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4000 - Advisory Opinions

Insured Nonmember Banks Must Obtain Prior FDIC Consent to Repurchase Underlying Securities from Unit Investment Trust


February 12, 1985

John C. Murphy, Jr., General Counsel

At your request the FDIC's Legal Division has reviewed a registration statement forwarded from the Securities and Exchange Commission pertaining to the ***, a unit investment trust which is to be registered under the Securities Act of 1933 and which will own a fixed portfolio of preferred stocks issued by banks, bank holding companies, other financial institutions and public utilities. Your letter specifically requested the FDIC's comments on the registration statement as the filing "may raise concerns or problems under the statutes administered by the FDIC" and because the filing represents that FDIC staff has "confirmed" certain matters.

Description of Registration Statement:

Based upon our reading of the registration statement, we conclude that the investment trust will operate as follows. The investment trust is being formed to obtain current income from dividends and capital gains through investment in a fixed portfolio of fixed dividend preferred stocks (hereinafter referred to as "underlying securities"). The trust will purchase the underlying securities from savings banks and from savings and loan associations pursuant to a collateralized agreement to repurchase, i.e., a collateralized "put". The terms of the put commit each seller to repurchase the preferred stock on the annual repurchase date under the trust indenture (12-1-85 and annually thereafter until termination of the trust on 12-1-89) if required to satisfy redemption requests that are not satisfied by the sponsor's market making activity with respect to the underlying securities. The sponsor of the trust is ***. The put is also activated if: (1) the seller fails to make any sinking fund payment relating to the preferred stock, (2) the seller fails to declare and pay any quarterly dividend at a rate equal to the dividend rate set for the preferred stock at issuance, (3) if insolvency proceedings are commenced against the seller or the seller is deemed to be insolvent, or (4) if the seller fails to meet its collateral requirements.

The price at which the securities are to be put back into the selling institution will not be less than the original cost of the securities to the trust. Upon default by the seller under the repurchase obligation, the sponsor may go against the collateral; the sponsor's sole recourse against the seller. If any seller becomes, or is deemed to become insolvent, the collateral will be automatically foreclosed upon, and if necessary, sold. The proceeds from the sale will then be used to purchase the securities from the trust, the proceeds of which will be distributed to unit holders in the trust.

Eligible collateral is defined under the trust agreement to include cash, U.S. government obligations, GNMA pass-throughs, FNMA pass-throughs, FHLMC PC's, corporate bonds, and corporate preferred stocks. The minimum percentage of each type of collateral is respectively set at 105%, 113%, 145%, 155%, 155%, 155% and 160%. A seller is required to deposit additional collateral within 10 days if the market value of the collateral falls below the minimum level. The registration statement recites that the ability of the trust to exercise its rights as to the collateral in the event the seller defaults on its repurchase obligation depends upon the validity of the security interest of the trust in the underlying securities and recognition of the security interest by any conservator or receiver appointed to manage the assets of the seller if the seller has become insolvent.

The representations with regard to the FDIC appear at pages 20 and 21 of the registration statement. The statement indicates that staff of the FDIC has confirmed in general that the FDIC as receiver of an insolvent savings bank will recognize liens on the bank's assets under state law if in its opinion there are no legal deficiencies with such liens. The statement continues to say that, "to the extent the trust has a valid lien on the collateral under the collateral agreement, the FDIC should not assert a claim to such collateral in the event one of the sellers defaults on its obligations." The statement also indicates that with respect to a Federally chartered savings bank, the FDIC is automatically appointed as receiver in the event of the bank's insolvency and the FDIC will exercise all rights, powers and privileges granted to the Federal Savings and Loan Insurance Corporation ("FSLIC") as the receiver of a savings and loan association.

