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4000 - Advisory Opinions


Question of deposit insurance coverage for "funding certificates"

FDIC--02--05 December 19, 2002 Joseph A. DiNuzzo, Counsel

This is in response to your letters dated October 18 and December 17, 2002, and our follow-up telephone discussions regarding the FDIC deposit insurance coverage available in connection with the ("Program"). You have asked that we concur in your analysis and conclusion.

You indicate that the Program will involve a series of limited liability companies (each an "Issuer") that will purchase certificates of deposits ("CDs") from "well capitalized" FDIC-insured institutions ("Seller Banks"). Each Seller Bank's deposit account records will reflect that the Issuer that purchased the CD is the sole owner of the CD. Each Issuer will be a separate limited liability company managed by a limited liability company ("Facilitator"), which is owned by (X'). X will form the Facilitator of which X ("Investors") or by the Facilitator. The Facilitator will be the sole manager of each Issuer and will offer "funding certificates" to Investors, which will represent either equity membership interests in the Issuer or debt instruments of that Issuer. Each Issuer will be formed for the limited purpose of acquiring and holding CDs issued by a diverse set of Seller Banks. All investments made by Investors in any Issuer will be used by that Issuer to purchase CDs from the Seller Banks which will be held in that Issuer's funding pool.

The two deposit insurance issues identified and discussed in your letters are, in essence: (1) whether the FDIC would regard each of the Issuers as a separately insurable entity; and (2) whether each Issuer would be insured up to $100,000 in its own ownership capacity, and not be deemed to be acting as a fiduciary for its Investors. In my opinion, the answer to both questions is yes.

As explained in your materials, each Issuer is a limited liability company chartered by the State of Delaware. The Issuers are formed to acquire and hold CDs issued by a diverse set of Seller Banks. Investors will invest in interests in the Issuers in the form of "funding certificates." Presumably, the nature of the Program is that Investors will be able to purchase shares or promissory notes (funding certificates) from Issuers whose assets will consist solely of FDIC-insured CDs. Thus, the Investors' interests in the Issuers will be safeguarded by the deposit insurance provided in connection with each of the corresponding CDs.

Section 330.11 of the FDIC's regulations (12 CFR §330.11) provides that the deposits of a corporation "engaged in any independent activity" will be insured up to $100,000 per FDIC-insured institution. The FDIC's regulations state that an entity is engaged in an independent activity if it is operated "primarily for some purpose other than to increase deposit insurance."(Id.. at §330.1(g).) The first issue is whether each Issuer is "engaged in an independent activity." The FDIC resolves this issue on a case-by-case basis by reviewing the relevant facts. Here the Issuers are formed to provide a mechanism by which the Seller Banks' CDs can, in effect, be bundled to form a security that can be brought and sold in the stream of commerce. In other words, the Issuers provide a conduit through which the Investors can purchase a security (in the form of "funding certificates") backed by CDs issued by FDIC-insured institutions. When an investor purchases a $1 million funding certificate from an Issuer, it acquires an asset backed by corresponding CDs issued by FDIC-insured institutions on a dollar-for-dollar basis, since the CDs are the sole assets of the Issuer. Thus, the Investor is indirectly protected by the FDIC insurance provided on the CDs.

I agree that the Issuer's reason for existence meets the "independent activity" requirement in section 330.11 of the FDIC's regulations. Without doubt, an obvious component of the Program is the investment safety provided by FDIC insurance. The primary purpose of the Program (and, hence, for the existence of the Issuer), however, is to enable investors to purchase securities, in high dollar increments, backed by CDs issued by FDIC-insured institutions. Moreover, if instead of purchasing a $1 million "funding certificate" from an Issuer each Investor were to purchase a $100,000 CD directly from each of ten FDIC-insured depository institutions, the cumulative deposit insurance coverage would be the same; thus, the formation of the Issuer does not necessarily increase deposit insurance coverage--the chief concern underlying the requirements of section 330.11. I also concur in the observation made in your letter that the Issuers are not merely divisions of the Facilitator and acknowledge the relevance of FDIC Advisory Opinion 95-14 (August 23, 1995), concluding that the function of "holding assets" qualifies as an "independent activity" under section 330.11. For the foregoing reasons, I agree that each Issuer would be recognized as a separate entity under section 330.11 of the FDIC's regulations eligible for deposit insurance.

Because each Issuer would be separately recognized under section 330.11, it follows that each Issuer would be insured up to $100,000 for deposits placed at each FDIC-insured institution. This is the second issue identified in your October 18th letter. The question is whether each Issuer would be insured as the owner of the respective CDs or whether the FDIC would deem the Issuers to be acting in a fiduciary or agency capacity for their Investors. Considering the information you have provided to us, there is no basis to conclude that the CDs purchased by an Issuer would be deemed to be owned by anyone other than the Issuer. The CDs will be purchased in the Issuer's name alone and, as discussed above, the Issuer is recognized as a separate entity entitled to its own deposit insurance coverage under section 330.11. Thus, we agree with the conclusion reached in your letter that each Issuer would be insured up to $100,000 as to the CDs purchased from each of the applicable FDIC-insured depository institutions. No pass-through theory of deposit insurance coverage would apply. Also, under the general principles of FDIC deposit insurance coverage, deposits held in the name of an Issuer with a particular Seller Bank would not be aggregated with the deposit accounts held in the name of any other Issuer with that particular Seller Bank for purposes of determining available insurance coverage limits.

I hope this is fully responsive to your request. Please note that this letter addresses only FDIC deposit insurance issues. It is not intended to address any other legal or policy issues raised in connection with the Program. Feel free to contact me at (202) 898-7349 with any additional questions or comments.


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