U.S. Treasury Securities-State and Local Government Series, 59353-59363 [2022-21173]

Agencies

• DEPARTMENT OF THE TREASURY
• Bureau of the Fiscal Service

[Federal Register Volume 87, Number 189 (Friday, September 30, 2022)]
[Proposed Rules]
[Pages 59353-59363]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-21173]


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DEPARTMENT OF THE TREASURY

Bureau of the Fiscal Service

31 CFR Part 344

[FISCAL-2022-0002]
RIN 1530-AA25


U.S. Treasury Securities--State and Local Government Series

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

ACTION: Notice of proposed rulemaking with request for comments.

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[[Page 59354]]

SUMMARY: The Department of the Treasury (Treasury) is issuing this 
notice of proposed rulemaking (NPRM) to amend the regulations governing 
State and Local Government Series (SLGS) securities. Treasury is 
proposing to amend the SLGS regulations to address misuse of the SLGS 
program, most notably the use of program flexibilities by tax-
advantaged entities, usually a state or local government, investing in 
SLGS securities to create impermissible cost-free options. This NPRM 
proposes amendments to existing regulations to help stop such activity. 
In addition, this NPRM proposes administrative changes to increase 
efficiencies in the program.

DATES: To be considered, comments must be received on or before 
November 29, 2022.

ADDRESSES: You may submit comments by either of the following methods:
    Internet: https://www.regulations.gov (via the online comment form 
for this NPRM as posted within Docket ID No. FISCAL-2022-0002 at 
www.regulations.gov, the Federal e-rulemaking portal);
    U.S. Mail: Mike Goodwin, Division Director, or Jared Waters, 
Program Manager, Bureau of the Fiscal Service, P.O. Box 396, 
Parkersburg, WV 26106-1328.
    All submissions received must be addressed to the Bureau of the 
Fiscal Service and include the Docket ID Number FISCAL-2022-0002. All 
comments received will be posted without change to www.regulations.gov. 
The posting will include any personal information that you provide in 
the submission.

FOR FURTHER INFORMATION CONTACT: Mike Goodwin, Division Director, Jared 
Waters, Program Manager, Brian Metz, Senior Counsel, or Elizabeth 
Spears, Senior Counsel, at [email protected] or (304) 480-5299.

SUPPLEMENTARY INFORMATION: 

I. Regulatory Background

A. SLGS Program

    SLGS securities are non-marketable Treasury securities that are 
available only for purchase by an Issuer, as defined in 31 CFR 344.1, 
of tax-advantaged securities (Issuers). The purpose of the SLGS program 
is to assist Issuers when investing proceeds from bond issuances in 
complying with yield restriction and rebate requirements applicable to 
tax-advantaged securities under the Internal Revenue Code. Because an 
Issuer's bond issuance process is characterized by several variables 
that may take a number of weeks to resolve, flexibility has been built 
into the SLGS program to allow Issuers to customize the SLGS security 
terms such as interest rate, maturity, and issue date. Over the years, 
Treasury has amended the SLGS regulations in an effort to maintain SLGS 
securities as an attractive investment alternative to marketable 
securities for Issuers, while also preventing the program from being 
misused by Issuers and from becoming burdensome to Treasury financing 
operations.
    Treasury has repeatedly stated that speculation by Issuers in 
interest rate movements between marketable Treasury securities and/or 
SLGS securities is both inconsistent with the purpose of the SLGS 
program and is prohibited by the SLGS regulations. Despite Treasury's 
prohibition on such speculation, impermissible transactions have been 
observed within the SLGS program. Treasury attributes the impermissible 
transactions to the exploitation of certain flexibilities in the 
program. The proposed amendments to the regulations are to reinforce to 
Issuers the prohibition on these transactions and to make it less 
likely that SLGS investors can use the flexibilities to impermissibly 
create cost-free options based on interest rate movements. This NPRM 
identifies in Section E the observed cost-free options that are 
prohibited and proposes amendments to reduce Issuers' flexibility in 
structuring the terms of SLGS securities to create such cost-free 
options. Treasury is also proposing other changes that are designed to 
improve the administration of the SLGS program.

B. Flexibilities Added to the SLGS Program in 1996

    In 1996, Treasury revised the regulations governing SLGS securities 
to make the program a more flexible and competitive investment vehicle 
for Issuers in a manner that was intended to be cost effective for 
them. 61 FR 55690 (October 28, 1996). The 1996 final rule eliminated 
several requirements such as the Issuer's certifications to purchase 
SLGS securities. In addition, the regulations were amended to permit an 
Issuer to subscribe for SLGS securities and subsequently cancel the 
subscription, without a monetary penalty, under certain circumstances

C. Cost-Free Options Addressed in 1997

    In 1997, Treasury amended the regulations to clarify that certain 
transactions in which Issuers previously used subscriptions for SLGS 
securities to provide a cost-free interest rate hedge or option were 
prohibited. 62 FR 46444 (September 3, 1997). The 1997 final rule added 
Sec. Sec.  344.2(f)(1) and (f)(2), stating that it is impermissible to 
subscribe for SLGS securities for deposit in a defeasance escrow or 
fund if: (1) the amount of SLGS securities subscribed for, plus the 
securities already in the escrow or fund, plus the amount the Issuer 
has acquired or has a right to acquire for deposit in the escrow or 
fund, exceeds the total amount of securities needed to fund such escrow 
or fund, and (2) the securities in the escrow or fund are subject to an 
agreement conditioned on changes in the interest rate on marketable 
Treasury securities.

D. Cost-Free Options Addressed in 2004

    Treasury has often noted that the prices established for SLGS 
securities do not include the cost of an option. Although Treasury 
considered whether to allow optionality on SLGS securities if Treasury 
were compensated, Treasury concluded in a 2004 NPRM that there was no 
practical way to charge for the value of an option. 69 FR 58756 
(September 30, 2004).

E. Cost-Free Options Addressed in 2005

    In a 2005 final rule, Treasury amended the regulations to prohibit 
practices that were variations on the use of SLGS securities to create 
some form of a cost-free option. These practices included: (1) the 
redemption before maturity or sale of securities to reinvest in a 
higher yielding SLGS or marketable security, and (2) the cancellation 
of SLGS subscriptions upon rising interest rates and re-subscribing for 
SLGS securities at a higher yield. 70 FR 37904 (June 30, 2005). In an 
attempt to stop recurring misuse of the SLGS program, the preamble 
reaffirmed that it is ``inappropriate to use the SLGS securities 
program as an option'' and that such practice is ``contrary to the 
purpose of the program.''
    Under current regulations, Issuers are not allowed to create a 
cost-free option. 31 CFR 344.2(f) provides: ``What are some practices 
involving SLGS securities that are not permitted? (1) In General. For 
SLGS securities subscribed for on or after August 15, 2005, it is 
impermissible: (i) To use the SLGS program to create a cost-free 
option. . . .''

