June 16, 2015
The U.S. House of Representatives passed legislation May 15 to establish clear standards for assets pledged by an individual surety on a federal construction project.
"Individual sureties are 'natural persons' and are not subject to the same auditing procedures reserved for corporate sureties under the Federal Miller Act," said Chris Ring of NACM's Secured Transaction Services.
Individual sureties must post collateral in the care of the government, which will only accept cash, readily marketable assets or irrevocable letters of credit from a federally insured financial institution to satisfy underlying bond obligations, Ring noted. "By moving the ball forward on this legislation, it assures that individual sureties have adequate assets to pay potential claims."
The proposed provision is part of H.R. 1735, the National Defense Authorization Act for Fiscal Year 2016. Sec. 839 of the bill would require an individual surety to pledge solely those assets that the law currently allows to be pledged directly to the government and to place such assets in the care and custody of the federal government (i.e., the Secretary of Treasury, a federal reserve bank or a depository designated by the Secretary).
This section would also increase the amount of surety bond guarantees from the Small Business Administration from 70% to 90% and would require the U.S. comptroller general to study the surety bond program and to examine the impact of this amendment.
The provision would eliminate fraud and abuse by curbing the ability of an individual surety to pledge insufficient or illusory assets, Ring said. In addition, the federal government could pay claims to subcontractors and suppliers more easily and expeditiously if an individual surety bond is accepted.