 Submission of transaction requests; further information. Transaction requests and requests for forms and information may be submitted to any Federal Reserve Bank currently serving as a Treasury Retail Securities Site or to the Bureau of the Fiscal Service, Legacy Treasury Direct®, P.O. Box 426, Parkersburg, West Virginia 26106-0426. A list of the Federal Reserve Banks currently serving as Treasury Retail Securities Sites is available upon request to the Bureau. The Federal Reserve Banks, as fiscal agents of the United States, are authorized to perform such functions as may be delegated to them by the Department in order to carry out the provisions of this part. [51 FR 18265, May 16, 1986, as amended at 76 FR 18064, Apr. 1, 2011] Subpart D—Additional Provisions § 357.40 Additional requirements. In any case or any class of cases arising under these regulations, the Secretary of the Treasury (“Secretary”) may require such additional evidence and a bond of indemnity, with or without surety, as may in the judgment of the Secretary be necessary for the protection of the interests of the United States. § 357.41 Waiver of regulations. The Secretary reserves the right, in the Secretary's discretion, to waive any provision(s) of these regulations in any case or class of cases for the convenience of the United States or in order to relieve any person(s) of unnecessary hardship, if such action is not inconsistent with law, does not adversely affect any substantial existing rights, and the Secretary is satisfied that such action will not subject the United States to any substantial expense or liability. [61 FR 43630, Aug. 23, 1996] § 357.42 Liability of Department and Federal Reserve Banks. The Department and the Federal Reserve Banks may rely on the information provided in a tender, transaction request form, or Transfer Message, and are not required to verify the information. The Department and the Federal Reserve Banks shall not be liable for any action taken in accordance with the information set out in a tender, transaction request form, or Transfer Message, or evidence submitted in support thereof. [61 FR 43630, Aug. 23, 1996] § 357.43 Liability for transfers to and from Legacy Treasury Direct ®. A depository institution or other entity that transfers to, or receives, a security from Legacy Treasury Direct is deemed to be acting as agent for its customer and agrees thereby to indemnify the United States and the Federal Reserve Banks for any claim, liability, or loss resulting from the transaction. § 357.44 [Reserved] § 357.45 Supplements, amendments, or revisions. The Secretary may, at any time, prescribe additional supplemental, amendatory or revised regulations with respect to securities, including charges and fees for the maintenance and servicing of securities in book-entry form. Appendix A to Part 357—Discussion of Final Rule Background Twenty-four written comments were received to the notice of proposed rulemaking from various sources, including Federal agencies, trade associations, as well as financial and commercial investment institutions. With the exception of one bank, all commentators endorsed the concept of a certificateless security. The grouping and identification of the comments received have been made on a section-by-section basis, with an explanation of the action taken with respect thereto. As circumstances necessitated the publication of the rule in two segments, in order to make each part more understandable, certain definitions, such as those for “Department” and “securities”, have appeared in the proposed rule for both Legacy Treasury Direct ® and TRADES, and were slightly modified in the proposed rules on TRADES. Because these modifications represent non-substantive clarifications, and to avoid confusion as between the two portions of the rules, the definitions as used in TRADES have been adopted. Section-By-Section Analysis Section 357.21 Registration. The forms of registrations provided for securities to be held in Legacy Treasury Direct have different legal effect from those currently provided for in the case of definitive Treasury securities and for the Treasury's book-entry Treasury bill system. A comment was received that, as a result, this could lead to some confusion, and that the Treasury bill forms of recordation currently offered should be changed, particularly since Treasury bills will be phased into Legacy Treasury Direct gradually. The Bureau believes that the benefits of uniformity of rights and interests that Legacy Treasury Direct investors will derive far outweigh any possible confusion. As for confusion with the current Treasury bill book-entry system, given the fact that Treasury bills have a term of not more than a year, it is believed that the problem, if any, will be short-lived. Given the importance of the change that Legacy Treasury Direct provides as to registration, the discussion thereof that accompanied the Notice of Proposed Rulemaking is re-published below. “ Forms of Registration. “The reason for establishing the rights of ownership for securities held in Legacy Treasury Direct is that it will give investors the assurance that the forms of registration they select will establish conclusively the rights to their book-entry securities. It will also serve to eliminate some of the uncertainties, as well as possible conflicts, between the varying laws of the several States. “A Federal rule of ownership is being adopted by the Treasury for Legacy Treasury Direct securities. This regulatory approach is consistent with the one previously taken in the case of United States Savings Bonds. It will have the effect of overriding inconsistent State laws. See, Free v. Bland, “In the case of individuals (who are likely to be by far the majority of holders of securities in Legacy Treasury Direct), the options offered will permit virtually all the preferred forms of ownership. At the investor's option, it will be possible to provide for the disposition of the securities upon death through rights of survivorship. “ Coownership registration. “ Joint ownership. “ Beneficiary form. One commentator questioned the “natural guardian” and “voluntary guardian” forms of registration provided in the regulations, pointing out that financial institutions are reluctant to establish an account in the name of a natural guardian of a minor because of the uncertainties as to who might be entitled to the funds on the death of the natural guardian or minor, or when the minor reached majority. It was mentioned that a bank would be reluctant to open an account in the name of a voluntary guardian, or to release funds from an existing account to a voluntary guardian because of the potential risk in the event of a claim from a court-appointed guardian. It seems apparent that the comment was prompted by the provision that appeared in the proposed rule that the account