II. Treasury's Proposals To Address Creation of Impermissible Cost-Free 
Options

    During escrow restructurings, Issuers often redeem SLGS securities 
before maturity (early redemption) and reinvest the proceeds in SLGS or 
marketable securities at a higher yield to

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eliminate ``negative arbitrage'' under the Internal Revenue Code. 
Negative arbitrage occurs when bond proceeds are invested by an Issuer 
at a yield that is less than the yield on the bond issue, often as a 
result of market conditions where the maximum SLGS rates available are 
lower than what would be permissible under arbitrage provisions of the 
Internal Revenue Code (26 U.S.C. 148). Such restructuring transactions 
to eliminate negative arbitrage generally are allowed under the current 
SLGS regulations, so long as a cost-free option is not created. 
However, changing the terms of or early redemption of SLGS securities 
to take advantage of infrequent pricing of SLGS securities is 
prohibited under the current regulations even when undertaken to 
eliminate negative arbitrage. Section 244.2(f)(1)(i) of the current 
regulations makes it impermissible ``to use the SLGS program to create 
a cost-free option.'' The rationale for this prohibition was previously 
explained in two prior Federal Register publications, in which Treasury 
specifically stated that cost-free options are impermissible, even if 
used to eliminate negative arbitrage. 69 FR 58756 (September 30, 2004) 
and 70 FR 37904 (June 30, 2005). Furthermore, section 244.2(f)(2) of 
the current regulations includes examples of negative arbitrage 
situations that are prohibited.
    To further clarify the boundaries of the cost-free option 
prohibition, Treasury proposes modest reductions in the current 
flexibilities available under the SLGS regulations to eliminate the 
following three types of practices that create cost-free options in 
violation of the SLGS regulations:
    (1) Purchasing a long-term SLGS security and redeeming the security 
before maturity to capture redemption premium;
    (2) Establishing or changing the maturity and associated interest 
rate on SLGS securities already subscribed for to take advantage of 
interest rate movements, either to capture redemption premiums or to 
minimize losses or
    (3) Establishing or changing the SLGS subscription amount to 
maximize redemption premiums or minimize potential losses.
    Any of these practices, alone or in combination, creates a cost-
free option. Treasury has repeatedly stated that manipulating the 
administrative flexibility designed in the SLGS regulations to create a 
cost-free option is an inappropriate use of the program and 
inconsistent with its purpose even when undertaken to eliminate 
negative arbitrage. Treasury incurs a direct cost from such 
manipulation because it is not compensated for the value of the cost-
free option, which may generate large gains in the hands of the SLGS 
purchasers. In addition, SLGS transactions motivated by cost-free 
options result in volatility in Treasury's cash balances and difficulty 
in forecasting cash balances, which increases Treasury's borrowing and 
administrative costs, as previously identified in 2004 and in 2005. 69 
FR 58756 (September 30, 2004) and 70 FR 37904 (June 30, 2005). The 
three practices identified above create features that are not available 
in marketable Treasury securities and result in additional costs to the 
Federal taxpayer.
    For these reasons, this NPRM proposes the amendments described 
below to the SLGS regulations to eliminate these practices. Treasury 
believes that the proposed amendments retain sufficient flexibility for 
Issuers to be able to select maturities and interest payment dates, 
thereby continuing to make SLGS securities an attractive investment 
vehicle for Issuers. The proposed rule amendments will apply only to 
SLGS subscriptions started on or after the effective date of the final 
rule. Treasury anticipates that the effective date will be six months 
after the final rule's publication in the Federal Register.

A. Purchasing and Early Redemption of a Long-Term SLGS Security

    The first type of cost-free option identified in this NPRM is 
``purchasing a long-term SLGS security and redeeming the security 
before maturity in order to capture redemption premium.'' To eliminate 
this cost-free option, Treasury proposes imposing a requirement that 
the Issuer match the maturity of the SLGS security with an underlying 
governmental purpose and hold Time Deposit securities, as defined by 31 
CFR 344.4, for a minimum amount of time before requesting an early 
redemption. The meaning of the phrase ``governmental purpose'' is 
intended to be consistent with its meaning pursuant to the Income Tax 
Regulations under section 148 of the Internal Revenue Code (26 U.S.C. 
148). Thus, an underlying governmental purpose generally refers to the 
Issuer's expected use of the invested funds; for example, financing a 
construction project, repaying a prior issue of bonds, or funding a 
debt service reserve.
    1. No Maturity Longer Than Necessary. In a 2004 NPRM, Treasury 
proposed a provision that would make it impermissible for an Issuer to 
purchase a SLGS security with a maturity longer than was reasonably 
necessary to accomplish a governmental purpose of the Issuer. The 
provision was intended to address a practice where the Issuer, acting 
on movements of interest rates, would redeem the SLGS security before 
maturity to capture a premium. 69 FR 58756 (September 30, 2004). Based 
on public comments received, Treasury decided not to include the 
provision in the 2005 final rule. 70 FR 37904 (June 30, 2005).
    However, due to more recently observed early redemption requests 
and changes to SLGS subscriptions that appear to have been made without 
a legitimate governmental purpose, Treasury is revisiting the previous 
proposal. Treasury believes that the costs to Treasury of early 
redemptions and changes to SLGS subscriptions have the potential to 
outweigh any administrative burden imposed on either Treasury or the 
Issuer. To help ensure clarity, Treasury has added specific examples 
explaining the proposed amendment.
    Treasury proposes two provisions that will require the Issuer to 
match the maturity of the SLGS security with an underlying governmental 
purpose in order to preclude the Issuer from purchasing a long-term 
SLGS security and redeeming it prior to maturity in order to capture 
redemption premium. First, Treasury proposes adding a new ``duration'' 
certification in Sec.  344.2(e)(3), requiring the Issuer to certify 
that the length of the maturity of a SLGS security subscribed for is no 
longer than reasonably necessary for the underlying governmental 
purpose of the investment. Because Demand Deposit securities, defined 
at 31 CFR 344.7, are one-day certificates of indebtedness, they will 
not be subject to the duration certification.
    Second, Treasury proposes amending the non-exhaustive list of 
impermissible transactions in Sec.  344.2(f)(1) by adding a new 
functional description in subsection (iv) that will make it an 
impermissible practice to purchase or redeem prior to maturity a SLGS 
security with a maturity that is longer than is reasonably necessary to 
accomplish the Issuer's governmental purpose. This functional 
description is meant to encompass the policy behind the amendments 
Treasury is proposing in this NPRM while acknowledging that 
impermissible activity could occur in a variety of ways, including ways 
not described in the non-exhaustive list. To illustrate how the 
duration certification will apply to refunding escrow funds, bond debt 
service reserve funds, and project construction funds, new examples of 
impermissible transactions

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will be added to Sec.  344.2(f)(2)(vii). Other examples will provide 
guidance on how the certification will apply to purchases and early 
redemptions of SLGS securities. Even with the addition of the new 
examples of impermissible practices, Treasury considers the list of 
examples to be non-exhaustive. There may be other transactions where 
manipulative practices create a cost-free option using the 
flexibilities afforded to Issuers in the SLGS program. All such 
practices are prohibited. Conforming technical amendments will be made 
throughout the regulation.
    2. Minimum Holding Period and Notification for Early Redemption of 
Time Deposit Securities. Under the current regulations, the Issuer may 
request early redemption of a Time Deposit security as early as the day 
after Treasury issues the SLGS security. Proposed Sec.  344.6(a)(3) 
requires a 14-day minimum holding period after the security has been 
issued before the Issuer may request early redemption of a Time Deposit 
note or bond. Increasing the minimum holding period from 1 day to 14 
days will increase the Issuer's interest rate risk and help to address 
the type of cost-free option described in this NPRM as ``purchasing a 
long-term SLGS security and redeeming the security before maturity in 
order to capture redemption premium.''
    The SLGS rate table on the date a subscription is ``started'' 
establishes the maximum interest rate applied to a SLGS security based 
on the term of the security. The SLGS rate table in effect on the date 
of the early redemption request is used in determining if the SLGS 
security will be redeemed at a discount or premium. A premium might be 
earned under the current regulations if the Issuer impermissibly 
creates a cost-free option by either: (a) starting a subscription and 
redeeming the security prior to maturity in response to a fall in 
interest rates occurring between the subscription and issuance dates, 
or (b) changing the term of a SLGS security in a subscription and 
redeeming the security prior to maturity in response to a fall in 
interest rates occurring between the subscription and issuance dates. 
For instance, if the Issuer subscribes for a shorter-term SLGS 
security, changes the subscription to a longer-term security, and 
submits an early redemption request on the day after the issue date in 
response to interest rate movements, an impermissible cost-free option 
has been created, unless Treasury grants the Issuer a waiver in 
accordance with Sec.  344.2(n). Increasing the minimum holding period 
before an Issuer may request early redemption will deter the creation 
of this type of impermissible cost-free option by increasing the 
interest rate risk to a more meaningful level than exists under current 
regulations. It is Treasury's view that even more than de minimis risk 
to the Issuer does not change the fact that this is still a cost-free 
option and, either with or without risk, this is an impermissible 
practice.
    Treasury does not believe that the proposed new holding period will 
impose undue hardship on Issuers that have a need for cash proceeds 
sooner than the maturity date that was chosen when the subscription was 
started. If new or intervening circumstances arise before issuance of 
the SLGS securities, the Issuer could take steps to change the 
subscription by adjusting the maturity to a shorter-term SLGS security. 
Additionally, if circumstances change after issuance of the SLGS 
securities, the Issuer may seek a waiver of the minimum holding period 
from Treasury as detailed in the regulations. The proposed new holding 
period would not apply to Time Deposit certificates of indebtedness or 
Demand Deposit securities, as these are short-term securities.

