# Our Ref. No. 93-254-CC

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

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JUN 241993
Our Ref. No. 93-254-CC
T. Rowe Price Tax-Free

Funds

RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF INVESTMENT MAAGEMENT

File Nos. 811-4521,
et. aL.

Your letter of May 7, 1993, requests assurance that we would
not recommend that the Commission take enforcement action against
T. Rowe Price Associates, Inc. or any of the T. Rowe Price TaxFree Funds (the "Funds"), ~/ if the Funds treat an investment in
a municipal bond refundeq with escrowed U.S. Government
securities, in the manner described in your letter, as an
investment in the U. S. Government securities solely for purposes
of section 5 (b) (1) of the Investment Company Act of 1940 ("1940
Act"). £/

The Funds invest in municipal bonds. l/ From time to time,
a municipality may refund a bond that it has already issued prior
to the original bond's call date by issuing a second bond, the
proceeds of which are used to purchase securities. The
securi ties are placed in an escrow account pursuant to an
agreement between the municipality and an independent escrow
agent. The principal and interest payments on the securities are
then used to payoff the original bondholders.
Section 5(b) (1) limits the amount a diversified investment
company may invest in anyone issuer generally to five percent of

ii The Funds currently consist of the following: T. Rowe Price
Tax-Exempt Money Market Fund, Inc., T. Rowe Price Tax-Free
Short-Intermediate Fund, Inc., T. Rowe Price Tax-Free Income
Fund, Inc., T. Rowe Price Tax-Free High Yield Fund, Inc., T.
Rowe Price Tax-Free Insured Intermediate Bond Fund, Inc., T.
Rowe Price California Tax-Free Income Trust, and T. Rowe
Price State Tax-Free Income Trust. Your letter also
requests relief with respect to any additional tax-free
funds created in the future that T. Rowe Price Associates,
Inc. manages and sponsors.

£/ Section 5 (b) (1) defines a diversified company as a
management company that meets the following requirements:
at least 75 per centum of the value of its total assets
is represented by cash and cash items (including
receivables), Government securities, . . . and other
securities for the purposes of this calculation limited
in respect of anyone issuer to an amount not greater
in value than 5 per centum of the value of the total
assets of such management company . . ."

ll All of the Funds other than the State Tax-Free Income Trust
are diversified, open-end companies. The State Tax Free
Income Trust is a non-di versif ied, open-end company.

the investment company's assets. By the express terms of Section
5(b) (1), this limit does not apply to u.S. Government
securities. ~I You assert that where a municipal bond is
refunded with escrowed U. S. Government securities in the manner
described below, a Fund's investment in the bond should be deemed
to be an investment in the u.S. Government securities for
purposes of section 5 (b) (1), thereby relieving the Fund from the

5 percent limitation.

You specifically represent that the escrowed securities will
consist exclusively of u.s. Government securities as defined in

section 2 (a) (16) of the 1940 Act. 2/ The securities will not be

redeemable prior to maturity. The deposit of the securities into
the escrow account will be irrevocable and pledged only to the
debt service on the original bonds. ~/ The escrow agent will
hold an express first lien on, pledge of, and perfected security
interest in the escrow securities and the interest income on the
securities for the benefit of the bondholders. Disbursements
from the escrow account to parties other than the bondholders
will not be permitted, other than from excess securities. You
represent that neither the preference provisions 2/ nor the
automatic stay provisions ~/ of the Bankruptcy Code should affect
the payment of the original bonds from the escrow account.
Consequently, securities deposited in the escrow account will not
be subj ect to the claims of creditors of the municipality, even
in the case of economic defeasance. ~/

~I See American Express Income Shares, Inc. (pub. avail. Nov.
14, 1979).

2/ Section 2 (a) (16) defines "Government security" as "any
securi ty issued or guaranteed as to principal or interest by
the United States, or by a person controlled or supervised
by and acting as an instrumentality of the Government of the
United States pursuant to authority granted by the Congress
of the united States; or any certificate of deposit for any

of the foregoing. II

~/ Any escrow securities or funds remaining in the escrow
account after the original bondholders are paid in full,
however, may be applied to pay escrow agent fees or returned
to the issuer.

21 See 11 U.S.C. § 362 and 901(a).

~I See 11 V.S.C. § 547 and 548.
~I You note that refunded bonds generally fall into two
categories: (1) bonds whose indentures contain express

provisions permitting defeasance (" legal defeasance"), and
(2) bonds whose indentures do not contain express defeasance
- 2 ­

v ',' I
The escrow agent will not be an affiliated person of the
issuer, or an affiliated person of an affiliated person of the
issuer, within the meaning of section 2(a) (3) of the 1940 Act.
The escrow agent will have no lien of any type with respect to
the escrow securities for payment of its fees or expenses except
with respect to excess securities. The escrow agent's authority
to substitute escrow securities under the escrow agreement will
be severely limited. Substitute securities must be the same type
as the securities being replaced and must be sufficient to

adequately fund the debt ..service on the original bonds. An

independent certified public accountant, counsel to holders of
the original bond, or other party acceptable to a nationally
recognized statistical rating agency, will verify at the time of
the initial deposit of securities into the escrow account and at
the time any substitute securities are deposited into the escrow
account, that the securities will satisfy all scheduled
principal, interest, and any applicable premiums on the original

bonds. Finally, you represent that each of the Funds that is a

diversified company will invest no more than 25% of its total
assets in refunded bonds of the same municipal issuer.
On the basis of the facts and representations in your
letter, and assuming appropriate prospectus disclosure, we would
not recommend that the Commission take any enforcement action
against T. Rowe Price Associates, Inc. or any of the Funds if the
Funds treat an investment in a municipal bond refunded with
escrowed V. S. Government securities as an investment in the V. S.

Government securities solely for purposes of Section 5 (b) (1). 101

You should note that any different facts or representations might

provisions but are refunded by escrowed securities
("economic defeasance

II ). Where the indenture for the

original bond provides for legal defeasance, a deposit of
the securities into the escrow account legally discharges
the municipality from all of its obligations with respect to
the original bonds. The municipality has no beneficial
interest in the escrow account. In the case of economic
defeasance, the municipality remains responsible under the

original bond. In both cases, the deposit of the securities

removes the original bond from the liability portion of the

municipali ty' s balance sheet.

101 You have not asked and we express no opinion regarding the
status of bonds refunded with escrowed V. S. Government
securities under any other provisions of the 1940 Act or the
other federal securities laws.
- 3 ­

?

require a different conclusion. Moreover, this response
expresses the Division's position on enforcement action only and
does not express any legal conclusions on the questions

presented.
/,

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Jana
M. cayneJ ~.
Attorney

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May 7, 1993

Thomas S. Harman, Esquire
Division of Investment Management
U.S. Securities and Exchange Commission
450 Futh Street, N.W.
STOP 5-2
Washington, D.C. 20549

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Re: Restated and Resubmitted Request for No Action Relief

Purchase of Refunded Municipal

Bonds by T. Rowe Price Tax-Free Funds

Dear Mr. Harman:
In response to comments to our October 15, 1992 letter and various telephone conversations
with your staff, we are restating and resubmitting our request for no action relief.
Summary of Request. We are writing to request assurance that the staff of the Division
of Investment Management ("StaW') would not recommend enforcement action against any T. Rowe
Price Tax-Free Fund (as described below and collectively the "Funds")! or T. Rowe Price
Associates, Inc. ("Price Associates"), the investment manager and sponsor of the Funds, u any of

the Funds were to invest 'in refunded municipal bonds as defined and in the manner described
below. If the relief requested herein were granted, the Funds, for purposes of Section 5(b)(1) of
the Investment Company Act of 1940 (the "Act"), would consider an investment in a municipal bond
refunded with escrowed U.S. government securities to be an investment in the U.S. government
securities instead of an investment in the municipal issuer. In our view, such a position is justuied

beuse refunding of the bond means the municipality is no longer looked to for payment of
principal and interest but rather the escrowed account containing the U.S. government securities
is considered the source of such payments.

! Currently, the T. Rowe Price Tax-Free Funds consist of the T. Rowe Price Tax-Exempt Money
Fund, Inc., T. Rowe Price Tax-Free Short-Intermediate Fund, Inc., T. Rowe Price Tax-Free Income

Fund, Inc., T. Rowe Price Tax-Free High Yield Fund, Inc., T. Rowe Price Tax-Free Insured
Intermediate Bond Fund, Inc., T. Rowe Price California Tax-Free Income Trust, with two portfolios,

and the T. Rowe Price State Tax-Free Income Trust, with six single state portfolios. Al of the
Funds are diversuied, open-end management companies with the exception of the six portfolios of
the State Tax-Free Income Trust which are non-diversified, open-end management companies. We
also request that any relief granted in response to this letter include any additional tax-free funds

created in the future and managed and sponsored by Price Associates.

