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4000 - Advisory Opinions

Do "pass-through" deposit insurance rules apply to funds placed with the trust department of an FDIC-insured institution

FDIC--03--01 January 3, 2003 Christopher L. Hencke, Counsel

In a letter dated October 17, 2002, you presented the following question: "Under any circumstances may securities and treasury certificates of a Charitable Trust held in a custodian account in a regulated financial institution be subject to the general creditors of that institution in the event the institution becomes insolvent, is placed into receivership, bankruptcy, etc.?"

I presume that your reference to a "custodian account" means an account with the trust department of an FDIC-insured depository institution. Further, I presume that your question relates to a situation in which the trust department--on behalf of a trust customer (the Charitable Trust)--has purchased securities or other assets. In the event of the failure of the depository institution, the disposition of such assets (i.e., assets held by the trust department on behalf of trust customers) will be governed by well settled principles of law. Under these principles, the "general assets" of the failed institution are subject to the claims of creditors but the "trust assets" may be recoverable in full by the trust customers. In order to make a full recovery of these assets, the trust customers must (1) establish the existence of a fiduciary relationship between themselves and the failed institution with respect to the assets; and (2) trace the assets into the hands of the institution's receiver (i.e., the FDIC). The satisfaction of the first requirement will depend upon the terms of the agreement between the trust customer and the depository institution; the satisfaction of the second requirement will depend upon whether the depository institution--in accordance with this agreement--continues to hold the asset (separate and apart from its general assets) at the time of the institution's failure. See generally Union Light & Power Co. v. Cherokee National Bank, 94 F.2d 517, 519--20 (8th Cir. 1938); Keyes v. Paducah & I.R. Co., 61 F.2d 611, 612 (6th Cir. 1932); City of Miami v. First National Bank of St. Petersburg, 58 F.2d 561, 562 (5th Cir. 1932); Dixon v. Hopkins, 56 F.2d 783, 784 (5th Cir. 1932). Cf. Peoples Westchester Savings Bank v. FDIC, 961 F.2d 327 (2d Cir. 1992).

In most cases, the satisfaction of the requirements above will not be a problem. Indeed, the FDIC (as the failed institution's receiver) will surrender the trust assets to the trust customers (or arrange for the holding of the trust assets by a substitute fiduciary) without requiring any action by the trust customers. Please note, however, that the FDIC cannot guarantee that every depository institution--after receiving or purchasing assets in a fiduciary capacity--will honor its obligations to handle these assets in an appropriate manner.

I have enclosed a copy of FDIC Advisory Opinion No. 91-47 (May 24, 1991). In that advisory opinion, the FDIC staff stated that "rollover funds awaiting investment in securities" at the time of failure of an insured depository institution would be treated as a "deposit." In other words, the FDIC would provide insurance up to the $100,000 limit but funds in excess of this limit would be entitled to nothing except "a claim against the closed bank's assets." On the other hand, the rollover of funds prior to the bank's failure would have the effect of "allowing the return of purchased securities to the customer."

I hope that this information is useful.

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