[Federal Register Volume 89, Number 191 (Wednesday, October 2, 2024)]
[Proposed Rules]
[Pages 80135-80154]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-22565]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 89, No. 191 / Wednesday, October 2, 2024 /
Proposed Rules
[[Page 80135]]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 375
RIN 3064-AG07
Recordkeeping for Custodial Accounts
AGENCY: Federal Deposit Insurance Corporation.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Federal Deposit Insurance Corporation (FDIC) is proposing
requirements that would strengthen FDIC-insured depository
institutions' (IDI) recordkeeping for custodial deposit accounts with
transactional features and preserve beneficial owners' and depositors'
entitlement to the protections afforded by Federal deposit insurance.
The proposal is intended to promote the FDIC's ability to promptly make
deposit insurance determinations and, if necessary, pay deposit
insurance claims ``as soon as possible'' in the event of the failure of
an IDI holding custodial accounts with transactional features. The
proposed requirements also are expected to result in depositor and
consumer protection benefits, such as promoting timely access by
consumers to their funds, even in the absence of the failure of an IDI.
The requirements described in this document would only apply to IDIs
offering custodial accounts with transactional features and that are
not specifically exempted as provided in this document.
DATES: Comments must be received on or before December 2, 2024.
ADDRESSES: You may submit comments, identified by RIN 3064-AG07, by any
of the following methods:
FDIC Website: https://www.fdic.gov/regulations/laws/federal/. Follow instructions for submitting comments on the agency
website.
Email: [email protected]. Include RIN 3064-AG07 in the
subject line of the message.
Mail: James P. Sheesley, Assistant Executive Secretary,
Attention: Comments--RIN 3064-AG07, Federal Deposit Insurance
Corporation, 550 17th Street NW, Washington, DC 20429.
Hand Delivery to FDIC: Comments may be hand-delivered to
the guard station at the rear of the 550 17th Street NW building
(located on F Street) on business days between 7 a.m. and 5 p.m.
Public Inspection: Comments received, including any
personal information provided, may be posted without change to https://www.fdic.gov/resources/regulations/federal-register-publications/.
Commenters should submit only information that the commenter wishes to
make available publicly. The FDIC may review, redact, or refrain from
posting all or any portion of any comment that it may deem to be
inappropriate for publication, such as irrelevant or obscene material.
The FDIC may post only a single representative example of identical or
substantially identical comments, and in such cases will generally
identify the number of identical or substantially identical comments
represented by the posted example. All comments that have been
redacted, as well as those that have not been posted, that contain
comments on the merits of the proposed rule will be retained in the
public comment file and will be considered as required under all
applicable laws. All comments may be accessible under the Freedom of
Information Act.
This proposal, all comments received, and a summary of not more
than 100 words of the proposed rule pursuant to the Providing
Accountability Through Transparency Act of 2023 are available at
https://www.fdic.gov/resources/regulations/federal-register-publications/.
FOR FURTHER INFORMATION CONTACT: Division of Resolutions and
Receiverships: Shivali Nangia, Assistant Director, 972-761-2945,
[email protected]; Cathy K. Davis, Chief, Claims, 972-761-2336,
[email protected]. Division of Depositor and Consumer Protection: Luke H.
Brown, Associate Director, Supervisory Policy, 202-898-3842,
[email protected]; Meron Wondwosen, Assistant Director, Supervisory
Policy, 202-898-7211, [email protected]; Edward J. Hof, Senior
Policy Analyst, 202-898-7213, [email protected]. Legal Division: Vivek V.
Khare, Senior Counsel, 202-898-6847, [email protected]; James S. Watts,
Counsel, 202-898-6678, [email protected].
SUPPLEMENTARY INFORMATION:
Introduction
The business of deposit taking in the digital age has evolved,
creating new opportunities for IDIs to gain access to deposits through
third parties in increasingly complex relationships. This evolution has
included the widespread use of digital channels, including websites and
mobile applications, which created new opportunities and options to
deliver financial products and services to consumers. However, it has
also created risks for consumers, including confusion regarding the
applicability and availability of deposit insurance to protect their
money from loss.
Recent events have underscored issues that can be associated with
some IDI arrangements with third parties to deliver IDI deposit
products and services. For example, the bankruptcy of Synapse Financial
Technologies, Inc. (Synapse), a technology company that worked with
several IDIs and numerous financial technology (fintech) companies, has
affected the ability of consumers to access funds placed at IDIs for a
number of months, resulting in significant and ongoing harm to those
consumers. In many cases, it was advertised that the funds were FDIC-
insured, and consumers may have believed that their funds would remain
safe and accessible due to representations made regarding placement of
those funds in IDIs. Consumers have been unable to access their funds
at IDIs for an extended period of time while the IDIs attempt to
determine ownership of the funds deposited by fintechs. Since May 2024,
the FDIC National Center for Consumer and Depositor Assistance has
received more than a thousand inquiries, complaints, and concerns from
consumers regarding the Synapse bankruptcy. Published reports further
suggest that some of those consumers affected by the Synapse bankruptcy
had placed the funds in accounts through a fintech that they used for
day-to-day living expenses thereby intensifying the effect of their
loss of access.
In the wake of Synapse's bankruptcy, including the fact that IDIs
encountered significant difficulties in obtaining, reviewing, and
reconciling Synapse's
[[Page 80136]]
records, the FDIC believes these circumstances have raised concerns
about the accuracy and integrity of those records. These circumstances
also raise questions about the completeness, accuracy, and integrity of
custodial deposit account records for other IDIs' arrangements with
third parties to deliver deposit products and services.
Custodial deposit account records are critical when the FDIC makes
deposit insurance determinations following the failure of an IDI that
has custodial deposit account records. The FDIC generally relies upon a
failed IDI's records to determine deposit insurance coverage, but in
certain circumstances, the FDIC's regulations also provide for
consideration of records of parties other than the failed IDI if such
records are maintained in good faith and in the regular course of
business.\1\ The events described above highlight substantial risks
with respect to the FDIC fulfilling its statutory mandate to maintain
public confidence in the banking system by ensuring the prompt and
accurate payment of deposit insurance in the case of an IDI's failure.
Specifically, if an IDI fails, and it has an arrangement with a third
party where custodial deposit account recordkeeping is inadequate or
unreliable, such a situation would impede the FDIC's ability to
promptly make deposit insurance determinations for an IDI holding
custodial deposit accounts, and if necessary, pay claims to depositors.
The FDIC's mission is rooted in maintaining public confidence in the
banking system, which heavily relies on the prompt and accurate payment
of insured deposits. Any inaccuracies or discrepancies in the relevant
records can delay a deposit insurance determination, leaving depositors
in a state of uncertainty during a critical time.
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\1\ See 12 CFR 330.5.
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In addition, recent events have exposed potential risks to current
beneficial owners, including consumers, of deposits at IDIs, even in
the absence of the failure of an IDI. These issues create uncertainty
that could undermine the public confidence that underpins IDIs and our
nation's broader financial system.
These events, along with the increased complexity of certain
arrangements, demonstrate a need to strengthen IDIs' recordkeeping
practices with respect to custodial deposit accounts, and in
particular, those with transactional features. The FDIC believes that
custodial deposit accounts with transactional features present unique
challenges in resolving a failed IDI because making a deposit insurance
determination requires the FDIC to not only gather and process records
of beneficial ownership maintained by parties other than the failed
IDI, but also to reconcile those records with a significant amount of
payment activity taking place with respect to the accounts.
The FDIC neither prohibits nor discourages IDIs from providing
banking services to customers of any specific class or type, as
permitted by law or regulations. The FDIC notes that the Federal
banking agencies have recently taken steps to address IDIs' management
of the risks involved in arrangements with non-bank third parties,
including fintech companies,\2\ as well as steps to address consumer
confusion relating to the nature and application of deposit insurance
coverage. In addition, the Federal banking agencies have addressed
supervisory concerns, including concerns relating to consumer
protection, at specific IDIs through enforcement actions. However, the
FDIC believes rulemaking is also warranted to promote the prompt
payment of deposit insurance in the event of the failure of an IDI
holding custodial deposit accounts with transactional features.
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\2\ For example, the agencies recently issued a Joint Statement
on Banks' Arrangements with Third Parties to Deliver Bank Deposit
Products and Services. See FIL-45-2024 (July 25, 2024).
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The FDIC is accordingly seeking comment on all aspects of the
proposed rule, including specific questions provided herein, that would
strengthen IDIs' recordkeeping for custodial deposit accounts with
transactional features. The proposed rule is also expected to result in
depositor and consumer protection benefits even in the absence of the
failure of an IDI.
Summary of Primary Provisions
The proposed rule would establish new recordkeeping requirements at
IDIs for ``custodial deposit accounts with transactional features,''
subject to a list of specific exemptions. IDIs holding deposits within
the scope of the proposed rule would be required to maintain records
identifying the beneficial owners of those deposits, the balance
attributable to each beneficial owner, and the ownership category in
which the deposited funds are held. The IDI could maintain those
records itself or, if certain additional requirements are satisfied,
the IDI could maintain the records through an arrangement with a third
party (which could include a vendor, processor, software or service
provider, or a similar entity). The proposed rule provides a specific
electronic file format for records on beneficial owners and their
interests in the deposited funds. This standardized format would enable
the FDIC to more quickly gather and use these records if a deposit
insurance determination becomes necessary.
The proposed rule would provide that where IDIs choose to maintain
the required records through a contractual relationship with a third
party, additional requirements would need to be satisfied. These
additional requirements are intended to promote the integrity of the
records and ensure that the IDI has continued access to the records.
Among other things, the IDI would be required to have direct,
continuous, and unrestricted access to the records of the beneficial
owners, including, but not limited to, in the event of the business
interruption, insolvency, or bankruptcy of the third party. In
addition, reconciliation of these records would be required, as would
periodic validation of the third party's records by a person
independent of the third party.
The proposal would require specific actions by IDIs to achieve and
maintain compliance with the rule. IDIs that hold custodial deposit
accounts with transactional features would be required to establish and
maintain written policies and procedures to achieve compliance with the
rule's requirements. IDIs would be required to complete an annual
certification of compliance, signed by an executive officer, stating
that the IDI has implemented and tested the recordkeeping requirements.
IDIs would further be required to complete a report annually that (1)
describes any material changes to their information technology systems
relevant to compliance with the rule; (2) lists the account holders
that maintain custodial deposit accounts with transactional features,
the total balance of those custodial deposit accounts, and the total
number of beneficial owners; (3) sets forth the results of the
institution's testing of its recordkeeping requirements; and (4)
provides the results of the required independent validation of any
records maintained by third parties.
I. Background and Need for Rulemaking
FDIC, Its Mission, and Pass-Through Deposit Insurance
The FDIC is an independent Federal agency, and its mission is to
maintain stability and public confidence in the nation's financial
system by, among other things, insuring deposits at all IDIs. As of
June 30, 2024, there are over
[[Page 80137]]
4,500 IDIs in the United States. Since 1933, the FDIC has taken action
in accordance with its mission to restore public confidence in the
banking system in times of financial turmoil. The FDIC has proactively
sought to protect depositors and promote public confidence in insured
deposits.
The FDIC only insures deposits of IDIs, and deposit insurance is
only paid in the event of the failure of an IDI. Importantly, the
FDIC's deposit insurance coverage does not provide consumers and
businesses with general protection against the default, insolvency, or
bankruptcy of any non-bank entities with which IDIs might do business,
even if a non-bank entity has a relationship with, or deposits funds
at, an IDI.\3\
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\3\ FDIC deposit insurance also does not protect against losses
due to theft or fraud, which are addressed by other laws.
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The FDIC has long recognized the significance of custodial deposit
accounts in the banking system, and specifically accommodates these
types of accounts in its deposit insurance regulations through the
concept of pass-through deposit insurance. This concept, which dates
back to the 1930s, provides a mechanism for recognizing the owners of
deposited funds and insuring their interests in the deposit to the same
extent as if the owners had deposited the funds directly at the bank,
provided certain conditions are met.\4\ Under the pass-through
insurance rules, the FDIC may rely on records of those other than a
failed IDI to identify depositors and their insured deposits, if such
records are maintained in good faith and in the regular course of
business. If the regulatory pass-through insurance requirements are
satisfied, each owner's interest in the deposit at the IDI is
separately insured up to the statutory deposit insurance limit,
currently $250,000 for deposits held in each deposit ownership
category. If the pass-through insurance requirements are not satisfied,
the deposit is insured to the person named on the IDI's records and
aggregated with any other deposits that person holds at the same IDI in
the same ownership category. The FDIC makes determinations with respect
to pass-through deposit insurance coverage at the time an IDI fails.\5\
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\4\ The FDIC is statutorily required to aggregate, for purposes
of the deposit insurance limit, deposits maintained by a depositor
``either in the name of the depositor or in the name of any other
person. . . .'' 12 U.S.C. 1821(a)(1)(C). The FDIC's pass-through
insurance rules initially applied only to deposits maintained by
specific types of non-bank entities, though this limitation was
subsequently removed.
\5\ By statute, the FDIC is required to pay deposit insurance
``as soon as possible'' following the liquidation, closing, or
winding up of any IDI. 12 U.S.C. 1821(f)(1).
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Custodial Deposit Accounts and Technology Developments
Custodial deposit accounts have been a fixture of the U.S. banking
system for decades. A ``custodial deposit account'' arrangement, for
purposes of this proposal, is a relationship where one party is
responsible for opening a deposit account at an IDI on behalf of
others, who may own the funds but often lack a direct relationship with
the bank. The term ``custodial deposit account'' may have different
meanings in other banking contexts, and the FDIC does not intend to
address or affect, through this rulemaking, any requirements that might
apply in other contexts in which the term ``custodial deposit account''
is used.
Coupled with technology innovations and advancements, custodial
deposit account arrangements have transformed the industry in many
respects over the years, resulting in new business models for providing
banking and financial services. For example, companies have been formed
to meet the desire of investors to deposit their money at IDIs paying
the highest interest rates on deposits. Other firms have been formed to
meet the need of organizations and individuals to divide large deposits
exceeding the statutory deposit insurance limit across multiple IDIs
for the purpose of ensuring that the total is fully insured by the
FDIC.
Custodial deposit accounts have also, in some cases, been utilized
in the development of products intended to meet the needs of consumers.
For example, prepaid cards and other similar products were developed to
offer consumers new ways of accessing and spending money without
maintaining a traditional deposit account at an IDI.\6\ Based on a
national survey conducted by the FDIC in 2021, 6.9 percent of all
households were using prepaid cards.\7\ The FDIC's experience is that
prepaid cards generally utilize custodial deposit accounts at IDIs to
hold consumers' funds until they are spent.
