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4000 - Advisory Opinions

Interpretation of "Group Annuity Contracts" and the applicability of "pass through" deposit insurance and Regulation DD

February 19, 2002


Christopher L. Hencke, Counsel

In a letter dated November 7, 2001, you requested the FDIC's review of certain marketing materials relating to deposits to be established under a "Group Annuity Contract." These deposits were the subject of a letter dated January 29, 2001, in which I explained the insurance coverage of such deposits under the FDIC's regulation at 12 C.F.R. § 330.8 ("Annuity contract accounts"). A copy of this letter is enclosed for your convenience.

You have provided two sample documents for the FDIC's review. These documents are (1) a "Fund Description"; and (2) a "Performance Report." In connection with these documents, you have requested the FDIC's views on two subjects. Each of these subjects is discussed in turn below.

Deposit Insurance

The deposits at issue are part of a particular investment option offered through the "Group Annuity Contract." This investment option is known as the "Bank Savings Option Bank X." In the "Fund Description," the deposits are described as follows:


The Bank Savings Option is an investment choice available through the group variable annuity product and may be appropriate for investors seeking to maintain stability of principal. Amounts allocated to this option are held in a separate account and the assets of the separate account are placed in deposits in deposit accounts, including certificates of deposit, with Bank X, an FDIC-insured depository institution.

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FDIC Insurance--Please note that FDIC insurance protects the owners of deposits in insured institutions in an amount of up to $100,000 per customer per institution. Deposits made in connection with the Bank Savings Option will be part of a "separate account" under Connecticut law, and therefore the deposits will be owned by Life Insurance Co. The deposits will not be owned by the plan or the plan participants. Accordingly, the directly insured party under the deposit insurance will be Life Insurance Co. and any benefit derived by the participant from Life Insurance Co. status as an insured depositor will be indirect. Under relevant FDIC authorities, however, the interests of individual participants in the deposits will be entitled to separate FDIC insurance coverage up to a maximum amount of $100,000 per participant. Such FDIC deposit insurance applies to the deposits only and does not apply to any of the insurance or annuity components of the participant's account which are provided solely by Life Insurance Company.

As quoted above, the "Fund Description" includes the following sentence: "Under relevant FDIC authorities, however, the interests of individual participants in the deposits will be entitled to separate FDIC insurance coverage up to a maximum amount of $100,000 per participant." This sentence may suggest to some participants that they will hold ownership interests in the deposits. To avoid confusion, you may wish to delete this sentence or rephrase this sentence as follows: "Under relevant FDIC authorities, Life Insurance Co. will be entitled to insurance coverage on these deposits in a maximum amount of $100,000 per participant."

Truth in Savings

A separate issue is whether the marketing materials are subject to the Trust in Savings Act as implemented by Regulation DD (12 C.F.R. Part 230). Under Regulation DD, certain advertising rules "apply to any person who advertises an account offered by a depository institution, including deposit brokers." 12 C.F.R § 230.1(c).

We agree that Life Insurance Co.--as the actual owner of the deposits--will not be a "deposit broker." The only question is whether Life Insurance Co. will be a "person who advertises an account" at a depository institution. In the "Fund Description," the "investment return" for the "Bank Savings Option" is described as follows:

Investment Return--The deposits are maintained in a variable rate interest account. The interest rates paid on the deposits are set quarterly in advance and are guaranteed for that quarter by: Bank X but not by Hartford Life. The interest amounts actually credited to participant accounts are further reduced by the deduction of separate account charges and other contract level fees. For more information, please call 1-800-xxx-xxxx.

This description of the "investment return" seems to be an advertisement of accounts offered by a depository institution (i.e., Bank X). As mentioned above, Regulation DD applies to "any person" who advertises accounts at depository institutions. If the object is to avoid the advertising rules in Regulation DD, the best approach is simply not to advertise the deposit accounts at Bank X or any other depository institution. In this case, no apparent reason exists to advertise the accounts at Bank X inasmuch as these deposit accounts will be owned by Life Insurance Co. and not by the participants. Rather than advertising the deposit accounts at Bank X, Life Insurance Co. may wish to advertise the "Bank Savings Option" investment accounts that will be owned by the participants. For example, the above description of the "investment return" could be rephrased as follows: "The earnings credited to participant accounts will be based on the interest earned by Life Insurance Co. on variable-rate deposits at Bank X (reduced by account charges and other contract fees)." No opinion is offered as to whether this illustrative language would satisfy the applicable rules or standards of the National Association of Securities Dealers (NASD).

Finally, please note that Bank X is subject to Regulation DD. One of the requirements under Regulation DD is that an advertised rate of return must be expressed as an "annual percentage yield" or "APY." See 12 C.F.R. § 230.8(b). In the case of a variable-rate account, Regulation DD includes rules for calculating the "APY." See Appendix A to 12 C.F.R. Part 230. In light of the fact that Bank X is obligated to provide Life Insurance Co. with the "APY" for these variable-rate accounts, I am not sure why Life Insurance Co. cannot provide the "APY" to any participants who may be interested in this information.

Please feel free to contact us if you would like to explore these matters in greater detail.

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