HomeMy WebLinkAboutRes 2010-21RESOLUTION NO. 2010 -21
A RESOLUTION OF THE MAYOR AND COUNCIL OF THE TOWN OF
FOUNTAIN HILLS, ARIZONA, ADOPTING THE AMENDED AND
RESTATED TOWN OF FOUNTAIN HILLS INVESTMENT /CASH
MANAGEMENT POLICY.
WHEREAS, the Mayor and Council of the Town of Fountain Hills (the "Town
Council ") approved Resolution No. 2003 -09 on March 20, 2003, adopting the Town of Fountain
Hills Investment/Cash Management Policy (the "Investment Policy ") to establish the framework
for the Town's investment activities; and
WHEREAS, the Mayor and Council of the Town of Fountain Hills desire to amend and
restate the Investment Policy to incorporate additional investment options.
NOW, THEREFORE, BE IT RESOLVED BY THE MAYOR AND COUNCIL OF
THE TOWN OF FOUNTAIN HILLS as follows:
SECTION I. The recitals above are hereby incorporated as if fully set forth herein.
SECTION2. The Town of Fountain Hills Investment/Cash Management Policy,
Amended and Restated December 2, 2010, is hereby adopted in the form attached hereto as
Exhibit A and incorporated herein by reference.
SECTION 3. The Mayor, the Town Manager, the Town Clerk and the Town Attorney
are hereby authorized and directed to take all steps and to execute all documents necessary to
carry out the purpose and intent of this Resolution.
PASSED AND ADOPTED by the Mayor and Council of the Town of Fountain Hills,
December 2, 2010.
FOR THE TOWN OF FOUNTAIN HILLS:
(jwq. Schlum, Mayor
REVIEWED BY:
/ Richar . Davi 11 Town Manager
13190631
ATTESTED TO:
APPROVED AS TO FORM:
omx,
Andrew J. McGuire, Town Attorney
EXHIBIT A
TO
RESOLUTION NO. 2010 -21
[Town of Fountain Hills Investment/Cash Management Policy
Amended and Restated December 2, 2010]
See following pages.
1319063.1
TOWN OF FOUNTAIN HILLS
INVESTMENUCASH MANAGEMENT POLICY
AMENDED AND RESTATED
DECEMBER 2, 2010
TOWN OF FOUNTAIN HILLS
INVESTMENT /CASH MANAGEMENT POLICY
1.0 Policy:
It is the investment policy of the Town of Fountain Hills that idle public funds will be invested in a
manner which maintains the safety of principal, maintains liquidity to meet cash flow needs,
provides competitive investment returns and conforming to all state and local statutes governing the
investment of public funds. The purpose of these investment guidelines is to formalize the
framework for the Town's daily investment activities to include scope, prudence, objectives,
authority, eligible investments, collateralization and diversification.
The Town, pursuant to A.R.S. 8 35 -323, has determined that a portion of the assets of the Town
fund balance are reserved and may be invested in long term (more than 30 days) government
securities; the allocation of funds in long term securities shall be capped at 60% of the total reserved
balance of all funds including the Rainy Day Fund.
2.0 Scope:
This investment policy shall be administered in a manner that follows A.R.S. Title 35, Chapter 2,
Article 2.1 and other investment guidelines mandated by statute and is limited in its application to
funds that are not immediately needed and are available for investment, including any and/or all
districts, component units, etc. (hereinafter referred to as "the Town "). These funds are accounted
for in the Town of Fountain Hills Annual Financial Report and may include:
2.1 Funds:
2.1.1 General Fund
2.1.2 Special Revenue Funds
2.1.3 Excise Tax Funds
2.1.4 Capital Project Funds
2.1.5 Debt Service Funds
2.1.6 Municipal Property Funds
2.1.7 Internal Service Funds
2.1.8 Any new fund/component unit created unless specifically exempted.
Except for cash in certain restricted, special funds and indentured funds, the Town will consolidate
cash balances from all funds to maximize investment earnings. Investment income will be allocated
to the various funds based on their respective participation and in accordance with generally
accepted accounting principles.
3.0 Prudence:
Investments shall be made with judgment and care - -under circumstances then prevailing - -which
persons of prudence, discretion and intelligence exercise in the management of their own affairs, not
for speculation, but for investment, considering the probable safety of their capital as well as the
probable income to be derived.
3.1 The standard of prudence to be used by any firm or individual given responsibility as
investment official shall be the "prudent person" standard and shall be applied in the context of a
professional investment official managing an overall portfolio or account in a manner that aims to
accomplish the objectives set forth in these policies. Investment officers acting in accordance with
the Town's written procedures and the investment policy and exercising due diligence shall be
relieved of personal responsibility for an individual security's credit risk or market price changes,
provided deviations from expectations are reported in a timely fashion and appropriate action is
taken to control adverse developments.
4.0 Obiective:
The primary objectives, in priority order, of the Town of Fountain Hills investment activities shall
be:
4.1 Safety: Safety of principal is the foremost objective of the investment program.
Investments of The Town shall be undertaken in a manner that seeks to ensure the preservation of
principal in the overall portfolio. To attain this objective, diversification is required in order that
potential losses on individual securities do not exceed the income generated from the remainder of
the portfolio. The objective will be to prudently mitigate credit risk and interest rate risk.
4.2 Liquidity: The Town of Fountain Hills investment portfolio will remain
sufficiently liquid to enable the Town of Fountain Hills to meet all operating requirements which
might be reasonably anticipated. Liquidity will be achieved by matching investment maturities with
forecasted cash flow funding requirements, by investing in securities with active secondary markets
and by diversification of maturities and call dates. Furthermore, since all possible cash demands
cannot be anticipated, a portion of the portfolio may also be placed in savings accounts, Certificates
of Deposit or local government investment pools which offer same day liquidity for short term
funds.
4.3 Return on Investments: The Town of Fountain Hills investment portfolio shall be
designed with the objective of regularly exceeding the average rate of return on three month U.S.
Treasury Bills and commensurate with the Town of Fountain Hills investment risk constraints and
the cash flow characteristics of the portfolio. Return shall be subordinated to safety and liquidity.
The core of investments is limited to relatively low risk securities in anticipation of earning a fair
return relative to the risk being assumed. Securities shall not be sold prior to maturity with the
following exceptions:
• A security with declining credit may be sold early to minimize loss of principal.
• A security swap would improve the quality, yield or target duration in the portfolio.
• Liquidity needs of the portfolio require that the security be sold.
• If market conditions present an opportunity for the Town to benefit from the sale.
Risk of Loss: All participants in the investment process will seek to act responsibly and prudently
as custodians of the public trust. Investment officials will avoid any transactions that they
reasonably believe might impair public confidence in the Town's ability to govern effectively. The
governing body recognizes that in a diversified portfolio, occasional measured losses due to market
volatility are inevitable, and must be considered within the context of the overall portfolio's
investment return, provided that adequate diversification has been implemented.
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5.0 Investment Strategy:
The Town of Fountain Hills intends to pursue a passive portfolio management philosophy; passive
management means that the financial markets will be monitored by investment officials and
investments will be purchased and sold based on the Town's parameters for safety and liquidity and
based on market conditions. All marketable securities purchased by the Town shall have active
secondary markets, unless a specific cash outflow is being matched with an investment that will be
held to maturity to meet that obligation. Securities may be purchased as a new issue or in the
secondary markets. Securities may be sold as provided in Section 4.3. Securities may be purchased
with the intent from the beginning, to sell them prior to maturity or with the expectation that the
security would likely be called prior to maturity under the analyzed market scenario. The portfolio
will be structured to benefit from anticipated market conditions and to achieve a reasonable return.