Thomas S. Harman, Esquire
May 7, 1993
Page 2

Refunded Bonds. The sequence of events leading to a refunded bond begis when a
municipality, in the normal course of its operations, issues a bond (the "Original or Refunded
Bond"), which is not callable for a specified period after the date of issuance. If interest rates fall
signuicantly after the issuance of the Odgial Bond, or U the municipality believes it otherwise
advantageous to refund the Origial Eond, for example, to free itself of a restrictive covenant, then,

prior to the first date the Original Bond is callable, the municipality may decide to refund the
Origial Bond in advance of that first call date by issuing a Second or Refunding Bond.2

The Escrow Securities. The proceeds of the Second Bond are used to purchase securities
selected by the municipal issuer and are generally liited to securities which, under guidelies

established by the major rating agencies, wil permit the Original Bonds to secure AAl Aaa
ratings.3 Although the rating agencies may allow AAlAaa rated, non-U.S. government securities
to be placed in the Escrow Account, the relief requested herein relates only to bonds which are
refunded with "u.s. Government Securities" as defined in Section 2(a)(16) of the Act.
The Escrow Account. The securities purchased by the Second Bond are held by an escrow
agent, unrelated to the municipality, in an Escrow Account pursuant to an Escrow Agreement
between the municipality and the Escrow Agent. Attached as Exhibit A is an Escrow Agreement.
It is my understanding that escrow agreements do not differ in any material respect for legally
defeased and economically defeased bonds, as described below.

Under the terms of the Escrow Agreement, principal and interest payments on the Escrow
Securities come due at such times and in such amounts as wil be sufficient to pay the principal and
interest on the Original Bonds. This is verified by a CPA or some other person acceptable to the
rating agencies in a Verification Report submitted at the time of the establishment of the Escrow
Fund. The Escrow Securities are irrevocably pledged only to the debt service on the Original Bonds
and are not available for the payment of any other bonds, including the Second Bonds. The deposit
of funds in the Escrow Account is irrevocable and for the equal and ratable benefit of all holders
of the Origial Bonds. Disbursements from the Escrow Account to parties other than the

bondholders are not permitted (except to the extent there may be excess securities in the Escrow
Account (see Excess Escrow Securities below).
Escrow Ai;ent. The Escrow Agent must be independent of the Issuer. The Escrow Agent

would not be an affilate, or an affilate of an affiiate, of the Issuer within the meaning of Section
2(a)(3) of the Act. The Escrow Agent's duties are set forth in the Escrow Agreement and it may
act only pursuant to such agreement. None of the funds in the Escrow Account necessary to satisfy
2A bond issue refunded in advance of its first call date and slated to be called on that first call
date is commonly referred to as "pre-refunded." Refunded bonds slated to be paid at maturity are

termed "escrowed to maturity." For purposes of the issues described in this letter, there is no
difference between "pre-refunded" and "escrowed to maturity" bonds and we are requesting the same

relief for both. .

3Importantly, however, not all Refunded Bonds receive a rating due to cost considerations and

the wilingness of the market to ac(;ept Refunded Bonds without a rating.

Thomas~~ Harm~ E~uire
May 7, 1993
Page 3
the debt service on the Origial Bonds may be used to pay fees of the Escrow Agent, although

amounts in excess of funds necessary for debt service may be so used ("Excess Seurities"). The
Escrow Agent has no lien of any tye with respect to the Escrow Securities for the payment of its
fees and expenses except to the extent there are Excess Securities.

Pied~es and Liens. The Escrow Agreement provides that the Issuer grants and assigns to
the Escrow Agent, solely in its capacity as Escrow Agent, for the equal and ratable benefit of the

holders of the Origial Bonds an express first lien on, pledge of and perfected security interest in
the Escrow Securities and the interest income thereon. In the event of a fraudulent

misappropriation of the Escow Securities by the Escrow Agent, the Escrow Agent would remain
liable to the holders of the Original Bonds.
Substitution of Escrow Securities. The Escrow Agreement may allow the Escrow Agent
or Issuer liited authority to substitute Escrow Securities (Substitute Securities). This authority

is severely proscribed and Substitute Securities must be of the same tye as Escrow Securities and
must be sufficient to adequately fund the debt service on the Original Bonds. There is no active
management of the Escrow Account. The purchase of Substitute Securities by the Escrow Agent

or Issuer is subject to the receipt of a Veruication Report from an independent CPA or other
acceptable person that the Escrow Securities, including any Substitute Securities, wil be sufficient
to satisfy the debt service on the Original Bonds.

Excess Escrow Securities. Any Escrow Securities or funds remaining in the Escrow Account

after payment in full of the Original Bonds may be applied to pay fees due the Escrow Agent or
returned to the Issuer.
Defeasance. Refunded bonds generally may be considered to fall into two broad categories.
In the first, the Origial Bond is issued with express provisions in its indenture permitting
defeasance of the issuer's obligations.. This tye of situation is termed "legal defeasance" and

tyically can be found in revenue bond transactions that are secured by a lien on specific property,

for example, a mortgage on hospital facilities or a pledge of a utility system's revenues. The
rationale for providing for the possibilty of defeasance in the Original Bond is that priority in the
property secured cannot be given to the Second Bond's holders unless the lien under the Origial

Bond documents is released upon the creation of the Escrow Account. In addition, the borrower
does not want the Origial and Second Bonds to both be considered "outstanding" at the same time
for purposes of coverage and other financial covenants usually present in bond documents. In this

regard, where the indenture for the Original Bond provides for the possibilty of legal defeasance,
deposit of the Escrow Securities into the Escrow Account in satisfaction of the bond's defeasance
requirements legally discharges the municipality from all of its obligations with respect to the
Original Bonds.
In contrast, legal defeasance provisions generally are not found in general obligation bonds,

which are secured by the issuer's unlimited covenant to levy and collect taxes to pay the debt.
Becuse of the unlimited nature of this covenant, there is no need to remove it from the Original

Bond in order to grant it to the Second Bond. Nevertheless, in these situations, deposit of the
Escrow Securities into the Escrow Account has the effect of removing the Original Bond from the
municipality's debt on its "balanee sheet", even though the municipality remains technically

Thomas S. Harman, Esquire
May 7, 1993
Page 4

responsible under the Origial Bond. This latter situation is referred to below as "economic
defeasance" .

Section 5(b)(i) of the Act. Section 5(b)(1) of the Act provides that a diversified company
means a management company which meets the following requirements: at least 75% of the value
of its total assets is represented by cash and cash items (including receivables), government
securities, securities of other investments companies and other securities for the purposes of this

calculation liited in respect of anyone issuer to an amount not greater in value than 5% of the
value of the total assets of such management company and to not more than 10% of the outstanding
voting securities of such issuer.
The issue presented by our request is how to apply the diversification test of this section

to the refunded bonds described above.
In American Express Income Shares, Inc. (available November 14, 1974), the Staff, took the
position that the 5% diversification limitation in Section 5(b )(1) does not apply to a fund's holdings

of U.S. government securities. Thus, for purposes of section 5(b)(I), if a fund's investment in a
bond refunded with U.S. government securities were deemed to be an investment in the U.S.

government securities rather than the municipality issuing the Original Bond, section5(b)(1)
diversuication requirements essentially would not apply to the fund's investment in the bond.4

Guide 18 to Form N-IA. Guide 18 to Form N-IA provides as follows:
The identification of the issuer of a tax-exempt security for purposes of section 5(b )(1) of
the 1940 Act depends on the terms and conditions of the security. When the assets and revenues
of an agency, authority, instrumentality or other political subdivision are separate from those of the
government creating the subdivision (the "Separate Assets Test") and the security is backed only by
the assets and rtvenues of the subdivision (the "Sole Backing Test") such subdivision would be

deemed to be th6 sole issuer for purposes of section 5(b)(1). Similarly, in the case of an industrial
development bond, U that bond is backed only by the assets and revenues of the non-governmental
user, then such non-governmental user would be deemed to be the sole issuer for purposes of
section 5(b)( 1). If however, in either case, the creating government or some other entity guarantees
a security, such a guarantee would be considered a separate security which must be valued and
included in the 5 percent liitation computation section 5(b)(I) subject to the liited exclusion

allowed under rule 5b-2 of the Act.

Under Guide 18, there should be no question, for purposes of section 5(b)( 1) diversuication
standards, that the Funds' investment in legally defeased bonds is an investment in the escrowed
U. S. government securities. Where there is legal defeasance, the escrowed government securities
clearly satisfy the Separate Assets Test and the Sole Backing Test. For purposes of these two tests,

the Escrow Accffnt obviously is separate from the municipality issuing the Original Bonds and
4If the relief requested herein is granted, we would anticipate seeking similar relief from the
Internal Revenue Service with respect to the diversification requirements of Section 851 of the

Internal Revenue Code.

Thomas S. Harman, Esquire
May 7;i~3
Page 5
holders of the Origial Bonds look solely to the Escrow Account for payment of principal and
interest on the Origial Bonds at their designated redemption and maturity dates.

