Title of Regulation: 1VAC75-20. Virginia Security for Public Deposits Act Regulations (amending 1VAC75-20-10, 1VAC75-20-30, 1VAC75-20-50 through 1VAC75-20-160; repealing 1VAC75-20-20, 1VAC75-20-40).

Statutory Authority: § 2.1-364 of the Code of Virginia.

Public Hearing Information: No public hearing is currently scheduled.

Public Comment Deadline: April 15, 2022.

Agency Contact: Kristin A. Reiter, Director of Operations, Department of the Treasury, James Monroe Building, 101 North 14th Street, 3rd Floor, Richmond, VA 23219, telephone (804) 225-3240, FAX (804) 225-3187, or email kristin.reiter@trs.virginia.gov.

Basis: The Treasury Board's regulatory authority for this action can be found at §§ 2.2-4405 and 2.2-2416 of the Code of Virginia.

Purpose: The regulation is essential to protect the financial stability of the Commonwealth and citizens by ensuring public deposits of the Commonwealth of Virginia and its counties, cities, towns, and other public entities are adequately protected against economic consequences of a failure of a financial institution holding public funds. Certain changes are being made to improve the types, values, and ease of liquidation of required collateral and establish minimum requirements banks must meet to become and remain qualified public depositories (QPDs) and escrow agents, with the intent of strengthening the Security for Public Deposits Act (SPDA) program and better protecting Virginia public funds.

Substance: The proposed amendments revise the statutory authority; bring the regulatory language in line with the SPDA as amended in 2009 and 2010; make certain changes to the types of securities eligible to be pledged as collateral and their valuation; establish formal eligibility criteria for banks to become and remain QPDs and escrow agents; and make other changes determined to be necessary to better administer the SPDA to accommodate the needs of Virginia's banking community and public institutions while ensuring the protection of public funds.

Issues: The primary advantage to the public is the enhanced safety of public funds deposits. The primary disadvantage would be to pooled QPDs that pledge municipal securities as collateral, as the revision would subject these securities to a haircut. This means that some QPDs may have to pledge more or different collateral. The primary advantage to public agencies and the Commonwealth is the enhanced safety of public funds deposits; a possible disadvantage would be if a QPD decided to leave the SPDA program because of the new requirements, meaning public agencies banking at the QPD would need to close their accounts at that QPD and open new accounts at a different QPD.

Department of Planning and Budget's Economic Impact Analysis:

The Department of Planning and Budget (DPB) has analyzed the economic impact of this proposed regulation in accordance with § 2.2-4007.04 of the Code of Virginia (Code) and Executive Order 14 (as amended, July 16, 2018). The analysis presented represents DPB's best estimate of these economic impacts.¹

Summary of the Proposed Amendments to Regulation. As the result of a 2018 periodic review,² the Treasury Board (Board) proposes to: 1) update the regulation to reflect legislative changes that occurred in 2009 and 2010, 2) increase the amount of collateral required for municipal securities in the pooled collateralization method, 3) exclude corporate notes from eligible collateral types in the pooled method, 4) add a requirement for public depositors to periodically verify their account balances through the Department of Treasury's (Treasury) website, and 5) formalize in the regulation minimum qualifications to become a Qualified Public Depository (QPD) and an escrow agent and update compliance requirements for continued eligibility.

Background. The Virginia Security for Public Deposits Act (Act), Code of Virginia §§ 2.2-4400 et seq, establishes a single body of law applicable to the pledge of collateral for public deposits in financial institutions. Consequently, the Treasury requires collateral that QPDs must pledge in order to secure public deposit balances in excess of the insurance coverage provided by the Federal Deposit Insurance Corporation. The purpose of collateral is to safeguard the financial stability of the Commonwealth by ensuring that public deposits of the Commonwealth and its counties, cities, towns, and other public entities are adequately protected against the economic consequences of a failure of a financial institution holding public funds.

According to the Treasury, significant changes were made to the Act in 2009 and 2010. These changes include Chapter 64 of the 2009 Acts of Assembly and Chapters 640 and 674 (identical) of the 2010 Acts of Assembly.³ However, the regulation has not been amended to reflect these changes. This action largely involves updating the regulatory text to reflect the legislative changes that took place in practice more than a decade ago. However, several proposed changes would depart from current practices as discussed below.

Estimated Benefits and Costs. The Treasury may require that certain securities (those that are difficult-to-value, subject to rapid declines in value, or otherwise represent a risk of decrease in value) be valued for collateral purposes at a rate that is less than 100% of their market value. This valuation approach is intended to minimize the risk that any securities used as collateral will diminish in value and thus no longer serve as adequate protection against financial loss. The percentage difference between an asset's market value and the amount that can be used as collateral is commonly referred to as the "haircut" in the context of this regulation. For example, if the Treasury counts only 80% of an asset's value as collateral, that translates to a 20% haircut on that security. Currently, there is a 20% haircut on mortgage-backed pass-through securities pledged as collateral by both dedicated and pooled QPDs,⁴ and a 10% and a 20% haircut on Virginia municipal securities and non-Virginia municipal securities respectively that are pledged by dedicated QPDs.

