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[Federal Register Volume 89, Number 191 (Wednesday, October 2, 2024)]
[Proposed Rules]
[Pages 80135-80154]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-22565]

========================================================================
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.

========================================================================


Federal Register / Vol. 89, No. 191 / Wednesday, October 2, 2024 / 
Proposed Rules

[[Page 80135]]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 375

RIN 3064-AG07

Recordkeeping for Custodial Accounts

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Deposit Insurance Corporation (FDIC) is proposing 
requirements that would 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 accounts with transactional features. The 
proposed requirements also are expected to 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. 
The requirements described in this document would only apply to IDIs 
offering custodial accounts with transactional features and that are 
not specifically exempted as provided in this document.

DATES: Comments must be received on or before December 2, 2024.

ADDRESSES: You may submit comments, identified by RIN 3064-AG07, by any 
of the following methods:
     FDIC Website: https://www.fdic.gov/regulations/laws/federal/. Follow instructions for submitting comments on the agency 
website.
     Email: [email protected]. Include RIN 3064-AG07 in the 
subject line of the message.
     Mail: James P. Sheesley, Assistant Executive Secretary, 
Attention: Comments--RIN 3064-AG07, Federal Deposit Insurance 
Corporation, 550 17th Street NW, Washington, DC 20429.
     Hand Delivery to FDIC: Comments may be hand-delivered to 
the guard station at the rear of the 550 17th Street NW building 
(located on F Street) on business days between 7 a.m. and 5 p.m.
     Public Inspection: Comments received, including any 
personal information provided, may be posted without change to https://www.fdic.gov/resources/regulations/federal-register-publications/. 
Commenters should submit only information that the commenter wishes to 
make available publicly. The FDIC may review, redact, or refrain from 
posting all or any portion of any comment that it may deem to be 
inappropriate for publication, such as irrelevant or obscene material. 
The FDIC may post only a single representative example of identical or 
substantially identical comments, and in such cases will generally 
identify the number of identical or substantially identical comments 
represented by the posted example. All comments that have been 
redacted, as well as those that have not been posted, that contain 
comments on the merits of the proposed rule will be retained in the 
public comment file and will be considered as required under all 
applicable laws. All comments may be accessible under the Freedom of 
Information Act.
    This proposal, all comments received, and a summary of not more 
than 100 words of the proposed rule pursuant to the Providing 
Accountability Through Transparency Act of 2023 are available at 
https://www.fdic.gov/resources/regulations/federal-register-publications/.

FOR FURTHER INFORMATION CONTACT: Division of Resolutions and 
Receiverships: Shivali Nangia, Assistant Director, 972-761-2945, 
[email protected]; Cathy K. Davis, Chief, Claims, 972-761-2336, 
[email protected]. Division of Depositor and Consumer Protection: Luke H. 
Brown, Associate Director, Supervisory Policy, 202-898-3842, 
[email protected]; Meron Wondwosen, Assistant Director, Supervisory 
Policy, 202-898-7211, [email protected]; Edward J. Hof, Senior 
Policy Analyst, 202-898-7213, [email protected]. Legal Division: Vivek V. 
Khare, Senior Counsel, 202-898-6847, [email protected]; James S. Watts, 
Counsel, 202-898-6678, [email protected].

SUPPLEMENTARY INFORMATION:

Introduction

    The business of deposit taking in the digital age has evolved, 
creating new opportunities for IDIs to gain access to deposits through 
third parties in increasingly complex relationships. This evolution has 
included the widespread use of digital channels, including websites and 
mobile applications, which created new opportunities and options to 
deliver financial products and services to consumers. However, it has 
also created risks for consumers, including confusion regarding the 
applicability and availability of deposit insurance to protect their 
money from loss.
    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 Synapse Financial 
Technologies, Inc. (Synapse), a technology company that worked with 
several IDIs and numerous 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. In many cases, it was advertised that the 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. Consumers have been unable to access their funds 
at IDIs for an extended period of time while the IDIs attempt to 
determine ownership of the funds deposited by fintechs. Since May 2024, 
the FDIC National Center for Consumer and Depositor Assistance has 
received more than a thousand inquiries, complaints, and concerns from 
consumers regarding the Synapse bankruptcy. Published reports further 
suggest that some of those consumers affected by the Synapse bankruptcy 
had placed the funds in accounts through a fintech that they used for 
day-to-day living expenses thereby intensifying the effect of their 
loss of access.
    In the wake of Synapse's bankruptcy, including the fact that IDIs 
encountered significant difficulties in obtaining, reviewing, and 
reconciling Synapse's

[[Page 80136]]

records, the FDIC believes these circumstances have raised concerns 
about the accuracy and integrity of those records. These circumstances 
also raise questions about the completeness, accuracy, and integrity of 
custodial deposit account records for other IDIs' arrangements with 
third parties to deliver deposit products and services.
    Custodial deposit account records are critical when the FDIC makes 
deposit insurance determinations following the failure of an IDI that 
has custodial deposit account records. The FDIC generally relies upon a 
failed IDI's records to determine deposit insurance coverage, but in 
certain circumstances, the FDIC's regulations also provide for 
consideration of records of parties other than the failed IDI if such 
records are maintained in good faith and in the regular course of 
business.\1\ The events described above highlight substantial risks 
with respect to the FDIC fulfilling its statutory mandate to maintain 
public confidence in the banking system by ensuring the prompt and 
accurate payment of deposit insurance in the case of an IDI's failure. 
Specifically, if an IDI fails, and it has an arrangement with a third 
party where custodial deposit account recordkeeping is inadequate or 
unreliable, such a situation would impede the FDIC's ability to 
promptly make deposit insurance determinations for an IDI holding 
custodial deposit accounts, and if necessary, pay claims to depositors. 
The FDIC's mission is rooted in maintaining public confidence in the 
banking system, which heavily relies on the prompt and accurate payment 
of insured deposits. Any inaccuracies or discrepancies in the relevant 
records can delay a deposit insurance determination, leaving depositors 
in a state of uncertainty during a critical time.
---------------------------------------------------------------------------

    \1\ See 12 CFR 330.5.
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    In addition, recent events have exposed potential risks to current 
beneficial owners, including consumers, of deposits at IDIs, even in 
the absence of the failure of an IDI. These issues create uncertainty 
that could undermine the public confidence that underpins IDIs and our 
nation's broader financial system.
    These events, along with the increased complexity of certain 
arrangements, demonstrate a need to strengthen IDIs' recordkeeping 
practices with respect to custodial deposit accounts, and in 
particular, those with transactional features. The FDIC believes that 
custodial deposit accounts with transactional features present unique 
challenges in resolving a failed IDI because making a deposit insurance 
determination requires the FDIC to not only gather and process records 
of beneficial ownership maintained by parties other than the failed 
IDI, but also to reconcile those records with a significant amount of 
payment activity taking place with respect to the accounts.
    The FDIC neither prohibits nor discourages IDIs from providing 
banking services to customers of any specific class or type, as 
permitted by law or regulations. The FDIC notes that the Federal 
banking agencies have recently taken steps to address IDIs' management 
of the risks involved in arrangements with non-bank third parties, 
including fintech companies,\2\ as well as steps to address consumer 
confusion relating to the nature and application of deposit insurance 
coverage. In addition, the Federal banking agencies have addressed 
supervisory concerns, including concerns relating to consumer 
protection, at specific IDIs through enforcement actions. However, the 
FDIC believes rulemaking is also warranted to promote the prompt 
payment of deposit insurance in the event of the failure of an IDI 
holding custodial deposit accounts with transactional features.
---------------------------------------------------------------------------

    \2\ For example, the agencies recently issued a Joint Statement 
on Banks' Arrangements with Third Parties to Deliver Bank Deposit 
Products and Services. See FIL-45-2024 (July 25, 2024).
---------------------------------------------------------------------------

    The FDIC is accordingly seeking comment on all aspects of the 
proposed rule, including specific questions provided herein, that would 
strengthen IDIs' recordkeeping for custodial deposit accounts with 
transactional features. The proposed rule is also expected to result in 
depositor and consumer protection benefits even in the absence of the 
failure of an IDI.

Summary of Primary Provisions

    The proposed rule would establish new recordkeeping requirements at 
IDIs for ``custodial deposit accounts with transactional features,'' 
subject to a list of specific exemptions. IDIs holding deposits within 
the scope of the proposed rule would be required to maintain records 
identifying the beneficial owners of those deposits, the balance 
attributable to each beneficial owner, and the ownership category in 
which the deposited funds are held. The IDI could maintain those 
records itself or, if certain additional requirements are satisfied, 
the IDI could maintain the records through an arrangement with a third 
party (which could include a vendor, processor, software or service 
provider, or a similar entity). The proposed rule provides a specific 
electronic file format for records on beneficial owners and their 
interests in the deposited funds. This standardized format would enable 
the FDIC to more quickly gather and use these records if a deposit 
insurance determination becomes necessary.
    The proposed rule would provide that where IDIs choose to maintain 
the required records through a contractual relationship with a third 
party, additional requirements would need to be satisfied. These 
additional requirements are intended to promote the integrity of the 
records and ensure that the IDI has continued access to the records. 
Among other things, the IDI would be required to have direct, 
continuous, and unrestricted access to the records of the beneficial 
owners, including, but not limited to, in the event of the business 
interruption, insolvency, or bankruptcy of the third party. In 
addition, reconciliation of these records would be required, as would 
periodic validation of the third party's records by a person 
independent of the third party.
    The proposal would require specific actions by IDIs to achieve and 
maintain compliance with the rule. IDIs that hold custodial deposit 
accounts with transactional features would be required to establish and 
maintain written policies and procedures to achieve compliance with the 
rule's requirements. IDIs would be required to complete an annual 
certification of compliance, signed by an executive officer, stating 
that the IDI has implemented and tested the recordkeeping requirements. 
IDIs would further be required to complete a report annually that (1) 
describes any material changes to their information technology systems 
relevant to compliance with the rule; (2) lists the account holders 
that maintain custodial deposit accounts with transactional features, 
the total balance of those custodial deposit accounts, and the total 
number of beneficial owners; (3) sets forth the results of the 
institution's testing of its recordkeeping requirements; and (4) 
provides the results of the required independent validation of any 
records maintained by third parties.