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\6\ See FDIC National Survey of Unbanked and Underbanked
Households (October 2022), available at https://www.fdic.gov/analysis/household-survey/2021report.pdf.
\7\ FDIC, 2021 FDIC National Survey of Unbanked and Underbanked
Households.
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More recently, this evolution of banking and financial services has
increasingly included non-bank fintech companies offering consumers new
options and alternatives for accessing banking products and services.
Increasingly many consumers are choosing to open deposit accounts
indirectly through fintech companies, typically online or through
mobile apps. FDIC survey results indicate that a significant number of
consumers use non-bank (e.g., fintech) online payment services to make
purchases online and to send or receive money. Households also reported
relying on this method to pay bills, make purchases in person, receive
income or save or ``keep money safe.'' Nearly half of all households,
or 46.4 percent, were using non-bank online payment services at the
time of the survey.\8\ These fintech companies' accounts at IDIs
frequently, though not always, depend upon custodial deposit accounts.
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\8\ FDIC, 2021 FDIC National Survey of Unbanked and Underbanked
Households.
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Alternatively, some IDIs are entering into and expanding business
arrangements with fintech companies to deliver the IDI's deposit
products and services. These arrangements can take many different
forms, and they continue to evolve. For example, an IDI and a fintech
company might enter into an arrangement where the fintech company
offers the IDI's deposit products and services to the fintech company's
customers. In other instances, fintech companies might simply deposit
their customers' funds at an IDI. In such cases, the fintech company
may open a custodial deposit account at an IDI as an agent or
custodian. Fintech companies have sometimes represented to their
customers that the customers' funds are FDIC-insured, or that they are
insured by the FDIC on a ``pass-through'' basis.
Many custodial deposit account arrangements also increasingly rely
on third parties that, depending on the context, might be referred to
as, for example, ``processors,'' ``middleware providers,'' or ``program
managers,'' to perform a range of critical functions. These third
parties' functions have included accepting deposits, maintaining a
transaction system of record, processing payments, performing
regulatory compliance functions, providing customer-facing technology
applications, servicing accounts, and directly interacting with
customers. In this context, a customer may be a consumer or a business.
Relationships between IDIs and these third parties can be quite
complex. While this complexity can contribute to the development of
novel and innovative products, in the absence of reliable recordkeeping
this complexity adds to the operational challenges faced by the FDIC in
the event of an IDI's failure, in particular when the FDIC is required
to make deposit insurance determinations. Complex custodial deposit
account arrangements also
[[Page 80138]]
introduce significant potential for operational disruptions and other
risks outside the context of an IDI's failure, as demonstrated by
recent events.
Synapse Bankruptcy
Synapse was a so-called ``middleware provider'' for numerous
fintech companies, meaning that its software bridged the information
technology systems of fintech companies and IDIs. More specifically,
Synapse provided application programming interfaces (APIs) and
technological infrastructure that allowed businesses to integrate
banking services into their own applications. This also included
opening and managing deposit accounts, issuing debit and credit cards,
and facilitating payments for customers. Synapse enabled fintech
companies to quickly develop products and services that used deposit
accounts at IDIs to hold customers' funds. Synapse had relationships
with several IDIs. In these arrangements, fintech companies developed
user interfaces and application logic, and importantly, maintained the
ledgers of their customers, including the deposit amounts attributed to
each individual customer.
Synapse filed for bankruptcy protection in late April 2024. The
bankruptcy of Synapse resulted in severe hardship for consumers that is
deeply troubling to the FDIC.\9\ In early May 2024, one of the IDIs
that partnered with Synapse froze deposits that had been placed at the
IDI through relationships with Synapse and the fintech companies that
Synapse serviced. The IDI stated at the time that it froze the accounts
because Synapse denied the IDI access to an essential system through
which the IDI accessed information on end users, deposits, and
transactions. As a result, consumers who had deposited funds through
these fintech companies that partnered with Synapse were unable to
access their funds held at the IDI.
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\9\ While many facts relevant to Synapse's bankruptcy are
disputed among the relevant parties, the events prompting the FDIC's
proposal are not.
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The bankruptcy court appointed a trustee for Synapse on May 24,
2024, and both the bankruptcy court and the trustee have sought to
facilitate the release of the fintech customers' funds that are being
held at the IDIs as quickly as possible. Court filings state that the
trustee had difficulty obtaining access to Synapse's data, due in part
to Synapse's termination of its employees, including employees who held
credentials necessary to access systems and databases where the
relevant records were stored. Court filings also state that even after
obtaining access to Synapse's data, the trustee and IDIs have
experienced difficulties reviewing and reconciling this data against
the IDIs' data. In addition, the trustee has indicated that the
deposits at the IDIs appear to be insufficient to cover the amounts
owed by the fintech companies to their customers. The trustee sent a
letter to Federal banking regulators on June 20, 2024, seeking
assistance in communicating with end users whose funds are affected by
the Synapse bankruptcy, and noting that the bankruptcy's impact on end
users of the fintechs has been devastating.
FDIC and Other Regulators' Responses
Synapse's bankruptcy illustrates a number of risks associated with
these arrangements. While some of those issues fall outside the scope
of this rulemaking, which is focused on strengthening IDIs'
recordkeeping with respect to certain custodial deposit accounts, a
brief discussion on regulatory responses to date provides helpful
context and may serve as a reminder of regulators' broader efforts in
this area.
Following the freeze of deposits at an IDI in the aftermath of the
Synapse bankruptcy, many consumers have contacted the FDIC to ask
questions, raise concerns, or seek the return of their funds, as
evidenced by the more than 1,000 consumer inquiries that were referred
to the FDIC since May 2024. It is clear that some consumers
misunderstood the nature of the relationships they entered into, the
nature of deposit insurance, or both.
Even prior to Synapse's bankruptcy, the FDIC has observed instances
where consumers have been unable to access funds in custodial deposit
accounts at IDIs. For example, in 2022, Voyager Digital claimed to hold
customers' U.S. dollar funds at an IDI. Voyager falsely represented
that customer funds held with Voyager were insured by the FDIC up to
$250,000 in the event of Voyager's failure, not just the failure of the
IDI where Voyager deposited customer funds.\10\ When Voyager declared
bankruptcy in July 2022, many customers were unable to access the funds
in their accounts for a period of time. This led to significant
uncertainty and frustration for consumers who were unable to access the
deposited funds, and underscored the importance of clear and accurate
disclosures to consumers regarding deposit insurance coverage.
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\10\ See FDIC Press Release 56-2022.
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In recent years, the FDIC has observed an increasing number of
instances where financial service providers, other entities, or
individuals have engaged in false advertising or made
misrepresentations about FDIC insurance coverage on the internet in
violation of section 18(a)(4) of the Federal Deposit Insurance Act (FDI
Act). For example, the FDIC has seen situations where companies in
relationships with IDIs (e.g., for the placement of customer deposits)
have made false statements on the companies' websites stating or
suggesting that the companies are FDIC-insured and/or that their
uninsured financial products are insured by the FDIC. In other
instances, companies have misused the FDIC logo or failed to identify
an IDI with which they have a relationship. These types of
misrepresentations and omissions would be false and misleading and have
potential to harm consumers.
Consequently, the FDIC has proactively sought to protect depositors
and consumers, promote public confidence in insured deposits, and
prevent false and misleading representations about the manner and
extent of FDIC deposit insurance. The FDIC has taken appropriate action
when it becomes aware of prohibited conduct. For example, the FDIC has
issued advisory letters pursuant to 12 CFR 328.106 in situations where
the FDIC had reason to believe that these non-IDI third parties may be
misusing an FDIC-Associated Image or FDIC-Associated Terms and/or
making false or misleading representations regarding FDIC deposit
insurance. In these actions, the FDIC requested appropriate corrective
action to be taken so that consumers are not misled as to the non-IDI's
insured status, or the extent or manner of deposit insurance offered to
them.
The FDIC has taken other steps to address concerns that parties are
misrepresenting the nature and extent of deposit insurance coverage. In
December 2023, the FDIC issued a final rule on FDIC Official Signs and
Advertising Requirements, False Advertising, Misrepresentation of
Insured Status, and Misuse of the FDIC's Name or Logo (FDIC Signs and
Misrepresentation Rule).\11\ This rule requires, among other things,
disclosures differentiating deposits and non-deposit products and
clarifies the FDIC's rules regarding misrepresentations of deposit
insurance coverage to address specific scenarios where information
provided to consumers may be misleading. For example, the rule
clarifies that if a non-
[[Page 80139]]
bank makes a statement regarding deposit insurance coverage, it is a
material omission by the non-bank to fail to clearly and conspicuously
disclose that it is not an IDI, and that FDIC insurance only covers the
failure of the IDI. The FDIC has continued to engage with IDIs and
others to help them understand their obligations under the FDIC Signs
and Misrepresentation Rule.\12\
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\11\ 89 FR 3504, 3516 (Jan. 18, 2024).
\12\ For example, the FDIC has held seminars for bankers on the
Sign and Misrepresentation Rule and has issued questions and answers
relating to the rule online. See https://www.fdic.gov/resources/deposit-insurance/questions-and-answers-related-to-the-fdics-part-328-final-rule.html.
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The FDIC maintains public facing portals on its website where the
public can submit questions or complaints to the FDIC about a number of
topics. One portal, the FDIC Information and Support Center, allows the
public to submit inquiries about deposit insurance coverage as well as
complaints and inquiries about IDIs. A second portal, the FDIC Deposit
Insurance Misrepresentation Form, provides an opportunity for the
public to submit a complaint or concern regarding potential false
statements about an entity or product claiming to be FDIC-insured or
making false statements or casting doubt on whether FDIC insurance
applies and is therefore paid in the event of an IDI failure.
In addition to communicating with IDIs and third parties regarding
their FDIC Signs and Misrepresentation Rule obligations, the FDIC also
conducts public outreach and education initiatives to promote public
awareness of deposit insurance, including the launch of a national
campaign entitled ``Know Your Risk. Protect Your Money.'' This
consumer-focused campaign informs consumers on how deposit insurance
protects their deposits in the event of an IDI's failure and features a
piggy bank known as ``Penny the Pig,'' aimed at reaching people who
have lower confidence in the U.S. banking system, the unbanked, and
consumers who use mobile payment systems, alternative banking services
and financial products that may appear to be FDIC-insured, but are
not.\13\
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\13\ See press release, ``FDIC Launches Public Campaign to Raise
Awareness About Deposit Insurance'' (Oct. 11, 2023).
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Another public education initiative is conducted through a
publication entitled FDIC Consumer News, which is a series of monthly
newsletters directed to the general public that provides practical
guidance on how to become a smarter, safer user of financial services
including helpful tips and common-sense strategies to protect consumer
money. Through the various consumer news articles, the FDIC addresses
consumer confusion related to digital banking, including regarding the
emergence and use of third-party, non-bank apps. Some recent examples
of the relevant articles include ``Banking with Third Party Apps'' (May
2024), which warns consumers of the risks in using non-bank companies
for financial services; ``Is My Money Insured by the FDIC?'' (July
2023), which reminds consumers that FDIC deposit insurance does not
apply if a non-bank company fails; ``The Importance of Deposit
Insurance and Understanding Your Coverage'' (August 2022), which lists
the top five things to know about deposit insurance coverage; ``Banking
with Apps'' (November 2022), which provides an overview of the
differences in deposit products offered by IDIs and non-bank companies;
and ``Is Digital Banking for Me?'' (April 2020), which offers key
considerations of using online and mobile banking technology. The FDIC
will continue to consider further measures to address consumer
confusion about deposit insurance coverage.
In addition, the FDIC and the other Federal banking agencies have
recently published a number of issuances to IDIs concerning the risks
involved in arrangements with non-bank third parties, including fintech
companies. As recently explained in the Federal banking agencies' Joint
Statement on Banks' Arrangements with Third Parties to Deliver Bank
Deposit Products and Services, ``the agencies have observed an
evolution and expansion of these arrangements to include more complex
arrangements that involve the reliance on third parties to deliver
deposit products and services.'' \14\ It also indicated that
``[d]epending on the structure, third-party arrangements for the
delivery of deposit products and services can involve elevated risk.''
The Federal banking agencies also recently published a Request for
Information soliciting input on the nature of bank-fintech
arrangements, effective risk management practices regarding bank-
fintech arrangements, and the implications of such arrangements,
including whether enhancements to existing supervisory guidance might
be helpful in addressing risk.\15\
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\14\ See FIL-45-2024 (July 25, 2024).
\15\ Id.
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An IDI's use of a non-bank third party to perform activities
related to its deposit-taking function does not diminish its
responsibility to conduct those activities in a manner consistent with
safe and sound practices and in compliance with applicable laws and
regulations, including, but not limited to, those designed to protect
consumers. As such, IDIs have also been subject to a number of consent
orders and other actions by the Federal banking agencies related to
these types of arrangements.
Need for Rulemaking
The FDIC neither prohibits nor discourages IDIs from providing
banking services to customers of any specific class or type, as
permitted by law or regulation. It has become apparent from the events
described above that IDIs' recordkeeping practices should be enhanced
with respect to certain custodial deposit account arrangements. The
FDIC believes it would be beneficial to address these issues in a
consistent manner across the industry through rulemaking, rather than
rely solely on the supervisory and enforcement processes.
The events that occurred following Synapse's bankruptcy demonstrate
the importance of strong recordkeeping practices in certain custodial
account relationships. The trustee and IDIs encountered significant
difficulties in obtaining, reviewing, and reconciling Synapse's records
against the IDIs' records. While none of the IDIs that had business
arrangements with Synapse have failed, the difficulties encountered by
the parties obtaining, reviewing, and reconciling Synapse's records
against the IDIs' records would likely also have hindered the FDIC's
ability to make a prompt and accurate deposit insurance determination
in the event one of the IDIs had failed. Depositors could have been
affected by delays in obtaining their insured deposits, depending on
the accuracy and completeness of account records and how long it would
have taken to gather and review records.
