Requirements for Custodial Deposit Accounts with Transactional Features and Prompt Payment of Deposit Insurance to Depositors

Summary:

The Federal Deposit Insurance Corporation (FDIC) issued for public comment a notice of proposed rulemaking (proposal) to 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 deposit accounts with transactional features. Through this proposal, the FDIC expects the requirements would 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. 

Statement of Applicability: The contents of, and material referenced in, this FIL apply to all FDIC-insured financial institutions.

Highlights:

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 a nonbank entity, Synapse Financial Technologies, Inc. (Synapse), which worked with IDIs and 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. Following the bankruptcy, Synapse’s banking partners encountered significant difficulties in obtaining, reviewing, and reconciling Synapse’s records and have raised concerns about the accuracy of the records. In many cases, it was advertised that 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. 

This recent bankruptcy and other interruptions to consumers’ ability to access their funds in these circumstances have exposed substantial risks of inadequate or unreliable recordkeeping by a third party that has a custodial account arrangement with an IDI.  If an IDI fails, such a third-party arrangement, or any third-party custodial account with inadequate recordkeeping, would impede the FDIC’s ability promptly make deposit insurance determinations, and, if necessary, pay claims to depositors.  These events also created risks for consumers, including confusion regarding the applicability and availability of deposit insurance to protect their money from loss.

Key Details:

Under the proposal, IDIs holding custodial deposit accounts with transactional features, subject to a list of defined exemptions, would be required to maintain records relating to the account, using a specific file format provided by the rule.  These records would identify, for each custodial account:

• the beneficial owners of the custodial account, 
• the balance attributable to each beneficial owner, and 
• the ownership category in which the beneficial owner holds the deposited funds. 

IDIs also would be required to implement internal controls to ensure that account balances are accurate, including reconciliations no less frequently than as of the close of business daily.

The rule would permit records to be maintained through a third party if certain specific requirements are satisfied, among other things:

• 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; and
• establish a new requirement for an annual validation of third parties in these arrangements by persons or entities independent of the third party to assess and verify that the third party is maintaining accurate and complete records consistent with the proposal’s provisions.

To achieve compliance with the proposed rule, IDIs would be required to:

• Establish written policies and procedures;
• Complete and submit to the FDIC and the IDI’s primary federal regulator an annual certification confirming the institution’s compliance with, and testing of, the proposed requirements, and 
• Complete and submit to the FDIC and the IDI’s primary federal regulator an annual report that includes information on account relationships, results of the institution’s compliance testing, and results of the independent validation of any records maintained by third parties under the rule.

The proposal’s provisions also provide for oversight by the banks’ primary federal supervisor to review for compliance with this rule and enforcement authority to compel compliance if the bank fails to meet these requirements.

The proposed rule includes a specific list of custodial deposit accounts which would be exempted in situations where the FDIC believes its policy objectives would not be advanced by the additional recordkeeping requirements because separate recordkeeping requirements apply or transactional activity should be minimal as well as where the identified types of accounts have not historically presented significant difficulty to the FDIC in making deposit insurance determinations in the event of an IDI’s failure.

Comments on the proposed rule will be accepted for 60 days after publication in the Federal Register.