Relative value between asset groups shall be analyzed and pursued as part of the investment
program within the restrictions set forth by this policy. Diversification by market sector and
security types, as well as maturity will be used to protect the Town from credit and market risk in
order to meet liquidity requirements. Market and credit risk shall be minimized by diversification
and are defined below:
Credit Risk: The Town will seek to mitigate credit risk, which is defined as the risk of loss due
to failure of the security issuer or backer. Mitigating credit risk is to be accomplished by:
• Limiting investments in the portfolio to the asset classes designated as acceptable in A.R.S.
635 -323 provided, however, any investments described in Paragraph 8 or 9 of such statute
section shall require written consent from the Finance Director. When possible, analysis of
the credit worthiness of all individual debt issuers held in the portfolio should be conducted
on an annual basis in an effort to guard against investing in weak or deteriorating credit
situations.
• Pre- qualifying the financial institutions, broker /dealers, and investment advisers with which
the Town will do business in accordance with Section 7.
Interest Rate Risk: The Town will seek to mitigate interest rate risk, which is defined as the risk
that the market value of securities held in the portfolio will decline due to increases in market
interest rates subsequent to their purchase. This mitigation will be accomplished by:
• Structuring the investment portfolio so that securities mature concurrent with the anticipated
cash requirements for ongoing operations, thereby avoiding, as much as possible, the need
to sell securities into an adverse market environment prior to maturity
• Investing funds primarily in shorter -term securities or similar investment pools and limiting
the average maturity of the portfolio in accordance with the needs of the Town
• With respect to any firm or individual given responsibility for investments utilizing external
research and advice regarding the current interest rate outlook and global economic
condition to optimize portfolio duration strategy.
6.0 Responsibility and Control:
6.1 Delegation of Authority: Authority to manage the Town of Fountain Hills
investment program is derived from the ARS §35 -323 through 328. Management responsibility for
the investment program is hereby delegated to the Town of Fountain Hills Finance Director, or
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designee, who shall establish written procedures for the operation of the investment program
consistent with this investment policy. Procedures should include reference to: safekeeping, PSA
repurchase agreements, wire transfer agreements, banking service contracts and
collateral /depository agreements. Such procedures shall include explicit delegation of authority to
persons responsible for investment transactions. No person may engage in an investment
transaction except as provided under the terms of this policy and the procedures established by the
Finance Director.
No person shall engage in an investment transaction except as provided under the terms of this
policy, the procedures established by the Finance Director, or designee, and verbal or written
authorization by the Finance Director to withdraw, transfer, deposit and invest the Town's funds.
The Finance Director shall be responsible for all transactions undertaken, and shall establish a
system of controls to regulate the activities of subordinate investment officials. The Finance
Director has the authority to manage internally or to delegate the management of the investment
program to an investment adviser. If authority to manage all or a part of the investment program of
the Town is delegated to an investment adviser, the Finance Director is responsible for:
• Periodic investment portfolio reporting
• Evaluating the performance of the externally managed portfolio
• Monitoring investment adviser's compliance with the investment policy
• Conveying the investment needs of the Town to the investment adviser
• Developing investment strategy with the investment adviser
6.2 Ethics and Conflicts of Interest: All persons involved in the investment process
shall refrain from personal business activity that could conflict with proper execution of the
investment program, or which could impair their ability to make impartial investment decisions.
Employees and investment officials shall disclose to the Town Manager any material financial
interests in financial institutions that conduct business within this jurisdiction, and they shall further
disclose any material personal financial/investment positions that could be related to the
performance of the Town of Fountain Hills, particularly with regard to the time of purchases and
sales. This policy expressly incorporates the provision of Title 38, Chapter 3, Article 8, Arizona
Revised Statutes.
6.3 Disclosure: Investment officials and employees shall disclose to the Town
Manager any material financial interest in financial institutions that conduct business with the Town
of Fountain Hills. Investment officials and employees shall further disclose any material personal
investment positions that could be related to the performance of the Town's investment portfolio.
Investment officials and employees shall subordinate their personal investment transaction to those
of this jurisdiction, particularly with regard to the timing of purchases and sales. An investment
official who is related within the second degree by affinity or consanguinity to individuals seeking
to sell an investment to the Town shall file a statement disclosing that relationship.
6.4 Investment Training: Investment officials shall have a finance, accounting or
related degree and knowledge of treasury functions and the State of Arizona laws governing public
money management and investments. Investment training must take place not less than once in a
two year period, and receive no less than ten hours of instruction relating to investment
responsibilities from an independent source such as Government Finance Officers Association,
Municipal Treasurers Association, American Institute of Certified Public Accountings, Arizona
Finance Officers Association, Arizona Society of Public Accounting or other professional
Pap 4 of 28
organizations. The Finance Director and all investment officials of the Town shall attend at least
one training session relating to their cash management and investment responsibilities within 12
months after assuming these duties for the Town. Training must include education in investment
controls, security risks, strategy risks, market risks, and compliance with state investment statutes.
7.0 Authorized Financial Dealers and Institutions:
The Finance Director will maintain a list of qualified persons or firms authorized to provide
investment services that have been publicly procured. In addition, a list will also be maintained of
approved security broker /dealers selected by credit worthiness who are authorized to provide
investment services in the State of Arizona. The Town shall qualify persons or firms by applying
generally accepted industry standards (i.e. capital requirements, asset quality, earnings, liquidity,
management and local community development) using available public agency and private rating
services as appropriate. Investment transactions shall only be conducted with financial institutions
that are licensed as may be required by law to do business in Arizona. Primary government
securities dealers, or broker - dealers engaged in the business of selling government securities shall
be registered in compliance with section 15 or 15C of the Securities Exchange Act of 1934 and
registered pursuant to A.R.S. §44 -3101, as amended. It shall be the responsibility of the financial
institutions and broker /dealers who desire to become qualified bidders for investment transactions to
provide the following:
a) audited financial statements within six months of the close of the fiscal year,
b) proof of National Association of Security Dealers certification, trading resolution,
C) proof of Arizona registration,
d) certification of having read the Town of Fountain Hills investment policy and
depository contracts.
An eligible listing of broker /dealers shall be established for the purchase and sale of investment
securities;a new list of approved broker /dealers will be established as needed and at least every five
years. An annual review of the financial condition and registrations of qualified companies will be
conducted by the Town Manager.
7.1 Selection of Depository, Financial Institutions and Broker/Dealers:
Depositories shall be selected through the Town's procurement process, which shall include a
formal request for proposal (RFP) issued at least every five years, with a typical contract being for
two (2) years with an option to extend the contract for three (3) additional one (1) year terms. In
selecting depositories, the credit worthiness of institutions shall be considered, and the Finance
Director shall conduct a comprehensive review of the prospective depositories' credit characteristics
and financial history. No public deposit shall be made except in an eligible public depository as
established by state depository laws. The depository bank bid will not include bids for investment
rates on certificates of deposit.
Certificate of deposit rates will be evaluated competitively between qualified financial institutions in
accordance with the manner in which all other types of investment assets are purchased. Investment
officials for the Town may accept bids for certificates of deposit and for all marketable securities
either orally, in writing, electronically, or in any combination of these methods. The investment
official will strive to receive two to three price quotes on marketable securities being sold, but may
allow one broker /dealer to sell at a predetermined price under certain market conditions.
