4000 - Advisory Opinions
Effect of Insurance Purchased from a Private Insurance Company on Federal Deposit Insurance Coverage Available to Certain Employee Benefit Plans
October 26, 1990
Claude A. Rollin, Senior Attorney
This is in response to your recent letter inquiring about the insurance that would be provided by the FDIC for the deposits of certain employee benefit plans and the extent to which that deposit insurance would be affected by the fact that additional (private) insurance would be provided to the depositors by an insurance company.
As outlined in your letter, an entity (the "Holder") holding certificates of deposit ("CDs") issued by an FDIC-insured bank (the "issuer"), in a principal amount of $ ***, intends to sell the CDs to various employee benefit plans (the "Plans"). In connection with the sale of the CDs, the Holder has agreed to purchase insurance ("private insurance") from the ***, a New York licensed insurance company ("***"), for the benefit of the Plans and, ultimately the Plan participants.
In the event the issuer becomes insolvent and is closed, *** would pay the fiduciaries for the Plans such principal and interest as the FDIC fails or refuses to pay to the fiduciaries for the Plans provided that the FDIC's nonpayment is not based on facts that are inconsistent with certain representations and covenants (as outlined in your letter) made by the Plans to ***. Under the private insurance policy, to the extent *** is called upon to make any payment under the policy subsequent to the default of the issuer, *** would be subrogated to the rights of each Plan acting on behalf of its participants with respect to the CDs, including any rights of the Plan to obtain deposit insurance payments from the FDIC.
Prior to addressing the effect of private insurance on the FDIC's deposit insurance, I will outline the rules governing the FDIC insurance provided for the deposits of most trusteed employee benefit plans and the requirements for obtaining "pass-through" or per-participant deposit insurance under the FDIC's rules. Under section 330.12(a) of the FDIC's amended deposit insurance regulations, the deposits of an employee benefit plan are insured up to $100,000 per plan participant. 55 Fed. Reg. 20127 (1990) (to be codified at 12 C.F.R. §330.12(a) (1991)). Section 330.12(f) provides that the term "employee benefit plan" means a pension, profit-sharing or stock bonus plan established by an employer for the benefit of employees, including plans qualifying under section 401(a) of the Internal Revenue Code. §330.12(f).
To qualify for this "pass-through" deposit insurance coverage, the allocable ownership interests of the participants in the plan must be determinable without the evaluation of contingencies, except for those covered by the present worth tables and rules of calculation for their use set forth in the Federal Estate Tax Regulations. §330.12(f)(3). The interests of the participants need not be vested in order to be insured, but will be treated as vested on the date the insured depository institution is closed.
In addition, in order to obtain "pass-through" deposit insurance certain recordkeeping requirements must be satisfied. Subsections 330.4(b)(1) and (2) of the FDIC's amended regulations provide that the deposit account records of an insured depository institution must disclose the nature of any relationship that may provide a basis for additional insurance coverage. §330.4(b)(1), (2). In the case of a pension plan, this entails clearly identifying the deposit as a pension plan deposit. In addition, records of either the insured depository institution or the depositor, maintained in good faith and in the regular course of business, must reveal the allocable ownership interest in the account of each beneficiary under the plan. It is permissible for such records to be maintained for the depositor by a third party, such as a plan administrator or actuary.
In your letter, you indicate that each Plan will represent to and covenant with ***, inter alia, that (1) it is an employee benefit plan as defined in section 330.12 of the FDIC's amended regulations; (2) it has instructed the issuer in writing to reflect the Plan's ownership of the CD on its deposit account records (and to reflect on such records the fact that the Plan holds such CD as fiduciary for the Plan's participants); (3) the recordkeeping requirements set forth in section 330.4 of the FDIC's amended regulations have been and will continue to be complied with; (4) the value of each participant's interest in such Plan is capable of evaluation in accordance with the FDIC's regulations; and (5) in the case of defined benefit plans, no overfunding of such plans exists.
Assuming that the representations and covenants stated in the preceding paragraph are truthful and accurate at the time the issuer becomes insolvent and is closed, it is my opinion that the CDs in question would be insured in the amount of up to $100,000 per-participant.
In your letter, you ask whether (1) the CDs acquired by the Plans on behalf of their participants would be entitled to "pass through" deposit insurance (and therefore fully covered by FDIC insurance) notwithstanding the presence of the *** guarantee; and (2) the entitlement to FDIC insurance would be diminished or affected if *** makes a payment under its insurance policy, succeeds to the interests of the Plans and their participants with respect to the CDs and thereafter seeks to obtain payment of insurance from the FDIC as subrogee of the Plan acting on behalf of its participants.
In my opinion, there is nothing in the Federal Deposit Insurance Act (12 U.S.C. §1811 et seq.) or the FDIC's rules and regulations (12 C.F.R. Part 301--Part 353) that would prohibit a depositor from obtaining private insurance which would cover any funds that are not insured by the FDIC. Assuming no other laws are violated and the availability of private insurance does not adversely affect the subrogation and receivership rights of the FDIC or the safety and soundness of the issuer, the FDIC would generally not object to a private insurance arrangement of the type described in your letter. Of course, the FDIC's failure to object should not be construed as an endorsement of such private insurance programs.
With the foregoing caveats, it is my opinion that the private insurance would not affect the "pass-through" insurance provided for deposits that are otherwise entitled to "pass-through" insurance. Whether or not such funds would be fully insured depends upon whether all of the requirements for "pass-through" insurance (outlined above) have been satisfied and on the extent of each participant's interest in the deposit.
You should be aware, however, of certain restrictions that may apply to advertisements for deposits having private insurance. Section 709 of Title 18 provides, in relevant part, as follows:
.....Whoever, except as expressly authorized by Federal law, uses the words "Federal Deposit", "Federal Deposit Insurance", or "Federal Deposit Insurance Corporation" or a combination of any three of these words, as the name or a part thereof under which he or it does business, or advertises or otherwise represents falsely by any device whatsoever that his or its deposit liabilities, obligations, certificates, or shares are insured or guaranteed by the Federal Deposit Insurance Corporation, or by the United States or by any instrumentality thereof, or whoever advertises that his or its deposits, shares, or accounts are federally insured, or falsely advertises or otherwise represents by any device whatsoever the extent to which or the manner in which the deposit liabilities of an insured bank or banks are insured by the Federal Deposit Insurance Corporation.....[s]hall be punished as follows: a corporation, partnership, business trust, association, or other business entity, by a fine of not more than $1,000; an officer or member thereof participating or knowingly acquiescing in such violation or any individual violating this section, by a fine of not more than $1,000 or imprisonment for not more than one year, or both.....
18 U.S.C. §709
Accordingly, if the entity selling the CDs in question advertises their availability and makes reference to the private insurance in such advertisements, it should be clearly and unmistakenly stated that such private insurance is in no way connected with the deposit insurance provided by the FDIC.
Finally, in your letter you indicate that the CDs were issued prior to July 29, 1990 (the effective date of most of the amended deposit insurance regulations) but are to be transferred from the Holder to the Plans subsequent to that date. You further indicate that the CDs are transferable only by the Holder surrendering the original CDs to the Insured Bank which will then issue replacement CDs to the Plans. You ask whether the deposit insurance rules in effect prior to July 29, 1990 or the amended regulations which, for the most part, have been effective since July 29, 1990, would apply to the replacement CDs. It is my opinion that since the CDs must be redeemed and re-issued new deposits will be created subsequent to July 29, 1990 and thus the amended deposit insurance regulations, rather than regulations in effect prior to July 29, 1990, would be applicable to such deposits.
The opinions expressed herein represent the current thinking of the FDIC Legal Division staff and, like all other staff opinions, they are not binding upon the FDIC or its Board of Directors. Moreover, the opinions expressed herein are based upon the facts as you have presented them and any change in those facts might cause us to reach a different conclusion.
I hope that I have adequately addressed the issues that you raised in your letter. If you have any further questions, you may contact me at (202) 898-3985.