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Department of the Treasury
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FEB 0 1 2006
Treas.
HJ
10
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v.399
Department of the Treasury
PRESS RELEASES
JS-03 is missing
JS-41 and 42 appear to
be the same
OFFICE O F PUBLIC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. • WASHINGTON, D.C. • 20220 • (202) 622-2960
For Immediate Release
February 1, 2003
Contact: Tara Bradshaw
(202) 622-2014
PRESIDENT'S BUDGET STRENGTHENS IRS COMPLIANCE EFFORTS A N D
PROTECTS TAXPAYER RIGHTS
High Income Taxpayers to Receive Increased Scrutiny in Comprehensive Strategy
The President's budget strengthens the IRS' comprehensive efforts to improve compliance with
the tax laws to ensure that all taxpayers pay their fair share, while protecting taxpayer rights.
N e w funding and staffing resources will be focused toward the most significant areas of noncompliance. These n e w initiatives, along with other major efforts already underway, comprise a
comprehensive strategy to ensure the tax laws are administered fairly by helping taxpayers
understand and meet their tax responsibilities and by applying the tax law with integrity and
fairness to all.
There are three key proposals in the budget aimed at improving the fairness of tax administration
and compliance. The first proposal focuses resources on high-income taxpayers and businesses
in areas where noncompliance is likely to be greatest. The second proposal permits private
collection agencies to support the IRS 1 collection efforts while affording full protection of
taxpayer rights, allowing the IRS to devote resources to more complex enforcement and
collection issues. The third proposal strives to improve the effectiveness of thp Earned Income
Tax Credit (EITC) program by ensuring that benefits go to those w h o qualify for them.
"Americans' sense of fairness dictates that all taxpayers should pay their fair share," stated
Pamela Olson, Treasury Assistant Secretary for Tax Policy. "The President's budget for the IRS
will target the real problem areas in a fair and even-handed manner, restoring confidence in the
tax system for hard-working taxpayers. At the same time the IRS goes after those w h o cheat, the
IRS must provide better service to law-abiding taxpayers and respect every taxpayer's rights. It
can and it must do both."
Olson continued, "These new proposals are part of Treasury's comprehensive strategy to ensure
fair and effective enforcement of the tax laws. It includes stable funding for the IRS, refocusing
attention on the most serious compliance problems, aggressively combating abusive tax
avoidance transactions and schemes, better detecting n e w areas of non-compliance through
measures like the National Research Program, and simplifying the tax code."
KD-3821
Far press releases, speeches, public schedules and official biographies, call our 24-hourfax line at (202) 622-204
'U.S. Government Printing Office: 1998 - 619-559
Unlike certain other federal benefit payment programs administered outside the tax code, there is
currently little eligibility verification before E I T C payments are made. The high number of
erroneous claims are difficult to retrieve after the fact and require significant additional resources
to recover.
As a result, the FY 2004 Budget requests an additional $100 million to begin a new strategy for
improving the E I T C program. The IRS will begin to use an integrated approach to address
potential erroneous claims by identifying cases that have the highest likelihood of error before
they are accepted for processing and before any E I T C benefits are paid. A key part of this
strategy is to begin certifying taxpayers for the EITC. The IRS will seek to minimize the burdens
on taxpayers by using existing databases and other sources of information to verify eligibility in
advance.
This integrated approach is designed to provide far greater assurance that EITC payments go to
the individuals w h o qualify for the credit, without sacrificing the goals of the E I T C program.
IRS Funding
The President's FY 2004 Budget increases the total IRS budget by 5.25% to $10,437 billion.
-30-
For Immediate Release
February 3, 2003
Contact:
Betsy Holahan
202-622-2960
REMARKS OF
UNDER SECERETARY OF THE TREASURY
FOR DOMESTIC FINANCE PETER R. FISHER
TO THE BANKNOTE 2003 CONFERENCE
WASHINGTON, DC
FEBRUARY 2,2003
The Objective for U.S. Currency Design is Continuous Improvement
The overarching goal for U.S. currency design is to maintain confidence in our notes,
both at h o m e and abroad. T o achieve this goal, w e want to apply continuous downward
pressure on the penetration of counterfeit notes. Our strategy to do this is continuous
improvement: continuous improvement in design features and in aggressive law
enforcement.
A constraint that we face as we introduce these improvements is consumer acceptance.
W e must surmount the fact that our citizens here in the United States have been
accustomed to continuity in currency design over m a n y years and only recently have had
to adapt to changes in the physical appearance of our currency. However, w e are n o w
beginning a process of continuous cycles of design change so that, at a minimum,
significant changes will be introduced every seven or eight years. While this will require
extensive foreign and domestic marketing campaigns to educate consumers, banks and
law enforcement officials, continuous improvement is our most effective defense against
counterfeiting.
The design of our notes must help maintain confidence in U.S. currency as a stable and
accepted medium of exchange and store of value around the world. This goal demands
our attention because use of the dollar underpins our domestic economy and, due to its
widespread foreign use, the global economy as well. O f course, its use abroad offers
seignorage benefits to U.S. taxpayers.
We focus our efforts on the specific objective of continuous downward pressure
on counterfeiting. The cost of preventing counterfeiting is minor compared with the risk
of a loss of confidence in U.S. currency.
KD-3822
For press releases, speeches, public schedules and official biographies, call our 24-hourfax line at (202) 622-2040
•U.S. Government Printing Office 1998 - 619-559
Today's confidence in the currency rests on a legacy of success in suppressing
counterfeiting based on fixed design features. In 1928, the United States introduced a
currency design that lasted nearly seventy years. Its security was based on traditional
features such as high-quality distinctive rag paper and fine line intaglio printing. At its
start, the currency circulated almost exclusively within the borders of the United States.
Threats to its integrity originated almost exclusively within our borders. Effective law
and design enforcement kept counterfeiting at bay and customer acceptance high.
The currency environment changed and our strategy had to evolve as well. U.S.
dollars are n o w used globally, with 60 percent of circulating Federal Reserve notes held
abroad. While our customer base has grown worldwide, computer technology has
transformed the nature of methods used in counterfeiting.
In 1996, the United States introduced a major redesign of banknotes. These design
changes were needed to combat the emergence of color copiers and other emerging
technologies to replicate notes. The n e w design incorporated a number of security
features, and succeeded in raising the difficulty of producing a high quality counterfeit
note. But as the quality and sophistication of printers has since improved, so did the
quality of the counterfeited notes.
Our strategy today is continuous improvement: continuous design change, continuous
development of security features, and continuous cooperation with the digital imaging
industry, foreign banks, and law enforcement. Success will demand educating consumers
to k n o w and accept these changes. This is a particular challenge for domestic use,
because Americans are not yet used to a shifting currency.
One example of the fruits of cooperation is the recent digital counterfeit deterrence
system introduced by the Central Bank Counterfeit Deterrent Group. I applaud everyone
involved in this endeavor. Y o u are building a record of achievement in our cooperation
with central banks and the private sector. A s the word "continuous" implies, this success
is just the first step.
While so many people have helped us get this far, I would like, in particular, to thank and
recognize the efforts of T o m Ferguson, of the Bureau of Engraving and Printing, Marsha
Reidhill, at the Federal Reserve Board, Tony Chapa, of the United States Secret Service,
and John Moore, from the Federal Reserve Bank of San Francisco.
We are also working with an international group of major banknote producers to
minimize the threat posed by digital devices and computers. A s a matter of policy, w e do
not identify individualfirms,but w e thank you for your collaboration.
In 2003, w e begin the roll-out of the next generation of currency.
The most dramatic change that you will notice is color. The color symbolizes a more
sophisticated note and captures attention. W e k n o w from experience that security
features are effective deterrents only if the public knows about and uses them to
authenticate currency. For m a n y years, Americans have taken our currency for granted.
W e have tended not to notice its appearance and w e have also been confident that w e
won't receive counterfeit currency. In other areas of the world, people'sfirstinstinct is
to check a note before accepting it. Foreign users of our currency are keenly aware of its
features and cash handling professionals are adept at detecting counterfeits.
With the advent of new reprographic technology, it is critical that we educate our own
citizens to look, feel and assess their currency before acceptance.
Introducing a new U.S. design will require us to educate people worldwide to take greater
cognizance of security features and the importance of scrutinizing a note one receives.
The introduction of the 1996 series showed that an integrated worldwide public
information campaign can succeed in informing, educating and training the users of U.S.
currency about a redesign. W e used a variety of media from printed materials to public
service announcements to paid advertising, and w e mobilized support including the
United States Information Agency and U.S. embassies around the globe. In the end, w e
achieved the goal of extremely high awareness of the n e w currency.
It takes several years from a new design concept to issuance of currency. We plan years
ahead. A s I mentioned, w e n o w anticipate that w e will be introducing refinements in
currency design at least every seven to eight years. Also beyond design, there is the
quality of production. The United States is looking towards innovations such as
producing 50 subject sheets and acquiring more computer aided equipment.
How can the United States keep up with the pace of continuous improvement? Our best
bet is tofindways of spurring private sector innovation. W e need to provide avenues for
the private sector to bring n e w ideas into the industry and encourage them to participate
in developing anti-counterfeiting solutions. W e must reach out beyond the traditional
players and welcome n e w ideas and technologies. A partnership of government and
industry is the only prudent w a y to achieving our objective: continuous downward
pressure on counterfeiters' penetration rates through continuous improvement in our
currency's design.
Thank you for this opportunity to speak to you today as you begin your conference on the
essential mission of protecting of the world's currencies.
-30-
D E P A R T M E N T
OF
THE
T R E A S U R Y
NEWS
TREASURY
OFFICE OF PUBLIC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. • WASHINGTON, D.C. • 20220 • (202) 622-2960
Embargoed Until 11:30 a.m. E S T
February 3, 2003
Contacts: Betsy Holahan, Treasury
202-622-2960
John Heine, S E C
202-942-0020
Stefanie Mullin, O F H E O
202-414-6921
Treasury, O F H E O and S E C Release Joint Report on Mortgage-Backed Securities Markets
The Department of the Treasury, the Office of Federal Housing Enterprise Oversight
( O F H E O ) and the Securities and Exchange Commission (SEC) today released a joint staff report
on disclosure practices in the mortgage-backed securities ( M B S ) markets.
The purpose of the report was to evaluate current disclosure practices and consider
whether disclosure enhancements are desirable in assisting investors to make informed
investment decisions.
The report finds that additional disclosures in the MBS markets are desirable, feasible
and would be useful for investors. To implement additional disclosures, the report encourages
market participants to work together to reach a consensus on appropriate enhancements. The
Treasury Department, O F H E O , and the S E C will continue to monitor and assess disclosure
developments in the M B S markets.
The report can be found at www.treas.gov/press.
-30-
KD-3823
For press releases, speeches, public schedules and official biographies, call our 24-hourfax line at (202) 622-2040
'U.S. Government Printing Office: 1998 - 619-559
OFFICE OF PUBLIC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. • WASHINGTON, D.C. • 20220 • (202) 622-2960
For Immediate Release
February 3, 2003
Contact:
Betsy Holahan
202-622-2960
Media Advisory
Treasury Department's Quarterly Refunding Events
Economic Briefing To Be Webcast Live on Treasury's Web Site
The Treasury Department will hold the following events in connection with its scheduled
Quarterly Refunding:
Tuesday, Feb. 4,2003
Assistant Secretary for Economic Policy Richard Clarida
Economic Briefing before Treasury Borrowing Advisory Committee
Remarks
9:00 a.m. E S T
Treasury Department, Large Conference R o o m 3327
1500 Pennsylvania Ave., N W
Washington, D C
• Note: this event will be webcast L I V E at 9:00 a m E S T from the Treasury's web site at
www.treasurv. gov
Wednesday, Feb. 5, 2003
Q & A on Quarterly Refunding Documents
Credentialed Media Only - N o Cameras; Pen and Pad Only
9:30 a.m. E S T
Treasury Department, Large Conference R o o m 3327
1500 Pennsylvania Ave., N W
Washington, D C
All media attending the above events must be credentialed and must have a Treasury or
White House press pass to enter the building. Those without a Treasury or White House press
pass must be cleared in by the Secret Service IN A D V A N C E . Please contact Frances Anderson
in the Office of Public Affairs at 202-622-2960 by Monday, February 3, 2003 at 5:00 p m for
clearance, or you will not be admitted to the building. The following information can also be
faxed to 202-622-1999, attention Frances Anderson: name, media organization, date of birth and
social security number.
-30KD-3824
For press releases, speeches, public schedules and official biographies, call our 24-hourfax line at (202) 622-2040
*U.S. Government Printing Office: 1998 - 619-559
OFFICE OF PUBLIC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. • WASHINGTON, D.C. • 20220 • (202) 622-2960
E M B A R G O E D U N T I L 3:00 P.M.
February 3, 2003
C O N T A C T : Betsy Holahan
(202) 622-2960
TREASURY ANNOUNCES MARKET FINANCING ESTIMATES
The Treasury Department announced today that it expects to borrow $110
billion in marketable debt during the January - March 2003 quarter and to
target a cash balance of $25 billion on March 31. In the last quarterly
announcement on October 28, 2002, Treasury announced that it expected to
borrow $84 billion in marketable debt and to target an end-of-quarter cash
balance of $30 billion. The increase in borrowing is due to lower receipts,
higher outlays and changes in the actual and estimated cash balances at the
ends of the October - December 2002 and January - March 2003 quarters.
Treasury also announced that it expects to pay down $25 billion in
marketable debt during the April - June 2003 quarter and to target a cash
balance of $45 billion on June 30.
The financing estimates for the January - March 2003 and April - June 2003
quarters are based upon current law and make no assumptions regarding the
timing of the passage of the Administration's economic package.
During the October - December 2002 quarter, Treasury borrowed $83
billion in marketable debt and ended with a cash balance of $33 billion on
December 31. O n October 28, Treasury announced that it expected to
borrow $76 billion in marketable debt and to target an end-of-quarter cash
balance of $45 billion.
KD-3825
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
^*^ 'U.S. Government Printing Office: 1998 - 619-559
The increase in borrowing was the result of increases in compensating
balances, lower receipts and lower net issues of State and Local Government
Series securities partially offset by lower outlays and a lower end-of-quarter
cash balance.
Additional financing details relating to Treasury's Quarterly Refunding will
be released at 9:00 A . M . on Wednesday, February 5.
1003-2-3-9-58-55-16578: General Explanations of the Administration's Fiscal Year 2004 Revenu... Page 1 of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat*® Reader®.
February 3, 2003
2003-2-3-9-58-55-16578
General Explanations of the Administration's Fiscal Year 2004 Revenue
Proposals
This report summarizes the revenue proposals in the Administration's Fiscal Year
2004 Budget. These proposals include the economic growth package of proposals,
which is designed to reinvigorate the economic recovery, create jobs, and enhance
long-term economic growth. The other proposals, also intended to strengthen the
American economy, affect a wide range of areas including encouraging saving,
strengthening education, investing in health care, increasing housing opportunities,
protecting the environment, encouraging telecommuting, and providing incentives
for charitable giving, as well as simplifying the tax laws and improving tax
administration. To maintain their favorable effects and provide greater certainty for
economic and financial planning, the proposals extend several tax provisions that
expire in 2003 and 2004 and permanently extend the tax cuts enacted in the
Economic Growth and Tax Relief Reconciliation Act of 2001 as well as the
Research and Experimentation tax credit.
Report(s):
• General Explanations
http://www.treas.gov/press/releases/2003239585516578.htm
4/14/2004
OFFICE OF PUBLIC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. • WASHINGTON, D.C. • 20220 • (202) 622-2960
For Immediate Release
February 3, 2003
Contact: Tara Bradshaw
(202) 622-2014
United States Deputy Treasury Secretary Kenneth W. Dam
R e m a r k s Regarding the Proposed Treasury Budget for 2004
February 3,2004
Washington, D C
The Department of the Treasury strongly supports President Bush's proposed budget for fiscal
year 2004. W e believe it reflects the values and priorities that the President set forth in his State
of the Union Address.
The President's budget recognizes the Treasury's role as an economic policymaker, financial
manager, and revenue collector for the federal government. Treasury's allocation within the
budget will allow this department to continue its recent accomplishments in these areas.
The overall budget request for Treasury is reduced by nearly a third from the previous year's
budget of $15,943 billion because of the transfer of Treasury law enforcement functions to the
Department of Homeland Security and the Department of Justice. This reorganization of the law
enforcement functions within the federal government will improve the nation's ability to defend
itself against terrorism and other threats, and allows Treasury to focus on its core functions. The
proposed Treasury budget for 2004 is $11.408 billion, a 3.5% increase over the adjusted 2003
level of $11.018 billion.
These funds will help us achieve our chief objectives, which include ensuring the fairness of the
U.S. system of taxation, increasing Treasury's efficiency and effectiveness as an organization,
fighting the financial war on terrorism, and safeguarding the integrity of our nation's financial
systems and currency. I would like to highlight a few of the programs that fall into these
categories.
With regard to ensuring the fairness of our system of taxation, the 2004 budget directs new
resources toward areas where non-compliance is highest in dollar terms while maintaining
balanced reviews across all areas, thereby applying tax laws fairly and equally to all taxpayers.
KD-3826
For press releases, speeches, public schedules and official biographies, call our 24-hourfax line at (202) 622-2040
*U.S. Government Printing Office 1998 - 619-559
The budget also provides $35 million in 2004 to continue implementation of a health coverage
tax credit program authorized by the Trade Act of 2002. This program provides a refundable tax
credit to eligible individuals and their family members for the cost of qualified health insurance.
The budget invests $429 million to continue the Business System Modernization at the Internal
Revenue Service, n o w in its fifth year of implementation. This funding level restores
modernization funding that had been diverted last year to support the startup of the health
coverage tax credit.
I would also like to highlight the Treasury Department's critical role in the financial war on
terrorism, the newest and highest priority for our agency. The Treasury's Financial Crimes
Enforcement Network (FinCEN) serves as the hub for interagency and global cooperation toward
fighting domestic and international financial crimes. This function has m a d e F i n C E N the natural
center for fighting the financial war on terror, and the divestiture of most of Treasury's other law
enforcement activities will allow us to focus on this task with even greater precision and
effectiveness than before. Since September 2001, Treasury's Office of Foreign Assets Control
and our allies have frozen over $124 million in terrorist assets.
The FY 2004 budget also supports a $14M level for our International Technical Assistance
program, $ 4 M above last year, to continue programs that improve economic governance,
particularly in post-conflict countries, and to increase focus on international terrorist financing.
The funding also increases economic assistance for key geographic regions, such as, Central
Europe, former Soviet Union, Africa, and Latin America.
I have chosen to highlight only a very few of the important tasks that Treasury accomplishes for
the people of the United States. Let m e add, however, that in these matters and all others, w e are
striving to make the President's Management Agenda the foundation of our success. W e are
focused on achieving results, improving customer and employee satisfaction, enhancing our
productivity, and providing accurate and timely financial information to support governmentwide implementation of accounting standards.
In conclusion, the Department of the Treasury is looking forward to implementing the
President's budget programs in 2004.
Thank you.
-30-
OFFICE OF PUBLIC AFFAIRS • 15M PENNSYLVANIA AVENUE, N.\V.« WASHINGTON. D.C.* 2«220 •(201) 422-2f«)
EMBARGOED UNTIL 11:00 A.M.
February 3, 2003
Contact:
Office of Financing
202/691-3550
TREASURY OPFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $22,000 million to
refund an estimated $13,000 million of publicly held 4-week Treasury bills maturing
-February 6, 2003, and to raise new cash of approximately $9,000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreaauryDlrect will not be accepted.
The Federal Reserve System holds $14,334 million of the Treasury bills maturing
on February 6, 2003, in the System Open Market Account (SOMA) . This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balance of the amount not awarded in today's 13-week and 26-week Treasury
bill auctions. Amounts awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of Mew York
will be included within the offering amount of the auction. These noncompetitive bids
will have a limit of $100 million per account and will be accepted in the order of
smallest to largest, up to the aggregate award limit of $1,000 million.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions
set forth in the Uniform Offering Circular for the Sale and Issue of Marketable BookEntry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended)•
Details about the new security are given in the attached offering highlights.
oOo
Attachment
KD-3827
HIGHLIGHTS OF TREASURY OFPERING
OF 4-WEEK BILLS TO BE ISSUED FEBRUARY 6, 2003
February 3, 2003
Offering Amount $22, 000 million
Maximum Award (35% of Offering Amount) ... $ 7,700 million
Maximum Recognized Bid at a Single Rate.. $ 7,700 million
NLP Reporting Threshold
$ 7,700 million
NLP Exclusion Amount
$ 3,800 million
Description of Offering:
Term and type of security
CUSIP number
Auction date
Issue date
Maturity date
Original issue date
Currently outstanding
Minimum bid amount and multiples...
28-day bill
912795 MB 4
February 4, 2003
February 6, 2003
March 6, 2003
September 5, 2002
$38,520 million
.$1,000
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FIMA accounts. Accepted in order of size from smallest to largest
with no more than $100 million awarded per account. The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FIMA accounts will not exceed $1,000 million. A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate award total to the $1,000
million limit. However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 4.215%.
(2) Net long position (NLP) for each bidder must be reported when
the sum of the total bid amount, at all discount rates, and the
net long position equals or exceeds the NLP reporting threshold
stated above.
(3) Net long position must be determined as of one half-hour prior
to the closing time for receipt of competitive tenders.
Receipt of Tenders:
Noncompetitive tenders:
Prior to 12:00 noon eastern standard time on auction day
Competitive tenders:
Prior to 1:00 p.m. eastern standard time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank
on issue date.
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, D C 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:
FOR IMMEDIATE RELEASE
February 03, 2 003
Office of Financing
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
182-Day Bill
February 06, 2 003
August 07, 2 0 03
912795NG2
Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate
1.185%
Investment Rate 1/
1.209%
Price:
99.401
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted
7.20%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type
Tendered
Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)
34,930,950
1,026,002
75,000
15,899,550
1,026,002
75,000
SUBTOTAL
36,031,952
17,000,552 2/
Federal Reserve
TOTAL
6,057,166
6,057,166
42,089.118
23,057,718
Median rate
1.170%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.150%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 36,031,952 / 17,000,552 = 2.12
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $775,005,000
http://www.publicdebt.treas.gov
KD-3828
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, D C 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:
FOR IMMEDIATE RELEASE
February 03, 2 003
Office of Financing
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
91-Day Bill
February 06, 2003
May 08, 2003
912795ML2
Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:
1.155%
Investment Rate 1/:
1.175%
Price:
99.708
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 35.74%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type
Tendered
Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)
42,087,798
1,639,789
275,000
17,085,878
1,639.789
275,000
SUBTOTAL
44,002,587
19,000,667 2/
6,669,919
6,669.919
50,672,506
25,670,586
Federal Reserve
TOTAL
Median rate
1.145%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.13 5%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 44,002,587 / 19,000,667 = 2.32
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,305,472,000
http://www.publicdebt.treas.gov
KD-3829
OFFICE OF PUBLIC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. • WASHINGTON, D.C. • 20220 • (202) 622-2960
Text as Prepared for Delivery
February 4, 2003
Contact: Betsy Holahan
(202) 622-2960
ASSISTANT SECRETARY RICHARD H. CLARIDA
REMARKS TO THE TREASURY BORROWING ADVISORY COMMITTEE
OF THE B O N D MARKET ASSOCIATION
Over the past 16 months, the U.S. economy has exhibited impressive resiliency in
the face of a number of significant shocks: the tragic events of September 11 , the
bursting of the 1990s equity bubble, the revelations of and repercussions deriving from
major corporatefinancialscandals, a synchronized slump in global demand, and arisein
aversion to perceived and actualriskson the part of investors, business leaders, and
households. Although w e n o w k n o w that the U S economy was contracting when
President Bush took office, the recession was, by historical standards, brief and modest,
and the economy has n o w grown forfiveconsecutive quarters, at an average annual rate
2.7 percent.
Economic recovery has been supported by a number of favorable fundamentals,
including strong productivity growth - advancing a greater than a 4 percent pace during
the recovery, low interest rates - recently at 40 year lows, andrisingreal after tax
incomes - up 5.9 percent during 2002 thanks, in part, to the tax cuts that President Bush
signed into law in 2001.
Yet, while the economy continues to grow, the road to recovery has been bumpy,
with rapid growth in thefirstand third quarters of last year, and sluggish growth in the
second and fourth quarters. Moreover, the unemployment rate, which fell to 5.6 percent
last summer, has recently increased to the 6 percent levelfirstreached back in April.
Although a growing economy with 6 percent unemployment might have been considered
acceptable in previous business cycles, President Bush has said m a n y times that he will
not be satisfied until every American w h o wants a job has a job.
O n January 7th, the President outlined a bold proposal that, if passed by the
Congress, will help to insure that the recovery, n o w going through a soft patch, will not
only continue, but will also accelerate its pace of growth and job creation.
JS-01
For press releases, speeches, public schedules and official biographies, call our 24-hourfax line at (202) 622-20
®
*U.S. Government Printing Office: 1998 - 619-559
Importantly, the President's package also provides a solid foundation for future
gains in living standards and prosperity, by tearing d o w n obstacles in the tax code that
slow growth and job creation. The package will support consumer spending by
accelerating to this year reductions in tax rates that under current law are scheduled to be
phased-in in future years. The package will promote productive investments by
eliminating the double taxation of dividends, by raising the expensing limit for small
firms to $75,000, and by lowering tax rates for small businesses, m a n y millions of which
pay taxes at the top individual rate. Higher investment spending and continued growth in
consumer spending will create jobs and lower the unemployment rate. Ending the double
taxation of dividends will lower the cost of capital tofirms,will improve corporate
governance, and will improve the allocation of investment thus boosting productivity. At
Treasury w e estimate that by the end of 2004, real G D P will be about 2 percent higher
and that the economy will generate almost 1-1/2 million more jobs with the package than
without it.
While passage of the growth package will result in a modest deterioration in the
Federal budget balance, most of the swing in the budget that has occurred to date - and
that is projected to occur in the future - is due to the weak economy, the bursting of the
equity bubble, and the pressing needs of national defense and homeland security. A s the
President has emphasized, it is a growing economy that provides the opportunity to run
surpluses, not the other w a y around. Moreover, w e believe that the estimates in the
budget on the cost of the President's program likely overstate the loss of tax revenues that
will ultimately result if the program is passed.
OFFICE OF PUBLIC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. • WASHINGTON, D.C. • 20220 • (202) 622-2960
EMBARGOED UNTIL 2:00 P.M. EST
Tuesday, February 4, 2003
Contact: Rob Nichols
(202) 622-2910
SECRETARY SNOW'S OPENING STATEMENT BEFORE THE HOUSE WAYS
AND MEANS COMMITTEE TESTIMONY ON THE PRESIDENT'S BUDGET
Chairman Thomas, Ranking Member Rangel, and distinguished members of the
Committee on W a y s and Means, I welcome the opportunity to appear before you today to
discuss the President's budget forfiscalyear 2004.
Let me begin by offering my views on the essential background for this budget: the
United States economy and President Bush's economic growth plan, which promises to
create jobs, accelerate America's economic recovery, and increase our growth for years
to come.
As every American knows by now - whether from having lost a job, knowing someone
w h o has, or worrying about losing theirs - our economy took a turn for the worse
beginning in the summer of 2000. B y the time President Bush took office an
undercurrent was running against the economy. The unprovoked and unprecedented
terrorist attacks of September 11, 2001 compounded a recession that was well underway,
while the discovery of serious abuses of trust by some corporate business leaders slowed
our recoveryfromit.
In response to this confluence of adverse events, President Bush led decisively. Acting
with Congress in a bipartisan fashion, he took the steps necessary to protect a shaken
nation and afragileeconomy. In 2001 when relief was needed, he signed the most
sweeping tax relief in a generation. A s evidence of the damage became clearer, he acted
again in March 2002 to further bolster the economy. These were precisely the right
medicine at precisely therighttime. These actions made the recession shorter and
shallower than it would have been. In fact, by most measures it was the mildest since
World W a r II.
JS-02
For press releases, speeches, public schedules and official biographies, call our 24-hourfax line at (202) 622-204
'U.S. Government Printing Office: 1998 - 619-559
2
In the face of extreme adversity, our economy, like our nation, remains resilient. Despite
a sequence of economic slowdown, attack on our homeland, war in Afghanistan, and
weakened investor confidence, the economy is recovering. But as the President has
stated, w e can and must do better. Relative success is not sufficient. Too m a n y
Americans are out of work today, and too m a n y Americans are insecure about their
tomorrow.
We must build on the proven strengths of our economy. We must continue to move
towards policies that will create more good jobs and raise living standards for all.
As long as there are Americans who want a job and can't find one, the economy is not
growing fast enough. That's w h y President Bush's jobs and growth package is so
important. Under the President's proposal, 92 million taxpayers and their families would
receive a tax cut in 2003.
A typical family of four with two earners making a combined $39,000 will receive a total
of $1,100 in tax relief, compared to the taxes they paid in 2002, under the President's plan
- and not just this year, but in each and every year after. A n d his plan will create
hundreds of thousand of additional jobs by the end of this year and well over a million
more by the end of next year.
The package will not only help America return to its economic potential, it will increase
it, creating a more abundant future with more good jobs andrisingreal wages. I believe
that is what everyone in this room and across America seeks.
Before I turn to the budget, a word about deficits. Deficits matter. They are never
welcome. But there are times, such as these, when they are unavoidable, particularly
when w e are compelled to address critical national needs. It is important to remember,
even without the President's economic growth and jobs package, homeland security, and
the war on terrorism, w e would have deficits now. Are these deficits welcome? No. Are
they understandable? Yes.
The surpluses we enjoyed were the product of a strong economy, not a weak one. We
will not return to economic strength by taxing our economy w h e n it is struggling, any
more than w e would increase our nation's security by failing to fund its defense when it
is threatened. The prescription for returning to balanced budgets is straightforward: hold
the line on spending and grow the economy. This is the direction the President has
chosen: a course to create real jobs that last. W e are not going to let terrorism and its
effects bring either our nation or our economy to its knees.
Finally, we should remember that current deficits are small relative to our unique
circumstances and to our economy as a whole. Even at their depth, they remain
considerably below the typical levels following a recession over the last 30 years and
they begin a pronounced improvement after next year.
3
W e face n e w threats and challenges. Job creation and economic growth are keys not only
to our near-term but our long-term success as well. If w e are to meet the threats of today
and the challenges of tomorrow, w e must have a strong economy.
In fact, we must seek a higher level of prosperity for America than we have known - one
which puts us on an even higher growth path, one which unlocks the fullest potential and
talents of the American people. That means encouraging hard work, rewarding hard
work, and creating the opportunities for work for all Americans. These are the values
that brought America to where w e are today and they are the ones that w e must allow to
lead us into the future.
We must also remember that our success and our example in this endeavor promises not
only a brighter, better future for our people and our children, but for the rest of the world
as well.
The Jobs and Growth Package, our new initiatives to promote savings, to promote health
care coverage, to encourage charitable giving, to promote responsible energy production,
and improved compliance measures from the Internal Revenue Service are all important
budget initiatives.
I look forward to discussing that plan and the rest of the President's budget with you
today.
-30-
OFFICF. O F PIB1.1C AFKAIKS • IS«t PKNNSYI YANIA W F N U E . N.W, « W A S H I N G T O N . D.C* 2022* • <2«2l *22-29*0
EMBARGOED UNTIL 9:00 A.M.
February 5, 2003
CONTACT:
Office of Financing
202/691-3550
TREASURY FEBRUARY QUARTERLY FINANCING
The Treasury will auction $24,000 million of 5-year notes and $18,000 million of
10-year notes to refund $21,589 million of publicly held securities maturing
February 15, 2003, and to raise about $20,411 million of new cash.
In addition to the public holdings, Federal Reserve Banks, for their own
accounts, hold $4,980 million of the maturing securities, which may be refunded by
issuing additional amounts of the new securities.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of each auction. These
noncompetitive bids will have a limit of $100 million per account and will be accepted
in the order of smallest to largest, up to the aggregate award limit of $1,000
million.
TreasuryDirect customers requested that we reinvest their maturing holdings of
approximately $54 million into the 5-year note and $22 million into the 10-year note.
The auctions being announced today will be conducted in the single-price auction
format. All competitive and noncompetitive awards will be at the highest yield of
accepted competitive tenders. The allocation percentage applied to bids awarded at
the highest yield will be rounded up to the next hundredth of a whole percentage
point, e.g., 17.13%.
The notes being offered today are eligible for the STRIPS program.
This offering of Treasury securities is governed by the terms and conditions set
forth in the Uniform Offering Circular for the Sale and Issue of Marketable Book-Entry
Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about the notes are given in the attached offering highlights.
oOo
Attachment
JS-04
HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC
FEBRUARY 2 003 QUARTERLY FINANCING
February 5, 2 003
Offering Amount
Maximum Award (35% of Offering Amount)
Maximum Recognized Bid at a Single Rate
NLP Reporting Threshold
Description of Offering:
Term and type of security
Series
CUSIP number
Auction date
Issue date
Dated date
Maturity date
Interest rate
Amount currently outstanding
Yield
Interest payment dates
Minimum bid amount and multiples
Accrued interest payable by investor
Premium or discount
$24,000
$ 8,400
$ 8,400
$ 8,400
million
million
million
million
$18,000
$ 6,300
$ 6,300
$ 6,300
million
million
million
million
5-year notes
E-2008
912828 AT 7
February 11, 2003
February 18, 2003
February 15, 2003
February 15, 2008
Determined based on the highest
accepted competitive bid
Not applicable
Determined at auction
August 15 and February 15
$1,000
Determined at auction
Determined at auction
10-year notes
A-2013
912828 AU 4
February 12, 2003
February 18, 2003
February 15, 2003
February 15, 2013
Determined based on the highest
accepted competitive bid
Not applicable
Determined at auction
August 15 and February 15
$1,000
Determined at auction
Determined at auction
912820 HQ 3
912820 HR 1
Not applicable
Not applicable
STRIPS Information;
Minimum amount required $1,000 $1,000
Corpus CUSIP number
Due date(s) and CUSIP number(s)
for additional TINT(s)
The following rules apply to all securities mentioned above;
Submission of Bids;
Noncompetitive bids: Accepted in full up to $5,000,000 at the highest accepted yield.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve Banks as
agents for FIMA accounts. Accepted in order of size from smallest to largest with no more than $100 million awarded per account.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for FIMA accounts will not exceed $1,000 million. A
single bid that would cause the limit to be exceeded will be partially accepted in the amount that brings the aggregate award total
to the $1,000 million limit. However, if there are two or more bids of equal amounts that would cause the limit to be exceeded,
each will be prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a yield with three decimals, e.g., 7.123%.
(2) Net long position (NLP) for each bidder must be reported when the sum of the total bid amount, at all yields, and the
net long position equals or exceeds the NLP reporting threshold stated above.
(3) Net long position must be determined as of one half-hour prior to the closing time for receipt of competitive tenders.
Receipt of Tenders:
Noncompetitive tenders
Competitive tenders
Prior to 12:00 noon eastern standard time on auction day
Prior to 1:00 p.m. eastern standard time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank on issue date, or payment of full par amount with i
TreasuryDirect customers can use the Pay Direct feature which authorizes a charge to their account of rec.
their financial institution on issue date.
REPORT TO THE SECRETARY OF THE TREASURY
F R O M THE
TREASURY BORROWING ADVISORY COMMITTEE
OF THE
BOND MARKET ASSOCIATION
February 4, 2003
Dear Mr. Secretary:
Since the Committee's last meeting on October 29th, the economic situation remains largely
the same, if not slightly worse despite the F O M C ' s 50 basis point rate cut on November 6th.
Payroll growth not only remains below what is generally considered necessary to absorb n e w
entrants into the labor market but fell a total of 189,000 in November and December. The
unemployment rate has reached 6.0%. Consumer confidence indicators have all continued to
move sharply lower and both inventory and equipment investment have slowed.
However, not all sectors of the economy are weak. The housing market has remained
exceptionally strong throughout the downturn as low mortgage rates encouraged h o m e
purchases. Additionally, there have recently been signs of improvements in both the business
fixed-investment portion of the G D P report and the recent I S M reports. These improvements
suggest that a full-fledged recovery m a y be near for these sectors.
Nevertheless, the balance has tilted toward weakness as the evolving situation in regard to
Iraq has permeated throughout the economy. The resulting geopolitical uncertainty is
hampering both consumer and business spending. Most economists agree that the risk of subpar growth remains high despite low and real nominal interest rates.
Since our last meeting, interest rates have stalled with the 2-year yield just 2 basis points
lower than at the time of our last meeting despite having traded in a 52 basis point range. The
10-year yield is just 8 basis points higher and has traded in a 46 basis point range. With
continued weakness in the economy and equity markets, combined with the ongoing
geopolitical uncertainty, there has been little reason for Treasuries to m a k e a sustained m o v e
in any direction.
Most major equity indices are down another 2-3% while volatility has eased. Indeed, while
the V I X index, a measure of volatility, is near the same level as our last meeting, it has
JS-05
-2-
averaged under 32 during the inter-meeting period versus a 40 reading in the last intermeeting period.
Budget deficit estimates for FY 2003 continue to evolve as economists attempt to factor in the
costs of a potential conflict as well as the impact of the recently proposed tax cuts. At
present, most budget deficit estimates for F Y 2 0 0 3 n o w run between $275 billion and $325
billion, in some cases $100 billion higher than at the time of our last meeting. Most expect
that the budget situation will deteriorate further in F Y 2 0 0 4 and that the budget will remain in
deficit for several years to come.
With this economic and financial back drop in mind, the Committee began consideration of
debt management questions posed in the Treasury Borrowing Committee Quarterly Meeting
Committee Charge.
The first question addressed potential announcement options available to Treasury based on
the premise that they planned to re-introduce 3-year note issuance in M a y , 2003 and to
increase the use of long-term financing, primarily in the 5-year note sector, while reducing
reliance on bills and 2-year notes.
In response to Treasury's request for a prioritization of the following announcement options:
1. Intra-quarter re-openings for 5-year notes (starting with the May note), and/or
2. Intra-quarter re-openings of 10-year notes, and/or
3. Further study of one or both of these options.
4. Other options.
the Committee first discussed the optimal minimum size for 3-year note auctions. While the
range of suggestions was $15-25 billion, most members agreed that $20 billion 3-year
auctions would attract adequate liquidity to the sector while still allowing financing markets
to operate efficiently.
Then the Committee turned the discussion to prioritizing what it felt were the three logical
choices for Treasury: Intra-quarter re-openings of 5-year notes; monthly 5-year note
issuance; and intra-quarter re-openings of 10-year notes. S o m e members felt that monthly 5year issuance was almost inevitable over time, and to be as transparent as possible Treasury
should bypass re-openings and go directly to monthly 5-year note issuance. The majority,
however, felt that quarterly 5-year note re-openings would provide Treasury more flexibility
over time to increase and decrease issuance in the sector. Additionally, the doubling of
annual auctions would smooth issuance so Treasury was not as dependent on the quarterly
auction windows for issuing all of their longer-dated securities. In terms of sizes and timing
of 5-year note issuance, the Committee recommended $20 billion auctions with $15 billion reopenings as m i n i m u m s with the re-opening occurring in the middle of the month following
the initial auction. For instance, a 6/16/03 re-opening of $15 billion 5-year notes would
follow a 5/15/03 auction of $20 billion n e w 5-year notes.
-3-
The Committee then discussed the merits of monthly 5-year note issuance versus quarterly
10-year note issuance with re-openings if Treasury's borrowing needs increased beyond what
could be handled by quarterly 5-year notes, and re-openings alone. S o m e members felt that
the optical symmetry created by monthly 5-year note issuance would create robust demand
while others thought that since historically the market already had experience with monthly 5year notes and not with intra-quarterly re-opened 10-year notes, the former would prove less
disruptive for markets generally. Proponents of intra-quarter re-openings of 10-year notes felt
that this option not only created less sense of permanence but also helped Treasury further
smooth issuance over the full year, and away from traditional refunding dates. Although
relatively evenly split, the Committee decided by a vote of 10-8 to recommend that Treasury
consider monthly 5-year note issuance before considering intra-quarter re-openings of 10-year
notes.
The Committee then listed other options of debt management available to Treasury for further
study and discussion. Relevant topics included by maturity:
1. 9-month or 12-month bills
2. 7-year notes
3. 30-year bonds
4. Additional TIIS issuance
5. N e w products—floating rate notes, putable notes and a formalized T A P program
for outstanding securities.
The Treasury has a stated objective to achieve the lowest cost financing over time. Their
objective is to be able to measure their performance around debt management. With this in
mind, Treasury presented a series of slides to the Committee that detailed rough ideas they
have on this topic. They were interested in the Committee's views on h o w to create a method
for measuring their performance. After some discussion, one m e m b e r of the Committee
suggested developing a stated framework of measurement. That is to say, establish a range
for duration of the debt, a baseline for budgetary forecasts, and extrapolate forward a potential
path of issuance. This would establish a matrix to develop a performance discussion from.
This discussion regarding performance measurement was meant to be ongoing, and to expand
upon Treasury's o w n internal deliberations.
The Committee then turned to the question involving the composition of five- and ten-year
notes needed to refund $21.6 billion of privately held notes and bonds maturing February 15th,
2003 the composition of Treasury marketable financing for the remainder of the JanuaryMarch quarter, including cash management bills if necessary, and the composition of the
marketable financing for the April-June quarter.
For the January to March quarter the Committee recommended a new $24 billion 5-year note
due February 15, 2008 and a n e w $20 billion 10-year note due February 2013, representing a
$2 billion increase for each security from the prior quarter. For the remainder of the quarter,
-4-
the Committee recommended two $27 billion 2-year notes to be auctioned February 26 and
March 26th, respectively. The Committee's recommendations regarding Treasury bill
issuance for the quarter are contained in the attached charts.
For the April-June quarter, recommendations for Treasury borrowing included three $25
billion 2-year notes issued monthly, one $20 billion 3-year note issued 5/15/03, one 5-year
note issued 5/15/03, one re-opened 5-year note issued 6/16/03 and one $18 billion 10-year
note issued 5/15/03. Additionally, the Committee recommended a 12-day $20 billion cash
management bill to be auctioned April 1st.
Respectfully submitted,
Timothy W . Jay
Chairman
M a r k B . Werner
Vice Chairman
Attachments (2)
MINUTES OF THE MEETING OF THE
TREASURY BORROWING ADVISORY COMMITTEE
OF THE BOND M A R K E T ASSOCIATION
February 4, 2003
The Committee convened at 9:12 a.m. at the Treasury Department for the portion of the
meeting that was open to the public. All members were present except Mr. White. The Federal
Register announcement of the meeting and a list of Committee members are attached.
Brian Roseboro, Assistant Secretary for Financial Markets, welcomed the Committee.
Richard Clarida, Assistant Secretary for Economic Policy, summarized the current state of the
U.S. economy (statement attached). Timothy Bitsberger, Deputy Assistant Secretary for Federal
Finance, presented the chart show, updating Treasury borrowing estimates and debt statistics.
The public meeting ended at 9:24 a.m.
The Committee reconvened in closed session at the Hay-Adams Hotel at 12:05 p.m. All
members were present except M r . White. The Chairman read the charge, which is also attached.
The meeting began with a slide show presentation (attached) by Timothy Bitsberger. Mr.
Bitsberger first reviewed Treasury's goal and constraints. The Treasury is constrained in
meeting its objective of lowest cost financing over time by the uncertainty it faces in its
borrowing requirements and its borrowing costs. Mr. Bitsberger outlined the Treasury's efforts
over the last few months to better analyze debt management decision-making and asked the
Committee to use the slides as the basis for initial advice on approaches the Treasury could use
to quantify its performance and decision-making criteria. The first four slides represented some
of Treasury's work in following through on Committee recommendations from the previous
meeting on possible performance measures. The remaining slides illustrated some of the work
Treasury has done to quantify its debt management decisions. Committee m e m b e r suggested
titles and explanatory notes be expanded to improve understanding of the concepts before the
charts were released to the public.
The first slide showed that forecast errors by both public and private sector analysts have
been consistently large. Despite the size of forecast errors, some Committee members suggested
that Treasury consider the range of possible debt management outcomes given the range of
forecasted outcomes.
The second and third slides showed trading and pricing activity for 2-year notes over
selected time periods. Committee members felt that the trading data did not cover a long enough
time period to show trends in market activity around auctions. The third slide, showing the
relationship between market prices at auction time and the auction stop for 2-year notes since
1
JS-06
1995, led to two discussion points: whether Treasury should be concerned about h o w closely
auction results match pricing in the secondary market.and whether the relationship between
auction pricing and secondary market pricing has changed in recent years. Several Committee
members said that activity in the when-issued market has declined in recent years; possible
reasons cited for this decline included Treasury's use of Dutch auctions or a decline in the
relevance of Treasuries during the surplus era. The Committee recommended that Treasury
expand the data set to get a better idea of long-term trends in when-issued activity.
Committee members generally viewed a normal distribution of spreads between whenissued prices at auction time and auction prices as a good outcome because a normal distribution
encourages capital commitment to auctions. Committee members suggested looking at outliers
to see if there were lessons to be learned for Treasury, looking at comparisons to auctions after
the market had time to respond to auction results but before n e w information had m o v e d the
market, and seeing if auction size affected the distribution of outcomes.
Committee members had a variety of views on the fourth chart. Some viewed it as a
useful indicator of h o w m u c h risk the market is taking on in Treasury auctions, but some argued
that the denominator should be capital available to the market and that the measure needed to be
adjusted for volatility.
The fifth chart led to a discussion of the factors Treasury should consider as it works
towards meeting its objective of lowest cost financing over time. The Committee recognized the
trade-off between reducing costs associated with long-term issuance and taking on additional
rollover risk.
Committee members suggested that the sixth chart include projections of future average
maturities of the debt. M e m b e r s used the chart as the basis for a discussion on what is meant by
"regular and predictable" issuance and whether the volatility of issuance maturity increased
Treasury's borrowing costs. A couple of members argued that issuance volatility could be
consistent with regular and predictable issuance if that volatility was in response to factors that
the market could monitor. O n e m e m b e r suggested that Treasury develop measures of risk
aversion similar to those used for private sector borrowers. Others argued, however, that the
unique status of a sovereign borrower might reduce the usefulness of such measures.
The next three slides were discussed jointly with the Committee debating the appropriate
weighting measures for characterizing debt issuance. The constant issuance concept was
recognized as a w a y to weight issuance by maturity, but Committee members also recognized
that there were multiple approaches to describing Treasury's debt issuance.
The final slide provided the basis for a discussion on what a long-term view on Treasury
debt issuance decisions should mean. Committee members offered a wide range of observations
(listed as mentioned). Better forecast accuracy would better enable Treasury to define its
financing options. Confidence bands around central projections would provide guidance on
Treasury decision-making. Alternatively, Treasury could focus on the fundamental factors that
would drive specific decisions. In thinking about demand for its securities, Treasury can
improve auction mechanics (as it has done) and it can ensure that it sells products that are
preferred by investors. O n e unambiguous indicator of demand that Treasury can follow is bidto-cover ratios.
2
The Committee met through lunch to discuss the first question of the charge (attached).
Some Committee members thought that the market would be surprised by the reintroduction of
the 3-year note, others thought that the market was expecting it. M i n i m u m sizes for quarterly 3year note auctions were ranged from $15 billion to $25 billion. Commercial banks and central
banks were viewed as the strongest source of demand. The Committee noted that the size of 2year note auctions might be a factor in determining the ultimate level of demand for the 3-year
notes.
Committee members generally spoke favorably about a regular re-opening policy for 5year notes. Reasons cited for a regular re-opening policy were high level of financing flexibility
with the policy, the market has already adjusted to expectations of greater 5-year note issuance,
and it m a y be premature to issue monthly issues given budgetary uncertainty. The Committee
concluded that the Treasury could conduct initial auctions of $20 billion with reopenings of $15
billion. The Committee was split on the timing of the reopenings with some favoring the midpoint between existing auctions and others favoring a mid-month date.
The Committee discussed what, if financing was required, the next step should be for
Treasury to m o v e to monthly 5-year notes or regular reopenings of 10-year notes (ten members
favored monthly 5-year notes and eight favored regular reopenings of 10-year notes). The
advantages cited for monthly 5-year issuance were good market focus; the shorter maturity is
preferable given budgetary uncertainty, and good market depth. The main advantage of regular
reopenings of 10-year notes was that reopenings in general are less permanent, giving the
Treasury the option of scaling back if deficits are smaller than expected.
The Committee also discussed other financing options including the introduction of a tap
issue security, the reintroduction of 30-year bonds, introducing floating note securities,
reintroducing 52-week bills and reintroducing the 7-year note. S o m e Committee members
argued that Treasury should reintroduce securities in the order in which they were suspended
while others suggested that Treasury should look at the demand side before deciding on the next
generation securities.
The Committee recommended that auction sizes for the 5-year and 10-year notes be
increased to $24 billion and $20 billion respectively.
The meeting adjourned at 2:30 p.m.
The Committee reconvened at the Madison Hotel at 5:40 p.m. All members were present
except Mr. White. The Chairman presented the Committee report to the Assistant Secretary for
Financial Markets, Brian Roseboro and Deputy Assistant Secretary for Federal Finance, Tim
Bitsberger. A brief discussion followed the Chairman's presentation, but did not raise significant
questions regarding the report's content.
The meeting adjourned at 5:50 p.m.
3
Paul F. Malvey
Director
Office of Market Finance
February 4, 2003
Certified by:
Timothy W . Jay, Chairman
Treasury Borrowing Advisory Committee
of The Bond Market Association
February 4, 2003
4
February 4, 2003
Committee Charge
The Treasury Department would like the Committee's advice on the following:
• We plan to reintroduce the 3-year note in May to reduce reliance on bills and 2-year notes.
W e also plan to increase long-term financing, largely through increased 5-year note
issuance. Given forecasts of increased borrowing needs, should w e announce:
> A n intra-quarter reopening policy for 5-year notes auctioned in M a y ;
> Our intention to study the advantages of reopening 5-year notes;
> A n intra-quarter reopening policy for 5-year year notes and our intention to study
whether w e should m o v e to an intra-quarterly reopening policy for 10-year notes;
> A n intra-quarter reopening policy for 5-year and 10-year notes; or
> Our intention to study the advantages of reopening 5-year and 10-year notes.
• Our objective is to finance the government at lowest cost over time. Our largest constraint in
meeting this objective is the uncertainty w e face. W e have identified some indicators that
m a y be helpful in quantifying our success in meeting our objective. W e will begin this part
of the meeting with a presentation of slides that illustrate the some of these efforts. Our goal
is to develop a set of performance measures by which our past decisions can be objectively
measured and our future debt management decisions can be guided. A s w e present these
slides, w e have the following questions:
> Which measures are most likely to help us meet our goal?
> Are there any measures that are unlikely to be helpful?
> Are w e heading in the right direction?
> Are there alternatives or extensions that you would recommend?
• The composition of Treasury notes to refund $3.2 billion of privately held bonds maturing on
February 15.
• The composition of Treasury marketable financing for the remainder of the January - March
quarter, including cash management bills if necessary.
• The composition of Treasury marketable financing for the April - June quarter.
5
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, D C 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT
FOR IMMEDIATE RELEASE
February 04, 2 0 03
Office of Financing
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
28-Day Bill
February 06, 2003
March 06, 2003
912795MB4
Term:
Issue Date:
Maturity Date
CUSIP Number:
High Rate:
1.145%
Investment Rate 1/:
1.161%
Price:
99.911
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate we-re
allotted 85.93%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands
Tender Type
Tendered
Accepted
Competitive
Noncompetitive
FIMA (noncompetitive
53,573,602
47,241
0
21,953,287
47,241
0
SUBTOTAL
53,620,843
22,000,528
1,606,996
1,606,996
55,227,839
23, 607,5"24
Federal Reserve
TOTAL
Median rate
1.140%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.130%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 53,620,843 / 22,000,528 = 2.44
1/ Equivalent coupon-issue yield.
http://www.publicdebt.treas.gov
JS-07
For Immediate Release
February 4, 2003
Contact:
Betsy Hoiahan
202-622-2960
Treasury Department Creates N e w Position
to Oversee Office of Critical Infrastructure Protection
New Deputy Assistant Secretary for CIP and Compliance Policy Will Lead Office
The Treasury Department today announced the newly-created position of Deputy Assistant
Secretary for Critical Infrastructure Protection and Compliance Policy, which will oversee the
Office of Critical Infrastructure Protection as part of the Administration's ongoing effort to
strengthen the nation's safeguards against terrorist activities and financial crime.
Michael A. Dawson, named today as the new Deputy Assistant Secretary for Critical
Infrastructure Protection and Compliance Policy, will oversee the Office's efforts to enforce
statutes and regulations within thefinancialsector, including m o n e y laundering, terrorist
financing, and identity theft. H e will guide the office as it continues to develop and implement
policies regarding sharing of information among financial institutions and between the private
and public sectors, including security of personalfinancialinformation and the sharing of
suspicious information under the Bank Secrecy Act.
"The Office of Critical Infrastructure Protection plays a key role in coordinating public and
private efforts to protect the critical infrastructure of thefinancialservices industry from attack,"
said W a y n e A. Abernathy, Assistant Secretary for Financial Institutions. "Deputy Assistant
Secretary D a w s o n will do an outstanding job as w e work cooperatively to defend our economy
and its institutions in a post-September 1 \u world."
The Office of Critical Infrastructure Protection, established after September 11, 2001 under
Treasury's Office of Financial Institutions, also staffs the Financial and Banking Information
Infrastructure Committee (FBIIC); assists in developing and promulgating m o n e y laundering
regulations related to the U S A P A T R I O T Act; and is currently negotiating with the European
Union to obtain a finding that U.S. financial privacy law is "adequate" under the EU's Data
Protection Directive.
JS-08
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622
—
_
_
.
_ _ _ _ _
_
_
.
_
_
_
Deputy Assistant Secretary Dawson, previously the Senior Advisor to the Deputy Secretary of
the Treasury from April 2001 to February 2003, was active in that role in Treasury's efforts to
fight money laundering and terrorist financing.
Prior to joining the Treasury Department, Mr. Dawson served as Chief of Staff at FOLIQ/h, a
web-based broker-dealer that was thefirstto allow investors to buy and trade customizable
baskets of equities. Mr. D a w s o n also worked for the Washington-based lawfirm,Covington &
Burling, and clerked for Judge James L. Oakes on the United States Court of Appeals for the
Second Circuit.
Mr. Dawson holds a B.A. in Economics from Williams College, an M. Phil, in Economics from
Cambridge University, and a J.D. from the Yale L a w School.
-30-
OFFICE OF PUBLIC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. • WASHINGTON, D.C. • 20220 • (202) 622-2960
E M B A R G O E D U N T I L 9:00AM
February 5,2003
C O N T A C T : Betsy Holahan
(202) 622-2960
Assistant Secretary for Financial Markets
Brian C. Roseboro
February 2003 Quarterly Refunding Statement
The Department of the Treasury announced its quarterly refunding needs and
relatedfinancingchanges today. There will be no change in the issuance calendar this
quarter.
For this quarterly refunding, we are offering $42 billion of notes to refund
approximately $21.6 billion of privately held notes and bonds maturing on February 15,
raising approximately $20.4 billion. The securities are:
1. A new 5-year note in the amount of $24 billion, maturing February 15, 2008.
2. A new 10-year note in the amount of $18 billion, maturing February 15, 2013.
These securities will be auctioned on a yield basis at 1:00 p.m. Eastern time on
Tuesday, February 11, and Wednesday, February 12, respectively. The balance of our
financing requirements will be met through 2-year note and bill offerings.
Treasury may issue off-cycle cash management bills due to seasonal cash swings
in early March. If permitted under the debt ceiling, Treasury will issue cash management
bills in early April.
After this quarterly refunding, we plan to:
Reintroduce a 3-year note at the May refunding, to be part of future quarterly
financing packages, with the first auction on M a y 6, 2003; and
Institute a regular reopening policy for 5-year notes, beginning with the May
15, 2008 issue. The reopening will occur one month after the initial auction
(two months before the next auction for a new note).
JS-09
For press releases, speeches, public schedules and official biographies, call our 24-hourfax line at (202) 622-2040
*U.S. Government Printing Office: 1998 - 619-559
The primary purpose of introducing the 3-year note is to diversify issuance.
Issuance of the 3-year note will diminish somewhat Treasury's borrowing in 2-year notes
and bills, while also providing additional capacity forfreshborrowing.
Lowest Cost Financing Over Time
We are examining ways to measure the Treasury's performance against our goal
of lowest cost funding over time. In particular w e are examining our issuance patterns,
the structure of our maturing debt, and the efficiency of our auctions. W e welcome the
thoughts of interested parties. W e have sought the advice of the Treasury Borrowing
Advisory Committee on these issues. The minutes of the Committee's most recent
meeting are available on our website (see address below).
Market Consultation
Prior to each quarterly refunding, Treasury seeks the individual advice of some of
the Federal Reserve Bank of N e w York's primary dealers. A s announced last quarter, w e
are n o w posting the questions w e sent to primary dealers on our website:
http://www.treas.gov/offices/domestic-finance/debt-management/index.html.
Other market participants and observers are invited to respond to these questions via
email at the address below.
Buyback Operations
Treasury will not be conducting buybacks this quarter.
Policy Issues Under Discussion
Treasury continues to review how offerings would be adjusted in the event that
additional borrowing capacity is needed. Consideration will focus on whether the next
step would be to reopen 10-year notes or, alternatively, to auction 5-year notes monthly.
W e are studying the costs and benefits of these options. W e will not reopen the February
and M a y 10-year notes.
As part of our promotion of inflation-indexed securities, we are re-examining the
current auction cycle. W e anticipate expanding inflation-indexed issuance in the coming
quarters.
Also, we continue to explore ways to reduce the costs associated with short-term
fluctuations in cash balances.
Please send comments and suggestions on these subjects or others relating to debt
management to debt.management@do.treas.gov.
D E P A R T M E N T
OF
TREASURY
THE
T R E A S U R Y
NEWS
OFFICE OF PUBLIC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. • WASHINGTON, D.C. • 20220 • (202) 622-2960
Embargoed Until 9:00 a.m. EST
February 5,2003
Contact:
Betsy Holahan
202-622-2960
TREASURY STATEMENT O N THE DEBT CEILING
This morning the Treasury issued its quarterly refunding statement, reflecting revised
projections of the government's borrowing needs for the next two quarters of the 2003
fiscal year. Under these projections, debt subject to limit is expected to reach the statutory
ceiling of $6,400 billion on or about February 20th and will likely remain above the
current debt ceiling thereafter.
If the statutory debt ceiling is not raised, the Treasury will have to begin to use a number
of stopgap devices - some costly - to manage debt subject to limit, which have been
previously utilized under established legal authority.
On current projections, this additional limited borrowing capacity may only be adequate
to meet the government's needs until the beginning of April, w h e n recurring benefit and
tax refund payments occur.
The Treasury will continue to work with Congress to ensure the government's ability to
finance its operations. Prompt action by Congress to raise the debt ceiling is necessary to
ensure success in our efforts to combat terrorism, continue the economic recovery and
maintain the soundness of federal government securities.
-30JS-10
For press releases, speeches, public schedules and official biographies, call our 24-hourfax line at (202) 622-2040
*U.S. Government Printing Office: 1998 - 619-559
OFFICE OF PUBLIC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. • WASHINGTON, D.C. • 20220 • (202) 622-2960
Embargoed Until 10:00 a.m. EST
Wednesday, February 5, 2003
Contact: Rob Nichols
(202) 622-2910
Snow Opening FY04 Budget Statement: Oral
before House Budget Committee
February 5, 2003
Chairman Nussle, Ranking Member Spratt, and distinguished members of the Budget
Committee on W a y s and Means, I welcome the opportunity to appear before you today to
discuss the President's budget for fiscal year 2004.
Let me begin by offering my views on the essential background for this budget: the
United States economy and President Bush's economic growth plan, which promises to
create jobs, accelerate America's economic recovery, and increase our growth for years
to come.
As every American knows by now - whether from having lost a job, knowing someone
w h o has, or worrying about losing theirs - our economy took a turn for the worse
beginning in the summer of 2000. B y the time President Bush took office an
undercurrent was running against the economy. The unprovoked and unprecedented
terrorist attacks of September 11, 2001 compounded a recession that was well underway,
while the discovery of serious abuses of trust by some corporate business leaders slowed
our recovery from it.
In response to this confluence of adverse events, President Bush led decisively. Acting
with Congress in a bipartisan fashion, he took the steps necessary to protect a shaken
nation and afragileeconomy. In 2001 when relief was needed, he signed the most
sweeping tax relief in a generation. A s evidence of the damage became clearer, he acted
again in March 2002 to further bolster the economy. These were precisely the right
medicine at precisely the right time. These actions made the recession shorter and
shallower than it would have been. In fact, by most measures it was the mildest since
World W a r II.
JS-11
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-204
—
^*^
*U.S Government Printing Office: 1998 - 619-559
2
In the face of extreme adversity, our economy, like our nation, remains resilient. Despite
a sequence of economic slowdown, attack on our homeland, war in Afghanistan, and
weakened investor confidence, the economy is recovering. But as the President has
stated, w e can and must do better. Relative success is not sufficient. Too m a n y
Americans are out of work today, and too m a n y Americans are insecure about their
tomorrow.
W e must build on the proven strengths of our economy. W e must continue to m o v e
towards policies that will create more good jobs and raise living standards for all.
As long as there are Americans who want a job and can't find one, the economy is not
growing fast enough. That's w h y President Bush's jobs and growth package is so
important. Under the President's proposal, 92 million taxpayers and their families would
receive a tax cut in 2003.
A typical family of four with two earners making a combined $39,000 will receive a total
of $1,100 in tax relief, compared to the taxes they paid in 2002, under the President's plan
- and not just this year, but in each and every year after. A n d his plan will create
hundreds of thousand of additional jobs by the end of this year and well over a million
more by the end of next year.
The package will not only help America return to its economic potential, it will increase
it, creating a more abundant future with more good jobs and rising real wages. I believe
that is what everyone in this room and across America seeks.
Before I turn to the budget, a word about deficits. Deficits matter. They are never
welcome. But there are times, such as these, when they are unavoidable, particularly
when w e are compelled to address critical national needs. It is important to remember,
even without the President's economic growth and jobs package, homeland security, and
the war on terrorism, w e would have deficits now. Are these deficits welcome? No. Are
they understandable? Yes.
The surpluses we enjoyed were the product of a strong economy, not a weak one. We
will not return to economic strength by taxing our economy when it is struggling, any
more than w e would increase our nation's security by failing to fund its defense when it
is threatened. The prescription for returning to balanced budgets is straightforward: hold
the line on spending and grow the economy. This is the direction the President has
chosen: a course to create real jobs that last. W e are not going to let terrorism and its
effects bring either our nation or our economy to its knees.
Finally, we should remember that current deficits are small relative to our unique
circumstances and to our economy as a whole. Even at their depth, they remain
considerably below the typical levels following a recession over the last 30 years and
they begin a pronounced improvement after next year.
We face new threats and challenges. Job creation and economic growth are keys not only
to our near-term but our long-term success as well. If w e are to meet the threats of today
and the challenges of tomorrow, w e must have a strong economy.
3
In fact, w e must seek a higher level of prosperity for America than w e have known - one
which puts us on an even higher growth path, one which unlocks the fullest potential and
talents of the American people. That means encouraging hard work, rewarding hard
work, and creating the opportunities for work for all Americans. These are the values
that brought America to where w e are today and they are the ones that w e must allow to
lead us into the future.
We must also remember that our success and our example in this endeavor promises not
only a brighter, better future for our people and our children, but for the rest of the world
as well.
The Jobs and Growth Package, our new initiatives to promote savings, to promote health
care coverage, to encourage charitable giving, to promote responsible energy production,
and improved compliance measures from the Internal Revenue Service are all important
budget initiatives.
I look forward to discussing that plan and the rest of the President's budget with you
today.
OFFICE OF PUBLIC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. • WASHINGTON, D.C. • 20220 • (202) 622-2960
For Immediate Release
Tuesday, February 4, 2003
Contact: R o b Nichols
(202) 622-2910
LETTER FROM DEPUTY SECRETARY DAM TO PRESIDENT BUSH
President George W. Bush
The White House
Washington, D.C. 20500
Dear Mr. President:
I am writing to submit my resignation as Deputy Secretary of the Treasury to be effective
on a date consistent with an orderly transition.
It has been a great privilege to serve in your Administration and at the Treasury. I
consider it a special opportunity to support the goals and policies you have set forth so
clearly and wisely for the country. A n d I have found it inspiring to be able to work with
the great leaders you have attracted to government service in your Administration in
bringing about results I so deeply believe in.
In my period at the Treasury I have worked hard on the financial aspects of the war on
terrorism. A m o n g other issues on which I have endeavored to provide n e w and
innovative approaches are international taxation and international trade—and especially
internationalfinancialservices negotiations. I have also been the principal person in the
Treasury working on national security and foreign policy within the framework of the
National Security Council.
As Deputy Secretary I have, of course, spent much of my time on management issues,
especially those involving the Internal Revenue Service and the bureaus and offices
concerned with terroristfinanceand money laundering.
Mr. President, I thank you for the opportunity to serve my country under your leadership.
Sincerely,
Kenneth W. Dam
JS-12
For press releases, speeches, public schedules and official biographies, call our 24-hourfax line at (202) 622-2040
^^ 'U.S. Government Printing Office: 1998 - 619-559
Embargoed Until 2:00 p.m. EST
Wednesday, February 5, 2003
Contact: Rob Nichols
(202) 622-2910
Snow Opening FY04 Budget Statement: Oral
before Senate Finance Committee
February 5, 2003
Chairman Grassley, Ranking M e m b e r Baucus, and distinguished members of the Finance
committee, before I begin m y testimony today I would like to thank you for the trust you
expressed in m e last week by reporting out m y nomination to be Secretary of the
Treasury. I intend to do m y utmost to live up to the tremendous responsibility you and
the President have given to m e .
I welcome the opportunity to appear before you today to discuss the President's budget
forfiscalyear 2004.
Let me begin by offering my views on the essential background for this budget: the
United States economy and President Bush's economic growth plan, which promises to
create jobs, accelerate America's economic recovery, and increase our growth for years
to come.
As every American knows by now - whether from having lost a job, knowing someone
w h o has, or worrying about losing theirs - our economy took a turn for the worse
beginning in the summer of 2000. B y the time President Bush took office an
undercurrent was running against the economy.
The unprovoked and unprecedented terrorist attacks of September 11, 2001 compounded
a recession that was well underway, while the discovery of serious abuses of trust by
some corporate business leaders slowed our recovery from it.
JS-13
For press releases, speeches, public schedules and official biographies, call our 24-hourfox line at (202)
*U.S. Government Printina Office: 1998 - 619-559
2
In response to this confluence of adverse events, President Bush led decisively. Acting
with Congress in a bipartisan fashion, he took the steps necessary to protect a shaken
nation and a fragile economy. In 2001 w h e n relief was needed, he signed the most
sweeping tax relief in a generation. A s evidence of the damage became clearer, he acted
again in March 2002 to further bolster the economy.
These were precisely the right medicines at precisely the right time. These actions made
the recession shorter and shallower than it would have been. In fact, by most measures it
was the mildest since World W a r II.
In the face of extreme adversity, our economy, like our nation, remains resilient. Despite
a sequence of economic slowdown, attack on our homeland, war in Afghanistan, and
weakened investor confidence, the economy is recovering. But as the President has
stated, w e can and must do better. Relative success is not sufficient. Too m a n y
Americans are out of work today, and too m a n y Americans are insecure about their
tomorrow.
We must build on the proven strengths of our economy. We must continue to move
towards policies that will create more good jobs and raise living standards for all. A s
long as there are Americans w h o want a job and can't find one, the economy is not
growing fast enough. That's w h y President Bush's jobs and growth package is so
important. Under the President's proposal, 92 million taxpayers and their families would
receive a tax cut in 2003.
A typical family of four with two earners making a combined $39,000 will receive a total
of $1,100 in tax relief, compared to the taxes they paid in 2002, under the President's plan
- and not just this year, but in each and every year after.
A n d his plan will create hundreds of thousand of additional jobs by the end of this year
and well over a million more by the end of next year.
The package will not only help America return to its economic potential, it will increase
it, creating a more abundant future with more good jobs and rising real wages. I believe
that is what everyone in this room and across America seeks.
Before I turn to the budget, a word about deficits. Deficits matter. They are never
welcome. But there are times, such as these, when they are unavoidable, particularly
when w e are compelled to address critical national needs.
It is important to remember, even without the President's economic growth and jobs
package, homeland security, and the war on terrorism, w e would have deficits now. Are
these deficits welcome? N o . Are they understandable? Yes.
The surpluses we enjoyed were the product of a strong economy, not a weak one. We
will not return to economic strength by taxing our economy w h e n it is struggling, any
more than w e would increase our nation's security by failing to fund its defense w h e n it
is threatened. The prescription for returning to balanced budgets is straightforward: hold
the line on spending and grow the economy.
3
This is the direction the President has chosen: a course to create real jobs that last. W e
are not going to let terrorism and its effects bring either our nation or our economy to its
knees.
Finally, we should remember that current deficits are small relative to our unique
circumstances and to our economy as a whole. Even at their depth, they remain
considerably below the typical levels following a recession over the last 30 years and
they begin a pronounced improvement after next year.
We face new threats and challenges. Job creation and economic growth are keys not only
to our near-term but our long-term success as well.
If we are to meet the threats of today and the challenges of tomorrow, we must have a
strong economy. In fact, w e must seek a higher level of prosperity for America than w e
have k n o w n - one which puts us on an even higher growth path, one which unlocks the
fullest potential and talents of the American people. That means encouraging hard work,
rewarding hard work, and creating the opportunities for work for all Americans. These
are the values that brought America to where w e are today and they are the ones that w e
must allow to lead us into the future.
We must also remember that our success and our example in this endeavor promises not
only a brighter, better future for our people and our children, but for the rest of the world
as well.
The Jobs and Growth Package, our new initiatives to promote savings, to promote health
care coverage, to encourage charitable giving, to promote responsible energy production,
and improved compliance measures from the Internal Revenue Service are all important
budget initiatives.
I look forward to discussing that plan and the rest of the President's budget with you
today.
FROM THE OFFICE OF PUBLIC AFFAIRS
February 5, 2003
JS-14
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. A s indicated in this table, U.S. reserve assets
totaled $78,823 million as of the end of that week, compared to $79,198 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
January 24, 2003
January 31, 2003
79,198
78,823
TOTAL
1. Foreign Currency Reserves!
Euro
Yen
TOTAL
Euro
Yen
TOTAL
a. Securities
7,070
13,353
20,423
7,015
13,113
20,127
0
Of which, issuer headquartered in the U.S.
0
b. Total deposits with:
b.i. Other central banks and BIS
[1,582
2,681
14,263
11,497
2,633
14,129
b.ii. Banks headquartered in the U.S.
0
0
b.ii. Of which, banks located abroad
0
0
b.iii. Banks headquartered outside the U.S.
0
0
b.iii. Of which, banks located in the U.S.
0
0
2. IMF Reserve Position
22,189
22,225
3. Special Drawing Rights (SDRs) 2
11,280
11,298
4. Gold Stock3
11,043
11,043
0
0
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
January 24, 2003
Euro
1. Foreign currency loans and securities
Yen
January 31, 2003
TOTAL
Euro
0
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
Yen
TOTAL
0
2. a. Short positions
0
0
2.b. Long positions
0
0
3. Other
0
0
III. Contingent Short-Term Net Drains on Foreign Currency Assets
January 24, 2003
Euro
1. Contingent liabilities in foreign currency
Yen
January 31, 2003
TOTAL
Euro
Yen
TOTAL
0
0
2. Foreign currency securities with embedded
options
0
0
3. Undrawn, unconditional credit lines
0
0
0
0
La. Collateral guarantees on debt due within 1
year
l.b. Other contingent liabilities
3.a. With other central banks
3.b. With banks and other financial institutions
Headquartered in the U.S.
3.c. With banks and otherfinancialinstitutions
Headquartered outside the U.S.
4. Aggregate short and long positions of
options in foreign
Currencies vis-a-vis the U.S. dollar
4. a. Short positions
4.a.l. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.l. Bought calls
4.b.2. Written puts
Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week m a y be subject to revision. Foreign Currency
Reserves for the prior week are final.
2/The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to the prior week's IMF data. IMF data for the latest week m a y be
subject to revision. IMF data for the prior w e e k are final.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
OFFICE OF
AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. • WASHINGTON, B.C. • 20220 • (202) 622-2960
FOR IMMEDIATE RELEASE
February 6, 2003
Contact: Tony Fratto
(202) 622-2960
TREASURY DESIGNATES CALI CARTEL N E T W O R K IN SPAIN AND COLOMBIA
The Treasury Department's Office of Foreign Assets Control (OF AC) last night added the
names of 59 businesses and 78 individuals to its list of Specially Designated Narcotics
Traffickers (SDNTs). S D N T s are subject to the economic sanctions imposed against Colombian
drug cartels in Executive Order 12978. O F A C has determined that these 137 n e w S D N T s are
acting as fronts for Colombia's Cali drug cartel and are part of its international business and
financial network operating in Spain and Colombia. The drug cartel businesses added to the list
of S D N T s today are all determined to be owned or controlled by Cali cartel leaders Miguel
Rodriguez Orejuela, currently incarcerated in a Colombian m a x i m u m security prison, Gilberto
Rodriguez Orejuela, and other named S D N T s .
The OF AC action blocks the assets of SDNTs found in U.S. jurisdiction and prohibits
Americans from doing business with them, thereby further exposing, isolating, and incapacitating
Colombian drug cartels and their agents. The 59 Cali drug cartel businesses announced today
include 10 Colombian-owned Spanish companies and 49 Colombian companies. In Spain, the
businesses include real estate firms, an Internet services company, a coffee import/export
company, a general services company, a graphic arts services provider, and a film distribution
services company. In Colombia, the businesses include a m o n e y exchange house,
pharmaceutical manufacturers and distributors, import/export firms, and investment, real estate
and consulting companies.
The network of 59 Cali cartel fronts in Spain and Colombia named today on the list join
244 other Colombian drug cartel businesses on the S D N T list. The list includes Cali cartel
businesses Copservir, and its Drogas La Rebaja drugstore chain and Credirebaja charge card,
the America de Cali professional soccer team, the Cosmepop cosmetics company, the
Farmacoop pharmaceutical laboratory, a Cali radio broadcasting company, as well as consulting,
investment, construction, real estate, agricultural, and distribution firms.
This action is part of the ongoing interagency effort of the Treasury, Justice and State
Departments to carry out Executive Order 12978, signed on October 21, 1995, which applies
economic sanctions against Colombia's drug cartels.
JS-15
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 62
'U.S. Government Printing Office: 1998 - 619-559
The assets of a total of 749 Colombian drug cartel businesses and individuals are n o w
blocked under the 1995 Executive Order; and those businesses and individuals are prohibited
from American financial and business dealings. The list of S D N T s includes 12 kingpins from
Colombia's Cali, North Valle, and North Coast drug cartels.
The list of businesses and individuals named by OF AC as SDNTs today is attached and
available at www.treas.gov/ofac, as is the entire list of S D N T s . Today's list will be published in
the Federal Register at a later date.
OFFICE OF PUBLIC AFFAIRS ® 1500 PENNSYLVANIA AVENUE, N.W. • WASHINGTON, B.C. « 20220 ® (202) 622-2960
Embargoed Until 11:15 a.m. E S T
Friday, February 7, 2003
Contact: R o b Nichols
(202) 622-2910
Prepared R e m a r k s by United States Treasury Secretary J o h n W . S n o w
At the Swearing-in with the
President of the United States
T h e Treasury Department
February 7, 2003
Mr. President, Treasury colleagues, family and friends, it is humbling to stand before you today,
as the heir to a tradition as old as our constitution, in a role established by the founders of this
republic.
Mr. President, you have upheld the honor and dignity of your office through tfmes of unforeseen
peril, renewing our nation's hope and confidence. I, too, shall strive to maintain that standard of
leadership in m y office. Working with m y colleagues here, I intend to earn your faith and reward
your trust.
Today, the challenge to the Department of the Treasury is clear. Our task is to help restore the
American economy to its full and vast potential. Mr. President, in the past you have taken welltimed and decisive action to bolster our economic freedom, security, and confidence. At the start
of this year you put forth a n e w proposal for jobs and growth that is precisely the right plan at the
exactly the right time.
My first responsibility shall be to deliver your plan to the American people, so that all those who
seek work can find it, all families can provide for parents and children, and all businesses can
invest with confidence in our shared future. Like you, Mr. President, I want to see more "Help
Wanted" signs all across America.
W e must build on the proven strengths of our economy. W e must continue to m o v e towards
policies that will create more good jobs and raise living standards for all. As long as there are
Americans w h o want a job and can't find one, the economy is not growing fast enough.
That's why your jobs and growth package is so important. The package will not only help
America return to its economic potential, it will increase it, creating a more abundant future with
more good jobs and rising real wages. Swift enactment of this package is m y top priority.
Mr. President, you have asked m u c h of this department, and put us at the center of the economic
policy debate. I a m confident that w e will be able to respond to all you ask of us, because of the
truly dedicated public servants that serve here at 1500 Pennsylvania Avenue. These are the best
and the brightest. The success w e enjoy will only c o m e through the excellence and integrity of
the m e n and w o m e n of the United States Treasury. It is an honor, today, to count myself among**
them.
Mr. President, the charge you have bestowed on us is a joyful privilege. I thank you for it. We
will execute it with pride.
Thank you.
JS-16
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
'U.S. Government Printing Office- 1998 - 519-559
REMARKS B Y THE PRESIDENT
AT THE SWEARING-IN CEREMONY FOR
TREASURY SECRETARY JOHN S N O W
The Cash Room
The Treasury Building
11:00 A.M. EST
JS-17
THE PRESIDENT: Listen, thank you, all, for coming and good morning. Toda
welcome John S n o w as the 73rd Secretary of the Treasury. (Applause.) In this position
John Snow will be a key advisor on the economy, will be an advocate for m y
administration's agenda of faster growth, more n e w jobs, and wider trade. John has had a
distinguished career, both in the private sector and the public sector. A n d I a m so pleased
to have him join in m y Cabinet. A n d I a m grateful for his willingness to serve our nation
once again.
I want to thank Judge Wilkinson for swearing in his good buddy.
(Laughter.) Thank you for coming, Judge. I'm honored you and your wife are here. I'm
also so pleased that the Snows are with us; Carolyn and all the Snows are up here with us.
(Laughter.) Thank you all for coming. I want to thank Donnie Evans, w h o is the
Secretary of Commerce for being here; K e n D a m , the Deputy Secretary of the Treasury,
who serves so well in that position; other distinguished guests w h o are here to witness
this swearing-in. I want to thank all of those w h o work in the Department of the Treasury
for joining us today, as well.
Secretary Snow takes office at a time of challenge for this country. The American
economy is in its second consecutive year of growth, yet it is not growing fast enough.
The economy is not strong enough. M a n y family budgets are strained in America today.
Too many small businesses are struggling just to stay afloat. The nation's rate of
unemployment was 5.7 pergent last month, d o w n from the prior months. But w e will not
be satisfied until this economy grows fast enough to employ every m a n and w o m a n w h o
seeks a job. (Applause.)
W e will work with the United States Congress to address these challenges. A n d John
Snow will be on point, and working with the Congress. I proposed a plan to boost the
economy with tax relief for every American w h o pays federal income taxes. (Applause.)
Here's what we believe: by leaving more money in the hands that earned it, we will
stimulate consumer spending and encourage investment, so that businesses large and
small can expand and employ more people.
We know the role of government is not to create wealth, but an environment in which
the entrepreneurial spirit flourishes. W e k n o w that businesses hire w h e n they grow, and
they grow w h e n they invest. A n d so our proposal will promote capital formation. It is
important for Congress to remember that most small businesses are sole proprietorships
or limited partnerships. A n d when w e cut individual tax rates, w e are stimulating capital
formation in the small business sector of America. (Applause.)
Our proposal will promote capital formation and investment by ending the
unfair double taxation on dividends. (Applause.) Not only will this proposal
help when it comes for job creation, it will help all investors, including nearly 10 million
seniors w h o receive dividend income.
The Secretary of Treasury has been to Capitol Hill a lot already.
(Laughter.) A n d he went up there recently to talk about the budget I submitted to the
Congress. This budget calls for spending discipline in Washington, D.C. W e believe the
best way to deal with our deficits is to encourage economic growth and encourage
spending discipline in Washington, D.C. (Applause.)
In addition to his work as economic advisor and economic spokesman for the country
and for this administration, Secretary S n o w will lead one of the oldest, largest and most
important departments of our government. The Department of Treasury bears
responsibility for a wide range of important tasks, from minting our nation's currency to
stopping the flow of m o n e y to terrorist groups.
I appreciate the good work of the dedicated men and women throughout this
department. A n d you can rest assured that your n e w boss is a superb executive and a fine
man, with a good heart. John will be an active advocate for policies that encourage
economic growth. A n d he'll be a good steward of the taxpayer's dollars. A n d that is
fitting, because very soon, each one of those dollars will bear the signature of Secretary
John Snow. Congratulations. (Applause.)
SECRETARY SNOW: Mr. President, Treasury colleagues, family and friends, it's
truly humbling to stand before you today as the heir to a tradition as old as our
Constitution, and in a role established by the founders of this republic.
Mr. President, you've upheld the honor and dignity of your office through times of
unforeseen peril, renewing our nation's hope and our nation's confidence. I, too, shall
strive to maintain that standard of leadership in the
office to which you've appointed m e . In working with m y colleagues here, w e
intend to earn your faith and reward your trust in us.
Today the challenge facing the department is clear. The President has mentioned it.
Our task is to help restore the American economy to its full and its vast potential. In the
past, Mr. President, you've taken well-timed and decisive actions to bolster the economy,
to bolster our freedoms and our security and our confidence. A n d at the start of this year,
you put forth a bold n e w proposal for jobs and for growth, a proposal that is precisely the
right medicine at precisely the right time.
My first responsibility, the department's first responsibility, is to deliver your plan to
the American people so that all those w h o seek tofindwork, all families w h o seek to
provide for their parents and their children, and all businesses can invest and grow with
confidence in our shared future. Like you, Mr. President, I want to see "help wanted"
signs go up all across America.
To do so we must build on the proven strengths of our economy. We must continue to
m o v e towards policies that create more good jobs and raise the living standards for all.
A s long as there is one American w h o wants a job and can'tfindone, the econofaiy
simply isn't growing fast enough. That's w h y your jobs and growth package is so
essential. The package will not only return America to its economic potential, but I'm
convinced it's going to give us a higher growth path for the future. It will create a more
abundant future for all. Swift enactment of this package is m y number one priority.
Mr. President, you've asked much of this department, and you've put us at the very
center of the economic policy debate. I'm confident that working with m y colleagues
here, w e will respond to all that you ask of us, because of the truly dedicated and able
public servants here at 1500 Pennsylvania Avenue. I've gotten to k n o w a lot of the folks
here in this department going through this confirmation process. They really are the best
and the brightest. The success w e will enjoy is due to their excellence and their integrity.
A n d it's an honor to count myself, today, among all of you.
Mr. President, the charge you've bestowed upon us is truly a joyful privilege. I want
to thank you for it and commit to you that w e will execute it with pride. Thank you.
(Applause.)
END
11:13 A.M. EST
OFFICE OF Pl'ftUC AfTURS * Hm
l'l\SNSYl^AM\ AVfc>i!jl.S, N.W, * WASHINGTON. 1>A\* liillu «M202|ft*2*2**41
EMBARGOED UNTIL 11:00 A.M.
February 6, 2003
CONTACT:
Office of Financing
202/691-3550
TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction 13-week and 26-week Treasury bills totaling $34,000
million to refund an estimated $30,882 million of publicly held 13-week and 26-week
Treasury bills maturing February 13, 2003, and to raise new cash of approximately
$3,118 million. Also maturing is an estimated $11,000 million of publicly held 4-week
Treasury bills, the disposition of which will be announced February 10, 2003.
The Federal Reserve System holds $13,660 million of the Treasury bills maturing
on February 13, 2003, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders either in these
auctions or the 4-week Treasury bill auction to be held February 11, 2003. Amounts
awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of each auction. These
noncompetitive bids will have a limit of $100 million per account and will be accepted
in the order of smallest to largest, up to the aggregate award limit of $1,000
million.
Treasury-Direct customers have requested that we reinvest their maturing holdings
of approximately $1,105 million into the 13-week bill and $886 million into the 26week bill.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions set
forth in the Uniform Offering Circular for the Sale and Issue of Marketable Book-Entry
Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about each of the new securities are given in the attached offering
highlights.
oOo
Attachment
JS-18
HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED FEBRUARY 13, 2 003
February 6, 2 0 03
Offering Amount
$18,000
Maximum Award (35% of Offering Amount)
$ 6,300
Maximum Recognized Bid at a Single Rate .... $ 6,300
NLP Reporting Threshold
$ 6,300
NLP Exclusion Amount
$ 5,600
Description of Offering:
Term and type of security
CUSIP number
Auction date
Issue date
Maturity date
Original issue date
Currently outstanding
Minimum bid amount and multiples
million
million
million
million
million
91-day bill
912795 MM 0
February 10, 2003
February 13, 2003
May 15, 2003
November 14, 2002
$21,817 million
$1,000
$16,000
$ 5,600
$ 5,600
$ 5,600
None
million
million
million
million
182-day bill
912795 NH 0
February 10, 2003
February 13, 2003
August 14, 2003
February 13, 2003
$1,000
The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve
Banks as agents for FIMA accounts. Accepted in order of size from smallest to largest with no more than $100
million awarded per account. The total noncompetitive amount awarded to Federal Reserve Banks as agents for FIMA
accounts will not exceed $1,000 million. A single bid that would cause the limit to be exceeded will
be partially accepted in the amount that brings the aggregate award total to the $1,000 million limit. However,
if ^ there are two or more bids of equal amounts that would cause the limit to be exceeded, each will be prorated
to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in increments of .005%, e.g., 7.100%, 7.105%.
(2) Net long position (NLP) for each bidder must be reported when the sum of the total bid amount, at all
discount rates, and the net long position equals or exceeds the NLP reporting threshold stated above.
(3) Net long position must be determined as of one half-hour prior to the closing time for receipt of
competitive tenders.
Receipt of Tenders:
Noncompetitive tenders
Prior to 12:00 noon eastern standard time on auction day
Competitive tenders
Prior to 1:00 p.m. eastern standard time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank on issue date, or payment of full par amount
with tender. Treasury-Direct customers can use the Pay Direct feature, which authorizes a charge to their account of
record at their financial institution on issue date.
of the Treasury • Bureau of the Public Debt • Washington, D C 20239
Contact: Stephen Meyerhardt
(202) 691-3792
FOR R E L E A S E A T 3:00 P M
February 6,2003
PUBLIC DEBT ANNOUNCES ACTIVITY FOR
SECURITIES IN THE STRIPS PROGRAM FOR JANUARY 2003
The Bureau of the Public Debt announced activity for the month of January 2003, of securities within the
Separate Trading of Registered Interest and Principal of Securities program (STRIPS).
