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4000 - Advisory Opinions

Deposit Insurance for "Bank Investment Contracts" (BICS)


October 11, 1989

Katharine H. Haygood, Senior Attorney

I am writing in reply to your letter of September 18, 1989 which makes reference to a Wall Street Journal article dealing with the subject of deposit insurance for "bank investment contracts." Your question, which I believe specifically concerns the insurability of pension plan deposits, can be answered without analyzing the article in detail, since the article is somewhat misleading.

The FDIC insures deposits held by depositors in insured institutions, and the term "deposit" is defined in the Federal Deposit Insurance Act at 12 U.S.C. § 1813(l). We have reviewed several instruments which were called "bank investment contracts" which appeared to us to be "deposits" within the terms of the statute. Since the term "bank investment contract" is not a term of art, however, that label will not necessarily be applied to a deposit. Assuming that a transaction, be it bank investment contract or otherwise, constitutes a deposit under the statute, then it is insured according to certain established principles.

If I understand your question correctly and by the term "labor trust funds" you mean pension plans, such pension plans are regarded as a form of trust for deposit insurance purposes. Accordingly, pension funds deposited in FDIC insured banks are insured pursuant to the rules for insurance of trust interests set forth in Sections 330.1 and 330.10 of the FDIC rules and regulations (12 C.F.R. §§  330.1, 330.10). Under these sections, the allocable interests of each beneficiary in funds deposited pursuant to one or more employee benefit plans established by the same employer or union are separately insured to $100,000 in the aggregate. In order to achieve this per participant coverage, however, certain conditions must be met.

The first condition is that the allocable interest of each participant in such a plan must be capable of determination without evaluation of contingencies except for those covered by certain present worth tables set forth in the Federal Estate Tax Regulations. For example, health or accident plans are generally not insured on a per participant basis since the contingency giving rise to benefits (illness or accident) is not determinable without evaluation of contingencies. To the extent that the interests of participants are not separately determinable without evaluation of such contingencies, those interests in the plan would be aggregated and insured up to $100,000.

The second condition that must be met concerns recordkeeping criteria. The deposit account records of the bank must disclose the fiduciary nature of the deposits of the plan. Also, records of either the bank or the fiduciary depositor, maintained in good faith and in the regular course of business, must show the allocable interest of each beneficiary under the plan. The aforementioned records showing the allocable interest of each beneficiary may be maintained by a third party in some contractual or agency capacity with the depositor.

If these criteria are met, the trust interest of each participant in an employee pension plan is evaluated for insurance purposes as if the interest of such participant had fully vested as of the date the insured bank closed. The determinable interests of each participant on that date are deemed to be his or her trust interests in the corresponding deposit account. Thus, the participant's interest in the plan need not be vested so long as each participant's interest in the plan is allocable on the day the insured bank closed. Payment of insurance would be calculated on the basis of each participant's pro rata interest in the entire plan on the date the insured bank was closed.

The recognition for insurance purposes of beneficial interests in trust and other custodial accounts arising not only from pension fund deposits, but from a variety of other custodial arrangements, is not, as suggested in the Wall Street Journal article, a new development. Such interests have been recognized throughout FDIC's history, and specifically by regulation for more than twenty years. What the article describes as "new instruments" are traditional instruments evidencing either deposit liabilities or other borrowings of the bank, upon which have been grafted some new provisions regarding payment of the obligations. Those that represent deposits are entitled under the regulations to the same insurance as more traditional certificates of deposit held in the same ownership capacity.

I hope this has been responsive to your inquiry.

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