FDIC Law, Regulations, Related Acts
4000 - Advisory Opinions
Insurance Coverage of CDs Representing Advances to Subsidiary
April 11, 1988
F. Douglas Birdsell, Special Counsel to the Deputy General Counsel
This will respond to your letter to me of March 8, 1988, concerning our telephone conversation with regard to insurance coverage. Specifically, one of your clients conducts operations through a number of subsidiaries. Your client is interested in having certain of its subsidiaries invest in Certificates of Deposit ("CD's") in a single insured bank. In some cases the funds invested would be advanced by the parent (your client) to a subsidiary which would then purchase a CD. For accounting purposes the transaction would be treated as a loan by the parent to the subsidiary. Your client's questions is whether funds of the various subsidiaries deposited in a single insured bank would be separately insured to each subsidiary.
For purposes of the discussion we are assuming that each subsidiary is a separate business entity organized for an independent activity (i.e., an activity other than one solely directed at increasing insurance coverage).
Solely within the context of the insurance coverage regulations as they pertain to insurance of funds of corporations, partnerships, and unincorporated associations, the funds of each subsidiary deposited in the same insured bank would be separately insured to the $100,000 maximum.
However, the fact that the funds may represent "loan" proceeds from the parent may raise other issues. If the transaction whereby funds are transferred to the subsidiary from the parent is in fact a true loan transaction, where the funds ultimately placed in a CD are considered funds of the subsidiary to be used as the subsidiary sees fit, subject to the repayment terms of the loan, no problem with insurance coverage would arise. However, if the "loan" is not a loan at all but merely a subterfuge whereby the parent is in fact instructing the subsidiary to purchase CD's in the subsidiary's name with the so-called loan proceeds, but in reality intends that the CD's so purchased should be CD's of the parent, then the funds would be considered the parent's funds and insured accordingly. The underlying principle is that insurance coverage runs to the actual beneficial owner of the deposit funds, so that ownership must be as indicated on the records of the bank. Attempts to increase insurance coverage by setting up accounts in the name of other parties with no intent to vest any ownership interest in those parties will be unavailing.
By way of summary, to the extent that CD's purchased by a subsidiary through funds advanced from the parent are purchased for a legitimate independent purpose other than increasing the parent's insurance coverage, they will be insured to $100,000 per subsidiary. On the other hand if the advancement of funds is for the purpose of increasing the parent's insurance coverage through use of the subsidiary as record but not beneficial owner of the funds, then insurance will be to the true owner of the funds, the parent for $100,000 in the aggregate including other funds of the parent held in the same insured bank.