Collateralization of Public Deposits in North Carolina
*IMPORTANT NOTE REGARDING COLLATERALIZATION FORMS: Please be advised that the naming convention used throughout Title 20, Chapter 7 of the North Carolina Administrative Code to reference FOD's various collateralization forms (all specifically enumerated in 20 NCAC 07 .0106) has been replaced with a naming convention more suitable to the underlying subject matter. Specifically, the “INV" prefix formerly appearing on all collateralization forms has been replaced with “COLL," although the Administrative Code has not been updated to reflect this change. (For example, the Request for Collateral Pledge and/or Release form, formerly identified as “Form INV-95," is now identified as “Form COLL-95," even though “Form INV-95" still appears in the Administrative Code.) The Department of State Treasurer is currently in the process of revising 20 NCAC 07 to account for this change.
The material below highlights some, but not all, of the roles and responsibilities associated with collateralizing “Public Deposits" (as that term is defined in 20 NCAC 07 .0102) in the manner prescribed by Title 20, Chapter 7 of the North Carolina Administrative Code (hereinafter referred to generally as “20 NCAC 07"). Please be advised that this material is for guidance purposes only and is not intended to replace or modify the provisions of 20 NCAC 07 or any other law applicable to the collateralization of Public Deposits in North Carolina.
Unless the context clearly requires otherwise, capitalized words and phrases used on this page have the same meaning ascribed to them in the Definition of Terms section of 20 NCAC 07.
The North Carolina General Statutes require Depositories to collateralize the uninsured balances of public funds on deposit in the manner prescribed by 20 NCAC 07. For additional information regarding the Federal Deposit Insurance Corporation's limits on deposit insurance coverage for accounts held by public depositors, please visit https://www.fdic.gov/deposit/deposits/factsheet.html
. Understanding these limits is fundamental to determining the appropriate amount of collateral to require in any given situation.
Upon opening a new Deposit Account with a Depository, the Public Depositor must notify the Depository, either verbally or in writing, that deposits made to that account are Public Deposits subject to the collateralization rules of 20 NCAC 07.
By June 30 of each year (the State's fiscal year-end), the Public Depositor must submit Form COLL-91, Notification of Public Deposit to any Depository in which the Public Depositor maintains Public Deposits. In so doing, any Public Depositor who is not the State Treasurer must provide a duplicate copy of Form COLL-91, Notification of Public Deposit to the State Treasurer.
With respect to Public Deposits held in the name of the State Treasurer to the credit of other units of State government (i.e., the various units of State government on whose behalf the State Treasurer acts as Public Depositor), all such other units of State government are responsible for completing and submitting Form COLL-91 to the State Treasurer (but not to any Depository) by June 30 of each year so that DST may have a proper accounting of all Public Deposit accounts of the State.
- From the Public Depositor's perspective, ensuring the Depository is aware of the funds' public nature is critical, because the duty of the Depository under 20 NCAC 07 is to maintain adequate collateral “for all uninsured deposits in accounts for which the public depositor has notified the depository pursuant to Rule .0103 of this Chapter." 20 NCAC 07 .0107.
Methods of Collateralization: Dedicated vs. Pooling
- Upon opening a new Deposit Account with a Depository, the Public Depositor must also determine whether the Depository uses the “dedicated method" of collateralizing Public Deposits (the “Dedicated Method") or the “pooling method" (the “Pooling Method"). If the Public Depositor has existing Deposit Accounts at the Depository in question, then presumably the Public Depositor is already aware of that Depository's preferred method of collateralization. In any event, the Public Depositor should remain informed of any changes in the Depository's preferred method of collateralizing Public Deposits. Such a change could occur, for example, in connection with a merger between two financial institutions.
