Vessel financing assistance: Deposit funds; establishment and administration,


[Federal Register: June 12, 2002 (Volume 67, Number 113)]

[Proposed Rules]

[Page 40260-40263]

From the Federal Register Online via GPO Access []



Maritime Administration

46 CFR Part 298

[Docket No. MARAD-2002-12425]

RIN 2133-AB47

Amendment of MARAD's Regulations Establishing and Administering Deposit Funds Authorized by Section 1109 of the Merchant Marine Act, 1936, as Amended

AGENCY: Maritime Administration, Transportation.

ACTION: Notice of Proposed Rulemaking (NPRM).

SUMMARY: Recent legislation modified the Merchant Marine Act, 1936, as amended, by adding a new Section 1109, which authorizes the Secretary of Transportation to hold funds from Title XI obligors as collateral by depositing them with the United States Treasury and investing them in Treasury obligations. As a consequence, these funds need no longer be deposited in private banks. This notice of proposed rulemaking proposes changes to existing procedures to simplify, reduce costs of, and expedite Title XI closings.

DATES: You should submit your comments early enough to ensure that Docket Management receives them not later than August 12, 2002.

ADDRESSES: Your comments should refer to docket number MARAD-2002- 12425. You may submit your comments in writing to: Docket Clerk, U.S. DOT Dockets, Room PL-401, 400 7th St., SW., Washington, DC 20590. You may also submit them electronically via the Internet at http:// submit/. You may call Docket Management at (202) 366- 9324 and visit the Docket Room from 10 a.m. to 5 p.m., E.T., Monday through Friday, except Federal Holidays. An electronic version of this document is available on the World Wide Web at

FOR FURTHER INFORMATION CONTACT: Mr. Richard M. Lorr, Assistant Chief Counsel for Ship Financing, at (202) 366-5882. You may send mail to Mr. Lorr at Maritime Administration, Office of Chief Counsel, Room 7221, 400 Seventh Street, SW., Washington, DC 20590. You may also e-mail Mr. Lorr at



How Do I Prepare and Submit Comments?

Your comments must be written and in English. To ensure that your comments are correctly filedin the Docket, please include the docket number of this document in your comments. We encourage you to write your primary comments in a concise fashion. However, you may attach necessary additional documents to your comments. There is no limit on the length of the attachments. Please submit two copies of your comments, including the attachments, to Docket Management at the address given above under ADDRESSES.

How Can I Be Sure That My Comments Were Received?

If you wish Docket Management to notify you upon its receipt of your comments, enclose a self-addressed, stamped postcard in the envelope containing your comments. Docket Management will return the postcard by mail.

How Do I Submit Confidential Business Information?

If you wish to submit any information under a claim of confidentiality, you should submit three copies of your complete submission, including the information you claim to be confidential business information, to the Chief Counsel, Maritime Administration, at

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the address given above under FOR FURTHER INFORMATION CONTACT. You should mark ``CONFIDENTIAL'' on each page of the original document that you would like to keep confidential. In addition, you should submit two copies, from which you have deleted the claimed confidential business information, to Docket Management at the address given above under ADDRESSES. When you send comments containing information claimed to be confidential business information, you should include a cover letter setting forth with specificity the basis for any such claim.

Will the Agency Consider Late Comments?

We will consider all comments that Docket Management receives before the close of business on the comment closing date indicated above under DATES. To the extent possible, we will also consider comments that Docket Management receives after that date.

How Can I Read the Comments Submitted by Other People?

You may read the comments received by Docket Management at the address given above under ADDRESSES. The hours of the Docket Room are indicated above in the same location. You may also see the comments on the Internet. To read the comments on the Internet, take the following steps: Go to the Docket Management System (DMS) Web page of the Department of Transportation ( On that page, click on ``search.'' On the next page (, type in the five-digit docket number shown at the beginning of this document. The docket number for this document is 12425. After typing the docket number, click on ``search.'' On the next page, which contains docket summary information for the docket you selected, click on the desired comments. You may download the comments. Please note that even after the comment closing date, we will continue to file relevant information in the Docket as it becomes available. Further, some people may submit late comments. Accordingly, we recommend that you periodically check the Docket for new material.


The Title XI Program is a loan guarantee program which was established under Title XI of the Merchant Marine Act, 1936, as amended (the ``Act''). The Secretary of Transportation (Secretary) acting by and through the Maritime Administrator administers the Title XI Program.

Title XI provides for the full faith and credit of the United States for the payment of debt obligations for: (1) U.S. or foreign shipowners for the purpose of financing or refinancing either U.S. flag vessels or eligible export vessels constructed, reconstructed, or reconditioned in U.S. shipyards and (2) U.S. shipyards for the purpose of financing advanced shipbuilding technology and modern shipbuilding technology of a privately owned general shipyard facility located in the U.S.

The guaranteed obligations (i.e., notes and bonds) are sold in the private sector. The main purchasers of the obligations include banks, pension funds, life insurance companies, and the general public.

