Opinion 95 - 32


This opinion represents the views of the Office of the State Comptroller at the time it was rendered. The opinion may no longer represent those views if, among other things, there have been subsequent court cases or statutory amendments that bear on the issues discussed in the opinion.

MUNICIPAL FUNDS -- Deposits and Investments (use of model security and custodial agreements provided by the Comptroller's Office)

STATE COMPTROLLER -- Powers and Duties (preparation of model security and custodial agreements)

GENERAL MUNICIPAL LAW, §§10, 11: A local government is not required by law to enter into security and custodial agreements identical to the models prepared by the Office of the State Comptroller.

You ask whether a fire district is required to enter into the model security and custodial agreements prepared by this Office pursuant to chapter 708 of the Laws of 1992.

Chapter 708 of the Laws of 1992 enacted a new section 10 and amended section 11 of the General Municipal Law to, inter alia, prescribe uniform procedures for securing deposits and investments of public funds by local governments, including fire districts. All public deposits in excess of the amount insured under the provisions of the Federal Deposit Insurance Act must be secured in accordance with subdivision 3 of section 10. The permissible methods of securing public deposits specified by subdivision 3 include a pledge of "eligible securities" having an aggregate market value at least equal to the aggregate amount of the deposits, together with a security agreement from the depositary bank or trust company (General Municipal Law, §10[3][a],[b]; see General Municipal Law, §§10[1][f], defining the term "eligible securities", and 10[3][c], relating to determining the market value of certain eligible securities). Section 11, pertaining to temporary investments, requires that special time deposit accounts and certificates of deposit be secured in the same manner as provided for securing deposits in section 10(3) (see also Banking Law, §107-a, which relates to the compliance by a public depositary with the provisions of law governing the deposit of public funds).

Pursuant to section 10(3)(a), a security agreement must provide that the collateral is being pledged by the bank or trust company as security for the deposits or investments, together with agreed upon interest, if any, and the costs and expenses arising out of the collection of the deposits or investments upon default. Section 10 also states that the agreement must provide for the conditions under which the securities may be sold, presented for payment, substituted or released, and the events of default which will enable the local government to exercise its rights against the pledged securities.

If securities pledged as collateral are not registered or inscribed in the name of the local government, they must be delivered in a form suitable for transfer, or with an assignment in blank to the local government or to a bank or trust company with which the local government has entered into a written custodial agreement. The custodial agreement may be the same agreement as the security agreement.

Subdivision 3(a) of section 10 prescribes certain minimum requirements for the custodial agreement, including that the agreement: (a) provide that the pledged securities will be held by the custodial bank or trust company as agent of, and custodian for, the local government; (b) provide that the pledged securities will be kept separate and apart from the general assets of the custodial bank or trust company; (c) provide that the pledged securities will not, in any circumstances, be commingled with or become part of the backing for any other deposit or other liabilities; (d) provide for the manner in which the custodial bank or trust company will confirm the receipt, substitution or release of the collateral; (e) provide for the frequency of revaluation of the collateral by the custodial bank or trust company; (f) provide for the substitution of collateral when a security becomes ineligible; and (g) include all provisions necessary and sufficient to secure, in satisfactory manner, the local government's interest in collateral held by the bank or trust company (see also Office of the State Comptroller's Financial Management Guide, Cash Management and Investment Policies and Procedures, subsection 2.1050; 1985 Opns St Comp No. 85-47, p 63; Federal Deposit Insurance Corp., Statement of Policy Regarding Treatment of Security Interests After Appointment of the FDIC as Conservator or Receiver, adopted March 23, 1993; 12 USC §§1821[e][11], 1823[e]; Uniform Commercial Code, art. 8). If eligible securities delivered to the custodial bank are transferred by book-entry on the books of the Federal Reserve or other book-entry system operated by a federally regulated entity without physical delivery of evidence of such obligations, the records of the custodial bank or trust company must show, at all times, the interest of the local government in such securities as set forth in the security agreement (General Municipal Law, §10[3][b]). The custodial agreement may also contain such other provisions as the governing board of the local government deems necessary (General Municipal Law, §10[3][a]).

Section 44 of chapter 708 of the Laws of 1992 requires the State Comptroller to provide model security and custodial agreements for local governments. This Office has prepared and distributed such model security and custodial agreements (see Office of the State Comptroller's Financial Management Guide, Cash Management and Investment Policies and Procedures, Appendix E). Section 44, however, provides the following:

It is the intent of the legislature that such model ... agreements shall provide information and assistance to local government officials who are formulating local ... agreements. The provision of such model ... agreements by the comptroller shall not be construed as a mandate upon local governments to adopt identical ... agreements. [Emphasis added]

Accordingly, it is clear that a fire district or other local government is not required by law to enter into agreements identical to the models prepared by this Office. In view of the potential risk attendant to not properly securing deposits and investments, however, it is advisable that the local government's legal counsel carefully review the form and content of all security and custodial agreements prior to their execution by the local government to ensure they are sufficient and comply with all legal requirements.

December 29, 1995
Loring K. Manley, Chairman of Board
Valley Cottage Fire District