The Board proposes to introduce a 10% and a 20% haircut respectively for Virginia based and non-Virginia based municipal securities pledged by pooled QPDs. According to the Treasury, this change would provide consistency with the dedicated method and better protect public deposits at pooled QPDs by requiring them to either increase their pledged collateral, or pledge different security types that are more easily valued and liquidated in the event of a QPD failure. Using balances as of June 30, 2021, three pooled QPDs would either need to pledge approximately $45 million in additional securities combined (individually $35 million, $8 million, and $2 million), or substitute other security types with lower or no haircuts for municipal securities, in order to maintain sufficient collateral and improve protection of public funds.⁵

Similarly, the Board proposes to exclude corporate notes from eligible collateral types for pooled QPDs in order to achieve consistency with the collateral types accepted for dedicated QPDs. A corporate note is a short term loan agreement between a lending source and a company and as such is riskier relative to some other types of collateral. According to the Treasury, there is currently only one QPD that pledges two corporate notes with a combined market value of $1.9 million. However, that bank is currently over-collateralized by $13.6 million and would still be over-collateralized by $11.7 million without the corporate notes under this change. Thus, this change would not have an immediate impact. In the long-term, if the bank wants to maintain its deposit capacity at the current level it would have to replace its corporate notes with other types of collateral. This change would provide consistency between the pooled and dedicated methods as well as reduce public funds' exposure to risk in the long-term.

The Board also proposes to add a requirement for public depositors to verify their fund account balances after the end of each quarter, using the search feature presented on the Treasury's website for that purpose, to ensure their accounts are being properly reported to the Board by the QPDs. This requirement would help reveal any public fund accounts that were not reported or reported inaccurately so corrections can be made. According to the Treasury, many public depositors are already doing this voluntarily. Thus, the administrative cost to QPDs is expected to be modest.

Finally, the Board proposes to formalize in the regulation minimum qualifications to become a QPD and an escrow agent as well as update compliance requirements for continued eligibility. The Board would also make numerous changes to conform the regulatory language to the Code of Virginia. According to the Treasury, these changes are primarily housekeeping measures to reflect in the regulation the current standards that are already followed in practice. Thus, no significant economic impact is expected from these changes other than improving the accuracy of the regulatory text.

Businesses and Other Entities Affected. This regulation applies to 83 banks that hold public deposits. Of these, 57 are collateralized using the pooled method and 26 using the dedicated method.

The Code of Virginia requires DPB to assess whether an adverse impact may result from the proposed regulation.⁶ An adverse impact is indicated if there is any increase in net cost or reduction in net revenue for any entity, even if the benefits exceed the costs for all entities combined. As noted above, three pooled QPDs would be affected by the increased haircut requirements for municipal securities and would therefore be required to pledge additional collateral or pledge different collateral with lower or no haircuts. One pooled QPD would be affected by the exclusion of corporate notes from use as collateral and would therefore be required to pledge additional collateral if it wishes to maintain its current deposit capacity. Thus, an adverse impact is indicated on the four banks.

Small Businesses⁷ Affected.⁸ The proposed amendments appear to adversely affect banks that are small businesses.

Types and Estimated Number of Small Businesses Affected. The Treasury reports that two of the three banks affected by the increased haircut to municipal securities appear to be small businesses (employ fewer than 500 full-time employees) and thus an adverse impact on small businesses is indicated. More generally, of the current total of 57 pooled QPDs, approximately 20 to 25 appear to fit the criteria for a small business and could potentially be impacted at some time in the future.

Costs and Other Effects. The proposed amendments would require affected small banks to increase the amount of collateral provided to continue as QPDs or pledge different collateral with lower or no haircuts. Thus, an adverse economic impact on them is indicated.

Alternative Method that Minimizes Adverse Impact. There does not appear to be a clear alternative method that both reduce adverse impact and meet the intended policy goals. The affected banks could potentially decide to no longer hold public funds if the costs of doing so because of this regulation exceed the benefits. The Treasury notes, however, that this outcome would be unlikely.

Localities⁹ Affected.¹⁰ The proposed amendments primarily affect banks that hold deposits of public entities including towns, cities, and counties. However, the proposed changes do not appear to introduce costs for local governments and no localities appear to be disproportionately affected.

Projected Impact on Employment. The proposed amendments do not appear to directly affect total employment.

Effects on the Use and Value of Private Property. Having to provide additional collateral or pledge different collateral with lower or no haircuts may negatively affect the profitability and hence the asset values of banks using the pooled method. Otherwise, the proposed amendments do not appear to affect the use and value of private property or the real estate development costs.

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¹Section 2.2-4007.04 of the Code of Virginia requires that such economic impact analyses determine the public benefits and costs of the proposed amendments. Further the analysis should include but not be limited to: (1) the projected number of businesses or other entities to whom the proposed regulatory action would apply, (2) the identity of any localities and types of businesses or other entities particularly affected, (3) the projected number of persons and employment positions to be affected, (4) the projected costs to affected businesses or entities to implement or comply with the regulation, and (5) the impact on the use and value of private property.

