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4000 - Advisory Opinions

FDIC Insurance of Public Unit Deposits


March 19, 1985

Roger A. Hood, Assistant General Counsel

This is in response to your letter of January 3, 1985 to Chairman Isaac requesting "assistance in resolving interpretations pertaining to FDIC Insurance of Public Unit Deposits and FDIC rules." You enclosed copies of thirteen letters, seven of them being between your office and the FDIC and six of them being between your office and the Office of the Colorado Attorney General.

State Compensation Insurance Fund

Apparently, one of your concerns is whether Colorado's State Compensation Insurance Fund qualifies for deposit insurance as a political subdivision or public unit (12 U.S.C. §§ 1813(m)(1), 1821(a)(2)(A)(ii); 12 CFR § 330.8). By his letter of April 20, 1981, Colorado's Deputy Attorney General Hennessey, responding to your inquiry of February 2, 1981, concludes in essence that the State Compensation Insurance Fund is a subordinate or nonautonomous division of Colorado's Department of Labor and Employment and therefore not a political subdivision or public unit for purposes of FDIC deposit insurance. Your Deputy Treasurer Thornberry was advised by letter of May 13, 1983 from Frederic H. Karr of our Legal Division of his agreement with Mr. Hennessey's conclusion on this point.

Subsequently, Mr. Thornberry, by letter of May 23, 1983, requested the Colorado Attorney General to review the opinion of April 20, 1981, citing a change in state law to give the Treasurer (the official custodian) authority to make investment decisions for the State Compensation Insurance Fund, which investment decision authority formerly resided with the Industrial Commission. Mr. Thornberry addressed this same subject in letters of May 24 and July 25, 1984 to Fred Karr of our Legal Division, noting in essence in the letter that the Colorado Attorney General's Office had advised him of its intent to adhere to its opinion of April 20, 1981. Mr. Thornberry thereafter was advised by letter of August 17, 1983 from F. Douglas Birdzell of our Legal Division that the question whether the State Compensation Insurance Fund qualifies as a political subdivision or public unit for FDIC Insurance purposes (12 CFR § 330.8(c)) is one of state law, adding that, "If, in the opinion of the State Attorney General, these criteria are met separate insurance will be accorded."

Incidentally, Mr. Birdzell's statement, while in effect connoting agreement with your Attorney General's Office on the ultimate point at issue, is overly broad. While provisions of state law are germane in determining whether an entity qualifies as a political subdivision or public unit under the criteria of 12 CFR § 330.8(c), the ultimate question of qualification is one of Federal law, and the opinion of the cognizant State Attorney General, although entitled to respect and careful consideration, is not conclusive. The Colorado Attorney General's Office recognizes this as is witnessed by Mr. Hennessey's endorsement, on the middle of page four of his opinion letter to you of April 20, 1981, of the earlier advice to you by his colleague Mr. Friedman that "the controlling opinion on the application of federal insurance coverage in these matters would be that of the appropriate officials for the FDIC and the FSLIC." The ultimate arbiter for such questions is, of course, the Federal judiciary.

In sum, we find no reason to disagree with the conclusion of your Attorney General's Office that the State Compensation Insurance Fund does not qualify as a political subdivision or public unit under 12 CFR § 330.8(c). The transfer of the authority to make investment decisions for the Fund from the Industrial Commission to the Treasurer appears to be a further reason for concluding that the Fund does not so qualify since the Fund, in addition to the reasons already cited by your Attorney General's Office for the Fund's nonautomony, does not enjoy the "exclusive use and control" of money allocated to it as required by 12 CFR § 330.8(c)(3).

Mr. Thornberry transmitted to our Legal Division with his letter of May 24, 1983, described above, a copy of what he characterized as a "favorable opinion from FSLIC with regard to the State Compensation [Fund] as a public unit fund." This FSLIC opinion consists of a letter of April 27, 1983 from the FHLBB addressed to Mr. Thornberry and includes as an enclosure an FHLBB letter of August 19, 1982. As we read these documents, they are entirely consistent with the April 20, 1981 opinion of your Attorney General's Office, which opinion is in fact cited in the FHLBB letter of August 19, 1982.

Multiple Custodians for Public Unit Accounts

Another area of concern for you, we gather from certain of the correspondence submitted with your letter, is whether multiple (or additional) "custodians" for public unit accounts appointed pursuant to section 24-36-109 of the Colorado Revised Statutes, as amended in 1979, qualify for separate FDIC insurance. This issue was the subject of letters (June 20, 1979; July 25, 1979) between your Mr. Murphy and Colorado's Assistant Attorney General Richard J. Forman, as well as of letters (August 23, 1979; December 19, 1979) between Mr. Murphy and Jerry L. Langley of our Legal Division. Mr. Langley advised that "each custodian appointed pursuant to the amended statute would be considered an official custodian' within the meaning of . . . [12 CFR § 330.8] and would be entitled to separate insurance coverage for the amounts specified in the section." For the reasons discussed below, Mr. Langley's opinion on this matter is withdrawn.