held in Legacy Treasury Direct and the deposit account to which payments are to be directed should be in the same form. As hereafter pointed out in the discussion under the payment section, this is not a requirement. While parents are universally recognized as the natural guardians of the person of minors, they have generally not been recognized as entitled to control the estates of these minors, except perhaps in the case of small amounts. Traditionally, the guardian of the estate of a minor involves judicial appointment and supervision. In order to provide a means of dealing with the problem of disposing of securities inadvertently registered in the name of minors without requiring the appointment of a legal guardian and to provide a means for investing funds of a minor, which did not technically qualify for investment under the Uniform Gifts to Minors Act, the Department decided to provide recognition for natural guardians. The voluntary guardianship procedure is wholly a creature of the Department's regulations. It was established in recognition of the burden placed on an incompetent's estate and his/her family by requiring the appointment of a legal guardian to receive the interest on, or to redeem securities for, the account of an individual who has become incompetent, at least where the incompetent's estate is relatively modest. This form of registration is not available on original issue and is limited to an aggregate of $20,000 (par amount) of Legacy Treasury Direct securities. The $20,000 limit in connection with the use of the voluntary guardianship procedure is in keeping with the limits used in connection with the summary administration of decedents' estates under the laws of many States. Section 357.23 Judicial proceedings. No comments were received regarding the provisions on judicial proceedings. Given their importance, the discussion that accompanied the publication thereof in proposed form is included here. Judicial proceedings. “The Department will recognize a final court order affecting ownership rights in Legacy Treasury Direct securities provided that the order is consistent with the provisions of subpart C and the terms and conditions of the security, and the appropriate evidence, as described in § 357.23(c), is supplied to the Department. For example, the Department may recognize final orders arising from divorce or dissolution of marriage, creditor or probate proceedings, or cases involving application of a State slayer's act. The Department will also recognize a transaction request submitted by a person appointed by a court and having authority under an order of a court to dispose of the security or payment with respect thereto, provided conditions similar to those above are met.” Section 357.25 Security interests. Legacy Treasury Direct is not designed to reflect or handle the various types of security interests that may arise in connection with a Treasury bond, note or bill. However, the Treasury has from time to time and to a limited extent held in safekeeping, for such agencies as the Customs Service and Immigration and Naturalization Service, Treasury securities submitted in lieu of surety bonds in accordance with 31 U.S.C. 9303. While the Federal Reserve Banks handle the majority of such pledges and will continue to do so, as this statute requires the Treasury to accept these Government obligations so pledged, a provision has been added for accepting and holding book-entry securities submitted for such purposes. Section 357.26 Payments. (a) General. One comment expressed concern as to who would have the burden of resolving errors in cases where a receiving financial institution fails to properly credit a payment. The Department has concluded that while the direct deposit payment method is not without risks, it is far superior to the use of checks, in terms of the risks, potential losses, and costs. In a case where a receiving institution fails to act in accordance with the instructions given it, the Bureau intends to use its best efforts to assist investors in rectifying the error. (b) Direct deposit. Given the variance between the procedures set out in the proposed rules and existing practice, and the increased burdens resulting therefrom, several clearing house associations and financial institutions requested that the implementation of Legacy Treasury Direct be delayed from July 1986 to July 1987. The Treasury is satisfied that the added burdens that would have been imposed on financial institutions to receive Legacy Treasury Direct payments under the proposed rules have been effectively eliminated in the final rule. Thus, Treasury plans to implement the system on or about the original target date. The final rules are being published, however, in advance of actual implementation so as to give financial institutions an opportunity to make whatever remaining, minor procedural changes as may be necessary. (b)(1) Information on deposit account at financial institution. The rule requiring the naming of the first-named owner on the receiving financial institution account was based on tax reporting considerations. It has now been determined that the first-named security owner need not be named on the receiving deposit account. The rule relating to establishment of the receiving account in joint ownership cases in the same form as the registration of the security was intended to be a notice to investors of a potential problem, rather than a requirement. In cases where an investor intends a beneficiary, joint owner or coowner to receive securities after the investor's death, this intention may be defeated if the recipient is not also named on the receiving deposit account. It is up to the investor to examine his or her particular circumstances and determine whether the form in which the deposit account will be held is satisfactory. This matter has been clarified in paragraph (b)(1)(v) of the final rule. Except for the restriction described in paragraph (b)(1)(ii) (see below), the Treasury does not intend to establish any limitations on how the receiving deposit account is held. Several comments addressed the issue of the registration of the security versus the title of the deposit account. Two comments pointed out that if the deposit account must be in the same form as the registration of the security, then existing traditional forms of ownership for bank accounts, which do not include all the forms of registration for securities held in Legacy Treasury Direct, would not suffice. Concerns were also expressed that with multiple forms of ownership, financial institutions could become involved in disputes with investors. As noted above, there is no requirement that the Legacy Treasury Direct account and the deposit account be identical. The responsibility to choose the title of the deposit account rests with the investor. Another comment objected