²https://townhall.virginia.gov/L/ViewPReview.cfm?PRid=1757

³https://leg1.state.va.us/cgi-bin/legp504.exe?ses=091&typ=bil&val=ch64

https://leg1.state.va.us/cgi-bin/legp504.exe?ses=101&typ=bil&val=ch640

https://leg1.state.va.us/cgi-bin/legp504.exe?ses=101&typ=bil&val=ch644

⁴Under the dedicated method, a depository collateralizes deposits made by a public depositor individually without contingent liability. Under the pooling method, however, the depositories secure all of their public deposits collectively by establishing a pool of collateral with contingent liability.

⁵Using balances three months earlier, March 31, 2021, there was a fourth QPD under-collateralized by $71,826.

⁶Pursuant to Code § 2.2-4007.04 D: In the event this economic impact analysis reveals that the proposed regulation would have an adverse economic impact on businesses or would impose a significant adverse economic impact on a locality, business, or entity particularly affected, the Department of Planning and Budget shall advise the Joint Commission on Administrative Rules, the House Committee on Appropriations, and the Senate Committee on Finance. Statute does not define "adverse impact," state whether only Virginia entities should be considered, nor indicate whether an adverse impact results from regulatory requirements mandated by legislation.

⁷Pursuant to § 2.2-4007.04a, small business is defined as "a business entity, including its affiliates, that (i) is independently owned and operated and (ii) employs fewer than 500 full-time employees or has gross annual sales of less than $6 million."

⁸If the proposed regulatory action may have an adverse effect on small businesses, § 2.2-4007.04 requires that such economic impact analyses include: (1) an identification and estimate of the number of small businesses subject to the proposed regulation, (2) the projected reporting, recordkeeping, and other administrative costs required for small businesses to comply with the proposed regulation, including the type of professional skills necessary for preparing required reports and other documents, (3) a statement of the probable effect of the proposed regulation on affected small businesses, and (4) a description of any less intrusive or less costly alternative methods of achieving the purpose of the proposed regulation. Additionally, pursuant to § 2.2-4007.1 of the Code of Virginia, if there is a finding that a proposed regulation may have an adverse impact on small business, the Joint Commission on Administrative Rules shall be notified.

⁹"Locality" can refer to either local governments or the locations in the Commonwealth where the activities relevant to the regulatory change are most likely to occur.

¹⁰Section 2.2-4007.04 defines "particularly affected" as bearing disproportionate material impact.

Agency's Response to Economic Impact Analysis: The Treasury Board concurs with the economic impact analysis of the Department of Planning and Budget.

Summary:

The proposed amendments (i) bring the regulatory language in line with the Security for Public Deposits Act (SPDA); (ii) make certain changes to the types of securities eligible to be pledged as collateral and their valuation; (iii) establish formal eligibility criteria for banks to become and remain qualified public depositories and escrow agents; and (iv) make other changes determined to be necessary to better administer the regulation to accommodate the needs of Virginia's banking community and public institutions while ensuring the protection of public funds.

1VAC75-20-10. General.

A. The definitions provided by § 2.1-360 § 2.2-4401 of the Code of Virginia shall be used throughout this chapter unless the context requires otherwise.

B. The Treasury Board has designated the State Treasurer to be the chief administrative officer with respect to the provisions of the Virginia Security for Public Deposits Act (the "Act") (§ 2.1-359 § 2.2-4400 et seq. of the Code of Virginia) and the State Treasurer reserves the right to designate a representative to act on his behalf.

C. The primary responsibility for compliance with the Act rests upon the financial institutions that accept and hold public deposits. If the deposit is a "public deposit," the deposit must be secured pursuant to the Act. If a depositor or a depository is unable to ascertain whether a particular deposit is a "public deposit" for purposes of the Act, he they should obtain the essential details information about the purpose of the account, the custodian of the account, and under what authority the account was established and communicate with the State Treasurer's office by the use of a notice of election form. A final determination will be made by the State Treasurer's office with the assistance of the Office of the Attorney General, if needed.

1VAC75-20-20. Effective date. (Repealed.)

This chapter, as amended, shall be effective on and after November 18, 1993.

1VAC75-20-30. Required collateral for banks Collateral requirements for qualified public depositories.

The required collateral of a national or state chartered bank to secure public deposits shall be determined according to the following applicable criteria and shall consist of securities qualifying as eligible collateral pursuant to these regulations which have a value for collateralization purposes not less than:

1. Fifty percent. Fifty percent of the actual public deposits held at the close of business on the last banking day of the immediately preceding month, or 50% of the average balance of public deposits for the immediately preceding month, whichever is greater;

2. Seventy-five percent. A. The Treasury Board shall establish the required collateral that qualified public depositories must pledge to secure public deposit balances in excess of insurance coverage provided by the Federal Deposit Insurance Corporation based on resolutions and guidelines approved by the Treasury Board. These collateral requirements shall be made available for public access. Public depositors and qualified public depositories will be notified of changes to the requirements in advance of their effective dates.

