Arkansas Administrative Code › Agency 045 - Board of Finance › Rule 045.00.12-001 - Management of Cash Funds

Current through Register Vol. 49, No. 6, June, 2024
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 Collateral
Agreement
		  and
the 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
		  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. 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
and
Custodial Services
			 Agreement
that 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 Resolutions
recommended by the
		  Arkansas State Board of Finance for use by agencies.
b. The
Certificate of Corporate
		  Resolutions
shall 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