to the rule that the first-named security owner be named on the receiving deposit account because the rule would eliminate the possibility of payment to an account at a financial institution in the name of a mutual fund, security dealer, or insurance company. Although the change in the tax reporting rule described above permits payment to such accounts, as well as to trust accounts, since it appears that there is a question as to the capability of some receiving institutions to handle such payments, investors are strongly urged to consult their financial institution before requesting such payment arrangements. See paragraph (b)(1)(iii). It should be emphasized that any payments that must be made by check will be made in the form in which the Legacy Treasury Direct account is held, which may be different than the form of the deposit account. Investors should be aware that this may result in checks being issued, and thus payment being made, in a form different than they intended the direct deposit payments to be made. For example, if Investor A purchases a security in his or her name alone with instructions that payments be directed to a financial institution for the account of a money market fund, any checks that must be issued will be drawn in the name of Investor A. This could happen if Investor A furnishes erroneous payment instructions and the problem cannot be resolved before a payment date, in which case a check would be issued. The one restriction on the form of the deposit account that appears in paragraph (b)(1)(ii) of the final regulations is a rule that where the Legacy Treasury Direct account is in the name of individual(s), and the receiving deposit account is also in the name of individual(s), one of the individuals on the Legacy Treasury Direct account must be named on the deposit account. This rule is intended to provide a means to determine the disposition of the payment, if necessary. The Treasury does not expect financial institutions to monitor this rule. Provision has been made in paragraph (b)(1)(vii) to permit financial institutions to request “mass changes” of deposit account numbers without the submission of individual requests from investors to Legacy Treasury Direct. This procedure is intended for use where an institution changes all or an entire group of its account numbers, typically as a result of an organizational change. Legacy Treasury Direct will honor requests from a financial institution to change deposit account numbers under such circumstances, with the understanding that the institution agrees to indemnify the Treasury and the security owners for any losses resulting from errors made by the institution. If the institutions does not wish to use the “mass change” procedure, then the change in account number must be requested by the investor, using the authorized transaction request form. See § 357.28. Some institutions voiced concern in general about investor errors in furnishing the Legacy Treasury Direct a deposit account number and the financial institution's routing number. Although the Treasury plans to provide as much assistance to investors as possible, the investor must bear the responsibility for securing accurate payment information. Investors are urged to consult with their receiving institution to verify the accuracy of the payment information, since neither the Treasury nor the receiving financial institution would be responsible for payment errors resulting from erroneous information provided by investors. The proposed rule provided in § 357.26(b)(1)(iii) that the designation of a financial institution by a security owner to receive payments from Legacy Treasury Direct would constitute the appointment of the financial institution as agent for the owner for the receipt of payments. The crediting of a payment to the financial institution for deposit to the owner's account, in accordance with the owner's instructions, would discharge the United States of any further responsibility for the payment. One comment noted that, in contrast, the rule in 31 CFR 210.13 for Federal recurring payments is that the United States is not acquitted until the payment is credited to the account of the recipient on the books of a financial institution. Although, in principle, the same rules should apply to all Government payments, the proposed Legacy Treasury Direct rule has been retained in the final regulations on the basis of the major differences in the procedures to be used in Legacy Treasury Direct. Most significantly, the Treasury will not be securing any written verification ( i.e. (b)(2) Agreement of financial institution. One financial institution commented that a receiving institution that has already agreed to accept part 210 payments should have the choice as to whether to accept payments from Legacy Treasury Direct. The basis for this comment was the perception that the receipt of Legacy Treasury Direct payments would require the implementation of special procedures by the financial institution and expose it to additional risks. As explained earlier, the Treasury has significantly modified the procedures and reduced the requirements imposed upon a financial institution in order to receive Legacy Treasury Direct payments, and decreased as well the risks an institution will incur in the receipt of such payments. Thus, the proposed rule on eligibility of receiving institutions has been retained in the final rule in essentially the same form. Two other comments were made to the effect that the category of institutions receiving payments should be broadened. In deciding to authorize payments to all institutions receiving part 210 payments, the Treasury considered the fact that many more institutions are designated endpoints for Government (direct deposit) payments than for commercial ACH payments. In order to afford investors the widest choice of recipient institutions, all institutions that had agreed to accept part 210 payments were designated as authorized recipients. Treasury has now broadened the rule further to also authorize those financial institutions that are willing to agree to accept part 210 payments in the future. This rule will permit investors to designate institutions that are not now receiving Government direct deposit payments as the recipients of their Legacy Treasury Direct payments if the institutions make appropriate arrangements with the Federal Reserve Bank of their District. (b)(3) Pre-notification. The proposed regulations provided that the financial institution would be required to reject the pre-notification message within four calendar days after the date of receipt if the information contained in the message did not agree with the records of the institution or if for any other reason the institution would not be able to credit the payment. The rules also stated that a failure to reject the message within