Looking beyond the case of Synapse, these types of arrangements
between IDIs and fintechs are becoming more prevalent in the market,
and the FDIC believes the increased complexity of certain custodial
deposit account arrangements warrants strengthened recordkeeping to
support a prompt payment of deposit insurance in the event of an IDI's
failure. Accurate and complete custodial deposit account records are
absolutely critical in the event of an IDI's failure to ensure that the
FDIC is able to make prompt and accurate payment of deposit insurance
for all insured depositors. Prompt payment of deposit insurance is
especially important where custodial deposit account arrangements are
used to support day-to-day financial needs. For example, many consumers
are increasingly choosing to open deposit
[[Page 80140]]
accounts through fintech companies, typically online or though mobile
apps. From a consumer's perspective, these fintechs offer financial
services through such accounts that may resemble IDI deposit accounts,
and consumers often rely on these accounts as substitutes for
traditional demand deposit accounts. Specifically, consumers use these
accounts to support the inflows and outflows of daily transactions and
expenses, such as making purchases and sending or receiving money,
including income.\16\ The transactional nature of these accounts,
including high volumes of per customer transfers and digital payments,
significantly increases the amount of activity compared to other types
of custodial deposit accounts.
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\16\ In addition, fintechs allow consumers to pay merchants and
transfer funds on their phones, often utilizing ``digital wallets''
that have credit and debit cards stored. With mobile technology,
consumers can use a single device to pay for goods or initiate
online payments faster and easier.
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A lack of accurate and complete custodial deposit account records,
as described in this proposal, would adversely affect the FDIC's
ability to make a prompt and accurate deposit insurance determinations,
and pay claims to depositors in the event of an IDI failure. In
addition, these circumstances have exposed potential risks for current
beneficial owners of deposits at IDIs, even in the absence of the
failure of an IDI. These issues create uncertainty that undermines the
confidence that underpins IDIs and our nation's broader financial
system.
II. Legal Authority
The FDIC is authorized to prescribe rules and regulations as it may
deem necessary to carry out the provisions of the FDI Act.\17\ The FDIC
has previously used this authority to issue regulations providing
specificity on deposit insurance coverage, including defining the
recognized ownership categories and how deposit insurance is
calculated. Under the FDI Act, the FDIC is responsible for paying
deposit insurance ``as soon as possible'' following the failure of an
IDI.\18\ To pay deposit insurance, the FDIC uses a failed IDI's records
to aggregate the amounts of all deposits that are maintained by a
depositor in the same right and capacity, and then applies the standard
maximum deposit insurance amount of $250,000.\19\
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\17\ 12 U.S.C. 1819(a)(Tenth), 1820(g), and 1821(d)(4)(B)(iv).
\18\ 12 U.S.C. 1821(f)(1).
\19\ 12 U.S.C. 1821(a)(1)(C) and (E).
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The FDIC generally relies upon a failed IDI's deposit account
records to identify deposit owners and the right and capacity in which
deposits are owned. In certain circumstances, if specific regulatory
requirements are satisfied, the FDIC will consider the records of the
depositor or another party when making a deposit insurance
determination.\20\
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\20\ See 12 CFR 330.5.
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III. The Proposed Rule
Overview
The proposed rule would establish new recordkeeping requirements
for IDIs with custodial deposit accounts with transactional features,
subject to a list of defined exemptions. If IDIs hold custodial deposit
accounts with transactional features that are subject to the rule, they
would be required to maintain records identifying the beneficial owners
of those deposits, the balance attributable to each beneficial owner,
and the ownership category in which the deposited funds are held. The
IDI could maintain those records itself or, if certain additional
requirements are satisfied, the IDI could maintain the records through
an arrangement with a third party (which could include a vendor,
processor, software or service provider, or a similar entity). The
proposed rule provides a specific electronic file format for records on
beneficial owners and their interests in the deposited funds. This
standardized format would enable the FDIC to more quickly gather and
use these records when a deposit insurance determination becomes
necessary.\21\
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\21\ Use of standardized file formats may also have other
benefits, such as simplifying the transition of recordkeeping if an
IDI seeks to end a relationship with a third party.
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For IDIs that choose to maintain the required records through a
contractual relationship with a third party, certain additional
requirements would need to be satisfied. These additional requirements
are intended to promote the integrity of records and ensure that the
IDI has continued access to the records. Among other things, the IDI
would be required to have direct, continuous, and unrestricted access
to the records of the beneficial owners, including in the event of the
business interruption, insolvency, or bankruptcy of the third party.
Reconciliation of these records would be required, as would periodic
validation of the third party's records by a person independent of the
third party.
The proposal also would require certain measures by IDIs to achieve
and maintain compliance with the rule. IDIs that hold custodial deposit
accounts with transactional features would be required to establish and
maintain written policies and procedures to achieve compliance with the
rule's requirements. IDIs would be required to complete an annual
certification of compliance, signed by the chief executive officer,
chief operating officer, or the highest-ranking official of the
institution, stating that the IDI has implemented and tested the
recordkeeping requirements. IDIs would further be required to complete
a report annually that (1) describes any material changes to their
information technology systems relevant to compliance with the rule;
(2) lists the account holders that maintain custodial deposit accounts
with transactional features, the total balance of those custodial
deposit accounts, and the total number of beneficial owners; (3) sets
forth the results of the institution's testing of its recordkeeping
requirements; and (4) provides the results of the required independent
validation of any records maintained by third parties. Both the
compliance certification and report would be submitted to the FDIC and
the IDI's primary Federal regulator.
Custodial Deposit Accounts With Transactional Features
The proposed rule's requirements would apply to IDIs that hold
``custodial deposit accounts with transactional features,'' other than
custodial deposit accounts specifically exempted by the rule as
described below. The term ``custodial deposit accounts with
transactional features'' would be defined as a deposit account that
meets three requirements: (1) the account is established for the
benefit of beneficial owner(s); (2) the account holds commingled
deposits of multiple beneficial owners; and (3) a beneficial owner may
authorize or direct a transfer through the account holder from the
account to a party other than the account holder or beneficial owner.
``Beneficial owner'' is defined as ``a person or entity that owns,
under applicable law, the funds in a custodial deposit account.'' \22\
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\22\ ``Beneficial owner'' as used in the proposed rule is
intended to mirror the meaning of beneficial owner as currently used
for deposit insurance coverage purposes under 12 CFR part 330.5. The
proposed rule does not intend to incorporate the meaning of
``beneficial owner'' as that term may be used for purposes of other
laws applicable to IDIs, such as the Bank Secrecy Act. The proposed
rule's definition of ``beneficial owner'' should not be confused
with other definitions of the same term, including that associated
with the Corporate Transparency Act or the Customer Due Diligence
rule, which relate to beneficial owners of legal entities, rather
than accounts.
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The proposal distinguishes a ``beneficial owner'' from an ``account
holder,'' with ``account holder'' defined
[[Page 80141]]
as ``the person or entity who opens or establishes a custodial deposit
account with transactional features with an insured depository
institution.'' This definition does not require that the ``account
holder'' is the titled owner of the account. For example, some
businesses establish accounts at IDIs for the benefit of their
customers, but the account is titled in the name of the IDI itself for
benefit of the business's customers. In such instances, the FDIC would
interpret the ``account holder'' under the proposed rule to be the
business that contracted with the IDI to establish the custodial
deposit account.
The proposed rule's scope is limited to custodial deposit accounts
with transactional features that hold deposits, meaning that other
types of custodial accounts, such as those holding non-deposit
securities, would be excluded.\23\ The proposed rule would apply to
custodial deposit accounts with transactional features, regardless of
the date a particular custodial deposit account was established.
Custodial deposit accounts with transactional features already in
existence would be subject to the proposed rule's requirements.
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\23\ The proposal defines ``deposit'' by reference to section
3(l) of the FDI Act, 12 U.S.C. 1813(l).
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As noted above, the definition of ``custodial deposit account with
transactional features'' includes, as one of its criteria, that a
beneficial owner may authorize or direct a transfer through the account
holder from the account to a party other than the account holder or
beneficial owner. By including this prong, the FDIC intends to apply
the proposed recordkeeping requirements only to custodial deposit
accounts that are established and used in a manner that allows
beneficial owners to direct a transfer of funds from the account to
another party--for example, to make purchases or pay bills.
The FDIC believes that, in some custodial deposit account
arrangements, IDIs allow the account holder to submit payment
instructions from beneficial owners to the IDI in order to make funds
transfers. Such custodial deposit accounts would fall within the scope
of the proposed rule and would be subject to its recordkeeping
requirements.\24\ If, on the other hand, the IDI only returns the funds
held in the custodial deposit account to the account holder or
beneficial owner, the account activity would not be ``transactional''
in the sense that term is used under the proposed rule.
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\24\ The proposed rule's definition is not limited to situations
where the transfer takes place directly from the custodial account.
If, for example, funds are routinely accomplished by transferring
funds from the custodial account to another account, and the
transfers to third parties are made from the second account, the
FDIC believes the first account would fall within the proposed
rule's scope.
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Exemptions
Where the FDIC believes its policy objectives would not be advanced
by the additional recordkeeping requirements, the proposal would
expressly exempt certain custodial deposit accounts from the new
recordkeeping requirements even if they have transaction features. The
proposal would accomplish this through a list of specific exemptions.
As discussed below, given the FDIC's experience in managing these
relationships, additional recordkeeping requirements for a number of
custodial deposit accounts would not be required even if they have
transactional features.
The proposed rule exempts from its scope custodial deposit accounts
that hold only trust deposits, as described in the FDIC's deposit
insurance regulations for trust accounts set forth at 12 CFR 330.10 and
330.12. These custodial deposit accounts are established in many cases
by a trustee that already has a duty under State law to maintain
records regarding the beneficial owners of the funds.
The proposal exempts from its recordkeeping requirements custodial
deposit accounts established at an IDI by government depositors. There
are a variety of circumstances in which government depositors establish
deposit accounts that hold funds for others, such as accounts
maintained for the payment of government benefits. In these cases, the
FDIC believes that the safeguards and controls imposed by statute and
regulation will generally be sufficient to ensure that accurate records
are available on a regular basis, including in the event of an IDI's
failure.
The proposal also would exempt custodial deposit accounts
established by brokers or dealers under the Securities and Exchange Act
of 1934, and investment advisers under the Investment Advisers Act of
1940. These entities are already subject to recordkeeping requirements
under Federal and State laws in addition to regulatory supervision, and
the FDIC believes these measures should generally mitigate the issues
addressed through this proposal.
The proposed rule exempts custodial deposit accounts established by
attorneys or law firms on behalf of clients, commonly known as interest
on lawyers trust accounts (IOLTA accounts). The FDIC recognizes that
attorneys and law firms maintaining IOLTA accounts are subject to
independent recordkeeping requirements under State law, and IOLTA
accounts generally would not be used for the sort of day-to-day
transactions that introduce significant complexity into a potential
deposit insurance determination in the event of an IDI's failure.
The proposal exempts custodial deposit accounts maintained in
connection with employee benefit plans and retirement plans, as
described in 12 CFR 330.14. These accounts could be maintained in the
name of a trustee or plan administrator and used for defined benefit
plans, defined contribution plans, and other employee benefit plans.
The FDIC believes that these accounts are subject to independent
recordkeeping requirements under Federal and State laws, and the
accounts are not used for transactions in a manner that would add to
the complexity of a potential deposit insurance determination.
The proposal would exempt accounts maintained by real estate
brokers, real estate agents, title companies, and qualified
intermediaries under the Internal Revenue Code. The FDIC believes these
accounts generally hold an owner's funds for a limited period of time
for the purposes of completing a specific real estate transaction.
Historically, these types of accounts have not presented significant
difficulty to the FDIC in making deposit insurance determinations in
the event of an IDI's failure.
The proposal exempts custodial deposit accounts maintained by a
mortgage servicer in a custodial or other fiduciary capacity. Mortgage
servicers are subject to recordkeeping requirements by other laws and
regulations, and funds are transferred from these deposit accounts on
predictable dates corresponding to contractual deadlines. For this
reason, the FDIC believes that the additional recordkeeping
requirements imposed by the proposed rule are unnecessary to achieve
its policy objectives.
The proposal exempts custodial deposit accounts where Federal or
State law prohibits the disclosure of the identities of the beneficial
owners of the deposits. The FDIC believes that such cases will be
relatively rare but does not intend to impose any recordkeeping
requirements through this proposal that directly conflict with other
legal requirements.
The proposal exempts from its scope accounts maintained pursuant to
an agreement to allocate or distribute deposits among participating
IDIs in a network for purposes other than payment transactions of
customers of the IDI or participating IDIs. Such
[[Page 80142]]
networks are often referred to as deposit placement networks or
reciprocal networks and are often administered by a firm that
coordinates the depositing of funds across a group of institutions to
ensure that no owner's funds at an individual IDI exceed the deposit
insurance limit. If the network only allows clients to deposit and
retrieve their funds from the network of IDIs, its activity should not
present difficulty in making a deposit insurance determination.
However, if the network purpose is to enable clients to make payment
transactions using funds in the custodial deposit account at the
network IDI(s), such as making purchases through a card network or
transferring funds to another individual, then the custodial deposit
accounts would not qualify for the exemption, and therefore would fall
within the scope of the proposed rule.
Finally, the proposal would exempt accounts holding security
deposits tied to property owners for a homeownership, condominium, or
other similar housing association governed by State law, and accounts
holding security deposits tied to residential or commercial leasehold
interests. The FDIC believes such entities are generally subject to
other recordkeeping requirements that would ensure that beneficial
owners' interests are available if necessary. Moreover, although such
custodial deposit accounts may exhibit some degree of transactional
activity, this is expected to be relatively limited in nature and
unlikely to present significant difficulty in making a deposit
insurance determination.
Recordkeeping Requirements and Data Formatting
In general, the proposed rule would require IDIs that hold any
custodial deposit accounts with transactional features subject to the
rule to maintain records establishing the beneficial owners of those
deposit accounts. These records would establish, for each custodial
deposit account, the beneficial owners of the custodial deposit
account, the balance attributable to each beneficial owner, and the
ownership category in which the beneficial owner holds the deposited
funds.
The proposed rule would provide a specific electronic file format
for maintenance of records on beneficial owners and their interests in
the deposited funds. This electronic file format is described in
appendix A to the proposed rule, which provides, for each of the
required fields: (1) the field's name; (2) a description of its
contents; (3) the data format for the field; and (4) whether a null
value is permitted for the field in the file. IDIs' records would be
required to include the information set forth in these fields for each
beneficial owner of the deposits in the custodial deposit account, with
one row in the file per beneficial owner. The specified data file
format would be required regardless of whether the IDI maintains the
necessary records itself or maintains those records through an
arrangement with a third party. The FDIC believes these records of
beneficial ownership would be useful to the IDI in the event of a
disruption affecting the account holder, as they would enable the IDI
to determine the identity of the owners of the funds it is holding on
deposit. Importantly, these records would also be useful to the FDIC in
the event of the IDI's failure, as they would enable a prompt payment
of deposit insurance.
