Each depositor insured to at least $250,000 per insured bank

State restrictions on the establishment of Interstate De Novo Branches by Industrial Loan Companies

FDIC--06--02

July 28, 2006

Julie L. Williams, Chief Counsel, OCC

Doug Jones, Acting General Counsel, FDIC

Scott Alvarez, General Counsel, Board

You have asked our opinion regarding certain state legislation intended to restrict interstate de novo branching by industrial loan companies and industrial banks (collectively, "ILCs"). Specifically, we understand that some states have proposed or enacted legislation that prohibits an out-of-state LLC, but not other types of banks, from establishing a de novo branch in their states. These restrictions have particular significance for those states that generally permit out-of-state banks to establish de novo branches in their states. With respect to such states, the question has been raised whether these state ILC restrictions, if enacted, would affect the ability of other out-of-state banks to establish de novo branches in those states.

Riegle-Neal Act

As noted above, some states have enacted or proposed legislation that prohibits an out-of-state ILC, but not other types of banks, from establishing a de novo branch in their states. Viewing these state ILC restrictions in light of the Host State Law Requirements, it is apparent that, if enacted, these restrictions would cause a host state's law to fail those requirements. If a state enacted these restrictions, the state's de novo branching law would not apply equally to all banks because the state's law would exclude one type of bank, i.e., ILCs. Similarly, the state's de novo branching law would not expressly permit all out-of-state banks to establish de novo branches in such state because the state's law would not permit one category of out-of-state banks (i.e., out-of-state ILCs, generally, or in some state laws, Utah-chartered ILCs) to establish de novo branches in such state.

Treatment of Auto Leases as Financial Assets under 12 C.F.R. §360.6

FDIC-10-01

David N. Wall Assistant General Counsel

This letter responds to your email of October 1, 2010 requesting clarification of the treatment by the Federal Deposit Insurance Corporation (the "FDIC") of auto leases under 12 C.F.R. §360.6, Treatment of Financial Assets Transferred in Connection With a Securitization or Participation, as amended pursuant to the restatement thereof approved by the FDIC Board of Directors on September 27, 2010 (as so restated, the "Securitization Rule"). You are requesting that the FDIC confirm that auto leases are not excluded from the definition of "financial asset" solely because there may be a need to dispose of the underlying leased equipment in order to convert portions of the residuals into cash. You are also requesting that the FDIC confirm that obligations serviced by the cash flows of such leases are not excluded from the definition of "obligation" solely because of such need to dispose of underlying leased equipment.

The FDIC does not provide binding determinations except through regulations and orders. Without careful consideration of all of the particular facts, relevant documents, and other circumstances surrounding an individual situation, it is impossible to determine how a particular transaction may be treated under the Securitization Rule. Nonetheless, we can provide some general guidance as to our view of the proper interpretation of the Securitization Rule.

Under the Securitization Rule, "financial asset" is defined as "cash or a contract or instrument that conveys to one entity a contractual right to receive cash or another financial instrument from another entity." In drafting the Securitization Rule, the FDIC was aware that auto and other equipment leases were often included as financial assets underlying a securitization, and that in the case of such lease securitizations, the right to receive cash may consist in part of the realization of cash proceeds upon the disposition of the physical property underlying such leases. It is our view that the better interpretation of the Securitization Rule is that the term "financial asset" includes auto and other equipment leases and does not exclude such leases solely because there may be a need to dispose of the underlying leased equipment in order to convert portions of the residuals into cash. Consistent with this interpretation, it is our view that a debt or equity or mixed beneficial interest or security that would otherwise qualify as an "obligation" under the Securitization Rule should not be excluded from the term "obligation" solely because it is serviced by cash flows from leases in connection with which there may be a need to so dispose of the underlying leased equipment. Of course, as noted above, it is impossible for us to determine whether a specific transaction would be treated in this way under the relevant facts andthe Securitization Rule without careful consideration of all of circumstances for that transaction.

Whether the FDI Act’s Prohibition on the Acceptance of Employee Benefit Plan Deposits by Less-than-Adequately-Capitalized Institutions Applies to Same-day Transfers

FDIC--10--02

December 8, 2010

Daniel G. Lonergan, Counsel

This is in response to your recent inquiry seeking guidance as to the breadth of section 11(a)(1)(D) of the FDI Act, which sets forth a prohibition on the acceptance of “employee benefit plan deposits” by institutions that are less-than-adequately capitalized. 12 U.S.C. § 1821(a)(1)(D). Your inquiry presents two factual scenarios that implicate the section 1821(a)(1)(D)(ii) prohibition.

Under the first factual scenario presented, you inquire whether an institution that is, or becomes, less than adequately capitalized is permitted to accept employee benefit plan contributions into an omnibus asset management deposit account if, on the same business day, the funds are “swept out” from the account to an external sweep vehicle or other investment outside the bank. Under the second scenario, you ask whether an institution that administers employee benefit plan accounts through its trust or asset management department and becomes less than adequately capitalized may nevertheless continue to permit funds to flow through an omnibus deposit account used to process routine account transactions (e.g., trade settlements, receipts for maturing assets, interest and dividend receipts, participant loan payments, and retirement and other distributions of plan participants) provided that, on the same business day, the funds are distributed electronically or by check, or are swept out of the omnibus account to an investment vehicle outside the bank.

