statute which authorizes state bank invest- ments in them limits to 20% the portion of a bank’s capital base that may be so invested.)


In addition to the changes in eligible se- curities, the General Assembly enacted ma- jor amendments to the UCC, in 2001. Tese include, in particular, amendments to those provisions dealing with the creation and per- fection of security interests.


In order to be protected, a depositing county must comply both with (1) the federal Financial Institutions Reform, Recovery and Enforcement Act of 1989 (so called “FIR- REA”) and (2) the UCC.


A look at FIRREA


Te Congress enacted FIRREA in response to the savings and loan turmoil of the 1980s. Among other things, it included additional requirements for the va- lidity and enforceability of security interests against the FDIC in a take- over.


Te requirements of FIRREA, which are set forth in 12 United States Code § 1823(e), are that there be an agreement in writing,


(a) executed contemporaneously with the acquisition of the collateral, (b) maintained, continuously


of the collateral. After all, one reason for the agreement requirement is to permit examin- ers to identify any claims against the assets of the bank.


Now we consider state law


When I began practicing law, nearly all se- curities were in the form of paper certificates which were held (physically) by the true, or beneficial, owner. In order to pledge a se- curity to secure a debt, the certificates were delivered to the lender and indorsed by the owner. Tere was rarely any doubt about who owned the security or who had a security in- terest in it. If the security was in registered form, instructions were given to the registrar. In the event of a default, the securities could be instantly liquidated.


1. Uncertificated. For the most part, only


U.S. treasury or agency obligations are held in this way. For them the registrar is a Federal Reserve Bank, and there is a direct relation- ship between the owner and the issuer. Tat is, the identity of the owner is reflected on the book maintained by the issuer’s registrar. Transfers are made by notification to the reg- istrar.


2. Certificated but “indirect.” DTC main-


tains records which reflect ownership by a “participant” which is a “securities intermedi- ary” and what you own is not a security but is a package of rights and interests against your securities intermediary. Tis package is called a “security entitlement.” Tis is the “indi- rect system,” and it is now the system for the holding and transfer of almost all municipal bonds and corporate securities.


“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 obliga- tions of the US or obligations guaran- teed by the US) to a very long one”


from the time of execution, as an of- ficial record of the bank, and (c) approved (i) by the board of directors or loan com- mittee of the bank, (ii) which approval must be shown in the minutes of the board or the committee.


It is instantly obvious that, of the FIR-


REA requirements, (b) could be difficult and (a) would be worse. Happily, the FDIC has recognized the difficulties with (a), and has announced that it will not seek to avoid a security interest, otherwise perfected and legally enforceable, solely because the agree- ment does not meet the “contemporaneous” requirement. Te FDIC policy was enacted into law in 1994 but the security agreement must still be adopted in the ordinary course of business, and not in the contemplation of insolvency. If you fail to have a security agree- ment in place prior to when you have reason to fear insolvency of a bank, it will likely be too late.


Also, to be effective, the security agreement should include a description of the eligible collateral and how specific collateral is to be identified at any point in time, such as by a confirmation from the third party custodian


COUNTY LINES, FALL 2010 But there was a terrible problem. By the


1970s the volume of traded certificates was overwhelming the markets. At one point, the New York Stock Exchange closed on Wednes- days in order to allow market participants to catch up with the paperwork.


Te Uniform Commercial Code was re- written to authorize uncertificated securi- ties. Te issuer’s registrar made an entry on its books reflecting the identity of the owner and reflecting any security interest granted by the owner. But the markets had gotten ahead of the change in the UCC and had already established a system that utilized certificates.


But these certificates were “jumbo” or immobilized and held by a single registered owner, today Te Depository Trust Company or “DTC.” If you buy a security today, other than a U.S. treasury or agency obligation, it is almost certainly registered to the nominee of DTC, and DTC reflects on its books not you as the owner but a “securities intermediary” (typically a broker or bank) which holds the security for you. Terefore, today almost all securities are held in one of two ways:


Now: We get to “perfection”, which primarily requires “control” of the pledged collateral. Te Gov- ernment Finance Officers Associa- tion recommends the use of a custo- dian – which is typically a bank and is preferably a separate trust or safe- keeping department. In most cases, this will be accomplished by having a custodian hold the bank’s pledged collateral in its name on your be- half pursuant to an agreement so that nothing can be done with the collateral unless you approve. Also,


the agreement should permit you to sell the collateral if necessary to satisfy your deposits without the consent of the bank or the FDIC. (Tat’s right: You have the contractual right to sell it without bank consent.)


Typically, the custodian will be an in- dependent party that regularly holds your bank’s securities or securities entitlements for this and other business purposes. In or- der to establish properly the arrangement and protect your interest, you will need to enter into a three party agreement among you, the custodian and your bank in which the par- ties will acknowledge these terms and that the collateral is held on your behalf. Tis is in ad- dition to the security agreement required by FIRREA, discussed above.


In the uncertificated system, a security in-


terest can be perfected in a security by having your custodian reflected as the owner of the securities on the books of the registrar. Tis amounts to perfection even against a “pro- tected purchaser.” (More on that below.)


In the indirect system, your custodian will Continued Page 54 >>>


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