The registration statement describes the rights, powers and privileges granted to the FSLIC as the receiver of a savings and loan association as follows. The FSLIC may either take over the assets of the insolvent institution and continue to operate it or take such other action as the FSLIC deems appropriate, including the liquidation of the institution's assets. The statement indicates that staff of the FSLIC has confirmed that the FSLIC may choose to continue to operate an insolvent savings and loan association and affirm its repurchase obligations rather than permit the liquidation of collateral by the collateral agent under the trust. As a result, the collateral agreement provides that, with respect to the insolvency of any seller whose deposits are insured by the FSLIC, the collateral agent will liquidate the seller's collateral unless the FSLIC promptly reaffirms the seller's repurchase obligations.


Under section 18(i)(1) of the Federal Deposit Insurance Act, insured nonmember banks must obtain the FDIC's prior consent to the retirement of any part of their common or preferred corporate stock. Despite the fact that the securities at issue have several features that are inconsistent with the concept of preferred stock and, in many ways the securities are akin to debt instruments, it is still our opinion that section 18(i)(1) would apply. Any seller insured nonmember bank would therefore have to obtain FDIC's prior consent to the repurchase of the underlying securities from the trust. The provision for collateral effectively eliminates the FDIC's ability to grant or deny consent to the retirement of the bank's stock. If an insured nonmember bank enters into the collateralized put agreement with the trust, the FDIC's power to deny consent to repurchase the securities in accordance with the put is effectively nullified as the bank will, in any event, repurchase with our consent or suffer the loss of its collateral. The FDIC is therefore of the opinion that an insured nonmember bank must obtain the FDIC's prior consent to enter into the transaction. The request for consent would take the form of an application under section 18(i)(1) for the FDIC's prior consent to the retirement of the preferred stock.

As to the FDIC's treatment of the proposed transaction as receiver of an FDIC insured savings bank, I would first wish to make clear that the FDIC is not inclined to issue advisory opinions as to hypothetical situations that might arise in its receivership activities. This is because the FDIC, as receiver of an insured institution, represents unsecured creditors and must act in accordance with the appropriate legal authority governing each receivership and in view of the specific facts involved in each transaction. Moreover, to my knowledge, no member of the FDIC Legal staff has specifically confirmed as positions of the FDIC the points set forth in pages 20 through 22 of the registration statement. Thus, it would be incorrect to infer from that portion of the statement that the positions set forth therein have been approved by the FDIC.

The FDIC's Legal Division has been requested on several occasions to issue opinions as to the manner in which the FDIC, as receiver of an insured institution, would treat transactions which are similar to that in question here in the utilization of pledges of an institution's assets to secure the institution's performance. The substance of the responses prepared by members of the Legal Division to opinion requests regarding similar transactions has been that, unless the facts or the law require a contrary position, the FDIC as receiver would probably not oppose the liquidation of pledged collateral pursuant to pledge agreements by, or on behalf of, a properly secured creditor.

Where the FDIC is appointed receiver of a Federal savings bank chartered pursuant to section 5(o) of the Home Owner's Loan Act of 1933 and insured by the FDIC, Section 5(d)(6)(D) of that act provides that the FDIC "shall have the same powers as receiver as those granted by this paragraph to the Federal Savings and Loan Insurance Corporation as receiver of other associations." I am aware of a March 24, 1984 letter signed by *** of the FSLIC, which indicates that the FSLIC would have the option in a similar put arrangement to accelerate an insured institution's obligations under the put or, in the alternative, to continue performing in accordance with it. In that letter, *** stated that "we cannot represent that FSLIC as receiver would not challenge provisions of a put arrangement' that provides for immediate acceleration by the . . . trustee upon appointment of a receiver for the insured institution." The Legal staff of the FDIC has issued an opinion in which the power described by *** in his March 24, 1984 letter to accelerate a Federal savings and loan association's obligations under a put, or instead to continue performing in accordance with it, was stated to be available to the FDIC as receiver of a Federal mutual savings bank. Therefore, on this basis, the FDIC could, in the present case, oppose liquidation of pledged collateral and elect to continue performance under the repurchase agreement. However, because the FDIC's policy has been to require the immediate liquidation of assets, the FDIC would not necessarily utilize this option.

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