I. Background and Need for Rulemaking

FDIC, Its Mission, and Pass-Through Deposit Insurance

    The FDIC is an independent Federal agency, and its mission is to 
maintain stability and public confidence in the nation's financial 
system by, among other things, insuring deposits at all IDIs. As of 
June 30, 2024, there are over

[[Page 80137]]

4,500 IDIs in the United States. Since 1933, the FDIC has taken action 
in accordance with its mission to restore public confidence in the 
banking system in times of financial turmoil. The FDIC has proactively 
sought to protect depositors and promote public confidence in insured 
deposits.
    The FDIC only insures deposits of IDIs, and deposit insurance is 
only paid in the event of the failure of an IDI. Importantly, the 
FDIC's deposit insurance coverage does not provide consumers and 
businesses with general protection against the default, insolvency, or 
bankruptcy of any non-bank entities with which IDIs might do business, 
even if a non-bank entity has a relationship with, or deposits funds 
at, an IDI.\3\
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    \3\ FDIC deposit insurance also does not protect against losses 
due to theft or fraud, which are addressed by other laws.
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    The FDIC has long recognized the significance of custodial deposit 
accounts in the banking system, and specifically accommodates these 
types of accounts in its deposit insurance regulations through the 
concept of pass-through deposit insurance. This concept, which dates 
back to the 1930s, provides a mechanism for recognizing the owners of 
deposited funds and insuring their interests in the deposit to the same 
extent as if the owners had deposited the funds directly at the bank, 
provided certain conditions are met.\4\ Under the pass-through 
insurance rules, the FDIC may rely on records of those other than a 
failed IDI to identify depositors and their insured deposits, if such 
records are maintained in good faith and in the regular course of 
business. If the regulatory pass-through insurance requirements are 
satisfied, each owner's interest in the deposit at the IDI is 
separately insured up to the statutory deposit insurance limit, 
currently $250,000 for deposits held in each deposit ownership 
category. If the pass-through insurance requirements are not satisfied, 
the deposit is insured to the person named on the IDI's records and 
aggregated with any other deposits that person holds at the same IDI in 
the same ownership category. The FDIC makes determinations with respect 
to pass-through deposit insurance coverage at the time an IDI fails.\5\
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    \4\ The FDIC is statutorily required to aggregate, for purposes 
of the deposit insurance limit, deposits maintained by a depositor 
``either in the name of the depositor or in the name of any other 
person. . . .'' 12 U.S.C. 1821(a)(1)(C). The FDIC's pass-through 
insurance rules initially applied only to deposits maintained by 
specific types of non-bank entities, though this limitation was 
subsequently removed.
    \5\ By statute, the FDIC is required to pay deposit insurance 
``as soon as possible'' following the liquidation, closing, or 
winding up of any IDI. 12 U.S.C. 1821(f)(1).
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Custodial Deposit Accounts and Technology Developments

    Custodial deposit accounts have been a fixture of the U.S. banking 
system for decades. A ``custodial deposit account'' arrangement, for 
purposes of this proposal, is a relationship where one party is 
responsible for opening a deposit account at an IDI on behalf of 
others, who may own the funds but often lack a direct relationship with 
the bank. The term ``custodial deposit account'' may have different 
meanings in other banking contexts, and the FDIC does not intend to 
address or affect, through this rulemaking, any requirements that might 
apply in other contexts in which the term ``custodial deposit account'' 
is used.
    Coupled with technology innovations and advancements, custodial 
deposit account arrangements have transformed the industry in many 
respects over the years, resulting in new business models for providing 
banking and financial services. For example, companies have been formed 
to meet the desire of investors to deposit their money at IDIs paying 
the highest interest rates on deposits. Other firms have been formed to 
meet the need of organizations and individuals to divide large deposits 
exceeding the statutory deposit insurance limit across multiple IDIs 
for the purpose of ensuring that the total is fully insured by the 
FDIC.
    Custodial deposit accounts have also, in some cases, been utilized 
in the development of products intended to meet the needs of consumers. 
For example, prepaid cards and other similar products were developed to 
offer consumers new ways of accessing and spending money without 
maintaining a traditional deposit account at an IDI.\6\ Based on a 
national survey conducted by the FDIC in 2021, 6.9 percent of all 
households were using prepaid cards.\7\ The FDIC's experience is that 
prepaid cards generally utilize custodial deposit accounts at IDIs to 
hold consumers' funds until they are spent.
---------------------------------------------------------------------------

    \6\ See FDIC National Survey of Unbanked and Underbanked 
Households (October 2022), available at https://www.fdic.gov/analysis/household-survey/2021report.pdf.
    \7\ FDIC, 2021 FDIC National Survey of Unbanked and Underbanked 
Households.
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    More recently, this evolution of banking and financial services has 
increasingly included non-bank fintech companies offering consumers new 
options and alternatives for accessing banking products and services. 
Increasingly many consumers are choosing to open deposit accounts 
indirectly through fintech companies, typically online or through 
mobile apps. FDIC survey results indicate that a significant number of 
consumers use non-bank (e.g., fintech) online payment services to make 
purchases online and to send or receive money. Households also reported 
relying on this method to pay bills, make purchases in person, receive 
income or save or ``keep money safe.'' Nearly half of all households, 
or 46.4 percent, were using non-bank online payment services at the 
time of the survey.\8\ These fintech companies' accounts at IDIs 
frequently, though not always, depend upon custodial deposit accounts.
---------------------------------------------------------------------------

    \8\ FDIC, 2021 FDIC National Survey of Unbanked and Underbanked 
Households.
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    Alternatively, some IDIs are entering into and expanding business 
arrangements with fintech companies to deliver the IDI's deposit 
products and services. These arrangements can take many different 
forms, and they continue to evolve. For example, an IDI and a fintech 
company might enter into an arrangement where the fintech company 
offers the IDI's deposit products and services to the fintech company's 
customers. In other instances, fintech companies might simply deposit 
their customers' funds at an IDI. In such cases, the fintech company 
may open a custodial deposit account at an IDI as an agent or 
custodian. Fintech companies have sometimes represented to their 
customers that the customers' funds are FDIC-insured, or that they are 
insured by the FDIC on a ``pass-through'' basis.
    Many custodial deposit account arrangements also increasingly rely 
on third parties that, depending on the context, might be referred to 
as, for example, ``processors,'' ``middleware providers,'' or ``program 
managers,'' to perform a range of critical functions. These third 
parties' functions have included accepting deposits, maintaining a 
transaction system of record, processing payments, performing 
regulatory compliance functions, providing customer-facing technology 
applications, servicing accounts, and directly interacting with 
customers. In this context, a customer may be a consumer or a business. 
Relationships between IDIs and these third parties can be quite 
complex. While this complexity can contribute to the development of 
novel and innovative products, in the absence of reliable recordkeeping 
this complexity adds to the operational challenges faced by the FDIC in 
the event of an IDI's failure, in particular when the FDIC is required 
to make deposit insurance determinations. Complex custodial deposit 
account arrangements also

[[Page 80138]]

introduce significant potential for operational disruptions and other 
risks outside the context of an IDI's failure, as demonstrated by 
recent events.

Synapse Bankruptcy

    Synapse was a so-called ``middleware provider'' for numerous 
fintech companies, meaning that its software bridged the information 
technology systems of fintech companies and IDIs. More specifically, 
Synapse provided application programming interfaces (APIs) and 
technological infrastructure that allowed businesses to integrate 
banking services into their own applications. This also included 
opening and managing deposit accounts, issuing debit and credit cards, 
and facilitating payments for customers. Synapse enabled fintech 
companies to quickly develop products and services that used deposit 
accounts at IDIs to hold customers' funds. Synapse had relationships 
with several IDIs. In these arrangements, fintech companies developed 
user interfaces and application logic, and importantly, maintained the 
ledgers of their customers, including the deposit amounts attributed to 
each individual customer.
    Synapse filed for bankruptcy protection in late April 2024. The 
bankruptcy of Synapse resulted in severe hardship for consumers that is 
deeply troubling to the FDIC.\9\ In early May 2024, one of the IDIs 
that partnered with Synapse froze deposits that had been placed at the 
IDI through relationships with Synapse and the fintech companies that 
Synapse serviced. The IDI stated at the time that it froze the accounts 
because Synapse denied the IDI access to an essential system through 
which the IDI accessed information on end users, deposits, and 
transactions. As a result, consumers who had deposited funds through 
these fintech companies that partnered with Synapse were unable to 
access their funds held at the IDI.
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    \9\ While many facts relevant to Synapse's bankruptcy are 
disputed among the relevant parties, the events prompting the FDIC's 
proposal are not.
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    The bankruptcy court appointed a trustee for Synapse on May 24, 
2024, and both the bankruptcy court and the trustee have sought to 
facilitate the release of the fintech customers' funds that are being 
held at the IDIs as quickly as possible. Court filings state that the 
trustee had difficulty obtaining access to Synapse's data, due in part 
to Synapse's termination of its employees, including employees who held 
credentials necessary to access systems and databases where the 
relevant records were stored. Court filings also state that even after 
obtaining access to Synapse's data, the trustee and IDIs have 
experienced difficulties reviewing and reconciling this data against 
the IDIs' data. In addition, the trustee has indicated that the 
deposits at the IDIs appear to be insufficient to cover the amounts 
owed by the fintech companies to their customers. The trustee sent a 
letter to Federal banking regulators on June 20, 2024, seeking 
assistance in communicating with end users whose funds are affected by 
the Synapse bankruptcy, and noting that the bankruptcy's impact on end 
users of the fintechs has been devastating.

FDIC and Other Regulators' Responses

    Synapse's bankruptcy illustrates a number of risks associated with 
these arrangements. While some of those issues fall outside the scope 
of this rulemaking, which is focused on strengthening IDIs' 
recordkeeping with respect to certain custodial deposit accounts, a 
brief discussion on regulatory responses to date provides helpful 
context and may serve as a reminder of regulators' broader efforts in 
this area.
    Following the freeze of deposits at an IDI in the aftermath of the 
Synapse bankruptcy, many consumers have contacted the FDIC to ask 
questions, raise concerns, or seek the return of their funds, as 
evidenced by the more than 1,000 consumer inquiries that were referred 
to the FDIC since May 2024. It is clear that some consumers 
misunderstood the nature of the relationships they entered into, the 
nature of deposit insurance, or both.
    Even prior to Synapse's bankruptcy, the FDIC has observed instances 
where consumers have been unable to access funds in custodial deposit 
accounts at IDIs. For example, in 2022, Voyager Digital claimed to hold 
customers' U.S. dollar funds at an IDI. Voyager falsely represented 
that customer funds held with Voyager were insured by the FDIC up to 
$250,000 in the event of Voyager's failure, not just the failure of the 
IDI where Voyager deposited customer funds.\10\ When Voyager declared 
bankruptcy in July 2022, many customers were unable to access the funds 
in their accounts for a period of time. This led to significant 
uncertainty and frustration for consumers who were unable to access the 
deposited funds, and underscored the importance of clear and accurate 
disclosures to consumers regarding deposit insurance coverage.
---------------------------------------------------------------------------

    \10\ See FDIC Press Release 56-2022.
---------------------------------------------------------------------------