Dollar Amounts in Thousands
Principal Outstanding
(Eligible Securities)
$2,238,917,742
Held in Unstripped Form
$2,067,937,832
Held in Stripped Form
Reconstituted in January
$170,979,910
$13,548,419
The accompanying table gives a breakdown of STRIPS activity by individual loan description. The balances in
this table are subject to audit and subsequent revision. These monthly figures are included in Table V of the
Monthly Statement of The Public Debt, entitled "Holdings of Treasury Securities in Stripped Form."
r
The Strips Table along with the n e w Monthly Statement of The Public Debt is available on Public Debt's
Internet site at: www.publicdebt.treas.gov. A wide range of information about the public debt and Treasury
securities is also available at the site.
oOo
www.publicdebt.treas.gov
JS-19
TABLE V - HOLDINGS OF TREASURY SECURITIES IN STRIPPED FORM, JANUARY 31, 2003 - Continued
Corpus
STRIP
CUSIP
L(Dan Description
Treasury Notes:
Series:
CUSIP:
912827 J78
A
3Z3
6U1
4B5
6V9
4D1
6W7
4H2
6Y3
4K5
6Z0
7A4
L83
4N9
7C0
7D8
7E6
4U3
7G1
7H9
7K2
N81
5A6
7M8
912828 A A 8
AB6
912827 P89
5F5
912828 A D 2
AEO
AG5
912827 Q 8 8
5M0
912828 A K 6
AL4
AM2
912827 R 8 7
5S7
912828 A Q 3
AR1
AS9
912827 S86
T85
6D9
U83
V82
6N7
W81
X80
6X5
Y55
Z62
7F3
2J0
2U5
912828 A C 4
912827 3E0
912828 A H 3
ANO
912827 3X8
4F6
4V1
5G3
5N8
5Z1
6J6
6T4
7B2
7L0
912828 AJ9
AP5
D
M
E
N
F
P
G
Q
H
R
S
B
J
T
U
V
K
W
X
J
A
E
K
L
M
B
F
N
P
Q
C
G
R
S
T
D
H
U
V
G
A
B
E
C
D
F
A
B
E
C
D
F
B
C
E
D
F
G
B
4
5-1/2
4-1/4
5-S/8
3-7/8
3-7/8
5-3/4
5-1/4
3-5/8
2-3/4
2-3/4
4-1/4
3
3-1/4
3
5-7/8
4-3/4
3
3-5/8
3-3/8
7-1/4
5-1/4
3-1/4 *
2-7/8
2-1/4
7-1/4
6
2-1/8
1-7/8
2-1/8
7-7/8
5-7/8
2
1-3/4
1-5/8
7-1/2
6-1/2
6-3/4
6-1/2
5-7/8
5-3/4
5-5/8
6-7/8
4-5/8
7
6-1/2
3-1/2
6-1/4
6-5/8
4-3/8
6-1/8
3-1/4
3
c
D
B
5-1/2
5-5/8
4-3/4
5-1/2
c
6
B
c
B
c
B
D
E
Total Treasury Notes
Grand Total
Interest Rate:
6-1/4
5-1/2
4-5/8
5-1/2
4-1/4
5-3/4
6-1/2
5-3/4
5
5
4-7/8
4-3/8
4
912820 BFcJ
CS4I
GDc!
CU£)
GE1
CW£
GFfi
DA2
GH4
DC8
GJO
GK7
BG1
DE4
GM3
GN1
GP6
DJ3
GR2
GSO
GU5
BH9
DQ7
GW1
GX9
GY7
BJ5
DU8
HA8
HB6
HD2
BK2
DZ7
HG5
HH3
HJ9
BLO
EE3
HM2
HNO
HP5
BM8
BN6
ER4
BP1
BQ9
FXO
BR7
BS5
GG6
BT3
BUO
GQ4
BW6
BX4
GZ4
CA3
HEO
HK6
CQ8
CY1
DKO
DV6
EA1
EM5
FT9
GC5
GL5
GV3
HF7
HL4
Amount Outstanding in Thousands
Maturity Date
Total
Outstanding
02/15/03
02/28/03
02/28/03
03/31/03
03/31/03
04/30/03
04/30/03
05/31/03
05/31/03
06/30/03
06/30/03
07/31/03
08/15/03
08/15/03
08/31/03
09/30/03
10/31/03
11/15/03
11/30/03
12/31/03
01/31/04
02/15/04
02/15/04
02/29/04
03/31/04
04/30/04
05/15/04
05/15/04
05/31/04
06/30/04
07/31/04
08/15/04
08/15/04
08/31/04
09/30/04
10/31/04
11/15/04
11/15/04
11/30/04
12/31/04
01/31/05
02/15/05
05/15/05
05/15/05
08/15/05
11/15/05
11/15/05
02/15/06
05/15/06
05/15/06
07/15/06
10/15/06
11/15/06
02/15/07
05/15/07
05/15/07
08/15/07
08/15/07
11/15/07
02/15/08
05/15/08
11/15/08
05/15/09
08/15/09
02/15/10
08/15/10
02/15/11
08/15/11
02/15/12
08/15/12
11/15/12
23,562,691
13,670,354
14,685,095
14,172,892
14,674,853
12,573,248
13,338,528
13,132,243
13,331,937
13,126,779
14,671,070
16,003,270
28,011,028
19,852,263
18.665,038
22,675,482
25,147,960
18,625,785
26,170,526
29,666,988
30,775,555
12,955,077
17,823,228
31,746.067
32,873,508
32,654,971
14,440,372
18,925,383
33,297,400
34,050,042
33,250.010
13,346,467
18,089,806
34,541,397
34,655,535
32,439,549
14,373,760
32,658,145
32,871,320
33,203,363
33,838.032
13,834,754
14,739,504
28.562,370
15,002,580
15,209,920
28,062,797
15.513.587
16.015.475
27,797,852
22,740.446
22,459,675
35,380,129
13,103,678 *
13,958.186
24,351.431
25,636,803
25,410.844
23.311,319
13,583,412
27,190,961
25,083,125
14,794,790
27,399,894
23,355,709
22,437,594
23,436,329
26,635,316
24,779.838
19.647.976
18,112,742
Portion Held in
Unstripped Form
21,568,365
13,623,154
14,278,695
14,132,092
14.674,853
12,532,448
13,338,528
13,021,843
13,331,937
13,077,179
14,671,070
16,000,070
25.136,062
19,782,663
18,665,038
22,673,882
25.146,360
16,958,390
26,170,526
29.666,988
30,775,555
12,030,593
17,811,228
31,746,067
32,873,508
32,654.971
13.378,335
18.925.383
33,297,400
34.050,042
33,250.010
11,110,796
18,089,806
34,541.397
34,655,535
32,439,549
14,365,760
32,658,145
32,871,320
33,203,363
33,838,032
13,183.835
14,739,104
28,491,170
15.002.180
14,488.568
27,392.197
15,508,107
14,930,834
27.797,852
22,602.446
22,395,675
34,517.243
12,423,640
12.558,073
24.351,431
23,438,511
25,410,844
22,472.039
13.197,191
27,124.041
24,950,333
14,731,490
26,861,781
23,352,309
22,437.094
23.427,289
26,628.096
24.772,238
19,647,976
18,112,542
1,586,116,053
1,563,963,067
2,238,917,742
2,067,937.832 |
Portion Held in
Stripped Form
1,994.326
47,200
406,400
40,800
Reconstituted.
This Month 17
324,792
0
0
0
0
0
0
0
0
0
0
0
0
40.800
0
110,400
0
49,600
0
3,200
2,874,966
69,600
160,200
0
0
0
0
0
1,600
1,600
1,667.395
4,300
0
0
0
0
0
0
924,484
12,000
37,600
0
0
0
0
0
0
0
1.062.037
14,000
0
0
0
0
0
0
0
0
2.235,671
24,700
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
650,919
105,440
8,000
400
0
71.200
72,000
400
0
721,352
670,600
5,480
1.084.641
17,000
8,600
0
55,529
0
0
138,000
64.000
862.886
680,038
1,400,113
8,000
0
186,000
64,608
28,600
0
0
2,198,292
11,200
0
0
839,280
386,221
66,920
132,792
63,300
538,113
3,400
439,800
5,000
0
0
4,000
0
200
0
0
0
0
0
0
0
0
22.152,986
1,571.369
170,979,910
13,548,419
500
9.040
7,220
7,600
Loan Description
Treasury Bonds:
CUSIP:
912810 DM7
DQ8
DR6
DU9
DN5
DPO
DS4
DT2
DV7
DW5
DX3
DY1
DZ8
EA2
EBO
EC8
ED6
EE4
EF1
EG9
EH7
EJ3
EKO
EL8
EM6
EN4
EP9
EQ7
ES3
ET1
EV6
EW4
EX2
EYO
EZ7
FA1
FB9
FE3
FFO
FG8
FJ2
FM5
FP8
Interest Rate:
11-5/8
12
10-3/4
9-3/8
11-3/4
11-1/4
10-5/8
9-7/8
9-1/4
7-1/4
7-1/2
8-3/4
8-7/8
9-1/8
9
8-7/8
8-1/8
8-1/2
8-3/4
8-3/4
7-7/8
8-1/8
8-1/8
8
7-1/4
7-5/8
7-1/8
6-1/4
7-1/2
7-5/8
6-7/8
6
6-3/4
6-1/2
6-5/8
6-3/8
6-1/8
5-1/2
5-1/4
5-1/4
6-1/8
6-1/4
5-3/8
Total Treasury Bonds.
Treasury Inflation-Indexed Notes:
Interest Rate:
Series:
CUSIP:
3-3/8
A
912827 2 M 3
3-5/8
A
3T7
3-7/8
A
4Y5
4-1/4
A
5W8
3-1/2
A
6R8
3-3/8
A
7J5
3
C
912828AF7
912803 A B 9
AD5
AG8
AJ2
912800 AA7
912803 AA1
AC7
AE3
AFO
AH6
AK9
AL7
AM5
AN 3
AP8
AQ6
AR4
AS2
ATO
AU7
AV5
AW3
AX1
AY9
AZ6
BAO
BB8
BC6
BD4
BE2
BF9
BG7
BH5
BJ1
BK8
BL6
BM4
BP7
BV4
BW2
CG6
CH4
CK7
912820 BV9
CL9
DN4
EK9
GA9
GT8
HC4
11/15/04
05/15/05
08/15/05
02/15/06
11/15/14
02/15/15
08/15/15
11/15/15
02/15/16
05/15/16
11/15/16 .
05/15/17
08/15/17
05/15/18
11/15/18
02/15/19
08/15/19
02/15/20
05/15/20
08/15/20
02/15/21
05/15/21
08/15/21
11/15/21
08/15/22
11/15/22
02/15/23
08/15/23
11/15/24
02/15/25
08/15/25
02/15/26
08/15/26
11/15/26
02/15/27
08/15/27
11/15/27
08/15/28
11/15/28
02/15/29
08/15/29
05/15/30
02/15/31
01/15/07
01/15/08
01/15/09
01/15/10
01/15/11
01/15/12
07/15/12
Total Inflation-Indexed Notes.
Treasury Inflation-Indexed Bonds:
CUSIP:
Interest Rate:
912810 FD5
3-5/8
FH6
3-7/8
FQ6
3-3/8
Total Inflation-Indexed Bonds
912803 B N 2
CF8
CL5
04/15/28
04/15/29
04/15/32
8,301,806
4,260,758
9,269,713
4,755,916
5,015,284
10,520,299
4,023,916
5,584,859
5,431,754
18,823,551
18,787,448
15,559.169
10.968,358
6,717,439
7,174,470
13.090,498
18,940.932
9,476,268
7,582,183
17,059,306
10,075,573
10,066,788
9,506,382
30,632,194
10,127,790
7,423,626
15,782,061
22,659,044
9,604,162
9,509,170
11,187,207
12.837,916
8,810.418
10.860.177
9.521,971
9,196,756
22,021,339
11,776,201
10,947,052
11,350.341
11,178.580
17.043.162
16.427,648
4,736,988
2,055,830
5,781,666
4,238,909
1,794,162
9,214,259
3,274.755
3,173,573
4,923,594
18,245.738
16,745,848
8,763,430
7,675,143
2,728,538
2.826,994
8.657,383
17.751.232
6,684,635
3,440,290
8,639,210
8,962,183
5,403,541
7.011.352
15,219.621
9.149.780
3.719.358
10,445,847
19,379,701
3,326,464
3,411,729
6,891,910
11,695,157
5,835.975
4.421,765
5,512,914
6,706,226
9,248,919
10,496,801
10.118,322
10.528,745
10,091,230
16,176,278
16,212,248
3,564,818
2,204,928
3,488,047
517,007
3,221,122
1,306,040
749,161
2.411,286
508,160
577,813
2,041,600
6,795,739
3,293,215
3,988,901
4,347,476
4,433,115
1,189.700
2,791,633
4,141,893
8.420,096
1,113,390
4,663,247
2.495,030
15,412,573
978,010
3,704,268
5,336,214
3.279,343
6,277.698
6,097.441
4.295,297
1,142,759
2,974,443
6,438,412
4,009,057
2,490,530
12.772,420
1,279,400
828.730
821,596
1,087.350
866,884
215,400
1,015,800
96,147
38,205
83,040
0
393,560
127,440
102,400
363,200
125,600
177,360
546,200
602,200
140,800
119,900
757,200
323,720
222,600
171,420
873,600
175,000
744,571
91,160
1,235,700
20,800
381,200
123,200
107,200
205,680
156,800
538,685
31,200
115,540
.287,600
430,400
315,200
483,600
47,900
67,400
25,200
45,050
67,572
0
499,889.485
351,318,243
148,571,242
11,977,050
18,032,004
18,866,258
17.579,941
12,199.357
11,459,559
6.130,613
23,209,856
18,032,004
18,754,036
17,579,941
12,199,357
11.459.559
6,130.613
23,209,856
0
112,222
0
0
0
0
0
107,477,587
107,365,365
112,222
18,813,104
21,501,966
5,119,547
18,807,499
21,364,111
5.119,547
5,605
137,855
0
45,434,617
45,291,157
143,460
OPKH JC nr w;»uc U FURS * l^ihi ;M«.N\5»YL\ \ M \ \\ KM,K, \\H\ * n \MH\<; n>V [>.<'.* liii:n a<Io: hZl » M I
EMBARGOED UNTIL 11J00 A.M.
February 10, 2003
Contact:
Office of Financing
202/691-3550
TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $20,000 million to
refund an estimated $11,000 million of publicly held 4-week Treasury bills maturing
February 13, 2003, and to raise new cash of approximately $9,000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreasuryDirect will not be accepted.
The Federal Reserve System holds $13,660 million of the Treasury bills maturing
on February 13, 2003, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balance of the amount not -awarded in today's 13-week and 26-week Treasury
bill auctions. Amounts awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New York
will be included within the offering amount of the auction. These noncompetitive bids
will have a limit of $100 million per account and will be accepted in the order of
smallest to largest, up to the aggregate award limit of $1,000 million.
Note; The closing times for receipt of noncompetitive and competitive tenders
will be at 11:00 a.m. and 11:30 a.m. eastern standard time, respectively.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions
set forth in the Uniform Offering Circular for the Sale and Issue of Marketable BookEntry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about the new security are given in the attached offering highlights.
oOo
Attachment
JS-20
HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED FEBRUARY 13, 2003
February 10, 2 003
r^-F^-i™ lTBrt11T1i.
....$20,000
Oifering Amount. ...........»•-•
. . * /
Maximum Award (35% of Offering Amount)... $ 7,000
Maximum Recognized Bid at a Single Rate.,$ 7,000
NLP Reporting Threshold
•-•$ 7,000
NLP Exclusion M o u n t
••
••$ 9,500
million
. •. i •
million
million
million
million
Description of Offering;
.28-day bill
Term and type of security
.912795 MC 2
CUSIP number 0 ............
.February 11, 2 0 03
Auction date.............
.February 13, 2 003
JL S sue Qaus ...............
.March 13, 2 003
Maturity date
.September 12, 2002
Original issue date......
.$37,123 million
Currently outstanding.
Minimum bid amount and multiples....$1, 000
Submission of Bids;
Noncompetitive bids; Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FIMA accounts. Accepted in order of size from smallest to largest
with lio more than $100 million awarded per account. The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FIMA accounts will not exceed $1,000 million. A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate award total to the $1,000
million limit. However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 4.215%.
(2) Net long position (NLP) for each bidder must be reported when
the sum of the total bid amount, at all discount rates, and the
net long position equals or exceeds the NLP reporting threshold
stated above.
(3) Net long position must be determined as of one half-hour prior
to the closing time for receipt of competitive tenders.
Receipt of Tenders:
Noncompetitive tenders:
Prior to 11:00 a.m. eastern standard time on auction day
Competitive tenders;
Prior to 11:30 a.m. eastern standard time on auction day
Payment Terms; By charge to a funds account at a Federal Reserve Bank
on issue data.
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, D C 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT
FOR IMMEDIATE RELEASE
February 10, 2 0 03
Office of Financing
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
91-Day Bill
February 13, 2003
May 15, 2003
912795MM0
Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:
1.150%
Investment Rate 1/:
1.171%
Price:
99.709
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 28.34%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type
Tendered
Accepted
Competitive
Noncompete tive
FIMA (noncompetitive^
32,767,375
1,537,560
125,000
16,337,675
1,537,560
125,000
SUBTOTAL
34,429,935
18,000,235 2/
6,306,490
6,306,490
40,736,425
24,306,725
Federal Reserve
TOTAL
Median rate
1.140%: 5 0 % of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.125%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 34,429,935 / 18,000,235 = 1.91
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT =
$1,228,367,000
http ://www.publicdebt.treas.gov
JS-21
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, D C 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT
FOR IMMEDIATE RELEASE
February 10, 2 003
Office of Financing
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
182-Day Bill
February 13, 2003
August 14, 2 0 03
912795NH0
Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:
1.165%
Investment Rate 1/:
1.18
Price:
99.411
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted
81.98%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type
Tendered
Accepted
Competitive
Noncompetitive
FIMA (noncompetitive
32,077,730
1,263,988
195,000
14,541,140
1,263,988
195,000
SUBTOTAL
33, 536, 71!
16,000,128 2/
5,702,347
5,702,347
39,239,065
21,702,475
Federal Reserve
TOTAL
Median rate
1.155%: 5 0 % of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.140%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 33,536,718 / 16,000,128 = 2.10
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $953,395,000
http ://www.publicdebt.treas.gov
JS-22
PUBLIC DEBT N E W
Department of the Treasury • Bureau of the Public Debt • Washington, D C 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
Office of Financing
202-691-3550
CONTACT
FOR IMMEDIATE RELEASE
February 11, 2 0 03
RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
28-Day Bill
February 13, 2 003
March 13, 2003
912795MC2
Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:
1.155%
Investment Rate 1/:
1.174%
Price:
99.910
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted
55.89%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Competitive
Noncompetitive
FIMA (noncompetitive)
$
SUBTOTAL
43,547,500
46,501
0
$
$
19,953,, 750
46, . 501
0
43,594,001
20,000, 251
1,650,956
1,650, 956
Federal Reserve
TOTAL
Accepted
Tendered
Tender Type
45,244,957
$
21,651, 207
Median rate
1.145%: 5 0 % of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.130%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 43,594,001 / 20,000,251 = 2.18
1/ Equivalent coupon-issue yield.
http ://www.publicdebt.treas.gov
JS-23
PUBLIC DE
Department of the Treasury • Bureau of the Public Debt • Washington, D C 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE
February 11, 2003
Office of Financing
202-691-3550
CONTACT
RESULTS OF TREASURY'S AUCTION OF 5-YEAR NOTES
Interest Rate:
Series:
CUSIP No:
Issue Date:
Dated Date:
Maturity Date:
3%
E-2008
912828AT7
High Yield:
3 .029%
Price:
February 18, 2003
February 15, 2003
February 15, 2008
99.866
All noncompetitive and successful competitive bidders were awarded
securities at the high yield. Tenders at the high yield were
allotted 71.96%. All tenders at lower yields were accepted in full.
Accrued interest of $ 0.24862 per $1,000 must be paid for the period
from February 15, 2003 to February 18, 2003.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tendered
Tender Type
Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)
33,895,105
237,378
30,000
23,732,654
237,378
30,000
SUBTOTAL
34,162,483
24,000,032 1/
Federal Reserve
TOTAL
3,483,950
3,483,950
37,646,433
27,483,982
Median yield
2.980%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low yield
2.900%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 34,162,483 / 24,000,032 = 1.42
1/ Awards to TREASURY DIRECT = $145,222,000
http://www.publicdebt.treas.gov
JS-24
OFFICE OF PUBLIC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. © WASHINGTON, B.C. » 20220 * (202) 622-2960
Jill HTIi " •i.l.lillJ«r-^»-^^"»"- j '-''-" M '* > '"'^^
AIR T R A N S P O R T A T I O N STABILIZATION B O A R D
Contact:
For Immediate Release
February 11, 2003
Betsy Holahan
(202) 622-2960
Air Transportation Stabilization Board
Conditionally Approves Application by US Airways, Inc.
W A S H I N G T O N , D C - The Air Transportation Stabilization Board (the Board) confirmed
today its conditional approval of the application by U S Airways, Inc. for a $900 million
loan guarantee under the Air Transportation Safety and System Stabilization Act and
implementing regulations promulgated by the Office of Management and Budget. The
Board's decision was unanimous. The Board's approval is subject to several conditions
identified inthe Board's letter to U S Airways, Inc., which is attached.
-30JS-25
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 62
•I I Q
ffnwernmonl
Pr.nl.nn Offiro- 1QQR . filO.gfi.
AIR TRANSPORTATION STABILIZATION BOARD
Daniel G. Montgomery
Executive Director
February 11,2003
Mr. David N. Siegel
President and Chief Executive Officer
U S Airways, Inc.
Crystal Park Four
2345 Crystal Drive
Arlington, V A 22227
Re: Application for a Loan Guarantee Under the Air Transportation Safety and System
Stabilization Act
Dear Mr. Siegel:
This letter refers to the application of US Airways, Inc. (the "Applicant"), dated June
7, 2002, as supplemented (the "Application"), for a Federal loan guarantee under the Air
Transportation Safety and System Stabilization Act, Pub. L. N o . 107-42, 115 Stat. 230 (the
"Act") and the regulations promulgated thereunder, 14 C F R Part 1300 (the "Regulations").
The Applicant has requested expedited action by the Board in connection with the
Applicant's reorganization plan pending in the United States Bankruptcy Court for the
Eastern District of Virginia, Alexandria Division, and to facilitate access to the remaining
portion of its debtor-in-possession financing. The Board is asked to participate in a $1 billion
financing by providing a Federal government guarantee of $900 million, representing 90
percent of the proposed financing.
The Board has carefully considered the Application under the standards set out in the
Act and Regulations. The Board's consideration has included a review and analysis of the
Application by the Board's staff and the Board's financial and industry consultants. The
Board voted unanimously to approve the Application incorporating the revised business plan,
subject to the conditions set out in this letter.
The Applicant's management has pursued a disciplined approach to executing its
restructuring plan and reacting to changing economic conditions in the airline industry. The
Board recognizes the difficult decisions confronting management and stakeholders in
proposing, negotiating and accepting concessions. A m o n g other factors, the Board's action is
based on the proposed achievement of substantial and diverse cost savings and the
development of credible revenue assumptions to support the business plan submitted. In the
Mr. David N . Siegel
February 11,2003
Page 2
Board's view, the Applicant's management has presented a business plan that reasonably
positions the Applicant to meet the challenges and risks of this industry and to achieve
financial stability over the term of the proposed loan. These factors, in the Board's view,
together with the demonstrated commitment and cooperation of the Applicant's stakeholder
groups, indicate a financially sound business plan and a reasonable assurance of repayment of
the proposed loan.
The Board's approval is subject to satisfaction, as determined by the Board in its sole
discretion, of all the conditions in the Act and the Regulations and the following:
> The Applicant must conclude legally binding agreements regarding the concessions and
initiatives described in the Applicant's revised business plan.
> As required by the Regulations, the Applicant must obtain confirmation by the
Bankruptcy Court of the Applicant's plan of reorganization
> Among the regulatory and judicial approvals that are required to be obtained pursuant to
the Regulations, a resolution of the Applicant's pension funding issue must be approved
by the Pension Benefit Guaranty Corporation and, if necessary, the Bankruptcy Court.
The Board understands that discussions involving the Applicant's pension initiative are
ongoing a m o n g the Applicant and other interested parties. The Board takes no position on
the form or specific provisions of such a resolution
> The Applicant must resolve specific collateral issues.
> Final loan documents, including related collateral security documents and filings, affiliate
guarantees, certifications, the warrant and registration rights agreement, and appropriate
opinions of counsel, all in form and substance satisfactory to the Board, remain to be
negotiated by the Board. The Board m a y require control rights, representations,
warranties, covenants (including, without limitation, covenants relating to the Applicant's
financial ratios), anti-dilution protections and registration rights in connection with the
warrants, and other customary lending provisions which are different from or in addition
to those described in the S u m m a r y of Indicative Terms and Conditions included in the
Application
The Board considers the warrants for 10% of the Applicant's reorganized equity (on a
fully diluted basis), which is offered to the Government in the Application, to represent
sufficient participation in the Applicant's potential future gains. The Board will accept a
strike price equal to that proposed for all other initial stakeholders in the Applicant's plan of
reorganization
The Board will continue to perform business and legal due diligence as the transaction
progresses. The Board's willingness to issue the guarantee, and the specific terms it m a y
Mr. David N . Siegel
February 11,2003
Page 3
require in the loan documents, are subject, therefore, to on-going due diligence and the
Board's satisfaction with the results thereof. In the event that the Board discovers any
materially negative information concerning the Applicant not currently k n o w n to it, the Board
in its sole discretion m a y decline to issue its guarantee. The issuance of the Board's guarantee
is subject also to the absence, in the sole judgment of the Board, of any material adverse
change in the condition (financial or otherwise), business, property, operations, prospects,
assets or liabilities of the Applicant, or in the Applicant's ability to repay the loan, or in the
value of the collateral between the date hereof and the date the guarantee is issued.
The Board and Board staff look forward to working with you toward the successful
completion of this transaction and are prepared to devote all of the resources necessary to
accomplish this end.
Sincerely,
Daniel G. Montgomery
cc:
Edward M . Gramlich
Kirk K. V a n Tine
Peter R. Fisher
OFFICE OF PUBLIC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. © WASHINGTON, D.C. • 20220 • (202) 622-2960
•n^raara^---.««^,w,_:j^
-rrrl?Ty».»M.<WIL^l_«i^»MW>it-'y.i'^K-.*^^
AIR TRANSPORTATION STABILIZATION BOARD
Daniel G. Montgomery
Executive Director
February 11, 2003
Jeffrey T. Tolbert
President & C E O
MEDjet International, Inc.
1000 Urban Center Drive, Suite 470
Birmingham, Alabama 35242
Re: Request for Reconsideration
Dear Mr. Tolbert:
We have received the materials submitted to the Air Transportation Stabilization Board (the
"Board") on January 24, 2002, by MEDjet International, Inc. ("MEDjet"). In the materials,
MEDjet requests reconsideration by the Board of its November 26, 2002 denial of MEDjet's
application (the "Application") for a Federal loan guarantee under the Air Transportation
Safety and System Stabilization Act, Pub. L. No. 107-42, 115 Stat. 230 and the regulations
promulgated thereunder, 14 C F R Part 1300.
The Board and Board staff have reviewed and considered the information recently submitted.
The Board has determined that the information recently submitted does not alter in a material
manner the rationale underlying the Board's November 26l decision. Accordingly, the
Board's November 26 th denial of MEDjet's Application remains in effect.
Sincerely,
Daniel G. Montgomery
Executive Director
JS-26
line at (202) 622-2040
^^
^n ^
ra- 1QOB - filO-^CQ
5_27:
Remarks of Peter R. Fisher at the Global Association of Risk Professionals 4th Annual Convention
F R O M T H E OFFICE O F PUBLIC A F F A I R S
February 12, 2003
JS-27
Remarks of Peter R. Fisher
Under Secretary of the Treasury for Domestic Finance
at the Global Association of Risk Professionals 4th Annual Convention
February 12, 2003
N e w York, N Y
As the nature of financial risks evolve, so must risk management. Today I want to
suggest two changes that risk managers should make to keep up with a new
macroeconomic era.
For the past five years, the source of the greatest variance between investment
objectives and outcomes has been credit risk, not market risk. The art and science
of risk management grew up focused on market risk, but now needs to get back to
the basics of credit risk. Keeping a closer eye on credit risk demands a crisp
understanding of firms' creditworthiness. But a risk manager w h o seeks the critical
firm-level details of cash flow and real economic leverage in today's capital markets
will find they are too often absent. As long as investors are in the dark about
companies' real, economic leverage, risk management threatens to remain less a
science, less even an art, than a crap shoot.
The field of risk management bears the marks of coming into maturity during the
past twenty-five or so years. Its tools are attuned to the sharp swings in output and
inflation expectations from the 1970s to the early 1990s. The trick to making money
in the debt markets was to anticipate corresponding changes in real and nominal
interest rates: catching the turns from the negative real U.S. interest rates in the late
1970s, to the highly-volatile nominal and real rates of the 1980s, and to the low
nominal rates of the early 1990s. Risk managers for their part concentrated on
stress-testing portfolios against outsized moves in interest and exchange rates. It
was good enough for your model, or your credit officer, to rely upon rules of thumb
for credit spreads, for both corporate and sovereign debt, as long as you could
hang on for the macroeconomic ride.
In a period of more stable output and prices, it becomes by definition less important
to anticipate changes in macroeconomic conditions and more important to assess
the credit standing of individual borrowers. In this environment w e have learned
that investment risk is a little less about macroeconomics and a little more about
microeconomics.
To take a micro example, we know that the real value of a firm is the present value
of future unencumbered cash flow. If the discount rate is volatile, differences in
expected cash flows between two firms are almost background noise. But if the
discount rate is stable, differences in expected cash flow demand center stage not just for equity investors, but for debt investors too. Just investing in the energy
sector is no longer good enough. It actually matters whether the company you are
investing in is Enron or Chevron.
In a world where credit matters, risk managers cannot be content with stress-testing
portfolios against macroeconomic variables. The transition to a world where credit
matters has been an expensive education for some. The strategies of the 1980s
and early 1990s - of tracking indexes and trading off rule-of-thumb spread
relationships - have been hard to shed. W e have grown accustomed to
outsourcing vital judgments about credit quality to the rating agencies and, less
http://www.treas.gov/press/releases/js27.htm
Page 1 of 3
[S-27: Remarks ot raer K . Eisner at tne Ulobal Association of Risk Professionals 4th Annual Convention
Page 2 of 3
obviously, to the indexes. Reliance on indexing in particular has led us to a "herd
mentality" of investing in which is better to fail together than m a k e critical risk-andreward judgments as individuals.
We need to watch the risks specific to the companies in our portfolios. Careful
study of historical market prices will not provide us with a better understanding of
credit quality. W e need to focus on basic elements of credit: leverage and cash
flow.
For a long time we have assumed that leverage was visible to anyone willing to
dissect an annual report. W e n o w know better. Going forward, users of financial
information - yourselves included - are on notice to d e m a n d full disclosure of firms'
real economic leverage.
We need to explode the idea that the balance sheet remains a useful concept for
measuring a firm's true assets and liabilities. W e need to m o v e beyond the false
dichotomy between the balance sheet and the off-balance sheet. You all know this
with respect to your o w n firm. W h y do w e continue, collectively, to pretend that w e
can m a k e reasoned investment decisions about other firms without knowledge of
their real, economic leverage?
As I look back over the last decade, I see a series of events all about inadequate
disclosure and elevated leverage.
In 1994, in the wake of the bond market sell off and Orange County, the hue and
cry w a s about derivatives; keener-eyed critics knew it had more to do with
inadequate disclosure and off-balance sheet leverage.
In Asian crisis of 1997, whole countries were criticized for the purported failure of
their economic model; s o m e of us saw inadequate disclosure and off-balance sheet
leverage run amok. In 1998, anxieties focused on hedge funds; but the real issue
w a s inadequate disclosure and excessive off-balance sheet leverage. In m y
judgment, Enron also w a s more a story of inadequate disclosure of the real
economic leverage via off-balance sheet devices. Each of these w a s a credit
event: a failure of other market participants to understand the amount of leverage
employed - a confusion between leverage and real cash flow.
Our capital markets need a measure of all the contractually-obligated liabilities,
whether contingent or fixed, future or current. W e need a parallel measure of all the
firm's contractually obligated revenues. Tying them together will give the firm's
contractually-obligated net present value - a true indicator of the firm's leverage.
This is not an untested or novel idea. The concept of N P V appears everywhere in
modern finance except in financial reporting.
Contractually-obligated NPV will in most cases be negative. That's the little secret
of capitalism: it involves risk. Disclosing the true leverage will focus investors'
attention on h o w companies plan to close the gap - h o w they plan to generate the
cash flow needed to exceed net obligations. I hope this attention will encourage
firms to bring to life their M a n a g e m e n t Discussion and Analysis passages by
providing the key indicators of business performance that m a n a g e m e n t itself uses
to judge expected cash flow.
Why don't more firms disclose this information? Habit. People are reluctant to
change their ways. Habit is the most underestimated variable in h u m a n behavior
and, therefore, in finance and economics. Firms claim that that they don't want to
aid competitors. I don't buy it, at least not for most of their business indicators and
nearly all financial measures. Moreover, this claim simply reflects a value judgment
that keeping secrets from competitors is more important than informing the owners
- that investors are better off if they remain ignorant of what's going on inside the
companies that they own.
Our publicly-traded capital markets cannot function on so faulty a foundation. In the
division of labor in our financial markets, too m a n y have complacently accepted the
status quo of corporate disclosure. Too few have seen it as their responsibility to
work systematically to improve the quality of information that investors receive.
http://www.treas.gov/press/releases/is27.htm
3/7/2003
rc.27' Remarks of Peter R. Fisher at the Global Association of Risk Professionals 4th Annual Convention
Page 3 of 3
I suggest that you as risk managers should not tolerate these practices. You
should d e m a n d that companies disclose this information in periodic disclosures. In
its absence, h o w can you rationally m a n a g e investment decisions, other than on the
lottery-ticket theory of investing?
_http://www.treas.gov/press/releases/js27.htm
3/7/2003
S-28: "250 Economists Endorse President Bush's Jobs and Growth Plan"
F R O M THE OFFICE OF PUBLIC AFFAIRS
February 12,2003
JS-28
"250 Economists Endorse President Bush's Jobs and Growth Plan"
The Honorable George W. Bush
The White House
1600 Pennsylvania Avenue, N W
Washington, D.C. 20500
Dear President Bush:
We enthusiastically endorse your economic growth and jobs
proposal. It is fiscally responsible and it will create more
employment, economic growth, and opportunities for all Americans.
Moreover, it will improve corporate accountability and strengthen
the nation's international competitiveness.
Sincerely,
Douglas K. Adie, Ohio University
Richard Agnello, University of Delaware
William Albrecht, University of Iowa
Donald Alexender, Western Michigan University
William R. Allen, U C L A
Annelise Anderson, Hoover Institution, Stanford University
Martin Anderson, Hoover Institution, Stanford University
Jim Araji, University of Idaho
Paul Ballantyne, University of Colorado in Colorado Springs
Stacie E. Beck, University of Delaware
Donald Bellante, University of South Florida
Bruce Bender, University of Wisconsin at Milwaukee
James T. Bennett, George Mason University
M . Douglas Berg, S a m Houston State University
Robert Blake, Forecasters Club of N e w York
Cecil E. Bohanon, Ball State University
D o n Booth, Chapman University
George H. Borts, Brown University
Michael J. Boskin, Hoover Institution, Stanford University
Leonard Bower, consultant
Michael Brandl, University of Texas at Austin
Emile J. Brinkmann, Mortgage Bankers Association of America
Horace W . Brock, Strategic Economic Decisions, Inc.
W a y n e T. Brough, Citizens for a Sound Economy
Jackson Brown, American Dental Association
Jeffrey Brown, University of Illinois at Urbana-Champaign
http://www.treas.gov/press/releases/is28.htm 3/7/2003
Page 1 of 6
5-28: "250 Economists Endorse President Bush's Jobs and Growth Plan"
Phillip J. Bryson, Marriott School, BYU
Todd Buchholz, Enso Capital Management
James B. Burnham, Duquesne University
Michelle Burtis, L E C G L L C
James L. Butkiewicz, University of Delaware
Samantha Carrington, California State University at Los Angeles
Kenneth W . Chilton, Lindenwood University
Ernest S. Christian, Center For Strategic Tax Reform
Lawrence R. Cima, John Carroll University
J.R. Clark, University of Tennessee at Chattanooga
Darin G. Clay, University of Southern California
Daniel M . Clifton, American Shareholders Association
Howard Cochran, Belmont University
John P. Cochran, Metropolitan State College of Denver
John Cogan, Hoover Institution, Stanford University
Boyd Collier, Tarleton State University
Phil Colling, Mortgage Bankers Association of America
Roy Cordato, John Locke Foundation
Ted Covey, Prosperity Caucus
Eleanor D. Craig, University of Delaware
Mark Crain, George Mason University
Thomas D. Crocker, University of W y o m i n g
Coldwell Daniel III, University of Memphis
Lawrence S. Davidson, Indiana University
Ronnie H. Davis, Printing Industries of America
Ed Day, University of Central Florida
Stephen J. Dempsey, University of Vermont
Christopher DeMuth, American Enterprise Institute
John L. Dobra, University of Nevada
Michael D o w d , University of Toledo
Thomas J. Duesterberg, Manufacturers Alliance
Douglas G. Duncan, Mortgage Bankers Association of America
John B. Egger, Towson University
Isaac Ehrlich, S U N Y at Buffalo
Michael A. Ellis, Kent State University
Kenneth G. Elzinga, University of Virginia
Michael R. Englund, M M S International
Stephen J. Entin, Institute for Research on the Economics of
Taxation
Ed Erickson, North Carolina State University
Richard E. Ericson, Columbia University
Paul Evans, Ohio State University
Frank Falero, California State University
Allen M . Featherstone, Kansas State University
Martin Feldstein, Harvard University
John Foltz, University of Idaho
Kristin J. Forbes, M I T
William F. Ford, Middle Tennessee State University
Kenneth C. Froewiss, N Y U
Robert C. Fry, Washington, West Virginia
David Garthoff, University of Akron
ittp://www.treas.gov/press/releases/js28.htm 3/7/2003
P a g e 2 of 6
S-28: "250 Economists bndorse President Bush's Jobs and Growth Plan"
James F. Gatti, University of Vermont
David Gay, University of Arkansas
Richard F. Gleisner, St. Cloud State University
Claudio Gonzalez, Ohio State University
Ernest Goss, Creighton University
Scott F. Grannis, Western Asset Management
John G. Greenhut, Arizona State University West
Earl Grinols, University of Illinois, Urbana-Champaign
Timothy Groseclose, Stanford Graduate School of Business
James Gwartney, Florida State University
David L. H a m m e s , University of Hawaii at Hilo
J. Daniel H a m m o n d , W a k e Forest University
Stephen Happel, Arizona State University
Kevin Hassett, American Enterprise Institute
Joel W . Hay, University of Southern California
Will C. Heath, Heath Economics
Dale M . Heien, University of California at Davis
Pat Hendershott, Ohio State University
James W . Henderson, Baylor University
Melvin J. Hinich, University of Texas
Mark Hirschey, University of Kansas
Harold M . Hochman, Lafayette College
Robert J. Hodrick, Columbia University
Lawrence A. Hunter, E m p o w e r America
Thomas R. Ireland, University of Missouri at St. Louis
John D. Jackson, Auburn University
Lowell Jacobsen, Baker University
Sherry Jarrell, W a k e Forest University
Michael C. Jensen, Harvard Business School
Clifton T. Jones, Stephen F. Austin State University
Richard E. Just, University of Maryland
Steven N. Kaplan, University of Chicago
Ed Kaplan, Western Washington University
Raymond J. Keating, Small Business Survival Committee
Kristen Keith, University of Toledo
B.F. Kiker, University of South Carolina
E. H a n Kim, University of Michigan
Paul Koch, Olivet Nazarene University
Meir Kohn, Dartmouth College
Melvyn Krauss, Hoover Institution, Stanford University
Peter Kretzmer, Bank of America
Robert Krol, California State University at Northridge
Larry Kudlow, Kudlow & Co.
Richard La Near, Missouri Southern State College
Arthur Laffer, Laffer Associates
William E. Laird, Jr., Florida State University
Russell Lamb, North Carolina State University
D o n Leet, California State University at Fresno
John D. Leeth, Bentley College
Ken Lehn, University of Pittsburgh
Cotton M . Lindsay, Clemson University
j%://www.treas.gov/press/releases/is28.htm 3/7/2003
Page 3 of 6
28: "250 Economists Endorse President Bush's Jobs and Growth Plan"
Page 4 of 6
Larry Lindsey, The Lindsey Group
Dennis E. Logue, University of Oklahoma
Lawrence W . Lovik, Troy State University
Harold I. Lunde, Bowling Green State University
Donald L. Luskin, Trend Macrolytics, L L C
Burton Malkiel, Princeton University
David Malpass, Bear Stearns & Co. Inc.
N. Gregory Mankiw, Harvard University
Richard Manning,. Pfizer, Inc.
Dick Marcus, University of Wisconsin at Milwaukee
Michael L. Marlow, California Polytechnic State University, San
Luis Obispo
Merrill Matthews, Jr., Council for Affordable Health Insurance
Thomas H. Mayor, University of Houston
T o m Means, San Jose State University
Allan H. Meltzer, Carnegie Mellon University
Michael Melvin, Arizona State University
Stephen Mennemeyer, University of Alabama at Birmingham
Lloyd Mercer, University of California at Santa Barbara
John Merrifield, University of Texas at San Antonio
Jim Miller, Director, Office of Management and Budget, 1985-88
Jim Mintert, Kansas State University
Velma Montoya, National Council of Hispanic W o m e n
Steve Moore, Club for Growth
John Moorhouse, W a k e Forest University
John Murray, University of Toledo
Harry Nagel, St. John's University
Anthony Negbenebor, Gardner-Webb University
George R. Neumann, University of Iowa
Grover Norquist, Americans for Tax Reform
Seth W . Norton, Wheaton College
William Oakland, Tulane University
Lee E. Ohanian, U C L A
Richard W . Oliver, American Graduate School of Management
June O'Neill, Baruch College, City University of N e w York
Lydia Ortega, San Jose State University
Karen Palasek, John Locke Foundation
Randall E. Parker, East Carolina University
James Parrino, Babson College
E.C. Pasour, Jr., North Carolina State University
Mark Perry, University of Michigan at Flint
Tomas Philipson, University of Chicago
Barry Poulson, University of Colorado
Edward C. Prescott, University of Minnesota
Jan S. Prybyla, Pennsylvania State University
Gary Quinlivan, Saint Vincent College
Richard W . Rahn, Discovery Institute
John Rapp, University of Dayton
Eric Rasmusen, Indiana University
Martin A. Regalia, U.S. Chamber of Commerce
Carmen M . Reinhart, International Monetary Fund
^tp://www.treas.gov/press/releases/is28.htm
3/7/2003
S-28: "250 Economists Endorse President Bush's Jobs and Growth Plan"
Page 5 of 6
Christine P. Ries, Georgia Institute of Technology
Aldona Robbins, Fiscal Associates
Gary Robbins, Fiscal Associates
Paul Craig Roberts, Institute for Political Economy
Charles K. Rowley, George Mason University
Paul H. Rubin, Emory University
Roy J. Ruffin, University of Houston
Mark Rush, University of Florida
John Ryding, Bear Stearns & Co. Inc.
Andrew Sacher, Caxton Associates
Gary J. Santoni, Ball State University
Thomas R. Saving, Texas A & M University
Kurt Schuler, Office of the Vice Chairman, Joint Economic
Committee, U S Congress
Michael Schuyler, Institute for Research on the Economics of
Taxation
Robert Scott, California State University, Chico
Gerald W . Scully, University of Texas at Dallas
Richard T. Selden, University of Virginia
Barry J. Seldon, University of Texas at Dallas
John Semmens, Laissez Faire Institute
Richard J. Sexton, University of California at Davis
Sol Shalit, University of Wisconsin at Milwaukee
Alan C. Shapiro, University of Southern California
Gary L. Shoesmith, W a k e Forest University
William F. Shughart II, University of Mississippi
Charles David Skipton, Florida State University
A m y Smith, formerly with the Office of Management and Budget
James F. Smith, University of North Carolina at Chapel Hill
Rodney T. Smith, Stratecon, Inc.
Vernon L. Smith, George Mason University (Nobel Laureate)
Neil H. Snyder, University of Virginia
John C. Soper, John Carroll University
Frank Spreng, McKendree College
Beryl W . Sprinkel, B.W. Sprinkel Economics
Stan Spurlock, Mississippi State University
William G. Stanford, University of Illinois at Chicago
Ben Stein, actor, writer, economist
Carl H. Stem, Texas Tech University
Craig A. Stepenson, Babson College
E. Frank Stephenson, Berry College
Courtenay C. Stone, Ball State University
Robert Tamura, Clemson University
Fred Telling, Pfizer, Inc.
Rebecca Thacker, Ohio University
Clifford Thies, Shenandoah University
Leo Troy, Rutgers University
Kamal Upadhyaya, University of N e w Haven
Richard Vedder, Ohio University
Tony Villamil, The Washington Economics Group
Richard E. Wagner, George Mason University
j%://www.treas.gov/press/releases/is28.htm
3/7/2003
28* "250 Economists Endorse President Bush's Jobs and Growth Plan"
Page 6 of 6
William B. Walstad, University of Nebraska at Lincoln
Stephen J.K. Walters, Loyola College in Maryland
Harold Warren, East Tennessee State University
Marc Weidenmier, Clarempnt M c K e n n a College
John T. Wenders, University of Idaho
Brian S. Wesbury, Griffin, Kubik, Stephens & Thompson
Walter Wessels, North Carolina State University
Robert Whaples, W a k e Forest University
John Whitley, University of Adelaide
John H. Wicks, University of Montana at Missoula
Gary W . Williams, Texas A & M University
Michael E. Williams, University of Denver
Douglas Wills, University of Washington at Tacoma
Michael K. Wohlgenant, North Carolina State University
Charles Wolf, Jr., Hoover Institution, Stanford University
Gary Wolfram, Hillsdale College
Gene C. Wunder, Washburn University
Richard Yamarone, Argus Research Corp.
Andrew Yuengert, Pepperdine University
Paul J. Zak, Claremont Graduate University
M . Y . Zaki, Northern Michigan University
Asghar Zardkoohi, Texas A & M University
Kate Zhou, University of Hawaii
Benjamin Zycher, Pacific Research Institute
tp://www.treas.gov/press/releases/js28.htm
3/7/2003
9: U.S. International Reserve Position
Page 1 of 2
FROM THE OFFICE OF PUBLIC AFFAIRS
February 12, 2003
JS-29
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. A s indicated in this table, U.S. reserve assets
totaled $78,479 million as of the end of that week, compared to $78,551 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
January 31, 2003
February 7, 2003
78,551
78,479
TOTAL
1. Foreign Currency Reserves1
Euro
Yen
TOTAL
Euro
Yen
TOTAL
a. Securities
7,015
13,113
20,127
7,068
13,065
20,133
0
0
Of which, issuer headquartered in the U.S.
b. Total deposits with:
b.i. Other central banks and BIS
11,497
14,129
2,633
11,569
14,192
2,623
0
0
0
0
0
0
0
0
2. IMF Reserve Position 2
21,953
21,861
3. Special Drawing Rights (SDRs)2
11,298
11,251
4. Gold Stock 3
11,043
11,043
0
0
b.ii. Banks headquartered in the U.S.
b.ii. Of which, banks located abroad
b.iii. Banks headquartered outside the U.S.
b.iii. Of which, banks located in the U.S.
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
January 31, 2003
Yen
Euro
February 7, 2003
TOTAL
Yen
Euro
TOTAL
0
1. Foreign currency loans and securities
0
2. Aggregate short and long positions in forwards and-futures in foreign currencies vis-a-vis the U.S. dollar:
0
0
0
2.a. Short positions
2.b. Long positions
3. Other
0
0
0
III. Contingent Short-Term Net Drains on Foreign Currency Assets
January 31, 2003
II
^/www.treas.gov/press/releases/js29.htm
il
February 7, 2003
il
ll
3/7/2003
S-29: U.S. International Reserve Position
Page 2 of 2
Yen
Euro
1. Contingent liabilities in foreign currency
TOTAL
Euro
Yen
TOTAL J
0
0
0
0
0
0
0
0
1.a. Collateral guarantees on debt due within 1
year
1.b. Other contingent liabilities
2. Foreign currency securities with e m b e d d e d
options
3. Undrawn, unconditional credit lines
3.a. With other central banks
3.b. With banks and other financial institutions
Headquartered in the U.S.
3.c. With banks and other financial institutions
Headquartered outside the U.S.
4. Aggregate short and long positions of options
in foreign
Currencies vis-a-vis the U.S. dollar
4.a. Short positions
4.a.1. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.1. Bought calls
4.b.2. Written puts
Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest w e e k m a y be subject to revision. Foreign Currency
Reserves for the prior w e e k are final.
2/The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. T h e entries for the latest w e e k reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to the prior week's IMF data. IMF data for the latest w e e k m a y be
subject to revision. IMF data for the prior w e e k are final.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
j%//www.treas.gov/press/releases/js29.htm
3/7/2003
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, D C 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:
FOR IMMEDIATE RELEASE
February 12, 2003
Office of Financing
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 10-YEAR NOTES
Interest Rate:
Series:
CUSIP No:
Issue Date:
Dated Date:
Maturity Date:
3 7/8%
A-2013
912828AU4
High Yield:
3.960%
Price:
February 18, 2003
February 15, 2003
February 15, 2013
99.304
All noncompetitive and successful competitive bidders were awarded
securities at the high yield. Tenders at the high yield were
allotted 51.28%. All tenders at lower yields were accepted in full.
Accrued interest of $ 0.32113 per $1,000 must be paid for the period
from February 15, 2003 to February 18, 2003.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type
Tendered
Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)
33,083,431
128,291
50,000
17,821,753
128,291
50,000
SUBTOTAL
33,261,722
18,000,044 1/
Federal Reserve
TOTAL
1,496,500
1,496,500
34,758,222
19,496,544
Median yield
3.930%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low yield
3.894%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 33,261,722 / 18,000,044 = 1.85
1/ Awards to TREASURY DIRECT = $90,681,000
http://www.publicdebt.treas.gov
JS-30
fS-31: Remarks from United States Treasury Secretary John W . Snow, Detroit Economic Club
Page 1 of 4
F R O M T H E OFFICE O F PUBLIC A F F A I R S
February 13, 2003
JS-31
United States Treasury Secretary John W. Snow
Remarks to the Detroit Economic Club
February 13, 2003
Detroit, Michigan
Good afternoon. Thank you, Rick [Wagoner, General Motors] for that kind
introduction.
This is my second week on the job, and Detroit is one of my first stops as Treasury
Secretary for a reason: few places better embody the American spirit of enterprise
than this town, and this state. Today, I'd like to talk about the United States
economy, and I'll focus on President Bush's economic growth plan, which promises
to create jobs, accelerate our economic recovery, and increase our growth in the
years to come. I think it's the right medicine at the right time. And I think the plan
will do a lot for the people of the state of Michigan.
As every American knows by now - whether from losing a job, from feeling the fear
that comes when your job is insecure, or from knowing someone w h o has lost a job
- our economy took a turn for the worse beginning in the summer of 2000. By the
time President Bush took office, an undercurrent was running against the
economy. The unprovoked and unprecedented terrorist attacks of September 11,
2001 compounded a recession that was well underway, and the discovery of
serious abuses by some corporate business leaders slowed our recovery from it.
In response to this convergence of adverse events, President Bush led decisively.
Acting with Congress, he took the steps necessary to protect a shaken nation and a
fragile economy. In 2001, when relief was needed, he signed the most sweeping
tax relief in a generation. As evidence of the damage became clearer, he acted
again in March 2002 to further bolster the economy. The timing was perfect.
These actions m a d e the recession shorter and shallower than it would have been.
In fact, by most measures it was the mildest since World W a r II.
In the face of extreme adversity, our economy, like our nation, remains resilient.
Despite an economic slowdown, attacks on our homeland, war in Afghanistan, and
weakened investor confidence, the economy is recovering. But as the President
has stated, w e can and must do better. Too many Americans are out of work
today, and too many Americans feel uncertainty about tomorrow.
We must build on the proven strengths of our economy. We must continue to move
towards policies that enable the private sector to invest in more good jobs that raise
living standards for all. As long as there are Americans w h o want jobs and can't
find them, the economy is not growing fast enough. That's why President Bush's
jobs and growth package is so important.
Let me describe the package in a little more detail.
The President's growth plan is especially favorable to working families. The 10%
tax rate bracket will expand immediately so that the lowest income earners can
keep more of their pay. The marriage penalty will end once and for all, and the
child credit will increase to $1,000 per child immediately - double its level in the
year 2000. The President's plan will accelerate the tax cuts approved in 2001, to
accelerate their economic benefits for the American people.
http://www.treas.gov/press/releases/js31 .htm
3/7/2003
31: Remarks from United States Treasury Secretary John W . Snow, Detroit Economic Club
Page 2 of 4
The President's growth plan also offers n e w assistance to the unemployed,
extending existing unemployment benefits, and creating n e w personal reemployment accounts. Re-employment accounts grant unemployed workers up to
$3,000 to use toward the expense of finding a n e w job, such as moving costs, child
care, training and transportation.
The President's plan also helps businesses create the new jobs that workers are
looking for. For one, the plan offers tax relief to small businesses that invest in our
future. The plan will triple the amount of equipment that small businesses can
deduct rather than depreciate, which adds incentive for entrepreneurs to invest
now. More investment n o w m e a n s more jobs, and sooner.
But the key job creation provision of the President's plan is the elimination of the
double taxation of dividends. Companies pay dividends to their shareholders to
attract equity investment, which allows the companies to expand their businesses
and create n e w jobs. Yet today, our tax laws discourage that investment and job
creation, and needlessly penalize all those investors -- especially seniors -- by
taxing dividends twice. The company pays taxes on its profits, and w h e n it pays out
those profits to shareholders as a dividend, the s a m e earnings get taxed again as
income.
Most American would agree that double taxation is unfair. It is also bad policy. The
net effect of double taxation of dividends is that the American economy grows more
slowly than it should, because it is more costly than it needs to be for businesses to
expand and invest.
And double taxation hits seniors the hardest. Of the 17 million seniors we expect
will file tax returns in 2003, 9 million - over half - have taxable dividend income. In
fact, seniors receive over half of all taxable dividends. It doesn't s e e m right to put a
higher tax burden on folks w h o have already contributed most of a lifetime to this
country.
Under the President's plan, corporations will still be taxed on their profits, but when
they pay out their profits as dividends, shareholders will not be taxed on that
income a second time. W e think that is fair. It is also smart. And the w a y w e have
written the plan, it will encourage companies to pay the taxes that they owe,
because they can only pay tax-free dividends when pay taxes on their profits.
Under the President's proposal, 92 million taxpayers and their families would
receive a tax cut in 2003. A typical family of four with two earners making a
combined $39,000 will receive a total of $1,100 in tax relief compared to 2002 - not
just this year, but in every year after. And the plan will create jobs. The Treasury
Department estimates that by the end of next year, the Presidents growth plan will
create over 1.5 million n e w jobs, with much of that coming from the elimination of
dividend double taxation.
The President and his economic team have given this plan a lot of thought. Our
goal w a s to do something n o w that would pay off for America long into the future not here today, gone tomorrow. The package will not only help America return to its
economic potential, it will increase it, creating a more abundant future with more
good jobs and rising real wages. I believe that is what everyone in this room and
across America seeks.
Now, I know not everyone agrees with me, and a lot of Americans still have
questions about the President's plan. I spent most of m y first w e e k on the job
testifying to Congress, and while I w a s up on the hill, I heard s o m e reasonable
questions about the President's plan. Let m e take those head-on.
First, I was asked about the federal budget deficit. Yes, in the short term, the
President's plan would increase the deficit - w e would leave more m o n e y with the
American taxpayers and take less to Washington. Deficits matter. They are never
welcome. But there are times, such as these, w h e n they are unavoidable,
particularly w h e n w e must address critical national needs. Even without the
President's economic growth and jobs package, improved homeland security, and
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S-31: Remarks from United States Treasury Secretary John W . Snow, Detroit Economic Club
Page 3 of 4
the war on terrorism, w e would still have deficits today from the economic
slowdown. Are these deficits welcome? No. Are they understandable? Yes.
The surpluses we enjoyed were the product of a strong economy, not a weak one.
W e will not return to economic strength by taxing our economy w h e n it is
struggling. The prescription for returning to balanced budgets is straightforward:
hold the line on government spending and grow the economy. This is the direction
the President has chosen: a course to create real jobs that last.
We should also remember that current deficits are small relative to our economy as
a whole. Even at their worst, they are expected to remain considerably below the
typical levels following other recessions in the last 30 years, and they are expected
to improve considerably after next year, as our growth accelerates.
I've also been asked how the President's plan will help states and municipalities.
S o m e people s e e m to think the best w a y to help ailing state budgets is to hook
them up to federal life support. W e think the best w a y is to administer the medicine
that will restore their economic health. The President's plan does offer assistance
to the unemployed in every state through re-employment accounts, and the
President's budget increases state and local grants-in-aid. But the most important
aspect of this plan is that it will create more, better-paying jobs in your state.
In Michigan alone, the President's growth package will reduce income tax bills for
3.2 million taxpayers, and over 800,000 small businesses will have tax savings to
apply toward n e w jobs and equipment. 2.5 million married and single filers will
benefit from the expanded 10-percent tax bracket. 1.3 million couples will benefit
from the elimination of the marriage penalty; 900,000 parents will benefit from the
increased child tax credit, and nearly 1.2 million taxpayers will gain from the end of
double taxation of dividends.
I've heard people say that the President's plan is unfair. Let's be real clear about
this one. I already explained that the proposal favors working families because it
eliminates the marriage penalty, nearly doubles the child tax credit, and expands
the 10 percent rate bracket. It also favors seniors by ending double-taxation of
dividends.
Here are the facts: under the President's plan, taxpayers with income under
$30,000 will get an average tax reduction of about 17 percent. Taxpayers with
incomes over $100,000 will get a reduction of about 11 percent.
Under the President's plan, families with incomes under $50,000 will pay a smaller
share of the total income tax burden than they do today. Families with incomes
over $100,000 will pay a larger share of the total income tax burden than they pay
today. Under this plan, the share of income taxes paid by families with income over
$100,000 will rise to 73.3 percent.
I think that's pretty fair.
Job creation and economic growth are keys not only to our near-term but our longterm success as well. To the meet the n e w challenges our nation faces today, and
the unexpected threats of tomorrow, w e must have a strong economy.
We must seek a higher level of prosperity for America than we have known - one
that puts us on a path to ever-greater growth, one which unlocks the fullest potential
and talents of the American people. That m e a n s encouraging hard work, rewarding
hard work, and creating the opportunities for all Americans. These are the values
that brought America to its glory, and these are the values that should lead us into
the future.
President Bush's Jobs and Growth Package is the right plan at the right time.
Thank you.
ij%://www.treas.gov/press/releases/js31 .htm
3/7/2003
O N II I O K IM'BI.IC A IT<\ I U S • I54H) I'M-"A'NS V l.\ A N I \ A\ I.M I , N.W, • W A M I I N C T O N . t>.t .» 2022U • (202 Ift22-2<>Ml
EMBARGOED UNTIL 11:00 A.M.
February 13, 2003
CONTACT:
Office of Financing
202/691-3550
TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction 13-week and 26-week Treasury bills totaling $33,000
million to refund an estimated $28,911 million of publicly held 13-week and 26-week
Treasury bills maturing February 20, 2003, and to raise new cash of approximately
$4,089 million. Also maturing is an estimated $14,000 million of publicly held 4-week
Treasury bills, the disposition of which will be announced February 18, 2003.
The Federal Reserve System holds $13,006 million of the Treasury bills maturing
on February 20, 2003, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders either in these
auctions or the 4-week Treasury bill auction to be held February 19, 2003. Amounts
awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of each auction. These
noncompetitive bids will have a limit of $100 million per account and will be accepted
in the order of smallest to largest, up to the aggregate award limit of $1,000
million.
TreasuryDirect customers have requested that we reinvest their maturing holdings
of approximately $1,066 million into the 13-week bill and $650 million into the 26week bill.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions set
forth in the Uniform Offering Circular for the Sale and Issue of Marketable Book-Entry
Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about each of the new securities are given in the attached offering
highlights.
oOo
Attachment
JS -3*-
HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED FEBRUARY 2 0 , 2003
February 13, 2003
Offering Amount
$17,000
Maximum Award (35% of Offering Amount)
$ 5,950
Maximum Recognized Bid at a Single Rate .... $ 5,950
NLP Reporting Threshold
$ 5,950
NLP Exclusion Amount
$ 5,300
Description of Offering:
Term and type of security
CUSIP number
Auction date
Issue date
Maturity date
Original issue date
Currently outstanding
Minimum bid amount and multiples
million
million
million
million
million
91-day bill
912795 MN 8
February 18, 2003
February 20, 2003
May 22, 2003
November 21, 2002
$20,507 million
$1,000
$16,000
$ 5,600
$ 5,600
$ 5,600
None
million
million
million
million
182-day bill
912795 NJ 6
February 18, 2003
February 20, 2003
August 21, 2003
February 20, 2003
$1,000
The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve
Banks as agents for FIMA accounts. Accepted in order of size from smallest to largest with no more than $100
million awarded per account. The total noncompetitive amount awarded to Federal Reserve Banks as agents for FIMA
accounts will not exceed $1,000 million. A single bid that would cause the limit to be exceeded will
be partially accepted in the amount that brings the aggregate award total to the $1,000 million limit. However,
if there are two or more bids of equal amounts that would cause the limit to be exceeded, each will be prorated
to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in increments of .005%, e.g., 7.100%, 7.105%.
(2) Net long position (NLP) for each bidder must be reported when the sum of the total bid amount, at all
discount rates, and the net long position equals or exceeds the NLP reporting threshold stated above.
(3) Net long position must be determined as of one half-hour prior to the closing time for receipt of
competitive tenders.
Receipt of Tenders:
Noncompetitive tenders
Prior to 12:00 noon eastern standard time on auction day
Competitive tenders
Prior to 1:00 p.m. eastern standard time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank on issue date, or payment of full par amount
with tender. TreasuryDirect customers can use the Pay Direct feature, which authorizes a charge to their account of
record at their financial institution on issue date.
33* Remarks from U.S. Deputy Treasury Secretary Kenneth W . D a m at the Japan Society
Page 1 of 6
F R O M T H E OFFICE O F PUBLIC A F F A I R S
February 13, 2003
JS-33
The Road to Wellville: Economic Challenges Facing Japan
U.S. Deputy Treasury Secretary Kenneth W . D a m
Remarks to the Japan Society
N e w York City
It's a pleasure for me to speak before the Japan Society, an organization that has
done so much to promote cooperation and understanding between our two
countries.
This is a particularly appropriate venue because the Bush Administration made a
deliberate decision to change the tone and approach of the US-Japan economic
policy relationship. W e chose to move from the confrontation and hectoring that
characterized the past to a more supportive, cooperative relationship.
Now, two years into that policy, I can report to you that our political and security
alliance and our economic relationship with Japan are as strong as they have ever
been. Japan has been a steadfast ally of the United States, and w e have worked
together closely on issues of international concern.
Our cooperation to bring about Afghan reconstruction is a particularly good
example. Japan hosted the first pledging meeting of the Afghan Reconstruction
Steering Group. W e collaborated to fund the Kabul-Kandahar-Herat road, a major
transportation infrastructure project that will form a basis for a national economy.
The Bush Administration has encouraged Japan to step forward and play its rightful
role as a strategic and international partner. At the same time, the Administration
has recognized that Japan's ability to play that role depends substantially on its
economic performance. This is one of the reasons why restoring vibrant growth in
Japan is so important.
The Japanese economy has struggled throughout the last 12 years, and many
observers now believe it is headed into yet another downturn. The cost in lost
income and employment opportunities has been high. If the Japanese economy
had managed to grow at 3 % over the past 12 years instead of the 1.1% that it
actually managed since 1991, Japanese output would be 2 5 % greater than it is
today.
Public finances would also be in far better shape. The Japanese fiscal deficit and
burgeoning public debt are the result of falling tax revenues and over $1 trillion
spent trying to stimulate the economy. Japan's fiscal difficulties carry over into
international affairs. Budget pressures have led the Japanese to substantially cut
their foreign aid in the last two years.
When an economy struggles, the effect spills over into the public mood, in
increasing pessimism and dissatisfaction. A recent Nikkei survey found that 8 4 % of
those polled expected the economy to fail to improve or deteriorate further. Eightythree percent felt uneasy about their current or future employment. Economic
recovery consistently tops the list of the public's policy priorities. And
dissatisfaction with the economy played an important role in making Mr. Koizumi
Prime Minister.
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33: Remarks from U.S. Deputy Treasury Secretary Kenneth W . D a m at the Japan Society
Page 2 of 6
Rather than trying to prop the economy up in the short term with government
expenditure, the Prime Minister has concentrated on the challenges that Japan
faces in restoring vibrant, sustained growth. These are:
• Resolving the problems of the banking system
• Eliminating deflation
• Carrying out fundamental economic and structural reform
• Reducing the deficit
I'd like to take these in reverse order, building up to the banking system problem.
Fiscal Consolidation
Limiting the deficit and bringing Japan's rapidly growing public debt under control is
a challenge that Prime Minister Koizumi has clearly identified. Cutting fiscal
deficits, particularly in a w e a k economy, requires hard choices. But a transparent,
credible medium term plan to cut the deficit - one that increases household and
investor confidence - can do m u c h to assure that fiscal consolidation enhances
growth rather than holding it back.
Economic and Structural Reform
The second challenge - economic and structural reform - is one of re-invigorating
the private, domestic Japanese economy. This requires opening up n e w
opportunities for investment and growth. It also requires reversing the drop in the
productivity growth rate in Japan, which has fallen farther and faster than in any
other G 7 country.
All of us have been greatly impressed by the prowess of Japanese export
manufacturers - in electronics, optics, automobiles, and a host of other goods.
Indeed, where Japanese firms have faced foreign competition, they have often
b e c o m e world productivity and technology leaders.
But Japan combines industries where productivity is the highest in the world with
industries that lag strikingly behind their counterparts in other countries.
In many cases these lagging industries have extensive regulation on products,
technologies, and companies. Regulation has sheltered these industries from
competition, not only from foreign companies, but also from domestic n e w entrants.
But industries that don't face competition fail to innovate. And they fall further
behind. Unfortunately, m a n y of these regulated and lagging industries - business
services, medical services, communications, and financial services - are industries
that offer the greatest potential for growth in today's economy.
Structural reform and deregulation that removes barriers to competition, new entry,
and n e w product introduction is the strongest tool for pushing productivity and
growth upwards. The deregulation of Japan's cellular telephone industry provides a
vivid example. It is n o w an industry in which Japan is world-leading. Prime Minister
Koizumi is absolutely right w h e n he says "no growth without structural reform."
Overcoming Deflation
Eliminating deflation is the next challenge. Deflation raises the burden of debts,
discourages investment, and leads households to postpone expenditures. Although
Japanese deflation has been modest - about 1 % for the consumer price index and
2 % for the broader G D P deflator - deflation has been strikingly persistent. And,
with w a g e s currently falling by more than 1 % per year, deflation is n o w endemic
and firmly e m b e d d e d in expectations.
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iS-33: Remarks from U.S. Deputy Treasury Secretary Kenneth W . D a m at the Japan Society
Page 3 of 6
Deflation is a monetary phenomenon and the monetary policy of the Bank of Japan
will play a central role in overcoming deflation. In March 2001 the Bank of Japan
m a d e a commitment to expand liquidity until the consumer price index w a s stable or
increasing year-on-year. Since the change in policy the BoJ has increased bank
reserves and currency in circulation by 43 percent. Most of this increase c a m e from
a rapid start, however, and BoJ's efforts to increase the m o n e y supply have flagged
recently. And Japanese prices continue to fall.
The persistence of deflation, despite BoJ's efforts, should not be discouraging. As
m y former University of Chicago colleague, Milton Friedman, says, monetary policy
operates through m a n y channels, often with considerable lags.
It has been some time since a major country has had to deal with deflation. But
experience in S w e d e n and the United States during the 1930's suggests that
increases in the m o n e y supply that are larger than Japan has had so far and that
are sustained over time are necessary to break deflation's grip.
Sweden is a particularly good example. Like Japan, Swedish prices declined
steadily without a deflationary spiral. W h e n the Central Bank announced a
commitment and took action to eliminate deflation, it increased base m o n e y by 92
percent between 1931 and 1936. It still took almost 3 years from the beginning of
the monetary easing for Swedish prices to begin to rise again.
The deflation problem is also intertwined with the other challenges that Japan
faces. Persistent deflation increases the burden of debts, exacerbating the bank
bad debt problem.
Banking difficulties also make the task of monetary policy in overcoming deflation
more difficult. W e a k e n e d banks do not increase their lending w h e n the central
bank provides more reserves, blocking a principal channel through which monetary
policy works.
Sometime soon, perhaps in the coming week, Prime Minister Koizumi will appoint a
n e w Governor of the Bank of Japan, along with two n e w Deputy Governors.
Actions by the Bank of Japan are a critical component in meeting Japan's
challenges and restoring vibrant growth. But they are not a magic bullet.
Simultaneous action on all fronts will be needed if Japan is to restore vibrant
growth.
Banking Sector: Dealing with Bad and Troubled Loans
I have saved the banking problem to last because it is the most complicated and
persistent of the challenges that Japan faces.
The financial system - the flow of funds from savers to investors - is the lifeblood of
a modern economy. A banking system that is hobbled by bad and troubled debts
loses the critical ability to gauge and fund n e w business opportunities. This creates
a tremendous obstacle to economic growth.
Many countries have had banking problems. As a result, there is now a clear basis
- expensively w o n - for understanding the steps necessary to clean up a troubled
banking system. These steps involve:
recognizing the full extent of bad and troubled loans,
- closing banks that are insolvent,
- assuring that the remaining banks accurately gauge the risks of their loan
portfolios, have sufficient reserves against loss, and maintain enough capital to
operate prudently, and
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S-33: Remarks from U.S. Deputy Treasury Secretary Kenneth W . D a m at the Japan Society
Page 4 of 6
- ensuring that the n e w m a n a g e m e n t of the remaining banks have the skills and the
incentives to run their banks well.
Many actions are necessary to bring these results about, and Japan has made
considerable progress - more than it is often given credit for. The Government's
Financial Revival Program, announced on October 30 is an important step forward.
The Revival Program sets out a much more specific and detailed set of measures
than previous Japanese bank reform programs. These cover h o w required loan
provisions should be calculated, h o w collateral should be valued, what should count
in bank capital, and what conditions should accompany the use of public funds to
strengthen banks.
Implementation of those measures is, of course, key. The Financial Services
Agency has already put into effect several of the measures under its jurisdiction.
Full and effective implementation of the Government's October 30 program would
markedly increase the incentives for Japanese banks to deal with their bad debt
problems.
A crucial point, however, is that a banking crisis is not simply a bank problem. The
problems of non-performing and troubled borrowers are at least as serious in their
effects on the economy as a whole. And, along with cleaning up the banks, the
problems of the distressed borrowers must be dealt with.
Borrowers who are not able to make payments on their loans are the owners and
employers of productive assets—property, buildings, capital equipment, and
workers— that are not being used efficiently.
In addition, at Japan's current low interest rates many performing borrowers are
able to meet their interest payments, but little else. They can't invest, they can't
expand, nor can they enter n e w fields of activity. And they have no realistic
prospect of ever repaying their loans.
The name given to these companies - "zombie firms" - is telling. These are
companies that don't live, in the sense of growing, innovating, or making money.
But nor do they die. Productive assets, including m u c h of Japan's workforce,
remain frozen in place, often in excess capacity industries, worsening deflationary
pressures.
Efforts to address the problems of distressed borrowers have progressed very
slowly in Japan. The Resolution and Collection Corporation, or R C C , w a s set up to
receive bad loans from failed though still operating banks. But the R C C has long
seen its role as that of a collection agent, rather than a resolution mechanism. A s a
result, it has b e c o m e a warehouse, not a halfway house.
This may be about to change. The Financial Revival Program provides clear
instructions to the R C C to m o v e beyond collection and sell loans where it has been
unable to m a k e collections.
The Japanese Government has also decided to create an Industrial Revitalization
Corporation that would purchase loans to major companies that are judged to have
viable businesses. Mr. Tanigaki has been n a m e d Minister for Industrial
Revitalization, and there is legislation before the Diet to establish the IRC this
spring.
The IRC is interesting and promising in a number of ways. First, the focus is
explicitly on corporate restructuring and turnaround, not on collection. Second, the
IRC will work with borrowers at an earlier stage, before they are bankrupt or in
danger of bankruptcy, where there is likely to be a greater chance of success.
Third, Minister Tanigaki has said .that he plans to appoint experts from the private
sector to run the IRC and to m a k e up its decision-making council.
As anyone in the industry will tell you, corporate restructuring is inherently difficult.
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S-33: Remarks from U.S. Deputy Treasury Secretary Kenneth W . D a m at the Japan Society
Page 5 of 6
There are m a n y failures as well as successes. T h e United States, with the R T C ,
did not choose the restructuring approach. Instead, w e chose to sell assets
quickly. But other countries have opted for a restructuring approach to bad debt
workout. S o m e of them - notably S w e d e n and Korea - have had success with this
approach.
Experience across a number of countries suggests that the restructuring approach
can be successful w h e n the institutions in charge are:
• Well-funded, with the ability to take (and therefore recognize) losses on particular
transactions
• Independent, with the ability to make hard-headed commercial judgments. This is
important not just at the beginning, but throughout the restructuring process. The
ability to change course midway or abandon a failed restructuring effort is crucial.
• Given a fixed termination date. A sunset provision not only assures that decisions
are m a d e quickly, it also assures that decisions are actually m a d e .
• Transparent in their operations. In both Sweden and Korea, the public was given
considerable detail about the operations of the restructuring entities, which built
public support.
• Able to draw on experts from the private sector and employ the services of private
firms in the restructuring process.
The Japanese government is now in the process of designing and establishing the
Industrial Revitalization Corporation. I hope that they will draw on international best
practice based on the lessons of restructuring entities elsewhere.
There is one additional point that I would like to make that deals with the social and
political environment surrounding restructuring and with the role of foreign
investors.
Dealing with distressed borrowers is a wrenching experience. Huge losses must be
recognized, mostly by the taxpayer. Bankruptcies throw people out of work.
Companies pass from one set of owners to another, often at a fraction of their
original value. Buyers are sometimes foreign, leading to complaints that national
assets are moving into foreign hands. These are highly charged issues wherever
they occur.
They certainly were in United States in the late 1980's - when it was our
skyscrapers and golf courses, and the buyers were often Japanese. Book titles of
the period - "Selling Out...," and "Yen! Japan's N e w Financial Empire" - reflected
and fed that fear. These fears were irrational, and in hindsight s e e m quaint.
Japanese concerns about foreigners benefiting from distress are similarly
misplaced. It's true that the initial interest in distressed debt purchases and
corporate workouts in Japan w a s from foreign firms - m a n y of them American drawing on the experience they had accumulated in other countries.
But already there are new Japanese institutions in this market - affiliates of big
companies like Nomura's Jafco or m u c h smaller firms like Akusa Capital. Seminars
on corporate restructuring, such as the one given recently by PriceWaterhouse
Coopers, n o w attract huge Japanese audiences.
Corporate restructuring is not about nationality, nor is it about instant profit.
Corporate restructuring is fundamentally about freeing viable businesses from the
death grip of overextended, failed companies. And it is risky.
But there are already examples of successes - Denon in electronic equipment and
Victoria Sportswear in retailing. Sogo, which recently c a m e out of court-ordered
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33: Remarks from U.S. Deputy Treasury Secretary Kenneth W . D a m at the Japan Society
Page 6 of 6
rehabilitation, will m a k e the largest number of n e w job offers of any department
store this spring.
Japanese banks have recognized what many of the critics of foreign involvement
overlook - the valuable skills that restructuring experts can bring to the process of
loan workout. UFJ has teamed up with Merrill Lynch and Sumitomo-Mitsui will work
with Goldman Sachs in corporate restructuring efforts. This is clearly a win-win
situation for Japan.
Conclusion
The United States fully supports Prime Minister Koizumi's resolve to overcome
these four challenges facing Japan. Returning the Japanese economy to its full
growth potential is critically important to Japan in order to assure employment,
income security, and fiscal sustainability.
Why is this so important to the United States? It is because we clearly recognize
that a vibrant international economy requires strong performance from each of the
major economies. W e realize that today m a n y countries depend on the United
States as a source of growth for the world economy. But continued world economic
growth needs more than a single engine. It needs the powerful engine of a
vigorous Japanese economy. W e can't applaud with one hand clapping.
Nor is our interest simply a matter of economics. A healthy, vibrant Japan is a
Japan that is able to take is proper place on the world stage - a critical factor in the
security of this region, and of theworld as a whole.
http://www.treas.gov/press/releases/js33.htm
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34: Media Advisory - Treasury Secretary John S n o w to visit Philadelphia, Pennsylvania
Page 1 of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
February 13, 2003
JS-34
MEDIA ADVISORY
Treasury Secretary John Snow to visit Philadelphia, Pennsylvania
FRIDAY, FEBRUARY 14, 2003
8:00 A M
TOUR OF THE PHILADELPHIA MINT
OPEN PRESS
The United States Mint
Philadelphia Mint Facility
151 North Independence Mall East
Philadelphia, Pennsylvania
SEPARATE ADVISORY FOR DETAILS
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F R O M T H E OFFICE O F PUBLIC A F F A I R S
February 14, 2003
JS-35
United States Treasury Secretary John W. Snow
Remarks to the Philadelphia Chamber of C o m m e r c e
February 14, 2003
Philadelphia, P A
Good afternoon. Thank you, Governor Schweiker for that kind introduction.
This is my second week on the job as Treasury Secretary, and Philadelphia is one
of m y first stops on the road, talking to people about the state of our economy and
President Bush's economic growth plan, which promises to create jobs, accelerate
our economic recovery, and increase our growth in the years to come. I think it's
the right medicine at the right time, and his plan will do a lot for the people of the
state of Pennsylvania.
As every American knows by now - whether from losing a job, from feeling the fear
that comes when your job is insecure, or from knowing someone w h o has lost a job
- our economy took a turn for the worse beginning in the summer of 2000. By the
time President Bush took office, an undercurrent was running against the
economy. The unprovoked and unprecedented terrorist attacks of September 11,
2001 compounded a recession that was well underway, and the discovery of
serious abuses by some corporate business leaders slowed our recovery from it.
In response to this convergence of adverse events, President Bush led decisively.
Acting with Congress, he took the steps necessary to protect a shaken nation and a
fragile economy. In 2001, when relief was needed, he signed the most sweeping
tax relief in a generation. As evidence of the damage became clearer, he acted
again in March 2002 to further bolster the economy. The timing was perfect.
These actions m a d e the recession shorter and shallower than it would have been.
In fact, by most measures it was the mildest since World W a r II.
In the face of extreme adversity, our economy, like our nation, remains resilient.
Despite an economic slowdown, attacks on our homeland, war in Afghanistan, and
weakened investor confidence, the economy is recovering. But as the President
has stated, w e can and must do better. Too many Americans are out of work
today, and too many Americans feel uncertainty about tomorrow.
We must build on the proven strengths of our economy. We must continue to move
toward policies that enable the private sector to invest in more good jobs that raise
living standards for all. As long as there are Americans w h o want jobs and can't
find them, the economy is not growing fast enough. That's why President Bush's
jobs and growth package is so important.
Let me describe the package in a little more detail.
The President's growth plan is especially favorable to working families. The 10%
tax rate bracket will immediately expand to help the lowest income earners keep
more of their pay. The marriage penalty will end once and for all, and the child
credit will increase to $1,000 per child immediately - double its level in the year
2000.
The President's plan will also accelerate the tax cuts approved in 2001, to
accelerate economic benefits for the American people.
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For the unemployed, the President's growth plan offers considerable assistance,
extending existing unemployment benefits, and creating n e w personal reemployment accounts. Re-employment accounts grant unemployed workers up to
$3,000 to use toward the expense of finding a n e w job, such as moving costs, child
care, training and transportation.
The President's plan also helps businesses create the new jobs that workers are
looking for. For one, the plan offers tax relief to small businesses that invest in our
future. The plan will triple the amount of equipment that small businesses can
deduct rather than depreciate, which adds incentive for entrepreneurs to invest
now. More investment n o w m e a n s more jobs, and sooner.
But the key job creation provision of the President's plan is the elimination of the
double taxation of dividends. Companies pay dividends to their shareholders to
attract equity investment, which allows the companies to expand their businesses
and create n e w jobs. Dividends provide investors with an incentive to invest in
American companies, American products and services and in the American
worker. Yet today, our tax laws discourage that investment and job creation, and
needlessly penalize all those investors -- especially seniors -- by taxing dividends
twice. The company pays taxes on its profits, and when it pays out those profits to
shareholders as a dividend, the s a m e earnings get taxed again as income.
Most American would agree that double taxation is unfair. It is also bad policy. The
net effect of double taxation of dividends is that the American economy grows more
slowly than it should, because it is more costly than it needs to be for businesses to
expand and invest.
And double taxation hits seniors the hardest. Of the 17 million seniors we expect
will file tax returns in 2003, 9 million - over half- have taxable dividend income. In
fact, seniors receive over half of all taxable dividends. It doesn't seem right to put a
higher tax burden on folks w h o have already contributed most of a lifetime to this
country.
This double taxation is unfair, counter-productive and damaging to our economy.
Double taxation makes it doubly difficult for companies to hire n e w workers, for
hardworking taxpayers to save for their retirements, and for the economy to grow
and create jobs. For every dollar a business sends to Washington in taxes, it is one
less dollar used to hire a n e w employee, develop a n e w product or invest in the
future. For every dollar an individual taxpayer sends to Washington in the form of a
dividend tax, it's one less dollar to invest in a business or save for the future.
Under the President's plan, corporations will still be taxed on their profits, but when
they pay out their profits as dividends, shareholders will not be taxed on that
income a second time. W e think that is fair. It is also smart. And the w a y w e have
written the plan, it will encourage companies to pay the taxes that they owe,
because they can only pay tax-free dividends when they pay taxes on their profits.
Under the President's proposal, 92 million taxpayers and their families would
receive a tax cut in 2003. A typical family of four with two earners making a
combined $39,000 will receive a total of $1,100 in tax relief, compared to 2002 - not
just this year, but in every year after. And the plan will create jobs. The Treasury
Department estimates that by the end of next year, the Presidents growth plan will
create over 1.5 million n e w jobs, with much of that coming from the elimination of
dividend double taxation.
The President and his economic team have given this plan a lot of thought. Our
goal w a s to do something now that would pay off for America long into the future not here today, gone tomorrow. The package will not only help America return to its
economic potential, it will increase it, creating a more abundant future with more
good jobs and rising real wages. I believe that is what everyone in this room and
across America seeks.
Now, I know not everyone agrees with me, and a lot of Americans still have
questions about the President's plan. I spent most of m y first w e e k on the job
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testifying to Congress, and while I w a s up on the hill, I heard s o m e reasonable
question about the President's plan. Let m e take those head-on.
First, I was asked about the federal budget deficit. Yes, in the short term, the
President's plan would increase the deficit - w e would leave more m o n e y with the
American taxpayers and take less to Washington. Deficits matter. They are never
welcome. But there are times, such as these, w h e n they are unavoidable,
particularly w h e n w e must address critical national needs. Even without the
President's economic growth and jobs package, improved homeland security, and
the war on terrorism, w e would still have deficits today from the economic
slowdown. Are these deficits welcome? No. Are they understandable? Yes.
The surpluses we enjoyed were the product of a strong economy, not a weak one.
W e will not return to economic strength by taxing our economy w h e n it is
struggling. The prescription for returning to balanced budgets is straightforward:
hold the line on government spending and grow the economy. This is the direction
the President has chosen -- a course to create real jobs that last.
We should also remember that current deficits are small relative to our economy as
a whole. Even at their worst, they are expected to remain considerably below the
typical levels following other recessions in the last 30 years, and they are expected
to improve considerably after next year, as our growth accelerates.
I've also been asked how the President's plan will help states and municipalities.
S o m e people s e e m to think the best w a y to help ailing state budgets is to hook
them up to federal life support. W e think the best w a y is to create an environment
that will restore their economic health. The President's plan does offer assistance
to the unemployed in every state through re-employment accounts, and the
President's budget increases state and local grants-in-aid. But the most important
aspect of this plan is that it will create more, better-paying jobs in your state.
In Pennsylvania alone, the President's growth package will reduce income tax bills
for over 4 million taxpayers, and over 1 million small businesses will have tax
savings to apply toward n e w jobs and equipment. More than 3 million married and
single filers will benefit from the expanded 10-percent tax bracket. Over 1.5 million
couples will benefit from the elimination of the marriage penalty. Over 1.1 million
parents will benefit from the increased child tax credit, and over 1.4 million
taxpayers will gain from the end of double taxation of dividends.
I've heard people say that the President's plan is unfair. Let's be real clear about
this one. I already explained that the proposal favors working families because it
eliminates the marriage penalty, nearly doubles the child tax credit, and expands
the 10 percent rate bracket. It also favors seniors by ending double-taxation of
dividends.
Here are the facts: under the President's plan, taxpayers with income under
$30,000 will get an average tax reduction of about 17 percent. Taxpayers with
incomes over $100,000 will get a reduction of about 11 percent.
Under the President's plan, families with incomes under $50,000 will pay a smaller
share of the total income tax burden than they do today. Families with incomes
over $100,000 will pay a larger share of the total income tax burden than they pay
today. Under this plan, the share of income taxes paid by families with income over
$100,000 will rise to 73.3 percent.
I think that's pretty fair.
Job creation and economic growth are keys not only to our near-term but our longterm success as well. To the meet the new challenges our nation faces today, and
the unexpected threats of tomorrow, w e must have a strong economy.
We must seek a higher level of prosperity for America than we have known - one
that puts us on a path to ever-greater growth, one which unlocks the fullest potential
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7v$- Remarks of United States Treasury Secretary John W . S n o w , to the Philadelphia C h a m b e r ot uo...
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and talents of the American people. That means encouraging hard work, rewarding
hard work, and creating the opportunities for all Americans. These are the values
that m a d e America great, and these are the values that should lead us into the
future.
President Bush's Jobs and Growth Package is the right plan at the right time.
Thank you.
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36: Valentine's D a y Fact from the Treasury Department
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FROM THE OFFICE OF PUBLIC AFFAIRS
February 14, 2003
JS-36
VALENTINE'S DAY FACT FROM THE TREASURY DEPARTMENT
JOBS AND ECONOMIC GROWTH FACT OF THE DAY
FEBRUARY 14, 2003
46,000,000
Number of married couples who will be able to enjoy Valentine; js Day a little more
knowing that they will receive an average of $1716 as a result of the President} js
jobs and economic growth plan.
• Under the Presidents plan, the standard deduction for married couples
would be increased to double the amount of the standard deduction for
single taxpayers in 2003. The width of the 15-percent tax bracket for
married couples would be increased to twice the width for single taxpayers
in 2003.
• These provisions were scheduled to phase-in over the period between 2005
and 2010 as part of the tax cuts of 2001. President Bush believes that the
time to deliver this relief is nowjV when it can do the most good for married
couples, businesses, and the economy.
• Under the President! js plan, 46 million married couples would receive
average tax cuts of $1,716 in 2003, with the total tax relief for the tax year
reaching $78 billion.