The Colorado statute, at the time of Mr. Langley's opinion, provided:

The state treasurer is authorized, in his discretion, to deposit state moneys with national or state banks doing business in this state for fixed periods of time, not exceeding two years, at such rate of interest as may be negotiated from time to time. For the purpose of making such deposits, the state treasurer may, in his discretion, appoint in writing one or more persons to act as custodians of the moneys. Such persons shall give surety bonds in such amounts and form and for such purposes as the state treasurer requires. All such time deposits shall be evidenced by certificates of deposit issued in the name of "Treasurer, State of Colorado" or in the name of the appointed custodian as representative of the state treasurer.

Under the Federal Deposit Insurance Act (see 12 U.S.C. §§ 1813(m), 1821(a)), an "agent'', as well as an "officer'' or "employee'', may have "official custody" of public funds, and may be an "official custodian" under 12 CFR § 330.8, as well. But, it is axiomatic that to have "official custody'' and to be an "official custodian", the official must in fact have "custody" of public funds. The term "custody" is not defined in the statute or regulation (although the FDIC is empowered to define it, and other terms), but in its ordinary, or dictionary, meaning, an essential element of "custody" is control, and this element is clearly lacking in the case of the putative custodians appointed pursuant to section 24-36-109 of the Colorado Revised Statutes, as adopted in 1979.

The statute allows the state treasurer to appoint "one or more persons to act as custodians of the moneys" that the state treasurer is authorized to deposit in banks doing business in Colorado, evidenced by certificates of deposit (of up to two years maturity). The highly circumscribed function of the "custodian" is to allow one or more of these certificates of deposit to be issued in his or her name, but only with the qualification on the certificate that the "appointed custodian" is the "representative of the state treasurer." It is manifest that these so-called "custodians" exercise no control over the funds and that control remains in the state treasurer, the official custodian. Accordingly, the conclusion is compelled that "custodians" appointed pursuant to section 24-36-109 of the Colorado Revised Statutes, as adopted in 1979, cannot be "official custodians" under the Federal Deposit Insurance Act or under 12 CFR § 330.8 and that they, therefore, are not entitled to separate deposit insurance coverage.

We understand that section 24-36-109 was amended in 1981 to delete the last sentence from the 1979 version, which required that: "All such time deposits shall be evidenced by certificates of deposit issued in the name of Treasurer, State of Colorado' or in the name of the appointed custodian as representative of the state treasurer." We cannot conclude on the basis of the deletion of this requirement from the statute that the state treasurer does not in fact continue to use "custodians" for the same highly circumscribed function described above, and, concomitantly, we have no basis for concluding that the "custodians" now exercise control over public funds. Accordingly, our conclusion that these "custodians" are not entitled to separate deposit insurance applies to the 1979 and 1981 versions, alike. You, of course, may present additional material facts and we will reconsider the matter.

We need not, in the circumstances, reach the question whether separate deposit insurance would be accorded multiple (or additional) "custodians" of public unit accounts who, although they exercise control over public funds, do so solely for the purpose of increasing deposit insurance coverage. We surmise, however, that our Board of Directors would require that, to qualify for separate deposit insurance, a custodian must perform an additional bona fide function, for otherwise the statutory provisions limiting deposit insurance for public funds would be virtually nullified and public funds would be accorded de facto 100 percent deposit insurance. Congress has heretofore considered and rejected a proposal to provide 100 percent deposit insurance for public funds. (See H.R. 11221; H. Rep. No. 93-751, January 21, 1974).

Interest in Deposit Accounts; State Collateral Requirements

You ask, in your letter, if ". . . FDIC insurance on deposits of or in excess of $100,000 extends to the accrued interest thereon. . . . ?" A qualified deposit is insured up to $100,000, a ceiling that includes principal and interest. Amounts, whether of principal or interest, in excess of the $100,000 ceiling are uninsured. In particular, contrary to your apparent understanding, amounts in deposit accounts in excess of $100,000 are not "allocated" (presumably in some fashion to increase deposit insurance coverage). The provisions of 12 CFR § 330.15 deal with the problem of how to determine the amount of interest that is owed on a deposit account when a bank fails. The $100,000 limit is then applied to the deposit. The section in no way increases the ceiling that is fixed by Federal statute.

Your questions about the collateral requirements of Colorado's Public Deposit Protection Act of 1975 for securing deposits of public funds that are not covered by FDIC insurance are not within the province of the FDIC's authority and should be addressed to your Attorney General.


We have endeavored to respond to what we discern to be the principal concerns that prompted your letter. If, despite this effort, questions remain, please specify them for us and we will undertake to answer them for you.

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