The Guide 18 tests are also satisfied by the ecnomically defeased bond. Again, as in the
case of legally defeased bonds, the escrowed U.S. government securities satisfy the Separate Assets
Test. The Sole Backig Test should "also be deemed to be satisfied, although in a duferent manner
than with a legally defeased bond. In the case of economic defeasance, the Original Bond holder
has the right to look solely to the Escrow Account for satisfaction of the obligation. However, the

Original Bond holder would also have the abilty to look to the municipality for payment of the
obligation u, for some reason, the Escrow Account could or did not pay. We know of no situation
where this has ocurred.
Importantly, in an economic defeasance, the municipality is not guaranteeing the Original

Bond or standing behind it in any sense. Rather, simply because of the structure of the
economically defeased bond, the municipality has not been technically removed as a potential source

of payment. We do not believe this should make a difference in the staffs position under section
5(b)(1). In the case of legal and economic defeasance alike, the Original Bonds are removed from
the "balance sheet" of the municipality and no longer considered in determining any applicable legal
debt ceiling imposed on the municipality. The credit rating agencies consider both tyes of bonds
to be of the highest credit rating and persons trading in the bonds make no distinction when valuing

them. Under the circumstances described above, we believe Guide 18 mandates that both legally
and economically defeased bonds escrowed with U.S. government securities be considered U.S.

government securities for purposes of the diversification requirements of Section 5(b)(I).
Repurchase Agreements. The Commission's position on fully collateralized repurchase

agreements compels the same result as Guide 18. The Commission is firmly committed to the
position that a mutual fund's investment in repurchase agreements, collateralized by U.S.

government securities, may be considered to be an investment in the U.S. government securities

rather than the broker/dealer or bank which is the counterparty to the repurchase agreement. (See
Note 30 and accompanying text to Release 33-6882 adopting revisions to rules regulating money
market funds (February 29, 1991)). The rationale for the Commission's position with respect to
repurchase agreements would seem to be that collateralization with U.S. government securities
effectively converts the fund's investment from one in the counterparty to the repurchase agreement
to one in the U.S. government securities held as collateraL.

We believe the logic applied to repurchase agreements fully collateralized by U.S.
government securities applies with equal force to the refunded bonds described above. In one case,

the obligation of the municipality is legally defeased -- a situation which does not exist in
collateralized repurchase agreements. Obviously, the holder of such a bond has just as much, u not
a greater, right to the escrowed U.S. government securities as the holder of a repurchase agreement
has to the collateral for the repurchase agreement. In the case of bonds which are economically
defeased, the holder of the bond stil has the absolute right to look to the Escrow Account for

payment of principal and interest. Again, this situation is at least as secure as the repurchase
agreement where the holder of a repurchase agreement can only collect on the collateral upon

default of the counterparty.

Thomas-S~Ha.i:an,-Esqir-.
May 7, 1993
Page 6
As described above and pursuant to the Escrow Agreement, there are no circumstances

(absent fraud or misappropriation by the Escrow Agent or Municipality) under which payments

from the Escow Account would not be sufficient, or would not be required, to satisfy the debt
service on the Origial Bonds. The only remaining issue is what, u any, effect on an Escow
Account would result from the bankruptcy of the isuer within a short time of the deposit of the
Escrow Securities in the Escrow Account.

The Bankrptcy Reform Act of 1978. as amended. Title 11. United States Code (the
"Bankrptcy Code"). The treatment of the escrowed funds under the federal bankruptcy laws lends
further support to our position that a refunded bond should not be treated as an investment in the
municipal issuer. Upon the commencement of a case under the Bankruptcy Code, subjec to the
provisions of 11 U.S.c. §§547 and 548, the beneficial interest in the dedicated escrowed accunt is
not deemed property of the estate as defined in 11 U.S.c. §902 (1).5 Consequently, the securities

deposited in the dedicated escrow account are not subject to the claims of creditors of the
municipality. Likewise, "the automatic stay that becomes effective against creditors of a
municipality is made inapplicable to the payment of principal and interest on municipal bonds paid
from pledged revenues. In this context, 'pledged revenues' includes funds in the possession of the
bond trustee as well as other pledged revenues." Senate Report No. 100-506, 100th Cong., 2d Sess.
13 (1988).6

Prior to the 1988 municipal bankruptcy amendments, establishment and funding of an

escrow account under a refunding issue or payment of pledged revenues within 90 days preceding
the commencement of the case might have been adjudicated a preference under section 547 of the

Bankruptcy Code. Section 926 now makes section 547 inapplicable to municipal bonds.7 This
section is intended to allow municipalities and their holders of notes and bonds to have the same
rights under state law and constitutional provisions as to transfers and benefits conferred regardless
SUnder a legally defeased bond, the municipality has no beneficial interest in the escrowed
account.

liections 901 and 922 make section 362, which sets forth provisions regarding the automatic stay
which arises on the filng of a petition, applicable in the bankruptcy case of a municipality.

Subsection 922(d) provides a carve-out with respect to payment of pledged revenues:
(d) Notwithstanding section 362 of this title and subsection (a) of

this section, a petition filed under this chapter does not operate as

a stay of application of pledged special revenues in a manner
consistent with section 927 of this title to payment of indebtedness
secured by such revenues.
11 u.s.c. § 922 (d)
7Section 926 provides in pertinent part: "(b) A transfer of property of the debtor to or for the

benefit of any holder of a bond or note, on account of such bond or note, may not be avoided under
section 547 of this title". 11 U.S.C..§926.

ThQmasS.-Harma-n,Esqu-Ì!e
May 7, 1993
Page 7

of the institution of a Chapter 9 case. Senate Report No. 100-506, 100th Cong., 2d Sess. 22 (1988).
The legislators clearly intended that, notwithstanding the bankruptcy of the municipality, provided

the establishment of the accunt was not fraudulent, the abilty of the holder of an ecnomically
defeased bond to collect from the escow 'account wil remain inviolate.s This is directly analogous

to the Code's treatment of a properly executed and collateralied repurchase agreement. The
insolvency of the repo vendor wil not affect the abilty of the counterparty to the repo to retain and
collect upon the collateraL. Bevell. Bresler & Schulman Asset Management Corp. v. Spencer Savings

and Loan Assn.. 878 F2d 742 (3rd Cir. 1989). On the basis of reasoned analysis of the foregoing
statutory provisions and reported case law in existence as of the date hereof, neither the preference
provision of 11 U.S.c. § 547 nor the automatic stay provisions of 11 U.S.c. § 362 or 901(a) should
affect the payment of refunded bonds from the Escrow Account.
The Escrow Account is Not an Issuer nor an Investment Company under the 1940 Act. The

Escrow Account is not an issuer nor an investment company under the 1940 Act. It is a passive
account much lie any other tye of escrow or custodial account whose sole purpose is to hold the
Escrow Securities in safekeeping for the benefit of the holders of the Original Bonds. The amounts
due the holders of the Original Bonds are determined by reference to the Original Bonds and not
to the Escrow Account. Under section 2(a)(22) of the 1940 Act, an issuer is, as here relevant, any
person who issues a security. The only securities involved here are the Refunding and Refunded
Bonds and the Escrow Securities. There is no other interest in the Escrow Account which could

or should reasonably considered to be a security. Because the Escrow Account does not issue a
security, it can not be an investment company under Section 3(a) of the 1940 Act.

Our position would appear consistent with a series of no-action letters issued by the Staff

involving Centex Corporation. Centex Corporation (October 10, 1986) (Centex I); Centex
Corporation (November 20, 1986) (Centex II); and Stephen B. Flood (February 2, 1987) (Centex
III). The ultimate conclusion in these three letters seems to have been that the Staff would not
recommend enforcement action if an escrow deposit account, created to satisfy the obligations of
certain Debentures defeased under the terms of an Indenture, was not registered as an investment
company under the 1940 Act.
In the Centex letters, a Trust Fund Deposit was created which would hold U.S. government
securities and cash in sufficient quantity "to pay and discharge the principal of, and premium, U any,
and interest on (certain) Debentures" when due. The Trust Fund Deposit was to be substituted for

or joined with the issuer of the Debentures as the obligor on the Debentures. The Trust Fund
Deposit would be structured so that funds would be available to the Trustee on each payment date
in sufficient quantity to pay in full the principal, premium, U any, and or interest when due without
the Trustee being required to invest or reinvest any amounts in the Trust Fund Deposit.

The Escrow Account at issue here is structured in a manner essentially identical to the

Centex Trust Fund Deposit - U.S. government securities are deposited in sufficient quantity and in

SSee Senate Report No. 100-506, 100th Cong.,2d Sess. 22 (1988): "There is not likely to be a
high incidence of preferential treatment of these creditors and, where there is an actual intent to
hinder, delay or defraud other creøitors, section 548 would apply."

