Recent events in 2008 should bring the specter of bank failures to the attention of company risk managers. Absent properly designed and right-sized deposit arrangements with your financial institutions, business owners and those responsible for enterprise risk management programs as required by Sarbanes-Oxley may end up with some explaining to do.

Deposit Insurance Issues for Business and Corporate Entities

Each corporation (or LLC, LP, etc.) with a tax ID number conducting "independent activities" is entitled to $250,000 in deposit insurance. However, divisions of a single corporation (or LLC, LP, etc.) will likely be treated as a single owner.

  • Do you have funds in excess of $250,000 in an interest-bearing deposit account? Do you have funds at the same institution in excess of $250,000 in interest-bearing tax and payroll accounts?
  • Did you know that assets held in deposit accounts become liabilities of the bank and, as such, deposits create a debtor-creditor relationship between the bank and the depositor? Do you want to have to explain that the uninsured portion of your deposit account is now a claim against a failed bank or savings and loan?
  • Do your cash management arrangements sweep funds from a non-interest-bearing demand deposit account into an interest-bearing account or a non-FDIC-insured account or product? Do the arrangements comply with recently enacted regulations by the FDIC such that overnight bought and sold U.S. government securities are titled in your name and not bank co-mingled and positioned on the financial institution's balance sheet?
  • Are your fiduciary trust and custody accounts properly reflected as such on the books and records of your depository institutions? Has your financial institution properly reflected your accounts to take advantage of pass-through deposit insurance?
  • Has your financial depository institution opted out of FDIC's program to provide unlimited deposit insurance for non-interest bearing commercial deposit accounts?

Modern financial institutions comprise multiple business units, all typically held by a bank and/or financial holding company. Some subsidiaries of the holding company are not regulated by the government, and some financial products sold by financial institutions are not FDIC- insured. Are you certain you understand the legal risk (not investment risk) profile of the instruments and products you own? For example, do you own covered bonds of an insured depository institution? Preferred stock of a financial institution? Bank money market funds, as opposed to a third-party money market fund?

Buchanan Ingersoll & Rooney PC stands ready to assist you with these issues.

Our potential solutions for you include assisting you in a review and planning process to minimize your potential creditor status with respect to potentially failed depository institutions. In addition, we can guide you with respect to your reverse set-off rights in the event you have uninsured deposits and a loan(s) at the failed depository institution.

Recent Legislation

So that almost immediately the FDIC can confirm what is or is not covered by deposit insurance and what is or is not subject to the creditors of the failed depository institutions, the FDIC issued regulations effective August 2008 requiring most depository institutions (by size of deposits) to:

  1. Properly reflect ownership status in depository records

  2. Properly reflect and disclose repurchase and sweep agreements associated risk of loss so that:
a.  Affected U.S. government securities are properly titled in the name of the true owner of the security so that it is clear that a security is or is not owned by the financial institution and that when the security is sold overnight that the true owner retains a properly secured security interest.             
b.  Disclose important cut-off timing issues when the securities are bought and sold, in the event the institution is closed by FDIC (typically 4 p.m.).

Basic Principles of FDIC deposit insurance limitations

General Coverage Limits. The basic insurance amount is $100,000($250,000 until December 31st 2009) per depositor per insured bank.  Certain retirement accounts, such as Individual Retirement Accounts, are insured up to $250,000 per depositor per insured bank.

Single Account Limits. All single accounts at the same insured bank are added together and the total is insured up to $100,000 ($250,000 until December 31st 2009).

Retirement Accounts. Retirement accounts that qualify for $250,000 per depositor per insured bank limit are: Individual Retirement Accounts (IRAs) including traditional IRAs; Roth IRAs; Simplified Employee Pension (SEP) IRAs; Savings Incentive Match Plans for Employees (SIMPLE) IRAs; Section 457 deferred compensation plan accounts (whether self-directed or not); self-directed defined contribution plan accounts; self-directed Keogh plan (or H.R. 10 plan) accounts. The naming of or the number of beneficiaries for such an account is not relevant.

Joint Accounts (Including Joint Tenants with the Right of Survivorship, as Tenants in Common or as Tenants by the Entirety). For qualifying joint accounts, where each account holder has an equal right to withdraw from the account, the account is allocated to each account holder in equal shares, for purposes of $100,000 ($250,000 through December 31, 2009)) limits per deposit per insured bank. All of the joint owners must be natural persons, and each joint owner has signed a signature card (subject to some exceptions).