B. In the event a bank's depository's average daily public deposits for the immediately preceding month exceed one-fifth of its average daily total deposits for that month, the required collateral will be 75% of the actual public deposits held at the close of business on the last banking day of the immediately preceding month, or 75% of the average balance of public deposits for the immediately preceding month, whichever is greater; 3. One hundred percent. in accordance with the Treasury Board's established collateral requirements with the added stipulation that no public deposit be collateralized at less than 75% of the actual public deposits held at the close of business on the last day of the immediately preceding month, or no public deposit be collateralized at less than 75% of the average balance of public deposits for the immediately preceding month, whichever is greater.

C. In the event a bank's depository's average daily public deposits for the immediately preceding month exceed one-fifth of its average daily total deposits and the bank depository has not been actively engaged in the commercial banking business for at least three years, or in the event that a bank's depository's average daily public deposits for the immediately preceding month exceed one-third of its average daily total deposits, or in the event that a bank depository has not been actively engaged in the commercial banking business for at least one year, the required collateral will be no less than 100% of the actual public deposits held at the close of business on the last banking day of the immediately preceding month, or no less than 100% of the average balance of public deposits for the immediately preceding month, whichever is greater.

D. In the event a bank depository has violated the pledging statutes and regulations Security for Public Deposits Act, this chapter, or for other reasons deemed sufficient prudent by the Treasury Board, such as the deteriorating financial condition of the bank depository or the reasons referred to in 1VAC75-20-130 the failure to meet compliance requirements established by the Treasury Board pursuant to 1VAC75-20-130, the Treasury Board may increase the bank's ratio of required collateral to 100% of its actual public deposits depository's collateral requirement.

1VAC75-20-40. Required collateral for savings institutions. (Repealed.)

The required collateral of a savings institution to secure public deposits shall consist of securities qualifying as eligible collateral pursuant to these regulations which have a value, for collateralization purposes, not less than a sum equal to 100% of the average daily balance of public deposits held by such savings institution for the immediately preceding month, but shall not be less than 100% of the public deposits held by such savings institution at the close of business on the last banking day of the immediately preceding month.

In the event that a savings institution has violated the pledging statutes and regulations, or for other reasons deemed sufficient, such as the financial condition of the savings institution or the reasons referred to in 1VAC75-20-130, the Treasury Board may increase such savings institution's ratio of required collateral above 100% of its actual public deposits.

1VAC75-20-50. Average daily balance computation.

A. The average daily balance for any month shall be derived by dividing the sum of the daily balances of any item being computed by the number of calendar days in the month.

B. In computing the amount of public deposits and the average balance of public deposits to be collateralized during any month, there shall be excluded the amount of each deposit which is insured by federal deposit insurance the Federal Deposit Insurance Corporation.

1VAC75-20-60. Eligible collateral.

A. Securities eligible for collateral are limited to:

1. Obligations of the Commonwealth. Bonds, notes and other evidences of indebtedness of the Commonwealth of Virginia, and securities unconditionally guaranteed as to the payment of principal and interest by the Commonwealth of Virginia.

2. Obligations of the United States. Bonds, notes and other obligations of the United States, and securities unconditionally guaranteed as to the payment of principal and interest by the United States, or any agency thereof.

3. Obligations of Virginia counties, cities, etc. and other public bodies. Bonds, notes and other evidences of indebtedness of any county, city, town, district, authority or other public body of the Commonwealth of Virginia upon which there is no default provided that such bonds, notes and other evidences of indebtedness of any county, city, town, district, authority or other public body are either direct legal obligations of, or unconditionally guaranteed as to the payment of principal and interest by, the county, city, town, district, authority or other public body in question and revenue bonds issued by agencies or authorities of the State of Virginia Commonwealth or its political subdivisions upon which there is no default and which are rated BBB Baa2 or better by Moody's Investors Service, Inc. or BBB or better by Fitch Ratings, Inc. or Standard & Poor's Corporation Financial Services LLC.

4. Obligations of the International Bank for Reconstruction and Development, African Development Bank, and Asian Development Bank. Bonds and other obligations issued, guaranteed, or assumed by the International Bank for Reconstruction and Development by the African Development Bank, or by the Asian Development Bank.

5. Obligations partially insured or guaranteed by any U.S. Government Agency.

6. Obligations (including revenue bonds) of states, other than Virginia, and their municipalities or political subdivisions rated A A2 or better by Moody's Investors Service, Inc. or A or better by Fitch Ratings, Inc. or Standard & Poor's Corporation Financial Services LLC.

7. Corporate Notes rated AA by both Moody's Investors Services, Inc. and Standard & Poor's Corporation with a maximum maturity of 10 years.

8. Any additional securities approved by the Treasury Board pursuant to § 2.1-364(d) of the Code of Virginia for which written notification to qualified public depositories from the State Treasurer will be provided.

7. Any additional securities approved by the Treasury Board pursuant to § 2.2-4405.4 of the Code of Virginia.

B. Federal Home Loan Bank letters of credit issued in accordance with the Security for Public Deposits Act are eligible as collateral.

C. No security which is in default as to principal or interest shall be acceptable as collateral.

C. D. No qualified public depository shall utilize securities issued by itself, its holding company, or any affiliate for purposes of collateralizing its public deposits.

