2005 Texas Government Code CHAPTER 2257. COLLATERAL FOR PUBLIC FUNDS

GOVERNMENT CODE

CHAPTER 2257. COLLATERAL FOR PUBLIC FUNDS

SUBCHAPTER A. GENERAL PROVISIONS


	§ 2257.001. SHORT TITLE.  This chapter may be cited as the 
Public Funds Collateral Act.

Added by Acts 1993, 73rd Leg., ch. 268, § 1, eff. Sept. 1, 1993.           


	§ 2257.002. DEFINITIONS.  In this chapter:                                  
		(1)  "Bank holding company" has the meaning assigned by 
Section 31.002(a), Finance Code.
		(2)  "Control" has the meaning assigned by Section 
31.002(a), Finance Code. 
		(3)  "Deposit of public funds" means public funds of a 
public entity that:  
			(A)  the comptroller does not manage under Chapter 
404;  and               
			(B)  are held as a demand or time deposit by a 
depository institution expressly authorized by law to accept a 
public entity's demand or time deposit.
		(4)  "Eligible security" means:                                               
			(A)  a surety bond;                                                          
			(B)  an investment security;                                                 
			(C)  an ownership or beneficial interest in an 
investment security, other than an option contract to purchase or 
sell an investment security;
			(D)  a fixed-rate collateralized mortgage 
obligation that has an expected weighted average life of 10 years or 
less and does not constitute a high-risk mortgage security;  or
			(E)  a floating-rate collateralized mortgage 
obligation that does not constitute a high-risk mortgage security.
		(5)  "Investment security" means:                                             
			(A)  an obligation that in the opinion of the 
attorney general of the United States is a general obligation of the 
United States and backed by its full faith and credit;
			(B)  a general or special obligation issued by a 
public agency that is payable from taxes, revenues, or a 
combination of taxes and revenues;  or
			(C)  a security in which a public entity may 
invest under Subchapter A, Chapter 2256.
		(6)  "Permitted institution" means:                                           
			(A)  a Federal Reserve Bank;                                                 
			(B)  a clearing corporation, as defined by Section 
8.102, Business & Commerce Code;
			(C)  a bank eligible to be a custodian under 
Section 2257.041;  or         
			(D)  a state or nationally chartered bank that is 
controlled by a bank holding company that controls a bank eligible 
to be a custodian under Section 2257.041.
		(7)  "Public agency" means a state or a political or 
governmental entity, agency, instrumentality, or subdivision of a 
state, including a municipality, an institution of higher 
education, as defined by Section 61.003, Education Code, a junior 
college, a district created under Article XVI, Section 59, of the 
Texas Constitution, and a public hospital.
		(8)  "Public entity" means a public agency in this 
state, but does not include an institution of higher education, as 
defined by Section 61.003, Education Code.
		(9)  "State agency" means a public entity that:                               
			(A)  has authority that is not limited to a 
geographic portion of the state;  and
			(B)  was created by the constitution or a statute.                           
		(10)  "Trust receipt" means evidence of receipt, 
identification, and recording, including:
			(A)  a physical controlled trust receipt;  or                                
			(B)  a written or electronically transmitted 
advice of transaction.        

Added by Acts 1993, 73rd Leg., ch. 268, § 1, eff. Sept. 1, 1993.  
Amended by Acts 1995, 74th Leg., ch. 76, § 5.48(a), eff. Sept. 1, 
1995;  Acts 1995, 74th Leg., ch. 914, § 5, eff. Sept. 1, 1995;  
Acts 1997, 75th Leg., ch. 254, § 1, eff. Sept. 1, 1997;  Acts 
1997, 75th Leg., ch. 891, § 3.22(4), eff. Sept. 1, 1997;  Acts 
1997, 75th Leg., ch. 1423, § 8.70, eff. Sept. 1, 1997;  Acts 
1999, 76th Leg., ch. 62, § 7.63, eff. Sept. 1, 1999.