Payable on Death Accounts — Totten Trusts — ITF (In Trust For) Accounts. $100,000 ($250,000 through December 31, 2009)) of coverage per insured bank is provided for each non-owner named qualified beneficiary who succeeds to the account at death of the owner. No additional coverage is provided for the owner. If a beneficiary also is a beneficiary under a revocable trust at an insured bank, all such beneficiary accounts are aggregated so only $100,000 ($250,000 through December 31, 2009) is insured no matter how many accounts name a given person as a beneficiary. The beneficiary must be identified by name in the bank's records. The account title must indicate that it is a covered type of account, such as by using the acronyms POD or ITF. Prior to September 26, 2008, qualified beneficiaries are limited to the owner's spouse, child, grandchild, parent or sibling. Adopted and stepchildren, grandchildren, parents and siblings also qualify. In-laws, grandparents, great-grandchildren, cousins, nieces and nephews, friends, organizations (including charities) and trusts do not qualify. Since September 26, 2008, FDIC adopted a simpler rule and essentially eliminates the concept of a qualifying beneficiary, making coverage available based on the naming of virtually any beneficiary.

Revocable Trusts/Living Trusts. Apply the foregoing Payable on Death Account rules. The account title must indicate the existence of the trust relationship by including a term such as in trust for, trust, living trust, or family trust. Each life-estate holder and each remainder-man will be deemed to have equal interests in the trust assets for deposit insurance purposes.

Irrevocable Trusts — Deposit Institution as Trustee. Deposits held by an insured depository institution as trustee of an irrevocable trust, whether held in its trust department, held or deposited in any other department of the fiduciary institution or deposited by the fiduciary institution in another insured depository institution, shall be insured up to the insured limits for each owner or beneficiary represented. This insurance shall be separate from, and in addition to, the insurance provided for any other deposits of the owners or the beneficiaries.

Other Irrevocable Trusts. Deposited funds representing the "noncontingent trust interest(s)" of a trust beneficiary under one or more irrevocable trust agreements created by the same settlor(s)/grantor(s) are added together and insured up to the single limits in the aggregate. This coverage is separate from the coverage provided for other accounts maintained by the settlor(s), trustee(s) or beneficiary(ies) of the irrevocable trust(s) at the same insured depository institution. Funds held for noncontingent trust interests are added together and insured up to the single limits in the aggregate.

Multiple Types of Accounts. A deposit in one insured bank can receive $100,000 ($250,000 through December 31, 2009) in coverage for all of his or her single-owner accounts, $100,000 ($250,000 through December 31, 2009) in coverage for his or her interest in joint owner accounts, and $100,000 ($250,000 through December 31, 2009) in coverage as a beneficiary of a POD/revocable trust account suggesting a total of $750,000 in FDIC insurance coverage.

Deceased Depositor. The death of a deposit owner shall not affect the insurance coverage of the deposit for a period of six months following the owner's death unless the deposit account is restructured.

Agency, Nominee, Guardian or Conservator Accounts. These accounts generally treat the principal as the owner, for purposes of coverage rules.

Foreigners. Deposit insurance applies equally to U.S. citizens, U.S. residents, and nonresidents of the U.S.

Separate Banks. Any deposit accounts maintained by a depositor at one insured depository institution are insured separately from, and with regard to, any deposit accounts that the same depositor maintains at any other separately chartered and insured depository institution, even if two or more separately chartered and insured depository institutions are affiliated through common ownership. The deposit accounts of a depositor maintained in the same right and capacity at different branches or offices of the same insured depository institution are not separately insured.

Certain Non-Interest-Bearing Deposit Accounts Fully Guaranteed Until December 31, 2009

Effective October 12, 2008, through December 31, 2009, the FDIC has adopted a rule to provide unlimited deposit insurance coverage to commercial depositors in eligible entities. The program is known as the Transaction Account Guarantee Program. This guarantee does not cover interest bearing accounts. If you have funds sweep from your non-interest bearing commercial demand deposit account to an interest bearing account, the guarantee will not cover the funds deposited into the interest bearing account. This special program is in addition to and does not replace existing deposit insurance provided by FDIC. A special assessment will be charged to an eligible institution for this temporary deposit insurance program unless the eligible institution opts out of the program before November 12, 2008.