the specified time period would be deemed an acceptance of the pre-notification and a warranty that the information in the message was accurate. Because there was some confusion over when the pre-notification message woud be sent, the final rules clarify, in paragraph (b)(3)(i), that in most cases, this will occur shortly after establishment of a Legacy Treasury Direct account. The Treasury has under consideration a system change that would permit a second pre-notification to be sent closer to the time of the payment if the first payment is to occur a substantial length of time after account establishment. One of the items of information contained in a pre-notification message is the name the investor has indicated appears on the deposit account. Comments were received that existing procedures and software do not permit automatic verification of the account name. Although there is apparently some variation in practice, and some institutions undertake to verify the account name information manually, the Treasury has decided to drop the account name verification requirement in the final rules. This means that under paragraph (b)(3)(ii), a financial institution need only verify the account number and type designations on the pre-notification message. However, the Treasury urges institutions which are able to verify account names to do so and encourages the development of software that would have this capability. A number of comments urged that the four-day period provided for an institution to reject a pre-notification message be lengthened. After consideration of the various alternatives proposed, the Treasury has concluded that an eight-day period will meet the needs of most institutions. See paragraph (b)(3)(ii) of the final rule. In responding to a pre-notification message, an institution may use the NACHA's “notification of change” procedure, standardized automated rejection codes, or any other similar standard procedure. Upon receipt of such notification, the Treasury will either make the necessary changes in the Legacy Treasury Direct account or contact the investor, depending on the circumstances. One commentator objected to the warranty by the receiving institution as to the accuracy of the pre-notification information, particularly in view of the manual verification or changes in procedures that would be required, and the resulting possibility of error. As previously noted, the requirement to verify an account name has been eliminated. In addition, language has been added to make it clear that the verification is limited to the time of pre-notification. The Treasury is of the view that the warranty is a useful concept in encouraging institutions to respond to pre-notification messages and will benefit all concerned by increasing the likelihood that payments will be made accurately and to the appropriate party. (b)(5) Responsibility of financial institution. Several financial institutions objected to this requirement on the grounds that it would be burdensome and would require the development of new procedures to monitor the changes in deposit accounts. Specifically, several institutions indicated they would be unable to relate the receipt of Legacy Treasury Direct payments, which would be handled in a centralized area of the institution, to the changes being made in a deposit account, which are handled in another operational area of the institution. These institutions said they would not necessarily be aware of who is the first-named owner of the security in Legacy Treasury Direct, and that more responsibility should be placed on the security owner in reporting changes. In response to these comments, the Treasury has narrowed the notification rule, in paragraph (b)(5)(ii) of the final rule, to require a financial institution to notify Legacy Treasury Direct only in cases where it is on notice of the death or legal incapacity of an individual named on the deposit account, or where it is on notice of the dissolution of a corporation named in the deposit account. Upon receipt of notice by the area of the institution that receives credit payments, the institution will be required to return any Legacy Treasury Direct payments received thereafter. (b)(6) Payments in error/duplicate payments. Several institutions raised objections about various aspects of the above procedures. One stated that 30 days was an insufficient time to respond and urged conformity with the rules in 31 CFR part 210 permitting a 60-day response time. Some objected to furnishing information about the persons who withdrew money from an account. Several objected in principle to the provision authorizing the debiting of their accounts. Several comments indicated that if a payment is returned by a financial institution using an automated payment reversal procedure, then only the full amount of the payment (not a partial amount) can be reversed. In the final rule, the Treasury has clarified the procedures. The requirement to provide the names of persons who withdrew funds from an account has been changed. In paragraph (b)(6)(i), financial institutions are asked to provide only such information as they have about the matter. The debiting of an institution's account at a Federal Reserve Bank is intended to be simply a last resort if the institution fails totally to respond to the notice of a duplicate payment or payment made in error. See paragraph (b)(6)(iii). The time provided for response to this notice has been lengthened to 60 days. The final rule has also been clarified in paragraph (b)(6)(i) to provide that the amount that should be returned is an amount equal to the payment. The Treasury reserves the right, however, to request the return by other than automated means of a partial amount of a payment made in error. It is anticipated that such a procedure would occur only if the notice of a payment made in error is not issued immediately after the payment was made. (d) Handling of payments by Federal Reserve Banks. In making payments, the Federal Reserve Banks are acting in the capacity as fiscal agents of the United States, pursuant to 12 U.S.C. 391. They are not acting in an individual (banking) capacity. If a Federal Reserve Bank misdirects a payment contrary to instructions provided by the investor, the United States, as principal, may remain liable to the investor for the payment. The United States could seek to recover any loss from its agent, the Fedeal Reserve Bank. However, because the proposed rule simply stated a legal conclusion and tended to create the impression that the rule was broader than intended, it has been omitted from the final regulations. Section 357.31 Certifying individuals. For clarity, the warranties which accompany the use of a “Signature guaranteed” stamp have been set out. Section 357.42 Preservation of existing rights. This section has been deleted. The same subject-matter