Investments purchased shall be shopped competitively between approved financial institution and
broker /dealers.
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7.2 Insurability: Banks, financial institutions, individuals and firms seeking to
establish eligibility for the Town's certificates of deposit purchase program, shall submit financial
statements, evidence of federal insurance and other information as required by the investment
officials of the Town of Fountain Hills.
8.0 Portfolio and Investment Asset Parameters:
8.1 Pricing: Market price for investments acquired for the Town's investment portfolio
shall be priced using independent pricing sources and market value monitor at least annually.
8.2 Eligible Investments: In addition to investments authorized by State law, the
following forms of investment are specified as eligible investments; all investments will carry a
minimum A (Investment Grade) or better rating of Moody's Investors Service or a A
(Investment Grade) or better rating of Standard and Poor's Rating Service or their successors.
All investments not listed will be considered prohibited investment purchases.
a) Insured or if in excess of insurance, collateralized, certificates of deposit, savings
accounts, deposit accounts or money market deposits issued by a national bank or
savings and loan domiciled in the State of Arizona, in amounts that are continuously
and fully insured by the Federal Deposit Insurance Corporation ( "FDIC "), including
the Bank Insurance Fund and the Savings Association Insurance Fund, collateralized
at no less than 102 percent.
b) State of Arizona Local Government Investment Pool — GOV.
C) U.S. government obligations, senior debt of U.S. government agencies, and U.S.
goverment instrumentality obligations, which have a liquid market with a readily
determinable market value.
d) Direct obligations of this state or its agencies.
e) Other obligations, the principal and interest of which are unconditionally guaranteed
or insured by the State of Arizona, the United States or its instrumentalities.
f) Money market funds investing exclusively in obligations authorized by the
preceding paragraphs, (a) through (e) of this section of the policy.
g) Certificates of deposit in one or more federally insured banks or savings and loan
associations pursuant to the provisions of Arizona Revised Statutes §35- 323.01.
8.3 Prohibited Investments: In addition to the limitations on investment types
according to Arizona statutes, Town funds will not be invested in:
a) reverse repurchase agreement
b) callable agencies
c) derivative type investments such as collateralized mortgage obligations, strips,
floaters, etc.
d) futures, contractual swaps, options
e) inverse floaters
0 interest only securities
g) forward contracts
h) interest bearing securities that have a possibility of not accruing current income
i) closed end management type companies
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j) securities whose yield/market value is based on currency, commodity or non - interest
indices
k) bearer -form securities
Certain types of such investments may qualify under state statute but are not deemed appropriate for
use by the Town of Fountain Hills.
9.0 Collateralization:
Collateralization will be required on all types of investments: including certificates of deposit,
money market or savings accounts, securities, etc. In order to anticipate market changes and
provide a level of security for all funds, the collateralization level will be (102 %) of market value of
principal and accrued interest. Acceptable collateral of surplus cash in demand deposit accounts
and certificates of deposit are:
direct obligations of the United States Government, its agencies or instrumentalities to the
payment of which the full faith and credit of the Government of the United States is
pledged, or obligations to the payment of which the full faith and credit of this state is
pledged.
The Federal Deposit Insurance Corporation (FDIC) protects deposits. The Town will seek to
collateralize certificates of deposit or any other time deposits less the amount insured by the FDIC
Collateral will always be held by an independent third party with whom the Town of Fountain Hills
has a current custodial agreement. A clearly marked evidence of ownership (safekeeping receipt)
must be supplied to the Town of Fountain Hills and retained.
The Town of Fountain Hills shall accept only the following insurance and securities as collateral for
cash deposits, certificates of deposit, and repurchase agreements:
a) FDIC insurance coverage
b) Obligations of the United States of America, its agencies and instrumentalities,
including agency and instrumentality issued mortgage backed collateral if directly
guaranteed by the U.S of America.
C) Other obligations , the principal of and interest on which are unconditionally
guaranteed or insured by the State of Arizona, the United States of America or its
agencies and instrumentalities.
d) Obligations of states, agencies thereof, counties, cities, and other political
subdivisions of any state having been rated as to investment quality by a nationally
recognized investment rating firm and having received a raring of no less than A or
its equivalent.
10.0 Safekeenint! and Custody
All security transactions including collateral for repurchase agreements, entered into by the Town of
Fountain Hills or it's agents /trustees shall be conducted on a delivery- versus - payment (DVP)
basis. That is, funds shall not be wired or paid until verification has been made that the safekeeping
bank received the correct security. The safekeeping, or custody, bank is responsible for matching
instructions from the Town's investment officials on an investment settlement, with what is wired
from the broker /dealer, prior to releasing the Town's designated funds for a given purchase. The
security shall be held in the name of the town, or held on behalf of the Town, in a bank nominee
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name. A third party custodian designated by the Finance Director and evidenced by safekeeping
receipts will hold securities. The safekeeping bank's records shall assure the notation of the Town's
ownership of, or explicit claim on, the securities. The original copy of all safekeeping receipts shall
be delivered to the Town. Securities shall be held by a custodian designated by the Town Manager
and evidenced by safekeeping receipts.
11.0 Diversification:
The Town of Fountain Hills will diversify its investments by security type and institution. With the
exception of U.S. Treasury securities and authorized pools, no more than 25% of the Town of
Fountain Hills' total investment portfolio will be invested in a single security type or with a single
financial institution. Investments will be diversified by:
• Limiting investments to avoid over - concentration in securities from a specific issuer or
business sector;
• Limiting investments in securities with higher credit risks;
• Investing in securities with varying maturities; and
• Continuously investing a portion of the portfolio in readily available funds such as the Local
Government Investment Pool or money market funds to ensure that appropriate liquidity is
maintained to meet ongoing obligations.
12.0 Maximum Maturities:
12.1 Maximum maturities: To the extent possible, the Town or it's agents/trustees will
attempt to match its investments with anticipated operating cash flow requirements. Unless
matched to a specific cash requirement, the Town shall not directly invest in securities maturing
more than two (2) years from the date of purchase. Reserve or other funds with longer -term
investment horizons may be invested in securities not ?? exceeding five years, if the maturities of
such investments are made to coincide as nearly as practicable with the expected use of funds. The
Town shall adopt weighted average maturity limitations consistent with the investment objectives.
12.2 Maximum Dollar - Weighted Average Maturity: Under most market conditions,
the composite portfolio will be managed to achieve a two year dollar - weighted average maturity.
However, under certain market conditions, investment officials may need to shorten or lengthen the
average life or duration of the portfolio to protect the Town. The maximum dollar weighted average
maturity based on the stated final maturity, authorized by this investment policy for the composite
portfolio of the town shall be four years.
12.3 Pricing: Market price for investments acquired for the Town's investment portfolio
shall be priced using independent pricing sources and market value monitored at least annually.
13.0 Internal Control:
The Town Manager shall establish an annual process of independent review as part of the external
audit. This review will provide internal control by assuring compliance with policies and
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procedures. The investment officer is responsible for establishing and maintaining an internal
control structure designed to ensure that the assets of the Town are protected from loss, theft or
misuse. The internal control structure shall be designed to provide reasonable assurance that these
objectives are met.
