This opinion represents the views of the Office of the State Comptroller at the time it was rendered. The opinion may no longer represent those views if, among other things, there have been subsequent court cases or statutory amendments that bear on the issues discussed in the opinion.

MUNICIPAL FUNDS -- Deposits and Investments (authority to invest in Treasury Bills under "Treasury Direct" program)

GENERAL MUNICIPAL LAW, §§6-f, 11; LOCAL FINANCE LAW, §165.00: A village may temporarily invest in short term United States Treasury bills issued in book-entry form, which are registered in the name of the village, under the "Treasury Direct" program.

This is in reply to your letter concerning the investment of village funds in short term United States Treasury bills under a system known as "Treasury Direct." Under this system, no physical security is issued, the security being evidenced only by an account master record and a description of the security in a securities portfolio associated therewith in the Federal Reserve's computer system (see 31 CFR 357.20[b]). You inquire as to the propriety of investing village funds under this program.

Initially, we note that the temporary investment of municipal funds is generally governed by section 11 of the General Municipal Law. Subdivision 2 of section 11 provides, in pertinent part, that:

2. Investments pursuant to this section may also be made in obligations of the United States of America...

b. Such obligations, unless registered or inscribed in the name of the municipal corporation or fire district, shall be purchased through, delivered to and held in the custody of a bank or trust company or, with respect to the city of New York, a reputable dealer in such obligations as shall be designated by the state comptroller, in this state and shall be sold or presented for redemption or payment only by such bank or trust company or dealer in obligations upon receipt of written instructions from the officer authorized to make the investment. [Emphasis added]

Section 6-f of the General Municipal Law and section 165.00 of the Local Finance Law contain similar provisions relating, respectively, to the investment of reserve fund moneys and the proceeds from the sale of obligations.

It is clear from the above-quoted provision that obligations which are registered in the name of the municipal corporation need not be purchased through, delivered to and held in the custody of a bank or trust company. Further, nothing in the above-quoted provision requires that obligations registered in the name of the municipality be evidenced by a physical instrument. Therefore, it is our opinion that if the Treasury bills purchased under the "Treasury Direct" program are registered in the name of the village, a village may temporarily invest village funds in those obligations.

A Treasury bill is an obligation of the United States issued under section 5 of the Second Liberty Bond Act (31 USC §§3104, 4121; 31 CFR 350.1[a]). Treasury bills are no longer offered in physical form and are available only in electronic ("book-entry") form (31 CFR 350.0[b]). Although no physical security is issued, the Treasury does issue a confirmation of transactions relating to Treasury bills. The confirmation describes the amount, maturity date and CUSIP (Committee on Uniform Security Identification Procedures) number of the bills, as well as pertinent transaction data (31 CFR 350.9).

The regulations adopted by the United States Department of the Treasury relative to the "Treasury Direct" book entry securities system provide that every "owner" of a security must establish an account master record before the owner may deposit a security in "Treasury Direct" (31 CFR 357.20[c]). An "owner" for this purpose is defined as the "individual(s) or entity in whose name a security is registered" (31 CFR 357.3).

Section 357.21 of the regulations contains provisions for registration of securities and provides, that, except in the case of partnership nominees, "(r)egistration of security conclusively establishes ownership ..." (31 CFR 357.21[a][1]). Further, the regulations expressly authorize registration of a security "in the name of a county, city, town, village, school district or other governmental entity, body or corporation established by law" (31 CFR 357.21[e]). The account master record will include, along with other information, the exact form of registration in which the security is held, the Treasury Direct account number, and the correspondence address for the account (31 CFR 357.20[c]).

In Appendix A (Discussion of Final Rule) to 31 CFR 357, the Department of the Treasury discussed the registration of securities provisions of Treasury Direct and stated, as follows:

Forms of Registration. The proposed rule provides the investor with a variety of registration options. They are essentially similar to those provided for registered, definitive securities ...

The reason for establishing the rights of ownership for securities held in Treasury Direct is that it will give investors the assurance that the forms of registration they select will establish conclusively the rights to their book-entry securities. It will also serve to eliminate some of the uncertainties, as well as possible conflicts, between the varying laws of the several states.

A federal rule of ownership is being adopted by the Treasury for Treasury Direct securities. This regulatory approach is consistent with the one previously taken in the case of United States Savings Bonds. It will have the effect of overriding inconsistent State Laws * * *

The pre-emption of inconsistent state law by the "Treasury Direct" registration regulations has been recognized by at least one New York court (see Application of Scheiner, _____ Misc 2d _____, 535 NYS2d 920).

Based on the foregoing, we conclude that a village may invest in Treasury bills purchased under the "Treasury Direct" program. In our opinion, these securities, which are issued in book-entry form, constitute securities registered in the name of the village for purposes of section 11 of the General Municipal Law. Therefore, they need not be purchased through, delivered to and held in the custody of a New York bank or trust company.

October 27, 1989
John Luck, Clerk/Treasurer
Village of Farmingdale