In those instances where the Secretary guarantees obligations under Title XI and where the proceeds of the sale of the obligations are to be used for the construction, reconstruction, or reconditioning of a vessel or for a shipyard improvement, all such proceeds constitute security for the Secretary's risks in extending the guarantees, and are to be under the control of the Secretary as governed by applicable agreements between the Secretary and the Title XI debtor. In addition, the documentation of a Title XI transaction requires the Title XI debtor, under certain circumstances, to make deposits into the Title XI Reserve Fund as additional security for the Secretary.

Prior to the enactment of Section 1109, section 1108 authorized the Secretary to hold only a percentage of obligation proceeds in an escrow account (the ``Escrow Fund'') with the Treasury. The remaining percentage was deposited with a commercial bank in what has become to be known as the ``Construction Fund.'' In addition, the Secretary had no authority under the Act to accept or hold Title XI Reserve Fund deposits. Currently, such deposits, like the Construction Fund, are placed with and held by a commercial bank. The Depository Agreement among the Title XI debtor, the Secretary, and the commercial bank sets forth the terms and conditions under which the funds may be invested, withdrawn, or otherwise paid to the Secretary or the Title XI debtor. The Title XI debtor granted to the Secretary security interests in these accounts and their contents (the ``Collateral''), and provided the Secretary an opinion of counsel on the perfection and first priority of these security interests.

The Uniform Commercial Code (the ``UCC'') of the various states, for the most part, governs the perfection and priority of the Secretary's security interests in the Collateral. At its financial closings, MARAD's experience has been that, given the provisions of the UCC and especially the recent changes to the UCC, even the most knowledgeable of legal counsel have had difficulty drafting clean legal opinions about the perfection and enforceability of MARAD's security interest in the Collateral held by commercial depositories. As a result of these factors, opinions of counsel have, over time, become increasingly time consuming and costly. On the other hand, there has never been any question about the perfection and enforceability of MARAD's security interest in funds held in the Escrow Fund by the Treasury under MARAD's normal security agreements.

In an effort to ameliorate the situation and to streamline the Title XI closing process, the Secretary determined that an alternate means for holding and investing the proceeds of the obligations was necessary. Since the Escrow Fund was already in place, it seemed only logical to use it for not just a percentage of the proceeds, but for all the proceeds. Accordingly, the Secretary sought the enabling legislation, and section 1109 is the result. The Secretary believes this authority will reduce the cost of obtaining Title XI benefits by simplifying the opinions of counsel and eliminating the costs of engaging commercial banks to hold and invest the proceeds. In addition, it is anticipated that closing documentation will be reduced or simplified.

Section 1109 of the Merchant Marine Act, 1936, as amended (codified at 46 App. U.S.C. 1279b) provides:

Section 1279b. Deposit Fund

(a) Establishment of deposit fund. There is established in the Treasury a deposit fund for purposes of this section. The Secretary may, in accordance with an agreement under subsection (b), deposit into and hold in the deposit fund cash belonging to an obligor to serve as collateral for a guarantee under this title made with respect to the obligor.

(b) Agreement.

(1) In general. The Secretary and an obligor shall enter into a reserve fund or other collateral account agreement to govern the deposit, withdrawal, retention, use, and reinvestment of cash of the obligor held in the deposit fund established by subsection (a). (2) Terms. The agreement shall contain such terms and conditions as are required under this section and such additional terms as are considered by the Secretary to be necessary to protect fully the interests of the United States. (3) Security interest of

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United States. The agreement shall include terms that grant to the United States a security interest in all amounts deposited into the deposit fund. (c) Investment. The Secretary may invest and reinvest any part of the amounts in the deposit fund established by subsection (a) in obligations of the United States with such maturities as ensure that amounts in the deposit fund will be available as required for purposes of agreements under subsection (b). Cash balances of the deposit fund in excess of current requirements shall be maintained in a form of uninvested funds and the Secretary of the Treasury shall pay interest on these funds.

(d) Withdrawals.

(1) In general. The cash deposited into the deposit fund established by subsection (a) may not be withdrawn without the consent of the Secretary.

(2) Use of income. Subject to paragraph (3), the Secretary may pay any income earned on cash of an obligor deposited into the deposit fund in accordance with the terms of the agreement with the obligor under subsection (b).

(3) Retention against default. The Secretary may retain and offset any or all of the cash of an obligor in the deposit fund, and any income realized thereon, as part of the Secretary's recovery against the obligor in case of a default by the obligor on an obligation.

In accord with the new legislation, the Maritime Administration (MARAD, we, our, or us) proposes to amend our regulations at 46 CFR part 298 to authorize deposit of Reserve Funds, Construction Funds, and Escrow Funds in the U.S. Treasury.