	§ 2257.0025. HIGH-RISK MORTGAGE SECURITY.  (a) For 
purposes of this chapter, a fixed-rate collateralized mortgage 
obligation is a high-risk mortgage security if the security:
		(1)  has an average life sensitivity with a weighted 
average life that:     
			(A)  extends by more than four years, assuming an 
immediate and sustained parallel shift in the yield curve of plus 
300 basis points;  or
			(B)  shortens by more than six years, assuming an 
immediate and sustained parallel shift in the yield curve of minus 
300 basis points;  and
		(2)  is price sensitive;  that is, the estimated change 
in the price of the mortgage derivative product is more than 17 
percent, because of an immediate and sustained parallel shift in 
the yield curve of plus or minus 300 basis points.
	(b)  For purposes of this chapter, a floating-rate 
collateralized mortgage obligation is a high-risk mortgage 
security if the security:
		(1)  bears an interest rate that is equal to the 
contractual cap on the instrument;  or
		(2)  is price sensitive;  that is, the estimated change 
in the price of the mortgage derivative product is more than 17 
percent, because of an immediate and sustained parallel shift in 
the yield curve of plus or minus 300 basis points.

Added by Acts 1997, 75th Leg., ch. 254, § 2, eff. Sept. 1, 1997.           


	§ 2257.003. CHAPTER NOT APPLICABLE TO DEFERRED 
COMPENSATION PLANS.  This chapter does not apply to funds that a 
public entity maintains or administers under a deferred 
compensation plan, the federal income tax treatment of which is 
governed by Section 401(k) or 457 of the Internal Revenue Code of 
1986 (26 U.S.C. Sections 401(k) and 457).

Added by Acts 1993, 73rd Leg., ch. 268, § 1, eff. Sept. 1, 1993.           


	§ 2257.004. CONFLICT WITH OTHER LAW.  This chapter 
prevails over any other law relating to security for a deposit of 
public funds to the extent of any conflict.

Added by Acts 1993, 73rd Leg., ch. 268, § 1, eff. Sept. 1, 1993.           


	§ 2257.005. CONTRACT GOVERNS LEGAL ACTION.  A legal 
action brought by or against a public entity that arises out of or 
in connection with the duties of a depository, custodian, or 
permitted institution under this chapter must be brought and 
maintained as provided by the contract with the public entity.

Added by Acts 1993, 73rd Leg., ch. 268, § 1, eff. Sept. 1, 1993.           

SUBCHAPTER B. DEPOSITORY;  SECURITY FOR DEPOSIT OF PUBLIC FUNDS


	§ 2257.021. COLLATERAL REQUIRED.  A deposit of public 
funds shall be secured by eligible security to the extent and in the 
manner required by this chapter.

Added by Acts 1993, 73rd Leg., ch. 268, § 1, eff. Sept. 1, 1993.           


	§ 2257.022. AMOUNT OF COLLATERAL.  (a) Except as provided 
by Subsection (b), the total value of eligible security to secure a 
deposit of public funds must be in an amount not less than the 
amount of the deposit of public funds:
		(1)  increased by the amount of any accrued interest;  
and                  
		(2)  reduced to the extent that the United States or an 
instrumentality of the United States insures the deposit.
	(b)  The total value of eligible security described by 
Section 45.201(4)(D), Education Code, to secure a deposit of public 
funds of a school district must be in an amount not less than 110 
percent of the amount of the deposit as determined under Subsection 
(a).  The total market value of the eligible security must be 
reported at least once each month to the school district.
	(c)  The value of a surety bond is its face value.                             
	(d)  The value of an investment security is its market value.                  

Added by Acts 1993, 73rd Leg., ch. 268, § 1, eff. Sept. 1, 1993.  
Amended by Acts 2003, 78th Leg., ch. 201, § 46, eff. Sept. 1, 
2003.


	§ 2257.023. COLLATERAL POLICY.  (a) In accordance with a 
written policy approved by the governing body of the public entity, 
a public entity shall determine if an investment security is 
eligible to secure deposits of public funds.
	(b)  The written policy may include:                                           
		(1)  the security of the institution that obtains or 
holds an investment security;
		(2)  the substitution or release of an investment 
security;  and            
		(3)  the method by which an investment security used to 
secure a deposit of public funds is valued.

Added by Acts 1993, 73rd Leg., ch. 268, § 1, eff. Sept. 1, 1993.           