D. E. Securities excluded by action of the Treasury Board pursuant to § 2.1-364(d) § 2.2-4405.4 of the Code of Virginia shall not be acceptable. Written notification of securities excluded will be provided to qualified public depositories by the State Treasurer.

1VAC75-20-70. Valuation of collateral.

A. Each qualified public depository shall value its securities for reporting purposes at current market value as of the close of business on the last banking day of the immediately preceding month. Weekly, qualified public depositories that have elected the dedicated method of collateralization must additionally report current market values as of the close of business on Friday of the immediately preceding week. At all times the current market value of collateral must be equal to or greater than a depository's required collateral as defined in 1VAC75-20-30, 1VAC75-20-40 and 1VAC75-20-80 of this chapter. Current market value is defined as the market value of a security priced on a same day basis or no older than one business day. Business day is defined as the close of a commercial business at 5 p.m. The State Treasurer, upon written notice to any or all qualified public depositories and eligible escrow agents, may require as deemed necessary for reporting purposes any day other than a Saturday, Sunday, a legal holiday, or a day in which banking institutions are authorized or required by law or other governmental action to be closed.

B. The Treasury Board may require that certain securities that are difficult-to-value or subject to rapid declines in value or otherwise represent a risk of decrease in value be valued at a rate less than 100% of their market value. Accordingly, this shall apply to all of the following security types: mortgage-backed securities (MBS) and collateralized mortgage obligations (CMO) issued by United States agencies or government-sponsored enterprises (GSE) shall be valued at 80% of their market value; obligations (bonds, notes and other evidences of indebtedness) of the Commonwealth of Virginia and any Virginia county, city, town, authority, or other public body shall be valued at 90% of their market value; and obligations (bonds, notes and other evidences of indebtedness) of other states and their municipalities and political subdivisions shall be valued at 80% of their market value. Qualified public depositories shall have six months from the date these regulations are effective to adjust their pledged collateral, if necessary.

1VAC75-20-80. Deposit of collateral.

A. No qualified public depository shall accept or retain any public deposit which is required to be secured unless it has previously executed a "Public Deposit Security Agreement," approved by the depository's Board of Directors or Loan Committee, with such approval reflected in the minutes of said board or committee. The depository shall maintain the security agreement as an official record continuously from the time of its execution. The depository must also have deposited eligible collateral, as defined in these regulations, equal to its required collateral, determined as herein provided, with an eligible escrow agent approved by the State Treasurer. Each depository is responsible for providing a written notification and executing new agreements upon its name change.

B. Whether or not a qualified public depository has eligible collateral deposited as heretofore provided at the time it receives a public deposit, if such deposit would result in an increase in the qualified public depository's required collateral computed as of the day on which the deposit is received, such qualified public depository shall immediately deposit sufficient securities to increase its collateral to an amount equal to that determined pursuant to 1VAC75-20-30 or 1VAC75-20-40, whichever is applicable, utilizing the qualified public depository's actual public deposits held at the close of business on the banking day such deposit is received in lieu of those held at the close of business on the last banking day in the immediately preceding month. Banking day is defined as the financial institution's close of business at 2 p.m. Written notice of deposit of collateral shall be submitted to the State Treasurer Treasury Board.

At the time of the deposit of registered securities, the qualified public depository owning the securities shall attach appropriate bond power forms as required to allow the State Treasurer to transfer ownership of such registered securities for the purpose of satisfying the qualified public depository's liabilities under the Act in the event the collateral needs to be liquidated.

1VAC75-20-90. Substitution of eligible collateral.

A. A substitution of eligible collateral may be made by the qualified public depository at any time provided that the current market value of the collateral substituted is equal to or greater than the current market value of the collateral withdrawn.

B. At the time of making a collateral substitution, the qualified public depository shall prepare a request for the substitution upon a form approved by the State Treasurer Treasury Board and deliver the original provide it to the escrow agent and a copy to the State Treasurer Treasury Board. The escrow agent shall not allow a collateral substitution unless the current market value of the collateral to be substituted is equal to or greater than the current market value of the collateral to be withdrawn. Current market value for the escrow agent in regards to a substitution is the market value of a security priced on a same day basis or no older than one business day prior to the date of the substitution. The escrow agent shall calculate adjustments to the current market value of collateral that the State Treasurer Treasury Board has identified as difficult-to-value or subject to rapid declines in value or otherwise represents a risk of decrease in value at the time of substitution to determine if the market value is equal to or greater than the value of the collateral to be withdrawn in accordance with 1VAC75-20-70.

C. In the event the current market value of the substituted collateral is not equal to or greater than the value of the collateral to be withdrawn as determined in accordance with 1VAC75-20-70, the qualified public depository shall obtain written approval of the State Treasurer Treasury Board to substitute the collateral.

1VAC75-20-100. Withdrawal of collateral.

