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4000 - Advisory Opinions

Interests of Bondholders in CDs Issued by S&L, Which Subsequently Merged With Another S&L, to Secure Repayment of Mortgage Revenue Bonds Continue to be Insured Pursuant to FSLIC Regulations Until First Maturity Date; FDICIA Does Not Adversely Affect Such Deposit Insurance


September 23, 1992

Mark A. Mellon, Attorney

This is in response to your letter of September 15, 1992 concerning federal deposit insurance coverage of a certificate of deposit ("CD") issued by a savings association to secure repayment of public unit revenue bonds.

Based on your letter and our previous telephone conversation, it is my understanding that a savings association issued a CD in 1983 to secure the repayment of multifamily housing revenue bonds. Under the terms of the deposit agreement, the CD will mature in 1995, twelve years after the date of issuance. The savings association that issued the original CD was merged into another savings association in 1991. The acquiring savings association agreed to assume all of the obligations under the Deposit Agreement and the terms of the CD. You wish to ascertain: a) whether the CD will receive the same insurance coverage subsequent to the merger that it received prior to that event; b) whether insurance will still "pass through" to the holders of interests in the CD after the merger and c) whether the FDIC Improvement Act of 1991 (the "FDICIA") has adversely affected the availability of deposit insurance for the CD funds?

Under the insurance regulations of the now-defunct Federal Savings and Loan Insurance Corporation (the "FSLIC"), the interests of bondholders in CDs issued by savings associations to secure repayment of revenue bonds were insured as trust estates if the bonds were issued pursuant to a trust indenture which created an irrevocable express trust for the benefit of a bondholder which was valid under state law. 12 C.F.R. § 564.10, redesignated as 12 C.F.R. § 386.10. If the recordkeeping requirements of 12 C.F.R. § 564.2, redesignated as 12 C.F.R. § 386.2, were complied with, the interest of each bondholder in the CDs was separately insured by the FSLIC as a trust estate up to $100,000. Bondholders were insured up to $100,000 in the aggregate for all bonds issued by the same issuer, regardless of whether there may have been a different series involved. This insurance coverage was separate, however, from any funds held directly by bondholders in the savings associations that issued the CDs.

Under the FSLIC insurance regulations, before a claim for deposit insurance based on a fiduciary relationship can be made, the relationship must be disclosed in the account records of the defaulted insured savings association. 12 C.F.R. § 564.2(b)(1) redesignated as 12 C.F.R. § 386.2(b)(1). If this disclosure requirement is met, the details of the relationship and the interests of the other parties in the account may then be ascertained either from the records of the insured savings association or from the records of the nominal accountholder. 12 C.F.R. § 564.2(b)(2) redesignated as 12 C.F.R. § 386.2(b)(2).

The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (the "FIRREA") abolished the FSLIC and made the FDIC the insurer of savings association deposits. Pursuant to section 402(c)(3) of the FIRREA, the FDIC promulgated uniform deposit insurance regulations for deposits in all insured depository institutions, including savings associations that were formerly FSLIC-insured. The effective date for these regulations was July 29, 1990. The new regulations provide that any time deposits issued by an insured depository institution on or before the effective date of the new regulations are entitled to the insurance protection provided by the regulations which previously applied until the first maturity date of those time deposits. 12 C.F.R. § 330.16(b). This means that the interests of the bondholders in CDs issued by savings associations prior to July 29, 1990 will continue to be insured pursuant to the FSLIC insurance regulations until the first maturity date of the CDs.

Section 8(q) of the Federal Deposit Insurance Act (the "FDIA") (12 U.S.C. § 1818(q)) provides that whenever the liabilities of an insured depository institution for deposits have been assumed by another insured depository institution, the insured status of the institutions whose deposits are assumed shall terminate on the date that the FDIC receives satisfactory evidence of that assumption. The section further provides that the deposits which have been assumed as a result of the transaction shall be separately insured from the deposits of the assuming institution for: a) six months from the date of assumption for all demand deposits or b) the earliest maturity date after the six-month period in the case of time deposits (a provision in the FDIC insurance regulations, 12 C.F.R. § 330.3(g), follows the language of section 8(q)).

In light of the relevant law, it is my opinion that, if it is necessary to make an insurance determination for the CD in question, the deposit will be separately insured from the accounts of the institution which assumed the CD in 1991 as required by section 8(q) of the FDIA. The insurance regulations of the FSLIC would be applicable for this insurance determination, as required by 12 C.F.R. § 330.16 of the FDIC insurance regulations. If FSLIC recordkeeping and disclosure requirements are met, the interest of each bondholder should be separately insured as a trust estate up to $100,000.

This insurance coverage is not affected by the FDICIA. The FDICIA provision pertaining to the aggregation of accounts which you discussed in your letter stipulated that aggregation would occur for accounts held in the same right and capacity. Funds held in different rights and capacities will continue to be separately insured from one another under this provision. Trust estates such as bondholders' interests in a CD will be separately insured from any funds of a bondholder deposited (either directly or through an agent) with the insured institution which issued the CD. Moreover, the FDICIA did not affect the grandfathering of FSLIC insurance regulations for savings association time deposits issued on or before the effective date of the FDIC uniform insurance regulations. FSLIC insurance regulations therefore should still apply.

I hope that this letter is responsive to your query. Please do not hesitate to contact me if you should have any questions about this or any other matter.

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