	§ 2257.024. CONTRACT FOR SECURING DEPOSIT OF PUBLIC 
FUNDS.  (a) A public entity may contract with a bank that has its 
main office or a branch office in this state to secure a deposit of 
public funds.
	(b)  The contract may contain a term or condition relating to 
an investment security used as security for a deposit of public 
funds, including a term or condition relating to the:
		(1)  possession of the collateral;                                            
		(2)  substitution or release of an investment security;                       
		(3)  ownership of the investment securities of the bank 
used to secure a deposit of public funds;  and
		(4)  method by which an investment security used to 
secure a deposit of public funds is valued.

Added by Acts 1993, 73rd Leg., ch. 268, § 1, eff. Sept. 1, 1993.  
Amended by Acts 1999, 76th Leg., ch. 344, § 5.006, eff. Sept. 1, 
1999.


	§ 2257.025. RECORDS OF DEPOSITORY.  (a) A public entity's 
depository shall maintain a separate, accurate, and complete record 
relating to a pledged investment security, a deposit of public 
funds, and a transaction related to a pledged investment security.
	(b)  The comptroller or the public entity may examine and 
verify at any reasonable time a pledged investment security or a 
record a depository maintains under this section.

Added by Acts 1993, 73rd Leg., ch. 268, § 1, eff. Sept. 1, 1993.  
Amended by Acts 1997, 75th Leg., ch. 891, § 3.16, eff. Sept. 1, 
1997.


	§ 2257.026. CHANGE IN AMOUNT OR ACTIVITY OF DEPOSITS OF 
PUBLIC FUNDS.  A public entity shall inform the depository for the 
public entity's deposit of public funds of a significant change in 
the amount or activity of those deposits within a reasonable time 
before the change occurs.

Added by Acts 1993, 73rd Leg., ch. 268, § 1, eff. Sept. 1, 1993.           

SUBCHAPTER C. CUSTODIAN;  PERMITTED INSTITUTION


	§ 2257.041. DEPOSIT OF SECURITIES WITH CUSTODIAN.  (a) In 
addition to other authority granted by law, a depository for a 
public entity other than a state agency may deposit with a custodian 
a security pledged to secure a deposit of public funds.
	(b)  At the request of the public entity, a depository for a 
public entity other than a state agency shall deposit with a 
custodian a security pledged to secure a deposit of public funds.
	(c)  A depository for a state agency shall deposit with a 
custodian a security pledged to secure a deposit of public funds.  
The custodian and the state agency shall agree in writing on the 
terms and conditions for securing a deposit of public funds.
	(d)  A custodian must be approved by the public entity and 
be:               
		(1)  a state or national bank that:                                           
			(A)  is designated by the comptroller as a state 
depository;               
			(B)  has its main office or a branch office in this 
state;  and            
			(C)  has a capital stock and permanent surplus of 
$5 million or more;      
		(2)  the Texas Treasury Safekeeping Trust Company;                            
		(3)  a Federal Reserve Bank or a branch of a Federal 
Reserve Bank;  or      
		(4)  a federal home loan bank.                                                
	(e)  A custodian holds in trust the securities to secure the 
deposit of public funds of the public entity in the depository 
pledging the securities.

Added by Acts 1993, 73rd Leg., ch. 268, § 1, eff. Sept. 1, 1993.  
Amended by Acts 1995, 74th Leg., ch. 1010, § 1, eff. June 17, 
1995;  Acts 1997, 75th Leg., ch. 891, § 3.17, eff. Sept. 1, 1997;  
Acts 1999, 76th Leg., ch. 344, § 5.007, eff. Sept. 1, 1999.


	§ 2257.042. DEPOSIT OF SECURITIES WITH PERMITTED 
INSTITUTION.  (a) A custodian may deposit with a permitted 
institution an investment security the custodian holds under 
Section 2257.041.
	(b)  If a deposit is made under Subsection (a):                                
		(1)  the permitted institution shall hold the 
investment security to secure funds the public entity deposits in 
the depository that pledges the investment security;
		(2)  the trust receipt the custodian issues under 
Section 2257.045 shall show that the custodian has deposited the 
security in a permitted institution;  and
		(3)  the permitted institution, on receipt of the 
investment security, shall immediately issue to the custodian an 
advice of transaction or other document that is evidence that the 
custodian deposited the security in the permitted institution.