A qualified public depository shall not be permitted to withdraw collateral previously pledged without the prior written approval of the State Treasurer Treasury Board. The State Treasurer Treasury Board may grant such approval only if the qualified public depository certifies in writing that such withdrawal will not reduce the current market value of its pledged collateral below its required collateral as defined by these regulations this chapter, and this certification is substantiated by a statement reporting the qualified public depository's current public deposits, which indicates that after withdrawal such deposits will continue to be secured to the full extent required by the law and regulations. Current public deposits are defined as for this purpose are the amount of public deposits held at the time of withdrawal of collateral. If a qualified public depository cannot determine the amount of current public deposits when collateral is to be withdrawn, the depository shall request an exception to this provision from the State Treasurer stating why the depository cannot comply and how it intends to determine the current public deposit balance under this provision. The request for exception must be in writing and formally approved by the State Treasurer. The escrow agent shall not permit the qualified public depository to withdraw collateral without the prior written approval of the State Treasurer Treasury Board.

1VAC75-20-110. Reports by qualified public depositories.

A. Within 10 business calendar days after the end of every the month, each qualified public depository shall submit to the State Treasurer a written report, under oath, signed by an authorized officer of the financial institution indicating Treasury Board an electronic report of such data required by the Treasury Board, certified as to its accuracy by an authorized official of the qualified public depository. The report shall include the total amount of public deposits held by it at the close of business on the last banking day in the immediately preceding month; the average daily balance for such month of all public deposits held by it during the immediately preceding month; the average daily balance of all bank deposits for the immediately preceding month; the total required collateral; the total par value and the total current market value of collateral for at the close of business on the last day in the immediately preceding month; and the average daily collateral balance. Included with this report shall be a detailed schedule of pledged collateral to include, but not limited to, the security description, coupon rate, CUSIP (Committee on Uniform Securities Identification Procedures) number, maturity date, debt rating by Moody's Investors Services, Inc., Fitch Ratings, Inc. or Standard & Poor's Corporation Financial Services LLC, par value amount, book or principal value amount, and current market value amount, determined pursuant to 1VAC75-20-70.

B. Qualified public depositories selecting the dedicated method to collateralize their public deposit balances shall also submit reports similar to those outlined in subsection A of this section each week for the immediately preceding week.

C. At the request of any a public depositor for which it a qualified public depository holds deposits, within 10 business calendar days after the end of any a month, the qualified public depository shall submit a statement indicating the total public deposits in each account to the credit of such depositor on the last banking day in the immediately preceding month and the total amount of all public deposits held by it upon such date.

D. Within the first 10 business calendar days of each calendar quarter, every qualified public depository depositories shall submit to the State Treasurer a Treasury Board an electronic report indicating the account number, type of account, amount of federal deposit insurance applied, total amount on deposit and total amount on deposit to be secured by its pledged collateral or a combined listing containing the same information as an attachment to the "Public Depository Monthly Report" as of the close of business on the last banking day of the calendar quarter being reported. At the same time every qualified public depository shall submit to each public depositor for whom it holds public deposits, a report indicating the account number, type of account, and total account amount to be secured by its pledged collateral by public deposit account to include the account number, type of account (demand or savings), full name of account, name of public entity, custodian name and title, federal tax identification number, amount on deposit in the account, amount on deposit secured by federal deposit insurance, and amount of deposit secured by pledged collateral. Qualified public depositories shall also within the first 10 calendar days of each quarter provide to each public depositor for whom it holds public deposits, a schedule detailing the public deposit accounts reported to the Treasury Board for that depositor, indicating the account name and number, type of account, amount on deposit secured by federal deposit insurance, and total account amount to be secured by its pledged collateral.

With the submission of the "Public Depository Monthly Report" to the State Treasurer for the month ending on June 30, E. By the 10th calendar day of July, qualified public depositories shall attach submit an annual certification from an independent certified public accountant or their internal audit department, attesting to the accuracy of the public deposit balances reported to the State Treasurer Treasury Board during their previous fiscal year in accordance with the instructions issued by the Treasury Board.

1VAC75-20-120. Reports by State Treasurer.

The State Treasurer shall report to the auditors of any public depositor, upon their written request, the status of any qualified public depository's collateral account and its compliance with the reporting requirements of the Act. The State Treasurer shall notify any public depositor that maintains accounts with any bank or savings institution of any irregularities, including, but not limited to, the late filing of the required monthly reports or deficiencies in the qualified public depository's eligible collateral at any time. make available to public depositors and their auditors reports of compliance irregularities of public depositories including undercollateralization and repeated late filings of required compliance reports. The Treasury Board shall be notified of the sending of any reports of irregularities required herein no later than at its next compliance irregularities during the board's regularly scheduled meeting meetings.

1VAC75-20-130. Compliance requirements Eligibility criteria and compliance requirements for qualified public depositories.

Pursuant to the power granted under § 2.1-364 § 2.2-4405 of the Code of Virginia, the Treasury Board may establish criteria for determining the continued eligibility of public depositories to accept public deposits. By formal request, any depository may receive a copy of the approved policy enacted by the Treasury Board. The State Treasurer shall notify public depositors of any policy irregularity regarding their depository to become a qualified public depository and compliance requirements for continued eligibility.

