What is a bond?
Bonding is one form of financial protection offered under the Packers and Stockyards (P&S) Act. A bond is a written guarantee of payment up to the face amount of the bond if you, as the principal, fail to meet your obligations for the covered business activities. Three different types of financial instruments are available to satisfy your bond requirement: (1) Surety Bond; (2) Trust Agreement, or (3) Trust Fund Agreement. You can use one or any combination of financial instruments to satisfy your required bond amount. Hereafter, any reference to a surety, bond, or any financial instrument will be referred to simply as a bond.
What is the purpose of a bond?
People harmed by your failure to meet your obligations for covered business activities can file claims against your bond. If the surety company or trustee on the bond deems the claims to be timely filed and valid, the claimants may recoup some or all of their losses from the bond. You will remain liable for any unmet obligations not paid by your bond.
Who is subject to the bonding requirement?
Five types of businesses activities are subject to the bonding requirement of the P&S Act. These activities include:
- Market agency selling livestock on commission
- Market agency buying on commission or Livestock Dealer
- Market agency operating as a clearing agency, and
- Packer if average annual purchases of livestock exceed $500,000.
How do I determine which condition clause applies to my business?
Firstly, identify from the table below the business activity that you conduct. Secondly, find the respective condition clause (1, 2, 3, or 4). Subject business activities are defined in the P&S Act. The condition clauses are listed in the regulations, on the various Packers and Stockyards Division (P&SD) bonding forms, and the related instructions.
Market agency selling livestock on commission
Market agency buying on commission or Livestock Dealer
Market agency providing clearing services (providing bond coverage for the subject buying activities of another market agency or dealer)
On the bond forms, you will only select the condition clause that applies to your business activity. Clause 2 and 3 activities can be covered by one bond (2/3 clause bond). However, clause 1 and clause 4 bonds must be independent and separate bonds.
What is the required bond amount?
The minimum requirement is $10,000. There is no upper-limit on the required bond amount. Some states may require a higher bond amount than the PSD. If that is true in your state, you will have to obtain the higher bond amount to comply with state law. PSD computes the required bond amount using formulas in the P&S regulations. The formula for market agencies selling livestock on commission is based on the actual dollar value of livestock sold during the preceding business year divided by the number of days on which livestock is sold.
The formulas for market agencies buying on commission, or acting as a clearing agency, dealers, and packers are based on the average value of livestock purchased during two (2) business days. Special circumstances where we may calculate your bond differently include, but are not limited to, new registrants and successors of previously registered entities. For these circumstances, contact your regional office for more details. The Administrator of AMS has the authority to adjust your bond amount as necessary. If you are operating in a manner subject to the bonding requirement, and have not received notice, please contact the PSD regional office that covers the state where your business is headquartered to confirm the required bond amount for your business.
What is required to obtain a bond?
The following table provides a summary.
Trust Agreements & Letters of Credit
Trust Fund Agreements
Trust Agreements: Trustee
Letters of Credit: Bank or other financial institution (Credit Unions are not acceptable)
Bank or other financial institution, or the trustee
Must be currently approved to issue bonds executed to the U.S.A.***
Bank or institution must be Federally-insured; trustee must be financially responsible & disinterested
The trustee must be financially responsible & disinterested
Lien on assets /line of credit
One or more irrevocable, transferable, standby letter(s) of credit
Federally-insured accounts or deposits ****, or fully negotiable obligations of the U.S.A.
Who retains possession of the security
Depository bank /financial institution or trustee
Surety representative, trustee (if one is required) & you
Bank representative, trustee, & you
Bank representative, if applicable, trustee, & you
**Representatives who sign for the surety must enclose a current power of attorney showing authority to obligate the company for the bond.
***See http://www.fms.treas.gov/c570/c570.html (FMS Surety Companies) for a list of approved surety companies.
****Assets used as security must be in the name of the trustee and be readily convertible to currency. The assets may not be released or pledged for another purpose while the Trust Fund Agreement is in effect.
Where do I go to get a bond?
Look for a company that provides bonds in the state(s) where your business is headquartered (see link of approved surety companies noted above). You might start with a company that you already have a business relationship, such as your insurance agent or banker.
How much will it cost?
If you have the funds to set aside in a Certificate of Deposit (CD) to obtain a Trust Fund Agreement (TFA), the only cost would be the trustee’s fee, if any. You would lose access to the CD, as long as it backs the TFA. If you obtain a surety bond or a Letter of Credit pledged to a Trust Agreement, there will be an annual fee that is a percentage of the face value, and collateral is often required. If you have a poor credit history, that fee may be much higher, or you may be denied.
Who may serve as a trustee?
The trustee must be a financially responsible and disinterested person. The trustee cannot be directly involved in your business. Examples include:
- State officials
- Officers of livestock exchanges or similar trade associations
- Attorneys at Law or Certified Public Accountants (CPAs), and
- Banks and other financial institutions, or their officers.
If a statute requires a state official, or the state official has agreed to act as trustee, you must designate that official as the trustee. See Trustees (pdf) for more information about states requiring a state official serve as trustee.
Where do I file the bond?
Submit the fully executed bond(s) to the PSD regional office covering the state where your business is headquartered. If no trustee is named on a surety bond, a copy of the surety bond may be submitted instead of the original.
If you are a market agency or dealer, you must also file an Application for Registration, along with a fully executed bond. The name on the Application for Registration must exactly match the name on the bond. The business activity on the Application for Registration must also match the effective condition clause(s) on the bond. PSD will not process your Application for Registration until you file a fully executed and effective bond in the required amount, and we find them both acceptable. Wait for written notice from us that your registration is effective before conducting business activities subject to the P&S Act.