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4000 - Advisory Opinions

Selling Participations in "Negotiable" Certificates of Deposit: Recordkeeping Requirements


August 9, 1990

Gerald J. Gervino, Senior Attorney

I have received your telephonically transmitted letter dated August 8, 1990, in which you request our opinion concerning the insurance coverage afforded participations which you intend to sell to purchasers of undivided interests in certificates of deposit, which you have purchased in the secondary market.

You often purchase already issued certificates of deposit which have come to rest in the hands of a dealer. These certificates are usually in denominations of one million dollars or more and you feel are negotiable when purchased. You would like to transfer ownership to your firm's street name in order that you might sell participation interests to individual customers in amounts of less than $100,000. You want to be assured that your smaller customers are insured to a maximum of $100,000, separately from other investors owning participations in the same large certificate of deposit. You specifically ask what factors determine if a certificate of deposit is negotiable or non-negotiable.

Recognition of deposit ownership and thus the insurance coverage afforded a deposit held in street name is governed by §330.4 of our insurance coverage regulations, a copy of which is enclosed. §330.4(b) of our regulations (page 36 of the enclosed circular) provides:

(b)  Recordkeeping requirements.

(1)  Disclosure of fiduciary relationships.

The deposit account records of an insured depository institution must expressly disclose, by way of specific references, the existence of any fiduciary relationship including, but not limited to, relationships involving a . . .nominee. . .pursuant to which funds in an account are deposited and on which a claim for insurance coverage is based. No claim for insurance coverage based on a fiduciary relationship is evident from the deposit account records of the insured depository institution.

While §330.4(b)(2) of our regulations allows coverage where the details of the relationship and the interests of the customers are ascertainable from the records maintained in good faith and in the regular course of business, by the depositor or by some other person or entity that has undertaken to maintain the records for the depositor.

Thus, if your firm transfers ownership, on the books of the bank, into its own name as nominee for its participating customers and maintains regular customer records, the interests of the various participants would be insured separately from that of other participants, intermediaries, or your firm. Since your firm appears to be acting as agent for its customers, the interests of the customers as principles would be added to any individually held funds in the bank issuing the certificate of deposit and insured in the aggregate to a maximum of $100,000.

Please note the provisions of §330.4(b)(3) of our regulations which specify alternative methods of meeting the recordkeeping requirements where there are multi-tiered fiduciary relationships. Examples might include a securities depository, clearing agency, or other custodian in the chain of ownership extending from the bank issuing the certificate of deposit to your participating customer.

You specifically inquire concerning the meaning of the term "negotiable" in the context of a certificate of deposit which you have purchased from a dealer in the secondary market several months after its issuance. Section 330.4(b)(4)(i) of our insurance coverage regulations provides an exception to the recordkeeping requirements discussed above which would apply to this obviously negotiated transaction.

Your proposed second step, selling participations to customers, would not extend insurance coverage to those customers interests under the "negotiable" exception because they obviously have not purchased their interest by "negotiation". The instrument they have received, if any, is not payable to order or to bearer nor is it a conveyance of the entire certificate of deposit. Uniform Commercial Code §§3--104, 3--202. Thus, there is no negotiation within the meaning of the exception. If insurance coverage is to be attained for the individual interests of the participating customers, the above recordkeeping requirements must be met.

The above position with respect to "negotiability" represents our interpretive position with respect to our insurance coverage regulations and does not represent an opinion as to state law with respect to the general negotiability of instruments. An opinion on the latter question should be addressed to local counsel.

If you have any further questions, feel free to write or call me at (202) 898-3723.

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