4000 - Advisory Opinions
Insurance Coverage of Accounts of Minority Financial Institutions Deposit Program
January 11, 1988
Roger A. Hood, Assistant General Counsel
This is in response to your letter of December 24, 1987 wherein you summarize the discussion during our meeting of December 16, 1987, and ask for my concurrence in your understanding of the conclusions reached during that meeting, with regard to the above-referenced subject.
The first issue discussed at our meeting and raised in your letter concerns the Department of *** proposal to use the Federal Reserve's Automated Clearinghouse ("ACH") System. The *** proposal is to use the ACH System, rather than the agent banks, to transmit interest payments from each minority financial institution ("MFI") to ***. You asked whether this use of the ACH System would, in any way, reduce or jeopardize the deposit insurance coverage afforded to the accounts of the Minority Financial Institutions Deposit Program ("MFIDP").
As I stated at our meeting, it is my opinion that *** proposed use of the ACH System will have no effect on the deposit insurance coverage of the MFIDP accounts. The ACH System would just be a different vehicle for the transmission of the interest payments to *** and it does not otherwise affect the agency relationship between the fund administrators (agent banks) and ***. As noted in your letter, the banks acting as fund administrators would continue to perform numerous functions for ***, including purchasing certificates of deposit from the MFIs, responding to *** letters of instruction, maintaining detailed records of account descriptions and transactions, reconciling delinquent accounts, claiming and collecting all MFIDP deposits in the event an MFI fails, generating detailed financial reports and holding all safekeeping receipts. With these responsibilities, it is my opinion that the fund administrators would continue to be classified as fiduciary banks entitled to the deposit insurance provided by section 7(i) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1817(i). Therefore, I am able to confirm your understanding that utilization of the ACH System will not result in the aggregation of any MFIDP accounts in the event that an MFI should be closed.
The second issue that you have raised is whether *** could substitute its field offices or research laboratories for the commercial banks that currently serve as fund administrators without jeopardizing the separate insurance coverage provided, by section 7(i) of the FDI Act, for fiduciary deposits. 12 U.S.C. § 1817(i). The opinion I expressed at our meeting, which I now confirm in writing, is that if *** makes such substitutions, the MFIDP deposits at a particular MFI would not be entitled to separate deposit insurance under section 7(i) of the FDI Act. 12 U.S.C. § 1817(i). My opinion is based on the fact that section 7(i) provides separate insurance coverage for "funds held by an insured bank in a fiduciary capacity" or funds "deposited by the fiduciary bank in another insured bank." 12 U.S.C. § 1817(i). Since *** field offices and research laboratories are not insured banks they could not take advantage of the insurance provided by that section. Instead, they would be entitled to the insurance coverage provided for agents under section 330.2 of the FDIC rules and regulations, 12 C.F.R. § 330.2. Under that section, all MFIDP accounts at a particular MFI would be treated as being owned by *** and would be aggregated, for deposit insurance purposes.
The third issue discussed at our meeting and in your letter concerns the manner in which the certificates of deposit are styled. You have stated that the certificates of deposit are currently made payable to the "Department of ***/Minority Financial Institutions Deposit Program for the [name of fund administrator]." I expressed the opinion that this "payable to" reference should be changed to more clearly reflect the ownership of the funds and the relationship between *** and the fund administrator. You suggested that these references could be changed to "the [name of fund administrator] as agent for the Department of ***/Minority Financial Institutions Deposit Program." I concluded, and I now do so in writing, that this suggested change in the styling of the accounts would be appropriate.
The fourth and final issue which you have raised concerns your proposal to eliminate the Bank Joinder Agreements, which are the agreements between the fund administrators and the MFIs. You asked whether the elimination of those agreements would reduce or jeopardize the deposit insurance coverage for the MFIDP accounts. I expressed the opinion that those agreements are not necessary to establish the agency relationship between *** and the agent banks. As noted in your letter, the agency relationship between *** and the fund administrator is outlined in the "Declaration of Trust", which delineates the responsibilities of the parties. Therefore, it is the Declaration of Trust, not the Bank Joinder Agreement, which would be relevant in establishing the fiduciary relationship between the parties. Moreover, the certificates of deposit, if styled in the above-noted manner, would provide evidence of that relationship. For these reasons, I conclude that the elimination of the Bank Joinder Agreements would have no effect on the deposit insurance coverage afforded to the MFIDP accounts.
I trust that the foregoing is consistent with your understanding of the opinions expressed and conclusions reached at our meeting. If you have any further questions, please do not hesitate to contact me.