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4000 - Advisory Opinions

FDIC Insurance of Public Unit Deposits


April 8, 1985

Roger A. Hood, Assistant General Counsel

This is in response your letter of March 30, 1985 requesting clarification and confirmation of certain matters in the opinion letter of November 30, 1984 from Senior Attorney Pamela E. F. LeCren to *** regarding deposit insurance for public funds commingled and deposited, as custodian, by ***, which you state was created for the exclusive use of local government entities in Colorado. Your questions are largely prompted, we understand, by our opinion letter of March 19, 1985 to Colorado's State Treasurer holding that multiple custodians of public funds appointed by the Treasurer pursuant to section 24-36-109 of the Colorado Revised Statutes are not "official custodians" for FDIC insurance purposes (12 C.F.R. § 330.8) and are not entitled to separate deposit insurance coverage. That opinion found that the multiple custodians appointed as aforesaid exercised no control over public funds and were not, therefore, custodians in fact, and appeared to have been appointed solely in an effort to increase deposit insurance coverage.

The rationale of the March 19, 1985 opinion implies that, to qualify as an "official custodian" under 12 C.F.R. § 330.8, a designee must have plenary authority (which includes control) over funds allocated to the public unit which the custodian is appointed to serve. Control of public funds includes possession, as well as the authority to establish accounts for such funds in insured banks and to make deposits, withdrawals and disbursements. The deposit insurance available to a public unit cannot be increased merely by fragmentizing such authority over that unit's funds among several putative official custodians. Similarly, if the exercise of authority or control over the funds of a public unit requires action by or the consent of two or more putative official custodians, then they will be treated as one "official custodian" with respect to such funds for the purposes of 12 C.F.R. § 330.8.

You ask that we confirm the present validity of the "pass-through" insurance portions of Ms. LeCren's opinion letter, specifically the following portion from paragraph five:

Likewise, if a depositor is the official custodian of more than one public unit, each public unit is afforded separate insurance coverage. The FDIC has previously concluded that for insurance purposes deposits owned by several public units and managed by an investment advisor pursuant to a custodial agreement are separately insured as to each public unit, i.e. the insurance coverage passes through the custodian to the beneficial owners of the fund, the public units.

The March 19, 1985 opinion does not eliminate "pass-through" insurance, and the statements quoted above remain valid, when read in the context of Ms. LeCren's entire letter. You understand, of course, that the quoted statements are subject to the caveat that multiple custodians, as related in the opinion letter of March 19, 1985, and amplified herein, will not be recognized as "official custodians". That opinion, however, does not affect the use by "official custodians" of *** (or its designated officer) as custodian for commingled public funds. ***, while called custodian for this purpose, is not an "official custodian" for purposes of the Federal Deposit Insurance Act and our deposit insurance regulation, but functions as an agent for such "official custodians" for certain circumscribed investment purposes, which is a permissible role when conducted in accordance with the Act and regulation, and one that has no substantive effect on the amount of deposit insurance coverage provided (or "passed-through") to the "official custodians".

You indicate that there is some concern by local government entities in Colorado that if an "official custodian" of a public unit places a deposit of public funds directly into a given insured bank which by chance is also a depository bank for ***, as custodian, then the portion of the funds in the *** custodial account that is owned by the public unit will be combined with the public unit's direct deposit in determining deposit insurance coverage. This concern is well-founded, as that is, and always has been, the rule governing such cases (12 C.F.R. § 330.2(b)) and the rule is not changed by our opinion letter of March 19, 1985. As you know, however, an "official custodian" of a Colorado public unit is entitled to separate deposit insurance up to $100,000 for a time or savings deposit and up to $100,000 for a demand deposit placed in the same insured bank in Colorado. See 12 C.F.R. § 330.8(a)(2),(5). Thus, for example, a demand deposit placed in an insured bank by an "official custodian" of a public unit would not be aggregated for insurance purposes with funds owned by that public unit and placed in a time or savings deposit in the same bank by ***, as custodian.

We trust that we have responded adequately to the concerns expressed in your letter, and expanded upon during your recent visit to our offices. If questions remain, please specify them for us and we will undertake to answer them for you.

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