FDIC Law, Regulations, Related Acts
4000 - Advisory Opinions
Non-Appropriated Fund Activities (NAFAs)
January 12, 1990
Valerie J. Best, Senior Attorney
Assistant General Counsel Roger A. Hood asked me to respond to your letter regarding deposit insurance coverage for United States Coast Guard Exchanges. The Exchanges are also known as non-appropriated fund activities (NAFAs). Based upon our conversation with *** , it is our understanding that Coast Guard NAFAs are similar in structure and function to those of the other branches of the military services.
Public Unit Status of NAFAs for Insurance Coverage Purposes
FDIC regulations provide that each official custodian of public funds belonging to the United States depositing such funds in time or savings deposits in an insured bank, shall be insured up to $100,000 as to such deposits. 12 C.F.R. 330.8(a)(1). In addition, each such official custodian placing public funds in a demand deposit is separately insured up to $100,000.
The FDIC Legal Division has consistently taken the position that NAFAs qualify for treatment as "public units" as that term is used in section 3(m)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(m)(1)), and that the deposits of NAFAs are public funds even though the funds are not appropriated funds. This is because the court system and Congress treat military NAFAs as instrumentalities of the United States government. See e.g. Standard Oil Co. v. Johnson, 316 U.S. 481 (1942), and 5 U.S.C. 2105(c).
Therefore, pursuant to 12 C.F.R. 330.8, the time and savings funds owned by a NAFA and deposited by the duly appointed official custodian of the NAFA in an insured bank are added together and insured up to the $100,000 maximum. This $100,000 coverage is for the combination of both principal and accrued interest. In addition, the demand deposits owned by a NAFA and deposited by the official custodian in an insured bank are added together and insured to a maximum of $100,000.
An official custodian is an officer, employee or agent of a public unit having official custody of public funds and lawfully depositing the funds in an insured depository institution. 12 U.S.C. 1813(m)(1). If an individual is not vested with the authority to serve as lawful custodian of the public unit funds in question, he or she would not be entitled to the insurance coverage afforded under section 330.8
Pooling the Funds of Several NAFAs
In your letter you ask if the funds of several NAFAs may be pooled into one certificate of deposit and still obtain insurance coverage per NAFA. If the record keeping requirements described below are met, per NAFA coverage is available.
Pooling the funds of several NAFAs could occur in two ways. First, an individual who has been appointed the official custodian of more than one NAFA could aggregate the funds of the various NAFAs of which he is custodian into one deposit. In that event, the official custodian would be separately insured with respect to the funds held by him for each NAFA pursuant to 12 C.F.R. 330.8(a)(6). Thus, ten separate NAFAs with an equal ownership interest in a $1,000,000 certificate of deposit and with the same official custodian would each be insured up to $100,000. Similarly, if, under proper authority, one individual is serving as official custodian for ten separate and independent NAFAs and is consolidating the funds from all ten NAFAs into a single checking account, then the interest of each NAFA in that account would be insured to $100,000. Each NAFA must be a genuinely separate entity; setting up one post's Exchange as two NAFAs, one for the meat department and one for the dairy department, will not increase coverage. The recordkeeping requirements described below must be satisfied before such additional insurance coverage is available, however.
A second arrangement through which the funds of multiple NAFAs may be pooled is through the appointment of an agent to act on behalf of the official custodians of multiple NAFAs. It is our understanding that some military services appoint a financial manager to provide financial, accounting, and administrative recordkeeping for a NAFA. A financial manager may support more than one NAFA. In some instances, the financial manager is appointed agent for the official custodians of multiple NAFAs in order to better administer the deposits of NAFAs. Where a financial manager who has been appointed as agent for official custodians of multiple NAFAs pools the funds owned by the NAFAs into a single deposit account, the ownership interest of each NAFA in the commingled account is afforded insurance coverage up to $100,000.1 Again, the recordkeeping requirements described below must be satisfied.
Certain prescribed recordkeeping requirements must be complied with before the above described insurance coverage is available. The deposit account records of the bank must disclose the simple fact that the funds are held by the depositor as custodian for the NAFA. If the funds are deposited under the second type of arrangement, the deposit account records must disclose that the funds are held by the agent (financial manager) on behalf of various official custodians for multiple NAFAs. In addition, the records of the bank or the depositor must disclose the details of the custodial relationship. The allocable interest of each NAFA in the deposit must be ascertainable from either the records of the bank or the depositor. If it is the NAFAs' records which disclose the relative ownership interests, these records must be maintained in good faith and in the regular course of business. The records showing the allocable interest of each NAFA may be maintained by a third party in some contractual or agency capacity with the depositor, however.
Coast Guard Exchange System
In your letter you write that the Coast Guard NAFAs currently have 160 certificates of deposit in 160 banks. None of the CDs exceed $100,000. Due to the recordkeeping difficulties, you are considering pooling the funds of the NAFAs into one CD which will then exceed $100,000. Whether the funds are deposited by an official custodian acting on behalf of several NAFAs, or by an agent (funds manager) acting on behalf of several official custodians each of whom represents a single NAFA, the allocable interest of $100,000 provided the recordkeeping requirements are satisfied.
In your letter you also describe a second arrangement whereby each NAFA has a bank account at the same bank. Each NAFA draws checks against its account and conducts its routine business through the account. You also write, however, that the Exchange and Morale Division at Coast Guard Headquarters acts as trustee for all the funds on deposit at the bank. It is not clear to me if each NAFA has separately established a checking account in its own name and Headquarters then has access to the account for management purposes, or if Headquarters as agent for the official custodian of each NAFA established an account for each NAFA. Under either scenario, however, each NAFA would be separately insured as described above2
You also state that when the funds in each bank account exceed normal cash flow requirements, the funds are invested by Headquarters in CDs. As noted above, demand deposits owned by a NAFA are separately insured from time/savings deposits owned by a NAFA and deposited in the same bank.
FDIC regulations provide for the recognition of the fractional or percentage interest of owners of commingled funds in custodial accounts on deposit in an insured bank. 12 C.F.R. 330.101. If the records of the depositor, maintained in good faith and in the regular course of business, reflect at all times the name and ascertainable interest of each owner in a specifically designated custodial deposit, such interest may be determined on a fractional or percentage basis.
Finally, you may be interested to know that the FDIC has in the past paid at least one claim for deposit insurance coverage of consolidated Coast Guard NAFAs. Please call me at (202) 898-3812 if you have any questions.
1If an official custodian of a NAFA deposits funds in an insured bank which is also used by the financial manager acting as agent for the same official custodian, then that portion of the funds attributable to the official custodian in the agency account would be combined with the amount deposited directly by the official custodian for purposes of determining deposit insurance coverage. However, because of the separate deposit insurance coverage for demand deposits, a demand deposit placed in an insured bank by such an official custodian would not be aggregated for insurance purposes with funds placed by the financial manager in a pooled time or savings deposit in the same bank. Go back to Text
2The agreement between the USCG and the bank states that the USCG is the "sole legal trustee" of the funds. This conflicts with Exhibit A to the agreement which states Headquarters is "sole owner" of the accounts. Each NAFA, not Headquarters, is the owner of the funds. The reference in Exhibit A should be corrected. For insurance coverage purposes, your records should make it clear who the official custodian is (most likely the commanding officer at the base where each NAFA is located) and also make it clear that Headquarters is acting on behalf of the official custodian. Go back to Text