B. Establishing or Changing the Maturity and Interest Rate on SLGS 
Securities

    The second type of cost-free option identified in this NPRM is 
referred to as ``establishing or changing the maturity and associated 
interest rate on SLGS securities already subscribed for to take 
advantage of interest rate movements, either to capture redemption 
premiums or to minimize losses.'' To eliminate this cost-free option, 
Treasury proposes that the Issuer be required to specify the maturity 
of Time Deposit securities when a subscription is started and be 
limited in adjustments that can be made to the maturity of Time Deposit 
securities.
1. Specifying the Maturity of Time Deposit Securities
    Current regulations permit Issuers to subscribe for SLGS up to 60 
days in advance of issuance and until 3 p.m. Eastern Time on the day of 
issuance to specify the maturity for Time Deposit securities. This 
flexibility makes it possible for the Issuer to impermissibly create 
the cost-free option described in this NPRM as ``establishing or 
changing the maturity and associated interest rate on SLGS securities 
already subscribed for to take advantage of interest rate movements, 
either to capture redemption premiums or to minimize losses.''
    Treasury's research reveals that approximately 99 percent of SLGS 
subscriptions are started with a stated maturity date. Only a small 
percentage of subscriptions have had changes made by Issuers to the 
maturity dates of the securities following the start of a subscription. 
Given that the overwhelming majority of Issuers have identified the 
maturity date at the start of the SLGS subscription process, Treasury 
proposes that all Issuers must provide a maturity date at the start of 
a subscription, rather than by the time of completion of the 
subscription. Treasury proposes that when starting a Time Deposit 
security subscription under Sec.  344.5(b)(5) and completing a 
subscription under Sec.  344.5(e)(2), the Issuer must separately 
itemize the maturity date(s) by individual Time Deposit security. 
Issuers will have the ability to adjust the maturities, within certain 
parameters, if necessary.
2. Limiting Maturity Adjustments on Time Deposit Securities
    Additionally, Treasury proposes to limit Issuer adjustments to the 
maturity of a Time Deposit security before issuance. The current SLGS 
regulations permit the Issuer to make unrestricted changes to the 
maturity of a Time Deposit security and choose any term from 30 days to 
40 years (31 CFR 344.4(a)). This flexibility is an attractive feature 
of the SLGS program. However, when this flexibility results in the 
Issuer ``establishing or changing the maturity and associated interest 
rate on SLGS securities already subscribed for to take advantage of 
interest rate movements, either to capture redemption premiums or to 
minimize losses,'' an impermissible cost-free option is created.
    Proposed Sec.  344.5(d)(4), governing how to change a subscription, 
and Sec.  344.5(e)(7), governing when a subscription is completed, 
state that the Issuer cannot change the maturity date on a Time Deposit 
security by more than 30 days for certificates of indebtedness, 6 
months for notes, and 1 year for bonds. The proposed amendments retain 
flexibility in setting maturity of SLGS securities, while removing the 
ability to alter maturities beyond the time required to accomplish a 
governmental purpose.

C. Establishing or Changing the SLGS Subscription Amount

    The third type of cost-free option identified in this NPRM is 
referred to as ``establishing or changing the SLGS subscription amount 
in order to maximize redemption premiums or minimize potential 
losses.'' Treasury proposes to limit principal amount changes to Time 
Deposit securities at

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the individual security level to address this cost-free option.
1. Changing Principal Amounts on Time Deposit Securities
    Before 2005, the Issuer could change the aggregate principal amount 
specified in the initial subscription by up to $10 million or 10 
percent, whichever was greater. In a 2004 NPRM, Treasury proposed a 
size amendment provision to permit a change in the aggregate principal 
amount by 10 percent above or below the amount originally specified in 
the subscription. 69 FR 58756 (September 30, 2004). The provision was 
adopted in the 2005 final rule. 70 FR 37904 (June 30, 2005).
    The current regulation provides that the aggregate principal amount 
originally specified in the SLGS subscription cannot be changed by more 
than 10 percent. Because a single subscription may be used to purchase 
multiple Time Deposit securities with different principal and maturity 
terms, the current size provision at the aggregate subscription level 
is inadequate to address Treasury's concerns about the creation of 
cost-free options at the individual security level. Treasury proposes 
to limit the amount of principal that each Time Deposit security in a 
subscription can be changed. Proposed Sec.  344.5(d)(2) applies the 10 
percent limit at the individual SLGS security level instead of at the 
case level, which may be composed of multiple SLGS securities.
    Notwithstanding the above, even if a principal adjustment within 10 
percent of the original subscription amount of a particular Time 
Deposit security complies with proposed Sec.  344.5(d)(2), that 
adjustment would violate the current prohibition in Sec.  
344.2(f)(1)(i) if the change is motivated by interest rate movements. 
In that case, the Issuer would be creating a cost-free option by 
``establishing or changing the SLGS subscription amount in order to 
maximize redemption premiums or minimize potential losses.''
2. Changing Principal Amounts on Demand Deposit Securities
    Treasury does not propose to amend Sec.  344.8(d) pertaining to 
Demand Deposit securities. Demand Deposit securities will remain 
subject to the current rule that the aggregate principal amount may not 
be changed by more than 10 percent above or below the amount originally 
specified in the subscription.

