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Federal Deposit
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Each depositor insured to at least $250,000 per insured bank

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4000 - Advisory Opinions

Questions Concerning Safety and Insurance of Funds Placed in a Money Market Fund Investing in Short-Term U.S. Government Securities


March 26, 1991

Gerald J. Gervino, Senior Attorney

Janice M. Smith of our Office of Consumer Affairs has forwarded your letter concerning the safety of funds placed in a money market fund investing in short-term U.S. government securities. You ask five questions.

1. What is the extent of insurance, bonding, and government inspection to protect investors from personnel improprieties and other risks in operations of the fund, its contractors, and the custodian bank?

The FDIC only supervises insured financial institutions, such as the custodian bank you have mentioned. Our examiners, or the staff of other federal and state supervisors, have the power to examine banks on an unannounced basis. We and these other agencies normally require banks to maintain some form of bond (a kind of insurance) against fidelity and other similar risks. These bonds will extend to a bank's activities as custodian for a mutual fund. Although they do not affect the direct liability of the custodian bank to the investors in the fund, this private insurance helps protect investors of a fund in the event of a bank's closing from losses caused by improprieties. Risks from interest rate changes are not covered by private or FDIC insurance.

2. In the event of the failure of a custodian bank because of its inability to meet the claims of its depositors, is the fund's fiduciary account at the custodian bank insured by the FDIC?

Funds held by the custodian bank and awaiting investment in government securities, distribution to investors, use for administrative expenses, or for other purposes, will be insured to the statutory maximum of $100,000.

3. If FDIC insured, are the entire assets of the fund ($750,000,000) insured to the maximum amount for each investor or only for the fund as a whole?

Deposits owned by the fund are insured to a maximum of $100,000 for the fund as a whole. We would like to point out that this coverage only applies to funds on deposit. The government securities are not deposits and thus neither insured nor subject to the limits on insurance coverage. Please see the answer to your question numbered 5.

4. Are investors covered individually for funds deposited in the custodian bank, since investors may write checks which the custodian pays by debiting to the investor's fund balance?

Arrangements such as these do not usually involve a deposit account relationship between the custodian bank and the investor. Rather, the fund underwriter may have an arrangement where investors may use a negotiable order of withdrawal or third party check to secure funds placed on deposit by the money market fund. During the period of collection on one of these checks, an investor could very briefly be a depositor of the custodian bank for the amount of an individual check. You are never a depositor with respect to your investment in government securities.

5. In the event of the custodian bank's closing, will the amount of an investor's money market fund investment be released by the FDIC immediately, or will it be tied up in lengthy bankruptcy proceedings?

The closing of a custodian bank would not normally wind up a money market fund, which is a separate entity. A fund of this size would very likely find a successor custodian bank immediately after the closing of its custodian bank. If not, the FDIC would transfer the securities to another custodian bank or return them to the money market fund. Only deposited funds in excess of the insurance limit could become part of the receivership estate. That claim would be due to the money market fund, rather than to investors directly.

If we have not completely answered your inquiry or you have any further questions, please write or call us.

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