The FDIC issued a final rule (the “Final Rule”) establishing the FDIC’s practices for determining deposit and other liability account balances in the event of a failure of an insured depository institution (a “DI”). The Final Rule is substantially the same as the interim rule issued in July 2008 regarding this topic, and, to a large extent, is a codification of long-standing FDIC practices and procedures.
The Final Rule describes the method under which the receiver of a failed insured DI will construct an ending balance sheet for the DI and determine the value and nature of the claims against such failed DI, including claims to be made by depositors, general creditors, subordinated creditors and shareholders. Pursuant to the Final Rule, the FDIC, as insurer and receiver, will generally treat deposits and other liabilities of the failed DI according to the ownership and nature of the underlying obligations based on end-of-day ledger balances for each account using the DI’s normal posting procedures. However, the Final Rule allows the FDIC to establish an FDIC Cutoff Point, coinciding with the point in time at which the receiver acts to stop deposit transactions which might result in creating new liabilities or extinguishing existing liabilities resulting from external transactions. As of the FDIC Cutoff Point, the FDIC will use its best efforts to take all steps necessary to stop the generation, via transactions or transfers coming from or going outside the DI, of new liabilities or extinguishing existing liabilities for the DI. The Final Rule does not require a DI to adjust its systems, policies or procedures to accommodate the receiver’s responsibility in this regard.
With respect to sweep accounts, in making claims determinations on funds swept from a deposit account yet still residing within the DI, the FDIC will use the following guidelines: (1) ownership of the funds and the nature of the claim will be based on records established and maintained by the DI for that specific account or investment vehicle; (2) depositor owned funds residing in a general ledger account as of the DI’s end-of-day will be treated as a deposit for insurance purposes (further, in calculating deposit insurance, these funds will be aggregated with the balance in the deposit account from which they originally were swept if their ownership interest has not changed, and will be aggregated with the transaction deposit account balances of the new owner if there has been a change in ownership); and (3) the full amount of swept funds attributable to an individual customer residing in an omnibus or other commingled account as of the DI’s normal end-of-day will be treated as belonging to that customer, regardless of any netting practices established by the DI. In the case of funds swept outside of the DI, in the event of failure the swept funds also will be treated consistent with their status in the end-of-day ledger balances of the depository institution and the external entity. If an expected transfer to the external sweep investment vehicle is not completed prior to the FDIC Cutoff Point, the external investment will not be purchased and the funds will remain in the account identified on the end-of-day ledger balance. (For more information, see the Final Rule itself, which provides a detailed discussion of how the FDIC will treat funds associated with various specific sweep products in the event of failure.)
Moreover, the Final Rule imposes certain disclosure requirements in connection with sweep accounts. As of July 1, 2009, DIs must prominently disclose in writing to sweep account customers whether their swept funds are deposits within the meaning of 12 U.S.C. 1813(l): (1) within 60 days after July 1, 2009, and no less than annually thereafter; (2) in all new sweep account contracts, and (3) in renewals of existing sweep account contracts. Furthermore, if the funds are not deposits, the institution must disclose the status such funds would have if the institution failed (e.g., general creditor status or secured creditor status). These disclosure requirements do not apply to sweep accounts where: (a) the transfers are within a single account, or a sub-account; or (b) the sweep account involves only deposit-to-deposit sweeps, such as zero-balance accounts, unless the sweep results in a change in the customer’s insurance coverage. For external sweep arrangements, the required disclosures also should indicate the possibility that, if the DI should fail, the applicable funds might not be swept to the source outside the institution and should indicate how the funds would be treated in that situation. The Final Rule does not impose specific disclosure language, but rather allows DIs to form their own disclosures, as long as they satisfy the provided disclosure requirements. The Final Rule becomes effective on March 4, 2009. As noted above, the disclosure requirements with respect to sweep accounts go into effect on July 1, 2009.