The Public Funds Investment Act limits the amount of uninsured and uncollateralized public funds deposits we hold to “75% of the capital stock and surplus” of our bank. If we place public funds under a CDARS or ICS arrangement, does the 75% limitation apply? One of our municipal customers is concerned about that provision. Also, does the definition of “capital stock and surplus” include retained earnings?

No, the 75% limitation in the Public Funds Investment Act (the “Act”) does not apply to these arrangements. Funds held through a Certificate of Deposit Account Registry Service (CDARS) or an Insured Cash Sweep (ICS) arrangement are fully insured by the FDIC. In addition, a 2005 amendment to the Act added a new Section 6.5 in order to accommodate the use of split deposit programs like CDARS. Section 6.5 exempts such deposits from “the provisions of Section 6 of this Act [including the 75% limitation] and any other statutory requirements pertaining to the eligibility of a bank to receive or hold public deposits or to the pledging of collateral by a bank to secure public deposits.”

Nonetheless, your municipal customer may object to a CDARS or ICS arrangement, and it may require additional information about your institution or the other institutions holding the municipality’s funds through a CDARS or ICS arrangement. The provisions added in the 2005 amendment also state: “Nothing in this Section is intended to: (1) prohibit a public agency from requiring the bank at or through which the investment of public funds is initiated to provide the public agency” with copies of its sworn statements of resources and liabilities required under Section 6 of the Act.

If your municipal customer is concerned about the use of a CDARS or ICS arrangement, you may wish to share an FDIC advisory opinion concluding that split deposits under the CDARS program are fully insured. However, that opinion comes with two provisos: (1) it assumes that your institution and the other institutions in the program are following the appropriate recordkeeping and other procedures, and (2) the CDARS program has not changed since the FDIC issued that opinion in 2003.

Given that the CDARS and ICS arrangements qualify for the exception in Section 6.5, the “75% of capital stock and surplus” limitation does not apply here. In addition, we note that retained earnings are not included in capital stock and surplus calculations under generally accepted accounting principles. Moreover, while the Act does not define “capital stock and surplus,” the Illinois Banking Act’s definitions of “capital stock” and “surplus” do not include retained earnings.

For resources related to our guidance, please see:

Public Funds Investment Act, Section 6.5, 30 ILCS 235/6.5(a) (This Section permits municipalities and other public agencies to use CDARS and similar arrangements and exempts such deposits from “the provisions of Section 6 of this Act and any other statutory requirements pertaining to the eligibility of a bank to receive or hold public deposits or to the pledging of collateral by a bank to secure public deposits . . . .”)

Public Funds Investment Act, Section 6.5, 30 ILCS 235/6.5(b) (This Section permits municipalities and other public agencies to require a bank “at or through which the investment of public funds is initiated to provide the public agency with the information otherwise required by subsection (a), (b), or (c) of Section 6 of this Act as a condition of investing the public funds at or through that bank . . . .”)

Public Funds Investment Act, Section 6, 30 ILCS 235/6 (This section require banks to furnish “the corporate authorities of a public agency submitting a deposit with copies of the last two sworn statements of resources and liabilities which the bank is required to furnish to the Commissioner of Banks and Real Estate or to the Comptroller of the Currency . . . provided, that if such funds or moneys are deposited in a bank, the amount of all such deposits not collateralized or insured by an agency of the federal government shall not exceed 75% of the capital stock and surplus of such bank . . . .”)

FDIC Advisory Opinion 03-03: (As to whether “pass-through” deposit insurance rules apply to funds placed in the “Certificate of Deposit Account Registry Service” (July 29, 2003): “. . . deposits placed through the CDARS system would be insured on a pass-through basis under the FDIC’s rules on the insurance coverage of agency or custodial accounts. For this coverage to be available, the recordkeeping and other applicable procedures specified in the materials would have to be followed. These views are based on the information contained in the version of the CDARS materials enclosed with your letter. Revisions to those documents on deposit ownership and recordkeeping may affect the deposit insurance coverage results.”)

Illinois Banking Act, 205 ILCS 5/2 (This section defines “capital stock” and “surplus,” and neither term includes retained earnings.)