• 92 million taxpayersjXespecially middle-income AmericansjXwill benefit as
tax reductions passed by Congress in 2001 are made effective
immediately. Middle-income families will receive relief from the accelerated
reduction of the marriage penalty, a faster increase in the child tax credit,
and immediate implementation of the new, wider 10 percent tax bracket.
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.37: Remarks by U.S Treasury Deputy Secretary Kenneth W . D a m at the Atlantic Council
F R O M T H E OFFICE O F PUBLIC A F F A I R S
February 14, 2003
JS-37
"A Fresh Perspective on U.S.-EU Economic Relations"
remarks by
Kenneth W . D a m
U.S Treasury Deputy Secretary
delivered to the
Atlantic Council
Washington, D.C.
February 13, 2003
This evening I'd like to offer a fresh perspective on U.S.-EU economic relations. If
you've been reading the financial press on a regular basis, you might think the
United States and the E U were fighting a transatlantic trade war.
Consider these recent headlines: "EU allowed to retaliate up to $4 billion dollars;"
"Steel tariffs stir transatlantic trade unrest;" "U.S. farm bill coldly received in
Europe." Fortunately, international economic relations are about more than
headlines.
The facts tell a different story. In the last decade, the U.S.-EU economic
relationship, when measured as trade plus investment, has swelled into the largest
and most complex on earth. U.S. investors are deeply invested in Europe's growth,
and vice-versa. You might not realize it, but more than 800 of Europe's best
companies choose to list their shares, in the form of American Depository Receipts,
on U.S. stock exchanges.
Sure, every so often, the United States and the E U experience "trade rows," - as
our British friends call them but trade disputes are inevitable given the scope of
our economic ties. In any event, the real action today in international trade is not in
the W T O dispute settlement process, but in the new Doha Round of negotiations.
There w e have put on the table unprecedented proposals for the reduction of
barriers in both agricultural and industrial products.
We propose to eliminate agricultural export subsidies and greatly reduce
agricultural support payments aswell as to eliminate all tariffs on industrial products
by 2015. Any major reform of the C o m m o n Agricultural Policy naturally presents a
challenge to the EU's internal processes. Our agricultural proposal is far more
forward-looking and more beneficial to the developing world than anything under
consideration in the EU. The same may well prove true with respect to our
proposals for industrial and other non-agricultural products.
The fact is that the overall U.S.-EU economic relationship is about more than just
trade. W e have both devoted new resources to fighting the financial war on
terrorism and collaborating with our E U counterparts on new financial and
regulatory changes.
Therefore, while I a m open to questions regarding U.S.-EU trade relations, I'd like
to spend the next few minutes exploring some of the less publicized aspects of the
U.S.-EU economic relationship. Let's start with the financial war against terrorism.
U.S.-EU Cooperation in Combating Terrorist Financing
Since September 11th, the United States and the EU have campaigned jointly to
designate terrorist entities and their financial backers, and then to freeze their
assets. For example, nearly every terrorist individual and entity designated by the
United States also has been designated by the E U or s o m e of its m e m b e r states.
Moreover, the United States and the E U have established a fluid, informal
mechanism for sharing information on terrorists and their supporters. Action also
was taken by the E U against the al-Aqsa Martyrs Brigade, a group that has taken
responsibility for a number of suicide bombings in Israel. In December, the E U
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designated an Algerian terrorist organization with operations in Italy and Western
Europe, and 17 of its key operatives.
Recent terrorist finance developments at the E U member-state level also are
positive. Last September, w e co-chaired with Spain an important meeting of the
Financial Action Task Force to discuss international standards and measures being
taken in the war against terrorist financing. In August, Italy joined the United States
in submitting to the U N 1267 Sanctions Committee the n a m e s of 25 individuals and
entities linked to al Qaida. The Dutch Government recently froze the assets of the
"New Peoples Army" and its leader Jose Sison, both known to be responsible for
the killing of American citizens in the Philippines. Both France and G e r m a n y have
submitted n a m e s in the past few months to the U N 1267 list.
However, there is room for improvement on both substantive and procedural
issues.
First, it still takes far too long for terrorist names to be submitted and considered for
designation by the EU. Although the E U has established a so-called
"clearinghouse" based on unanimity to streamline the process, it remains too
cumbersome. Given the threat w e face, this process must be improved.
Second, the assets of "internal terrorists" are being left unblocked in a number
[VGC1]of European countries. This is because under current E U treaty
interpretation, the E U cannot direct m e m b e r states to block the assets of individuals
and entities of so-called "internal terrorists." M e m b e r countries must rely on their
o w n domestic law to block the assets of "internal terrorists." Unfortunately, not all
of the fifteen E U countries have the necessary domestic laws. Our European
friends need to close this loophole.
Third, it is time the EU joined the United States in labeling Hamas and Hizballah as
what they are -- terrorist organizations. Thus far, most European countries have
dodged this issue, on grounds of a supposed distinction between the "charitable" or
"political" wing of H a m a s and Hizballah and the terrorist wing. The United States
has rejected the notion that "firewalls" exist walling off the terrorist activities of
H a m a s and Hizballah, and w e urge our European counterparts to do the same. Not
only is m o n e y fungible, but no evidence has been brought forward to establish the
existence of any such "firewall." Nor is their any reason to suppose that terrorists
within either organization respect such niceties. W e are beginning to see s o m e
progress. Recently, for example, Denmark seized the assets of the Al Aqsa
[VGC2]Foundation -- a fundraiser for H a m a s -- and arrested three individuals
affiliated with that organization. This is movement in the right direction, but w e have
a long w a y yet to go.
Our E U counterparts know that the United States is pressing for resolution on these
critical issues, which w e believe will enhance the EU's ability to combat terrorist
financing more effectively. W e welcome the generally good cooperation of the E U
in the financial war on terrorism to date. N o w is the time to confront the remaining
issues.
U.S.-EU Financial and Regulatory Cooperation
A s in the financial war on terrorism, the United States and the European Union
have been actively working together over the past year on financial and regulatory
changes that have transatlantic consequences. A good example is Europe's plan
to introduce a single financial market in 2005.
Ever since the idea took shape, the United States has been very supportive of the
EU's Financial Services Action Plan for a single financial market. If properly
implemented, w e believe the Plan will stimulate economic growth in Europe,
facilitate international capital flows, and provide advantageous opportunities to
borrowers and savers.
Our most general concern is in seeing that the process of European capital market
integration is well-managed and that the process of formulating n e w legislation and
rules is transparent and fair to all.market participants. W e have m a d e our E U
counterparts aware of concerns where newly proposed E U financial directives could
adversely impact non-EU companies operating in EU-regulated markets. For
example, w e have voiced concerns that n e w E U directives under consideration
governing the prospectuses, capital adequacy, investment services and financial
conglomerates could discriminate against U.S. firms in unintended ways.
Take one such directive -- the Financial Conglomerates Directive. Under the
directive, U.S.-based investment banks operating in Europe would be subject to
supervision at the holding company level. In the United States, however,
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investment banks are supervised by the S E C at the broker-dealer level - not at the
holding company level. Therefore, absent a finding of "equivalent" oversight by E U
authorities, U.S.-based investment banks operating in Europe no doubt would face
higher compliance and operating costs. Officials in Brussels have been supportive
of our efforts to resolve this problem, and w e are continuing to work with officials
from the U.K.'s Financial Services Authority to try to address specific concerns they
have raised.
In order to m a n a g e these and other cases of regulatory "spillover" that crop up on
both sides of the Atlantic, and more generally to have a two-way dialogue on key
financial market issues of import to both sides, Treasury created an informal U.S.E U Financial Markets Dialogue in early 2002.. European issues of concern include
the Sarbanes-Oxley Act and the draft rules that the S E C has been promulgating to
implement sections of that Act. In addition, a request by the Frankfurt Stock
Exchange is n o w pending before the S E C to allow the former to place its trading
screens in the United States.
Treasury and the European Commission chair the dialogue and are accompanied
by financial regulators on both sides. A number of informal dialogue meetings have
been held in Brussels and Washington to date. Later this month, Commissioner
Bolkestein, w h o oversees the Internal Market Directorate, will visit Washington. H e
has asked to meet with Secretary S n o w at that time for further discussions on these
financial market issues.
While conflicts are inevitable given our varied experiences and attitudes toward
financial regulation and oversight, the Financial Markets Dialogue has been a
successful forum for openly airing concerns on both sides. Both sides share the
s a m e objectives: sound financial markets regulation and efficient capital markets
that generate real benefits to firms and investors on both sides of the Atlantic. I
have been impressed by the depth and professionalism of the talks thus far.
The Financial Markets Dialogue has also begun dealing with the issue of
accounting. Here, the general level of cooperation is high, and for the m o m e n t
convergence between our respective standards of accounting s e e m s a mid-range
possibility.
In June 2002, the E U called upon all 15 m e m b e r states to m o v e from national
accounting standards to International Accounting Standards (IAS) by 2005. This
m e a n s that all 7,000 firms listed in the E U will soon be adopting the s a m e
accounting standards. Only a month later, President Bush signed the SarbanesOxley Act, which introduces stricter government oversight of the audit process for
public companies, in accordance with Generally Accepted Accounting Principles
(GAAP). Though w e share c o m m o n goals on better corporate disclosure, both
actions - as you might imagine - raised eyebrows on the opposite side of the
Atlantic, as corporations feared that the costs of reconciliation between the two
standards - IAS and G A P P - as well as compliance would increase significantly.
Fortunately, h o w these more muscular regulatory schemes will be implemented and
enforced is being discussed openly by U.S. and E U regulatory officials, with market
participants' input. This needs to continue. The S E C has indicated a willingness to
consider accepting IAS for firms listed on U.S. exchanges without reconciliation to
U.S. G A A P , provided there is consistent interpretation and enforcement at the E U
level across all m e m b e r countries. Convergence needs to be about not just
reducing differences in treatment, but also about optimizing the respective
advantages of each approach to ensure the best reporting and to give specific
guidance on particular kinds of transactions.
I also understand that the Financial Accounting Standards Board (FASB), which
sets accounting standards in the United States, has added convergence to its
formal work agenda. This is a positive development, as is the FASB's and IAS'
recent "Norwalk Agreement." This agreement acknowledges a commitment to the
development of high-quality compatible accounting standards that could be used for
both domestic and cross-border financial reporting. After all, capital markets are
rapidly becoming a worldwide feature and regulations need to keep pace.
EU Enlargement
M y discussion of U.S.-EU economic relations would not be complete without a brief
word on the EU's continued enlargement. This enlargement highlights both the
opportunities and challenges in the relationship.
The prospect of E U membership has been a key factor in motivating economic and
political reform in the countries of Central Europe and the Baltics, enabling them to
m a k e rapid progress from centrally planned to market economies. Over the past
twelve years, these countries have shown a consistent and sustained commitment
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to reform. This includes actions to create attractive and competitive investment
climates. These actions include selling off state-owned enterprises, simplifying
regulatory procedures, creating predictable tax regimes, establishing secure
property rights, promoting good governance, and providing basic infrastructure.
These reforms have not been without costs: Privatizing state enterprises, for
example, has often led to massive layoffs. S o m e governments have been forced to
cut generous but unsustainable benefit programs. The "carrot" of joining the E U
has facilitated the implementation of difficult policies, enabling these countries to
avoid the pitfalls of reform limbo that have afflicted other transition economies. A s a
result, most of these economies are enjoying the benefits of reform in terms of
prolonged macroeconomic stability and robust, private-sector led growth.
Despite the natural economic linkages created by close proximity with Western
Europe, U.S. investors have benefited significantly from the opportunities offered in
the E U accession countries. U.S. investment in Hungary, for example, accounted
for 29 percent of all Hungarian FDI between 1989 and 2002. (To see h o w
significant this figure is, consider that next-door Germany c a m e in second to the
United States. The United States also has 130 firms operating in Poland, second
only to the Germans. In total, the U.S. firms have invested over $7.5 billion in
Poland since 1993.
The United States stands to gain further from opportunities that are arising because
of the accession process. The Central European accession countries are
harmonizing with E U standards on a broad range of issues, from the environment to
financial services. The upgrades and reforms that are being undertaken will
provide additional opportunities for U.S. investors, as U.S. firms can assist in
technological upgrading, investment in manufacturing equipment, and financial
sector servicing.
In addition to these specific opportunities, development of a larger internal market
will offer a bigger consumer base and greater economies of scale, which can only
promote trade and investment. Administrative simplification at the borders through
an extension of the internal market will also facilitate trade and investment.
To ensure that U.S. businesses can fully capitalize on new opportunities, it is
important that they are not disadvantaged by E U integration. N o doubt w e will hear
more about this issue in the future.
We are particularly concerned, that the vast potential that this new market will offer
could be undermined by the structural rigidities that have already dampened growth
in the EU, especially labor market rigidities. S o m e E U accession countries especially those in the Baltics - are actually surpassing current E U m e m b e r states
in development of open, flexible market economies. W e fear they will be required
to impose regulations that will reduce competition and could obstruct growth in
order to comply with E U standards. The E U needs to hasten implementation of
reforms that support deregulation and labor market flexibility if its current and future
m e m b e r s are to benefit fully from the opportunities of integration.
Conclusion
The U.S.-EU economic relationship continues to evolve. It is characterized by deep
cooperation on c o m m o n public goals and complex integration of private pursuits.
While important challenges remain, I expect the relationship to be a source of
strength, stability, and opportunity in the years to come.
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5-38: Air Transportation Stabilization Board Issues Federal Guarantee O n Behalf of Frontier Airlines, I... Page 1 of 1
F R O M T H E OFFICE O F PUBLIC A F F A I R S
February 14, 2003
JS-38
Air Transportation Stabilization Board Issues Federal Guarantee
O n Behalf of Frontier Airlines, Inc.
The Air Transportation Stabilization Board today announced that Frontier Airlines,
Inc. has closed on a $70 million loan. The loan is backed by a $63 million federal
guarantee issued under the Air Transportation Safety and System Stabilization Act
and implementing regulations promulgated by the Office of Management and
Budget.
http://www.treas.gov/press/releases/js38.htm
3/7/2003
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE CONTACT: Office of Financing
February 18, 2003
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Term: 91-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:
February 20, 2003
May 22, 2003
912795MN8
High Rate: 1.160% Investment Rate 1/: 1.179% Price: 99.707
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted
3.07%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tendered
Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)
$
34,058,283
1,450,715
150,000
Accepted
$
SUBTOTAL
35,658,998
Federal Reserve
5,828,786 5,828,786
TOTAL $
41,487,784
15,399,436
1,450,715
150,000
17,000,151 2/
$
22,828,937
Median rate
1.150%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.125%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 35,658,998 / 17,000,151 = 2.10
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,166,909,000
http://www.publicdebt.treas.gov
sj
S -3f
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE
February 18, 2003
CONTACT
Office of Financing
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 2 6-WEEK BILLS
182-Day Bill
February 20, 2003
August 21, 2003
912795NJ6
Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:
1.180%
Investment Rate 1/:
1.204%
Price:
99.403
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted
5.36%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type
Tendered
Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)
33,373,833
967,690
50,000
14,982,713
967,690
50,000
SUBTOTAL
34,391,523
16,000,403 2/
Federal Reserve
TOTAL
5,666,910
5,666,910
40,058,433
21,667,313
Median rate
1.170%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.150%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 34,391,523 / 16,000,403 = 2.15
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $708,960,000
http://www.publicdebt.treas.gov
S^G
OKI K K O K PI B I U A H A l k S • 1500 I'l-\NS VIA A M A AVKM.ii:, N.W. • W A M I I N C M O V
EMBARGOED UNTIL 11:00 A.M.
February 18, 2003
Contact:
I M .» 2«22n • <2l)2l 622-><>MI
Office of Financing
202/691-3550
TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $20,000 million to
refund an estimated $14,000 million of publicly held 4-week Treasury bills maturing
February 20, 2003, and to raise new cash of approximately $6,000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreasuryDirect will not be accepted.
The Federal Reserve System holds $13,006 million of the Treasury bills maturing
on February 20, 2003, in the System Open Market Account (SOMA) . This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balance of the amount not awarded in today's 13-week and 26-week Treasury
bill auctions. Amounts awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New York
will be included within the offering amount of the auction. These noncompetitive bids
will have a limit of $100 million per account and will be accepted in the order of
smallest to largest, up to the aggregate award limit of $1,000 million.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions
set forth in the Uniform Offering Circular for the Sale and Issue of Marketable BookEntry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about the new security are given in the attached offering highlights.
oOo
Attachment
JS-^
HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED FEBRUARY 20, 2003
February 18, 2003
Offering Amount $20,000 million
Maximum Award (35% of Offering Amount) . . . $ 7,000 million
Maximum Recognized Bid at a Single Rate. . $ 7,000 million
NLP Reporting Threshold
$ 7,000 million
NLP Exclusion Amount
$ 9,400 million
Description of Offering:
Term and type of security
CUSIP number
Auction date
Issue date
Maturity date
Original issue date
Currently outstanding
Minimum bid amount and multiples. .
28-day bill
912795 MD 0
February 19, 2003
February 20, 2003
March 20, 2003
September 19, 2002
$36,982 million
. .$1,000
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FIMA accounts. Accepted in order of size from smallest to largest
with no more than $100 million awarded per account. The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FIMA accounts will not exceed $1,000 million. A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate award total to the $1,000
million limit. However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 4.215%.
(2) Net long position (NLP) for each bidder must be reported when
the sum of the total bid amount, at all discount rates, and the
net long position equals or exceeds the NLP reporting threshold
stated above.
(3) Net long position must be determined as of one half-hour prior
to the closing time for receipt of competitive tenders.
Receipt of Tenders:
Noncompe ti tive tende r s:
Prior to 12:00 noon eastern standard time on auction day
Competitive tenders:
Prior to 1:00 p.m. eastern standard time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank
on issue date.
5 43:
Treasury Department Issues Additional U S A P A T R I O T Act Regulations
Page 1 of 2
F R O M T H E OFFICE O F PUBLIC A F F A I R S
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
February 19, 2003
JS-43
Treasury Department Issues Additional USA PATRIOT Act Regulations
The Department of the Treasury and the Financial Crimes Enforcement Network
(FinCEN) today issued a proposed rule and two advance notices of proposed
rulemaking concerning a requirement that additional categories of financial
institutions establish an anti-money laundering program.
These regulations form part of Treasury's work to implement section 352 of the
U S A P A T R I O T Act, a provision that requires all financial institutions to establish
anti-money laundering programs. Treasury wishes to specifically c o m m e n d those
within these industries for helping Treasury and FinCEN to understand various
aspects of these industries.
In a proposed rule, Treasury and FinCEN propose to require certain dealers in
precious metals, precious stones, and jewels to establish an anti-money laundering
program designed to detect and prevent money laundering and the financing of
terrorism. The proposed rule covers a broad range of industry segments including
those trading in precious metals, including refiners; those trading in loose
gemstones; large and small scale manufacturers of jewelry; and retail stores that
function as a dealer in such items.
The proposed rule is limited, however, to dealers—those businesses that both buy
and sell the items—thereby excluding pure retail outlets. Additionally, the rule
proposes to exclude businesses that purchase or sell less than $50,000 worth of
the material each year. Written comments on the proposed rule may be submitted
within 60 days of its publication in the Federal Register, which is expected to occur
later this week.
In addition, Treasury and FinCEN issued two advance notices of proposed
rulemaking seeking public comment on imposing an anti-money laundering
program requirement on vehicle sellers and travel agents. Section 352 requires
Treasury to issue regulations requiring financial institutions to establish an antimoney laundering program that is commensurate with the financial institutions' size,
location and activities.
After researching these two industry sectors, Treasury and FinCEN determined thatadditional public comment on various aspects, including the money laundering risks
that could be addressed through additional regulation, is necessary. An advance
notice of proposed rulemaking provides Treasury and FinCEN with an opportunity
to discuss the various risks and regulatory issues while soliciting public comment
prior to issuing a formal proposed rule.
The notices highlight important issues under consideration. For example, because
the category of vehicle sellers is quite inclusive, comments on the scope of the
definition, the money laundering risks associated with the various types of vehicles
and distribution mechanisms, and the structure of an appropriate anti-money
laundering program are sought.
With respect to travel agents, comments are specifically sought on whether
^//www.treas.gov/press/releases/is43.htm
3/7/2003
TvTreasury Department Issues Additional U S A P A T R I O T Act Regulations
Page 2 of 2
minimum business thresholds are necessary as well as the money laundering risks
that m a y be posed by these businesses. Both vehicle sellers and travel agents, like
most other businesses, are already under the existing regulatory obligation to report
the receipt of cash or monetary instruments in excess of $10,000.
Written comments on the advance notices of proposed rules may be submitted
within 45 days of its publication in the Federal Register, which is expected to occur
later this week.
Related Documents:
• "Proposed Rule"
• "Advance Notice of Prosposed Rule"
• "Advance Notice of Prosposed Rule"
J%://www.treas.gov/press/releases/j s43.htm
3/7/2003
(BILLING CODE: 4810-02-P)
DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506-AA28
Financial Crimes Enforcement Network; Anti-Money Laundering Programs
Dealers in Precious Metals, Stones, or Jewels
AGENCY: Financial Crimes Enforcement Network ("FinCEN"), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: FinCEN is issuing this proposed rule to prescribe minimum standards
applicable to dealers in precious metals, stones, or jewels pursuant to the provisio
USA PATRIOT Act of 2001 that require financial institutions to establish anti-money
laundering programs.
DATES: Written comments may be submitted on or before [INSERT DATE THAT IS
60 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER].
ADDRESSES: Commenters are encouraged to submit comments by electronic mail
because paper mail in the Washington, D.C, area may be delayed. Comments submitted
by electronic mail may be sent to regcomments@fincen.treas.gov with the caption in t
body of the text, "ATTN: Section 352 - Jewelry Dealer Regulations." Comments also
may be submitted by paper mail to FinCEN, P.O. Box 39, Vienna, VA 22183-0039,
"ATTN: Section 352 - Jewelry Dealer Regulations." Comments should be sent by one
method only. Comments may be inspected at FinCEN between 10 a.m. and 4 p.m., in the
FinCEN Reading Room in Washington, D.C. Persons wishing to inspect the comments
submitted must request an appointment by telephoning (202) 354-6400 (not a toll-free
number).
FOR FURTHER INFORMATION CONTACT: Office of Chief Counsel, FinCEN,
(703) 905-3590; the Office of the General Counsel, (202) 622-1927; or the Office of the
Assistant General Counsel (Banking and Finance), (202) 622-0480 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
I. Background
On October 26, 2001, the President signed into law the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
(USA PATRIOT Act) of 2001 (Public Law 107-56) (the "Act"). Title III of the Act
makes a number of amendments to the anti-money laundering provisions of the Bank
Secrecy Act ("BSA"), which are codified in subchapter II of chapter 53 of title 31, United
States Code. These amendments are intended to promote the prevention, detection, and
prosecution of international money laundering and the financing of terrorism.
Section 352(a) of the Act, which became effective on April 24, 2002, amended
section 5318(h) of the BSA. As amended, section 5318(h)(1) requires every financial
institution to establish an anti-money laundering program that includes, at a minimum: (i)
the development of internal policies, procedures, and controls; (ii) the designation of a
compliance officer; (iii) an ongoing employee training program; and (iv) an independent
audit function to test programs. Section 352(c) of the Act directs the Secretary of the
Treasury ("Secretary") to prescribe regulations for anti-money laundering programs that
are "commensurate with the size, location, and activities" of the financial institutions to
which such regulations apply.
1
Regulations implementing the BSA appear at 31 CFR Part 103. The authority of the Secretary the
Treasury to administer the B S A and its implementing regulations has been delegated to the Director of
2
Although a dealer "in precious metals, stones, or jewels" ("dealer") is defined as a
financial institution under the BSA, 31 U.S.C. 5312(a)(2)(N), FinCEN has not previously
defined the term or issued regulations regarding dealers. On April 29, 2002, FinCEN
deferred the anti-money laundering program requirement contained in 31 U.S.C. 5318(h)
that would have applied to the industry. The purpose of the deferral was to provide
FinCEN with time to study the industry and to consider how anti-money laundering
controls could best be applied to the industry.2 This rule defines the term dealer and
provides guidance, tailored to the industry, to such entities in complying with section
352.
The industry of dealers encompasses various segments, including: (1) those who
trade in precious metals, including large scale metal suppliers and large and small scale
refiners; (2) those who trade loose gemstones; (3) large and small scale manufacturers of
jewelry; and (4) retail stores, including independent and chain stores of varying sizes,
selling jewelry products to, and buying jewelry products from, the consuming public.
The size of businesses in each segment of the industry varies substantially from a single
artisan goldsmith to publicly traded commercial manufacturers employing hundreds of
people and producing millions of finished pieces every year. The sources of supply vary
as well, from large scale producers of fabricated precious metals materials to small
dealers selling unique and rare gemstones on an individualized basis. Further, there is an
active secondary market for jewelry, loose gemstones, and precious metals, with small
firms selling used or antique pieces for scrap value or as unique works of art.
FinCEN.
See 31 C F R 103.170, as codified by interimfinalrule published at 67 FR 21110 (April 29, 2002), as
amended at 67 FR 67547 (November 6, 2002) and corrected at 67 FR 68935 (November 14, 2002).
2
3
Because dealers are not generally regulated asfinancialinstitutions, the industry
traditionally has been subject to limited federal financial regulation. Federal laws
governing this industry, such as the National Gold and Silver Stamping Act (15 U.S.C.
291-300) and the Lanham Act (15 U.S.C. 1117, 1125), are generally intended to protect
consumers against misleading descriptions of the fineness of precious metals or the
identity and quality of precious stones and jewels. Similarly, state regulation of the
industry is focused on consumer protection.
II. The Anti-Money Laundering Program
The Congressional mandate that all financial institutions establish an anti-money
laundering program is a key element in the national effort to prevent and detect money
laundering and the financing of terrorism. The mandate recognizes that financial
institutions other than depository institutions (which have long been subject to BSA
requirements) are vulnerable to money laundering. The legislative history of the Act
explains that the anti-money laundering program is not a one-size-fits-all requirement. The
general nature of the requirement reflects Congress' intent that each financial institution
have the flexibility to tailor its program to fit its business, taking into account factors such
as size, location, activities, and risks or vulnerabilities to money laundering. This
flexibility is designed to ensure that all firms subject to the anti-money laundering program
requirement, from the largest to the smallest firms, have in place policies and procedures
appropriate to monitor for anti-money laundering compliance.
3
See U S A P A T R I O T Act of 2001: Consideration of H.R. 3162 Before the Senate (October 25, 2001)
(statement of Sen. Sarbanes); Financial Anti-Terrorism act of 2001: Consideration Under Suspension of
Rules of H.R. 3004 Before the House of Representatives (October 17, 2001) (statement of Rep. Kelly)
(provisions of the Financial Anti-Terrorism Act of 2001 were incorporated as Title III in the Act).
4
Although dealers do not perform the same functions as banking institutions, the
industry presents identifiable money laundering risks. Precious metals, precious stones,
and jewels constitute easily transportable, highly concentrated forms of wealth. They
serve as international mediums of exchange that can be converted into cash anywhere in
the world. In addition, precious metals, especially gold, silver, and platinum, have a
ready, actively traded market, and can be melted and poured into various forms, thereby
obliterating refinery marks and leaving them virtually untraceable. For these reasons,
precious metals, precious stones, and jewels can be highly attractive to money launderers
and other criminals, including those involved in the financing of terrorism.
In addition, significant incentives currently exist for dealers to minimize financial
losses caused by fraud in connection with the valuable products in which they deal. By
their very nature, precious metals, precious stones, and jewels are extremely valuable by
weight and volume, and fraud perpetrators attempt to incorrectly identify the mass,
quality, or fineness of these products. Theft of such items, through the use of counterfeit
checks, forged signatures, or other means, is likewise a risk. As such, this industry has
long been aware that rigorous anti-fraud measures are a necessity in order to remain
economically viable. This proposed rule seeks to take advantage of those existing
practices by focusing the due diligence conducted by dealers to include the potential for
money laundering or terrorist financing.
A. Definitions
Section 103.140(a) defines the key terms used in the proposed rule. Paragraph
103.140(a)(l)(i) defines "dealer" as any person who is "engaged in the business of
purchasing and selling jewels, precious metals, or precious stones, or jewelry composed of
5
jewels, precious metals, or precious stones." The proposed definition of dealer reflects
Treasury's determination that all segments of the industry are vulnerable to money
laundering and terrorist financing. Thus, the anti-money laundering requirement contained
in the proposed rule covers entities including manufacturers, refiners, wholesalers, retailers,
and any other entity engaged in the business of purchasing and selling jewels, precious
metals, precious stones, or jewelry.
The proposed definition contains an explicit minimum dollar threshold, to carve out
small businesses that may, on a part-time basis, deal in precious metals, stones, jewels, or
jewelry. Thus, paragraphs (a)(l)(i)(A) and (B) provide that a person is a "dealer" only if,
during the prior calendar or tax year, the person (1) purchased more than $50,000 in jewels,
precious metals, precious stones, or jewelry, or (2) received more than $50,000 in gross
proceeds from the sale of jewels, precious metals, precious stones, or jewelry. Thus, an
amateur silversmith, who sells a portion of his production to finance his hobby, would not
be subject to this rule if he were to remain below the proposed threshold. FinCEN
specifically solicits comment on the amount of the proposed threshold, and whether an
alternative threshold should be employed, such as specific physical quantities of precious
metals, stones, or jewels, or other types of thresholds.
In addition to the minimum dollar threshold, the definition of "dealer" contains two
exceptions, found in proposed paragraph (a)(l)(ii). The first exception provides that a
retailer4 is a dealer only if it purchased more than $50,000 in jewels, precious metals,
precious stones, or jewelry from persons other than dealers during the prior calendar or tax
year. Thus, a retailer that purchases jewels, precious metals, precious stones, or jewelry
4
The NPRM defines a retailer as a person engaged in the business of selling to the public jewels, precious
metals, or precious stones or jewelry composed of jewels, precious metals, or precious stones.
6
from a dealer (for example, from a wholesaler), would not fall within the definition of
"dealer," even if its gross sales of jewels, precious metals, stones, and jewelry exceeded
$50,000 in the prior calendar or tax year. However, a retailer that, in the prior calendar or
tax year, purchased more than $50,000 in jewels, precious metals, precious stones, or
jewelry from sources other than a dealer (for example, from the general public), would be a
dealer for purposes of the rule. The rationale for this limited exception is that, in order to
abuse this industry, a money launderer must be able to sell as well as purchase the goods.
Therefore, there is substantially less risk that a retailer who purchases goods exclusively or
almost exclusively from dealers subject to the proposed rule will be abused by money
launderers.
The second exception, contained in proposed paragraph (a)(l)(ii)(B), carves out
from the definition of "dealer" a person buying or selling value-added fabricated goods
containing minor amounts of precious metals or gemstones. Precious metals, stones, and
jewels often have minor uses in equipment for which they act as a very small component,
for example, in computers or drills with industrial diamond cutting tools, or as reflective
coating on windows. Similarly, sapphire bearings may be used in highly precise electronic
equipment, because of the toughness exhibited by corundum. Although the amount of
precious metals, stones, and jewels contained in each industrial product may be minimal,
the high volume production or sale of such products could result in a high volume of sale of
precious metals, stones, or jewels. FinCEN has determined that the anti-money laundering
program requirement should be imposed on those sectors of the industry that pose the most
significant risk of ironey laundering and terrorist financing, and for this reason, persons
7
w h o buy and sell value-added fabricated goods containing minor amounts of precious
metals or gemstones are excluded from the proposed definition of "dealer."
The term "jewel" is defined in paragraph (a)(2) to include organic substances that
have a market-recognized gem level of quality, beauty, and rarity. Certain substances, such
as coral, are available in two forms that are not generally transmutable, one that is of gem
quality, and another that is of non-gem quality. As proposed, the definition of "jewel"
would not include substances that are of non-gem quality.
Paragraph (a)(3) contains a definition of the term "precious metal," which is
defined to include gold, silver, and the platinum group of metals, when it is at a level of
purity of 0.500 (50 percent) or greater, singly or in any combination. For example, an alloy
of 25 percent gold and 30 percent platinum would be a precious metal under the proposed
rule. Similarly, this definition excludes the products of a mining firm or refinery that does
not deal in precious metals refined to that purity level, but would include 12 karat gold
jewelry. The 50 percent threshold is intended to exclude materials that have incidental
levels of precious metals, such as polymer resin castings that have been electroplated with
gold, or antique mirrors with a thin silver foil on the back. Similarly, operations that
process lead ore that may contain smaller amounts of silver or gold would also be
excluded. As a result, the focus of the definition is on materials that are predominantly
precious metal.
The term "precious stone" is defined in paragraph (a)(4) to include inorganic
substances that have a market-recognized gem level of quality, beauty, and rarity. Certain
substances, such as diamonds, are available in two forms that are not generally
transmutable, one that is of gem quality, and another that is of industrial (or non-gem)
8
quality. For example, diamonds are available in both industrial grades and g e m quality
grades. However, industrial grade diamonds cannot generally be transformed into gem
quality diamonds. Similarly, a flame fusion synthetic corundum may be chemically
identical to a gem quality ruby, yet not be a "precious stone." Therefore, precious stones of
industrial quality have been carved out of the definition of precious stones.
B. Anti-Money Laundering Program Requirements
Section 103.140(b) requires that each dealer develop and implement an anti-money
laundering program reasonably designed to prevent the dealer from being used to facilitate
money laundering or the financing of terrorist activities. The program must be in writing
and should set forth clearly the details of the program, including the responsibilities of
the individuals and departments involved. To ensure that this requirement receives the
highest level of attention throughout the company, the proposed rule requires that each
dealer's program be approved in writing by its senior management.5 A dealer must make
its anti-money laundering program available to Treasury or its designee upon request.
While it is permissible for a dealer to delegate certain functions relating to its anti-money
laundering program to a third party, the dealer remains responsible for ensuring
compliance with these requirements.
Section 103.140(c) sets forth the minimum requirements of a dealer's money
laundering program. Section 103.140(c)(1) requires the anti-money laundering program to
incorporate policies, procedures, and internal controls based upon the dealer's assessment
of the money laundering and terrorist financing risks associated with its line(s) of
business. Policies, procedures, and internal controls must also be reasonably designed to
5
This may be the sole proprietor in the case of a sole proprietorship, the board of directors, or a committee
authorized for this purpose in the case of a corporation, or partners representing a majority interest in a
9
ensure compliance with B S A requirements. The only B S A regulatory requirement
currently applicable to a dealer is the obligation to report on Form 8300 the receipt of
cash or certain non-cash instruments totaling more than $10,000 in one transaction or two
or more related transactions.6 To assure reasonable compliance, the program should be
reasonably designed to detect and report not only transactions required to be reported on
Form 8300, but also activity designed to evade this reporting requirement. Such activity,
commonly known as "structuring," may involve payments of more than $10,000 with
multiple money orders, travelers' checks, or cashiers' checks or other bank checks, each
with a face amount of less than $10,000. Such methods of payment may be indicative of
money laundering, particularly when the payment instruments were obtained from
different sources or the payments were made at different times on the same day or were
made on consecutive days or close in time. Should dealers become subject to additional
requirements, their compliance programs would have to be updated to include appropriate
policies, procedures, training, and testing functions relating to such requirements.
Section 103.140(c)(l)(i) provides that, for purposes of making the risk assessment
required under section 103.140(c)(1), a dealer must consider all relevant factors,
including those listed in the rule. First, the dealer must assess the money laundering and
terrorist financing risks associated with its products, customers, suppliers, distribution
channels, and geographic locations. In addition, a dealer must take into consideration the
extent to which the dealer engages in transactions other than with established customers
or sources of supply. Finally, a dealer must analyze the extent to which it engages in
transactions for which payment or account reconciliation is routed to or from accounts
general partnership.
6
See 31 C F R 103.30.
10
located in jurisdictions that have been identified as vulnerable to terrorism or m o n e y
laundering.7 The proposed rule is intended to give a dealer the flexibility to design its
program to meet the specific money laundering and terrorist financing risks presented by
the dealer's business, based on the dealer's assessment of such risks.
Section 103.140(c)(l)(ii) provides that a dealer's policies, procedures, and
internal controls must be reasonably designed to detect transactions that may involve use
of the dealer to facilitate money laundering or terrorist financing. In addition, a dealer's
program must incorporate procedures for making reasonable inquiries to determine
whether a transaction involves money laundering or terrorist financing. A dealer that
identifies indicators that a transaction may involve money laundering or terrorist
financing should take reasonable steps to determine whether its suspicions are justified
and respond accordingly, including refusing to enter into, or complete, a transaction that
appears designed to further illegal activity.8 The proposed rule provides flexibility to
dealers in developing procedures for making reasonable inquiries under paragraph
(c)(1)(h). For example, a dealer may appropriately determine that reasonable inquiry
with respect to a transaction conducted by a new customer or supplier involves
considerable scrutiny, including verification of customer identity, income source, or the
purpose of a transaction. In contrast, reasonable inquiry with respect to an established
7
Examples of designations to this effect include the Department of State's designation of a jurisdiction as
a sponsor of international terrorism under 22 U.S.C. 2371, the FATF's designation of jurisdictions that are
non-cooperative with international anti-money laundering principles, or the Secretary of the Treasury's
designation pursuant to 31 U.S.C. 5318A of jurisdictions warranting special measures due to money
laundering concerns.
8
18 U.S.C. 1956 and 1957 m a k e it a crirre for any person, including an individual or company, to engage
knowingly in a financial transaction with the proceeds from any of a long list of crimes or types of "specific
unlawful activity." Although the standard of knowledge required is "actual knowledge," actual knowledge
includes "willful blindness." Thus, a person could be deemed to have knowledge that proceeds were
derived from illegal activity if he or she ignored "red flags" that indicated illegality. See, e.g LLS^v,
Finkelstein. 229 F 3d 9 0 (2 nd Cir. 2000) (owner of jewelry/precious metals business convicted for
11
customer m a y not involve additional steps beyond those normally required to complete
the transaction, unless the transaction appears suspicious or unusual to the dealer. As
explained further below, the determination whether to refuse to enter into, or to terminate,
a transaction lies with the dealer. In addition, dealers are encouraged to adopt procedures
for voluntarily filing Suspicious Activity Reports with FinCEN and for reporting
suspected terrorist activities to FinCEN using its Financial Institutions Hotline (1-866566-3974).
The proposed rule lists several examples of factors that may indicate that
a
transaction is designed to involve use of the dealer to facilitate money laundering
or
terrorist financing. Factors that may indicate a transaction is designed to involve use of
the dealer to facilitate money laundering or terrorist financing include: (1) unusual
payment methods, such as the use of large amounts of cash, multiple or sequentially
numbered money orders, traveler's checks, or cashier's checks, or payment from
unknown third parties; (2) unwillingness by a customer or supplier to provide complete
or accurate contact information, financial references, or business affiliations; (3) attempts
by a customer or supplier to maintain a high and unusual degree of secrecy with respect
to the transaction, such as a request that normal business records not be kept; (4)
purchases or sales that are unusual for the particular customer or supplier or type of
customer or supplier; and (5) purchases or sales that are not in conformity with standard
industry practice. For example, one money laundering scheme observed in this industry
involved a customer who ordered items, paid for them in cash, cancelled the order, and
participation in m o n e y laundering scheme; sentence enhancement based on willful blindness of certain
funds received derived from narcotics trafficking).
12
then received a large refund.9 In one case, funds were laundered through large cash
purchases of a dealer's gold at artificially inflated prices, followed by re-purchase by the
dealer of the same gold at lower prices.10 A dealer should make reasonable inquiries
when transactions appear to vary from standard industry practice, or from the standard
practice of an established customer or supplier. Over- or under-invoicing, structured,
complex, or multiple invoice requests, and high-dollar shipments that are over- or underinsured may all be indicia that a transaction involves money laundering or terrorist
financing.
The list of factors contained in the proposed rule is intended to provide examples
of indicia of illegal activity, and is by no means exhaustive. Determinations as to
whether a transaction should be refused or terminated must be based on the facts and
circumstances relating to the transaction and the dealer's knowledge of the customer or
supplier in question. It is not intended that dealers automatically refuse to engage in or
terminate transactions simply because such transactions involve one or more of the
factors listed in the rule. Rather, it is intended that dealers will develop procedures for
identifying transactions involving potentially illegal activity, and procedures setting forth
the actions that a dealer will take in response to such transactions.
Section 103.140(c)(2) requires that a dealer designate a compliance officer to be
responsible for administering the anti-money laundering program. The person (or group
of persons) should be competent and knowledgeable regarding BSA requirements and
money laundering issues and risks, and should be empowered with full responsibility and
authority to develop and enforce appropriate policies and procedures throughout the
9
See United States v. Huppert. 917 F.2d 507 (11th Cir. 1990).
10
13
See Finkelstein. supra n. 8.
dealer's business. The role of the compliance officer is to ensure that (1) the program is
being implemented effectively; (2) the program is updated as necessary; and (3)
appropriate persons are trained in accordance with the rule. Whether the compliance
officer is dedicated full time to BSA compliance would depend upon the size and
complexity of the dealer's business and the risks posed. In all cases, the person
responsible for the supervision of the overall program should be an officer or employee
of the dealer.
Section 103.140(c)(3) requires that a dealer provide for training of appropriate
persons. Employee training is an integral part of any anti-money laundering program.
Employees of the dealer must be trained in BSA requirements relevant to their functions
and in recognizing possible signs of money laundering that could arise in the course of
their duties, so that they can carry out their responsibilities effectively. Such training
could be conducted by internal or external seminars, and could include videos, computerbased training, booklets, etc. The level, frequency, and focus of the training should be
determined by the responsibilities of the employees and the extent to which their
functions bring them in contact with BSA requirements or possible money laundering
activity. Consequently, the training program should provide both a general awareness of
overall BSA requirements and money laundering issues, as well as more job-specific
guidance regarding particular employees' roles and functions in the anti-money
laundering program.11 For those employees whose duties bring them in contact with
BSA requirements or possible money laundering activity, the requisite training should
1
' Appropriate topics for an anti-money laundering program include, but are not limited to: BSA
requirements, a description of money laundering, h o w money laundering is carried out, what types of
activities and transactions should raise concerns, what steps should be followed when suspicions arise, and
the need to review O F A C and other government lists.
14
occur w h e n the employee assumes those duties. Moreover, these employees should
receive periodic updates and refreshers regarding the anti-money laundering program.
Section 103.140(c)(4) requires that a dealer conduct periodic testing of its
program, in order to ensure that the program is indeed functioning as designed. Such
testing should be accomplished by personnel knowledgeable regarding BSA
requirements. Testing may be accomplished either by dealer employees or unaffiliated
service providers so long as those same individuals are not involved in the operation or
oversight of the program. The frequency of such a review would depend upon factors
such as the size and complexity of the dealer and the extent to which its business model
may be more subject to money laundering than other institutions. Any useful
recommendations resulting from such review should be implemented promptly or
reviewed by senior management.
Section 103.140(d) provides that a dealer must develop and implement an antimoney laundering program within 90 days after enactment of a final rule based on the
Notice, or not later than 90 days after the date a person becomes a dealer for purposes of
the rule.
III. Regulatory Flexibility Act
It is hereby certified, pursuant to the Regulatory Flexibility Act (5 U.S.C. 601 et
seq.), that the proposed rule is not likely to have a significant economic impact on a
substantial number of small entities. Because the requirements of the proposed rule
closely parallel the requirements for anti-money laundering programs for all financial
institutions mandated by section 352 of the Act, the costs associated with the
establishment and implementation of anti-money laundering programs are attributable to
15
the statute and not the proposed rule. Moreover, FinCEN believes that the definition of
"dealer" in section 103.140(a)(1), which excludes dealers who have less than $50,000 in
gross proceeds in a year, will exclude most small dealers from the requirements of the
rule.
Furthermore, the proposed rule provides for substantial flexibility in how each
dealer may meet its requirements. This flexibility is designed to account for differences
among dealers, including size. In this regard, the costs associated with developing and
implementing an anti-money laundering program will be commensurate with the size of a
dealer. If a dealer is small, the burden to comply with section 352 and the proposed rule
should be similarly small.
FinCEN specifically solicits comment on the impact of section 352 and the
proposed rule on small dealers, particularly whether the proposed $50,000 threshold should
be higher or lower, and whether an alternative threshold (such as one based upon specific
physical quantities of precious metals, stones, or jewels, or other types of thresholds) would
be more appropriate.
IV. Paperwork Reduction Act
The collection of information contained in this proposed rule has been submitted
to the Office of Management and Budget for review under the requirements of the
Paperwork Reduction Act, 44 U.S.C. 3507(d). An agency may not conduct or sponsor,
and a person is not required to respond to, a collection of information unless it displays a
valid control number assigned by OMB.
Comments concerning the collection of information in the proposed rule should
be sent (preferably by fax (202-395-6974)) to the Desk Officer for the Department of the
16
Treasury, Office of Information and Regulatory Affairs, Office of Management and
Budget, Paperwork Reduction Project (1506), Washington, D.C. 20503 (or by the
Internet to ilackevi@omb.eop.govV with a copy to FinCEN by mail or the Internet at the
addresses previously specified.
FinCEN specifically invites comments on: (a) whether the proposed collection of
information is necessary for the proper performance of the mission of FinCEN, and
whether the information shall have practical utility; (b) the accuracy of the estimate of the
burden of the collection of information (see below), including the number of dealers (as
defined in section 103.140(a)(1)) who will be subject to the requirements of the proposed
rule; (c) ways to enhance the quality, utility, and clarity of the information collection; (d)
ways to minimize the burden of the information collection, including through the use of
automated collection techniques or other forms of information technology; and (e)
estimates of capital or start-up costs and costs of operation, maintenance, and purchase of
services to maintain the information.
The collection of information is the recordkeeping requirement in section
103.140(b). The information will be used by federal agencies to verify compliance by
dealers with the provisions of sections 103.140 and 103.141. The collection of
information is mandatory.
Estimated Number of Recordkeepers: 20,000.
Estimated Average Annual Burden Per Recordkeeper: The estimated average
burden associated with the recordkeeping requirement in section 103.140(b) rule is 1
hour per recordkeeper.
Estimated Total Annual Recordkeeping Burden: 20,000 hours.
17
V.
Executive Order 12866
It has been determined that this proposed rule is not a significant regulatory
action for purposes of Executive Order 12866. Accordingly, a regulatory impact analysis
is not required.
List of Subjects in 31 CFR Part 103
Administrative practice and procedure, Authority delegations (Government
agencies), Banks and banking, Currency, Investigations, Law enforcement, Reporting and
recordkeeping requirements.
Authority and Issuance
For the reasons set forth in the preamble, part 103 of title 31 of the Code of
Federal Regulations is proposed to be amended as follows:
PART 103 - FINANCIAL RECORDKEEPING AND REPORTING OF
CURRENCY AND FINANCIAL TRANSACTIONS
1. The authority citation for part 103 continues to read as follows:
Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314 and 53165332; title III, sees. 312, 313, 314, 326, 352, Pub. L. 107-56, 115 Stat. 307.
2. Subpart I of part 103 is amended by adding new §103.140 to read as follows:
§ 103.140 Anti-money laundering programs for dealers in precious metals, precious
stones, or jewels.
(a) Definitions. For purposes of this section:
(1) Dealer, (i) Except as provided in paragraph (a)(1)(h) of this section, the term
"dealer" means a person engaged in the business of purchasing and selling jewels,
18
precious metals, or precious stones, or jewelry composed of jewels, precious metals, or
precious stones, and who, during the prior calendar or tax year:
(A) Purchased more than $50,000 in jewels, precious metals, or precious stones,
or jewelry composed of jewels, precious metals, or precious stones; or
(B) Received more than $50,000 in gross proceeds from transactions in jewels,
precious metals, precious stones, and jewelry composed of jewels, precious metals, or
precious stones.
(ii) The term "dealer" does not include:
(A) A retailer, i.e., a person engaged in the business of sales to the public of
jewels, precious metals, or precious stones, or jewelry composed thereof, other than a
retailer that, during the prior calendar or tax year, purchased more than $50,000 in jewels,
precious metals, precious stones, or jewelry composed of jewels, precious metals, or
precious stones, from persons other than dealers (such as members of the general public
or persons engaged in other businesses); or
(B) A person who engages in transactions in jewels, precious metals, or precious
stones for purposes of fabricating finished goods that contain minor amounts of, or the
value of which is not significantly attributable to, such precious metals, precious stones,
or jewels.
(2) Jewel means an organic substance with gem quality market-recognized
beauty, rarity, and value, and includes pearl, amber, and coral.
(3) Precious metal means:
(i) Gold, iridium, osmium, palladium, platinum, rhodium, ruthenium, or silver,
having a level of purity of 500 or more parts per thousand; and
19
(ii) A n alloy containing 500 or more parts per thousand, in the aggregate, of two
or more of the metals listed in paragraph (a)(3)(i) of this section.
(4) Precious stone means an inorganic substance with gem quality marketrecognized beauty, rarity, and value, and includes diamond, corundum (including rubies
and sapphires), beryl (including emeralds and aquamarines), chrysoberyl, spinel, topaz,
zircon, tourmaline, garnet, crystalline and cryptocrystalline quartz, olivine peridot, jadeite
jade, nephrite jade, spodumene, feldspar, turquoise, lapis lazuli, and opal.
(5) Person shall have the same meaning as provided in § 103.1 l(z).
(b) Anti-money laundering program requirement. Each dealer shall develop and
implement a written anti-money laundering program reasonably designed to prevent the
dealer from being used to facilitate money laundering and the financing of terrorist
activities. The program must be approved by senior management. A dealer shall make
its anti-money laundering program available to the Department of Treasury or its
designee upon request.
(c) Minimum requirements. At a minimum, the anti-money laundering program
shall:
(1) Incorporate policies, procedures, and internal controls based upon the dealer's
assessment of the money laundering and terrorist financing risks associated with its
line(s) of business. Policies, procedures, and internal controls developed and
implemented by a dealer under this section shall include provisions for complying with
the applicable requirements of the Bank Secrecy Act (31 U.S.C. 5311 et seq.), and this
part.
20
(i) For purposes of making the risk assessment required by paragraph (c)(1) of
this section, a dealer shall take into account all relevant factors including the following:
(A) The type(s) of products the dealer buys and sells, as well as the nature of the
dealer's customers, suppliers, distribution channels, and geographic locations;
(B) The extent to which the dealer engages in transactions other than with
established customers or sources of supply; and
(C) Whether the dealer engages in transactions for which payment or account
reconciliation is routed to or from accounts located in jurisdictions that have been
identified by the Department of State as a sponsor of international terrorism under 22
U.S.C. 2371; designated as non-cooperative with international anti-money laundering
principles or procedures by an intergovernmental group or organization of which the
United States is a member and with which designation the United States representative or
organization concurs; or designated by the Secretary of the Treasury pursuant to 31
U.S.C. 5318A as warranting special measures due to money laundering concerns.
(ii) A dealer's program shall incorporate policies, procedures, and internal
controls to assist the dealer in identifying transactions that may involve use of the dealer
to facilitate money laundering or terrorist financing, including provisions for making
reasonable inquiries to determine whether a transaction involves money laundering or
terrorist financing, and for refusing to consummate, withdrawing from, or terminating
such transactions. Factors that may indicate a transaction is designed to involve use of
the dealer to facilitate money laundering or terrorist financing include, but are not limited
to:
21
(A) Unusual payment methods, such as the use of large amounts of cash, multiple
or sequentially numbered money orders, traveler's checks, or cashier's checks, or
payment from third-parties;
(B) Unwillingness by a customer or supplier to provide complete or accurate
contact information, financial references, or business affiliations;
(C) Attempts by a customer or supplier to maintain a high degree of secrecy with
respect to the transaction, such as a request that normal business records not be kept;
(D) Purchases or sales that are unusual for the particular customer or supplier, or
type of customer or supplier; and
(E) Purchases or sales that are not in conformity with standard industry practice.
(2) Designate a compliance officer who will be responsible for ensuring that:
(i) The anti-money laundering program is implemented effectively;
(ii) The anti-money laundering program is updated as necessary to reflect changes
in the risk assessment, current requirements of this part, and further guidance issued by
the Department of the Treasury; and
(iii) Appropriate personnel are trained in accordance with paragraph (c)(3) of this
section;
(3) Provide for on-going education and training of appropriate persons concerning
their responsibilities under the program; and
(4) Provide for independent testing to monitor and maintain an adequate program.
The scope and frequency of the testing shall be commensurate with the risk assessment
conducted by the dealer in accordance with paragraph (c)(1) of this section. Such testing
may be conducted by an officer or employee of the dealer, so long as the tester is not the
22
person designated in paragraph (c)(2) of this section or a person involved in the operation
of the program
(d) Effective date. A dealer must develop and implement an anti-money
laundering program that complies with the requirements of this section on or before
[insert date that is 90 days after the date on which the final regulation to which this notice
of proposed rulemaking relates is published in the Federal Register], or not later than 90
days after the date a dealer becomes subject to the requirements of this section.
DATED:
James F. Sloan
Director,
Financial Crimes Enforcement Network
23
(BILLING CODE: 4810-02-P)
DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506-AA28
RIN 1506-AA38
Financial Crimes Enforcement Network; Anti-Money Laundering Programs
Travel Agencies
AGENCY: Financial Crimes Enforcement Network (FinCEN), Treasury.
ACTION: Advance Notice of Proposed Rulemaking.
SUMMARY: FinCEN is in the process of implementing the requirements delegated to it
under the USA PATRIOT Act of 2001, in particular the requirements pursuant to sections
352 and 326 of the Act that require financial institutions to establish anti-money
laundering compliance and customer identification programs. Pursuant to 31 U.S.C.
5312(a)(2)(Q), the term "financial institution" is defined to include a "travel agency.
FinCEN is issuing this advance notice of proposed rulemaking (ANPRM) to solicit public
comments on a wide range of questions pertaining to this requirement, including how to
define the term travel agency.
DATES: Written comments may be submitted on or before [INSERT DATE THAT IS
45 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER].
ADDRESSES: Because paper mail in the Washington area may be subject to delay,
commenters are encouraged to e-mail comments. Comments may be submitted by
electronic mail to regcomments@fincen.treas.gov with the caption in the body of the tex
"ATTN: ANPRM - Section 352 - Travel Agency Regulations." Comments may be
mailed to FinCEN, P.O. Box 39, Vienna, V A 22183, A T T N : A N P R M - Section 352 Travel Agency Regulations. Comments should be sent by one method only. Comments
may be inspected at FinCEN between 10 a.m. and 4 p.m., in the FinCEN Reading Room
in Washington, D.C. Persons wishing to inspect the comments submitted must request an
appointment by telephoning (202) 354-6400 (not a toll-free number).
FOR FURTHER INFORMATION CONTACT: Office of Chief Counsel, FinCEN,
(703) 905-3590; the Office of the General Counsel, (202) 622-1927; or the Office of the
Assistant General Counsel (Banking and Finance), (202) 622-0480 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
I. Background
On October 26, 2001, the President signed into law the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
(USA PATRIOT Act) Act of 2001 (Public Law 107-56) (the Act). Title III of the Act
makes a number of amendments to the anti-money laundering provisions of the Bank
Secrecy Act (BSA), which are codified in subchapter II of chapter 53 of title 31, United
States Code. These amendments are intended to make it easier to prevent, detect, and
prosecute international money laundering and the financing of terrorism. Section 352(a)
of the Act, which became effective on April 24, 2002, amended section 5318(h) of the
BSA. As amended, section 5318(h)(1) requires every financial institution to establish an
anti-money laundering program that includes, at a minimum: (i) the development of
internal policies, procedures, and controls; (ii) the designation of a compliance officer;
(iii) an ongoing employee training program; and (iv) an independent audit function to test
2
programs. W h e n prescribing m i n i m u m standards for anti-money laundering programs,
section 352 directs the Treasury to consider the extent to which such standards are
commensurate with the size, location, and activities of the financial institutions to which
such regulations apply.
As a "travel agency" is defined as a financial institution under the BSA, 31 U.S.C.
5312(a)(2)(Q), it is subject to the anti-money laundering program requirement. On April
29, 2002, FinCEN temporarily exempted certain financial institutions, including travel
agencies, from the requirement to establish an anti-money laundering compliance
program. The purpose of the deferral was to enable FinCEN to study the affected
industries and consider to what extent anti-money laundering program requirements
could best be applied, taking into account the specific characteristics of the various
entities defined as financial institutions by the BSA. *
In addition, section 326 of the Act added new subsection (1) to 31 U.S.C. 5318,
which requires Treasury to prescribe regulations setting forth minimum standards for
financial institutions to identify customers applying to open accounts. Section 326
applies to all BSA financial institutions that open accounts for their customers.
FinCEN is proceeding with this ANPRM because of questions about travel
agencies and money laundering that make it difficult to assess the benefits and burdens
associated with imposition of anti-money laundering regulations on this industry.
Through this process, FinCEN hopes to solicit sufficient information to enable it to
determine whether to go forward with a Notice of Proposed Rulemaking, as well as the
scope of entities and procedures that any such Notice should encompass.
1
See 31 CFR 103.170, as codified by interim final rule published at 67 FR 21110 (April 29, 2002), as
amended at 67 FR 67547 (November 6, 2002) and corrected at 67 F R 68935 (November 14, 2002).
3
II.
Issues for C o m m e n t
1. How should a travel agency be defined? Should there be a minimum
threshold value in the definition?
Although the BSA identifies a travel agency as a financial institution, the statute
contains no definition of the term, nor has FinCEN had an occasion to define the term in
a regulation. Thus, the first step in addressing the appropriateness of issuing anti-money
laundering regulations is determining a functional definition of a travel agency. The
legislative history of the BSA provides no insight into how Congress intended the term to
be defined.
As the name implies, a travel agency offers its services in the capacity of an
agent, and not as a principal. A travel agency offers travel and tourism related services to
the public as a result of agency agreements with airlines, cruise lines, hotels, and other
suppliers of travel-related services. It may contract directly with suppliers such as hotels,
car rental companies, and tour operators, or may contract with a coordinating body such
as the Airlines Reporting Corporation (ARC)2 and the International Airlines Travel
Agency Network (IATAN). Travel agencies also may provide financial services such as
traveler's checks to their customers, and may offer travel-related insurance. Travel
agencies that offer such financial services in conjunction with travel services are
considered financial institutions for the purpose of consumer privacy regulations.3
2
A R C provides a mechanism that carriers m a y use to appoint travel agents, and such agents are then
entitled to use A R C standard ticket stock for participating carriers, which comprise the vast majority of
domestic and international carriers. A R C requires travel agents to obtain and maintain an irrevocable letter
of credit as bond.
3
See 16 C F R 313.3 (k)(2)(ix) (Federal Trade Commission regulations governing privacy of consumer
information).
4
For purposes of this A N P R M , F i n C E N is using the following functional definition
of travel agency: "Any person who sells, as an agent and not as a principal, the following
travel services: airline tickets, rail tickets, hotel and motel reservations, and cruise
reservations, or some combination of those services." This definition excludes direct
sales by service providers such as hotels and tour buses. These principals are excluded
because their inclusion appears to be at odds with the use of the term "agency" in the
BSA definition (such entities are providers of travel-related services, rather than travel
agents).
According to the Small Business Administration (SBA), most travel agencies are
small businesses.4 Of the 22,687 travel agencies identified by the SBA operating out of
29,332 establishments, only 450 fall outside the SBA definition of a small business in this
industry. These larger businesses generate 47% of all industry revenue.5 FinCEN's
regulations in the past have recognized that businesses that do not transact in sufficient
dollar amounts or volume may not present sufficient money laundering risk to require the
imposition of federally mandated programs. For example, under the BSA, money
services businesses other than money transmitters (currency exchangers and check
cashers, as well as issuers, sellers, and redeemers of traveler's checks and money orders)
are defined as financial institutions only if they transact over $1,000 in covered
transactions for any one person in any one day.6 This threshold reflects the judgment that
businesses that never engage in transactions above that level fail to present a money
laundering risk sufficient to justify the regulatory burden. FinCEN solicits comment on
4
See 67 FR 38184 (May 31, 2002) (raising ceiling for defining a travel agency as a small business to $3
million in total revenue, a definition encompassing 9 8 % of travel agencies).
5
6
Id.
31 C F R 103.1 l(uu)(l>(4).
5
whether, if travel agencies are required to implement anti-money laundering programs,
there should be a monetary threshold of some kind in defining a travel agency for
purposes of the BSA. Commenters should address whether any such threshold should be
transaction based, as with the money services business rules, or on an annual gross
income, or some other basis.
2. What is the potential money laundering risk posed by travel agencies? Are
there different kinds of travel agencies or different services offered that pose
different money laundering risks?
Although some travel agencies perform some of the functions of traditional
financial institutions, such as selling traveler's checks, such agencies, to the extent they
meet the regulatory threshold, would be considered money services businesses under 31
CFR Part 103.1 l(uu)(4). The focus of this ANPRM is on the risks unique to travel
agencies' provision of travel-related services. Within this focus, the industry does
present some potential money laundering risks. For example, some travel agencies have
a significant portion of their clients pay for the agencies' products and services in cash.
While the risk of money laundering is minimized, to some extent, by the existing
obligation on all travel agencies to report, pursuant to 26 U.S.C. 60501, 31 U.S.C. 5331,
and 31 CFR 103.30, the receipt of cash or monetary instruments in excess of $10,000, a
rule that requires an anti-money laundering compliance or customer identification
program may alleviate further the money laundering risk associated with the cash
intensive nature of some travel agencies. Moreover, some travel agencies are associated
with ancillary businesses, including money services businesses offering money transfer
7
Sellers of travel fall within the type of retail business required to report receipts of monetary instruments
(cashier's checks, traveler's checks, m o n e y orders) that have face amounts of less than $10,000 and which
6
and check cashing, that pose additional m o n e y laundering risk. T o the extent customers
wish to avoid the recordkeeping and reporting requirements applicable to the money
services side of the business, they may try to route their transactions through the
unregulated travel agency side of the business. Instead of obtaining a money order or
traveler's check to make an illicit payment (which would be subject to FinCEN's
recordkeeping rules if over $3,000), a money launderer could buy an expensive airline
ticket for another person, who could then exchange it for a legitimate-seeming refund.
FinCEN has received reports indicating that some travel agencies (or their
customers) have engaged in structuring sequential deposits and withdrawals of cash near
the reporting threshold of $10,000. There have also been reports of some travel agencies
structuring outgoing wire transfers in small amounts to avoid BSA recordkeeping
requirements. Some travel agents have been observed receiving unusual wire transfers
from foreign countries or wire transfers of unusually large amounts.
In addition, travel agencies reportedly have been used to transfer value through
the provision of in-kind services. A travel agent sending groups to a foreign country, for
example, can make an offsetting payment in a foreign entity's U.S. or other account and
instruct that entity to cover the costs of the group during their trip. This method is one
o
w a y that businesses involved in informal value transfer systems, such as hawala, can
transfer funds between entities in various countries.
Travel agencies may need to have an understanding of the identity of customers
who participate in transactions with money laundering risk. For purchases of travel
services involving large sums of cash, knowing the customer's identity may be an
are used to make a purchase of greater than $10,000. See 31 CFR 103.30.
8
See Report to Congress in Accordance with Section 359 of the U S A Patriot Act (November 22, 2002),
7
essential part of an effective anti-money laundering program. Customers m a y request
complex invoicing arrangements or payment arrangements or m a y structure their cash
payments to avoid B S A reports. While travel agencies m a y scrutinize non-cash
transactions to managefraudrisk,they are undoubtedly less aware of possible m o n e y
laundering risk with both cash and non-cash transactions.
Accordingly, F i n C E N solicits comments on the existence of the above, and other,
types ofrisksin the travel agency business. Specifically, F i n C E N is interested in
identifying risks in the products and services that travel agencies provide that m a k e them
uniquely susceptible to m o n e y laundering, as opposed to therisksinherent in all
businesses that sell products or services to the public that m a y be purchased with tainted
funds. Such heightenedrisksinclude, for example, the ability to transfer funds, even with
a sizable penalty or cost, from one person to another; the ability to pay in funds and, in
return, receive funds from the travel agency or related business that have the appearance
of legitimacy and no ties to incoming funds. Furthermore, should regulatory distinctions
based on m o n e y launderingriskbe m a d e between travel agencies that restrict their sales
to domestic travel and those that handle international travel? Are there other functional
distinctions that should be made?
3. Should travel agencies be exempt from coverage under sections 352 and
326 of the Patriot Act?
Based on the determination of the extent of the risk of m o n e y laundering within
the travel agency industry, the question arises as to whether the industry should be
exempt under sections 352 and 326 of the Act. If the risk of m o n e y laundering in the
travel agency industry is determined to be minimal such that it does not justify the
available on FinCEN's website at www.fincen.gov under Publications. Reports.
8
imposition of a regulatory burden, it might be reasonable to exempt the industry from
coverage of these provisions. This judgment will be based on the existing risks of money
laundering, the potential risks of money laundering, as well as the volume of possible
illicit funds that may flow through travel agencies.
In light of these issues, FinCEN would like to solicit comments with regard to the
issue of whether there should be an exemption from these provisions for travel agencies.
These comments should be designed to enable FinCEN to decide whether or not to
propose the promulgation of an appropriate regulation designed to provide protection for
the travel agency industry with regard to the risk of money laundering.
4. If travel agencies, or some subset of the industry, should be subject to the
anti-money laundering program requirements, how should the program be
structured?
In applying section 352 to travel agencies, FinCEN must take into account which
requirements are "commensurate with the size, location, and activities" of this industry.
In undertaking this review, FinCEN recognizes that travel agencies likely have some
programs already in place to meet existing legal obligations. For example, as a
nonfinancial trade or business, travel agencies are required to report on Form 8300 the
receipt of over $10,000 in currency and certain monetary instruments. Travel agencies
also may have procedures in place to protect themselves against fraud. Such procedures
may be sufficient in themselves given the money laundering risk in the industry, or they
may serve as a foundation on which additional anti-money laundering program
requirements could be built. FinCEN therefore seeks comment on what types of
9
programs travel agencies have in place to prevent fraud and illegal activities, and the
applicability of such programs to the prevention of money laundering.
5. Do travel agencies maintain "accounts" for their customers?
Section 326 requires the setting of minimum standards for identification of
customers "in connection with the opening of an account at a financial institution."
Section 311 of the Patriot Act provides a definition of "account" for banks, but requires
the Secretary to promulgate a regulation defining "account" for non-bank financial
institutions. Although such a regulation has yet to be issued, the definition for banks ("a
formal banking or business relationship established to provide regular services, dealings,
and other financial transactions") is a useful starting point. This definition incorporates
two key concepts: (1) formality of the business relationship, and (2) regularity of
dealings. In light of these concepts, FinCEN solicits comments as to whether (and to
what extent) travel agencies maintain accounts for their customers. If so, what kinds of
services do travel agencies provide to account holders? Are these account relationships
ongoing? Are accounts established to receive recurring payments from a customer, or are
additional services provided to the accountholder?
III. Conclusion
With this ANPRM, FinCEN is seeking input to assist it in determining how to
implement the requirements of sections 352 and 326 of the Act with respect to travel
agencies. FinCEN welcomes comments on all aspects of potential regulation and
encourages all interested parties to provide their views.
10
IV.
Executive Order 12866
Because this is an ANPRM, FinCEN does not know whether or in what form it
may issue a regulation pursuant to sections 352 and 326 of the Act affecting travel
agencies. Accordingly, FinCEN does not know whether potential regulations will
constitute a significant regulatory action under the Executive Order. This ANPRM
neither establishes nor proposes any regulatory requirements. FinCEN has submitted a
notice of planned regulatory action to OMB for review. Because this ANPRM does not
contain a specific proposal, information is not available with which to prepare an
economic analysis. FinCEN will prepare a preliminary analysis if it proceeds with a
proposed rule that constitutes a significant regulatory action.
Accordingly, FinCEN solicits comments, information, and data on the potential
effects of any potential regulation. FinCEN will carefully consider the costs and benefit
associated with this rulemaking.
DATED:
James F. Sloan
Director,
Financial Crimes Enforcement Network
11
(BILLING CODE: 4810-02-P)
DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506-AA28
RIN 1506-AA41
Financial Crimes Enforcement Network; Anti-Money Laundering Programs f
Businesses Engaged in Vehicle Sales
AGENCY: Financial Crimes Enforcement Network (FinCEN), Treasury.
ACTION: Advance Notice of Proposed Rulemaking.
SUMMARY: FinCEN is in the process of implementing the requirements delegated to it
under the USA PATRIOT Act of 2001, in particular the requirements pursuant to sections
352 and 326 of the Act that require financial institutions to establish anti-money
laundering compliance and customer identification programs. Pursuant to 31 U.S.C.
5312(a)(2)(T), the term "financial institution" is defined to include a "business engaged
in vehicle sales, including automobile, airplane, and boat sales." FinCEN is issuing this
advance notice of proposed rulemaking (ANPRM) to solicit public comments on a wide
range of questions pertaining to these requirements, including the money laundering risk
that are posed by these businesses, whether these businesses should be subject to these
requirements, and if so, how the requirements should be structured.
DATES: Written comments may be submitted on or before [INSERT DATE THAT IS
45 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER].
ADDRESSES: Because paper mail in the Washington, D.C, area may be subject to
delay, commenters are encouraged to e-mail comments. Comments may be submitted by
electronic mail to regcomments@fincen.treas.gov with the caption in the body of the text,
"ATTN: A N P R M - Sections 352 and 326 - Vehicle Seller Regulations." Comments may
be mailed to FinCEN, P.O. Box 39, Vienna, VA 22183, ATTN: ANPRM - Sections 352
and 326 - Vehicle Seller Regulations. Comments should be sent by one method only.
Comments may be inspected at FinCEN between 10 a.m. and 4 p.m., in the FinCEN
Reading Room in Washington, D.C. Persons wishing to inspect the comments submitted
must request an appointment by telephoning (202) 354-6400 (not a toll-free number).
FOR FURTHER INFORMATION CONTACT: Office of Chief Counsel, FinCEN,
(703) 905-3590; the Office of the General Counsel, (202) 622-1927; or the Office of the
Assistant General Counsel (Banking and Finance), (202) 622-0480 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
I. Background
On October 26, 2001, the President signed into law the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
(USA PATRIOT Act) Act of 2001 (Public Law 107-56) (the Act). Title III of the Act
makes a number of amendments to the anti-money laundering provisions of the Bank
Secrecy Act (BSA), which are codified in subchapter II of chapter 53 of title 31, Unite
States Code. These amendments are intended to promote the prevention, detection, and
prosecution of international money laundering and the financing of terrorism. Section
352(a) of the Act, which became effective on April 24, 2002, amended section 5318(h) of
the BSA. As amended, section 5318(h)(1) requires every financial institution to establ
an anti-money laundering program that includes, at a minimum: (i) the development of
internal policies, procedures, and controls; (ii) the designation of a compliance offic
2
(iii) an ongoing employee training program; and (iv) an independent audit function to test
programs. When prescribing minimum standards for anti-money laundering programs,
section 352 directs the Treasury to consider the extent to which such standards are
commensurate with the size, location, and activities of the financial institutions to which
such regulations apply.
As a "business engaged in vehicle sales" (vehicle seller) is defined as a financial
institution under the BSA, 31 U.S.C. 5312(a)(2)(T), it is subject to the anti-money
laundering program requirement. On April 29, 2002, and again on November 6, 2002,
FinCEN temporarily exempted certain financial institutions, including vehicle sellers,
from the requirement to establish an anti-money laundering compliance program. The
purpose of the deferral was to enable FinCEN to study the affected industries and
consider the extent to which anti- money laundering program requirements should be
applied to them, taking into account the specific characteristics of the various entities
defined as financial institutions by the BSA.l
In addition, section 326 of the Act added new subsection (1) to 31 U.S.C. 5318,
which requires Treasury to prescribe regulations setting forth minimum standards for
financial institutions to identify customers applying to open accounts. Section 326
applies to all BSA financial institutions that open accounts for their customers.
The business of vehicle sellers encompasses various segments, including sellers
of: (1) new land-based vehicles, such as automobiles, trucks, RVs, and motorcycles; (2)
1
See 31 C F R 103.170, as codified by interim final rule published at 67 F R 21110 (April 29, 2002), as
amended at 67 F R 67547 (November 6, 2002) (as corrected at 67 F R 68935 (November 14, 2002)).
3
n e w aircraft, including fixed wing airplanes and helicopters; (3) n e w boats and ships; and
(4) used vehicles (as well as those who broker the sale of used vehicles).2
Businesses engaged in the selling of vehicles comprise a significant percentage of
the total gross domestic product of the United States, and the vehicles that they
collectively sell account for a major portion of U.S. consumption, exports, and other
important economic indicia.3 As such, because of both the economic significance of this
industry, and the important and pervasive role that vehicles, and therefore vehicles sales,
play in the United States, this ANPRM is intended to assist FinCEN in striking a balance
between the important statutory requirements of the Act, and the important benefits that
vehicle sellers provide to our country.
Some vehicle sellers are tied to the manufacturing of the vehicles, while others
may not be. While some vehicle sellers are publicly traded companies, most are privately
held or family owned. Some may be characterized as wholesale sellers of vehicles, while
others are engaged in retail sales of the vehicles. In each segment, there is often
substantial variety in function and practice.
Vehicle sellers range in size from very large entities that sell vehicles with a total
value that is measured in billions of dollars annually, to very small entities (such as a
neighborhood used car dealer) that may only sell a few vehicles each year. Vehicle
sellers may sell either new or used vehicles, and may sell to customers domestic or
foreign, or both. Moreover, the characteristics of vehicle sellers often vary based on the
2
FinCEN does not intend to impose anti-money laundering program obligations on individuals in
connection with the sale of their o w n personal vehicle to others, whether as a "trade-in" with a retail
vehicle dealer or by private sale with another party, unless an individual is engaged in the business of
selling vehicles.
3
According to the Department of Transportation, in the year 2000 there were 8,847,000 n e w automobiles,
578,700 boats, and 3,285 civilian aircraft sold at retail. U.S. Dept. of Transportation Bureau of
Transportation Statistics, National Transportation Statistics 2002 ( G P O July 2002).
4
type of vehicles sold. For example, retail sellers of large, multi-engine commercial
aircraft are generally much larger businesses than sellers of small, general aviation
aircraft, reflecting the capital and business risks needed to maintain inventory. In a like
manner, sales of large marine ships in excess of 100,000 deadweight tons are conducted
very differently than sales of pleasure watercraft, such as sail boats. Similarly, sellers of
used vehicles often have different characteristics than sellers of new vehicles, reflecting
the different relationships with vehicle manufacturers and the differences in these
markets.
II. Issues for Comment
1. What is the potential money laundering risk posed by vehicle sellers? Do
money laundering risks vary by (1) vehicle type (e.g., boat, airplane, automobile);
(2) market (wholesale vs. retail); or (3) business line (international sales, sales to
governments)?
The threshold issue being addressed by this ANPRM is the extent to which
vehicle sellers pose a significant risk of money laundering.4 For example, a money
laundering risk is presented where a vehicle is purchased with cash.5 This is particularly
true for the placement stage of money laundering; that is, where the money launderer
seeks to cleanse illegal proceeds by introducing them into the financial system. A large
cash purchase of an expensive vehicle could form the placement stags for a money
4
For the purpose of this ANPRM, FinCEN is focusing on the money laundering risks associated with the
sale of the vehicles themselves, and not with the financing of such sales. Although some vehicle sellers
that provide financing for their products (generally through a finance subsidiary) perform a function similar
to that of traditionalfinancialinstitutions such as banks and loan companies, that function will be addressed
separately by a proposed rule to be issued that will require loan and finance companies to have anti-money
laundering programs.
5
Recently, in Operation Lightning Strike, manufacturers of illegal liquor were convicted of laundering the
illegal proceeds of untaxed liquor sales by using cash transactions and purchasing a number of vehicles in
the names of other family members.
5
laundering scheme. While the risk of m o n e y laundering is minimized, to some extent,
by the existing obligation on all vehicle sellers to report, pursuant to 26 U.S.C. 60501, 31
U.S.C. 5331, and 31 CFR 103.30, the receipt of cash or monetary instruments in excess
of $10,000, a rule that requires an anti-money laundering compliance or customer
identification program may alleviate further the money laundering risk associated with
large cash purchases. In response to documented instances of abuse, industry
associations representing new car dealers have already taken steps to guard against the
laundering of illicit proceeds through the purchase of automobiles with cash, providing
their members with educational materials concerning their legal obligations and cashrelated money laundering red flags.
The next stage of money laundering, the layering stage, involves the distancing of
illegal funds from their criminal source through the creation of complex layers of
financial transactions. Examples of layering through the vehicle sellers industry might
include trading in vehicles for other vehicles and engaging in successive transactions of
buying and selling both new and used vehicles.
Vehicle sales businesses also could be used for integrating illicit income into
assets that appear legitimate. Integration occurs when illegal funds appear to have been
derived from a legitimate source. This could occur, for instance, when the funds or
vehicles received from the vehicle seller in the aftermath of the layering transactions are
held out as coming from a legitimate source.
6
See, e.g., U.S. v. Cruz, 993 F.2d 164 (8th Cir. 1993) (narcotics dealer laundered proceeds by purchasing
three automobiles for cash in amount that greatly exceeded his stated income).
7
Sellers of vehicles for personal consumption (as opposed to commercial sales) fall within the type of
retail business required to report receipts of monetary instruments (cashier's checks, traveler's checks,
money orders) that have face amounts of less than $10,000 and which are used to make a purchase of
greater than $10,000. See 31 C F R 103.30.
6
Vehicle sellers m a y need to have an understanding of the identity of customers
who participate in transactions with money laundering risk. For purchases of vehicles
involving large sums of cash, knowing the customer's identity may be an essential part of
an effective anti-money laundering program. Customers may request complex invoicing
arrangements or payment arrangements or may structure their cash payments to avoid
BSA reports. While vehicle sellers may scrutinize non-cash transactions to manage fraud
risk, they are undoubtedly less aware of possible money laundering risk with both cash
and non-cash transactions.
FinCEN has received reports indicating that some vehicle sellers have engaged in
structuring8 sequential deposits of cash near the reporting threshold of $10,000. FinCEN
also has received reports of the purchase of automobiles with structured checks and
money orders. Other instances of suspicious activity reported to FinCEN concerning this
industry include consumer loan fraud and check fraud. These instances all involve the
placement stage of money laundering.
Accordingly, FinCEN solicits comments on the existence of the above, and other,
types of risks in the vehicle sellers business/ Specifically, FinCEN is interested in
identifying risks in the products that vehicle sellers provide that make them uniquely
susceptible to money laundering, as opposed to the risks inherent in all businesses that
sell products or services to the public that may be purchased with tainted funds. Such
heightened risks include, for example, the payment of funds to the seller by third parties
on behalf of customers, particularly from jurisdictions with lax money laundering
controls, and the ability to pay funds to the vehicle seller and, in return, receive funds
8
Structuring refers to the breaking up of a transaction into multiple smaller transactions to evade
recordkeeping or reporting requirements.
7
from the seller that have the appearance of legitimacy. F i n C E N further seeks comment
on whether differentiation should be made for lines of business that appear to have
minimal money laundering risks, such as the sale of vehicles to federal, state, and local
governments. Are there other functional distinctions that should be made?
2. Should vehicle sellers be exempt from coverage under sections 352 and
326 of the Patriot Act?
Based on the determination of the extent of the risk of money laundering posed by
vehicle sellers, the question arises as to whether the industry should be exempt under
sections 352 and 326 of the Act. If the risk of money laundering in the vehicle sellers
industry is determined to be minimal such that it does not justify the imposition of a
regulatory burden, it might be reasonable to exempt the industry from coverage of these
provisions. This judgment will be based on the existing risks of money laundering, the
potential risks of money laundering, as well as the volume of possible illicit funds that
may flow through vehicle sellers.
In light of these issues, FinCEN would like to solicit comments with regard to the
issue of whether there should be an exemption from these provisions for vehicle sellers,
or any category thereof. These comments should be designed to enable FinCEN to
decide whether or not to propose an appropriate regulation designed to provide protection
for the vehicle seller industry from the risks of money laundering.
3. If vehicle sellers, or some subset of the industry, should be subject to the
anti-money laundering program requirements, how should the program be
structured?
8
In applying section 352 of the Act to vehicle sellers, F i n C E N must take into
account which requirements are "commensurate with the size, location, and activities" of
this industry. In undertaking this review, FinCEN recognizes that vehicle sellers likely
have some programs already in place to meet existing legal obligations. For example, as
a nonfinancial trade or business, vehicle sellers are required to report on Form 8300 the
receipt of over SI0,000 in currency and certain monetary instruments. Vehicle sellers
also may have procedures in place to protect themselves against fraud. Such procedures
may be sufficient in themselves, given the money laundering risk in the industry, or they
may serve as a foundation on which additional anti-money laundering program
requirements could be based. FinCEN therefore seeks comment on the particular
elements that should be included in any required anti-money laundering program, should
it be determined that such a requirement should be imposed on this industry. In this
regard, comment is requested regarding the types of programs vehicle sellers currently "
have in place to prevent fraud and illegal activities, and the applicability of such
programs to the prevention of money laundering.
4. How should a vehicle seller be defined? Should there be a minimum
threshold value in the definition? Should it include wholesale and retail sellers?
Should sellers of used vehicles be included?
In the event FinCEN determines to propose requirements on vehicle sellers under
sections 352 and 326 of the Act, it will be necessary to define the term vehicle seller.
Although the BSA identifies a vehicle seller as a financial institution, the statute contains
no definition of the term, other than to state that it includes sellers of automobiles,
airplanes, and boats. The legislative history of the BSA provides no insight into how
9
Congress intended the term to be defined, nor has F i n C E N had an occasion to define the
term in a regulation.
As discussed above, vehicle sellers form an extremely large and diverse industry,
accounting for a major portion of American consumption as well as exports. Given this
diversity in the vehicle sellers industry, the risks of money laundering and the costs of
preventive programs can vary widely. Thus, FinCEN solicits comment on whether any
proposed rule should limit the definition to sellers of particular types of vehicles, to retail
or wholesale vehicle sellers, or sellers of new or used vehicles. In addition, FinCEN's
regulations in the past have recognized that businesses that do not transact in sufficient
dollar amounts or volume, or in cash or monetary instruments, may not present sufficient
money laundering risk to require the imposition of federally mandated programs. For
example, under the BSA, money services businesses other than money transmitters
(currency exchangers, check cashers, and issuers, sellers, and redeemers of traveler's
checks and money orders) are defined as financial institutions only if they transact over
$1,000 in covered transactions for any one person in any one day.9 This threshold
reflects the judgment that businesses that never engage in transactions above that level
fail to present a money laundering risk sufficient to justify the regulatory burden.
FinCEN solicits comment on whether, if vehicle sellers are required to implement antimoney laundering programs, there should be a monetary threshold of some kind in
defining a vehicle seller for purposes of the BSA. Commenters should address whether
any such threshold should be transaction based, as with the money services business
rules, or on an annual gross income, or some other basis.
5. Do vehicle sellers maintain "accounts" for their customers?
10
Section 326 requires the setting of m i n i m u m standards for identification of
customers "in connection with the opening of an account at a financial institution."
Section 311 of the Patriot Act provides a definition of "account" for banks, but requires
the Secretary to promulgate a regulation defining "account" for non-bank financial
institutions. Although such a regulation has yet to be issued, the definition for banks ("a
formal banking or business relationship established to provide regular services, dealings,
and other financial transactions") is a useful starting point. This definition incorporates
two key concepts: (1) formality of the business relationship, and (2) regularity of
dealings. In light of these concepts, F i n C E N solicits comments as to whether (and to
what extent) vehicle sellers maintain accounts for their customers, in addition to fleet
accounts. W h a t kinds of services do vehicle sellers provide to any such account holders
(including fleet accountholders)? Are these account relationships ongoing? Are accounts
established to receive recurring payments from a customer, or are additional services
provided to the accountholder?
III.
Conclusion
With this A N P R M , F i n C E N is seeking input to assist it in determining h o w to
implement the requirements of sections 352 and 326 of the Act with respect to vehicle
sellers. F i n C E N welcomes comments on all aspects of this potential regulation and
encourages all interested parties to provide their views.
IV.
Executive Order 12866
Because this is an A N P R M , F i n C E N does not k n o w whether or in what form it
m a y issue a regulation pursuant to sections 352 and 326 of the Act affecting vehicle
sellers. Accordingly, F i n C E N does not k n o w whether potential regulations will
9
31 CFR 103.1 l(uu).
11
constitute a significant regulatory action under the Executive Order. This A N P R M
neither establishes nor proposes any regulatory requirements. FinCEN has submitted a
notice of planned regulatory action to OMB for review. Because this ANPRM does not
contain a specific proposal, information is not available with which to prepare an
economic analysis. FinCEN will prepare a preliminary analysis if it proceeds with a
proposed rule that constitutes a significant regulatory action.
Accordingly, FinCEN solicits comments, information, and data on the potential
effects of any potential regulation. FinCEN will carefully consider the costs and benefits
associated with this rulemaking.
DATED:
James F. Sloan
Director,
Financial Crimes Enforcement Network
12
(BILLING CODE: 4810-02-P)
DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506-AA28
RIN 1506-AA41
Financial Crimes Enforcement Network; Anti-Money Laundering Programs for
Businesses Engaged in Vehicle Sales
AGENCY: Financial Crimes Enforcement Network (FinCEN), Treasury.
ACTION: Advance Notice of Proposed Rulemaking.
SUMMARY: FinCEN is in the process of implementing the requirements delegated to it
under the USA PATRIOT Act of 2001, in particular the requirements pursuant to sections
352 and 326 of the Act that require financial institutions to establish anti-money
laundering compliance and customer identification programs. Pursuant to 31 U.S.C.
5312(a)(2)(T), the term "financial institution" is defined to include a "business engaged
in vehicle sales, including automobile, airplane, and boat sales." FinCEN is issuing this
advance notice of proposed rulemaking (ANPRM) to solicit public comments on a wide
range of questions pertaining to these requirements, including the money laundering risks
that are posed by these businesses, whether these businesses should be subject to these
requirements, and if so, how the requirements should be structured.
DATES: Written comments may be submitted on or before [INSERT DATE THAT IS
45 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER].
ADDRESSES: Because paper mail in the Washington, D.C, area may be subject to
delay, commenters are encouraged to e-mail comments. Comments may be submitted by
electronic mail to regcomments@.fmcen.treas.govwith the caption in the body of the text,
" A T T N : A N P R M - Sections 352 and 326 - Vehicle Seller Regulations." Comments m a y
be mailed to FinCEN, P.O. Box 39, Vienna, VA 22183, ATTN: ANPRM - Sections 352
and 326 - Vehicle Seller Regulations. Comments should be sent by one method only.
Comments may be inspected at FinCEN between 10 a.m. and 4 p.m., in the FinCEN
Reading Room in Washington, D.C. Persons wishing to inspect the comments submitted
must request an appointment by telephoning (202) 354-6400 (not a toll-free number).
FOR FURTHER INFORMATION CONTACT: Office of Chief Counsel, FinCEN,
(703) 905-3590; the Office of the General Counsel, (202) 622-1927; or the Office of the
Assistant General Counsel (Banking and Finance), (202) 622-0480 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
I. Background
On October 26, 2001, the President signed into law the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
(USA PATRIOT Act) Act of 2001 (Public Law 107-56) (the Act). Title III of the Act
makes a number of amendments to the anti-money laundering provisions of the Bank
Secrecy Act (BSA), which are codified in subchapter II of chapter 53 of title 31, United
States Code. These amendments are intended to promote the prevention, detection, and
prosecution of international money laundering and the financing of terrorism. Section
352(a) of the Act, which became effective on April 24, 2002, amended section 5318(h) of
the BSA. As amended, section 5318(h)(1) requires every financial institution to establish
an anti-money laundering program that includes, at a minimum: (i) the development of
internal policies, procedures, and controls; (ii) the designation of a compliance officer;
2
(iii) an ongoing employee training program; and (iv) an independent audit function to test
programs. When prescribing minimum standards for anti-money laundering programs,
section 352 directs the Treasury to consider the extent to which such standards are
commensurate with the size, location, and activities of the financial institutions to which
such regulations apply.