will be covered in § 357.1, as finally adopted. Section 357.43 Liability of Department and Federal Reserve Banks. This section was published as § 357.42 in the notice of proposed rulemaking for TRADES. The final version will be published after all the comments on the rulemaking for TRADES have been reviewed and considered. Section 357.46 Supplements, amendments, or revisions. Provision for “charges and fees for services and maintenance of book-entry Treasury securities” has been added in the event circumstances should dictate their imposition. [51 FR 18260, May 16, 1986; 51 FR 18884, May 23, 1986] Appendix B to Part 357—TRADES Commentary Introduction The adoption of regulations for the Treasury/Reserve Automated Debt Entry System (“TRADES”) is the culmination of a multi-year Treasury process of moving from issuing securities only in definitive (physical/certificated/paper) form to issuing securities exclusively in book-entry form. The TRADES regulations provide the legal framework for all commercially-maintained Treasury book-entry securities. For a more detailed explanation of the procedural and legal development of book-entry and the TRADES regulations, see the preamble to the rule proposed March 4, 1996 (61 FR 8420), as well as the earlier proposals cited therein 51 FR 8846 (March 14, 1986); 51 FR 43027 (November 28, 1986); 57 FR 12244 (April 9, 1992). Comparison of TRADES and Legacy Treasury Direct A person may hold interests in Treasury book-entry securities either in TRADES 1 1 Persons holding Treasury book-entry securities in TRADES hold their interests in such securities in a tiered system of ownership accounts. In TRADES, Treasury, through its fiscal agents, the Federal Reserve Banks, recognizes the identity only of Participants (persons with a direct account relationship with a Federal Reserve Bank). While Participants may be beneficial owners of interests in Treasury book-entry securities, there are many beneficial owners of such interests that are not Participants. Such beneficial owners hold their interests through one or more Securities Intermediaries such as banks, brokerage firms or securities clearing organizations. In TRADES, the rights of non-Participant beneficial owners may be exercised only through their Securities Intermediaries. Neither Treasury nor the Federal Reserve Banks have any obligation to a non-Participant beneficial owner of an interest in a Treasury book-entry security. Two examples illustrate this principle. First, except where a pledge has been recorded directly on the books of a Federal Reserve Bank pursuant to § 357.12(c)(1), Federal Reserve Banks, as Treasury's fiscal agents, will act only on instructions of the Participant in whose Securities Account the Treasury book-entry security is maintained in recording transfers of an interest in a Treasury book-entry security. A beneficial owner of the interest that is a non-Participant has no ability to direct a transfer on the books of a Federal Reserve Bank. Second, Treasury discharges its payment obligation with respect to a Treasury book-entry security when payment is credited to a Participant's account or paid in accordance with the Participant's instructions. Neither Treasury nor a Federal Reserve Bank has any payment obligation to a non-Participant beneficial owner of an interest in a Treasury book-entry security. A non-Participant beneficial owner receives its payment when its Securities Intermediary credits the owner's account. Persons holding Treasury book-entry securities in Legacy Treasury Direct, on the other hand, hold their securities accounts on records maintained by Treasury through its fiscal agents, the Federal Reserve Banks. The primary characteristic of Legacy Treasury Direct is a direct account relationship between the beneficial owner of a Treasury book-entry security and Treasury. In Legacy Treasury Direct, Treasury discharges its payment obligation when payment is credited to the depository institution specified by the beneficial owner of the Treasury book-entry security, paid directly to the beneficial owner by check, or paid in accordance with the beneficial owner's instructions. Unlike TRADES, Legacy Treasury Direct does not provide a mechanism for the exchange of cash to settle a secondary market transaction, nor are pledges of Treasury book-entry securities held in Legacy Treasury Direct generally recognized. Accordingly, Legacy Treasury Direct is suited for persons who plan to hold their Treasury securities until maturity, and provides an alternative for investors who are concerned about holding securities through intermediaries and who do not wish to hold their interests in Treasury securities indirectly in TRADES. Scope of Regulation Just as the scope of Revised Article 8 is limited, 2 3 2 3 Section-by-Section Analysis Section 357.0 Dual book-entry systems. Section 357.0 sets forth that Treasury provides two systems for maintaining Treasury book-entry securities—TRADES and Legacy Treasury Direct. Subpart A of part 357 of 31 CFR contains general information about TRADES and Legacy Treasury Direct. Subpart B contains the TRADES regulations. Subpart C contains the Legacy Treasury Direct regulations. Subpart D contains miscellaneous provisions. Thus, in its totality, part 357 sets forth in one place the complete set of governing rules for Treasury securities issued in book-entry form. Section 357.1 Effective date. Section 357.1 establishes the effective date for TRADES. TRADES applies to outstanding securities formerly governed by 31 CFR part 306, subpart O. Conforming changes to parts 306, 356, and 358 are being made to coincide with the publication of TRADES in final form. Consistent with the approach set forth in Revised Article 8 (see § 8-603 and the official comment thereto), on and after the effective date these regulations will apply to all transactions, including transactions commenced prior to the effective date. Revised Article 8, in Section 8-603, gave secured parties four months after the effective date to take action to continue the perfection of their security interests. TRADES, through its delayed effectiveness, provides a similar period. In TRADES, January 1, 1997, becomes the date by which such actions must be completed. The effective date for TRADES is January 1, 1997. While TRADES is based in large part on Revised Article 8 that has received widespread attention in the financial community and already has been adopted in 28 states, 4 4 Section 357.2 Definitions. Section 357.2 contains definitions for use in subparts B and C. While most of the definitions are straightforward, four terms—Participant, Entitlement Holder, Security Entitlement and Securities Intermediary—are critical to an understanding of the proposed TRADES regulations. (a) Participant. (b) Securities Intermediary. In addition, entities such as clearing corporations, banks, brokers