1. To become a qualified public depository, the minimum qualifications are that a bank:

a. Meet the requirements of a qualified public depository as defined in § 2.2-4401 of the Code of Virginia.

b. Have an average or above rating from the Treasury Board's designated rating service for the most recent eight calendar quarters.

c. Cannot be under a formal federal or state bank regulatory enforcement action that would impair its ability to serve as a qualified public depository, to be determined on a case by case basis. Banks will be required to disclose to the Treasury Board any such formal enforcement actions currently in force.

2. For continued eligibility, compliance requirements are:

a. Sufficient collateralization, pooled method. If a qualified public depository using the pooled method of collateralization is undercollateralized three months in a rolling 12-month period, the Treasury Board may take action, including the following, as it deems appropriate:

(1) Increase the depository's collateral requirement.

(2) Prohibit the depository from opening any new public deposit accounts.

(3) Restrict the types of securities the depository may pledge as collateral.

b. Sufficient collateralization, dedicated method. If a qualified public depository using the dedicated method of collateralization is undercollateralized for weekly reporting, it will be penalized accordingly.

c. Timely monitoring and collateralization of public deposit balances. Failing to monitor public deposit balances daily and pledge additional collateral when necessary may result in the Treasury Board taking action, including the actions outlined in subdivisions 2 a (1), 2 a (2), and 2 a (3) of this section.

d. Timely reporting. If a qualified public depository reports late or otherwise fails to report when required, the Treasury Board may take action as it deems necessary.

e. Rating from Treasury Board's designated rating service.

(1) Pooled method: If the depository's rating should fall below average, the collateral requirement will increase to at least 100% of public deposits, net of FDIC coverage, until the rating is again average or above for two consecutive quarters. If the depository's rating should fall into the rating service's lowest rating tier, the Treasury Board may restrict the types of securities the depository may pledge as eligible collateral, or require securities be valued at less than 100%, or both.

(2) Dedicated method: If the depository's rating should fall from one category to another, the collateral requirement will be increased accordingly.

1VAC75-20-140. Criteria for the selection of Eligibility criteria and compliance requirements for escrow agents.

Pursuant to the powers granted to the Treasury Board by § 2.1-362 of the Code of Virginia, the State Treasurer has determined that the selection of an escrow agent or agents is consistent with administration of the Act and the State Treasurer shall define all escrow agent criteria under an agreement labeled "Public Deposit Security Agreement" to be signed and sealed by an authorized officer for the escrow agent, depository and State Treasurer. All escrow agent requirements shall be outlined under a "Master Custodial Agreement" to be signed by an authorized officer for the escrow agent and the State Treasurer, acting on behalf of the Treasury Board. A depository may have no more than one escrow agreement for Virginia public deposits in effect at any given time period. Each depository and The escrow agent is responsible for providing a written notification and executing new agreements upon their its name change. Every qualified public depository shall comply with this section within 60 days of the effective date of this chapter. An escrow agent selected by a qualified public depository for the purpose of holding collateral pledged to the Treasury Board under the Virginia Security for Public Deposits Act (the Act) must meet the following requirements:

1. The escrow agent must sign a "Public Deposit Security Agreement," which shall also be signed by the depository and the State Treasurer, acting on behalf of the Treasury Board.

2. The escrow agent shall hold in a separate account for the Treasury Board eligible collateral pledged under the provisions of the Act and, if acting as escrow for more than one public depository, the collateral must be accounted for in a manner that will allow separate reporting by account and public depository. The escrow shall hold the eligible collateral in a section of the institution which is separate from daily activities performed by that institution such as its trust department and be held accountable for the regulatory requirements of such department.

3. The escrow agent shall be an independent entity in the performance of its duties on behalf of the Treasury Board. The escrow agent may not be the depository itself, its holding company, or any affiliate of the depository.

4. The escrow agent must be able to ascertain whether pledged collateral is eligible in accordance with 1VAC75-20-60. The escrow agent shall distribute all interest, dividends, or other income for the pledged securities to the depository and shall be payable thereto provided the escrow agent has not received written notice from the Treasury Board that the depository is in a condition of "default or insolvency" as defined in the Act, in which event the escrow agent shall hold such income subject to the order of the Treasury Board.

5. The escrow agent shall allow the Treasury Board to examine pledged securities held as collateral at any time, upon 24-hour notice, during the regular business hours of the escrow agent without cost to the Treasury Board. Upon notification from the Treasury Board of the "default or insolvency" of a depository, the escrow agent shall deliver the pledged securities to the Treasury Board for disposition as provided in the Act, and take a receipt thereof, which shall relieve the escrow agent from any further liability to the depository.

6. The escrow agent shall price securities held as collateral at a current market value no older than one business day from the date of a substitution of collateral and from the close of business on the last banking day of the month for monthly reporting purposes.

