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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.
{{2-29-00 p.4984.39}}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.
{{2-29-00 p.4984.40}}
1 The 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
2 The 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). Go Back to Text
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