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4000 - Advisory Opinions


Deposit Brokers and "Transferable Custodial Certificates of Deposit"

FDIC--99--5

August 17, 1999

Marc J. Goldstrom, Council

It has been brought to our attention that your firm has issued an advertising circular concerning "transferable custodial certificates of deposit (CD)." A redacted copy of a letter to a potential investor and the relevant portion of the circular is enclosed. We would like to take this opportunity to apprise you of certain legal requirements pertaining to the solicitation of such deposits.

Because you facilitate the placement of deposits of third parties with insured depository institutions, you appear to be a "deposit broker" as that term is defined in section 29(g) of the Federal Deposit Insurance Act ("FDIA") (12 U.S.C. § 1831f(g)). Deposit brokers are required to provide notice to the FDIC before they may solicit or place deposits with an insured depository institution. See 12 C.F.R. § 337.6(e). Our records indicate that your firm has not complied with this requirement. The required notice may be in letter form and should describe the history, nature and volume of its deposit brokerage operations, including the sources and placements of such funds. The notice should be submitted to: FDIC, Special Activities Section, Division of Supervision, 550 17th Street, NW, Washington, D.C. 20429. If you have any questions on this point, please contact Vincent M. Filippini at (202) 898--6863.

We are also concerned that portions of the advertising circular may be misleading. A question and answer portion of the advertising circular states the following: "Q. Is the Transferable Custodial CD FDIC Insured? A. Yes, all of our banks are FDIC insured." This provision is potentially misleading. It conveys the impression that in the event of the failure of a bank, a Group customer who purchased a transferable custodial CD issued by that bank is automatically entitled to deposit insurance.

While it is true that CDs are generally insured deposits, 12 U.S.C. § 1813(l)(1), CDs are not always fully insured. For example, a Group customer who purchases a transferable custodial CD might hold a second deposit at the same insured depository institution. If both deposits are held by the customer in the same ownership capacity, the two deposits would be aggregated for insurance purposes. In the aggregate, the two deposits would be insured to only $100,000. Another possibility is that the depository institution's account records might not reflect the ownership interest of the Group customer. In such a case, the customer would not be entitled to "pass-through" insurance coverage for his/her ownership interest.1 Negotiated CDs are subject to a different rule,2 but there is no indication as to whether these "transferable custodial certificates of deposit" actually would be negotiated (i.e., indorsed and delivered) to the Group customer. In summary, the advertising circular is misleading in stating that a transferable custodial CD will be FDIC-insured because it will be issued by an FDIC-insured bank. For the reasons mentioned above, part or all of the CD would be uninsured insofar as the Group client is concerned.

In addition to the foregoing, the explanation of transferable custodial CDs may be misleading. You explain that these CDs allow customers to "transfer out at any time." However, you do not make clear that in order to do so the customer may have to transfer the CD for less than its face value.

Finally, the copy of the letter to the potential investor makes reference to CDs at "8%-1 year-FDIC insured." We are not aware of any insured depository institutions that are issuing one year CDs at this rate. Please provide us with the names of the insured depository institutions offering such CDs.

Within 15 days of the date of this letter, provide the FDIC with proper notice of your deposit broker activities as mandated by 12 CFR § 337.6. Furthermore, by separate letter advise us of the corrective actions you intend to take regarding the concerns expressed above. Also, provide us with the name(s) of insured depository institution(s) offering one year CDs at 8.0%. If you have any questions or concerns, please feel free to contact me at (202) 898--8807. Thank you for your cooperation.

1The FDIC's insurance regulations include the following rule: "Funds owned by a principal or principals and deposited into one or more deposit accounts in the name of an agent, custodian or nominee, shall be insured to the same extent as if deposited in the name of the principal(s)." 12 C.F.R. § 330.7(a). In other words, the insurance coverage "passes through" the agent or custodian to the principal. "Pass-through" coverage generally is not available, however, unless the agency or custodial relationship "is expressly disclosed, by way of specific references, in the deposit account records' . . . of the insured depository institution." 12 C.F.R. § 330.5(b)(1). Go back to Text

2The insurance of negotiable CDs is subject to the following special rule:
  If any deposit obligation of an insured depository institution is evidenced by a negotiable certificate of deposit, negotiable draft, negotiable cashier's or officer's check, negotiable certified check, negotiable traveler's check, letter of credit or other negotiable instrument, the FDIC will recognize the owner of such deposit obligation for all purposes of claim for insured deposits to the same extent as if his or her name and interest were disclosed on the records of the insured depository institution; provided that the instrument was in fact negotiated to such owner prior to the date of default of the insured depository institution. The owner must provide affirmative proof of such negotiation, in a form satisfactory to the FDIC, to substantiate his or her claim. Receipt of a negotiable instrument directly from the insured depository institution in default shall, in no event, be considered a negotiation of said instrument for purposes of this provision.
  12 C.F.R. § 330.5(b)(4)(i) (emphasis added).
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