(a)

1. (1) The bank or financial institution with which 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, rules, and regulations governing the establishment of an enforceable security interest.
2. (2) The agency is responsible for ensuring that any depository collateral agreement and custodial services agreement that it enters into creates an enforceable security interest in the collateral pledged by the bank or financial institution with which cash funds have been deposited.
3. (3) If the agency uses the agreement forms prescribed by the State Board of Finance, it will be considered to have met this requirement.

4. (4) Forms used by a Federal Reserve bank or Federal Home Loan bank:

   1. (A) Are acceptable; and
   2. (B) Will be considered to have met this requirement.
5. (5) 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 part.

(b)

1. (1) 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, Arkansas Code § 4-1-101 et seq.

2. (2)

   1. (A) Generally, control means that the secured party can exercise power over the investment property without further action or consent of the financial institution.
   2. (B) Control is obtained:

(i) Through possession;

1. (ii) Through registration; or

   1. (iii) On the basis that the issuer or an intermediary will act on the instructions of the agency.

      1. (c)
2. (1) The documents described in subsections (d) – (f) of this section must be executed to collateralize agency deposits.
3. (2) Exhibits A, B, and C attached to this part are sample agreements that may be used.

4. (3) However, the parties to the agreements may agree to other forms if they comply with the requirements of this part.

   1. (d) Depository resolution.

5. (1)

   1. (A) 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.
   2. (B) 58 FR 16833 (March 31, 1993).
6. (2) Attached as Exhibit A is a certificate of corporate resolutions recommended by the State Board of Finance for use by agencies.
7. (3) The certificate of corporate resolutions shall not be dated after the depository collateral agreement.
8. (4) A bank’s or financial institution’s standard resolution form is acceptable if it achieves the purposes of this part.

9. (5) 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 specifically identifies the:

   1. (A) Bank or financial institution official or officials authorized to act on behalf of the bank or financial institution; and
   2. (B) Actions the bank or financial institution official or officials are authorized to take on behalf of the board or loan committee.

(e) Depository collateral agreement.

1. (1) Attached as Exhibit B is a depository collateral agreement recommended by the State Board of Finance for use by agencies.

2. (2) Depository collateral agreements used to collateralize state funds shall contain the following provisions:

   1. (A) The agreement shall provide the specific terms setting forth how funds not covered by Federal Deposit Insurance Corporation insurance will be collateralized;
   2. (B) 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. (C)

      1. (i) The agreement must provide for a periodic recalculation of the fair value of pledged securities to ensure the value meets the collateralization ratios of 19 CAR § 10-105(c).
      2. (ii) 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.
      3. (iii) The periodic statement of collateral must:

(b) (b) Describe the collateral and the collateral’s current fair value.

1. (iv) The agreement should specify the methods by which the fair value will be determined;

   1. (D) The agreement must specify the collateralization ratio applicable to the pledged collateral;

   2. (E)

      1. (i) Letters of credit, surety bonds, and private deposit insurance policies must identify the:

(b) (b) Coverage amount.

1. (ii) 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.

   1. (iii) 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.

      1. (iv) 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.
      2. (v) 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 (1) 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;

   2. (F)

      1. (i) 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.
      2. (ii) The agency, bank or financial institution, and custodian must execute a custodial services agreement;

   3. (G)

      1. (i) The agreement must specify procedures for substitution or release of collateral.
      2. (ii) The collateralization ratio shall be recalculated upon the substitution or release of pledged collateral; and
   4. (H) The agreement must provide that it will be governed by Arkansas law.

2. (3) The agreement must be reviewed, updated, and re-executed if the bank or financial institution undergoes:

   1. (A) A name change;
   2. (B) A merger;
   3. (C) A sale;
   4. (D) A change in ownership; or
   5. (E) Any other material change to the bank or financial institution.

(f) Custodial services agreement.

1. (1) Attached as Exhibit C is a custodial services agreement recommended by the State Board of Finance for use by agencies.

2. (2) 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. (A)

      1. (i) The agreement must vest control of the pledged collateral in the agency as provided in the Uniform Commercial Code, Arkansas Code § 4-1-101 et seq.
      2. (ii) 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. (B) The agreement must:

      1. (i) Provide that the custodian waives its right to a security interest in the pledged collateral; and
      2. (ii) Prohibit the custodian and bank or financial institution from further pledging the collateral subject to the agreement;
   3. (C) 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. (D) 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. (E) The agreement must provide that:

      1. (i) The pledged collateral will not be held in a margin account; and
      2. (ii) No margin or other credit will be extended to the bank or financial institution with respect to the pledged collateral;
   6. (F) 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. (G) The agreement must provide that the custodian will:

      1. (i) Notify the agency if another person claims a property interest in the pledged collateral; and
      2. (ii) Immediately substitute unencumbered collateral of equivalent value that is free and clear of any adverse claims;

   8. (H) The agreement must provide that the:

      1. (i) Duties of the custodian shall continue in effect until the security interest has been terminated; and
      2. (ii) Agency shall notify the custodian of the termination in writing within a reasonable period of time;
   9. (I) 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. (J) The agreement must provide that the bank or financial institution does not have the ability to terminate the agreement; and
   11. (K) The agreement must provide that it will be governed by Arkansas law.