14.0 Reyortine:
The Town Manager or designee is charged with the responsibility of including a report on
investment activity and returns in the Town of Fountain Hills Comprehensive Annual Financial
Report. The report shall summarize investment transactions that occurred during the reporting
period, and shall discuss the current portfolio in terms of performance, market sector breakdown,
number of trades, interest earnings, and other features.
15.0 General Obli!ation Bond Fund Proceeds
General obligation bond fund proceeds shall be invested pursuant to applicable laws, relevant bond
indenture requirements and relevant tenets of this policy. Proceeds from tax - exempt general
obligation bonds shall be invested, recorded and reported in the manner set forth by the U.S.
Treasury and Internal Revenue Service to preserve the tax - exempt status of the bonds. The Finance
Department will maintain systems to ensure that these requirements are met. Funds set aside to
defease Town debt in conjunction with an advance refunding agreement, will be invested in
accordance with State statutes and appropriate bond documents and as the trustee bank holding such
funds deems necessary.
16.0 Investment Policy Adoption:
The Town of Fountain Hills investment policy shall be adopted by resolution of the Town of
Fountain Hills legislative authority. The policy shall be reviewed at least once every five years by
the Town Manager and any modifications made thereto must be approved by the Town Council.
17. Certification
A copy of this policy will be provided upon request to the senior management of any financial
institution who is approved to transact business with the Town in order that it is appraised of the
policies of the Town. The certification must be signed and executed by a senior member of the
financial institution before any business is conducted.
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GLOSSARY
AGENCY: A debt security issued by a federal or
federally sponsored agency. Federal agencies are backed
by the full faith and credit of the U.S. Government.
Federally sponsored agencies (FSA's) are backed by each
particular agency with a market perception that there is an
implicit government guarantee. An example of federal
agency is the Government National Mortgage Association
(GNMA). An example of a FSA is the Federal National
Mortgage Association (FNMA).
ASKED: The price at which securities are offered.
BANKERS' ACCEPTANCE (BA): a draft or bill or
exchange accepted by a bank or trust company. The
accepting institution guarantees payment of the bill, as
well as the issuer.
BASIS POINT: A unit of measurement used in the
valuation of fixed- income securities equal to 1 /100 of 1
percent of yield, e.g., "1/4" of 1 percent is equal to 25
basis points.
BID: The price offered by a buyer of securities. (When
you are selling securities, you ask for a bid.) See Offer.
BROKER: A broker brings buyers and sellers together
for commission.
CERTIFICATE OF DEPOSIT (CD): A time deposit
with a specific maturity evidenced by a certificate.
Large- denomination CD's are typically negotiable.
COLLATERAL: Securities, evidence of deposit or other
property which a borrower pledges to secure repayment
of a loan. Also refers to securities pledged by a bank to
secure deposits of public monies.
COMPREHENSIVE ANNUAL FINANCIAL
REPORT (CAFR): The official annual report for the
Town of Fountain Hills. It includes five combined
statements for each individual fund and account group
prepared in conformity with GAAP. It also includes
supporting schedules necessary to demonstrate
compliance with finance- related legal and contractual
provisions, extensive introductory material, and a detailed
Statistical Section.
COUPON: (a) The annual rate of interest that a bond's
issuer promises to pay the bondholder on the bond's face
value. (b) A certificate attached to a bond evidencing
interest due on a payment date.
DEALER: A dealer, as opposed to a broker, acts as a
principal in all transactions, buying and selling for his
own account.
DEBENTURE: A bond secured only by the general
credit of the issuer.
DELIVERY VERSUS PAYMENT: There arc two
methods of delivery of securities: delivery versus
payment and delivery versus receipt. Delivery versus
payment is delivery of securities with an exchange of
money for the securities. Delivery versus receipt is
delivery of securities with an exchange of a signed receipt
for the securities.
DISCOUNT: The difference between the cost price of a
security and its maturity when quoted at lower than face
value. A security selling below original offering price
shortly after sale also is considered to be at a discount.
DISCOUNT SECURITIES: Non - interest bearing
money market instruments that are issued a discount and
redeemed at maturity for full face value, e.g. U.S.
Treasury Bills.
DIVERSIFICATION: Dividing investment funds
among a variety of securities offering independent
returns.
FEDERAL CREDIT AGENCIES: Agencies of the
Federal Government set up to supply credit to various
classes of institutions and individuals, e.g., S &L's small
business firms, students, farmers, farm cooperatives, and
exporters.
FEDERAL DEPOSIT INSURANCE
CORPORATION (FDIC): A federal agency that insures
bank deposits, currently up to $250,000 per deposit.
FEDERAL FUNDS RATE: The rate of interest at which
Fed funds are traded. This rate is currently pegged by the
Federal Reserve through open - market operations.
FEDERAL HOME LOAN BANKS (FHLB): The
institutions that regulate and lend to savings and loan
associations. The Federal Home loan Banks play a role
analogous to that played by the Federal Reserve Banks
vis -a -vis member commercial banks.
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (FNMA): FNMA, like GNMA was
chartered under the Federal National Mortgage
Association Act in 1938. FNMA is a federal corporation
working under the auspices of the Department of Housing
and Urban Development (HUD). It is the largest single
provider of residential mortgage funds in the United
States. Fannie Mae, as the corporation is called, is a
private stockholder -owned corporation. The corporation's
purchases include a variety of adjustable mortgages and
second loans, in addition to fixed -rate mortgages.
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FNMA's securities are also highly liquid and are widely
accepted. FNMA assumes and guarantees that all
security holders will receive timely payment of principal
and interest.
FEDERAL OPEN MARKET COMMITTEE
(FOMC): Consists of seven members of the Federal
Reserve Board and five of the twelve Federal Reserve
Bank Presidents. The President of the New York Federal
Reserve Bank is a permanent member, while the other
Presidents serve on a rotating basis. The Committee
periodically meets to set Federal Reserve guidelines
regarding purchases and sales of Government Securities
in the open market as a means of influencing the volume
of bank credit and money.
FEDERAL RESERVE SYSTEM: The central bank of
the United States created by Congress and consisting of a
seven member Board of Governors in Washington, D.C.,
12 regional banks and about 5,700 commercial banks that
are members of the system.
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION (GNMA OR GINNIE MAE):
Securities influencing the volume of bank credit
guaranteed by GNMA and issued by mortgage bankers,
commercial banks, savings and loan associations, and
other institutions. Security holder is protected by full
faith and credit of the U.S. Govcmntcnt. Ginnie Mac
securities are backed by the FHA, VA or FMHM
mortgages. The term "passthroughs" is often used to
describe Ginnie Macs.
INTERNAL CONTROLS: An internal control
structure designed to ensure that the assets of the entity
are protected from loss, theft, or misuse. The internal
control structure is designed to provide reasonable
assurance that these objectives are met. The concept of
reasonable assurance recognizes that l) the cost of a
control should not exceed the benefits likely to be derived
and 2) the valuation of costs and benefits requires
estimates and judgments by management.. Internal
controls should address the following points:
1. Control of collusion — Collusion is a situation
where two or more employees are working in
conjunction to defraud their employer.
2. Separation of transaction authority from
accounting and record keeping — by separating
the person who authorizes or performs the
transaction from the people who record or
otherwise account for the transaction, a
separation of duties is achieved.
3. Custodial safekeeping — Securities purchased
from any bank or dealer including appropriate
collateral (as defined by state law) shall be
placed with an independent third party of
custodial safekeeping.
