GFOA Sample Agreements 29

Sample Custodial Trust Agreement

The Committee on Cash Management also developed a sample of the type of custody agreement that should be executed between the bank and the custodian of the collateral. The sample custodial trust agreement is aimed at banks that use bank trust departments as their custodians. If a bank were to use a Federal Reserve Bank, the agreement would need proper modification. This agreement can be used in states with or without collateralization laws. If a state does not have a collateralization law, references to the law should be replaced with references to the security agreement between the public depositor and the public depository. Custodial Trust Agreement This Custodial Trust Agreement (Agreement), dated as of _________________, 20____, between [name of financial institution acting as Custodian (whether or not the institution is the same as the institution acting as public depository)] , a [type of bank - national or state, bank and trust, savings or savings and loan] , as custodian (the Custodian), for the [ public depositor] , having an address at ____________, (the Public Depositor), [type of bank - national or state, bank and and [name of financial institution acting as public depository] , a trust, savings or savings and loan] (the Public Depository). WHEREAS, the Public Depository receives or holds public deposits, as said term is defined by [state statute] (Public Deposits); WHEREAS, the Public Depository is required by [state statute] to grant a security interest in its public deposits to the Public Depositor for the benefit of public depositors by the segregation of eligible collateral, as said term is defined by [state statute] ; and WHEREAS, the Public Depository desires to appoint the Custodian and the Custodian desires to act as custodian for the public depository in the conduct of its duties under [state statute] , all upon the terms and conditions and subject to the limitations hereinafter set forth. NOW THEREFORE, in consideration of the premises and of the mutual covenants herein contained, the Custodian and the Public Depository hereby agree as follows: 1. Transfer of Collateral.

a. Initial Transfer. The Public Depository hereby transfers to the Custodian, on behalf of the Public Depositor, subject to the security interest granted to public depositors under [state statute] , the collateral described in Schedule 1 attached hereto (the Collateral). The Public Depository certifies that the Collateral is Eligible Collateral, subject to the requirements of the Security Agreement between the Public Depositor and the Public Depository and [if applicable] [state statute] and regulations adopted pursuant thereto (together, the Public Deposits Act). b. Additions and Substitutions of Collateral. The Public Depository may, from time to time, transfer to and deposit with the Custodian additional Eligible Collateral or moneys for the purchase of additional Eligible Collateral, to be held by the Custodian pursuant to the terms of this Agreement; provided, however, that if in its sole discretion the Custodian deems the same necessary or convenient, the Public Depository and the Custodian shall first have entered into an amendment to this Agreement describing additional or different terms subject to which the Custodian will receive, hold and dispose of such additional Eligible Collateral. Except as otherwise provided in an amendment to this Agreement, upon transfer or purchase thereof by the Custodian, such additional Eligible Collateral shall be subject in all respects to the terms of this Agreement, and the word Collateral as used in this Agreement shall include such additional Eligible Collateral. If Collateral is purchased by the Custodian with moneys provided by the Public Depository, including moneys designated for such purpose pursuant to Section 2 hereof, such

30 An Introduction to Collateralizing Public Deposits

purchase of Collateral shall be at the written direction of the Public Depository, specifically identifying the Collateral to be purchased. c. Public Depositorys Transfer Certificate. Each transfer of Collateral or money for the purchase of Collateral, including the initial transfer of Collateral under this Agreement, shall be accompanied by a certificate of the Public Depository stating, as applicable, the par value or original face amount, current par value, interest rate, CUSIP number, maturity date, market value and security rating of the Collateral transferred or to be purchased. The certificate shall also contain a description of the Collateral and shall state that the Collateral is being transferred to [name of financial institution acting as Custodian] , as Custodian, pursuant to this Agreement. 2. Sale or Disposition of the Collateral; Recoveries of Moneys With Respect to the Collateral.