III. Administrative Changes

    On October 7, 2012, the Secretary of the Treasury issued Treasury 
Order 136-01, establishing within the Department of the Treasury, the 
Bureau of the Fiscal Service (Fiscal Service). The new bureau 
consolidated the bureaus formerly known as the Financial Management 
Service (FMS) and the Bureau of the Public Debt (BPD). 78 FR 31629 (May 
24, 2013).
    On October 2, 2013, Treasury published a final rule entitled 
``Regulatory Reorganization; Administrative Changes to Regulations Due 
to the Consolidation of the Financial Management Service and the Bureau 
of the Public Debt Into the Bureau of the Fiscal Service.'' This final 
rule renamed subchapter A, transferred parts 306 through 391 of 
subchapter B to subchapter A, and removed and reserved subchapter B in 
31 CFR chapter II. This had the effect of moving the SLGS regulations 
from subchapter B to subchapter A; removing all references to ``Bureau 
of the Public Debt'' and adding, in their place, ``Bureau of the Fiscal 
Service''; removing all references to ``BPD'' and ``Public Debt'' and 
adding, in their place, ``Fiscal Service''; and, removing all 
references to ``www.publicdebt.treas.gov'' and adding, in each place, 
``www.fiscal.treasury.gov'', but did not make any corresponding changes 
to the current requirements of the SLGS regulations. 78 FR 60695 
(October 2, 2013).
    This NPRM makes other minor administrative or technical changes. 
See, e.g., proposed Sec. Sec.  344.0(a), 344.1, 344.2(d), (e)(2)(i), 
(e)(4), (f)(2)(iv), (f)(2)(v), (g), 344.3(e), 344.4(b)(1), 344.5(a)-
(b), (d)-(f), 344.6(a)(3), (g), 344.7(b)(1)-(2), 344.8(a)-(b), (e), and 
344.9(a). Some of these changes are noted below.

A. Purpose of the SLGS Program

    Previously Sec.  344.0(a) provided that SLGS securities may be 
issued to assist Issuers in complying with the yield restriction and 
rebate requirements applicable to tax-exempt securities under the 
Internal Revenue Code (26 U.S.C. 148). Treasury issued a final rule in 
2005 deleting the language relating to amounts that ``assist in 
complying with applicable provisions of the Internal Revenue Code 
relating to the tax exemption'' stating that this language was somewhat 
vague and proved too difficult to administer. 70 FR 37904, 37909, June 
30, 2005. This deletion has had the unintended consequence of confusing 
some Issuers about the purpose of the SLGS program. Treasury proposes 
to amend Sec.  344.0(a) by reinserting language that the purpose of the 
SLGS program is ``to assist in complying with applicable provisions of 
the Internal Revenue Code.''

B. Definitions Updates.

    The 2005 final rule amended the regulations to require 
certifications under Sec.  344.2(e)(2)(A) if Issuers purchase SLGS 
securities with any amount received from the sale or redemption before 
maturity of any marketable security, that the yield on such SLGS 
security does not exceed the yield at which such marketable security 
was sold or redeemed. The preamble of the 2005 final rule explained 
that ``marketable securities'' was a broader category than Treasury 
securities and could include ``marketable securities that have a lower 
credit rating than Treasury securities.'' 70 FR 37904, 37906 (June 30, 
2005).
    Since 2005, the SLGS Frequently Asked Questions have explained that 
a ``marketable security'' is ``any security other than a State or Local 
Government Series (SLGS) security. Examples of marketable securities 
include Treasury securities (other than SLGS securities), guaranteed 
investment contracts, and federal agency securities.'' https://www.slgs.gov. While this definition may appear broad, given that owners 
of SLGS securities are generally restricted in the types of investments 
they may purchase with tax-advantaged bond proceeds, this definition 
has served to clarify how the term ``marketable security'' is used in 
the context of the SLGS regulations.
    Treasury proposes adding a definition of ``marketable security'' 
under Sec.  344.1 that closely aligns with the example in the SLGS 
Frequently Asked Questions. The proposed definition states, 
``Marketable security, with reference to the types of securities that 
issuers of tax-advantaged securities are permitted to purchase with 
tax-advantaged proceeds, means any security other than a SLGS security. 
Examples of marketable securities include Treasury securities (other 
than SLGS securities) and federal agency securities.'' Treasury is not 
incorporating ``guaranteed investment contracts'' within the proposed 
definition of ``marketable security.'' This change is not because 
Treasury intends to allow guaranteed investment contracts to be used to 
create cost-free options, but is meant to keep the definition of 
``marketable security'' more in line with industry use. For the 
avoidance of doubt, Treasury affirms that the use of guaranteed 
investment contracts, any other nonmarketable security, or any other 
means to create a cost-free option, is prohibited. The definition would 
apply throughout the rule whenever the term ``marketable security'' is 
used.

[[Page 59358]]

    Additionally, Treasury proposes adding a new definition of ``cost-
free option'' under Sec.  344.1 that states that the use of any 
provision(s) in the SLGS program to exploit movements in interest 
rates, including, but not limited to, those designed to provide 
marginal flexibility to Issuers in structuring their SLGS investments 
constitutes the creation of an impermissible cost-free option. Treasury 
has intentionally drafted the definition of cost-free option broadly to 
encompass all situations in which exploitation of the movement in 
interest rates is an impermissible practice.
    Treasury further proposes adding a new definition of ``governmental 
purpose'' under Sec.  344.1 that clarifies that using the SLGS program 
to create cost-free options is not a permitted governmental purpose. A 
permitted governmental purpose includes but is not limited to financing 
a construction project, repaying a prior issue of bonds, or funding a 
debt service reserve. The governmental purpose must be consistent with 
the purposes of the Income Tax Regulations under section 148 of the 
Internal Revenue Code.
    Treasury also proposes adding a new definition of ``tax-advantaged 
bond'' under Sec.  344.1 that corresponds with the definition of the 
types of bonds to which the relevant portions of the Internal Revenue 
Code and the Income Tax Regulations (generally 26 U.S.C. 148 and 26 CFR 
1.148-0 through 1.148-11) apply. The Internal Revenue Code is dynamic 
and new types tax-advantaged bonds have been created and could be 
created in the future. The definition of ``tax-advantaged bond'' 
includes (i) a tax-exempt bond, (ii) a taxable bond that provides a 
federal tax credit to the investor with respect to the Issuer's 
borrowing costs, (iii) a taxable bond that provides a refundable 
federal tax credit payable directly to the Issuer for its borrowing 
cost, and (iv) any future similar bond that provides a federal tax 
benefit that reduces an Issuers' borrowing cost. (26 CFR 1.150-1(b)).
    Treasury proposes amending the definition of ``business day'' under 
Sec.  344.1 to clarify which days normal processing of SLGS securities 
transactions will occur. Section 6103 of Title 5 of the United States 
Code sets forth which days are considered ``legal public holidays.'' 
Generally, federal agencies are closed for business on legal public 
holidays and such holidays are non-workdays for federal employees. 
However, while federal agencies may be closed on such days, the Federal 
Reserve Bank of New York may still be open and conducting payment 
transactions. Because payment transactions are still possible, even 
though the Bureau of the Fiscal Service may be closed for most 
transactions, scheduled payments for SLGS securities still occur those 
days when the Federal Reserve Bank of New York is open. The revision to 
the definition of ``business day'' clarifies when normal SLGS 
transactions may occur and payments will be processed.
    Finally, Treasury proposes amending the definition of ``eligible 
source of funds'' under Sec.  344.1 to better align with the relevant 
portions of the Internal Revenue Code and the Income Tax Regulations. 
New types of tax-advantaged bonds have been and can be added to the 
Internal Revenue Code. Treasury is amending the definition of 
``eligible source of funds'' to include proceeds of all types of tax-
advantaged bonds as defined in 26 CFR 1.150-1(b), including those 
created after the date of any SLGS final rule.