4. Avoidance of physical delivery securities —
Book -entry securities are much easier to transfer
and account for since actual delivery of a
document never takes place. Delivered
securities must be properly safeguarded against
loss or destruction. The potential for fraud and
loss increases with physically delivered
securities.
5. Clear delegation of authority to subordinate
staff members — subordinate staff members
must have a clear understanding of their
authority and responsibilities to avoid improper
actions. Clear delegation of authority also
preserves the internal control structure that is
contingent on the various staff positions and
their respective responsibilities.
6. Written confirmation of transactions for
investments and wire transfers — due to the
potential for error and improprieties arising
from telephone and electronic transactions, all
transactions should be supported by written
communications and approved by the
appropriate person. Written communications
may be via fax if on letterhead and if the
safekeeping institution has a list of authorized
signatures.
7. Development of a wire transfer agreement with
the lead bank and third -party custodian — the
designated official should ensure that an
agreement will be entered into and will address
the following points: controls, security
provisions, and responsibilities of each party
making and receiving wire transfers.
LIQUIDITY: A liquid asset is one that can be converted
easily and rapidly into cash without a substantial loss of
value. In the money market, a security is said to be liquid
if the spread between bid and asked prices is narrow and
reasonable size can be done at those quotes.
LOCAL GOVERNMENT INVESTMENT POOL
(LGIP): The aggregate of all funds from political
subdivisions that are placed in the custody of the State
Treasurer for investment and reinvestment.
MARKET VALUE: The price at which a security is
trading and could presumably be purchased or sold.
MASTER REPURCHASE AGREEMENT: A written
contract covering all future transactions between the
parties to repurchase -- reverse repurchase agreements that
establishes each parry's rights in the transactions. A
master agreement will often specify, among other things,
the right of the buyer - lender to liquidate the underlying
securities in the event of default by the seller - borrower.
MATURITY: The date upon which the principal or
stated value of an investment becomes due and payable.
MONEY MARKET: The market in which short-term
Page 12 of 28
debt instruments (bills, commercial paper, bankers'
acceptances, etc.) are issued and traded.
NATIONAL ASSOCIATION OF SECURITIES
DEALERS (NASD): A self - regulatory organization
(SRO) of brokers and dealers in the over- the - counter
securities business. Its regulatory mandate includes
authority over firms that distribute mutual fund shares as
well as other securities.
OFFER: The price asked by a seller of securities. (When
you arc buying securities, you ask for an offer.) See
Asked and Bid.
OPEN MARKET OPERATIONS: Purchases and sales
of government and certain other securities in the open
market by the New York Federal Reserve Bank as
directed by the FOMC in order to influence the volume of
money and credit in the economy. Purchases inject
reserves into the bank system and stimulate growth of
money and credit; sales have the opposite effect. Open
market operations are the Federal Reserve's most
important and most flexible monetary policy tool.
PORTFOLIO: Collection of securities held by an
investor.
PRIMARY DEALER: A group of government
securities dealers who submit daily reports of market
activity and positions and monthly financial statements to
the Federal Reserve Bank of New York and are subject to
its informal oversight. Primary dealers include Securities
and Exchange Commission (SEC) - registered securities
broker - dealer, banks, and a few unregulated finns.
PRUDENT PERSON RULE: An investment standard.
In some states the law requires that a fiduciary, such as a
trustee, may invest money only in a list of securities
selected by the custody state - -the so- called legal list. In
other states the trustee may invest in a security if it is one
which would be bought by a prudent person of discretion
and intelligence who is seeking a reasonable income and
preservation of capital.
QUALIFIED PUBLIC DEPOSITORIES: A financial
institution which does not claim exemption from the
payment of any sales or compensation use or ad valorem
taxes under the laws of this state, which has segregated
for the benefit of the commission eligible collateral
having a value of not less than its maximum liability and
which has been approved by the Public Deposit
Protection Commission to hold public deposits.
RAINY DAY FUND: Designed to set revenue aside
during times of above -trend economic growth and to
utilize this revenue during times of below -trend growth.
Can be used to balance the budget which is the intended
purpose.
RATE OF RETURN: The yield obtainable on a security
based on it purchase price or its current market price.
This may be the amortized yield to maturity on a bond the
current income return.
REPURCHASE AGREEMENT (RP OR REPO): A
holder of securities sells these securities to an investor
with an agreement to repurchase them at a fixed price on
a fixed date. The security "buyer" in effect lends the
"seller" money for the period of the agreement, and the
terms of the agreement are structured to compensate him
for this. Dealers use RP extensively to finance their
positions. Exception: When the Fed is said to be doing
RP, it is lending money, that is, increasing bank reserves.
SAFEKEEPING: A service to customers rendered by
banks for a fee whereby securities and valuables of all
types and descriptions are held in the bank's vaults for
protection.
SECONDARY MARKET: A market made for the
purchase and sale of outstanding issues following the
initial distribution.
TOTAL RETURN: The sum of all investment income
plus changes in the capital value of the portfolio. For
mutual funds, return on an investment is composed of
share price appreciation plus any realized dividends or
capital gains. This is calculated by taking the following
components during a certain time period. (Price
Appreciation) + (Dividends paid) + (Capital Gains) _
Total Return.
TREASURY NOTES: Intermediate U.S.. government
debt securities with maturities of one to 10 years and
issued in denominations ranging from $1,000 to S I
million or more.
TREASURY BONDS: Long -term U.S. government
debt securities with maturities of ten years or longer and
issued in minimum denominations of $1,000. Currently,
the longest outstanding maturity for such securities is 30
years.
YIELD: The current rate of return on an investment
security generally expressed as a percentage of the
security's current price.
Page 13 of 28
TOWN OF FOUNTAIN HILLS, ARIZONA
Broker /Dealer Quesionnaire
1. Name of Firm:
2. Local Address: National Address:
3. Telephone:
4. PRIMARY REPRESENTATIVE /MANAGER/PARNTER -IN- CHARGE
Secondary representative /manager /partner -in- charge
5. Are you a Primary Dealer in U.S. Government Securities?
6. What is the date of your firm's fiscal year end?
7. Attach certified documentation of your capital adequacy and financial solvency. In addition,
an audited financial statement must be provided within 120 days of your fiscal year end.
8. Is your firm owned by a holding company? If so, what is its name and net capitalization?
9. Identify all personnel who will be trading with or q uoting securities to our employees
(attach current resumes of all persons listed).
10. Please identify your most directly comparable clients in our geographical area.
1 l . Have any of your public - sector client ever sustained or calimed a loss on a securities
transaction, or loss of principal arising from a misunderstanding or misrepresentation of the
risk characteristics of a re commended instrument purchased through your firm?
12. Has your firm ever been subject to a regulatory or state or federal agency investigation for
alleged improper, fraudulent, disreputable or unfair activities related to the sale of
government securities or money market instruments? If yes, please explain.
13. Please provide your wiring and delivery instructions.
14. Which instruments are offered regularly by your local desk?
15. Which of the above does your firm specialize in marketing?
16. What precautions are taken by your firm to protect the interest of the public when dealing
with government agencies as investors?
17. Do you participate in the SIPC Insurance program? If not, please explain.
Page 14 of 28
LONG FORM
SECURITY AGREEMENT
This SECURITY AGREEMENT, dated , is between [name of
bank[ (the "Bank"), a [bank and trust company, national banking association, state banking
corporation, savings bank or savings and loan association] having an address at
, and [public depositor], having an address at
"Public Depositor ").
