4000 - Advisory Opinions
Do "pass-through" deposit insurance rules apply to funds placed in the "Certificate of Deposit Account Registry Service"
FDIC--03-03 July 29, 2003 Joseph A. DiNuzzo, Counsel
This is in response to your request for an opinion on the FDIC deposit insurance coverage available for deposits purchased through a program sponsored by Promontory Interfinancial Network ("Network"). Entitled the "Certificate of Deposit Account Registry Service" ("CDARS"), the program is a deposit-placement service designed to allow FDIC-insured depository institutions to accept deposits of more than $100,000 and obtain full coverage for the depositor by spreading the funds among as many separate FDIC insured institutions as necessary so that no institution holds more than $100,000 (principal plus interest) for each depositor. Your view is that FDIC insurance would apply to all deposits placed through the CDARS program, assuming the program is operated as indicated in the materials enclosed with your letter.
The applicable materials you provided to us are marked "02/03 Version." The "Participating Institution Agreement" defines a Participating Institution as an institution participating in the CDARS program and indicates that a Participating institution may act from time to time in one or three capacities: a Relationship Institution--an institution that submits its depositors' funds for placement through CDARS and acts as custodian with respect to its depositors certificates of deposit ("CDs"); and Issuing Institution--an institution that issues CDs to depositors for funds placed with the Participating Institution through CDARS; and a Surplus Institution--an institution that on an order date is willing to accept time deposits in excess of the funds, if any, it has submitted for placement through CDARS on that order date.
"The CDARS Deposit Placement Agreement" provides the terms and conditions upon which the Relationship Institution will place a depositor's funds with other FDIC-insured institutions (Issuing Institutions) that have entered into similar contracts with the Network. The agreement states that the Relationship Institution will act as the depositor's agent in placing funds in CDs with the Issuing Institutions. It indicates that: the Relationship Institution will act as the depositor's custodian with respect to the CDs and has entered into an agreement with The Bank of New York ("BNY") to act as the Relationship Institution's sub-custodian with respect to the CDs for which the Relationship Institution is acting as the depositor's custodian; each CD for which the Relationship Institution is acting as the depositor's custodian will be recorded on the Issuing Institution's records in the name of the sub-custodian, BNY; the CD will be recorded on BNY's records in the Relationship Institution's name; and the CD will be recorded on the Relationship Institution's records in the depositor's name.
The Participating Institution Agreement contains these relevant disclosure and recordkeeping provisions:
Section 9.01 Recordkeeping for FDIC Purposes
As custodian for your Depositors, you will maintain, in accordance with applicable published requirements of the FDIC, a record of (i) the name, address, taxpayer identification number, and amount of the account of each Depositor for which CDs have been issued through CDARS and (ii) any representative capacity in which the Depositor may be acting.
Section 9.04 Recordation of CDs
Each CD that you issue will be established on your deposit account records in the name of "[Name of Sub-custodian], acting as agent for itself and others, each acting for itself and others," or in such other manner of recordation as may be approved from time to time by the FDIC to permit "pass-through" of deposit insurance to the beneficial owner of the CD.
The agreement between BNY (the sub-custodian) and the Participating Institutions specifies that the sub-custodian will:
2. Record each CD as issued by you [the issuing institution] in the name of "BNY, as agent for itself and others, each acting for itself and others" (or such other manner of recordation as may be approved from time to time by the FDIC to permit "pass-through" of deposit insurance) . . . . (Schedule A)
Deposit insurance is provided under the Federal Deposit Insurance Act, as implemented by the FDIC's regulations, based on the rights and capacities in which deposits are held at FDIC-insured depository institutions. 12 U.S.C. § 1821(a) and 12 CFR Part 330. For deposits held by an agent for its principals at FDIC-insured institutions, such as in the CDARS program, deposit insurance is said to "pass-through" the holder of the account (the agent) to the owners of the funds (the principals). 12 CFR § 330.7. The same logic applies where an agent is acting for multiple owners/principals and where there are multiple levels of agency relationships. The FDIC's depository insurance regulations impose specific requirements for funds held in a fiduciary relationship. 12 CFR § 330.5(b) Essentially, as long as the institution's deposit account records indicate that the funds are held in an agency capacity and the institution's records, the agent's records or an authorized third-party's records, maintained in good faith and in the ordinary course of business, designate the ownership interest of the principal(s) in the account, the FDIC will insure the funds on a pass-through basis as if each principal had placed his or her respective funds directly with the applicable depository institution.
For deposits held in multi-tiered fiduciary relationships, such as in the CDARS program, special rules apply. One way to satisfy the disclosure and recordkeeping requirements is for the deposit account records of an insured institution to indicate the existence of each and every level of the fiduciary relationships and disclose at each level the names and interest of the person(s) on whose behalf the party at that level is acting. Another way is to: expressly indicate on the deposit account records of the insured institution that there are multiple levels of fiduciary relationships; disclose the existence of additional levels of fiduciary relationships in records by parties at subsequent levels; and disclose at each of the levels the names and interests of the persons on whose behalf the part at that level is acting. 12 CFR § 330.5(b)(3).
The CDARS program is a self-described deposit-placement service in which participating institutions act as agents for depositors in placing funds at other participating institutions. As specified in the above-quoted provisions of the applicable CDARS documents: (1) the Issuing Institutions' records will indicate that the deposits are being held by BNY "acting as agent for itself and others, each acting for itself and others"; (2) BNY's records will record each CD held by BNY as sub-custodian for the Relationship Institution as custodian for its depositors; and (3) the Relationship Institution's records (and/or an authorized third party's records) will contain the name, address and other identifying information of each depositor for which CDs are purchased through CDARS. This methodology conforms to the disclosure and recordkeeping requirements in section 330.5(b) of the FDIC's regulations. As such, the FDIC's requirements for agency pass-through deposit insurance coverage would be satisfied and, thus, the FDIC would regard each depositor/principal to be the insured party per participating institution for deposit insurance purposes.
As explained in the CDARS materials, please note that if the same depositor/principal also has an ownership interest in other deposits at the same Issuing Institution, those deposits would be added to his or her ownership interests in deposits (held in the same ownership capacity) placed through the CDARS system and insured in the aggregate to a limited of $100,000.
In summary, based on the CDARS information in the materials enclosed with your letter, we agree that deposits placed through the CDARS system would be insured on a pass-through basis under the FDIC's rules on the insurance coverage of agency or custodial accounts. For this coverage to be available, the recordkeeping and other applicable procedures specified in the materials would have to be followed. These views are based on the information contained in the version of the CDARS materials enclosed with your letter. Revisions to those documents on deposit ownership and recordkeeping may affect the deposit insurance coverage results. Also, this opinion addresses only the deposit insurance implications of the CDARS program. It is not intended to address any other legal or policy issues.
I hope this is fully responsive to your inquiry. Feel free to call me 202-898-7349 with any additional questions or comments.