C. Certification of Eligibility To Purchase

    Given that the purpose of the SLGS program is to assist Issuers in 
complying with the yield restriction and rebate requirements applicable 
to tax-advantaged securities under the Internal Revenue Code, Treasury 
views it prudent to provide for what are currently rare situations when 
bonds lose their tax-advantaged status. In such cases, the proceeds 
used by the Issuer to purchase SLGS may no longer be considered an 
``eligible source of funds.''
    Treasury proposes a new Sec.  344.2(e)(4) that would add an Issuer 
certification as to its eligibility to purchase SLGS securities. Under 
this new section, the Issuer would certify that it will notify Treasury 
if the funds used to purchase SLGS securities were no longer considered 
``an eligible source of funds.'' The notification requirement would 
apply to all outstanding SLGS securities (e.g., Time Deposit, Demand 
Deposit, and special 90-day certificates of indebtedness). Treasury 
would deem the notification as a request to redeem those outstanding 
Demand Deposit securities that are affected by the ineligibility under 
Sec.  344.9, as amended. The Issuer would not be required to redeem 
Time Deposit securities that are outstanding at the time of the 
notification because Time Deposit securities are longer-term securities 
that would have been purchased with an eligible source of funds. 
Special 90-day certificates of indebtedness containing funds that are 
no longer considered ``an eligible source of funds'' would be redeemed 
either upon maturity (i.e., would not be rolled into a new special 90-
day certificate of indebtedness) or upon reversion to Demand Deposit 
securities.

D. SLGS Rate Table

    Under the current regulation, Sec.  344.4(b)(1), if the SLGS rate 
table is not released to the public by 10 a.m. Eastern Time on a 
particular business day, then the SLGS rate table for the preceding 
business day applies. Treasury proposes amending Sec.  344.4(b)(1) to 
state that Treasury will post the SLGS rate table ``by 10 a.m. Eastern 
Time each business day or as soon as practicable thereafter.'' Under 
this proposed amendment, Treasury would have more flexibility in those 
instances where the SLGS rate table could not be released to the public 
by 10 a.m. Eastern Time. However, if no SLGS rate table has been 
published by 11 a.m. Eastern Time, then the SLGS rate table for the 
preceding business day would apply. This provides Issuers with more 
accurate pricing when there is a slight delay in publishing the SLGS 
rate table, while carrying over the previous day's rate if 
circumstances prevent publication of a new SLGS rate table.

E. Establishment of the Issue Date

    Under the current rule in Sec.  344.5(a) and Sec.  344.8(a), the 
issue date for Time Deposit and Demand Deposit securities cannot be 
more than 60 calendar days after the date Treasury receives the 
subscription. Our data analysis reveals that less than 4 percent of 
SLGS subscriptions are started more than 45 days in advance of the 
issue date. Treasury proposes to amend these provisions to reduce the 
lead time for an Issuer to subscribe for SLGS securities from 60 to 45 
calendar days. The subscription date controls which SLGS rate table 
applies to the subscription for securities. Moving the subscription 
date closer to the issue date would provide more accurate pricing for 
SLGS securities. Additionally, this proposed amendment has the added 
benefit of narrowing the window of time in which an impermissible cost-
free option could be created. Conforming amendments would also be made 
to Sec.  344.2(f)(2)(iv).

F. Subscription Process

    The current regulation specifies the information the Issuer must 
provide to start and complete the subscription process for both Time 
Deposit and Demand Deposit securities. The current rule in Sec.  344.5 
and Sec.  344.8 specifies the information that the Issuer must provide 
when starting the SLGS subscription process (Sec.  344.5(b) and Sec.  
344.8(b)), how the Issuer may change a subscription (Sec.  344.5(d) and 
Sec.  344.8(d)), and how the

[[Page 59359]]

Issuer completes the subscription (Sec.  344.5(e) and Sec.  344.8(e)). 
To implement Treasury's proposed amendments discussed in Sections 
II(A)(1) (duration certification regarding matching the SLGS maturity 
to the governmental purpose), II(B)(1) (specifying the maturity of each 
Time Deposit security in the subscription), II(C) (changing the 
principal amounts), III(C) (eligibility certification), and III(G) 
(including the EMMA[supreg] registration in the SLGS case, discussed 
below), Treasury proposes amending Sec.  344.5 and Sec.  344.8 to 
include these requirements.
    Additionally, Treasury proposes amending Sec.  344.5 and Sec.  
344.8 to more specifically identify currently required information such 
as the Issuer's address and banking information, while removing the 
requirement to specify the ``title of an official authorized to 
purchase SLGS securities'' as the title is no longer needed. In 
addition, the reference to the ``proceeds that are derived, directly or 
indirectly, from the redemption before maturity of SLGS securities 
subscribed for on or before December 27, 1976,'' would be deleted as 
none of these securities remain outstanding.

G. Identification of the Tax-Advantaged Bond Issue

    Under the current rule in Sec.  344.5(b)(5) and Sec.  344.8(b)(5), 
the underlying tax-advantaged bond issue must be identified when the 
Issuer ``starts'' and ``completes'' the subscription for SLGS 
securities. The Issuer starts the subscription process by entering 
certain information in required data fields in SLGSafe, the secure 
internet site through which SLGS transactions are submitted. When 
starting a subscription, the Issuer typically enters information on the 
new or ``refunding bonds,'' and not the ``refunded bonds'' or the 
``prior issue'' being refinanced.
    This requirement has been in the current regulation since the 2005 
final rule required the Issuer to enter a description of the Issuer's 
tax-exempt bond issue such as ``Water and Sewer Revenue Bonds Series 
2004'' (70 FR 37904, 37907, June 30, 2005). Subsequently, the Municipal 
Securities Rulemaking Board (MSRB) launched its Electronic Municipal 
Market Access (EMMA[supreg]) system, and EMMA[supreg] has now become 
the official repository for municipal securities disclosures.
    Given that EMMA[supreg] generally contains information about state 
and local government bonds, Treasury proposes to amend the regulation 
to require that if a bond issue is registered in EMMA[supreg], the 
Issuer must adhere to the naming convention supplied in the ``issue 
description'' field on the ``Security Information'' tab in EMMA[supreg] 
at https://emma.msrb.org when describing the tax-advantaged bond in 
SLGSafe. If the EMMA[supreg] website revises its naming convention, the 
Issuer would supply the updated registration as it is presented in 
EMMA[supreg], or its successor system.
    The Issuer would be able to input the ``EMMA[supreg] registration'' 
into SLGSafe at the time the subscription is started (Sec.  344.5(b)(4) 
and Sec.  344.8(b)(4)), but that information would not be required 
until such time as the subscription is completed (Sec.  344.5(e)(3) and 
Sec.  344.8(e)(2)). This would allow additional time for the Issuer to 
update the description field if the bond issue has not yet been 
registered with EMMA[supreg] when the subscription is started. 
Conforming the underlying bond issuance field in SLGSafe with the 
EMMA[supreg]'s naming convention would assist Treasury in determining 
if the amounts are an ``eligible source of funds'' under Sec.  344.1 
that may be used to purchase SLGS securities.

H. Special Zero Interest Securities and Subscriptions on or Before 
December 27, 1976

    Special zero interest securities were discontinued by Treasury on 
October 28, 1996. Therefore, Treasury proposes removing Subpart D of 
the current rule. In addition, all outstanding SLGS securities issued 
on or before December 27, 1976, matured by November 1, 2013. Therefore, 
Treasury proposes removing Sec.  344.5(e)(4) and Sec.  344.6(g) of the 
current rule.