7. The escrow agent shall adhere to the reporting requirements as detailed in the "Public Deposit Security Agreement."

8. The escrow agent shall allow substitutions in accordance with 1VAC75-20-90.

9. The escrow agent shall ensure that withdrawals of collateral will be in accordance with 1VAC75-20-100.

1. To become an escrow agent, the minimum requirements are that an entity:

a. Be a bank or trust company organized under federal law, Virginia law, or under the laws of another state.

b. Be located in Virginia, meaning it has a main office or branch office in the Commonwealth where deposits are accepted, checks are paid, and money is lent, or where similar services required by an escrow agent under the SPDA Master Custodial Agreement are offered. Existing escrow agents not located in Virginia are grandfathered in.

c. Have an Average or above rating from the Treasury Board's designated rating service for the most recent eight calendar quarters.

d. Cannot be under a formal federal or state bank regulatory enforcement action that would impair its ability to serve as an escrow agent, to be determined on a case by case basis. Banks will be required to disclose to the Treasury Board any such formal enforcement actions currently in force.

e. Be an independent entity in the performance of its duties on behalf of the Treasury Board. The escrow agent may not be the depository itself, its holding company, or any affiliate of the depository.

2. For continued eligibility, compliance requirements are:

a. The escrow agent shall hold in a separate account for the Treasury Board eligible collateral pledged under the provisions of the Act and, if acting as escrow for more than one public depository, a separate account must be opened for each depository. The escrow shall hold the eligible collateral in a section of the institution which is separate from daily activities performed by that institution such as its trust department and be held accountable for the regulatory requirements of such department.

b. The escrow agent must be able to ascertain whether pledged collateral is eligible collateral in accordance with 1VAC75- 20-60.The escrow agent shall distribute all interest, dividends, or other income for the pledged securities to the depository and such income shall be payable thereto provided the escrow agent has not received written notice from the Treasury Board that the depository is in a condition of "default or insolvency" as defined in the Act, in which event the escrow agent shall hold such income subject to the order of the Treasury Board.

c. The escrow agent shall price securities held as collateral at a current market value no older than one business day from the date of a substitution of collateral, as of the close of business on the last day of the month for monthly reporting purposes, and as of the close of business Friday for weekly reporting purposes for depositories using the dedicated method.

d. The escrow agent shall adhere to the reporting requirements as detailed in the "Master Custodial Agreement" and the "Public Deposit Security Agreement."

e. The escrow agent shall allow substitutions in accordance with 1VAC75-20-90.

f. The escrow agent shall ensure that withdrawals of collateral will be in accordance with 1VAC75-20-100.

The State Treasurer, acting on behalf of the Treasury Board, will determine that an escrow agent can meet is eligible based upon the criteria established under this section prior to executing the "Master Custodial Agreement" and the "Public Deposit Security Agreement." The State Treasurer may request information from an escrow agent to substantiate its ability to meet the aforementioned criteria.

In the event an escrow agent violates the requirements of the "Master Custodial Agreement" or the "Public Deposit Security Agreement," the State Treasurer shall notify the escrow agent and applicable public depositories of the violation and require the escrow agent to comply with all terms of the agreement agreements. The escrow agent must provide the State Treasurer and public depositories a written statement, within 30 days of the notification, outlining how and when the violations will be remedied. This statement must be acceptable to the State Treasurer, who will monitor adherence to it. If the escrow agent fails to provide a statement or adhere to it or violates the agreement three times within a two-year period, the State Treasurer will classify such an escrow agent as "disqualified" as an escrow agent under the provisions of the Act and notify all parties its remediation plan or continues to violate the agreements, the Treasury Board may take disciplinary action, up to and including termination of the "Master Custodial Agreement". Qualified public depositories shall have 90 days to select a new escrow agent after such a disqualification in accordance with Treasury Board instructions.

In the event an escrow agent is classified as "disqualified," the term of suspension shall be for one year from the date of disqualification. After "disqualification," an escrow agent must request from the Treasury Board approval to be reinstated as an eligible escrow agent.

After "disqualification," an escrow agent may request approval from the Treasury Board to be reinstated as an eligible escrow agent if correction of prior deficiencies is demonstrated.

1VAC75-20-150. Suspension of authority to receive public deposits.

For failure to comply with or the regulations the Virginia Security for Public Deposits Act (the Act) or this chapter, the Treasury Board may rescind the authority of a qualified public depository to receive further public deposits open new public deposit accounts, or accept new deposits into existing public deposit accounts in accordance with 1VAC75- 20-130 1VAC75-20-130. A depository that continues to hold public deposits after its authority to do so has been rescinded remains fully subject to the provisions of the Act. This includes, without limitation, continuing to meet collateralization and reporting requirements and acting as a qualified public depository for purposes of §§ 2.1-363 2.2-4403 and 2.1-363.1 2.2-4404 of the Code of Virginia.

1VAC75-20-160. Exception reports reportings by public depositors..

Upon receipt of the quarterly public depositor report, as stated outlined in 1VAC75-20-110, public depositors shall notify the State Treasurer of any unresolved discrepancy between the information provided and the public depositors' records. Additionally, public depositors shall verify and confirm to Treasury their account balances as reported by the "Public Fund Accounts" search feature on the Department of the Treasury's website after the end of each quarter to ensure their public funds accounts are being properly reported to the Treasury Board by their qualified public depositories.

FORMS (1VAC75-20)

Public Deposit Security Agreement (and relevant exhibits), # 1001.

Notice of Election to Require Security for Public Deposit, # 1004.

Master Custodial Agreement (filed 1/2022)

Public Deposit Security Agreement (filed 1/2022)