[Federal Register Volume 61, Number 100 (Wednesday, May 22, 1996)]
[Proposed Rules]
[Pages 25596-25598]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12780]
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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. 61, No. 100 / Wednesday, May 22, 1996 /
Proposed Rules
[[Page 25596]]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 330
RIN 3064-AB73
Simplification of Deposit Insurance Rules
AGENCY: Federal Deposit Insurance Corporation.
ACTION: Advance notice of proposed rulemaking.
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SUMMARY: The Board of Directors of the Federal Deposit Insurance
Corporation (FDIC) is seeking comment on whether the deposit insurance
rules (insurance regulations) should be simplified and, if so, how. If
the Board finds simplification to be warranted, it will propose
specific amendments on which public comment will then be invited. The
purpose of this notice is to solicit comments to help guide the
possible preparation of a proposed rule. This notice presents only a
general description of the insurance simplification options being
considered and includes no regulatory text.
DATES: Written comments must be received by the FDIC on or before
August 20, 1996.
ADDRESSES: Written comments are to be addressed to the Office of the
Executive Secretary, Federal Deposit Insurance Corporation, 550 17th
Street, N.W., Washington, D.C. 20429. Comments may be hand-delivered to
Room F-402, 1776 F Street, N.W., Washington, D.C. 20429, on business
days between 8:30 a.m. and 5 p.m. (FAX number: (202) 898-3838; Internet
address: [email protected]). Comments will be available for inspection
in the FDIC Public Information Center, room 100, 801 17th Street, N.W.,
Washington, D.C., between 9:00 a.m. and 5:00 p.m. on business days.
FOR FURTHER INFORMATION CONTACT: Joseph A. DiNuzzo, Acting Senior
Counsel, Legal Division, (202) 898-7349; Adrienne George, Attorney,
Legal Division, (202) 898-3859; Federal Deposit Insurance Corporation,
550 17th Street, N.W., Washington, D.C. 20429.
SUPPLEMENTARY INFORMATION:
Background
One of the FDIC's corporate operating projects under its Strategic
Plan is to simplify the deposit insurance rules. The purpose is to
promote public understanding of deposit insurance and to increase
financial institution and consumer understanding of deposit insurance.
This Advance Notice of Proposed Rulemaking (Notice) is one of the steps
in realizing the project's goals.
This effort to simplify the FDIC's insurance regulations, found in
12 CFR part 330 (part 330), also is intended to satisfy the provisions
in section 303(a) of the Riegle Community Development and Regulatory
Improvement Act of 1994, 12 U.S.C. 4803(a), to reduce regulatory burden
and improve efficiency.
The FDIC revised its insurance regulations twice in the recent
past. The first time, in 1990, was necessitated by the termination of
the Federal Savings and Loan Insurance Corporation (FSLIC). The
Financial Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA) (Pub. L. 101-73, 103 Stat. 183 (1989)) required the FDIC to
issue uniform insurance regulations for deposits in all insured
depository institutions, including those previously insured by the
FSLIC. The second set of recent changes in the FDIC insurance rules
were made pursuant to provisions in the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA) (Pub. L. 102-242 (1991)).
A provision in FDICIA, in essence, limited the insurance coverage of
employee benefit and retirement plans. Also, in February 1995, the FDIC
issued disclosure requirements in connection with the limited
availability of insurance for employee benefit plan accounts, 60 FR
7701 (Feb. 9, 1995).
The amendments made to the insurance rules in 1990 not only
reconciled differences between the FSLIC insurance regulations and the
then-existing FDIC regulations, they also revised the insurance
regulations to, among other things, better organize and define terms
used in the regulations, convert long-standing interpretive opinions
into regulations, resolve outstanding issues and clarify ambiguous
provisions.