WITNESSETH:
(the
WHEREAS, the Bank is an eligible public depository as defined in [state statute], (the
"Act"); and
WHEREAS, Public Depositor from time to time makes deposits, as said term is defined in
the Act, in the Bank (its "Public Deposits "), which Public Deposits shall from time to time
aggregate in excess of One Hundred Thousand Dollars ($250,000); and
WHEREAS, the Public Depositor desires to have its Public Deposits secured by collateral;
and
WHEREAS, the Bank has agreed to secure the Public Depositor's Public Deposits by
granting to the Public Depositor a security interest in certain collateral ( "Eligible Collateral')
owned by the Bank, as permitted by 12 U.S.C. § 90;
Now THEREFORE, in consideration of the Public Depositor depositing its Public Deposits
as herein described, and for other good and valuable consideration, hereby acknowledged as
received, it is hereby agreed between the Public Depositor and the Bank as follows:
1. In order to secure the Public Depositor's Public Deposits the Bank hereby pledges,
assigns, transfers and grants to the Public Depositor a perfected first priority
security interest in (a) such amounts of the Eligible Collateral to meet the collateral
ratios and other requirements described in this Agreement, and (b) the Custody
Account (as defined in Section 9 below) and any and all investment property and
security entitlements from time to time held in, by, or for the benefit of the Custody
Account (including without limitation the Eligible Collateral) and all proceeds
thereof (collectively, the "Collateral"). If at any time the ratio of the market value
of the Eligible Collateral to the Public Depositor's Public Deposits, plus accrued
interest, is less than required by this Agreement, the Bank shall immediately, within
no more than 24 hours, make such additions to the Eligible Collateral in such
Pap 15 of 28
amounts such that the ratio of the market value of the Eligible Collateral to the
Public Depositor's Public Deposits, plus accrued interest, shall be at least equal to
that required by this Agreement. Such additions to the Eligible Collateral shall
constitute an assignment, transfer, pledge, and grant to the Public Depositor of a
security interest in such additional Eligible Collateral pursuant to this Agreement
and the Act.
2. The security interest granted herein (as described in Section 1 above) shall secure
not only such Public Deposits and accrued interest of the Public Depositor as are
held by the Bank at the time of this Agreement, but also any and all subsequent
Public Deposits made by the Public Depositor in the Bank regardless of the
accounts in which such funds may be held or identified by the Bank.
3. The pledge of Collateral by the Bank shall be in addition to, and shall in no way
eliminate or diminish, any insurance coverage to which the Public Depositor may be
entitled under the rules and regulations of the Federal Deposit Insurance
Corporation (FDIC) or any private insurance carried by the Bank for the purpose of
protecting the claims and rights of its depositors.
4. The Public Depositor is under no obligation to maintain its deposits with the Bank
and may withdraw them at any time without notice. It is agreed that when the Bank
shall have paid out and accounted for all or any portion of the Public Depositor's
Public Deposits, any Collateral pledged under this Agreement to secure such paid
out Public Deposits shall be released from the security interest created hereunder.
5. The Bank hereby represents that (i) it is a [state banking corporation] duly
organized and validly existing under the laws of the State of Arizona (ii) it is a
qualified public depository as defined by the Act; (iii) it has, or will have as of the
time of delivery of any securities as Collateral under this Agreement, the right,
power and authority to grant a security interest therein with priority over any other
rights or interests therein; (iv) the execution and delivery of this Agreement and the
pledge of securities as Collateral hereunder have been approved by resolution of the
Bank's Board of Directors at its meeting of [date], and the approval of the Board of
Directors is reflected in the minutes of that meeting, copies of which resolution and
relevant portion of the minutes of said meeting are attached hereto as Exhibit A and
made a part hereof; (v) the execution and delivery of this Agreement and the pledge
of securities as Collateral hereunder will not violate or be in conflict with the
Articles of Incorporation or By -laws of the Bank, any agreement or instrument to
which the Bank may be a party, any rule, regulation or order of any banking
regulator applicable to the Bank, or any internal policy of the Bank adopted by its
Board of Directors; and (vi) this Agreement shall be continuously maintained, from
the time of its execution, as an official record of the Bank.
6. The Bank warrants that it is the true and legal owner of all Collateral pledged under
this Agreement, that the Collateral is free and clear of all liens and claims, that no
other person or entity has any right, title or interest therein, and that the Collateral
Pap 16 of 28
has not been pledged or assigned for any other purpose. Should an adverse claim be
placed on any pledged Collateral, the Bank shall immediately substitute
unencumbered Collateral of equivalent value that is free and clear of all adverse
claims.
7. At any time that the Bank is not in default under this Agreement, the Bank may
substitute Eligible Collateral, provided that (a) the total market value of Eligible
Collateral held in the Custody Account shall meet the requirements of this
Agreement, and (b) the Public Depositor shall have approved such actual
substitution or substitution process and all documentation relating to such
substitution before it becomes effective.
8. Any additional pledge of Collateral hereunder, substitution of Collateral, or release
of Collateral shall be approved by an officer of the Bank duly authorized by
resolution of the Board of Directors to approve such additional pledges,
substitutions, or releases of Collateral under this Agreement.
9. The Bank agrees to place the Collateral with a Federal Reserve Bank, a trust
department of a commercial bank, or with a trust company (the "Custodian") to
hold in a custody account (the "Custody Account') for the benefit of the Public
Depositor. Any such commercial bank or trust company shall be a securities
intermediary that in the ordinary course of its business regularly maintains securities
accounts for its customers. The Bank shall execute a custodial trust agreement with
the Custodian ( "Custodial Trust Agreement') for the custody of the Eligible
Collateral consistent with the terms of this Agreement. The Custodial Trust
Agreement shall contain the Custodian's agreement to hold all Collateral in the
Custody Account for the benefit of the Public Depositor and subject to the Public
Depositor's direction and control and to comply with entitlement orders originated
by the Public Depositor without the Bank's further consent. The executed Custodial
Trust Agreement is attached hereto as Exhibit B. The execution by the Bank of the
Custodial Trust Agreement shall in no way relieve it of any of its duties or
obligations hereunder.
10. Upon the initial transfer of Eligible Collateral under this Agreement and monthly
thereafter, the Bank shall cause the Custodian to report to the Public Depositor
specifying the type and market value of Eligible Collateral being held in the
Custody Account for the benefit of the Public Depositor.
11. The Bank shall pledge and transfer to the Custody Account Eligible Collateral
having a total market value of at least the total value of the Public Deposits,
including accrued interest, of the Public Depositor, less amounts covered by
insurance of the FDIC.
12. Eligible Collateral shall include only the following securities and shall have a
minimum market value as expressed in the following collateral ratios:
Pap 17 of 28
COLLATERAL RATIO*
FORM OF ELIGIBLE (MARKET VALUE DIVIDED BY
COLLATERAL PLEDGE DEPOSIT PLUS ACCRUED INTEREST)
A. United States treasury
Bills, notes and bonds
i. Maturing in less than one year ...... ...........................102%
ii. Maturing in one to five years ........ ...........................105%
iii. Maturing in more than five years . ...........................110%
B. Actively traded United States government agency securities
i. Maturing in less than one year ...... ...........................103%
ii. Maturing in one to five years ....... ...........................107%
iii. Maturing in more than five years ...........................115%
C. United States government agency variable rate securities
D. [State] general obligation bonds
i. Maturing in less than one year ..... ...........................102%
ii. Maturing in one to five years ....... ...........................107%
iii. Maturing in more than five years ...........................110%
13. The Bank shall recalculate the market value of individual securities comprising
Eligible Collateral at least monthly.