Added by Acts 1993, 73rd Leg., ch. 268, § 1, eff. Sept. 1, 1993.           


	§ 2257.043. DEPOSITORY AS CUSTODIAN OR PERMITTED 
INSTITUTION.  (a) A public entity other than a state agency may 
prohibit a depository or an entity of which the depository is a 
branch from being the custodian of or permitted institution for a 
security the depository pledges to secure a deposit of public 
funds.
	(b)  A depository or an entity of which the depository is a 
branch may not be the custodian of or permitted institution for a 
security the depository pledges to secure a deposit of public funds 
by a state agency.

Added by Acts 1993, 73rd Leg., ch. 268, § 1, eff. Sept. 1, 1993.           


	§ 2257.044. CUSTODIAN AS BAILEE.  (a) A custodian under 
this chapter or a custodian of a security pledged to an institution 
of higher education, as defined by Section 61.003, Education Code, 
whether acting alone or through a permitted institution, is for all 
purposes the bailee or agent of the public entity or institution 
depositing the public funds with the depository.
	(b)  To the extent of any conflict, Subsection (a) prevails 
over Chapter 8 or 9, Business & Commerce Code.

Added by Acts 1993, 73rd Leg., ch. 268, § 1, eff. Sept. 1, 1993.           


	§ 2257.045. RECEIPT OF SECURITY BY CUSTODIAN.  On receipt 
of an investment security, a custodian shall:
		(1)  immediately identify on its books and records, by 
book entry or another method, the pledge of the security to the 
public entity;  and
		(2)  promptly issue and deliver to the appropriate 
public entity officer a trust receipt for the pledged security.

Added by Acts 1993, 73rd Leg., ch. 268, § 1, eff. Sept. 1, 1993.           


	§ 2257.046. BOOKS AND RECORDS OF CUSTODIAN;  
INSPECTION.  (a) A public entity's custodian shall maintain a 
separate, accurate, and complete record relating to each pledged 
investment security and each transaction relating to a pledged 
investment security.
	(b)  The comptroller or the public entity may examine and 
verify at any reasonable time a pledged investment security or a 
record a custodian maintains under this section.  The public entity 
or its agent may inspect at any time an investment security 
evidenced by a trust receipt.
	(c)  The public entity's custodian shall file a collateral 
report with the comptroller in the manner and on the dates 
prescribed by the comptroller.

Added by Acts 1993, 73rd Leg., ch. 268, § 1, eff. Sept. 1, 1993.  
Amended by Acts 1997, 75th Leg., ch. 891, § 3.18, eff. Sept. 1, 
1997.


	§ 2257.047. BOOKS AND RECORDS OF PERMITTED 
INSTITUTION.  (a) A permitted institution may apply book entry 
procedures when an investment security held by a custodian is 
deposited under Section 2257.042.
	(b)  A permitted institution's records must at all times 
state the name of the custodian that deposits an investment 
security in the permitted institution.

Added by Acts 1993, 73rd Leg., ch. 268, § 1, eff. Sept. 1, 1993.           


	§ 2257.048. ATTACHMENT AND PERFECTION OF SECURITY 
INTEREST.  (a) A security interest that arises out of a 
depository's pledge of a security to secure a deposit of public 
funds by a public entity or an institution of higher education, as 
defined by Section 61.003, Education Code, is created, attaches, 
and is perfected for all purposes under state law from the time that 
the custodian identifies the pledge of the security on the 
custodian's books and records and issues the trust receipt.
	(b)  A security interest in a pledged security remains 
perfected in the hands of a subsequent custodian or permitted 
institution.

Added by Acts 1993, 73rd Leg., ch. 268, § 1, eff. Sept. 1, 1993.           

SUBCHAPTER D. AUDITS AND EXAMINATIONS;  PENALTIES


	§ 2257.061. AUDITS AND EXAMINATIONS.  As part of an audit 
or regulatory examination of a public entity's depository or 
custodian, the auditor or examiner shall:
		(1)  examine and verify pledged investment securities 
and records maintained under Section 2257.025 or 2257.046;  and
		(2)  report any significant or material noncompliance 
with this chapter to the comptroller.

Added by Acts 1993, 73rd Leg., ch. 268, § 1, eff. Sept. 1, 1993.  
Amended by Acts 1997, 75th Leg., ch. 891, § 3.19, eff. Sept. 1, 
1997.


