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4000 - Advisory Opinions

Insurance on Deposits Subject to Bank's Corporate Automated Sweep Program


September 14, 1988

Jules Bernard, Senior Attorney

In your letter of August 1, 1988, addressed to Regional Counsel Judith Sinclair, you inquire about the insurance available on deposits subject to your bank's Corporate Automated Sweep program. The letter has been referred to the FDIC's Washington Office for reply.

I understand that, under the program, a corporate customer that has funds on deposit in a demand account at your bank may withdraw funds from that account for the purpose of making overnight investments in Treasury bills through the vehicle of a Treasury bill mutual fund. To that end the trust department of your bank offers to serve as agent for the customer. You ask:

If the bank were to close with bank records indicating a ledger balance of $50,000, available balance of $150,000 ($100,000 of which is invested by the Trust Department in this mutual fund or is to be invested on that date), what amount of deposit would the F.D.I.C. consider as a bank deposit?

You indicate that Ms. Sinclair assured you that the FDIC would look at the bank records and show the $50,000 as the deposit.

It is true that the FDIC would rely on the bank records. But the amount of the insured deposit would depend on whether, at the time of the bank's failure, the $100,000 would be "invested . . . in this mutual fund" on one hand or would still be held by the bank "to be invested" on the other.

If the bank had invested the money for the customer, then the $100,000 would not be an obligation of the bank itself, and would not be insured; only the $50,000 remaining on deposit would be insured. Of course, your customer would continue to own the $100,000 interest in the mutual fund, and in that regard would not be affected by the demise of the bank.

If the bank had not yet invested the money, but were still holding it as the customer's agent for the purpose of making the investment, the funds would continue to be an obligation of the bank itself, but would be classified as "trust funds." 12 U.S.C. 1813(p). "Trust funds" held by an insured bank are "deposits," see id. 1813(1)(2), and accordingly are eligible for insurance.

The only remaining question is the amount of insurance available on this deposit: that is to say, the only question is whether the deposit that is classified as "trust funds" should be insured separately from the deposit that the customer holds in his demand account. Section 7(i) of the Federal Deposit Insurance Act provides:

. . . .[T]trust funds held by an insured bank in a fiduciary capacity whether held in its trust department or held or deposited in any other department of the fiduciary bank shall be insured in an amount not to exceed $100,000 for each trust estate . . . Notwithstanding any other provision of this Act, such insurance shall be separate from and additional to that covering other deposits of the owners of such trust funds or the beneficiaries of such trust estates. . . .

Id. 1817(i).

In my view, the deposit that is classified as "trust funds" does indeed qualify for separate insurance. I consider that the bank holds the funds "in a fiduciary capacity," because the bank is charged with the duty of investing the money on the customer's behalf.

By contrast, occasionally someone will set up two ordinary deposit accounts, one in his own name alone, and one in the name of the depository bank as his "agent." The FDIC does not provide separate insurance for the latter deposit in such cases. It might appear that naming the bank as agent would have the effect of reclassifying the deposit as "trust funds." But the relationship between the bank and the customer that is established by this arrangement does differ in any way from the relationship that arises as a result of a simple deposit established in the depositor's name alone. Accordingly, in cases like these, the FDIC aggregates the deposit held in the customer's own name with the deposit held in the bank's name "as agent" for the customer.

In sum, I conclude that the funds your customer holds on deposit in the demand account is insured up to a maximum of $100,000; that the funds that your bank holds for investment are separately insured up to a maximum of $100,000; and that any funds actually invested by the bank for the customer are not eligible for insurance, as they are not obligations of the bank.

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