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4000 - Advisory Opinions

Deposit Insurance Coverage of a Negotiable Certificate of Deposit


December 15, 1995

Dirck A. Hargraves, Attorney

This is response to your October 30, 1995 letter addressed to the General Counsel, which was forwarded to me. In your letter you request clarification of FDIC insurance coverage of your deposit. Specifically, you state that you may purchase a 15 year negotiable certificate of deposit ("CD") issued by Bank "A", with Bank "B" acting as safe keeping agent. Your understanding is that Bank A will issue the CD to Bank B. You will deposit funds at Bank B and Bank B will send you a safe keeping receipt and semi annual interest checks.

Based upon your description, it would appear that you are purchasing what is commonly referred to as a "brokered CD." That is, you are purchasing a partial interest in a much larger CD which has been issued by one insured depository institution to another. With respect to the CD, you ask the following questions:

1.  Will your CD be FDIC-insured for up to $100,000?

2.  If you sell the CD, will the buyer be FDIC-insured?

3.  How can you determine whether a particular CD is FDIC-insured?

The answer to your first question is yes, provided that certain conditions are met. Under section 330.6 of the FDIC's regulations, 12 CFR part 330.6, the funds owned by a principal or principals and deposited into one or more deposit accounts in the name of an agent, custodian or nominee, other than an insured depository institution acting as trustee of an irrevocable trust, shall be insured to the same extent as if deposited in the name of the principal. Sections 330.4(b)(1) and (2) of the FDIC's regulations, 12 CFR part 330.4(b)(1) & (2), provide that the deposit records of an insured depository institution must expressly disclose the existence of any fiduciary relationship. The details of that fiduciary relationship must be ascertainable either from the deposit account records of the institution or from the records maintained, in good faith and in the regular course of business, by the depositor or some other person or entity that has undertaken to maintain such records for the depositor. Section 330.4(b)(4)(i) of the FDIC's deposit insurance regulations set forth an exception to the recordkeeping requirement in the case of deposits evidenced by negotiable instruments which have been properly negotiated to the new owner prior to the institution's default.

It is difficult to respond to your second question appropriately because of the limited information provided in your letter. The answer turns on whether the sale of your interest in the brokered CD constitutes a proper "negotiation" within the meaning of section 330.4(b)(4)(i) of the FDIC's regulations. Generally, brokered CD's are non-negotiable because the owner is not in possession of an instrument which is capable of being properly negotiated to a third party. You may wish to consult local counsel for an opinion on the issue of negotiability of your CD.

You also inquire as to what information you should obtain from your broker or financial institution to determine whether a particular CD is FDIC insured. In order to ensure that your interest in a brokered CD is insured on a pass-through basis, you should make certain that your broker's or the financial institution's customer records detail the fiduciary relationship, the interest of the customer and are maintained in good faith and in the regular course of business. If you have any further questions, feel free to write or call me at (202) 898-7049.

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