Alert July 19, 2011

FRB Issues Final Rule Repealing Regulation Q, Effective July 21, 2011

The FRB issued a final rule (the “Rule”) repealing the FRB’s Regulation Q (“Reg Q”), effective July 21, 2011.  Prior to July 21, 2011, member banks of the Federal Reserve System are prohibited from paying interest on demand deposits under Section 19(i) (“Section 19(i)”) of the Federal Reserve Act.  Similarly, until July 21, 2011, Section 18(g) (“Section 18(g)”) of the Federal Deposit Insurance Act imposes the parallel prohibition on state nonmember banks. Section 627 of the Dodd-Frank Act, however, as of July 21, 2011, repeals Section 19(i) and Section 18(g).  Accordingly the FRB, in the Rule, eliminates Reg Q (including without limitation, Reg Q’s definition of “interest”) and removes references to Reg Q found in the FRB’s other regulations, interpretations and commentary.

The FRB issued a proposed version of the Rule, discussed in the April 19, 2011 Financial Services Alert and received public comments, most of which opposed the repeal of Reg Q (many of them on the grounds that the repeal would adversely affect community banks).  The FRB, however, did not make changes as a result of those comments because, the FRB stated, as a result of the enactment of Section 627 of the Dodd-Frank Act, the FRB no longer has the authority to retain Reg Q nor to postpone the effective date of the repeal beyond July 21, 2011.