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Each depositor insured to at least $250,000 per insured bank

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4000 - Advisory Opinions

Conflict of South Dakota Banking Law with Part 332 of FDIC's Regulations


April 8, 1983

Douglas H. Jones, Deputy General Counsel

The following is in response to the five questions set forth in your March 15, 1983 memorandum concerning the recently enacted legislation in South Dakota permitting banks to "engage in all facets of the insurance business".

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* * * section 332.1 provides that a state nonmember bank shall not exercise, take, or assume the power to: (a) do a surety business; (b) insure the fidelity of others; (c) engage in insuring, guaranteeing or certifying titles to real estate; or (d) guarantee or become surety upon the obligation of others other than by the issuance of acceptances, endorsements, or letters of credit made or issued in the usual course of banking business. The South Dakota legislation clearly conflicts with section 332.2 in that it permits any facet of the insurance business some of which include activities proscribed by FDIC's regulations.1

The FDIC has recognized two exceptions to the restrictions contained in Section 332.1: (1) where the bank has a substantial interest in the transaction; and (2) where there is a segregated deposit that fully covers the bank's exposure. Whether or not a bank has a sufficient interest in the transaction for the FDIC to determine that the bank's interest is "substantial" and thus excepted must be decided on a case-by-case basis. Any instructions to examiners should identify the above exceptions; describe transactions previously found within the substantial interest exception; and direct examiners to confer with their regional counsel and/or the Washington Office Legal Division concerning whether or not any transaction is excepted.

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* * * In 1982, the State of Florida enacted legislation which required as a condition of being a depository for public funds that every depository agree to pick up a pro rata share of any loss incurred by a public depositor as a result of the failure of any public depository. Although the FDIC ultimately determined that one of the interpretative exceptions to section 332.1 was applicable to the Florida public depository cross-guarantee program,2 a letter expressing FDIC's disapproval of the legislation was sent to the State Treasurer and Insurance Commissioner. (copy attached) * * *

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1 Section 332.1 would reach such things as performance bond activities, real estate title insurance, and fidelity and surety bonding. We are not, however, now in a position to comment on how much of an overlap there is between activities covered by the language of section 332.1 and insurance activities in general. Go back to Text

2 As indicated above, one of the exceptions to section 332.1 which has been recognized on an interpretative basis is the substantial interest exception.
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