- Under the Dedicated Method of collateralizing Public Deposits, the Depository makes separate pledges of collateral to each of the Participating Units having public funds on deposit at that particular Depository. In other words, the collateral securing the Public Deposits of one Participating Unit is administered separate and apart from the collateral securing the Public Deposits of other Participating Units. Under the Pooling Method, however, the Depository secures all of its Public Deposits collectively by establishing a pool of collateral with the State Treasurer. See 20 NCAC 07 .0104.
- By default, a Depository is considered to operate under the Dedicated Method of collateralizing Public Deposits unless and until it satisfies certain additional requirements necessary for exercising the Pooling Method. These requirements are set out in 20 NCAC 07 .0105.
Security Agreement with Resolution and Escrow Agent Agreement
- With respect to any Depository using the Dedicated Method of collateralizing Public Deposits, the Public Depositor and Depository must execute Forms COLL-94A, Security Agreement with Resolution and COLL-94B, Escrow Agent Agreement. Similarly, with respect to any Depository using the Pooling Method of collateralizing Public Deposits, the Public Depositor and Depository must execute Forms COLL-93A, Security Agreement with Resolution and COLL-93B, Escrow Agent Agreement. In both cases, an eligible third-party escrow agent must also be party to (and execute) the appropriate Escrow Agent Agreement.
Record-keeping and Monitoring Requirements
- Under the Dedicated Method of collateralizing Public Deposits, the Public Depositor must maintain a record of all securities pledged for monitoring purposes, while under the Pooling Method, the State Treasurer is responsible for maintaining such record. In either case, the Public Depositor or State Treasurer must monitor the market value of these securities to ensure that no less than 100% of the amount required to be collateralized remains pledged. The frequency with which market values should be monitored will depend upon the amount of excess collateral pledged, the types of securities pledged, and the volatility of market conditions at the time. Where securities involving periodic pay-downs on principal have been pledged, the Public Depositor should record the appropriate decline in “outstanding principal" with each such pay-down.
- The Depository must maintain an official record of all securities pledged to the relevant Participating Unit (in the case of the Dedicated Method) or to the State Treasurer (in the case of the Pooling Method). In addition, the Depository must make this record available to any examiner or representative of any regulatory agency having the authority to inspect such record.
Pledging, Releasing, and Substituting Collateral
- From time to time, the Public Depositor, including the State Treasurer, may be asked to approve changes in the amounts and/or types of collateral being used to secure the Public Depositor or State Treasurer's Public Deposits.
- Under the Pooling Method, and with respect to any Public Deposit held in the name of the State Treasurer at a Dedicated Method bank, the Depository would request such a change in collateral by completing and submitting Form COLL-95, Request for Collateral Pledge and/or Release to DST. By approving this form, the State Treasurer is authorizing one of the following modifications to the collateral being used to secure some or all of the Public Deposits held at that particular Depository: (i) the release of certain collateral already pledged; (ii) the pledge of additional collateral; or (iii) the pledge of new collateral as a substitution for separate collateral being simultaneously released. Importantly, the Depository must certify on the Request for Collateral Pledge and/or Release form itself that, upon completion of the underlying release, pledge, or substitution of collateral, the amount of collateral then pledged will still be sufficient to meet the requirements of 20 NCAC 07.
- Other than the State Treasurer, any Public Depositor with public moneys on deposit at a Dedicated Method bank is responsible for ensuring that all requests to pledge, release, or substitute the collateral securing such deposits are reviewed, approved, and generally accounted for using a form similar to DST's Form COLL-95, Request for Collateral Pledge and/or Release.
Depositories' Reporting Requirements
- Depositories must comply with the quarterly and annual reporting requirements set out in 20 NCAC 07 .0501 and .0502, using Forms COLL-96 (Quarterly Report on Public Deposits), COLL-97 (Annual Report on Public Deposits), COLL-98 (Annual Report on Collateral for Public Deposits), and COLL-99 (Selected Financial Data), as appropriate.
- Please note that, in addition to the reporting requirements referenced above, the State Treasurer may impose additional reporting requirements at his discretion, as provided in 20 NCAC 07.