Internal Controls
The proposed rule would require IDIs to maintain appropriate
internal controls that include (1) maintaining accurate deposit account
balances, including the respective individual beneficial ownership
interests associated with the custodial deposit account, and (2)
conducting reconciliations against the beneficial ownership records no
less frequently than at the close of business daily, with the
understanding that reconciling variances due to unposted transactions
and timing of transactions occurs and should be addressed based on
standard banking practices, which are sufficient to manage and resolve
such variances. Reconciliations compare multiple data elements and, if
differences are identified, actions are taken to bring the data
elements into agreement. The reconciliation requirement is intended to
address the completeness and accuracy of transaction processing.
Appropriate internal controls should be designed to consider multi-
layer relationships, where applicable, and the associated risks these
relationships may present related to recordkeeping. For example, such
controls may be appropriate where an account holder, such as an
intermediary, collects and places deposits on behalf of other firms,
which themselves collect deposits from individual depositors. The
internal control requirements of the proposed rule are intended to
enable the IDI to be able to accurately determine individual beneficial
ownership interests for deposits held in custodial deposit accounts,
and would expedite a deposit insurance determination in the event of
the IDI's failure.\25\
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\25\ Under appendix A to 12 CFR part 364, an IDI should have
internal controls appropriate to its size and the nature, scope, and
risk of its activities.
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Recordkeeping by Third Parties
The FDIC recognizes that many IDIs, including community banks,
regularly employ third parties such as vendors and technology service
providers to assist them in carrying out a variety of banking
functions. While the proposed rule generally would require that IDIs
maintain records of beneficial ownership for custodial deposit
accounts, it also would permit those records to be maintained by the
IDI through a third party if certain requirements are satisfied. The
rule mentions, as examples of third parties, vendors, software
providers, and service providers, and other similar entities that
regularly process deposit transaction data, but does not limit third
parties to these categories of entities. Third parties also could
include the account holder, for example, if the account holder
regularly maintains beneficial ownership records.
The IDI would be required to have direct, continuous, and
unrestricted access to records maintained by the third party in the
standardized file format described in appendix A to the proposed rule,
including access in the event of a business interruption, insolvency,
or bankruptcy of the third party. This could be accomplished, for
example, by the IDI and the third party implementing capabilities to
enable secure real-time exchange of data, where authorized IDI
personnel can access the records at any time.
The IDI also would be required to have continuity plans in place,
including backup recordkeeping for the required beneficial ownership
records and technical capabilities to ensure compliance with the
proposal's requirements. When developing a contingency plan, an IDI may
consider elements such as (1) storing copies of prior daily or weekly
account balances and beneficial ownership balances internally at the
IDI, or at another location independent of the third party; (2)
establishing legal authority and technological capability for the IDI
to access daily transaction records associated with the custodial
deposit account directly from payment networks, processors, or service
providers used by the third party; and (3) maintaining at the IDI
sufficient trained staff, technical systems, and other resources to
process transaction records necessary for the IDI to
[[Page 80143]]
reconcile and establish accurate records for ownership interests in the
custodial deposit account, in the event the third party is disrupted.
Like other risk management practices, contingency plans for different
IDIs would vary according to the scope and complexity of the businesses
and the nature of the third-party relationships.\26\
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\26\ For more discussion regarding risk management and
contingency planning in the context of third-party relationships,
see FDIC FIL-29-2023 ``Interagency Guidance on Third-Party
Relationships: Risk Management'' (June 6, 2023).
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In addition, records of beneficial ownership maintained by a third
party could only be used to satisfy the proposed rule's requirements if
the IDI implements appropriate internal controls to (1) accurately
determine the respective beneficial ownership interests associated with
the custodial deposit account with transactional features, and (2)
conduct reconciliations against the beneficial ownership records no
less frequently than as of the close of business daily, with the
understanding that reconciling variances due to unposted transactions
and timing of transactions occurs and should be addressed based on
standard banking practices, which are sufficient to manage and resolve
such variances. Appropriate internal controls should be designed to
consider multi-layer relationships, where applicable, and the
associated risks these relationships may present related to
recordkeeping. For example, such controls may be appropriate where an
account holder, such as an intermediary, collects and places deposits
on behalf of other firms, which themselves collect deposits from
individual depositors. This requirement is intended to address the
completeness and accuracy of transaction processing data maintained by
the third party.
Contractual Requirements
Where records are maintained by a third party, the IDI would be
required to have a direct contractual relationship with the third party
that includes certain risk mitigation measures. For example, the
contract between the IDI and the third party would need to clearly
define roles and responsibilities for recordkeeping, including
assigning to the IDI rights of the third party that are necessary to
access data held by other parties. The contract would need to include
an explicit provision requiring the third party to implement
appropriate internal controls to be able to accurately determine the
beneficial ownership interests represented in the custodial deposit
account and to conduct reconciliations against the beneficial ownership
records no less frequently than as of the close of business daily, with
the understanding that reconciling variances due to unposted
transactions and timing of transactions occurs and should be addressed
based on standard banking practices, which are sufficient to manage and
resolve such variances. Appropriate internal controls should be
designed to consider multi-layer relationships, where applicable, and
the associated risks these relationships may present related to
recordkeeping. For example, such controls may be appropriate where an
account holder, such as an intermediary, collects and places deposits
on behalf of other firms, which themselves collect deposits from
individual depositors.
In addition, the contract would need to provide for periodic
validations, by a person independent of the third party, to verify that
the third party is maintaining accurate and complete records and that
reconciliations are being performed consistent with the proposed rule's
recordkeeping requirement for beneficial ownership interests. If the
validation is performed by a party other than the IDI, the results must
be provided to the IDI. The proposed rule's approach of requiring an
independent, unbiased opinion or assessment and validation of a third
party's system of internal controls, operations, and compliance risk
management framework for maintaining accurate and complete records is
intended to proactively identify and address weaknesses. The
independent validation could be performed by the IDI itself. The
validation activities should be commensurate with the size, complexity,
and risk profile of the third party.
An IDI would not be permitted, through any contract or agreement,
to shift its responsibility for ensuring that the requirements of the
proposed rule are satisfied. The proposed rule also would not limit, in
any way, an IDI's ability to include further risk mitigation measures
in contracts with third parties, and IDIs would be encouraged to
include additional measures as they deem appropriate.
Effect on Other Recordkeeping Requirements
The proposed rule would not supersede or modify any requirements
imposed by statute or regulation. For example, where IDIs are required
to gather and maintain specific information about their customers under
the Bank Secrecy Act and its implementing regulations, satisfying the
proposed rule's recordkeeping requirements would not necessarily
satisfy the IDI's obligation under the Bank Secrecy Act. Similarly, the
fact that a custodial deposit account with transactional features
qualifies for an exemption from the proposed rule's recordkeeping
requirements would not exempt the account or the IDI from any other
recordkeeping requirements imposed by law or regulation. Nothing in the
proposed rule would prohibit or limit additional recordkeeping or
reconciliation efforts by IDIs with respect to particular custodial
deposit accounts with transactional features, and IDIs would be
encouraged to consider such measures as they deem appropriate.
Compliance Measures
An IDI that holds custodial deposit accounts within the scope of
the proposed rule would be required to establish and maintain written
policies and procedures to achieve compliance with the proposed rule's
requirements. To the extent an IDI maintains the relevant records
through a third party, these policies and procedures would also need to
address achieving compliance with the requirements specific to
maintaining records through a third party. The policies and procedures
requirement is intended to promote an appropriate level of due
diligence on the part of IDIs that maintain custodial deposit accounts
with transactional features within the scope of the rule.
The proposed rule would enhance compliance by implementing an
annual certification and reporting process for IDIs holding custodial
deposit accounts with transactional features that are subject to the
rule's requirements. The chief executive officer, chief operating
officer, or the highest ranking official of an IDI would be required to
annually certify that the IDI (1) implemented the proposed
recordkeeping requirements for the covered custodian accounts; (2)
tested the implementation of the recordkeeping requirements within the
preceding 12 months; and (3) is in compliance with all requirements of
the proposed rule at the time of the annual certification. The
certification would be required regardless of whether the records are
maintained by the IDI itself or through a third party. The
certification would be required within 1 year of the effective date of
the final rule and annually thereafter, and submitted to both the FDIC
and the IDI's primary Federal regulator.
In addition to the annual certification of compliance, an IDI would
be required to prepare an annual report containing (1) a description of
any material changes to the IDI's information technology
[[Page 80144]]
systems since the prior annual report that are relevant to the
requirements of the proposed rule; (2) a list of the account holders
that maintain custodial deposit accounts with transactional features
subject to the rule, as well as the total balance of those custodial
deposit accounts, and the total number of beneficial owners; (3) the
results of the IDI's testing of its implementation of the recordkeeping
requirements; and (4) the results of any independent validation of
records maintained by third parties as required by the proposed rule
and discussed above. The report would be required within 1 year of the
effective date of the final rule and annually thereafter, and submitted
to both the FDIC and the IDI's primary Federal regulator.
If an IDI experiences a significant change in its deposit-taking
operations, or the FDIC or the IDI's primary Federal regulator
identifies aspects of the institution's operations that pose elevated
risks of compliance with proposed 12 CFR part 375, the proposed rule
provides that the FDIC or the IDI's primary Federal regulator may
require that the IDI file the certification and report required by this
section more frequently than annually, as requested.
Violations and Enforcement
As discussed above, the proposed rule would impose recordkeeping
requirements with respect to certain custodial deposit accounts at
IDIs. If an IDI does not satisfy the proposed rule's requirements, the
violation could be addressed through the supervisory process, including
examinations and in appropriate cases, through enforcement actions. In
addition, certain circumstances may implicate misrepresentations of
deposit insurance, which are covered under section 18(a)(4) of the FDI
Act. The FDIC carries out its enforcement authorities primarily through
section 8 of the FDI Act, which may include cease-and-desist orders and
civil money penalties.
Relation to Existing Recordkeeping and Data Standard Requirements
The FDIC has previously issued regulations that include
recordkeeping and data standard requirements to support timely
determinations of deposit insurance coverage at IDIs. For example,
Sec. 360.9 of the FDIC's regulations includes data standards that
apply to IDIs with at least 250,000 deposit accounts or $20 billion in
assets. In addition, 12 CFR part 370 of the FDIC's regulations requires
IDIs with more than 2 million deposit accounts to implement certain
recordkeeping capabilities to calculate deposit insurance coverage in
the event of the IDI's failure. These requirements are generally
intended to address scenarios where the size of an IDI hinders the
FDIC's ability to make a timely determination of deposit insurance.
The proposed rule, by contrast, is intended to address the
difficulties that a particular set of deposit accounts--custodial
deposit accounts with transactional features--present for the FDIC in
making a deposit insurance determination, regardless of the size of the
IDI holding the deposits. As noted above, custodial deposit accounts
with transactional features present difficulties in making a timely and
accurate deposit insurance determination due to their nature and usage.
The FDIC believes many IDIs that fall below the size thresholds for
Sec. 360.9 and 12 CFR part 370 hold custodial deposit accounts with
transactional features that would complicate a deposit insurance
determination. Moreover, to the extent that recordkeeping on beneficial
owners is performed by third parties rather than IDIs, the proposed
rule includes measures intended to address the integrity and
availability of third parties' records. Institutions subject to 12 CFR
part 370 are not necessarily required to maintain records on the
beneficial owners of deposits, and 12 CFR part 370 specifically
contemplates that the FDIC may need to reach out in the event of the
IDI's failure to obtain these records from third parties. As explained
above, however, the FDIC believes that for custodial deposit accounts
with transactional features it is critical that the IDI either maintain
the records of beneficial owners of deposits or have continuous access
to those records. In these respects, the proposed rule complements the
requirements of Sec. 360.9 and 12 CFR part 370 in promoting a timely
deposit insurance determination by the FDIC. While the problems that
the proposed rule is intended to address differ from those addressed by
12 CFR part 370, the FDIC nevertheless acknowledges that in a narrow
set of circumstances, the benefits of 12 CFR part 370 may coincide with
those of the proposed rule. With that in mind, the FDIC will continue
to consider whether any amendments or modifications to 12 CFR part 370
are warranted.
IV. Expected Effects
The FDIC has considered the expected effects of the proposed rule
on IDIs, consumers, the banking industry, and the U.S. economy. The
proposed rule, if promulgated, would require IDIs with custodial
deposit accounts that have transactional features to maintain records
for such accounts in a format prescribed by the FDIC. This requirement
would likely impose costs on all IDIs and particularly IDIs that hold,
or plan to hold, significant amounts of insured deposits in these
custodial deposit accounts. These costs may be shared with the account
holders and beneficial owners of the custodial deposit accounts. The
proposed rule would pose several benefits including (1) prompt and
accurate determination of beneficial owners' deposit insurance coverage
in the event of a failure of an IDI with custodial deposit accounts
covered by the proposal, and (2) prompt determination of beneficial
ownership in the event of a failure of an account holder. These
outcomes would reduce the likelihood of a disruption to beneficial
owners' access to their funds in the event of an IDI's or account
holder's failure, reduce operational risk for IDIs, increase the
stability of funds in custodial deposit accounts, and support consumer
confidence in the banking system and financial services industry.
Additionally, the FDIC believes the proposal could indirectly support
growth in IDIs' partnering with non-bank companies to offer financial
products through the proposal's standardization of enhanced
recordkeeping and positive effect on consumer confidence.
Scope
The baseline for this analysis includes all statutes, regulations,
and guidance applicable to IDIs, as well as all open and operating
IDIs, as of March 31, 2024. The FDIC insures 4,577 IDIs as of March 31,
2024.\27\ The proposed rule would apply to all IDIs with custodial
deposit accounts that are not explicitly exempt from the rule.\28\ The
FDIC does not have the data available to estimate the number of IDIs
that currently have or would potentially have custodial deposit
accounts subject to the rule. However, as discussed in section I of
this document, custodial deposit accounts have been a fixture of the
U.S. banking system for decades and used widely throughout the
industry; therefore, the FDIC believes that all IDIs would, at a
minimum, review the nature of their relationships with non-bank
companies to determine whether these non-bank companies have custodial
deposit accounts at the IDI that fall under the scope of the proposed
rule. In addition, the proposed rule would
[[Page 80145]]
change the costs and benefits of accepting and maintaining custodial
deposit account relationships with non-bank companies, which may affect
the number of IDIs entering into such relationships in future periods.
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\27\ Call Report for the period ending March 31, 2024.
