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4000 - Advisory Opinions

Pass-Through Deposit Insurance for Certificates of Deposit Issued Through Broker-Dealers

FDIC--04--01 September 11, 2003 Christopher L. Hencke, Counsel

This is in response to your recent letter and our subsequent telephone conversations on specific FDIC deposit insurance issues. Your inquiry involves section 8(q) of the Federal Deposit Insurance Act (12 U.S.C. 1818(q)) ("Section 8(q)") and its corresponding regulation, section 330.4 (12 CFR 330.4).

You note that your client, an FDIC-insured institution, has issued certificates of deposit ("CDs") through various broker-dealers. Your client plans to assign all the brokered CDs to a new institution that your client's holding company and others propose to charter. The CDs will be assumed according to their terms. After the CDs are assigned, the assigning and assuming institutions each intends to issue additional CDs through broker-dealers and to accept deposits directly from depositors.

Generally, Section 8(q) provides that deposits assumed by an FDIC-insured institution are separately insured from deposits the same depositor has at the assuming institution. For deposits other than time deposits, this separate insurance is available for six months from the date of the assumption. For time deposits, the separate insurance applies for six months or until the maturity date of the particular deposit, whichever is longer. Section 8(q) is intended to provide temporary separate insurance coverage for deposits transferred from one insured institution to another. When the temporary insurance ends, affected depositors will be subject to the standard insurance limits for deposits at the assuming institution.

Your first question is: If a customer's deposits at Bank X are assumed by Bank Y, will the customer be entitled to coverage up to $100,000 at Bank Y for the Bank X deposits separately from coverage up to $100,000 for any deposits the same customer has at Bank Y, regardless of whether the deposits were placed with Bank Y before or after the date of the assumption? The answer is yes. Section 8(q) and Section 330.4 are clear in providing coverage for the assumed deposits separately from any preexisting deposits at the assuming institution. As to deposits placed after the date of the assumption, the FDIC's interpretation is that Section 8(q) insulates the assumed deposits from pre-existing deposits and additional deposits the same depositor places at the assuming bank after the date of the assumption (until the termination of the temporary separate insurance). This position has been endorsed by the courts. For example, in First American Bank v. RTC, 30 F.3d 644 (5th Cir. 1994) the court concluded that the separate insurance coverage provided by Section 8(q) applied irrespective of whether the applicable depositor placed deposits at the assuming bank before or after the date of the assumption. Thus, the assumed deposits would be insured separately from the insurance available to the depositor's total pre- and post-assumption deposits at Bank Y.

Second, you ask: If the same customer has additional preexisting deposits with Bank X (i.e., deposits that were not part of the deposits assigned to Bank Y) or places new deposits with Bank X after the date of the Bank Y assumption, will the total of those deposits at Bank X be entitled to coverage up to $100,000? The answer is yes. Preexisting deposits at the assigning bank are not affected by the operation of Section 8(q). Section 8(q) only addresses the separate insurance of the deposits assumed by the assuming institution. The coverage of a customer's remaining and new deposits at the assigning institution would be unaffected by the operation of Section 8(q) and would be insured up to the usual limits of coverage and in the normal course, based on the ownership capacity in which the depositor maintains those deposits.

Your final question is: If the same customer purchases additional assigned Bank X CDs in a secondary market, would those deposits be eligible for insurance separate from the coverage for any deposits established by the customer at Bank Y? This answer also is yes. The issue is addressed in FDIC Legal Advisory Opinion 2000--4 (June 14, 2000), a copy of which was enclosed with your letter. Based on the reasoning in that opinion, assigned Bank X deposits that the customer purchases in a secondary market would be added to any other deposits the customer had at Bank X that were assigned to Bank Y and the combined amount would be insulated (and, hence, eligible for separate insurance up to $100,000) under Section 8(q) for either six months from the date of the assumption or the maturity date of the CDs, which is later.

Please note that this letter is limited to the applicable deposit insurance issues. It does not address the other aspects of the proposed transaction, including whether the assuming institution will be permitted to accept brokered deposits under section 29 of the FDI Act.

I hope this information is helpful. Feel free to call with any additional questions or comments.

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