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4000 - Advisory Opinions
Non-Appropriated Fund Activities (NAFAs)
FDIC-90-4
January 12, 1990
Valerie J. Best, Senior Attorney
Assistant General Counsel Roger A. Hood asked me to respond to your
letter regarding deposit insurance coverage for United States Coast
Guard Exchanges. The Exchanges are also known as non-appropriated fund
activities (NAFAs). Based upon our conversation with
{{2-28-90 p.4436}}*** , it is our understanding that
Coast Guard NAFAs are similar in structure and function to those of the
other branches of the military services.
Public Unit Status of NAFAs for Insurance Coverage
Purposes
FDIC regulations provide that each official custodian of public
funds belonging to the United States depositing such funds in time or
savings deposits in an insured bank, shall be insured up to $100,000 as
to such deposits. 12 C.F.R. 330.8(a)(1). In addition, each such
official custodian placing public funds in a demand deposit is
separately insured up to $100,000.
The FDIC Legal Division has consistently taken the position that
NAFAs qualify for treatment as "public units" as that term is
used in section 3(m)(1) of the Federal Deposit Insurance Act (12 U.S.C.
1813(m)(1)), and that the deposits of NAFAs are public funds even
though the funds are not appropriated funds. This is because the court
system and Congress treat military NAFAs as instrumentalities of the
United States government. See e.g. Standard Oil Co. v. Johnson,
316 U.S. 481 (1942), and 5 U.S.C. 2105(c).
Therefore, pursuant to 12 C.F.R. 330.8, the time and savings funds
owned by a NAFA and deposited by the duly appointed official custodian
of the NAFA in an insured bank are added together and insured up to the
$100,000 maximum. This $100,000 coverage is for the combination of both
principal and accrued interest. In addition, the demand deposits owned
by a NAFA and deposited by the official custodian in an insured bank
are added together and insured to a maximum of $100,000.
An official custodian is an officer, employee or agent of a public
unit having official custody of public funds and lawfully depositing
the funds in an insured depository institution. 12 U.S.C. 1813(m)(1).
If an individual is not vested with the authority to serve as lawful
custodian of the public unit funds in question, he or she would not be
entitled to the insurance coverage afforded under section 330.8
Pooling the Funds of Several NAFAs
In your letter you ask if the funds of several NAFAs may be pooled
into one certificate of deposit and still obtain insurance coverage per
NAFA. If the record keeping requirements described below are met, per
NAFA coverage is available.
Pooling the funds of several NAFAs could occur in two ways. First,
an individual who has been appointed the official custodian of more
than one NAFA could aggregate the funds of the various NAFAs of which
he is custodian into one deposit. In that event, the official custodian
would be separately insured with respect to the funds held by him for
each NAFA pursuant to 12 C.F.R. 330.8(a)(6). Thus, ten separate NAFAs
with an equal ownership interest in a $1,000,000 certificate of deposit
and with the same official custodian would each be insured up to
$100,000. Similarly, if, under proper authority, one individual is
serving as official custodian for ten separate and independent NAFAs
and is consolidating the funds from all ten NAFAs into a single
checking account, then the interest of each NAFA in that account would
be insured to $100,000. Each NAFA must be a genuinely separate entity;
setting up one post's Exchange as two NAFAs, one for the meat
department and one for the dairy department, will not increase
coverage. The recordkeeping requirements described below must be
satisfied before such additional insurance coverage is available,
however.
A second arrangement through which the funds of multiple NAFAs may
be pooled is through the appointment of an agent to act on behalf of
the official custodians of multiple NAFAs. It is our understanding that
some military services appoint a financial manager to provide
financial, accounting, and administrative recordkeeping for a NAFA. A
financial manager may support more than one NAFA. In some instances,
the financial manager is appointed agent for the official custodians of
multiple NAFAs in order to better administer the deposits of NAFAs.