As a "business engaged in vehicle sales" (vehicle seller) is defined as a financial
institution under the BSA, 31 U.S.C. 5312(a)(2)(T), it is subject to the anti-money
laundering program requirement. On April 29, 2002, and again on November 6, 2002,
FinCEN temporarily exempted certain financial institutions, including vehicle sellers,
from the requirement to establish an anti-money laundering compliance program. The
purpose of the deferral was to enable FinCEN to study the affected industries and
consider the extent to which anti-money laundering program requirements should be
applied to them, taking into account the specific characteristics of the various entities
defined as financial institutions by the BSA.l
In addition, section 326 of the Act added new subsection (1) to 31 U.S.C. 5318,
which requires Treasury to prescribe regulations setting forth minimum standards for
financial institutions to identify customers applying to open accounts. Section 326
applies to all BSA financial institutions that open accounts for their customers.
The business of vehicle sellers encompasses various segments, including sellers
of: (1) new land-based vehicles, such as automobiles, trucks, RVs, and motorcycles; (2)
1
See 31 C F R 103.170, as codified by interim final rule published at 67 FR 21110 (April 29, 2002), as
amended at 67 FR 67547 (November 6, 2002) (as corrected at 67 FR 68935 (November 14, 2002)).
3
n e w aircraft, including fixed wing airplanes and helicopters; (3) n e w boats and ships; and
(4) used vehicles (as well as those who broker the sale of used vehicles).2
Businesses engaged in the selling of vehicles comprise a significant percentage of
the total gross domestic product of the United States, and the vehicles that they
collectively sell account for a major portion of U.S. consumption, exports, and other
important economic indicia.3 As such, because of both the economic significance of this
industry, and the important and pervasive role that vehicles, and therefore vehicles sales,
play in the United States, this ANPRM is intended to assist FinCEN in striking a balance
between the important statutory requirements of the Act, and the important benefits that
vehicle sellers provide to our country.
Some vehicle sellers are tied to the manufacturing of the vehicles, while others
may not be. While some vehicle sellers are publicly traded companies, most are privately
held or family owned. Some may be characterized as wholesale sellers of vehicles, while
others are engaged in retail sales of the vehicles. In each segment, there is often
substantial variety in function and practice.
Vehicle sellers range in size from very large entities that sell vehicles with a total
value that is measured in billions of dollars annually, to very small entities (such as a
neighborhood used car dealer) that may only sell a few vehicles each year. Vehicle
sellers may sell either new or used vehicles, and may sell to customers domestic or
foreign, or both. Moreover, the characteristics of vehicle sellers often vary based on the
2
F i n C E N does not intend to impose anti-money laundering program obligations on individuals in
connection with the sale of their o w n personal vehicle to others, whether as a "trade-in" with a retail
vehicle dealer or by private sale with another party, unless an individual is engaged in the business of
selling vehicles.
According to the Department of Transportation, in the year 2000 there were 8,847,000 n e w automobiles,
578,700 boats, and 3,285 civilian aircraft sold at retail. U.S. Dept. of Transportation Bureau of
Transportation Statistics, National Transportation Statistics 2002 ( G P O July 2002).
3
4
type of vehicles sold. For example, retail sellers of large, multi-engine commercial
aircraft are generally much larger businesses than sellers of small, general aviation
aircraft, reflecting the capital and business risks needed to maintain inventory. In a like
manner, sales of large marine ships in excess of 100,000 deadweight tons are conducted
very differently than sales of pleasure watercraft, such as sail boats. Similarly, sellers of
used vehicles often have different characteristics than sellers of new vehicles, reflecting
the different relationships with vehicle manufacturers and the differences in these
markets.
II. Issues for Comment
1. What is the potential money laundering risk posed by vehicle sellers? Do
money laundering risks vary by (1) vehicle type (e.g., boat, airplane, automobile);
(2) market (wholesale vs. retail); or (3) business line (international sales, sales to
governments)?
The threshold issue being addressed by this ANPRM is the extent to which
vehicle sellers pose a significant risk of money laundering.4 For example, a money
laundering risk is presented where a vehicle is purchased with cash.5 This is particularly
true for the placement stage of money laundering; that is, where the money launderer
seeks to cleanse illegal proceeds by introducing them into the financial system. A large
cash purchase of an expensive vehicle could form the placement stags for a money
4
For the purpose of this A N P R M , F i n C E N is focusing on the m o n e y laundering risks associated with the
sale of the vehicles themselves, and not with the financing of such sales. Although some vehicle sellers
that provide financing for their products (generally through a finance subsidiary) perform a function similar
to that of traditional financial institutions such as banks and loan companies, that function will be addressed
separately by a proposed rule to be issued that will require loan and finance companies to have anti-money
laundering programs.
Recently, in Operation Lightning Strike, manufacturers of illegal liquor were convicted of laundering the
illegal proceeds of untaxed liquor sales by using cash transactions and purchasing a number of vehicles in
5
the names of other family members.
5
laundering scheme. 6 While the risk of m o n e y laundering is minimized, to some extent,
by the existing obligation on all vehicle sellers to report, pursuant to 26 U.S.C. 60501, 31
U.S.C. 5331, and 31 CFR 103.30, the receipt of cash or monetary instruments in excess
of $10,000, a rule that requires an anti-money laundering compliance or customer
identification program may alleviate further the money laundering risk associated with
large cash purchases. In response to documented instances of abuse, industry
associations representing new car dealers have already taken steps to guard against the
laundering of illicit proceeds through the purchase of automobiles with cash, providing
their members with educational materials concerning their legal obligations and cashrelated money laundering red flags.
The next stage of money laundering, the layering stage, involves the distancing of
illegal funds from their criminal source through the creation of complex layers of
financial transactions. Examples of layering through the vehicle sellers industry might
include trading in vehicles for other vehicles and engaging in successive transactions of
buying and selling both new and used vehicles.
Vehicle sales businesses also could be used for integrating illicit income into
assets that appear legitimate. Integration occurs when illegal funds appear to have been
derived from a legitimate source. This could occur, for instance, when the funds or
vehicles received from the vehicle seller in the aftermath of the layering transactions are
held out as coming from a legitimate source.
6
See, e.g., U.S. v. Cruz 993 F.2d 164 (8th Cir. 1993) (narcotics dealer laundered proceeds by purchasing
three~automobiles for cash in amount that greatly exceeded his stated income).
7
Sellers of vehicles for personal consumption (as opposed to commercial sales) fall within the type of
retail business required to report receipts of monetary instruments (cashier's checks, traveler's checks,
m o n e y orders) that have face amounts of less than $10,000 and which are used to m a k e a purchase of
greater than $10,000. See 31 C F R 103.30.
6
Vehicle sellers m a y need to have an understanding of the identity of customers
who participate in transactions with money laundering risk. For purchases of vehicles
involving large sums of cash, knowing the customer's identity may be an essential part of
an effective anti-money laundering program. Customers may request complex invoicing
arrangements or payment arrangements or may structure their cash payments to avoid
BSA reports. While vehicle sellers may scrutinize non-cash transactions to manage fraud
risk, they are undoubtedly less aware of possible money laundering risk with both cash
and non-cash transactions.
FinCEN has received reports indicating that some vehicle sellers have engaged in
structuring8 sequential deposits of cash near the reporting threshold of $10,000. FinCEN
also has received reports of the purchase of automobiles with structured checks and
money orders. Other instances of suspicious activity reported to FinCEN concerning this
industry include consumer loan fraud and check fraud. These instances all involve the
placement stage of money laundering.
Accordingly, FinCEN solicits comments on the existence of the above, and other,
types of risks in the vehicle sellers business. Specifically, FinCEN is interested in
identifying risks in the products that vehicle sellers provide that make them uniquely
susceptible to money laundering, as opposed to the risks inherent in all businesses that
sell products or services to the public that may be purchased with tainted funds. Such
heightened risks include, for example, the payment of funds to the seller by third parties
on behalf of customers, particularly from jurisdictions with lax money laundering
controls, and the ability to pay funds to the vehicle seller and, in return, receive funds
8
Structuring refers to the breaking up of a transaction into multiple smaller transactions to evade
recordkeeping or reporting requirements.
7
from the seller that have the appearance of legitimacy. F i n C E N further seeks comment
on whether differentiation should be made for lines of business that appear to have
minimal money laundering risks, such as the sale of vehicles to federal, state, and local
governments. Are there other functional distinctions that should be made?
2. Should vehicle sellers be exempt from coverage under sections 352 and
326 of the Patriot Act?
Based on the determination of the extent of the risk of money laundering posed by
vehicle sellers, the question arises as to whether the industry should be exempt under
sections 352 and 326 of the Act. If the risk of money laundering in the vehicle sellers
industry is determined to be minimal such that it does not justify the imposition of a
regulatory burden, it might be reasonable to exempt the industry from coverage of these
provisions. This judgment will be based on the existing risks of money laundering, the
potential risks of money laundering, as well as the volume of possible illicit funds that
may flow through vehicle sellers.
In light of these issues, FinCEN would like to solicit comments with regard to the
issue of whether there should be an exemption from these provisions for vehicle sellers,
or any category thereof. These comments should be designed to enable FinCEN to
decide whether or not to propose an appropriate regulation designed to provide protection
for the vehicle seller industry from the risks of money laundering.
3. If vehicle sellers, or some subset of the industry, should be subject to the
anti-money laundering program requirements, how should the program be
structured?
8
In applying section 352 of the Act to vehicle sellers, F i n C E N must take into
account which requirements are "commensurate with the size, location, and activities" of
this industry. In undertaking this review, FinCEN recognizes that vehicle sellers likely
have some programs already in place to meet existing legal obligations. For example, as
a nonfmancial trade or business, vehicle sellers are required to report on Form 8300 the
receipt of over $10,000 in currency and certain monetary instruments. Vehicle sellers
also may have procedures in place to protect themselves against fraud. Such procedures
may be sufficient in themselves, given the money laundering risk in the industry, or they
may serve as a foundation on which additional anti-money laundering program
requirements could be based. FinCEN therefore seeks comment on the particular
elements that should be included in any required anti-money laundering program, should
it be determined that such a requirement should be imposed on this industry. In this
regard, comment is requested regarding the types of programs vehicle sellers currently
have in place to prevent fraud and illegal activities, and the applicability of such
programs to the prevention of money laundering.
4. How should a vehicle seller be defined? Should there be a minimum
threshold value in the definition? Should it include wholesale and retail sellers?
Should sellers of used vehicles be included?
In the event FinCEN determines to propose requirements on vehicle sellers under
sections 352 and 326 of the Act, it will be necessary to define the term vehicle seller.
Although the BSA identifies a vehicle seller as a financial institution, the statute contains
no definition of the term, other than to state that it includes sellers of automobiles,
airplanes, and boats. The legislative history of the BSA provides no insight into how
9
Congress intended the term to be defined, nor has F i n C E N had an occasion to define the
term in a regulation.
As discussed above, vehicle sellers form an extremely large and diverse industry,
accounting for a major portion of American consumption as well as exports. Given this
diversity in the vehicle sellers industry, the risks of money laundering and the costs of
preventive programs can vary widely. Thus, FinCEN solicits comment on whether any
proposed rule should limit the definition to sellers of particular types of vehicles, to retail
or wholesale vehicle sellers, or sellers of new or used vehicles. In addition, FinCEN's
regulations in the past have recognized that businesses that do not transact in sufficient
dollar amounts or volume, or in cash or monetary instruments, may not present sufficient
money laundering risk to require the imposition of federally mandated programs. For
example, under the BSA, money services businesses other than money transmitters
(currency exchangers, check cashers, and issuers, sellers, and redeemers of traveler's
checks and money orders) are defined as financial institutions only if they transact over
$1,000 in covered transactions for any one person in any one day.9 This threshold
reflects the judgment that businesses that never engage in transactions above that level
fail to present a money laundering risk sufficient to justify the regulatory burden.
FinCEN solicits comment on whether, if vehicle sellers are required to implement antimoney laundering programs, there should be a monetary threshold of some kind in
defining a vehicle seller for purposes of the BSA. Commenters should address whether
any such threshold should be transaction based, as with the money services business
rules, or on an annual gross income, or some other basis.
5. Do vehicle sellers maintain "accounts" for their customers?
10
Section 326 requires the setting of m i n i m u m standards for identification of
customers "in connection with the opening of an account at a financial institution."
Section 311 of the Patriot Act provides a definition of "account" for banks, but requires
the Secretary to promulgate a regulation defining "account" for non-bank financial
institutions. Although such a regulation has yet to be issued, the definition for banks ("a
formal banking or business relationship established to provide regular services, dealings,
and other financial transactions") is a useful starting point. This definition incorporates
two key concepts: (1) formality of the business relationship, and (2) regularity of
dealings. In light of these concepts, F i n C E N solicits comments as to whether (and to
what extent) vehicle sellers maintain accounts for their customers, in addition to fleet
accounts. W h a t kinds of services do vehicle sellers provide to any such account holders
(including fleet accountholders)? Are these account relationships ongoing? Are accounts
established to receive recurring payments from a customer, or are additional services
provided to the accountholder?
III.
Conclusion
With this A N P R M , F i n C E N is seeking input to assist it in determining h o w to
implement the requirements of sections 352 and 326 of the Act with respect to vehicle
sellers. F i n C E N welcomes comments on all aspects of this potential regulation and
encourages all interested parties to provide their views.
IV.
Executive Order 12866
Because this is an A N P R M , F i n C E N does not k n o w whether or in what form it
m a y issue a regulation pursuant to sections 352 and 326 of the Act affecting vehicle
sellers. Accordingly, F i n C E N does not k n o w whether potential regulations will
9
31 CFR103.11(uu).
11
constitute a significant regulatory action under the Executive Order. This A N P R M
neither establishes nor proposes any regulatory requirements. FinCEN has submitted a
notice of planned regulatory action to OMB for review. Because this ANPRM does not
contain a specific proposal, information is not available with which to prepare an
economic analysis. FinCEN will prepare a preliminary analysis if it proceeds with a
proposed rule that constitutes a significant regulatory action.
Accordingly, FinCEN solicits comments, information, and data on the potential
effects of any potential regulation. FinCEN will carefully consider the costs and benefit
associated with this rulemaking.
DATED:
James F. Sloan
Director,
Financial Crimes Enforcement Network
12
Bureau of the Public Debt: Treasury Suspends Sales of State and Local Government Seri... Page 1 of 1
B u r e a u of 'he
Public
j
Uri'tL d State* OeporrmcUt
oi r,!;e !,,t?cs,..,.ry
Treasury Suspends Sales of State and Local Government Series
Securities
FOR IMMEDIATE RELEASE
February 19, 2003
The Treasury Department announced today the suspension of sales of State and Local Government series (SLGS)
nonmarketable Treasury securities until further notice, effective immediately. This suspension is necessary because the
statutory debt ceiling has not been raised. The suspension will facilitate Treasury's managing debt subject to limit.
The suspension applies to demand deposit and time deposit securities. Subscriptions for SLGS received by the Bureau of
the Public Debt prior to this announcement will be issued on the date requested. N e w subscriptions for SLGS will not be
accepted until the suspension is lifted. The Internal Revenue Service has issued guidance to affected entities in Rev.
Proc. 95-47, 1995-2 C.B. 417, which is available in the "Tax Exempt Bond Tax Kit" which can be found by following the
link labeled "More Topics for Tax Exempt Bonds" at www.irs.gov/bonds.
Intellectual Property | Privacy & Security Notices | Terms & Conditions | Accessibility | Data Quality
U.S. Department of the Treasury, Bureau of the Public Debt
Last Updated November
3, 2004
js -W
http://www.publicdebt.treas.gov/com/comslgsoff2003.htm
5/5/2005
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, D C 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE
February 19, 2003
CONTACT:
Office of Financing
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
28-Day Bill
February 20, 2003
March 20, 2003
912795MD0
Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:
1.155%
Investment Rate 1/:
1.174%
Price:
99.910
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 82.18%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type
Tendered
Competitive
Noncompetitive
FIMA (noncompetitive)
$
SUBTOTAL
Federal Reserve
TOTAL
$
43,409,359
35,716
0
Accepted
$
19,964,919
35,716
0
43,445,075
20,000,635
1,510,738
1,510,738
44,955,813
$
21,511,373
Median rate
1.150%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.130%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 43,445,075 / 20,000,635 = 2.17
1/ Equivalent coupon-issue yield.
http://www.publicdebt.treas.gov
JZ-Vs
Page 1 of
5: Treasury Letter to Congress on the Debt Limit
PRC5S ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
February 19,2003
JS-46
Treasury Letter to Congress on the Debt Limit
Debt Limit
Related Documents:
• "Treasury Letter to Congress on the Debt Limit"
February 19,2003
The Honorable Dennis Hastert
Speaker of the House
United States House of Representatives
Washington, D.C. 20515
Dear Mr. Speaker:
In December of last year, Deputy Secretary Kenneth Dam wrote Congress requesting an
increase in the statutory debt limit. Because the debt limit has not yet been raised, I must inform
Congress that, pursuant to 5 U.S.C. § 8438(h)(2), it is m y determination that, by reason of the
public debt limit, I will be unable to fully invest the Government Securities Investment Fund
("G-Fund") of the Federal Employees Retirement System in special interest-bearing Treasury
securities, beginning on February 20, 2003. The statute governing G-Fund investments
explicitly authorizes the Secretary of the Treasury to suspend this G-Fund investment to avoid
breaching the statutory debt limit. Such a suspension action was taken by m y predecessors both
last year and also in 1995.
G-Fund beneficiaries are fully protected and will suffer no adverse consequences from
this action. The statute ensures that once the Secretary of the Treasury can m a k e the G-Fund
whole without exceeding the public debt limit, he is to do so. Under the governing law in this
case, the G-Fund will receive complete restoration of all funds temporarily affected by this
necessary action, including full and automatic restoration of any interest that would have been
credited to the Fund. In short, the result on the G-Fund and its beneficiaries will be the same as
if this temporary action had never taken place.
I know that you share the President's and my commitment to maintaining the full faith
and credit of the U.S. government, especially at this critical time. Together w e must continue
working to enact an increase in the statutory debt limit as quickly as possible to avoid any
negative repercussions at h o m e or abroad.
Sincerely,
John W . S n o w
Also sent to:
Rep. DeLay - House Majority Leader
Rep. Pelosi - House Minority Leader
Rep. Thomas - Ways & Means Chairman
Rep. Rangel - Ways & Means Ranking Member
Rep. Nussle - Budget Committee Chairman
Rep. Spratt - Budget Committee Ranking Member
Rep. Oxley - Financial Services Committee Chairman
Rep. Frank - Financial Services Ranking Member
Rep. Davis - Government Reform Chairman
Rep. Waxman - Government Reform Ranking Member
Sen. Frist - Senate Majority Leader
Sen. Daschle - Senate Minority Leader
Sen. Stevens - President Pro Tempore of the Senate
Sen. Grassley - Finance Chairman
Sen. Baucus - Finance Ranking Member
Sen. Shelby - Banking, Housing, and Urban Affairs Chairman
Sen. Sarbanes - Banking, Housing, and Urban Affairs Ranking Member
Sen. Nickles - Budget Chairman
Sen. Conrad - Budget Ranking Member
Sen. Collins - Governmental Affairs Chairman
Sen. Lieberman - Governmental Affairs Ranking Member
DEPARTMENT
TREASURY
OF
Q'
THE
tvm \\*'
TREASURY
NEWS
Otl'K I O K I'l BI.U A H M R S • I54H> l»lA NS \ "|.\ A \ I \ A Y I M i:, V W . • \\ \ M l I \(i I O N , D.t .» 2022U •i2l>2i <i22-2<>MI
EMBARGOED UNTIL 11:00 A.M.
FEBRUARY 20, 2003
CONTACT:
Office of Financing
202/691-3550
TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction 13-week and 26-week Treasury bills totaling $35,000
million to refund an estimated $28,989 million of publicly held 13-week and 26-week
Treasury bills maturing February 27, 2003, and to raise new cash of approximately
$6,011 million. Also maturing is an estimated $16,000 million of publicly held 4-week
Treasury bills, the disposition of which will be announced February 24, 2003.
The Federal Reserve System holds $12,860 million of the Treasury bills maturing
on February 27, 2003, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders either in these
auctions or the 4-week Treasury bill auction to be held February 25, 2003. Amounts
awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of each auction. These
noncompetitive bids will have a limit of $100 million per account and will be accepted
in the order of smallest to largest, up to the aggregate award limit of $1,000
million.
TreasuryDirect customers have requested that we reinvest their maturing holdings
of approximately $1,111 million into the 13-week bill and $990 million into the 26week bill.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions set
forth in the Uniform Offering Circular for the Sale and Issue of Marketable Book-Entry
Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about each of the new securities are given in the attached offering
highlights.
oOo
Attachment
C L
V
HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED FEBRUARY 27, 2003
February 20, 2003
Offering Amount $18,000 million $17,000 million
Maximum Award (35% of Offering Amount)
$ 6,300
Maximum Recognized Bid at a Single Rate
$ 6,300
NLP Reporting Threshold
$ 6,300
NLP Exclusion Amount
$ 5,200
Description of Offering:
Term and type of security
CUSIP number
Auction date
Issue date
Maturity date
Original issue date
Currently outstanding
Minimum bid amount and multiples
million
million
million
million
91-day bill
912795 MP 3
February 24, 2003
February 27, 2003
May 29, 2003
November 29, 2002
$20,593 million
$1,000
$ 5,950 million
$ 5,950 million
$ 5,950 million
None
182-day bill
912795 NK 3
February 24, 2003
February 27, 2003
August 28, 2003
February 27, 2003
$1,000
The following rules apply to all securities mentioned above:
Submission of Bids:
..
Noncompetitive bids: Accepted in full up to $1 million at the highest discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve
Banks as agents for FIMA accounts. Accepted in order of size from smallest to largest with no more than $100
million awarded per account. The total noncompetitive amount awarded to Federal Reserve Banks as agents for FIMA
accounts will not exceed $1,000 million. A single bid that would cause the limit to be exceeded will
be partially accepted in the amount that brings the aggregate award total to the $1,000 million limit. However,
if there are two or more bids of equal amounts that would cause the limit to be exceeded, each will be prorated
to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in increments of .005%, e.g., 7.100%, 7.105%.
(2) Net long position (NLP) for each bidder must be reported when the sum of the total bid amount, at all
discount rates, and the net long position equals or exceeds the NLP reporting threshold stated above.
(3) Net long position must be determined as of one half-hour prior to the closing time for receipt of
competitive tenders.
Receipt of Tenders:
Noncompetitive tenders
Prior to 12:00 noon eastern standard time on auction day
Competitive tenders
Prior to 1:00 p.m. eastern standard time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank on issue date, or payment of full par amount
with tender. TreasuryDirect customers can use the Pay Direct feature, which authorizes a charge to their account of
record at their financial institution on issue date.
48: Treasury Department Statement Regarding the Designation of Ansar al-Islam
Page 1 of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
February 20, 2003
JS-48
Treasury Department Statement Regarding the Designation of Ansar al-Islam
The United States government is taking action today to designate Ansar al-Islam
(Al), formerly known as Jund al-Islam, as a terrorist group with links to Al-Qa'ida
and to notify the United Nations to ensure that any assets or transactions related to
this group are frozen internationally. Al is a terrorist group operating in
northeastern Iraq with close links to and support from al-Qa'ida. Al-Qa'ida and
U s a m a bin Laden participated in the formation and funding of Ansar al-Islam, and
Al has provided safe haven to al-Qa'ida in northeastern Iraq. Al's predecessor,
Jund al-Islam, w a s formed in September 2001. Al c a m e into being with the
"blessing" of bin Laden after its leaders visited al-Qa'ida in Afghanistan in 2000 and
2001. Bin Laden provided Al with an estimated $300,000 to $600,000 in seed
money. Al has acknowledged that it contracted "Islamic figures abroad" before
declaring jihad in northeastern Iraq.
Ansar al-Islam has received training and logistical assistance from al-Qa'ida.
Groups of Al's Kurdish m e m b e r s have traveled to Afghanistan to train with alQa'ida, while Al's foreign m e m b e r s are believed to be al-Qa'ida-trained veterans of
conflicts in Afghanistan and Chechnya.
Ansar al-Islam has a close association with senior al-Qa'ida operative Abu Musab
al-Zarqawi, a poisons and chemical weapons expert whose network has
established a poison and explosives training c a m p in the area of northeastern Iraq
that is controlled by Ansar al-Islam. Zarqawi's lieutenants help run this camp, which
teaches operatives h o w to produce ricin and other poisons.
Ansar al-Islam (whose cadres include Kurdish, Arab, and Pashtun members) has
declared "jihad" against secular and non-Islamic groups in northeastern Iraq and
conducts violent attacks against Kurdish groups in the region, such as the Patriotic
Union of Kurdistan (PUK).
This action today is yet another step in uncovering the tangled web of al Qa'ida and
its alliances throughout the world. Including today's action there are 260
individuals, entities and organizations listed pursuant to the President's Executive
Order 13224, whose assets must be frozen in the United States and with w h o m U.S
persons m a y not do business or support. Since September 11, 2001, $124.5
million has been blocked worldwide. Of that amount, $36.2 million has been
blocked in the United States. Over 165 countries and jurisdictions have taken
concrete actions to disrupt the financing of terrorism.
www.treas.gov/press/releases/js48.htm
3/7/2003
JS-49: U.S. International Reserve Position
Page 1 of2
PRESS R O O M
F R O M THE OFFICE OF PUBLIC AFFAIRS
February 21,2003
JS-49
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table
totaled $78,500 million as of the end of that week, compared to $78,498 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
TOTAL
1. Foreign Currency Reserves
1
a. Securities
February 7, 2003
February 14, 2003
78,498
78,500
Euro
Yen
TOTAL
Euro
Yen
TOTAL
7,068
13,065
20,133
7,075
13,064
20,139
Of which, issuer headquartered in the U.S.
0
0
b. Total deposits with:
b.i. Other central banks and BIS
11,569
2,623
14,192
11,573
2,623
14,196
b.ii. Banks headquartered in the U.S.
0
0
b.ii. Of which, banks located abroad
0
0
b.iii. Banks headquartered outside the U.S.
0
0
b.iii. Of which, banks located in the U.S.
0
0
2. IMF Reserve Position 2
21,763
21,758
3. Special Drawing Rights (SDRs) 2
11,367
11,365
4. Gold Stock 3
11,043
11,043
0
0
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
February 14, 2003
February 7, 2003
.Euro
1. Foreign currency loans and securities
Yen
TOTAL
Euro
Yen
TOTAL
0
0
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-v.s the U.S. dollar:
2.a. Short positions
2.b. Long positions
3. Other
0
0
0
0
0
0
III Contingent Short-Term Net Drains on Foreign Currency Assets
February 14, 2003
February 7, 2003
htrrv/Aimm/ fraon ^„/^ooo/i-Dlp<aopc/iQ4Q h t m
3/7/2003
: U.S. International Reserve Position
Page 2 of2
Euro
Yen
1. Contingent liabilities in foreign currency
TOTAL
Euro
Yen
|_ TOTAL j
0
0
0
0
0
0
0
0
1.a. Collateral guarantees on debt due within 1
year
1.b. Other contingent liabilities
2. Foreign currency securities with e m b e d d e d
options
3. Undrawn, unconditional credit lines
3.a. With other central banks
3.b. With banks and other financial institutions
Headquartered in the U.S.
3.c. With banks and other financial institutions
Headquartered outside the U.S.
4. Aggregate short and long positions of options
in foreign
Currencies vis-a-vis the U.S. dollar
4. a. Short positions
v
4.a.1. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.1. Bought calls
4.b.2. Written puts
Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week m a y be subject to revision. Foreign Currency
Reserves for the prior w e e k are final.
2/The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to the prior week's IMF data. IMF data for the latest week m a y be
subject to revision. IMF data for the prior w e e k are final.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
p://www.treas.gov/nress/releases/is49.htm
3/7/2003
Bureau of the Public Debt: Treasury's Inflation-Indexed Securities Reference CPI Numbe... Page 1 of 1
PUBLIC DEBT NEWS
Department o*. the Treasury • Bureau ot the Public iH-bt • Waslnnjiton, 1>C 2<y2yi
FOR IMMEDIATE RELEASE
February 21, 2003
X:«}-T-;^.^'
Contact: Office of Financing
(202) 691-3550
TREASURY'S INFLATION-INDEXED SECURITIES
MARCH REFERENCE CPI NUMBERS AND DAILY INDEX RATIOS
Public Debt announced today the reference Consumer
Price Index (CPI) numbers and daily index ratios
for the month of March for the following
Treasury inflation-indexed securities:
(1) 3-3/8% 10-year notes due January 15, 2007
(2) 3-5/8% 10-year notes due January 15, 2008
(3) 3-5/8% 30-year bonds due April 15, 2 028
(4) 3-7/8% 10-year notes due January 15, 2009
(5) 3-7/8% 30-year bonds due April 15, 2029
(6) 4-1/4% 10-year notes due January 15, 2010
(7) 3-1/2% 10-year notes due January 15, 2011
(8) 3-3/8% 30-1/2-year bonds due April 15, 2032
(9) 3-3/8% 10-year notes due January 15, 2012
(10) 3% 10-year notes due July 15, 2012
This information is based on the non-seasonally
adjusted U.S. City Average All Items Consumer Price
Index for All Urban Consumers (CPI-U) published by
the Bureau of Labor Statistics of the U.S. Department
of Labor.
In addition to the publication of the reference CPI's
(Ref CPI) and index ratios, this release provides the
non-seasonally adjusted CPI-U for the prior threemonth period.
The information for April is expected to be
released on March 21, 2003.
oOo
March Reference CPI Numbers and Daily «ndex Rat.os Table PDF format (file size-16KB, uploaded02/21/03)
intellect. Property | Privacy » Security Notices | Terms * Conditions , Accessibility | Data Quality
U.S. Department of the Treasury, Bureau of the Public Debt
Last Updated January 12, 2005
JS-56
Bureau of the Public Debt: 3-3/8% T R E A S U R Y 10-YEAR INFLATION-INDEXED NO... Page 1 of 2
3-3/8% TREASURY 10-YEAR INFLATION-INDEXED NOTES
Due January 15,2007
Ref CPI and Index Ratios for March 2003
202-691-3550
Contact: Office of Financing
Series A-2007
9128272M3
January 15, 1997
February 6, 1997
April 15, 1997
January 15, 2007
158.43548
March 2003
31
DESCRIPTION:
CUSIP NUMBER:
DATED DATE:
ORIGINAL ISSUE DATE:
ADDITIONAL ISSUE DATE:
MATURITY DATE:
Ref CPI on DATED DATE:
TABLE FOR MONTH OF:
NUMBER OF DAYS IN MONTH
181.3
180.9
181.7
CPI-U (NSA) November 2002
CPI-U (NSA) December 2002
CPI-U (NSA) January 2003
Month
Calendar Day
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
Year
Ref CPI
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
180-90000
180.92581
180.95161
180.97742
181.00323
181.02903
181.05484
181.08065
181.10645
181.13226
181.15806
181.18387
181.20968
181.23548
181.26129
181. 28710
181. 31290
181. 33871
181. 36452
181. 39032
181. 41613
181, 44194
181 ,46774
181 .49355
181 .51935
181 .54516
181 .57097
181 .59677
181 .62258
.64839
181
181.67419
Index Ratio
1, 14179
1 14195
1 14212
1 14228
1 14244
1 14260
1 14277
1 14293
1.14309
1.14326
1. 14342
1. 14358
1. 14374
1, 14391
1, 14407
1 14423
1 14440
1 14456
1. 14472
1.,14488
1..14505
1..14521
1..14537
1..14554
1..14570
1.14586
1. 14602
1, 14619
1 14635
1 14651
1 14668
VV2005
bttn-//www.publicdebtUHS
^,/nf/nflOa0320Q3.htm_
Bureau of the Public Debt: 3-5/8% T R E A S U R Y 10-YEAR I N F L A T I O N - I N D E X E D NO... Page 1 of 2
3-5/8% TREASURY 10-YEAR INFLATION-INDEXED NOTES
Due January 15, 2008
Ref CPI and Index Ratios for March 2003
202-691-3550
Contact: Office of Financing
Series A-2008
9128273T7
January 15, 1998
January 15, 1998
October 15, 1998
January 15, 2008
161.55484
March 2003
31
DESCRIPTION:
CUSIP NUMBER:
DATED DATE:
ORIGINAL ISSUE DATE:
ADDITIONAL ISSUE DATE:
MATURITY DATE:
Ref CPI on DATED DATE:
TABLE FOR MONTH OF:
NUMBER OF DAYS IN MONTH:
181.3
180.9
181.7
CPI-U (NSA) November 2002
CPI-U (NSA) December 2002
CPI-U (NSA) January 2003
Month
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
Calendar Day
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
Year
Ref CPI
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
180. 90000
180. 92581
180. 95161
180. 97742
181. 00323
181. 02903
181. 05484
181. 08065
181. 10645
181. 13226
181. 15806
181. 18387
181. 20968
181. 23548
181. 26129
181. ,28710
181, ,31290
181 .33871
181 .36452
181 .39032
181 .41613
181 .44194
181 .46774
181 .49355
181 .51935
181 .54516
181 .57097
181 .59677
181 .62258
181 .64839
181 .67419
Index Ratio
1. 11974
1 11990
1 12006
1 12022
1 12038
1 12054
1 12070
1 12086
1 12102
1 12118
1 12134
1 12150
1 12166
1 12182
1 12198
1 12214
1.12230
1.12246
1.
1.12262
1.12278
1.12294
1. 12310
1. 12326
1. 12342
1. 12358
1 12374
1 12390
1 12406
1 12422
1 12438
12454
5/5/2005
111
^f/nf10h032Q03ihtm
Bureau of the Public Debt: 3-5/8% T R E A S U R Y 30-YEAR INFLATION-INDEXED BO... Page 1 of 2
3-5/8% TREASURY 30-YEAR INFLATION-INDEXED BONDS
Due April 15, 2028
Ref CPI and Index Ratios for March 2003
202-691-3550
Contact: Office of Financing
Bonds of April 2028
912810FD5
April 15, 1998
April 15, 1998
July 15, 1998
April 15, 2028
161.74000
March 2003
31
DESCRIPTION:
CUSIP NUMBER:
DATED DATE:
ORIGINAL ISSUE DATE:
ADDITIONAL ISSUE DATE:
MATURITY DATE:
Ref CPI on DATED DATE:
TABLE FOR MONTH OF:
NUMBER OF DAYS IN MONTH
181.3
180.9
181.7
CPI-U (NSA) November 2002
CPI-U (NSA) December 2002
CPI-U (NSA) January 2003
Month
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
Calendar Day
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
Year
Ref CPI
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
180.90000
180.92581
180.95161
180.97742
181.00323
181.02903
181.05484
181.08065
181.10645
181.13226
181.15806
181.18387
181.20968
181.23548
181.26129
181.28710
181.31290
181.33871
181.36452
181.39032
181.41613
181.44194
181.46774
181.49355
181.51935
181.54516
181.57097
181.59677
181.62258
181.64839
181.67419
Index Ratio
1. 11846
1. 11862
1. 11878
1.11894
1. 11910
1.11926
1.11942
1. 11958
1. 11974
1. 11990
1.12006
1. 12022
1. 12038
1. 12054
1. 12070
1.,12086
1..12101
1,.12117
1,.12133
1 .12149
1 .12165
1 .12181
1 .12197
1 .12213
1 .12229
1 .12245
1 .12261
1 .12277
1 .12293
1.12325
.12309
1
5/5/2005
1
"
11
^f/nnOaQ32003.htm
Bureau of the Public Debt: 3-7/8% T R E A S U R Y 10-YEAR INFLATION-INDEXED NO... Page 1 of 2
3-7/8% TREASURY 10-YEAR INFLATION-INDEXED NOTE
Due January 15, 2009
Ref CPI and Index Ratios for March 2003
Contact: Office of Financing
202-691-3550
DESCRIPTION:
CUSIP NUMBER:
DATED DATE:
ORIGINAL ISSUE DATE:
ADDITIONAL ISSUE DATE:
MATURITY DATE:
Ref CPI on DATED DATE:
TABLE FOR MONTH OF:
NUMBER OF DAYS IN MONTH:
Series A-2009
9128274Y5
January 15, 1999
January 15, 1999
July 15, 1999
January 15, 2009
164.00000
March 2003
31
CPI-U (NSA) November 2002
CPI-U (NSA) December 2002
CPI-U (NSA) January 2003
181.3
180.9
181.7
Month
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
Calendar Day
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
Year
Ref CPI
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
180. 90000
180. 92581
180. 95161
180. 97742
181. 00323
181. 02903
181- 05484
181. 08065
181. 10645
181. 13226
181. 15806
181. 18387
181. 20968
181. 23548
181..26129
181..28710
181..31290
181..33871
181..36452
181..39032
181 .41613
181 .44194
181 .46774
181 .49355
181 .51935
181 .54516
181 .57097
181 .59677
181 .62258
181 .64839
181 .67419
Index Ratio
1.10305
1.10321
1.10336
1.10352
1. 10368
1.10384
1.10399
1. 10415
1. 10431
1. 10447
1. 10462
1. 10478
1. 10494
1. 10509
1. 10525
1,.10541
1,.10557
1 .10572
1 .10588
1 .10604
1 .10620
1 .10635
1 .10651
1 .10667
1 .10683
1 .10698
1 .10714
1 .10730
1 .10745
1.10777
.10761
1
5/5/2005
111 "
11' 1
- — / ^ f i ^.032003jto
Bureau of the Public Debt: 3-7/8% T R E A S U R Y 30-YEAR INFLATION-INDEXED BO... Page 1 of 2
3-7/8% TREASURY 30-YEAR INFLATION-INDEXED BONDS
Due April 15, 2029
Ref CPI and Index Ratios for March 2003
202-691-3550
Contact: Office of Financing
Bonds of April 2029
912810FH6
April 15, 1999
April 15, 1999
October 15, 1999
October 15, 2000
April 15, 2029
164.39333
March 2003
31
DESCRIPTION:
CUSIP NUMBER:
DATED DATE:
ORIGINAL ISSUE DATE:
ADDITIONAL ISSUE DATE:
MATURITY DATE:
Ref CPI on DATED DATE:
TABLE FOR MONTH OF:
NUMBER OF DAYS IN MONTH
181.3
180.9
181.7
CPI-U (NSA) November 2002
CPI-U (NSA) December 2002
CPI-U (NSA) January 2003
Month
Calendar Day
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
httrv IIWTWTWT rw
ir n n
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
Year
Ref CPI
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
180.90000
180.92581
180.95161
180.97742
181.00323
181.02903
181.05484
181.08065
181.10645
181.13226
181.15806
181.18387
181.20968
181.23548
181.26129
181.28710
181.31290
181.33871
181.36452
181.39032
181.41613
181.44194
181.46774
181.49355
181.51935
181.54516
181.57097
181.59677
181.62258
181.64839
181.67419
--^"^7.Q03.hto
Index Ratio
1 10041
1 10057
1 10072
1 10088
1 10104
1 10119
1 10135
1 10151
1.10167
1. 10182
1.10198
1.,10214
1.,10229
1..10245
1..10261
1..10276
1..10292
1..10308
1..10324
1..10339
1..10355
1,.10371
1 .10386
1 .10402
1 .10418
1 10433
1 10449
1 10465
1 10481
1 10496
1 10512
3ureau of the Public Debt: 4-1/4% T R E A S U R Y 10-YEAR INFLATION-INDEXED NO... Page 1 of 2
4-1/4% TREASURY 10-YEAR INFLATION-INDEXED NOTE
Due January 15, 2010
Ref CPI and Index Ratios for March 2003
Contact: Office of Financing
202-691-3550
DESCRIPTION:
CUSIP NUMBER:
DATED DATE:
ORIGINAL ISSUE DATE:
ADDITIONAL ISSUE DATE:
MATURITY DATE:
Ref CPI on DATED DATE:
TABLE FOR MONTH OF:
NUMBER OF DAYS IN MONTH:
Series A-2010
9128275W8
January 15, 2000
January 18, 2000
July 17, 2000
January 15, 2010
168.24516
March 2003
31
CPI-U (NSA) November 2002
CPI-U (NSA) December 2002
CPI-U (NSA) January 2003
181.3
180.9
181.7
Month
Calendar Day
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
Year
Ref CPI
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
180. 90000
180. 92581
180- 95161
180. 97742
181. 00323
181. 02903
181. 05484
181. 08065
181. 10645
181. 13226
181. 15806
181. 18387
181. 20968
181. 23548
181. 26129
181.,28710
181,.31290
181 .33871
181 .36452
181 .39032
181 .41613
181 .44194
181 .46774
181 .49355
181 .51935
181 .54516
181 .57097
181 .59677
181 .62258
181 .64839
181 .67419
Index Ratio
1 07522
1.07537
1.07552
'l.07568
1.07583
1.07598
1.07614
1.07629
1.07644
1.07660
1.07675
1.07690
1.07706
1.07721
1.,07736
1.,07752
1..07767
1..07782
1,.07798
1 .07813
1 .07828
1 .07844
1 .07859
1 .07874
1 .07890
1 .07905
1 .07920
1 .07936
1 .07951
1 .07966
1 07982
S/V?00<5
VttttWAiT T11T11T
tAI
ikliVrUht trPflS QOV
• f-fi^nnjSim
iureau of the Public Debt: 3-1/2% T R E A S U R Y 10-YEAR INFLATION-INDEXED NO... Page 1 of 2
3-1/2% TREASURY 10-YEAR INFLATION-INDEXED NOTE
Due January 15, 2011
Ref CPI and Index Ratios for March 2003
Contact: Office of Financing
202-691-3550
DESCRIPTION:
CUSIP NUMBER:
DATED DATE:
ORIGINAL ISSUE DATE:
ADDITIONAL ISSUE DATE:
MATURITY DATE:
Ref CPI on DATED DATE:
TABLE FOR MONTH OF:
NUMBER OF DAYS IN MONTH:
Series A-2011
9128276R8
January 15, 2001
January 16, 2001
July 16, 2001
January 15, 2011
174.04516
March 2003
31
CPI-U (NSA) November 2002
CPI-U (NSA) December 2002
CPI-U (NSA) January 2003
181.3
180.9
181.7
Month
Calendar Day
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
Year
Ref CPI
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
180.90000
180.92581
180.95161
180.97742
181.00323
181.02903
181.05484
181.08065
181.10645
181.13226
181.15806
181.18387
181.20968
181.23548
181.26129
181.28710
181.31290
181.33871
181.36452
181.39032
181.41613
181.44194
181.46774
181.49355
181.51935
181.54516
181.57097
181.59677
181.62258
181.64839
181.67419
Index Ratio
1.03939
1.03953
1.03968
1.03983
1.03998
1.04013
1.04028
1.04042
1.04057
1.04072
1.04087
1.04102
1.04116
1.04131
1.04146
1. 04161
1.,04176
1.,04191
1,.04205
1..04220
1 .04235
1 .04250
1 .04265
1 .04280
1 .04294
1 .04309
1 .04324
1 .04339
1 .04354
1 .04369
1 .04383
V5/2005
Vltfr\- / /\tr\\n i ; M i M\nAo\\t
trpflS POV
,.^fifwmn03.htin
Bureau of the Public Debt: 3-3/8% T R E A S U R Y 30-1/2-YEAR INFLATION-INDEXED... Page 1 of 2
3-3/8% TREASURY 30-1/2-YEAR INFLATION-INDEXED
BONDS
Due April 15,2032
Ref CPI and Index Ratios for March 2003
202-691-3550
Contact: Office of Financing
Bonds of April 2032
912810FQ6
Octobe r 15, 2001
Octobe r 15, 2001
DESCRIPTION:
CUSIP NUMBER:
DATED DATE:
ORIGINAL ISSUE DATE:
ADDITIONAL ISSUE DATE:
MATURITY DATE:
Ref CPI on DATED DATE:
TABLE FOR MONTH OF:
NUMBER OF DAYS IN MONTH
April 15, 2032
177.50000
March 2003
31
181.3
180.9
181.7
CPI-U (NSA) November 2002
CPI-U (NSA) December 2002
CPI-U (NSA) January 2003
Ref CPI
Month Calendar Day Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
httrr//-wrwrwr m ihliVHp.ht
treas
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
180.90000
180.92581
180.95161
180.97742
181.00323
181.02903
181.05484
181.08065
181.10645
181.13226
181.15806
181.18387
181.20968
181.23548
181.26129
181.28710
181.31290
181.33871
181.36452
181.39032
181.41613
181.44194
181.46774
181.49355
181.51935
181.54516
181.57097
181-59677
181.62258
181.64839
181.67419
,^n.m7.003.htm
Index Ratio
1.01915
1.01930
1.01945
1.01959
1.01974
1.01988
1.02003
1.02017
1.02032
1.02046
1.02061
1.02075
1.02090
1.02104
1.02119
1.02134
1.02148
1.02163
1.02177
1.02192
1.02206
1.02221
1.02235
1.02250
1.02264
1.02279
1.02294
1.02308
1.02323
1.02337
1.02352
Bureau of the Public Debt: 3-3/8% T R E A S U R Y 10-YEAR INFLATION-INDEXED NO... Page 1 of 2
3-3/8% TREASURY 10-YEAR INFLATION-INDEXED NOTES
Due January 15, 2012
Ref CPI and Index Ratios for March 2003
202-691-3550
Contact: Office of Financing
DESCRIPTION:
CUSIP NUMBER:
DATED DATE:
ORIGINAL ISSUE DATE:
ADDITIONAL ISSUE DATE:
MATURITY DATE:
Ref CPI on DATED DATE:
TABLE FOR MONTH OF:
NUMBER OF DAYS IN MONTH:
Series A-2012
9128277J5
January 15, 2002
January 15, 2002
CPI-U (NSA) November 2002
CPI-U (NSA) December 2002
CPI-U (NSA) January 2003
181.3
180.9
181.7
Month
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
Calendar Day
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
January 15, 2012
177.56452
March 2003
31
Year
Ref CPI
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
180.90000
180.92581
180.95161
180.97742
181.00323
181.02903
181.05484
181.08065
181.10645
181.13226
181.15806
181.18387
181.20968
181.23548
181.26129
181.28710
181.31290
181.33871
181.36452
181.39032
181-41613
181.44194
181-46774
181.49355
181.51935
181.54516
181.57097
181.59677
181.62258
181.64839
181.67419
Index Ratio
01878
01893
01908
01922
01937
01951
1.01966
1.01980
1.01995
1. 02009
1, 02024
1 02038
1 02053
1 02067
1 ,02082
1 .02096
1 .02111
1.02126
1.02140
1. 02155
1. 02169
1 02184
1 02198
1 02213
1 02227
1 02242
1 02256
1 ,02271
1 .02285
1.02300
1.02314
5/5/2005
' ^infrmno^httn
VlHvx//^.
™iUK^At*Ut tr(*a<l P O V
Bureau of the Public Debt: 3 % T R E A S U R Y 10-YEAR INFLATION-INDEXED N O T E S
Page 1 of 2
3% TREASURY 10-YEAR INFLATION-INDEXED NOTES
Due July 15, 2012
Ref CPI and Index Ratios for March 2003
Contact: Office of Financing
202-691-3550
DESCRIPTION:
CUSIP NUMBER:
DATED DATE:
ORIGINAL ISSUE DATE:
ADDITIONAL ISSUE DATE:
Series C-2012
912828AF7
July 15, 2002
July 15, 2002
October 15, 2002
January 15, 2003
July 15, 2012
179.80000
March 2003
31
MATURITY DATE:
Ref CPI on DATED DATE:
TABLE FOR MONTH OF:
NUMBER OF DAYS IN MONTH:
181.3
180.9
181.7
CPI-U (NSA) November 2002
CPI-U (NSA) December 2002
CPI-U (NSA) January 2003
Month
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
Calendar Day
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
Year
Ref CPI
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
180. 90000
180. 92581
180. 95161
180. 97742
181. 00323
181. 02903
181. 05484
181. 08065
181. 10645
181. 13226
181. 15806
181. 18387
181..20968
181..23548
181..26129
181..28710
181..31290
181..33871
181..36452
181..39032
181 .41613
181 .44194
181 .46774
181 .49355
181 .51935
181 .54516
181 .57097
181 .59677
181 .62258
181 .64839
181 .67419
Index Ratio
1.00612
1.00626
1. 00640
1. 00655
1. 00669
1, 00684
1, 00698
1 00712
1 00727
1 ,00741
1 ,00755
1 .00770
1 .00784
1 .00798
1 .00813
1 .00827
1 .00841
1 .00856
.00870
1
1.00884
00899
00913
00928
00942
00956
00971
00985
00999
01014
1.01028
1.01042
5/5/2005
^ hthv/Ain,™ ^UUrA.U tress W o f M l M M M S
JS . 5 1: Treasury,
H o m e l a n d Security, Justice Departments Join to Celebrate L a w Enforcement
P a g e xo f 2
'^^'•^^t^')^^^^^^^^^^^^^^^
PR CSS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
February 21,2003
JS-51
MEDIA A D V I S O R Y
Treasury, Homeland Security, Justice Departments
Join to Celebrate L a w Enforcement
Ceremony will also highlight the realignment of law enforcement
responsibilities.
O n Tuesday, February 25, 2003, Treasury Secretary John Snow, Homeland
Security Secretary T o m Ridge and Deputy Attorney General Larry Thompson will
join in a ceremony to celebrate law enforcement and highlight the transfer of
agencies and new enforcement responsibilities.
The ceremony will take place at Lisner Auditorium on the The George Washington
University campus. Law enforcement officials from the three departments and the
realigned bureaus and agencies will attend.
Participating:
Commissioner Robert C. Bonner U.S. Customs Service
Director W . Ralph Basham U.S. Secret Service
Director Connie L. Patrick - Federal Law Enforcement Training Center
Director Bradley A. Buckles - Bureau of Alcohol, Tobacco, Firearms and Explosives
Tuesday, February 25, 2003
3:00PM
Law Enforcement Day Celebration
Treasury Secretary John Snow
Homeland Security Secretary T o m Ridge
Deputy Attorney General Larry Thompson
Lisner Auditorium
The George Washington University
730 21st Street, N.W.
Washington, D C 20052
MEDIA NOTES:
. The event is OPEN PRESS. Members of the media ^^^^
rhPrk in table located in the Lisner Auditorium lobby no later than 2.30PM to
S r i r t S l
Prior notification is not requested, but a government
^ ^ ^ ^ s r e q ^ . Credentials will only be available on-s.te and not
prior to the event.
. Video photographers may arrive for set up at 1:30PM; set up must be complete by
2:30PM. T V lighting. Mult box.
,
^p://www.treas.gov/press/releases/js51 .htm
3/7/2003
"^51: Treasury, H o m e l a n d Security, Justice Departments Join to Celebrate L a w Enforcement
Page 2 of 2
N o press availability is planned for this event.
3/7/2003
tap://www.treas.gov }H css/rc!eases/js51 .htm
52: Treasury statement regarding uruguay-nvi^ Discussions
Page 1 of 1
F R O M T H E OFFICE O F PUBLIC AFFAIRS
February 21,2003
JS-52
Treasury Statement Regarding Uruguay-IMF Discussions
We welcome the positive outcome of discussions between Uruguay's authorities
and IMF staff and management. W e look forward to timely review by the IMF Board
of Uruguay's economic program and welcome this important step to restored
economic growth.
3/7/2003
tep://www.treas.gov/press/releases/js52.htm
I
Immediate Release
Saturday, February 22, 2003
Contact: P l M c Affairg
/ 2 02) 622-2960
Post-G7 Statement by United States Treasury Secretary John Snow
(Paris, France) --1 was pleased this weekend to join - for the first time - the G-7 Finance
Ministers and Central Bank Governors. I enjoyed meeting with m y colleagues and
valued the opportunity to exchange views and work together on key issues that w e face in
the global economy.
The strength of the international economy is tied to the performance of the domestic U.S.
economy. A s the world's largest economy, if w e grow, if w e see improvement in our
o w n economy, that will boost the world economy. That's w h y strengthening our o w n
economic recovery is so important, and w h y President Bush's jobs and growth package is
so critical - not just to the U.S. economy - but to the international economy. If w e get
moving on a higher growth path, two things will happen: 1) more Americans w h o want
work can find a job, and 2) and the economies of Europe, Japan, South America and
every other corner of the world will get a lift - therefore employing millions, and raising
the standard of living for millions of families across the world. Within the international
community, the United States must lead by example - and w e are not growing fast
enough or strongly enough. I a m convinced that enactment of President Bush's jobs and
growth plan is important not just for the United States, but for global economic growth as
well, and accordingly in each and every meeting this weekend I laid out for m y
colleagues h o w President Bush's economic growth proposals will build on the proven
strength of the U.S. economy - generating jobs, encouraging savings and investment, and
promoting entrepreneurship. Each G 7 nation must take its o w n steps - appropriate to its
o w n respective set of conditions - to spur growth. That's important, since our prosperity
is tied to stronger growth outside of the United States.
In addition to growth, we discussed the key role of sound corporate governance in
financial stability, efficient capital markets and sustained growth. I outlined the steps the
United States has taken to strengthen corporate governance pursuant to the President's
Ten Point Plan and the Sarbanes-Oxley legislation, and m y colleagues described the steps
their governments were taking to address corporate governance as well. W e focused on
the centrality of market discipline - as well as the quality of corporate financial
disclosure and effective regulation - in achieving our shared goals in this area.
JS-53
W e extended our strong support for the ongoing work of the various international bodies
focusing on auditing, accounting, and related corporate governance issues
W e also discussed our c o m m o n unwavering commitment to combating financial crime
and terrorist financing as a critical component of the war on terrorism W e agreed to
contribute technical assistance to priority countries, and urge the I M F and World Bank in
coordination with the U N , to continue to do so as well. W e encourage the ongoing '
efforts of F A T F to foster the effective implementation of the U N S C Resolutions
regarding assets freezing, and w e recognize the need for greater oversight of informal
financial sectors and the need for total integrity of charities so they don't unwittingly
become vehicles of terrorist financing.
Another subject we addressed was improving the framework for preventing and resolving
financial crises in emerging market countries. This subject remains a priority for the G-7.
W e had a good discussion of the role collective action clauses play in advancing this
objective, and broad support was reaffirmed for this approach. Viewing this in
conjunction with steps the private sector has taken in embracing collective action clauses
- as well as indications of support from other sovereigns - I a m encouraged w e are
making progress on this important issue. It is imperative that parties to sovereign debt
transactions continue to focus on the use of collective action clauses in their transactions.
We also had a good discussion about development issues and aid effectiveness. Our goal
is greater economic growth and prosperity in developing countries. Therefore I
emphasized the importance of rewarding countries with strong policy performance,
measuring concrete results of our assistance, and strengthening management of public
resources. I explained h o w our Millennium Challenge Account is designed to
accomplish these goals. International financial institutions - such as the World Bank can improve aid effectiveness for the world's poorest nations by further embracing these
objectives.
I want to note in closing the importance of free trade to the overall goal of global
economic growth. In this light, I a m encouraged m a n y of m y G 7 colleagues agree to
work with our trade ministers and the international financial institutions to support the
objectives of the W T O negotiations under the Doha Development Agenda, focusing in
particular on thefinancialservices and agriculture sectors and the need for resultsoriented trade related capacity building. Reducing barriers to trade is also needed to spur
global economic growth.
Thank you.
2003-4-12-13-1O-1-15576: Statement of G-7 Finance Ministers and Central Bank Governors
Page 1 of2
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 12,2003
2003-4-12-13-10-1-15576
Statement of G-7 Finance Ministers and Central Bank Governors April 2003
We met today at a time in which the world economy faces many challenges. In this
light, w e reaffirm our commitment to multilateral cooperation.
Growth in most of our economies has been subdued, though uncertainties have
diminished. A strong and lasting recovery is essential for our own countries and for
the world. T o this end, w e each commit to pursue sound macroeconomic policies
that support sustained growth. In a low inflation, low interest rate environment, there
is potential for higher growth through productivity-enhancing structural reforms, and
to buttress investor confidence through continued improvements in corporate
governance practices, market discipline, and transparency. W e will respond as
needed to developments in the economic environment. W e will continue to monitor
exchange markets closely and cooperate as appropriate. W e underscore the
importance to global growth and poverty reduction of successful trade liberalization
through the timely implementation of the Doha Development Agenda, notably in
financial services.
We encourage all emerging market countries to pursue sound policies and to
enhance their investment climates. These policies will help attract financial flows,
importantly including foreign direct investment, to reduce external vulnerabilities,
and to support sustained growth. W e welcome the strong macroeconomic policies
and ambitious structural reforms that Brazil's authorities are implementing.
We reiterate our commitment to strengthen crisis prevention and resolution
measures W e are pleased to see progress being made on each element of our
Action Plan of last April, as detailed in the accompanying update. W e will continue
to work to further implementation in this area.
We reaffirm our strong commitment to combat terrorist financing and pledge to
maintain the m o m e n t u m w e have achieved thus far. W e will
^.^fj^^}
n s t ,
Action Task Force, the U N , and the International Financial h
f^
the work plan that w e endorsed in February. W e welcome ^ ^ o n P l ^ J t h e
IMF and World Bank, and are encouraged by the progress
ritoeWoXPn®*™
aareed with FATF" w e urge them to successfully carry forward this important
S ' w S f o r w a r d t o revised FATF recommendations by June, establishing
an enhanced standard in the fight against financial crime.
We reaffirm our February commitment to address.the challenge J9^poverty
effective in countries with sound ^es^K^fu'ppSrt for NEPAD
conducive to private sector-led growth W e reite ate our pp
principles. W e will develop a n ^ ^ ^ l ^ F e also encourage
^ ^
„e recognize ,he ne*. (era <«^™l^jr,SS£*£?
U N Security Council resolution. The IMF and tne vvo
7/21/2005
• t o m i r trr i «™,/nv,•,•./••.
W7.QQ34:
7003-4-12-13-10-1-15576: Statement of G-7 Finance Ministers and Central Bank Governors
Page 2 of 2
normal role in rebuilding and developing Iraq, recognizing that the Iraqi people have
the ultimate responsibility to implement the right policies and build their o w n future.
It is important to address the debt issue and w e are looking forward to the early
engagement of the Paris Club.
7/21/2005
'www.trens.L'-.AV press.
i -
-i^sa
UofTG8 Information Centre: G 8 Finance Ministers' Meetings.
Page 1 of2
G 8 Information Centre
.
,, (1
|
|f| l^lj L»|
Summits | Meetings | Plications | Research | G8-Related| Search | G 8 Centre
Statement of G-7 Finance Ministers and Central Bank Governors
F e b r u a r y 22, 2003
Paris, France
Our economies are experiencing slower growth, yet they remain resilient. Geopolitical uncertainties have in
We remain confident in the underlying strength of our economies and in their capacity to grow more vigorously.
We recognise the imperative for higher growth rates and resolve to take steps to achieve this result. To th
is committed to accelerating labour, product and capital market reforms to achieve a moreflexibleeconomy ; Japan has
reiterated its commitment to structural reforms, including in the financial and corporate sectors ; the U S is
implementing action to create jobs, encourage capital formation and savings and raise productivity growth. W e also
remain steadfast in our commitment to ensure sustainable public finances and price stability. W e are all committed to
the Doha Development Agenda and to meeting its overall timetable and interim milestones.
We will continue to cooperate closely. If the economic outlook weakens, we are prepared to respond as approp
We will continue to monitor exchange markets closely and cooperate as appropriate.
To strengthen corporate governance and to bolster further investor confidence, we are implementing ambitious
domestic reforms. Strengthened market discipline, improved corporate disclosure, increased transparency and effective
regulation are c o m m o n principles that underpin soundfinancialsystems and ensure their coherence. W e support the
work of the Financial Stability Forum and other fora, covering independent auditing, high-quality accounting standards,
sound corporate governance andfinancialinformation quality. W e will review the progress of their work.
We encourage developing and emerging market countries to pursue sound policies and to enhance their investme
climates. These policies will help attract foreign direct investment, reduce external vulnerabilities and raise sustained
growth. W e welcome Brazil's pursuit of sound economic policies and social reforms. As Argentina moves forward to
fulfill its commitments agreed with the I M F , w e look forward to the authorities restoring contract enforcement and
engaging in a dialogue with its private creditors. W e welcome Turkey's commitment to economic and financial
stabilization as agreed with the IMF.
We are implementing our April 2002 action plan to prevent and resolve financial crises in emerging market co
Progress has been made in ensuring greater discipline through clarifying normal and exceptional access to official
finance in crisis situations. W e welcome the positive response of the private sector to collective action clauses and its
on-going work with the public sector on model clauses. W e look forward to the early adoption of effective collective
action clauses and to the discussion of a concrete proposal from the I M F on a sovereign debt restructuring mechanism
at its Spring meeting. A s a complement, w e welcome work on a code of good conduct based on negotiating principles.
We urge the I M F to enhance crisis prevention, including by making its surveillance more effective.
We urge all countries to implement and enforce laws to combat the financing ^}f^nY^^^ SdS
JJJ- assise ,o cJL.
.ha. .a*
a p p r o v e — ^ J ^ S ^ ^ S
World Bank to step up the r assessments and their provision ot tecnnicai a s s i s e
; ^s and to PreL?a„ action plan a. ,he ^ ! » ^ ' Z £ £ 2 Z g X ^ T £ £ £ L
! afechve asset freezing. W e encourage more effective oversight ot inrormdi
! lo°kforwardto revised Financial Action Task Force recommendations by June.
AH U 7/21/2005
JJttflara^a „t»m«t» .o/fi.o^./^m^m htm
w«
UofT G8 Information Centre: G 8 Finance Ministers' Meetings.
Page 2 0f
2
We urge all OECD countries to implement the standards set out in the OECD's 2000 report on access to bank
information and to ensure effective exchange of information for all tax purposes. A level playingfieldis crucial to
avoid tax evasion shifting from those countries that engage in exchange of information to those that do not.
Our duty, our responsibility for the prosperity and sustainable development of the world require us to address
vigorously the challenge of global poverty. T o build on the positive outcomes of Monterrey and Johannesburg,
developed and developing countries should mobilize greater financial resources and improve aid effectiveness by
setting and achieving measurable results and adopting growth-oriented policies. W e reaffirm our support for the
Millennium Development Goals, including on health, education and water supply and sanitation, as well as to the
completion of the Highly-Indebted Poor Countries (HIPC) initiative and of the Global Health Fund. Their achievement
calls for an increased volume of development resources. W e have m a d e progress particularly on H I V / A I D S and will
continue to focus on the Goals and their financing, including facilities, with a view to making further progress by
Evian. Consistent with the G 8 Africa Action Plan, w e are ready to provide substantial support to African countries that
implement N e w Partnership for Africa's Development ( N E P A D ) principles and are committed to improving
governance and demonstrate solid policy performance. W e recognize the fundamental importance of rules-based trade
in driving economic growth and poverty reduction.
Source: GJLEyian Summit Website
This Information System is provided by the Universityof
Toronto Library and the G 8 Research Group at the University
a v l ;
^
' of Toronto.
T O ? ;.:i ru'.r
. „ ^, M
Please send comments to: g8info@liMary.utomnto.ca
This page was last updated M a y 26, 2004.
All contents copyright © 1995-2004. University of Toronto unless otherwise stated. All rights reserved.
7/21/2005
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE
February 24, 2003
CONTACT
Office of Financing
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
91-Day Bill
February 27, 2003
May 29, 2003
912795MP3
Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:
1.175%
Investment Rate 1/:
1.195%
Price:
99.703
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 33.39%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)
SUBTOTAL
$
34,271,600
1,539,357
340,700
16,120,469
1,539,357
340,700
36,151,657
18,000,526 2/
5,346,118
5,346,118
Federal Reserve
41,497,775
TOTAL
Accepted
Tendered
$
23,346,644
Median rate
1.165%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.140%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 36,151,657 / 18,000,526 = 2.01
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,209,215,000
http://www.publicdebt.treas.gov
5</
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, D C 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE CONTACT: Office of Financing
February 24, 2003
202-691-3550
RESULTS OF .TREASURY'S AUCTION OF 2 6-WEEK BILLS
Term: 182-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:
February 27, 2003
August 28, 2003
912795NK3
High Rate: 1.175% Investment Rate 1/: 1.198% Price: 99.406
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 41.35%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)
$
38,191,047
1,421,503
543,900
$
SUBTOTAL
40,156,450
Federal Reserve
5,636,302 5,636,302
TOTAL
45,792,752
15,035,272
1,421,503
543,900
17,000,675 2/
$
22,636,977
Median rate
1.170%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.140%:
5% of the amount
of accepted competitive tenders was tendered at or-below that rate.
Bid-to-Cover Ratio = 40,156,450 / 17,000,675 = 2.36
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,043,211,000
http://www.publicdebt.treas.gov
y
KJ
S-$s
DEPARTMENT
OF T H E
TREASURY
TREASURY!® N E W S
'' 7 H '1
>NS\|.\A\U A M Ml,,
EMBARGOED UNTIL 11:00 A.M.
February 24, 2003
N.W..UAMIIN(;T(>N.
Contact:
D.C.. 2«220.<2U2i *22-2 <>MI
Office of Financing
202/691-3550
TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $25,000 million to
refund an estimated $16,000 million of publicly held 4-week Treasury bills maturing
February 27, 2003, and to raise new cash of approximately $9,000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreasuryDlrect will not be accepted.
The Federal Reserve System holds $12,860 million of the Treasury bills maturing
on February 27, 2003, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balance of the amount not awarded in today's 13-week and 26-week Treasury
bill auctions. Amounts awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New York
will be included within the offering amount of the auction. These noncompetitive bids
will have a limit of $100 million per account and will be accepted in the order of
smallest to largest, up to the aggregate award limit of $1,000 million.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions
set forth in the Uniform Offering Circular for the Sale and Issue of Marketable BookEntry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about the new security are given in the attached offering highlights.
oOo
Attachment
>s
~j
54
™ >, , HIGH LIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED FEBRUARY 27, 2003
February 24, 2003
Offering Amount
$25 000
ll"
Maximum Award (35% of Offering Amount ' ] [ $ 8 ; 7 5 0 Million
Maximum Recognized Bid at a Single Raj-a . $ 8 / 7 5 0 m i l l i o n
NLP Reporting Threshold
$ 8;750 million
NLP Exclusion Amount
<.Q / n n ....
•
•—
9 9,400 million
Description of Offering:
Term and type of security
28-day bill
CUSIP number
912795 ME 8
Auction date
February 25, 2003
Issue date
February 27, 2003
Maturity date
March 27 , 2003
Original issue date
September 26, 2002
Currently outstanding
$36,936 million
Minimum bid amount and multiples. . . .$1,000
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FIMA accounts. Accepted in order of size from smallest to largest
with no more than $100 million awarded per account. The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FIMA accounts will not exceed $1,000 million. A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate award total to the $1,000
million limit. However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 4.215%.
(2) Net long position (NLP) for each bidder must be reported when
the sum of the total bid amount, at all discount rates, and the
net long position equals or exceeds the NLP reporting threshold
stated above.
(3) Net long position must be determined as of one half-hour prior
to the closing time for receipt of competitive tenders.
Receipt of Tenders:
Noncompetitive tenders:
Prior to 12:00 noon eastern standard tune on auction day
Competitive tenders:
.•_.:„ J-,,
Prior to 1:00 p.m. eastern standard tun. on auctxon day
J. , flinH<? account at a Federal Reserve Bank
Payment Terms: By charge to a funds account a
on issue date.
DEPARTMENT
OF T H E
TREASURY
TREASURY
NEWS
nHH'l.t)IHHIH\MMUS.I5«0|M;ANSVnVNM
UT
M
EMBARGOED UNTIL 11:00 A.M.
February 24, 2003
K, V.W.
. UVSMIN., I ON, i,.t •.. ;„::„. ,202, «:.2»
fill
CONTACT:
Office of Financing
202/691-3550
TREASURY OFFERS 2-YEAR NOTES
The Treasury will auction $27,000 million of 2-year notes to refund $20,022
million of p u b l i c l y held notes maturing February 28, 2003, and to raise new cash of
approximately $6,978 million.
In addition to the public holdings, Federal Reserve Banks hold $8,333 million
of the maturing notes for their own accounts, which may be refunded by issuing
an additional amount of the new securityUp to $1,000 m i l l i o n in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of the auction.
These noncompetitive
bids will have a limit of $100 million per account and will be accepted in the order
of smallest to largest, up to the aggregate award limit of $1,000 million.
TreasuryDirect
customers requested that we reinvest their maturing holdings
of approximately $565 million into the 2-year note.
The auction will be conducted
tive and noncompetitive awards will
tenders. The allocation percentage
be rounded up to the next hundredth
in the single-price auction format. All competibe at the highest yield of accepted competitive
applied to bids awarded at the highest yield will
of a whole percentage point, e.g., 17.13%.
The notes being offered today are eligible for the STRIPS program.
This offering of Treasury securities is governed by the terms and conditions
set forth in the Uniform Offering Circular for the Sale and Issue of Marketable BookEntry Treasury B i l l s , N o t e s , and Bonds
(31 CFR Part 356, as amended).
Details about the new security are given in the attached offering highlights.
oOo
Attachment
\7
57
HIGHLIGHTS OF TREASURY OFFERING TO THE PUBLIC OF
2-YEAR NOTES TO BE ISSUED FEBRUARY 28, 2003
February 24, 2003
Offering Amount $27,000 million
Maximum Award (35% of Offering Amount)
Maximum Recognized Bid at a Single Rate
NLP Reporting Threshold
Description of Offering:
Term and type of security
Series
CUSIP number
Auction date
Issue date
Dated date
Maturity date
Interest rate
Yield
Interest payment dates
Minimum bid amount and multiples
Accrued interest payable by investor
Premium or discount
STRIPS Information:
Minimum amount required
Corpus CUSIP number
Due date(s) and CUSIP number(s)
for additional TINT(s)
$ 9,450 million
$ 9,450 million
$ 9;450 m i l l i o n
2-year notes
H-2005
912828 AV 2
February 26, 2003
February 28, 2003
February 28, 2003
February 28, 2005
Determined based on the highest
accepted competitive bid
Determined at auction
The last calendar day of August and
February through February 28, 2005
$1,000
None
Determined at auction
$1, 00°
912820 HS 9
February 28, 2005 - - 912833 ZE 3
Submission of Bids:
Noncompetitive bids:
.
Accepted in full up to $5 million at the highest accepted yield.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids
submitted through the Federal Reserve Banks as agents for FIMA *ceount..
Accepted in order of size from smallest to largest with no more « ™ * " °
million awarded per account. The total noncompetitive « » £ * « « f £ £ F e f t a l
Reserve Banks as agents for FIMA accounts will not exceed
^ ' ^ ^ ^ V ,
single bid that would cause the limit to ^ - c ^ e d will be pa la ^accepted
in the amount that brings ^ £ Z ^ ™ ^ £ £ .
that would cause the
b
However, if there are two or » f * " ^ r ° * e d ^ 0 a v o i d exceeding the limit.
limit to be exceeded, each will be prorated
Competitive bids:
,
n 103%
clo.ir.gti.. for «o«P« <* «-f«"~ "•""'"'
Receipt of Tenders:
Noncompetitive tenders:
. r d t i m e on auction day.
Va
Prior to 12:00 noon eastern standard time
Competitive tenders:
nH *rd time on auction dayPrior to 1:00 p.m. eastern stana*
^ ^ Federal Reserve Bank on issue date,
Payment Terms: By charge to a funds accou TreasuryD±rect
customers can use the Pay
or payment of full par amount with ten e . ^ ^ acC ount of record at their
Direct feature which authorizes a cnarg
financial institution on issue date.
58: Domestic Finance Peter R. Fisher to the Bloomberg O i ! ^ r TT
•
Derg 0utlook
forU.S. Bonds 2003
Page 1 of3
PRLSS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
February 25, 2003
JS-58
RemarksofUnd
%!:T/LV^irrrfor Domestic •=*»•«•
reter R. Fisher to the Bloomberg
Outlook for U.S. Bonds 2003
N e w York, N Y
enough but not too much" in each auction across the yield curve is theTeatest
9
challenge w e face in managing the government's debt
A year ago I spoke to you about.the challenge we face in managing our marketable
debt on a regular and predictable basis in a changing world. M y message was that
a schedule of regular and predictable auctions has never- and could never- mean
that debt management practices do not change. Our mix of instruments our
borrowing requirements and our maturity structure are always changing.'
Today I will focus on the challenge of issuing "enough but not too much" at each
auction in the face of continuous change in our borrowing requirements. But first
let m e begin at the beginning.
The objective of federal debt management is to meet the government's financing
needs at the lowest cost over time. The dominant constraint w e face is that w e see
the future imperfectly; w e must always make decisions in conditions of uncertainty
about the future path of our financing needs.
Our MO - our modus operandi - is that we issue securities on a regular and
predictable schedule and w e try to limit changes in auction sizes. Investors and
dealers rely upon routine availability of Treasury securities both as a source for
constant duration matching and as a liquid vehicle for financial intermediation. As a
consequence, they tend to pay a slight premium for our newly issued securities. By
capturing this premium, w e lower our borrowing costs.
The regularity and predictability of our auction cycle also supports the liquidity of
our secondary market which, in turn, supports demand for our auctions.
Changes in debt management are regularly and predictably announced at our
quarterly refundings. W e strive to make our actions transparent and
understandable. Ex ante market participants may not be able to predict exactly
what changes w e will make but ex post market participants should be able to
understand our actions in light of our objective (lowest cost over time) and our
constraints (uncertain financing needs).
For all this to work in practice, we need to issue "enough but not too much" at each
auction Neither is a concrete limit. Too little and w e cannot sustain a deep and
liquid secondary market for our securities. Too much and w e create concern
a m o n g primary market participants that they may find it difficult to dis ribute^their
holdings in the secondary market. Matching these market size constraints with our
aggregate borrowing needs is surprisingly difficult.
J^ww.treas.gov/press/releases/js58.htm
3/7/2003
^ 8 : Domestic Finance Peter R. Fisher to the Bloomberg uutlook for U.S. Bonds 2003
Page 2 of 3
inS^ C°,nditi0nS are always chan9'in9 ^e demand for our
instruments so that the apparent optimal auction size at any one maturity point in
any one year, m a y not be the same in another year. Second, our forecasts are less
than perfect so w e must always somehow distribute the deviations from forecasts
across our maturity points. Finally, in adjusting auction sizes over time w e must
m a n a g e both levels and rates of change for each maturity point: w e want to issue
enough but not too much at each point and w e want to limit the rate of change of
auction amounts at each maturity point as well.
So how do we know whether we are issuing "enough but not too much" at each
maturity point? H o w do w e know that w e are doing our best to capture the liquidity
premium at each and at all of our auctions? H o w do w e know whether, in the face
of changing financing needs, w e are adjusting our maturity profile too quickly or too
slowly?
Unfortunately, we don't - or, more precisely, I am not yet satisfied that we do. But
w e are working hard to articulate better measures of our performance.
A clearer, more complete understanding of auction performance, and of the
intersection of primary and secondary market liquidity, will be the most direct
measure of whether w e are offering enough but not too much in each auction. A
fuller picture of our maturity profile, and its changes across time, will provide us a
better gauge of whether w e are adjusting the number, range and size of our
offerings too quickly or too slowly.
At our last quarterly refunding, we released a number of new charts and we
discussed these charts with the Treasury Borrowing Advisory Committee. These
included s o m e unconventional measures of both auction outcomes and our maturity
profile.
For auction performance, I am convinced that we need to look beyond the
traditional measures such as bid-to-cover. Bid-to-cover reflects the primary dealers
commitment to meet their role as counterparties to the Federal Reserve Bank in
addition to the underlying demand for Treasuries. W e need to develop measures
that tell us more about that underlying demand because this ultimately determines
whether w e are meeting our objective of lowest cost financing over time. W e also
need to develop measures that wilt help us better understand the relationship
brtween the primary market and the secondary market. W e need to measure the
range of auction outcomes for each maturity point as they accumulate overtoe,so
t h X e can observe in as many ways as possible the market's assessment of
whether w e are issuing enough but not too much.
The average maturity of our total outstanding debt may be of interest to historians
and^econom^sbut L not a particularly usefulmetric-for 1 ^ t ^ ^ J ^
moves so slowly it's almost inert. Having served as the U n d \ ^ S e ^ ^ ^
be responsible for 2/30ths.)
At the other end of the spectrum, there£ mucf^{^^^stSf"
to the nominal size of each auct.on w e hold relajve,terecentp
^
But this has a different ^™^*££££& in these dollar amounts
each auction size from quarter to qua.iter so n
decisions. what is harder
tends to dominate market;atten,0n d 0 e f n a n a n g ^
^ ^^
^ ^
im ortant
to see, but much more P
''t,\ fnr pr as t financing requirements.
profile in light of our (albeit imperfect) forecast tinancng
A ot thP rpfundinq we introduced the concept of
In one of the charts released at ^™™Zeadh
quarter what that quarter's
"constant issuance maturity" v ^ c h dep.c^for«acn Q
^
jf j(
S
issuance pattern would have P^^ ^c\sJ
of our forecasts, this is not a
been sustained for ten years. Givefi » w imp
issuance pattern ltse|f
realistic hypothesis. But it is interesting to see w n
would have been sustainable.
3/7/2003
%//www.treas.gov/press/releases/js58.htm
^ D o m e s t i c Finance Peter R. Fisher to the Bloomberg Outlook for U.S. Bonds 2003
Page 3 of 3
The surprising result is that this measure of our issuance pattern has been highly
volatile over time, abruptly swinging long and short. This suggests that on a
number of occasions our issuance pattern itself has not been sustainable setting
up the need for subsequent changes and, thus, the series' volatility.
It is entirely to be expected, and appropriate, that variance in revenues (positive or
negative) will first be absorbed by changes in bill issuance. W e auction bills every
week and coupon instruments only monthly and quarterly. But eventually,
decisions must be m a d e to distribute changes in our financing needs across the
curve - consistent with our aim to issue enough but not too much at each of our
different maturities.
In order to assess whether we are adjusting our maturity profile too quickly or too
slowly, w e need a better understanding of the sustainability of our maturity
distribution. A concept like constant issuance maturity may provide just such a
measure.
I am frequently asked why we don't renew issuance of the long-bond in order to
"lock in" these currently "low" rates. W h e n I a m asked this question, I know that I
a m talking to someone w h o does not understand the Treasury's debt management
strategy. I also realize that I must also be talking to someone who has exceptional
confidence in the accuracy of their ten-year forward forecast of ten and thirty year
rates. Does anyone actually think that a small group of Treasury officials is better
than the market at forecasting long term interest rates? Regular and predictable
issuance assures the market that w e will not make the mistake of trying.
So whenever I hear the idea of our "locking in" low, long-term rates I know that it
must be time to give another speech about our pattern of regular and predictable
issuance.
We give up the opportunity to time the market so that we can capture the liquidity
premium in all of our auctions. If w e were to try to time the market w e would
introduce much greater uncertainty to our borrowing pattern, raising the risk
premiun^^at w e would have to pay investors.and losing the liquidity premium w e
now capture as a cost saving.
if thP United States Treasury were actually a market timer we would do great
best to achieve the lowest borrowing costs over time.
„„m hor-nmp npcessarv we will continue to
A s changes in our borrowing pattern become n^es 8 ?'*
ho|d
announce them at our regular a n d H P ; t ^ J ^ l h e e X f e w V w m strive to issue in
our auctions on a regular and predic^le s c h e d u ^ - ™
market but nott00
'
amounts that are enough to sustaintheMjidjy o ou s
y tQ ^ for bet(er
much to eliminate the on-the-run' P / " | e ™ ' m our past actions.
measures of our own performance and to learn rrom
„th nf mntinuous improvement, while we strive to
Setting debt management on a P a ^ ° " i m p l e m e n t a t i o n of changes to our
P?acf^
time.
3/7/2003
l)
ttp://www.treas.gov/press/releases/js58.htm
TREASURY jj|NF. W S
OFKU I OK IH'BI.U' A M M R S . 1500 I'l \Ns\| \V M v V\ l-M i v n „..
>>>i\ W l \ V\kM|., V ^ . U A S J I I M M O N . | M .. 2«>2ll •(2U>| *:2.2¥MJ
EMBARGOED UNTIL 11:00 A.M.
February 25, 2003
CONTACT: Office of Financing
202/691-3550
TREASURY OFFERS CASH MANAGEMENT BILLS
The Treasury will auction approximately $26,000 million of 14-day
Treasury cash management bills to be issued March 3, 2003.
Tenders for Treasury cash management bills to be held on the book-entry
records of TreasuryDirect will not be accepted.
Up to $1,000 million in noncompetitive bids from Foreign and International Monetary Authority (FIMA) accounts bidding through the Federal
Reserve Bank of New York will be included within the offering amount of
the auction. These noncompetitive bids will have a limit of $100 million
per account and will be accepted in the order of smallest to largest, up
to the aggregate award limit of $1,000 million.
The allocation percentage applied to bids at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g.,
17.13%.
This offering of Treasury securities is governed by the terms and conditions set forth in the Uniform Offering Circular for the Sale and Issue of
Marketable Book-Entry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as
amended).
Details about the new security are given in the attached offering
highlights.
oOo
Attachment
/ £ - £1
HIGHLIGHTS OF TREASURY OFFERING
OF 14-DAY CASH MANAGEMENT BILLS
February 25, 2003
nffering Amount
$26,000 million
Maximum Award (35% of Offering Amount! .. $ 9,100 million
Maximum Recognized Bid at a Single Rate . $ 9'100 million
NLP Reporting Threshold
$ 9^100 m i l l i o n
Description of Offering:
Term and type of security
14-day Cash Management Bill
CUSIP number
912795 MX 6
Auction date
February 27, 2003
Issue date
March 3, 2003
Maturity date
March 17, 2003
Original issue date
March 3, 2003
Currently outstanding
Minimum bid amount and multiples . . . $1,000
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest discount
rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids
submitted through the Federal Reserve Banks as agents for FIMA accounts.
Accepted in order of size from smallest to largest with no more than $100
million awarded per account. The total noncompetitive amount awarded to
Federal Reserve Banks as agents for FIMA accounts will not exceed $1,000
million. A single bid that would cause the limit to be exceeded will be
partially accepted in the amount that brings the aggregate award total to
the $1,000 million limit. However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be prorated to
avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in increments
of .005%, e.g., 7.100%, 7.105%.
(2) Net long position (NLP) for each bidder must be reported when the sum of the
total bid amount, at all discount rates, and the net long posxtxon equals or
exceeds the NLP reporting threshold stated above.
(3) Net long position must be determined as of one half-hour prior to the
closing time for receipt of competitive tenders.
Receipt of Tenders:
Noncompetitive tenders:
. .
.
Prior to 12:00 noon eastern standard time on auction day
Competitive tenders:
. .
. ,r
Prior to 1:00 p.m. eastern standard time on auction day
„,,«•»- at- a. Federal Reserve Bank on issue
Payment Terms: By charge to a funds account at a Federal
date.
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE
February 25, 2003
CONTACT
Office of Financing
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
28-Day Bill
February 27, 2003
March 27, 2003
912795ME8
Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:
1.220%
Investment Rate 1/:
1.240%
Price:
99.905
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 12.13%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tendered
Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)
$
SUBTOTAL
Federal Reserve
TOTAL
$
38,907,831
56,209
0
Accepted
$
24,944,096
56,209
0
38,964,040
25,000,305
1,877,687
1,877,687
40,841,727
$
26,877,992
Median rate
1.205%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.150%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 38,964,040 / 25,000,305 = 1.56
1/ Equivalent coupon-issue yield.
http://www.publicdebt.treas.gov
js
JS-61: "Treasury Announces Terrorism Risk Insurance Act Regulation"
F R O M T H E OFFICE O F PUBLIC A F F A I R S
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
February 25, 2003
JS-61
Treasury Department Announces a Regulation Implementing
the Definitions in the Terrorism Risk Insurance Act
The Treasury Department today announced the first round of regulations under the
Terrorism Risk Insurance Act of 2002, which was signed into law by President Bush
on November 26, 2002.
Today's regulation addresses definitions under the Terrorism Risk Insurance Act.
The regulation builds upon previously issued interim guidance that was designed to
assist insurers in determining how they may comply with certain immediately
applicable provisions of the Terrorism Risk Insurance Act prior to the issuance of
regulations by the Treasury. Insurers and other interested parties will have the
opportunity to submit formal comments on the regulation, and the comment period
will last for 30 days from the date of the regulation's publication in the Federal
Register.
"As promised when we issued interim guidance, regulations on the issues
addressed in interim guidance are now being promulgated, and interested parties
will have the opportunity to submit comments on the new regulations," said
Treasury Assistant Secretary W a y n e Abemathy, who oversees the Terrorism Risk
Insurance Program. "We anticipate continuing to benefit from thoughtful input as w e
move forward." This first interim final regulation on the Terrorism Risk Insurance
Act sets forth the key definitions that lay the groundwork for implementation of the
Act. Subsequent regulations will follow in the coming weeks on other issues that
were addressed in interim guidance, such as the disclosure requirements and the
"make available" requirement, and on the treatment of State residual market entities
and State workers' compensation funds.
Today's interim final regulation codifies and provides further clarification of the
definitions in the Terrorism Risk Insurance Act. Key definitions of the Act that are
addressed in the interim final regulation include: act of terrorism; affiliate; control;
insurer; insured loss; property and casualty insurance; and insurer deductible.
While previously issued interim guidance formed the basis for much of the
regulation, important clarifications are m a d e in a number of areas, such as making
it clear that personal insurance is not part of the Program. In addition, the interim
final regulation addresses the definition of control and related issues under the Act.
Determining control under the Act is important as affiliate insurers must be
consolidated with the parent company for purposes of calculating an insurer's
deductible. The control provisions of the regulation strike a balance between the
requirements of the Act, state regulatory authority, and the need to maintain the
integrity of the Program and treat insurers comparably.
Treasury is also soliciting comments in several areas, including comments on how
the Program should treat multiple controlling owners of an insurer and how
Treasury might prevent evasion of insurer deductible and other Program
requirements by certain newly formed insurance companies. This interim final
regulation, previously issued interim guidance notices, and other information related
to the Terrorism Risk Insurance Program can-be found at www.treasury.gov/trip.
Related Documents:
http://www.treas.gov/press/releases/js61.htm
3/7/2003
Billing Code 4810-25-M
DEPARTMENT OF THE TREASURY
Departmental Offices
31 CFR Part 50
RIN 1505-AA96
Terrorism Risk Insurance Program
AGENCY: Departmental Offices, Treasury.
ACTION: Interim final rule with request for comments.
SUMMARY: The Department of the Treasury (Treasury) is issuing this interim final
rule as part of its implementation of Title I of the Terrorism Risk Insurance Act of 2002
(Act). That Act established a temporary Terrorism Risk Insurance Program (Program)
under which the Federal Government will share the risk of insured loss from certified acts
of terrorism with commercial property and casualty insurers until the Program sunsets on
December 31, 2005. This interim final rule sets forth the purpose and scope of the
Program and key definitions that Treasury will use in implementing the Program. In
general, this interim final rule incorporates interim guidance previously issued by
Treasury concerning these definitions. However, the preamble indicates those areas in
which Treasury has modified the interim guidance. This interim final rule is the first of a
series of regulations Treasury will issue to implement the Program.
