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4000 - Advisory Opinions

Separate FDIC Insurance of Savings and Demand Deposits of Public Units


May 28, 1985

J. William Via, Jr., Counsel

This is to advise, in response to your letter of May 13, that the Treasurer of ***, as official custodian of that city's public funds, is entitled to separate deposit insurance of up to $100,000 in toto for time or savings deposits and of up to $100,000 in toto for demand deposits placed in the same insured bank in Illinois. See 12 C.F.R. § 330.8(a)(2), (5). If the city has autonomous subdivisions or departments within the sense of 12 C.F.R. § 330.8(c), then each such additional public unit is entitled to separate deposit insurance for its public funds in the amounts specified in the preceding sentence, and it matters not for these purposes if each public unit has its own official custodian or if the Treasurer of *** is the official custodian for each, as well as for the city. See 12 C.F.R. § 330.8(a)(6). Of course, in all cases the custodial nature of an account and the ownership interests in the deposit funds must be ascertainable, pursuant to 12 C.F.R. § 330.1(b)(1), (2) (per 12 U.S.C. § 1822(c)).

We understand your view to be that section 11(a)(2)(A) of the Federal Deposit Insurance Act (12 U.S.C. § 1821(a)(2)(A)), by its plain terms, not only provides the official custodian of the funds of a city, or other public unit, with $100,000 in deposit insurance for funds placed in a time or savings deposit account in each insured bank (in the state of the public unit's location), but that there is no limit on the number of such accounts that a given official custodian can have in a single bank. This reading of the statute would result in de facto 100 percent deposit insurance for public funds and is impermissible, under the basic tenets of statutory construction, given that Congress, in enacting section 11(a)(2)(A), considered and explicitly rejected 100 percent deposit insurance for public funds.

The bill (H.R. 11221) that added paragraph (2)(A) to section 11(a) of the FDI Act would have, in its original form, provided full, or 100 percent, insurance for all the deposits owned by public units, be they demand, or time or savings deposits (and the bill originally would have also increased the basic deposit insurance limit from $20,000 to $50,000). See H.R. Rep. No. 93-751, 93d Cong., 2d Sess. 2-3, 6 (1974); 120 Cong. Rec. H470, et seq. (Feb. 5, 1974). It was subsequently proposed on the floor of the House that 100 percent deposit insurance for the funds of public units be limited to time deposits. 120 Cong. Rec. H480, et seq. (Feb. 5, 1974). The Conference Report (H.R. Rep. No. 93-1429, 93d Cong., 2d Sess. (1974)) contains the language that was ultimately adopted as paragraph (2)(A) of section 11(a) of the FDI Act (and includes, as well, the basic deposit insurance limitation of $40,000 that was ultimately adopted). See 120 Cong. Rec. H9935 (Oct. 4, 1974). Mr. St Germain, explaining the work of the conference committee, said, in part (120 Cong. Rec. H10277 (Oct. 9, 1974)):

Mr. Speaker, let me make one additional point, the conference committee worked long and hard on the difficult job of settling our differences with the Senate conferees on H.R. 11221. We were especially pleased in agreeing on the principle of 100 percent insurance of public funds up to $100,000 in view of the fact that the House had supported the basic principle some months ago. The Senate, however, did not take a specific position nor did it include a provision on insurance of public funds in its version of H.R. 11221. [Emphasis added.]

Mr. Rinaldo, also a member of the conference committee, remarked to the same effect (120 Cong. Rec. H10273 (Oct. 9, 1974)):

H.R. 11221 will provide full insurance for the first $100,000 of public funds deposited in financial institutions. This should also be of great assistance in our effort to increase the supply of mortgage money. [Emphasis added.]

The legislative history of section 11(a)(2)(A) reveals that those who opposed expansive or unlimited deposit insurance for public funds argued that such insurance would have a substantially adverse effect on the demand for, and thus on the market for, state and municipal bonds, which were (and are) typically used as collateral for uninsured deposits of public funds. See, e.g., H.R. Rep. No. 93-751, supra. There was also concern by supporters of the housing industry that thrift institutions had not been getting enough deposits of public funds, which was said to be largely a result of the greater resources available to commercial banks for the purchase of the bonds used for collateral for such deposits in excess of the deposit insurance limit. The interest rate advantage enjoyed by thrift institutions for deposits under $100,000 was also a factor in the deliberations that led to the compromise that was ultimately reached whereby the time or savings deposits of a public unit in a single insured bank (or in an insured thrift institution) are insured to a maximum of $100,000. In this connection, Mr. St Germain commented thusly, at 120 Cong. Rec. H10277 (Oct. 9, 1974):

At the time of the conference, it was agreed that the main purpose of raising the insurance limit on public funds was to give the savings and loan associations and mutual savings banks, which are institutions primarily concerned with providing home financing, a useful tool in attracting some of the public units throughout the United States to invest in these institutions. Commercial banks, of course, already enjoy an overwhelming superiority in this type of deposit.

It was also the intention of the conferees that in bidding for these funds up to $100,000, the thrift institutions would not sacrifice the principle of the needed differential which they have historically enjoyed over the rate set for commercial banks--the main purpose of which is to give depositors an incentive to put their money in these institutions that support home finance.