	§ 2257.062. PENALTIES.  (a) The comptroller may revoke a 
depository's designation as a state depository for one year if, 
after notice and a hearing, the comptroller makes a written finding 
that the depository, while acting as either a depository or a 
custodian:
		(1)  did not maintain reasonable compliance with this 
chapter;  and         
		(2)  failed to remedy a violation of this chapter 
within a reasonable time after receiving written notice of the 
violation.
	(b)  The comptroller may permanently revoke a depository's 
designation as a state depository if the comptroller makes a 
written finding that the depository:
		(1)  has not maintained reasonable compliance with this 
chapter;  and       
		(2)  has acted in bad faith by not remedying a violation 
of this chapter.   

Added by Acts 1993, 73rd Leg., ch. 268, § 1, eff. Sept. 1, 1993.  
Amended by Acts 1997, 75th Leg., ch. 891, § 3.19, eff. Sept. 1, 
1997.


	§ 2257.063. MITIGATING CIRCUMSTANCES.  (a) The 
comptroller shall consider the total circumstances relating to the 
performance of a depository or custodian when the comptroller makes 
a finding required by Section 2257.062, including the extent to 
which the noncompliance is minor, isolated, temporary, or 
nonrecurrent.
	(b)  The comptroller may not find that a depository or 
custodian did not maintain reasonable compliance with this chapter 
if the noncompliance results from the public entity's failure to 
comply with Section 2257.026.
	(c)  This section does not relieve a depository or custodian 
of the obligation to secure a deposit of public funds with eligible 
security in the amount and manner required by this chapter within a 
reasonable time after the public entity deposits the deposit of 
public funds with the depository.

Added by Acts 1993, 73rd Leg., ch. 268, § 1, eff. Sept. 1, 1993.  
Amended by Acts 1997, 75th Leg., ch. 891, § 3.19, eff. Sept. 1, 
1997.


	§ 2257.064. REINSTATEMENT.  The comptroller may 
reinstate a depository's designation as a state depository if:
		(1)  the comptroller determines that the depository has 
remedied all violations of this chapter;  and
		(2)  the depository assures the comptroller to the 
comptroller's satisfaction that the depository will maintain 
reasonable compliance with this chapter.

Added by Acts 1993, 73rd Leg., ch. 268, § 1, eff. Sept. 1, 1993.  
Amended by Acts 1997, 75th Leg., ch. 891, § 3.19, eff. Sept. 1, 
1997.

SUBCHAPTER E. EXEMPT INSTITUTIONS


	§ 2257.081. DEFINITION.  In this subchapter, "exempt 
institution" means:  
		(1)  a public retirement system, as defined by Section 
802.001;  or         
		(2)  the permanent school fund, as described by Section 
43.001, Education Code.

Added by Acts 1993, 73rd Leg., ch. 268, § 1, eff. Sept. 1, 1993.  
Amended by Acts 1997, 75th Leg., ch. 165, § 6.31, eff. Sept. 1, 
1997.


	§ 2257.082. FUNDS OF EXEMPT INSTITUTION.  An exempt 
institution is not required to have its funds fully insured or 
collateralized at all times if:
		(1)  the funds are held by:                                                   
			(A)  a custodian of the institution's assets under 
a trust agreement;  or  
			(B)  a person in connection with a transaction 
related to an investment;  and
		(2)  the governing body of the institution, in 
exercising its fiduciary responsibility, determines that the 
institution is adequately protected by using a trust agreement, 
special deposit, surety bond, substantial deposit insurance, or 
other method an exempt institution commonly uses to protect itself 
from liability.

Added by Acts 1993, 73rd Leg., ch. 268, § 1, eff. Sept. 1, 1993.           


	§ 2257.083. INVESTMENT;  SELECTION OF DEPOSITORY.  This 
chapter does not: 
		(1)  prohibit an exempt institution from prudently 
investing in a certificate of deposit;  or
		(2)  restrict the selection of a depository by the 
governing body of an exempt institution in accordance with its 
fiduciary duty.

Added by Acts 1993, 73rd Leg., ch. 268, § 1, eff. Sept. 1, 1993.