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

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4000 - Advisory Opinions

Applicability of Part 332 to Repurchase and Resale of Industrial Development Bonds by Insured State Nonmember Bank


April 23, 1984

Roger A. Hood, Assistant General Counsel

This is in response to your April 20 letter regarding the repurchase and resale of industrial development bonds ("IDBs") by an insured state nonmember bank and the applicability, vel. non, of Part 332 of FDIC's regulations (12 C.F.R. Part 332) to the transaction.

As outlined in your letter, the bank in question originally sold the IDBs to a sponsor of two tax exempt unit investment trusts. The sales agreement provided for the repurchase by the bank under certain specified conditions. In letters dated July 8 and 19, 1983, attorneys representing the FDIC Legal Division expressed opinions that such repurchase agreements would not violate this prohibition contained in 12 C.F.R. Part 332 relating to guarantees by insured state nonmember banks because the bank had a substantial financial interest in the transaction. The letters cautioned that the opinions were based on the assumption that the IDBs were originally bought by the bank for its own investment purposes, and not with the intention of reselling them to the sponsor or anyone else.

You have advised that your client will be required to repurchase the IDBs under the repurchase agreement, but that a new unit investment trust will be established and that the bank intends to sell the IDBs to the new trust under a similar repurchase agreement. You ask that I confirm that the repurchase agreement outlined in your letter would not constitute a prohibited guaranty under Part 332.

This is to advise you the subject transaction would not be regarded as a prohibited guaranty under Part 332. The repurchase of the IDBs by the bank was pursuant to the requirement of the original sale, and not for the purpose of selling them to the new trust. The purchase by the new trust will be on the same terms and conditions as the original sale and will involve the identical securities originally sold subject to repurchase. The transaction as outlined in your letter, will put the bank in no worse position than it occupied under the original sale, and does not appear to be a transaction intended to run the IDBs through the bank's investment account for the purpose of evading the provisions of Part 332.

Accordingly, I confirm the opinion I tentatively stated in our April 20 telephone conversation that neither Part 332 nor the language you quoted from our July 8, 1983 letter regarding purchase of securities for the purpose of reselling them to a mutual fund prohibit the bank and the sponsor from consummating the transaction outlined in your April 20 letter.

I trust this adequately responds to your inquiry.

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