    In recent years, the FDIC has observed an increasing number of 
instances where financial service providers, other entities, or 
individuals have engaged in false advertising or made 
misrepresentations about FDIC insurance coverage on the internet in 
violation of section 18(a)(4) of the Federal Deposit Insurance Act (FDI 
Act). For example, the FDIC has seen situations where companies in 
relationships with IDIs (e.g., for the placement of customer deposits) 
have made false statements on the companies' websites stating or 
suggesting that the companies are FDIC-insured and/or that their 
uninsured financial products are insured by the FDIC. In other 
instances, companies have misused the FDIC logo or failed to identify 
an IDI with which they have a relationship. These types of 
misrepresentations and omissions would be false and misleading and have 
potential to harm consumers.
    Consequently, the FDIC has proactively sought to protect depositors 
and consumers, promote public confidence in insured deposits, and 
prevent false and misleading representations about the manner and 
extent of FDIC deposit insurance. The FDIC has taken appropriate action 
when it becomes aware of prohibited conduct. For example, the FDIC has 
issued advisory letters pursuant to 12 CFR 328.106 in situations where 
the FDIC had reason to believe that these non-IDI third parties may be 
misusing an FDIC-Associated Image or FDIC-Associated Terms and/or 
making false or misleading representations regarding FDIC deposit 
insurance. In these actions, the FDIC requested appropriate corrective 
action to be taken so that consumers are not misled as to the non-IDI's 
insured status, or the extent or manner of deposit insurance offered to 
them.
    The FDIC has taken other steps to address concerns that parties are 
misrepresenting the nature and extent of deposit insurance coverage. In 
December 2023, the FDIC issued a final rule on FDIC Official Signs and 
Advertising Requirements, False Advertising, Misrepresentation of 
Insured Status, and Misuse of the FDIC's Name or Logo (FDIC Signs and 
Misrepresentation Rule).\11\ This rule requires, among other things, 
disclosures differentiating deposits and non-deposit products and 
clarifies the FDIC's rules regarding misrepresentations of deposit 
insurance coverage to address specific scenarios where information 
provided to consumers may be misleading. For example, the rule 
clarifies that if a non-

[[Page 80139]]

bank makes a statement regarding deposit insurance coverage, it is a 
material omission by the non-bank to fail to clearly and conspicuously 
disclose that it is not an IDI, and that FDIC insurance only covers the 
failure of the IDI. The FDIC has continued to engage with IDIs and 
others to help them understand their obligations under the FDIC Signs 
and Misrepresentation Rule.\12\
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    \11\ 89 FR 3504, 3516 (Jan. 18, 2024).
    \12\ For example, the FDIC has held seminars for bankers on the 
Sign and Misrepresentation Rule and has issued questions and answers 
relating to the rule online. See https://www.fdic.gov/resources/deposit-insurance/questions-and-answers-related-to-the-fdics-part-328-final-rule.html.
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    The FDIC maintains public facing portals on its website where the 
public can submit questions or complaints to the FDIC about a number of 
topics. One portal, the FDIC Information and Support Center, allows the 
public to submit inquiries about deposit insurance coverage as well as 
complaints and inquiries about IDIs. A second portal, the FDIC Deposit 
Insurance Misrepresentation Form, provides an opportunity for the 
public to submit a complaint or concern regarding potential false 
statements about an entity or product claiming to be FDIC-insured or 
making false statements or casting doubt on whether FDIC insurance 
applies and is therefore paid in the event of an IDI failure.
    In addition to communicating with IDIs and third parties regarding 
their FDIC Signs and Misrepresentation Rule obligations, the FDIC also 
conducts public outreach and education initiatives to promote public 
awareness of deposit insurance, including the launch of a national 
campaign entitled ``Know Your Risk. Protect Your Money.'' This 
consumer-focused campaign informs consumers on how deposit insurance 
protects their deposits in the event of an IDI's failure and features a 
piggy bank known as ``Penny the Pig,'' aimed at reaching people who 
have lower confidence in the U.S. banking system, the unbanked, and 
consumers who use mobile payment systems, alternative banking services 
and financial products that may appear to be FDIC-insured, but are 
not.\13\
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    \13\ See press release, ``FDIC Launches Public Campaign to Raise 
Awareness About Deposit Insurance'' (Oct. 11, 2023).
---------------------------------------------------------------------------

    Another public education initiative is conducted through a 
publication entitled FDIC Consumer News, which is a series of monthly 
newsletters directed to the general public that provides practical 
guidance on how to become a smarter, safer user of financial services 
including helpful tips and common-sense strategies to protect consumer 
money. Through the various consumer news articles, the FDIC addresses 
consumer confusion related to digital banking, including regarding the 
emergence and use of third-party, non-bank apps. Some recent examples 
of the relevant articles include ``Banking with Third Party Apps'' (May 
2024), which warns consumers of the risks in using non-bank companies 
for financial services; ``Is My Money Insured by the FDIC?'' (July 
2023), which reminds consumers that FDIC deposit insurance does not 
apply if a non-bank company fails; ``The Importance of Deposit 
Insurance and Understanding Your Coverage'' (August 2022), which lists 
the top five things to know about deposit insurance coverage; ``Banking 
with Apps'' (November 2022), which provides an overview of the 
differences in deposit products offered by IDIs and non-bank companies; 
and ``Is Digital Banking for Me?'' (April 2020), which offers key 
considerations of using online and mobile banking technology. The FDIC 
will continue to consider further measures to address consumer 
confusion about deposit insurance coverage.
    In addition, the FDIC and the other Federal banking agencies have 
recently published a number of issuances to IDIs concerning the risks 
involved in arrangements with non-bank third parties, including fintech 
companies. As recently explained in the Federal banking agencies' Joint 
Statement on Banks' Arrangements with Third Parties to Deliver Bank 
Deposit Products and Services, ``the agencies have observed an 
evolution and expansion of these arrangements to include more complex 
arrangements that involve the reliance on third parties to deliver 
deposit products and services.'' \14\ It also indicated that 
``[d]epending on the structure, third-party arrangements for the 
delivery of deposit products and services can involve elevated risk.'' 
The Federal banking agencies also recently published a Request for 
Information soliciting input on the nature of bank-fintech 
arrangements, effective risk management practices regarding bank-
fintech arrangements, and the implications of such arrangements, 
including whether enhancements to existing supervisory guidance might 
be helpful in addressing risk.\15\
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    \14\ See FIL-45-2024 (July 25, 2024).
    \15\ Id.
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    An IDI's use of a non-bank third party to perform activities 
related to its deposit-taking function does not diminish its 
responsibility to conduct those activities in a manner consistent with 
safe and sound practices and in compliance with applicable laws and 
regulations, including, but not limited to, those designed to protect 
consumers. As such, IDIs have also been subject to a number of consent 
orders and other actions by the Federal banking agencies related to 
these types of arrangements.

Need for Rulemaking

    The FDIC neither prohibits nor discourages IDIs from providing 
banking services to customers of any specific class or type, as 
permitted by law or regulation. It has become apparent from the events 
described above that IDIs' recordkeeping practices should be enhanced 
with respect to certain custodial deposit account arrangements. The 
FDIC believes it would be beneficial to address these issues in a 
consistent manner across the industry through rulemaking, rather than 
rely solely on the supervisory and enforcement processes.
    The events that occurred following Synapse's bankruptcy demonstrate 
the importance of strong recordkeeping practices in certain custodial 
account relationships. The trustee and IDIs encountered significant 
difficulties in obtaining, reviewing, and reconciling Synapse's records 
against the IDIs' records. While none of the IDIs that had business 
arrangements with Synapse have failed, the difficulties encountered by 
the parties obtaining, reviewing, and reconciling Synapse's records 
against the IDIs' records would likely also have hindered the FDIC's 
ability to make a prompt and accurate deposit insurance determination 
in the event one of the IDIs had failed. Depositors could have been 
affected by delays in obtaining their insured deposits, depending on 
the accuracy and completeness of account records and how long it would 
have taken to gather and review records.
    Looking beyond the case of Synapse, these types of arrangements 
between IDIs and fintechs are becoming more prevalent in the market, 
and the FDIC believes the increased complexity of certain custodial 
deposit account arrangements warrants strengthened recordkeeping to 
support a prompt payment of deposit insurance in the event of an IDI's 
failure. Accurate and complete custodial deposit account records are 
absolutely critical in the event of an IDI's failure to ensure that the 
FDIC is able to make prompt and accurate payment of deposit insurance 
for all insured depositors. Prompt payment of deposit insurance is 
especially important where custodial deposit account arrangements are 
used to support day-to-day financial needs. For example, many consumers 
are increasingly choosing to open deposit

[[Page 80140]]

accounts through fintech companies, typically online or though mobile 
apps. From a consumer's perspective, these fintechs offer financial 
services through such accounts that may resemble IDI deposit accounts, 
and consumers often rely on these accounts as substitutes for 
traditional demand deposit accounts. Specifically, consumers use these 
accounts to support the inflows and outflows of daily transactions and 
expenses, such as making purchases and sending or receiving money, 
including income.\16\ The transactional nature of these accounts, 
including high volumes of per customer transfers and digital payments, 
significantly increases the amount of activity compared to other types 
of custodial deposit accounts.
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    \16\ In addition, fintechs allow consumers to pay merchants and 
transfer funds on their phones, often utilizing ``digital wallets'' 
that have credit and debit cards stored. With mobile technology, 
consumers can use a single device to pay for goods or initiate 
online payments faster and easier.
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    A lack of accurate and complete custodial deposit account records, 
as described in this proposal, would adversely affect the FDIC's 
ability to make a prompt and accurate deposit insurance determinations, 
and pay claims to depositors in the event of an IDI failure. In 
addition, these circumstances have exposed potential risks for current 
beneficial owners of deposits at IDIs, even in the absence of the 
failure of an IDI. These issues create uncertainty that undermines the 
confidence that underpins IDIs and our nation's broader financial 
system.