D A T E S : This interim rule is effective [INSERT D A T E O F P U B L I C A T I O N IN T H E
FEDERAL REGISTER]. Written comments on this interim final rule may be submitted
to the Treasury Department on or before [INSERT DATE THAT IS [30] DAYS AFTER
PUBLICATION IN THE FEDERAL REGISTER].
ADDRESSES: Submit comments (if hard copy, preferably an original and two copies) to
Office of Financial Institutions Policy, Attention: Terrorism Risk Insurance Program
Public Comment Record, Room 3160 Annex, Department of the Treasury, 1500
Pennsylvania Ave., N.W., Washington, DC 20220. Because paper mail in the
Washington, DC area may be subject to delay, it is recommended that comments be
submitted by electronic mail to: triacomments@do.treas.gov. Please include your name,
affiliation, address, e-mail address and telephone number in your comment. All
comments should be captioned with "[INSERT DATE OF PUBLICATION IN THE
FEDERAL REGISTER] TRIA Comments." Comments will be available for public
inspection by appointment only at the Reading Room of the Treasury Library. To make
appointments, call (202) 622-0990 (not a toll-free number).
FOR FURTHER INFORMATION CONTACT: Mario Ugoletti, Deputy Director,
Office of Financial Institutions Policy (202) 622-2730 or Martha Ellett, AttorneyAdvisor, Office of the Assistant General Counsel (Banking & Finance), (202) 622-0480
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
I. Background
A. Terrorism Risk Insurance Act of 2002
2
O n November 26, 2002, President Bush signed into law the Terrorism Risk
Insurance Act of 2002 (Public Law 107-297, 116 Stat. 2322). The Act was effective
immediately. Title I of the Act establishes a temporary federal program of shared public
and private compensation for insured commercial property and casualty losses resulting
from an act of terrorism as defined in the Act and certified by the Secretary of the
Treasury, in concurrence with the Secretary of State and the Attorney General. The Act
authorizes Treasury to administer and implement the Terrorism Risk Insurance Program,
including the issuance of regulations and procedures. The Program will sunset on
December 31, 2005.
The Act's purposes are to address market disruptions, ensure the continued
widespread availability and affordability of commercial property and casualty insurance
for terrorism risk and to allow for a transition period for the private markets to stabilize
and build capacity while preserving State insurance regulation and consumer protections.
The amount of Federal payment for an insured loss resulting from an act of terrorism
is to be determined based upon the insurance company deductibles and excess loss
sharing with the Federal Government, as specified by the Act. Thus, the Program
provides a Federal reinsurance backstop for a temporary period of time. The Act also
provides Treasury with authority to recoup Federal payments made under the Program
through policyholder surcharges, up to a maximum annual limit.
Each entity that meets the definition of "insurer"(well over 2000 firms) must
participate in the Program. From the date of enactment of the Act through the last day of
Program Year 2 (December 31, 2004), insurers under the Program must "make available"
terrorism risk insurance in their commercial property and casualty insurance policies and
3
T o assist insurers, policyholders and other interested parties in complying with
immediately applicable and time sensitive requirements of the Act prior to the issuance of
these and future regulations, Treasury issued interim guidance in three separate notices.
Treasury publicly released these interim guidance notices on its Program website,
www.treasury.go\7trip, and published each notice in the Federal Register.
Treasury released the first notice of Interim Guidance on December 3, 2002, within a
week of the Act's enactment (Interim Guidance I). Interim Guidance I was published at
67 FR 76206 on December 11, 2002 and addressed several issues pertaining to
immediately applicable provisions of the Act, including statutory disclosure obligations
of insurers as conditions for Federal payment under the Program and the requirement that
an insurer "make available" terrorism risk insurance. The disclosure guidance in Interim
Guidance I references certain model forms of the National Association of Insurance
Commissioners (NAIC) and provides safe harbor for those insurers that make use of such
forms prior to the issuance of regulations, but Interim Guidance I stated that these forms
are not the exclusive means by which insurers could comply with the disclosure
conditions prior to the issuance of regulations. Interim Guidance I also provided
guidance concerning the "direct earned premium" on lines of property and casualty
insurance to enable insurers to calculate their "insurer deductible" and enable insurers to
price and disclose their premiums for terrorism risk insurance to policyholders within
statutory time periods.
On December 18, 2002, Treasury issued a second notice of interim guidance. This
interim guidance was published at 67 FR 78864 on December 26, 2002 (Interim
Guidance II). Interim Guidance II further addressed the statutory categories of "insurers"
5
that are required to participate in the Program, including their "affiliates"; provided
clarification on the scope of "insured loss" covered by the Program and provided
additional guidance to enable eligible surplus line carriers listed on the Quarterly Listing
of Alien Insurers of the NAIC or federally approved insurers to calculate their insurer
deductible for purposes of the Program.
On January 22, 2003, Treasury issued a third notice of interim guidance, published at
68 FR 4544 on January 29, 2003 (Interim Guidance III). Interim Guidance III further
clarified certain disclosure and certification questions, issues for non-U.S. insurers, and
the scope of the term "insured loss" under the Act.
In issuing each notice of Interim Guidance, Treasury stated that the Interim Guidance
may be relied upon by insurers until superseded by regulations or a subsequent notice.
Treasury provided safe harbors for actions by those insurers taken in accordance with,
and in reliance on, the interim guidance for the time period prior to the issuance of
regulations. Treasury now is issuing an interim final rule with request for comment. The
interim final rule addresses certain general Program provisions and Program definitions.
Treasury is also issuing a companion proposed rule with request for comment.
II. Analysis of the Interim Final Rule
The interim final rule establishes a new Part 50 in Title 31 of the Code of Federal
Regulations, 31 CFR Part 50. Part 50 eventually will include other regulations deemed
necessary by Treasury to implement the Program. Subpart A of new Part 50 contains
certain general provisions and definitions of Program terms.
Some of the definitions are taken virtually verbatim from the Act because they do
not need further clarification and are included in the interim final regulations primarily
6
for ease of reference. In addition, the interim final rule generally incorporates the interim
guidance provided previously by Treasury as it pertains to Program terms, for example,
the terms "insurer," "affiliate", "property and casualty insurance" and "direct earned
premium." In several areas, the interim final regulation makes clarifying modifications to,
or supplements, the interim guidance. For example, the interim final rule clarifies and
emphasizes that the Program covers only commercial lines of property and casualty
insurance, subject to the inclusions and exclusions of certain lines of insurance as set
forth in the definition of property and casualty insurance in section 102(12) of the Act.
The Program does not cover personal lines of property and casualty insurance, even if the
latter are reported by an insurer on the NAIC's Exhibit of Premiums and Losses
(commonly know as Statutory Page 14).
In implementing the Program, Treasury has been guided by several goals. First,
we strive to implement the Act in a transparent and effective manner that, for example,
treats comparably those insurers required to participate in the Program and that provides
necessary information to policyholders in a useful and efficient manner. Second,
Treasury seeks to rely as much as possible on the State insurance regulatory structure. In
that regard, Treasury is closely coordinating with the NAIC in implementing definitions
and other aspects of the Program. Third, to the extent possible within statutory
constraints, Treasury seeks to allow insurers to participate in the Program in a manner
consistent with their normal course of business. Finally, given the temporary and
transitional nature of the Program, Treasury is guided by the Act's goal for insurers to
develop their own capacity, resources and mechanisms for terrorism risk insurance
coverage when the Program expires.
7
K e y Program definitions contained in the interim final regulation are analyzed
below.
A. What is an "act of terrorism" under the Program?
The Program definition of "act of terrorism" in the interim final rule is the same
definition that is contained in section 102(1) of the Act. Section 106(a)(2) of the Act
provides that the Act's definition is the exclusive definition of the term "act of terrorism"
for purposes of compensation for insured losses under the Act. The Act's definition
requires a certification by the Treasury Secretary, in concurrence with the Secretary of
State and the Attorney General of the United States, that an act is an act of terrorism
within the statutory parameters. These parameters include an act that is violent or
dangerous to human life, property or infrastructure; that has resulted in damage within the
United States, or outside the United States in the case of certain air carriers or vessels or
if on the premises of a U.S. mission; and that has been committed by individual(s) on
behalf of any foreign person or foreign interest, as part of an effort to coerce the U.S.
civilian population or to influence the policy or affect the conduct of the U.S. government
by coercion.
Thus, for example, acts of domestic civil disturbance would not be covered by the
Act's definition of "act of terrorism" or therefore, by the Program. As in the Act, the
interim final rule provides that the Secretary's determination or certification with regard
to an act is final and is not subject to judicial review. An act of terrorism must meet a
$5,000,000 de minimis aggregate loss requirement before it may be certified. The Act
also provides that an act is not certifiable if committed as part of a course of war declared
by Congress, except with respect to workers compensation coverage.
8
B. W h a t Entities M u s t Participate in the P r o g r a m ("Affiliate9', "Control",
Insurer")?
1. Mandatory participation of insurers
The general provisions of the interim final rule incorporate the Act's requirement
in section 103(a)(3) that each entity meeting the definition of "insurer" under the Act
must participate in the Program.
2. "Insurer"
The interim final rule incorporates the statutory definition of "insurer" and
generally incorporates the guidance set forth in Interim Guidance II concerning the
categories of insurer and the definition of affiliate. To participate in the Program, an
entity, including an affiliate of an insurer, must itself meet all of the requirements of
section 102(6)(A),(B) and, as the Treasury may prescribe, (C). This means that to be an
insurer, an entity must 1) fall within one of the categories in section 102(6)(A) described
below, and 2) must receive direct earned premiums as required by section 102(6)(B) and
3) must meet any additional criteria established by Treasury pur suant to section
102(6)(C).
a. Must Fall Within a Category of Insurers in Section 102(6)(A)
First, an insurer must fall within at least one of the following several categories
set forth in section 102(6)(A):
(i) Licensed or admitted to engage in the business of providing primary or excess
insurance in any State ("State" includes the District of Columbia and
territories of the United States);
9
(ii)
Not so licensed or admitted, but is an eligible surplus line carrier listed on the
Quarterly Listing of Alien Insurers of the National Association of Insurance
Commissioners;
(iii) Approved for the purpose of offering property and casualty insurance by a
Federal agency in connection with maritime, energy or aviation activity; or
(iv) A State residual market insurance entity or State workers' compensation fund.
Consistent with Interim Guidance II, the interim final rule provides that an entity
that falls within two categories will be considered by Treasury to fall within the first
category it meets under section 102(6)(A)(i)-(v). Therefore, if an entity is a federally
approved insurer under section 102(6)(A)(iii) and is licensed or admitted in any State, it
will be treated under the Program as a State licensed or admitted insurer under section
102(6)(A)(i).
In each of the categories of insurer in section 102(6)(A)(i)-(iv), the insurer has a
pre-existing State or NAIC regulatory framework, or has a relationship with a Federal or
State program. In developing this interim final rule, Treasury considers such a nexus
between an insurer and a Federal or State program or regulatory authority to be extremely
important to the effective and efficient administration of the Program. A pre-existing
nexus between an insurer and a regulatory structure, for example, assists Treasury in
ensuring the financial integrity of participating entities, in obtaining necessary data to
implement and evaluate the Program and in carrying out Treasury's surcharge and
recoupment, audit and enforcement responsibilities under the Act. Treasury's emphasis
on such a nexus is also in accord with the temporary nature of the Program and other
aspects of the Program's statutory structure.
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"State Licensed or Admitted"
Insurers under clause (i) of section 102 (6)(A) include all entities that are licensed
or admitted by a State's insurance regulatory authority. This group of insurers includes
captive insurers, risk retention groups, and farm and county mutuals, if such entities are
State licensed or admitted. The Program treats all State licensed or approved insurers
consistently in accord with the plain language of section 102(6)(A)(i). This treatment also
furthers other statutory objectives such as ensuring that policyholders have widespread
access to the terrorism risk insurance benefits of Program, and spreading potential costs
of the Program associated with any federal loss-sharing payments. (For example, see the
cost spreading provisions in connection with recoupment as required by section 103(e)(7)
and in connection with surcharges as required by section 103(e)(8) to be applied to all
commercial property and casualty policyholders).
Other Categories of Insurers
The NAIC has established criteria for approval of eligible surplus line carriers for
listing on the NAIC's Quarterly Listing of Alien Insurers. Federally approved insurers
under section 102(6)(A)(iii) are addressed in detail below. Treasury intends to issue
additional regulations to apply the provisions of the Act to insurers in clause (iv) of State
residual market insurance entities and State workers' compensation funds pursuant to
section 103(d)
As described above, all State licensed or admitted captive insurers are insurers
within the Program under section 102(6)(A)(i). Treasury may, in consultation with the
NAIC or the appropriate State regulatory authority, apply the provisions of the Act to
"other classes or types of captive insurers and other self insurance arrangements"
11
pursuant to section 103(f) of the Act, but only if such an application is determined before
the occurrence of an act of terrorism and all of the provisions of the Act are applied
comparably to such entities. Treasury has engaged in consultations, but has not yet made
a decision regarding the participation in the Program of captives and other self insurance
arrangements that do not fall into other categories in clauses (i)-(iv).
b. Must Receive Direct Earned Premiums As Required by Section 102(6)(B)
The second criteria an entity must meet to be an insurer for purposes of the
Program is prescribed by section 102(6)(B). In addition to falling within a category in
section 102(6)(A), to be an "insurer" under the Act, an entity must receive "direct earned
premiums" (as defined) on any type of commercial property and casualty insurance (as
defined). The key aspect of this requirement in the statutory definition of insurer is the
Act's specification of a direct measure of premium income as opposed, for example, to a
net measure of premium income which accounts for reinsurance. Although the legislative
history and design of the Act envision reinsurance arrangements as an important
component of capacity within the insurance market, the Act excludes reinsurance from
the Program. (Section 103(g) of the Act provides that the Act does not limit or prevent
"insurers" from obtaining reinsurance coverage for "insurer deductibles" or "insured
losses" retained by insurers.) Therefore, consistent with the Act and Treasury's Interim
Guidance II, the interim final rule provides that, if an entity does not receive direct earned
premiums as required by section 102(6)(B), and subject to statutory exceptions, then the
entity is not an "insurer" under the Act. In that regard, Section 102(6)(B) excepts State
residual market insurance entities from the direct earned premium requirement.
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c. Must Meet Additional Criteria Prescribed by Treasury Under Section
102(6)(C)
In addition to the requirements of Section 102(6)(A) and (B) described above,
Section 102(6)(C) of the Act requires that an insurer also meet "any other criteria that the
Secretary of the Treasury may reasonably prescribe." The interim final rule does not
prescribe additional criteria under section 106 (C). Published elsewhere in this separate
part of the Federal Register is a notice of proposed rulemaking in which Treasury solicits
public comment on whether the Secretary should prescribe other criteria for certain
insurers pursuant to the authority provided by section 102(6)(C) and, if so, what criteria
Treasury should prescribe. In this regard, in the notice of proposed rulemaking Treasury
solicits comment on appropriate criteria to prevent participation in the Program by newly
formed insurance companies deemed by Treasury to be established for the purpose of
evading the insurer deductible requirements of the Act and the Program. As stated in the
notice of proposed rulemaking, Treasury's objectives are to encourage new sources of
capital in the market for terrorism risk insurance, and at the same time, ensure the
integrity of the Program and provide comparable treatment of Program participants.
Accordingly, the intent of any additional criteria, if proposed, is not to discourage
Program participation by newly formed commercial property and casualty insurance
companies in their normal course of business, but to administer the Program effectively
and fairly, including preventing evasion of insurer deductible requirements by special
purpose entities formed to provide terrorism risk only coverage.
Also in the notice of proposed rulemaking published elsewhere in this separate
part of the Federal Register, Treasury is solicits comment on appropriate additional
13
criteria, including financial standards, that should be proposed for federally approved
insurers under Treasury's authority in section 102(6)(C). One reason for imposing
additional criteria on federally approved insurers is because there are no uniform
requirements or standards for federal approval under various federal programs. Although
some federal programs impose minimum financial standards, others do not. Therefore,
Treasury is considering whether additional criteria for federally approved insurers should
be proposed to promote the financial integrity of the Program and to otherwise effectively
administer the Program. In addition, in the notice of proposed rulemaking published
elsewhere in this separate part of the Federal Register, Treasury solicits comment on
criteria that Treasury should propose and prescribe under section 102(6)(C) to ensure that
payments under the Program do not benefit entities with connections to terrorist
organizations.
d. "Federally Approved" Insurer
If an entity does not fall within section 102(6)(A)(i) or (ii), but is approved or
accepted by a Federal agency to offer property and casualty insurance in connection with
maritime, energy or aviation activities; receives direct earned premiums for any type of
commercial property and casualty insurance as required by 102(6)(B), and, if prescribed,
meets any criteria established by Treasury under 102(6)(C), then, such an entity is
considered by Treasury to be a federally approved "insurer" under section 102(6)(A)(iii).
As reflected in Interim Guidance II, this interim final rule provides that the scope
of insurance coverage (insured losses) under the Program for federally approved insurers
under section 102(6)(A)(iii) is only to the extent of federal approval of the commercial
property and casualty insurance coverage approved by the Federal Agency in connection
14
with maritime, energy or aviation activity. Insured losses under other insurance coverage
that may be offered by a federally approved insurer under section 102(6)(A)(iii) is not
covered by the Program. This treatment of federally approved insurers is in accord with
the statutory language of the Act in section 102(6)(A)(iii) ("approved for the purpose of
offering property and casualty insurance by a Federal agency in connection with
maritime, energy or aviation activity"). This treatment is also in accord with Treasury's
consideration of a pre-existing nexus (for example, the nexus of State- licensing or NAIC
approval for listing on the Quarterly Listing of Alien Insurers) as very important to the
effective and efficient administration of the Program. This nexus is considered by
Treasury to be an important aid in ensuring financial integrity of participants in the
Program, in obtaining data, and in connection with recoupment, audit and enforcement
responsibilities, among others. In addition, this treatment is consistent with the
temporary nature and other statutory structure of the Program. Treasury recognizes that it
is possible to interpret section 102(6)(A)(iii) more broadly, but for reasons stated above
has determined that the narrower reading is not only in accord with the statutory language
but serves other important purposes in the administration of the Program.
Examples of federally approved insurers under section 102(6)(A)(iii) are those
insurers that do not fall within section 102(6)(A)(i) or (ii), and are approved or accepted
by a Federal agency under the following federal programs and statutes:
• Approval of Underwriters for Marine Hull Insurance (Maritime Administration,
U.S. Department of Transportation)
• Aircraft Accident Liability Insurance (U.S. Department of Transportation)
• Oil Spill Financial Responsibility for Offshore Facilities (Minerals Management
15
Service, U.S. Department of the Interior
• Oil Spill Financial Responsibility for Vessels (United States Coast Guard, U.S.
Department of Transportation)
• Longshoremen's and Harbor Workers' Compensation Act (Employment
Standards Administration, U.S. Department of Labor)
• Price Anderson Act (Nuclear Regulatory Commission, U.S. Department of
Energy)
The above list of Federal insurance programs contains an addition to the list
contained in Interim Guidance II through the express inclusion of insurers approved or
accepted under the Price Anderson Act. This list is provided as a starting reference point
and is not exclusive. Any entity that is approved or accepted by a U.S. agency to offer
commercial property and casualty insurance in connection with maritime, energy or
aviation activities by a program that is not listed above is particularly encouraged to
advise the designated Treasury contacts provided by this rule with the name of the
program and the name of the Federal agency that approved or accepted them.
Treasury is not prescribing additional criteria under section 102(6)(C) in the
interim final rule for federally approved insurers, but solicits comments elsewhere in this
separate part of the Federal Register on whether and what additional criteria should be
prescribed for federally approved insurer.
3. "Affiliates"
The definition of "insurer" in section 102(6) includes "any affiliate thereof."
Section 102(2) of the Act defines "affiliate" to mean "with respect to any insurer, any
entity that controls, is controlled by or is under common control with the
16
insurer"(emphasis supplied). A n y affiliate that does not meet the definition of insurer,
for example, it does not fall into any of the categories in section 102(6)(A) or does not
receive direct earned premiums for commercial property and casualty insurance as
required by section 102(6)(B), is not an "insurer" for purposes of the Program. Consistent
with Interim Guidance II, and the definition of "control" discussed below, Treasury will
treat the parent company, and all affiliates that meet the requirements of "insurer" in
section 102(6)(A), (B) and (C), collectively as one "insurer" for purposes of calculating
the direct earned premiums on which the insurer deductible is based under the Program.
This consolidated treatment is also in accord with the Conference Report to accompany
the Act, which states, in the explanation of section 102 of the Act, that "the terms
'affiliate' and 'control' are meant to ensure that affiliated insurers are treated as a
consolidated entity for calculating direct earned premiums." H.R. Conf. Rep. No. 107779 (2002).
For example, if an insurance company is licensed or admitted to engage in the
business of providing primary or excess insurance in a State and receives direct earned
premiums as required in section 102(6)(B), and three out of four of its affiliate insurance
companies also are State licensed and meet the requirements of section 102(6)(B)and (C),
then the parent company and the three affiliates that meet the definition of "insurer" are,
collectively, one insurer for purposes of calculating and consolidating direct earned
premiums and calculating insurer deductibles under the Program. The affiliate that does
not fall within one of the categories in section 102(6)(A) or fails to meet all the
requirements to be an "insurer" under section 102(6) is not included in the Program.
17
A s discussed previously in Interim Guidance II, if an entity is "under c o m m o n
control with the insurer," and that entity meets the requirements to be an "insurer" in
section 102(6)(A)-(C), Treasury will consider that entity collectively with the other
insurer (its affiliate) as one "insurer" for the Program purposes of consolidating direct
earned premiums and calculating the insurer deductible. For example, assume that two
insurance companies are licensed to engage in the business of providing primary or
excess insurance in any State (either in one State or in separate States) and both receive
direct earned premiums as required by section 102(6)(B). Each company, would meet
the definition of "insurer." Assume additionally that the common parent of the two
companies does not fall into any of the categories in section 102(6)(A). Treasury will
consider the two affiliated companies to be, collectively, one insurer for purposes of
calculating and consolidating direct earned premiums and their insurer deductible under
the Program, but their parent company is not an insurer and not included in the Program.
4. "Control"
Related to the definition of insurer and affiliate is the definition of "control" in
Section 102(3)(A)-(C) of the Act. The definition and determination of "control" for
purposes of the Program is used by Treasury to calculate the insurer deductible on a
consolidated basis for an insurer "including any affiliate thereof'(see discussion of
affiliate above). Under the Act, an entity is in control of another entity if the statutory
definition is met under section 102(3)(A) or (B), or if Treasury makes a determination
under (C) that the entity directly or indirectly exercises a controlling influence over the
management or policies of the other entity. Each category of control for purposes of the
Program is described below with examples.
18
a. "Owns, Controls or has the Power to Vote" 25 Percent of Voting Securities
Section 102(3)(A) provides that an entity has "control" over another if the entity
directly or indirectly or acting through 1 or more other persons owns, controls or has
power to vote, 25 percent or more of any class of voting securities of the other entity. For
example, if Insurer X owns, or has the power to vote, 25 percent or more of any class of
voting securities of Insurer Y, then Insurer X is in control of Insurer Y under section
102(3)(A). This control relationship means, among other things, that Treasury will
consolidate the direct earned premiums of these two insurers under Insurer X for
purposes of calculating the insurer deductible and evaluating a claim for federal payment.
Published elsewhere in this separate part of the Federal Register is a notice of
proposed rulemaking in which Treasury solicits comments on whether the definition of
control contained in the interim final rule should be supplemented by proposing a rule to
address situations in which a corporate insurance structure may contain multiple insurers
that own, control or have the power to vote more than 25 percent of the voting shares of
another insurer. Based on available information, such control arrangements exist but they
do not appear to be common. In particular, Treasury is considering consolidating direct
earned premiums for purposes of calculating the insurer deductible on a pro rata basis
among the multiple controlling owners. For example, if Insurer Y owns 40 percent of the
voting shares of Insurer Z and Insurer X owns 30 percent of the voting shares of Insurer
Z, then a pro rata allocation of premium income and insured loss under the Program
would be, respectively, 57 percent and 43 percent.
b. Controls Election of Majority of Directors or Trustees
19
Pursuant to section 102(3)(B), an entity also is in control over another entity for
purposes of the Program if the entity controls in any manner the election of a majority of
the directors or trustees of the other entity. For example, even if Insurer A does not own
or have the power to vote 25 percent or more of any class of voting securities of Insurer
B, if Insurer A controls in any manner the election of a majority of the directors or
trustees of Insurer B, then Insurer A "controls" Insurer B under the Act. This means that,
for purposes of the Program, Treasury will consolidate the direct earned premiums of
these two insurers under Insurer A in calculating the insurer deductible and evaluating a
claim for federal payment.
c. Control Determination by Treasury under Section 102(3)(C)
If no control relationship exists on the basis of either section 102(3)(A) or (B),
Treasury has authority, under section 102(3)(C), to determine, after notice and
opportunity for hearing, that an insurer directly or indirectly exercises a controlling
influence over the management or policies of another insurer. To provide further
guidance for purposes of a control determination under this subsection (C), the interim
final rule establishes several rebuttable presumptions. The first rebuttal presumption
under section 102(3)(C) is that an entity is in control of another entity for purposes of the
Program (including consolidation of direct earned premiums in calculating the insurer
deductible) if a State has determined that a control relationship exists between the two
entities. If a State has made such a control determination with regard to two insurers, and
the affected insurers wish to rebut the presumption established in this interim final rule,
then the insurers may request an informal hearing (e.g. exchange of documents) in which
they will be given an opportunity by Treasury to present and support their position that
20
no control relationship exists, prior to afinaldetermination by Treasury.
The second rebuttable presumption Treasury is establishing is that an insurer
exercises directly or indirectly a controlling influence over the management or policies of
another insurer under section 102(3)(C) if 25 percent or more of capital of a stock insurer,
policyholder surplus of a mutual insurer, or corporate capital of other entities qualifying
as insurers is provided by another insurer, even in the absence of voting shares or of
control of the election of a majority of the directors or trustees of the other insurer. The
third rebuttable presumption is that an insurer exercises directly or indirectly a controlling
influence over the management or policies of a syndicate insurer if, at any time during the
Program Year, the insurer supplies 25 percent or more of the underwriting capacity for
that year to the other insurer that is a syndicate consisting of a group including
incorporated and individual unincorporated underwriters.
If the affected insurers wish to rebut the presumptions described above and
established by this interim final rule, then such insurers may request a hearing in which
they will be given an opportunity to rebut the presumption of control by presenting and
supporting their position through written submissions to Treasury and, in Treasury's
discretion, through informal oral presentation.
21
Published elsewhere in this separate part of the Federal Register is a notice of
proposed rulemaking in which Treasury solicits comment on a pro rata allocation
method for control determinations under section 102(3)(C) of the Act, similar to the pro
rata method under consideration for controlling insurers under section 102(3)(A), in
situations in which multiple insurers each provide 25 percent or more of the capital of a
stock insurer, policyholder surplus of a mutual insurer or corporate capital of other
entities that meet the definition of insurer under the Act and in the interim final rule. The
pro rata approach under consideration by Treasury would treat each insurer on a
standalone basis for Program purposes such as calculation of direct earned premiums and
the insurer deductible if no insurer provides 25 percent or more of the capital of a stock
insurer, policyholder surplus of a mutual insurer or corporate capital of other entities that
meet the definition of insurer under the Act and the Program.
At a later date, Treasury will be issuing claims procedures. In accordance with the
consolidated treatment of direct earned premiums among insurer affiliates, Treasury
anticipates that the controlling insurer will be the insurer that will be required to file any
claim with Treasury for federal payment under the Program and that this insurer will
receive the federal payment that is to be distributed within the consolidated insurer group
in accordance with distribution of risk within the consolidated insurer group. Elsewhere
in this separate part of the Federal Register, Treasury solicits comments on various means
to ensure the prompt distribution of the federal payment as appropriate to ensure that the
purposes of the Program are not thwarted or evaded, and that the ultimate risk bearing
entities are treated in an equitable manner, within the Act's requirements.
C. What is the scope of insurance coverage under the Program? ("insured loss",
22
"property and casualty insurance", "direct earned p r e m i u m " and insurer
deductible")
1. "Insured Loss"
The definition of "insured loss" in the interim final rule incorporates the statutory
definition in section 102(5) supplemented by the guidance concerning scope of the term
"insured loss" that is contained in Interim Guidance II and Interim Guidance III. Section
102(5) of the Act defines insured loss to mean any loss resulting from a certified "act of
terrorism" covered by primary or excess "property and casualty insurance," that is issued
by an "insurer," if such loss:
• "occurs within the United States," or
• occurs to an "air carrier"; a U.S. flag vessel or a vessel "based principally
in the United States on which United States income tax is paid and whose
insurance coverage is subject to regulation in the United States,
regardless of where the loss occurs," or
• occurs "at the premises of any United States mission."
In general, if the property and casualty insurance coverage is provided within the
geographic and other statutory parameters of the definition of "insured loss" in the Act as
described above, and is provided by an "insurer" as defined in section 102(6) of the Act
(whether or not the insurer is non-U. S. based or owned), then such losses will be covered
by the Program, subject to the conditions for payment and other requirements of the Act.
However, if insurance coverage is provided by an entity that is not an "insurer" under the
Act, then, even if a loss occurs within the United States, or otherwise meets the
definitional parameters of "insured loss," e.g. occurs to an air carrier or vessel or mission
23
as defined in the Act, the loss would not be covered by the Program. In addition, if
insurance is provided by a U.S. insurer, but the loss does not fall within the definition of
"insured loss," for example, it occurs on foreign soil and not to a U.S. mission or covered
air carrier or vessel, then the loss would not be covered by the Program. Section
102(5)(A) provides that "insured losses" means any loss resulting from a certified act of
terrorism and covered by primary or excess property and casualty insurance issued by an
insurer if such loss occurs within the United States.
As described in Interim Guidance III, insured losses under section 102(5)(B) are
only those losses that are incurred by covered air carriers or vessels, if the insured loss
occurs beyond the geographic boundaries of the United States as described in Section
102(5)(A). Losses that are incurred by covered air carriers or vessels would include
losses covered by insurance coverage provided to those entities (for example, property
insurance coverage and liability coverage). Not included under section 102(5)(B) are
losses that are not incurred by covered air carriers or vessels, such as losses covered by
third party insurance contracts that are separate from the insurance coverage provided to
covered air carriers or vessels.
2. "Property and casualty insurance"
Section 102(12) of the Act defines "property and casualty insurance" to mean
commercial lines of property and casualty insurance. The statutory definition expressly
includes "excess insurance, workers compensation insurance and surety insurance." In
addition, the Act specifically excludes (i) federal crop insurance issued or reinsured under
the Federal Crop Insurance Act or any other type of crop or livestock insurance that is
privately issued or reinsured; (ii) private mortgage insurance as defined in the
24
H o m e o w n e r s Protection Act of 1998 or title insurance; (iii) financial guaranty insurance
issued by monoline financial guaranty insurance corporations; (iv) insurance for medical
malpractice; (v) health or life insurance including group life insurance; (vi) flood
insurance provided under the National Flood Insurance Act of 1968; and (vii) reinsurance
or retrocessional reinsurance.
Insurance is generally regulated by State law in the United States. There is no
uniform or consistent definition of "commercial property and casualty insurance" among
the States. In some States, a line of insurance may be considered commercial and in other
States the same line of insurance is considered personal. However, as Program
administrator, Treasury must designate types or lines of commercial property and
casualty insurance on which direct earned premiums and insurer deductibles are to be
calculated and for which federal payments will be made for "insured losses" under the
Program. Direct earned premiums received by insurers for commercial property and
casualty insurance under the Program are the basis for the Program's statutory
reinsurance structure, for other terms and for federal payments. In developing a
definition of property and casualty insurance for purposes of administrating and
implementing the Program, Treasury considered the statutory definition, the Program
structure, and effective administration of the Program. In this regard, Treasury also
consulted with the NAIC and others regarding State law and premium reports filed with
the NAIC.
The interim final rule defines the scope of commercial property and casualty
insurance for purposes of the Program to include commercial property and casualty
insurance, including those lines of insurance expressly included in section 102(12) of the
25
Act and excluding those lines of insurance expressly excluded by the same statutory
definition. Treasury's interim final rule incorporates the suggested guidance in Interim
Guidance I that commercial lines within the following lines of insurance coverage that
are reported on the NAIC Annual Statement of the Exhibit of Premiums and Losses—
commonly known as Statutory Page 14 are included in the Program: Line 1—Fire; Line
2.1—Allied Lines; Line 3—Farmowners Multiple Peril; Line 5.1—Commercial Multiple
Peril (non-liability portion); Line 5.2—Commercial Multiple Peril (liability portion);
Line 8—Ocean Marine; Line 9—Inland Marine; Line 16—Workers' Compensation; Line
17—Other Liability; Line 18—Products Liability; Line 19.3—Commercial Auto NoFault (personal injury protection); Line 19.4—Other Commercial Auto Liability; Line
21.2—Commercial Auto Physical Damage; Line 22—Aircraft (all perils); Line 24—
Surety; Line 26—Burglary and Theft; and Line 27—Boiler and Machinery.
The interim final rule also clarifies that premium information on such lines of
Statutory Page 14 should only be included in calculating an insurer's direct earned
premium and insurer deductible to the extent that coverage is provided for commercial
property and casualty exposures. In other words, personal insurance that is reported on
the specified covered lines of Statutory Page 14 should be excluded from an insurer's
calculation of its direct earned premium and insurer deductible. In making that
determination for purposes of the Program, insurers may consider insurance coverage
primarily designed to cover personal, family or household purposes to be personal
insurance and, therefore, not covered by the Program. Personal insurance policies that
include incidental coverage for commercial purposes would be considered to be primarily
personal policies. For purposes of the Program, as reflected in this interim final rule,
26
Treasury considers incidental commercial coverage to exist where less than 25 percent of
total premium is attributable to commercial coverage.
In contrast, commercial property and casualty insurance generally is designed to
cover the commercial interests of business, civic, not-for-profit or governmental entities,
or other similar individuals, organizations, or professional practices. In cases where an
insurance policy covers both commercial and personal exposures, and is not primarily a
personal policy, insurers should allocate the proportion of risk between commercial and
personal components in determining what portion of the policy falls under the Program.
In suggesting this allocation, Treasury is not establishing a new reporting requirement at
this time, but is suggesting a method by which insurers may calculate their deductibles
and for Treasury to verify any claims under the Program.
Insurers that do not report premiums to the NAIC on Statutory Page 14 may use the
guidance provided above as an analogy or reference point in determining whether and
what lines of their commercial property and casualty insurance are included in the
Program and in calculating their direct earned premium and insurer deductible. In this
regard, as discussed earlier, the insurance coverage of federally approved insurers within
the Program covers only those lines for which the insurer has received federal approval.
3. "Direct earned premium"
Section 102(4) of the Act defines direct earned premium as a "direct earned premium
for property and casualty insurance issued by any insurer for insurance against" insured
losses as defined in section 102(5). As discussed below, the term "insurer deductible" is
based on direct earned premiums received by insurers during specified time periods.
Interim Guidance I and II, provided guidance to concerning the term "direct earned
27
premium" in relation to the terms "insurer deductible", "insured loss" and "property and
casualty insurance". The interim final rule reflects this previous guidance but contains
further clarifications and supplementary guidance. For insurers that report premiums to
the NAIC on Statutory Page 14, "direct earned premium" is the information reported on
column 2 for the lines of commercial property and casualty insurance referenced above,
with the specified adjustments to remove personal insurance coverage. This
interpretation of direct earned premium information is consistent with scope of "insured
loss" as defined in the Act and will be used by Treasury to calculate the insurer
deductible for these insurers.
Other insurers that are required to participate in the Program but that do not report on
Statutory Page 14 may use the discussion above with reference to Statutory Page 14 as an
analogy in developing a comparable means by which they may calculate their direct
earned premiums. Treasury will use similar premium information (compiled by these
entities or their State regulators) to calculate an insurer's deductible. For county or town
mutual insurers that do not report to the NAIC, for purposes of calculating direct earned
premium, data that is reported to their State regulator or maintained by the insurer should
be adjusted to: (1) reflect an appropriate breakdown between commercial and personal
risks as outlined above; and (2) if necessary, re-stated to reflect the accrual method of
determining direct earned premium versus direct premium. In addition, such entities
should also consider other types of payments that compensate an insurer for the risk of
loss (for example, assessments, contributions, or other similar concepts) as being
equivalent to premium income for purposes of the Program.
28
Eligible surplus line carrier insurers m a y determine the scope of insurance coverage
and their insurer deductible under the Program for policies that are in-force as of the date
of enactment or that are entered into prior to January 1, 2003, with reference to the
geographic scope in the definition of "insured loss," and with reference to the covered
commercial property and casualty lines of insurance described above. For policies issued
by eligible surplus line carriers after January 1, 2003, as stated in Interim Guidance II, the
premium for insurance coverage within the geographic scope of "insured loss" must be
priced separately by eligible surplus line carrier insurers.
In calculating the appropriate measure of direct earned premium to determine the
deductible for Program Year 1, eligible surplus line carriers may use and rely on the same
allocation methodologies contained within the NAIC's "Allocation of Surplus Lines and
Independently Procured Insurance Premium Tax on Multi-State Risks Model Regulation"
for allocating premium between coverage within the geographic scope of "insured loss"
and all other coverage to estimate the appropriate percentage of premium income for such
policies that applies to such risks.
Similarly, consistent with the scope of insurance coverage under the Program and
other limitations that apply to federally approved insurers, such insurers should a use
methodology similar to that used by eligible surplus line carriers in calculating the
appropriate measure of their direct earned premium.
4. "Insurer Deductible"
The Act defines an "Insurer Deductible" in Section 102(7) for the various "Program
Years" and other periods covered by the Program. For example, Section 102(7)(B)
defines the insurer deductible for Program Year 1 (January 1, 2003 through December
29
31, 2003) as "the value of an insurer's direct earned premiums over the calendar year
immediately preceding Program Year 1 multiplied by 7 percent". A State licensed or
admitted insurer may estimate its insurer deductible by multiplying the applicable
percentage (listed in the Act for each of the Program Years) by the direct earned premium
information for commercial lines of property and casualty insurance reported on
Statutory Page 14 with the appropriate adjustments as described above. Other entities
should follow a similar methodology based the definitions of "insured loss," "property
and casualty insurance," and "direct earned premium."
Section 102(7)(E) provides Treasury with authority to determine the appropriate
methodology for measuring the direct earned premium if an insurer has not had a full
year of operations during the calendar year immediately preceding the Program Year.
Because new companies have only had limited business operations, it is likely that
their premium income will be somewhat volatile. Such volatility could persist
throughout the life of the three-year Program. Thus, to treat these newly formed insurers
in a manner that is consistent with other insurers under the Program and to prevent newly
formed insurers from having the unfair advantage of lower relative deductibles, this
interim final rule specifies that the deductible measure for new companies formed after
the date of enactment (November 26) will be based on contemporaneous data for direct
earned premium that corresponds to the current Program Year. If a newly formed insurer
does not have a full year of operations within a particular Program year, this interim final
rule provides that an insurer's direct earned premium for Program year will be annualized
to determine an insurer's deductible.
III. Procedural Requirements
30
The Act established a Program to provide for loss sharing payments by the Federal
Government for insured losses resulting from certified acts of terrorism. The Act became
effective immediately upon the date of enactment (November 26, 2002). Preemptions of
terrorism risk exclusions in policies, mandatory participation provisions, disclosure and
other requirements and conditions for federal payment contained in the Act applied
immediately to those entities that come within the Act's definition of "insurer." In the
near term, Treasury will be issuing additional regulations to implement the Program.
This interim final regulation provides critical information concerning the definitions of
Program terms that lays the groundwork for Treasury's implementation of the Program.
No one can predict if, or when, an act of terrorism may occur. There is an urgent need
for Treasury, as Program administrator, to lay the groundwork for Program
implementation through interim final regulations to provide clarity and certainty
concerning which entities are required to participate in the Program; the scope and
conditions of Program coverage; and other implementation issues that immediately affect
insurers, their policyholders, State regulators and other interested parties. This includes
the need to supplement, or modify as necessary, previously issued interim guidance.
Accordingly, pursuant to 5 U.S.C. 553(b)(B), Treasury has determined that it would
be contrary to the public interest to delay the publication of this rule in final form during
the pendency of an opportunity for public comment. For the same reasons, pursuant to 5
U.S.C. 553(d)(3), Treasury has determined that there is good cause for the interim final
rule to become effective immediately upon publication. While this regulation is effective
immediately upon publication, Treasury is seeking public comment on the regulation and
will consider all comments in developing a final rule.
31
This interimfinalrule is a significant regulatory action and has been reviewed by
the Office of Management and Budget under the terms of Executive Order 12866.
Because no notice of proposed rulemaking is required, the provisions of the
Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply. However, the Act and the
Program are intended to provide benefits to the U. S. economy and all businesses,
including small businesses, by providing a federal reinsurance backstop to commercial
property and casualty policyholders and spreading the risk of insured loss resulting from
an act of terrorism.
List of Subjects in 31 CFR Part 50
Terrorism risk insurance.
Authority and Issuance
For the reasons set forth above, 31 CFR Subtitle A is amended by adding
Part 50 to read as follows:
PART 50 - TERRORISM RISK INSURANCE PROGRAM
Subpart A—General Provisions
Sec.
50.1 Authority, purpose and scope.
50.4 Mandatory participation in Program.
50.5 Definitions.
50.6 Rules of construction for dates.
50.7 Special rules for Interim Guidance safe harbors.
Subpart B - Disclosures as Conditions for Federal Payment [Reserved]
32
Subpart C—Mandatory Availability [Reserved]
Subpart D—State Residual Market insurance Entities; Workers' Compensation Funds
[Reserved]
Subpart E - Self-Insurance Arrangements; Captives [Reserved]
Subpart F - Claims Procedures [Reserved]
Subpart G - Audit, Investigative and Civil Money Penalty Procedures [Reserved]
Subpart H - Recoupment and Surcharge Procedures [Reserved]
Authority: 5 U.S.C. 301; 31 U.S.C. 321; Title I, Pub. L. 107-297, 116 Stat. 2322 (15
U.S.C 6701 note).
Subpart A - General Provisions
§ 50.1 Authority, purpose and scope.
(a) Authority. This Part is issued pursuant to authority in Title I of the Terrorism
Risk Insurance Act of 2002, Pub. L. 107-297, 116 Stat. 2322.
(b) Purpose. This Part contains rules prescribed by the Department of the
Treasury to implement and administer the Terrorism Risk Insurance Program.
(c) Scope. This Part applies to insurers subject to the Act and their policyholders.
§ 50.4 Mandatory participation in Program.
Any entity that meets the definition of an insurer under the Act is required to
participate in the Program.
§ 50.5 Definitions.
For purposes of this Part:
(a) Act means the Terrorism Risk Insurance Act of 2002.
(b) Act of terrorism (1) In general. The term act of terrorism means any act that
33
is certified by the Secretary, in concurrence with the Secretary of State and the Attorney
General of the United States:
(i) To be an act of terrorism;
(ii) To be a violent act or an act that is dangerous to human life, property, or
infrastructure;
(iii) To have resulted in damage within the United States, or outside of the United
States in the case of:
(A) An air carrier (as defined in 49 U.S.C. 40102) or a United States flag vessel
(or a vessel based principally in the United States, on which United States income tax is
paid and whose insurance coverage is subject to regulation in the United States); or
(B) The premises of a United States mission; and
(iv) To have been committed by an individual or individuals acting on behalf of
any foreign person or foreign interest, as part of an effort to coerce the civilian population
of the United States or to influence the policy or affect the conduct of the United
States Government by coercion.
(2) Limitations. The Secretary is not authorized to certify an act as an act of
terrorism if:
(i) The act is committed as part of the course of a war declared by the Congress
(except with respect to any coverage for workers' compensation); or
(ii) property and casualty losses resulting from the act, in the aggregate, do not
exceed $5,000,000.
34
(3) Judicial review precluded. The Secretary's certification of an act of terrorism,
or determination not to certify an act as an act of terrorism, is final and is not subject to
judicial review.
(c)(1) Affiliate means, with respect to an insurer, any entity that controls, is
controlled by, or is under common control with the insurer. An affiliate must itself meet
the definition of insurer to participate in the Program.
(2) For purposes of paragraph (c)(1) of this section, an insurer has control over
another insurer for purposes of the Program if:
(i) An insurer directly or indirectly or acting through one or more other persons
owns, controls, or has power to vote 25 percent or more of any class of voting securities
of the other insurer;
(ii) An insurer controls in any manner the election of a majority of the directors or
trustees of the other insurer; or
(iii) The Secretary determines, after notice and opportunity for hearing, that an
insurer directly or indirectly exercises a controlling influence over the management or
policies of the other insurer, even if there is no control as defined in paragraph (c)(2)(i) or
(c)(2)(h) of this section.
(3) For purposes of a determination of controlling influence under paragraph
(c)(2)(iii) of this section, the following rebuttable presumptions will apply:
(i) If a State has determined that an insurer controls another insurer, there is a
rebuttable presumption that the insurer that is determined by the State to control another
insurer exercises a controlling influence over the management or policies of the other
insurer for purposes of paragraph (c)(2)(iii) of this section; and
35
(ii) If an insurer provides 25 percent or more of another insurer's capital (in the
case of a stock insurer), policyholder surplus (in the case of a mutual insurer), or
corporate capital (in the case of other entities that qualify as insurers), there is a
rebuttable presumption that the insurer providing such capital, policyholder surplus, or
corporate capital exercises a controlling influence over the management or policies of the
receiving insurer for purposes of paragraph (c)(2)(iii) of this section.
(iii) If an insurer, at anytime during a Program Year, supplies 25 percent or more
of the underwriting capacity for that year to an insurer that is a syndicate consisting of a
group including incorporated and individual unincorporated underwriters, there is a
rebuttable presumption that the insurer exercises a controlling influence over the
syndicate for purposes of paragraph (c)(2)(iii) of this section.
(4) An insurer deemed to be in a control relationship pursuant to paragraph
(c)(2)(iii) of this section as a result of the rebuttable presumption in paragraph (c)(3)(i),
(ii) or (iii) of this section may request a hearing in which the insurer will be given an
opportunity to rebut the presumption of control by presenting and supporting its position
through written submissions to Treasury and, in Treasury's discretion, through informal
oral presentations.
(d) Direct earned premium means the direct earned premium(s) received by an
insurer for commercial property and casualty insurance issued by the insurer against
insured losses under the Program.
(1) State licensed or admitted insurers. For a State licensed or admitted insurer
that reports to the NAIC, direct earned premium is the premium information for
commercial property and casualty insurance coverage reported by the insurer on column
36
2 of the N A I C Exhibit of Premiums and Losses of the Annual Statement (commonly
known as Statutory Page 14). (See definition of property and casualty insurance).
(i) Premium information as reported to the NAIC is included in the calculation of
direct earned premiums for purposes of the Program only for commercial property and
casualty coverage issued by the insurer.
(ii) Premiums for personal property and casualty insurance coverage (coverage
primarily designed to cover personal, family or household risk exposures) are excluded in
the calculation of direct earned premiums for purposes of the Program.
(iii) Personal property and casualty insurance coverage that includes incidental
coverage for commercial purposes is primarily personal coverage, and therefore
premiums are excluded from the calculation of direct earned premium. For purposes of
the Program, commercial coverage is incidental if less than 25 percent of the total direct
earned premium is attributable to commercial coverage.
(iv) If a property and casualty insurance policy covers both commercial and
personal risk exposures and is not primarily a personal insurance policy, insurers may
allocate the premiums in accordance with the proportion of risk between commercial and
personal components in order to ascertain direct earned premium.
(2) Insurers that do not report to NAIC. An insurer that does not report to the
NAIC, but that is licensed or admitted by any State (such as certain farm or county
mutual insurers), should use the guidance provided in paragraph (d)(1) of this section to
assist in ascertaining its direct earned premium.
(i) Direct earned premium may be ascertained by adjusting data maintained by
such insurer or reported by such insurer to its State regulator to reflect a breakdown of
37
premiums for commercial and personal property and casualty exposure risk as described
in paragraph (d)(1) of this section and, if necessary, re-stated to reflect the accrual
method of determining direct earned premium versus direct premium.
(ii) Such an insurer should consider other types of payments that compensate the
insurer for risk of loss (contributions, assessments, etc.) as part of its direct earned
premium.
(3) Certain eligible surplus line carrier insurers. An eligible surplus line carrier
insurer listed on the NAIC Quarterly Listing of Alien Insurers must ascertain its direct
earned premium as follows:
(i) For policies that were in-force as of November 26, 2002, or entered into prior
to January 1, 2003, direct earned premiums are to be determined with reference to the
definitions of insured loss and property and casualty insurance by allocating the
appropriate portion of premium income that falls within the definition of insured loss.
The same allocation methodologies contained within the NAIC's "Allocation of Surplus
Lines and Independently Procured Insurance Premium Tax on Multi-State Risks Model
Regulation" for allocating premium between coverage within the definition of insured
loss and all other coverage to ascertain the appropriate percentage of premium income to
be included in direct earned premium may be used; and
(ii) For policies issued after January 1, 2003, premium for insured losses covered
by property and casualty insurance under the Program must be priced separately by such
eligible surplus line carrier insurers.
(4) Federally approved insurers. A federally approved insurer under section
102(6)(A)(iii) of the Act should use a methodology similar to that specified for eligible
38
surplus line carrier insurers in paragraph (d)(3) of this section to calculate its direct
earned premium. Such calculation should be adjusted to reflect the limitations on scope
of insurance coverage under the Program (i.e. to the extent of federal approval of
commercial property and casualty insurance in connection with maritime, energy or
aviation activities).
(e) Insured loss. (1) The term insured loss means any loss resulting from an act of
terrorism (including an act of war, in the case of workers' compensation) that is covered
by primary or excess property and casualty insurance issued by an insurer if the loss:
(i) Occurs within the United States;
(ii) Occurs to an air carrier (as defined in 49 U.S.C. 40102), to a United States
flag vessel (or a vessel based principally in the United States, on which United States
income tax is paid and whose insurance coverage is subject to regulation in the United
States), regardless of where the loss occurs; or
(iii) Occurs at the premises of any United States mission.
(2)(i) A loss that occurs to an air carrier (as defined in 49 U.S.C. 40102), to a
United States flag vessel, or a vessel based principally in the United States, on which
United States income tax is paid and whose insurance coverage is subject to regulation in
the United States, is not an insured loss under section 102(5)(B) of the Act unless it is
incurred by the air carrier or vessel outside the United States.
(ii) An insured loss to an air carrier or vessel outside the United States under
section 102(5)(B) of the Act does not include losses covered by third party insurance
contracts that are separate from the insurance coverage provided to the air carrier or
vessel.
39
(f) Insurer means any entity, including any affiliate of the entity, that meets the
following requirements:
(l)(i) The entity must fall within at least one of the following categories:
(A) It is licensed or admitted to engage in the business of providing primary or
excess insurance in any State (including, but not limited to, State licensed captive
insurance companies, State licensed or admitted risk retention groups, and State licensed
or admitted farm and county mutuals);
(B) It is not licensed or admitted to engage in the business of providing primary or
excess insurance in any State, but is an eligible surplus line carrier listed on the Quarterly
Listing of Alien Insurers of the NAIC, or any successor to the NAIC;
(C) It is approved or accepted for the purpose of offering property and casualty
insurance by a Federal agency in connection with maritime, energy, or aviation activity,
but only to the extent of such federal approval of commercial property and casualty
insurance coverage offered by the insurer in connection with maritime, energy or aviation
activity;
(D) It is a State residual market insurance entity or State workers' compensation
fund; or
(E) As determined by the Secretary, it falls within any other class or type of
captive insurer or other self-insurance arrangement by a municipality or other entity, to
the extent provided in Treasury regulations issued under section 103(f) of the Act.
(ii) If an entity falls within more than one category described in paragraph
(f)(l)(i) of this section, the entity is considered to fall within the first category within
which it falls for purposes of the Program;
40
(2) The entity must receive direct earned premiums for any type of commercial
property and casualty insurance coverage, except in the case of:
(i) State residual market insurance entities and State workers' compensation
funds, to the extent provided in Treasury regulations; and
(ii) Other classes or types of captive insurers and other self-insurance
arrangements by municipalities and other entities, if such entities are included in the
Program by Treasury under regulations in this Part.
(3) The entity must meet any other criteria as prescribed by Treasury.
(g) Insurer deductible means:
(1) For an insurer that was in existence on November 26, 2002 and has had a full
year of operations during the calendar year immediately preceding the applicable
Program Year:
(i) For the Transition Period (November 26, 2002 through December 31, 2002),
the value of an insurer's direct earned premiums over calendar 2001, multiplied by 1
percent;
(ii) For Program Year 1 (January 1, 2003 through December 31, 2003), the value
of an insurer's direct earned premiums over calendar year 2002, multiplied by 7 percent;
(iii) For Program Year 2 (January 1, 2004 through December 31, 2004), the value
of an insurer's direct earned premiums over calendar year 2003, multiplied by 10 percent;
(iv) For Program Year 3 (January 1, 2005 through December 31, 2005), the value
of an insurer's direct earned premiums over calendar year 2004, multiplied by 15 percent;
and
(2) For an insurer that came into existence after November 26, 2002, the insurer
41
deductible will be based on data for direct earned premiums for the current Program
Year. If the insurer has not had a full year of operations during the applicable Program
Year, the direct earned premiums for the current Program Year will be annualized to
determine the insurer deductible.
(h) NAIC means the National Association of Insurance Commissioners.
(i) Person means any individual, business or nonprofit entity (including those
organized in the form of a partnership, limited liability company, corporation, or
association), trust or estate, or a State or political subdivision of a State or other
governmental unit.
(j) Program means the Terrorism Risk Insurance Program established by the Act.
(k) Program Years means the Transition Period (November 26, 2002 through
December 31, 2002), Program Year 1 (January 1, 2003 through December 31, 2003),
Program Year 2 (January 1, 2004 through December 31, 2004), and Program Year 3
(January 1, 2005 through December 31, 2005).
(1) Property and casualty insurance means commercial lines of property and
casualty insurance, including excess insurance, workers' compensation insurance, and
surety insurance. Property and casualty insurance:
(1) Includes commercial lines within the following lines of insurance from the
NAIC's Exhibit of Premiums and Losses (commonly known as Statutory Page 14): Line
1—Fire; Line 2.1—Allied Lines; Line 3—Farmowners Multiple Peril; Line 5.1—
Commercial Multiple Peril (non-liability portion); Line 5.2—Commercial Multiple Peril
(liability portion); Line 8—Ocean Marine; Line 9—Inland Marine; Line 16—Workers'
Compensation; Line 17—Other Liability; Line 18—Products Liability; Line 19.3—
42
Commercial Auto No-Fault (personal injury protection); Line 19.4—Other Commercial
Auto Liability; Line 21.2—Commercial Auto Physical Damage; Line 22—Aircraft (all
perils); Line 24—Surety; Line 26—Burglary and Theft; and Line 27—Boiler and
Machinery; and
(2) Does not include:
(i) Federal crop insurance issued or reinsured under the Federal Crop Insurance
Act (7 U.S.C. 1501 et seq.), or Multiple Peril Crop insurance reported on Line 2.2 of the
NAIC's Exhibit of Premiums and Losses (commonly known as Statutory Page 14);
(ii) Private mortgage insurance (as defined in section 2 of the Homeowners
Protection Act of 1988 (12 U.S.C. 4901)) or title insurance;
(iii) Financial guaranty insurance issued by monoline financial guaranty insurance
corporations;
(iv) Insurance for medical malpractice;
(v) Health or life insurance, including group life insurance;
(vi) Flood insurance provided under the National Flood Insurance Act of 1968 (42
U.S.C. 4001 et seq.); or
(vii) Reinsurance or retrocessional reinsurance.
(m) Secretary means the Secretary of the Treasury.
(n) State means any State of the United States, the District of Columbia, the
Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands,
American Samoa, Guam, each of the United States Virgin Islands, and any territory or
possession of the Untied States.
(o) Treasury means the United States Department of the Treasury.
43
(p) United States means the several States, and includes the territorial sea and the
continental shelf of the United States, as those terms are defined in the Violent Crime
Control and Law Enforcement Act of 1994 (18 U.S.C. 2280 and 2281).
§ 50.6 Rule of construction for dates.
Unless otherwise expressly provided in the regulation, any date in these
regulations is intended to be applied so that the day begins at 12:01 a.m. and ends at
midnight on that date.
§ 50.7 Special rules for Interim Guidance safe harbors.
(a) An insurer will be deemed to be in compliance with the requirements of the
Act to the extent the insurer reasonably relied on Interim Guidance prior to the effective
date of applicable regulations.
(b) For purposes of this section, Interim Guidance means the following
documents, which are also available from the Department of the Treasury at
www.treasury.gov/trip:
(1) Interim Guidance I issued by Treasury on December 3, 2002, and published at
67 FR 76206 (December 11, 2002);
(2) Interim Guidance II issued by Treasury on December 18, 2002, and published
at 67 FR 78864 (December 26, 2002); and
(3) Interim Guidance III issued by Treasury on January 22, 2003, and published at
68 FR 4544 (January 29, 2003).
Dated: February , 2003
44
W a y n e A. Abernathy
Assistant Secretary of the Treasury
45
Billing Code 4810-25-M
DEPARTMENT OF THE TREASURY
Departmental Offices
31 CFR Part 50
RIN 1505-AA96
Terrorism Risk Insurance Program
AGENCY: Departmental Offices, Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: The Department of the Treasury (Treasury) is issuing this proposed rule as
part of its implementation of Title I of the Terrorism Risk Insurance Act of 2002. That
Act established a temporary Terrorism Risk Insurance Program (Program) under which
the Federal Government will share the risk of insured loss from certified acts of terrorism
with commercial property and casualty insurers until the Program sunsets on December
31, 2005. This proposed rule sets forth the purpose and scope of the Program and key
definitions that Treasury will use in implementing the Program. In general, the proposed
rule incorporates interim guidance previously issued by Treasury concerning these
definitions, but with some modifications. This proposed rule, together with the interim
final rule published elsewhere in this separate part of the Federal Register, are the first in
a series of regulations Treasury will issue to implement the Act.
DATES: Written comments may be submitted on or before [INSERT DATE THAT IS
30 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER].
ADDRESSES: Submit comments (if hard copy, preferably an original and two copies)
to Office of Financial Institutions Policy, Attention: Terrorism Risk Insurance Program
Public Comment Record, Room 3160 Annex, Department of the Treasury, 1500
Pennsylvania Ave., N.W., Washington, DC 20220. Because paper mail in the
Washington, DC area may be subject to delay, it is recommended that comments be
submitted by electronic mail to: triacomments@do.treas.gov. All comments should be
captioned with "[INSERT DATE OF PUBLICATION IN THE FEDERAL REGISTER]
TRIA Comments." Please include your name, affiliation, address, e-mail address and
telephone number in your comment. Comments will be available for public inspection by
appointment only at the Reading Room of the Treasury Library. To make appointments,
call (202) 622-0990 (not a toll-free number).
FOR FURTHER INFORMATION CONTACT: Mario Ugoletti, Deputy Director,
Office of Financial Institutions Policy (202) 622-2730, or Martha Ellett, AttorneyAdvisor, Office of the Assistant General Counsel (Banking & Finance), (202) 622-0480
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
I. The Proposed Rule
Published elsewhere in this separate part of the Federal Register is an interim final
rule establishing 31 CFR Part 50, which will comprise Treasury's regulations
2
implementing the Terrorism Risk Insurance Act of 2002 (the Act). The preamble to the
interim final rule explains these provisions of the proposed rule in detail, and the text of
the interim final rule serves as the text for this proposed rule.
In addition, Treasury specifically solicits public comment on whether the
Secretary should prescribe criteria for certain insurers pursuant to the authority provided
to Treasury in section 102(6)(C) and, if so, what criteria Treasury should prescribe. First,
Treasury solicits comment on appropriate criteria to prevent participation in the Program
by newly formed insurance companies deemed by Treasury to be established for the
purpose of evading the insurer deductible requirements of the Act and the Program. In
this regard, Treasury's objectives are to encourage new sources of capital in the market
for terrorism risk insurance, and at the same time, ensure the integrity of the Program and
provide comparable treatment of Program participants. Accordingly, the intent of any
additional criteria, if proposed under section 102(6)(C), is not to discourage Program
participation by newly formed commercial property and casualty insurance companies in
their normal course of business, but to administer the Program effectively and fairly,
including preventing evasion of insurer deductible requirements by special purpose
entities formed to provide terrorism risk only coverage.
Second, Treasury solicits comment on appropriate additional criteria, including
financial standards, that should be proposed for federally approved insurers under
Treasury's authority in section 102(6)(C) of the Act. One reason for imposing additional
criteria on federally approved insurers is because there are no uniform requirements or
standards for federal approval under various federal programs. Although some federal
programs impose minimum financial standards, others do not. Therefore, Treasury is
3
considering whether additional criteria for federally approved insurers should be
proposed to promote the financial integrity of the Program and to otherwise effectively
administer the Program. Third, Treasury solicits comment on appropriate additional
criteria that should be proposed pursuant to section 102(6)(C) to ensure that federal
payments made under the Program do not benefit entities with connections to terrorist
organizations.
In addition to comments concerning possible additional criteria under section
102(6)(C), Treasury is soliciting comments on whether the definition of control contained
in the interim final rule should be supplemented by proposing a rule to address situations
in which a corporate insurance structure may contain multiple insurers that own, control
or have the power to vote more than 25 percent of the voting shares of another insurer.
See Section 102(3)(A) of the Act. Based on available information, such control
arrangements exist but they do not appear to be common. In particular, Treasury is
considering and solicits comment on consolidating direct earned premiums for purposes
of calculating the insurer deductible on a pro rata basis among the multiple controlling
owners. For example, if Insurer Y owns 40 percent of the voting shares of Insurer Z and
Insurer X owns 30 percent of the voting shares of Insurer Z, then a pro rata allocation of
premium income and insured loss under the Program would be, respectively, 57 percent
and 43 percent.
Treasury also is considering and solicits comment on a similar pro rata allocation
method for control determinations under section 102(3)(C) of the Act in situations in
which multiple insurers each provide 25 percent or more of the capital of a stock insurer,
policyholder surplus of a mutual insurer or corporate capital of other entities that meet the
4
definition of insurer under the Act and in the interimfinalrule. If proposed as
considered, this pro rata approach would treat each insurer on a standalone basis for
purposes of section 102(3)(C) of the Act if no insurer provides 25 percent or more of the
capital of a stock insurer, policyholder surplus of a mutual insurer or corporate capital of
other entities that meet the definition of insurer under the Act and the Program.
In accordance with the consolidated treatment of direct earned premiums among
insurer affiliates, Treasury anticipates that the controlling insurer will be the insurer that
will be required to file any claim with Treasury for federal payment under the Program
and that this insurer will receive the federal payment that is to be distributed within the
consolidated insurer group in accordance with distribution of risk within the consolidated
insurer group. Treasury solicits comments on various means to ensure the prompt and
equitable distribution of the federal payment as appropriate to ensure that the purposes of
the Program are not thwarted or evaded, and that the ultimate risk bearing entities are
treated in an equitable manner, within the Act's requirements.
II. Procedural Requirements
This proposed rule is a significant regulatory action and has been reviewed by the
Office of Management and Budget under the terms of Executive Order 12866.
It is hereby certified that this proposed rule will not have a significant economic
impact on a substantial number of small entities. The Act requires all licensed or
admitted insurers to participate in the Program. This includes all insurers regardless of
size or sophistication. The Act also defines property and casualty insurance to mean
commercial lines without any reference to the size or scope of the commercial entity.
Although the Act affects small insurers, the proposed rule also gives insurers flexibility in
5
calculating their direct earned premium for policies that have both commercial and
personal exposures, and it provides a safe harbor to exclude policies that have incidental
coverage for commercial purposes. Accordingly, any economic impact associated with
the proposed rule flows from the Act and not the proposed rule. However, the Act and
the Program are intended to provide benefits to the U. S. economy and all businesses,
including small businesses, by providing a federal reinsurance backstop to commercial
property and casualty insurance policyholders and spreading the risk of insured loss
resulting from an act of terrorism.
List of Subjects in 31 CFR Part 50
Terrorism risk insurance.
Authority and Issuance
For the reasons set forth above, the Department of the Treasury proposes to adopt
as a final rule the interim final rule adding part 50 to 31 CFR subtitle A, as follows:
[The part title and text of proposed Part 50 is the same as the part title and text of
Part 50 in the interim final rule published elsewhere in this separate part of this issue of
the Federal Register.]
Dated: February ,2003
^'ayne A. Abernathy
Assistant Secretary of the Treasury
6
-62: Post-G7 Statement by United States Treasury Secretary John S n o w
Page 1 of 2
F R O M T H E OFFICE O F PUBLIC A F F A I R S
February 22, 2003
JS-62
Post-G7 Statement by United States Treasury Secretary John Snow
(Paris, France) --1 was pleased this weekend to join - for the first time - the G-7
Finance Ministers and Central Bank Governors. I enjoyed meeting with m y
colleagues and valued the opportunity to exchange views and work together on key
issues that w e face in the global economy.
The strength of the international economy is tied to the performance of the domestic
U.S. economy. As the world's largest economy, if w e grow, if w e see improvement
in our own economy, that will boost the world economy. That's why strengthening
our own economic recovery is so important; and why President Bush's jobs and
growth package is so critical - not just to the U.S. economy - but to the international
economy. If w e get moving on a higher growth path, two things will happen: 1)
more Americans w h o want work can find a job, and 2) and the economies of
Europe, Japan, South America and every other corner of the world will get a lift therefore employing millions, and raising the standard of living for millions of
families across the world. Within the international community, the United States
must lead by example - and w e are not growing fast enough or strongly enough. I
a m convinced that enactment of President Bush's jobs and growth plan is important
not just for the United States, but for global economic growth as well, and
accordingly in each and every meeting this weekend I laid out for m y colleagues
how President Bush's economic growth proposals will build on the proven strength
of the U.S. economy - generating jobs, encouraging savings and investment, and
promoting entrepreneurship. Each G 7 nation must take its own steps - appropriate
to its own respective set of conditions - to spur growth. That's important, since our
prosperity is tied to stronger growth outside of the United States.
In addition to growth, we discussed the key role of sound corporate governance in
financial stability, efficient capital markets and sustained growth. I outlined the steps
the United States has taken to strengthen corporate governance pursuant to the
President's Ten Point Plan and the Sarbanes-Oxley legislation, and m y colleagues
described the steps their governments were taking to address corporate
governance as well. W e focused on the centrality of market discipline - as well as
the quality of corporate financial disclosure and effective regulation - in achieving
our shared goals in this area. W e extended our strong support for the ongoing work
of the various international bodies focusing on auditing, accounting, and related
corporate governance issues.
We also discussed our common unwavering commitment to combating financial
crime and terrorist financing as a critical component of the war on terrorism. W e
agreed to contribute technical assistance to priority countries, and urge the IMF and
World Bank, in coordination with the UN, to continue to do so as well. W e
encourage the ongoing efforts of-FATF to foster the effective implementation of the
U N S C Resolutions regarding assets freezing, and w e recognize the need for
greater oversight of informal financial sectors and the need for total integrity of
charities so they don't unwittingly become vehicles of terrorist financing.
Another subject we addressed was improving the framework for preventing and
resolving financial crises in emerging market countries. This subject remains a
priority for the G-7. W e had a good discussion of the role collective action clauses
play in advancing this objective, and broad support was reaffirmed for this
approach. Viewing this in conjunction with steps the private sector has taken in
embracing collective action clauses - as well as indications of support from other
sovereigns - I a m encouraged w e are making progress on this important issue. It
is imperative that parties to sovereign debt transactions continue to focus on the
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TQ. post-G7 Statement by United States Treasury Secretary John S n o w
Page 2 of 2
use of collective action clauses in their transactions.
We also had a good discussion about development issues and aid effectiveness.
Our goal is greater economic growth and prosperity in developing countries.
Therefore I emphasized the importance of rewarding countries with strong policy
performance, measuring concrete results of our assistance, and strengthening
m a n a g e m e n t of public resources. I explained h o w our Millennium Challenge
Account is designed to accomplish these goals. International financial institutions
- such as the World Bank - can improve aid effectiveness for the world's poorest
nations by further embracing these objectives.
I want to note in closing the importance of free trade to the overall goal of global
economic growth. In this light, I a m encouraged m a n y of m y G 7 colleagues agree
to work with our trade ministers and the international financial institutions to support
the objectives of the W T O negotiations under the Doha Development Agenda,
focusing in particular on the financial services and agriculture sectors and the need
for results-oriented trade related capacity building. Reducing barriers to trade is
also needed to spur global economic growth.
Thank you.
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3/7/2003
7003-2-24-18-17-11-20575: Statement Regarding Mexico Decision to Issue Bonds with Collective Actio... Page 1 of 1
F R O M T H E OFFICE O F PUBLIC AFFAIRS
February 24, 2003
2003-2-24-18-17-11-20575
U.S. Treasury Statement Regarding the Decision by Mexico to Issue Bonds
with Collective Action Clauses
Mexico announced today its intention to issue external bonds with collective
action clauses.
The United States strongly supports and welcomes Mexico's decision. Mexico has
been one of the top performing emerging markets in recent years, reflecting the
country's sound policies and economic fundamentals. As a solid investment grade
borrower, Mexico is making an important contribution to strengthening the
international financial system.
http://www.treas.gov/press/releases/200322418171120575 .htm
3/7/2003
PARIS, FEBRUARY 22ND 2003
Contact: Rob Nichols
STATEMENT OF G-7 FINANCE MINISTERS A N D CENTRAL B A N K
GOVERNORS
Our economies are experiencing slower growth, yet they remain resilient. Geopolitical
uncertainties have increased. W e remain confident in the underlying strength of our
economies and in their capacity to grow more vigorously.
We recognise the imperative for higher growth rates and resolve to take steps to achieve
this result. T o this end, Europe is committed to accelerating labour, product and capital
market reforms to achieve a more flexible economy ; Japan has reiterated its commitment
to structural reforms, including in the financial and corporate sectors ; the U S is
implementing action to create jobs, encourage capital formation and savings and raise
productivity growth. W e also remain steadfast in our commitment to ensure sustainable
public finances and price stability. W e are all committed to the D o h a Development
Agenda and to meeting its overall timetable and interim milestones.
We will continue to cooperate closely. If the economic outlook weakens, we are prepared
to respond as appropriate. W e will continue to monitor exchange markets closely and
cooperate as appropriate.
To strengthen corporate governance and to bolster further investor confidence, we are
implementing ambitious domestic reforms. Strengthened market discipline, improved
corporate disclosure, increased transparency and effective regulation are c o m m o n
principles that underpin sound financial systems and ensure their coherence. W e support
the work of the Financial Stability Forum and other fora, covering independent auditing,
high-quality accounting standards, sound corporate governance and financial information
quality. W e will review the progress of their work.
W e encourage developing and emerging market countries to pursue sound policies and to
enhance their investment climates. These policies will help attract foreign direct
investment, reduce external vulnerabilities and raise sustained growth. W e welcome
Brazil's pursuit of sound economic policies and social reforms. A s Argentina moves
forward to fulfill its commitments agreed with the I M F , w e look forward to the
authorities restoring contract enforcement and engaging in a dialogue with its private
creditors. W e welcome Turkey's commitment to economic and financial stabilization as
agreed with the I M F .
W e are implementing our April 2002 action plan to prevent and resolve financial crises in
emerging market countries. Progress has been m a d e in ensuring greater discipline
through clarifying normal and exceptional access to official finance in crisis situations.
W e welcome the positive response of the private sector to collective action clauses and its
on-going work with the public sector on model clauses. W e look forward to the early
adoption of effective collective action clauses and to the discussion of a concrete
proposal from the I M F on a sovereign debt restructuring mechanism at its Spring
meeting. A s a complement, w e welcome work on a code of good conduct based on
negotiating principles. W e urge the I M F to enhance crisis prevention, including by
making its surveillance more effective.
We urge all countries to implement and enforce laws to combat the financing of
terrorism. W e will continue to provide technical assistance to countries that lack
appropriate measures to combat terrorist financing. W e urge the I M F and the World Bank
to step up their assessments and their provision of technical assistance in coordination
with the United Nations and to present an action plan at the Spring meetings. W e urge the
Financial Action Task Force to foster effective asset freezing. W e encourage more
effective oversight of informal financial institutions and charities and w e look forward to
revised Financial Action Task Force recommendations by June.
We urge all OECD countries to implement the standards set out in the OECD's 2000
report on access to bank information and to ensure effective exchange of information for
all tax purposes. A level playing field is crucial to avoid tax evasion shifting from those
countries that engage in exchange of information to those that do not.
Our duty, our responsibility for the prosperity and sustainable development of the world
require us to address vigorously the challenge of global poverty. T o build on the positive
outcomes of Monterrey and Johannesburg, developed and developing countries should
mobilize greater financial resources and improve aid effectiveness by setting and
achieving measurable results and adopting growth-oriented policies. W e reaffirm our
support for the Millennium Development Goals, including on health, education and water
supply and sanitation, as well as to the completion of the Highly-Indebted Poor Countries
(HIPC) initiative and of the Global Health Fund. Their achievement calls for an increased
volume of development resources. W e have made progress particularly on H I V / A I D S
and will continue to focus on the Goals and their financing, including facilities, with a
view to making further progress by Evian. Consistent with the G 8 Africa Action Plan, w e
are ready to provide substantial support to African countries that implement N e w
Partnership for Africa's Development ( N E P A D ) principles and are committed to
improving governance and demonstrate solid policy performance. W e recognize the
fundamental importance of rules-based trade in driving economic growth and poverty
reduction.
JS-62
JS-63: Testimony of Peter R. Fisher Before the Committee on Banking, Housing and Urban Affairs
Page 1 of 5
FROM THE OFFICE OF PUBLIC AFFAIRS
February 26, 2003
JS-63
Deposit Insurance Reform
Testimony of Peter R. Fisher
Under Secretary for Domestic Finance
U.S. Department of the Treasury
Before the
Committee o n Banking, Housing and Urban Affairs
United States Senate
February 26, 2003
Mr. Chairman, Senator Sarbanes, and Members of the Committee, I appreciate the
opportunity to provide the Administration's views on deposit insurance reform. I
also want to c o m m e n d Chairman Powell and the FDIC staff for their valuable
contributions to the discussion of this important issue.
The Administration strongly supports reforms to our deposit insurance system that
would, first, merge the bank and thrift insurance funds, second, allow more flexibility
in the management of fund reserves while maintaining adequate reserve levels and,
third, ensure that all participating institutions fairly share in the maintenance of FDIC
resources in accordance with the insurance fund's loss exposure from each
institution. The Administration strongly opposes any increases in deposit
insurance coverage limits.
Our current deposit insurance system managed by the Federal Deposit Insurance
Corporation (FDIC) serves to protect insured depositors from exposure to bank
losses and, as a result, helps to promote public confidence in the U.S. banking
system. I a m concerned today that our deposit insurance system has structural
weaknesses that, in the absence of reform, could deepen over time. I want to
emphasize that there is no crisis in the FDIC; both of its funds are strong, well
managed, with adequate reserves. This is the right time to act - when w e do not
face a crisis - and the Administration supports legislation focused on the repair of
these structural weaknesses.
Increases in FDIC benefits, however, including any increases in the level of
insurance coverage, are not part of the solution to these problems and should be
avoided. W h e n I testified before this Committee last April, I argued that an increase
in deposit insurance coverage limits would serve no sound public policy purpose.
Nothing has occurred since then to change that view. The Administration continues
to oppose higher coverage limits in any form. Indeed, w e feel that the entire issue
of coverage limits regrettably diverts attention from the important reforms that are
needed.
Merging the Bank and Thrift Insurance Funds
We support a merger of the Bank Insurance Fund (BIF) and Savings Association
Insurance Fund (SAIF) as soon as practicable. A larger, combined insurance fund
would be better able to diversify risks, and thus withstand losses, than would either
fund separately. Merging the funds while the industry is strong and both funds are
adequately capitalized would not burden either BIF or SAIF members. A merged
fund would also end the possibility that similar institutions could pay significantly
different premiums for the s a m e product, as w a s the case in the recent past and
could occur again in the near future without this change. A merger would also
recognize changes in the industry. As a result of mergers and consolidations, each
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fund now insures deposits of both commercial banks and thrifts. Indeed,
commercial banks n o w account for 45 percent of all SAIF-insured deposits.
Flexibility in the Management of FDIC Reserves
Current law generally requires each insurance fund to maintain reserves equal to
1.25 percent of estimated insured deposits, the "designated reserve ratio." W h e n
the reserve ratio falls below this threshold, the FDIC must charge either a premium
sufficient to restore the reserve ratio to 1.25 percent within one year, or a minimum
of 23 basis points if the reserve ratio would remain below 1.25 percent for a longer
period. Since the latter would be'expected when the banking system, and probably
the economy as well, were under stress, such a sharp increase in industry
assessments could have an undesirable pro-cyclical effect, further reducing liquidity
precisely w h e n liquidity is needed. W e r e FDIC fund contributions to c o m e from
resources that otherwise might be part of capital, every dollar paid would m e a n a
potential reduction of 10 or 12 dollars in lending, or as much as $12 billion in
reduced lending for a $1 billion FDIC replenishment.
Reserves should be allowed to grow when conditions are good. This would enable
the fund to better absorb losses under adverse conditions without sharp increases
in premiums. In order to achieve this objective and also to account for changing
risks to the insurance fund over time, w e support greater latitude for the FDIC to
alter the designated reserve ratio within statutorily prescribed upper and lower
bounds. Within these bounds, the FDIC should provide for public notice and
comment concerning any proposed change to the designated reserve ratio. The
FDIC should also have discretion in determining how quickly the fund meets the
designated reserve ratio as long as the actual reserve ratio is within these bounds.
If the reserve ratio were to fall below the lower bound, the FDIC should restore it to
within the statutory range promptly, over a reasonable but limited timeframe. W e
would also support s o m e reduction in the prescribed minimum premium rate currently 23 basis points - that would be in effect if more than one year were
required to restore the fund's reserves.
Nevertheless, as we learned from the deposit insurance experience of the 1980s,
flexibility must be tempered by a clear requirement for prudent and timely fund
replenishment. The statutory range for the designated reserve ratio should strike
an appropriate balance between the burden of pre-funding future losses and the
pro-cyclical costs of replenishing the insurance fund in a downturn. A key benefit to
giving the FDIC greater flexibility in managing the reserve ratio within statutorily
prescribed bounds is the ability to achieve low, stable premiums over time,
adequate to meet FDIC needs in bad times, with the least burden on financial
institutions and on the economy.'We also believe that with this reform, the
possibility of recourse to taxpayer resources is even further removed.
Full Risk-Based Shared Funding
Every day that they operate, banks and thrifts benefit from their access to federal
deposit insurance. For several years, however, the FDIC has been allowed to
obtain premiums for deposit insurance from only a few insured institutions.
Currently, over 90 percent of banks and thrifts pay nothing to the FDIC. This is an
untenable formula for the long-term stability of the FDIC.
Moreover current law frustrates one of the most important reforms enacted in the
wake of the collapse of the Federal Savings and Loan Insurance Corporation
(FSLIC) and the depletion of FDIC reserves: the requirement for risk-based
premiums W h e n 90 percent of the industry pays no premiums, there is little
opportunity to do what any prudent insurer would do: adjust premiums for risk.
Nearly all banks are treated the same, and lately they have been treated to free
service.
For example today a bank can rapidly increase its insured deposits without paying
anything into the insurance fund.' As is now well known s o m e large financial
companies have greatly augmented their insured deposits in the past few years by
sweeping uninsured funds into their affiliated depository institutions - without
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jS^63: Testimony of Peter R. Fisher Before the Committee on Banking, Housing and Urban Affairs
Page 3 of 5
compensating the FDIC at all. Other major financial companies might be expected
to do the s a m e in the future. In addition, most of the over 1,100 banks and thrifts
chartered after 1996 have never paid a penny in deposit insurance premiums. Yet
if insured deposit growth by a relatively few institutions were to cause the reserve
ratio to decline below the designated reserve ratio, all banks would be required to
pay premiums to raise reserves.
To rectify this "free rider" problem and ensure that institutions appropriately
compensate the FDIC commensurate with their risk, Congress should remove the
current restrictions on FDIC premium-setting. In order to recognize past payments
to build up current reserves, w e support the proposal to apply temporary transition
credits against future premiums that would be distributed based on a measure of
each institution's contribution to the build-up of insurance fund reserves in the earlyto-mid 1990s. In addition to transition credits, allowing the FDIC to provide
assessment credits on an on-going basis would permit the FDIC to collect
payments from institutions more closely in relation to their deposit growth.
We strongly oppose rebates, which would drain the insurance fund of cash. Over
m u c h of its history, the FDIC insurance fund reserve ratio remained well above the
current target, only to drop into deficit conditions by the beginning of the 1990s.
Therefore, it is vital that funds collected in good times, and the earnings on those
collections, be available for times when they will be needed.
There are other important structural issues that need to be addressed sooner than
later. It would be appropriate to evaluate whether there are changes to the National
Credit Union Share Insurance Fund (NCUSIF) that would be suitable in light of the
proposed reforms m a d e to FDIC insurance so as to avoid unintended disparities
between the two programs. Perhaps even more important is the heed to address
the long-term funding of supervision by the National Credit Union Administration,
particularly in view of recent trends toward conversions from federal to state
charters and growing consolidation of credit unions. Similarly, there are structural
problems in the funding of the Office of the Comptroller of the Currency and the
Office of Thrift Supervision, the resolution of which should not be delayed.
Deposit Insurance Coverage Limits
The improvements to the deposit insurance system that I have just outlined are vital
to the system's long-term health.. Other proposals, however, would not contribute to
the strength of the taxpayer-backed deposit insurance system and m a y actually
weaken it.
Increasing the general coverage limit up front or through indexation, or raising
coverage limits for particular categories of deposits, is unnecessary. Savers do not
need an increase in coverage limits and would receive no real financial benefit.
Unlike other government benefit programs, there is no need for indexation of
deposit insurance coverage because savers can now obtain all the coverage that
they desire by using multiple banks and through other means.
Higher coverage limits would not predictably advantage any particular size of
banks, would increase all banks' insurance premium costs, and would m e a n greater
taxpayer exposure by adding to the contingent liabilities of the government and
weakening market discipline. An increase in coverage limits would reduce - not
enhance - competition a m o n g banks in general as the efficient and inefficient offer
the s a m e investment risk to depositors; in fact, perversely, investors would be
drawn at no risk to the worst banks, which usually offer the highest interest rates.
Higher Coverage Limits Not Sought by Savers
First of all the clamor for raising coverage limits does not come from savers. The
evidence that current coverage limits constitute a burden to savers is scant; there
has been little d e m a n d from depositors for higher m a x i m u m levels. The recent
consumer finance survey data released by the Federal Reserve confirm what w e
found in the previous survey, namely that raising the coverage limit would do little, if
anything for most savers. Median family deposit balances are only $4,000 for
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Page 4 of 5
transaction account deposits and $15,000 for certificates of deposit, far below the
current $100,000 ceiling. The s a m e holds true even w h e n considering only older
Americans, a segment of the population with higher bank account usage: median
transaction account balances and certificates of deposit total $8,000 and $20,000,
respectively, for those households headed by individuals between the ages of 65
and 74.
Examining the Federal Reserve data for retirement accounts shows present
m a x i m u m deposit insurance coverage to be more than adequate. The median
balance across age groups held in IRA/Keogh accounts at insured depository
institutions is only $15,000. For the 65 to 69 age group, median household
IRA/Keogh deposits total $30,000.
A small group of relatively affluent savers might find greater convenience from
increased m a x i m u m coverage levels. But it is a tiny group. Only 3.4 percent of
households with bank accounts held any uninsured deposits, and the median
income of these households w a s more than double the median income of all
depositors in the survey.
Under current rules, these savers have plenty of options, with the market place
presenting n e w options for unlimited deposit insurance coverage without changing
federal coverage limits. At little inconvenience, savers with substantial bank
deposits - including retirees and those with large bank savings for retirement - m a y
place deposits at any number of banks to obtain as much FDIC coverage as
desired. They m a y also establish accounts within the s a m e bank under different
legal capacities, qualifying for several multiples of current m a x i m u m coverage
limits. Firms are n o w developing programs for exchanging depositor accounts that
could offer seamless m e a n s of providing unlimited coverage for depositors without
any change in current limits.
One of the fundamental rules of prudent retirement planning is to diversify
investment vehicles. M a n y individuals, including those w h o are retired or planning
for retirement, feel comfortable putting substantial amounts into uninsured mutual
funds, m o n e y market accounts, and a variety of other investment instruments. Just
21 percent of all IRA/Keogh funds are in insured depository institutions. There is
simply no widespread consumer concern about existing coverage limits that would
justify extending taxpayer exposure by creating a n e w government-insured
retirement program under the FDIC.
Coverage Limits and Bank Competition
Banks, regardless of size, continue to have little trouble attracting deposits under
the existing coverage limits. Federal Reserve data have shown that smaller banks
have grown more rapidly and experienced higher rates of growth in both insured
and uninsured deposits than have larger banks over the past several years. After
adjusting for the effects of mergers, domestic assets of the largest 1,000
commercial banks grew 5.5 percent per year on average from 1994 to 2002; all
other banks grew 13.8 percent per year on average. Nor are smaller banks losing
the competition for uninsured deposits. Uninsured deposits of the top 1,000 banks
grew 9.9 percent annually on average over this period, while such deposits at
smaller banks grew on average by 21.4 percent annually.
Higher Coverage Limits for Municipal Funds Erode Discipline
Proposals for substantially higher levels of protection of municipal deposits than of
other classes of deposits would exacerbate the inherent moral hazard problems of
deposit insurance. Rather than keep funds in local institutions, state and municipal
treasurers would have powerful incentives to seek out not the safest institutions in
which to place taxpayer funds but rather those offering the highest interest rates.
Since these are usually riskier institutions, state and municipal treasurers would be
drawn into funding the more troubled banks. Local, well run, healthy banks might
have to pay a premium in increased deposit rates to retain municipal business.
Today there are incentives for state and local government treasurers to monitor
risks taken with large volumes of public sector deposits. Should the FDIC largely
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protect these funds, an important source of credit judgment on the lending and
investment decisions of local banks would be lost.
Conclusion
In conclusion, I reaffirm the Administration's support for the three-part general
framework that I have outlined to correct the structural flaws in the deposit
insurance system. I encourage Congress to pursue these improvements with a
steady focus on the important work that needs to be done. The Administration does
not support legislation that raises deposit insurance coverage limits in any form,
and w e urge that Congress avoid such an unneeded and counterproductive
diversion from real and necessary reform.
