RULE
2012-A
MANAGEMENT OF CASH FUNDS
The State Board of Finance hereby promulgates the following rule
under Ark. Code Ann. §
19-3-101,
§
19-4-801
et seq. and §
25-15-201 et
seq. This rule is intended to address the management, investment and
collateralization of cash funds deposited with banks or financial institutions
by agencies of the State of Arkansas. The Treasurer of the State of Arkansas
and the Arkansas Department of Finance and Administration are hereby authorized
to act on behalf of the State Board of Finance to administer this rule. The
purpose of this rule is to provide guidance for state agencies consistent with
commonly recognized cash management, investment and collateralization
practices. Cash funds are "public monies" subject to all applicable Arkansas
code provisions.
A. GENERAL OVERVIEW.
The goal of cash management is to protect the principal while
maximizing investment income and minimizing non-interest earning balances. Cash
management considerations begin with the collection of funds and extend to the
actual expenditure of those funds. Agencies should ensure that incoming funds
are collected and deposited as soon as possible. Whenever possible, funds
should be deposited in interest-earning accounts or invested in
interest-earning investments. Interest income can be used to fund an agency's
operating expenses and can reduce the necessity of increasing the fees levied
on the public. An agency may use non-interest-earning accounts if they provide
a greater rate of return. Agencies should utilize accounts and programs that
maximize Federal Deposit Insurance Corporation (FDIC) deposit insurance
coverage. A minimum of four bids should be obtained from approved banks or
financial institutions in order to obtain the highest interest rate possible.
If an agency determines it is unable to obtain four bids, the agency should
provide a written explanation of that determination to the State Board of
Finance, or its designee. If the State Board of Finance rejects the
determination, it can direct the agency to re-bid.
Fund expenditures should be regularly reviewed for noticeable
spending patterns. Expenditures should generally be consolidated into as narrow
a time span as possible. Whenever possible, expenditures should be made at the
time existing investments mature or new incoming funds are deposited. The
Treasurer of the State of Arkansas and the Arkansas Department of Finance and
Administration can assist agencies with cash management, investment and
collateralization considerations. Each agency should develop a written plan for
management of cash.
B.
MANAGEMENT AND INVESTMENT OF CASH FUNDS.
A Depository Collateral Agreement must be
executed before any deposits can be made. Prior to depositing any funds with a
bank or financial institution operating within the borders of the State of
Arkansas, the agency should review the financial condition of the bank or
financial institution. The agency should periodically review the financial
condition of the bank or financial institution so long as the agency has funds
on deposit with the bank or financial institution. Certain quarterly financial
reports are open for public inspection. The website of the FDIC provides
additional public information that can be used to review the financial
condition of the bank or financial institution. An agency should not deposit
funds with a bank or financial institution if it would cause cash funds on
deposit to exceed the capital of the bank or financial institution.
C. AUTHORIZED ACCOUNTS.
Cash funds may be deposited only in the transactional and
non-transactional accounts defined in the State of Arkansas Financial
Management Guide. The account must qualify for Federal Deposit
Insurance Corporation deposit insurance coverage.
D. AUTHORIZED INVESTMENTS.
Cash funds may be invested only in the accounts and investment
instruments authorized under Ark. Code Ann. §
19-3-510
and §
19-3-518.
All noncash investment instruments must be held in safekeeping by a bank or
financial institution. Agencies should obtain safekeeping receipts for all
investments.
E.
COLLATERALIZATION OF CASH FUNDS.
Collateralization is necessary when an agency deposits cash funds
with a bank or financial institution in excess of current FDIC insurance
coverage. Securing deposits with assets pledged to an agency by a bank or
financial institution protects the state from a loss of cash funds in the event
of a default or failure by the bank or financial institution. All collateral is
to be valued at fair value when determining the amount pledged. Current market
prices or current market value is also referred to as fair value. Fair value is
the price at which the collateral could be sold in an "arms-length"
transaction. The following collateralization provisions are minimum
requirements for agencies. Additional collateralization requirements may be
imposed at the discretion of the agency. An agency should not deposit any funds
with a bank or financial institution in excess of FDIC insurance limits until
such time that the agency has received the collateral pledged by the financial
institution for the funds.
