4000 - Advisory Opinions
Deposit of CDs Supporting Municipal Bonds
July 19, 1988
Roger A. Hood, Assistant General Counsel
This is in response to your letters, dated May 13, 1988 and June 7, 1988, which were written on behalf of your client, ***, and questioned the extent to which deposit insurance was afforded to certain certificates of deposit ("CDs") that were on the books of *** at the time the bank failed.
In your letters and in subsequent telephone conversations, you asked that we reconsider our position with respect to the deposit insurance afforded to those CDs, which supported municipal bonds of the (*** that were owned by customers of *** and other financial institutions ***). In addition, you requested that we issue an opinion concerning the application of FDIC recordkeeping regulations to deposit-backed bond programs generally. For the reasons stated below, we have decided to reconsider the deposit insurance determinations made with respect to the *** CDs and we will now consider the records of *** and the other financial institutions in determining ownership interests in the *** CDs. Moreover, in the pages that follow, we outline several means by which financial institutions, such as ***, can satisfy the FDIC's recordkeeping requirements and thus obtain multiple pass-through insurance coverage for CDs supporting municipal bonds which are registered in "street name", without changing the manner in which the bonds themselves are registered.
As you know, the *** was declared insolvent by the Comptroller of the Currency, and the FDIC was appointed receiver, on March 10, 1988 (the "Closing Date"). On or about the Closing Date, the FDIC discovered two certificates of deposit which were listed on the records of the bank as follows: ***, as Trustee for certain owners of bonds named on the registration books of trustee or its designee." The FDIC subsequently contacted *** of *** (the "Trustee") to request a list of the bondholders so that ownership interests in the certificates of deposit could be determined. The records provided by the Trustee indicated that *** and others were registered bondholders and had ownership interests in the certificates of deposit which exceeded $100,000. The Trustee's records did not provide any indication that ***, was acting as an agent, nominee, trustee, custodian or in any other fiduciary capacity for any other parties and thus the FDIC staff determined that deposit insurance should be limited to $100,000 per registered bondholder.
It has been, and continues to be, our position that the FDIC's recordkeeping requirements for providing multiple pass-through insurance coverage were not satisfied in this case. Section 330.1(b)(1) of the FDIC rules and regulations provides that the deposit account records of an insured bank "shall be conclusive as to the existence of any relationship pursuant to which the funds in the account are deposited and on which a claim for insurance coverage is founded." 12 C.F.R. § 330.1(b)(1). Section 330.1(b)(2) of our regulations provides that "[i]f the deposit account records of an insured bank disclose the existence of a relationship which may provide a basis for additional insurance, the details of the relationship and the interests of other parties in the account must be ascertainable either from the records of the bank or the records of the depositor maintained in good faith and in the regular course of business." 12 C.F.R. § 330.1(b)(2). In this case, the account records of *** did, in fact, disclose a relationship (a trust relationship) which provided a basis for additional insurance. This trust relationship was apparent from the certificates of deposit which expressly indicated that *** was serving as trustee for the owners of the aforementioned bonds. Since a trust relationship was evident from the records of the bank, the FDIC could determine the details of the relationship and the interests of the other parties from either the records of the bank or those of the depositor (the Trustee), pursuant to 12 C.F.R. § 330.1(b)(2). The bank's records were of no help in this endeavor. The depositor's records simply indicated that *** and others had interests in the deposit accounts, not that *** customers had any interests in the accounts. Since neither the records of the depository bank nor those of the depositor (the Trustee) indicated that *** and others were acting in any fiduciary capacity, it was our position that the FDIC had no basis for looking beyond the depositor's records to determine ownership interests in the *** CDs.
Subsequent to taking the aforementioned position, an opinion letter I wrote in 1982, on the subject of deposit insurance in the context of deposit-backed municipal bonds, was brought to my attention (the "1982 Opinion"). In that letter, I indicated that "if certain bonds are held by securities dealers under "street name,' the true owners would be recognized for insurance purposes so long as the securities dealer would disclose the identities of the parties for whom the bonds were held and would provide assurances that those ownership interests were those appearing at the time the bank was closed for insolvency." On further reflection, we have determined that the 1982 Opinion is not consistent with our deposit insurance regulations and accordingly, we are withdrawing that opinion as provided below.
