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4000 - Advisory Opinions

Accounting Treatment of Brokered Certificate of Deposit


December 10, 1987

Roger A. Hood, Assistant General Counsel

This is in response to your letter of November 13 concerning the determination of the amount of deposit for insurance purposes in a brokered transaction.

In particular, you put the case in which a deposit broker sells to a customer a $10,000 certificate of deposit and, pursuant to its agreement with the issuing bank, remits $9,700, retaining $300 as its commission. The bank records a $10,000 deposit liability to the certificate purchaser and, on the asset side, credits $9,700 to cash and $300 to deferred sales commissions. The deferred commission charge is amortized over the life of the certificate of deposit; if the deposit is redeemed prior to maturity the unamortized portion of the commission will be expensed at that time and the depositor will receive $10,000, plus interest earned and minus any applicable penalty for early withdrawal.

I am informed by our Division of Bank Supervision that the bank involved offers these certificates of deposit on the same terms (including interest rate) to the general public as it does to the clients of brokers, and that, for safety and soundness reasons, the certificates are structured so that the early withdrawal penalty is sufficient to offset any unamortized deferred sales commission. In these circumstances, the Division of Bank Supervision does not object to the above-described transaction or accounting treatment.

I concur in your conclusion that as a result of the transaction herein described the owner of the certificate of deposit owns a $10,000 deposit for insurance purposes.

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