Although the insurance rules were revised relatively recently, the
Corporation believes, preliminarily, that at least some additional
modification to and simplification of the insurance rules would be
helpful. The need for these changes has been brought to the FDIC's
attention in several ways, especially through the steady receipt of
letters and phone calls on insurance questions. Experience with bank
and thrift failures also has enabled the staff to identify procedural
aspects of the regulations which, when applied in accordance with the
regulations, may prove unfair to certain depositors in some situations.
The FDIC must be mindful of the applicable statutory parameters in
considering whether and to what extent to modify the insurance
regulations. The general statutory basis for and guidance on deposit
insurance is found in section 11(a) of the Federal Deposit Insurance
Act (FDI Act), 12 U.S.C. 1821(a), which provides, in relevant part,
that deposits are insured up to $100,000 based on the ``right'' and
``capacity'' in which the deposits are maintained. The FDIC interprets
the ``right-and-capacity'' criterion as essentially meaning ownership.
Thus, the rules provide ``separate'' insurance coverage for different
types of accounts which are owned in different ways. For example,
accounts owned by an individual are not added to joint accounts in
which that same individual has an ownership interest. ``Separate''
insurance means that each category of account in which a person has an
ownership interest is covered for up to $100,000 separately insured
from the funds in other categories of accounts.
Possible Areas of Simplification
Preliminarily, the Board believes that certain technical and
moderate substantive revisions to the deposit insurance rules may be
warranted. Technical revisions would entail rewriting ambiguous
provisions of the rules and generally making the rules easier to
understand. Moderate substantive revisions would entail making some
substantive changes to the rules (and statute) but the FDIC intends to
retain the principles that insurance is based on deposit ownership and
that separate insurance coverage within the same institution depends
upon the different ``rights and capacities'' in which deposits can be
held.
[[Page 25597]]
The FDIC has identified the following possible revisions to the
insurance regulations and laws:
1. Rewrite certain parts of the rules to make them clearer and
easier to understand. Ambiguous and potentially ambiguous provisions of
the rules would be rewritten and part 330 might be reordered and
reorganized.
2. Eliminate step one of the two steps involved in determining
insurance coverage for joint accounts. Joint ownership is one of the
account categories that qualifies for separate insurance coverage. 12
CFR 330.7. Thus, an individual who has an individual deposit and
interests in joint accounts at the same insured bank or thrift would be
insured for up to $100,000 per category of account. Currently deposit
insurance for joint accounts is determined by a two-step process:
first, all joint accounts that are identically owned (i.e., held by the
same combination of individuals) are added together and the combined
total is insurable up to the $100,000 maximum; second, each person's
interests in joint accounts involving different combinations of
individuals are combined and the total is insured up to the $100,000
maximum.
One option to simplify the current joint account rules is to
eliminate the first step of the two-step process. Under this
alternative, all funds held in joint accounts would be allocated among
the owners and each owner's interests in all joint accounts (held at
the same depository institution) would be added and insured up to
$100,000 in the aggregate.
3. Revise the recordkeeping rules allowing the FDIC more
flexibility (for the benefit of depositors) in determining the
ownership of deposits held in a custodial or fiduciary capacity. The
insurance regulations impose specific recordkeeping requirements as a
precondition for insuring parties other than those whose names appear
on the depository institution's deposit account records. 12 CFR 330.4.
For example, if A is acting as an agent for B, C, and D and places
funds belonging to them in an insured bank or thrift, the institution's
deposit account records must show that A is holding the account as an
agent in order for the FDIC to recognize the ownership interests of B,
C and D. The FDIC will then insure the account as if it were held
directly by B, C, and D (the owners of the account) as long as the
institution's deposit account records or the agent's records
(maintained in ``good faith and in the regular course of business'')
evidence B, C and D's ownership interests in the account. In this
context, we say that the insurance ``passes-through'' the agent to the
owner(s) of the account.