Although the 1982 Opinion was not requested by, addressed to, nor written for the benefit of, bond counsel for the *** and *** issues, we recognize that it is at least conceivable that bond counsel obtained a copy of, and relied upon, the 1982 Opinion in preparing the bond indentures and/or the composite official statement for the bond issues. For this reason, we have decided to reconsider the deposit insurance determinations made with respect to the CDs and to permit the financial institutions, who are listed as registered bondholders on the records of the Trustee, to present evidence which may indicate that, on the date the *** failed, they were holding the subject bonds as agents, nominees, custodians, trustees or in some other fiduciary capacity, for other parties. If the records of the financial institutions establish, to the FDIC's satisfaction, that the financial institutions were holding the bonds in a fiduciary capacity, the true owners of the bonds on the Closing Date will be recognized for deposit insurance purposes, so long as those records: (1) were maintained in good faith and in the regular course of business; (2) sufficiently identify the true owners of the bonds; and (3) enumerate the interests of the true owners of the bonds on the Closing Date.
Accordingly, *** should forward to the Trustee copies of any records which identify the true owners of the *** and *** bonds and which establish that was holding the bonds on behalf of those owners. With respect to each owner of bonds, *** must provide the owner's name, address and the exact dollar amount of his/her ownership interest in the subject bonds on the Closing Date (including interest accrued to the Closing Date). In addition, *** should certify that the records forwarded to the Trustee were maintained in good faith and in the regular course of business. The Trustee will be advised to forward the information and certifications received from *** and the other financial institutions to *** consolidated office. upon receipt of this information, the FDIC will reconsider the deposit insurance that should be afforded to the *** CDs.
Finally, as promised, we wish to advise you of several means by which a financial institution which is holding municipal bonds for its customers in "street name" can satisfy the FDIC's recordkeeping requirements and obtain multiple pass-through insurance coverage for CDs supporting those bonds without changing the manner in which the bonds are registered. One alternative for satisfying our recordkeeping requirements is to expressly indicate on the deposit account records of the depository bank that the depositor (bond trustee) is acting in a fiduciary capacity (as trustee for the registered bondholders) and that the registered bondholders may be holding the bonds for their own accounts or as agents, nominees, custodians, trustees or in some other fiduciary capacity, on behalf of others, who, in turn, may be acting on behalf of others. Such fiduciary relationships, or the possibility thereof, could be expressly noted either on the face of a CD or in a letter to the depository bank which is maintained by the depository bank as part of its deposit account records. Another alternative is to indicate, on the records of the depository bank, that the depositor (bond trustee) is acting in a fiduciary capacity (as trustee for the registered bondholders) and then indicate, on the depositor's (bond trustee's) records, that the registered bondholders may be holding the bonds for their own accounts or as agents, nominees, custodians, trustees or in some other fiduciary capacity on behalf of others, who, in turn, may be acting on behalf of others. Either of these alternatives would satisfy the FDIC's recordkeeping requirements so as to permit the FDIC to look to the registered bondholder's records in determining the ownership interests in CDs supporting municipal bonds. A more detailed statement of our position on the various means by which the FDIC's recordkeeping requirements can be satisfied, in the case of CDs which support municipal bonds, will be issued by the FDIC in the near future.
We recognize, however, that it will take some time for the financial institutions to identify all the deposit-backed bonds which they currently hold for their customers and to amend the necessary records so as to assure multiple pass-through insurance coverage. Therefore, we will continue to operate under the 1982 Opinion for 90 days from the date the aforementioned statement of position is issued. This is to say that, during the 90 day period, if a bank should fail and we are asked to determine the insurance coverage for CDs supporting municipal bonds which are registered on the depositor's (bond trustee's) records as being owned by financial institutions, we will permit the financial institutions to present evidence indicating that they are holding the bonds in a fiduciary capacity, on behalf of others, notwithstanding the fact that such fiduciary relationship may not be evident from either the records of the bank or the depositor.