II. Legal Authority

    The FDIC is authorized to prescribe rules and regulations as it may 
deem necessary to carry out the provisions of the FDI Act.\17\ The FDIC 
has previously used this authority to issue regulations providing 
specificity on deposit insurance coverage, including defining the 
recognized ownership categories and how deposit insurance is 
calculated. Under the FDI Act, the FDIC is responsible for paying 
deposit insurance ``as soon as possible'' following the failure of an 
IDI.\18\ To pay deposit insurance, the FDIC uses a failed IDI's records 
to aggregate the amounts of all deposits that are maintained by a 
depositor in the same right and capacity, and then applies the standard 
maximum deposit insurance amount of $250,000.\19\
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    \17\ 12 U.S.C. 1819(a)(Tenth), 1820(g), and 1821(d)(4)(B)(iv).
    \18\ 12 U.S.C. 1821(f)(1).
    \19\ 12 U.S.C. 1821(a)(1)(C) and (E).
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    The FDIC generally relies upon a failed IDI's deposit account 
records to identify deposit owners and the right and capacity in which 
deposits are owned. In certain circumstances, if specific regulatory 
requirements are satisfied, the FDIC will consider the records of the 
depositor or another party when making a deposit insurance 
determination.\20\
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    \20\ See 12 CFR 330.5.
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III. The Proposed Rule

Overview

    The proposed rule would establish new recordkeeping requirements 
for IDIs with custodial deposit accounts with transactional features, 
subject to a list of defined exemptions. If IDIs hold custodial deposit 
accounts with transactional features that are subject to the rule, they 
would be required to maintain records identifying the beneficial owners 
of those deposits, the balance attributable to each beneficial owner, 
and the ownership category in which the deposited funds are held. The 
IDI could maintain those records itself or, if certain additional 
requirements are satisfied, the IDI could maintain the records through 
an arrangement with a third party (which could include a vendor, 
processor, software or service provider, or a similar entity). The 
proposed rule provides a specific electronic file format for records on 
beneficial owners and their interests in the deposited funds. This 
standardized format would enable the FDIC to more quickly gather and 
use these records when a deposit insurance determination becomes 
necessary.\21\
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    \21\ Use of standardized file formats may also have other 
benefits, such as simplifying the transition of recordkeeping if an 
IDI seeks to end a relationship with a third party.
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    For IDIs that choose to maintain the required records through a 
contractual relationship with a third party, certain additional 
requirements would need to be satisfied. These additional requirements 
are intended to promote the integrity of records and ensure that the 
IDI has continued access to the records. Among other things, the IDI 
would be required to 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. 
Reconciliation of these records would be required, as would periodic 
validation of the third party's records by a person independent of the 
third party.
    The proposal also would require certain measures by IDIs to achieve 
and maintain compliance with the rule. IDIs that hold custodial deposit 
accounts with transactional features would be required to establish and 
maintain written policies and procedures to achieve compliance with the 
rule's requirements. IDIs would be required to complete an annual 
certification of compliance, signed by the chief executive officer, 
chief operating officer, or the highest-ranking official of the 
institution, stating that the IDI has implemented and tested the 
recordkeeping requirements. IDIs would further be required to complete 
a report annually that (1) describes any material changes to their 
information technology systems relevant to compliance with the rule; 
(2) lists the account holders that maintain custodial deposit accounts 
with transactional features, the total balance of those custodial 
deposit accounts, and the total number of beneficial owners; (3) sets 
forth the results of the institution's testing of its recordkeeping 
requirements; and (4) provides the results of the required independent 
validation of any records maintained by third parties. Both the 
compliance certification and report would be submitted to the FDIC and 
the IDI's primary Federal regulator.

Custodial Deposit Accounts With Transactional Features

    The proposed rule's requirements would apply to IDIs that hold 
``custodial deposit accounts with transactional features,'' other than 
custodial deposit accounts specifically exempted by the rule as 
described below. The term ``custodial deposit accounts with 
transactional features'' would be defined as a deposit account that 
meets three requirements: (1) the account is established for the 
benefit of beneficial owner(s); (2) the account holds commingled 
deposits of multiple beneficial owners; and (3) a beneficial owner may 
authorize or direct a transfer through the account holder from the 
account to a party other than the account holder or beneficial owner. 
``Beneficial owner'' is defined as ``a person or entity that owns, 
under applicable law, the funds in a custodial deposit account.'' \22\
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    \22\ ``Beneficial owner'' as used in the proposed rule is 
intended to mirror the meaning of beneficial owner as currently used 
for deposit insurance coverage purposes under 12 CFR part 330.5. The 
proposed rule does not intend to incorporate the meaning of 
``beneficial owner'' as that term may be used for purposes of other 
laws applicable to IDIs, such as the Bank Secrecy Act. The proposed 
rule's definition of ``beneficial owner'' should not be confused 
with other definitions of the same term, including that associated 
with the Corporate Transparency Act or the Customer Due Diligence 
rule, which relate to beneficial owners of legal entities, rather 
than accounts.
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    The proposal distinguishes a ``beneficial owner'' from an ``account 
holder,'' with ``account holder'' defined

[[Page 80141]]

as ``the person or entity who opens or establishes a custodial deposit 
account with transactional features with an insured depository 
institution.'' This definition does not require that the ``account 
holder'' is the titled owner of the account. For example, some 
businesses establish accounts at IDIs for the benefit of their 
customers, but the account is titled in the name of the IDI itself for 
benefit of the business's customers. In such instances, the FDIC would 
interpret the ``account holder'' under the proposed rule to be the 
business that contracted with the IDI to establish the custodial 
deposit account.
    The proposed rule's scope is limited to custodial deposit accounts 
with transactional features that hold deposits, meaning that other 
types of custodial accounts, such as those holding non-deposit 
securities, would be excluded.\23\ The proposed rule would apply to 
custodial deposit accounts with transactional features, regardless of 
the date a particular custodial deposit account was established. 
Custodial deposit accounts with transactional features already in 
existence would be subject to the proposed rule's requirements.
---------------------------------------------------------------------------

    \23\ The proposal defines ``deposit'' by reference to section 
3(l) of the FDI Act, 12 U.S.C. 1813(l).
---------------------------------------------------------------------------

    As noted above, the definition of ``custodial deposit account with 
transactional features'' includes, as one of its criteria, that a 
beneficial owner may authorize or direct a transfer through the account 
holder from the account to a party other than the account holder or 
beneficial owner. By including this prong, the FDIC intends to apply 
the proposed recordkeeping requirements only to custodial deposit 
accounts that are established and used in a manner that allows 
beneficial owners to direct a transfer of funds from the account to 
another party--for example, to make purchases or pay bills.
    The FDIC believes that, in some custodial deposit account 
arrangements, IDIs allow the account holder to submit payment 
instructions from beneficial owners to the IDI in order to make funds 
transfers. Such custodial deposit accounts would fall within the scope 
of the proposed rule and would be subject to its recordkeeping 
requirements.\24\ If, on the other hand, the IDI only returns the funds 
held in the custodial deposit account to the account holder or 
beneficial owner, the account activity would not be ``transactional'' 
in the sense that term is used under the proposed rule.
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    \24\ The proposed rule's definition is not limited to situations 
where the transfer takes place directly from the custodial account. 
If, for example, funds are routinely accomplished by transferring 
funds from the custodial account to another account, and the 
transfers to third parties are made from the second account, the 
FDIC believes the first account would fall within the proposed 
rule's scope.
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Exemptions

    Where the FDIC believes its policy objectives would not be advanced 
by the additional recordkeeping requirements, the proposal would 
expressly exempt certain custodial deposit accounts from the new 
recordkeeping requirements even if they have transaction features. The 
proposal would accomplish this through a list of specific exemptions. 
As discussed below, given the FDIC's experience in managing these 
relationships, additional recordkeeping requirements for a number of 
custodial deposit accounts would not be required even if they have 
transactional features.
    The proposed rule exempts from its scope custodial deposit accounts 
that hold only trust deposits, as described in the FDIC's deposit 
insurance regulations for trust accounts set forth at 12 CFR 330.10 and 
330.12. These custodial deposit accounts are established in many cases 
by a trustee that already has a duty under State law to maintain 
records regarding the beneficial owners of the funds.
    The proposal exempts from its recordkeeping requirements custodial 
deposit accounts established at an IDI by government depositors. There 
are a variety of circumstances in which government depositors establish 
deposit accounts that hold funds for others, such as accounts 
maintained for the payment of government benefits. In these cases, the 
FDIC believes that the safeguards and controls imposed by statute and 
regulation will generally be sufficient to ensure that accurate records 
are available on a regular basis, including in the event of an IDI's 
failure.
    The proposal also would exempt custodial deposit accounts 
established by brokers or dealers under the Securities and Exchange Act 
of 1934, and investment advisers under the Investment Advisers Act of 
1940. These entities are already subject to recordkeeping requirements 
under Federal and State laws in addition to regulatory supervision, and 
the FDIC believes these measures should generally mitigate the issues 
addressed through this proposal.
    The proposed rule exempts custodial deposit accounts established by 
attorneys or law firms on behalf of clients, commonly known as interest 
on lawyers trust accounts (IOLTA accounts). The FDIC recognizes that 
attorneys and law firms maintaining IOLTA accounts are subject to 
independent recordkeeping requirements under State law, and IOLTA 
accounts generally would not be used for the sort of day-to-day 
transactions that introduce significant complexity into a potential 
deposit insurance determination in the event of an IDI's failure.
    The proposal exempts custodial deposit accounts maintained in 
connection with employee benefit plans and retirement plans, as 
described in 12 CFR 330.14. These accounts could be maintained in the 
name of a trustee or plan administrator and used for defined benefit 
plans, defined contribution plans, and other employee benefit plans. 
The FDIC believes that these accounts are subject to independent 
recordkeeping requirements under Federal and State laws, and the 
accounts are not used for transactions in a manner that would add to 
the complexity of a potential deposit insurance determination.
    The proposal would exempt accounts maintained by real estate 
brokers, real estate agents, title companies, and qualified 
intermediaries under the Internal Revenue Code. The FDIC believes these 
accounts generally hold an owner's funds for a limited period of time 
for the purposes of completing a specific real estate transaction. 
Historically, these types of accounts have not presented significant 
difficulty to the FDIC in making deposit insurance determinations in 
the event of an IDI's failure.
    The proposal exempts custodial deposit accounts maintained by a 
mortgage servicer in a custodial or other fiduciary capacity. Mortgage 
servicers are subject to recordkeeping requirements by other laws and 
regulations, and funds are transferred from these deposit accounts on 
predictable dates corresponding to contractual deadlines. For this 
reason, the FDIC believes that the additional recordkeeping 
requirements imposed by the proposed rule are unnecessary to achieve 
its policy objectives.
    The proposal exempts custodial deposit accounts where Federal or 
State law prohibits the disclosure of the identities of the beneficial 
owners of the deposits. The FDIC believes that such cases will be 
relatively rare but does not intend to impose any recordkeeping 
requirements through this proposal that directly conflict with other 
legal requirements.
    The proposal exempts from its scope accounts maintained pursuant to 
an agreement to allocate or distribute deposits among participating 
IDIs in a network for purposes other than payment transactions of 
customers of the IDI or participating IDIs. Such

[[Page 80142]]

networks are often referred to as deposit placement networks or 
reciprocal networks and are often administered by a firm that 
coordinates the depositing of funds across a group of institutions to 
ensure that no owner's funds at an individual IDI exceed the deposit 
insurance limit. If the network only allows clients to deposit and 
retrieve their funds from the network of IDIs, its activity should not 
present difficulty in making a deposit insurance determination. 
However, if the network purpose is to enable clients to make payment 
transactions using funds in the custodial deposit account at the 
network IDI(s), such as making purchases through a card network or 
transferring funds to another individual, then the custodial deposit 
accounts would not qualify for the exemption, and therefore would fall 
within the scope of the proposed rule.
    Finally, the proposal would exempt accounts holding security 
deposits tied to property owners for a homeownership, condominium, or 
other similar housing association governed by State law, and accounts 
holding security deposits tied to residential or commercial leasehold 
interests. The FDIC believes such entities are generally subject to 
other recordkeeping requirements that would ensure that beneficial 
owners' interests are available if necessary. Moreover, although such 
custodial deposit accounts may exhibit some degree of transactional 
activity, this is expected to be relatively limited in nature and 
unlikely to present significant difficulty in making a deposit 
insurance determination.