1.
Securities pledged as collateral shall be held by a third-party custodian that
is unaffiliated with the bank or financial institution. The agency acts as the
custodian for surety bonds, letters of credit and private deposit insurance
pledged as collateral.
2. Assets
eligible to be pledged as collateral for deposits are those assets in which a
bank or financial institution may invest without limitation as identified in
Ark. Code Ann. §
23-47-401(a)
and those set forth in Ark. Code Ann. §
19-8-203.
The total fair value of the pledged collateral shall be at least equal to 105%
of the total amount of cash funds on deposit with a bank or financial
institution that is in excess of current FDIC insurance coverage
3. Monitoring the value of assets pledged as
collateral is the responsibility of the agency making the deposit. The bank or
financial institution shall provide a periodic collateral report to the agency.
The frequency of the periodic collateral reports is to be agreed upon by the
agency and bank or financial institution and written in the Depository
Collateral Agreement. Costs associated with providing periodic
collateral reports should be considered in submitting a bid for deposit of cash
funds. The report shall include the fair value and description of the assets
pledged as collateral with pricing of the pledged collateral to be within five
business days of the report date. The agency shall verify through an
independent source the fair value reported by the bank or financial institution
in its periodic collateral report. A list of acceptable independent sources to
be used by agencies for verifications shall be maintained in the State
of Arkansas Financial Management Guide.
4. A
Custodial Services Agreement
shall be executed with each custodian for safekeeping of assets
pledged to an agency by a bank or financial institution. Collateral pledged to
secure deposits may be held only by a custodian that satisfies the following
requirements:
a. A custodian may be a Federal
Reserve Bank, a Federal Home Loan Bank, a bankers' bank, the trust department,
or similar safekeeping function, of a commercial bank or a trust company
primarily located within the State of Arkansas.
b. A bank or financial institution may not
hold assets for safekeeping that it has pledged to an agency as collateral for
a deposit. Collateral shall be placed for safekeeping with a custodian that is
unaffiliated with the financial institution.
c. To be considered "unaffiliated," all of
the following conditions must be met:
(1) The
custodian, or an affiliate, does not possess, directly or indirectly, the power
to direct or cause the direction of the management and policies of the bank or
financial institution including, but not limited to, ownership of voting
securities.
(2) The bank or
financial institution, or an affiliate, does not possess, directly or
indirectly, the power to direct or cause the direction of the management and
policies of the custodian including, but not limited to, ownership of voting
securities.
(3) The custodian and
bank or financial institution are not owned directly or indirectly by the same
parent corporation.
(4) Voting
securities of up to 5% of the outstanding voting securities of the bank or
financial institution or the custodian, being a de minimus
interest, will be considered "unaffiliated" for the purpose of acting
as a custodian for safekeeping collateral pledged to an agency.
d.
(1) A bank or financial institution may
request permission from the Board of Finance to use a custodian primarily
located outside the State of Arkansas. The Director of the Department of
Finance and Administration, with advice of the State Bank Commissioner, will
review such requests and make recommendations to the Board of Finance. The
Director and Commissioner shall examine the potential custodian to determine
whether it has the financial stability, experience, technical skill, and
staffing levels necessary to properly carryout the duties of a
custodian.
(2) A bank or financial
institution may request permission from the Board of Finance to use a
securities broker or dealer as a custodian. That request shall be made in
accordance with the process outlined in paragraph E.4.d(1) of this
rule.
5.
Collateral shall not be released, substituted or compromised by a bank or
financial institution or custodian unless approval is obtained from the agency
to which the collateral was pledged prior to taking any such action.
Substitution may be allowed without prior authorization if the agency and the
bank or financial institution agree to the substitution procedures and the
types of securities allowable for substitution. Substitution procedures shall
be addressed in the Depository CollateralAgreement
andthe Custodial Services Agreement.The percentage of coverage
required by paragraph 2 of this section shall be recalculated upon substitution
or release of collateral.