The Custodian shall not sell or otherwise dispose of the Collateral prior to its maturity. Notwithstanding the foregoing, the Custodian shall, if and as directed in writing by the Public Depository, transfer to the Public Depository, sell or otherwise dispose of any or all of the Collateral. The Custodian shall pay to the Public Depository the proceeds, if any, of any such sale or other disposition of the Collateral. The Custodian shall promptly pay to the Public Depository all other moneys, other than interest (which is to be paid to the Public Depository pursuant to the terms of Section 3 hereof), received by the Custodian with respect to the Collateral. Notwithstanding the foregoing, the Public Depository may provide to the Custodian written instructions to apply all or any part of such proceeds or moneys to the purchase of additional Collateral, provided that such purchase of additional Collateral shall be subject to the terms of Section 1 hereof. 3. Interest Fund.

An Interest Fund (the Interest Fund) is hereby established with the Custodian, into which Interest Fund the Custodian shall deposit any interest or other amounts (excluding amounts subject to the terms of Section 2 hereof) received by the Custodian on the Collateral. By the fifteenth day of each month during the term of this Agreement, the Custodian shall pay to the Public Depository any amounts then held in the Interest Fund, subject, however, to the Custodians lien or right of set off pursuant to Section 5(d) hereof. 4. Custodians Certificate; Notice of Noncompliance.

Prior to or upon execution of this Agreement, the Custodian will deliver to the Public Depository a certificate in substantially the form attached hereto as Schedule 2, stating that the Custodian: (a) is authorized under law to exercise fiduciary powers in the State of ____________; (b) complies with all applicable capital guidelines and requirements as described in the Public Deposits Act; has assets which exceed its liabilities; and that the Custodians execution and performance of this Agreement is legal, valid, binding, and enforceable in accordance with the terms of this Agreement; and (c) is either federally insured or has the approval of the state banking commissioner (Commissioner) to act as custodian hereunder despite not being federally insured. The Custodian agrees to notify the Public Depositor and the Public Depository immediately in writing if at any time (a), (b), or (c) ceases to be true of the Custodian. 5. Concerning the Custodian.

a. Custodians Duties and Responsibilities. The Custodian may act upon any instrument or other writing believed by it in good faith to be genuine and to have been signed or presented by the proper person and shall not be liable to any party hereto or to the Public Depositor in connection with the performance of its duties hereunder, except for its own negligence or willful misconduct. The Custodians duties shall be determined only with reference to this Agreement and the Public Deposits Act (as it relates specifically to the qualifications or duties of the Custodian) and the Custodian is not charged with knowledge of or any duties or responsibilities in connection with any other document or agreement.

