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4000 - Advisory Opinions

Would CDs Purchased by a Deposit-Broker and Resold to a Third Party be Insured Separately from the Third Parties' Other CDs at the Same Bank for a Six Month Period Under Section 8(q) of FDIC's Regulations

June 14, 2000


Joseph A. DiNuzzo, Counsel

This is in response to your letter requesting an interpretation of section 8(q) of the Federal Deposit Insurance Act (12 U.S.C. 1818(q)) ("Section 8(q)"). In pertinent part, Section 8(q) states:

(q) Whenever the liabilities of an insured depository institution for deposits shall have been assumed by another insured depository institution . . . , whether by way of merger, consolidation, or other statutory assumption, or pursuant to contract . . . (2) the separate insurance of all deposits so assumed shall terminate at the end of six months from the date such assumption takes effect or, in the case of any time deposit, the earliest maturity date after the six-month period. . . ."

In essence, section 8(q) provides that deposits assumed in a merger-type transaction are insured separately from the deposits of the assuming depository institution for at least six months from the date the assumption is effective. Section 330.4 of the FDIC's regulations (12 C.F.R. § 330.4) reiterates the language of Section 8(q).

As explained in your letter, your firm represents a registered broker-dealer that acts as a deposit broker in placing with its retail customers negotiable certificates of deposit ("CDs") issued by insured institutions. Your client maintains a secondary market in CDs, permitting its customers to purchase and sell CDs that have been previously issued by an insured institution. On occasion the CDs issued by an insured institution prior to the acquisition of the institution or its deposits by another insured institution are purchased in the secondary market after the acquisition by a depositor who also holds CDs issued by the acquiring institution. You believe that the CDs issued by the acquired institution and the acquiring institution should each be eligible for up to $100,000 of deposit insurance. Your reasoning is that Section 8(q) provides for continuation of separate deposit insurance "of all deposits so assumed" and that the separate insurance applies to the deposit, not to the depositor.

You also request confirmation that First American Bank v. Resolution Trust Corporation, 30 F.3d 644 (5th Cir. 1994) ("Spindletop") resolved the issue of separate deposit insurance on deposits established at the acquiring institution after the acquisition.

Using the sample in your letter, the situation is this: Bank X issues CDs through a broker and the broker sells the CDs to its customers, including Customer #1. Bank Y acquires Bank X. Subsequent to the acquisition, Customer #1 sells the CDs issued by Bank X in the secondary market maintained by the broker and Customer #2 purchases the CDs. Customer #2 owned Bank Y CDs at the time Bank Y acquired Bank X and purchases additional Bank Y CDs after the acquisition. Are Customers #2's "Bank X" CDs insured separately from his or her Bank Y CDs?

Pursuant to Section 8(q), the answer is yes. Section 8(q) explicitly states that the "separate insurance of all deposits so assumed shall terminate at the end of six months from the date such assumption takes effect or, in the case of time deposits, the earliest maturity date after the six-month period." Notably, the statute does not say that the "depositor" is insured separately. It expressly says the "deposit" is insured separately. As such, in this example, whether the CD is continued to be held by Customer #1, who purchased the CD prior to the effective date of the assumption, or is purchased by Customer #2, who purchased the CD after that date, the CD issued by Bank X will continue to be eligible for separate insurance until its maturity date, or at least six months after the date of the assumption. "Separate insurance," of course, means insurance separate from that available on deposits held by Customer #2 at Bank Y, the assuming institution.

What if Customer #2 obtains deposits from Bank Y after Bank Y assumes Bank X's deposits? Would the former Bank X deposits continue to be separately insured from the Bank Y deposits? That is the second question raised in the example above. As you correctly indicate in your letter, that issue was addressed in the Spindletop case cited above. In the case the judge concluded that the separate insurance provided in Section 8(q) applied irrespective of whether the applicable depositor obtained deposits at the acquiring bank before or after the date of the assumption.

I hope this responds fully to the questions posed in your letter. Please contact me with any additional questions or comments.

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