Simplification of Deposit Insurance Rules

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