Rulemaking Analyses and Notices

Executive Order 12866 and DOT Regulatory Policies and Procedures

We have reviewed this notice of proposed rulemaking (NPRM) under Executive Order 12866 and have determined that it is not a significant regulatory action under section 3(f). It is also not significant under DOT Regulatory Policies and Procedures (44 FR 11034; February 26, 1979). Due to the limited economic impact of this NPRM, no further analysis is necessary. These proposals are intended only to authorize deposit of Reserve Funds and Construction Funds in the U.S. Treasury. The intended effect is to encourage the construction of ships in U.S. shipyards both for the domestic and the Eligible Export Vessel programs and the modernization and improvement of U.S. general shipyard facilities by improving Title XI program administration.

Regulatory Flexibility Act

The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires MARAD to determine whether this NPRM will have a significant economic impact on a substantial number of small entities. Although a substantial number of Title XI applicants may meet the United States Small Business Administration's criteria for small entity, this NPRM will not have a significant economic impact because it merely proposes to authorize the deposit of Reserve Funds and Construction Funds into the U.S. Treasury. Section 1279b of 46 App. U.S.C. authorizes the deposit of these funds. Currently, obligors deposit these funds in private banks which charge depository fees. This proposal will eliminate depository fees. We do not believe that this NPRM will have a significant economic impact on a substantial number of small entities. We welcome specific comments regarding the economic impact of this proposal.

Executive Order 13132

We have analyzed this rulemaking in accordance with the principles and criteria contained in Executive Order 13132 (``Federalism'') and have determined that it does not have sufficient federalism implications to warrant the preparation of a federalism summary impact statement. The proposed regulations will have no substantial effects on the States, or on the current Federal-State relationship, or on the current distribution of power and responsibilities among the various local officials. Therefore, consultation with State and local officials was not necessary.

Executive Order 13175

We do not believe that the proposed regulations will significantly or uniquely affect the communities of Indian tribal governments when analyzed under the principles and criteria contained in Executive Order 13175 (``Consultation and Coordination with Indian Tribal Governments''). Therefore, the funding and consultation requirements of this Executive Order would not apply.

Paperwork Reduction Act

This rulemaking contains requirements that have been approved previously by the Office of Management and Budget (Approval No. 2133- 0018).

Unfunded Mandates Reform Act

This NPRM does not impose unfunded mandates under the Unfunded Mandates Reform Act of 1995. It does not result in costs of $100 million or more to either State, local, or tribal governments, in the aggregate, or to the private sector, and is the least burdensome alternative that achieves the objectives of the rule.

Regulation Identifier Number (RIN)

The Department of Transportation assigns a regulation identifier number (RIN) to each regulatory action listed in the Unified Agenda of Federal Regulations. The Regulatory Information Service Center publishes the Unified Agenda in April and October of each year. You may use the RIN contained in the heading of this document to cross- reference this action with the Unified Agenda.

List of Subjects in 46 CFR Part 298

Loan programs--transportation, Maritime carriers, Reporting and recordkeeping requirements. Accordingly, we propose to amend 46 CFR part 298 as follows:


  1. The authority citation for part 298 continues to read as follows:

    Authority: 46 App. U.S.C. 1114(b), 1271 et seq.; 49 CFR 1.66.

    Sec. 298.2 [Amended]

  2. In Sec. 298.2, the definition of Depository is amended by removing all words after ``Depository means'' and adding in their place ``the U.S. Department of Treasury, acting in its capacity under Section 1109 of the Act.''

  3. In Sec. 298.21 revise paragraph (f)(2) to read as follows:

    Sec. 298.21 Limits.

    * * * * *

    (f) * * *

    (2) As long as we have not paid the Guarantees, you or other recipient shall promptly deposit these moneys with us to be held by the Depository in accordance with the Depository Agreement. * * * * *

  4. In Sec. 298.22 revise paragraph (b)(2) to read as follows:

    Sec. 298.22 Amortization of Obligations.

    * * * * *

    (b) * * *

    (2) You establish a fund with the Depository in which you deposit an equal annual amount necessary to redeem the outstanding Obligations at maturity; or * * * * *

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    Sec. 298.33 [Amended]

  5. Section 298.33 is amended as follows:

    1. In paragraph (a), by removing the word ``us'' and adding the words ``the Depository'' in its place.

    2. By removing paragraph (b)(2)(i) and redesignating paragraphs (b)(2)(ii) through (iv) as paragraphs (b)(2)(i) through (iii).

  6. Section 298.35(d) introductory text is revised to read as follows:

    Sec. 298.35 Title XI Reserve Fund and Financial Agreement.

    * * * * *

    (d) Deposits. Unless the Company, as of the close of its accounting year, was subject to and in compliance with the financial requirements set forth in paragraph (b)(2) of this section, the Company shall make one or more deposits to us to be held by the Depository (the Title XI Reserve Fund), as further provided for in the Depository Agreement. The amount of deposit as to any year, or period less than a full year, where applicable, will be determined as follows: * * * * *

    Dated: June 7, 2002.

    By Order of the Maritime Administrator. Joel C. Richard, Secretary, Maritime Administration.

    [FR Doc. 02-14823Filed6-11-02; 8:45 am]

    BILLING CODE 4910-81-P