On July 16, 2019, the Federal Deposit Insurance Corporation (“FDIC”) adopted an amendment (the “Amendment”) to its Recordkeeping for Timely Deposit Insurance Determination rule1 (the “Rule”) in response to concerns about implementing the requirements of the Rule. The Rule applies to any insured depository institution with two million or more deposit accounts (a “Covered Institution”). The FDIC estimates that 36 depository institutions will be affected by the Rule. The full text of the Amendment and the accompanying adopting release can be found here.
As discussed below, the Amendment clarifies the definition of the term “transactional features”, eliminates certain certification requirements by Covered Institutions and permits a Covered Institution to obtain an extension of its compliance date.
I. Application of the Rule to Brokered Deposits Prior to the Amendment
The Rule was adopted to implement recordkeeping requirements designed to facilitate prompt payment of FDIC-insured deposits in the event that a Covered Institution fails. The Rule generally requires a Covered Institution to obtain and maintain on its records customer information, including name and tax ID number, on all owners and beneficial owners of deposit accounts so that the FDIC can expeditiously resolve the Covered Institution in the event of its failure.
Under the Rule, a Covered Institution may utilize “alternative recordkeeping requirements” with respect to accounts eligible for FDIC pass-through insurance, such as certificates of deposit (“CDs”) offered by a broker-dealer and held through The Depository Trust Company or deposit accounts maintained by a broker-dealer in connection with a “sweep” program offered by the broker-dealer to its customers. Under the alternative recordkeeping requirements, a Covered Institution need only maintain in its deposit account records (1) a unique identifier2 for the account holder3 of each account and (2) a “pending reason” code indicating to the FDIC that additional information is required to complete the deposit insurance calculation.4
For Deposit Accounts with transactional features held on a “pass-through” basis, a Covered Institution was required to certify to the FDIC that the account holder will provide to the FDIC the information needed to calculate deposit insurance coverage within 24 hours after failure. The FDIC staff took the position that deposit accounts held by broker-dealers in connection with sweep programs in which a customer may have check writing, debit or other payment features on the customer’s securities account satisfied by withdrawals from the deposit account have transactional features.
No certification was required with respect to brokered CDs because the FDIC staff does not consider brokered CDs to be deposit accounts with transactional features.
II. Summary of the Amendment
Transactional Features
The Amendment revises the definition of transactional features to exclude deposit accounts in which:
- the account holder or beneficial owner of deposits can make transfers only to the account holder, beneficial owner of deposits, or the Covered Institution itself; and
- the transfer is reflected in the end-of-day ledger balance for such deposit account on the day that such transfer is initiated.
As discussed below, we believe deposit accounts in broker-dealer sweep programs would not be deemed to have transactional features even if the customer’s securities account has check writing, debit or other payment features, so long as (i) deposits and withdrawals are made by the broker-dealer for the benefit of its customers and (ii) the deposit account activity is reflected in the end-of-day ledger balance at the Covered Institution.
Certification Requirement
For deposit accounts with transactional features utilizing alternative recordkeeping requirements, the Amendment eliminates the certification requirement, replacing it with a requirement to take “steps reasonably calculated” to ensure that the account holder will provide to the FDIC the information needed to calculate deposit insurance coverage.
CDs
The Amendment does not change the treatment of brokered CDs.
III. Description of the Amendment
Revisions to the Definition of “Transactional Features” and Application to Sweep Program Deposit Accounts
The definition of transactional features under the Rule included deposit accounts from which an account holder or depositor could make transfers or withdrawals to other accounts they held or to a third party by certain means, including check, debit card or other similar order.
The Amendment narrows the definition of transactional features to include only deposit accounts from which the account holder or beneficial owner can make a transfer to a party other than the account holder, beneficial owner of deposits, or the Covered Institution itself, by a method that may result in such transfer not being reflected in the end-of-day ledger balance for the deposit account.5 This revised definition of transactional features appears to clarify a way that would permit a Covered Institution to conclude that deposit accounts established by a broker-dealer in connection with its sweep program are not deposit accounts with transactional features.
In a sweep program, a broker-dealer establishes one or more deposit accounts with a Covered Institution in its name, noting that it is acting as agent for its customers, and automatically deposits, or sweeps, uninvested customer funds into such deposit accounts.6 All withdrawals and deposits are made by the broker-dealer, as agent for its customers, by wire at one or more settlement times, permitting the transfer to be reflected in the end-of-day ledger balance at the Covered Institution. Any funds withdrawn by the broker-dealer, as agent for its customers, are credited to the appropriate customer account.
To the extent that there any ambiguities in the agreements with Covered Institutions governing these transactions, it may be prudent to include provisions clarifying that (i) no checks, debit cards, or other payment features will be issued on the deposit accounts at the Covered Institutions and (ii) all transactions will be accomplished each day at the specified settlement times.
Replacement of the Certification Requirement
Prior to the Amendment, for each deposit account with transactional features for which the Covered Institution maintained its records in accordance with the alternative recordkeeping requirements, the Rule required Covered Institutions to provide a certification to the FDIC concerning the ability of third parties, such as broker-dealers, to provide the FDIC with customer names and deposit information within 24 hours of a Covered Institution’s failure.
This certification has been replaced with a requirement that Covered Institutions take “steps reasonably calculated” to contractually require third parties to deliver the necessary customer information to the FDIC in an approved format. As it is our view that deposit accounts in a broker-dealer sweep program do not have transactional features after adoption of the Amendment, we do not believe that a Covered Institution needs to take such steps.
No additional actions are required with respect to brokered CDs because they are not considered deposit accounts with transactional features.
Other Aspects of the Amendment
The Rule originally provided that the applicable compliance date was the later of three years after (1) April 1, 2017 or (2) the date on which the institution became a Covered Institution. The Amendment provides for an elective extension of the compliance date for certain Covered Institutions who submit a request or provide written notice, depending on when the insured depository institution became a Covered Institution, to the FDIC.
The Amendment provides further clarification regarding compliance certification, the effect of a change in law or merger transaction on compliance, and the process for requesting exception from the Rule’s requirements. A provision of the Amendment also enables insured depository institutions not considered Covered Institutions to voluntarily become Covered Institutions.
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Please call any of the following Seward & Kissel attorneys at (202) 737-8833 if you have any questions about the Amendment:
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1 12 C.F.R. Part 370.
2 A “unique identifier” means an alpha-numeric code associated with an individual or entity that is used consistently and continuously by a Covered Institution to monitor the Covered Institution’s relationship with that individual or entity.
3 An “account holder” is defined as the person or entity that has opened a deposit account with a Covered Institution and with whom the Covered Institution has a direct legal and contractual relationship with respect to the deposit.
4 The “pending reason” codes are set forth in the Rule.
5 12 C.F.R. § 370.2(j).
6 The deposit accounts are typically money market deposit accounts, demand deposit accounts or negotiable order of withdrawal accounts or some combination of those accounts.
