We are an Illinois state-chartered nonmember bank, and our trust department has a master deposit account for our trust funds. We would like to pledge securities to this account to provide additional deposit protection for trusts that occasionally exceed the FDIC insurance limits. Are there any regulations or requirements we need to be aware of to establish this pledging?

Generally, Illinois state banks may pledge their assets to secure private trust funds, but they must seek the FDIC’s approval before doing so. Additionally, we recommend reviewing the individual trust account agreements to determine whether any collateralization requirements apply to trust funds.

The FDIC Trust Examination Manual states that “in order for a state nonmember bank to pledge assets to secure private deposits” it must file an application for approval from the FDIC. The IDFPR also has issued an interpretive letter which opines that the Illinois Banking Act permits state banks to pledge assets to secure private deposits, since it grants Illinois state banks the same powers as Illinois savings banks, which are permitted to “pledge assets . . . to secure deposits.”

The Illinois Trust Code and Corporate Fiduciary Act do not specifically address pledging requirements for trust funds. The Illinois Trust Code does provide that a trustee’s powers include the power to “enter into agreements for bank or other deposit accounts . . . for all or any part of the trust estate.” The Corporate Fiduciary Act imposes requirements on corporate trustees as to investing and commingling trust funds without imposing pledging requirements.

For resources related to our guidance, please see:

FDIC Trust Examination Manual, Section E.3.b ERISA, Deposit Insurance, and Pledging (“The pledging of bank assets to secure private deposits, generally for amounts not covered by FDIC insurance, is not a permissible activity for national banks, except for funds awaiting investment or distribution. In order for a state nonmember bank to pledge assets to secure private deposits, the bank must file an application for approval under Part 362 of the FDIC's Rules and Regulations.”)

FDIC Regulations and Statements of General Policy, 12 CFR 362.3(b) (“Activities other than equity investments—

(1) Prohibited Activities. An insured State bank may not directly or indirectly engage as principal in any activity, that is not an equity investment, and is of a type not permissible for a national bank unless one of the exceptions in paragraph (b)(2) of this section applies.

(2) Exceptions— (i) Consent obtained through application. An insured State bank that meets and continues to meet the applicable capital standards set by the appropriate Federal banking agency may conduct activities prohibited by paragraph (b)(1) of this section if the bank obtains the FDIC's prior written consent. Consent will be given only if the FDIC determines that the activity poses no significant risk to the Deposit Insurance Fund. Applications for consent should be filed in accordance with §303.121 of this chapter and will be processed under §303.122(b) of this chapter. Approvals granted under §303.122(b) of this chapter may be made subject to any conditions or restrictions found by the FDIC to be necessary to protect the Deposit Insurance Fund from risk, to prevent unsafe or unsound banking practices, and/or to ensure that the activity is consistent with the purposes of Federal deposit insurance and other applicable law.”)

IDFPR Interpretive Letter 98-12 (September 8, 1998) (“Public Act 90-665 amended the Illinois Banking Act (‘Act’) to give state banks the power to offer any product or service that insured savings associations may offer. This authority is subject to the same limitations and restrictions that apply to insured savings associations. 205 ILCS 5/5(25). One service that this new provision authorizes for state banks is the pledging of their assets to secure private deposits. . . . The Federal Deposit Insurance Corporation (‘FDIC’) has issued a regulation that generally requires FDIC approval before a state bank may engage in an activity not permitted for national banks. 12 C.F.R. 362. A state bank should contact the FDIC to determine whether the bank must file an application with and receive approval from the FDIC prior to engaging in the pledging of assets to secure private deposits.”)

Illinois Banking Act, 205 ILCS 5/5(25) (“Notwithstanding any other provisions of this Act or any other law, to offer any product or service that is at the time authorized or permitted to any insured savings association or out-of-state bank by applicable law, provided that powers conferred only by this subsection (25): (a) shall always be subject to the same limitations and restrictions that are applicable to the insured savings association or out-of-state bank for the product or service by such applicable law . . .”)