"

Th9ma.s-S..!!-a-rmap.,Esqtu~i:
May 7, 1993
Page 8

such a manner to pay principal, premium, U any, and interest when due. The only diference would

seem to be that in Centex, the issuer remained a co-obligor with the Trust Fund Accunt. This
would dufer from a legal defeasance where the issuer's obligations are terminated but be somewhat
similar to "ecnomic defeasance" wher~ the issuer remains technically, although not practically,
liable for satisfying obligations under. ihe Origial Bond.

ex III, however, thè Staff specifcally stated that the fact that the issuer remained
as a co-obligor under Centex II was not a necessary component of its rulig in Centex II that it
In Cent

would not recommend enforcement action U the Trust Fund Deposit did not register as an
investment company. Hence, it would appear that it should not matter whether an Escow Accunt

holds legally or economically defeased bonds for purposes of determining whether the Escow
Account'

is an investment company.

The arguments set forth in Centex III against considering the Trust Deposit Account as an
investment company are equally applicable to the Escrow Account at issue here. We would only
add that there are and have been countless bonds which have been defeased under circumstances

similar or identical to those described in the Centex letters and herein. For the reasons described
in Centex III, a finding that the escrow or deposit accounts created as a result of these defeasance
provisions were investment companies under the Act would serve no public purpose, offer no
additional protection to investors, and significantly disrupt market practices which have been in
place for years without problem.
Conditions for Relief. Subject to the conditions described below, for purposes of section

5(b)(1) of the 1940 Act, we request that the staff consider an investment in a Refunded Bond as
an investment in U.S. Government Securities. The conditions are as follows:

· The Escrow Securities, and any Substitute Securities, are U.S. Government
Securities as defined in Section 2(a)(16) of the Act.

· The Escrow Securities are deposited in an Escrow Account subject to an irrevocable
Escrow Agreement which establishes that the Escrow Securities are irrevocably

pledged only to the debt service on the Refunded Bonds, except to the extent there
are Excess Securities, as described above.

· Principal and interest on the Escrow Securities, and any Substitute Securities, wil
be sufficient to satisfy all scheduled principal, interest and any applicable premiums
on the Refunded Bonds.

· A Verifcation Report prepared by an independent CPA, or other party acceptable
to a nationally recognized statistical rating agency, or counsel to holders of the

Refunded Bond, veruies, at the time of the initial deposit of the Escrow Securities
in the Escrow Account and at the time any Substitute Securities are deposited into
the Escrow Account, that the Escrow Securities, including any Substitute Securities,
are adequate to satisfy all scheduled principal, interest and any applicable premiums
on the Refunded Bonds.

Thomas S. Harman, Esquire

19'-~
Page 9

· The Escow Agreement provides that the Issuer grants and assigns to the Escow
Agent, solely in its capacity as Escrow Agent, for the equal and ratable benefit of
the holders of the Refunded Bonds an express first lien on, pledge of and perfected

security interest in the Escrow securities and the interest income thereon.

· The Escow Agent has no lien of any tye with respect to the Escrow securities for
payment of its fee~ or expenses except to the extent there are Excess Securities, as
described above.

· Any of the Funds which is a diversuied investment management company within the
meaning of Section 5(b)( 1) of the Act and which relies on the relief provided herein

wil not invest more than 25% of its total assets in pre-refunded bonds of the same
municipal issuer.

We would be happy to discuss these matters with you further. Please let us know u there
is any additional information that you require in order to consider this request.
Sincerely,

8- (.
/i. I./('
~ /' /\./~l/_
! r i/,'-­
Forrest R. Foss

FRF /les

Attachment

cc: Larry Stadulis, SEC
Jana Cayne, SEC

Ie\Hannan,SEC

ESCROW DEPOS IT AGREEMENT

This ESCROW DEPOSIT AGREEMENT, dated as of May 1, 1992,

between Anne Arundel County, Maryland, a body politic and
corporate and a political aubdivision of the State of Maryland
(the "County"), and The, .First National Bank of Maryland, a

national banking associátion, as escrow deposit agent (the
"Escrow Deposit Agent") under this Escrow Deposit Agreement.
RECITALS

The County, (i) pursuant to Article 25A of the Anotated
Code of Maryland (1990 Replacement Volume and 1991 Supplement)

("Article 25A") , The Anne Arundel County Charter (the

"Charter"), and Bill No. 98:"79 ("Bill 98-79") passed by the

County Council of Anne Arndel County (the "County Council") on
August 6, 1979, approved by the County Executive on August 8,

1979 and effective on Septemer 22, 1979, issued, sold and

delivered $18,000,000 aggregate principal amount of its bonds
designated "Consolidated General Improvements Series, 1980"
(the "General Improvements Bonds") (the $7,200,000 aggregate
principal amount of the General Improvements Bonds outstanding

on the date hereof being referred to herein as "General
Improvements Refunded Bonds") i (ii) pursuant to Article 25A,
the Charter and Bill No. 107-82 ("Bill 107-82") passed by the

County Council on August 2, 1982, approvep by the County
Executive on August 3, 1982 and effective on Septemer 17,

1982, issued, sold and delivered $12,000,000 aggregate
principal amount of its bonds designated "Consolidated Water
and Sewer Series, 1983" (the "Water and Sewer Bonds.) (the
$8,750,000 aggregate principal amount of the Water and Sewer
Bonds outstanding on the date hereof and stated to mature on or
after March 15, 1994 being referred to herein as the .Water and

Sewer Refunded Bonds"). The General Imrovements Refunded
Bonds and the Water and Sewer Refunded Bonds are collectively
referred to herein as the "Refunded Bonds."

The County, pursuant to Section 24 of Article 31 of
the Annotated Code of Maryland (1990 Replacement Volume and
1991 Supplement), Article 25A, the Charter and Bill No. 13-92
(the "Authorizing Ordinance") passed by the County Council on
March 2, 1992, approved by the County Executive on March 5,

1992, and effective March 5, 1992, is issuing, selling and

delivering $7,555,000 aggregate principal amount of its bonds

~esignated "Consolidated General Improvements Series, 1992

Refunding Series" and $8,795,000 aggregate principal amount of
its bonds designated "Consolidated Water and Sewer Series, 1992

Kefunding Series".

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..

The County, pursuant to the Authorizing Ordinance has
determined to provide for the payment of the Refunded Bonds by
depositing with the Escrow Deposit Agent immediately available
funds sufficient to purchase noncallable, non-prepayable direct
obligations of, or noncallable non-prepayable obligations the
timely payment of the principal of and the interest on which
are unconditionally guarantéed by, the United States of America

which mature at stated-;' fixed prices as to principal and

interest at such times so that sufficient moneys will be
available from such maturing principal and interest (i) to
redeem on July 1, 1992, at the redemption price of 101% of the

principal amount of, and to pay interest accrued to July 1,
1992 on the $7,200,000 aggregate principal amount of the

General Improvements Bonds stated to mature on and after
February 15, 1993, (ii) to redeem on March 15, 1993, at the
redemption price of 102% of the principal amount thereof, the
$8,750,000 aggregate principal amount of the Water and Sewer
Bonds stated to mature on and after March 15, 1994.
NOW,

THEREFORE, the County and the Escrow Deposit Agent,

intending to be legally bound hereby and in consideration of
the mutual covenants hereinafter contained, do hereby agree as
follows:
ARTICLE I
DEFINITIONS

Section 1.01.

Definitions. All term defined in the
Escrow Deposit Agreement shall have the
meanings set forth therein. In addition, the following term
used in this Escrow Deposit Agreement shall have the meanings

Recitals to this

hereinafter provided for such term, unless a different meaning
clearly appears from the context:

"Bond Counsel n means an attorney at law or firm of
attorneys at law selected by the County regularly rendering
opinions of general acceptance in the municipal bond market.

"Business Day" means a day other than a Saturday, Sunday

or day on which baing institutions under the laws of the

state governing the Escrow Deposit Agent are authorized or
obligated by law or required by executive order to remain

closed.

"County" means Ane Arundel County, Maryland, a body
politic and corporate and a political subdivision of the State
of l-làryland.

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(

"Escrow Deposit Aqent n means The First National Bank of
Maryland, a national banking association, as Escrow Deposit
Agent under this Escrow Deposit Agreement.

"Escrow Deposit Agreement n means this Escrow Deposit

Agreement dated as of May 1, 1992, pertaining to the
Consolidated General Improvements Series, 1992 Refunding Series

and the Consolidated Water and Sewer Series, 1992 Refunding
Series, executed by and between the County and the Escrow
Deposit Agent.

"Escrow Deposit Fund" means each of the General
Improvements Escrow Deposit Fund and the Water and Sewer Escrow
Depos it Fund.

. "Escrowed Governent - Obliqations" means Governent
Obligations on deposit from time to time to the credit of the

Escrow Deposit Fund created and established by this Escrow
Deposit Agreement.

"General Improvements Bonds" means the bonds of the County

designated "Consolidated General Improvements Series, 1980" ,

dated February 15, 1980 and issued in the aggregate principal
amount of $18,000,000 pursuant to Bill 98-79.

