(a)

1. (1) Collateralization is necessary when an agency deposits cash funds with a bank or financial institution in excess of current Federal Deposit Insurance Corporation insurance coverage.
2. (2) 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.
3. (3) All collateral is to be valued at fair value when determining the amount pledged.
4. (4) Current market prices or current market value is also referred to as fair value.
5. (5) Fair value is the price at which the collateral could be sold in an “arms-length” transaction.
6. (6) The following collateralization provisions are minimum requirements for agencies.
7. (7) Additional collateralization requirements may be imposed at the discretion of the agency.
8. (8) An agency should not deposit any funds with a bank or financial institution in excess of Federal Deposit Insurance Corporation insurance limits until such time that the agency has received the collateral pledged by the financial institution for the funds.

(b)

1. (1) Securities pledged as collateral shall be held by a third-party custodian that is unaffiliated with the bank or financial institution.
2. (2) The agency acts as the custodian for surety bonds, letters of credit, and private deposit insurance pledged as collateral.

(c)

1. (1) 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 Arkansas Code § 23-47-401(a) and those set forth in Arkansas Code § 19-8-203.
2. (2) The total fair value of the pledged collateral shall be at least equal to one hundred five percent (105%) of the total amount of cash funds on deposit with a bank or financial institution that is in excess of current Federal Deposit Insurance Corporation insurance coverage.

(d)

1. (1) Monitoring the value of assets pledged as collateral is the responsibility of the agency making the deposit.
2. (2) The bank or financial institution shall provide a periodic collateral report to the agency.

3. (3) The frequency of the periodic collateral reports is to be:

   1. (A) Agreed upon by the agency and bank or financial institution; and
   2. (B) Written in the depository collateral agreement.
4. (4) Costs associated with providing periodic collateral reports should be considered in submitting a bid for deposit of cash funds.
5. (5) 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 (5) business days of the report date.
6. (6) The agency shall verify through an independent source the fair value reported by the bank or financial institution in its periodic collateral report.
7. (7) A list of acceptable independent sources to be used by agencies for verifications shall be maintained in the State of Arkansas Financial Management Guide.

(e)

1. (1) A custodial services agreement shall be executed with each custodian for safekeeping of assets pledged to an agency by a bank or financial institution.

2. (2) Collateral pledged to secure deposits may be held only by a custodian that satisfies the following requirements:

   1. (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;
   2. (B)

(i) A bank or financial institution may not hold assets for safekeeping that it has pledged to an agency as collateral for a deposit.

1. (ii) Collateral shall be placed for safekeeping with a custodian that is unaffiliated with the financial institution;

   1. (C) To be considered unaffiliated, all of the following conditions must be met:

      1. (i) 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. (ii) 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. (iii) The custodian and bank or financial institution are not owned directly or indirectly by the same parent corporation; and
      4. (iv) Voting securities of up to five percent (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; and

   2. (D)

      1. (i)

(b) (b) The Secretary of the Department of Finance and Administration, with advice of the Bank Commissioner, will review such requests and make recommendations to the State Board of Finance.

1. (c) (c) The secretary and commissioner shall examine the potential custodian to determine whether it has the financial stability, experience, technical skill, and staffing levels necessary to properly carry out the duties of a custodian.

   1. (ii)

(f)

1. (1) 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.

2. (2) Substitution may be allowed without prior authorization if the agency and the bank or financial institution agree to the:

   1. (A) Substitution procedures; and
   2. (B) Type of securities allowable for substitution.

3. (3) Substitution procedures shall be addressed in the:

   1. (A) Depository collateral agreement; and
   2. (B) Custodial services agreement.
4. (4) The percentage of coverage required by subsection (d) of this section shall be recalculated upon substitution or release of collateral.

(g)

1. (1) Any violation of a depository collateral agreement or custodial services agreement by 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.
2. (2) 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.

(h) The State of Arkansas is authorized to conduct collateralization audits of agencies, banks or financial institutions, and custodians to ensure compliance with this part and Arkansas law.

1. (i) Agencies shall follow any other collateralization procedures set forth in the State of Arkansas Financial Management Guide not specifically addressed herein.