and dealers can be Securities Intermediaries in a single chain of ownership of a Treasury security. An individual, unless registered as a broker or dealer under the federal securities laws, cannot be a Securities Intermediary. As an illustration of a possible chain of ownership, in the following chart, the Federal Reserve Bank, Participant and Broker-Dealer are all Securities Intermediaries. Treasury Federal Reserve Bank | Participant | Broker-Dealer | Individual Holder (c) Entitlement Holder. (d) Security Entitlement. Section 357.10 Law governing the United States and Reserve Banks. Section 357.10(a) provides that the rights and obligations of the United States and the Federal Reserve Banks (with one exception detailed below), with respect to both the TRADES system and Treasury book-entry securities maintained in TRADES are governed solely and exclusively by Federal law. Thus, claims against the United States and Federal Reserve Banks of both Participants and all other persons with an interest (or claiming an interest) in a Treasury book-entry security maintained in TRADES are governed by Federal law. Federal law is defined to include TRADES, the offering circulars pursuant to which the Treasury securities are sold, the offering announcements and Federal Reserve Bank Operating Circulars. 5 Federal Register. 6 5 6 While TRADES is based in large measure on Revised Article 8, a fundamental principle of these regulations (and a divergence from Revised Article 8) is that the obligations of the issuer (the United States) and the Federal Reserve Banks, as well as all claims with respect to TRADES or a Treasury book-entry security against Treasury or a Federal Reserve Bank, are governed solely by Federal law. Thus, for example, those parts of Revised Article 8 that detail obligations of issuers (or their agents) of securities are not applicable to either the United States or Federal Reserve Banks. 7 7 In interpreting this section, it is important to note that the scope of TRADES, like that of Revised Article 8, is limited. Accordingly, the governing law set forth in § 357.10(a) is applicable only to the matters set forth in § 357.10(a). Other laws remain applicable and could affect the holders of book-entry securities. For example, the tax treatment of Securities Entitlements is outside the scope of TRADES and other law (the Federal income tax code) is applicable in determining such tax treatment. Similarly, nothing in § 357.10(a) limits the applicability of other laws to matters such as whether the activities of Participants or Securities Intermediaries with respect to interests in Treasury book-entry securities are subject to banking or securities laws. While TRADES in § 357.10(a) defines what law governs the contract between the United States, as issuer, and the holder of a Security Entitlement, it is not a complete statement of the contract law applicable to the United States or Federal Reserve Banks. For example, if a Participant obtains a discount window loan from a Federal Reserve Bank and agrees to pledge collateral, including Treasury book-entry securities, to the Federal Reserve Bank as security for the loan, § 357.10(a) does not establish the law for determining the validity or enforceability of the contract or the law applicable to the creation and perfection of security interests in property that is not a Treasury book-entry security. Section 357.10(a) does provide the law applicable for how a security interest in Treasury book-entry securities is perfected, the priority of such interest and, if § 357.12(c)(1) is applicable, how such security interest is created. Similarly, nothing in § 357.10(a) affects the continuing applicability or enforceability of Federal Reserve Bank operating circulars such as the circular setting forth provisions regarding electronic access to services provided by Federal Reserve Banks and agreements executed in connection with such circulars. The law applicable with respect to interests granted to a Federal Reserve Bank depends on the manner in which the security interest is granted. Where a security interest in favor of a Federal Reserve Bank is marked on the books of the Federal Reserve Bank under Section 357.12(c)(1), § 357.10(a) establishes the applicable law. A security interest in favor of a Federal Reserve Bank would be recorded on the Federal Reserve Bank's books where, for example, the Federal Reserve Bank made a discount window loan to a depository institution and any Treasury book-entry securities provided by the depository institution as collateral have been deposited to a pledge account on the books of the Federal Reserve Bank. For a borrowing depository institution that is not a Participant, the book-entry securities used as collateral generally would be deposited to the Federal Reserve Bank pledge account by the borrowing institution's Securities Intermediary. See Hypothetical 5. Section 357.10(b) sets forth law applicable with respect to security interests in favor of a Federal Reserve Bank that have not been marked on the books of a Federal Reserve Bank. A security interest in the Securities Entitlement of a Participant in favor of a Federal Reserve Bank that is not marked on the books of the Federal Reserve Bank is governed by the law of the state in which the head office of the Federal Reserve Bank is located. Such a security interest could arise, for example, where the delivery of book-entry securities to the securities account of the Participant results in an overdraft in the Participant's Funds Account. The extent to which the Federal Reserve Bank has an interest in the Participant's book-entry securities to secure the overdraft therefore would be determined under the law of the state in which the Reserve Bank's head office is located. If the State in which the head office of the Federal Reserve Bank is located has not adopted Revised Article 8, under § 357.10(c) that State is deemed to have adopted Revised Article 8. In certain very limited circumstances, a Federal Reserve Bank also may have a security interest in the book-entry securities of a non-Participant that is not marked on the books of the Federal Reserve Bank. Section 357.10(b) provides a separate rule for such a security interest, which would be governed by the law of the non-Participant's Securities Intermediary, as determined under § 357.11. Under § 357.11, the perfection, effect of perfection, and priority of a security interest created under such an agreement would be governed by the law of the Securities Intermediary's jurisdiction, as determined under § 357.11(b). Under § 357.11(d), if the jurisdiction specified in § 357.11(b) has not adopted Revised Article 8, jurisdiction would be deemed to have adopted Revised Article 8. 