(i) Pass-through insurance The Corporation shall provide pass-through deposit insurance for the deposits of any employee benefit plan.

(ii) Prohibition on acceptance of benefit plan deposits An insured depository institution that is not well capitalized or adequately capitalized may not accept employee benefit plan deposits.

As section 1821(a)(1)(D)(ii) expressly provides that an insured depository institution that is less than adequately capitalized may not “accept” employee benefit plan deposits, in both of the hypothetical situations presented the question arises whether the funds received by the institution have been “accepted” within the meaning of the section 1821(a)(1)(D)(ii) prohibition. The question is whether the arrangements to have the funds “swept out” or distributed before the close of the business day render the funds not “accepted,” and thus permit their receipt by an institution less than adequately capitalized.

Although the statute does not define the phrase “to accept” for purposes of the employee benefit plan deposit prohibition under 12 U.S.C. § 1821(a)(1)(D)(ii), the term “accept” has been employed in this section long before the recent 2006 amendment and was employed when the provision was formerly tied to the brokered deposit restrictions and other measures. Clarification has been provided in prior FDIC Advisory Opinions. Previously, staff has asserted that “receiving” funds, as well as “renewing” and “rolling-over” already-held funds, fall within the ambit of the term “accept” for purposes of this provision. See FDIC Advisory Opinion 92-96, Dec. 18, 1992, Douglas H. Jones, Deputy General Counsel (addressing the applicability of the then-recently-enacted FDIC Improvement Act’s provision linking the availability of pass-through deposit insurance for employee benefit plan deposits and the institution’s capital, staff opined that any deposits “accepted or received” after the enactment date of the statute were subject to the section 1821(a)(1)(D) prohibition. (emphasis added)); see also FDIC Advisory Opinion 93-7, Jan. 28, 1993, Claude A. Rollin, Counsel (finding a rollover or renewal of an already-held time deposit to constitute “acceptance”). The former opinion, though brief, answers a question as to the effective date of section 1821(a)(1)(D) provisions governing pass-through coverage, and logically finds “receipt” sufficient for “acceptance.”

There is an additional point of significance. While some might argue that the “receipt” of funds in the hypothetical scenarios does not constitute “long-term acceptance” of the funds in light of the pre-arranged sweep from the account, the statute imposes a flat prohibition, and neither the statute nor its legislative history indicates Congress intended any long-term duration or other requirement was intended by its use of the term “accept.” The fact remains that, should the institution fail prior to the occurrence of the sweep or distribution, the funds received by the institution will nevertheless receive pass-through deposit insurance coverage under section 1821(a)(1)(D)(i). In short, the Deposit Insurance Fund still must incur the deposit insurance liability notwithstanding the institution’s best intentions to have the funds swept from the institution before the close of business. Taken together, although the likelihood may be low that pre-arranged procedures to ensure the impermissibly received funds do not remain at the institution overnight will not be carried out, and the possibility of an institution’s failure may also be low, the funds would still receive pass-through deposit insurance.

As noted, one aim of the section 1821(a)(1)(D) statutory provision, which specifically attempts to prevent less-than-adequately capitalized institutions from taking in employee benefit plan deposits, is to avoid obligating the Deposit Insurance Fund to incur the cost of providing pass-through insurance at institutions with lower capital and thus at a heightened risk of failing. This Congressional aim can be thwarted under a contrary interpretation that such employee benefit plan funds -- although received by the institution when its capital is less than adequate -- are somehow not “accepted” due to the planned sweep and despite the fact that they constitute deposits. The statute’s use of the term “accept” is not so narrowly interpreted as to permit institutions to “temporarily” receive such deposits under circumstances that can result in exposure to the Deposit Insurance Fund. In instances where an institution impermissibly receives such deposits on account of its capital position, the statute nevertheless affords the plan’s employees with pass-through deposit insurance coverage. The institution’s customer and the employees under the benefit plan would not be adversely affected, as any administrative, procedural, or timing infirmity in the institution’s “planned” sweep or distribution would result in the Deposit Insurance Fund still incurring a pass-through insurance liability -- the very insurance liability section 1821(a)(1)(D)(ii) seeks to avoid.

Encouraging the hypothetical scenarios would thus be at cross-purposes with the statute’s aims to minimize such exposure to the Deposit Insurance Fund, as it would permit an institution with less than adequate capital to receive and hold such deposits. In such instances should an institution fail before the anticipated sweep or distribution is executed, the liability falls to the Fund since pass-through insurance coverage is still afforded. Moreover, while there is no assumption that an institution would not act in good faith or would fail to exercise care in any proposed “sweep” or other mechanism to make such receipt of funds “temporary,” the incentives for doing so are arguably somewhat lessened where the customer is not harmed should the institution utterly fail to exercise the sweep or other arrangement. In the hypothetical situations presented, an early-in-the-day failure, or any administrative, procedural, or timing infirmity or delay in the institution’s “planned” sweep or distribution would still result in the Deposit Insurance Fund incurring the very pass-through deposit insurance liability Congress sought to preclude.

This opinion is based upon the facts set forth in your inquiry and as understood by staff, and any differences between the facts and circumstances as described and understood could lead to a different conclusion. Please be advised that this legal opinion is not binding on the FDIC or its Board of Directors.

I hope this is helpful, and please let us know if we can be of further assistance.