The effect of the compromise legislation (Pub. L. 93-495) was to provide $100,000 in deposit insurance for a public unit's time or savings deposits in a single insured bank at a time when the basic deposit insurance limit was only $40,000, the latter having been raised to that figure (from $20,000) by the same enactment. Thus, the last sentence of section 11(a)(1) read at the time, "Except as provided in paragraph (2), the maximum amount of the insured deposit of any depositor shall be $40,000". The basic insurance limit was subsequently, in 1980, increased to $100,000, but no change was made in the $100,000 limit set in paragraph (2) of section 11, so that reading section 11(a) now without the benefit of the legislative history makes it seem plausible (but it is nonetheless erroneous) to conclude that a public unit is entitled to more than $100,000 in deposit insurance for its time or savings deposits in a single insured bank.

We do not agree that the language of section 11 is unambiguous, apart from the ambiguity alluded to in the preceding paragraph. The section does not, for example, define the terms that it uses, notably "account", which in its ordinary or dictionary sense is not confined to one meaning. Moreover, the meaning of a statutory section is not to be (and frequently cannot be) ascertained by reference to its language alone. Rather it must be read in juxtaposition with other provisions of the larger statutory scheme, here the FDI Act, and this must be done in light of the objective or purpose that Congress sought to achieve, as revealed by the statutory scheme itself and amplified by pertinent legislative history.

Section 3 of the FDI Act (12 U.S.C. § 1813) is a definitional provision, which, while it does not define "account'' (or "per account''), needs to be consulted in construing section 11. At the outset, it must be noted that the first sentence of section 3(m)(1) defines the term "insured deposit" as the net amount due any depositor (other than an official custodian of public funds) up to $100,000. As in the case of the last sentence in section 11(a)(1), discussed above, this limit in section (3)(m)(1) read $40,000 in 1974 (when paragraph (2) was added to section 11(a)). The parenthetical exception in the first sentence of section 3(m)(1) for depositors who are official custodians of public funds makes sense today, however, for it is consistent with the determination made by the FDIC that while Congress meant by section 11(a)(2) to limit the deposit insurance for the time or savings deposits of a public unit to $100,000 in a single insured bank, Congress also meant for each public unit to be able to have an insured demand deposit of up to the basic insurance limit in the same bank.

The second sentence of section 3(m)(1), in relevant part, states that "in determining the amount due to any depositor there shall be added together all deposits in the bank maintained in the same capacity and the same right for his benefit either in his own name or in the names of others . . ." The effect of this is to require that the time or savings deposits maintained in a single insured bank by an official custodian for a public unit be added together and insured to $100,000 in total. The first clause of paragraph (2)(A), section 11, does not change this requirement for, as we have seen, the purpose and effect of that clause was to confer a $100,000 insurance limitation on public unit time or savings deposits when the basic insurance limit was $40,000.

It must be noted also that, by the last sentence of section 3(m)(1), Congress has conferred on the FDIC considerable authority to clarify and define deposit insurance coverage. That provision states, in essence, that for the purpose of clarifying and defining the insurance coverage under section 3(m) and section 7(i), the FDIC is authorized to define, with such classifications and exceptions as it may prescribe, the terms used in those sections and certain others, including section 11(a), and the extent of the insurance coverage resulting therefrom. The FDIC, of course, relied on this authority, among others, in adopting its deposit insurance regulations.

We gather from your letter that you also question the validity of the Legal Division's March 19, 1985 opinion (subsequently ratified by implication by our Board of Directors) 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 purposes of 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 (they simply held deposits in their name for the Treasurer) and were not, therefore, custodians in fact, and appeared to have been appointed solely to increase deposit insurance coverage.

While the facts of the Colorado multiple custodians case enabled us to have the March 1985 opinion turn on the narrow issue of control, we have, as anticipated, subsequently had occasion to opine in broader scope on the requirements for recognition as an "official custodian." While provisions of state law are germane to this issue, it is clear that the ultimate question is one of Federal law.

We have concluded that, in order to qualify as an "official custodian" under 12 C.F.R. § 330.8, a designee, whether an officer, employee or agent, must have plenary authority (which concludes 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 the 12 C.F.R. § 330.8.

We are of the opinion that the foregoing meaning of "official custodian" is compelled by due regard for the principle that the language of a statute must not be construed so as to render it ineffective, or a nullity, in terms of its purpose. The FDI Act in sections 3(m)(1) and 11(a)(2)(A) speaks of an "officer, employee, or agent" having "official custody" of public funds without defining these terms, leaving that task, as we have seen, to the FDIC. Similarly, our regulation (12 C.F.R. § 330.8) uses the term "official custodian'' without defining it. We are confident that the construction we have given the term is proper and that it would be approved by our Board of Directors. To hold otherwise, that is to hold that a public unit can increase the deposit insurance available to it by the mere conferring of a title or by fragmentizing the authority over its funds among several putative official custodians, whether they be officers, employees or agents, would result in the virtual nullification of the statutory provisions limiting deposit insurance for public funds and is, therefore, impermissible.

We trust that this rather protracted discussion constitutes an adequate response to your question, which is a fair one, but if we can be of further service, please let us know.

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