3/7/2003
ittp://www.treas.gov/press/releases/js63.htm
PUBLIC DEBT N E W S
Department of the Treasury • Bureau of the Public Debt • Washington, D C 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE
February 26, 2003
CONTACT:
Office of Financing
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 2-YEAR NOTES
Interest Rate:
Series:
CUSIP No:
1 1/2%
H-2005
912828AV2
High Yield:
Issue Date:
Dated Date:
Maturity Date:
1.575'
Price:
February 28, 2003
February 28, 2003
February 28, 2005
99.853
All noncompetitive and successful competitive bidders were awarded
securities at the high yield. Tenders at the high yield were
allotted 90.26%. All tenders at lower yields were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)
Tendered
$
53,061,300
819,852
0
$
53,881,152
SUBTOTAL
$
62,214,019
26,180,222
819,852
0
27,000,074 1/
8,332,867
Federal Reserve
TOTAL
Accepted
8,332,867
$
35,332,941
Median yield
1.540%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low yield
1.500%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 53,881,152 / 27,000,074 = 2.00
1/ Awards to TREASURY DIRECT = $650,057,000
http://www.publicdebt.treas.gov
js ~W
JS-65: U.S. International Reserve Position
Page 1 of 2
FROM THE OFFICE OF PUBLIC AFFAIRS
February 26, 2003
JS-65
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. A s indicated in this table, U.S. reserve assets
totaled $78,677 million as of the end of that week, compared to $78,406 million as of the end of the prior week.
1. Official U.S. Reserve Assets (in US millions)
TOTAL
February 14,2003
February 21, 2003
78,406
78,677
1. Foreign Currency Reserves 1
Euro
Yen
TOTAL
Euro
Yen
TOTAL
a. Securities
7,075
13,064
20,139
7,076
13,243
20,319
0
0
Of which, issuer headquartered in the U.S.
b. Total deposits with:
b.i. Other central banks and BIS
11,573
2,623
14,196
11,566
14,225
2,659
0
0
0
0
0
0
0
0
2. IMF Reserve Position 2
21,664
21,705
3. Special Drawing Rights (SDRs) 2
11,365
11,386
4. Gold Stock 3
11,043
11,043
0
0
b.ii. Banks headquartered in the U.S.
b.ii. Of which, banks located abroad
b.iii. Banks headquartered outside the U.S.
b.iii. Of which, banks located in the U.S.
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
February 14, 2003
Euro
Yen
February 21, 2003
TOTAL
Yen
Euro
TOTAL
0
1. Foreign currency loans and securities
0
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
0
0
0
2.a. Short positions
2.b. Long positions
3. Other
0
0
0
III. Contingent Short-Term Net Drains on Foreign Currency Assets
February 14, 2003
II
n
http://www.treas.gov/press/releases/js65.htm
February 21, 2003
II
II
3/7/2003
JS-65: U.S. International Reserve Position
Page 2 o f 2
Euro
Yen
1. Contingent liabilities in foreign currency
TOTAL
Euro
Yen
TOTAL J
0
0
0
0
0
0
0
0
1.a. Collateral guarantees on debt due within 1
year
1.b. Other contingent liabilities
2. Foreign currency securities with e m b e d d e d
options
3. Undrawn, unconditional credit lines
3.a. With other central banks
3.b. With banks and other financial institutions
Headquartered in the U.S.
3.c. With banks and other financial institutions
Headquartered outside the U.S.
4. Aggregate short and long positions of options
in foreign
Currencies vis-a-vis the U.S. dollar
4.a. Short positions
4.a.1. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.1. Bought calls
.
4.b.2. Written puts
1
Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Accou
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week m a y be subject to revision. Foreign Currency
Reserves for the prior week are final.
2/The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and ar
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to the prior week's IMF data. IMF data for the latest week m a y be
subject to revision. IMF data for the prior week are final.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
http://www.treas.gov/press/releases/js65.htm
3/7/2003
JS-66: Media Advisory: Background Briefing on Final Tax Shelter Regulations
Page 1 of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
February 27, 2003
JS-66
Media Advisory:
Background Briefing on Final Tax Shelter Regulations
Regulation to be Releases at Briefing
Treasury Assistant Secretary for Tax Policy P a m Olson and IRS Chief Counsel B.
John Williams will hold a background briefing on tax shelter regulations on
Thursday, February 27, 2003 at 12:00 p m in room 4121 (the n e w media room). This
session will provide a synopsis of final regulations that apply to the disclosure of
potentially abusive tax avoidance transactions and will also allow for a Question
and Answer session with Tax Policy staff. N o cameras will be admitted-- this is a
"pen and pad" only briefing.
Media without Treasury or White House press credentials planning to attend
should contact Treasury's Office of Public Affairs at (202) 622-2960 with the
following information: name, social security number and date of birth. This
information m a y also be faxed to (202) 622-1999.
http://www.treas.gov/press/releases/js66.htm
3/7/2003
JS-67: C D F I Director Tony Brown's Testimony on F Y 2 0 0 4 Budget
Page 1 of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
February 27, 2003
JS-67
Hearing on FY 2004 Appropriations
U.S. House of Representatives
Subcommittee on VA, HUD, and Independent Agencies
Written Statement
Tony T. Brown, Director
Community Development Financial Institutions Fund
February 27, 2003
CDFI Director Tony Brown's Testimony on FY2004 Budget
httn://www.treas.eov/nress/releases/is67Jitm
4/22/2005
Hearing on FY 2004 Appropriations
U.S. House of Representatives
Subcommittee on VA, H U D , and Independent Agencies
Written Statement
Tony T. Brown, Director
DEPARTMENT OF THE TREASURY
Community Development Financial Institutions Fund
February 27, 2003
INTRODUCTION
Chairman Walsh, Congressman Mollohan and Members of the Subcommittee, I
appreciate the opportunity to testify before you today on behalf of the Department of
Treasury's Community Development Financial Institutions (CDFI) Fund and in support
of the President's FY 2004 budget. Last year was my first visit before this honorable
body.
I am Tony Brown, Director of the CDFI Fund. The Secretary of the Treasury selecte
to serve in this post in August 2001. I bring a 20-year prior experience in banking and a
personal passion for community development finance. Joining me today are my Deputy
Director for Policy and Programs (Fred Cooper) and Deputy Director for
Management/Chief Financial Officer (Owen Jones).
I characterize my visit before you today as filled with a great sense of accompli
and enthusiasm for the potential of the CDFI Fund. Our goal is to help make America a
place where all of its people, including those in economically distressed communities,
can realize the American dream through better access to credit, capital and financial
services. FY 2003 has been a transition year where the Fund has shiftedfromprimarily a
grants-making organization to one aimed at measurably improving the economic
conditions of the residents of low-income communities by spurring economic growth and
jobs through community development finance.
The CDFI Fund aims to do this primarily through the New Markets Tax Credit (NMTC)
Program, the Community Development Financial Institutions (CDFI) Program, the Bank
Enterprise Award (BEA) Program, and the Native American CDFI Development
(NACD) Program.
M y testimony today will focus on three key areas: the President's F Y 2004 budget
proposal; the C D F I Fund's management and operations in F Y 2003; and some
background on the C D F I Fund programs.
PRESIDENT'S FY 2004 BUDGET
The President's FY 2004 budget requests a $51 million appropriation for the CDFI Fund.
The proposed budget supports the administration of the N M T C Program, the C D F I
Program, the N A C D Program, and the B E A Program. Because the N M T C Program
involves an allocation of tax credits rather than program funds, all costs associated with
the development, implementation and monitoring of the N M T C Program are
administrative. The Administration's request reflects the following factors:
First, the NMTC Program is aimed at achieving similar economic development objectives
as the C D F I and B E A Programs.
Second, the NMTC Program is vastly larger in scope than the other CDFI Fund
programs. The first year N M T C Program allocation authority of $2.5 billion is some 50
times larger than the entire C D F I Fund request.
Third, the Administration currently is evaluating the BEA Program and how it might be
made more efficient and effective. In this process, the C D F I Fund is considering possible
legislative changes and, in the near future, I expect that w e will consult with Congress
regarding legislative options that would clearly distinguish the program from the
mandates of the Community Reinvestment Act and ensure that awardees use B E A
Program awards for community development activities. In F Y 2002 - 2003, the C D F I
Fund's o w n internal evaluation of the B E A Program concluded that the program needed
to be re-formed so that awards would be better targeted to wealth-building activities and
outcome-based performance goals to better track the program's impact would be adopted.
Fourth, this proposed FY 2004 funding level, reflecting a division of resources, is
adequate to continue an effective baseline funding level in each program, particularly in
light of the reforms put in place in recent months. The recent reforms reflect the
organizational maturity of the C D F I Fund and the C D F I industry so that a better, more
targeted effort is n o w possible, focusing on opportunities where real needs can be
addressed through sustainable economic development.
The proposed FY 2004 budget includes increased funding for administrative expenses to
$13 million to support staffing requirements of the N M T C Program and technology
requirements to enhance our support for E-grants and E-government. The E-grant and Egovernment activities support a "green rating" received from O M B on the Presidential
Management Agenda Scorecard.
2
M A N A G E M E N T A N D OPERATIONS
Internal Financial and Management Controls. The CDFI Fund has implemented
effective financial and management controls, as verified by its independent auditors
( K P M G , LLP). These controls have allowed the C D F I Fund to receive an unqualified
(clean) audit opinion. Additionally, this marks the fifth consecutive year that the
independent auditors have identified no material weaknesses or reportable conditions.
K P M G ' s opinion affirms that the C D F I Fund's Statements of Financial Position,
Operations, and Changes in Net Position and Cash Flow are fairly presented. These
findings reflect the commitment of the C D F I Fund to sustain and improve its internal
controls, operating policy and procedures, and awards management.
The CDFI Fund continues to comply with the Federal Managers' Financial Integrity Act
( F M F I A ) and the Federal Financial Management Improvement Act (FFMIA). The C D F I
Fund's internal management systems, accounting and administrative controls are
operating effectively.
Administrative Processes. During my tenure as Director, I have spent a significant
amount of time reviewing the C D F I Fund's internal operations. W e have made
successful changes that have streamlined our awards process. In F Y 2002, w e
successfully reduced the amount of time required for our award processes. In a
September 2002 O I G audit report titled "CDFI Fund Post-Award Administration
Process," the O I G concluded "that the C D F I Fund's post-award administration process is
effective in ensuring that C D F I award recipients are carrying out their activities in
accordance with their assistance agreements." The report further states, "[T]he Fund has
taken steps to reduce the length of time that it takes to disburse funds. These steps
include Program and Compliance staff performing a compliance and matching funds
analysis, implementation of the Reports Monitoring Database, and revising h o w it
processes assistance agreements."
Integration of New Programs. We successfully integrated the NMTC Program within
our existing operations without increasing the number of n e w employees above F Y 2001
levels. O n e of the most significant E-government initiatives undertaken by the C D F I
Fund in F Y 2002-03 was the implementation of electronic applications for the N M T C
Program, facilitating ease of the application scoring process and metrics for various
management reports by having captured data readily available for analysis and reporting.
This was an overwhelming success and the C D F I Fund is moving forward to introduce
electronic applications for each of its financial assistance programs in F Y 2003.
Compliance and Portfolio Monitoring. In FY 2004 and beyond, we will continue to
enhance the C D F I Fund's research capacity, implementing market and portfolio analyses
to measure the availability of financial services in underserved markets and to critique the
financial and program performance of existing CDFIs. The C D F I Fund has an investment
portfolio of over 600 awards, totaling over $500 million currently under compliance
review.
3
Measuring Investment Impact. The C D F I Fund places a high priority on measuring
impact and is in the forefront of improving performance reporting within the C D F I
industry. The C D F I Fund is building on its experience with the C D F I Data Project, an
initiative undertaken by the C D F I Fund and C D F I industry representatives, to develop a
more sophisticated data collection system for CDFIs and C D E s that will allow for the
collection of transaction-level data to provide the specific location and characteristics of
each loan in a CDFI/CDE's portfolio, thus allowing the C D F I Fund to measure impact at
the census tract level. The C D F I Fund plans to use this data to compare CDFI/CDEs'
lending behavior and community development impact to that of traditional financial
institutions and thus demonstrate that C D F I / C D E s lend in areas where traditional banks
have less of a presence.
You will notice a significant difference in the format of the FY 2004 budget submission.
In the past, the C D F I Fund reported nearly 20 measures, mostly measuring activity
outputs. The introduction of our F Y 2004 budget complies with the President's mandate
for integrated budget performance measures. The C D F I Fund received a "green rating"
from the Office of Management and Budget in its latest scorecard reporting for this
Presidential Management Agenda initiative.
The stated objectives of the CDFI Fund have been simplified to three key statements: (i)
increase financing to businesses (including non-profit businesses) and individuals that
have low wealth, have limited collateral, are located in underserved communities, or have
other characteristics that inhibit them from obtaining financing from traditional financial
sources, but w h o present good opportunities for assistance promoting sustainable
economic development in the community; (ii) expand the supply and quality of housing
units in underserved communities and increase homeownership in these markets by
increasing the availability of housingfinancingthat leverages conforming mortgages or
non-traditional sources of housing finance; and (iii) expand access to affordable financial
services for the "unbanked," low-income people and others in underserved communities.
New baseline performance measures have been established and set into motion this year,
through the C D F I Fund's F Y 2003 programs, and include better tools for tracking
investment results and the use of the C D F I Fund's awards. W e will continue the process
of improving the Fund's programs by evaluating for measurable results, targeting
resources through sustainablefinancialinstitutions, with an emphasis on supporting
financial services that impact our nation's most distressed areas.
Interagency Cooperation. The CDFI Fund's Community Development Advisory Board
likewise is very interested in measuring impact. At the most recent Advisory Board
meeting, the federal agency representatives ( H U D , U S D A , S B A , Commerce, and
Interior) agreed to work with the C D F I Fund to try to develop c o m m o n performance
measures for federal community development finance programs. Such an interagency
collaborative could lead to a consolidated report on the impact of federal government
expenditures in distressed communities across the country.
4
The C D F I Fund has worked very closely with the Internal Revenue Service to develop
the guidance and regulations necessary to implement the N M T C Program; engaged in
extensive discussions with the S B A on h o w to best match the N M T C Program
requirements with the SBA's N e w Markets Venture Capital Program; and conducted
numerous meetings with the G A O to determine appropriate compliance and performance
measurement requirements for N M T C Program allocatees.
Investment Underwriting. The CDFI Fund will use the new data collection system to
implement P L U M , a n e w C D F I performance rating system. P L U M stands for
Performance/community development impact; Liquidity and overall financial condition;
Underwriting/portfolio quality; and Management capacity. Based on these four broad
components, the C D F I Fund will use P L U M to rate each certified CDFI's financial
strength and level of community development impact. The C D F I Fund's plan is to use
this rating system to better manage its investment portfolio by creating a compliance
"watch list" of under-performing entities, and to identify and promote best practices in
the industry. Eventually, w e plan to incorporate P L U M in the Fund's award underwriting
process.
E-Gov Enhancements. The CDFI Fund will soon announce a new electronic web-based
customer relationship tool called "myCDFI." This n e w tool will assist interested parties
with a variety of services from a single location. The initial services to be offered
through m y C D F I include: access to all program electronic applications; access to
historical electronic applications (read-only mode); self service address and
organizational information updates; ability to create and maintain additional user
accounts with various access levels; ability to access target service area information
created while using the C D F I Fund Help Desk (including Hot Zones); and access to a
message box for communication with C D F I Fund staff. Additional features will be added
in the near future, including the ability to submit electronically reports required by the
C D F I Fund per award agreement terms.
CDFI FUND PROGRAMS OVERVIEW
The strategic goal of the CDFI Fund is to improve the conditions of economically
distressed communities by enhancing greater access to capital and otherfinancialservices
through CDFIs (which generally are small business and housing loan funds, as well as
regulated, community-oriented depository institutions), C D E s (which include for-profit
and nonprofit corporations and partnerships), and insured depository institutions (banks,
thrifts and credit unions).
The approach for investing in CDFIs includes three major strategies:
1) focusing CDFI Program awards on the nation's most economically distressed
areas;
5
2) establishing a "growth continuum" strategy in award decisions, through which
awards are provided to support CDFIs to the point where they can be selfsustaining, thus permitting the C D F I Fund to provide assistance to CDFIs with
unmet capital needs in other distressed communities; and
3) taking actions to obtain the information necessary to measure and report on the
impact of the C D F I Fund's programs.
Targeting CDFI Fund Resources: The authorizing statute allows the CDFI Fund to
provide incentives for the purposes of facilitating increased lending and provision of
financial and other services in economically distressed communities. The economic
distress definitions vary among the Fund's programs.
The CDFI Fund views its partnership with CDFIs, CDEs, and insured depository
institutions as a catalyst for vigorous community and economic development financing
activity. In F Y 2003, the C D F I Fund introduced "Hot Zones" to the C D F I Program to
help prioritize and direct the C D F I Fund's limited investments. B y managing C D F I Fund
resources to entities that serve Hot Zones, our dollars will be prioritized for investments
into areas with the greatest needs and among CDFIs that can produce strong measurable
impact.
Targeting Resources Geographically
CDFI Program
Total Metro
Census
Tracts
Percent of
National
Metro
Tracts
Non-Metro
Census
Tracts
Percent of
Non-Metro
Total Tracts
Percent of
National
Non-Metro
Counties
Percent of
National
BEA
Program
NMTC
Program
Eligible LowIncome
Communities
19,732
National
Total
Eligible
Investment Areas
Hot Zones
52,241
20,093
10,851
Eligible
Distressed
Communities
1,670
100%
38%
21%
3%
38%
14,063
4,966
NA
656
6,605
100%
35%
NA
5%
47%
66,304
25,059
NA
2,326
26,337
100%
38%
NA
4%
40%
2,319
743
285
NA
NA
100%
32%
12%
NA
NA
Sources: 2000 Census data, U.S. Dept. of Housing and Urban Development 2002 Difficult Development Areas.
Figures do not include outlying territories other than Puerto Rico.
6
Hot Zones are a subset of C D F I Program Investment Areas designated by the C D F I Fund
as having greater economic distress and community development needs. They are the
"most distressed" of the nation's distressed markets. Hot Zones have been identified
based on census data and include, among other factors, areas with a poverty rate of at
least 20 percent, income levels at or below 80 percent of the area median income,
unemployment rates that are at least 1.5 times the national average, and housing costs that
exceed 30 percent of the gross monthly income of a low-income household.
States that have the highest percentage of non-metropolitan Hot Zones - such as
Mississippi, Kentucky, Montana, and Arizona - also have significant non-metropolitan
persistent poverty populations (see Figures 1 and 2, below).
Figure 1.
Nonmetro Persistent Poverty Counties
Poverty Rates of 2 0 % or more in 1960,1970, 1980.1990 and 2000
Source: Economic Research Service . US D A and
U.S. Census Bureau
2000 Update Prepared and Mapped by RUPRI
Nonmemo Persistent Poverty Counties (361)
7
Figure 2.
012 S f
50
I iiiI•i'I
Mes
0 1?,V~G
540
I < ' i I '' • I
Viles
>.
i . ? 5 150
Illllllll
V: .;-i
In the F Y 2003 round of the Financial Assistance Component of the C D F I Program, the
C D F I Fund will target its resources to CDFIs that will use the award proceeds to serve
Hot Zones and/or achieve the programmatic priorities of increased homeownership
opportunities that are affordable to low-income households and homeownership
opportunities for other targeted populations lacking access to loans, investments and
financial services.
In its evaluation of applications, the CDFI Fund will give the most points to those
applicants that show that at least 75 percent of their activities will be directed toward Hot
Zones. Applicants that are not principally serving Hot Zones m a y be scored to receive
the most evaluation points if they demonstrate an effective track record and plan for
promoting homeownership opportunities among low-income, very-low income and other
targeted populations.
Eligible geographic areas under the BEA Program are called Distressed Communities and
include communities that meet certain criteria of economic distress, including Indian
Reservations. Specifically, a Distressed Community must have (1) a poverty rate of at
least 30 percent, provided no individual census tracts has a poverty rate of less than 20
percent (according to the most recent census); and (2) an unemployment rate that is at
least 1.5 times the national average (according to the most recent Bureau of Labor
Statistics data1).
1
Census tracts meeting these distress criteria are some of the most distressed in the nation. Using 2000
Census and B L S data, there are some 2,326 census tracts that qualify for the B E A Program. These tracts
8
The N M T C Program requires that substantially all of the investments m a d e by a C D E
using NMTC-related investment proceeds be invested in low-income communities,
geographic areas meeting certain economic distress criteria. Investments must be m a d e
in census tracts where the area median income is 80 percent or less than the statewide
area median income (or, in the case of metropolitan areas, metropolitan area median
family income, if greater), or where the poverty rate is 20 percent or greater. Applicants
to the first round of the N M T C Program were reviewed on a competitive basis.
Applicants that indicated that they intend to target their activities to communities with
higher levels of economic distress than required by statute generally scored more
favorably.
Certified CDFIs and CDEs. CDFIs are building a financial services network that is
focused on our most economically deprived communities and citizenry. C D F I Fund
estimates show that certified CDFIs' Target Markets cover 100 percent of nonmetropolitan Hot Zones and 77 percent of metropolitan Hot Zones 2 . There is at least one
C D F I headquartered in each state, the District of Columbia, Puerto Rico and the U.S.
Virgin Islands.
CDFIs are specialized financial institutions that operate in markets, increasingly in
partnership with traditional lenders. The organizations w e support are often able to lend
in ways that are more flexible or not available to traditionally regulated financial
institutions. A s of February 1, 2003, w e have certified 633 financial institutions as
CDFIs:
Certified CDFIs
F Y 2002
F Y 2003
(as of 2/1/02)
(as of date 2/1/03)
Total CDFIs
Banks, Thrifts,
Holding Cos.
Credit Unions
Loan Funds
Venture Funds
F Y 2004
(Projected)
513
633
706
58(11%)
72(11%)
85 (12%)
94(18%)
344 (67%)
17(3%)
117(18%)
424 (67%)
20 (4%)
120(17%)
475 (67%)
26 (4%)
Through the N M T C Program, the C D F I Fund designates entities as community
development entities (CDEs). T o qualify for C D E designation by the C D F I Fund, an
entity must be a domestic corporation or partnership that: (1) has the primary mission of
serving, or providing investment capital for low-income communities or low-income
persons; and (2) maintains accountability to residents of low-income communities
represent 4 percent of all U S census tracts and less than 12 percent of the 20,433 tracts that are considered
"Low and Moderate Income."
2
Please note that CDFI Target Markets were originally geocoded using 1990 Census tracts and county
boundaries and that CDFI Target Markets are subject to change due to post-award amendments.
Consequently, the total estimates are subject to adjustment, due both to changes in tract and county
boundaries between the 1990 and 2000 Census (which the CDFI Fund's Hot Zones are based on) and to
amendments to individual CDFI Target Markets.
9
through representation on a governing or an advisory board. Entities m a y apply to
become C D E s even if they do not plan to seek a N M T C allocation. Such entities
presumably have a strategy of selling loans to a C D E with an allocation, or seeking an
investment or loan from a C D E with an allocation. A s of February 11, 2003, the C D F I
Fund has certified 821 organizations as C D E s .
Certified C D E s
F Y 2003
(as of
2/11/03)
Total C D E s
CDFIs
S B A designated
SSBICs
Other entities
821
F Y 2004
(Projected)
335 (41%)
9 (1%)
1,200
400 (33%)
15(1%)
477 (58%)
785 (66%)
N e w Markets T a x Credit ( N M T C ) Program Overview. The intent of the Community
Renewal Tax Relief Act of 2000 is to attract private sector investment in businesses
located in low-income communities. Through the N M T C Program, taxpayers will be
provided a credit against Federal income taxes for qualified equity investments made to
acquire stock or other equity interests in designated community development entities
(CDEs). In turn, substantially all of the proceeds of qualified equity investments must be
used by the C D E to m a k e qualified investments in low-income communities. These
qualified low-income community investments include loans to or equity investments in,
businesses or C D E s operating in low-income communities.
The NMTC Program creates a capitalization mechanism that many of the larger, more
established CDFIs can advantage. In addition, other non-CDFIs m a y participate as well thereby widening the pool of entities and capital sources involved in building the
economies of our low-income communities. In this regard, the N M T C Program helps to
supplement the C D F I Program; however, the N M T C Program is limited to areas that
qualify as low-income communities and, to attract investors, the underlying business
activity of the C D E must be able to deliver a return on investor's capital at risk. Those
C D F I activities that are outside of the N M T C Program's eligible low-income
communities and are of such risk that investment motivated capital is inappropriate, will
not be able to generally benefit from the N M T C Program.
By offering a tax credit, the NMTC Program encourages private investment in lowincome communities. If investors embrace the program, it will be a significant source of
n e w capital that could help to stimulate n e w industries and entrepreneurs, diversify the
local economy, and generate n e w jobs in low-income communities.
The tax credit provided to the investor will cover a seven-year period. In each of the first
three years, the investor will receive a credit totaling 5 percent of the total value of the
stock or equity interest at the time of purchase. For thefinalfour years, the value of the
credit is 6 percent annually.
10
The $15 billion of equity investments for which tax credits can be claimed through the
N M T C Program m a y be allocated between 2001-2007. Because the C D F I Fund was
launching the program in 2001, thefirsttwo years' allocations were combined, and $2.5
billion was available for allocation in the just completedfirstround.
In FY 2003, the CDFI Fund evaluated 345 applications to the NMTC Program; these
applications together requested the authority to issue $25.8 billion in equity for which
N M T C s m a y be claimed. In March 2003, the Treasury Department, through the C D F I
Fund, will announce the allocation of N M T C authority to certain community
development entities (CDEs), thus supporting $2.5 billion in private sector equity
investments that will result in economic stimulus in low-income communities throughout
the country.
To achieve the Administration's goals of demonstrably improving the life of residents in
impacted low-income communities. Treasury attempted to set a high bar for applicants
and strove to m a k e the selections based on a rigorous merit-based selection process. This
review was conducted in the following manner:
Step One:
• All policy decisions regarding the selection process were m a d e by officials separate
and apart from those w h o reviewed and rated applications. N o identifying
information for any application was provided to policy officials until after the
selection process was concluded.
• In scoring each application, the reviewers rated each of four evaluation sections:
Business Strategy, Capitalization Strategy, Management Capacity and Community
Impact, awarding up to 25 points per section. In addition, reviewers rated applicants
with respect to two statutory priorities: (i) up to 5 points for a track record of serving
disadvantaged businesses or communities, and (ii) 5 points for committing to invest
substantially all of the proceeds from its qualified equity investments in unrelated
entities.
• For consistency, the process required three reviewers to independently review and
evaluate each application. The reviewers included C D F I Fund staff, other federal
agency staff working in other community development finance programs, and
independent private sector members of the community development finance
community.
• In addition to evaluating and scoring each application, reviewers recommended an
allocation amount that was supported by the information in the application.
Step Two:
• Advancing applications were deemed to be those with an aggregate base score
(without including priority points) that was in the "good" range based on a scoring
scale of weak, limited, average, good and excellent. In addition, each advancing
11
application had to achieve an aggregate base score in the "good" range in each of the
four application evaluation criteria.
• For each application, panelists reviewed the scores, comments and recommended
allocation amounts provided by each of thefirstphase reviewers. A statistical review
was conducted to identify anomalous scores. In cases where there was an anomalous
first phase reviewer score, the comments and recommendations of a fourth
independent reviewer were used to determine whether the anomalous score should be
replaced.
• The review panel also reviewed a variety of compliance, eligibility, due diligence and
regulatory matters. Included in this review were (i) checks to determine whether any
applicants that have been awarded funds through other Fund programs were
compliant with the award requirements, (ii) verification that the applicants' investor
letters were consistent with the capitalization information provided in their
applications, and (iii) consultation with the IRS with respect to any applicant that
proposed a business strategy that m a y not be permitted under the N M T C Program
regulations.
Step Three:
• After the second stage of the review process, the rank order list of applicants and the
recommended allocation amounts were forwarded to the Selecting Official (the
N M T C Program Manager). The Selecting Official reviewed the rank order list and
the recommendations, and decided whether to accept or modify the panel's
recommendations. In the event the Selecting Official's decision varied from the
panel's recommendation by more than a prescribed amount, then concurrence is
required by the Reviewing Official (Deputy Director). This process ensures that
adequate documentation and oversight is maintained to protect the integrity of the
allocation decisions.
• Per the Fund's allocation application evaluation policies and procedures, the
Selecting Official's (and, as the case m a y be, the Reviewing Official's) allocation
decisions are final.
• The CDFI Fund expects that applicants will be informed of the Fund's decisions in
March 2003. Shortly thereafter, allocatees will enter into allocation agreements with
the Fund.
Following an internal evaluation of the NMTC application and selection process, the
C D F I Fund will determine modifications for the next round of application and applicant
guidance materials. It is expected that applications for the next round will be due in the
last quarter of calendar year 2003, and allocation decisions in thefirstquarter of 2004.
The CDFI Fund is developing, with the Internal Revenue Service, a compliance system
for the N M T C Program to ensure that each entity that receives a N M T C allocation will
continue to fulfill its C D E certification requirements and the terms of its allocation
12
agreements with the C D F I Fund, and that the IRS has appropriate information to
determine that allocatees are operating within the legislation and regulations promulgated
by the IRS. The compliance system will be based in part on input provided at a meeting
co-sponsored by the C D F I Fund and the General Accounting Office in March of 2002.
At that meeting, academics and other community development financing experts
discussed the advantages and disadvantages to various approaches to both compliance
issues as well as approaches to evaluating the impact of the investments m a d e under the
N M T C Program on low-income communities.
CDFI Program Overview. Through the CDFI Program, the CDFI Fund promotes
access to capital and local economic growth in distressed communities by directly
investing in and supporting CDFIs. The C D F I Program provides financial assistance in
the form of grants, loans, equity investments or deposits to CDFIs. Since its inception,
the C D F I Fund has made over 900 C D F I Program awards, totaling S405 million.
For FY 2003, the CDFI Fund has refocused the CDFI Program to meet more effectively
the Fund's objectives in three key ways: promoting a "continuum of growth" that
encourages the largest and most established CDFIs to leverage non-governmental sources
of capital; giving highest priority on investments that serve the most distressed
geographic areas; and giving priority to initiatives that promote homeownership among
low-income and other underserved populations.
The Financial Assistance Component: replaces the Core, Intermediary, and part of the
Small and Emerging C D F I Assistance Components offered in past years. The Financial
Assistance Component consolidates the C D F I Program's components that provide
financial assistance (requiring matching funds) into one competitive funding round.
The following table depicts asset-size of CDFI Program awardees and illustrates the
continuum of growth strategies:
All CDFI
Program
Applicants
2000-2002
Total CDFIs/Awardees
Asset-Size
CDFIs/Awardees
< S5 million
>S5 - < S25 million
>S25 - < S50 million
>S50 - <S500 million
>S500 million
842
Financial Assistance Awards
(formerly Core & S E C A )
2002
2003
2004
(Projected)
(Budget)
91
71%
65%
19%
6%
4%
0%
18%
14%
3%
0%
40
63%
27%
8%
2%
0%
30
60%
30%
9%
1%
0%
Technical Assistance Awards
2002
2003
2004
(Projected)
(Budget)
61
40
30
82%
85%
85%
14%
0%
4%
0%
15%
0%
0%
0%
15%
0%
0%
0%
The C D F I Fund recognizes that there are two broad categories of CDFIs: larger CDFIs
that have greater ability to leverage private-sector resources, have greater self-sufficiency
and generate higher volume of activity and corresponding community development
impact, and smaller CDFIs that serve smaller, more underserved markets, are less
efficient and produce lower volumes of activity, but serve critical market needs.
13
T h e Technical Assistance/Native American Technical Assistance ( T A / N A T A )
C o m p o n e n t allows applicants to apply for limited technical assistance funds on a rolling
first-in,first-reviewedbasis. This program replaces the Small and Emerging C D F I
Assistance (SEC A ) Component and part of the Native American C D F I Technical
Assistance ( N A C T A ) Program offered in F Y 2002. The main purpose of the n e w
T A / N A T A Component is to allow n e w and growing CDFIs to access needed technical
assistance w h e n they need it, in order to help them enhance their capacity to serve their
target markets.
Entities applying to this program are on the beginning end of the "growth continuum,"
either as start-up or small entities. The purpose of the technical assistance provided
(including staff training, technology, and outside expertise), is to push entities more
quickly and effectively up the growth continuum than they would without the technical
assistance. S o m e typical uses of T A grants include: computer system upgrades and
software acquisition; developing loan underwriting policies and procedures; evaluating
current loan products and developing n e w ones; and training staff.
Bank Enterprise Award (BEA) Program Overview. The BEA Program is aimed at
expandingfinancialservice organizations' community development lending and
investments through regulated institutions.
The BEA Program provides monetary incentives for banks and thrifts to expand
investments in CDFIs and/or to increase lending, investment and service activities in
distressed communities. B E A Program awards have varied in size from less than $1,000
to almost $3 million, depending upon the type and amount of assistance provided by the
bank and the activities being funded through the bank's investments. In general, banks
that provide equity investments to CDFIs are likely to receive the largest awards relative
to the size of their investments.
However, the Administration currently is evaluating the BEA Program to ensure that it is
as effective and efficient as possible, to distinguish the program from the mandates of the
Community Reinvestment Act, and to ensure that awardees use B E A Program awards for
community development activities.
In addition, the CDFI Fund concluded that the BEA Program regulations should be
revised to target awards to "personal wealth" and "community asset" building activities,
and to those CDFIs with a greater need for the incentive provided by the B E A Program
award to facilitate their bank partnerships. Thus, in 2002, the C D F I Fund initiated
regulatory changes to the B E A Program to take effect with the F Y 2003 funding round.
The Administration supports continuation of a reconstituted BEA Program. An effective
B E A Program could provide the Treasury Department with an effective strategy to
engage traditional banks and thrifts to help us achieve our goal of improving the
economic conditions of underserved areas through insured depository institutions. The
role that banks and thrifts play is critical to capital access. W e need to encourage them to
14
target these underserved communities in ways that do not impede safe and sound banking
practices in a sustainable manner.
Training Program. The Training Program is aimed at supporting the CDFI Fund's
strategic goal of strengthening the organizational capacity and expertise of CDFIs and
other Financial Service Organizations. The Training Program, which was started in F Y
1999, provides funds that support the development and delivery of training products to
CDFIs and other entities engaged in community development finance. Training is
addressed via classroom instruction, web-based distance learning, and other electronic
formats. The C D F I Fund is particularly excited about providing the support to help build
the electronic teaching capacity of the C D F I industry. Through distance learning, the
cost of accessing training is reduced for the CDFIs (elimination of the time and cost of
travel) and the ability of CDFIs that are either of limited resources or of remote locations
to access training is enhanced.
By the end of calendar 2002, two of the training providers completed their efforts under
the training contract with the C D F I Fund. The remaining two will continue to provide
training through this fiscal year. Training provided in F Y 2003 is largely through
distance learning technology. Extension of training delivery requirements will be
determined in part on availability of appropriated funds.
Rural Community Assistance. The FY 2002 appropriations for the CDFI Fund
contained report language requesting an update on rural lending practices as part of the
fiscal year 2003 budget submission. C D F I Program and B E A Program awardees are
indeed reaching rural areas. In 2002, 60 percent of awardees receiving financial
assistance, and 50 percent of technical assistance awardees, indicated that they served
rural areas as all or part of their markets.
Of 156 surveyed awardee CDFIs, 20 (13 percent) estimated that 100 percent of their
activities served rural areas and an additional 23 (15 percent) estimated that 51 to 99
percent of their activities served rural areas. Considering that 20 percent of U.S.
households reside in non-metropolitan areas (Census 2000), the percentage of C D F I Fund
awardees that target more than half their activities to rural areas (28 percent) compares
favorably.
Under the BEA Program, a "distressed area" must have a population of at least 4,000.
Distressed areas are composed of census tracts. M a n y rural census tracts do not have
4,000 people, which in m a n y cases precludes their eligibility as B E A distressed areas.
Eliminating the B E A Program population requirement would result in a greater portion of
rural America becoming eligible for benefiting from the B E A Program; such a change
would require legislative action.
Native American Strategic Plan; the NACD Program; the Native American CDFI
Training Program. The C D F I Fund is preparing a Native American Strategic Plan. It
will address the issues of C D F I reach and service to Native American, Alaska Native and
Native Hawaiian communities; increasing capacity within these communities to respond
15
to credit, investment and financial services needs; and attracting other existing resources
to these underserved communities.
Since 2002, the CDFI Fund has broadened its outreach to Native American communities.
In F Y 2002, the C D F I Fund m a d e itsfirstset of awards under the N A C T A Program. A
total of 38 organizations were selected to receive $2.7 million in technical assistance.
Eleven awards were to CDFIs or entities planning to become CDFIs and 27 were to
entities, such as tribes and tribal housing authorities, proposing to create separate CDFIs.
Funded organizations are based in 18 states. The successful outcome of the launch of the
N A C T A Program has greatly increased the C D F I Fund's reach in support of Native
American and Alaska Native communities, and is building an emerging network of
Native American focused CDFIs.
In 2003, the CDFI Fund is modifying the 2002 NACTA Program by separating it into
two parts: (i) the N A T A Component (of the C D F I Program's Technical Assistance
Component) and (ii) the N A C D Program. This modification again reflects the C D F I
Fund's "continuum of growth" approach. Entities such as tribes or non-profit
organizations serving Native American communities that want to create CDFIs are at the
earliest stage of the growth continuum. These entities can apply for technical assistance
funds to develop a plan to create a C D F I over a three-year period. In this way,
organizations that serve Native American communities are within the mainstream of the
C D F I Fund's programs.
In 2003, the CDFI Fund is implementing the Native American CDFI Training Program.
This training program is designed to help Native American communities build technical
and leadership skills enabling them to create and manage CDFIs. Funds will be provided
to selected contractors to provide training programs through both Internet based and
classroom based formats.
The CDFI Fund is also actively looking to build partnerships with other Federal agencies
in support of community development in Native American communities. The C D F I
Fund is considering the possibility of coordinating efforts to provide incentives to use
existing Federal programs (such as loan guarantee programs), and efforts to attract
depository institutions and private sector investors to serve Native American
communities. T o this end, the C D F I Fund is developing a demonstration program to test
approaches to provide financing for economic development, affordable housing, and for
provision offinancialservices in Native American communities.
Secondary Market Study. The CDFI Fund is conducting a study to explore the
possibility of expanding the secondary market for C D F I loans. Selling loans on the
secondary market while c o m m o n among traditional lenders is not a general practice
among CDFIs. In fact, very few CDFIs have engaged in loan sales to date. If C D F I
loans can be made attractive to potential investors and investors are willing to pay a
reasonable price, the C D F I industry will gain a major source of private sector capital that
is likely to grow with the industry's needs and will limit the CDFIs need for additional
capitalization.
16
The C D F I Fund's study will examine the current and future capital needs of CDFIs, and
will make recommendations. The study will involve consultations with CDFIs, potential
loan purchasers and others with an interest in the secondary market. A draft report is
expected in the summer of 2003.
*5> 3jC 5j» 3jC 5jC
As you can see, the CDFI Fund has made substantial progress over the last year. The
C D F I Fund's programs represent a continuum of capital, investment and incentive
opportunities aimed at developing affordable housing, promoting homeownership,
starting and expanding businesses, meeting unmet market needs, and stimulating
economic growth in our nation's low-income and distressed areas. In short, the goal of
the C D F I Fund is to help bring mainstream capital to those people and communities that
have been overlooked. The C D F I Fund has made significant strides in the integration of
its performance measures in the budget process.
Again, I thank you for the opportunity to present my testimony in support of the
President's F Y 2004 budget request and look forward to answering any questions you
m a y have for m e .
17
on U J m
I'l Bl.lt M l-\lkS • 1500 I'lNNSVIA A M v w KM:I;, \.W. • WASHINGTON. !>.(.. 2022H •.:202i <i22-2<>MJ
EMBARGOED UNTIL 11:00 A.M.
February 27, 2003
CONTACT:
Office of Financing
202/691-3550
TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction 13-week and 26-week Treasury bills totaling $33,000
million to refund an estimated $28,008 million of publicly held 13-week and 26-week
Treasury bills maturing March 6, 2003, and to raise new cash of approximately $4,992
million. Also maturing is an estimated $22,001 million of publicly held 4-week
Treasury bills, the disposition of which will be announced March 3, 2003.
The Federal Reserve System holds $12,118 million of the Treasury bills maturing
on March 6, 2003, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders either in these
auctions or the 4-week Treasury bill auction to be held March 4, 2003. Amounts
awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of each auction. These
noncompetitive bids will have a limit of $100 million per account and will be accepted
in the order of smallest to largest, up to the aggregate award limit of $1,000
million.
TreasuryDirect customers have requested that we reinvest their maturing holdings
of approximately $1,092 million into the 13-week bill and $624 million into the 26week bill.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions set
forth in the Uniform Offering Circular for the Sale and Issue of Marketable Book-Entry
Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about each of the new securities are given in the attached offering
highlights.
oOo
Attachment
s,0
HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED MARCH 6, 2003
February 27, 2003
Offering Amount
$17,000
Maximum Award (35% of Offering Amount)
$ 5,950
Maximum Recognized Bid at a Single Rate .... $ 5,950
NLP Reporting Threshold
$ 5,950
NLP Exclusion Amount
$ 5,200
Description of Offering:
Term and type of security
CUSIP number
Auction date
Issue date
Maturity date
Original issue date
Currently outstanding
Minimum bid amount and multiples
million
million
million
million
million
91-day bill
912795 MQ 1
March 3, 2003
March 6, 2003
June 5, 2003
December 5, 2002
$20,634 million
$1,000
$16,000
$ 5,600
$ 5,600
$ 5,600
None
million
million
million
million
182-day bill
912795 NL 1
March 3, 2003
March 6, 2003
September 4, 2003
March 6, 2003
$1,000
The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve
Banks as agents for FIMA accounts. Accepted in order of size from smallest to largest with no more than $100
million awarded per account. The total noncompetitive amount awarded to Federal Reserve Banks as agents for FIMA
accounts will not exceed $1,000 million. A single bid that would cause the limit to be exceeded will
be partially accepted in the amount that brings the aggregate award total to the $1,000 million limit. However,
if there are two or more bids of equal amounts that would cause the limit to be exceeded, each will be prorated
to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in increments of .005%, e.g., 7.100%, 7.105%.
(2) Net long position (NLP) for each bidder must be reported when the sum of the total bid amount, at all
discount rates, and the net long position equals or exceeds the NLP reporting threshold stated above.
(3) Net long position must be determined as of one half-hour prior to the closing time for receipt of
competitive tenders.
Receipt of Tenders:
Noncompetitive tenders
Prior to 12:00 noon eastern standard time on auction day
Competitive tenders
Prior to 1:00 p.m. eastern standard time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank on issue date, or payment of full par amount
with tender. TreasuryDlrect customers can use the Pay Direct feature, which authorizes a charge to their account of
record at their financial institution on issue date.
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:
FOR IMMEDIATE RELEASE
February 27, 2003
Office of Financing
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 14-DAY BILLS
14-Day Bill
March 03, 2003
March 17, 2003
912795MX6
Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:
1.240%
Investment Rate 1/:
1.255%
Price:
99.952
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 31.84%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tendered
Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)
$
SUBTOTAL
61,265,000
0
0
$
$
26,000,384
0
0
61,265,000
26,000,384
0
0
Federal Reserve
TOTAL
Accepted
61,265,000
$
26,000,384
Median rate
1.225%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.200%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 61,265,000 / 26,000,384 = 2.36
1/ Equivalent coupon-issue yield.
http://www.publicdebt.treas.gov
((6 - (SI
JS-70: Treasury Issues Final Regulations to Crack D o w n on Abusive Tax Avoidance Transactions
Page 1 of 2
F R O M T H E OFFICE O F PUBLIC A F F A I R S
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
February 27, 2003
JS-70
Treasury Issues Final Regulations to Crack Down on Abusive Tax
Avoidance Transactions
The Treasury Department and the Internal Revenue Service are issuing final
regulations requiring taxpayers to disclose their participation in potentially abusive
tax avoidance transactions, promoters to register certain abusive transactions, and
advisors to maintain lists of clients w h o have entered into potentially abusive tax
avoidance transactions. These rules will help ensure that the Treasury Department
and the Internal Revenue Service get the information needed to identify and
evaluate questionable transactions.
"By issuing final regulations, we are putting the promoters that sell questionable
transactions and the taxpayers that participate in them on notice. W e are increasing
our efforts to identify and shut down abusive tax avoidance transactions as quickly
as possible," stated Treasury Assistant Secretary for Tax Policy P a m Olson. "The
final regulations improve the system by helping us get the information needed to
identify questionable transactions and the taxpayers w h o have participated in
them. Besides using the information to target enforcement resources better, the
Treasury Department and the Internal Revenue Service will use this information to
prepare guidance that advises taxpayers about transactions marketed to them that
may not work as advertised."
These final regulations conform the taxpayer disclosure regulations and the
promoter list-maintenance regulations so that the rules are easier to apply and
administer. In addition, in response to the comments received when the rules were
proposed in October 2002, the final regulations reflect a number of changes
intended to reduce unnecessary disclosure.
Six Categories of Potential Tax Avoidance Transactions Covered. Taxpayers will
be required to disclose and promoters will be require to maintain investor lists for
six categories of transactions:
(1) Listed transactions (i.e., transaction that have been specifically identified by the
IRS as tax avoidance transactions);
(2) Transactions marketed under conditions of confidentiality;
(3) Transactions with contractual protection;
(4) Transactions generating a tax loss exceeding specified amounts;
(5) Transactions resulting in a book-tax difference exceeding $10 million; and
(6) Transactions generating a tax credit when the underlying asset is held for a brief
period of time.
The final regulations generally are effective for transactions entered into on or after
the date that they are filed with the Federal Register, which is expected to be this
http://www.treas.gov/press/releases/is70.htm
3/7/2003
JS-70: Treasury Issues Final Regulations to Crack D o w n on Abusive T a x Avoidance Transactions
Page 2 of 2
Friday, February 28, 2003. Taxpayers, however, m a y elect to apply the final
disclosure regulations for transaqtions entered into on or after January 1, 2003.
Background. After evaluating the effectiveness of the prior rules, in March 2002,
the Treasury Department issued its Enforcement Proposals for abusive tax
avoidance transactions. The Enforcement Proposals include administrative,
regulatory, and legislative actions and proposals. These final regulations carry out
an important regulatory action by simplifying the definition of a transaction that must
be disclosed on a return by a taxpayer and for which lists of participants must be
maintained by a promoter. These changes provide objective rules that more clearly
identify w h e n taxpayers and promoters are covered by the disclosure and listmaintenance requirements. The final regulations, therefore, will enhance
compliance and disclosure.
The text of the final regulations and the text of two related revenue procedures are
attached. They are subject to minor technical changes for publication by the
Federal Register and the Internal Revenue Service.
Related Documents:
• 6011-4 Text
• Book Tax
• Loss Transactions
http://www.treas.gov/press/releases/js70.htm
3/7/2003
QUARTERLY REPORT TO CONGRESS ON
FINANCIAL IMPLICATIONS OF U.S. PARTICIPATION
IN THE INTERNATIONAL MONETARY FUND
FEBRUARY 2002
This report has been prepared in compliance with Section 504(b) of Appendix E, Title V of the
Consolidated Appropriations Act for F Y 2000 \ The report focuses exclusively on the financial
implications of U.S. participation in the I M F and does not attempt to quantify the broad and
substantial economic benefits to the United States and the global economy resulting from U.S.
participation in the IMF.
As required, the report provides financial information on the net interest and valuation changes
associated with U.S. participation in the International Monetary Fund (IMF). The broader
context for the financial implications of U.S. participation in the I M F and the methodology used
in deriving these figures is laid out in previous reports; the methodology is also summarized
briefly in the footnotes attached to the tables. Reports under this provision are prepared quarterly
and m a d e available to the public on the Treasury website:
http://www.treas.gov/press/releases/reports.htm.
This report provides quarterly data for FY 2001. It provides information on U.S. participation in
the IMF's General Department as well as information related to U.S. holdings of Special
Drawing Rights (SDRs) 2 as part of its international reserves and the financial implications of
U.S. participation in the S D R Department of the IMF.
Data on U.S. participation in the IMF's General Department during the second, third, and fourth
quarters, and year-end data for fiscal year 2001 are provided in Table 1. Data on U.S.
participation in the S D R Department of the I M F are provided in Table 2. Historical data are also
included in this report to reflect a methodological adjustment, relative to previous reports. In
previous reports dollar financing costs were calculated using the 3-month T-bill rate. This
methodology has been revised to use the average cost of funds to the U.S. Treasury on all of its
borrowings.
Table 1 shows the net interest and valuation changes related to U.S. participation in the General
Department for the quarters ending March 31, June 30, and September 30, 2001. Table 2 shows
the net interest and valuation changes related to U.S. participation in the S D R Department, also
for the quarters ending March 31, June 30, and September 30, 2001. The attached footnotes
1
Section 504(b) of Appendix E, Title V of the Consolidated Appropriations Act for F Y 2000, Public L a w 106-113,
113 Stat. 1501A-317 requires that the Secretary of the Treasury prepare and transmit to the appropriate committees
of the Congress a quarterly report on the costs or benefits of United States participation in the International
Monetary Fund (IMF), detailing the costs or benefits to the United States, as well as valuation gains or losses on the
United States' reserve position in the IMF.
2
The S D R is an international reserve asset created by the IMF. The S D R is used as a unit of account by the I M F
and other international organizations. Its value is determined as a weighted average of a basket of currencies — the
dollar, euro, pound sterling and yen. The S D R carries a market-based interest rate determined on the basis of a
weighted average of interest rates on short-term instruments in the markets of the currencies included in the S D R
valuation basket.
explain the columns shown on each table and provide pertinent information and assumptions
used in the calculations.
As shown in Table 1, for the second, third, and fourth quarters of the fiscal year beginning on
October 1, 2000 (FY 2001), the financial implications of U.S. participation in the General
Department reflected a net interest effect of positive $7 million, positive $1 million, and negative
S16 million, respectively. The valuation changes for the second, third, and fourth quarters were
negative $474 million, negative $181 million, and positive $543 million, respectively. For F Y
2001 as a whole, net interest paid was $4 million. The valuation change on the reserve position
was negative $56 million.
As shown in Table 2, for the second, third, and fourth quarter of FY 2001, the net interest effect
of U.S. participation in the S D R Department was negative $12 million, negative $6 million, and
negative $10 million, respectively. Over the same period, the valuation changes on S D R holdings
were negative $135 million, negative $50 million, and positive $150 million, respectively. For
F Y 2001 as a whole, net interest paid was $47 million. The valuation change on the reserve
position was negative $20 million.
Attachments
3
For an explanation of the methodology used in deriving these figures, see section on "Calculating the Financial
Implications of U.S. Participation in the General Department" in the report prepared for the fourth quarter of fiscal
year 2000, submitted in December 2000 and available at http://\vww.treas.gov/press/releases/reports.htm.
4
For an explanation of the methodology used in deriving these figures, see section on "Calculating the Financial
Implications of U.S. Participation in the S D R Department" in the report prepared for the fourth quarter of fiscal year
2000, submitted in December 2000 and available at http://www.treas.gov/press/releases/reports.htm.
2
Table 1 - Net Interest and Valuation Changes Related to U S Participation in the General Department, I M F
(U.S. Fiscal Year Basis, in millions of U S Dollars)
Transactions with the I M F
Interest Calculations
Valuation Changes
fiscal year
ending 9/30
Transactions Under U S
Quota (Letter of Credit U S Loans to IMF Under
&Transfers of Reserve
SFF, G A B , N A B
Assets, Cumulative)
(Cumulative)
Total U S
Transactions with
IMF
Interest
Remuneration
Associated with Received by U S Interest Received
Financing U S
from IMF &
from IMF Under
Transactions Refund of Burden SFF, G A B , and
with IMF
Sharing
NAB
(Col. 1+2)
Col. 1
Col. 2
Col. 3
Valuation Changes on
U S Reserve Position
Net Interest
(Col. 4+5+6)
Col. 4
Col.5
Total
(Col 7+ 8)
Col. 7
Col.6
Totals
Col. 8
Col. 9
1981
-2,061
-840
-2,902
-189
22
45
-122
-365
-487
1982
-3,883
1,186
-5,069
-520
216
121
-183
-323
-506
1983
-6,564
1,685
-8,249
-672
345
138
-189
-150
-339
1984
-9,501
1,601
-11,102
-1,066
673
175
-218
-565
-783
1985
-9,102
1,405
-10,507
-958
644
154
-161
547
386
1986
-8,073
1,052
-9,125
-690
595
111
17
1,444
1,461
1987
-6,904
-597
-7,501
-511
449
71
9
575
584
1988
-5,846
-217
-6,063
-434
406
49
22
135
157
1989
-5,262
-3
-5,265
-462
471
22
31
-67
-36
1990
-4,686
0
-4,686
-435
546
4
115
1991
-5,078
0
-5,078
-364
475
0
111
-178
-67
1992
-5,068
-5,068
-282
400
0
118
687
805
1993
-7,752
0
0
-7,752
-336
422
86
-336
-250
1994
-7,310
0
-7,310
-321
336
0
0
15
394
409
1995
-9,649
0
-9,649
-421
407
0
-14
270
256
1996
-11,051
0
-11,051
-488
475
0
-13
-695
-708
1997
-10,433
0
-10,433
-489
438
0
-50
-787
-837
1998
-17,363
-410
-17,773
-732
590
1
-141
151
10
1999
-16,058
0
-16,058
-769
686
21
-62
198
136
2000
-10,004
0
-10,004
-598
578
0
-21
-1,119
-1,140
1Q01
-11,949
0
-11,949
-129
133
0
4
56
60
2Q01
-11,378
0
-11,378
-128
135
0
7
-474
-467
3Q01
-13,778
0
-13,778
-114
115
0
1
-181
-180
4Q01
-17,021
0
-17,021
-121
105
0
-16
543
527
•17,021
-492
488
-4
-56
-60
2001
-17,021
Detail may not add to total due to rounding.
810
925
Footnotes to C o l u m n s in Table 1
Column 1: Total cumulative transactions under the U.S. Quota, including drawings by the I M F under the Letter of Credit ( 7 5 % portion of the U.S.
quota) and the transfers of reserve assets to the I M F (generally 2 5 % of the U.S. quota).
Column 2: Total cumulative dollar funding through loans to the IMF made by the U.S. under the Supplementary Financing Facility (SFF, in
1980), the General Arrangements to Borrow ( G A B , in FY1998) and the N e w Arrangements to Borrow ( N A B , in FY1999). All U.S. loans under
the three facilities/arrangements have been repaid.
Column 3: Total cumulative U.S. transactions with the Fund (horizontal summation of columns 1 and 2).
Column 4: Total interest associated with total cumulative transactions shown in column 3. This includes interest paid on additional public
borrowing to fund day-to-day transactions under the Letter of Credit and occasional transfers under loan arrangements (SFF, G A B , N A B ) , as well
as interest income foregone due to the transfer of reserve assets to the I M F at the time of a quota increase. In order to provide resources under the
Letter of Credit or under loan arrangements, the Treasury borrows from the public via additional issuance in the Treasury market; average cost of
funds is used as a proxy for calculating the associated interest cost. This portion of the total interest paid enters the U.S. budget as interest on the
public debt. For purposes of calculating foregone interest on the transfer of reserve assets to the IMF, the S D R interest rate is used.
Column 5: The U.S. earns interest on the non-gold portion of its reserve position in the IMF. This interest is called remuneration and, in
combination with an adjustment by the I M F related to burden-sharing, is paid by the I M F every quarter. If remuneration is paid in S D R s , it is paid
to the Exchange Stabilization Fund (ESF) and the E S F transfers the dollar equivalent to the Treasury General Fund. It is recorded in the budget as
an offsetting receipt from the public. If the United States took payment in dollars (which it does not n o w do) the payment would be in the form of
a decrease in the U.S. Letter of Credit and a counterpart increase in the U.S. reserve position.
Column 6: These amounts constitute the interest payments the United States has received on its loans to the IMF under the SFF, GAB, and NAB.
Column 7: Total net interest paid, foregone or received as a result of U.S. participation in the General Department of the IMF.
Column 8: The U.S. reserve position in the IMF is denominated in SDRs. The valuation gain (if positive) or loss (if negative) refers to the
exchange rate gain or loss on the reserve position due to changes in the dollar value of the S D R . For example, if the S D R appreciates/dollar
depreciates, then the dollar value of the reserve position rises and a valuation gain is recorded. This column would also include valuation gains or
losses experienced as a result of U.S. loans under SFF, G A B and N A B .
Column 9: The total of net interest and valuation changes, obtained by summing column 7 and column 8.
Table 2 - Net Interest and Valuation Changes Related to U.S. Participation in the S D R Department
in the IMF, U.S. Fiscal Year, Quarterly*
(in millions of U.S. Dollars)
fiscal year
ending 9/30
Dollar Value of
SDR Holdings
Dollar Value of
Cumulative SDR
Allocation
Col. 1
Col. 2
Interest Associated
with Financing
Interest Earned (or
Net SDR Holdings Paid) on Net SDR Cumulative U.S. SDR
Transactions
(Col. / - Col. 2)
Holdings
Total
Net Interest
(Col. 4 + Col. 5)
Valuation Changes
Col. 6
Col. 7
Total
Col. 8
2,751
3,217
-233
-130
10
25
95
146
153
179
248
311
137
-12
-31
-109
-157
-165
-215
-265
78
7
-2
-6
-14
-11
-12
-36
-17
274
79
-11
-23
85
283
130
17
-35
352
86
-14
-29
71
272
119
-18
-51
6,823
3,843
344
-305
40
324
364
6,703
4,019
312
-262
51
-64
-14
85
326
412
-242
3,896
4,809
5,628
5,554
6,847
8,295
9,078
9,074
9,487
5,608
5,254
5,178
4,895
5,191
5,945
6,270
6,322
6,270
-1,712
-445
450
660
1,656
2,350
2,809
1990
10,666
1991
10,722
12,111
Col. 5
Col. 4
Col. 3
1981
1982
1983
1984
1985
1986
1987
1988
1989
1992
Valuation Changes
Interest Calculations
Net S D R Holdings
7,216
4,895
290
-205
1993
9,203
6,950
2,253
98
-74
23
-266
1994
9,971
7,189
2,782
106
-115
-9
91
82
1995
11,035
7,380
3,655
172
-225
-52
39
-13
1996
10,177
7,052
3,125
144
-202
-58
-170
-228
1997
9,997
6,689
3,308
129
-179
-50
-170
-220
1998
10,106
6,719
3,387
146
-184
-39
20
-19
1999
10,284
6,799
3,485
116
-160
-45
33
-12
2000
10,316
6,359
3,957
164
-227
-64
-247
-310
1Q-2001
10,539
6,384
4,155
45
-65
-19
15
-4
2Q-2001
10,379
6,177
4,202
41
-53
-12
135
147
3Q-2001
10,409
6,103
4,306
37
-43
-6
-50
-56
4Q-2001
10,919
6,316
4,604
30
-40
-10
150
140
10,919
6,316
4,604
153
-201
-47
-20
-67
2001
Detail may not add to total due to rounding.
Footnotes to C o l u m n s in Table 2
Column 1: Total stock of U.S. holdings of Special Drawing Rights (SDRs) measured from end of period, converted into dollars at the fiscal yearend exchange rate. Source: IMF.
Column 2: Total stock of U.S. SDR allocations measured from end of period, converted into dollars at the fiscal year-end exchange rate. Changes
in dollar value of S D R allocations reflect only exchange rate changes. Source: IMF.
Column 3: Total stock of U.S. SDR holdings minus allocations measured from end of period (Column 1 minus Column 2), converted into dollars
at the fiscal year-end exchange rate.
Column 4: Net interest earned on SDR holdings. Derived by subtracting charges on SDR allocations (the SDR end-of-quarter interest rate times
S D R allocations) from interest earned on S D R holdings (the S D R end-of-quarter interest rate times S D R holdings). All interest is calculated as
compounding quarterly.
Column 5: Net effect on U.S. borrowing costs due to cumulative net SDR purchases or sales, using the simplifying assumption that transactions
are carried out in dollars. Derived by multiplying the dollar equivalent of cumulative net S D R purchases by the average cost of funds rate.
Interest is calculated on the basis of end-quarter holdings and compounded quarterly.
Column 6: Net Interest (Column 4 plus 5).
Column 7: Derived by subtracting the change in total SDR holdings from the change in the dollar equivalent of total SDR holdings (end-period to
end-period) divided by the end-period SDR/dollar exchange rate. The valuation gain (if positive) or loss (if negative) refers to the exchange rate
gain or loss on the reserve position due to changes in the dollar value of the S D R . For example, if the S D R appreciates/dollar depreciates, then the
impact on the dollar value of U.S. holdings of S D R s is positive, and a valuation gain is recorded.
Column 8: The total net interest and valuation changes (sum of Columns 6 and 7).
Part III
Administrative, Procedural, and Miscellaneous
26 CFR 601.105: Examination of returns and claims for refund, credit or abatement;
determination of correct tax liability.
(Also Part I, § § 6 0 1 1 , 6 1 1 1 , 6112; 1.6011-4, 301.6111-2, 301.6112-1.)
Rev. Proc. 2003-25
SECTION 1. PURPOSE
This revenue procedure provides that certain book-tax differences are not taken into
account in determining whether a transaction is a reportable transaction for purposes of the
disclosure rules under § 1.6011-4(b)(6) of the Income Tax Regulations.
SECTION 2. BACKGROUND
.01 Section 1.6011-4 requires a taxpayer who participates in a reportable transaction to
disclose the transaction in accordance with the procedures provided in
1
§ 1.6011 -4. Under § 1.6011 -4(b), there are six categories of reportable transactions. O n e
category of reportable transaction is a transaction with a significant book-tax difference. A
transaction with a significant book-tax difference is defined in § 1.6011-4(b)(6).
.02 Section 1.6011-4(b)(8)(i) provides that a transaction will not be considered a
reportable transaction, or will be excluded from any individual category of reportable
transaction, if the Commissioner makes a determination by published guidance that the
transaction is not subject to the reporting requirements of § 1.6011 -4.
SECTION 3. SCOPE
This revenue procedure applies to taxpayers that may be required to disclose
reportable transactions under § 1.6011-4 and/or material advisors that may be required to
maintain lists under § 301.6112-1.
SECTION 4. APPLICATION
Book-tax differences arising by reason of the following items are not taken into
account in determining whether a transaction has a significant book-tax difference under
§1.6011-4(b)(6):
.01 Items to the extent a book loss or expense is reported before or without a loss or
deduction for federal income tax purposes.
.02 Items to the extent income or gain for federal income tax purposes is reported before
or without book income or gain.
.03 Depreciation, depletion under § 612, and amortization relating solely to differences in
methods, lives (for example, useful lives, recovery periods), or conventions as well as
differences resulting from the application of §§ 168(k), 14001, or 1400L(b).
2
.04 Percentage depletion under § 613 or § 613A, and intangible drilling costs deductible
under § 263(c).
.05 Capitalization and amortization under §§ 195, 248, and 709.
.06 Bad debts or cancellation of indebtedness income.
.07 Federal, state, local, and foreign taxes.
.08 Compensation of employees and independent contractors, including stock options
and pensions.
.09 Charitable contributions of cash or tangible property.
.10 Tax exempt interest, including municipal bond interest.
.11 Dividends as defined in § 316 (including any dividends received deduction), amounts
treated as dividends under § 78, distributions of previously taxed income under §§ 959 and
1293, and income inclusions under §§ 551, 951, and 1293.
.12 A dividends paid deduction by a publicly-traded REIT.
.13 Patronage refunds or dividends of cooperatives without a § 267 relationship to the
taxpayer.
.14 Items resulting from the application of § 1033.
.15 Items resulting from the application of §§ 354, 355, 361, 367, 368, or 1031, if the
taxpayer fully complies with the filing and reporting requirements for these sections,
including any requirement in the regulations or in forms.
.16 Items resulting from debt-for-debt exchanges.
.17 Items resulting solely from the treatment as a sale, purchase, or lease for book
purposes and as a financing arrangement for tax purposes.
3
.18 Treatment of a transaction as a sale for book purposes and as a nontaxable
transaction under § 860F(b)(1)(A) for tax purposes, not including differences resulting from
the application of different valuation methodologies to determine the relative value of
REMIC interests for purposes of allocating tax basis among those interests.
.19 Items resulting from differences solely due to the use of hedge accounting for book
purposes but not for tax purposes, the use of hedge accounting under § 1.446-4 for tax
purposes but not for book purposes, or the use of different hedge accounting
methodologies for book and tax purposes.
.20 Items resulting solely from (i) the use of a mark-to-market method of accounting for
book purposes and not for tax purposes, (ii) the use of a mark-to-market method of
accounting for tax purposes but not for book purposes, or (iii) in the case of a taxpayer who
uses mark-to-market accounting for both book purposes and tax purposes, the use of
different methodologies for book purposes and tax purposes.
.21 Items resulting from the application of § 1286.
.22 Inside buildup, death benefits, or cash surrender value of life insurance or annuity
contracts.
.23 Life insurance reserves determined under § 807 and non-life insurance reserves
determined under § 832(b).
.24 Capitalization of policy acquisition expenses of insurance companies.
.25 Imputed interest income or deductions under §§ 483,1274, 7872, or 1.1275-4.
.26 Gains and losses arising under §§ 986(c), 987, and 988.
.27 Items excluded under § 883, § 921, or an applicable treaty from a foreign
4
corporation's income that would otherwise be subject to tax under § 882.
.28 Section 481 adjustments.
.29 Inventory valuation differences whether attributable to differences in last-in, first-out
(LIFO) computations or obsolescence reserves.
.30 Section 198 deductions for environmental remediation costs.
SECTION 5. EFFECTIVE DATE
This revenue procedure is effective for transactions entered into on or after
February 28, 2003. However, if a taxpayer applies § 1.6011-4 retroactively, as provided in
§ 1.6011-4(h), to transactions entered into on or after January 1, 2003, then this revenue
procedure will be effective January 1, 2003, for those transactions.
SECTION 6. DRAFTING INFORMATION
The principal author of this revenue procedure is Charlotte Chyr of the Office of the
Associate Chief Counsel (Passthroughs and Special Industries). For further information
regarding this revenue procedure, contact Ms. Chyr on (202) 622-3080 (not a toll free call).
5
Part III
Administrative, Procedural, and Miscellaneous
26 CFR 601.105: Examination of returns and claims for refund, credit or abatement;
determination of correct tax liability.
(Also Parti, § § 6 0 1 1 , 6111, 6112; 1.6011-4, 301.6111-2, 301.6112-1.)
Rev. Proc. 2003-24
SECTION 1. PURPOSE
This revenue procedure provides that certain losses are not taken into account in
determining whether a transaction is a reportable transaction for purposes of the
disclosure rules under § 1.6011-4(b)(5) of the Income Tax Regulations.
SECTION 2. BACKGROUND
.01 Section 1.6011-4 requires a taxpayer who participates in a reportable transaction to
disclose the transaction in accordance with the procedures provided in § 1.6011-4. Under
§ 1.6011 -4(b), there are six categories of reportable transactions. One category of
reportable transaction is a loss transaction. A loss transaction is defined in
§1.6011-4(b)(5).
.02 Section 1.6011-4(b)(8)(i) provides that a transaction will not be considered a
reportable transaction, or will be excluded from any individual category of reportable
transaction, if the Commissioner makes a determination by published guidance that the
transaction is not subject to the reporting requirements of § 1.6011-4.
SECTION 3. SCOPE
This revenue procedure applies to taxpayers that may be required to disclose
reportable transactions under § 1.6011-4 and/or material advisors that may be required to
maintain lists under § 301.6112-1.
SECTION 4. APPLICATION
.01 In general. Losses from the sale or exchange of an asset with a qualifying basis
under section 4.02 or losses described in section 4.03 of this revenue procedure are not
taken into account in determining whether a transaction is a reportable transaction.
.02 Sale or exchange of an asset with a qualifying basis.
(1) General rule. A loss under § 165 of the Internal Revenue Code from the sale or
exchange of an asset is not taken into account in determining whether a transaction is a
loss transaction under § 1.6011-4(b)(5) if(a) the basis of the asset (for purposes of determining the loss) is a qualifying basis;
(b) the asset is not an interest in a passthrough entity (within the meaning of
§ 1260(c)(2));
(c) the loss from the sale or exchange of the asset is not treated as ordinary under
§988;
(d) the asset has not been separated from any portion of the income it generates; and
(e) the asset is not, and has never been, part of a straddle within the meaning of
§ 1092(c), excluding a mixed straddle under § 1.1092(b)-4T.
(2) Qualifying basis. For purposes of section 4 of this revenue procedure, a taxpayer's
basis in an asset (less adjustments for any allowable depreciation, amortization, or
casualty loss) is a qualifying basis if(a) the basis of the asset is equal to, and is determined solely by reference to, the
amount (including any option premium) paid in cash by the taxpayer for the asset and for
any improvements to the asset;
(b) the basis of the asset is determined under § 358 by reason of a transaction under
§ 355 or § 368, and the taxpayer's basis in the property exchanged in the transaction was
described in this section 4.02(2);
(c) the basis of the asset is determined under § 1014;
(d) the basis of the asset is determined under § 1015, and the donor's basis in the
asset was described in this section 4.02(2); or
(e) the basis of the asset is determined under § 1031(d), the taxpayer's basis in the
property that was exchanged for the asset in the § 1031 transaction was described in this
section 4.02(2), and any debt instrument issued or assumed by the taxpayer in connection
with the § 1031 transaction is treated as a payment in cash under section 4.02(3) of this
revenue procedure.
3
(3) Debt instruments. Except as provided below, an amount paid in cash will not be
disregarded for purposes of section 4.02(2) of this revenue procedure merely because the
taxpayer issued a debt instrument to obtain the cash. However, if the taxpayer has issued
a debt instrument to the person (or a related party as described in § 267(b) or
§ 707(b)) who sold or transferred the asset to the taxpayer, assumed a debt instrument (or
took an asset subject to a debt instrument) issued by the person (or a related party as
described in § 267(b) or § 707(b)) who sold or transferred the asset to the taxpayer, or
issued a debt instrument in exchange for improvements to an asset, the taxpayer will be
treated as having paid cash for the asset or the improvement only if the debt instrument is
secured by the asset and all amounts due under the debt instrument have been paid in
cash no later than the time of the sale or exchange of the asset (except in the case of stock
or securities traded on an established securities market, the settlement date) for which the
loss is claimed.
.03 Other losses. The following losses under § 165 are not taken into account in
determining whether a transaction is a loss transaction under § 1.6011-4(b)(5):
(1) A loss from fire, storm, shipwreck, or other casualty, or from theft, under § 165(c)(3);
(2) A loss from a compulsory or involuntary conversion as described in
§§ 1231 (a)(3)(A)(ii) and 1231(a)(4)(B);
(3) A loss arising from any mark-to-market treatment of an item under §§ 475,1256,
1296(a), 1.446-4(e), 1.988-5(a)(6), or 1.1275-6(d)(2), provided that the taxpayer computes
its loss by using a qualifying basis (as defined in section 4.02(2) of this revenue procedure)
4
or a basis resulting from previously marking the item to market, or computes its loss by
making appropriate adjustments for previously determined mark-to-market gain or loss as
provided, for example, in § 475(a) or § 1256(a)(2);
(4) A loss arising from a hedging transaction described in § 1221(b), if the taxpayer
properly identifies the transaction as a hedging transaction, or from a mixed straddle
account under § 1.1092(b)-4T;
(5) A loss attributable to basis increases under § 860C(d)(1) during the period of the
taxpayer's ownership;
(6) A loss attributable to the abandonment of depreciable tangible property that was
used by the taxpayer in a trade or business and that has a qualifying basis under section
4.02(2) of this revenue procedure;
(7) A loss arising from the bulk sale of inventory if the basis of the inventory is
determined under § 263A; or
(8) A loss that is equal to, and is determined solely by reference to, a payment of cash
by the taxpayer (for example, a cash payment by a guarantor that results in a loss or a cash
payment that is treated as a loss from the sale of a capital asset under § 1234A or
§1234B).
SECTION 5. EFFECTIVE DATE
This revenue procedure is effective for transactions entered into on or after
February 28, 2003. However, if a taxpayer applies § 1.6011-4 retroactively, as provided in
§ 1.6011-4(h), to transactions entered into on or after January 1, 2003, then this revenue
procedure will be effective January 1, 2003, for those transactions.
5
S E C T I O N 6. DRAFTING INFORMATION
The principal author of this revenue procedure is Tara P. Volungis of the Office of
Associate Chief Counsel (Passthroughs and Special Industries). For further information
regarding this revenue procedure, contact Ms. Volungis at (202) 622-3080 (not a toll free
call).
6
FROM THE OFFICE OF PUBLIC AFFAIRS
February 27, 2003
JS-71
Media Advisory
Secretary S n o w and Treasurer Marin
Provide Signatures for Currency at March 5 Ceremony
Event W e b Cast Live on Treasury W e b Site
Treasury Secretary John W. Snow and U.S. Treasurer Rosario Marin on
Wednesday, March 5, 2003, will provide their signatures to the Bureau of Engraving
and Printing for use on Series 2003 U.S. currency.
Once provided to the Bureau of Engraving and Printing, the signatures of Secretary
S n o w and Treasurer Marin are transferred by engravers to steel plates, which are
used to print all new U.S. currency.
The ceremony will be held at 11:00 a.m. EST-at the Treasury Department (Room
4121), 1500 Pennsylvania Ave., N W , Washington, DC. It will be w e b cast live on
the Treasury w e b site, www.treasury.gov.
All media attending the event must have a Treasury or White House press pass to
enter the building. Those without'a Treasury or White House press pass must be
cleared in by the Secret Service IN A D V A N C E . Please contact Frances Anderson
in the Office of Public Affairs at 202-622-2960 by Tuesday, March 4, 2003 at 5:00
p m for clearance, or admittance to the building will be delayed or denied. The
following information can also be faxed to 202-622-1999, or email
to frances.anderson@do.treas.gov attention Frances Anderson: name, media
organization, date of birth and social security number.
http://www.treas.gov/press/releases/js71 .htm
3/7/2003
.72: Treasury and T T B Limit Health Claims Related to Consumption of Alcoholic Beverages
Page 1 of 2
F R O M T H E OFFICE O F PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
February 28, 2003
JS-72
T R E A S U R Y A N D TTB LIMIT H E A L T H CLAIMS R E L A T E D
TO CONSUMPTION OF ALCOHOLIC BEVERAGES
Today the Treasury Department and its Alcohol and Tobacco Tax and Trade
Bureau (TTB) issued final regulations that provide new limitations on health-related
statements appearing on labels of alcoholic beverages.
Over the past several years there has been a great deal of public attention and
controversy over health claims related to alcoholic beverages. S o m e have sought
permission (two entities unsuccessfully sued the government for it) to include
health-related statements, other than the mandatory government warning label, on
alcoholic beverage labels and in advertising for alcoholic beverages.
Although some studies have shown that moderate consumption of alcohol may
have beneficial health effects for some, it is also clear that alcohol can have
devastating effects on some individuals and any individual who regularly consumes
large amounts. While the deleterious effects of alcohol lead many to strongly
oppose allowing any statements that might encourage consumption, those
concerns must be balanced against first-amendment protections of commercial free
speech.
After lengthy consultation with the public and the Food and Drug Administration, the
rule w e are adopting provides that:
• Labels and advertisements may not contain any health claim that is untrue
in any particular or tends to create a misleading impression.
• A health claim will be considered misleading unless it:
o is truthful and substantiated by scientific or medical evidence;
o discloses the health risks associated with both moderate and heavier
levels of alcohol consumption; and
o outlines the categories of individuals for whom any alcohol consumption
poses risks.
• "Directional" statements (statements that merely direct the consumer in a
neutral manner to a third party for additional information) are presumed to
be misleading in the labeling or advertising of alcohol beverages unless
accompanied by a disclaimer. The rule provides a model disclaimer: "This
statement should not encourage you to drink or to increase your alcohol
consumption for health reasons."
• TTB will consult with the Food and Drug Administration, as needed, on the
use of specific health claims on labels. If F D A determines that a specific
health claim is a drug claim that is not in compliance with the Food, Drug
and Cosmetic Act, TTB will not approve the label. TTB will likewise
evaluate specific health claims in advertisements and consult with F D A as
appropriate, in reviewing advertisements that are voluntary submitted for
pre-use clearance or discovered in use in the marketplace. Although
advertisements are not covered by FDA's labeling regulations and are not
subject to mandatory pre-approval by TTB, TTB can take administrative
p://www.treas.gov/press/releases/js72.htm
\ 72- Treasury and T T B Limit Health Claims Related to Consumption of Alcoholic Beverages
Page 2 ot i
action and seek to have the advertisement withdrawn.
The text of the final regulations on the health claims for alcoholic beverages is
attached and will be published in the Federal Register.
Related Documents:
• Text of Final Regulations on the Health Claims
3/7/2003
tp://www.treas.gov/press/releases/js72.htm
"a^PKsfe
Formatted: Font: Bold
OFFICE
liBLIC AFFAIRS
(Billing Code: 4810-31-P)
DEPARTMENT OF THE TREASURY
Alcohol and Tobacco Tax and Trade Bureau
27 CFR Parts 4, 5, and 7
[TTB T.D.-1; Ref: ATF Notice Nos. 884, 892, and 896]
RIN: 1512-AB97
Health Claims and Other Health-Related Statements in the Labeling and
Advertising of Alcohol Beverages (99R-199P)
A G E N C Y : Alcohol and Tobacco Tax and Trade Bureau (TTB), Treasury.
ACTION: Final rule, Treasury decision.
SUMMARY: TTB is amending the regulations to prohibit the appearance on
labels or in advertisements of any health-related statement, Including a specific
health claim, that is untrue in any particular or tends to create a misleading
impression. A specific health claim on a label or in an advertisement is
considered misleading unless the claim is truthful and adequately substantiated
-2-
by scientific evidence; properly detailed and qualified with respect to the
categories of individuals to w h o m the claim applies; adequately discloses the
health risks associated with both moderate and heavier levels of alcohol
consumption; and outlines the categories of individuals for w h o m any levels of
alcohol consumption m a y cause health risks. In addition, T T B will consult with
the Food and Drug Administration (FDA), as needed, on the use of specific
health claims on labels. If F D A determines that a specific health claim is a drug
claim that is not in compliance with the requirements of the Federal Food, Drug,
and Cosmetic Act, T T B will not approve the use of such statement on a label.
Health-related statements that are not specific health claims or healthrelated directional statements will be evaluated on a case-by-case basis to
determine if they tend to mislead consumers. The final rule provides that
health-related directional statements (statements that direct or refer consumers
to a third party or other source for information regarding the effects on health of
alcohol consumption) will be presumed misleading unless those statements
include a brief disclaimer advising consumers that the statement should not
encourage consumption of alcohol for health reasons, or s o m e other
appropriate disclaimer to avoid misleading consumers. T T B believes that the
final regulations will ensure that labels and advertisements do not contain
statements or claims that would tend to mislead the consumer about the
significant health consequences of alcohol consumption.
-3-
D A T E S : This rule is effective [Insert date 90 davs after date of publication in
the F E D E R A L REGISTER!.
FOR FURTHER INFORMATION CONTACT: William H. Foster, Regulations
and Procedures Division, Alcohol and Tobacco Tax and Trade Bureau, 650
Massachusetts Avenue, NW., Washington, D C 20226 (202-927-8210).
SUPPLEMENTARY INFORMATION:
Please note: References to "ATF" are to the Bureau of Alcohol, Tobacco
and Firearms as it existed before January 24, 2003. The new Alcohol and
Tobacco Tax and Trade Bureau (TTB) has taken over the former ATF's
responsibilities for alcohol beverage labeling regulations.
Table of Contents
I. Background
II. Health Consequences of Alcohol Consumption
III. Industry Circular 93-8
IV. Role of Other Federal Agencies With Respect to Specific Health Claims and Other
Health-Related Statements
V. Fourth Edition of the Dietary Guidelines for Americans (1995)
VI. Competitive Enterprise Institute Petition
VII. Other Health-Related Statements on Alcohol Beverage Labels
VIII. Notice of Proposed Rulemaking
IX. Notice of Hearings
X. Recent Developments
XI. Analysis of C o m m e n t s Received in Response to Notice No. 884
XII. Is There a Need to Engage in Rulemaking on This Issue?
-4XIII. Does the A B L A Preclude the Use of Specific Health Claims or Other Health-Related
Statements on the Labels of Alcohol Beverages?
XIV. What are the Effects on Health of Alcohol Consumption?
XV. Are Health Claims and Health-Related Statements in the Labeling and Advertising of
Alcohol Beverages Inherently Misleading?
XVI. Are Health-Related Directional Statements Misleading?
XVII. Should the S a m e Standards Apply to Wines, Distilled Spirits, and Malt Beverages?
XVIII. Should T T B Adopt the Procedures Set Forth in FDA's Regulations?
XIX. Is the Final Rule Consistent With the First Amendment?
XX. Final Rule
XXI. Applications for and Certificates of Label Approval
XXII. Notes Appearing in Text of Supplementary Information
XXIII. H o w This Document Complies With the Federal Administrative Requirements for
Rulemaking
Disclosure
Drafting Information
List of Subjects
Authority and Issuance
I. Background
The Federal Alcohol Administration Act (FAA Act), 27 U.S.C. 205(e) and
(f), authorizes T T B to issue regulations on the packaging, labeling and
advertising of alcohol beverages in order to prohibit deception of the consumer,
and to prohibit, irrespective of falsity, statements relating to analyses,
guarantees, and scientific or irrelevant matters that are likely to mislead the
consumer. The F A A Act generally requires bottlers and importers of alcohol
beverages to obtain certificates of label approval prior to the bottling or
importation of alcohol beverages for sale in interstate commerce. Pre-approval
-5-
of advertising is not required by the F A A Act.
Regulations that implement the provisions of section 205(e) and (f), as
they relate to the labeling and advertising of wine, distilled spirits, and malt
beverages, are set forth in Title 27, C o d e of Federal Regulations (CFR), parts 4,
5, and 7, respectively. These current regulations prohibit the appearance on
labels or in advertisements of any statement, design, representation, pictorial
representation, or device representing that the use of wine, distilled spirits, or
malt beverages has curative or therapeutic effects if the representation is untrue
in any particular or tends to create a misleading impression. This standard
originated more than 60 years ago with the initial labeling and advertising
regulations issued under the F A A Act.
T T B and its predecessor agencies have historically taken a very strict
view of the regulatory prohibition on false or misleading curative or therapeutic
claims about alcohol beverages. This strict interpretation is based on the view
that "distilled spirits, wines and malt beverages are, in reality, alcoholic
beverages and not medicines of any sort, * * *." FA-129, dated January 5,
1938.
In view of the undisputed health risks associated with alcohol
consumption, w e and our predecessors have always taken the position that
statements attributing positive effects on health to the consumption of alcohol
beverages are misleading unless such statements are appropriately qualified
and properly balanced. T T B views statements that m a k e substantive claims
regarding health benefits associated with alcohol beverage consumption (e.g.,
-6-
"moderate alcohol consumption is good for your health") as making curative or
therapeutic claims. Claims that set forth only a partial picture or representation
might be as likely to mislead the consumer as those that are actually false. A
claim that is supported by scientific evidence might still mislead the consumer
without appropriate qualification and detail. Any such claim is considered
misleading unless it is properly qualified and balanced, sufficiently detailed and
specific, and outlines the categories of individuals for whom any positive effects
on health would be outweighed by numerous negative effects on health.
II. Health Consequences of Alcohol Consumption
The risks associated with alcohol consumption are well documented. In
Notice No. 884, ATF summarized these risks as set forth in an article by
Charles H. Hennekens, M.D. as follows:1
The hazards of heavy alcohol consumption are clear and substantial
and have far-reaching health and social consequences. Alcohol is the
second leading cause of preventable deaths in the United States as well
as most industrialized countries, second only to cigarette smoking.
Drinking increases the risk of cancer of the liver, mouth, tongue, and
esophagus and has been implicated as a cause of 3 to 5 perc ent of all
cancer deaths. Heavy alcohol consumption is also associated with
increased risks of hemorrhagic stroke and cardiomyopathy, and it
predisposes to hepatic cirrhosis, the ninth most c o m m o n cause of death
in the United States. In pregnant w o m e n , heavy alcohol consumption is
associated with fetal alcohol syndrome. Alcohol drinking is also
implicated in over 40 percent of all fatal traffic crashes, which are a chief
cause of premature deaths in younger people, and it is associated with
suicides, industrial accidents, sex crimes, robberies, and murders. It is
estimated that 14 million U.S. residents suffer from alcohol abuse and
dependence, and 76 million are affected by its presence in a family
member. (Citations omitted).
-7-
It is true that heavier levels of alcohol consumption cause m a n y of these
health risks. It is also true that there are millions of Americans with alcohol
dependency problems w h o find themselves unable or unwilling to control their
consumption of alcohol. Given the serious healthrisksassociated with higher
levels of alcohol consumption, and given the fact that most medical studies
agree that the effects of moderate consumption differ from individual to
individual, it w a s ATF's longstanding, and is n o w our, position that any claim
associating health benefits with moderate alcohol consumption must be
carefully evaluated to ensure that it does not mislead the consumer about the
various health consequences related to the consumption of alcohol beverages.
Prior to engaging in this rulemaking, A T F recognized that there were
several scientific studies establishing a link between moderate alcohol
consumption and a reduced risk of coronary artery disease ("CAD").2 However,
it w a s ATF's conclusion that there w a s not significant scientific evidence to
support an unqualified conclusion that moderate alcohol consumption has net
health benefits for all or even most individual consumers. S o m e studies have
suggested that only older drinkers will accrue any net health benefits from
moderate alcohol consumption.3 This is.because younger individuals have
such a lowriskfor coronary artery disease, and are much more likely to be at
risk from alcohol consumption, even at lower levels. This difference in risk
factors has been explained as follows4:
The net outcome of all-cause mortality associated with a certain
alcohol consumption level therefore also depends on the drinker's.
absoluteriskof dying from these various causes. Accordingly, older
-8-
p e 0 p l e — w n o are at high absolute risk of coronary heart disease and
ischemic stroke and at lowriskfor injury, cirrhosis, and other alcohol related diseases—are most likely to benefit from low levels of alcohol
consumption. In contrast, for m e n and w o m e n under age 40, w h o have
relatively low absolute risk of dying from strokes, heart disease, and
alcohol-related diseases but a high absolute risk of dying from injury, allcause mortality will increase even at relatively low alcohol-consumption
levels. * * * Finally, the absolute risk of death from injury or coronary
heart disease is lower in young w o m e n than in young m e n , leading to an
increase in all-cause mortality even in young w o m e n w h o are light
drinkers (less than two drinks every 3 days) compared with abstainers.
(Citations omitted).
Overall, the available scientific literature establishes that there
may be serious health risks associated with heavy as well as moderate
alcohol consumption, depending on the individual.5
III. Industry Circular 93-8
On August 2, 1993, ATF published Industry Circular 93-8. The circular
generally restated ATF's longstanding position regarding misleading curative
and therapeutic claims. ATF explained that claims that set forth only a partial
picture, representation, or truth might be as likely to mislead the consumer as
those that are actually false. Thus, a statement that attributed health benefits to
the moderate consumption of alcohol beverages, even if backed up by medical
evidence, might have an overall misleading effect if such statement was not
properly qualified, did not give all sides of the issue, and did not outline the
categories of individuals for whom any such positive effect would be
outweighed by numerous negative effects on health.
ATF also explained that its policy regarding health claims on labels had
been reinforced by the 1988 enactment of the Alcoholic Beverage Labeling Act
-9-
(ABLA), 27 U.S.C. 213 etseq. The A B L A contains a declaration of policy and
purpose which states that the Congress finds that "the American public should
be informed about the health hazards that may result from the consumption or
abuse of alcoholic beverages, and has determined that it would be beneficial to
provide a clear, nonconfusing reminder of such hazards, and that there is a
need for national uniformity in such reminders in order to avoid the
promulgation of incorrect or misleading information and to minimize burdens on
interstate commerce." 27 U.S.C. 213. As a result of this concern, the ABLA
requires that any alcohol beverage container held for sale or distribution in the
United States must bear the following statement on the label:
GOVERNMENT WARNING: (1) According to the Surgeon
General, w o m e n should not drink alcoholic beverages during
pregnancy because of the risk of birth defects. (2) Consumption
of alcoholic beverages impairs your ability to drive a car or
operate machinery, and m a y cause health problems.