Illinois Banking Act, 205 ILCS 5/2 (“‘Insured savings association’ means any federal savings association chartered under Section 5 of the federal Home Owners' Loan Act and any State savings association chartered under the Illinois Savings and Loan Act of 1985 or a predecessor Illinois statute, the deposits of which are insured by the Federal Deposit Insurance Corporation. The term also includes a savings bank organized or operating under the Savings Bank Act.”)

Illinois Savings Bank Act, 205 ILCS 205/1008(a) (“A savings bank operating under this Act shall be a body corporate and politic and shall have all of the powers conferred by this Act including, but not limited to, the following powers: . . . (13) To pledge its assets: . . . (B) to secure deposits; . . .”)

Illinois Trust Code, 760 ILCS 3/816(27) (“Without limiting the authority conferred by Section 815, a trustee may . . . enter into agreements for bank or other deposit accounts, safe deposit boxes, or custodian, agency, or depository arrangements for all or any part of the trust estate, including, to the extent fair to the beneficiaries, agreements for services provided by a bank operated by or affiliated with the trustee, and to pay reasonable compensation for those services, including, to the extent fair to the beneficiaries, compensation to the bank operated by or affiliated with the trustee, except that nothing in this Section shall be construed as removing any depository arrangements from the requirements of the prudent investor rule . . .”)

Illinois Trust Code, 760 ILCS 3/804 (“A trustee shall administer the trust as a prudent person would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.”)

Illinois Trust Code, 760 ILCS 3/908 (“No specific investment course of action is, taken alone, prudent or imprudent. The trustee may invest in every kind of property and type of investment, subject to this Article. A trustee’s investment decisions and actions are to be judged in terms of the trustee's reasonable business judgment regarding the anticipated effect on the trust portfolio as a whole under the facts and circumstances prevailing at the time of the decision or action. This Article is a test of conduct and not of resulting performance.”)

Corporate Fiduciary Act, 205 ILCS 620/2-8 (“(a) A corporate fiduciary shall not be required and shall not have the power to collateralize or secure fiduciary funds except as provided in this Section.
(b) All funds, both principal and income, deposited with or held in a fiduciary capacity by any corporate fiduciary awaiting investment or distribution, and not otherwise subject to direction regarding investment or non-investment, shall to the extent reasonable under existing circumstances, be prudently invested for the beneficiaries at a rate of return commensurate with that available on trust quality investments.

(c) Funds, both principal and income awaiting investment or distribution, may be deposited in deposit accounts or other investment vehicles of the corporate fiduciary, or of any affiliate of the corporate fiduciary; and funds, both principal and income awaiting investment or distribution which need not be invested hereunder for the beneficiaries may be commingled with the corporate fiduciary’s own funds and used by the corporate fiduciary in the conduct of its business, provided that in either case the following apply . .

(d) Funds shall not be held commingled and uninvested or undistributed for an account any longer than is reasonable under existing circumstances for the proper management of the account.”)
Corporate Fiduciary Act, 205 ILCS 620/1-5.05 (“‘Corporate fiduciary’ means . . . the trust department of a bank . . .”)
FDIC Trust Examination Manual, Section N.1 Master Deposit Accounts (“A master deposit account is a single interest-bearing deposit account in which the temporary funds of individual trust accounts are commingled. The master deposit account is often a money market deposit account of the fiduciary institution. Only deposits are involved, no other types of assets are held in a master deposit account. The number of trust accounts invested in and the balance of the master deposit account may vary from day-to-day. This is not a common or collective investment fund. The concerns with a master deposit account include, management's ability to:

identify the amount of funds attributable to each trust account invested in the master deposit account,

ensure that the funds of each trust account is not left in the master deposit account as a long term investment,

determine how FDIC insurance applies to the trust account invested in the master deposit account, and

identify conflicts of interest.”)