Structured Thoughts - Volume 2, Issue 2 - February 2011

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In this issue: Repackaging; Fiduciary Duty: An Update; IFLR Derivatives and Structured Products Conference; and FINRA Rule 5122 Revisions May Affect Certain Structured Products.

Excerpt from 'Repackaging':

We are often asked to consider whether “bundling” certificates of deposit (CDs) and offering interests in these CDs would be considered a new instrument and whether the FDIC insurance would still be passed along to investors purchasing the interests. Generally, brokered CDs purchased by a financial intermediary and held by a trustee, on behalf of investors, will be bank deposits and not securities.1 However, does the sale of interests in a CD or the bundling of CDs create a different result?

The starting point for this analysis is the Staff’s position in a no-action letter to E.F. Hutton & Co., Inc. (pub. avail. Mar. 28, 1985). In the E.F. Hutton letter, the Staff indicated that no enforcement action would be recommended if E.F. Hutton offered and sold units in an irrevocable trust holding a single, non-negotiable, jumbo CD without registration under the Securities Act and without registration of the trust as an investment company. In granting this relief, the Staff noted that (1) each owner of a unit of the trust would be recognized by the financial institution as a beneficial owner of the CD, and would have the right to proceed directly against the financial institution and the trustee; (2) the CD would be selected prior to the sale of units and identified in the offering material for the units; (3) the trustee would perform only ministerial functions related to collections from the financial institution and disbursements to the owners of the trust units; and (4) the interest of each trust unit owner in the CD would be federally insured through both the trustee and the financial institution.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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