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4000 - Advisory Opinions

Deposit Insurance Coverage of CDs Accepted by Local Government Department in Lieu of Performance Bonds


December 2, 1987

Walter P. Doyle, Counsel

Thank you for your November 13 letter to Regional Attorney Robert Green regarding FDIC coverage of certificates of deposit accepted by your department in lieu of performance bonds. Although such a certificate is purchased by the mining operator under its tax identification number and accrued interest on the deposit is mailed directly to the operator by the insured bank, the certificate itself is nevertheless payable exclusively to your department and access to the principal amount thereof is limited solely to your department on the records of the bank.

It would be our interpretation that the underlying intent of the parties to this arrangement is that, until default, the operator is the true, ultimate beneficial owner of the funds on deposit but that your department has sole, exclusive control of such funds in order to secure it against the operator's failure to perform as agreed. If this is the true nature of the relationship between the parties and if the existence of such relationship is adequately disclosed on the deposit account records of the insured bank as required by § 330.1(b)(1) of our regulations (12 CFR 330.1(b)(1)), then (prior to default) we would treat each such certificate as a deposit of the operator which, after being aggregated with other deposits the operator may have in the same bank, would be insured to the $100,000 limit. One obvious way of complying with this disclosure requirement would be to add the word "agent," "custodian," "pledgee" or the like after your department's name as payee on the certificate. Alternatively, a letter in the bank's deposit account records for each such certificate, outlining the nature of the relationship as described above, would also suffice. However, a simple notation in bank records that interest on the deposit is to be paid to the operator, while suggestive as to ownership, is not necessarily determinative and I could not recommend relying exclusively on such a notation to establish separate coverage for each operator. Of course, after "default" by any particular operator, however that may be determined, the deposit would be subject to the $100,000 limit applicable to funds of your department.

Assuming compliance with § 330.1(b)(1) and no default by any operator, the three deposits in your first hypothetical would be aggregated with each other and with other deposits of the operator at the same bank and insured to a maximum of $100,000. In #2, each deposit would be fully covered. In #3, the one operator with other accounts would not be insured as to the $25,000 excess above the limit. The operator in #4 would not be insured as to the $100,000 excess and any other deposits it has at the same bank. Same as to #5. As to #6, if *** certificate is held in lieu of a performance bond and § 330.1(b)(1) is complied with, each deposit would appear to be fully insured, assuming no default and no other related deposits in the same bank. If, however, the $75,000 belongs to *** and is not held in lieu of a performance bond, then insurance coverage would depend on whether the two state agencies are separate, autonomous political subdivisions of the state as defined in § 330.8(c) of our regulation (12 CFR 330.8(c)). That provision requires, in order for separate insurance limits to apply as between two governmental units, that each be expressly created and given governmental functions by a state statute and that funds be allocated to each by statute or ordinance for its exclusive use and control.

I hope this letter is fully responsive to your inquiry. If not, please let me know and I'd be happy to explain further.

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