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b. Liability of the Custodian. The Custodian shall maintain and segregate all Collateral which at any time comes into its possession in accordance with the customary standards in the industry for such possession. The Custodian shall not be liable for any loss resulting from the investment of any moneys held by it hereunder. The Custodian shall in no event be liable for any violation by the Public Depository of, or be responsible to ensure the Public Depositorys compliance with, the Public Deposits Act. In addition, the Custodian makes no representations concerning [state] law as it relates to the Public Depositorys holding and securing of Public Deposits under the requirements of the Public Deposits Act applicable to the Public Depository. The Collateral is subject to the requirements of the Public Deposits Act; provided, however, that the Custodian shall have no liability to ensure the Public Depositorys compliance with such requirements. c. Indemnification; Fees and Expenses. In consideration of the Custodians acceptance of its appointment as the Custodian, the Public Depository agrees to indemnify and hold the Custodian harmless as to any liability incurred by the Custodian to any person, firm or corporation, including, without limitation, to the Public Depositor, by reason of its having accepted the same or in carrying out any of the terms hereof, and to reimburse the Custodian for all its expenses, including among other things, counsel fees and court costs, incurred by reason of its position hereunder or actions taken pursuant hereto, except in the event of the gross negligence or willful misconduct of the Custodian. In the event of its failure to exercise ordinary care, the Custodian shall be liable for direct damages. The Custodian shall be deemed to have exercised ordinary care if its actions or failure to act is in conformity with reasonable practice of its banking industry. Notwithstanding any other provision of this Agreement, if it becomes necessary for the Public Depositor to obtain court enforcement of its rights against the Custodian and the Public Depositor should prevail, the Custodian shall be liable for the legal fees and costs of the Public Depositor. The Public Depository agrees that the Custodian shall not be liable to it for any actions taken by the Custodian pursuant to the terms hereof. The Public Depository agrees to pay the fees of the Custodian pursuant to the terms of a fee letter delivered by the Custodian to the Public Depository and accepted by the Public Depository. The Public Depository also agrees to pay on demand the Custodians costs and expenses, including the fees and expenses of counsel and independent appraisers used by the Custodian, reasonably incurred in connection with its duties hereunder. d. Custodians Lien. The Custodian shall have a lien or right of set off on all moneys held in the Interest Fund to pay all fees, expenses and indemnities under this Agreement, and on all moneys being returned to the Public Depository pursuant to Section 2 hereof. e. Resignation. The Custodian shall have the right at any time to resign hereunder by giving written notice of its resignation to the Public Depository at the address set forth herein or at such other address as the Public Depository shall provide, at least thirty (30) business days prior to the date specified for such resignation to take effect (the Effective Date) and upon the Effective Date all moneys, Collateral, and proceeds of Collateral then held by the Custodian hereunder shall be delivered by it to the successor custodian designated in writing by the Public Depository. Any such resignation shall not be effective until a successor custodian has been appointed by the Public Depository. As used in this Agreement, the term business day means any Monday through Friday, excluding any day on which the Public Depository is authorized or required to be closed under [state] or federal law. f. Delivery of Collateral to the Public Depositor. Promptly upon receipt of written statement of the Public Depositor that the Public Depository is in default, and without need of inquiry as to the validity of such statement, the Custodian shall transfer and surrender to the Public Depositor all or any part of the Collateral, as demanded by the Public Depositor. If the Custodian transfers all of the Collateral held by it hereunder to the Public Depositor, the Custodian shall, concurrently therewith, transfer to the Public Depository all moneys held by it hereunder, subject to the Custodians lien pursuant to Section 5(d) hereof, and this Agreement shall thereupon terminate in accordance with the terms of Section 6 hereof. g. Insurance. The Custodian shall, at its own expense, maintain at all times during the existence of this Agreement and keep in full force and effect (a) fidelity insurance, (b) theft of documents insurance, (c) forgery insur-

32 An Introduction to Collateralizing Public Deposits

ance and (d) errors and omissions insurance. All such insurance shall be in amounts, with standard coverage and subject to deductibles, as are customary for insurance typically maintained by banks which act as Custodian in similar transactions. A certificate of the respective insurer as to each such policy shall be furnished to the Public Depository, upon request, containing the insurers statement or endorsement that such insurance shall not be materially altered or terminated prior to receipt by the Public Depository, by registered mail, of 10 days notice thereof. h. Miscellaneous. The Custodian may execute any of its powers or responsibilities hereunder and exercise any rights hereunder either directly or by or through its agents or attorneys. Nothing in this Agreement shall be deemed to impose upon the Custodian any duty to qualify to do business or to act as fiduciary or otherwise in any jurisdiction other than in the State of __________. The Custodian shall not be responsible for and shall not be under a duty to examine into or pass upon the validity, binding effect, execution or sufficiency of this Agreement or any agreement amendatory or supplemental hereto with regard to the Public Depository. 6. Termination.

This Agreement shall terminate upon the Effective Date of the Custodians resignation, or at any time at the option of the Public Depository by written notice to the Custodian terminating this Agreement and instructing the Custodian to transfer all moneys, Collateral, and proceeds of Collateral then held by it hereunder to the Public Depository or to a successor custodian, or upon transfer of all of the Collateral to the Public Depositor and of other moneys to the Public Depository pursuant to Section 5(g) hereof. The provisions of Subsections 5(c) and (d) hereof shall survive termination of this Agreement. 7. Notices.