I. Debt Limit Contingency

    1. Treasury's Discretion to Leave Demand Deposit Securities 
Invested or to Invest in Special 90-day Certificates of Indebtedness. 
The current regulation states that at any time the Secretary determines 
that issuance of obligations sufficient to conduct the orderly 
financing operations of the United States cannot be made without 
exceeding the statutory debt limit, Treasury must invest any unredeemed 
Demand Deposit securities in special 90-day certificates of 
indebtedness. Treasury proposes to amend Sec.  344.7(b) to provide the 
Secretary with the flexibility to exercise discretion to either leave 
the unredeemed Demand Deposit securities invested or to invest them in 
special 90-day certificates of indebtedness.
    2. Terms Applying to Invested Demand Deposit Securities. Treasury 
proposes to clarify Sec.  344.7(b)(1) to provide that Demand Deposit 
securities during a debt limit contingency remain subject to the normal 
terms and conditions that apply to Demand Deposit securities.
    3. Terms Applying to Special 90-day Certificates of Indebtedness. 
Treasury proposes to clarify Sec.  344.7(b)(2) to provide that special 
90-day certificates of indebtedness that are issued during a debt limit 
contingency remain subject to the same redemption rules as Demand 
Deposit securities. Treasury would roll over special 90-day 
certificates of indebtedness, along with accrued interest, into new 
special 90-day certificates of indebtedness when a debt limit 
contingency period lasts longer than 90 days.
    4. End of a Debt Limit Contingency. At the end of a debt limit 
contingency, the Issuer currently has the option to keep the special 
90-day certificates of indebtedness until maturity, redeem them before 
maturity, or reinvest them in Demand Deposit securities. Treasury 
proposes to amend Sec.  344.7(b)(2) to provide that when regular 
Treasury borrowing operations resume, Treasury would redeem any special 
90-day certificates of indebtedness and reinvest the proceeds, along 
with accrued interest, in Demand Deposit securities. As a result, the 
Issuer would once again hold the investment that the Issuer originally 
requested.

J. Notice Period for Redemption of Demand Deposit Securities

    The current regulation Sec.  344.9(a) requires notice of 1 business 
day for redemption of Demand Deposit securities in the amount of $10 
million or less and notice of 3 business days for redemptions of more 
than $10 million. To aid in Treasury's cash forecasting and cash 
management, Treasury proposes amending Sec.  344.9(a) to require notice 
of 5 business days for redemption of Demand Deposit securities and 
special 90-day certificates of indebtedness in the principal amount of 
$500 million or more. Some Issuers hold numerous securities in multiple 
SLGSafe cases. To determine which notice period applies, the Issuer 
would calculate the total amount of proceeds to be derived from 
redemption of Demand Deposit securities and special 90-day certificates 
of indebtedness at the ``owner,'' and not the ``case,'' level.

IV. Procedural Requirements

A. Executive Order 12866

    This NPRM is not a significant regulatory action as defined in 
Executive Order 12866, dated September 30, 1993. Therefore, a 
regulatory assessment of anticipated

[[Page 59360]]

benefits, costs, and regulatory alternatives is not required.

B. Administrative Procedure Act (APA)

    Because this NPRM relates to United States securities, which are 
contracts between Treasury and the owner of the security, this rule 
falls within the contract exception to the Administrative Procedure Act 
(APA), 5 U.S.C. 553(a)(2). As a result, the notice, public comment, and 
delayed effective date provisions of the APA are inapplicable to this 
rule. However, although not required under the APA, Treasury is seeking 
public comment on this NPRM.

C. Regulatory Flexibility Act

    Although this NPRM is being issued in proposed form to secure the 
benefit of public comment, it relates to matters of public contract and 
procedures for United States securities. Because a NPRM is not 
required, the provisions of the Regulatory Flexibility Act, 5 U.S.C. 
601 et seq., do not apply. However, Treasury will consider the 
potential impact of this proposed rule on small entities and will 
evaluate any proposed alternatives that would allow Treasury to 
accomplish the objectives of this proposed rule without unduly 
burdening small entities by imposing a significant economic impact on 
them. Therefore, Treasury will accept comments pertaining to the 
potential impact and proposed alternatives during the comment period.

D. Paperwork Reduction Act

    The provisions of the Paperwork Reduction Act, 44 U.S.C. 3501 et 
seq., and its implementing regulations, 5 CFR part 1320, do not apply 
to this NPRM because there are no new or revised recordkeeping or 
reporting requirements. The existing OMB Paperwork Reduction Act 
control numbers for Part 344 are 1530-0044 and 1530-0065.

V. Proposed Regulations

List of Subjects in 31 CFR Part 344

    Bonds, Government securities, Reporting and recordkeeping 
requirements.

    Accordingly, for the reasons set forth in the preamble, Treasury 
proposes to amend 31 CFR part 344 as follows:

PART 344--U.S. TREASURY SECURITIES--STATE AND LOCAL GOVERNMENT 
SERIES.

0
1. The authority citation for part 344 continues to read as follows:

    Authority: 26 U.S.C. 141 note; 31 U.S.C. 3102, 3103, 3104, and 
3121.

0
2. Amend Sec.  344.0, by revising paragraph (a) and removing paragraph 
(b)(3).
    The revisions read as follows:


Sec.  344.0  What does this part cover?

    (a) What is the purpose of the SLGS securities offering? The 
Secretary of the Treasury (the Secretary) offers for sale non-
marketable State and Local Government Series (SLGS) securities to 
provide issuers of tax-advantaged bonds with investments from any 
eligible source of funds (as defined in Sec.  344.1) to assist issuers 
in complying with applicable provisions of the Internal Revenue Code.
* * * * *
0
3. Amend Sec.  344.1, by:
0
a. Revising the definition of ``Business day(s)'';
0
b. Adding in alphabetical order a definition for ``Cost-free option'';
0
c. Revising the definition of ``Eligible source of funds'';
0
d. Adding in alphabetical order a definition for ``Governmental 
purpose'';
0
e. Revising the definition of ``Issuer'';
0
f. Adding in alphabetical order definitions for ``Marketable 
security''; and ``Tax-advantaged bond.''
    The revisions and additions read as follows:


Sec.  344.1  What special terms do I need to know to understand this 
part?

* * * * *
    Business day(s) means any day other than a Saturday or Sunday that 
the Federal Reserve Bank of New York is open for business.
    Cost-free option means the use of any provision(s) in the SLGS 
program to exploit movements in interest rates, including, but not 
limited to, those designed to provide marginal flexibility to issuers 
in structuring their SLGS investments.
* * * * *
    Eligible source of funds means:
    (1) Any amounts that are gross proceeds of an issue of tax-
advantaged bonds or are reasonably expected to become gross proceeds of 
such an issue of tax-advantaged bonds;
    (2) Any amounts that formerly were gross proceeds of a tax-
advantaged bond issue, but no longer are treated as gross proceeds of 
such issue as a result of the operation of the universal cap on the 
maximum amount treated as gross proceeds under 26 CFR 1.148-6(b)(2);
    (3) Amounts held or to be held together with gross proceeds of one 
or more tax-advantaged bond issues in a refunding escrow, defeasance 
escrow, parity debt service reserve fund, or commingled fund (as 
defined in 26 CFR 1.148-1(b));
    (4) Proceeds of a bond issue that is not an issue of tax-advantaged 
bonds but that refunds, or is refunded by, an issue of tax-advantaged 
bonds; or
    (5) Any other amounts that are subject to yield limitations under 
the rules applicable to tax-advantaged bonds under the Internal Revenue 
Code.
    Governmental purpose, under this part, means the issuer's expected 
use of the invested funds, including but not limited to, financing a 
construction project, repaying a prior issue of bonds, or funding a 
debt service reserve. Such use must be consistent with the purposes of 
the Income Tax Regulations under section 148 of the Internal Revenue 
Code. Generating gain on the proceeds of a bond issue through the use 
of a cost-free option in purchasing and redeeming SLGS is not a 
permitted governmental purpose.
    Issuer refers to the government body or other entity that issues 
tax-advantaged bonds, or to a conduit borrower.
    Marketable security, with reference to the types of securities that 
issuers are permitted to purchase with an eligible source of funds, 
means any security other than a SLGS security. Examples of marketable 
securities include Treasury securities (other than SLGS securities) and 
federal agency securities.
* * * * *
    Tax-advantaged bond means tax-advantaged bond as defined in 26 CFR 
1.150-1(b).
* * * * *
0
4. Amend Sec.  344.2 by:
0
a. Revising paragraph (d) and paragraph (e)(2)(i) introductory text;
0
b. Adding paragraphs (e)(3) and (e)(4);
0
c. Revising paragraph (f)(1), the second sentence of paragraph 
(f)(2)(iv), and the first sentence of paragraph (f)(2)(v);
0
d. Adding paragraph (f)(2)(vii);and
0
e. Revising the last sentence of paragraph (g).
    The revisions and additions read as follows:


Sec.  344.2  What general provisions apply to SLGS securities?