8 8 For purposes of applying the state law chosen under the rules of § 357.10(b), Federal Reserve Banks are treated as clearing corporations. As a result, a security interest in a Securities Entitlement of a Participant in favor of a Federal Reserve Bank under § 357.12(c)(2) has the same priority as security interests granted to other clearing corporations under state law. This is consistent with the treatment accorded to Federal Reserve Banks generally under Revised Article 8. Section 357.11 Law governing other interests. (a) Law governing the rights and obligation of Participants and third parties. Section 357.11(b) adopts Revised Article 8's general choice of law rule. Section 357.11(c) sets forth a special choice of law rule with respect to security interests perfected automatically or by filing, which also is included in Revised Article 8. Generally, the law applicable to the Securities Intermediary will govern matters involving an interest in a book-entry security held through that intermediary. This approach is not followed with respect to perfection of security interests automatically or by filing. In those cases, the law of the jurisdiction in which the debtor is located is the governing law. Since filing systems are based on the location of the debtor, this approach should reduce uncertainty and preserve the normal practice of searching records based on the debtor's location. 9 9 (b) Limited scope of Federal preemption. 10 10 As of August 1, 1996, 28 states have adopted Revised Article 8 and Treasury understands that it will soon be adopted in additional states. As with all uniform laws, the adoption process takes several years. In order to assure uniformity, in light of the unavoidable delays in the state-by-state adoption process of Revised Article 8, Treasury is promulgating regulations with a limited form of preemption. As provided in both §§ 357.10(c) and 357.11(d), if the choice of law rules set forth in TRADES would lead to the application of the law of a State that has not yet adopted Revised Article 8, TRADES will apply Revised Article 8 (with conforming and miscellaneous amendments to other Articles) in the form approved by the ALI and NCCUSL. Treasury expects that these provisions will be operative only during the state-by-state adoption process and would plan to amend TRADES to delete reference to these provisions once the adoption process has been completed. While Revised Article 8 is defined to mean the official text of Article 8 as approved by the ALI and NCCUSL, Treasury recognizes that states may make minor changes in that text when adopting Article 8. Treasury has concluded that minor changes should not prevent Revised Article 8, as adopted by a state, from being the appropriate law. In other words, if a state passes a version of Article 8 that is substantially identical to Revised Article 8, reference to Revised Article 8 (as defined) would no longer be required. Treasury has determined that the versions of Article 8 passed by 50 11 Federal Register 11 Section 357.12 Obtaining an interest in a book-entry security. (a) Creation of a Participant's Security Entitlement. The regulation focuses on the creation of a Participant's Security Entitlement because Security Entitlement is the term used to describe the Participant's interest in a Treasury book-entry security. Once a Participant obtains that interest, the regulation sets forth what that interest is. Thus, as provided in § 357.10, federal law describes a Participant's rights against the United States and the Federal Reserve Bank where it maintains its Securities Account. To the extent not inconsistent with § 357.10, § 357.11 describes the applicable law to determine Participants' rights and obligations with respect to all other persons. Under these regulations, Participants can still transfer their interests in a Treasury book-entry security as they did before—by issuing a Transfer Message to the Federal Reserve Bank where they hold such interest. Transfer of interests between Participants can occur by a Participant holding such interest issuing a Transfer Message. As a result of such message, the Federal Reserve Bank will make a book entry in favor of the receiving Participant (thereby creating a Security Entitlement in favor of such Participant) and also will make a book entry deleting the initiator Participant's interest in such Treasury book-entry security (thereby eliminating that Participant's Security Entitlement). In addition, if authorized under applicable state law, Participants may enter into agreements with other Participants that, as to the Participants, constitute a transfer. Such action is without effect to either the United States or a Federal Reserve Bank. (b) Creation and priority of a Security Interest. Security Interests of the United States. In addition, Federal Reserve Banks do recognize on their books and records security interests in favor of the United States. In that situation, the Federal Reserve Bank will not transfer the security without the permission of the United States. This section provides that a Federal Reserve Bank may rely exclusively on the directions of an authorized representative of the United States to transfer a security and is protected in so relying. Ordinarily, an authorized representative of the United States would take such action under circumstances such as the default or insolvency of the pledgor. (ii) Security Interests on the books of a Reserve Bank. 12 12 (iii) Other security interests. 13 13 If a Person perfects a security interest pursuant to § 357.12(c)(2), obligations of the Treasury and the Federal Reserve Banks with respect to that security interest are limited. Specifically, unless special arrangements are agreed to by the United States or a Federal Reserve Bank pursuant to § 357.12(c)(1), neither the Federal Reserve Bank nor the United States will recognize the interests of any person other than the person in whose securities account the interest in a Treasury book-entry security is maintained. This does not mean that such a security interest is invalid. Rather, it means that the creditor's recourse will be solely against the debtor Participant or other third party. Section 357.13 Rights and obligations of Treasury and the Reserve Banks. (a) Adverse claims. As noted previously, Treasury book-entry securities maintained in TRADES are held in a tiered system of ownership. The records of a Federal Reserve Bank reflect only the ownership at the top tier. Institutions maintaining a Securities Account with a Federal Reserve Bank frequently will hold interests in Treasury book-entry securities for their customers (which can include broker-dealers and other Securities Intermediaries) and in certain cases those customers will hold interests in securities for their customers. Accordingly, neither Treasury nor a Federal Reserve Bank will know the identity or recognize a claim of a Participant's customer if that customer were to present it to Treasury or a Federal Reserve Bank. In addition, except in the limited case where a security interest is marked on the books of a Federal Reserve Bank pursuant to § 357.12(c)(1), neither the Treasury nor a Federal Reserve Bank will recognize the claims of any other person asserting a claim in a Treasury book-entry security. Persons at levels below the Participant level must present their claims to their Securities Intermediary. (b) Payment obligations. 