I have used the term herein to refer day. In the typical deposit transaction (in- cluding a “municipality” to all public bodies. This article is written as certificate of deposit) the parties are re- versed. The addressed to municipalities and, accordingly, the bank is borrowing from the depositor, for our term refers to them. References to the purposes here, the municipality. (But the same “you” “UCC” are to the Arkansas Uniform Commercial Code. I state laws are applied.) Because more than one have referred to and as that person can claim to own a security, or an in- terest “indorse” “indorsement,” is how it is spelled in the UCC. in it, the challenge has always been to deter- mine Bond lawyers have been accused of having the which claimant has a prior right or interest. mind of a cabinet.” Being a bond lawyer, I In the event of a bank failure, you want your collat- “file am conservative in the opinions expressed here. eral to protect your funds against the claims of other Your lawyer may disagree with some of them (and bank creditors, primarily the claims of the FDIC. in a lawsuit might be upheld). Bond lawyers look Under Arkansas law, a municipality’s deposits upon an as a This, basi- in excess of FDIC insurance coverage ($250,000 “opinion” “conviction.” cally, amounts to a reasonable doubt standard. until Dec. 31, 2013, when the amount will revert to $100,000) should be secured by a “perfected” Some background pledge of certain eligible securities. This is set forth in Arkansas Code of 1987 Annotated at § 19-8- Securities were used to secure (or “collateral- 107 and § 19-8-203. It is not clear whether the re- ize”) loans before there were any uniform or clear quirement for an security” as collateral statutory rules covering such transactions. Banks “eligible refers to both securities and to entitle- lend on the basis of such collateral, of course, every “security ments,” which I will discuss below. This suggests
I have used the term “municipality” herein to refer to all public bodies. This article is written as addressed to municipalities and, accordingly, the term “you” refers to them. References to the “UCC” are to the Arkansas Uniform Commercial Code. I have referred to “indorse” and “indorsement,” as that is how it is spelled in the UCC. Bond lawyers have been accused of having the mind of a “file cabinet.” Being a bond lawyer, I am conservative in the opinions expressed here. Your lawyer may disagree with some of them (and in a lawsuit might be upheld). Bond lawyers look upon an “opinion” as a “conviction.” This, basi- cally, amounts to a reasonable doubt standard. Some background Securities were used to secure (or “collateral- ize”) loans before there were any uniform or clear statutory rules covering such transactions. Banks lend on the basis of such collateral, of course, every day. In the typical deposit transaction (in- cluding a certificate of deposit) the parties are re- versed. The bank is borrowing from the depositor, for our purposes here, the municipality. (But the same state laws are applied.) Because more than one person can claim to own a security, or an in- terest in it, the challenge has always been to deter- mine which claimant has a prior right or interest. In the event of a bank failure, you want your collat- eral to protect your funds against the claims of other bank creditors, primarily the claims of the FDIC. Under Arkansas law, a municipality’s deposits in excess of FDIC insurance coverage ($250,000 until Dec. 31, 2013, when the amount will revert to $100,000) should be secured by a “perfected” pledge of certain eligible securities. This is set forth in Arkansas Code of 1987 Annotated at § 19-8- 107 and § 19-8-203. It is not clear whether the re- quirement for an “eligible security” as collateral refers to both securities and to “security entitle- ments,” which I will discuss below. This suggests
AML+Municipal+Accounting+Handbook+Revised+July+2013.docx