"General Improvements Escrow Deposit Fund" means the fund
so designated which is created and establish~d by this Escrow
Deposi t Agreement.

"General Improvements Refunded Bonds" means the General
Improvements Bonds which mature on or after February 15, 1993.

"General Improvements Refunding Bonds" means the bonds of

the County designated .Consolidated General Improvements
Series, 1992 Refunding Series", dated May 1, 1992, in the
aggregate principal amount of $7,555,000, issued for the
purpose, among others, of refunding the General Improvements
Refunded Bonds.

"Governent Obligations" means noncallable, non-prepayable

direct obligations of, or noncallable, non~prepayable
obligations the timely payment of the principal of and the
interest on which are unconditionally guaranteed by, the United

States of America. Such obligations may not include
obligations of money market funds that invest in like

instruents.

"Refunded Bonds" means each of the General Improvements
Refunded Bonds and the Water and Sewer Refunded Bonds.

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3~: .~C5EQ5A:C5!20/92

(

"Refundinq Bonds" means the General Improvements Refunding
Bonds and the Water and Sewer Refunding Bonds_

"Water and Sewer Bonds" means the bonds of the County
designated "Consolidated Water and Sewer Series, 1983", dated
March 15, 1983 and issued in the aggregate principal amount of
$12,000,000 pursuant to Bi~l 107-82.

"Water and Sewer É'scrow Deposit Fund" means the fund so

designated which is created and established by this Escrow

Depos i t Agreement.

"Water and Sewer Refunded Bonds" means the Water and Sewer
Bonds which mature on or after March 15, 1994.

"Water and Sewer Refundinq Bonds" means the bonds of the
County designated "Consolidated Water and Sewer Series, 1992

Refunding Series, " dated May 1, 1992, in the aggregate
principal amount of $8,795,000, issued for the purpose, among
others, of refunding the Water and Sewer Refunded Bonds.

ARTICLE II

ESCROW FOR REFUED BONDS

Section 2.01. Receipt of Ordinances. The Escrow Deposit
Agent hereby acknowledges receipt of (a) copies of Bill No.
98-79, Bill No. 107-82 and Bill No. 13-92, each certified by

the Administrative Officer of the County as being true and

correct, an9 (b) a specimen of each of the General Imrovements
Refunded Bc1nds and the Water and Sewer Refunded Bonds, each
certified as being true and correct by the Controller of the

County.

Section 2.02. Establishment of Escrow Deposit Fund. (a)
There is hereby created and established with the Escrow Deposit
Agent a special and irrevocable escrow deposit fund designated

"Ane Arndel County, Maryland Escrow Deposit Fud _ General

Improvements Bonds" (the "General Improvements Escrow Deposit
Fund") to be held in trust by the Escrow Deposit Agent separate

and apart from other funds of the County and of the Escrow
Deposit Agent.

(b) Simultaneously with the receipt of the proceeds of
the sale of the General Improvements Refunding Bonds, the
County shall deliver to the Escrow Deposit Agent for deposit in

the General Improvements Escrow Deposit Fund immediately
available funds aggregating $7,432,178.12 to be applied solely

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3 ~ ç, Z05805A: OS/20/92
-". / - 07

as provided in this Escrow Deposit Agreement. The County
represents that, based on the verification report of KPMG Peat

Marwick, dated May 27, 1992 (the "Verification Report"), such
funds will be sufficient to purchase Government Obligations
that will mature in principal amounts at such times and bear
interest at a rate or rate~s so that sufficient moneys will be
available from such maturìng principal and interest and any
cash balance to redeem on' July 1, 1992, at the redemption price

of 101% of the principal amount thereof, the $7,200,000
aggregate principal amount of the General Improvements Refunded

Bonds stated to mature on and after February 15, 1993. The
County further represents that such funds are derived from the
net proceeds of the sale of the General Improvements Refunding

Bonds.

(c) There is hereby created and- established with the
Escrow Deposit Agent a special and irrevocable escrow deposit
fund designated "Ane Arndel County, Maryland Escrow Deposit

Fund - Water and Sewer Bonds" (the "Water and Sewer Escrow
Deposit Fund") to be held in trust by the Escrow Deposit Agent
separate and apart from other funds of the County and of the
Escrow Deposit Agent.

(d) Simul taneously with the receipt of the proceeds of
the sale of the Water and Sewer Refunding Bonds, the County
shall deliver to the Escrow Deposit Agent for deposit in the
Water and Sewer Escrow Deposit Fund immediate~y available funds
aggregating $8,650,000 to be applied solely as provided in this

Escrow Deposit Agreement. The County represents that, based on
the Verification Report, such funds will be sufficient to

purchase Government Obligations that will mature in principal
amounts at such times and bear interest at a rate or rates so
that sufficient moneys will be available from such maturing
principal and interest and any cash balance to pay on March 15,
1993 the redemption price of the $8,750,000 aggregate principal
amount of the Water and Sewer Refunded Bonds stated to mature
on and after March 15, 1994, at the redemtion price of 102t of
the principal amount thereof. The County further represents
that such funds are derived from the net proceeds of the sale
of the Water and Sewer Refunding Bonds.

Section 2.03. Deposit Irrevocable. The deposit of funds
in the Escrow Deposit Fund shall constitute an irrevocable
deposit of such funds for the eqUal and ratable benefit of the
holders of the Refunded Bonds. The principal of the Escrowed
Gpvernrent Obligations deposited in each of the Escrow Deposit
Funds, interest earned thereon and any proceeds from the sale

thereof shall be held in escrow and shall be applied, as
hereinafter set forth, solely to the payment of the principal

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:;Ç.20580SA:05/2G/92

*

and redemption price of and interest on the respective Refunded

Bonds, or as described in Section 2.10.

Section 2.04. Investment. (a) The Escrow Deposit Agent
hereby acknowledges creation and establishment of the Escrow
Deposit Funds and acknowled~es receipt of the sum described in
Section 2.02 of this Esc+ow Deposit Agreement. Simultaneously

with the receipt of ana deposit of the funds described in

Section 2.02 hereof ,the Escrow Deposit Agent shall apply
$7,432,100 of such funds on deposit in the General Improvements

Escrow Deposit Fund to the purchase of the Governent

Obligations described in Schedule A from the United States

Department of the Treasury. Simultaneously with the receipt of
and deposit of the funds described in Section 2.02 hereof, the

Escrow Deposit .l\gent shall apply $8,650,300 of such funds on
deposit in the Water and Sewer Escrow Deposit Fund to the
purchase of the Governent Obligations described in Schedule A
from the United States Department of the Treasury. The balance
of such funds shall be held by the Escrow Deposit Agent in cash.

(b) The Escrow Deposit Agent shall hold the Governent
Obligations described in Schedule A and apply amounts received

from the maturing principal and interest thereof in any maer

prescribed by Bond Counsel, in order to comply with the
requirements of Section 2.04 (e) hereof, subject to the
requirement that the Escrow Deposit Agent shall make payments
from each Escrow Deposit Fud required to be ~de on account of
the respective Refunded Bonds pursuant to Section 2.02 hereof.

(c) Notwithstanding Subsection 2.04 (b) , the Escrow

Deposit Agent may dispose of any or all of the Governent

Obligations described in Schedule A and invest the net proceeds
derived from the sale thereof in Governent Obligations to be
deposited in the Escrow Deposit Fud to which such Governent
Obligations relate subject to the requirement that the Escrow
Deposit Agent shall have received an opinion of a nationally
recognized firm of certified public accountants to the effect

that the maturing principal of and interest on Governent
Obligations on deposit in the respective Escrow Deposit Fud,
after such sale and purchase of Governent Obligations, shall
be sufficient without reinvestment to enable the Escrow Deposit
Agent to make payments from the Escrow Deposit Fund required to
be made on account of the respective Refunded Bonds pursuant to
Section 2.02, and subject to the further requirement that the

Escrow Deposit Agent shall have received an opinion of
n~tionally recognized Bond Counsel to the effect that,
subsequent to any such disposition and purchase of Government
Obligations as aforesaid, the Government Obligations on deposit

in the respective Escrow Deposit Funds comply with the
requirements set forth in Section 2.04 (e) hereof.

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3'~.205e05A:05/20/92

(
Cd) Except as otherwise expressly provided in

this
Section 2.04 or Section 2.05, the Escrow Deposi t Agent
have no power or duty to invest any moneys held hereunder s ha i i
make substitutions of Escrowed Government Obligations or to
held

hereunder.

(e) The County hereby covenants that no part of the
moneys or funds at any time in either Escrow Deposit Fund shall

be used directly or indirectly to acquire any securities or

obligations the acquisition of which would cause the Refunding
Bonds to be "arbitrage bonds" within the meaning of Section 148

of the Internal Revenue Code of 1986, as amended, and the
appl icable regulations thereunder.

