The Office of the Comptroller of the Currency has issued a no-objection leter to the Blackfeet National Bank with regard to the bank's expressed intention to market a new product, denominated a Retirement CD account, that combines features of a traditional certificate of deposit with certain payment terms and tax advantages of an annuity contract.

Shortly thereafter, the Federal Deposit Insurance Corp. released a letter addressed to Dennis Gingold, the legal architect of the new product, opining that the "Retirement CD is an insured product, with some limitations..."

The numerous specific conditions, articulated concerns, and several reservations contined in the two rulings underscore the complexity of the product and its varied treatment under differing regulatory schemes, including the Truth-in-Savings Act, the interagency statement on retail sales of nondeposit investment products, and the National Association of Securities Dealer's investor suitability considerations.

Questions Remain

Other issues were left conspicuously unanswered, such as tax treatment of the product and applicability of state laws.

Taken together the rulings nevertheless effect implicit approval by the two banking agencies of the new product and may open the way for widespread use of a seemingly competitive new bank savings (and investment) product.

While declining to specifically characterize the new product as either a deposit account, financial contract, bank borrowing or other type of bank product, the Comptroller's cheif counsel, William Bowden, opined that, whatever its characterization, the Retirement CD Account "remains a financial product which may be offered by the bank as part of the business of banking."

The substantial legal analysis contained in the ruling is unambiguous in its conclusion that "under the express powers granted the bank to receive deposits and enter into contracts, coupled with its powers to incur liabilities and fund its operations in conducting business of banking," the offering of the Retirement CD is legally authorized.

Commitment to Banks Seen

The enthusiasm demonstrated by the agency in embracing the new product seemingly reflects Comptroller Eugene A. Ludwig's commitment to restore the competitiveness of national banks with other financial intermediaries, particularly nonbank purveyors of alternative investment products such as mutual funds and annuities. The ruling might be seen as an attempt to stanch the flow of bank deposits into such alternative retail investment products

The blithe acknowledgment of the Comptroller's ruling that the new product is structured "to provide interest payments keyed in part to the expected life of the depositor" in a manner commonly thought to reflect insurance products' actuarial calculations in no way dissuaded the agency from characterizing the product as an "authorized bank product."

While phrasing his legal analysis in traditional terminology relating to the lawful parameters of the "business of banking," the ruling manifests the greater reality that the banking, insurance, and securities industries, and their respective investment products, continue to converge into a single highly competitive financial services industry tht admits little real distinction between participants.

Significantly, the Comptroller's office declined to express any opinion regarding either the deposit insurance status or the tax treatment of the new product.

The agency's articulated concerns and 17 specifically enumerated conditions seemingly relate to issues of safety and soundness, including risk management, disclosures to customers, and internal controls in the bank's proposed operation of the program.

Notably, however, the agency expressly stated its expectation that the bank "accurately ... represent the risk and economics of the product, the deposit insurance status, and tax treatment of the Retirement CD in its dealings with actual and prospective customers."

CD Called Deposit

The FDIC promptly accomodated the Comptroller's concern by issuing a letter to American Deposit Corp., care of Mr. Gingold, concerning the insurability of the new product.

In contrast to the Comtroller's analysis, the FDIC's acting general counsel, Doug Jones, stated unqualifiedly that the Retirement CD is a "deposit" within the meaning of the Federal Deposit Insurance Act.

The FDIC's head lawyer went on to caution, however, that the Retirement CD would be insured (up to a maximum of $100,000) for principal and accured interest up to the date of the failure of an insuing bank, or in the event of the bank's failure after maturity, for the balance of the account at the maturity date (principal plus accured interest) minus any laump sum distribution or any monthly payment.

That is, as literally underscored in the FDIC ruling, "[u]nder no circumstances would FDIC insurance extend to the bank's commitment to make lifetime payments, as the value of such payments is uncertain and may exceed the total account balance."

Concerns Over Advertising

As in the ruling of the Comptroller's office, much of the FDIC's cautionary language and concerns regarding the new product focused on the adequacy and complexities of disclosure entailed in the advertising and brokering of such an account.

Somewhat ominously, the FDIC also underscored the criminal sanctions applicable to unlawful representations concerning the insurability of the deposit liabilities of an insured bank. Again, like the Comptroller's office, the FDIC demurred in expressing any opinion with regard to the tax status of the new product.

The consequences of the agencies' actions will, of course, await the future marketing and consumer acceptance of the new product.

On its face, the new product initiative would appear to pose substantial promise for FDIC-insured banks to recoup lost savings amounts; and for nonbank purveyors of uninsured investment products, such as mutual funds and annuities, to suffer those losses.

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