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4000 - Advisory Opinions

Deposit Insurance for Brokered Deposits


January 3, 1990

Jamey Basham, Attorney

I am writing in response to your letter of December 4, 1989, in which you request our opinion as to the deposit insurance that would be provided for certain brokered deposits which may be offered by your client, *** .

Please be advised that the opinions expressed herein represent the current thinking of the FDIC Legal Division staff and are not in any way binding on the FDIC or its Board of Directors. Staff opinions are of an advisory nature only, and in the event of a bank closing, each claim for deposit insurance will be determined on a case-by-case basis at that time.

Your description of the brokered deposit offering, as I understand it, is as follows: *** and several other registered broker-dealers will obtain large certificates of deposit ("Master Certificates") from FDIC-insured banks and FDIC-insured savings banks, and then sell fractional undivided interests in those Master Certificates to individual purchasers ("Purchasers"). The maximum amount of each fractional interest will be $95,000.00. The brokers will offer the Purchasers a rate of interest slightly lower than the rate on the Master Certificates and keep the difference (the spread) as compensation.

The Master Certificates will then be assigned to a custodian bank, which will act as the brokers' agent and which will hold the Master Certificates under a custodian agreement for the benefit of the Purchasers. The custodian will maintain records reflecting the names and dollar amounts paid by each participating broker, and in turn, each broker will maintain records of the respective fractional interests of those Purchasers whom they deal with. The institution which issues the Master Certificates will make payments of principal and interest on the master certificates to the custodian, who will pass them to the brokers, who will then pass the appropriate amount to the Purchasers.

You request our opinion as to whether the respective interests of the Purchasers will be insured, in light of the fact that the brokers will be offering the Purchasers a lower rate than the rate paid by the issuing banks on the Master Certificates.

Insurance of the Purchasers' respective interests in the Master Certificates could be based on a "pass-through" of deposit insurance. Under the pass-through theory, the respective interests of several persons who participate in a single deposit through an agent or custodian may be separately insured, up to a $100,000 per-person, per-institution, provided that certain record-keeping requirements are met.

Under the pass-through theory, the FDIC could insure the Purchasers' respective claims to their specific portions of the deposit because each individual Purchaser can trace his or her claim to a certain portion of the account. If *** transaction is, in fact, a sale of an undivided interest in the deposit, then we would recognize each Purchaser's interest and separately insure it. The fact that the brokers in this transaction are passing on less than the full amount of interest earned on the Master Certificates might, depending on how the deal is structured, indicate that the Purchasers were not, in fact, owners of an undivided interest. If the Purchasers will be given the full amount of interest paid on the Master Certificates and then return a portion of it to the brokers, as pre-arranged consideration for the brokers' services, then it would appear that each Purchaser hold an undivided interest. However, if the brokers are exercising legal control over the account by taking a cut directly off the top before the Purchasers are in legal receipt of their fractional undivided interest, it would appear that it is the brokers, and not the Purchasers, who have ownership interests in the Master Certificates.

You also request an opinion on whether the individual Purchasers' interest in the Master Certificates will be recognized for deposit insurance purposes.

Assuming the above-discussed requirement concerning the payment of interest is satisfied, the pass-through theory will operate to insure each Purchaser's interest if certain recordkeeping requirements are met.

The source of these recordkeeping requirements is 12 C.F.R. § § 330.1(b)(1) and (2), which provides as follows:

(1)  The deposit account records of the insured bank shall be conclusive as to the existence of any relationship pursuant to which the funds in the account are deposited and on which a claim for insurance coverage is founded. Examples would be trustee, agent, custodian or executor. No claim for insurance based on such a relationship will be recognized in the absence of such disclosure.

(2)  If the deposit account records of an insured bank discloses the existence of a relationship which may provide a basis for additional insurance, the details of the relationship and the interests of other parties in the account must be ascertainable either from the records of the bank or the records of the depositor maintained in good faith and in the regular course or business.

The FDIC's staff interpretation of this section requires the possible existence of all fiduciary relationships be disclosed on the deposit account records of the issuing banks. Additionally, while § 330.1(b)(2) establishes the records of the depositor as a possible source of disclosure of the details of the custodial relationship, the FDIC will accept the records of someone other than the depositor who has undertaken, by contract or otherwise, to keep records on behalf of the depositor.

As applied to your case, these rules mean that the deposit records of the banks issuing the Master Certificates must indicate that the account is held by "(Depositor), as agent or custodian for various brokers, who may themselves be acting as agent or custodian for the beneficial owners of the account." Since the records of your custodian will indicate the names and interests of the brokers, and the brokers' records will indicate the names and interests of the Purchasers, the record-keeping requirements would then be satisfied.

Finally, you ask for our opinion as to whether the participating brokers will be subject to insurance liability to the Purchasers for principal and interest amounts. Since that is a legal issue which involves the relationship between the brokers and the Purchasers, and one in which the FDIC is not involved, we cannot render an opinion on the subject. You should be advised, however, that the FDIC would pay only the custodian bank (which is the depositor) the amount of the insured deposits in the event one of the issuing banks fails. The brokers and the Purchasers would have to look to the custodian bank in order to receive those portions of the deposits to which they are rightfully entitled.

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