Section 2.05 Use of Funds and Payment of the Refunded
Bonds and Fees; Deposit of Interim Balances. The Escrow
Deposit Agent shall deposit, as received, all maturing
principal of and interest on Escrowed Governent Obligations
purchased with the proceeds of the Refunding Bonds to the
credit of the Escrow Deposit Fund to which such Governent
Obligations relate. To the extent available, (i) on July 1,
1992, the Escrow Deposit Agent shall pay to the paying agent
for the General Improvements Refunded Bonds, from cash on hand

in the General Improvements Escrow Deposit Fund, a sum
sufficient to pay the redemption price of and interest on the
General Improvements Refunded Bonds on such date as set forth
in Schedule B attached hereto, and (ii) on March 15, 1993, the
Escrow Deposit Agent shall pay to the paying agent for such
Water and Sewer Refunded Bonds, from cash on hand in the Water

and Sewer Escrow Deposit Fund, a sum sufficient to pay the
redemption price of the Water and Sewer Refunded Bonds payable
on such date as set forth in Schedule B attached hereto. Any
cash on deposit in an Escrow Deposit Fud constituting proceeds
of the maturing principal of or interest on Escrowed Governent
Obligations set forth on Schedule A hereto (and any Governent
Obligations deposited in an Escrow Deposit Fud in substitution
for such Escrowed Governent Obligations pursuant to Section
2.04 (c) hereof) shall be held in cash and not invested, unless
(i) the County shall direct in writing the investment thereof
in Government Obligations and (ii) the County shall provide to

the Escrow Deposit Agent an opinion of Bond Counsel
satisfactory to the Escrow Deposit Agent to the effect that
such investment is in compliance with applicable law and will
not adversely affect the exemption from federal income taxtion
of interest on the Refunded Bonds or the Refunding Bonds.

Section 2.06. Pledges and Liens. The County hereby
assigns and pledges to the Escrow Deposi t Agent for the benefi t

of the holders of the Refunded Bonds and grants to the Escrow
Deposit Agent for the benefit of such holders of the Refunded

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"":' '. '). ç 7

..

~

Bonds a securi ty interest in the Escrowed Government
Obligations and funds on deposit in the Escrow Deposit Funds

and the interest income thereon. The Escrow Deposit Agent
shall have an express first lien on, pledge of and security
interest in all funds, Escrowed Government Obligations and
income earned then on deposit in or credited to the Escrow
Deposit Funds until such fpnds, Escrowed Government Obligations
and income are used and

applied
in accordance
this of
Escrow
Deposit Agreement, all for
the benefit
of thewith
holders
the
Refunded Bonds.

Section 2.07. Redemption (a) The County represents that
it has irrevocably elected to redeem on July 1, 1992, at the
redemption price of 101% of the principal amount of, and to pay
interest accrued and unpaid to July 1, 1992 on the $7,200,000
aggregate principal amount of the General Improver.ents Bonds
stated to mature on and after February 1S, 1993.

(b) The County hereby directs the Escrow Deposit Agent to

mail notice of redemption with respect to the General

Improvements Refunded Bonds substantially in the form set forth

in Exhibit A attached hereto, by first class mail, postage
prepaid, at least thirty (30) days prior to July 1, 1992, to
all registered owners of such General Improvements Refunded
Bonds at their addresses as they appear on the registration

books maintained by the bond registrar for the General
Improvements Bonds.

(c) In addition, the Escrow Deposit Agent shall publish a
notice of redemption with respect to the General Improvements
Refunded Bonds, substantially in the form set forth in Exhibit
'A attached hereto, at least once in each of four successive
calendar weeks, the first such publication to be made not less
than thirty (30) days prior to July 1, 1992, in (i) a financial

journal or daily newspaper of general circulation in the
Borough of Manhattan, New York, New York and (ii) a newspaper
of general circulation in the County.

(d) The County represents that it has irrevOCably elected
to redeem on March 15, 1993, at the redemption price of 102% of
the principal amount of, and to pay interest accrued and unpaid
to March 15, 1993, on the $8,750,000 aggregate principal amount
of Water and Sewer Refunded Bonds stated to mature on and after
March 15, 1994.

(e) The County hereby directs the Escrow Deposit Agent to
mail notice of redemption with respect to the Water and Sewer
Refunded Bonds stated to mature on and after March is, 1994,

substantially in the form set forth in Exhibit B attached
hereto, by first class mail, postage prepaid, at leê.st thirty
(30) days prior to March 15,1993, to all registered owners of

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~5~2-Ç7

such Water and Sewer Refunded Bonds at their addresses as they

appear on the registration books maintained by the bond
registrar for the Water and Sewer Bonds.

(f) In addition, the Escrow Deposit Agent shall publish a

notice of redemption with respect to the Water and Sewer
Refunded Bonds, substantially in the form set forth in Exhibit
12 attached hereto, at l~ast once in each of four successive
calendar weeks, the first such publication to be made not less
than thirty (30) days prior to March 15, 1993, in a financial

journal or daily newspaper of general circulation in the
Borough of Manhattan, New York, New York.

(g) The cost of the notices described in subparagraphs
2.07(b), (c), (e) and (f) shall be paid by the County pursuant
to Section 2.12 hereof.
Section 2.08. Fees and Expenses of Escrow Deposit Agent.

The County shall pay the Escrow Deposit Agent the fees set
forth on Exhibit D attached hereto. The County will provide
for the payment of the reasonable out-of-pocket expenses
incurred by the Escrow Deposit Agent in the performnce of its
duties under this Escrow Deposit Agreement, including, as
provided in Section 2.12, the cost of publishing notices under

Section 2.07 and 2.11 hereof. No fees and expenses of the
Escrow Deposit Agent other than those described in this Section

2.08 are anticipated. However, if the Escrow Deposit Agent
incurs any unusual or extraordinary exenses, or undertakes any
unusual or extraordinary services, not anticipated at the time
of the execution and delivery of this Escrow Deposit Agreement,
the Escrow Deposit Agent may request payment of its reasonable
fees and expenses in connection therewith from the County. The
Escrow Deposit Agent shall have no lien whatsoever upon any of
the moneys in the Escrow Deposit Fund for the payment of its
fees and expenses.

Section 2.09. Liability and Duties of Escrow De~osit
Aqent. (a) The Escrow Deposit Agent and its respective
Successors, assigns, agents and servants, absent negligence or
willful misconduct, shall not be held to any personal liability
whatsoever, in tort, contract or otherwise, in connection with
the execution and delivery of this Escrow Deposit Agreement,
the establishment of the Escrow Deposit Fud, the acceptance of

the moneys deposited therein, the purchase of Escrowed
Government Obligations, the retention of the Escrowed
Government Obligations or the proceeds thereof, or any payment,

transfer ór other application of moneys or securities by the
Escrow Deposit Agent in accordance with the provisions of this
~scrow Deposit Agreement.

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(b) This Escrow Deposit Agreement sets forth exclusively
the duties of the Escrow Deposit Agent with respect to any and

all matters pertinent hereto and no implied duties or
obligations shall be read into this Escrow Deposit Agreement
against the Escrow Deposit Agent. The Escrow Deposit Agent may
act in reliance upon any instruent or signature believed by it
to be genuine and may assUfe that any person purporting to give
any writing, notice, advice or direction in connection with the

provis ions hereof has been duly authorized to do so.

Section 2.10. Term: Dis?osition of Surplus Funds.

Escrow Deposit Agreement shall become effective upon This
execution and delivery and shall terminate when all its

Refunded Bonds and the interest due thereon have been paid

discharged.

the

and

Upon the redemption of the General Improvements Refunded
Bonds from funds on deposit in the Escrow Deposit Fund and
after payment of any unpaid expenses of the Escrow Deposit
Agent relating to the redemption of the General Improvements
Refunded Bonds, any moneys and Escrowed Governent Obligations
remaining in the General Improvements Escrow Deposit Fund shall
be paid and delivered by the Escrow Deposit Agent to the County
or to a depository designated by the County, to be applied at
the County's discretion in a manner consistent with Bill No.

13-92 and Section 2.04(e) hereof.

Upon the payment of the redemtion price of the Water and
Sewer Refunded Bonds from funds on deposit in the Water and
Sewer Escrow Deposit Fund and after payment of any unpaid
expenses of the Escrow Deposit Agent relating to the redemtion
of the Water and Sewer Refunded Bonds, any moneys and Escrowed
Government O~ligations remaining in the Water and Sewer Escrow
Deposit Fund i shall be paid and delivered by the Escrow Deposit

Agent to the County or to a depository designated by the
County, to be applied at the County's discretion in a manner
consistent with Bill No. 13-92 and Section 2.04(e) hereof.

Section 2.11. Notice of Refunding. Within thirty (30)
days after the delivery of and payment for the Refunding Bonds,

the Escrow Deposit Agent shall cause a notice of refunding,

substantially in the form set forth in Exhibit C hereto, to be
published once in a financial trade journal or daily newspaper
of general circulation in the Borough of Manhattan, New York,

New York.