\28\ Exemptions are listed at proposed 12 CFR 375.3(e).
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IDIs with custodial deposit accounts covered by the proposed rule
would be required to maintain records of beneficial ownership for each
custodial deposit account. The FDIC does not have the data to
accurately estimate the number of these IDIs. To assess the number of
IDIs potentially affected the FDIC identified the number of IDIs who
reported positive or non-zero values for non-managed custody and
safekeeping accounts or brokered deposits, excluding brokered
reciprocal deposits.\29\ The FDIC acknowledges that deposits obtained
through third-party partnerships may or may not be reported in these
items. According to a 2023 analyst report, as many as 24 percent of
IDIs during the fourth quarter of 2022 indicated that they are either
currently in a partnership with one or more non-bank companies, or may
potentially form such a partnership in the near future, that could
involve custodial deposit accounts covered by the proposal.\30\ The
FDIC acknowledges that the prevalence of IDI-non-bank company
partnerships that involve custodial deposit accounts subject to the
proposed rule may be higher or lower than this information indicates.
However, the FDIC believes that the information on the prevalence of
IDI-non-bank company partnerships, coupled with the data on the volume
of relevant deposit types, implies a range that likely captures the
volume of covered IDIs. For purposes of this analysis, the FDIC
estimates that between 600 and 1,100 IDIs (or between 13 and 24 percent
of the current population of 4,577 IDIs) would have custodial deposit
accounts covered by the proposed rule and therefore would be directly
and immediately affected.\31\ The FDIC notes that the number of
affected IDIs may be reduced by the ten account driven exemptions
included in the proposed rule. The FDIC does not have data to estimate
how many IDIs would be excluded due to these exemptions.
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\29\ Over 2,000 IDIs report a non-zero amount of brokered
deposits and reciprocal deposits from Call Reports for the period
ending March 31, 2024. Over 600 IDIs report a positive number of
non-managed custody and safekeeping accounts from Call Report
Schedule RC-T, Fiduciary and Related Services, line item 11 for the
period ending December 31, 2023. Not all institutions are required
to report fiduciary and related assets held in custody and
safekeeping accounts in this line item, and some are required to
report for the December reporting period only. Only accounts for
which the IDI serves as the fiduciary are generally reported in this
item.
\30\ Shevlin, Ron. ``What's going on in Banking 2023,''
Cornerstone Advisors, https://www.crnrstone.com/whats-going-on-in-banking-2023, as accessed August 1, 2024.
\31\ 1,100 IDIs [ap] 24 percent * 4577 IDIs.
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As previously discussed, the proposed rule may affect account
holders or other non-bank entities, who may have to keep records or
provide information to partner IDIs. In particular, these non-bank
entities may have to provide information on beneficial owners and their
interests in the deposited funds held in custodial deposit accounts.
Further, to the extent that covered IDIs elect to comply with the
proposed rule by maintaining the records through a contractual
relationship with a third party, non-bank entities may be required to
keep additional records to ensure that the IDI has continued access to
the records. The FDIC does not have data on the exact number of non-
bank entities that would be affected. Some data suggest that most IDIs
partner with two fintechs.\32\
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\32\ Ibid, page 41.
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In addition, the proposed rule would impact consumers whose
deposits are held in custodial deposit accounts that are not exempt
from the proposed rule. The remainder of the Expected Effects section
of this document discusses the proposed rule's effects on covered IDIs,
consumers, and non-bank entities.
Costs
As mentioned above, the FDIC estimates that between 600 and 1,100
IDIs would be directly and immediately affected by the proposed rule,
if it were adopted. Specifically, IDIs with custodial deposit accounts
that are not exempt from the proposed rule would be required,
themselves or through a third party, to maintain records of beneficial
ownership in the data format and layout specified in 12 CFR part 375,
appendices A and B, for each custodial deposit account. In addition,
these IDIs would be required to reconcile records for their custodial
deposit accounts as of the end of each day in order to determine the
respective individual beneficial ownership interests associated with
the custodial deposit account and the reconciliation of such interests
to the funds on deposit in the custodial deposit account. The FDIC
believes it is likely that many IDIs currently engage in some form of
reconciliation and maintain certain amounts of records in order to
maintain custodial accounts. However, the FDIC believes it is unlikely
that IDIs currently have all the records necessary to meet all the
proposed rule's requirements. As such, IDIs would have to arrange to
have the data transmitted to them from account holders and develop a
recordkeeping system for maintaining those data. These arrangements may
include revisions to IDIs' existing platform or core processing
systems, as well as the development of data interface systems. Further,
the proposed rule would require covered entities to incur costs
associated with conducting, testing, and validating the daily
reconciliation of records at the IDI. The FDIC also recognizes that the
costs of these actions will vary by IDI based on the size, scope, and
complexity of the IDI's custodial deposit accounts, as well as the
capability and efficiency of the IDI's current system for managing
deposit account data. The FDIC does not have data on the costs of these
actions. For purposes of this analysis, the FDIC assumes that it would
take IDIs and partner non-bank entities approximately 2,200 hours, on
average, per IDI to set up, and approximately 1,100 hours, on average,
per IDI per year to maintain, such a system.\33\ At an assumed labor
compensation rate of $100 per hour,\34\ the FDIC estimates that these
tasks would cost each IDI, on average, approximately $220,000 for the
first year and $110,000 for each subsequent year after the proposed
rule is enacted. The proposed rule would allow IDIs to arrange to have
the data maintained through a third party--this analysis assumes that
each IDI would choose the latter if it were more cost effective.\35\
For purposes of estimating the total cost to the industry, this
analysis assumes all affected IDIs would incur the estimated average
cost of developing an internal recordkeeping system. Assuming up to
[[Page 80146]]
1,100 IDIs are affected, the FDIC estimates that the proposed rule
would impose a cost upwards of approximately $250 million on affected
IDIs and their partner non-bank entities in the first year that the
proposed rule is enacted and approximately $120 million in each
subsequent year thereafter. These estimates may be lower if IDIs'
existing systems are capable of maintaining beneficial ownership
information as well as conducting daily reconciliations, as outlined in
the proposed rule. Not every IDI will incur the same compliance costs.
IDIs which do not currently retain beneficial ownership information nor
reconcile their accounts or those with greater complexity in their
business lines, accounts and operations would be expected to incur
above-average compliance costs.
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\33\ These labor cost estimates are assumed to cover the labor
costs for both the IDI and its partner non-bank entities. The FDIC
does not have the data to estimate the proportion of labor costs
borne by the IDI or its partner non-bank entity(ies).
\34\ Compensation rates for the applicable labor categories
range from $39 per hour for clerical workers to $181 per hour for
lawyers, based on the 75th percentile hourly wages reported by the
Bureau of Labor Statistics and adjusted for non-wage compensation
and inflation to March 2024. Source: Bureau of Labor Statistics:
``National Industry-Specific Occupational Employment and Wage
Estimates: Industry: Credit Intermediation and Related Activities
(5221 And 5223 only)'' (May 2023), Employer Cost of Employee
Compensation (March 2023), and Employment Cost Index (March 2023 and
March 2024).
\35\ Proposed 12 CFR 375.3(c) would allow IDIs to arrange for a
third party to assist the IDI in its recordkeeping, as long as this
arrangement meets additional requirements to ensure that the IDI is
able to comply with the proposed rule. The FDIC acknowledges that
the cost of such an arrangement would vary across IDIs and may
depend on the size, scope, and complexity of the IDI's custodial
accounts as well as the capability and efficiency of the third
party's information management system. For purposes of this
analysis, the FDIC assumes that the IDI would form such an
arrangement if it were more cost effective.
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IDIs affected by the proposed rule would also be required to
establish and maintain written policies and procedures to achieve
compliance with the proposed rule. These IDIs would also be required
to, on an annual basis, test the recordkeeping system required by the
proposed rule, independently validate certain records maintained by
third parties, document these actions in a report, and include in its
records a certification of compliance with the proposed rule.\36\ Non-
bank entities that partner with affected IDIs may incur costs
associated with IDIs' compliance with the aforementioned requirements.
The FDIC lacks the data necessary to quantify these costs, however it
believes they would be modest compared to the costs of implementing and
maintaining the recordkeeping system described above.
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\36\ Proposed 12 CFR 375.4.
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The proposed rule would also likely result in added costs, other
than those described above, on custodial deposit account holders. Such
non-bank companies may need to revise their internal systems, policies,
or procedures, and potentially adjust their business arrangements with
covered IDIs, in order to accommodate the proposed rule's requirements
on covered IDIs. The FDIC does not believe that the proposed rule would
impose material data collection costs on these non-banks, because the
data required by the proposed rule would likely already be collected
and maintained by the account holder in the ordinary course of
business. As discussed above, the account holder or non-bank entity may
share in the costs of developing and maintaining the systems required
for the transmission of data. The FDIC does not have the data necessary
to quantify this cost, but believes that these costs would be modest,
given that the IDI and account holder would likely already have systems
in place for the account holder to access its custodial deposit
accounts.
As discussed in the previous Scope section of this document, the
costs of the proposed rule may affect IDIs' and non-bank entities'
decisions to enter into or maintain custodial deposit account
relationships covered by the rule. Further, the proposed rule may
increase or decrease the count or dollar volume of covered custodial
deposit accounts held by IDIs. The FDIC does not have data to estimate
the effects of the rule on the volume and usage of covered custodial
deposit accounts.
To the extent that IDIs and non-bank entities pass the costs of
complying with these requirements onto their customers through lower
interest rates or higher fees, consumers could also bear some costs.
Benefits
A direct benefit of the proposed rule would be a reduction in the
likelihood and duration of a disruption to consumers' access of their
funds held in covered custodial deposit accounts, whether such
disruption is because of an IDI failure, or failure or operational
disruption experienced by an account holder. The proposal would benefit
customers by requiring that records be maintained in a standard format
identifying customers and their balances and by requiring
reconciliation between the records of IDIs and their associated non-
bank entities. The required records and reconciliation would allow
customers to have uninterrupted or near-uninterrupted access to their
underlying funds in the event of an IDI failure, or failure or
operational disruption of an associated non-bank entity. As discussed
in the context of the Synapse bankruptcy, there can be significant
differences in information on beneficial owners and their interests in
the deposited funds held in custodial deposit accounts at an IDI
between the IDI and its partner non-bank entity. These differences can
result in disruption to customers' access to funds in the event of a
failure of the IDI or non-bank entity. Nearly half of all households
use a fintech product with bank account-like features; therefore, as
illustrated by the failure of Synapse, the potential benefits of
avoiding consumer harm associated with disrupted access to funds, in
concert with the frequent usage of such custodial deposit accounts at
IDIs, are likely to be substantial.
Another direct benefit of the proposed rule would be prompt and
accurate determination of beneficial owners' deposit insurance coverage
in the event of a failure of an IDI with custodial deposit accounts
covered by the proposal. As discussed above, records of custodial
deposit account balances at IDIs can differ substantially from those at
their partner non-bank entities. In the event of a failure of an IDI,
such substantial differences can result in delays in determining the
insured status of depositors as well as losses to the Deposit Insurance
Fund (DIF). The increased accuracy of data on custodial deposit
accounts provided by the proposed rule would prevent or mitigate such
losses in the event of a failure of an IDI. The detailed account
information would also facilitate the FDIC's resolution of the failed
IDI, reduce the cost of the failure of the IDI, and ensure prompt
determination of insured status, allowing the FDIC to meet its
statutory mandate under the FDI Act to provide beneficial owners their
insured deposits ``as soon as possible'' and at the lowest resolution
cost.\37\
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\37\ See 12 U.S.C. 1821(f).
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The FDIC believes one of the indirect benefits of the proposed rule
would be to reduce operational risk to IDIs and account holders. The
proposed rule's requirement of daily reconciliation of records at the
IDI would prevent or mitigate discrepancies in beneficial owners'
account balances between the IDI and the account holder. In cases where
the account holder has multiple partner IDIs, the daily reconciliation
would also prevent or mitigate inaccurate recordkeeping at the account
holder from spreading to IDIs--a mismatch in account balances between
the account holder and a partner IDI could be resolved before the
underlying issue causes mismatches at other of the account holder's
partner IDIs.
The reduction in operational risk at affected IDIs and their
partner non-bank entities could be partially offset by an increase in
operational risk due to the additional operations required to comply
with the proposed rule.
The FDIC believes the proposed rule would reduce the reputational
risk to covered IDIs and non-bank entities. A (temporary) loss of
access to their funds could conceivably reduce confidence among
depositors of an IDI affected by a bankruptcy of a non-bank entity for
which it provides custodial deposit accounts or operational disruption.
By preventing or mitigating such disruptions, the proposed rule would
bolster consumer confidence in non-bank companies providing such
services and their partner IDIs. This bolstered confidence could
increase the potential
[[Page 80147]]
customer base of certain affected non-bank companies, as well as the
amount of funds consumers feel comfortable depositing with IDIs through
such entities. Finally, to the extent that an IDI affected by the
bankruptcy or operational disruption of a non-bank company cannot
determine beneficial ownership in a timely manner, it might reduce
confidence among owners of all deposit classes at the IDI. This loss in
confidence could lead to the rapid withdrawal of demand deposits or
short-term funding. The proposed rule would reduce the likelihood, and
mitigate the effects, of such a crisis of confidence by providing
consumers continued access to their funds. While the FDIC does not have
the data to quantify these benefits, they could potentially be material
for covered IDIs and account holders.
The FDIC believes another indirect benefit of the proposal would
result from the proposed rule's standardization of enhanced
recordkeeping requirements for custodial deposit accounts. This benefit
could affect both IDIs with covered custodial deposit accounts and IDIs
that may wish to form partnerships with non-bank companies where such
partnerships may lead to the creation of custodial deposit accounts.
Adoption of standardized recordkeeping would reduce the IDI's costs of
partnering with additional non-banks, and vice versa, since such a
partnership would not require the development of a bespoke information
management system for affected custodial deposit accounts. Once the IDI
implements the deposit information management system required by the
proposed rule, that system could potentially be used to manage
custodial deposit accounts from multiple account holders, thereby
reducing the average cost for the IDI.
Distributional Effects
Under the proposed rule, all IDIs that hold or plan to hold
custodial deposit accounts with transactional features will be subject
to the proposed requirements. To the extent that smaller IDIs are more
likely to have accounts subject to the proposed rule, or have larger
volumes of transactions move through such accounts relative to their
assets, smaller IDIs will bear higher costs as a share of their assets
than larger IDIs. In addition, smaller IDIs' existing recordkeeping
systems may be less sophisticated than the systems at larger IDIs.
