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4000 - Advisory Opinions

Insurance Coverage for Certain Deposit Notes

FDIC-90-20 April 25, 1990 Roger A. Hood, Assistant General Counsel

This is in response to your inquiry concerning the deposit insurance that would be provided by the FDIC for certain "Deposit Notes" issued by ***

A letter we issued in March, 1990 (which was inadvertently not dated) concerning those Deposit Notes indicated our current staff opinion that those obligations are "deposits" within the meaning of section 3(l) of the Federal Deposit Insurance Act, 12 U.S.C. § 1813(l). Consequently, it is our opinion that they would be insured by the FDIC to the extent provided under the Federal Deposit Insurance Act (12 U.S.C. § 1811 et seq.) and the regulations promulgated thereunder (12 C.F.R. Part 330 and 331).

You have requested further guidance on the issue of the extent to which these Deposit Notes would be insured. As noted in our previous letter, it appears that these Deposit Notes are being sold or transferred by numerous parties in a variety of ways. Although the FDIC is not in a position to review each and every transaction which may transfer ownership interests in these deposits, we are happy to provide some general guidance.

"Pass-through" deposit insurance coverage affords separate insurance coverage, up to $100,000 per person, per institution, for each of the respective interests of several persons participating in a deposit instrument through an agent or custodian, provided that certain recordkeeping requirements are met. The FDIC's regulations provide that the deposit account records of an insured institution 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. No claim for insurance based upon such a relationship will be recognized in the absence of such disclosure. (12 C.F.R. § 330.1(b)(1)).

The regulations further provide that if the deposit account records of an insured institution disclose 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 of business. (12 C.F.R. § 330.1(b)(2)).

There are, however, exceptions to the recordkeeping requirements such as for deposits evidenced by negotiable instruments. Where a "Deposit Note" is a negotiable instrument (within the meaning of section 3--104 of the Uniform Commercial Code), the FDIC will recognize for insurance purposes the owner of that deposit who has acquired ownership of the deposit instrument by negotiation to the same extent as if his or her name and interest were disclosed on the records of the bank, provided affirmative proof of negotiation prior to the failure of the insured institution, which is satisfactory to the FDIC, substantiates his or her insurance claim. Satisfactory proof of negotiation would be evidence of compliance with the formal requisites of proper negotiation under section 3--202 of the Uniform Commercial Code, along with credible evidence of the time of such negotiation.

The FDIC emphasizes once more that deposit insurance coverage provided to certain of these "Deposit Notes" will depend upon the evidence of ownership interests in the deposits. Circumstances could lead the FDIC to treat the account involved as a corporate account and insure it up to $100,000 in the aggregate. In the event of a default by an insured depository institution, each claim for deposit insurance will be determined on a case-by-case basis at that time.

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