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4000 - Advisory Opinions

Insurance Coverage of "Subordinated Deposits" in the Amount of $200,000 Made Prior to Bank Failure


April 9,1986

Roger A. Hood, Assistant General Counsel

This letter responds to your letter of February 25, 1986 in which you ask for confirmation that the earnings based account ("EBA") program you describe in your letter is in full compliance with the applicable regulations pertaining to EBA's and brokered deposits, and further that the funds of each customer that are deposited in FDIC-insured institutions under such an EBA program would be added to other funds of the customer in the same institution and be insured by the FDIC up to $100,000. *** intends to form a consortium of broker-dealer firms registered under the Securities Exchange Act of 1934 to offer their customers EBA's issued by FDIC-insured institutions. The EBA offerings will be made in full compliance with all potentially applicable securities statutes or regulations, specifically including, without limitation, the Securities Act of 1933 and the Investment Company Act of 1940. It is anticipated that fees totaling approximately 3-6% of the offering proceeds of the EBA's will be paid as commissions to broker-dealer firms and to other firms or individuals as organization and offering expenses (legal, accounting, and printing).

Proceeds of the EBA's would be utilized by the insured institution to make participating real estate mortgage loans. The loans would have a term of approximately three to ten years, and would be structured to provide both a fixed rate of interest and a contingent rate of interest. The contingent rate of interest would be determined by reference to an index based on the increased cash flow and appreciation of the underlying properties. The participating mortgage loans to be made with the EBA funds may be fully specified or partially specified by the issuing institution at the time of the offerings, and may be utilized to make a participating mortgage loan on one or more properties. *** intends to assist with the structuring and marketing of the EBA's through registered broker-dealer firms, as well as potentially becoming a borrower or co-borrower of such EBA funds.

The EPA's would be structured in strict compliance with the following rules and regulations promulgated by the Federal Home Loan Bank Board which currently apply to EBA's issued by federally insured savings and loan associations:

(1)  The fixed or guaranteed portion of the interest or return on the EBA's would exceed 66.667% of the average yield for AAA-rated corporate bonds in the Federal Reserve Board publication H15(519) most recently issued preceding the date of issuance of such accounts.

(2)  The EBA accounts would not grant the investor an ownership interest of any kind in such specified assets of the issuer.

(3)  The EBA accounts would not put the investor's funds at risk by providing for negative interest or by limiting the obligation to repay principal on the basis of asset performance.

(4)  The total amount of all such EBA's issued by the insured institution will not exceed 5% of the insured institution's assets, except that such amount may be increased to 20% of the institution's assets with prior permission of the institution's supervisory agent. (The FDIC regional director ?)

(5)  The assets, the income from or return on which is the basis for the index used in the accounts, will only be loans secured by real property.

(6)  Only the insured institution will exercise control over the selection or disposition of assets upon which the index is based.

(7)  The insured institution will use all reasonable means to ensure that persons who hold or have a meaningful interest in such accounts do not have an interest of any kind in the assets used to calculate the contingent interest.

(8)  The insured institution will not pay or commit to pay contingent interest in an amount greater than the amount of income actually received on assets serving as the index.

Based on the information you have above provided, we find no violation of our rules and regulations with respect to the above-described account. Further, if the funds are deposited in an insured bank, depositors' funds would be aggregated with any other funds which the depositor might have on deposit in the same insured bank and insured up to $100,000.

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