Thus, the fixed costs of setting up new internal recordkeeping systems
or enhancing existing systems in order to comply with the proposed rule
may also be higher as a share of their assets for smaller IDIs. To the
extent that these smaller IDIs are more likely to contract with third-
party service providers to manage their deposit information system and/
or general ledgers, these smaller IDIs would be more likely to increase
the scope of their existing contracts, rather than build a system from
scratch, to comply with the proposed rule. For these reasons, the FDIC
expects smaller IDIs would more likely opt for third-party arrangements
and pass those costs onto their account holders.
While smaller IDIs may bear a higher burden, relative to their
assets, to comply with the proposed rule, they would also receive a
disproportionately higher share of the benefits. Smaller IDIs, with
their smaller capital or liquidity reserves, would not have as much
capacity as larger IDIs to withstand the operational stress or
reputational damage caused by an event such as the Synapse failure, as
well as the deposit flight that may follow. As such, a mitigation or
prevention of such an event would greatly benefit those smaller IDIs.
Summary
The FDIC does not have sufficient information available to quantify
the potential benefits of the proposed rule because the benefits depend
on the probability, breadth, and severity of future failures of an IDI
or account holder. The FDIC also lacks sufficient data on the number of
IDIs and non-bank entities affected, the scope of custodial deposit
accounts covered, and the current capabilities of affected IDI's data
information management systems to accurately estimate the costs of the
proposed rule. These data limitations notwithstanding, the discussion
above describes the clear, material, and prudential benefits that the
prevention or mitigation of an event similar to the recent failure of
Synapse would provide to IDIs that partner with fintechs and other
third parties, as well as the financial industry as a whole.
V. Alternatives
The FDIC considered three alternatives to the proposed rule. First,
the FDIC considered the status quo alternative. Second, the FDIC
considered issuing a proposal in which certain custodial deposit
accounts would be covered based on whether activity in the account met
or exceeded certain thresholds, such as transaction volume. Third, the
FDIC considered a proposal covering all custodial deposit accounts.
However, the FDIC believes the proposed rule is preferable to each of
the alternatives for the reasons discussed below.
One alternative the FDIC considered was the status quo. However, as
discussed above, the recent bankruptcy of Synapse left many businesses
and customers without access to millions of dollars of their funds.
Such disruptions caused some customers of Synapse's fintech partners to
question the insured status of their funds that were advertised as
FDIC-insured. Some of the effects of this event have yet to be
resolved, even months after Synapse's bankruptcy. The disruption of
account access in the aftermath of Synapse's bankruptcy has shown that
IDIs currently do not have the necessary data to provide access to
funds in the status quo. The FDIC believes that the proposed rule would
provide data to enable IDIs to provide ready access to funds. In
addition, the proposed rule's recordkeeping requirements would enhance
the FDIC's ability to achieve its statutory obligation to pay deposit
insurance as soon as possible in the event an IDI fails by having
information about the beneficial owners of custodial deposit accounts
in the banks' records.
The second alternative the FDIC considered was to propose
recordkeeping requirements be applied only to those custodial deposit
accounts where the transaction volume and/or dollar volume of activity
over a certain period met particular thresholds. However, the FDIC
believes that, by using thresholds, the FDIC could potentially treat
otherwise similarly situated depositors differently in the event of an
IDI failure if one depositor's funds were in a custodial deposit
account that did not meet the thresholds to be covered by the proposal
while another's did meet the thresholds. For example, some financial
technology products or intermediaries working on behalf of financial
technology companies may deposit end-user funds across multiple
custodial deposit accounts at a single IDI, while others may deposit
funds from multiple end-users into a single custodial deposit account,
and others may spread funds across more than one IDI. The FDIC felt
that the straightforward approach, as provided in the proposed rule,
would be to apply the requirements to all custodial deposit accounts,
and exempt accounts that are not necessary to further the policy
objectives of the proposed rule.
Finally, the FDIC considered an alternative with fewer exemptions
that would have applied, if adopted, to many arrangements involving
custodial deposit accounts. Although this alternative would have had
exemptions
[[Page 80148]]
for accounts established by or on behalf of brokers, dealers, and
investment advisers as defined in the Securities and Exchange Act of
1934 and the Investment Advisers Act of 1940, the FDIC nevertheless
believed the alternative could result in large costs for non-bank
entities with certain sweep deposit, reciprocal deposit, and brokered
deposit arrangements. The FDIC believes that these arrangements are
dissimilar to the custodial deposit account arrangements involved the
Synapse bankruptcy and would not pose the same heightened risk. The
FDIC believes that the set of exemptions provided in the proposed rule
would allow the FDIC to achieve its policy objectives, as discussed
above, with less burden on IDIs and nonbank financial entities.
VI. Request for Comment
The FDIC invites comments on all aspects of this proposal. In
particular, the FDIC requests comment on the following:
Custodial Deposit Accounts With Transactional Features
The proposed definition of ``custodial deposit account
with transactional features'' generally relies on three elements: (1)
the account is established for the benefit of beneficial owners; (2)
the account contains commingled deposits of multiple beneficial owners;
and (3) the beneficial owners may authorize or direct a transfer from
the custodial deposit account to a party other than the account holder
or beneficial owner. The FDIC believes this definition would include
the types of custodial deposit accounts that would present significant
complexity in a deposit insurance determination. Should the FDIC
consider alternative approaches to defining the ``custodial deposit
accounts with transactional features'' that would generally be subject
to the proposed rule?
Should the rule's recordkeeping requirements instead apply
to all custodial deposit accounts, not only to those with
``transactional features'' as described in the proposed rule? Why and
what would be the benefits or challenges of applying the requirements
to all custodial deposit accounts?
Are there any other types of deposit accounts that should
be included in the scope of the proposed rule? If so, why should they
be addressed by the proposal?
Are custodial deposit account arrangements becoming more
complex in the industry to the point where it would not be clear who is
an account holder in the case of an IDI's failure? If so, how can the
proposal better add clarity to support the FDIC's policy objectives?
Should there be a minimum threshold for applying the
requirements of the rule? If so, what metric, and what threshold? For
example, should an IDI only be subject to the rule if its number of
unique beneficial owners with custodial deposit accounts with
transaction features exceeds a certain threshold? If so, what should
the minimum threshold be and why?
Exemptions
Are there other categories of custodial deposit accounts
with transactional features that should be expressly exempted from the
proposed rule's recordkeeping requirements? If so, why should they be
exempt, and what factors would tend to ensure that complete and
accurate records of the beneficial owners of the deposits are readily
available for the FDIC in the event of the failure of an IDI holding
such custodial deposit accounts?
The proposal would exempt custodial deposit accounts
established by or on behalf of one or more brokers or dealers under the
Securities and Exchange Act of 1934, and investment advisers under the
Investment Advisers Act of 1940. Although these entities are already
subject to recordkeeping requirements under Federal and State laws in
addition to regulatory supervision, given the risks described in this
proposal, should these entities entirely be exempted from the
proposal's requirements? Are there circumstances where some brokers or
dealers or related accounts should not be exempted from the proposal to
ensure that the proposal's policy objectives are being satisfied? If
so, why and how should this exemption be revised?
Are there other categories of custodial deposit accounts
with transactional features that should be revised or narrowed? If so,
why and how should the exemption(s) be revised?
Recordkeeping Requirements
What feedback or additional considerations should be
included in the proposed rule in the situation where an IDI maintains
records of beneficial ownership itself?
Should the FDIC consider any additional measures where an
IDI intends to rely on a third party for keeping the records required
by the proposed rule? Should the rule specifically address scenarios
where a third party is subject to examination under the Bank Service
Company Act?
What additional detail might be useful to IDIs in
understanding the provisions of the proposed rule addressing
reconciliations?
What are obstacles that would prevent an IDI from being
able to reconcile records daily as required by the proposed rule? Could
those obstacles be addressed? If not, are there alternative measures
that could be used to satisfy the FDIC's policy objectives of ensuring
that IDIs have access to complete and accurate records of beneficial
ownership of deposits on a daily basis?
Are there any challenges to an IDI's abilities to align
its internal records with those of the non-bank third party which whom
the IDI has a business relationship? How have IDIs addressed these
challenges?
Are there legal or other obstacles the FDIC should be
aware of with respect to meeting the proposed contractual requirements,
where an IDI intends to rely on one or more third parties to maintain
the records required by the rule?
Should the rule specify a set of elements that would be
required, at a minimum, as part of a contingency plan to address
disruptions with respect to a third party that maintains records for
custodial deposit accounts?
Are there aspects of 12 CFR part 370 or Sec. 360.9 that
the FDIC should give additional consideration to for purposes of this
rulemaking?
Compliance Provisions
The proposed rule would require IDIs to maintain written
policies and procedures to achieve compliance. Are there any additional
or specific criteria, factors, or situations that these policies and
procedures should be required to address?
The chief executive officer, chief operating officer, or
the highest ranking official of an insured depository institution
holding custodial deposit accounts with transactional features that are
not specifically exempt from the proposal would be required to sign a
certification attesting to the accuracy of the certification. Has the
proposal identified the appropriate level of the official at an insured
depository institution who should sign the certification? If not, which
official(s) should sign a certification for the purposes of achieving
the stated goals of the proposal?
Should the compliance report and certification address any
additional items, beyond those enumerated in the proposed rule?
[[Page 80149]]
Given the proposal's annual certification and reporting
requirements, please provide any feedback on what the potential format,
structure, or content of materials should be for the purposes of
complying with these requirements.
What system, process or mechanism should be used to
transmit such information to the FDIC and the appropriate federal
banking agency?
Given the recordkeeping, internal control, and compliance
requirements addressed in the proposal, how long would it take to
revise systems, processes, and contracts for the purposes of complying
with a rule? What would be a reasonable amount of time to achieve
compliance with the rule, and why?
Expected Effects
Would the proposed rule have any costs, benefits, or other
effects that the FDIC has not identified?
Alternatives
Are there other recordkeeping requirements or approaches
that are not reflected in the proposal that could be considered in
ensuring the accuracy and availability of beneficial ownership records
with respect to custodial deposit accounts with transactional features?
VII. Administrative Law Matters
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) generally requires an agency,
in connection with a proposed rule, to prepare and make available for
public comment an initial regulatory flexibility analysis that
describes the impact of the proposed rule on small entities.\38\
However, an initial regulatory flexibility analysis is not required if
the agency certifies that the proposed rule will not, if promulgated,
have a significant economic impact on a substantial number of small
entities. The Small Business Administration (SBA) has defined ``small
entities'' to include banking organizations with total assets of less
than or equal to $850 million.\39\ Generally, the FDIC considers a
significant economic impact to be a quantified effect in excess of 5
percent of total annual salaries and benefits or 2.5 percent of total
noninterest expenses. The FDIC believes that effects in excess of one
or more of these thresholds typically represent significant economic
impacts for FDIC-insured institutions.
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\38\ 5 U.S.C. 601 et seq.
\39\ The SBA defines a small banking organization as having $850
million or less in assets, where an organization's ``assets are
determined by averaging the assets reported on its four quarterly
financial statements for the preceding year.'' See 13 CFR 121.201
(as amended by 87 FR 69118, effective December 19, 2022). In its
determination, the ``SBA counts the receipts, employees, or other
measure of size of the concern whose size is at issue and all of its
domestic and foreign affiliates.'' See 13 CFR 121.103. Following
these regulations, the FDIC uses an insured depository institution's
affiliated and acquired assets, averaged over the preceding four
quarters, to determine whether the insured depository institution is
``small'' for the purposes of the RFA.
---------------------------------------------------------------------------
For the reasons described below, the FDIC believes that the
proposed rule would, if promulgated, have a significant effect on the
substantial number of FDIC-insured institutions that are small entities
under the RFA (small IDIs). As such, the FDIC has prepared and is
making available for public comment the following initial regulatory
flexibility analysis.
(1) A description of the reasons why action by the agency is being
considered.
As discussed in detail in section I of this document, Background
and Need for Rulemaking, the recent events surrounding the bankruptcy
of Synapse raised questions about the completeness, accuracy, and
integrity of custodial deposit account records underlying arrangements
with third parties at certain IDI. These events highlight substantial
risks with respect to the prompt access to customers funds held in
custodial deposit accounts. These issues create uncertainty that
undermines the public confidence that underpins banks and our nation's
broader financial system.
(2) A succinct statement of the objectives of, and legal basis for,
the proposed rule.
As discussed in detail in section III of this document, The
Proposed Rule, the FDIC is proposing requirements that would strengthen
IDIs' recordkeeping for custodial deposit accounts with transactional
features and preserve beneficial owners' and depositors' entitlement to
the protections afforded by Federal deposit insurance. The proposed
rule is authorized by the FDI Act, which requires the FDIC to determine
the net amount due to any depositor in the event of the failure of an
IDI \40\ and authorizes the FDIC to prescribe rules and regulations as
it may deem necessary to carry out these responsibilities.\41\
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\40\ 12 U.S.C. 1821(a)(1)(C) and (E).
\41\ 12 U.S.C. 1819(a)(Tenth), 1820(g), and 1821(d)(4)(B)(iv).
---------------------------------------------------------------------------
(3) A description of and, where feasible, an estimate of the number
of small entities to which the proposed rule will apply.
The FDIC insures 4,577 IDIs as of March 31, 2024,\42\ and the
proposed rule would apply to all IDIs with custodial deposit accounts
that are not explicitly exempt from the rule.\43\ Of these 4,577 IDIs,
the FDIC estimates that 3,259 (71 percent of) IDIs are small IDIs. The
FDIC does not have the data available to estimate the number of small
IDIs that currently have or would potentially have custodial deposit
accounts subject to the rule. As discussed in detail in section IV of
this document, Expected Effects, the FDIC estimates, based on Call
Report data and analyst reports, that between 600 and 1,100 IDIs would
be immediately and directly affected by the proposed rule. Applying the
71 percent proportion of small IDIs in the population of all IDIs, the
FDIC estimates that between 426 and 781 small IDIs would be immediately
and directly affected by the proposed rule.\44\
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\42\ Call Report for the period ending March 31, 2024.
\43\ Exemptions are listed at proposed 12 CFR 375.3(e).
\44\ These estimates may undercount the number of small entities
affected, given that entities with less than $10 billion in assets
are more likely to partner with fintechs than entities with more
than $10 billion.
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(4) A description of the projected reporting, recordkeeping and
other compliance requirements of the proposed rule, including an
estimate of the classes of small entities which will be subject to the
requirement and the type of professional skills necessary for
preparation of the report or record.