The recordkeeping requirements intentionally limit the FDIC's
ability to consider evidence outside the deposit account records of an
insured institution in determining the ownership of deposits. They
establish a presumption that deposited funds are actually owned in the
manner indicated on the account records. Those records are binding on
the depositor if they are ``clear and unambiguous''. The FDIC has the
discretion, however, to decide whether records are clear and
unambiguous. If the FDIC determines that the records are unclear or
ambiguous, then it may consider evidence other than the deposit account
records. The question is whether this discretion provides the FDIC with
sufficient flexibility to recognize beneficial and/or multiple
ownership of accounts when such ownership is not reflected on the bank
or thrift's deposit account records.
The objective in amending the recordkeeping requirements would be
to allow the FDIC staff more flexibility to consider the actual
ownership interests in deposit accounts and thereby prevent possible
hardships. The proper balance must be struck, however, to avoid fraud
in post-failure situations and to enable the FDIC to reasonably and
expeditiously calculate the insured deposits at failing institutions.
One option would be to amend the rules to allow the FDIC to look beyond
the deposit accounts records of the depository institution where
account titles are indicative of a fiduciary relationship. Two examples
would be accounts held by attorneys and those held by entities such as
title companies, who commonly hold funds for others.
4. Consider changing the rules on ``payable upon death'' accounts.
The insurance rules provide for separate coverage for funds owned by an
individual and deposited into any account commonly referred to as a
``payable-on-death'' account, tentative or ``Totten'' trust account,
revocable trust account, or similar account (POD accounts). 12 CFR
330.8. The account must evidence an intention that upon the death of
the owner the funds shall belong to certain qualifying beneficiaries.
The qualifying beneficiaries are limited to the owner's spouse,
children and grandchildren. The owner is insured up to $100,000 as to
each such named qualifying beneficiary, separately from any other
accounts of the owner or the beneficiaries. Thus, if the individual
names his spouse, three children and two grandchildren as
beneficiaries, the account would be insured up to $600,000.
The FDI Act does not expressly require that POD accounts receive
separate insurance coverage. The purpose of the POD separate insurance
rule is to track state laws that allow for the so-called ``poor-man's
will'' in which deposit account balances can be transmitted upon the
death of the account owner to beneficiaries named in the account
without an underlying trust document or will. It is support for this
will-substitute that underlies the separate insurance for POD accounts.
The FDIC limits the qualifying beneficiaries to the spouse, children
and grandchildren of the account owner because it believes that such
limitation strikes a reasonable balance between providing separate
coverage to those most likely to be named as beneficiaries of a POD
account while not overly expanding this category of deposit insurance
coverage.
In the context of simplifying the insurance regulations, the
question arises whether the FDIC should consider revising the POD rules
on qualifying degrees of kinship. The FDIC, therefore, requests
comments on whether and, if so, how the POD insurance rules should be
revised.
5. Consider modifying the way the FDIC insures certain types of
accounts upon the death of the owner(s) of the accounts. The ownership
interest of a deposit account often changes upon the death of the owner
of the account. If the beneficiaries/executor of the decedent do not
act immediately after the decedent's death to change the nature of the
account, insurance coverage may be decreased, sometimes significantly.
For example, if a husband and wife hold a joint account, a payable-
upon-death account and two individual accounts in their respective
names, the death of one spouse would result in the surviving spouse
becoming the sole owner of the joint account and the payable-upon-death
account. Thus, the accounts would be aggregated with the surviving
spouse's individual account, possibly resulting in a substantial
reduction in insurance coverage.
The former FSLIC, as a matter of policy, allowed a grace period of
six months following the death of a depositor for the decedent's
deposits to be restructured. If an insured thrift failed during the
grace period and additional insurance would be available if the
decedent had not died, the FSLIC insured the account(s) based on the
account ownership shown on the institution's records as if the decedent
were still living. The reason for the FSLIC policy was to ``lessen the
[[Page 25598]]
hardship'' that might be caused otherwise. In the course of revising
the FDIC insurance regulations in 1990 (in conjunction with FSLIC's
termination) the FDIC decided against adopting the FSLIC's grace-period
policy because of the questionable underlying legal basis. The argument
is that insurance coverage is based on the ownership of the deposits.
