4000 - Advisory Opinions
Insurance Coverage of CDs Purchased in Secondary Market and Sold to Bank Customers
August 24, 1988
Claude A. Rolling, Attorney
I have been asked to respond to your letter of June 3, 1988 inquiring about the deposit insurance that would be afforded by the FDIC to certain certificates of deposit purchased by *** in the secondary market and then sold, in smaller units, to customers of the bank. I sincerely apologize for our delay in responding to your inquiry.
In your letter, you describe a plan under which a securities broker obtains a $1 million certificate of deposit ("CD") from a bank (the "issuing bank") and registers the CD in the broker's street name on the issuing bank's records. The broker then sells the CD to your bank which, in turn, sells smaller portions of the CD to its customers. You indicate that, although the CD will be registered in the broker's street name, there will be no reference to the nominee status on the CD. You further indicate that the broker will not inform the issuing bank either by letter or in any other fashion that the CD is held for resale to other parties.
The four questions posed in your letter might be summarized as follows: What is necessary to satisfy the FDIC's recordkeeping requirements so as to obtain separate insurance coverage, of up to $100,000, for the interest of each of *** customers in the CD on a so called "pass-through" basis? The answer depends on whether the CD in question is negotiable and whether it has been properly negotiated to *** prior to the time the issuing bank is closed. If the CD is negotiable and has been properly negotiated to your bank prior to the time the issuing bank is closed, then 12 C.F.R. § 330.11 dictates that ". . . the owner of such deposit obligation will be recognized for all purposes of claim for insured deposits to the same extent as if his name and interest were disclosed on the records of the bank. . . ." Under this provision, once a CD has been negotiated to *** there is no need to alter the issuing bank's records to disclose the fact that the CD has been negotiated to *** or that *** may be holding the CD in some representative or fiduciary capacity on behalf of its customers (the beneficial owners). The interests of *** customers in the CD will be recognized, for deposit insurance purposes, so long as the records of *** disclose the names and interests of such customers. The FDIC will provide pass-through insurance coverage for the interests of *** customers notwithstanding the fact that *** name, and the names and interests of its customers, are not ascertainable from the records of the issuing bank. If, however, the CD is acquired directly from the issuing bank, and not by negotiation from a third party, then certain additional recordkeeping requirements must be satisfied in order to obtain pass-through insurance coverage for the beneficial owners of the CD. In such cases, the representative capacity in which the nominal owner holds the CD (e.g., as agent or trustee) must be disclosed on the deposit account records of the depository bank. 12 C.F.R. § 330.1(b)(1). Moreover, the details of those relationships and the interests of other parties in the account (the beneficial owners of the funds) 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. 12 C.F.R. § 330.1(b)(2).
In summary, if the CDs in question are negotiable and are, in fact, negotiated to *** prior to the time the issuing bank is closed, the FDIC will provide pass-through insurance coverage (recognizing the beneficial ownership interests of each of *** customers) notwithstanding the fact that the CDs are registered, on the issuing bank's records, in a broker's street name, provided that *** records disclose the names and interests of those customers. If, however, the CDs are acquired directly from the issuing bank, and not by negotiation from a third party, then just the broker (not *** or the beneficial owners of the funds) will be insured up to $100,000, unless the aforementioned additional recordkeeping requirements for providing pass-through insurance coverage are satisfied.