It is clear that one of the purposes of the ABLA was to avoid confusing
the American public about the health hazards associated with the consumption
of alcohol beverages. In order to effectuate this goal, Congress prescribed
specific language that must appear on the labels of alcohol beverage
containers. To the extent that the overall message of any health claim is
inconsistent with the message of the Government warning statement, then it
may result in label information that is confusing and could mislead the
consumer, and would thus be prohibited under the FAA Act.
-10-
In Industry Circular 93-8, A T F further noted that other Federal agencies,
such as the Food and Drug Administration and the Federal Trade Commission,
might have jurisdiction over certain aspects of advertising and labeling issues
involving health claims. W e will address this issue further in section IV ("Role of
Other Federal Agencies with Respect to Specific Health Claims and other
Health-Related Statements").
A T F also stated that the distribution of advertising materials that included
the full text of the April 1992 edition of "Alcohol Alert," a publication of the
National Institute on Alcohol Abuse and Alcoholism (NIAAA), would not be in
violation of current regulations. This NIAAA publication provides a
comprehensive discussion of the health consequences of moderate alcohol
consumption. T h e industry circular stated that if the advertising materials also
contained editorializing, advertising slogans, or exhortations to consume the
product, A T F would evaluate the additional text to determine whether or not the
advertisement presented a balanced picture of the risks associated with alcohol
consumption. In addition, A T F stated that the use of buttons, shelf talkers
(additional product information placed on the retail shelf), table tents, and
similar items that excerpt any portion of the NIAAA publication, contain health
slogans or other inferential statements drawn from this publication, or are based
on any other publication or article citing the health benefits of alcohol
consumption, would be closely scrutinized to determine if they presented a
balanced picture of the risks associated with alcohol consumption.
A T F reminded industry m e m b e r s in Industry Circular 93-8 that
-11 -
substantive health claims on labels are considered to be misleading unless they
are properly qualified, present all sides of the issue, and outline the categories
of individuals for w h o m any positive effects on health would be outweighed by
numerous negative effects on health. Finally, A T F stated that it intended to
initiate rulemaking on this issue; however, pending rulemaking, A T F would
continue to evaluate claims in labeling and advertising on a case-by-case basis.
IV. Role of Other Federal Agencies With Respect to Specific Health
Claims and Other Health-Related Statements
While T T B n o w has primary jurisdiction over the labeling and advertising
of alcohol beverages, under certain circumstances the labeling and advertising
of alcohol beverages m a y also be subject to the jurisdiction of the Food and
Drug Administration (FDA) or the Federal Trade Commission (FTC). For
example, since certain wine products containing less than 7 percent alcohol by
volume are not wines subject to the F A A Act, the labeling of such products
generally falls within FDA's jurisdiction. A T F always utilized, as T T B does now,
the scientific and public health expertise of F D A in approving ingredients in
alcohol beverages, requiring label disclosure of certain substances, and
identifying adulterated alcohol beverages that are deemed mislabeled.
By letter dated April 9, 1993, F D A advised A T F that certain curative,
therapeutic, or disease-prevention claims for an alcohol beverage might place
the product in the category of a drug under the Federal Food, Drug and
Cosmetic Act ( F F D C Act), 21 U.S.C. 321(g)(1)(B). F D A evaluates health claims
on food labels pursuant to its authority under the F F D C Act, as amended by the
-12Nutrition Labeling and Education Act (NLEA), Public L a w 101-535 (1990). The
law provides that a food product is misbranded if it bears a claim that
characterizes the relationship of a nutrient to a disease or health-related
condition, unless the claim is m a d e in accordance with certain procedures
mandated by FDA. 21 U.S.C. 343(r)(1)(B). FDA's regulations provide that F D A
will approve a health claim w h e n it determines, "based on the totality of publicly
available scientiic evidence" that there is "significant scientific agreement,
a m o n g experts qualified by scientific training and experience to evaluate such
claims, that the claim is supported by such evidence." 21 C F R 101.14(c).
FTC's general jurisdiction over advertising extends to alcohol beverages.
In a policy statement published in the Federal Register on June 1, 1994 (59 F R
28394), F T C stated that it is necessary to examine "whether qualified claims are
presented in a manner that ensures that consumers understand both the extent
of the support for the claim and the existence of any significant contrary view
within the scientific community." The F T C policy statement stated that an
unqualified health claim in the advertising of a food w a s likely to be deceptive if
the food also contained a nutrient that increased theriskfor another disease or
health-related condition, and therisk-increasingnutrient w a s closely related to
the subject health claim.
V. Fourth Edition of the Dietary Guidelines for Americans (1995)
The Fourth Edition (1995) of the "Dietary Guidelines for Americans" w a s
published by the U.S. Department of Agriculture (USDA) and the U.S.
-13Department of Health and H u m a n Services (HHS) in 1996. This edition of the
Guidelines contained a detailed discussion of the health consequences of
alcohol consumption.
The 1995 Guidelines acknowledged that "[cjurrent evidence suggests
that moderate drinking is associated with a lower risk for coronary heart disease
in s o m e individuals." The Guidelines then went on to discuss the "serious
health problems" caused by higher levels of alcohol consumption, including
increased risk for high blood pressure, stroke, and heart disease.
The 1995 Guidelines recommended that if adults chose to drink alcohol
beverages, they should consume them only in moderation. The term
"moderation" w a s defined as no more than one drink per day for w o m e n and no
more than two drinks per day for men. However, the 1995 Guidelines stressed
that m a n y people should not drink alcohol beverages at all, including children
and adolescents, w o m e n w h o are trying to conceive or w h o are pregnant,
individuals w h o plan to drive or take part in activities that require attention or
skill, and individuals using prescription and over-the-counter medications.
Finally, the 1995 Guidelines suggested that individuals of any age w h o could
not restrict their drinking to moderate levels should not drink at all.
VI. Competitive Enterprise Institute Petition
O n M a y 9, 1995, the Competitive Enterprise Institute (CEI) submitted a
petition asking A T F to issue a rule allowing alcohol beverage labels and
advertisements to carry statements regarding the purported benefits of
-14moderate alcohol consumption. More specifically, CEI proposed that A T F issue
a rule specifically allowing the following statement to appear on labels and in
advertisements: "There is significant evidence that moderate consumption of
alcoholic beverages m a y reduce the risk of heart disease." By letter dated
November 10, 1995, CEI submitted a survey purporting to show that less than
42 percent of the general public w a s "aware of the medical benefits of moderate
consumption."
By letter dated January 13, 1997, A T F denied CEI's rulemaking petition.
A T F determined that CEI's proposed claim w a s not appropriately qualified, in
that it did not define the categories of individuals for w h o m there would be no
appreciable benefits (such as younger individuals already at low risk of heart
disease), or individuals for w h o m there would be significant risks associated
with moderate alcohol consumption (such as recovering alcoholics and persons
otherwise atriskfor alcohol abuse, or people with certain medical conditions).
The claim w a s not balanced, in that it did not explain the significant risks
associated with higher levels of alcohol consumption, as well as the potential
risks of moderate alcohol consumption for certain individuals. A T F found that
the claim, taken in isolation, would tend to mislead the consumer about the
significant health consequences of alcohol consumption.
Before A T F had issued its denial of CEI's petition, CEI had filed suit
(October 29, 1996) in the United States District Court for the District of
Columbia, challenging ATF's delay in acting on its petition. In 1997, CEI
amended its complaint to challenge ATF's denial of the rulemaking petition.
-15-
CEI also alleged that ATF had a "de facto" ban on the use of health claims,
which violated the First Amendment and the FAA Act. In 1998, the district court
granted the Government's motion for summary judgment on CEI's challenge to
the denial of its rulemaking petition. Both parties filed motions for summary
judgment on the remaining issues.
VII. Other Health-Related Statements on Alcohol Beverage Labels
On February 4, 1999, ATF approved two applications for certificates of
label approval bearing directional health-related statements directing
consumers to the Dietary Guidelines or their family doctor for information about
the "health effects of wine consumption." ATF approved those labels based on
its determination that the statements were not substantive health claims, but
instead were neutral statements directing consumers to third parties for
additional information regarding the effects on health of alcohol consumption.
The first approved labeling statement read as follows:
The proud people who made this wine encourage you to consult
your family doctor about the health effects of wine consumption.
The second labeling statement read as follows:
TO LEARN THE HEALTH EFFECTS OF WINE CONSUMPTION, SEND
F O R T H E F E D E R A L G O V E R N M E N T S DIETARY GUIDELINES F O R
A M E R I C A N S , C E N T E R F O R NUTRITION POLICY A N D P R O M O T I O N ,
USDA, 1120 20TH STREET, N W , W A S H I N G T O N D C 20036 O R VISIT
ITS W E B SITE: HTTPV/WWW.USDA.GOV/FCS/CNPP.HTM
Prior to being approved, the two applications received a great deal
of public attention. In July of 1997, both HHS and FTC urged ATF not to
-16approve the labels until a consumer survey w a s conducted. In that s a m e
month, Senators Robert Byrd and Strom Thurmond wrote to the
Secretary of the Treasury, also raising several concerns about the
proposed labeling statements. A T F also received several letters from
public health organizations concerned that the labels would encourage
consumers to consume alcohol beverages for health reasons. In view of
these concerns, A T F decided to defer final action on the labels pending
the completion of a consumer survey by the Center for Substance Abuse
Prevention (CSAP), a component of H H S .
In January of 1998, C S A P transmitted to A T F the main findings from its
consumer survey. The survey found that most subjects reported that they do
not read wine labels, and that neither of the two labeling statements would likely
induce wine drinkers to alter their drinking pattern, quantitatively or otherwise
However, several members of the focus groups reported that information about
the positive effects on health of wine consumption from the media had led them
to increase their wine intake.
While the C S A P survey did not establish thatthe labeling statements
would influence the drinking patterns of wine drinkers, it did indicate that heavy
drinkers m a y justify or increase their consumption levels based on their
independent understanding of information regarding the alleged health benefits
of moderate cons umption. Furthermore, the survey established that consumers
would be no more likely to seek additional health information after reading the
proposed labeling statements.
-17-
Based on the evidence before it, including the consumer survey
conducted by C S A P , A T F concluded that there w a s insufficient evidence in the
record to establish that the directional statements tended to mislead consumers
about the effects on health of alcohol consumption. Accordingly, the labels
were approved.
The approval of these labels generated considerable interest from
Federal health officials, members of Congress, and public advocacy groups,
w h o expressed concern about consumer perception of the label statements. Of
particular note, former Surgeon General David Satcher expressed concern that
people might draw an incorrect message from these labels.
Moreover, A T F became aware of a number of press accounts
interpreting the directional statements as actual health claims about the benefits
of alcohol consumption. For example, on February 5,1999, the "Wall Street
Journal" wrote that the expected decision to approve the labels would allow
"wine producers to put labels on bottles that point to the potential health
benefits of their product." O n February 5,1999, the Associated Press reported
the decision as follows: "Scientific studies have suggested it, and n o w
winemakers finally m a y get a chance to tout it through their labeling: A glass or
two of the grape each day could be good for you." O n February 6, 1999, the
"Los Angeles Times" reported that "[t]he. federal government approved changes
Friday that will allow winemakers for the first time to tout on labels the
connection between drinking wine and better health." That s a m e date, the
"Washington Post" reported that A T F had "decided that winemakers m a y add
-18another label to the bottle to encourage consumers to learn more about the
possible benefits of drinking wine." In an article dated February 9, 1999, the
"San Francisco Examiner" stated that ATF's decision "would allow winemakers
to carry bottle labels suggesting consumers check with their doctors or the
government's nutritional guidelines on the possible health benefits of wine."
VIII. Notice of Proposed Rulemaking
O n October 25, 1999, A T F invited comments on its current policy on
health claims and health-related statements by publishing the policy as a
proposed regulation in the Federal Register (Notice No. 884; 64 F R 57413). A s
proposed, labels or advertisements could not contain any statement, design,
representation, pictorial representation, or device, whether explicit or implicit,
representing that consumption of alcohol beverages has curative or therapeutic
effects if such statement is untrue in any particular or tends to create a
misleading impression. A substantive claim regarding health benefits
associated with the use of an alcohol beverage would be misleading unless
such claim w a s properly qualified and balanced, sufficiently detailed and
specific, and outlined the categories of individuals for w h o m any positive effects
on health would be outweighed by numerous negative effects on health.
A T F also sought comments on whether even balanced and qualified
health claim statements should be prohibited because the negative
consequences of alcohol consumption are so serious as to m a k e any healthrelated statement on labels or in advertisements inherently misleading. In
-19-
addition, A T F sought comments on whether health-related directional
statements such as those approved in February 1999 tend to mislead
consumers about the health consequences of alcohol consumption.
The comment period for Notice No. 884, initially scheduled to close on
February 22, 2000, w a s extended until June 30, 2000, pursuant to Notice No.
896. (See following section, "Notice of Hearings.")
IX. Notice of Hearings
O n December 9, 1999, A T F announced in a press release that after the
close of the comment period, it would hold public hearings on the issue of
health claims in the labeling and advertising of alcohol beverages. A T F stated
that the hearings would provide it with a comprehensive record on which to
base final regulations on health claims.
Because it w a s seeking public comments on this very issue, A T F
announced that it would suspend action on any new applications for label
approval bearing similar health-related directional statements pending the
completion of the rulemaking proceeding. A T F noted that due to the adverse
consequences of alcohol consumption, it w a s concerned about anyriskof
misperception resulting from the two approved statements.
O n February 28, 2000, A T F published a notice in the Federal Register
announcing the dates and locations of five hearings that it planned to hold
concerning the proposed regulations (Notice No. 892; 65 F R 10434). A T F
subsequently canceled the hearings that were scheduled for Atlanta, Chicago,
-20-
and Dallas, due to the low number of requests to present oral comments in
those locations (Notice No. 896; 65 F R 24158). In addition, the hearings
scheduled for Washington, D C and San Francisco, California, were limited to
two days each. The hearing in Washington, D C w a s held on April 25-26, 2000,
and the hearing in San Francisco w a s held on M a y 23-24, 2000. A T F also
extended the close of the comment period regarding Notice No. 884 from
February 22, 2000, to June 30, 2000. Written comments addressing testimony
presented at the hearings could also be submitted up until June 30, 2000.
X. Recent Developments
A. 1999 Alcohol Alert
In 1999, NIAAA published an "Alcohol Alert" on "Alcohol and Coronary
Heart Disease" (No. 45-1999). In this publication, NIAAA reaffirmed that
"[rjesearch has revealed an association between moderate alcohol
consumption and lower risk for CHD." (Footnote omitted). However, NIAAA
cautioned that "[a]n association between moderate drinking and lower risk for
C H D does not necessarily m e a n that alcohol itself is the cause of the lower risk.
For example, a review of population studies indicates that the higher mortality
risk among abstainers m a y be attributable to shared traits other than the
participants' nonuse of alcohol." (Footnote omitted). NIAAA noted that "[t]he
role of exercise in the alcohol-CHD association requires additional study."
NIAAA noted that "[t]he apparent benefits of moderate drinking on C H D
mortality are offset at higher drinking levels by increasing risk of death from
-21 -
other types of heart disease; cancer; liver cirrhosis; and trauma, including
trauma from traffic crashes. Moderate drinking is not risk free. The trade-offs
between risks and benefits can be exemplified by the fact that alcohol's
anticlotting ability, potentially protective against heart attack, may increase the
risk of hemorrhagic stroke, or bleeding within the brain." (Footnotes omitted).
In a commentary that appeared with the Alert, NIAAA Director Enoch
Gordis, M.D., offered the following advice with respect to the health implications
of alcohol consumption:
(1) Individuals who are not currently drinking should not be
encouraged to drink solely for health reasons, because the basis
for health improvements has not yet been established as deriving
from alcohol itself;
(2) Individuals who choose to drink and are not otherwise at risk
for alcohol-related problems should not exceed the one-to twodrink-per-day limit r e c o m m e n d e d b y the U.S. Dietary Guidelines;
and
(3) Individuals who currently are drinking beyond the U.S. Dietary
Guidelines' recommended limits should be advised to lower their
daily alcohol intake to these limits.
B. Dietary Guidelines - Fifth Edition (2000)
In the summer of 2000, USDA and HHS published the "Dietary
Guidelines for Americans, 2000." The 2000 Dietary Guidelines contain more
specific guidance about alcohol consumption, and summarize the current
medical evidence regarding the risks associated with alcohol consumption as
follows:
Alcoholic beverages supply calories but few nutrients. Alcoholic
beverages are harmful w h e n consumed in excess, and s o m e
-22-
people should not drink at all. Excess alcohof alters judgment and
can lead to dependency and a great m a n y other serious health
problems. Taking more than one drink per day for w o m e n or two
drinks per day for m e n * * * can raise theriskfor motor vehicle
crashes, other injuries, high blood pressure, stroke, violence,
suicide, and certain types of cancer. Even one drink per day can
slightly raise the risk of breast cancer. Alcohol consumption
during pregnancy increases risk of birth defects. Too much
alcohol m a y cause social and psychological problems, cirrhosis of
the liver, inflammation of the pancreas, and d a m a g e to the brain
and heart. Heavy drinkers are also at risk of malnutrition because
alcohol contains calories that m a y substitute for those in nutritious
foods. If adults choose to drink alcoholic beverages, they should
c o n s u m e them only in moderation * * * and with meals to slow
alcohol absorption.
The 2000 Dietary Guidelines also contain a discussion of the
possible health benefits of alcohol consumption; however, the following
excerpt from this section emphasizes that these benefits accrue primarily
to older drinkers, and that there are other ways of reducing the risk of
heart disease:
Drinking in moderation may lower risk for coronary heart
disease, mainly a m o n g m e n over age 45 and w o m e n over age 55.
However, there are other factors that reduce the risk of heart
disease, including a healthy diet, physical activity, avoidance of
smoking, and maintenance of a healthy weight. Moderate
consumption provides little, if any, health benefit for younger
people. Risk of alcohol abuse increases when drinking starts at
an early age. S o m e studies suggest that older people m a y
become more sensitive to the effects of alcohol as they age.
The 2000 Dietary Guidelines recommend that if adults choose to
drink alcohol beverages, they should consume them only in moderation.
The term "moderation" is defined as no more than one drink per day for
women and no more than two drinks per day for men. The Dietary
-23-
Guidelines also conclude that for some people, even moderate drinking
is not recommended. Thus, m a n y people should not drink alcohol
beverages at all, including children and adolescents; individuals of any
age w h o cannot restrict their drinking to moderate levels; w o m e n w h o
m a y become pregnant or w h o are pregnant; individuals w h o plan to
drive, operate machinery, or take part in other activities that require
attention, skill, or coordination; and individuals taking prescription or
over-the-counter medications that can interact with alcohol.
C. Recent Developments in the CEI Litigation
O n June 18, 2001, the district court granted the Government's motion for
summary judgment on the remaining issues in the CEI litigation. The court
ruled that the case w a s not ready for judicial review given the fact that A T F w a s
in the middle of a rulemaking proceeding on the very issues raised by CEI in the
litigation. The plaintiffs appealed this decision to the Court of Appeals. O n M a y
10, 2002, the appellate court upheld the district court's ruling that the case w a s
not ripe (ready) for judicial review because A T F was nearing completion of a
rulemaking proceeding on the use of health claims. Thereafter, the plaintiffs
filed a petition for rehearing with the Court of Appeals that w a s denied.
XI. Analysis of Comments Received in Response to Notice No. 884
In response to Notice No. 884, A T F received 535 comments. C o m m e n t s
were submitted by several United States Senators, two Federal agencies, an
agency of a foreign government, consumers and consumer organizations,
-24-
medical professionals (includng physicians, nurses, and local health
departments), public health organizations, industry members, and others.
A s previously noted, in Notice No. 884 A T F sought comments on
whether the serious health risks associated with alcohol consumption meant
that any health claim, even a balanced and qualified one, w a s inherently
misleading to consumers. In response, approximately 45 commenters
supported the use of substantive health claims or health-related statements in
the labeling and advertising of alcohol beverages. O n the other side,
approximately 120 commenters opposed the use of either substantive health
claims or health-related directional statements in the labeling or advertising of
alcohol beverages. Many of these commenters suggested that health
statements were inherently misleading when used to market alcohol beverages.
A T F specifically sought comments on whether health-related directional
labeling statements such as the ones approved in February 1999 tended to
mislead consumers about the health consequences of alcohol consumption.
The vast majority of the commenters focused exclusively on this issue.
Approximately 355 comments supported the use of health-related directional
statements on alcohol beverage labels. The major issues raised by the
commenters, as well as the individuals w h o testified at the public hearings, are
summarized below.
XII. Is There a Need to Engage in Rulemaking on This Issue?
A. Issue
-25Four comments either opposed ATF's decision to engage in rulemaking
on this issue or suggested that the notice of proposed rulemaking be withdrawn.
These were comments submitted by the Beer Institute, a trade association for
domestic and international brewers; the National Association of Beverage
Importers (NABI), a trade association representing importers of beer, wine, and
distilled spirits; the Distilled Spirits Council of the United States (DISCUS), a
national trade association representing producers and marketers of distilled
spirits and importers of wine; and a comment submitted jointly by CEI and
Consumer Alert (CA).
DISCUS, the Beer Institute, and NABI all questioned the necessity for
engaging in rulemaking on the issue of health claims and health-related
statements in the labeling and advertising of alcohol beverages. (Comments
530, 396, and 522). These comments suggested that the authorization of any
directional statement on a label would be in violation of the ABLA. T T B does
not agree with this legal analysis. This issue will be discussed further in section
XIII.
D I S C U S and Beer Institute also objected to the proposed advertising
regulations. D I S C U S suggested that ATF's proposal w a s "insurmountably
vague and ambiguous. It only would serve to interfere with the rights of
advertisers to engage in truthful, non-misleading speech about their products
that are consumed responsibly by over a hundred million Americans." D I S C U S
suggested that "[a]n advertiser could run afoul of the provisions of BATF's
proposed rule without making any type of curative or therapeutic claim," giving
-26-
as an example an advertisement depicting attractive individuals relaxing in an
enjoyable setting. The Beer Institute similarly suggested that the requirements
for labeling and advertising should be separate, and that the proposed
regulation complicated the existing advertising standard. The Beer Institute
suggested that the current standard is readily understood and straightforward,
and that instead of issuing new regulations, A T F should adopt a more formal
review process of health statements on a case-by-case basis.
These commenters also suggested that large portions of the alcohol
beverage industry had no interest in using health claims in the labeling or
advertising of their products. For example, the Beer Institute comment
suggested that there w a s no need to a m e n d the malt beverage regulations,
since to its knowledge, none of its constituents had ever used such claims in
the past, and none had any intention to do so in the future. NABI raised similar
concerns, and stated that it did not support the proposed amendment to the
regulations "because any such support might imply the industry intends to m a k e
health-related statements on its labels and in its advertising." The comment
from D I S C U S stressed that "America's distillers do not recommend that
consumers drink beverage alcohol for health reasons." (Comment 530).
CEI, a pro-market public interest group dedicated to advancing the
principles of free markets and limited government, and CA, a free-market
consumer advocacy group, suggested that the proposed rule should be
withdrawn because the issuance of a regulation based on the proposal would
-27-
restrict commercial speech in a w a y that violates the First A m e n d m e n t .
(Comment 326). These issues will be discussed further in section XIX.
B. Decision
After carefully considering the record, T T B has determined that it is
important to issue afinalrule on specific health claims and other health-related
statements in the labeling and advertising of alcohol beverages. The
rulemaking record confirms that alcohol abuse is an important public health
issue. T h e use of health claims and health-related statements in the labeling
and advertising of alcohol beverages requires a balance between a producer's
First A m e n d m e n t right to label and advertise its products in a truthful and nonmisleading fashion and the public'sright'tobe informed of the significant health
risks associated with alcohol consumption. Specific regulations on the use of
health claims and other health-related statements in the labeling and
advertising of alcohol beverages will ensure that both the industry and the
public are aware of the restrictions on the use of labeling and advertising
statements that might tend to mislead the consumer about the serious health
risks associated with alcohol consumption.
T T B recognizes that based on the administrative record, it does not
appear that distillers and brewers are interested in using health claims or
health-related statements in the labeling or advertising of alcohol beverages.
However, as noted later in this preamble, both the Wine Institute and the
American Vintners Association (AVA), two industry associations representing
-28-
hundreds of wineries, supported ATF's proposed rule regarding substantive
health claims. At least one individual tes tifying at the hearing, Mr. John
Hinman, indicated that there were wineries interested in using a 664-word
substantive health claim in advertising materials. The Wine Institute and AVA,
as well as m a n y individual wineries, commented in favor of allowing directional
statements in the labeling of alcohol beverages. Thus, the record reflects that
there m a y be s o m e wineries interested in using substantive health claims in the
advertising of alcohol beverages, and that m a n y wineries are interested in using
directional statements on labels. For this reason, T T B believes it is important to
issue regulations that set forth the standards that must be met in the event that
a specific health claim or other health-related statement is used in the labeling
or advertising of alcohol beverages. A s set forth later in section XVII, the s a m e
standards should apply to wines, distilled spirits, and malt beverages, even if
there is no evidence that any m e m b e r s of the malt beverage or distilled spirits
industries are interested in using health claims or health-related statements.
The rule does not require anyone to use such statements; it merely sets forth
the standards that would apply in the event that an industry m e m b e r wishes to
use a specific health claim or a health-related statement on a label or in an
advertisement.
T T B does not agree that the proposed regulations would inject
uncertainty with respect to the use of advertisements that do not involve health
claims or health-related statements, such as the example provided by D I S C U S
of an advertisement that shows people relaxing in an attractive setting. There is
-29nothing in the proposed rule that would extend the definition of a health claim or
curative or therapeutic claim to cover such advertisements. However, we agree
that the lack of any definition of a "curative or therapeutic claim" or "health
claim" in the proposed rule might give rise to some uncertainty as to what types
of advertising claims would be covered by the regulation. Accordingly, the final
rule includes definitions of the terms "health-related statement" (which includes
statements of a curative or therapeutic nature), "specific health claims," and
"health-related directional statements." We believe that these definitions should
resolve any concerns by the commenters that the labeling or advertising
regulations are intended to broaden ATF's traditional interpretation of a curative
or therapeutic claim.
XIII. Does the ABLA Preclude the Use of Specific Health Claims or Other
Health-Related Statements on the Labels of Alcohol Beverages?
A. Issue
Five commenters, including Senator Thurmond (Comment 526), DISCUS
(Comment 530), the Beer Institute (Comment 396), NABI (Comment 522), and
Remy Amerique, Inc. (Comment 531), suggested that the use of any health
claims or other health-related statements on alcohol beverage labels was
foreclosed by the provisions of the ABLA. They argued that it was Congress'
intent to foreclose the use of any other health-related statements on alcohol
beverage labels.
-30-
B. Decision
T T B does not agree with those commenters w h o suggested that the
A B L A specifically precludes the voluntary use by industry members of any
health-related statements on alcohol beverage labels other than the required
warning statement. The A B L A was enacted in 1988. Pursuant to 27 U.S.C.
215, alcohol beverage containers distributed or sold In the United States must
bear a Government warning statement, which warns that alcohol consumption
during pregnancy m a y cause birth defects; that alcohol consumption impairs
one's ability to drive a car or to operate machinery; and that consumption of
alcohol beverages "may cause health problems."
S o m e commenters argued that the A B L A provided A T F with authority to
deny any statement on an alcohol beverage label that discusses the
relationship between alcohol consumption and health. The A B L A provides that
"[n]o statement relating to alcoholic beverages and health, other than the
statement required by section 204 [27 U.S.C. 215] of this title, shall be required
under State law to be placed on any container of an alcoholic beverage, or on
any box, carton, or other package, irrespective of the material from which made,
that contains such a container." This section of the law preempts State
governments from each requiring their own version of a health warning
statement on alcohol beverage containers. However, it in no way precludes
producers from voluntarily placing either additional warning statements or
health claims on alcohol beverage labels. See also 27 U.S.C. 213 (setting forth
Congress' policy to ensure that the public is adequately reminded about any
-31 -
health hazards that m a y be associated with alcohol consumption or abuse, and
not impeded by "diverse, nonuniform, and confusing requirements for warnings
or other information on alcoholic beverage containers with respect to any
relationship between the consumption or abuse of alcoholic beverages and
health").
S o m e commenters argued that 27 U.S.C. 217 provides the exclusive
method for allowing additional statements regarding alcohol consumption and
health on the label. Section 217 provides that if the Secretary, after consulting
with the Surgeon General, determines that there should be a change in the
mandatory health warning statement, or if such statement should be deleted, he
shall report such information to the Congress together with specific
recommendations for necessary amendments to the ABLA. After soliciting
public comments on this issue, A T F determined in 1993 that there w a s no need
to seek changes to the required health warning statement. However, this
provision applies only to the required health warning statement, not to voluntary
statements that producers seek to place on alcohol beverage labels. Thus, it is
clear that the statute does not specifically preclude the voluntary use of
additional health-related statements on alcohol beverage labels.
XIV. What are the Effects on Health of Alcohol Consumption?
A. Issue
Most of the commenters w h o addressed this issue agreed that there w a s
a link between moderate alcohol consumption and a reducedriskof heart
-32-
disease in certain individuals. However, s o m e commenters concluded that the
risks associated with alcohol consumption greatly outweighed any purported
cardiovascular benefits, while other commenters emphasized the benefits
associated with moderate consumption.'
CEI and C A presented a review of the medical evidence summarized by
Michael Gough (Ph.D.), which concluded that most adults would benefit from
moderate alcohol consumption. Dr. Gough stated that "with the exception of
those well-defined groups of people w h o should avoid alcohol, there is clearly
convincing evidence for the health benefits of moderate alcohol consumption."
Dr. Gough acknowledged that individuals in their 20s and 30s do not accrue net
benefits from consuming alcohol since they are at low risk for heart disease;
however, he suggests that "[bjased on understanding of the biological basis for
the protective effects of alcohol, it is likely that moderate alcohol consumption in
the 20s and 30s is important to the beneficial effects seen in later years."
CEI attached numerous medical studies regarding the effects on health
of alcohol consumption. In most important respects, the studies were
consistent with ATF's summary of the medical evidence in Notice No. 884.
Several of the studies reported an association between light to moderate
alcohol consumption and a reduced riskof heart disease. However, m a n y of
these s a m e studies supported the conclusion that the health benefits of alcohol
consumption do not apply to certain groups.
For example, the authors of one study began by noting that "[m]en and
w o m e n w h o drink alcoholic beverages regularly have, in comparison with
-33-
abstainers, higher death rates from injuries, violence, siicide, poisoning,
cirrhosis, certain cancers, and possibly hemorrhagic stroke, but lower death
rates from coronary heart disease and thrombotic stroke. The net balance of
risks and benefits is likely to differ in different age groups and populations."6
(Footnotes omitted). One of the conclusions of the study is that "the balance of
adverse and beneficial effects of drinking on mortality from all causes depends
not only on the amount of alcohol consumed but also on age and background
cardiovascular risk."7
Another article noted that it has not yet been determined how alcohol
reduces the risk of coronary heart disease. The authors stated that:8
Several possible mechanisms for a protective role of alcohol against
coronary disease have been hypothesized, including alcohol-mediated
increases in H D L cholesterol levels. * * * Knowledge of the basic
mechanisms by which alcohol exerts a protective effect against coronary
heart disease is critical to assessing the potential importance of
moderate alcohol consumption to the public health, particularly if the
beneficial effects of alcohol can be achieved through other interventions.
Because heavy consumption of alcohol has been implicated in
accidents, cirrhosis, cancer, and other adverse outcomes, the difference
between drinking small-to-moderate quantities of alcohol and drinking
large amounts m a y m e a n the difference between preventing and
causing disease. Any clinical recommendations based on this
epidemiologic evidence should therefore be cautious. (Footnotes
omitted).
A m o n g the more recent studies submitted by CEI and C A w a s one that
focused on the effects on health of alcohol consumption on women. The
authors noted that before beginning the study, it was unclear "[wjhether the
apparent overall benefit of light-to-moderate alcohol intake among men" could
be extrapolated to women, noting that "[a]s compared with men, women have a
-34-
lower risk of coronary heart disease, attain higher blood alcohol concentrations
for a given amount of alcohol consumed, and are more susceptible to alcoholic
liver disease. Moreover, w o m e n w h o consume moderate quantities of alcohol
have an increased risk of breast cancer.'6 (Footnotes omitted). The results of
the study showed that light to moderate female drinkers had a reduced risk of
heart disease, with w o m e n w h o drank one to three drinks per week having the
lowest risk of mortality.10 However, the study concluded that "the apparent
benefit of light-to-moderate alcohol consumption w a s mainly confined to w o m e n
at greater risk for coronary heart disease, specifically older w o m e n and w o m e n
with one or more coronary risk factors."11
The Wine Institute, representing over 500 California winery and
associate members, also submitted summaries of several medical studies that
established a link between moderate alcohol consumption and reducedriskof
cardiovascular disease (Comment 401). In its summary of these studies, the
Wine Institute asserted that moderate drinkers have a 40-50 percent reduction
in coronary artery diseas e risk compared with individuals w h o are abstinent,
with a lower overall mortality rate as well.
A s A T F stated in Notice No. 884, the serious health risks associated with
alcohol consumption are well established, and A T F received m a n y comments
from public health organizations that focused on those adverse consequences.
The major points m a d e by these commenters are summarized below.
M a n y of the commenters focused on the serious public health risks
associated with alcohol abuse. The National Council on Alcoholism and Drug
35
Dependence, Inc. ( N C A D D ) commented that "[wjhile most people w h o choose
to drink do so without negative health or life consequences, there are 13.8
million Americans over the age of 18 w h o have problems with drinking,
including 8.1 million people w h o are alcoholic. Millions of others, because of a
family history or the addictive potential of alcohol, are at risk for developing an
addiction." (Comment 15). N C A D D noted that alcohol contributes to 100,000
deaths annually, making it the third leading cause of preventable mortality in the
United States, after tobacco and diet/activity patterns. While there are fewer
deaths from alcohol-related causes than from cancer or heart disease, alcoholrelated deaths tend to occur at much younger ages.
S o m e commenters focused on the cost to society associated with
alcohol abuse. For example, the Center for Science in the Public Interest
(CSPI) commented that "[a] substantial body of evidence has shown a positive
relationship between the aggregate consumption of alcohol in society and
population rates of alcohol-related diseases, accidents, criminal violence, and
suicide. According to the National Institute on Alcohol Abuse and Alcoholism
(NIAAA), alcohol abuse and alcoholism cost society more than $166 billion
annually and each year over 110,640 deaths have alcohol-related causes.
(Comment 400). (Footnotes omitted).
M a n y of the commenters set forth the serious risks associated with
higher levels of alcohol consumption. N C A D D noted that "[hjeavy and chronic
drinking can harm virtually every organ and system in the body, and is the
single most important cause of illness and death from liver disease. It is also
36-
associated with cardiovascular diseases such as cardiomyopathy,
hypertension, arrhythmias and stroke." The Marin Institute identified similar
health risks associated with alcohol consumption. (Comment 324).
Many recognized experts on the effects on health of alcohol consumption
testified at the public hearings held by AJF in Washington, DC and San
Francisco, California. Dr. David Satcher, former Assistant Secretary for Health
and Surgeon General, testified about the public health dangers associated with
alcohol consumption as follows:
Although the majority of Americans who consume alcoholic beverages
do so safely, alcohol is one of the nation's leading causes of preventable
injury and premature death. Each year, over 100,000 premature deaths
result from alcoholism and alcohol abuse. Alcohol represents, therefore,
the third leading cause of premature death, right behind tobacco and
physical inactivity. Traffic crashes involving alcohol killed more than
16,000 people in 1997 and one in four victims of violent crime report that
the offender had been drinking alcohol prior to committing the crime.
Fetal alcohol syndrome continues to be the leading preventable cause of
mental retardation. I think w e fail to appreciate that the roots of
alcoholism and alcohol abuse have their origins in adolescence and that
children are especially vu Inerable to its dangers. Alcohol is the nation's
number one drug problem a m o n g youth, and it is involved in teen
automobile crashes, homicides, and suicides, the three leading causes
of teen death. (April 25, 2000; Washington, D C , pages 72-73).
Other physicians testified regarding the effects on health of alcohol
consumption. Dr. Carlos Camargo, an emergency room physician and alcohol
researcher, testified at the invitation of CSPI. He stated that "there is
persuasive evidence that moderate alcohol consumption reduces risk of
coronary heart disease in some people. There is also persuasive evidence that
even moderate drinking carries significant health risks for many people." (April
3725, 2000; Washington, DC, page 94).
Dr. Michael Criqui, a physician, epidemiologist, and professor, also
expressed concerns regarding the use of any healthrrelated statement in
connection with the labeling of alcohol beverages. Dr. Criqui stressed that
when evaluating the potential health benefits associated with alcohol
consumption, it is important to look at the effects of various diseases on the
potential years of life lost before age 75. H e noted that while heart disease is
the single largest cause of death in developed countries, it usually occurs at
older ages. Motor vehicle crashes and suicides together cause the loss of more
potential years of life in m e n than heart disease, and both are linked to alcohol
use. In women, breast cancer and motor vehicle accidents each account for
more potential years of life lost before age 75 than heart disease. (May 23,
2000; San Francisco, CA, pages 53-54).
Dr. Criqui also stressed the importance of evaluating the patterns of
consumption among drinkers. H e said that in the United States, about 8 0 % of
m e n and 7 0 % of w o m e n drink alcohol, with 5 0 % of drinkers reporting temporary
problems with alcohol. Qd. at page 55). About 1 0 % of m e n and 5 % of w o m e n
are alcoholics. Furthermore, Dr. Criqui stated that "half of all the alcohol
consumed in the United States is consumed by the 1 0 % of m e n and the 5 % of
w o m e n w h o are alcohol-dependent. (Id. at page 57).
Other medical professionals stressed the health benefits associated with
moderate drinking for persons w h o do not belong in the categories of
individuals for w h o m alcohol consumption is contraindicated. Dr. Curtis Ellison,
-38a Professor of Medicine, testified that "science clearly indicates that moderate
drinkers have much lower risk of coronary heart disease and ischemic stroke.
Because these are the number one and number three causes of death, it is not
surprising that moderate drinkers will live longer in the United States." (April 26,
2000; Washington, D C , page 109). Dr. Ellison suggested that "if I a m
withholding from a patient information that m a y reduce that individual's risk of a
heart attack by 30 or 40 percent and do not tell him about it, I a m doing him a
disservice." (|d. at page 110).
B. Decision
The evidence presented by the medical experts, as well as the studies
presented with s o m e of the comments, indicate that there are differences of
opinion as to h o w the relativerisksand benefits of alcohol consumption should
be weighed. The evidence reflects a broad consensus that heavy levels of
alcohol consumption pose serious health risks. The record also reflects that
there is a broad consensus that certain categories of people should not
consume any alcohol. With regard to those individuals for w h o m alcohol
consumption is not contraindicated, there w a s s o m e difference a m o n g the
experts as to how to weigh the relative risks and benefits of moderate
consumption, with s o m e experts stressing the protection against cardiovascular
disease, and other experts stressing the increased risk of injury and certain
cancers.
39Because T T B is not an expert on public health issues, w e (and our
predecessors) have generally deferred to thefindingsof the Department of
Health and H u m a n Services, including NIAAA, FDA, C S A P , and the Surgeon
General, on issues related to the effectson health of alcohol consumption. In
the case at hand, T T B finds that the evidence in the rulemaking record supports
thefindingsof NIAAA's 1999 "Alcohol Alert" and the 2000 Dietary Guidelines
published by U S D A and H H S . The main points of thesefindingscan be
summarized as follows:
• Alcohol beverages are harmful when consumed in excess, and s o m e
people should not drink at all. Excess alcohol alters judgment and
can lead to dependency and many other serious problems. Heavy
levels of alcohol consumption cause social and psychological
problems, cirrhosis of the liver, inflammation of the pancreas, and
damage to the brain and heart.
•
Taking more than one drink per day for w o m e n or two drinks per day
for m e n can raise the risk for motor vehicle accidents, other injuries,
high blood pressure, stroke, violence, suicide, and certain types of
cancer. Even one drink per day can slightly raise theriskof breast
cancer.
• Alcohol consumption during pregnancy increases the risk of birth
defects.
•
Certain individuals should not drink any alcohol; for these individuals,
even moderate levels of alcohol consumption m a y cause health risks.
-40-
Included in this category are children and adolescents; individuals of
any age w h o cannot restrict their drinking to moderate levels; w o m e n
w h o m a y b e c o m e pregnant or w h o are pregnant; individuals w h o plan
to drive, operate machinery, or take part in other activities that require
attention, skill, or coordination; and individuals taking prescription or
over-the-counter medications that can interact with alcohol.
•
Moderate levels of alcohol consumption are associated with a
reduced risk of coronary artery disease for certain individuals, but
causation has not been conclusively established.
•
T o the extent that moderate consumption is linked to a lowered risk
for coronary heart disease, the link appears mainly a m o n g m e n over
45 and w o m e n over age 55. Moderate consumption provides little, if
any, health benefit for younger people.
•
The effects on health of alcohol consumption vary from individual to
individual, depending on the individual's health profile and history, as
well as the levels of consumption. Risk of alcohol abuse increases
w h e n drinking starts at an early age. S o m e studies suggest that
older people m a y b e c o m e more sensitive to the effects of alcohol as
they age.
Based on the above, it is TTB's conclusion that the medical data still
supports ATF's longstanding (and n o w our) position that notwithstanding the
data linking moderate alcohol consumption to a reduced risk of heart disease in
s o m e individuals, there are significant healthrisksassociated with all levels of
-41
alcohol consumption. The medical data submitted by the commenters, as well
as the testimony presented by experts at the public hearings, suggest that there
is a link between moderate alcohol consumption and a reduced risk of heart
disease in certain individuals; however, causation has not been conclusively
established. The risk/benefit ratio varies with the individual's own health profile
and the level of consumption. For example, moderate alcohol consumption
confers few, if any, benefits on people at low risk for heart disease. The
evidence also establishes that there are serious risks associated with higher
levels of alcohol consumption, and that even moderate consumption poses
health risks for certain individuals. Finally, there are certain categories of
individuals for whom any level of alcohol consumption is not recommended.
XV. Are Health Claims and Health-Related Statements in the Labeling and
Advertising of Alcohol Beverages Inherently Misleading?
A. Comments in Opposition to the Use of Health Claims and/or Health-Related
Statements
Approximately 120 comments opposed the use of health claims and/or
health-related statements (including directional statements) in the labeling and
advertising of alcohol beverages. Many of these commenters, including 1he
American Medical Association, the American Cancer Society, and the Center
for Science in the Public Interest, commented in support of a complete ban on
the use of such statements in the labeling or advertising of beverage alcohol.
The primary arguments made by these commenters are summarized below.
1. It Has Not Been Proven That Moderate Alcohol Consumption Lowers the
-42-
Risk of Heart Disease
N C A D D commented that the evidence for the alleg ed health benefits of
alcohol consumption w a s "far from concrete," noting that the 1999 NIAAA report
concludes that while there is "an association between moderate drinking and a
lower risk of C H D , science has not confirmed that alcohol itself causes the
lower risk." "Alcohol Alert," National Institute on Alcohol Abuse and Alcoholism,
No. 45, October 1999. (Comment 15). Most other commenters, however,
acknowledged that there w a s a link or association between moderate alcohol
consumption and reduced risk of heart disease in s o m e individuals.
2. Because the Negative Health Consequences of Alcohol Consumption
Outweigh the Potential Benefits. Health Claims and Health-Related Statements
are Inherently Misleading and Should be Banned
M a n y of the commenters stated that health claims for alcohol beverages
were inherently misleading because the health risks associated with alcohol
consumption outweigh the purported cardiovascular benefits. For example, the
American Cancer Society commented in favor of a ban on all health benefit
claims and health-related statements in the labeling and advertising of alcohol
beverages. (Comment 527). They noted that "[wjhile moderate intake of
alcohol has been shown to reduce the risk of coronary heart disease in middleaged adults, 100,000 deaths each year are attributed to alcohol-related
diseases."
The American Medical Association (AMA) strongly urged A T F to reject
any type of beneficial claim for alcohol products on container labels, noting that
-43-
such claims would be misleading, and for many persons, inaccurate.
(Comment 534). A M A stated that "[wjhile s o m e research indicates that
moderate drinking is associated with a decreasedriskof s o m e diseases, other
research shows that such risks actually substantially increase lor certain
people."
Senator Strom Thurmond opposed the use of any health-related
statements on alcohol beverage labels. (Comment 526). H e testified that
health claims were inherently misleading because of the serious health risks
associated with alcohol consumption; because the supposed health benefits of
moderate drinking have not been conclusively established; and because any
explanatory statements are simply insufficient to clarify a misleading health
claim. (April 25, 2000; Washington, D C , pages 14-16).
CSPI argued that health claims are inherently misleading for five
reasons:
(1) There are serious healthrisksassociated with alcohol consumption,
even moderate consumption;
(2) the health benefits of moderate alcohol consumption do not apply
universally, but only to a discrete segment of the population;
(3) there are m a n y groups of people w h o should abstain from, or
minimize, their consumption of alcohol;
(4) allowing health claims would undermine the Government warning
label; and
-44-
(5) explanatory statements are insufficient to clarify a misleading health
claim. (Comment 400).
CSPI noted that researchers for the Centers for Disease Control and
Prevention (CDC) found that, after decreasing during the late 1980s, alcohol
consumption a m o n g pregnant w o m e n in the United States began to increase
after 1991, and the lead author hypothesized that the increased consumption
might be due to the media attention to the reports on the health benefits of
moderate drinking. At the Washington, D C hearing, Mr. George Hacker,
director of CSPI's Alcohol Policies Project, testified in opposition to the use of
health claims. Mr. Hacker stressed the health risks associated with even
moderate alcohol consumption, and stated that "[ajlcohol is a potentially
dangerous, potentially addictive, and potentially deadly drug. Any positive
health statement about such a drug must be presented, if at all, only in a
balanced and non-misleading manner." (April 25, 2Q00; Washington, D C , page
56).
O n behalf of its three million members and supporters, Mothers Against
Drunk Driving ( M A D D ) commented in favor of banning any health claims or
directional statements in the labeling and advertising of alcohol beverages.
(Comment 20). M A D D commented that "[t]he negative consequences and the
risk associated with alcohol consumption greatly outweigh any purported 'health
benefits.'" M A D D quoted Gen. Barry McCaffrey, former Director of the Office of
National Drug Control Policy, as telling an alcohol policy conference in 1997
-45-
that, "Undoubtedly, alcohol is the principal drug abuse problem in America
today."
M A D D also noted that in 1998, 15,935 people were killed in alcoholrelated traffic crashes and an estimated 850,000 were injured. These alcohol related crashes result in an annual cost of $114,800,000 in the United States.
The National Association for Children of Alcoholics commented that "the
health risks of alcohol far outweigh the health benefits" and advocated a
complete ban on health-related claims on alcohol beverage containers.
(Comment 29). This comment noted that 76 million Americans, about 4 3 % of
the U.S. adult population, have been exposed to alcoholism in the family.
Almost one infive(18%) of American adults lived with an alcoholic while
growing up. Its comment also noted the negative impact of alcoholism on
family and marital relationships, the association between alcoholism and violent
crime and child abuse, and the devastating impact of alcoholism on the children
of alcoholics.
The Marin Institute for the Prevention of Alcohol and Other Drug
Problems ("Marin Institute") commented in favor of a complete ban on all
health-related statements (other than the required warning statement) in the
labeling and advertising of alcohol beverages. (Comment 324). The Marin
Institute commented that "[statements attributing positive health effects to the
consumption of alcoholic beverages (as is the case with the previously
approved wine labels) are misleading and potentially dangerous because media
and marketing messages can be misinterpreted as public health
-46recommendations." They stated that "[simplistic and misleading messages
about the health effects of alcohol are dangerous to the health and safety of
Americans and could increase the enormous toll of alcohol-related problems in
this country. Because of the evidence regarding the risks associated with
alcohol consumption, alcoholic beverages should not be held to a lower
standard of accountability regarding heaJth messages than well-regulated
prescription drugs. Banning all health claim-related statements on labels or in
advertising of alcoholic beverages assures that public health information is
accurate and free of potentially harmful misinformation."
Other public health organizations strongly urged a ban on health claims.
See, Pacific Drug Policy Institute, Inc. (Comment 34); American Council on
Alcohol Problems (Comment 37); and West Los Angeles Alcohol Policy
Coalition (Comment 384).
M a n y individuals m a d e similar comments, noting the serious health risks
associated with alcohol consumption. S o m e shared personal experiences with
alcoholism or alcohol abuse. See comments 23, 28,' and 35.
M a n y of the individuals testifying at the public hearings also emphasized
the h u m a n costs associated with alcohol abuse. For example, Barrett Duke,
Ph.D., testified on behalf of the Ethics and Religious Liberty Commission, the
moral concerns agency for the Southern Baptist Convention. H e shared his
concerns from the perspective of the faith community, and noted that "[m]ost
faith communities deal with the devastating consequences of alcohol abuse on
a regular basis in their churches, missions, and benevolent ministries. * * *
-47-
Families have been destroyed. Lives have been lost. Careers have been
ruined. M e n and w o m e n have left the ministry as a direct result of alcohol
abuse. Furthermore, alcohol is often a primary contributing component to
poverty, forcing faith communities to use precious limited resources to assist
the alcohol abuser as well as the abuser's intended cr unintended victims."
(April 25, 2000; Washington, D C , page 151).
Ms. Suzanne Harrington-Cole, Chair of the Vallejo Alcohol Policy
Coalition, testified in favor of a complete ban on the use of health claims on
alcohol beverage containers. She stated that alcohol is present in more than
5 0 % of all incidents of domestic violence (May 24, 2000; San Francisco, CA,
page 245), and noted that "[w]e do not need a government sanction on more
drinking in the n a m e of health." (Id. at page 243).
3. The Issue is Too Complex to be Summarized on an Alcohol Beverage Label
Because the Effects on Health of Alcohol Consumption Vary From Person to
Person
Many of the commenters stated that a summary statement of health
benefits on an alcohol beverage label would mislead consumers because the
effects on health of alcohol consumption, vary from person to person, based on
various factors. These commenters also suggested that the issue w a s too
complex to be summarized on an alcohol beverage label, rendering all such
labeling statements inherently misleading. Thus, the American Cancer Society
noted that the potential health impact of alcohol consumption varied from
individual to individual, and that a "brief message on any beverage container
-48cannot provide a consumer with adequate information to make an informed
decision about drinking 'for health related reasons."' (Comment 527).
N C A D D urged A T F to "prohibit labels and advertisements that m a k e
claims regarding potential health benefits associated with the consumption of
alcoholic beverages, because it would be impossible to adequately and
appropriately convey the negative health consequences." (Comment 15).
N C A D D noted that elderly consumers have special concerns, and that NI AAA's
definition of moderate drinking for w o m e n and m e n over the age of 65 is no
more than one drink a day. They cited a study showing that among persons
older than 65, moderate and heavy drinkers were 16 times more likely than
nondrinkers to die of suicide.12
Senator Thurmond also testified that the effects of alcohol consumption
vary from individual to individual, and any clarifying statement along those lines
would "have to address factors such as age, sex, family, medical history, diet,
weight, and activity." (April 25, 2000; Washington, DC, page 16). M A D D noted
ATF's historic policy of requiring balance in health claims, and suggested that in
"order to 'appropriately qualify and balance' the alleged health claim benefits
with the negative consequences, the alcohol label would have to be the size of
a billboard and advertising messages would be longer than the State of the
Union Address." (Comment 20). Accordingly, M A D D suggested that to avoid
misleading consumers, such claims should be banned entirely.
The United Communities Against Drug & Alcohol Abuse commented that
"[n]o brief message on any beverage container can possibly provide a
-49-
consumer with adequate information to m a k e a decision about drinking Tor
health-related reasons.'" Instead, they suggested that in order to balance a
health message, "consumers would need to be provided with a detailed multipage document (similar to those n o w provided by manufacturers of prescription
medication) in order to m a k e [an] informed choice about whether or not a
decision to consume an alcoholic-beverage for health reasons would be, on
balance, a good or a bad decision." (Comment 31). The Marin Institute
(Comment 324) agreed, commenting that "[djetailed, balanced and cautionary
information about potential harmful effects would be required (as it is with
advertisements of prescription drugs) in order to offset the demonstrated
confusion of the general public about the health effects of alcohol. The volume
of information needed could hardly be legible if it were displayed on a bottle of
wine or beer."
4. Even if Moderate Alcohol Consumption is Linked to a Reduced Risk of Heart
Disease. There are Safer W a y s to Achieve the S a m e Reduction Without the
Risks Associated With Alcohol Consumption
M a n y commenters suggested that even if alcohol consumption resulted
in health benefits for certain individuals, there were lessriskyways to obtain
those benefits. For example, the Central Nebraska Council on Alcoholism, Inc.
(Comment 14) noted that "[tjhere are simply less risky ways to attain the s a m e
health benefits that consuming small amounts of alcoholic beverages provide to
a limited group of people. It would be irresponsible for the government to allow
a health-claims statement on alcoholic beverages that urge the most risk laden
-50-
way of obtaining those benefits."
CSPI also suggested that there were safer methods of reducing one's
risk of heart disease, stating that the "discrete category of people w h o m a y
benefit from moderate drinking could also lower their risk of heart disease by
other less risky alternatives, such as quitting smoking, reducing fat in the diet,
getting regular exercise, taking a daily low dose aspirin, or reducing stress. All
of those methods are much less likely to cause accidents or other health
problems than consuming alcohol, even in moderation." (Comment 400).
The Tangipahoa Alcohol and Drug Abuse Council (Comment 24) noted
that consumers often look for "the easy way out," and that m a n y m a y believe
that drinking alcohol will get the s a m e benefits as an overall healthy lifestyle.
The Pacific Drug Policy Institute, Inc. commented that "smoking cessation, good
diet, exercise, and stress management techniques provide cardiac benefits with
much lower risk of adverse consequences. W h e n there are low risk ways to
attain the health benefits attributed to wine, it would appear absurd to allow
advertisement of medicinal value in high-risk alcohol consumption." (Comment
34).
Ted Miller, Ph.D., an economist, testified at the hearings that a more
cost-effective w a y to obtain the purported benefits associated with consumption
of wine would be to walk a mile, drink a glass of juice, or eat one cup of
Mi" >>;••.:••.'•
vegetables every day. (April 25, 2000; Washington, D C , pages 179-183).
5. Health Claims and Health-Related Messages Would be Misconstrued by
Consumers. Particularly Those With a History of Alcoholism or W h o Are
-51 -
Susceptible to Alcohol Abuse Problems, as an Endorsement to C o n s u m e or
Abuse Alcohol
Many professionals in the field of addiction medicine commented that
health claims and health-related messages were likely to be misinterpreted by
those most susceptible to problem drinking. Many of these commenters were
particularly concerned with the risk that recovering alcoholics would use
information about the purported health benefits of alcohol consumption to justify
their continued use of alcohol. For example, a physician who has worked in the
alcohol and substance abuse treatment field for 18 years stated that any
message about purported health benefits sends the wrong message to the
public, especially the alcohol abuser or alcoholic. He expressed concern that
such a message "would only encourage the alcoholic to drink more to 'help his
heart"* and feared that "many current alcoholics who are in total recovery and
abstinence may use this as a justification to begin drinking alcohol again,
thinking they can control it." (Comment 381). Another doctor made a similar
point, (Comment 385) as follows:
The American public has become accustomed to warning labels on
harmful products * * *. A label touting health benefits of use of alcoholic
beverages in controlled and low amounts, is likely to be misinterpreted
by problem drinkers, especially by alcoholics, whose belief systems
about their drinking distort reality with respect to the relative benefits and
risks of consumption. * * * I do not deny the scientific validity of reports
of health benefits of consumption of one glass of wine per day for
females or two glasses of wine per day for males. However, the risk of
misinterpretation by the drinking public is far greater than any public
health or public information benefit that m a y be alleged to accrue from
adding labels to products that promote health benefits from drinking.
-52The National Association for Children of Alcoholics (Comment 29) also
suggested that health claims can lead to confusion among children of alcoholics
about the role of alcohol, and can reinforce and perpetuate the denial process
of the alcohol -addicted person.
6. The Use of the Term "Moderate" in a Specific Health Claim Would be
Misleading Unless the Term is Defined
Many public health organizations commented that the use of the term
"moderate" in a health claim could mislead consumers w h o did not understand
the definition of the term. The United Communities Against Drug & Alcohol
Abuse noted that "moderate" drinking was poorly defined. It noted that the
Substance Abuse and Mental Health Services Administration ( S A M S H A ) study
showed that "virtually all drinkers define .their personal level of consumption as
'moderate,' whether they consume one drink per week orfiveper day."
(Comment 31). CSPI also noted that consumers had varying definitions of the
term "moderate." (Comment 400). Rather than recommending moderate
consumption, CSPI suggested that any health claims should provide specific
quantities of alcohol that constitute moderate consumption, including a
recommendation that consumers drink no more than one drink per day.
Nancy Piotrowski, Ph.D., testified that she had been conducting research
on alcohol consumption for the past 16 years, and is in the middle of ongoing
research on the perceptions of drinkers regarding moderate alcohol
consumption. She noted that previous s.tudies had shown that perceptions of
moderate drinking were clearly related to drinkers' current drinking patterns and
-53their history of problems relating to drinking. (May 23, 2000; San Francisco,
page 37).
B. Comments in Favor of Health Claims
A few commenters specifically supported ATF's proposal to allow
qualified, detailed and balanced health claims in the labeling and advertising of
alcohol beverages. One comment, from CEI and CA, specifically supported the
use of summary health claim statements without qualification or disclosure of
the adverse effects on health caused by alcohol consumption. Finally,
approximately 45 commenters supported the general use of health claims with
respect to alcohol beverages.
1. Comments in Favor of Allowing Balanced Health Claims, as Set Forth in the
Proposed Rule
The comments in favor of the substantive health claim provisions of the
proposed rule generally stated that ATF had struck an appropriate balance in
dealing with a difficult issue. For example, the National Consumers League
(NCL), a national nonprofit consumer advocacy organization that was founded
in 1899 to represent consumers in the marketplace and workplace, recognized
the difficult nature of the issue as follows:
NCL believes that the proposed rule raises a serious public policy
question for which there is no easy answer. N C L understands ATF's
concern as to whether health claims should be permitted on alcoholic
beverages at all. While there is a body of research showing that
moderate consumption of alcohol reduces theriskof coronary heart
disease (CHD), there is also evidence that moderate drinking m a y
increase theriskof certain cancers. Moreover, as A T F notes, moderate
drinking isriskyfor certain individuals w h o are prone to alcoholism, s o m e
-54of w h o m m a y not realize that they are. Excessive alcohol consumption
is unquestionably harmful. Whether a properly qualified health claim
should be permitted on alcoholic beverage labels is a serious policy
question that has been debated by public health experts for years.
NCL concluded that while it "has reservations about authorizing any health
claim for alcoholic beverages, w e believe a properly qualified and balanced
claim would be of value to many consumers. * * * A health claim that includes
the elements specified in the proposed rule would provide these consumers
with useful information." (Comment 388).
T w o major associations representing the wine industry also commented
in support of the substantive health claims provisions of the proposed rule. The
Wine Institute commented "that the public should receive the whole story
regarding the responsible consumption of wine and applaud[ed] ATF's efforts,
as reflected in the additional proposed regulation language, to refine and focus
the conditions which must be met before any substantive claim regarding heath
benefits can be m a d e on wine labels or in advertisements." (Comment 401).
The A V A also stated it had no objection to the proposed amendment to
the regulations to reflect current A T F policy, noting that "[a]s our members have
been required to conform to these policies for s o m e years, converting them to
regulation would pose no further hardship." (Comment 417).
A comment from the Washington Legal Foundation (WLF) focused
primarily on legal issues, noting that if the rule was properly implemented, it
would pass muster under the First Amendment. (Comment 390). This
comment will be discussed further under section XIX.
-55-
2. C o m m e n t Supporting Summary Health Claims Without Qualification or
Disclosure of Adverse Effects
Only CEI and C A specifically argued in favor of allowing summary health
claims without qualification or disclosure of adverse effects in the labeling and
advertising of alcohol beverages. CEI and C A opposed ATF's notice on the
grounds that it would serve to suppress truthful and non-misleading speech.
(Comment 326). CEI and C A argued that the cardiovascular and overall health
benefits associated with moderate alcohol consumption are amply supported by
the medical evidence, and summary statements of these benefits are protected
by the First Amendment.
CEI and C A suggested that those individuals w h o would not benefit from
moderate drinking "know w h o they are and are unlikely to be misled." CEI and
C A also suggested that the C S A P survey supports a conclusion that consumers
would not be misled by directional statements, that such statements would not
change the drinking patterns of consumers, and that the population studied
understands the risks of drinking, particularly that drinking is counter-indicated
during pregnancy.
CEI and C A claimed that other Federal agencies have approved
!.!»"•';un(is il'.o
summary health statements without the extensive qualifications that would be
required under ATF's proposed rule. A s examples, they pointed to health
claims approved by F D A for diets low in saturated fat and cholesterol and diets
low in sodium. They also suggested that the "balance" A T F is ostensibly
-56-
seeking would automatically be provided by the mandatory health warning
statement on alcohol beverage containers.
The CEI and C A comment suggested that the proposed rule would result
in regulations that violated the First Amendment; thus, the proposed rule should
be withdrawn. At the public hearing, Mr. Ben Lieberman testified on behalf of
CEI and stated that CEI believed that the rulemaking should result in a "policy
allowing a wide range of accurate summary statements about moderate
drinking and health to appear on alcoholic beverage labels and ads." (April 25,
2000; Washington, D C , page 119). Mr. Lieberman also suggested that A T F
had not accurately summarized the evidence demonstrating the health benefits
associated with moderate alcohol consumption, but instead spent "much of its
time identifying and somewhat exaggerating every conceivable category of
individual w h o is not likely to benefit from moderate drinking, such as adults too
young to be at risk for heart disease, pregnant w o m e n , and recovering
alcoholics." Qd. at page 120).
In response to a question from the panel, Mr. Lieberman confirmed that it
w a s CEI's belief that a health claim regarding cardiovascular benefits, such as
"there is significant evidence that moderate consumption of alcoholic beverages
m a y reduce the risk of cardiovascular disease," could appear on a label with no
disclaimer and still not mislead consumers. H e stated that "it is well known that
people understand the limitations of advertising and labeling and that they
would be skeptical. They would also read the government warning, which does
at least allude to the other side of this story." (April 25, 2000; Washington, D C ,
tir;:^ ut:.
-57-
pages 133-134).
3. Other Comments in Favor of Health Claims
Approximately 45 comments supported the use of substantive health
claims in the labeling and advertising of alcohol beverages. However, these
commenters did not specifically support the type of summary health claim
advocated by CEI and CA. Instead, they commented in favor of the general
principle that health claims for alcohol beverages are not inherently misleading.
In s o m e cases, it w a s difficult to determine whether these commenters meant to
support directional statements only or whether they specifically supported the
use of substantive health claims on labels or in advertisements.
Most of the comments that favored a rule allowing the use of substantive
health claims reflected a general perception that consumers were entitled to
information about potential health benefits associated with moderate alcohol
consumption. For example, one individual suggested that "consumers have the
right to know and can be trusted to handle this scientific information."
(Comment 300). Another comment supported "therightsof wineries to list the
health benefits of their product on the labels." (Comment 277).
S o m e of the individuals commenting in favor of health claims specifically
supported the concept that the claims be balanced, although it w a s unclear
whether they were suggesting that the balance would c o m e from qualifications
in the claims or the required Government warning statement. For example, one
individual stated that "[i]t is only fair and proper that the labels on the bottle
-58-
contain the positive health benefits as well as the proper health warnings."
(Comment 143). Another commenter expressed his support for "producers of
wine to be able to print both the adverse and the positive effects of consuming
wine." (Comment 340).
M a n y of the commenters suggested that consumers need to be m a d e
aware of health-related information, including the positive and negative effects
of alcohol consumption, in order to m a k e informed decisions regarding its use.
For example, one commenter, a psychologist and attorney, stated that it w a s
"necessary to rationally accept that alcohol has benefits as well as dangers
* * *. Since Americans can easily and legally drink, and most in fact do so, the
need to inform them of the range of drinking consequences and the related
drinking limits for each is both prudent and democratic." (Comment 243). A
doctor commented as follows:
It makes more sense to put more information on the label in order for
the consumer to m a k e a better decision. A s a physician, I implore m y
patients to read labels. There are certainly s o m e potential health
benefits to wine as well as potential downsides in individuals. (Comment
145).
Two commenters argued that alcohol producers have a First Amendment
right to market the health benefits of alcohol consumption, provided that such
information is presented in a non-misleading manner. However, neither of
these comments suggested that industry members were entitled to use
summary health claims without any qualification or disclosure of adverse
effects. The First A m e n d m e n t issues raised by these commenters will be
-59-
addressed separately in section XIX.
Among the medical experts who testified at the hearings in favor of
allowing health claims or health-related statements on labels or in
advertisements, some specifically noted that consumers should be made aware
of both the risks and purported benefits of moderate alcohol consumption. For
example, Dr. Ellison suggested that an appropriate message on a label would
be m[w]hile light to moderate alcohol consumption can be consistent with a
healthy lifestyle for most individuals and has been shown to dramatically reduce
the risk of heart disease, certain individuals should not drink at all.' Then, you
should go through the list of the people that we are advising not to drink." (April
26, 2000; Washington, DC, page 116).
Finally, Mr. John Hinman testified on behalf of the American Wine
Alliance for Research and Education as well as the Coali tion for Truth and
Balance, a group of California wineries. Mr. Hinman suggested that it was the
Government warning statement, rather than the directional statements, which
misled consumers about the health consequences of alcohol consumption.
(May 23, 2000; San Francisco, CA, page 149). Mr. Hinman was also one of the
few individuals responding to ATF's question about whether it was possible to
a--
rp
craft a balanced substantive health claim. H e noted .that he had submitted a
664-word statement to ATF for review in 1993, entitled "Wine and Health Behind the French Paradox." Qd. at page 151). Mr. Hinman stated that
"considering that 664 words makes for a very wordy wine label, we seriously
doubt whether any wine maker really has an interest in providing sue h a
-60statement on the bottle. However, the statement can and should be available to
hand out to those customers w h o request more information or are interested in
the subject matter." (Id. at page 152). Accordingly, Mr. Hinman stated he w a s
resubmitting the statement to A T F for review, and later clarified in response to a
question from the panel that he would put the statement on an application for
label approval. (Id. at pages 152, 165).
In response to a question from the panel, Mr. Hinman stated that neither
the American Wine Alliance nor the Coalition for Truth and Balance w a s
"interested, to m y knowledge, in necessarily using CEI's proposed label. * * *
O n the other hand, as a lawyer * * * that's an absolutely accurate statement
that CEI is using on that particular thing, and I would support their First
A m e n d m e n t right to utilize it. It's going to be up to them tofindpeople that are,
in fact, going to use it." (Jd. at page 167).
C., Decision
After careful consideration of the record, T T B finds that the comments
and testimony on this issue establish that the use of health claims in the
labeling or advertising of alcohol beverages has the potential to mislead
consumers as to the very serious health consequences associated with alcohol
abuse and consumption. In particular, T T B finds that the rulemaking record
overwhelmingly supports the conclusion that the type of detail, qualification, and
balance required by the proposed rule would be necessary to avoid misleading
consumers about the serious health risks associated with alcohol consumption.
-61 Based on the comments on this issue, however, T T B is adopting certain
changes to thefinalrule to set forth more specifically h o w a substantive health
claim would comply with the requirements of theregulation.For example, T T B
agrees with the N C A D D comment that it has not been proven that alcohol itself
lowers the risk of heart disease in certain people; this comment is consistent
with the 1999 "Alcohol Alert" published by NIAAA. The 2000 Dietary Guidelines
state only that "[djrinking in moderation m a y lower risk for coronary heart
disease, mainly among m e n over age 45 and w o m e n over age 55." The final
rule provides that a specific health claim would not be approved unless it is
truthful and adequately substantiated by scientific or medical evidence. Thus,
T T B would not approve any claim implying that alcohol consumption itself
caused a reduced risk of heart disease in the absence of scientific or medical
evidence substantiating such a claim.
T T B also agrees with those commenters w h o suggested that the effects
on health of alcohol consumption vary from person to person, and that any
labeling or advertising statement that failed to take this into account would
mislead consumers. Consistent with the 2000 Dietary Guidelines, m a n y
commenters noted that moderate consumption provided little, if any, health
benefit for younger people, w h o are at low risk of heart disease. A s noted
above^ the Dietary_Guidelines provide that "[djrinking in moderation m a y lower
risk for coronary heart disease, mainly among m e n over age 45 and w o m e n
over age 55."
-62In consideration of these comments, the final rule specifically provides
that a claim will not be approved unless it is sufficiently detailed and qualified
with respect to the categories of individuals to whom the claim applies. For
example, assuming that the evidence continues to indicate that the potential
health benefits associated with moderate alcohol consumption are mainly
associated with men over age 45 and women over age 55, then the claim would
have to specifically set forth this qualification. Furthermore, the concerns
expressed in the comments regarding the definition of the term "moderate"
would also be addressed by requiring, where necessary, sufficient detail in the
claim itself regarding the meaning of this term. This level of detail could include
specific information as to what constitutes "moderate" levels of consumption,
possibly including separate definitions for men, women, and the elderly.
Many commenters suggested that there are safer ways to reduce the risk
of heart disease without the negative health consequences associated with
alcohol consumption. Again, this is a point noted in the 2000 Dietary
v.'.' r&>v-:-'
Guidelines, which remind consumers that "there are other factors that reduce
the risk of heart disease, including a healthy diet, physical activity, avoidance of
smoking, and maintenance of a healthy weight." In reviewing whether a health
claim tends to mislead consumers, TTB will certainly consider whether the
health claim misstates the role played by these factors in reducing one's risk of
heart disease.
Several commenters suggested that any health claim might be
misinterpreted by alcoholics and other abusers of alGohol as a rationalization for
-63their o w n consumption levels. T T B recognizes the possibility that certain
consumers will selectively interpret data regarding the health consequences of
alcohol consumption to justify their o w n behavior. W e believe that summary
health benefit claims that do not disclose the adverse health consequences
of alcohol consumption would be particularly susceptible to this type of
misinterpretation. W e recognize the possibility that certain abusers of alcohol
m a y use information regarding the potential cardbvascular benefits of alcohol
consumption to justify alcohol abuse that clearly poses significant health risks.
However, it is our conclusion that the best w a y to prevent this type of
misinterpretation of a health claim, by both alcohol abusers as well as
consumers w h o do not abuse alcohol, is to require detailed information
regarding the health risks associated with various levels of alcohol
consumption.
Accordingly, thefinalrule provides that a specific health claim must
adequately disclose the healthrisksassociated with both moderate and heavier
levels of alcohol consumption. It is misleading to imply that moderate alcohol
consumption confers only health benefits; the administrative record establishes
that there are significant risks associated with moderate consumption, including
an increased risk of certain cancers. Even if a claim is m a d e regarding only
moderate consumption, consumers should be advised of the health risks of
heavier levels of alcohol consumption. The record reveals that a high
percentage of the alcohol consumed in this country is consumed at levels that
exceed "moderate drinking." The Marin Institute comment states that alcohol is
-64consumed at heavy levels (3 or more drinks per day, or more than 5 drinks at
one time) in 78 perc ent of all drinking occasions. (Comment 324).
Furthermore, Dr. Criqui testified that half of all the alcohol consumed in the
United States is consumed by the 1 0 % of m e n and the 5 % of w o m e n w h o are
alcohol-dependent. (May 23, 2000; San Francisco, CA, page 57). Finally, a
study submitted by CEI and C A noted that "[i]n the United States, less than 1 0 %
of the population reports drinking more than two drinks per day, the cutoff for
'heavy drinking' in national survey research. This means that 'moderate'
drinkers, because of their much greater numbers, probably account for well
over half of all alcohol problems, afindingthat led researchers at the Institute of
Medicine to observe in a groundbreaking report that 'if all the clinically
diagnosed alcoholics were to stop drinking tomorrow, a substantial fraction of
what w e understand as alcohol problems would still remain.'"13 These statistics
m a k e it clear that a specific health claim touting the potential health benefits of
moderate alcohol consumption would be misleading without a referral to the
health risks associated with both moderate and higher levels of alcohol
l!>'n;?eo S---. ••••• :-
•• •)-^
consumption.
In addition, the administrative record establishes that there are certain
categories of individuals for w h o m any alcohol consumption at all is not
recommended. Accordingly, thefinalrule provides that any specific health
claim must outline the categories of individuals for w h o m any levels of alcohol
consumption m a y cause health risks. The Beer Institute commented that ATF's
proposed standard on this issue m a d e it unclear whether "disclaimers are
-65-
required only for categories of individuals whose potential negative health
effects are literally numerous or whether the potential negative health effects
would be aggregated for the purposes of performing the balancing test
envisioned by the proposed regulation." (Comment 396). Accordingly, the final
rule clarifies that this requirement is intended to cover the categories of
individuals for w h o m alcohol consumption is not recommended (e.g., pregnant
w o m e n , individuals taking certain medications, etc.).
W e do not agree with CEI and C A that it is unnecessary to set forth this
information in conjunction with a health claim because these people know w h o
they are. For example, it is not at all clear that most consumers know that
alcohol can interact harmfully with a variety of prescription and over-the-counter
medications. It is TTB's conclusion that any labeling or advertising statement
that m a k e s a substantive health claim regarding alcohol consumption would
mislead consumers if it does not set forth this important information about the
adverse consequences of alcohol consumption. Notwithstanding the above, w e
find that the rulemaking record does not support a conclusion that health claims
in the labeling and advertising of alcohol beverages are inherently misleading.
Nor does the record support a conclusion that the potentially misleading nature
of such claims cannot be cured with the appropriate use of disclaimers and
qualifying statements.
Initially, it should be noted that none of the commenters w h o supported a
total ban on the use of health claims in the labeling and marketing of alcohol
beverages presented consumer data on the use of substantive health claims in
-66-
the labeling or advertising of alcohol beverages. Thus, w e have no consumer
data establishing that consumers would be misled by the use of properly
qualified health claims that are sufficiently detailed and specific, and which
disclose the adverse health consequences of alcohol consumption.
- A complete ban on the use of health claims or health-related statements
in the labeling and advertising of alcohol beverages would prohibit even the
most qualified, detailed, and balanced discussion of health consequences in
advertising materials. For example, in Industry Circular 93-8, A T F advised
industry m e m b e r s that the regulations did not prohibit them from including the
entire text of NIAAA's April 1992 edition of "Alcohol Alert" in advertising
materials. This NIAAA publication presents a comprehensive overview of the
benefits and risks associated with alcohol consumption. If the regulations
imposed a complete ban on advertising materials that included health-related
statements, then industry m e m b e r s would no longer be allowed to include this
NIAAA publication in advertising materials. Yet T T B finds nothing in the record
to establish that the inclusion of this type of comprehensive discussion of
flit; '•'-•; p
-
effects on health in an advertisement in any w a y misleads consumers as to the
health risks of alcohol consumption. Accordingly, w e find that the record does
not support an overall ban on the use of specific health claims and healthrelated statements in the advertising of alcohol beverages.
A closer issue is presented by the labeling of alcohol beverages. A s A T F
noted in Industry Circular 93-8, w e believe that it would be difficult to compose a
health claim that is detailed and specific enough to meet our standards, yet
-67-
short enough tofiton a traditional alcohol beverage label. In addition, T T B will
not approve any labeling health claim that contradicts the message of the
required Government warning statement.
T T B agrees with the commenters w h o suggested that a summary
substantive health claim which does not include sufficient detail and
qualification would mislead consumers about the serious health consequences
of alcohol consumption. However, w e do not believe that this provides a basis
for banning all substantive health claims on alcohol beverage labels. Instead,
as set forth above, T T B is making changes to thefinalrule to clearly provide
that a specific health claim will not be allowed unless it is truthful and
adequately substantiated by scientific or medical evidence; sufficiently detailed
and qualified with respect to the categories of individuals to w h o m the claim
applies; adequately discloses the health risks associated with both moderate
and heavier levels of alcohol consumption; and outlines the categories of
individuals for w h o m any levels of alcohol consumption m a y cause health risks.
W e disagree with the arguments m a d e by CEI and CA, the only
commenters w h o specifically favored allowing industry m e m b e r s to m a k e
summary statements regarding health benefits that contained no qualification,
balance, or disclosure of adverse effects. In thefirstplace, the record did not
establish that there w a s any concrete interest on the part of the alcohol
beverage industry in using the summary'health claim proposed in the CEI
petition. Secondly, w e find that statements such as the one proposed by CEI
would mislead consumers by not disclosing the significant adverse effects on
-68health associated with alcohol consumption, which are set forth in great detail in
this rulemaking record.
T T B has not drafted a model health claim for use on alcohol beverage
labels because this extensive rulemaking record has revealed little, if any,
interest on the part of industry members in using substantive health claims on
alcohol beverage labels. In fact, industry members not only failed to express
such an interest, in m a n y cases, they specifically disavowed any interest in
using substantive health claims. Furthermore, as discussed further in section
XVIII, any such claim might well subject the product to regulation as a drug
under F D A regulations.
Accordingly, T T B will leave it to any interested industry m e m b e r s to seek
approval of a substantive health claim through the label approval process. The
final rule sets forth the standards that would apply to any such labeling
statement. If an industry m e m b e r wishes to use a substantive health claim on a
label in compliance with the standards set forth in thefinalrule, it should apply
for a certificate of label approval.
A T F announced in Industry Circular 93-8 that dissemination of the full
text of the April 1992 edition of "Alcohol Alert" as published by NIAAA, would
U'
i •
not be in violation of the regulations. Thefinalrule does not change this policy.
Furthermore, dissemination of the entire Dietary Guidelines as advertising
materials by industry members, or dissemination of the two pages from the
current Guidelines dealing with alcohol beverages (pages 36 and 37) would not
violate thefinalrule. Both of these materials provide a comprehensive
-69-
discussion of the health consequences of alcohol consumption. The
information in these materials regarding the health consequences of alcohol
consumption is truthful and supported by scientific evidence. T h e information is
sufficiently detailed, qualified and specific, and sets forth the health risks
associated with both moderate and heavier levels of alcohol consumption. Both
of these publications further set forth the categories of individuals for w h o m any
level of alcohol consumption m a y pose health risks. Accordingly, these
materials comply with the standards set forth in the regulations.
A s A T F stated in Industry Circular 93-8, w e will continue to evaluate any
additional text that accompanies these materials, such as editorializing,
advertising slogans, or exhortations to consume the product, to determine
whether or not the advertisement as a whole presents truthful and nonmisleading information regarding the risks associated with alcohol consumption.
Furthermore, the use of any buttons, shelf talkers, table tents, and similar items
that excerpt any portion of the N I A A A publication or the Dietary Guidelines, or
that are based on any other publication or article about the health
consequences of alcohol consumption, will be closely scrutinized to determine if
they tend to mislead consumers about the serious risks associated with alcohol
consumption.
XVI. Are Health-Related Directional Statements Misleading?
A s previously noted, the vast majority of the commenters addressed the
issue of health-related directional statements, such as the ones approved by
-70A T F in 1999, rather than the issue of substantive health claims. Approximately
355 commenters expressed support for the use of directional statements on
alcohol beverage labels. Many commenters stated that directional statements
are not substantive health claims and that they merely refer consumers to other
sources for information about the effects on health of alcohol consumption. As
such, the commenters maintain that directional statements are not misleading
to consumers. On the other hand, most of the approximately 120 comments in
opposition to the use of health claims also opposed the use of health-related
directional statements in the labeling and advertising of alcohol beverages.
A. Comments and Testimony in Favor of the Use of Health-Related Directional
Statements
Most of the comments in support of directional statements shared the view
set forth in the Wine Institute's comment as follows:
Directing consumers to consult with their doctors or to refer to the
Dietary Guidelines regarding the health effects of wine consumption
constitutes a responsible and neutral message. Far from misleading the
public, such statements are designed to educate and empower each
individual to m a k e fully informed choices regarding the consumption of
wine. (Comment 401).
The Wine Institute's comment also stated that health-related directional
statements were "certainly not misleading because they do not constitute
substantive health claims in the first instance." They cited the CSAP survey,
c ......
. _
which concluded that the drinking patterns of 88.3% of the participants would
'. 1 !
. •
. i ; •
' '
•
not be influenced by directional statements, with an additional 3.9% indicating
they would drink less.
-71 In response to ATF's question of whether the negative consequences of
alcohol consumption and abuse disqualified alcohol beverages from entitlement
to health claims or health-related statements, the Wine Institute submitted
extensive summaries of scientific studies on moderate consumption of wine and
alcohol for the Dietary Guidelines Review Process. A n updated compilation of
that submission w a s attached to their comment. The Wine Institute stated that
it "fully subscribes to an open and vigorous dialogue driven by the findings of
the scientific community on the health effects of alcohol consumption."
The Wine Institute submitted a supplemental comment in which it stated
that it wished "to underscore h o w critical it is to make the distinction between
health-related statements and those in which a substantive claim of health
benefits is advanced. A substantial number of submissions you have received
to date appear to blur this crucial difference and argue against directional labels
by incorrectly classifying such labels as health claims." (Comment 401b).
(i
:
: v ' i n r ! "••' _
Mr. John DeLuca, President and C E O of the Wine Institute, testified at
both the Washington, D C and San Francisco, California hearings. Mr. DeLuca
stated that he believed that wineries have a First Amendmentrightto use the
directional label, and pointed to the C S A P survey as evidencethat consumers
would not increase consumption as a result of directional statements. (April 25,
2000; Washington, D C , page 32). H e urged the empowerment of the public
through dissemination of information, and urged that the public should be
trusted "to handle this information." ([d. at pages 32-33).
W h e n asked about substantive health claims, Mr. DeLuca stated that "we
-72-
are not trying to sell wine as health food or as a medicine." Qd. at page 37). H e
said that "we should be erring on the side of making it as hard as possible for
s o m e o n e to m a k e a health claim. It really is not the province of the industry to
be talking that way. W e want third-party peer review journals research to be
what is presented to the public, not what w e put to the public." (id. at page 38).
In response to a question about whether the directional statements were
perceived as health claims, Mr. DeLuca stated that the Wine Institute had
withdrawn its original label submission, which included the phrase "health
benefits," because they "knew it w a s going to lead to a cascade of criticism"
and that the phrase "health effects" c a m e from the Appropriations Committee's
language in appropriating funds for NIH and NIAAA to research the effects on
health of moderate drinking, (jd. at page 40).
W h e n asked about consumer reaction to the directional statements, Mr.
DeLuca noted that only 17 companies had received approval from A T F for
using directional statements before the moratorium went into effect - 5 received
approval for the Dietary Guidelines statement, and 12 utilized the family doctor
statement. (May 23, 2000; San Francisco, CA, pages 14-15). Mr. DeLuca
stressed that the Wine Institute did not encourage wineries to use the label,
noting that "[w]e always thought of this as a voluntary option for our members.
They were designed primarily for public policy, not for public relations, a
distinction with an enormous difference." (Id. at 15).
The AVA, a trade association of American wineries representing
approximately 600 members, also noted that it had been involved on behalf of
-73-
one of its members in the A T F review process for the directional statements
approved in 1999. (Comment 417). A V A stated that it agreed with the
applicant, Mr. Patrick Campbell, that the directional statement "makes no claim,
pro or con, therapeutic or curative, true or false. The C O L A [certificate of label
approval] makes no claim at all. It merely (and sensibly) encourages
consumers to consult with their family doctor about their personal use of the
product. * * * Since this C O L A makes no claim, questions about its potential
to mislead are irrelevant." (Comment 417). The President of AVA, Mr. Simon
Siegl, testified at the public hearings in support of a winery'srightto use a
directional label. (April 26, 2000; Washington, DC, page 65).
M a n y winemakers also commented in support of the use of directional
statements. S o m e emphasized the neutral content of the directional
statements. The Associated Vintage Group asked "what can be a better
message than referring them [consumers] to our own government's nutritional
guides or, even better, checking with their doctors." (Comment 173). Mr. Kent
Rosenblum commented that "[directional labels do not constitute health claims,
pre cr r •:•••'
and government survey data indicate no changes in drinking patterns would
occur." (Comment 151). H e then went on to note that "[t]here is a developing
scientific consensus that moderate wine and alcohol consumption can be part
of a healthy diet and lifestyle for those w h o choose to drink."
Other wineries specifically referenced the directional statements as
providing balance to the Government warning statement, or referring to the
"benefits" of consumption. For example, D e Rose Vineyards commented that
-74"[t]he U.S. Dietary Guidelines for Americans constitutes a responsible and
neutral message." The winery also stated that "[tjhere is a very substantial
body of scientific data that verifies the efficacy and healthfulness of moderate
wine consumption. Withholding this most helpful and beneficial information,
and instead only emphasizing the harmful effects of wine consumption, is
ludicrous and ultimately destructive and irresponsible. A forthright balance of
both positive and negative simply educates an informed public and allows them
to m a k e responsible decisions." (Comment 172). T w o other wine producers
m a d e similar comments (Comments 214 and 387).
M a n y commenters w h o did not identify themselves as being part of the
wine industry also supported the directional statements. S o m e supported the
general concept of directing consumers to the Dietary Guidelines or their
physician for more information about the effects on health of alcohol
consumption. O n e suggested that "[t]he wording is neutral and not positive,
thereby serving as education rather than propaganda." (Comment 332).
Several commenters referred to the consumer survey conducted by C S A P as
evidence that the statements did not mislead consumers.
S o m e commenters argued that consumers have arightto know all the
scientific information available on both the positive and negative effects of
various levels of alcohol consumption, and that such information allows
consumers to m a k e informed decisions regarding alcohol consumption. For
example, one commenter stated that "people are generally capable of making
sensible decisions, if assisted by complete information. * * * Moreover, the
!ir
-75small minority w h o do not make sensible decisions will not be deterred by
suppressing the presentation of accurate, balanced information." (Comment
423). A n individual suggested that "in an era when w e all are trying to eliminate
governmental control of those areas of our lives where w e can be treated as
adults, it seems odd for you to be against a neutral statement that wine drinkers
should consult their doctors about the possible health benefits of wine."
(Comment 136).
M a n y of the commenters suggested that the directional statements or
other positive health-related statements were necessary to "balance" the
negative information provided by the Government warning statement. For
example, one commenter supported the directional statements because the
warning statement should be supplemented with "equally valid" information
"explaining the benefits and positive effects of responsible consumption."
(Comment 296). Another individual supported the use of "positive health
related statements" and stated that "[t]he wine industry deserves to be afforded
an opportunity to address the latest beneficial health aspects of moderate wine
consumption, as outlined in the U.S. dietary guidelines, on its products. The
entire thrust of Government Warning labels has been entirely negative."
(Comment 240).
Finally, s o m e commenters argued that the Government should
encourage consumers to seek the best advice possible from the most credible
sources available on any health issue. With respect to the consumption of
alcohol beverages, the National Association of Beverage Retailers suggested
- 76 that "[p]hysicians and the U.S. Dietary Guidelines are among the most credible
sources available to give professional, objective, responsible and balanced
advice on an important health issue." (Comment 424).