14. The Bank has heretofore or will immediately hereafter deliver to the Custodian for
immediate deposit into the Custody Account Eligible Collateral of sufficient value
to meet the terms of this Agreement. Said Eligible Collateral, or substitute
collateral, as herein provided for, shall be retained by the Custodian in the Custody
Account so long as the Bank holds deposits of the Public Depositor.
* The collateral ratios set forth below are merely suggested ratios and may be modified by the
Public Depositor to reflect applicable statutory requirements and their investment policies.
Pap 18 of 28
15. In the event the Bank shall (a) fail to pay the Public Depositor any funds which the
Public Depositor has on deposit, (b) fail to pay and satisfy when due any check,
draft, or voucher lawfully drawn against any deposit of the Public Depositor, (c) fail
or suspend active operations, (d) become insolvent, or (e) fail to maintain adequate
Collateral as required by this Agreement, the Bank shall be in default, the Public
Depositor's deposits in such Bank shall become due and payable immediately, the
Public Depositor shall have the right to unilaterally direct the Custodian to liquidate
the Collateral held in the Custody Account and pay the proceeds thereof to the
Public Depositor and to exercise any and all other security entitlements with respect
to the Custody Account and the other Collateral, to withdraw the Collateral, or any
part thereof, from the Custody Account and deliver such Collateral to the Public
Depositor or to transfer the Collateral or any part thereof into the name of the Public
Depositor or into the name of the Public Depositor's nominee, and ownership of the
Collateral shall transfer to the Public Depositor. The Bank authorizes the release,
withdrawal and delivery of the Collateral to the Public Depositor upon default by
the Bank, and authorizes the Custodian to rely without verification on the written
statement of the Public Depositor as to the existence of a default and to comply with
entitlement orders originated by the Public Depositor without further consent of that
Bank.
16. In the event of default as described in Section 15, the Public Depositor shall also
have the right to sell Collateral at any public or private sale at its option without
advertising such sale, upon not less than three (3) days' notice to the Bank and the
Custodian. In the event of such sale, the Public Depositor, after deducting all legal
expenses and other costs, including reasonable attorney's fees, from the proceeds of
such sale, shall apply the remainder on any one or more of the liabilities of the Bank
to the Public Depositor, including accrued interest, and shall return the surplus, if
any, to the Bank, or its receiver or conservator.
17. During the term of this Agreement, the Public Depositor will, through appropriate
action of its governing board, designate the officer, or officers, who singly or jointly
will be authorized to represent and act on behalf of the Public Depositor in any and
all matters arising under this Agreement.
18. All parties to this Agreement agree to execute any additional documents that may be
reasonably required to effectuate the terms, conditions and intent of this Agreement.
19. All of the terms and provisions of this Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and assigns.
20. This Agreement may be executed in one or more counterparts, each of which shall
be deemed an original and all of which taken together shall constitute one and the
same instrument.
21. This Agreement shall be governed by and construed in accordance with the laws of
jstatel and the laws of the United States, and it supersedes any and all prior
Pagc 19 of 28
agreements, arrangements or understandings with respect to the subject matter
hereof. In the event that any conflict of law issue(s) should arise in the
interpretation of this Agreement, the parties agree that when Arizona law is not
preempted by laws of the United States, Arizona law shall govern.
22. No provision of this Agreement may be waived except by a writing signed by the
party to be bound thereby and any waiver of any nature shall not be construed to act
as a waiver of subsequent acts.
23. In the event that any provision or clause of this Agreement conflicts with applicable
law, such conflict shall not affect other provisions of this Security Agreement,
which shall be given effect without the conflicting provision. To this end the
provisions of this Agreement are declared to be severable.
24. Unless applicable law requires a different method, any notice that must be given
under this Agreement shall be given in writing and sent by certified mail, return
receipt requested or third party overnight priority mail carrier to the address set
forth herein or such other place as may be designated by written notice in the same
manner from one party to the other.
Page 20 of 28
[public depository bank]
Its:
Date:
Page 21 of 28
SHORT FORM
SECURITY AGREEMENT
This SECURITY AGREEMENT, dated , is between [name of bank] (the
"Batik"), a [bank and trust company, national banking association, state banking
corporation, savings bank or savings and loan association] having an address at
, and [public depositor], having an address at , (the "Public
Depositor ").
WITNESSETH:
WHEREAS, the Bank is a qualified public depository as defined in [state statute] (the
"Act'); and
WHEREAS, Public Depositor from time to time makes deposits, as said term is defined in
the Act, in the Bank (its "Public Deposits'), which Public Deposits shall from time to time
aggregate in excess of One Hundred Thousand Dollars ($250,000); and
WHEREAS, the Public Depositor desires to have its Public Deposits secured by collateral
in the amounts required by the Act; and
WHEREAS, the Bank has agreed to secure the Public Depositor's Public Deposits by
granting to the Public Depositor a security interest in certain collateral ( "Eligible Collateral')
owned by the Bank, which collateral meets the requirements described in the Act, as permitted
by 12 U.S.C. § 90 and the Act;
Now THEREFORE, in consideration of the Public Depositor depositing its Public
Deposits as herein described, and for other good and valuable consideration, hereby
acknowledged as received, it is hereby agreed between the Public Depositor and the Bank as
follows:
1. Pursuant to the Act and in order to secure the Public Depositor's Public
Deposits the Bank hereby pledges, assigns, transfers and grants to the Public Depositor a
perfected first priority security interest in (a) such amounts of the Eligible Collateral to
meet the collateral ratios and other requirements described in the Act, and (b) the
Custody Account (as defined in Section 9 below) and any and all investment property and
security entitlements from time to time held in, by, or for the benefit of the Custody
Account (including without limitation the Eligible Collateral) and all proceeds thereof
(collectively, the "Collateral"). If at any time the ratio of the market value of the
Eligible Collateral to the Public Depositor's Public Deposits, plus accrued interest, is less
than required by the Act, the Bank shall immediately, within no more than 24 hours,
make such additions to the Eligible Collateral in such amounts such that the ratio of the
market value of the Eligible Collateral to the Public Depositor's Public Deposits, plus
Pap 22 of 28
accrued interest, shall be at least equal to that required by the Act. Such additions to the
Eligible Collateral shall constitute an assignment, transfer, pledge, and grant to the Public
Depositor of a security interest in such additional Eligible Collateral pursuant to this
Agreement and the Act.
2. The security interest granted herein (as described in Section 1 above) shall
secure not only such Public Deposits and accrued interest of the Public Depositor as are
held by the Bank at the time of this Agreement, but also any and all subsequent Public
Deposits made by the Public Depositor in the Bank regardless of the accounts in which
such funds may be held or identified by the Bank.
3. The pledge of Collateral by the Bank shall be in addition to, and shall in
no way eliminate or diminish, any insurance coverage to which the Public Depositor may
be entitled under the rules and regulations of the Federal Deposit Insurance Corporation
or any private insurance carried by the Bank for the purpose of protecting the claims and
rights of its depositors.