Section 2.12. Costs of Notices. The Escrow Deposi t Agent

shall submit to the County for payment by the County all

::eceipts and invoices for costs and expenses related to the

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-~ ~:-.:;;

(
publ ica tions and mailings described in Section 2 _ 07 and Section

2.11 hereof.

Section 2.13. Replacement of Escrow Deposit Agent. The
Escrow Deposit Agent may resign by notice in writing given to
the County and published once in a financial trade journal or

daily newspaper of general circulation in the Borough of
Manhattan, New York, Ne~r York, not less than sixty (60) days
before such resignation is to take effect. The cost of such
publication shall be the responsibility of the Escrow Deposit

Agent. Such resignation shall take effect only upon the

appointment and qualification of and the acceptance of duties
by a successor Escrow Deposit Agent, as described below. The
Escrow Deposit Agent may be removed at any time for any breach

of trust or failure to comply with the term of this Escrow
Deposit Agreement by any court of competent jurisdiction upon
the application of the County or the registered holders of not
less than ten percent (10%) in aggregate principal amount of
the outstanding Refunded Bonds.

Upon resignation or removal of the Escrow Deposit Agent, a

successor Escrow Deposit Agent (which shall be a commercial
bank, trust company or national banking association having a
combined capital and surplus of at least $50,000,000 and which

shall be subject to supervision or exnation by federal or

state authority) shall be appointed by the ~unty or, if the
County shall fail to make such appointment within forty-five
(45) days following removal or receipt of notice of resignation

of the predecessor Escrow Deposit Agent, by any court of
competent jurisdiction upon the petition of any registered

holder of any of the outstanding Refunded Bonds. Such
successor Escrow Deposit Agent shall agree in writing to assume
all of the duties and obligations of the Escrow Deposit Agent
under this Escrow Deposit Agreement and, upon such agreement,
without any further act, deed or conveyance, shall immediately
become vested with all the moneys, estates, properties, rights,

powers, trusts, duties and obligations of its predecessor
Escrow Deposit Agent.

Upon the resignation or removal of the initial Escrow
Deposit Agent hereunder, The First National Ba of Maryland
will refund to the County a pro rata portion of the fee paid to
the Escrow Deposit Agent pursuant to Section 2.08 hereof, such
pro rata portion representing the fee payable with respect to
the remaining unexpired term of this Escrow Deposit Agreement.

Sect ion 2.14. Amendments. This Escrow Deposi t Agreement
shall not be amended without the consent of the parties hereto
and all the holders of the Refunded Bonds then outstanding;
provided, however, that the County and the Escrow Deposi t Agent

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(

may, without the consent of, or notice to, such holders, enter

into such agreements supplemental to this Escrow Deposit
Agreement (the "Amendments" or "Amendment") as shall not
adversely affect the rights of such holders and as shall not be

inconsistent with the term and provisions of this Escrow
Deposit Agreement, for anyone or more of the following

purposes:

(i) to cure any amiguity or forml defect or
omission in this Escrow Deposit Agreement;

(ii)

to grant to, or confer upon the Escrow Deposit

Agent for the benefit of such holders any
additional rights, remedies, powers or authority

that may lawfully be granted to, or conferred
upon, such holders or the Escrow Deposit Agent;

and

(iii)

to make any other amendment deemed necessary by
the County and the Escrow Deposit Agent to sever
any clause or provision in this Agreement deemed
to be illegal or unenforceable.

The Escrow Deposit Agent shall not undertake or execute any
Amendment unless it has received an opinion of nationally
recognized bond counsel that (A) if such Amendment had been
adopted on the date of issuance of the Refunding Bonds, such
Amendment would not have caused the Refunding Bonds to be
"arbitrage bonds" within the meaning of Section 148 of the
Internal Revenue Code of 1986, as amended, and the regulations
and rulings thereunder applicable to the Refunding Bonds on the
date of ,the Amendment; (B) the Amendment will not cause any of

the Refunded Bonds to be "arbitrage bonds;" and (C) the

Amendment complies with this Section.

Prior to any amendment or revocation. of this Agreement,
the Escrow Deposit Agent shall give notice and provide draft

legal documents to (i) Moody's Investors Service, Inc. at

Moody's Investors Service, Inc., Pulic Finance Rating
Desk/Refunded Bonds, 99 Church Street, New York, New York
10007, (ii) Standard & Poor's Corporation, 25 Broadway, New
York, New York 10004, and (iii) Fitch Investors Services, Inc.,

One State Street Plaza, New York, New York 10004. Failure to
give the notices required in this paragraph, however, shall not
constitute an event of default hereunder.

Section 2.15. Reports by Escrow Deposit Aqent. Within
ten (10) days of each June 30 and December 31 during the term
of this Agreement, beginning June 30, 1992, the Escrow Deposi t
Agent shall forward to the County a statement describing the

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-.: . ") - :::­

Escrowed Government Obligations and cash held at the beginning

of business on each such date in each Escrow Deposit Fund,

including the income earned therefrom and the maturities

thereof, and any withdrawals of money from either Escrow
Deposit Fund since the last statement furnished pursuant to
this Sect ion.
~

'.ARTICLE III

MISCELLAEOUS

Sect ion 3.01. Entire Agreement. This Escrow Deposit
Agreement constitutes the entire agreement, and supersedes all
prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof

and may be executed simultaneously in several -counterparts,

each of which shall be deemed an original, but all of which
together shall constitute one and the same instruent.

Section 3.02. Section and Paraqraph Headings. The County

and the Escrow Deposit Agent agree that the Section and
paragraph headings have been prepared for convenience only and
are not part of this Escrow Deposit Agreement and shall not be

taken as an interpretation of any provision of this Escrow
Deposit Agreement.

Section 3.03. Severability. If any clause, provi~ion or
Section of this Escrow Deposit Agreement is held illegal or
invalid by any court, the invalidity of such clause, provision

or Section shall not affect any of the remining clauses,
provisions or Sections hereof, and this Escrow Deposit
Agreement shall be construed and enforced as if such illegal or

invalid clause, provision or Section had not been contained
herein. In case any agreement or obligation contained in this
Escrow Deposit Agreement is held to be in violation of law,
then such agreement or obligation shall be determined to be the

agreement or obligation of the County or the Escrow Deposit
Agent, as the case may be, only to the full extent permtted by
law. Immediately after such occurrence, the Escrow Deposit
Agent shall notify Moody's Investors Service, Inc., Standard &
Poor's Corporation and Fitch Investors Services, Inc. at their

addresses provided in Section 2.14.

Section 3.04. Maryland' Law. This Escrow Deposit
Agreement is executed and delivered with the intent that the
laws of the State of Maryland shall govern.

Section 3.05. Escrow Deposit Agreement Constitutes
Securi tv Aqreement. The County executes this Escrow Deposi t

Agreement as a debtor under the fi.iryland Uniform Commercial

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..

Code and the Escrow Deposit Agent executes this Escrow Deposit

Agreement as a secured party under the Maryland Uniform
Commercial Code, it being intended by the parties hereto that

this Escrow Deposit Agreement shall constitute and be a
security agreement under the laws of the State of Maryland.

Section 3.06. Rep~esentations. The County hereby
represents that (a) the .County was duly created by and is in

existence under the laws of the State of Maryland, and the

County possesses the authority under Bill No. 13 - 92 to enter

into the transactions contemplated by this Escrow Deposit
Agreement; (b) the County is not in default under any of the
provisions of the laws of the State of Maryland which would
affect its existence or its power referred to in the preceding
clause (a); and (c) the County has taken due and proper action
to authorize the execution and delivery of this Escr~w Deposit

Agreement.

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-~:2'97

IN WITNESS WHEREOF, the parties hereto have caused

Escrow Deposit Agreement to be duly executed, sealed this

delivered as of the day and year first written above.

ANE ARUNEL COUN, MAYLA

o
.~
fr
By~~'f~'L' /~

( SEAL )

Robert R. Neall,
County Executive

Attest:

Vßbr~
THE FIRST NATIONAL BAN OF

MA YLA
as Escrow Deposit Agent
( S EAL )

Attest:

BYW~~~I
/

(\i.
C0/'-Lf' ,.'- ~ ~
Authorized Officer
\. (~~I~ r ~'J '.' r

t

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3::. ZGSeOSA ~O)/28/92

~:~2.Ç7

and

(

STATE OF MAYLAN, ~NE AR~~EL COUNY, TO WIT:

.; (.-:. in!

I HEREBY CERTIFY, chat on this ~ day of ~ !l;¡. in the
year 1992, before the subscriber, a Notary Public i and for
the State of Maryland, personally appeared Robert R. Neall,
Cou:ity Executive of Anne ~ Arundel Ccunty, Maryland, a body
politic and corporate and. 'political subdivision of the State of

Maryland, and on behal f of the said County acknowledged the
aforegoing Escrow Deposit Agreement to be the act and deed of

Anne Arundel County, Maryland.

IN WITNESS WHEREOF, I have hereunto set my hand and
official seal.

~(Ii~.

Notary Public ~
My Commission Expires:

/!

