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4000 - Advisory Opinions

Explanation of "Pass-Through" Deposit Insurance Prohibition for Certain Employee Benefit Plan Deposits Required by Section 311 of FDICIA


January 28, 1993

Claude A. Rollin, Counsel

This is in response to your letter, dated December 16, 1992, inquiring about the proposed rules concerning the insurance coverage that is provided by the FDIC for employee benefit plan deposits in FDIC-insured depository institutions.

Section 311 of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires the FDIC to change some of the insurance rules applicable to employee benefit plan deposits. The amendments made by section 311 of FDICIA to section 11(a) of the Federal Deposit Insurance Act ("FDI Act") prohibit the FDIC, as of December 19, 1992, from providing "pass-through" or per-participant insurance coverage for certain employee benefit plan deposits in institutions which, at the time the deposits are accepted, may not accept brokered deposits pursuant to section 29 of the FDI Act. Under section 29 of the FDI Act, only "well-capitalized" institutions and "adequately capitalized" institutions that have obtained a waiver (permission) from the FDIC to take brokered deposits may accept brokered deposits.

This restriction on "pass-through" coverage does not apply, however, if, at the time the deposit is accepted (a) the insured depository institution meets each applicable minimum capital standard and (b) the depositor receives a written statement from the institution that such deposits are eligible for insurance coverage on a "pass-through" basis.

Although to our knowledge no court has interpreted these statutory provisions, we are of the opinion that employee benefit plan funds on deposit with an insured depository institution at the time it becomes subject to the restriction (or, in the case of an institution that becomes subject to the restriction on December 19, 1992, funds on deposit as of that date), will continue to be entitled to "pass-through" insurance coverage if the institution meets all recordkeeping and other requirements of the FDIC's existing regulations concerning employee benefit plan deposits. We reach this conclusion because, in our view, the restriction on "pass-through" coverage applies only to employee benefit plan funds which are "accepted" after the relevant date.

In your letter you ask the following specific questions:

1.  Are we protected on funds that we have invested based on the law as written when the investments were made--in other words will there be "grandfather" rights in the handling of any bank which subsequently must be taken over?

2.  What is the situation if we invest with a bank with proper ratios sometime in early 1993 and then learn that upon the next filing of their Quarterly Report they have failed to meet the guidelines in one or more of the parameters--would our coverage of $100,000 per participant be invalid?

3.  How is a citizen to determine what the ratios of any given bank might be?

4.  Will the FDIC furnish any information to depositors as to the status of various banks?

5.  If a bank quotes their ratios and those are above the parameters will that be sufficient to fully insure our deposits with that given bank?

6.  Has the law itself been changed or is there a different interpretation now being given the old law?

7.  If the law has been changed, please furnish me with a copy of same.

In answer to your first question, the FDIC's proposed regulations implementing the statutory changes (57 FR 49027, October 29, 1992), make clear that the relevant time period for determining whether or not an institution can accept brokered deposits, and thus provide "pass-through" insurance coverage, is the time that the employee benefit plan deposit is accepted. Accordingly, if a bank subsequently becomes ineligible to accept brokered deposits that would not affect the "pass-through" deposit insurance coverage provided for deposits made when the institution could accept brokered deposits. Any rollover or renewal of a time deposit would, however, be considered an "acceptance" under the proposed rules and thus the institution's ability to take brokered deposits at that point in time would determine whether the deposits were entitled to "pass-through" insurance coverage.

The answer to your first question also answers your second question but allow me to emphasize that any new deposits made after the institution is no longer eligible to accept brokered deposits (because it is undercapitalized) would obviously not be entitled to "pass-through" insurance coverage.

In answer to your third question, a depositor can obtain capital ratios directly from an insured institution since there is no regulation prohibiting the disclosure of such information. The depositor can also request and receive (for a fee of $2.50 each) a copy of an institution's quarterly Consolidated Report of Condition and Income ("Call Report") which contains a balance sheet and income statement as well as other detailed information about the institution. Additionally, Uniform Bank Performance Reports, which compare an individual bank with its peer group banks, are available for $30.00 each.

The above-noted information is available from the FDIC but the FDIC does not distribute any sort of "safe bank" or "problem bank" list or individual bank ratings to the public.

In response to your fifth question, the statute requires that insured institutions meet their minimum capital requirements in order to accept brokered deposits and thus provide "pass-through" insurance coverage for employee benefit plan deposits. Accordingly, only if the representations of the institution concerning its capital ratios are accurate (i.e., the institution actually meets its minimum capital requirements) would the deposits be entitled to "pass-through" deposit insurance.

In response to your sixth and seventh question, the law itself has changed and I have enclosed a copy of section 311 of FDICIA which changed the law. I have also enclosed a copy of the proposed rules so that you will be aware of all of the proposed changes.

Please note that the FDIC has only issued proposed regulations to implement the above-noted changes in the law. Final rules are expected to be adopted in the next few months and those rules may be somewhat different from the proposed rules.

If you have any further questions, please contact me at (202) 898-3985.

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