14 14 Section 357.14 Authority of Reserve Banks. Section 357.14 provides that Federal Reserve Banks are authorized, as fiscal agents of Treasury, to operate the commercial book-entry system for Treasury. Section 357.44 Notices. Section 357.44 contains a revised version of a provision that appeared in earlier TRADES proposals. Similar to the rule in Revised Article 8 (see section 8-112), it provides where certain legal process should be directed. While providing instructions on where notice should be directed, it makes clear that the regulations do not establish whether a Federal Reserve Bank is required to honor any such order or notice. J. Hypotheticals Hypothetical 1 TREASURY FEDERAL RESERVE BANK | PARTICIPANT | DEALER | INVESTOR The first hypothetical is designed to show what law applies at different levels of the tiered book-entry system. TRADES provides that federal law, and only federal law (defined in § 357.10(a)), governs the rights and obligations of the United States and the Federal Reserve Banks (except for those matters involving Federal Reserve Banks set forth in § 357.10(b)). Thus, for example, Treasury discharges its payment obligations with respect to a security it has issued in the manner described in § 357.13(b). Federal law both defines the payment obligation and describes how Treasury fulfills that obligation. Those portions of Revised Article 8 dealing with issuer obligations are not applicable to Treasury or the Federal Reserve Banks. 15 16 15 16 In the hypothetical above, as between Participant and Dealer, Participant is the Securities Intermediary. With respect to the matters set forth in § 357.11(a), the law of the Securities Intermediary's jurisdiction governs. Thus, with respect to the matters in § 357.11(a), the law of Participant's jurisdiction applies as between Participant and Dealer. 17 17 Hypothetical 2 Assume that Dealer A sells its interest in a Treasury book-entry security to Dealer B. The transaction likely would take the following form. Dealer A will instruct Participant A to transfer its interest in a Treasury security to Participant B against cash payment. Dealer B will instruct Participant B to transfer cash to Participant A against delivery of an interest in the specified securities. Participant A will instruct the Federal Reserve Bank to transfer its interest in the Treasury security to Participant B against simultaneous credit of cash. The Federal Reserve Bank will debit Participant A's security account and credit Participant B's security account and simultaneously credit Participant A's cash account and debit Participant B's cash account. Participant A will mark its books to show that it has debited Dealer A's securities account and credited Dealer A's cash account. Participant B will mark its books to show the Security Entitlement in the Treasury security in favor of Dealer B and a debit against Dealer B's cash account. Federal law, set forth in § 357.12(a) provides that Participant B acquires its interest in the Treasury book-entry security when the Federal Reserve Bank indicates by book-entry that the interest in the security has been credited to Participant B's Securities Account. Pursuant to § 357.11(a), but subject to § 357.11(d), Participant B's jurisdiction governs Dealer B's acquisition of a Securities Entitlement from Participant B. Hypothetical 3 TREASURY FEDERAL RESERVE BANK | PARTICIPANT Assume Participant wishes to obtain a loan from Federal Reserve Bank and, as part of the transaction, will grant Federal Reserve Bank a security interest in its Securities Entitlement with respect to Treasury book-entry securities. The transaction can be accomplished in one of two ways. Pursuant to § 357.12(c)(1), the Federal Reserve Bank can mark its books to reflect the security interest. As a matter of federal law, that action creates and perfects the Federal Reserve Bank's security interest and grants the Federal Reserve Bank priority over all other claimants (other than the United States pursuant to § 357.12(b)). 18 18 Hypothetical 4 TREASURY FEDERAL RESERVE BANK | | PARTICIPANT A PARTICIPANT B Assume that Participant A wishes to borrow from Participant B and grant Participant B a security interest in its Security Entitlement in Treasury book-entry securities. As provided in § 357.12(c)(2), the transaction would be completed pursuant to applicable law determined in accordance with 357.11. Although such an interest could be recorded on the books of a Federal Reserve Bank under § 357.12(c)(1), Federal Reserve Banks generally do not mark their books to record this type of security interest for Participants. Hypothetical 5 TREASURY FEDERAL RESERVE BANK | PARTICIPANT A | DEALER A | BANK A Assume that Bank A wishes to borrow from the Federal Reserve Bank and will pledge its interest in Treasury book-entry securities held at Dealer A to collateralize that loan. The transaction could be accomplished in two ways. Pursuant to § 357.12(c)(1), the interest could be created and perfected on the books of a Federal Reserve Bank. Such a transaction would take place in the following fashion. Bank A could have Dealer A instruct Participant A to deposit securities to a pledge account specified by the Federal Reserve Bank. The Federal Reserve Bank likely would create an account on its books and specify that account to Bank A as the account to receive Bank A's interest in Treasury book-entry securities. Participant A, upon receiving Dealer A's instructions, would then instruct the Federal Reserve Bank to debit its account at the Federal Reserve Bank and credit the account created by the Federal Reserve Bank. The second way the transaction could take place is by any method permitted by the law of Dealer A's (Bank A's Securities Intermediary) jurisdiction. This could involve a tri-party agreement among the Federal Reserve Bank, Dealer A, and Bank A. As set forth in § 357.11(b)(1), that agreement likely would specify which jurisdiction's law is to govern the transaction and could specify that such choice of law supersedes any other choice of law agreement previously entered into by Dealer A and Bank A. If Dealer A's jurisdiction has not adopted Revised Article 8, the applicable law would be the law of Dealer A's jurisdiction as it would be amended by Revised Article 8. [61 FR 43631, Aug. 23, 1996, as amended at 62 FR 43284, Aug. 13, 1997; 63 FR 69191, Dec. 16, 1998]

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