On November 15, 2016, the Federal Deposit Insurance Corporation (the “FDIC”) adopted a final rule requiring “covered institutions,” defined as insured depository institutions with two million or more deposit accounts,1 to implement new recordkeeping requirements designed to facilitate prompt payment of FDIC-insured deposits in the event of a covered institution’s failure (the “Final Rule”).2The FDIC’s initial proposal would have required covered institutions to obtain and maintain customer information, including name and tax ID number, for every owner of deposit accounts held on a “pass-through” basis, such as trust accounts, escrow accounts and brokered deposits, including CDs and “sweep” deposits. Under the FDIC’s regulations, an agent or fiduciary can establish a deposit account at a bank and, if the bank’s records indicate that the agent or fiduciary is acting for the benefit of others, the records of the agent or fiduciary will be used to establish account ownership if the bank fails. If the proposed rule had been adopted without revision, covered institutions would have had to request customer information from thousands of agents and fiduciaries, including brokers and banks that participate in the brokered deposit market. Under the proposed rule, a covered institution would have had to apply to the FDIC for an exemption if it could not obtain the customer information, either because the information was not readily available or the third party agent declined to provide it.
Seward & Kissel represented the Securities Industry and Financial Markets Association in drafting a joint comment letter to the FDIC with the American Bankers Association and The Clearing House. The comment letter detailed the operational and practical problems with the proposed rule and recommended an alternative approach for brokered deposits.
Under the Final Rule, covered institutions may utilize the “alternative recordkeeping requirements” with respect to accounts eligible for FDIC pass-through insurance, such as brokered deposits. Under the alternative recordkeeping requirements, a covered institution must maintain in its deposit account records a unique identifier3 for the account holder4 of each such account and a “pending reason” code that would indicate to the FDIC that additional information would be needed to complete the deposit insurance calculation.5 Application to the FDIC for an exemption is not necessary in order to utilize the alternative recordkeeping requirements under the Final Rule.
The Final Rule also requires (i) the covered institution’s information technology system to be capable of meeting certain requirements6; and (ii) the covered institution to submit a certification of compliance and a deposit insurance coverage summary report. Additionally, the FDIC will conduct periodic tests.
The Final Rule creates a few ambiguities. First, the Final Rule does not address the continued validity of the FDIC’s Deposit Broker’s Processing Guide and its format for submitting records in the event a of bank failure. Second, the Final Rule does not address existing FDIC guidance that allows a broker to access sweep deposits after a bank fails, but requires the broker to assume all risk of liability for amounts withdrawn in excess of coverage. Third, the Final Rule requires a covered institution that has deposit accounts with “transactional features”7 to provide a certification to the FDIC that the names of depositors will be provided within 24 hours of the appointment of the FDIC as receiver. Although the definition of “transactional features”, by its terms, does not include the “omnibus account” established by a broker-dealer in a sweep program, the Adopting Release suggests that the FDIC may have intended sweep accounts to be covered under this requirement.8 Lastly, the “pending reason” code list provided by the FDIC includes codes for a “direct obligation brokered deposit” and a “non-direct obligation brokered deposit.” The Final Rule does not define “direct obligation” or “non-direct obligation” nor does the Adopting Release explain the difference between these two “pending reason” codes.
The Final Rule is effective April 1, 2017, but covered institutions have until three years after the later of April 1, 2017 or the date on which the institution becomes a covered institution to comply with the Final Rule.
Please call any of the following Seward & Kissel attorneys at (202) 737-8833 if you have any questions about the Final Rule:
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1 The number of deposit accounts is determined as of the two consecutive quarters preceding April 1, 2017 or thereafter.
2 The full text of the Final Rule can be found at page 92 of the adopting release, which is available here: https://www.fdic.gov/news/news/press/2016/pr16101a.pdf (the “Adopting Release”).
3 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.
4 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.
5 The “pending reason” codes are set forth in the Final Rule.
6 Each covered institution’s information technology system must be capable of: (1) accurately calculating the deposit insurance coverage for each deposit account in accordance with the FDIC’s deposit insurance rules; (2) generating and retaining output records in the data format and layout specified in Appendix B of the Final Rule; (3) restricting access to some or all of the deposits in a deposit account until the FDIC has made its deposit insurance determination for that deposit account using the covered institution’s information technology system; and (4) debiting from each deposit account the amount that is uninsured as calculated pursuant to the FDIC’s deposit insurance rules.
7 Transactional features with respect to a deposit account means that the depositor or account holder can make transfers or withdrawals from the deposit account to make payments or transfers to third persons or others (including another account of the depositor or account holder at the same institution or at a different institution) by means of a negotiable or transferable instrument, payment order of withdrawal, check, draft, prepaid account access device, debit card, or other similar order made by the depositor and payable to third parties, or by means of a telephonic (including data transmission) agreement, order or instruction, or by means of an instruction made at an automated teller machine or similar terminal or unit.
8 See the Adopting Release at page 9.