As discussed in section IV of this document, Expected Effects, IDIs
with custodial deposit accounts that are not exempt from the proposed
rule would be required, themselves or through a third party, to
maintain records of beneficial ownership in the data format and layout
specified in proposed 12 CFR part 375, appendices A and B, for each
custodial deposit account. In addition, these IDIs would be required to
reconcile records for their custodial deposit accounts as of the end of
each day in order to determine the respective individual beneficial
ownership interests associated with the custodial deposit account and
the reconciliation of such interests to the funds on deposit in the
custodial deposit account. The FDIC believes it is unlikely that IDIs
currently have these records. As such, IDIs would have to arrange to
have the data transmitted to them from account holders and develop a
recordkeeping system for maintaining those data. These arrangements may
include revisions to IDIs' existing platform or core processing
systems, as well as the development of data interface systems.
[[Page 80150]]
Further, the proposed rule would require covered entities to incur
costs associated with conducting, testing, and validating the daily
reconciliation of records at the IDI. The FDIC also recognizes that the
costs of these actions would vary by IDI based on the size, scope, and
complexity of the IDI's custodial deposit accounts, as well as the
capability and efficiency of the IDI's current system for managing
deposit account data. The FDIC does not have data on the costs of these
actions. For purposes of this analysis, the FDIC assumes that it would
take IDIs and partner non-bank entities approximately 2,200 hours, on
average, per IDI to set up, and approximately 1,100 hours, on average,
per IDI per year to maintain such a system. The FDIC believes that
actions required by small IDIs to comply with the proposed rule,
described above, would require the skills of compliance officers,
information technology specialists, clerical workers, lawyers, and
executives and managers. At an assumed labor compensation rate of $100
per hour,\45\ the FDIC estimates that these tasks would cost each IDI,
on average, approximately $220,000 for the first year and $110,000 for
each subsequent year after the proposed rule is enacted. Although these
costs may vary across small IDIs affected by the rule, an estimated
increase in labor costs of $220,000 would be in excess of 5 percent of
total annual salaries and benefits for approximately 61 percent of the
3,259 small IDIs. Given the estimate that between 426 and 781 small
IDIs would be directly and immediately affected by the proposed rule,
the FDIC estimates that the proposed rule would have significant
effects on 61 percent of these affected small IDIs, or between 261 (8
percent) and 478 (15 percent) of all 3,259 small IDIs. The FDIC
believes these numbers are substantial.
---------------------------------------------------------------------------
\45\ Compensation rates for the applicable labor categories
range from $39 per hour for clerical workers to $181 per hour for
lawyers, based on the 75th percentile hourly wages reported by the
Bureau of Labor Statistics and adjusted for non-wage compensation
and inflation to March 2024. Source: Bureau of Labor Statistics:
``National Industry-Specific Occupational Employment and Wage
Estimates: Industry: Credit Intermediation and Related Activities
(5221 And 5223 only)'' (May 2023), Employer Cost of Employee
Compensation (March 2023), and Employment Cost Index (March 2023 and
March 2024).
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As discussed in section IV of this document, Expected Effects,
small IDIs affected by the proposed rule would also be required to
establish and maintain written policies and procedures to achieve
compliance with the proposed rule. These IDIs would also be required
to, on an annual basis, test the recordkeeping system required by the
proposed rule, independently validate certain records maintained by
third parties, document these actions in a report, and include in its
records a certification of compliance with the proposed rule.
(5) An identification, to the extent practicable, of all relevant
Federal rules which may duplicate, overlap or conflict with the
proposed rule.
The FDIC has not identified any likely duplication, overlap, and/or
potential conflict with this proposed rule and any other Federal rule.
(6) A description of any significant alternatives to the proposed
rule which accomplish the stated objectives of applicable statutes and
which minimize any significant economic impact of the proposed rule on
small entities.
The FDIC considered several alternatives to the proposed rule,
including keeping the status quo, adding minimum transaction volume
thresholds, and allowing fewer custodial deposit accounts to be
exempted from the proposed requirements. As discussed in detail in the
Alternatives section of this document, the FDIC believes that the
requirements in the proposed rule would, with minimal economic impact,
best accomplish the stated objective of strengthening IDIs'
recordkeeping for custodial deposit accounts with transactional
features and preserve beneficial owners' and depositors' entitlement to
the protections afforded by Federal deposit insurance.
The FDIC invites comments on all aspects of the supporting
information provided in this RFA section. The FDIC is particularly
interested in comments on any significant effects on small entities
that the agency has not identified.
Paperwork Reduction Act
Certain provisions of the proposed rule contain ``collections of
information'' within the meaning of the Paperwork Reduction Act of 1995
(PRA).\46\ In accordance with the requirements of the PRA, the FDIC may
not conduct or sponsor, and the respondent is not required to respond
to, an information collection unless it displays a currently valid
Office of Management and Budget (OMB) control number. The FDIC plans to
request a new OMB control number associated with this rulemaking.
---------------------------------------------------------------------------
\46\ 44 U.S.C. 3501-3521.
---------------------------------------------------------------------------
The proposed rule would establish new recordkeeping requirements at
IDIs for ``custodial deposit accounts with transactional features,''
subject to a list of specific exemptions. IDIs holding deposits within
the scope of the proposed rule would be required to maintain records
identifying the beneficial owners of those deposits, the balance
attributable to each beneficial owner, and the ownership category in
which the deposited funds are held. The IDI could maintain those
records itself or, if certain additional requirements are satisfied,
the IDI could maintain the records through an arrangement with a third
party (which could include a vendor, processor, software or service
provider, or a similar entity). The proposed rule provides a specific
electronic file format for records on beneficial owners and their
interests in the deposited funds.
The proposed rule would provide that where IDIs choose to maintain
the required records through a contractual relationship with a third
party, additional requirements would need to be satisfied. In addition,
reconciliation of these records would be required, as would periodic
validation of the third party's records by a person independent of the
third party.
The proposal would require specific actions by IDIs to achieve and
maintain compliance with the rule. IDIs that hold custodial deposit
accounts with transactional features would be required to establish and
maintain written policies and procedures to achieve compliance with the
rule's requirements. IDIs would further be required to complete a
report annually that (1) describes any material changes to their
information technology systems relevant to compliance with the rule;
(2) lists the account holders that maintain custodial deposit accounts
with transactional features, the total balance of those custodial
deposit accounts, and the total number of beneficial owners; (3) sets
forth the results of the institution's testing of its recordkeeping
requirements; and (4) provides the results of the required independent
validation of any records maintained by third parties. IDIs would be
required to complete an annual certification of compliance, signed by
the chief executive officer, chief operating officer, or the highest-
ranking official of the IDI, stating that the IDI has implemented and
tested the recordkeeping requirements.
Current Actions: The FDIC's proposal contains recordkeeping and
reporting burden categorized as follows:
Information Collection.
Title: Recordkeeping for Custodial Deposit Accounts.
OMB Number: 3064-NEW.
[[Page 80151]]
Affected Public: Businesses or other for-profit, all IDIs.
Table 1--Summary of Estimated Annual Burden
[OMB No. 3064-NEW]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of Average time Annual
Information collection (IC) (obligation to Type of burden (frequency of response) Number of responses per per response burden
respond) respondents respondent (HH:MM) (hours)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1. Recordkeeping Requirements for Custodial Recordkeeping (Annual).......................... 1,100 .33 900:00 326,700
Deposit Accounts 12 CFR Part 375
Implementation (Mandatory).
2. Recordkeeping Requirements for Custodial Recordkeeping (Annual).......................... 1,100 .67 500:00 368,500
Deposit Accounts 12 CFR Part 375 Ongoing
(Mandatory).
-----------------------------------------------------------------------------------------------------------
3. Filing Annually 12 CFR 375.4(b) and (c) Reporting (Annual).............................. 1,100 1 50:00 55,000
Ongoing (Mandatory).
Total Annual Burden (Hours)............. ................................................ ............ ............... .............. 750,200
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: FDIC.
Note: The estimated annual IC time burden is the product, rounded to the nearest hour, of the estimated annual number of responses and the estimated
time per response for a given IC. The estimated annual number of responses is the product, rounded to the nearest whole number, of the estimated
annual number of respondents and the estimated annual number of responses per respondent. This methodology ensures the estimated annual burdens in the
table are consistent with the values recorded in OMB's consolidated information system.
Comments are invited on the following:
(a) Whether the collection of information is necessary for the
proper performance of the FDIC's functions, including whether the
information has practical utility;
(b) The accuracy of the estimate of the burden of the information
collection, including the validity of the methodology and assumptions
used;
(c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(d) Ways to minimize the burden of the information collection on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
(e) Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
All comments will become a matter of public record. Comments on the
collection of information should be sent to the address listed in the
ADDRESSES section of this document. Written comments and
recommendations for this information collection also should be sent
within 30 days of publication of this document to www.reginfo.gov/public/do/PRAMain. Find this particular information collection by
selecting ``Currently under 30-day Review--Open for Public Comments''
or by using the search function.
Riegle Community Development and Regulatory Improvement Act
Section 302 of the Riegle Community Development and Regulatory
Improvement Act of 1994 (RCDRIA) requires that the Federal banking
agencies, including the FDIC, in determining the effective date and
administrative compliance requirements of new regulations that impose
additional reporting, disclosure, or other requirements on IDIs,
consider, consistent with principles of safety and soundness and the
public interest, any administrative burdens that such regulations would
place on depository institutions, including small depository
institutions, and customers of depository institutions, as well as the
benefits of such regulations.\47\ Subject to certain exceptions, new
regulations and amendments to regulations prescribed by a Federal
banking agency which impose additional reporting, disclosures, or other
new requirements on insured depository institutions shall take effect
on the first day of a calendar quarter which begins on or after the
date on which the regulations are published in final form.\48\ The
requirements of RCDRIA will be considered as part of the overall
rulemaking process, and the FDIC invites comments that will further
inform its consideration of RCDRIA.
---------------------------------------------------------------------------
\47\ 12 U.S.C. 4802(a).
\48\ 12 U.S.C. 4802(b).
---------------------------------------------------------------------------
Plain Language
Section 722 of the Gramm-Leach-Bliley Act \49\ requires the Federal
banking agencies to use plain language in all proposed and final
rulemakings published in the Federal Register after January 1, 2000.
The FDIC sought to present the proposed rule in a simple and
straightforward manner. The FDIC invites your comments on how to make
this proposal easier to understand. For example:
---------------------------------------------------------------------------
\49\ Public Law 106-102, 113 Stat. 1338, 1471 (Nov. 12, 1999).
---------------------------------------------------------------------------
Has the FDIC organized the material to suit your needs? If
not, how could the material be better organized?
Are the requirements in the proposed regulation clearly
stated? If not, how could the regulation be stated more clearly?
Does the proposed regulation contain language or jargon
that is unclear? If so, which language requires clarification?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the regulation easier to
understand?
List of Subjects in 12 CFR Part 375
Reporting and recordkeeping requirements, Custodial deposit
accounts.
Authority and Issuance
For the reasons stated in the preamble, the Board of Directors of
the Federal Deposit Insurance Corporation proposes to add part 375 to
title 12 of the Code of Federal Regulations as follows:
0
1. Add part 375 to read as follows:
PART 375--REQUIREMENTS FOR ACCURATE CUSTODIAL DEPOSIT ACCOUNTS WITH
TRANSACTIONAL FEATURES AND PROMPT PAYMENT OF DEPOSIT INSURANCE TO
DEPOSITORS
Sec.
Sec. 375.1 Purposes.
Sec. 375.2 Definitions.
Sec. 375.3 Recordkeeping and internal control requirements.
[[Page 80152]]
Sec. 375.4 Compliance.
Sec. 375.5 Enforcement.
Appendix A to Part 375--Data Format and Structure.
Appendix B to Part 375--Ownership Right and Capacity Codes.Inserting
required closing tag for E.
Authority: 12 U.S.C. 1819(a)(Eighth); 1819(a)(Tenth); 1820(g);
1821(f)(1); 1831g(a).
Sec. 375.1 Purposes.
Unless otherwise provided in this part, an insured depository
institution that has custodial deposit accounts with transactional
features is required to maintain records of beneficial ownership in a
prescribed format to preserve beneficial owners' and depositors'
entitlement to the protections afforded by Federal deposit insurance.
Doing so will facilitate a prompt and accurate determination of deposit
insurance coverage to support the FDIC achieving its statutory
obligation to pay deposit insurance ``as soon as possible'' in the
event of the insured depository institution's failure to benefit
depositors.
Sec. 375.2 Definitions.
For purposes of this part:
Account holder means the person or entity who opens or establishes
a custodial deposit account with transactional features with an insured
depository institution.
Appropriate Federal banking agency has the same meaning as provided
under section 3(q) of the Federal Deposit Insurance Act (12 U.S.C.
1813(q)).
Beneficial owner means a person or entity that owns, under
applicable law, an interest in the deposit held in a custodial deposit
account.
Custodial deposit account with transactional features means a
deposit account:
(1) Established for the benefit of beneficial owners;
(2) In which the deposits of multiple beneficial owners are
commingled; and
(3) Through which beneficial owner(s) may authorize or direct a
transfer through the account holder from the custodial deposit account
to a party other than the account holder or beneficial owner.
Deposit has the same meaning as provided under section 3(l) of the
Federal Deposit Insurance Act (12 U.S.C. 1813(l)).
Insured depository institution has the same meaning as provided
under section 3(c) of the Federal Deposit Insurance Act (12 U.S.C.
1813(c)(2)).
Sec. 375.3 Recordkeeping and internal control requirements.
(a) Recordkeeping. Records of beneficial ownership for each
custodial deposit account with transactional features must be
maintained in the data format and layout specified in appendix A to
this part, either:
(1) By the insured depository institution; or
(2) Through a third party, including but not limited to any vendor,
software provider, service provider, or similar entity in the business
of maintaining or processing deposit transaction data, in the manner
described in paragraph (c) of this section.
(b) Internal controls. An insured depository institution that
maintains records under paragraph (a)(1) of this section is required to
implement internal controls appropriate to its size and the nature,
scope, and risk of its activities that include:
(1) Maintaining accurate balances of custodial deposit accounts
with transactional features at the beneficial ownership level; and
(2) Conducting reconciliations against the beneficial ownership
records no less frequently than at the close of business daily.