Recordkeeping Requirements and Data Formatting

    In general, the proposed rule would require IDIs that hold any 
custodial deposit accounts with transactional features subject to the 
rule to maintain records establishing the beneficial owners of those 
deposit accounts. These records would establish, for each custodial 
deposit account, the beneficial owners of the custodial deposit 
account, the balance attributable to each beneficial owner, and the 
ownership category in which the beneficial owner holds the deposited 
funds.
    The proposed rule would provide a specific electronic file format 
for maintenance of records on beneficial owners and their interests in 
the deposited funds. This electronic file format is described in 
appendix A to the proposed rule, which provides, for each of the 
required fields: (1) the field's name; (2) a description of its 
contents; (3) the data format for the field; and (4) whether a null 
value is permitted for the field in the file. IDIs' records would be 
required to include the information set forth in these fields for each 
beneficial owner of the deposits in the custodial deposit account, with 
one row in the file per beneficial owner. The specified data file 
format would be required regardless of whether the IDI maintains the 
necessary records itself or maintains those records through an 
arrangement with a third party. The FDIC believes these records of 
beneficial ownership would be useful to the IDI in the event of a 
disruption affecting the account holder, as they would enable the IDI 
to determine the identity of the owners of the funds it is holding on 
deposit. Importantly, these records would also be useful to the FDIC in 
the event of the IDI's failure, as they would enable a prompt payment 
of deposit insurance.
Internal Controls
    The proposed rule would require IDIs to maintain appropriate 
internal controls that include (1) maintaining accurate deposit account 
balances, including the respective individual beneficial ownership 
interests associated with the custodial deposit account, and (2) 
conducting reconciliations against the beneficial ownership records no 
less frequently than at the close of business daily, with the 
understanding that reconciling variances due to unposted transactions 
and timing of transactions occurs and should be addressed based on 
standard banking practices, which are sufficient to manage and resolve 
such variances. Reconciliations compare multiple data elements and, if 
differences are identified, actions are taken to bring the data 
elements into agreement. The reconciliation requirement is intended to 
address the completeness and accuracy of transaction processing. 
Appropriate internal controls should be designed to consider multi-
layer relationships, where applicable, and the associated risks these 
relationships may present related to recordkeeping. For example, such 
controls may be appropriate where an account holder, such as an 
intermediary, collects and places deposits on behalf of other firms, 
which themselves collect deposits from individual depositors. The 
internal control requirements of the proposed rule are intended to 
enable the IDI to be able to accurately determine individual beneficial 
ownership interests for deposits held in custodial deposit accounts, 
and would expedite a deposit insurance determination in the event of 
the IDI's failure.\25\
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    \25\ Under appendix A to 12 CFR part 364, an IDI should have 
internal controls appropriate to its size and the nature, scope, and 
risk of its activities.
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Recordkeeping by Third Parties
    The FDIC recognizes that many IDIs, including community banks, 
regularly employ third parties such as vendors and technology service 
providers to assist them in carrying out a variety of banking 
functions. While the proposed rule generally would require that IDIs 
maintain records of beneficial ownership for custodial deposit 
accounts, it also would permit those records to be maintained by the 
IDI through a third party if certain requirements are satisfied. The 
rule mentions, as examples of third parties, vendors, software 
providers, and service providers, and other similar entities that 
regularly process deposit transaction data, but does not limit third 
parties to these categories of entities. Third parties also could 
include the account holder, for example, if the account holder 
regularly maintains beneficial ownership records.
    The IDI would be required to have direct, continuous, and 
unrestricted access to records maintained by the third party in the 
standardized file format described in appendix A to the proposed rule, 
including access in the event of a business interruption, insolvency, 
or bankruptcy of the third party. This could be accomplished, for 
example, by the IDI and the third party implementing capabilities to 
enable secure real-time exchange of data, where authorized IDI 
personnel can access the records at any time.
    The IDI also would be required to have continuity plans in place, 
including backup recordkeeping for the required beneficial ownership 
records and technical capabilities to ensure compliance with the 
proposal's requirements. When developing a contingency plan, an IDI may 
consider elements such as (1) storing copies of prior daily or weekly 
account balances and beneficial ownership balances internally at the 
IDI, or at another location independent of the third party; (2) 
establishing legal authority and technological capability for the IDI 
to access daily transaction records associated with the custodial 
deposit account directly from payment networks, processors, or service 
providers used by the third party; and (3) maintaining at the IDI 
sufficient trained staff, technical systems, and other resources to 
process transaction records necessary for the IDI to

[[Page 80143]]

reconcile and establish accurate records for ownership interests in the 
custodial deposit account, in the event the third party is disrupted. 
Like other risk management practices, contingency plans for different 
IDIs would vary according to the scope and complexity of the businesses 
and the nature of the third-party relationships.\26\
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    \26\ For more discussion regarding risk management and 
contingency planning in the context of third-party relationships, 
see FDIC FIL-29-2023 ``Interagency Guidance on Third-Party 
Relationships: Risk Management'' (June 6, 2023).
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    In addition, records of beneficial ownership maintained by a third 
party could only be used to satisfy the proposed rule's requirements if 
the IDI implements appropriate internal controls to (1) accurately 
determine the respective beneficial ownership interests associated with 
the custodial deposit account with transactional features, and (2) 
conduct reconciliations against the beneficial ownership records no 
less frequently than as of the close of business daily, with the 
understanding that reconciling variances due to unposted transactions 
and timing of transactions occurs and should be addressed based on 
standard banking practices, which are sufficient to manage and resolve 
such variances. Appropriate internal controls should be designed to 
consider multi-layer relationships, where applicable, and the 
associated risks these relationships may present related to 
recordkeeping. For example, such controls may be appropriate where an 
account holder, such as an intermediary, collects and places deposits 
on behalf of other firms, which themselves collect deposits from 
individual depositors. This requirement is intended to address the 
completeness and accuracy of transaction processing data maintained by 
the third party.
Contractual Requirements
    Where records are maintained by a third party, the IDI would be 
required to have a direct contractual relationship with the third party 
that includes certain risk mitigation measures. For example, the 
contract between the IDI and the third party would need to clearly 
define roles and responsibilities for recordkeeping, including 
assigning to the IDI rights of the third party that are necessary to 
access data held by other parties. The contract would need to include 
an explicit provision requiring the third party to implement 
appropriate internal controls to be able to accurately determine the 
beneficial ownership interests represented in the custodial deposit 
account and to conduct reconciliations against the beneficial ownership 
records no less frequently than as of the close of business daily, with 
the understanding that reconciling variances due to unposted 
transactions and timing of transactions occurs and should be addressed 
based on standard banking practices, which are sufficient to manage and 
resolve such variances. Appropriate internal controls should be 
designed to consider multi-layer relationships, where applicable, and 
the associated risks these relationships may present related to 
recordkeeping. For example, such controls may be appropriate where an 
account holder, such as an intermediary, collects and places deposits 
on behalf of other firms, which themselves collect deposits from 
individual depositors.
    In addition, the contract would need to provide for periodic 
validations, by a person independent of the third party, to verify that 
the third party is maintaining accurate and complete records and that 
reconciliations are being performed consistent with the proposed rule's 
recordkeeping requirement for beneficial ownership interests. If the 
validation is performed by a party other than the IDI, the results must 
be provided to the IDI. The proposed rule's approach of requiring an 
independent, unbiased opinion or assessment and validation of a third 
party's system of internal controls, operations, and compliance risk 
management framework for maintaining accurate and complete records is 
intended to proactively identify and address weaknesses. The 
independent validation could be performed by the IDI itself. The 
validation activities should be commensurate with the size, complexity, 
and risk profile of the third party.
    An IDI would not be permitted, through any contract or agreement, 
to shift its responsibility for ensuring that the requirements of the 
proposed rule are satisfied. The proposed rule also would not limit, in 
any way, an IDI's ability to include further risk mitigation measures 
in contracts with third parties, and IDIs would be encouraged to 
include additional measures as they deem appropriate.
Effect on Other Recordkeeping Requirements
    The proposed rule would not supersede or modify any requirements 
imposed by statute or regulation. For example, where IDIs are required 
to gather and maintain specific information about their customers under 
the Bank Secrecy Act and its implementing regulations, satisfying the 
proposed rule's recordkeeping requirements would not necessarily 
satisfy the IDI's obligation under the Bank Secrecy Act. Similarly, the 
fact that a custodial deposit account with transactional features 
qualifies for an exemption from the proposed rule's recordkeeping 
requirements would not exempt the account or the IDI from any other 
recordkeeping requirements imposed by law or regulation. Nothing in the 
proposed rule would prohibit or limit additional recordkeeping or 
reconciliation efforts by IDIs with respect to particular custodial 
deposit accounts with transactional features, and IDIs would be 
encouraged to consider such measures as they deem appropriate.

