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4000 - Advisory Opinions

Brokered Deposits: Master CD's Purchased From Financial Institutions and Held by a Custodian Bank for The Benefit of the Purchasers


February 22, 1990

Jamey Basham, Attorney

Mr. Hood asked me to respond to your letter of January 30, 1990, in which you requested information concerning the deposit insurance coverage on a transaction proposed by your client, * * * .

* * *  and other brokers propose to sell Participation Interests in Master Certificates of Deposit ("Master CD's") to various individual Purchasers. The Master CD's will be purchased from financial institutions and held by a Custodian Bank for the benefit of the Purchasers. Each Purchaser will pay a fee to his or her broker. This fee will be the difference between the rate of interest payable on the Master CD and the rate of interest offered to the Purchaser on his or her Participation Interest. Additionally, the interest on the Master CD's will be paid to the Custodian Bank at more frequent intervals than the interest on the Participation Interests will be paid to the Purchasers. In that interval, the interest pool will be held by the Custodian Bank, in an interest-bearing account. The "interest on the interest" will accrue to the benefit of * * *  and the other brokers, and will be disbursed to them at the time the Purchasers receive their interest payments on their Participation Interests.

As I stated in my letter to your firm, dated January 3, 1990, each Purchaser's Participation Interest will be insured by the FDIC on a "pass through" theory, provided certain record keeping requirements are met. I also expressed some reservation about the manner in which the brokers would receive the portion of the interest representing their fee. If the brokers took their fee before the total interest was reduced to the Purchasers' legal control, this fact would indicate that the Purchasers were not, in reality, buying an undivided interest in the Master CD's. This would mean that they would not qualify for pass through deposit insurance.

To resolve this problem, you propose, in your letter, the following language in the Custodian Agreement between the Purchasers and the Custodian Bank:

Purchaser has agreed to pay (name of broker) a fee for services rendered to Purchaser in connection with Purchaser's purchase of one or more CDs. Purchaser hereby authorizes Custodian to deduct and retain the amount of such fee from the interest received by Custodian on each CD and to directly remit such amount to (name of broker) on Purchaser's behalf. Purchaser acknowledges and agrees that the amount of the fee may differ between each CD that is subject to the terms and conditions of this Agreement. Upon request from the Purchaser, Custodian will inform Purchaser of the fee applicable to a CD.

In my opinion, this will be adequate, and assuming all other requirements are met, the Purchasers' Participation Interests will be separately insured by the FDIC.

Additionally, in telephone conversations with * * *  of your office, I had expressed some reservations about the fact that, in the interim between interest payment on the Master CD's and interest payments to the Purchasers, the brokers would be earning interest on the interest pool. After conferring with other members of FDIC staff, it appears that this arrangement will not negatively affect the pass through insurance of each Purchaser's interest.

If you have any other questions, please contact this office.

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