* * * * *
    (d) Can SLGS securities be transferred? No. SLGS securities issued 
as any one type, i.e., Time Deposit or Demand Deposit, cannot be 
transferred for other securities of that type or any other type. 
Transfer of securities by sale, exchange, assignment, pledge, or 
otherwise is not permitted.
    (e) * * *
    (2) * * *
    (i) Purchase of SLGS securities. Upon submitting a subscription, or 
performing

[[Page 59361]]

any other transaction for a SLGS security, a subscriber must certify 
that:
* * * * *
    (3) Duration certification. For each subscription to purchase a 
Time Deposit SLGS security, the subscriber must certify that the term 
of the SLGS security subscribed for is no longer than reasonably 
necessary for the underlying governmental purpose of the investment.
    (4) Eligibility certification. For each subscription to purchase a 
SLGS security, the subscriber must certify that if, at any point while 
SLGS securities are outstanding, the issuer becomes ineligible to 
purchase SLGS securities or the funds used to purchase SLGS securities 
are no longer an eligible source of funds, the issuer or agent thereof 
must, as soon as practicable, notify Treasury of such ineligibility. 
Such notification will be deemed to be a request for redemption of 
those outstanding Demand Deposit securities that are affected by the 
ineligibility.
    (f) * * *
    (1)Impermissible Transactions:
    (i) To use the SLGS program to create a cost-free option (while the 
following examples may specifically use marketable securities for 
illustration, creating a cost-free option via any means is prohibited);
    (ii) To purchase a SLGS security with any amount received from the 
sale or redemption (at the option of the holder) before maturity of any 
marketable security, if the yield on such SLGS security exceeds the 
yield at which such marketable security is sold or redeemed;
    (iii) To invest any amount received from the redemption before 
maturity of a Time Deposit security (other than a Zero Percent Time 
Deposit security) at a yield that exceeds the yield that is used to 
determine the amount of redemption proceeds for such Time Deposit 
security; or
    (iv) To purchase a SLGS security with a maturity that is longer 
than is reasonably necessary to accomplish the issuer's governmental 
purpose for its purchase of the SLGS security or to purchase a SLGS 
security with an intention to redeem such SLGS security earlier than is 
reasonably necessary to accomplish the issuer's governmental purpose 
for its purchase of the SLGS security.
    (2) * * *
    (iv) * * * To reduce or eliminate this negative arbitrage, the 
issuer subscribes for SLGS securities for purchase in 45 days. * * *
    (v) * * * On February 6, 2006, an issuer purchases a Time Deposit 
security using an eligible source of funds from a debt service reserve 
fund. * * *
* * * * *
    (vii) Purchase of SLGS security with maturity longer than 
reasonably necessary. An issuer may purchase SLGS securities to 
facilitate compliance with arbitrage yield restrictions for investments 
of various types of proceeds of tax[hyphen]advantaged bonds, including 
investments in refunding escrow funds, bond debt service reserve funds, 
or project construction funds, respectively. The determination of 
whether a maturity for a SLGS security is longer than is reasonably 
necessary depends on the issuer's governmental purpose for the 
issuance. Thus, the maturities of SLGS securities invested in a 
refunding escrow fund are reasonably necessary if they are no longer 
than those necessary to accomplish the defeasance of the underlying 
refunded bonds until the applicable redemption date or retirement date 
of the refunded bonds. Maturities of SLGS securities invested in a 
project construction fund are reasonably necessary if they are no 
longer than the reasonably expected construction period for the 
financed project, and early redemptions of such securities are 
reasonably necessary if they are reasonably related to construction 
draws for the financed project. Maturities of SLGS securities invested 
in a debt service reserve fund are reasonably necessary if they are no 
longer than the earlier of the permitted term of investments in that 
reserve fund under the bond documents or the term of the secured bonds. 
Early redemptions of SLGS securities with reasonably necessary 
maturities are permissible for the above bona fide business reasons, 
including changes in market interest rates. By contrast, the purchase 
of SLGS securities with maturities that are longer than the reasonably 
necessary maturities described above and associated early redemptions 
of those SLGS securities to obtain the funds within periods that would 
correspond to an issuer's bona fide governmental purpose for a SLGS 
investment constitute impermissible practices under paragraph 
(f)(1)(iv). Thus, for example, if an issuer purchases SLGS securities 
to fund a refunding escrow to be used to defease and call refunded 
bonds at the first call date in five years, the issuer's purchase of 
SLGS securities with maturities beyond that five-year period and 
corresponding early redemptions of those SLGS securities within that 
five[hyphen]year period constitute an impermissible use of the SLGS 
program.
    (g) * * * Fiscal Service's ABA Routing Number can be found on 
Fiscal Service's website under the SLGS FAQs.
* * * * *
0
5. Amend Sec.  344.3 by revising paragraph (e) to read as follows:


Sec.  344.3  What provisions apply to the SLGSafe Service?

* * * * *
    (e) How do I apply for SLGSafe access? Submit to Fiscal Service a 
completed SLGSafe Application for internet Access, which is found on 
Fiscal Service's website.
* * * * *
0
6. Amend Sec.  344.4 by revising paragraph (b)(1) to read as follows:


Sec.  344.4  What are Time Deposit securities?

* * * * *
    (b) * * *
    (1) When is the SLGS rate table released? We release the SLGS rate 
table to the public by 10 a.m. Eastern time each business day or as 
soon as practicable thereafter. If the SLGS rate table is not available 
by 11 a.m. Eastern time on any given business day, the SLGS rate table 
for the preceding business day applies.
* * * * *
0
7. Amend Sec.  344.5 by revising paragraphs (a), (b), (d), (e), and 
(f), to read as follows:


Sec.  344.5  What other provisions apply to subscriptions for Time 
Deposit securities?