Compliance Measures

    An IDI that holds custodial deposit accounts within the scope of 
the proposed rule would be required to establish and maintain written 
policies and procedures to achieve compliance with the proposed rule's 
requirements. To the extent an IDI maintains the relevant records 
through a third party, these policies and procedures would also need to 
address achieving compliance with the requirements specific to 
maintaining records through a third party. The policies and procedures 
requirement is intended to promote an appropriate level of due 
diligence on the part of IDIs that maintain custodial deposit accounts 
with transactional features within the scope of the rule.
    The proposed rule would enhance compliance by implementing an 
annual certification and reporting process for IDIs holding custodial 
deposit accounts with transactional features that are subject to the 
rule's requirements. The chief executive officer, chief operating 
officer, or the highest ranking official of an IDI would be required to 
annually certify that the IDI (1) implemented the proposed 
recordkeeping requirements for the covered custodian accounts; (2) 
tested the implementation of the recordkeeping requirements within the 
preceding 12 months; and (3) is in compliance with all requirements of 
the proposed rule at the time of the annual certification. The 
certification would be required regardless of whether the records are 
maintained by the IDI itself or through a third party. The 
certification would be required within 1 year of the effective date of 
the final rule and annually thereafter, and submitted to both the FDIC 
and the IDI's primary Federal regulator.
    In addition to the annual certification of compliance, an IDI would 
be required to prepare an annual report containing (1) a description of 
any material changes to the IDI's information technology

[[Page 80144]]

systems since the prior annual report that are relevant to the 
requirements of the proposed rule; (2) a list of the account holders 
that maintain custodial deposit accounts with transactional features 
subject to the rule, as well as the total balance of those custodial 
deposit accounts, and the total number of beneficial owners; (3) the 
results of the IDI's testing of its implementation of the recordkeeping 
requirements; and (4) the results of any independent validation of 
records maintained by third parties as required by the proposed rule 
and discussed above. The report would be required within 1 year of the 
effective date of the final rule and annually thereafter, and submitted 
to both the FDIC and the IDI's primary Federal regulator.
    If an IDI experiences a significant change in its deposit-taking 
operations, or the FDIC or the IDI's primary Federal regulator 
identifies aspects of the institution's operations that pose elevated 
risks of compliance with proposed 12 CFR part 375, the proposed rule 
provides that the FDIC or the IDI's primary Federal regulator may 
require that the IDI file the certification and report required by this 
section more frequently than annually, as requested.

Violations and Enforcement

    As discussed above, the proposed rule would impose recordkeeping 
requirements with respect to certain custodial deposit accounts at 
IDIs. If an IDI does not satisfy the proposed rule's requirements, the 
violation could be addressed through the supervisory process, including 
examinations and in appropriate cases, through enforcement actions. In 
addition, certain circumstances may implicate misrepresentations of 
deposit insurance, which are covered under section 18(a)(4) of the FDI 
Act. The FDIC carries out its enforcement authorities primarily through 
section 8 of the FDI Act, which may include cease-and-desist orders and 
civil money penalties.

Relation to Existing Recordkeeping and Data Standard Requirements

    The FDIC has previously issued regulations that include 
recordkeeping and data standard requirements to support timely 
determinations of deposit insurance coverage at IDIs. For example, 
Sec.  360.9 of the FDIC's regulations includes data standards that 
apply to IDIs with at least 250,000 deposit accounts or $20 billion in 
assets. In addition, 12 CFR part 370 of the FDIC's regulations requires 
IDIs with more than 2 million deposit accounts to implement certain 
recordkeeping capabilities to calculate deposit insurance coverage in 
the event of the IDI's failure. These requirements are generally 
intended to address scenarios where the size of an IDI hinders the 
FDIC's ability to make a timely determination of deposit insurance.
    The proposed rule, by contrast, is intended to address the 
difficulties that a particular set of deposit accounts--custodial 
deposit accounts with transactional features--present for the FDIC in 
making a deposit insurance determination, regardless of the size of the 
IDI holding the deposits. As noted above, custodial deposit accounts 
with transactional features present difficulties in making a timely and 
accurate deposit insurance determination due to their nature and usage. 
The FDIC believes many IDIs that fall below the size thresholds for 
Sec.  360.9 and 12 CFR part 370 hold custodial deposit accounts with 
transactional features that would complicate a deposit insurance 
determination. Moreover, to the extent that recordkeeping on beneficial 
owners is performed by third parties rather than IDIs, the proposed 
rule includes measures intended to address the integrity and 
availability of third parties' records. Institutions subject to 12 CFR 
part 370 are not necessarily required to maintain records on the 
beneficial owners of deposits, and 12 CFR part 370 specifically 
contemplates that the FDIC may need to reach out in the event of the 
IDI's failure to obtain these records from third parties. As explained 
above, however, the FDIC believes that for custodial deposit accounts 
with transactional features it is critical that the IDI either maintain 
the records of beneficial owners of deposits or have continuous access 
to those records. In these respects, the proposed rule complements the 
requirements of Sec.  360.9 and 12 CFR part 370 in promoting a timely 
deposit insurance determination by the FDIC. While the problems that 
the proposed rule is intended to address differ from those addressed by 
12 CFR part 370, the FDIC nevertheless acknowledges that in a narrow 
set of circumstances, the benefits of 12 CFR part 370 may coincide with 
those of the proposed rule. With that in mind, the FDIC will continue 
to consider whether any amendments or modifications to 12 CFR part 370 
are warranted.

IV. Expected Effects

    The FDIC has considered the expected effects of the proposed rule 
on IDIs, consumers, the banking industry, and the U.S. economy. The 
proposed rule, if promulgated, would require IDIs with custodial 
deposit accounts that have transactional features to maintain records 
for such accounts in a format prescribed by the FDIC. This requirement 
would likely impose costs on all IDIs and particularly IDIs that hold, 
or plan to hold, significant amounts of insured deposits in these 
custodial deposit accounts. These costs may be shared with the account 
holders and beneficial owners of the custodial deposit accounts. The 
proposed rule would pose several benefits including (1) prompt and 
accurate determination of beneficial owners' deposit insurance coverage 
in the event of a failure of an IDI with custodial deposit accounts 
covered by the proposal, and (2) prompt determination of beneficial 
ownership in the event of a failure of an account holder. These 
outcomes would reduce the likelihood of a disruption to beneficial 
owners' access to their funds in the event of an IDI's or account 
holder's failure, reduce operational risk for IDIs, increase the 
stability of funds in custodial deposit accounts, and support consumer 
confidence in the banking system and financial services industry. 
Additionally, the FDIC believes the proposal could indirectly support 
growth in IDIs' partnering with non-bank companies to offer financial 
products through the proposal's standardization of enhanced 
recordkeeping and positive effect on consumer confidence.

Scope

    The baseline for this analysis includes all statutes, regulations, 
and guidance applicable to IDIs, as well as all open and operating 
IDIs, as of March 31, 2024. The FDIC insures 4,577 IDIs as of March 31, 
2024.\27\ The proposed rule would apply to all IDIs with custodial 
deposit accounts that are not explicitly exempt from the rule.\28\ The 
FDIC does not have the data available to estimate the number of IDIs 
that currently have or would potentially have custodial deposit 
accounts subject to the rule. However, as discussed in section I of 
this document, custodial deposit accounts have been a fixture of the 
U.S. banking system for decades and used widely throughout the 
industry; therefore, the FDIC believes that all IDIs would, at a 
minimum, review the nature of their relationships with non-bank 
companies to determine whether these non-bank companies have custodial 
deposit accounts at the IDI that fall under the scope of the proposed 
rule. In addition, the proposed rule would

[[Page 80145]]

change the costs and benefits of accepting and maintaining custodial 
deposit account relationships with non-bank companies, which may affect 
the number of IDIs entering into such relationships in future periods.
---------------------------------------------------------------------------

    \27\ Call Report for the period ending March 31, 2024.
    \28\ Exemptions are listed at proposed 12 CFR 375.3(e).
---------------------------------------------------------------------------

    IDIs with custodial deposit accounts covered by the proposed rule 
would be required to maintain records of beneficial ownership for each 
custodial deposit account. The FDIC does not have the data to 
accurately estimate the number of these IDIs. To assess the number of 
IDIs potentially affected the FDIC identified the number of IDIs who 
reported positive or non-zero values for non-managed custody and 
safekeeping accounts or brokered deposits, excluding brokered 
reciprocal deposits.\29\ The FDIC acknowledges that deposits obtained 
through third-party partnerships may or may not be reported in these 
items. According to a 2023 analyst report, as many as 24 percent of 
IDIs during the fourth quarter of 2022 indicated that they are either 
currently in a partnership with one or more non-bank companies, or may 
potentially form such a partnership in the near future, that could 
involve custodial deposit accounts covered by the proposal.\30\ The 
FDIC acknowledges that the prevalence of IDI-non-bank company 
partnerships that involve custodial deposit accounts subject to the 
proposed rule may be higher or lower than this information indicates. 
However, the FDIC believes that the information on the prevalence of 
IDI-non-bank company partnerships, coupled with the data on the volume 
of relevant deposit types, implies a range that likely captures the 
volume of covered IDIs. For purposes of this analysis, the FDIC 
estimates that between 600 and 1,100 IDIs (or between 13 and 24 percent 
of the current population of 4,577 IDIs) would have custodial deposit 
accounts covered by the proposed rule and therefore would be directly 
and immediately affected.\31\ The FDIC notes that the number of 
affected IDIs may be reduced by the ten account driven exemptions 
included in the proposed rule. The FDIC does not have data to estimate 
how many IDIs would be excluded due to these exemptions.
---------------------------------------------------------------------------

    \29\ Over 2,000 IDIs report a non-zero amount of brokered 
deposits and reciprocal deposits from Call Reports for the period 
ending March 31, 2024. Over 600 IDIs report a positive number of 
non-managed custody and safekeeping accounts from Call Report 
Schedule RC-T, Fiduciary and Related Services, line item 11 for the 
period ending December 31, 2023. Not all institutions are required 
to report fiduciary and related assets held in custody and 
safekeeping accounts in this line item, and some are required to 
report for the December reporting period only. Only accounts for 
which the IDI serves as the fiduciary are generally reported in this 
item.
    \30\ Shevlin, Ron. ``What's going on in Banking 2023,'' 
Cornerstone Advisors, https://www.crnrstone.com/whats-going-on-in-banking-2023, as accessed August 1, 2024.
    \31\ 1,100 IDIs [ap] 24 percent * 4577 IDIs.
---------------------------------------------------------------------------

    As previously discussed, the proposed rule may affect account 
holders or other non-bank entities, who may have to keep records or 
provide information to partner IDIs. In particular, these non-bank 
entities may have to provide information on beneficial owners and their 
interests in the deposited funds held in custodial deposit accounts. 
Further, to the extent that covered IDIs elect to comply with the 
proposed rule by maintaining the records through a contractual 
relationship with a third party, non-bank entities may be required to 
keep additional records to ensure that the IDI has continued access to 
the records. The FDIC does not have data on the exact number of non-
bank entities that would be affected. Some data suggest that most IDIs 
partner with two fintechs.\32\
---------------------------------------------------------------------------

    \32\ Ibid, page 41.
---------------------------------------------------------------------------

    In addition, the proposed rule would impact consumers whose 
deposits are held in custodial deposit accounts that are not exempt 
from the proposed rule. The remainder of the Expected Effects section 
of this document discusses the proposed rule's effects on covered IDIs, 
consumers, and non-bank entities.