6. Any
violation of a Depository Collateral
AgreementorCustodial Services Agreementby a bank or
financial institution or a custodian, or any other action or circumstance
deemed by an agency to put its funds at substantial risk, will make the funds
subject to immediate withdrawal by the agency. In determining if its funds have
been placed at substantial risk, the agency, at its discretion, may waive minor
violations that are ministerial in nature if such violations do not result in
risk to its cash funds.
7. The
State of Arkansas is authorized to conduct collateralization audits of
agencies, banks or financial institutions and custodians to ensure compliance
with this rule and Arkansas law.
8.
Agencies shall follow any other collateralization procedures set forth in the
State of Arkansas Financial Management Guide not specifically
addressed herein.
F.
SECURITY INTEREST.
The bank or financial institution with whom cash funds have been
deposited is responsible for providing the agency with a security interest in
the collateral pledged by the bank or financial institution and compliance with
all federal and state laws and regulations governing the establishment of an
enforceable security interest. The agency is responsible for ensuring that any
Depository Collateral Agreement andCustodial Services
Agreementthat it enters into creates an enforceable security interest
in the collateral pledged by the bank or financial institution with whom cash
funds have been deposited. If the agency uses the agreement forms prescribed by
the Board of Finance, it will be considered to have met this requirement. Forms
used by a Federal Reserve Bank or Federal Home Loan Bank are acceptable and
will be considered to have met this requirement. Forms and agreements provided
by a bank or financial institution or custodian, other than a Federal Reserve
Bank or Federal Home Loan Bank, are acceptable if they comply with the
requirements of this Rule.
Perfection of a security interest in investment property such as
securities, security accounts and security entitlements is achieved through
control as provided in the Uniform Commercial Code. Generally, control means
that the secured party can exercise power over the investment property without
further action or consent of the financial institution. Control is obtained
through possession, registration or on the basis that the issuer or an
intermediary will act on the instructions of the agency.
The documents described in paragraphs 1, 2 and 3 below must be
executed to collateralize agency deposits. Exhibits A, B and C attached to this
Rule are sample agreements that may be used. However, the parties to the
agreements may agree to other forms if they comply with the requirements of
this Rule.
1. Depository Resolution.
The Policy Statement of the Federal Deposit Insurance Corporation
dated March 23, 1993, requires that security agreements pertaining to public
deposits must be approved by either the bank's or financial institution's board
of directors or loan committee. 58 Fed. Reg. 16833, March 31, 1993.
a. Attached as Exhibit A is a
Certificate of Corporate Resolutionsrecommended by the
Arkansas State Board of Finance for use by agencies.
b. The Certificate of Corporate
Resolutionsshall not be dated after the Depository Collateral
Agreement.
c. A bank's or
financial institution's standard resolution form is acceptable if it achieves
the purposes of this Rule.
d. A
continuing resolution of the board or loan committee of the bank or financial
institution that empowers certain bank or financial institution officials to
execute security agreements related to public deposits and pledge collateral to
secure those deposits, as well as ratifying all actions taken by the officials
to secure the public deposits, is acceptable if the continuing resolution:
1. Specifically identifies the bank or
financial institution official or officials authorized to act on behalf of the
bank or financial institution, and
2. Specifically identifies the actions the
bank or financial institution official or officials are authorized to take on
behalf of the board or loan committee.
2. Depository Collateral Agreement.
a. Attached as Exhibit B is a
Depository Collateral Agreement recommended by the Arkansas
State Board of Finance for use by agencies.
b.
Depository Collateral
Agreements used to collateralize state funds shall contain the
following provisions:
(1) The agreement shall
provide the specific terms setting forth how funds not covered by FDIC
insurance will be collateralized.
(2) The agreement must identify the specific
type or types of collateral to be pledged and grant the agency with a security
interest in the collateral.
(3) The
agreement must provide for a periodic recalculation of the fair value of
pledged securities to ensure the value meets the collateralization ratios of
Section E, paragraph 2. The agreement must provide that the bank or financial
institution will provide the agency with a periodic statement of collateral, to
verify the adequacy of the pledged collateral. The periodic statement of
collateral must identify the deposit secured by the collateral, describe the
collateral, and the collateral's current fair value. The agreement should
specify the methods by which the fair value will be determined.
(4) The agreement must specify the
collateralization ratio applicable to the pledged collateral.
