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4000 - Advisory Opinions

Insurance Coverage of Subscriptions for Bank's Own Capital Stock


July 15, 1988

Roger A. Hood, Assistant General Counsel

In your recent letter, you ask if the FDIC considers funds paid to an insured bank toward subscriptions for the bank's own capital stock to be "insured deposits" for purposes of the Federal Deposit Insurance Act, 12 U.S.C. 1811 et. seq. (1982).

Section 3(1) of the Federal Deposit Insurance Act defines the term "deposit" to mean

(1)  the unpaid balance of money or its equivalent received or held by a bank in the usual course of business and for which it has given or is obligated to give credit, either conditionally or unconditionally, to a commercial, checking, savings, time, or thrift account or which is evidenced by its certificate of deposit, thrift certificate, investment certificate, certificate of indebtedness, or other similar name, or a check or draft drawn against a deposit account and certified by the bank, or a letter of credit or a traveler's check on which the bank is primarily liable: Provided, That, without limiting the generality of the term "money or its equivalent", any such account or instrument must be regarded as evidencing the receipt of the equivalent of money when credited or issued in exchange for checks or drafts or for a promissory note upon which the person obtaining any such credit or instrument is primarily or secondarily liable, or for a charge against a deposit account, or in settlement of checks, drafts, or other instruments forwarded to such bank for collection.

(2)  trust funds as defined in this Act received or held by such bank, whether held in the trust department or held or deposited in any other department of such bank,

(3)  money received or held by a bank, or the credit given for money or its equivalent received or held by a bank, in the usual course of business for a special or specific purpose, regardless of the legal relationship thereby established, including without being limited to, escrow funds, funds held as security for an obligation due to the bank or others (including funds held as dealers reserves) or for securities loaned by the bank, funds deposited by a debtor to meet maturing obligations, funds deposited as advance payment on subscriptions to United States Government securities, funds held for distribution or purchase of securities, funds held to meet its acceptances or letters of credit, and withheld taxes: Provided, That there shall not be included funds which are received by the bank for immediate application to the reduction of an indebtedness to the receiving bank, or under condition that the receipt thereof immediately reduces or extinguishes such an indebtedness . . . [Emphasis Supplied]

The question as to whether the funds are issued as deposits of the subscriber turns upon the ownership of the funds. This is determined from the applicable contract provisions interpreted by state law.

The substantive rights and duties of the parties, rather than recitations of form, govern the ownership question. If the funds are received ab initial as payment in (full or partial) consideration for the stock, the subscriber has no ownership interest in them upon payment (he or she merely has a potential cause of action under the purchase agreement if the seller defaults). If the funds in fact remain the property of the subscriber until the fulfillment of a specific condition (e.g. subscriptions are received for a certain minimum number of shares) whereupon the funds are applied to the stock purchase price, then they would be regarded as deposits of the subscriber until the condition is fulfilled.

Prior to their acceptance by the issuing bank, the funds received in an offering of this kind would be amounts owned to the subscriber and thus "funds held for . . . (the) purchase of securities . . ." under the above definition of "deposit". The funds would be insured to the subscribers. Once the funds are accepted unconditionally by the issuing bank, they are owned by the bank. The offering materials would make it clear as to whether the funds are to be first received as "deposits" and as to when the funds will belong to the bank.

Assuming these funds are found to be deposits owned by the subscribers, and are insured as such, you next ask if each subscriber's funds will be insured separately from any other deposits which the subscribed may maintain in the bank. In the commonplace case where the insured bank is maintaining its own records of subscriptions, those potential shareholders' temporary deposits would presumably be identified on the books of the bank. They would thus meet our recordkeeping requirements which are contained in 12 C.F.R. 330.2 (1987). Even if all subscription funds are held in a single account, each subscriber would be insured separately from other subscribers to the offering. However, the subscription funds would be aggregated with any other deposits the subscriber/depositor may have at the insured bank. Different factual contexts may produce differing results as far as insurance coverage is concerned.

You also ask about insurance coverage where national banks establish escrow accounts for the receipt of subscription funds at independent third party insured banks in order to protect subscribers from issuing bank insolvency. You ask if the FDIC would separately insure each subscriber in this kind of an escrow account.

As in the previous case, ownership of the funds will control the amount of insurance coverage provided. If ownership of the funds will vest in the issuing bank only after certain conditions are met, we can insure the subscribers as depositors until the bank acquires ownership of the funds. Such insurance coverage would be provided in amounts consistent with the records maintained by the third party closed bank or on the records of the issuing bank if kept in the ordinary course of business. Any other subscribers' funds deposited in the same bank will be added to the subscription funds and insured in the aggregate to a maximum of $100,000.

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