    (a) When is my subscription due? The subscriber must set the issue 
date for the securities in the subscription. The issue date must be a 
business day. The issue date cannot be more than 45 days after the date 
we receive the subscription. If the subscription is for $10 million or 
less, we must receive a subscription at least 5 days before the issue 
date. If the subscription is for over $10 million, we must receive the 
subscription at least 7 days before the issue date.
    Example 1 to paragraph (a): If SLGS securities totaling $10 million 
or less will be issued on May 16th, we must receive the subscription no 
later than May 11th. If SLGS securities totaling more than $10 million 
will be issued on May 16th, we must receive the subscription no later 
than May 9th. In all cases, if SLGS securities will be issued on May 
16th, we will not accept the subscription before April 1st.
    (b) How do I start the subscription process? A subscriber starts 
the subscription process by entering into SLGSafe the following 
information:
    (1) The issue date;
    (2) The total principal amount;
    (3) The issuer's name and Taxpayer Identification Number;

[[Page 59362]]

    (4) A description of the tax-advantaged bond issue;
    (5) Separately itemized securities to be purchased, specifying 
principal amount, maturity date, interest rate, and first interest 
payment date (in the case of notes and bonds) for each; and
    (6) The certifications required by Sec.  344.2(e).
* * * * *
    (d) How do I change a subscription? You can change a subscription 
on or before 3 p.m. Eastern time, on the issue date. Changes to a 
subscription are acceptable with the following exceptions:
    (1) You cannot change the issue date; provided, however, you may 
change the issue date up to 7 days after the original issue date if you 
establish to the satisfaction of Treasury that such change is required 
as a result of circumstances that were unforeseen at the time of the 
subscription and are beyond the issuer's control (for example, a 
natural disaster);
    (2) You cannot change the principal amount originally specified for 
any security in the subscription by more than ten percent;
    (3) You cannot change an interest rate to exceed the maximum 
interest rate in the SLGS rate table that was in effect for a security 
of comparable maturity on the business day that you began the 
subscription process; and
    (4) You cannot change the maturity date originally specified for 
any security in the subscription by more than 30 days for certificates 
of indebtedness, 6 months for notes, and 1 year for bonds.
    (e) How do I complete the subscription process? The completed 
subscription must:
    (1) Be dated and submitted electronically by an official authorized 
to make the purchase;
    (2) Separately itemize securities specifying principal amount, 
maturity date, interest rate, and first interest payment date (in the 
case of notes and bonds) for each;
    (3) Describe the bond issue. If the tax-advantaged bond issue 
referenced in paragraph (b)(4) of this section is, or will be, 
registered or disclosed in the Municipal Securities Rulemaking Board's 
(MSRB) Electronic Municipal Market Access (EMMA[supreg]) system, 
describe the issue exactly as designated in the ``issue description'' 
field of EMMA[supreg], or successor system;
    (4) Include the issuer's address;
    (5) Include information on the financial institution that will 
transmit the funds for the purchase of the securities and information 
on the financial institution that will receive security principal and 
interest payments;
    (6) Not be more than ten percent above or below the aggregate 
principal amount originally specified in the subscription and not be 
more than ten percent above or below the originally subscribed for 
amount for each individual security;
    (7) Not deviate from the original subscribed for maturity date 
specified for any security in the subscription by more than 30 days for 
certificates of indebtedness, 6 months for notes, and 1 year for bonds;
    (8) Include the information required under paragraph (b) of this 
section, if not already provided; and
    (9) Include the certifications required by Sec.  344.2(e).
    (f) When must I complete the subscription? We must receive a 
completed subscription on or before 3 p.m. Eastern time on the issue 
date.
0
8. Amend Sec.  344.6 by revising paragraph (a)(3); and removing 
paragraph (g).
    The revision reads as follows:


Sec.  344.6  How do I redeem a Time Deposit security before maturity?

    (a) * * *
    (3) Notes or bonds. A note or bond can be redeemed, at the owner's 
option, no earlier than 30 days after the issue date. Any request for 
redemption received within 14 days of the issue date will be rejected.
* * * * *
0
9. Amend Sec.  344.7 by revising paragraph (b) to read as follows:


Sec.  344.7  What are Demand Deposit securities?

* * * * *
    (b) What happens to Demand Deposit securities during a Debt Limit 
Contingency? At any time the Secretary determines that issuance of 
obligations sufficient to conduct the orderly financing operations of 
the United States cannot be made without exceeding the statutory debt 
limit, we may invest any unredeemed Demand Deposit securities in 
special 90-day certificates of indebtedness.
    (1) Funds left invested in Demand Deposit securities remain subject 
to the normal terms and conditions for such securities as set forth in 
this part.
    (2) Funds invested in 90-day certificates of indebtedness earn 
simple interest equal to the daily factor in effect at the time Demand 
Deposit security issuance is suspended, multiplied by the number of 
days outstanding. Ninety-day certificates of indebtedness are subject 
to the same request for redemption notification requirements as those 
for Demand Deposit securities and will be redeemed at par value plus 
accrued interest. If a 90-day certificate of indebtedness reaches 
maturity during a debt limit contingency, we will automatically roll it 
into a new 90-day certificate of indebtedness, along with accrued 
interest, that earns simple interest equal to the daily factor in 
effect at the time that the new 90-day certificate of indebtedness is 
issued, multiplied by the number of days outstanding. When regular 
Treasury borrowing operations resume, the 90-day certificates of 
indebtedness, along with accrued interest, will be reinvested in Demand 
Deposit securities.
0
10. Amend Sec.  344.8 by revising paragraphs (a), (b), and (e) to read 
as follows:


Sec.  344.8  What other provisions apply to subscriptions for Demand 
Deposit securities?

    (a) When is my subscription due? The subscriber must set the issue 
date in the subscription. You cannot change the issue date to require 
issuance earlier or later than the issue date originally specified; 
provided, however, you may change the issue date up to 7 days after the 
original issue date if you establish to the satisfaction of Treasury 
that such change is required as a result of circumstances that were 
unforeseen at the time of the subscription and are beyond the issuer's 
control (for example, a natural disaster). The issue date must be a 
business day. The issue date cannot be more than 45 days after the date 
we receive the subscription. If the subscription is for $10 million or 
less, we must receive the subscription at least 5 days before the issue 
date. If the subscription is for more than $10 million, we must receive 
the subscription at least 7 days before the issue date.
    (b) How do I start the subscription process? A subscriber starts 
the subscription process by entering into SLGSafe the following 
information:
    (1) The issue date;
    (2) The total principal amount;
    (3) The issuer's name and Taxpayer Identification Number;
    (4) A description of the tax-advantaged bond issue; and
    (5) The certifications required by Sec.  344.2(e)(1), if the 
subscription is submitted by an agent of the issuer.
* * * * *
    (e) How do I complete the subscription process? The completed 
subscription must:
    (1) Be dated and submitted electronically by an official authorized 
to make the purchase;

[[Page 59363]]

    (2) Describe the bond issue. If the tax-advantaged bond issue 
referenced in paragraph (b)(4) of this section is, or will be, 
registered or disclosed in the Municipal Securities Rulemaking Board's 
(MSRB) Electronic Municipal Market Access (EMMA[supreg]) system, 
describe the issue exactly as designated in the ``issue description'' 
field of EMMA[supreg], or successor system;
    (3) Include the issuer's address;
    (4) Include the information on the financial institution that will 
transmit the funds for the purchase of the securities;
    (5) Not be more than ten percent above or below the aggregate 
principal amount originally specified in the subscription;
    (6) Include the information required under paragraph (b) of this 
section, if not already provided; and
    (7) Include the certifications required by Sec.  344.2(e)(1) (agent 
certification), Sec.  344.2(e)(2)(i) (yield certification), and Sec.  
344.2(e)(4) (eligibility certification).
0
11. Amend Sec.  344.9 by revising paragraph (a) to read as follows:


Sec.  344.9  How do I redeem a Demand Deposit security?

    (a) When must I notify Treasury to redeem a security? Demand 
Deposit securities can be redeemed at the owner's option, if we receive 
a request for redemption not less than:
    (1) One business day before the requested redemption date for total 
redemptions by an owner of $10 million or less;
    (2) Three business days before the requested redemption date for 
total redemptions by an owner of more than $10 million but less than 
$500 million; and
    (3) Five business days before the requested redemption date for 
total redemptions by an owner of $500 million or more.
* * * * *

Subpart D [Removed]

0
12. Remove Subpart D.

    By the Department of the Treasury.
David Lebryk,
Fiscal Assistant Secretary.
[FR Doc. 2022-21173 Filed 9-29-22; 8:45 am]
BILLING CODE 4810-AS-P