All notices, requests, consents, instructions, demands and other communications required under this Agreement shall be in writing and, unless otherwise specifically provided, may be delivered personally, by telegram, telex, facsimile, or by first class mail, postage prepaid, or by express delivery service, at the addresses set forth below, or such other addresses as may hereafter be furnished to the other parties by like notice. Any such demand, notice or communication hereunder shall be deemed to have been received on the date delivered to or received at the premises of the addressee at: If to the Custodian: [address] If to the Public Depository: [address] 8. Amendments.

No modification or amendment of or supplement to this Agreement shall be valid or effective unless the same is in writing and signed by all the parties hereto. 9. Governing Law.

This Agreement shall be governed by and construed in accordance with the laws of the State of __________. 10. Counterparts.

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This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which shall constitute but one and the same instrument. 11. Reports.

Upon the initial transfer of collateral under this Agreement, and by the fifteenth day of each month during the term of this Agreement, the Custodian shall provide to the Public Depository and Public Depositor a statement: (1) listing the Collateral held by the Custodian; (2) stating the aggregate Value (as defined below) of the Collateral; and (3) itemizing the interest and other amounts received on the Collateral and deposited into the Interest Fund pursuant to Section 3 hereof. The Value of Collateral shall be its market value, if the same is readily determinable. If the market value of Collateral is not readily determinable from sources available to the Custodian in the ordinary course of its corporate trust business, then the Custodian shall have no obligation to determine the value of such Collateral. 12. Successors and Assigns.

This Agreement shall be binding upon the parties hereto and their respective heirs, legal representatives, executors, administrators, successors and assigns. 13. Severability.

If any of the provisions of this Agreement shall be held invalid, then such provisions shall be deemed severable from the remaining provisions of this Agreement and shall in no way affect the validity or enforceability of the other provisions of this Agreement. 14. Further Assurances.

Upon demand, the Public Depository will execute and deliver to the Custodian such instruments and documents as the Custodian may reasonably deem necessary or advisable to confirm the Custodians interest in the Collateral or to further define the Custodians obligations hereunder. IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto as of the date first above written. [NAME OF FINANCIAL INSTITUTION], as Custodian

By:_____________________________ Name: Title: Dated:___________________________ [NAME OF FINANCIAL INSTITUTION], as Public Depository By:_____________________________ Name: Title: Dated:__________________________

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Attachments to the Agreement

The agreement references schedules 1 and 2 as attachments. Below are examples of schedules that may be used and include a schedule of collateral and a certificate of eligibility of the custodian. These schedules are as follows:

SCHEDULE 1

[DESCRIPTION OF COLLATERAL] SCHEDULE 2 CUSTODIANS CERTIFICATE OF ELIGIBILITY

The undersigned, being a duly authorized officer of [name of financial institution, acting as Custodian] , as custodian (in such capacity, the Custodian) under the Custodial Trust Agreement (the Agreement) dated as of __________________, 20__ between the Custodian and [name of financial institution acting as public depository] (the Public Depository) hereby certifies as follows: 1. the Custodian is authorized under the laws of the United States of America to exercise trust and fiduciary powers in the State of __________; 2. the Custodian complies with all applicable capital guidelines and requirements applicable to it, adopted by the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Board of Governors of the Federal Reserve System as from time to time amended; 3. 4. deposits of the Custodian are insured by the Federal Deposit Insurance Corporation; the Custodian has assets that exceed its liabilities; and

5. the Agreement is a legal, valid, and binding obligation of the Custodian, enforceable in accordance with its terms. The Custodian agrees to notify the Public Depositor and the Public Depository immediately in writing if at any time any of the above conditions ceases to be true and accurate. Certified this ________ day of ____________________, 20____. [NAME OF FINANCIAL INSTITUTION ACTING AS CUSTODIAN], as Custodian By:________________________________ Name: Title: