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4000 - Advisory Opinions


Deposit Insurance for Equal "Participations" in a Negotiable Certificate of Deposit

FDIC--94--18

April 1, 1994

Jeffrey M. Kopchik, Counsel

This is in response to your March 3, 1994 letter to Claude A. Rollin, Esq. You have inquired whether a $1,000,000 negotiable certificate of deposit (CD) which has been broken down into ten $100,000 participations will be insured by the FDIC on a pass-through basis. In some cases, the original CD is registered in the name of your company's clearing firm as nominee for the various participants. In other cases, the original CD is in bearer form.

Section 330.6 of the FDIC's deposit insurance regulations, 12 CFR part 330.6, provides that funds owned by a principal or principals and deposited into one or more deposit accounts in the name of an agent, custodian or nominee, other than an insured depository institution acting as trustee of an irrevocable trust, shall be insured to the same extent as if deposited in the name of the principal. Sections 330.4(b)(1) and (2) of the FDIC's regulations, 12 CFR parts 330.4(b)(1) & (2), provide that the deposit account records of an insured depository institution must expressly disclose the existence of any fiduciary relationship. The details of that fiduciary relationship must be ascertainable either from the deposit account records of the institution or from records maintained, in good faith and in the regular course of business, by the depositor or some other person or entity that has undertaken to maintain such records for the depositor. Section 330.4(b)(4)(i) of the FDIC's deposit insurance regulations sets forth an exception to the recordkeeping requirement in the case of deposits evidenced by negotiable instruments which have been properly negotiated to the new owner prior to the institution's default.

Based upon the facts as described in your letter, it is my opinion that the entities which purchase participations in the original $1,000,000 CD which is registered in the name of your company's clearing firm as nominee for the various participants will receive the benefit of pass-through insurance, up to a maximum of $100,000 per participant, provided that the recordkeeping requirements of section 330.4 of the Corporation's regulations are satisfied. With regard to the negotiable CD that is issued to "Bearer," the section 330.4(b)(4)(i) exception to the recordkeeping requirement for deposits evidenced by a negotiable instrument applies only after the instrument is negotiated. Thus, the section 330.4(b)(1) requirement that the deposit account records of the institution expressly disclose the existence of any fiduciary relationship would not be met and the account would not be entitled to pass-through insurance coverage.

I trust that this letter answers your questions. Please do not hesitate to contact us if we can be of any further assistance.


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