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5500 - General Counsel's Opinions


FEDERAL DEPOSIT INSURANCE CORPORATION
GENERAL COUNSEL'S OPINIONS


DEPOSITS SUPPORTING MUNICIPAL BOND ISSUES

General Counsel's Opinion No. 2

The FDIC's Legal Division has received a number of requests for an interpretation of 12 CFR 330.1(b) which sets forth the Legal Division's position on how the FDIC's recordkeeping requirements can be satisfied so as to provide pass-through insurance coverage for the owners of municipal bonds which are supported by deposits in FDIC-insured banks ("deposit-backed bonds"). It is the position of the Legal Division that there are alternative methods by which the FDIC's recordkeeping requirements can be satisfied so as to provide pass-through insurance coverage for the beneficial owners of deposit-backed bonds and those methods are outlined below.

The Legal Division has become aware that certain deposits in FDIC-insured banks support municipal bond issues in that they serve as the principal source for the payment of interest, and the repayment of principal, on the bonds. These deposits are commonly registered on the deposit account records of the depository bank as being owned by an FDIC-insured bank as trustee for the bondholders listed on the records of the trustee (the "registered bondholders"). The trustee's records often indicate that one or more financial institutions (i.e., securities broker/dealers, securities depositories, securities registration/transfer agents, FDIC-insured banks and other types of financial institutions) are registered bondholders. The FDIC recognizes that such financial institutions often register securities in "street name" when they are holding the securities as agent, nominee, custodian, trustee, or in some other fiduciary capacity, on behalf of their customers (who are the true beneficial owners of the bonds). This General Counsel's Opinion provides the Legal Division's position on how the FDIC's recordkeeping requirements can be satisfied so as to provide insurance coverage, on a pass-through basis, to those true beneficial owners of municipal bonds, given the manner in which the deposits supporting those bonds are commonly registered.

Section 330.1(b)(1) of the FDIC rules and regulations, 12 CFR 330.1(b)(1), provides as follows:

(b)  Records. (1)  The deposit account records of the insured bank shall be conclusive as to the existence of any relationship pursuant to which the funds in the account are deposited and on which a claim for insurance coverage is founded. Examples would be trustee, agent, custodian or executor. No claim for insurance based on such a relationship will be recognized in the absence of such disclosure.

Section 330.1(b)(2) of the FDIC rules and regulations, 12 CFR 330.1(b)(2), provides as follows:

If the deposit account records of an insured bank disclose the existence of a relationship which may provide a basis for additional insurance, the details of the relationship and the interests of other parties in the account must be ascertainable either from the records of the bank or the records of the depositor maintained in good faith and in the regular course of business.

The Legal Division believes that these recordkeeping requirements would be satisfied if: (1) The deposit account records of the depository bank expressly indicate that the depositor (bond trustee) is acting in a fiduciary capacity (as trustee for the registered bondholders) and that the registered bondholders may be holding the bonds for their own accounts or as agents, nominees, custodians, trustees or in some other fiduciary capacity, on behalf of others; and (2) the records of the registered bondholders, maintained in good faith and in the regular course of business, expressly indicate the name(s) and interest(s) of the true beneficial owner(s) of the bonds. In the event there are additional levels of fiduciary relationships, then the possible existence of each such level must be reflected on the deposit account records of the depository bank. For example, when a bank serves as trustee for the bondholders listed on its records (the "registered bondholders"), and the registered bondholders may be holding the bonds for themselves and/or in some fiduciary capacity for others, who may, in turn, be holding the bonds for themselves or in some fiduciary capacity on behalf of the true beneficial owners of the bonds, the following designation would be sufficient to identify the possible existence of each of the aforementioned levels of fiduciary relationships and to provide pass-through insurance coverage for the true beneficial owners of the municipal bonds:

ABC Bank, as trustee for the holders of the XYZ Municipal Bonds who are listed on the records of the trustee, each for itself and as agent, nominee, custodian or trustee for others, who may themselves be acting as agent, nominee, custodian, trustee, guardian, personal representative, executor or administrator for the beneficial owners of the XYZ Municipal Bonds.

The above-noted designation must appear on the face of a certificate of deposit, in correspondence maintained by the depository bank as part of its deposit account records or elsewhere in the deposit account records of the depository bank. In addition, the records at each of the various levels, maintained by the parties in good faith and in the regular course of business, must identify the party or parties for whom they are holding the bonds and must indicate their interest(s) therein.

The Legal Division believes that, in the alternative, +bb 330.1(b)(1) and (2) of our regulations, 12 CFR 330.1(b)(1) and (2), would be satisfied if (1) the deposit account records of the depository bank expressly indicate that the depositor (bond trustee) is acting in a fiduciary capacity (as trustee for the registered bondholders); and (2) the depositor's (bond trustee's) records expressly indicate that the registered bondholders may be holding the bonds for their own accounts or as agents, nominees, trustees, custodians or in some other fiduciary capacity, on behalf of others; and (3) the records of the registered bondholders, maintained in good faith and in the regular course of business, expressly indicate the name(s) and interest(s) of the true beneficial owner(s) of the bonds. If there are additional levels of fiduciary relationships, then the possible existence of each such level must be expressly noted on the depositor's (bond trustee's) records, which are deemed to include any correspondence maintained by the depositor in the regular course of business. In addition, the records at each of the various levels, maintained by the parties in good faith and in the regular course of business, must identify the party or parties for whom they are holding the bonds and must indicate their interest(s) therein. Assuming that these requirements are satisfied, the FDIC will follow the chain of records through each level to determine the name(s) and interest(s) of the true beneficial owner(s) of the bonds.

The foregoing represents the Legal Division's interpretation of 12 CFR 330.1(b) as it applies to deposits supporting municipal bonds. The opinions expressed above are applicable only in the specific factual context in which they were given and should not be applied in any other context.

[Source: 53 Fed. Reg. 38785, October 3, 1988]


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