4000 - Advisory Opinions
Offering of CDs with Fixed, Variable and Contingent Rate of Interest
September 9, 1986
Gerald J. Gervino, Senior Attorney
I am writing in response to your letter of August 12, 1986 addressed to Mr. Roger Hood of our Legal Division. You inquire with respect to a proposed transaction contemplating that certificates of deposit ("CDs") would be issued by a national or state-chartered commercial bank (the "Bank"), the accounts of which are insured by the Federal Deposit Insurance Corporation ("FDIC"). The CDs would be structured to provide a fixed or variable rate of interest ("Fixed Interest") and contingent interest.
The Fixed Interest will be determined at the time of the offering of the CDs and the account holders would be entitled to receive such interest in all events and regardless of the receipt of any contingent interest. Fixed Interest may also take the form of zero coupon CDs. The contingent interest would be a general obligation of the bank, the amount and timing of which would be determined by reference to an index based on a percentage of the profitability, earnings, cash flow, appreciation of income, and derived from assets of the bank ("Indexed Assets").
The Indexed Assets would be assets acquired by the bank from the proceeds of the sale of the CDs or assets already owned by the Bank, and would include, among other types of assets which the Bank may legally acquire or finance, real estate loans, equipment leases, mineral leases or loans, automobile loans and loans made in connection with the financing of assets purchases. The Indexed Assets may be fully or partially identified by the Bank at the time of the offering of the CDs.
You contemplate that the fixed or guaranteed portion of the interest or return on the CDs will be equal to or greater than 66.667% of the average yield for AAA-rated corporate bonds published in the issue of the Federal Reserve Board publication H15 (519) "Selected Interest Rates" most recently preceding the date of issuance of the CDs.
Investors in the CDs will not be granted an ownership interest of any kind in the Indexed Assets. Indexed Assets will be, directly or indirectly, owned by or within control of the Bank, which will exercise exclusive control over the selection and disposition of the indexed assets. The CDs will not provide for negative interest or in any way limit the obligation of the Bank to repay principal on the basis of asset performance. In addition, the Bank will be compliance with all applicable net-worth and other regulatory requirements.
You specifically ask for our concurrence with your opinion that offering of the CDs is in compliance with the rules and regulations of FDIC and that funds received from each investor for the CDs and deposited in the Bank would, subject to FDIC aggregation rules, be insured in an amount of up to $100,000 by FDIC.
Based upon the information that you have provided us, we find no violation of our rules and regulations with respect to the above-described hypothetical transaction. Further, if the funds contemplated to be received are deposited in an insured bank, each depositor's funds would be aggregated with any other funds which that depositor might have on deposit in the same insured bank and insured in the aggregate up to $100,000.