(c) Records maintained through a third party. An insured depository
institution that arranges for a third party, including but not limited
to any vendor, software provider, service provider, or similar entity
in the business of maintaining or processing deposit transaction data,
to assist the insured depository institution in meeting the
requirements in paragraph (a) of this section must:
(1) Have direct, continuous, and unrestricted access to the records
in the data format specified in appendix A to this part, maintained by
the third party, including in the event of business interruption,
insolvency, or bankruptcy of the third party;
(2) Have continuity plans, including backup recordkeeping, and
technical capabilities to ensure compliance with this section;
(3) Implement appropriate internal controls to:
(i) Accurately determine the respective beneficial ownership
interests associated with custodial deposit accounts with transactional
features; and
(ii) Conduct reconciliations against the beneficial ownership
records no less frequently than as of the close of business daily; and
(4) Have a contractual arrangement with the third party that:
(i) Clearly defines roles and responsibilities for recordkeeping,
including assigning to the institution the rights of the third party to
access data held by other parties;
(ii) Requires the third party to implement appropriate internal
controls as required under paragraph (c)(3) of this section;
(iii) Requires a periodic, but no less than annual, validation by a
person independent of the third party to assess and verify that the
third party is maintaining accurate and complete records consistent
with the provisions in paragraphs (a)(2), (b), and (c)(3) of this
section, with the results of the independent validation provided to the
insured depository institution; and
(iv) Does not relieve the insured depository institution of its
responsibility under this part.
(d) Exemptions. The following custodial deposit accounts with
transactional features are exempt from the recordkeeping requirements
in this section:
(1) Accounts only holding trust deposits, as described in 12 CFR
330.10 or 12 CFR 330.12;
(2) Accounts established by a Government depositor;
(3) Accounts established by or on behalf of one or more brokers, as
defined in section 3(4) of the Securities and Exchange Act of 1934;
dealers, as defined in section 3(5) of the Securities and Exchange Act
of 1934; or investment advisers, as defined in section 202 of the
Investment Advisers Act of 1940;
(4) Accounts established by an attorney or law firm on behalf of
clients, commonly known as an Interest on Lawyers Trust Accounts, or
functionally equivalent accounts;
(5) Accounts held in connection with an employee benefit plan or
retirement plan described in 12 CFR 330.14;
(6) Accounts maintained by real estate brokers, real estate agents,
title companies, or qualified intermediaries under the Internal Revenue
Code of 1986, in which funds from multiple clients are deposited and
held in connection with a real estate transaction;
(7) Accounts maintained by a mortgage servicer in a custodial or
other fiduciary capacity;
(8) Accounts where Federal or State law prohibits the disclosure of
the identities of the beneficial owners of the deposits;
(9) Accounts maintained pursuant to an agreement to allocate or
distribute deposits among participating insured depository institutions
in a network for purposes other than payment transactions of customers
of the insured depository institution or participating insured
depository institutions; and
(10) Accounts exclusively holding security deposits tied to
property
[[Page 80153]]
owners for a homeownership, condominium, or other similar housing
association governed by State law, or holding security deposits tied to
residential or commercial leasehold interests.
Sec. 375.4 Compliance.
(a) Policies and procedures. An insured depository institution
holding custodial deposit accounts with transactional features that are
not specifically exempt from the requirements of this part must
establish and maintain written policies and procedures to achieve
compliance with this part.
(b) Certification. An insured depository institution holding
custodial deposit accounts with transactional features that are not
specifically exempt from the requirements of this part must, within 1
year of the effective date of this part and annually thereafter
complete a certification that includes:
(1) Confirmation that the insured depository institution has
implemented the recordkeeping requirements described in this part, and
tested its implementation of such requirements during the preceding 12
months;
(2) Confirmation that the insured depository institution is in
compliance with this part; and
(3) The signature of the chief executive officer, chief operating
officer, or the highest-ranking official of the institution attesting
to the accuracy of the certification, made after due inquiry.
(4) The insured depository institution must file this certification
with the appropriate FDIC Regional or Area Office and the appropriate
Federal banking agency.
(c) Report. An insured depository institution holding custodial
deposit accounts with transactional features that are not specifically
exempt from the requirements of this part must, within 1 year of the
effective date of this part and annually thereafter, generate a report
that contains the following:
(1) A description of any material changes to the institution's
information technology systems since the prior annual report that are
relevant to compliance with this part;
(2) A list of the account holders that maintain custodial deposit
accounts with transactional features that are not exempt from the
recordkeeping requirements of the rule, the total balance of those
custodial deposit accounts, and the total number of beneficial owners;
(3) Results of the institution's periodic testing of its compliance
with the recordkeeping requirements set forth in this part; and
(4) Results of the independent validation of any records maintained
by third parties required by paragraph (c)(4)(iii) of this section.
(5) The insured depository institution shall file this report with
the appropriate FDIC Regional or Area Office and the appropriate
Federal banking agency.
(d) Frequency of certification and report. If an insured depository
institution experiences a significant change in its deposit-taking
operations, or the FDIC or the appropriate Federal banking agency
identifies aspects of the institution's operations that pose elevated
risks of compliance with this part, the FDIC or the appropriate Federal
banking agency may require that the institution update and file the
certification and report more frequently than annually, as requested.
Sec. 375.5 Enforcement.
Notwithstanding existing regulations, violating the requirements
set forth in this part constitutes a violation of a regulation and may
subject the insured depository institution to enforcement actions under
section 8 of the Federal Deposit Insurance Act (12 U.S.C. 1818).
Appendix A to Part 375--Data Format and Structure
This appendix provides the pipe-delimited data file format for
electronic file records of the beneficial owners for each custodial
deposit account, as required by Sec. 375.3(a).
----------------------------------------------------------------------------------------------------------------
Field name Description Format Null value allowed?
----------------------------------------------------------------------------------------------------------------
Account Number.............. Account number at Variable Character [50]............. No.
Insured Depository
Institution.
Account Holder.............. Full name of person(s) Variable Character [100]............ No.
or entity who opened
or established the
custodial deposit
account with the
insured depository
institution.
Beneficial Owner Account Custodian assigned Variable Character [50]............. No.
Number. account number for the
beneficial owner.
First Name 1................ First name of Variable Character [50]............. No.
beneficial owner 1 as
it appears on the
custodian's records.
Middle Name 1............... Middle Name of Variable Character [50]............. Yes.
beneficial owner 1 as
it appears on the
custodian's records.
Last Name 1................. Last Name of beneficial Variable Character [50]............. No.
owner 1 as it appears
on the custodian's
records.
Name Suffix 1............... Name suffix following a Variable Character [50]............. Yes.
beneficial owner 1's
surname adding
distinction in
generational sequence
as it appears on the
custodian's records.
Entity Name................. The registered name of Variable Character [100]............ Yes.
the entity as it
appears on the
custodian's records.
This field can be null
where the beneficial
owner is an individual.
Tax ID 1.................... Beneficial owner 1 Numeric [9]......................... No.
taxpayer
identification number.
Tax ID Code 1............... Beneficial owner 1 code Character [1]....................... No.
indicates corporate
``T'' (EIN), personal
tax identification
number ``S'' (SSN,
ITIN), or other ``O''
(foreign
identification number).
Alternate Identifier 1...... If account was opened Variable [20]....................... Yes.
without a United
States issued tax
identification number,
provide alternative
government issued
identification number.
First Name 2................ First name of Variable Character [50]............. Yes.
beneficial owner 2 (if
any) as it appears on
the custodian's
records.
Middle Name 2............... Middle Name of Variable Character [50]............. Yes.
beneficial owner 2 (if
any) as it appears on
the custodian's
records.
Last Name 2................. Last Name of beneficial Variable Character [50]............. Yes.
owner 2 (if any) as it
appears on the
custodian's records.
Name Suffix 2............... Name suffix following a Variable Character [50]............. Yes.
beneficial owner 2 (if
any)'s surname adding
distinction in
generational sequence
as it appears on the
custodian's records.
Tax ID 2.................... Beneficial owner 2 (if Numeric [9]......................... Yes.
any) taxpayer
identification number.
Tax ID Code 2............... Beneficial owner 2 (if Character [1]....................... Yes.
any) code indicates
corporate ``T'' (EIN),
personal tax
identification number
``S'' (SSN, ITIN), or
other ``O'' (foreign
identification number).
Alternate Identifier 2...... If beneficial owner 2 Variable [20]....................... Yes.
does not have a United
States issued tax
identification number,
provide alternative
government issued
identification number.
Name 3...................... Where more than 2 Variable Character [255]............ Yes.
beneficial owners are
present, additional
beneficial owners will
be reflected in this
field with tab spacing
between the first,
middle, last name, and
suffix (if any),
followed by a
semicolon between each
additional beneficial
owner. There will be
no tab spacing
preceding the first
character in the first
name and the last
character in the last
name or suffix
(whichever is last
identified).
Street Address 1............ Street address line 1 Variable Character [100]............ Yes.
is beneficial owner
address of record.
Street Address 2............ Street address line 2 Variable Character [100]............ Yes.
is beneficial owner
address of record, if
available.
Street Address 3............ Street address line 3 Variable Character [100]............ Yes.
is beneficial owner
address of record, if
available.
City........................ City associated with Variable Character [50]............. Yes.
the street address.
State....................... State associated with Variable Character [2].............. Yes.
the street address.
[[Page 80154]]
Zip......................... Zip associated with the Variable Character [10]............. Yes.
street address.
Country..................... Country associated with Variable Character [50]............. Yes.
the street address.
IRA Indicator............... If IRA, value must be Character [1]....................... Yes.
``Y''.
Current Balance............. Current balance of the Decimal [14,2]...................... No.
beneficiary account as
of the close of
business on the
effective date of the
file.
Accrued Interest............ The amount of interest Decimal [14,2]...................... No.
that has been earned
but not yet paid to
the beneficiary
account as of the date
of the file.
Ownership right and capacity Ownership right and Character [4]....................... No.
capacity as set forth
in appendix B to this
part.
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Appendix B to Part 375--Ownership Right and Capacity Codes
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Code Description
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SGL......................... Single Account (12 CFR 330.6): An account
owned by one person with no testamentary
or ``payable-on-death'' beneficiaries. It
includes individual accounts, sole
proprietorship accounts, single-name
accounts containing community property
funds, and accounts of a decedent and
accounts held by executors or
administrators of a decedent's estate.
JNT......................... Joint Account (12 CFR 330.9): An account
owned by two or more persons with no
testamentary or ``payable-on-death''
beneficiaries (other than surviving co-
owners) An account does not qualify as a
joint account unless: (1) all co-owners
are living persons; (2) each co-owner has
personally signed a deposit account
signature card (except that the signature
requirement does not apply to
certificates of deposit, to any deposit
obligation evidenced by a negotiable
instrument, or to any account maintained
on behalf of the co-owners by an agent or
custodian); and (3) each co-owner
possesses withdrawal rights on the same
basis.
TST......................... Trust Account (12 CFR 330.10): An account
held in connection with an informal
revocable trust, a formal revocable
trust, or an irrevocable trust.
CRA......................... Certain Other Retirement Accounts (12 CFR
330.14 (b) through (c)) to the extent
that participants under such plan have
the right to direct the investment of
assets held in individual accounts
maintained on their behalf by the plan,
including an individual retirement
account described in section 408(a) of
the Internal Revenue Code (26 U.S.C.
408(a)), an account of a deferred
compensation plan described in section
457 of the Internal Revenue Code (26
U.S.C. 457), an account of an individual
account plan as defined in section 3(34)
of the Employee Retirement Income
Security Act (29 U.S.C. 1002), a plan
described in section 401(d) of the
Internal Revenue Code (26 U.S.C. 401(d)).
EBP......................... Employee Benefit Plan Account (12 CFR
330.14): An account of an employee
benefit plan as defined in section 3(3)
of the Employee Retirement Income
Security Act (29 U.S.C. 1002), including
any plan described in section 401(d) of
the Internal Revenue Code (26 U.S.C.
401(d)), but not including any account
classified as a Certain Retirement
Account.
BUS......................... Business/Organization Account (12 CFR
330.11): An account of an organization
engaged in an ``independent activity''
(as defined in 12 CFR 330.1(g)), but not
an account of a sole proprietorship.
This category includes:
a. Corporation Account: An account
owned by a corporation.
b. Partnership Account: An account
owned by a partnership.
c. Unincorporated Association Account:
An account owned by an unincorporated
association (i.e., an account owned by
an association of two or more persons
formed for some religious,
educational, charitable, social, or
other noncommercial purpose).
GOV1-GOV2-GOV3.............. Government Account (12 CFR 330.15): An
account of a governmental entity.
GOV1........................ All time and savings deposit accounts of
the United States and all time and
savings deposit accounts of a State,
county, municipality, or political
subdivision depositing funds in an
insured depository institution in the
State comprising the public unit or
wherein the public unit is located
(including any insured depository
institution having a branch in said
State).
GOV2........................ All demand deposit accounts of the United
States and all demand deposit accounts of
a State, county, municipality, or
political subdivision depositing funds in
an insured depository institution in the
State comprising the public unit or
wherein the public unit is located
(including any insured depository
institution having a branch in said
State).
GOV3........................ All deposits, regardless of whether they
are time, savings or demand deposit
accounts of a State, county, municipality
or political subdivision depositing funds
in an insured depository institution
outside of the state comprising the
public unit or wherein the public unit is
located.
MSA......................... Mortgage Servicing Account (12 CFR
330.7(d)): An account held by a mortgage
servicer, funded by payments by
mortgagors of principal and interest.
PBA......................... Public Bond Accounts (12 CFR 330.15(c)):
An account consisting of funds held by an
officer, agent or employee of a public
unit for the purpose of discharging a
debt owed to the holders of notes or
bonds issued by the public unit.
DIT......................... IDI as trustee of irrevocable trust
accounts (12 CFR 330.12): ``Trust funds''
(as defined in 12 CFR 330.1(q)) account
held by an insured depository institution
as trustee of an irrevocable trust.
ANC......................... Annuity Contract Accounts (12 CFR 330.8):
Funds held by an insurance company or
other corporation in a deposit account
for the sole purpose of funding life
insurance or annuity contracts and any
benefits incidental to such contracts.
BIA......................... Custodian accounts for American Indians
(12 CFR 330.7(e)): Funds deposited by the
Bureau of Indian Affairs of the United
States Department of the Interior (the
BIA) on behalf of American Indians
pursuant to 25 U.S.C. 162(a), or by any
other disbursing agent of the United
States on behalf of American Indians
pursuant to similar authority, in an
insured depository institution.
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Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on September 17, 2024.
James P. Sheesley,
Assistant Executive Secretary.
[FR Doc. 2024-22565 Filed 10-1-24; 8:45 am]
BILLING CODE 6714-01-P