(5) Letters of credit, surety bonds and
private deposit insurance policies must identify the issuer of the instrument
and the coverage amount. The instrument must permit the agency to make a claim
directly on the issuer of the instrument in the event of default, financial
failure or insolvency of the bank or financial institution. These instruments
must be delivered to the agency and the Depository Collateral
Agreement should provide that the risk of loss is with the bank or
financial institution until the instrument is actually received by the agency.
The bank or financial institution shall also require the issuer of the
instrument to forward a copy of notification of coverage or insured limit to
the agency. As relevant to surety bonds, any surety bond pledged as collateral
is irrevocable and absolute, and that the issuer of the surety bond cannot
provide surety bonds for any one bank or financial institution in an amount
that exceeds ten percent (10%) of the surety bond insurer's policyholders'
surplus and contingency reserve, net of reinsurance.
(6) The agreement must provide that the
collateral is held in safekeeping by a third party unaffiliated with the bank
or financial institution with whom cash funds have been deposited. The agency,
bank or financial institution, and custodian must execute a Custodial
Services Agreement.
(7)
The agreement must specify procedures for substitution or release of
collateral. The collateralization ratio shall be recalculated upon the
substitution or release of pledged collateral.
(8) The agreement must provide that it will
be governed by Arkansas law.
c. The agreement must be reviewed, updated
and re-executed if the bank or financial institution undergoes a name change,
merger, sale, change in ownership or any other material change to the bank or
financial institution.
3. Custodial Services Agreement.
a. Attached as Exhibit C is a
Custodial Services Agreement recommended by the Arkansas
State Board of Finance for use by agencies.
b. Except for agreements required by a
Federal Reserve Bank or Federal Home Loan Bank,
Custodial Service
Agreements used to collateralize cash funds shall contain the
following provisions:
(1) The agreement must
vest "control" of the pledged collateral in the agency as provided in the
Uniform Commercial Code. As an example, the agreement should contain a clause
that is similar to the following: "From and after the date of this agreement,
the custodian will comply with all notifications and instructions it receives
directing it to transfer or redeem any property subject to the agreement
originated by the agency without further consent of the bank or financial
institution".
(2) The agreement
must provide that the custodian waives its right to a security interest in the
pledged collateral and prohibit the custodian and bank or financial institution
from further pledging the collateral subject to the agreement.
(3) The agreement must provide that the
custodian subordinates any security or lien it may claim in the pledged
collateral to the agency's security interest.
(4) The agreement must provide that the
custodian is a custodial agent of the agency and will hold the pledged
collateral solely for the benefit of the agency.
(5) The agreement must provide that the
pledged collateral will not be held in a margin account and no margin or other
credit will be extended to the bank or financial institution with respect to
the pledged collateral.
(6) The
agreement must provide that the custodian will send copies of all statements
and confirmations concerning the pledged collateral simultaneously to the bank
or financial institution and agency.
(7) The agreement must provide that the
custodian will notify the agency if another person claims a property interest
in the pledged collateral and immediately substitute unencumbered collateral of
equivalent value that is free and clear of any adverse claims.
(8) The agreement must provide that the
duties of the custodian shall continue in effect until the security interest
has been terminated and the agency shall notify the custodian of the
termination in writing within a reasonable period of time.
(9) The agreement must provide that upon
termination, the custodian and bank or financial institution agree that if the
agency's deposit requires collateral as provided in the Depository
Collateral Agreement, that the pledged collateral will be transferred
to an account under the exclusive control of the agency.
(10) The agreement must provide that the bank
or financial institution does not have the ability to terminate the
agreement.
(11) The agreement must
provide that it will be governed by Arkansas law.
G. CONFLICT OF LAWS.
Arkansas law shall prevail over any other state or local laws
relating to security for a deposit of cash funds to the extent of any
conflict.
H. CASH FUND
AGENCY REPORTING REQUIREMENTS.
Agencies shall follow the reporting requirements set forth in the
State of Arkansas Financial Management Guide (R 1-19-4
-805).
By: ____________________________________ Date:
___________________ , 2012
Richard A. Weiss, Director
Arkansas Department of Finance and Administration
Executive Officer, Arkansas State Board of Finance