Costs

    As mentioned above, the FDIC estimates that between 600 and 1,100 
IDIs would be directly and immediately affected by the proposed rule, 
if it were adopted. Specifically, IDIs with custodial deposit accounts 
that are not exempt from the proposed rule would be required, 
themselves or through a third party, to maintain records of beneficial 
ownership in the data format and layout specified in 12 CFR part 375, 
appendices A and B, for each custodial deposit account. In addition, 
these IDIs would be required to reconcile records for their custodial 
deposit accounts as of the end of each day in order to determine the 
respective individual beneficial ownership interests associated with 
the custodial deposit account and the reconciliation of such interests 
to the funds on deposit in the custodial deposit account. The FDIC 
believes it is likely that many IDIs currently engage in some form of 
reconciliation and maintain certain amounts of records in order to 
maintain custodial accounts. However, the FDIC believes it is unlikely 
that IDIs currently have all the records necessary to meet all the 
proposed rule's requirements. As such, IDIs would have to arrange to 
have the data transmitted to them from account holders and develop a 
recordkeeping system for maintaining those data. These arrangements may 
include revisions to IDIs' existing platform or core processing 
systems, as well as the development of data interface systems. Further, 
the proposed rule would require covered entities to incur costs 
associated with conducting, testing, and validating the daily 
reconciliation of records at the IDI. The FDIC also recognizes that the 
costs of these actions will vary by IDI based on the size, scope, and 
complexity of the IDI's custodial deposit accounts, as well as the 
capability and efficiency of the IDI's current system for managing 
deposit account data. The FDIC does not have data on the costs of these 
actions. For purposes of this analysis, the FDIC assumes that it would 
take IDIs and partner non-bank entities approximately 2,200 hours, on 
average, per IDI to set up, and approximately 1,100 hours, on average, 
per IDI per year to maintain, such a system.\33\ At an assumed labor 
compensation rate of $100 per hour,\34\ the FDIC estimates that these 
tasks would cost each IDI, on average, approximately $220,000 for the 
first year and $110,000 for each subsequent year after the proposed 
rule is enacted. The proposed rule would allow IDIs to arrange to have 
the data maintained through a third party--this analysis assumes that 
each IDI would choose the latter if it were more cost effective.\35\ 
For purposes of estimating the total cost to the industry, this 
analysis assumes all affected IDIs would incur the estimated average 
cost of developing an internal recordkeeping system. Assuming up to

[[Page 80146]]

1,100 IDIs are affected, the FDIC estimates that the proposed rule 
would impose a cost upwards of approximately $250 million on affected 
IDIs and their partner non-bank entities in the first year that the 
proposed rule is enacted and approximately $120 million in each 
subsequent year thereafter. These estimates may be lower if IDIs' 
existing systems are capable of maintaining beneficial ownership 
information as well as conducting daily reconciliations, as outlined in 
the proposed rule. Not every IDI will incur the same compliance costs. 
IDIs which do not currently retain beneficial ownership information nor 
reconcile their accounts or those with greater complexity in their 
business lines, accounts and operations would be expected to incur 
above-average compliance costs.
---------------------------------------------------------------------------

    \33\ These labor cost estimates are assumed to cover the labor 
costs for both the IDI and its partner non-bank entities. The FDIC 
does not have the data to estimate the proportion of labor costs 
borne by the IDI or its partner non-bank entity(ies).
    \34\ Compensation rates for the applicable labor categories 
range from $39 per hour for clerical workers to $181 per hour for 
lawyers, based on the 75th percentile hourly wages reported by the 
Bureau of Labor Statistics and adjusted for non-wage compensation 
and inflation to March 2024. Source: Bureau of Labor Statistics: 
``National Industry-Specific Occupational Employment and Wage 
Estimates: Industry: Credit Intermediation and Related Activities 
(5221 And 5223 only)'' (May 2023), Employer Cost of Employee 
Compensation (March 2023), and Employment Cost Index (March 2023 and 
March 2024).
    \35\ Proposed 12 CFR 375.3(c) would allow IDIs to arrange for a 
third party to assist the IDI in its recordkeeping, as long as this 
arrangement meets additional requirements to ensure that the IDI is 
able to comply with the proposed rule. The FDIC acknowledges that 
the cost of such an arrangement would vary across IDIs and may 
depend on the size, scope, and complexity of the IDI's custodial 
accounts as well as the capability and efficiency of the third 
party's information management system. For purposes of this 
analysis, the FDIC assumes that the IDI would form such an 
arrangement if it were more cost effective.
---------------------------------------------------------------------------

    IDIs affected by the proposed rule would also be required to 
establish and maintain written policies and procedures to achieve 
compliance with the proposed rule. These IDIs would also be required 
to, on an annual basis, test the recordkeeping system required by the 
proposed rule, independently validate certain records maintained by 
third parties, document these actions in a report, and include in its 
records a certification of compliance with the proposed rule.\36\ Non-
bank entities that partner with affected IDIs may incur costs 
associated with IDIs' compliance with the aforementioned requirements. 
The FDIC lacks the data necessary to quantify these costs, however it 
believes they would be modest compared to the costs of implementing and 
maintaining the recordkeeping system described above.
---------------------------------------------------------------------------

    \36\ Proposed 12 CFR 375.4.
---------------------------------------------------------------------------

    The proposed rule would also likely result in added costs, other 
than those described above, on custodial deposit account holders. Such 
non-bank companies may need to revise their internal systems, policies, 
or procedures, and potentially adjust their business arrangements with 
covered IDIs, in order to accommodate the proposed rule's requirements 
on covered IDIs. The FDIC does not believe that the proposed rule would 
impose material data collection costs on these non-banks, because the 
data required by the proposed rule would likely already be collected 
and maintained by the account holder in the ordinary course of 
business. As discussed above, the account holder or non-bank entity may 
share in the costs of developing and maintaining the systems required 
for the transmission of data. The FDIC does not have the data necessary 
to quantify this cost, but believes that these costs would be modest, 
given that the IDI and account holder would likely already have systems 
in place for the account holder to access its custodial deposit 
accounts.
    As discussed in the previous Scope section of this document, the 
costs of the proposed rule may affect IDIs' and non-bank entities' 
decisions to enter into or maintain custodial deposit account 
relationships covered by the rule. Further, the proposed rule may 
increase or decrease the count or dollar volume of covered custodial 
deposit accounts held by IDIs. The FDIC does not have data to estimate 
the effects of the rule on the volume and usage of covered custodial 
deposit accounts.
    To the extent that IDIs and non-bank entities pass the costs of 
complying with these requirements onto their customers through lower 
interest rates or higher fees, consumers could also bear some costs.

Benefits

    A direct benefit of the proposed rule would be a reduction in the 
likelihood and duration of a disruption to consumers' access of their 
funds held in covered custodial deposit accounts, whether such 
disruption is because of an IDI failure, or failure or operational 
disruption experienced by an account holder. The proposal would benefit 
customers by requiring that records be maintained in a standard format 
identifying customers and their balances and by requiring 
reconciliation between the records of IDIs and their associated non-
bank entities. The required records and reconciliation would allow 
customers to have uninterrupted or near-uninterrupted access to their 
underlying funds in the event of an IDI failure, or failure or 
operational disruption of an associated non-bank entity. As discussed 
in the context of the Synapse bankruptcy, there can be significant 
differences in information on beneficial owners and their interests in 
the deposited funds held in custodial deposit accounts at an IDI 
between the IDI and its partner non-bank entity. These differences can 
result in disruption to customers' access to funds in the event of a 
failure of the IDI or non-bank entity. Nearly half of all households 
use a fintech product with bank account-like features; therefore, as 
illustrated by the failure of Synapse, the potential benefits of 
avoiding consumer harm associated with disrupted access to funds, in 
concert with the frequent usage of such custodial deposit accounts at 
IDIs, are likely to be substantial.
    Another direct benefit of the proposed rule would be prompt and 
accurate determination of beneficial owners' deposit insurance coverage 
in the event of a failure of an IDI with custodial deposit accounts 
covered by the proposal. As discussed above, records of custodial 
deposit account balances at IDIs can differ substantially from those at 
their partner non-bank entities. In the event of a failure of an IDI, 
such substantial differences can result in delays in determining the 
insured status of depositors as well as losses to the Deposit Insurance 
Fund (DIF). The increased accuracy of data on custodial deposit 
accounts provided by the proposed rule would prevent or mitigate such 
losses in the event of a failure of an IDI. The detailed account 
information would also facilitate the FDIC's resolution of the failed 
IDI, reduce the cost of the failure of the IDI, and ensure prompt 
determination of insured status, allowing the FDIC to meet its 
statutory mandate under the FDI Act to provide beneficial owners their 
insured deposits ``as soon as possible'' and at the lowest resolution 
cost.\37\
---------------------------------------------------------------------------

    \37\ See 12 U.S.C. 1821(f).
---------------------------------------------------------------------------

    The FDIC believes one of the indirect benefits of the proposed rule 
would be to reduce operational risk to IDIs and account holders. The 
proposed rule's requirement of daily reconciliation of records at the 
IDI would prevent or mitigate discrepancies in beneficial owners' 
account balances between the IDI and the account holder. In cases where 
the account holder has multiple partner IDIs, the daily reconciliation 
would also prevent or mitigate inaccurate recordkeeping at the account 
holder from spreading to IDIs--a mismatch in account balances between 
the account holder and a partner IDI could be resolved before the 
underlying issue causes mismatches at other of the account holder's 
partner IDIs.
    The reduction in operational risk at affected IDIs and their 
partner non-bank entities could be partially offset by an increase in 
operational risk due to the additional operations required to comply 
with the proposed rule.
    The FDIC believes the proposed rule would reduce the reputational 
risk to covered IDIs and non-bank entities. A (temporary) loss of 
access to their funds could conceivably reduce confidence among 
depositors of an IDI affected by a bankruptcy of a non-bank entity for 
which it provides custodial deposit accounts or operational disruption. 
By preventing or mitigating such disruptions, the proposed rule would 
bolster consumer confidence in non-bank companies providing such 
services and their partner IDIs. This bolstered confidence could 
increase the potential

[[Page 80147]]

customer base of certain affected non-bank companies, as well as the 
amount of funds consumers feel comfortable depositing with IDIs through 
such entities. Finally, to the extent that an IDI affected by the 
bankruptcy or operational disruption of a non-bank company cannot 
determine beneficial ownership in a timely manner, it might reduce 
confidence among owners of all deposit classes at the IDI. This loss in 
confidence could lead to the rapid withdrawal of demand deposits or 
short-term funding. The proposed rule would reduce the likelihood, and 
mitigate the effects, of such a crisis of confidence by providing 
consumers continued access to their funds. While the FDIC does not have 
the data to quantify these benefits, they could potentially be material 
for covered IDIs and account holders.
    The FDIC believes another indirect benefit of the proposal would 
result from the proposed rule's standardization of enhanced 
recordkeeping requirements for custodial deposit accounts. This benefit 
could affect both IDIs with covered custodial deposit accounts and IDIs 
that may wish to form partnerships with non-bank companies where such 
partnerships may lead to the creation of custodial deposit accounts. 
Adoption of standardized recordkeeping would reduce the IDI's costs of 
partnering with additional non-banks, and vice versa, since such a 
partnership would not require the development of a bespoke information 
management system for affected custodial deposit accounts. Once the IDI 
implements the deposit information management system required by the 
proposed rule, that system could potentially be used to manage 
custodial deposit accounts from multiple account holders, thereby 
reducing the average cost for the IDI.