If under the applicable state law the ownership of an account changes
immediately upon the account owner's death, then the FDIC should
recognize that change immediately.
The FDIC has limited flexibility to amend its regulations on the
insurance of accounts upon an owner's death. That is because, as
indicated above, deposit insurance is statutorily based on deposit
ownership. If the ownership of a particular deposit changes
automatically under the applicable state law upon the owner's death,
then the insurance coverage may change also. That is the FDIC's long-
standing position on the issue. Although the FDIC has concerns about
whether a sound legal basis exists for providing a ``grace period''
(for insurance purposes) on accounts owned by a person who dies, the
FDIC welcomes comments on this issue.
6. Recommend that the FDI Act be amended to change the way employee
benefit plans are insured. Under an amendment to the FDI Act made by
FDICIA, pass-through insurance coverage is not available to employee
benefit plan deposits that are accepted by an insured bank or thrift
when the institution does not meet prescribed capital requirements. 12
U.S.C. 1821(a)(1)(D). If an institution accepts employee benefit plan
deposits at a time when it is not sufficiency capitalized, such
deposits are insured only up to $100,000 per plan (as opposed to
$100,000 per participant or beneficiary). The FDICIA-originated
provision is the only one in the FDI Act and regulations to base
insurance coverage on the capital sufficiency of the insured
institution where the deposits are placed. The statute is complex and
very difficult for the industry and the public to understand. Moreover,
if deposits are made with an insured bank or thrift that does not meet
the prescribed capital requirements, there is no disadvantage to the
institution. The depositor is the disadvantaged party.
The FDIC believes Congress should replace the employee benefit plan
provision with a general prohibition against insured institutions
accepting employee benefit plan deposits when they are not sufficiently
capitalized. This would be consistent with the statute pertaining to
brokered deposits and, thus, would prevent the disadvantage to
depositors if an insured institution provides incorrect information
about its capital condition. Comments are requested on whether the FDIC
should recommend this statutory amendment to the Congress.
7. Consider revising the rules on living trust accounts. A ``living
trust'' is a formal trust in which the owner retains control of the
trust assets during his or her lifetime and designates the
beneficiaries of the assets upon his or her death. The owner may revoke
or change the terms of the trust during his or her lifetime. In 1993
the FDIC Legal Division prepared guidelines on the insurance of
revocable accounts, with an emphasis on living trusts. The guidelines
are very detailed and somewhat complex. At the same time the Legal
Division prepared the guidelines on living trusts, the FDIC also
adopted an informal policy not to review complex living trust documents
to determine POD coverage but, instead, to recommend that persons
inquiring about such coverage consult with the lawyer who drafted the
living trust. Despite the availability of the FDIC guidelines on living
trusts and the existence of the FDIC's current policy not to review
trust documents, the FDIC still receives numerous questions about the
insurance of POD accounts held in connection with living trusts.
One possibility in simplifying the insurance rules on living trusts
is to limit the scope of the POD regulation to accounts which name
qualifying beneficiaries without reference to any underlying trust
documents. The rule would apply only to the traditional POD account
intended as a free-standing will substitute and would not apply to any
other type of revocable trust extraneous to the POD account itself.
This interpretation of the POD provision would be consistent with the
original rationale for extending separate insurance coverage for this
category of account and revise the coverage rules for the formal type
of revocable account which has added unintended complexity and caused
expansion to this category of coverage.
Request for Comment
The Board of Directors of the FDIC is seeking comment on all of the
above-mentioned possible means of simplifying the deposit insurance
rules, including the likely effect of such changes on consumers and the
banking industry. The Board also is seeking suggestions on any other
ways that the rules might be streamlined, simplified and clarified.
By order of the Board of Directors.
Dated at Washington, D.C., this 14th day of May, 1996.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Deputy Executive Secretary.
[FR Doc. 96-12780 Filed 5-21-96; 8:45 am]
BILLING CODE 6714-01-P