At the hearings, several doctors testified in support of the directional
labeling statements. S o m e specifically supported the statement encouraging
consumers to consult with their physician. For example, Dr. Michael Apstein, a
gastroenterologist and liver doctor, testified that advice regarding alcohol
consumption should be targeted to specific populations rather than generalized
for the entire population. H e stated that "[tjhese are complex issues that can't
easily be summarized on a label that goes on a wine bottle. They need to be
discussed with a person's physician and individualized to that person's
situation. Therefore, I a m in favor of a directional label that advises individuals
to discuss this topic with their physicians, because I a m hopeful that a
directional label will stimulate another kind of educational experience, so people
can use alcohol responsibly if they so desire and avoid it if they should be
avoiding it." (April 25, 2000; Washington, DC, page 167).
Similarly, Dr. Harvey Finkel, a physician and clinical professor of
medicine, testified that both directional statements should be allowed, stressing
the importance of advising consumers to consult their doctors, because the
public has a right to be fully informed about the health consequences of alcohol
consumption. (April 26, 2000; Washington, D C , pages 30-33). Mr. George
Linn, a consumer, also testified in support of the concept of referring consumers
to their physicians for more individualized advice about alcohol consumption.
-77(May 24, 2000; San Francisco, CA, page 256). O n the other hand, Dr. Paul
Scholten, an associate professor of obstetrics, gynecology, reproductive
medicine, and nursing, testified in support of the directional statement referring
consumers to the Dietary Guidelines, but expressed concerns about whether
doctors were well trained to advise patients about the health consequences of
alcohol consumption. (May 23, 2000; San Francisco, CA, pages 170-171).
S o m e individuals commented in support of the general concept of
directional statements. Dr. Dwight Heath, a Professor of Anthropology, testified
that while he opposed the use of substantive health claims, he favored the use
of the directional statements on labels. (April 26, 2000; Washington, DC, page
13). Dr. Heath suggested that the more-people know about alcohol
consumption, the less likely they are to have alcohol-related problems. (Id. at
page 5). Similarly, Professor R.L. Williams, of the Oenological Research
Facility of Old Dominion University, stated that in his opinion, "the level of
scientific information regarding the positive health effects of moderate
consumption of wine is now quite overwhelming. * * * This information should
be m a d e more available to the consumers in regard to the directional health
statements." (April 26, 2000; Washington, DC, page 91). Mr. Archie Brodsky, a
senior research associate in psychiatry and the law, testified in favor of the use
of directional statements on alcohol beverage labels. H e stated that the C S A P
survey confirmed that the labels would have a "negligible" influence on
consumers' drinking habits. (April 26, 2000; Washington, DC, page 171).
Mr. Patrick Campbell of Laurel Glen Winery, w h o submitted the first
-78directional statement to ATF for approval in 1995, testified on behalf of the
Coalition for Truth and Balance. Mr. Campbell stated that discussion of the
health benefits or risks of alcohol consumption w a s not relevant to a discussion
of the directional statements, since "the approved messages do not constitute
health-related statements or m a k e substantive claims regarding health
benefits." (May 23, 2000; San Francisco, CA, page 75). H e asserted that the
message encouraging consumers to consult with their family doctors "is neither
true nor false. It makes no claim * * * positive or negative, therapeutic or
curative, pro or con." Qd. at 76). Mr. Campbell argued that the message w a s
not misleading in that it "presumes nothing. It presupposes nothing. It in no
way directs the outcome of any consultation the consumer m a y or m a y not
undertake with his or her family physician. For all the winery knows, the doctor
might tell all of his or her patients never to touch the stuff * * *. It's a
directional ."•'• ^ :. .
thoroughly neutral and impartial message." ([d. at 76-77).
Mr. Campbell expressed surprise at the controversy over the message,
and said he would have expected that "every health professional and
governmental agency in the country would welcome it. * * * After all, if you
can't trust your family doctor for truthful and not misleading advice on health
issues w h o can you trust?" (Id. at 78). Mr. Campbell noted that the American
Heart Association "publishes a section on alcohol in their dietary guidelines that
explicitly recommends that patients consult with their personal physician on
questions of alcohol use * * *." {d. at 80).
Mr. Campbell stated that on June 3, 1999, before the moratorium on
-79approving directional statements went into effect, A T F approved a version of
the directional statement which omitted the language.about "the proud people
who made this wine" and instead read as follows: "We encourage you to
consult with your family doctor about the health effects of wine consumption."
(kj. at page 74). He stated that he now preferred this version, since he believes
that it fits better in the label, it's not pompous, and it was an appropriate
response to the people who argued that the "proud people" language
constituted an implicit endorsement of alcohol consumption. (Id. at page 87).
In response to a question from the panel, Mr. Campbell stated that he
had gotten no feedback from consumers as to how they viewed the directional
statements. He said that "[njobody's said anything, it's unbelievable. I mean, it
cost a lot of money to put these on the label." (Id. at page 88).
Mr. Jack Stuart testified on behalf of the Napa Valley Vintners
Association. He stated that "we think that the directional warning is a good
thing. We don't consider it to be a positive health claim. If you take out the
phrase 'proud people,' certainly it's a neutral statement, it's simply a way of
getting information, and we think it's a good idea for anyone who is proposing to
drink, or who does drink, or who does any other thing having to do with food,
their diet, their lifestyle, to consult their physician about the choices they make
in that regard." (May 24, 2000; San Francisco, California, page 200). In
C> '\ y~, ""' rjf-3 | !",'>/",
C
-"
•'
~'":>i. r
response to a question from the panel, Mr. Stuart suggested that "to have a
balanced message, to me the ideal would be to somehow combine both the
warning and the directional message." (|d. at page 210).
-80Mr. Mark Chandler, the Executive Director of the Lodi-Woodbridge
Winegrape Commission, also testified in favor of the directional statements. H e
stated that "[gjrowers and wineries have no intention to market their products as
health food. But, unlike other food products, w e are prevented by regulation
from even mentioning our product's positive health attributes, thus the need for
directional labels." (May 24, 2000; San Francisco, CA, page 250). Mr. Gordon
Murchie testified on behalf of the Virginia Wineries Association in favor of the
use of directional statements, calling them public service announcements that
"direct the concerned citizen to another source of professional non-biased,
balanced information." (April 26, 2000; Washington, DC, page 78). In response
to a question from the panel, Mr. Murchie said his members would be interested
in using directional statements on labels, but were reluctant to do so until they
saw that the statements were accepted by the Government and the public. (|d.
at pages 86-87).
Dr. Ellen Mack, a physician and part owner of a winery, testified that "[i]f
wine were considered a medication - and I'm not at all advocating that it should
be - it would be like most other medications, the dose is critical. Too little m a y
not have the desired effect, and too much can be dangerous or even deadly."
(May 23, 2000; San Francisco, CA, page 132). Dr. Mack suggested that "the
directional wine labels are effective agents in that the sources of information the U.S. Dietary Guidelines and personal physicians - will clearly m a k e the
point that the beneficial health effects result from moderate consumption of
alcohol, and these sources will define moderate as no more than one drink per
-81 -
day for w o m e n and no more than two drinks per day for men." id.
Various other individuals testified in favor of the directional statement.
For example, Ms. Annette Shafer, author of 'The Wine Sense Diet" testified in
favor of a "more balanced message on the bottle," suggesting that the warning
label is "very one-sided." (May 24, 2000; San Francisco, CA, page 212).
B. Comments and Testimony in Opposition to Directional Statements
Public health organizations and other commenters raised the following
specific objections to the use of directional health-related statements in the
labeling and advertising of alcohol beverages.
1. Directional Statements are Implicit Health Claims That Reinforce the
Inaccurate Perceptions of Consumers About Alcohol and Health
CSPI commented that the directional statements were actually implied
health claims. Its comment argued that the "reference to the 'health effects of
wine consumption' offers no useful information, but simply reinforces existing
inaccurate knowledge about the health benefits of alcohol consumption, as
spread through the media and the wine industry's misleading publicity
campaign, and implies that those benefits are substantial and universal."
(Comment 400).
The American Cancer Society noted that "[w]ith the publicity in the past
few years about the health benefits of consuming alcoholic beverages, any
less-detailed claim or reference to health impacts or benefits might be
interpreted by the uninformed consumer as a suggestion that people should
-82-
drink alcohol for their health. Sufficient information is needed to allow
consumers to m a k e a well-educated decision regarding theirriskfrom
consumption of this product." (Comment 527). Accordingly, the American
Cancer Society concluded that directional labels "may mislead the general
public regarding the health benefits of alcohol consumption by providing
inadequate information regarding the risks."
Senator Thurmond commented that the directional statements were
inherently misleading. H e stated that it w a s unlikely that consumers w h o read
the directional statements would actually send for the Dietary Guidelines or
consult their physicians. Instead, Senator Thurmond suggested that
"consumers m a y be left with the impression that these statements refer to
studies that suggest drinking alcohol m a y have s o m e positive health benefits."
H e noted that "[tjhis impression m a y reinforce inaccurate assertions about the
health benefits of alcohol consumption spread through the media. These
uonslr."
statements m a y also be inappropriately viewed as the government's
endorsement of drinking. However, any suggestion that the government
endorses drinking for health reasons is false." (Comment 526).
2. Directional Statements Undermine the Mandatory Government Warning
Statement and M a v be in Violation of the Alcoholic Beverage Labeling Act
N C A D D ' s comment stated that the directional statements approved by
A T F in 1999 "are misleading and potentially confusing to consumers in
juxtaposition to the federally mandated government warning on all alcoholic
beverage containers sold in the United States." (Comment 15). Similarly,
-83-
M A D D commented that "[t]he public and particularly youth are being given a
mixed message with the inclusion of 'health messages' in alcohol advertising
and on warning labels and the net result is consumer confusion." (Comment
20). M A D D also noted that "[w]aming labels on alcoholic beverages were
created for a specific purpose - to m a k e the consumer aware of the potential
harm they could suffer as a result of the use or abuse of the product."
The United Communities Against Drug & Alcohol Abuse commented that
"Congress has already required a warning statement on alcoholic-beverage
containers. Any other reference to health impacts or benefits is likely to
confuse consumers and undermine the impact of the existing warning
statement." (Comment 31). The American Council on Alcohol Problems urged
A T F "not to contribute to confusion by allowing any insinuation of health
benefits from alcohol consumption." (Comment 37).
Dr. T h o m a s Greenfield, a psychologist, testified in opposition to the use
of health-related statements. H e stated he w a s principal investigator of the
Impact of Alcoholic Beverage Warning Labels Research Project from 19911997. H e stated that research showed that the mandatory Government warning
statement had "fragile but beneficial effects" and that "one must be concerned
that a vague health effects message, by implication positive, m a y wipe out the
small gains in reminding the public of situational hazards of drinking when
driving or pregnant, and also the healthrisks."(May 24, 2000; San Francisco,
h:;i«taherCA, pages 182-183). H e suggested that in order to be truly neutral, a
c; • r: • -.-:
directional statement "should have a tone that would be to look at the health
-84-
risks and health benefits, and potential heath benefits. And one would have to
do it in such a way that it emphasized that - which is, w e believe, strongly the
case - that the health benefits [are] * * * relatively small in comparison to the
health harms." Qd. at page 191).
CSPI commented that if A T F allowed any health claim or health-related
statement on a label, it "should be worded and displayed in a manner that does
not overshadow, contradict, or undermine the government warning label. For
example, the claim should appear in the s a m e type size and style as the
government warning label, and should not contain any claim that contradicts
any of the statements in the warning label." (Comment 400).
Senator Thurmond testified that the purpose of the A B L A was to provide
"a clear, non-confusing reminder of the health hazards associated with alcohol
consumption." (April 25, 2000; Washington, DC, page 17). Senator Thurmond
suggested that "the two directional statements which the A T F approved last
year dilutes the required warnings and, worse, may be seen as the
government's endorsement of drinking. As one of the authors of the Alcohol
Beverage Labeling Act, let m e stress that the intent of the legislation was to
exclude such misleading statements." ]d. In response to the First Amendment
concerns raised by s o m e individuals, Senator Thurmond suggested that at a
minimum, "groups supporting health-related statements should be required to
prove beyond any reasonable doubt that such claims are not misleading and do
not detract from the government warning." (Id. at page 18).
-85In addition to Senator Thurmond's comment, a letter signed by Senators
Thurmond, Byrd, and Helms supported a ban on all health-related statements
and directional health statements on labels. (Comment 526). In this comment,
the three Senators stated that the directional statements approved by A T F in
1999 "dilute the required government warning and mislead consumers. In fact,
these labels might inappropriately be seen as the government's endorsement of
alcohol consumption." The comment also noted the difficulty of presenting a
balanced statement on the effects on health of alcohol consumption on an
alcohol beverage label. The Senators stated that "Congress has spoken clearly
on this important public health issue. The purpose of the A B L A should not be
subverted."
3. Directional Statements are Misleading Because Drinkers are Unlikely.to
Seek Health Information
M a n y commenters suggested that the directional statements were
misleading because the C S A P consumer survey established that consumers
w h o read the directional labels were unlikely to seek additional information from
their doctors or send for the Dietary Guidelines. For example, CSPI argued that
"referring consumers to a government publication which offers balanced
information is only credible if there is a reasonable likelihood that such referral
will in fact result." (Comment 400). CSPI suggested that "according to
consumer research, few people would actually look at or write for the Dietary
Guidelines on the basis of the label language." CSPI and others questioned
-86whether consumers would get complete information from either the Dietary
Guidelines or their doctors.
Similar points were raised in the testimony of Mr. James Mosher on
behalf of the California Council on Alcohol Policy, a nonprofit membership
organization dedicated to promoting pubjic health approaches to the prevention
Of alcohol-related problems. Mr. Mosher argued that the directional labels were
inherently misleading and thus did not constitute protected commercial speech
under the First Amendment. Because the directional statements themselves
m a k e no claim about the effects on health of alcohol consumption, Mr. Mosher
suggested that the key to determining whether they would mislead consumers
depends upon "the sources to be consulted, the likelihood of consumers
actually consulting them, and the possibility that the wording will lead to
consumer confusion, misleading or deceptive impressions." (May 23, 2000;
San Francisco, CA, page 92).
4. Directional Statements are Misleading Because Drinkers are Likely to
Rationalize Their Consumption Patterns
I";••<a!r cf ••• .
A s previously mentioned, several doctors w h o have been certified by the
American Society of Addiction Medicine commented in opposition to the use of
both health claims and health-related directional statements in the labeling and
advertising of wines. These commenters suggested that health claims and
directional statements could be misconstrued by problem drinkers in order to
rationalize their own levels of consumption. For example, one doctor suggested
that these statements could be misconstrued by consumers, because
-87"consumers, especially those with a vulnerability to alcoholism, m a y take the
message as an endorsement of excessive drinking." Accordingly, he urged that
A T F "prohibit the alcoholic-beverage industry from making these misleading
and potentially dangerous claims." (Comment 167).
Another medical doctor urged A T F to rescind approval of the directional
labeling statements, stating that H[a] brief message on any beverage container
will not provide consumers with adequate information about use of alcohol for
health-related reasons. Due to the publicity in the past few years about the
health benefits of moderate alcohol consumption, a brief label m a y be
interpreted by the uninformed consumer as a government-authorized statement
supporting consumption of alcohol for health benefit." (Comment 410).
N C A D D also cited the C S A P study as establishing that focus group
members were "generally aware" of the reports on positive effects on health of
wine consumption, and that the heavier drinkers were more aware of the media
reports. N C A D D suggested that heavy drinkers would use these "beliefs" about
the effects on health of wine consumption to justify their drinking levels.
(Comment 15).
Ms. Joan Kiley, coordinator of the Alcohol Policy Network of Alameda
County, testified in favor of a complete ban on health claims or health-related
statements in the labeling or advertising of alcohol beverages. She stated that
the directional statements were inherently misleading, since they were
"incomplete statements that do not put research results in their proper context."
(May 24, 2000; San Francisco, CA, page 228). Ms. Kiley noted that
-88H
[c]onsumers are not always aware of the effect that images and attitudes
promoted in advertising have on their own desires." Qd. at page 232). In
response to a question from the panel, Ms. Kiley said that in her experience,
people with alcohol problems were "very skilled atfindinggood reasons to
drink. They * * * can use a multiple number of reasons to drink, that might just
be another one." ([d. at page 239).
5. Directional Statements Could be Interpreted as the Government's
Endorsement of Alcohol Consumption
The former Surgeon General, Dr. David Satcher, testifi ed that it w a s
important to "carefully consider any action, whether it involves the health
warning or claims that could encourage underage drinking or mislead about the
very real, adverse health consequences." (April 25, 2000; Washington, DC,
page 73). Dr. Satcher stated he w a s "concerned that references to the U.S.
dietary guidelines on the labels of certain wine products could wrongly lead
consumers to conclude that consumption of wine would reduce healthrisksor
that it w a s recommended by guidelines or by family physicians. References to
alcohol in the guidelines should not be construed as evidence of health benefits
nor encouragement that consumers drink. * * * In fact, the Public Health
Service does not recommend consumption of alcohol beverages." (]d. at page
" The Marin Institute for the Prevention of Alcohol and Other Drug
Problems (Comment 324) suggested that the directional statements attributed
positive effects on health to the consumption of alcohol beverages, and were
-89thus "misleading and potentially dangerous because media and marketing
messages can be misinterpreted as public health recommendations." The
Marin Institute stated that the "60 Minutes" report on the possible heart
protective effects of drinking red wine led to a 44 percent increase in red wine
sales. They quoted the marketing manager of a winery as stating in "Impact"
magazine in 1997 that information about health benefits was "increasing
consumption more than anything else." Ms. Hilary Abramson testified on behalf
of the Marin Institute at the San Francisco hearing that the socalled French
Paradox ("the apparent coexistence in France of a low heart disease rate and a
dietrichin saturated fat, and the belief that alcohol [red wine] is the explanation
for it") had been overestimated, and the French heart disease statistics
underestimated. She stated that after the 60 Minutes Broadcast in November
1991 on the French Paradox, "sales of red wine in the United States rocketed
»i
4 4 % , and a Gallup poll showed that 5 8 % of Americans were aware of research
ii'.3SS£:c;€S c-
linking 'moderate drinking to lower rates of heart disease." (May 23, 2000; San
Francisco, CA, pages 115-116).
Similarly, the Greater Spokane Substance Abuse Council's Prevention
Center commented that "[a]ny statement or labeling in reference to supposed
'health benefits' could be construed by an uninformed consumer population as a
government endorsement to consume a likely harmful product." (Comment 32).
The American Council on Alcohol Problems also commented that "[i]f health
claims are allowed on labels or even implied, many uninformed consumers
would interpret this as a government sanctioned statement suggesting that
-90people drink alcohol for their health. Quite to the contrary, research clearly
shows that any measure which increases the level of alcohol consumption will
result in increased levels of disease and accidents." (Comment 37).
6. Other Testimony Against Directional Statements
M a n y of the medical ex perts w h o testified at the public hearings
expressed concerns that the directional statements would mislead consumers
9bout the effects on health of alcohol consumption. For example, Dr. Camargo
concluded that "with all of these variety of factors influencing the net health
effect of alcohol, I think it is really quite foolhardy to believe that any onesentence generic health claim about moderate wine consumption would serve
public-health interests, or even provide reliable consumer advice. In addition to
the gross simplification of a complex risk/benefit analysis, the labels will also
lead to several other levels of confusion." (April 25, 2000; Washington, D C ,
page 90). In particular, he noted that few consumers would actually consult the
Dietary Guidelines for information on the effects of alcohol consumption, that
m a n y people w h o notice the label would interpret the phrase "health effects" as
"healthy effects," that there is considerable confusion about what constitutes
moderate drinking, and that if consumers do consult their family physician, "it is
very unlikely the physician will be in a position to provide accurate, up-to-date
information about all of the risks and benefits of moderate drinking." (April 25,
2000; Washington, D C , pages 91 -92). Dr. Camargo also noted that "generic
fit :.-Cl O f
•'•• ,
health claims are likely to be misinterpreted by those at greatest risk of alcohol
-91 problems, a group that would likely use the health claim to justify continued or
increased consumption of excessive alcohol with all of its attendant health
hazards." (Id. at page 92).
I
Dr. Criqui also testified that because of the negative health
consequences associated with alcohol consumption and abuse, the directional
statements are inherently misleading. (May 23, 2000; San Francisco, CA, page
60). H e stated that the approved directional statements appear to implicitly
endorse the value of alcohol as a pharmacological protective agent. (Id. at
page 59). Dr. Criqui offered his opinion that consumers interpret the approved
statements as substantive health claims, which means that at least for most
people drinking is good and has health benefits and that the Government
endorses this position. Because the directional statements are recent and
c o m e in the context of media discussion-about the possible benefits of alcohol
consumption, Dr. Criqui stated that the statements are likely to be interpreted as
implicitly endorsing alcohol consumption as being potentially healthy, since they
do not emphasize or even mention the dangers of alcohol consumption. (Id. at
pages 59-60).
S o m e people suggested that consumers would interpret the directional
statements as making positive health-related claims simply because of an
assumption that the industry would not use the statements unless they were
positive. For example, Dr. Duke, representing the Ethics and Religious Liberty
Commission, the moral concerns agency for the Southern Baptist Convention,
suggested that the directional statements were misleading because they "create
-92an impression of endorsement of the health claims made by the alcohol
industry. * * * The average person would not conclude that the alcohol
industry would direct people to information damaging to their claim.
Consequently, the average person will assume a doctor would agree that
drinking alcohol is good for one's health." (April 25, 2000; Washington, DC,
154-155).
Ms. Diana Conti testified on behalf of the American Public Health
Association in support of a ban on all health-related statements on labels and in
advertisements, other than the required warning statement. Ms. Conti
i•
suggested that the directional statement regarding the Dietary Guidelines
"provides no specific information, no definition of moderate drinking, and no
cautions to those w h o should not drink. The message is confusing and it's
contradictory to the warning label." (May 23, 2000; San Francisco, CA, page
106). She stated that "[t]he lack of substantive information creates the
impression that the government says moderate wine consumption is good for
your health, and few, if any, will actually read the guidelines for the more
complete information." (Id. at page 107).
C. Decision
W h e n A T F approved the directional statements in 1999, it concluded that
the record did not establish that the statements would mislead consumers about
therisksassociated with alcohol consumption. A T F relied heavily upon the
I! .-
-93C S A P consumer survey, which concluded that the directional statements would
not encourage most consumers to alter their consumption levels or patterns.
u: After careful consideration of the comments and testimony on this issue,
it is TTB's conclusion that while the two directional statements approved in 1999
were worded in a w a y that w a s intended to represent a neutral referral to
doctors or the Dietary Guidelines for additional information, the statements were
capable of being interpreted in a very different fashion. In particular, the
statements could be interpreted as encouraging the consumption of alcohol for
health reasons.
While the C S A P survey established that the vast majority of consumers
would not alter their consumption patterns after exposure to the two directional
statements, it did not explore whether consumers would interpret the
statements as encouraging the consumption of alcohol for health reasons.
Since T T B has no consumer data on this issue, w e must rely upon the
secondary data that is available to us, including the opinions of medical and
public health experts in thefieldof alcohol and health.
Initially, T T B would note that m a n y media reports about approval of the
directional statements referred to these statements as health claims or
references to health benefits. See section VII, infra. W e recognize that these
reports only indirectly reflect consumer reactions to the directional statements,
and that they m a y have been influenced by the industry's or the public health
sector's characterizations of the statements. Nonetheless, to the extent that
these media reports both reflect and shape the perceptions of consumers, w e
-94believe that these reports are persuasive evidence that the directional
statements are perceived by m a n y as making a positive claim about the effects
on health of alcohol consumption.
W e are also persuaded by the opinions of m a n y of the foremost public
health experts in the nation. These public health experts believe that the
allegedly neutral directional statements in fact communicated a message that
the Government endorsed drinking for health reasons, or that the Dietary
Guidelines or a family physician would endorse the consumption of alcohol for
health reasons. For example, the former United States Surgeon General
testified that he w a s "concerned that references to the U.S. dietary guidelines
on the labels of certain wine products could wrongly lead consumers to
conclude that consumption of wine would reduce healthrisksor that it w a s
recommended by guidelines or by family physicians." (April 25, 2000;
Washington, D C , page 74). Similarly, the American Cancer Society noted that
"[w]ith the publicity in the past few years about the health benefits of consuming
alcoholic beverages, any less-detailed claim or reference to health impacts or
benefits might be interpreted by the uninformed consumer as a suggestion that
people should drink alcohol for their health" and concluded that directional
labels "may mislead the general public regarding the health benefits of alcohol
consumption by providing inadequate information regarding the risks."
(Comment 527). Other commenters, including the American Medical
Association and the Marin Institute, supported a ban on directional statements
for similar reasons.
-95TTB also finds persuasive the testimony of many of the foremost experts
on the medical research regarding alcohol and health. For example, Dr.
Camargo testified that in his opinion, consumers would interpret the phrase
"health effects" to mean "healthy effects." (April 25, 2000; Washington, DC,
pages 90-92). Dr. Criqui offered his opinion that the approved directional
' '' IJ .a
statements appear to implicitly endorse the value of alcohol as a
pharmacological protective agent, and that consumers interpret the approved
statements as substantive health claims meaning that at least for most people
drinking is good and has health benefits and that the Government endorses this
position. Because the directional statements are recent and come in the
context of media discussion about the possible benefits of alcohol consumption,
Dr. Criqui stated that the statements are likely to be interpreted as implicitly
endorsing alcohol consumption as being potentially healthy, since they do not
emphasize or even mention the dangers of alcohol consumption. (May 23,
2000; San Francisco, CA, pages 59-60):
TTB does not disregard the testimony of those medical professionals,
including Dr. Apstein, Dr. Finkel, and Dr. Scholten, who testified in favor of the
use of directional statements. We agree that industry members have the right
uui<-:,'-;;•:•••. a,,, -a
to suggest, in labels or in advertisements, that c o n s u m e r s refer to third party
sources for additional information regarding the effects on health of alcohol
consumption. The question presented is how to make such referrals without
misleading consumers.
-96ii* -1 it? W e would also note that m a n y of the comments in favor of the use of
directional statements referred to the need to provide "balance" to the negative
message of the health warning statement, and thus implicitly recognized that
the directional statements were meant to convey a positive message about the
effects on health of alcohol consumption. In this regard, it is noteworthy that in
a comment submitted after the hearings were held, Beer Institute suggested
that the position of several proponents of directional statements that such
statements did not constitute health claims w a s inconsistent with those s a m e
proponents' attempts "to defend the directional statements by relying on wellknown published medical literature that attributes certain health benefits to the
moderate consumption of alcohol beverages. Given the history of this issue
and the evidence cited by supporters of the directional statements, it s e e m s
impossible to characterize the directional statements as anything but health
* , W
- .. .
\
•
-• ?.
claims subject to the automatic qualifying provisions of the proposed n e w
l.li':u:i;-j;i. ~
regulations." (Comment 396b).
After careful consideration of the comments and testimony in the
rulemaking record, it is TTB's view that the directional statements approved in
1999 m a y be interpreted as advocating the consumption of alcohol beverages
for health reasons. W e recognize that producers of alcohol beverages have
contended that they have a constitutionally protected right to advocate that
consumers drink their products for health reasons. However, if such a claim is
m a d e on a label or in an advertisement, it must be m a d e in a truthful and nonmisleading fashion. Furthermore, such a claim would fall within the category of
-97a specific health claim, and would be subject to the requirements in the final
rule applicable to such claims. To the extent that producers instead wish to
m a k e a neutral referral to third parties for additional information regarding the
effects on health of alcohol consumption, w e believe that it is necessary to
provide a disclaimer that clarifies that the labeling or advertising statement
should not encourage consumption of alcohol for health reasons.
jijf; j:< Accordingly, the final rule provides that directional statements will not be
allowed in the labeling or advertising of alcohol beverages unless accompanied
by a disclaimer. Thefinalrule provides a model disclaimer that alcohol
beverage producers m a y use in conjunction with a general statement that
directs consumers in a neutral or other non-misleading manner to a third party
for balanced information regarding the effects on health of alcohol (wine,
distilled spirits, or malt beverage) consumption: "This statement should not
encourage you to drink or to increase your alcohol consumption for health
reasons." It should be noted that in some cases, an.acceptable disclaimer
might be incorporated into the language of the directional statement itself; thus,
if the directional statement makes it clear that it is not advocating consumption
of alcohol for health reasons, then an additional disclaimer may not be
necessary.
XVII. Should the Same Standards Apply to Wines, Distilled Spirits, and
Malt Beverages?
A. Issue
The D I S C U S comment opposed the Bureau's suggested "case-by-case"
-98approach; noting that the effects on health of alcohol consumption apply across
i
the board to all beverage alcohol products. Accordingly, D I S C U S suggested
that public policy and regulatory policy require fair and equal treatment for each
form of beverage alcohol, and any label statement for a beverage alcohol
container should apply equally to each type of beverage alcohol. (Comment
530).
B. Decision
Both the proposed and final rules make it clear that the same standards
apply to wine, distilled spirits, and malt beverages. The rulemaking record does
not provide a basis for setting forth different standards for these types of alcohol
beverages. The two directional statements approved by ATF in 1999 were both
submitted by wineries, and thus both referred to the effects on health of "wine
consumption." To the extent that a directional statement complies with the
standards set forth in this final rule, it may be used in the labeling of a wine,
distilled spirit, or malt beverage product.*
i: -.f
XVIII. Should T T B Adopt the Procedures Set Forth in FDA's Regulations?
A. Issue
Several commenters suggested that ATF should adopt the substantive
standards already in place in FDA's regulations governing the use of health
claims in the labeling of foods. FDA also raised several concerns about
consistency between ATF's proposed regulations and its own health claim
regulations.
-99F D A (Comment 327) commented that it w a s "imperative that [ATF]
regulate these claims in a manner consistent with the provisions of the Federal
Food, Drug, and Cosmetic Act (FFDC Act) to ensure the meaningful and nonmisleading use of such claims." F D A pointed out that pursuant to the Nutrition
Labeling and Education Act (NLEA), a manufacturer m a y m a k e a health claim
on a food label only if F D A determines "based on the totality of publicly
available scientific evidence (including evidence from well-designed studies
conducted in a manner which is consistent with generally recognized scientific
procedures and principles), that there is significant scientific agreement, a m o n g
experts qualified by scientific training and experience to evaluate such claims,
that the claim is supported by such evidence." 21 U.S.C. 343(r)(3)(B)(i)..
F D A also noted that the use of claims for foods that m a y have a negative
health impact generally is not appropriate under the NLEA. The statute
provides that a health claim m a y not be m a d e for a food that contains, as
i
determined by regulation, any nutrient in an amount that increases to persons in
the general population theriskof a disease or health-related condition that is
diet-related. 21 U.S.C. 343(r)(3)(A)(ii). F D A m a y grant an exception to allow
foods with disqualifying nutrient levels to bear a health claim if the claim is
accompanied by a disclosure statement regarding the disqualifying nutrient and
nvr:i!&b:=: £
F D A has determined by regulation that such a claim would assist consumers in
maintaining healthy dietary practices. 21 U.S.C. 343(r)(3)(A)(ii) and
343(r)(2)(B). F D A requires rigorous evidence to support a conclusion that a
-100health claim on a food with a disqualifying nutrient level would assist consumers
in maintaining healthy dietary practices.
j' ^ FDA expressed the following concern about the use of health claims on
alcohol beverage labels:
Alcohol beverages are foods for which there is evidence of a
substantial number of undisputed negative health effects. F D A has not
evaluated the evidence supporting the putative health benefits of alcohol
beverages. Therefore, w e cannot say whether health claims for an
alcohol beverage would be prohibited under FDA's existing health claim
authorization process, or if not prohibited, could be authorized with a
disclosure statement of the type required by 21 U.S.C. 343(r)(2)(B). W e
are concerned, however, that the evidence for the well-known direct
causative relationships between alcohol and numerous health risks
would be a significant hurdle to our concluding that label information
about a relationship between consumption of alcohol and a health claim
could assist consumers in maintaining healthy dietary practices.
FDA also noted that the absence of any significant nutritive value of alcohol
products would be another obstacle to FDA authorizing a health claim for
alcohol beverages.
jn rnai FDA stated that it was concerned that "certain therapeutic or curative
claims sought by manufacturers of alcohol beverages may in fact be claims that
woujd require regulation of the alcohol beverages as drugs." It noted that FDA
has authority and responsibility under the FFDC Act to regulate all products
bearing drug claims, and that the term "drug" is defined by statute to include an
article "intended for use in the diagnosis, cure, mitigation, treatment or
prevention of disease." 21 U.S.C. 321(g)(1)(B). FDA concluded that "[a]lcohol
beverages could fall within this definition if their labeling contains drug claims."
F D A expressed a concern that certain health claims that would be
allowed under ATF's proposed rule might render the product a drug subject to
regulation under the F F D C Act. The F F D C Act provides that any drug that is
not generally recognized by qualified experts as safe and effective for use
under the conditions prescribed, recommended, or suggested in its labeling, or
that has not been used to a material extent or for a material time under such
conditions, is a "new drug." 21 U.S.C. 321 (p). A new drug m a y not be legally
marketed unless F D A has approved a new drug application for such a drug. 21
U.S.C. 331(d) and 355(a). F D A noted that the F F D C Act requires substantial
evidence of effectiveness and evidence that the drug is safe for its intended use
before F D A will approve a n e w drug application. 21 U.S.C. 355(d). F D A
suggested that this standard differed from the "not misleading" standard
proposed by the A T F notice of proposed rulemaking.
F D A advised that A T F should explicitly articulate in its regulations the
processes by which it would review claims intended for alcohol beverages. It
stated that it w a s unable to determine, based on the proposed rule, whether the
proposed process for a review of health-related statements would be consistent
with FDA's statutory and regulatory authorities. Accordingly, F D A urged A T F to
clarify the process and criteria it intends to use to substantiate the validity of any
health claims or other health-related statements beforefinalizingthe proposed
rule.
"*' "''The iforrrier Surgeon General, Dr. David Satcher, also testified in support
of adopting standards "consistent with that relied upon by the Food and Drug
-102Administration or for regulated health claims for foods and drugs." (April 25,
2000; Washington, DC, page 77). Accordingly, "[c]laims should be based on
significant scientific agreement, and they should be qualified to identify those
categories of persons for whom the claims are relevant, as well as to identify
those for whom the negative consequences would outweigh any positive effect."
(]d. at page 78). In response to a question from the panel, Dr. Satcher agreed
that there were problems with consumers self-medicating without knowing all
the facts, noting that "with alcohol, you also have the added effect that you are
dealing with an addictive drug." (Id. at page 80). Senator Thurmond also
commented that "[amplication of the FFDC Act to this issue would appear to
prohibit any health-related statements on alcohol beverage labels. It is absurd
that the government would prevent whole milk from making health-related
claims but allow such claims by alcohol beverages." (Comment 526).
CSAP commented that "[a]lcohol abuse and alcoholism continue to be
among the most vexing public health problems facing the United States.
Indeed, alcohol is the nation's number one drug problem among youth.".While
Gr''
in!
. • "-e ''*r' "-"/","
v
*
C S A P did not take a position on any of the issues oh which comment was
Ii* S ;' • Vlhr •
sought, it noted that "[o]ne of the key issues challenging our efforts is the mixed
or misleading messages that consumers receive from a variety of sources. The
addition of health related information on beverage alcohol labels must be
carefully considered in relation to the general public's understanding of alcoholrelated health risk." (Comment 430).
CSPI suggested that ATF adopt regulations similar to FDA's regulations
-103under the NLEA, noting that U S D A did so on a voluntary basis for health claims
on meat and poultry. CSPI stated that under regulations similar to those of
FDA, health claims would be prohibited because alcohol consumption increases
the risk of other diseases, noting that "[t]o allow health claims for alcohol,
America's most devastating drug, while health claims for foods such as whole
milk are prohibited, would be indefensible and would m a k e a mockery of the
federal government's health-claim regime."
CSPI also noted that if an alcohol" beverage label or advertisement
claims that alcohol m a y reduce theriskof disease, the beverage m a y be
regulated as a drug by FDA. CSPI argued that, "aside from its regulatory
r.i;-^\ e
classification, alcohol is a drug. Depending on a variety of factors such as dose
and schedule of use, individual metabolism, personality factors, and situation,
alcohol is variously a stimulant and depressant, euphorigan and soporific,
irritant and anxiety reducer. Alcohol, like other intoxicants, can produce such
dependency phenomena as persistent search behavior, withdrawal, relapse,
and loss of control."
i
B. Decision
After giving careful consideration to these comments, and consulting with
FDA, T T B does not agree that its health claim regulations should be identical to
those of FDA. F D A regulations were promulgated pursuant to a very specific
grant of authority by Congress under the NLEA. Because of the differences in
statutory authority, as well as the differences in the-products regulated under
-104these two statutes, TTB's regulatory scheme for health claim labeling will differ
from FDA's regulatory scheme.
However, T T B agrees with the F D A comment in several respects. Most
importantly, w e agree that it is important to ensure that alcohol beverage
producers do not violate the new drug provisions of the F F D C Act when seeking
to use specific health claims on alcohol beverage labels. It would be where the
use of that claim would render the product subject to FDA's jurisdiction over drugs.
Furthermo re, FDA's authority over new drugs has significant public health and
safety consequences. T T B does not wish to create any confusion on the part of
industry members regarding their obligations to comply with FDA's requirements
over drug claims.
In the past, A T F merely advised industry members that they should be
aware of the fact that the use of a health claim on an alcohol beverage label m a y
subject the product to FDA's jurisdiction. However, after reviewing the comments
on this issue, w e met with F D A to discuss a process whereby T T B and F D A could
consult on the use of specific health claims on alcohol beverage labels. In this
way, F D A would have an opportunity to object to the use of a specific health
\i-on- *&rs oo • „
.
____
_.
claim, based on its jurisdiction over drugs, pnor to any T T B action.
Ic use $>
Accordingly, the final rule now provides that T T B will consult with FDA, as
needed, on the use of specific health claims on labels. If F D A determines that a
specific health claim is a drug claim that is not in compliance with the
requirements of the F F D C Act, T T B will not approve the use of such statement
on a label. There is no similar provision in the advertising regulations, since
-105advertisers are not required to obtain prior approval from TTB. W e will of
course consult with FDA, as appropriate, if the question anses as to whether an
advertisement is in violation of the F F D C Act.
XIX. Is the Final Rule Consistent With the First Amendment?
A. Issue
A s previously noted, many commenters suggested that the proposed rule
did not comply with the protection accorded truthful and non-misleading
commercial speech under the First Amendment. CEI and C A argued that A T F is
precluded from placing any restrictions on the dissemination of truthful information
about health benefits in the labeling and advertising of alcohol beverages. Beer
Institute, DISCUS, and NABI suggested that the proposed advertising regulations
would restrict protected commercial speech. Mr. Rex Davis, representing the
president's Forum of the Beverage Alcohol Industry,, testified that he believes
the proposed rule violates the First Amendment because it would restrict the
industry from communicating the benefits of alcohol consumption through labels
and advertisements. (April 26, 2000; Washington, D C , pages 133-141). Many
other commenters defended the constitutionality of a complete ban on the use of
i'
health-related statements in the labeling and advertising of alcohol beverages.
S o m e of the comments that (or commentators who) addressed the First
A m e n d m e n t issue suggested that while A T F would have authority to restrict the
use of misleading health claims, a complete ban on the use of health-related
statements would be unconstitutional. For example, the Washington Legal
-106-
Foundation concluded that an outright ban on the use of truthful health claims
would be unconstitutional, but stated that the proposed regulations, "if properly
implemented, strike the appropriate balance in ensuring the First A m e n d m e n t
rights of industry and consumers, and the dissemination of important information
regarding the health benefits proven to flow from moderate consumption of
alcohol beverages." (Comment 390). A comment submitted on behalf of the
Oregon Winegrower's Association also stated that a ban on the use of health
claims on labels or in advertisements would be unconstitutional; however, the
comment stated that the agency should instead "adhere to a policy of allowing
labeling and advertising claims about such health-related benefits to be fairly and
objectively evaluated for substantiation, balance and qualification." (Comment
380).
A comment from Mr. Erik Bierbauer (Comment 395) attached a copy of a
note that he wrote for the N e w York University L a w Review as a third-year law
student, entitled "Liquid Honesty: The First Amendment Right to Market the
Health Benefits of Moderate Alcohol Consumption," 74 N.Y.U.L. Rev. 1057
(1999). The note concludes that alcohol producers have a First A m e n d m e n t
right to market the health benefits of moderate drinking, as long as they do so
accurately and include certain limited disclaimers. Mr. Bierbauer suggested
that while such limited disclaimers would be constitutionally authorized, "the sort
chanson !~'"r
of disclosure described in ATF's Industry Circular 93-8 probably would be too
burdensome to comply with the First Amendment." However, Mr. Bierbauer*s
comment suggested that "[t]he Constitution would permit the government to
-107require health-related alcohol advertisements and labels to mention lesserknown risks that are present at moderate levels of drinking. For example, the
government might legitimately require a disclaimer warning consumers of the
possible link between moderate drinking and breast cancer, and also a
statement warning certain vulnerable consumers not to drink at all." Mr.
Bierbauer concluded that "[a]ds and labels that merely direct the consumer to
other sources of information, such as the wine labels approved by A T F in
February 1999, clearly would enjoy First A m e n d m e n t protection."
B. Decision
A s set forth in this final rule, T T B is not imposing a complete ban on the
use of health claims or other health-related statements in the labeling and
advertising of alcohol beverages. Accordingly, it is not necessary to consider
whether such a ban would be constitutional. Instead, thefinalrule requires T T B to
evaluate health claims on a case-by-case basis to determine if such claims would
tend to mislead the consumer.
po
_
_
The final rule codifies ATF's longstanding position that any substantive
health benefit claim is considered misleading unless it is truthful and adequately
substantiated by scientific or medical evidence; sufficiently detailed and
qualified with respect to the categories of individuals to w h o m the claim applies;
adequately discloses the health risks associated with alcohol consumption; and
outlines the categories of individuals for w h o m any levels of alcohol
consumption m a y cause health risks. Thefinalrule clarifies that the identified
-108health risks must include those associated with both moderate and higher levels
of consumption. Thus, the rule would require any such claim to include
appropriate qualifications and disclaimers about the health risks associated with
alcohol consumption. In addition, health-related directional statements that are
not substantive health claims must nonetheless include a disclaimer to clarify that
the statement does not advocate the consumption of alcohol beverages for health
reasons, or some other appropriate disclaimer to avoid misleading consumers.
The rule's requirements for appropriate disclaimers and qualifications in order to
!•!?••
avoid consumer deception about a health issue comport completely with the
It-.-. -;&$>
safeguards articulated by the Supreme Court to protect non-misleading
commercial speech.
Commercial speech is defined as speech that proposes a commercial
transaction. Virginia State Board of Pharmacy v. Virginia Citizens Consumer
i.
Council, Inc., 425 U.S. 748, 762 (1976). Information on alcohol beverage labels is
considered commercial speech. Rubin v. Coors Brewing Co.. 514 U.S. 476,481
(1995). Commercial speech is generally protected by the First Amendment;
however, it enjoys a more limited measure of protection. Florida Bar v. Went For
It, Inc., 515 U.S. 618 (1995). Nonetheless, the Government bears the burden of
justifying a restriction on commercial speech. See Greater New Orleans
Broadcasting Ass'n v. United States, 527 U.S. 173, 183 (1999).
~:\ :. r.jie!'
In order to regulate commercial speech, the Government must satisfy a 4prong test Central Hudson Gas & Electric Corp. v. Public Serv. Comnrm, 447
U.S. 557, 563-566 (1980). First, the expression is protected by the First
-109Amendment only if it concerns lawful activity and is not misleading. Second, the
Government must establish a substantial interest. Third, the regulation must
directly advance the governmental interest asserted. Finally, the regulation must
be no more extensive than necessary to serve the interest asserted.
- In two recent cases involving alcohol beverages, the Supreme Court has
struck down bans on truthful and non-misleading commercial speech. In Rubin
v. Coors Brewing Co., 514 U.S. 476,491 (1995), the Supreme Court applied the
Central Hudson analysis in striking down the F A A Act's prohibition against
statements of alcohol content on malt beverage labels unless required by State
law. In 44 Liguormart, Inc. v. Rhode Island 517 U.S. 484 (1996), the Supreme
Court struck down Rhode Island's ban on advertising the price of alcohol
beverages on First Amendment grounds. More recently, in Lorillard Tobacco Co.
v. Reillv. 533 U.S. 525 (2001), the Supreme Court struck down certain restrictions
imposed by the State of Massachusetts on the advertisement of tobacco products
on First Amendment grounds. However, none of these decisions restricts the
Government's authority to regulate rrisleading or potentially misleading
be PiO-mc* -
commercial speech.
If commercial speech is actually misleading, then it is not protected by the
First Amendment. If commercial speech [s potentially misleading, the
Government m a y regulate such commercial messages if the restrictions are "no
broader than reasonably necessary to prevent the deception." in re R.M.J.. 455
U.S. 191, 203 (1982). Potentially misleading speech cannot be banned "if the
information also m a y be presented in a way that is not deceptive" through the
-110use of "disclaimers or explanation." ]d. Requirements for disclaimers have
been upheld as long as the disclaimers are "reasonably related to the State's
interest in preventing deception" and do not constitute an undue burden on the
advertiser. Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626, 651-53
(1985).
T T B recognizes that under the commercial speech doctrine, there is a
preference for disclosure over suppression. See e.g., Zauderer and Pearson v.
Shalala, 164 F.3d 650 (D.C. Cir. 1999). In Pearson, the Court of Appeals for
the D.C. Circuit required the Food and Drug Administration to consider
appropriate disclaimers for health claims on dietary supplement labels. The
Court noted that "the government's interest in preventing the use of labels that
are true but do not mention adverse effects would seem to be satisfied - at least
ordinarily - by inclusion of a prominent disclaimer setting forth those adverse
effects." 164F.3dat659.
Consistent with the Supreme Court cases cited above, as well aslhe
D.C. Circuit's ruling in the Pearson case, thefinalrule requires any industry
m e m b e r w h o wishes to m a k e an explicit or implicit health claim on a label or in
an advertisement to m a k e a more complete disclosure of the adverse effects on
health caused by alcohol consumption. Thefinalrule does not impose any
additional requirements on industry members w h o do not wish to m a k e such
claims. However, given the very serious healthrisksassociated with alcohol
consumption, T T B believes that the use of health claims without such
qualifications and disclaimers would be misleading to consumers.
-111Thefinalrule is completely consistent with the preference expressed by
the courts for disclosure over suppression in the commercial speech arena.
The Supreme Court has held that more speech, not less, is the preferred
means of ensuring that consumers have sufficient information to m a k e informed
choices in the commercial arena. In re R.M.J.. 455 U.S. at 203. Thefinalrule
does not "ban" any type of speech regarding health claims or health-related
statements in the labeling or advertising of alcohol beverages. Instead, the rule
simply requires disclaimers for specific health claims and health-related
directional statements.
CEI and C A suggested that there is no need for disclaimers in
connection with health claims in the labeling or advertising of alcohol
beverages. They point to the fact that the Government warning statement
required on alcohol beverage containers already advises consumers that
"Consumption of alcoholic beverages impairs your ability to drive a car or
operate machinery, and m a y cause health problems." CEI and C A further g
suggest that consumers are well aware of the health risks associated with
alcohol abuse, and there is no need to remind them of such risks.
, T T B does not agree with this comment. The administrative record
tl^i.-ii n o t "bd.7<<
c. • >:
contains overwhelming evidence of the serious health risks associated with
CJ
. .
. I
.!LJ
:
. ..
-
alcohol consumption. Theserisksare not merely hypothetical; they are well
documented. A m o n g other things, the comments established that over 8 million
American adults are alcoholics; alcohol is a known human carcinogen; and
alcohol contributes to the deaths of more than 100,000 Americans each year.
-112-
Furthermore, alcohol abuse has devastating effects on innocent third parties. In
1998,15,935 people w e r e killed in alcohol-related traffic crashes, and an
estimated 850,000 were injured. Mothers Against Drunk Driving c o m m e n t e d
that the N I H estimated that the overall societal costs of alcohol abuse and
alcoholism in 1 9 9 5 ($167 billion) were m o r e than 5 0 percent higher than the
costs to society of illegal drug use ($110 billion). T h e health risks associated
with alcohol consumption are not simply hypothetical; on the contrary, they
present a serious public health problem in this country. Accordingly, the record
supports a conclusion that a health claim that does riot include information
about these serious health risks would tend to mislead c o n s u m e r s about the
health c o n s e q u e n c e s of alcohol consumption.
T T B also disagrees with the suggestion by CEI and C A that healthrelated statements presented a necessary "balance" to the warning presented
rvt-"'.herrtior<? •-:;•:.,...
by the mandatory G o v e r n m e n t warning statement. T h e warning statement w a s
intended by Congress to present a clear and nonconfusing reminder of the
health hazards associated with consumption or abuse of alcohol beverages.
S e e 2 7 U.S.C. 213. T h e use of health claims or other health-related statements
without qualification or disclosure of adverse effects to "balance" the mandatory
warning statement not only undermines the intent of the A B L A ; it also tends to
confuse c o n s u m e r s about the very real health risks associated with alcohol
consumption.
T h e administrative record contains significant evidence that truthful
statements about certain health benefits associated with moderate consumption
-113-
of alcohol beverages for certain individuals will tend to mislead consumers
unless such statements are truthful and adequately substantiated by scientific
or medical evidence; sufficiently detailed and qualified with respect to the
categories of individuals to w h o m the claim applies; adequately disclose the
healthrisksassociated with both moderate and heavier levels of alcohol
consumption; and outline the categories.of individuals for w h o m any levels of
alcohol consumption m a y cause health risks. Most consumers are unable to
conduct or verify health research for themselves to determine whether a health
claim is valid as to their o w n alcohol consumption, and are ill equipped to
interpret the medical data, evaluate the potential benefits, or identify and weigh
the other medical factors that m a y bear upon their individual decision to use
alcohol for therapeutic reasons. S e e In re R.M.J., 455 U.S. at 202 (the public's
comparative lack of knowledge regarding the product being advertised is an
important factor in determining whether speech is misleading). A requirement
for disclaimers of this nature in such a situation is clearly directly related to the
Government's interest in ensuring that consumers are not misled by health
statements on alcohol beverage labels.
S o m e commenters suggested that the types of disclaimers and
qualifications required by the proposed regulations would overly burden industry
aijorv,.: •,
members w h o wish to m a k e health claims about alcohol consumption, making
such requirements unconstitutional. CEI and C A suggested that "summary"
health claims for alcohol consumption are just as truthful as other short health
claims allowed by F D A for diets low in saturated fat and cholesterol, as well as
-114diets low in sodium. Other commenters suggested that because an alcohol
leverage label is not large enough to include the volume of information
necessary in order to give consumers a complete picture of the effects on
health of alcohol consumption, such statements should be banned completely
from alcohol beverage labels.
T T B agrees that the regulations m a k e it difficult to present a substantive
health claim (for example, one involving cardiovascular benefits associated with
moderate alcohol consumption) on an alcohol beverage label, because of the
level of qualification and explanation that would be necessary to set forth the
risks associated with such consumption. T T B would also note that there seems
to be an overwhelming lack of interest on the part of the alcohol beverage
industry in using such health claims on alcohol beverage labels. The comments
from major trade associations representing wineries, importers, brewers, and
distillers did not indicate a concrete interest in using substantive health claims in
the labeling or advertising of alcohol beverages. O n e lawyer testified in support
ii^..-(.ij;saT
••.-,.:
of a 664-word labeling statement regarding effects on health and asserted that
members of the wine industry had therightto m a k e such statements; however,
in response to questioning, he conceded that such a long statement would not
be likely to be used on a label.
In the absence of any concrete indications of industry interest in using
substantive health claims on alcohol beverage labels, there is no reason for
T T B to draft a model health claim for use by industry members. Discussions of
whether the regulations would unduly burden the industry's ability to use
-115-
qualified and truthful health claims in the labeling of alcohol beverages will be
better informed if and when industry m e m b e r s submit such statements to T T B
for review. Nothing in the regulation itself indicates that the requirements for
qualification and balance are unduly burdensome. Furthermore, it must be
concluded that the length of any required disclaimers and qualifications are
directly related to the serious health risks associated with alcohol consumption,
rather than any desire by the Government to suppress speech. In particular,
the comparison m a d e by CEI and C A with claims regarding diets low in
saturated fat and cholesterol or diets low in sodium is not persuasive in the
absence of any suggestion that such diets are associated with the types of
documented health risks associated with alcohol consumption. Accordingly,
J T B concludes that the requirements of the regulations do not unduly burden
speech about the effects on health of alcohol consumption.
Because the directional statements do not m a k e substantive health
claims, but instead have been interpreted as impicitly encouraging the
consumption of alcohol for health reasoris, T T B does not believe it is necessary
to require the s a m e level of detail in the disclaimers required to ensure that
such statements do not mislead consumers. In addition, there clearly is interest
on the part of several industry members in using the directional statements.
Accordingly, w e have provided a model disclaimer that m a y be used by
industry m e m b e r s in conjunction with such directional statements in order to
avoid misleading consumers. This one-sentence disclaimer is not overly
rthsence- ;•"" '\ / sv • •'' *'y *••• •
burdensome, and complies with the court cases allowing the Government to
ijocumenkia...«=:;.!;
-116mandate disclosures necessary to prevent consumer deception. TTB will
consider other disclaimers on a case-by case basis.
Accordingly, the final rule is in accordance with the case law under the
{•ivuc muri. '
commercial speech doctrine. Because the rule does not ban any speech, but
merely sets forth the type of qualification, detail, and disclosure required in
order to set forth a non-misleading health-related statement in the labeling or
advertising of alcohol beverages, the rule is completely consistent with the First
Amendment protection accorded truthful and non-misleading commercial
speech. On the other hand, the rule is also consistent with TTB 's statutory
responsibility to protect consumers from misleading commercial speech
regarding the serious effects on health of alcohol consumption.
XX. Final Rule
Accordingly, this final rule amends the regulations to provide that labels
and advertisements may not contain any health-related statement, including a
specific health claim, that is untrue in any particular or tends to create a
misleading impression. A specific health claim on an alcohol beverage label or
advertisement will be considered misleading unless it is truthful and adequately
substantiated by scientific or medical evidence; sufficiently detailed and
qualified with respect to the categories of individuals to whom the claim applies;
adequately discloses the health risks associated with both moderate and
heavier levels of alcohol consumption; and outlines the categories of indjviduals
for whom any alcohol consumption poses risks. This information must appear
-117as part of the specific health claim and, in the case of advertising, must also
appear as prominent as the specific health claim. In addition, TTB will consult
with FDA, as needed, on the use of specific health claims on labels. If FDA
determines that a specific health claim is a drug claim that is not in compliance
with the requirements of the FFDC Act, TTB will not approve the use of such
statement on a label.
The final rule provides that a health-related statement that is not a
specific health claim or a health-related directional statement will be allowed in
the labeling or advertising of alcohol beverages only if TTB determines that the
claim is not untrue in any particular and does not tend to create a misleading
impression as to the effects on health of alcohol consumption. We will evaluate
such statements on a case-by-case basis and may require as part of the healthjiu-.HIlrtiiVi---
related statement a disclaimer or other qualifying statement to dispel any
misleading impression created by the health-related statement.
H
r
With regard to the "directional" statements approved by A T F in 1999, w e
recognize that the producers of alcohol beverages may have a protected right
under the First Amendment to convey the message on labels and in
advertisements that consumers should refer to their doctors or the
Government's Dietary Guidelines for additional information about the effects on
health of alcohol consumption, as long as that message is conveyed in a
fashion that does not mislead consumers about the health consequences of
alcohol consumption. As discussed above, TTB has also determined that
-118without disclaimers, the directional statements approved in 1999 tended to
mislead consumers about the health consequences of alcohol consumption.
Accordingly, the final rule provides that a health-related directional
statement is presumed misleading unless it directs consumers in a neutral or
other non-misleading manner to a third party or other source for balanced
information regarding the effects on health of alcohol consumption and includes
as part of the health-related directional statement a brief disclaimer stating that
the statement should not encourage consumption of alcohol for health reasons,
or some other appropriate disclaimer to avoid misleading consumers.
As a clarifying change, the final rule uses the term "health-related
statement" instead of "curative or therapeutic claim." However, the definition of
a "health-related statement" in the final rule incorporates ATF's historic position
on what constitutes a statement of a curative or therapeutic nature, as set forth
in the preamble of it's final rule concerning the labeling and advertising
regulations under the FAA Act (T.D. ATF-180, 49 FR 31667; August 8, 1984).
Accordingly, a health-related statement includes any claim of a curative or
therapeutic nature that, expressly or by implication, suggests a relationship
between the consumption of alcohol, wine, distilled spirits, malt beverages, or
ii-i'r.ivn • o • rff -:ii'A *
any substance found within the alcohol beverage, and health benefits or effects
«
;
ns
M
* *
.
•
.„
u3l i Oi IH«
•:-•
i
on health. T h e term "health-related statement" also includes both specific
health claims and general references to alleged health benefits or effects on
health associated with the consumption of alcohol, wine, distilled spirits, malt
beverages, or any substance found within the alcohol beverage, as well as
-119-
health-related directional statements. T h e term also includes statements and
claims that imply that a physical or psychological sensation results from
consuming wine, distilled spirits, or malt beverages, as well as statements and
claims of nutritional value. Statements concerning caloric, carbohydrate,
protein, and fat content of alcohol beverages are not considered nutritional
claims about the product. However, statements of vitamin content are
considered nutritional value claims, and will be prohibited if presented in a
fashion that tends to mislead consumers as to the nutritional value of the
product.
T h e term "specific health claim" is defined as a type of health-related
statement that, expressly or by implication, characterizes the relationship of the
alcohol beverage (e.g., wine, distilled spirits, or malt beverage), alcohol, or any
substance found within the alcohol beverage, to a disease or health-related
.heaith-^-fec
- — condition. Implied specific health claims include statements, symbols,
vignettes, or other forms of communication that suggest, within the context in
which they are presented, that a relationship exists between the alcohol
beverage (wine, distilled spirits, or malt beverages), alcohol, or any substance
found within the alcohol beverage, and a disease or health-related condition.
T h e term "health-related directional statement" is defined as a type of
health-related statement that directs or refers consumers to a third party or
other source for information regarding the effects on health of alcohol
consumption.
-120The definitions in thefinalrule also clarify that T T B is not expanding its
traditional interpretation of a curative or therapeutic claim to cover, for example,
advertisements in which people are shown relaxing in an enjoyable setting
while consuming alcohol beverages. Accordingly, the final rule in no way
impinges on the right of industry members to advertise their products in a
truthful and non-misleading fashion.
XXI. Applications for and Certificates of Label Approval
Upon the effective date of this final rule, applications for certificates of
label approval must be in compliance with the regulations. In accordance with
the provisions of 27 CFR 13.51 and 13.72(a)(2), upon the effective date of this
final rule, certificates of label approval that are not in compliance with the
regulations will be revoked by operation of regulation. Certificate holders must
voluntarily surrender all certificates that are no longer in compliance and submit
new applications for certificates that are in compliance with the new
requirements.
XXII. Notes Appearing in Text of Supplementary Information
1. Hennekens, C.H., "Alcohol and Risk of Coronary Events," Research
Monograph No. 31, "Alcohol and the Cardiovascular System" at 15 (National
Institutes of Health, National Institute on Alcohol Abuse and Alcoholism,
Bethesda, M D , 1996).
2. See, e.g.. Boffetta, P. & Garfinkel, L., "Alcohol drinking and mortality
a m o n g m e n enrolled in an American Cancer Society prospective study,
"Epidemiology" 1(5):342-348, 1990; Stampfer, M.J.; Colditz, G.A.; Willett, W.C.;
5peizer, F.E. & Hennekens, C.H., "A prospective study of moderate alcohol
consumption and theriskof coronary disease and stroke in women," "New
England Journal of Medicine," 319(5):267-273,1988; Klatsky, A.L.; Armstrong,
-121-
M.A.; and Friedman, G.D., "Alcohol and Mortality," "Annals of Internal
Medicine," 117(8):646-654,1992. See generally National Institute on Alcohol
Abuse and Alcoholism, "Moderate Drinking," "Alcohol Alert," No. 16, April 1992,
at 2, and studies cited therein.
Mr
W
., .
"T
r
:••
*• ?.*•. 3: See, e.g.. Criqui, M.H., "Moderate Drinking: Benefits and Risks,"
"Alcohol and the Cardiovascular System," at 117-118 ("Clearly, younger
persons cannot possibly benefit much from alcohol consumption, at least in the
short term, because theirriskof ischemic C V D events is low.")
4. DuFour, M.C., "Risks and Benefits of Alcohol Use Over the Life
Span," "Alcohol Health & Research World," Vol. 20, No. 3:145-150 at 147,
1996.
5. See, e.g., Hennekens, C.H., "Alcohol and risk of coronary events,"
Research Monograph No. 31, "Alcohol and the Cardiovascular System" at 20
(National Institutes of Health, National Institute on Alcohol Abuse and
Alcoholism, Bethesda, M D 1996) ("while the healthrisksof excessive drinking
are clear, there m a y also be hazards associated with moderate intake that must
be weighed, on an individual basis, against the apparent protection against
CHD.").
6. Thun, M.J.; Peto, R.; Lopez, A.D.; Monaco, J.H.; Henley, S.J.; Heath,
C.W.; and Doll, R; "Alcohol Consumption and Mortality A m o n g Middle-Aged and
Elderly U.S. Adults," 'The N e w England Journal of Medicine," 337(24):17051714 at 1705, 1997.
;jrise7. Id. at 1712.
H'; 8. Manson, J.E.; Tosteson, H.; Ridker, P.M.; Satterfield, S; Hebert, P.;
O'Connor, G.T.; Buring, J.E.; and Hennekens, C.H.; "The Primary Prevention of
Myocardial Infarction," T h e N e w England Journal of Medicine," 326(21 ):14061416 at 1412, 1992.
9. Fuchs, C.S.; Stampfer, M.J.; Colditz, G.A.; Giovannucci, E.L.;
Manson, J.E.; Kawachi, I.; Hunter, D.J.; Hankinson, S.E.; Hennekens, C.H.;
Rosner, B; Speizer, F.E.; and Willett, W.C.; "Alcohol Consumption and Mortality
A m o n g Women," 'The N e w England Journal of Medicine," 332(19): 1245-1250
at 1245,1995.
,10. Jd. at 1246.
11. Id. at 1249.
12. Grabbe, L; Demi, A; Camann, M.A.; et al. 'The health status of
-122elderly persons in the last year of life; A comparison of deaths by suicide, injury,
and natural causes." "American Journal of Public Health" 87(3):434-437, 1997.
13. Stampfer, M.J.; Rimm, E.B.; Walsh, D.C; "Commentary: Alcohol,
the Heart, and Public Policy," "American Journal of Public Health," 83(6): 801804 at 803, 1993.
XXIII. How This Document Complies With the Federal Administrative
Requirements for Rulemaking
A. Executive Order 12866
TTB has determined that this final rule is not a significant regulatory
action as defined in E.0.12866. Therefore, a regulatory assessment is not
required.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires an agency to conduct a
regulatory flexibility analysis of any rule subject to notice and comment
J.
rulemaking requirements unless the agency certifies that the rule will not have a
significant economic impact on a substantial number of small entities. Small
entities include small businesses, small not -for-profit enterprises, and small
governmental jurisdictions. TTB has certifies that this final rule will not have a
significant economic impact on a substantial number of small entities. In
general, the final regulations merely clarify TTB's existing policy concerning the
use of health claims in the labeling and advertising of alcohol beverages and
jmpose no burdens on the industry. With respect to health-related statements,
JTB bejieves that the burden imposed by the additional wording required by a
-123disclaimer or other qualifying statement is minimal. Accordingly, a regulatory
flexibility analysis is not required.
C. Paperwork Reduction Act
,), " The provisions of the Paperwork Reduction Act of 1995, Public L a w 10413, 44 U.S.C. Chapter 35, and its implementing regulations, 5 C F R part 1320,
do not apply to this final rule because no requirement to collect information is
imposed.
Disclosure
Copies of the notice of proposed rulemaking, all comments, the hearing
transcripts, and thisfinalrule will be available for public inspection by
appointment during normal business hours at: T T B Public Reading Room,
R o o m 6480, 650 Massachusetts Avenue, NW., Washington, D C ; 202-9277890.
Drafting Information
C
^a
v ...
.
i ^ T T h e originating drafter of this document is James P. Ficaretta,
Regulations Division, Bureau of Alcohol, Tobacco and Firearms. However,
•,y.. 'vt ; J.b ^. ^r;a; v
!
personnel from other offices of the Bureau participated in developing this
Treasury decision.
-124-
List of Subjects
27 CFR Part 4
Advertising, Consumer protection, Customs duties and inspection,
Imports, Labeling, Packaging and containers, and Wine.
27 CFR Part 5
Advertising, Consumer protection, Customs duties and inspection,
Imports, Labeling, Liquors, and Packaging and containers.
27 CFR Part 7
Advertising, Consumer protection, Customs duties and inspection,
Imports, and Labeling.
i-
•*
.
Authority and Issuance
['• •[ For the reasons discussed in the preamble, TTB amends 27 CFR Parts
4, 5, and 7 as follows:
PART 4-LABELING AND ADVERTISING OF WINE
Paragraph 1. The authority citation for 27 CFR Part 4 continues to read
as follows:
Authority: 27 U.S.C. 205.
Par. 2. Section 4.39 is amended by revising paragraph (h) to read as
follows:
§ 4.39 Prohibited practices.
-125* * * * *
(h) Health-related statements. (1) Definitions. When used in this
paragraph (h), terms are defined as follows:
(i) Health-related statement means any statement related to health (other
than the warning statement required by § 16.21 of this chapter) and includes
statements of a curative or therapeutic nature that, expressly or by implication,
suggest a relationship between the consumption of alcohol, wine, or any
substance found within the wine, and health benefits or effects on health. The
term includes both specific health claims and general references to alleged
health benefits or effects on health associated with the consumption of alcohol,
wine, or any substance found within the wine, as well as health-related
directional statements. The term also includes statements and claims that
imply that a physical or psychological sensation results from consuming the
wine, as well as statements and claims of nutritional value (e.g., statements of
vitamin content). Statements concerning caloric, carbohydrate, protein, and fat
content do not constitute nutritional claims about the product.
(ii) Specific health claim is a type of health-related statement that,
expressly or by implication, characterizes the relationship of the wine, alcohol,
or any substance found within the wine, to a disease or health-related condition.
Implied specific health claims include statements, symbols, vignettes, or other
ri»'S^tBnc6 fn\'Ti \vl; ••
forms of communication that suggest, within the context in which they are
K;?r incl-..-
presented, that a relationship exists between wine, alcohol, or any substance
found within the wine, and a disease or health-related condition.
-126(iii) Health-related directional statement is a type of health-related
statement that directs or refers consumers to a third party or other source for
information regarding the effects on health of wine or alcohol consumption.
1
(2) Rules for labeling, (i) Health-related statements. In general, labels
may not contain any health-related statement that is untrue in any particular or
tends to create a misleading impression as to the effects on health of alcohol
consumption. TTB will evaluate such statements on a case-by-case basis and
may require as part of the health-related statement a disclaimer or some other
qualifying statement to dispel any misleading impression conveyed by the
health-related statement.
(ii) Specific health claims. (A) TTB will consult with the Food and Drug
Administration (FDA), as needed, on the use of a specific health claim on a
wine label, if FDA determines that the use of such a labeling claim is a drug
(
;
•
claim that is not in compliance with the requirements of the Federal Food, Drug,
iattLiernti;:1. u % f '^'£cAr-r? :orand Cosmetic Act, T T B will not approve the use of that specific health claim on
a wine label.
(B) TTB will approve the use of a "specific health claim on a wine label
pnly if the claim is truthful and adequately substantiated by scientific or medical
evidence; sufficiently detailed and qualified with respect to the categories of
individuals to whom the claim applies; adequately discloses the health risks
associated with both moderate and heavier levels of alcohol consumption; and
outlines the categories of individuals for whom any levels of alcohol
-127consumption m a y cause health risks. This information must appear as part of
the specific health claim.
(iii) Health-related directional statements. A statement that directs
consumers to a third party or other source for information regarding the effects
on health of wine or alcohol consumption is presumed misleading unless it—
(A) Directs consumers in a neutral or other non-misleading manner to a
third party or other source for balanced information regarding the effects on
health of wine or alcohol consumption; and
tinrj
1
>'
(B)(1) Includes as part of the health-related directional statement the
-.
i.-
following disclaimer: 'This statement should not encourage you to drink or to
i
increase your alcohol consumption for health reasons;" or
(2) Includes as part of the health-related directional statement s o m e
other qualifying statement that the appropriate T T B officerfindsis sufficient to
dispel any misleading impression conveyed by the health-related directional
statement.
Par. 3. Section 4.64 is amended by revising paragraph (i) to read as
follows:
§ 4.64. Prohibited practices.
fif.alth'.of wine nr Mc^r:,Hlj,-HiT-
-
. .
jiviH (^-Health-related statements. (1) Definitions. W h e n used in this
paragraph (i), terms are defined as follows:
-128-
(i) Health-related statement m e a n s any statement related to health and
includes statements of a curative or therapeutic nature that, expressly or by
implication, suggest a relationship between the consumption of alcohol, wine, or
any substance found within the wine, and health benefits or effects on health.
The term includes both specific health claims and general references to alleged
health benefits or effects on health associated with the consumption of alcohol,
wine, or any substance found within the wine, as well as health-related
directional statements. The term also includes statements and claims that
imply that a physical or psychological sensation results from consuming the
wine, as well as statements and claims of nutritional value (e.g., statements of
vitamin content). Statements concerning caloric, carbohydrate, protein, and fat
content do not constitute nutritional claims about the product.
(ii) Specific health claim is a type of health-related statement that,
expressly or by implication, characterizes the relationship of the wine, alcohol,
hcauCi3£Staterrid Uij ; ^ ...... or any substance found within the wine, to a disease or health-related condition.
irn;j.;Cajou.i3i:_::est -. - -,
Implied specific health claims include statements, symbols, vignettes, or other
iirr-'sysst'?
forms of communication that suggest, within the context in which they are
presented, that a relationship exists between wine, alcohol, or any substance
found within the wine, and a disease or health-related condition.
(iii) Health-related directional statement is a type of health-related
statement that directs or refers consumers to a third party or other source for
information regarding the effects on health of wine or alcohol consumption.
-129(2) Rules for advertising (i) Health-related statements. In general,
advertisements m a y not contain any health-related statement that is untrue in
any particular or tends to create a misleading impression as to the effects on
health of alcohol consumption. T T B will evaluate such statements on a caseby-case basis and m a y require as part of the health-related statement a
disclaimer or s o m e other qualifying statement to dispel any misleading
impression conveyed by the health-related statement. Such disclaimer or other
qualifying statement must appear as prominent as the health-related statement.
(ii) Specific health claims. A specific health claim will not be considered
Iii:misleading if it is truthful and adequately substantiated by scientific or medical
evidence; sufficiently detailed and qualified with respect to the categories of
individuals to w h o m the claim applies; adequately discloses the health risks
associated with both moderate and heavier levels of alcohol consumption; and
outlines the categories of individuals for w h o m any levels of alcohol
ii, -".'ds
consumption m a y cause health risks. This information must appear as part of
the specific health claim and in a manner as prominent as the specific health
claim.
(iii) Health-related directional statements. A statement that directs
consumers to a third party or other source for information regarding the effects
on health of wine or alcohol consumption is presumed misleading unless it—
(A) Directs consumers in a neutral or other non-misleading manner to a
fhird party or other source for balanced information regarding the effects on
health of wine or alcohol consumption; and
evidence: su[f;c en.;
l! ' .
-130" (B)(1) Includes as part of the health-related directional statement, and in
a manner as prominent as the health-related directional statement, the following
disclaimer: "This statement should not encourageyou to drink or increase your
alcohol consumption for health reasons;" or
!'
»;
»f
1
' - (2) Includes as part of the health-related directional statement, and in a
HvM£r
manner as prominent as the health-related directional statement, s o m e other
qualifying statement that the appropriate T T B officerfindsis sufficient to dispel
any misleading impression conveyed by the health-related directional
statement.
*
*
*
*
*
P A R T 5 - L A B E L I N G A N D A D V E R T I S I N G O F DISTILLED SPIRITS
Par. 4. The authority citation for 27 C F R Part 5 continues to read as
follows:
Authority: 26 U.S.C. 5301, 7805; 27 U.S.C. 205.
Par. 5. Section 5.42 is amended by revising paragraph (b)(8) to read as
follows:
§ 5.42 Prohibited practices.
i: x.
(b) * * *
(8) Health-related statements, (i) Definitions. W h e n used in this
paragraph (b)(8), terms are defined as follows:
-131(A) Health-related statement means any statement related to health
(other than the warning statement required by § 16.21 of this chapter) and
includes statements of a curative or therapeutic nature that, expressly or by
implication, suggest a relationship between the consumption of alcohol, distilled
spirits, or any substance found within the distilled spirits, and health benefits or
effects on health. T h e term includes both specific health claims and general
references to alleged health benefits or effects on health associated with the
consumption of alcohol, distilled spirits, or any substance found within the
distilled spirits, as well as health-related directional statements. The term also
includes statements and claims that impjy that a physical or psychological
sensation results from consuming the distilled spirits, as well as statements and
claims of nutritional value (e.g., statements of vitamin content). Statements
•-• f>iv
concerning caloric, carbohydrate, protein, and fat content do not constitute
(A*
nutritional claims about the product.
(B) Specific health claim is a type of health-related statement that,
expressly or by implication, characterizes the relationship of the distilled spirits,
alcohol, or any substance found within the distilled spirits, to a disease or
health-related condition. Implied specific health claims inc lude statements,
symbols, vignettes, or other forms of communication that suggest, within the
context in which they are presented, that a relationship exists between distilled
spirits, alcohol, or any substance found within the distilled spirits, and a disease
or health-related condition.
-132(C) Health-related directional statement is a type of health-related
statement that directs or refers consumers to a third party or other source for
Information regarding the effects on health of distilled spirits or alcohol
consumption.
(ii) Rules for labeling (A) Health-related statements. In general, labels
may not contain any health-related statement that is untrue in any particular or
tends to create a misleading impression as to the effects on health of alcohol
consumption. TTB will evaluate such statements on a case-by-case basis and
may require as part of the health-related statement a disclaimer or some other
qualifying statement to dispel any misleading impression conveyed by the
health-related statement.
(B) Specific health claims. Q) TTB will consult with the Food and Drug
Administration (FDA), as needed, on the use of a specific health claim on a
distilled spirits label. If FDA determines that the use of such a labeling claim is
a drug claim that is not in compliance with the requirements of the Federal
Food, Drug, and Cosmetic Act, TTB will not approve the use of that specific
health claim on a distilled spirits label.
(2) TTB will approve the use of a specific health claim on a distilled
'irl'.-ii-V fiOt'OOjViJ-^i'
spirits label only if the claim is truthful and adequately substantiated by scientific
ifecls u.d , o'v i r*v?'~ " " '
or medical evidence; sufficiently detailed and qualified with respect to the
no nsd Hinder. *!"*"*™"
categories of individuals to w h o m the claim applies; adequately discloses the
health risks associated with both moderate and heavier levels of alcoholconsumption; and outlines the categories of individuals for whom any levels of
i,.
-133alcohol consumption may cause health risks. This information must appear as
part pf the specific health claim.
:h
(C) Health-related directional statements. A statement that directs
consumers to a third party or other source for information regarding the effects
on health of distilled spirits or alcohol consumption is presumed misleading
unless it—
(1) Directs consumers in a neutral or other non-misleading manner to a
third party or other source for balanced information regarding the effects on
health of distilled spirits or alcohol consumption; and
(2)Q) Includes as part of the health-related directional statement the
following disclaimer: "This statement should not encourage you to drink or to
increase your alcohol consumption for health reasons;" or
(H) Includes as part of the health-related directional statement s o m e
other qualifying statement that the appropriate T T B officerfindsis sufficient to
pen of .j'.c i p ^ f .
,...;,.;.
dispel any misleading impression conveyed by the health-related directional
•*
it-
\.i'-
statement.
*
*
*
*
*
Par. 6. Section 5.65 is amended by revising paragraph (d) to read as
follows:
§ 5.65 Prohibited practices.
*
*
*
*
*
-134(d) Health-related statements. (1) Definitions. W h e n used in this"
paragraph (d), terms are defined as follows:
(i) Health-related statement m e a n s any statement related to health and
includes statements of a curative or therapeutic nature that, expressly or by
implication, suggest a relationship between the consumption of alcohol, distilled
spirits, or any substance found within the distilled spirits, and health benefits or
effects on health. T h e term includes both specific health claims and general
references to alleged health benefits or effects on health associated with the
consumption of alcohol, distilled spirits, or any substance found within the
distilled spirits, as well as health-related directional statements. The term also
includes statements and claims that imply that a physical or psychological
sensation results from consuming the distilled spirits, as well as statements and
claims of nutritional value (e.g., statements of vitamin content). Statements
concerning caloric, carbohydrate, protein, and fat content do not constitute
nutritional claims about the product.
(ii) Specific health claim is a type of health-related statement that,
expressly or by implication, characterizes the relationship of the distilled spirits,
alcohol, or any substance found within the distilled spirits, to a disease or
health-related condition. Implied specific health claims include statements,
symbols, vignettes, or other forms of communication that suggest, within the
context in which they are presented, that a relationship exists between distilled
spirits, alcohol, or any substance found within the distilled spirits, and a disease
dialled •:•-
' b" :JS Ac
*• ?
or health-related condition.
-135-
(iii) Health-related directional statement is a type of health-related
statement that directs or refers consumers to a third party or other source for
information regarding the effects on health of distilled spirits or alcohol
consumption/ ^>;•;<•••
1 '•i,':t (2) Rules for advertising (i) Health-related statements. In general,
advertisements may not contain any heath-related statement that is untrue in
any particular or tends to create a misleading impression as to the effects on
health of alcohol consumption. TTB will evaluate such statements on a caseby-case basis and may require as part of the health-related statement a
disclaimer or some other qualifying statement to dispel any misleading
impression conveyed by the health-related statement. Such disclaimer or other
qualifying statement must appear as prominent as the health-related statement.
(ii) Specific health claims. A specific health claim will not be considered
misleading if it is truthful and adequately substantiated by scientific or medical
evidence; sufficiently detailed and qualified with respect to the categories of
hdormaLiO:. ..
individuals to w h o m the claim applies; adequately discloses the health risks
fcnnsi»n",-'"':' )n
associated with both moderate and heavier levels of alcohol consumption; and
outlines the categories of individuals for whom any levels of alcohol
consumption may cause health risks. This information must appear as part of
the specific health claim and in a manner as prominent as the specific health
ii
u--. O'.' .
claim.
hw."„. ;s .
(iii) Health-related directional statements. A statement that directs
consumers to a third party or other source for information regarding the effects
-136on health of distilled spirits or alcohol consumption is presumed misleading
unless it—
(A) Directs consumers in a neutral or other non-misleading manner to a
third party or other source for balanced information regarding the effects on
health of distilled spirits or alcohol consumption; and
(B)(1) Includes as part of the health-related directional statement, and in
a manner as prominent as the health-related directional statement, the following
disclaimer: 'This statement should not encourage you to drink or increase your
alcohol consumption for health reasons;" or
(2) Includes as part of the health-related directional statement, and in a
manner as prominent as the health-related directional statement, some other
qualifying statement that the appropriate TTB officer finds is sufficient to dispel
' ii
r.
any misleading impression conveyed by the health-related directional
1
,' ; • -f.
statement.
*****
i:. *
PART 7-LABELING AND ADVERTISING OF MALT BEVERAGES
j: u Par. 7. The authority citation for 27 CFR Part 7 continues to read as
follows:
Authority: 27 U.S.C. 205.
Par. 8. Section 7.29 is amended-by revising paragraph (e) to read as
follows:
§ 7.29;- Prohibited practices.
-137*
*
*
*
*
(e) Health-related statements. (1) Definitions. When used in this
paragraph (e), terms are defined as follows:
(i) Health-related statement means any statement related to health (other
than the warning statement required by § 16.21 of this chapter) and includes
statements of a curative or therapeutic nature that, expressly or by implication,
suggest a relationship between the consumption of alcohol, malt beverages, or
any substance found within the malt beverage, and health benefits or effects on
health. The term includes both specific health claims and general references to
alleged health benefits or effects on health associated with the consumption of
alcohol, malt beverages, or any substance found within the malt beverage, as
well as health-related directional statements. The term also includes
statements and claims that imply that a physical or psychological sensation
results from consuming the malt beverage, as well as statements and claims of
nutritional value (e.g., statements of vitamin content). Statements concerning
caloric, carbohydrate, protein, and fat content do not constitute nutritional
claims about the product.
(ii) Specific health claim is a type of health-related statement that,
<-•*'> ;• ary-
r>-•!•<• -*
-=
c
c
"
-
expressly or by implication, characterizes the relationship of the malt beverage,
alcohol, or any substance found within the malt beverage, to a disease or
health-related condition. Implied specific health claims include statements,
symbols, vignettes, or other forms of communication that suggest, within the
context in which they are presented, that a relationship exists between malt
-138beverages, alcohol, or any substance found within the malt beverage, and a
i:
disease or health-related condition.
(iii) Health-related directional statement is a type of health-related
statement that directs or refers consumers to a third party or other source for
information regarding the effects on health of malt beverage or alcohol
consumption.
(2) Rules for labeling, (i) Health-related statements. In general, labels
may not contain any health-related statement that is untrue in any particular or
tends to create a misleading impression "as to the effects on health of alcohol
consumption. T T B will evaluate such statements on a case-by-case basis and
may require as part of the health-related statement a disclaimer or some other
qualifying statement to dispel any misleading impression conveyed by the
health-related statement.
i
• •
•
•
*^
s
•"'
•
•
•
•
•
'
.
it " Hi) Specific health claims. (A) T T & will consult with the Food and Drug
Administration (FDA), as needed, on the use of a specific health claim on a malt
beverage label. If F D A determines that the use of such a labeling claim is a
drug claim that is not in compliance with the requirements of the Federal Food,
Drug, and Cosmetic Act, T T B will not approve the use of that specific health
claim on a malt beverage label.
(B) T T B will approve the use of a specific health claim on a malt
beverage label only if the claim is truthful and adequately substantiated by
scientific or medical evidence; sufficiently detailed and qualified with respect to
the categories of individuals to w h o m the claim applies; adequately discloses
-139the health risks associated with both moderate and heavier levels of alcohol
consumption; and outlines the categories of individuals for w h o m any levels of
alcohol consumption m a y cause health risks. This information must appear as
part of the specific health claim.
(iii) Health-related directional statements. A statement that directs
consumers to a third party or other source for information regarding the effects
on health of malt beverage or alcohol consumption is presumed misleading
f-inless it—
h|w:
(A) Directs consumers in a neutral or other non-misleading manner to a
third party or other source for balanced information regarding the effects on
health of malt beverage or alcohol consumption; and
(B)(1) Includes as part of the health-related directional statement the
following disclaimer: This statement should not encourage you to drink or to
increase your alcohol consumption for health reasons;" or
(2) Includes as part of the health-related directional statement s o m e
other qualifying statement that the appropriate T T B officerfindsis sufficient to
dispel any misleading impression conveyed by the health-related directional
statement.
*
un{:3SSPar.
*
*
*
*
9. Section 7.54 is amended by revising paragraph (e) to read as
follows^) o\recAz con>L'.T:£ir .' *
§ 7.54 Prohibited statements.
-
*
* * ~'s'.:- :'d n -
-140*
*
*
*
*
I (e) Health-related statements. (1) Definitions. When used in this
paragraph (e), terms are defined as follows:
rp ^^ff ^-|eaith-related statement means any statement related to health and
includes statements of a curative or therapeutic nature that, expressly or by
implication, suggest a relationship between the consumption of alcohol, malt
beverages, or any substance found within the malt beverage, and health
benefits or effects on health. The term includes both specific health claims and
general references to alleged health benefits or effects on health associated
with the consumption of alcohol, malt beverages, or any substance found within
the malt beverage, as well as health-related directional statements. The term
also includes statements and claims that imply that a physical or psychological
sensation results from consuming the malt beverage, as well as statements and
claims of nutritional value (e.g., statements of vitamin content). Statements
concerning caloric, carbohydrate, protein, and fat content do not constitute
jjaraqraph iG' \yn\z ^i- rt Cr
nutritional claims about the product.
fiiVSpecific health claim is a type of health-related statement that,
expressly or by implication, characterizes the relationship of the malt beverage,
alcohol, or any substance found within the malt beverage, to a disease or
health-related condition. Implied specific health claims include statements,
symbols, vignettes, or other forms of communication that suggest, within the
I :
context in which they are presented, that a relationship exists between malt
-141-
beverages, alcohol, or any substance found within the malt beverage, and a
disease or health-related condition.
(iii) Health-related directional statement is a type of health-related
statement that directs or refers consumers to a third party or other source for
information regarding the effects on health of malt beverage or alcohol
consumption.
(2) Rules for advertising, (i) Health-related statements. In general,
advertisements m a y not contain any health-related statement that is untrue in
any particular or tends to create a misleading impression as to the effects on
health of alcohol consumption. T T B will evaluate such statements on a caseby-case basis and m a y require as part of the health-related statement a
s' .
disclaimer or s o m e other qualifying statement to dispel any misleading
impression conveyed by the health-related statement. Such disclaimer or other
qualifying statement must appear as prominent as the health-related statement.
(ii) Specific health claims. A specific health claim will not be considered
i
misleading if it is truthful and adequately substantiated by scientific or medical
evidence; sufficient^ detailed and qualified with respect to the categories of
individuals to w h o m the claim applies; adequately discloses the health risks
associated with both moderate and heavier levels of alcohol consumption; and
outlines the categories of individuals for w h o m any levels of alcohol
consumption m a y cause health risks. This information must appear as part of
the specific health claim and in a manner as prominent as the specific health
IK,:.-.!-:!- cfa'j?'^! cci>;u-"< , .-•
claim. :
-142(iii) Health-related directional statements. A statement that directs
consumers to a third party or other source for information regarding the effects
on health of malt beverage or alcohol consumption is presumed misleading
gnless it—
-143-
(A) Directs consumers in a neutral or other non-misleading manner to a
third party or other source for balanced information regarding the effects on
health of malt beverage or alcohol consumption; and
(B)(1) Includes as part of the health-related directional statement, and in
a manner as prominent as the health-related directional statement, the following
disclaimer: "This statement should not encourage you to drink or increase your
alcohol consumption for health reasons;" or
(2) Includes as part of the health-related directional statement, and in a
manner as prominent as the heath-related directional statement, some other
qualifying statement that the appropriate TTB officer finds is sufficient to dispel
any misleading impression conveyed by the health-related directional
statement.
I\:AM:;<:'.
* ••,.;-.;;
:
*
*
*
! r
'•h ' ' (A) Dfr^frt:-:cr- «J- ,
Signed: February 13, 2003.
Arthur, J. Libertucci,
Administrator.
Approved: February 25, 2003.
Timothy E. Skud,
Deputy Assistant Secretary
(Regulatory. Tariff and Trade Enforcement).
*
55361387 18
81/B4/B8 -', « N O
U.S. TREASURY LIBRARY
«afc4
@FedFRASER