‘Best Practices’ Securing your county’s bank deposits By Jim Buttry Friday, Eldredge & Clark, LLP


most lawyers are sometimes pulled into ques- tions related to their specialties. As a “bond lawyer,” I have had to deal from time to time with public deposits and how they may or must be secured.


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Here are a few disclaimers: 1. Te scope of this article is limited. It


deals with the “perfection” and “control” of security interests in collateral pledged to se- cure public deposits. I have, for example, not attempted to deal with the details involved in the liquidation of collateral in the event of a bank failure.


2. I have not attempted to deal with wheth-


er a particular deposit is of public funds, eli- gible for collateralization under federal and state law. Non-profit entities associated with or supporting governmental purposes would be examples of entities that might not qualify. Tink of the county hospital that is leased to a nonprofit organization.


3. Any change in existing law or regula- tions can affect the conclusions or opinions expressed in this article.


4. We are required by IRS Circular 230 to inform all readers of this article that any statements contained in it are not intended or written to be used, and cannot be used, by anyone for the purpose of avoiding any pen- alties that may be imposed under federal law.


Tis article is addressed to counties and,


accordingly, the term “you” refers to them. References to the “UCC” are to the Arkansas Uniform Commercial Code. I have referred to “indorse” and “indorsement,” as that is how it is spelled in the UCC.


Bond lawyers have been accused of having the mind of a “file cabinet.” Being a bond lawyer, I am conservative in the opinions ex- pressed here. Your lawyer may disagree with some of them (and in a lawsuit might be up-


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very lawyer would like to stay within his or her specialty and avoid having to learn new things. Learning can be hard work. But


(Author’s note: I was enticed into doing an article for City and Town, the official Arkansas Municipal League publication, by Paul Young, a lawyer, CPA, investment banker and friend who is now with the League (and who contributed greatly to the League article and, indirectly, to this one). I have adapted the article for County Lines at the suggestion of Eddie Jones, who flat- tered me – quite effectively – by saying that he had read the League article and liked it.)


held). Bond lawyers look upon an “opinion” as a “conviction.” Tis, basically, amounts to a reasonable doubt standard.


Some background: Securities were used to secure (or “collat-


eralize”) loans before there were any uniform or clear statutory rules covering such transac- tions. Banks lend on the basis of such col- lateral, of course, every day. In the typical deposit transaction (including a certificate of deposit) the parties are reversed. Te bank is borrowing from the depositor, for our pur- poses here the county. (But the same state laws are applied.) Because more than one per- son can claim to own a security, or an interest in it, the challenge has always been to deter- mine which claimant has a prior right or in- terest. In the event of a bank failure, you want your collateral to protect your funds against the claims of other bank creditors, primarily the claims of the FDIC.


Under Arkansas law, a county’s depos- its in excess of FDIC insurance coverage ($250,000 until December 31, 2013 when the amount will revert to $100,000) should be secured by a “perfected” pledge of certain eligible securities. Tis is set forth in Arkansas Code of 1987 Annotated at § 19-8-107 and § 19-8-203. Section 19-8-107(e)(3) specifically provides the “county depository agreements shall be entered into using standardized forms provided by the State Board of Finance [including] language necessary to achieve a perfected security interest in all collateral for deposits.” It is not entirely clear whether the requirement for an “eligible security” as col- lateral refers to both securities and to “secu- rity entitlements,” which I will discuss below.


Tis suggests that some consideration might be given to the amendment of our state stat- utes recognizing and confirming that eligible “securities” may be in the form of security entitlements.


In recent years the list of securities which


are “eligible securities” for the securing of public funds has grown from a very short one (direct obligations of the United States or obligations guaranteed by the United States) to a very long one as found in A.C.A. § 19- 8-203 which by reference includes § 23-47- 401.


Some of the items to be used by Ar- kansas banks as deposit collateral are:


(1) Direct obligations of the United States; (2) Obligations of agencies and instrumen- talities created by act of the Congress and authorized thereby to issue securities or evi- dences of indebtedness, regardless of guaran- tee of repayment by the United States (such as government sponsored entities like Fannie Mae, Freddic Mac or the Federal Home Loan Banks); (3) Obligations the principal and interest of which are fully guaranteed by the United States or an agency or an instrumentality cre- ated by an act of the Congress and authorized thereby to issue such guarantee; (4) General obligations of the states of the


United States and of the political subdivi- sions, municipalities, commonwealths, terri- tories or insular possessions thereof (provided the issuer has not had a default in the past ten years); (5) Surety bonds issued by insurance com-


panies licensed under the laws of the State of Arkansas that meet the statutory rating re- quirements or are listed on the then-current United States Department of the Treasury Listing of Approved Sureties; (6) Irrevocable standby letters of credit is-


sued by Federal Home Loan Banks; or (7) Revenue bond issues of any state of the


United States or any municipality or any po- litical subdivision thereof.


Some of the above, such as state or mu- nicipal revenue bonds, will only be suitable as collateral if they have very strong credit qual- ity and short to intermediate maturity. (Te


COUNTY LINES, FALL 2010


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