I . i /13

~

. r
- 1 t) ­

;,Ç.Zú580SA:OS/ZG/92

ST~~YLAND, CITY OF BALTIMORE, TO WIT:
I HEREBY CERTIFY, that on this ~ day of ,.:./~. in the
year 1992, before the subscriber, a Notary Public in and for

the State of Maryland, perSonally

appea red N4~y E li.(JK(.e.( , /JSSI'.Aif v/r':; "?¿es/2)l'~/ of The Fi rs t

Na tiona 1 Bank of Ma ryland, a na tiona 1 banking associ a tion
having its principal office in the City of Baltimore, Maryland,

and on behalf of the said association aCknowledged the
aforegoing Escrow Deposi t Agreement to be the act and deed of
The First National Bank of Maryland.

IN WITNESS WHEREOF,
official seaL.

I have hereunto set my hand and
~

"­
My Commission Expires:

/ý)~o/93r

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75 i2-97

EXHIBIT A
to Escrow Deposit Agreement

NOTICE OF REDEMPTION

ANE ARUNEL COUN, MAYLA
GENERA OBLIGATION BONDS

CONSOLIDATED GENERA IMPROVENTS SERIES, 1980
Dated February 15, 1980

NOTICE is HEREBY GIVE of the election by Ane Arndel

County, Maryland, to redeem on July i, 1992, $7,200,000
aggregate principal amount of its Consolidated General

Improvements Series, 1980 stated to mature on February 15 in
each of the years 1993 through 2000, inclusive, and bearing the
following CUSIP numers:

The above bonds will become due and will be redeemed
on July 1, 1992, at the redemption price of 101% (expressed as

a percentage of the principal amount of the bonds to be
redeemed), together with interest accrued to July 1, 1992, upon
presentation and surrender thereof, together with all coupons
appurtenant thereto maturing after the redemtion date, at the
principal corporate trust office of The First National Ban of
Maryland, Baltimore, Maryland (the "Paying Agent"). From and
after July i, 1992, interest will cease to accrue on the above
bonds called for redemption.

As of January 1, 1984, under the Interest and Dividend

Tax Compliance Act of 1983, the Paying Agent is required to
withhold 20% of any gross payments to holders who fail to

provide the Paying Agent with a valid Taxayer Identification
Numer (Employee Identification Numer or Social Security
Numer, as appropriate) on or before the date the bonds are

presented for redemtion. Holders are subject to a penalty of

$50 for such failure. Please therefore provide a valid
Taxayer Identification Numer when presenting your Bonds for

redemption.

Dated:

, 1992

ANE ARUNEL coinrry, t-.iYLA

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(

EXHIBIT B
to Escrow Deposit Agreement

NOTICE OF REDEMPTION

ANE ARUNDEL COUN, MAYLA
GENERA OBLIGATION BONDS

CONSOLIDATED WATER AN SEWR SERIES, 1983
Dated March 15, 1983

NOTICE IS HEREBY GIVEN of the election by Ane Ardel
County, Maryland, to redeem on March 15, 1993, $8,750,000
aggregate principal amount of its Consolidated Water and Sewer
Series, 1983 stated to mature on March 15 in each of the years
1994 through 2013, inclusive, and bearing the following CUSiP

numers:

The above bonds will become due and will be redeemed
on March 15, 1993, at the redemption price of 102% (expressed

as a percentage of the principal amount of the bonds to be
redeemed), together with interest accrued to March 15, 1993,

upon presentation and surrender thereof, together with all
Coupons appurtenant thereto maturing after the redemption date,
at the principal corporate trust office of The First National
Ban of Maryland, Baltimore, Maryland (the "Paying Agent").
From and after March 15, 1993, interest will cease to accrue on
the above bonds called for redemption.

As of January 1, 1984, under the Interest and Dividend

Tax Compliance Act of 1983, the Paying Agent is required to
withhold 20%' of any gross payments to holders who fail to

provide the Paying Agent with a valid Taxyer Identification
Numer (Employee Identification Numer or Social Security
Numer, as appropriate) on or before the date the bonds are

presented for redemption. Holders are subject to a penalty of

$50 for such failure. Please therefore provide a valid
Taxayer Identification Numer when presenting your bonds for

redemption.

Da ted:

ANE ARUNEL COUNY i MAYLA

i 199

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l

EXHIBIT C
to Escrow Deposit Agreement

NOTICE OF REFUNING

ANE ARUNEL COUN, MAYLA
CONSOLIDATED GENERA IMPROVEMENTS SERIES, 1980
(Dated February 15, 1980)

CONSOLIDATED WATER AN SEWER SERIES, 1983
(Dated March 15, 1983)

NOTICE IS HEREBY GIVEN that there have been deposited

in trust with the undersigned Escrow Deposit Agent direct

obligations of the United States of America, designated United
States Treasury Obligations, State and Local Governent Series

(the "Government Obligations n) .
The proj ected principal and interest payments to be
derived from the Government Obligations will be held in trust
by the undersigned Escrow Deposit Agent and will be applied by
the Escrow Deposit Agent (i) to the redemption on July 1, 1992

of the $7,200,000 aggregate principal amount of the
Consolidated General Improvements Series, 1980 (the "General
") maturing on or after February 15", 1993,
(ii) to the payment of interest on such General Improvements
Bonds maturing on and after February 15, 1993, and (iii) to the
Improvements Bonds

payment of the redemption price on March 15, 1993 of the
$8,750,000 aggregate principal amount of the Consolidated Water
and Sewer Series, 1983 (the "Water and Sewer Bonds") maturing

on or after March 15, 1994. The proj ected principal and
interest payments to be derived from the Governent Obligations

have been calculated to be adequate to mae these payments.
Such payments to the holders of the General Improvements Bonds
and the Water and Sewer Bonds being refunded shall be made at

the places, in the maer, in such medium of payment, by the
paying agents and otherwise as provided, with respect to the
General Improvements Bonds, in the General Improvements Bonds

and Bill No. 98-79 passed by the County Council of Ane Arndel

County (the "County") on August 6, 1979 and, with respect to
the Water and Sewer Bonds, in the Water and Sewer Bonds and
Bill No. 107 - 82 passed by the County Council of the County on
August 2, 1982.
The First National Bank of Maryland
as Escrow Deposit Agent

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(

EXHIBIT D
to Escrow Deposit Agreement

FEES OF ESCROW DEPOSIT AGENT

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....- ~
. ~,-..,
.-. ~

~10-244-459~
May 20, 1992

Anne Arundel County

ATTN: Mr. Alfred E. Warfield
Assistant Controller
P.o. Box 2700 MS1309

Annapolis, MD 21404

Dear Mr. Warfield:
The following will confirm our discussion concerning the
fees to be charged for the Escrow Deposit Agreement for the
upcoming Anne Arundel County bonds that are being refunded.
1. Ini tia1 Review and Set Up
2. Annual Administration
a) First year which includes
cost of issue account
b) Subsequent years
3. Out-of-Pocket Expense

$1,000
$1,750
$1,500

These charges are the basic charges and are subj ect to
expenses such as postage, shipping charges, wire charges, cost

change. They do not include counsel fees, or any out-Of-pocket

of checks~ governmental reporting, publications, etc. These
expenses ~ill be billed in addition to the quoted fees.
I believe the Escrow Deposit covers the fact that any cost
of publishing notices will be borne by Anne Arundel County. As
we discussed, Catherine Cornwell will be the Administrator on
this account. Thank you for your continued confidence in First
Na tional.

Sincerely,
Ronald J. Kruppa
Assistant Vice President

RJK: j lb/ 4 608T

~

SCHEDULE A
to Escrow Deposit Aqreement

GENERA IMPROVEMENTS ESCROW DEPOSIT FU

Amount of

Maturity

Principal

Date

Amoun t

7/1/92

$7,432,100

Interest

Cost of

Rate

Securi ty

Tye of
Security

3 .37%

$7,432,100

State and

Local
Government

Series

WATER AN SEWER ESCROW DEPOSIT FUN

Amount of

Y.iturity

Principal

Date

3/15/93

Amoun t

$8,650,300

Interest
Rate

Cos t of
Securi ty

3.97%

$8,650,300

Tye of

Securi ty

State and

Local

Governent
Series

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-:.~-.Ç7

r

B
to Escrow Deposit SCHEDULE
Aqreement
DEBT SERVICE REQUIREMENTS:

GENERA IMPROVENTS REFUNED BONDS
Date Payable

7/1/92
..

Princibal

Interest

$7,272,000"

Total

$184,195

$7,456,195

Includes Redemption Premium of $72,000.

DEBT SERVICE REQUIREMENTS:

WATER AN SEWR REFUED BONDS
Date Payable

3/15/92

Principal

Interest

$8,925,000**

$0

~~Includes Redemption Premium of $175,000.

- 23 ­
31,.20S8G5A:OS/20/92
75ì2-9ì

Total
$8,925,000

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3A9c8770ee50fab3d1. Public record. Not legal advice.