Where a financial manager who has been appointed as agent for official
custodians of multiple NAFAs pools the funds owned by the NAFAs into a
single deposit account, the ownership interest of each NAFA in the
commingled account is
{{2-28-90 p.4437}}afforded insurance coverage up to
$100,000. 1
Again, the recordkeeping requirements described below must be
satisfied.
Recordkeeping Requirements
Certain prescribed recordkeeping requirements must be complied with
before the above described insurance coverage is available. The deposit
account records of the bank must disclose the simple fact that the
funds are held by the depositor as custodian for the NAFA. If the funds
are deposited under the second type of arrangement, the deposit account
records must disclose that the funds are held by the agent (financial
manager) on behalf of various official custodians for multiple NAFAs.
In addition, the records of the bank or the depositor must disclose the
details of the custodial relationship. The allocable interest of each
NAFA in the deposit must be ascertainable from either the records of
the bank or the depositor. If it is the NAFAs' records which disclose
the relative ownership interests, these records must be maintained in
good faith and in the regular course of business. The records showing
the allocable interest of each NAFA may be maintained by a third party
in some contractual or agency capacity with the depositor, however.
Coast Guard Exchange System
In your letter you write that the Coast Guard NAFAs currently have
160 certificates of deposit in 160 banks. None of the CDs exceed
$100,000. Due to the recordkeeping difficulties, you are considering
pooling the funds of the NAFAs into one CD which will then exceed
$100,000. Whether the funds are deposited by an official custodian
acting on behalf of several NAFAs, or by an agent (funds manager)
acting on behalf of several official custodians each of whom represents
a single NAFA, the allocable interest of $100,000 provided the
recordkeeping requirements are satisfied.
In your letter you also describe a second arrangement whereby each
NAFA has a bank account at the same bank. Each NAFA draws checks
against its account and conducts its routine business through the
account. You also write, however, that the Exchange and Morale Division
at Coast Guard Headquarters acts as trustee for all the funds on
deposit at the bank. It is not clear to me if each NAFA has separately
established a checking account in its own name and Headquarters then
has access to the account for management purposes, or if Headquarters
as agent for the official custodian of each NAFA established an account
for each NAFA. Under either scenario, however, each NAFA would be
separately insured as described above 2
You also state that when the funds in each bank account exceed
normal cash flow requirements, the funds are invested by Headquarters
in CDs. As noted above, demand deposits owned by a NAFA are separately
insured from time/savings deposits owned by a NAFA and deposited in the
same bank.
FDIC regulations provide for the recognition of the fractional or
percentage interest of owners of commingled funds in custodial accounts
on deposit in an insured bank. 12 C.F.R. 330.101. If the records of the
depositor, maintained in good faith and in the regular course of
business, reflect at all times the name and ascertainable interest of
each owner in a specifically designated custodial deposit, such
interest may be determined on a fractional or percentage
basis.
{{2-28-90 p.4438}}
Finally, you may be interested to know that the FDIC has in the past
paid at least one claim for deposit insurance coverage of consolidated
Coast Guard NAFAs. Please call me at (202) 898-3812 if you have any
questions.
1If an official custodian of a NAFA deposits funds in an
insured bank which is also used by the financial manager acting as
agent for the same official custodian, then that portion of the funds
attributable to the official custodian in the agency account would be
combined with the amount deposited directly by the official custodian
for purposes of determining deposit insurance coverage. However,
because of the separate deposit insurance coverage for demand deposits,
a demand deposit placed in an insured bank by such an official
custodian would not be aggregated for insurance purposes with funds
placed by the financial manager in a pooled time or savings deposit in
the same bank. Go Back to Text
2The agreement between the USCG and the bank states that the
USCG is the "sole legal trustee" of the funds. This conflicts
with Exhibit A to the agreement which states Headquarters is "sole
owner" of the accounts. Each NAFA, not Headquarters, is the owner of
the funds. The reference in Exhibit A should be corrected. For
insurance coverage purposes, your records should make it clear who the
official custodian is (most likely the commanding officer at the base
where each NAFA is located) and also make it clear that Headquarters is
acting on behalf of the official custodian. Go Back to Text
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