4. The Public Depositor is under no obligation to maintain its deposits with
the Bank and may withdraw them at any time without notice. It is agreed that when the
Bank shall have paid out and accounted for all or any portion of the Public Depositor's
Public Deposits, any Collateral pledged under this Agreement to secure such paid out
Public Deposits shall be released from the security interest created hereunder.
5. The Bank hereby represents that (i) it is a [state banking corporation]
duly organized and validly existing under the laws of [state]; (ii) it is a qualified public
depository as defined by the Act; (iii) it has, or will have as of the time of delivery of any
securities as Collateral under this Agreement, the right, power and authority to grant a
security interest therein with priority over any other rights or interests therein; (iv) the
execution and delivery of this Agreement and the pledge of securities as Collateral
hereunder have been approved by resolution of the Bank's Board of Directors at its
meeting of [date], and the approval of the Board of Directors is reflected in the minutes
of that meeting, copies of which resolution and relevant portion of the minutes of said
meeting are attached hereto as Exhibit A and made a part hereof; (v) the execution and
delivery of this Agreement and the pledge of securities as Collateral hereunder will not
violate or be in conflict with the Articles of Incorporation or By -laws of the Bank, any
agreement or instrument to which the Bank may be a party, any rule, regulation or order
of any banking regulator applicable to the Bank, or any internal policy of the Bank
adopted by its Board of Directors; and (vi) this Agreement shall be continuously
maintained, from the time of its execution, as an official record of the Bank.
6. The Bank warrants that it is the true and legal owner of all Collateral
pledged under this Agreement, that the Collateral is free and clear of all liens and claims,
that no other person or entity has any right, title or interest therein, and that the Collateral
has not been pledged or assigned for any other purpose. Should an adverse claim be
placed on any pledged Collateral, the Bank shall immediately substitute unencumbered
Collateral of equivalent value that is free and clear of all adverse claims.
Page 23 of 28
7. At any time that the Bank is not in default under this Agreement, the Bank
may substitute Eligible Collateral, provided that (a) the total market value of Eligible
Collateral held in the Custody Account shall meet the requirements of the Act and this
Agreement, and (b) the Public Depositor shall have approved such actual substitution or
substitution process and all documentation relating to such substitution before it becomes
effective.
8. Any additional pledge of Collateral hereunder, substitution of Collateral,
or release of Collateral shall be approved by an officer of the Bank duly authorized by
resolution of the Board of Directors to approve such additional pledges, substitutions, or
releases of Collateral under this Agreement.
9. The Bank agrees to place the Collateral with a Federal Reserve Bank, a
trust department of a commercial bank, or a trust company (the "Custodian'), to hold in
a custody account (the "Custod}, Account ") for the benefit of the Public Depositor, as
required by the Act. Any such commercial bank or trust company shall be a securities
intermediary that in the ordinary course of its business regularly maintains securities
accounts for its customers. The Bank shall execute a custodial trust agreement with the
Custodian ("Custodial Trust Agreement") for the custody of the Eligible Collateral
consistent with the terms of this Agreement. The Custodial Trust Agreement shall
contain the Custodian's agreement to hold all Collateral in the Custody Account for the
benefit of the Public Depositor and subject to the Public Depositor's direction and control
and to comply with entitlement orders originated by the Public Depositor without the
Bank's further consent. The executed Custodial Trust Agreement is attached hereto as
Exhibit B. The execution by the Bank of the Custodial Trust Agreement shall in no way
relieve it of any of its duties or obligations hereunder or under the Act.
10. Upon the initial transfer of Eligible Collateral under this Agreement and
monthly thereafter, the Bank shall cause the Custodian to report to the Public Depositor
specifying the type and market value of Eligible Collateral being held in the Custody
Account for the benefit of the Public Depositor.
11. The Bank has heretofore or will immediately hereafter deliver to the
Custodian for immediate deposit in the Custody Account Eligible Collateral of sufficient
value to meet the terms of this Agreement. Said Eligible Collateral or substitute
collateral, as herein provided for, shall be retained by the Custodian in the Custody
Account so long as the Bank holds deposits of the Public Depositor.
12. In the event the Bank shall (a) fail to pay the Public Depositor any funds
which the Public Depositor has on deposit, (b) fail to pay and satisfy when due, any
check, draft, or voucher lawfully drawn against any deposit of the Public Depositor,
(c) fail or suspend active operations, (d) become insolvent, or (e) fail to maintain
adequate Collateral as required by this Agreement, the Bank shall be in default, the
Public Depositor's deposits in such Bank shall become due and payable immediately, the
Public Depositor shall have the right to unilaterally direct the Custodian to liquidate the
Collateral held in the Custody Account and pay the proceeds thereof to the Public
Page 24 or 28
Depositor and to exercise any and all other security entitlements with respect to the
Custody Account and the other Collateral, to withdraw the Collateral, or any part thereof,
from the Custody Account and deliver such Collateral to the Public Depositor, or to
transfer the Collateral or any part thereof into the name of the Public Depositor or into the
name of the Public Depositor's nominee, and ownership of the Collateral shall transfer to
the Public Depositor. The Bank authorizes the release, withdrawal and delivery of the
Collateral to the Public Depositor upon default by the Bank, and authorizes the Custodian
to rely without verification on the written statement of the Public Depositor as to the
existence of a default and to comply with entitlement orders originated by the Public
Depositor without further consent of the Bank.
13. In the event of default as described in Section 12, the Public Depositor
shall also have the right to sell Collateral at any public or private sale at its option without
advertising such sale, upon not less than three (3) days notice to the Bank and the
Custodian. In the event of such sale, the Public Depositor, after deducting all legal
expenses and other costs, including reasonable attorney's fees, from the proceeds of such
sale, shall apply the remainder on any one or more of the liabilities of the Bank to the
Public Depositor, including accrued interest, and shall return the surplus, if any, to the
Bank, or its receiver or conservator.
14. During the term of this Agreement, the Public Depositor will, through
appropriate action of its governing board, designate the officer, or officers, who singly or
jointly will be authorized to represent and act on behalf of the Public Depositor in any
and all matters arising under this Agreement.
15. All parties to this Agreement agree to execute any additional documents
that may be reasonably required to effectuate the terms, conditions and intent of this
Agreement.
16. All of the terms and provisions of this Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective successors and
assigns.
17. This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original and all of which taken together shall constitute one
and the same instrument.
18. This Agreement shall be governed by and construed in accordance with
the laws of Istate], and the laws of the United States, and it supersedes any and all prior
agreements, arrangements or understandings with respect to the subject matter hereof. In
the event that any conflict of law issue(s) should arise in the interpretation of this
Agreement, the parties agree that when Istate] law is not preempted by laws of the
United States, [state] law shall govern.
Pap 25 of 28
19. No provision of this Agreement may be waived except by a writing signed
by the party to be bound thereby and any waiver of any nature shall not be construed to
act as a waiver of subsequent acts.
20. In the event that any provision or clause of this Agreement conflicts with
applicable law, such conflict shall not affect other provisions of this Security Agreement,
which shall be given effect without the conflicting provision. To this end the provisions
of this Agreement are declared to be severable.
21. Unless applicable law requires a different method, any notice that must be
given under this Agreement shall be given in writing and sent by certified mail, return
receipt requested or third party overnight priority mail carrier to the address set forth
herein or such other place as may be designated by written notice in the same manner
from one party to the other.
[public depository bank]
By:
Its:
Date:
[public depositor]
By:
Its:
Date:
Page 26 of 28
[public depositor]
Its:
Dat
e:
Page 27 of 28