Distributional Effects

    Under the proposed rule, all IDIs that hold or plan to hold 
custodial deposit accounts with transactional features will be subject 
to the proposed requirements. To the extent that smaller IDIs are more 
likely to have accounts subject to the proposed rule, or have larger 
volumes of transactions move through such accounts relative to their 
assets, smaller IDIs will bear higher costs as a share of their assets 
than larger IDIs. In addition, smaller IDIs' existing recordkeeping 
systems may be less sophisticated than the systems at larger IDIs. 
Thus, the fixed costs of setting up new internal recordkeeping systems 
or enhancing existing systems in order to comply with the proposed rule 
may also be higher as a share of their assets for smaller IDIs. To the 
extent that these smaller IDIs are more likely to contract with third-
party service providers to manage their deposit information system and/
or general ledgers, these smaller IDIs would be more likely to increase 
the scope of their existing contracts, rather than build a system from 
scratch, to comply with the proposed rule. For these reasons, the FDIC 
expects smaller IDIs would more likely opt for third-party arrangements 
and pass those costs onto their account holders.
    While smaller IDIs may bear a higher burden, relative to their 
assets, to comply with the proposed rule, they would also receive a 
disproportionately higher share of the benefits. Smaller IDIs, with 
their smaller capital or liquidity reserves, would not have as much 
capacity as larger IDIs to withstand the operational stress or 
reputational damage caused by an event such as the Synapse failure, as 
well as the deposit flight that may follow. As such, a mitigation or 
prevention of such an event would greatly benefit those smaller IDIs.

Summary

    The FDIC does not have sufficient information available to quantify 
the potential benefits of the proposed rule because the benefits depend 
on the probability, breadth, and severity of future failures of an IDI 
or account holder. The FDIC also lacks sufficient data on the number of 
IDIs and non-bank entities affected, the scope of custodial deposit 
accounts covered, and the current capabilities of affected IDI's data 
information management systems to accurately estimate the costs of the 
proposed rule. These data limitations notwithstanding, the discussion 
above describes the clear, material, and prudential benefits that the 
prevention or mitigation of an event similar to the recent failure of 
Synapse would provide to IDIs that partner with fintechs and other 
third parties, as well as the financial industry as a whole.

V. Alternatives

    The FDIC considered three alternatives to the proposed rule. First, 
the FDIC considered the status quo alternative. Second, the FDIC 
considered issuing a proposal in which certain custodial deposit 
accounts would be covered based on whether activity in the account met 
or exceeded certain thresholds, such as transaction volume. Third, the 
FDIC considered a proposal covering all custodial deposit accounts. 
However, the FDIC believes the proposed rule is preferable to each of 
the alternatives for the reasons discussed below.
    One alternative the FDIC considered was the status quo. However, as 
discussed above, the recent bankruptcy of Synapse left many businesses 
and customers without access to millions of dollars of their funds. 
Such disruptions caused some customers of Synapse's fintech partners to 
question the insured status of their funds that were advertised as 
FDIC-insured. Some of the effects of this event have yet to be 
resolved, even months after Synapse's bankruptcy. The disruption of 
account access in the aftermath of Synapse's bankruptcy has shown that 
IDIs currently do not have the necessary data to provide access to 
funds in the status quo. The FDIC believes that the proposed rule would 
provide data to enable IDIs to provide ready access to funds. In 
addition, the proposed rule's recordkeeping requirements would enhance 
the FDIC's ability to achieve its statutory obligation to pay deposit 
insurance as soon as possible in the event an IDI fails by having 
information about the beneficial owners of custodial deposit accounts 
in the banks' records.
    The second alternative the FDIC considered was to propose 
recordkeeping requirements be applied only to those custodial deposit 
accounts where the transaction volume and/or dollar volume of activity 
over a certain period met particular thresholds. However, the FDIC 
believes that, by using thresholds, the FDIC could potentially treat 
otherwise similarly situated depositors differently in the event of an 
IDI failure if one depositor's funds were in a custodial deposit 
account that did not meet the thresholds to be covered by the proposal 
while another's did meet the thresholds. For example, some financial 
technology products or intermediaries working on behalf of financial 
technology companies may deposit end-user funds across multiple 
custodial deposit accounts at a single IDI, while others may deposit 
funds from multiple end-users into a single custodial deposit account, 
and others may spread funds across more than one IDI. The FDIC felt 
that the straightforward approach, as provided in the proposed rule, 
would be to apply the requirements to all custodial deposit accounts, 
and exempt accounts that are not necessary to further the policy 
objectives of the proposed rule.
    Finally, the FDIC considered an alternative with fewer exemptions 
that would have applied, if adopted, to many arrangements involving 
custodial deposit accounts. Although this alternative would have had 
exemptions

[[Page 80148]]

for accounts established by or on behalf of brokers, dealers, and 
investment advisers as defined in the Securities and Exchange Act of 
1934 and the Investment Advisers Act of 1940, the FDIC nevertheless 
believed the alternative could result in large costs for non-bank 
entities with certain sweep deposit, reciprocal deposit, and brokered 
deposit arrangements. The FDIC believes that these arrangements are 
dissimilar to the custodial deposit account arrangements involved the 
Synapse bankruptcy and would not pose the same heightened risk. The 
FDIC believes that the set of exemptions provided in the proposed rule 
would allow the FDIC to achieve its policy objectives, as discussed 
above, with less burden on IDIs and nonbank financial entities.

VI. Request for Comment

    The FDIC invites comments on all aspects of this proposal. In 
particular, the FDIC requests comment on the following:

Custodial Deposit Accounts With Transactional Features

     The proposed definition of ``custodial deposit account 
with transactional features'' generally relies on three elements: (1) 
the account is established for the benefit of beneficial owners; (2) 
the account contains commingled deposits of multiple beneficial owners; 
and (3) the beneficial owners may authorize or direct a transfer from 
the custodial deposit account to a party other than the account holder 
or beneficial owner. The FDIC believes this definition would include 
the types of custodial deposit accounts that would present significant 
complexity in a deposit insurance determination. Should the FDIC 
consider alternative approaches to defining the ``custodial deposit 
accounts with transactional features'' that would generally be subject 
to the proposed rule?
     Should the rule's recordkeeping requirements instead apply 
to all custodial deposit accounts, not only to those with 
``transactional features'' as described in the proposed rule? Why and 
what would be the benefits or challenges of applying the requirements 
to all custodial deposit accounts?
     Are there any other types of deposit accounts that should 
be included in the scope of the proposed rule? If so, why should they 
be addressed by the proposal?
     Are custodial deposit account arrangements becoming more 
complex in the industry to the point where it would not be clear who is 
an account holder in the case of an IDI's failure? If so, how can the 
proposal better add clarity to support the FDIC's policy objectives?
     Should there be a minimum threshold for applying the 
requirements of the rule? If so, what metric, and what threshold? For 
example, should an IDI only be subject to the rule if its number of 
unique beneficial owners with custodial deposit accounts with 
transaction features exceeds a certain threshold? If so, what should 
the minimum threshold be and why?

Exemptions

     Are there other categories of custodial deposit accounts 
with transactional features that should be expressly exempted from the 
proposed rule's recordkeeping requirements? If so, why should they be 
exempt, and what factors would tend to ensure that complete and 
accurate records of the beneficial owners of the deposits are readily 
available for the FDIC in the event of the failure of an IDI holding 
such custodial deposit accounts?
     The proposal would exempt custodial deposit accounts 
established by or on behalf of one or more brokers or dealers under the 
Securities and Exchange Act of 1934, and investment advisers under the 
Investment Advisers Act of 1940. Although these entities are already 
subject to recordkeeping requirements under Federal and State laws in 
addition to regulatory supervision, given the risks described in this 
proposal, should these entities entirely be exempted from the 
proposal's requirements? Are there circumstances where some brokers or 
dealers or related accounts should not be exempted from the proposal to 
ensure that the proposal's policy objectives are being satisfied? If 
so, why and how should this exemption be revised?
     Are there other categories of custodial deposit accounts 
with transactional features that should be revised or narrowed? If so, 
why and how should the exemption(s) be revised?

Recordkeeping Requirements

     What feedback or additional considerations should be 
included in the proposed rule in the situation where an IDI maintains 
records of beneficial ownership itself?
     Should the FDIC consider any additional measures where an 
IDI intends to rely on a third party for keeping the records required 
by the proposed rule? Should the rule specifically address scenarios 
where a third party is subject to examination under the Bank Service 
Company Act?
     What additional detail might be useful to IDIs in 
understanding the provisions of the proposed rule addressing 
reconciliations?
     What are obstacles that would prevent an IDI from being 
able to reconcile records daily as required by the proposed rule? Could 
those obstacles be addressed? If not, are there alternative measures 
that could be used to satisfy the FDIC's policy objectives of ensuring 
that IDIs have access to complete and accurate records of beneficial 
ownership of deposits on a daily basis?
     Are there any challenges to an IDI's abilities to align 
its internal records with those of the non-bank third party which whom 
the IDI has a business relationship? How have IDIs addressed these 
challenges?
     Are there legal or other obstacles the FDIC should be 
aware of with respect to meeting the proposed contractual requirements, 
where an IDI intends to rely on one or more third parties to maintain 
the records required by the rule?
     Should the rule specify a set of elements that would be 
required, at a minimum, as part of a contingency plan to address 
disruptions with respect to a third party that maintains records for 
custodial deposit accounts?
     Are there aspects of 12 CFR part 370 or Sec.  360.9 that 
the FDIC should give additional consideration to for purposes of this 
rulemaking?

Compliance Provisions

     The proposed rule would require IDIs to maintain written 
policies and procedures to achieve compliance. Are there any additional 
or specific criteria, factors, or situations that these policies and 
procedures should be required to address?
     The chief executive officer, chief operating officer, or 
the highest ranking official of an insured depository institution 
holding custodial deposit accounts with transactional features that are 
not specifically exempt from the proposal would be required to sign a 
certification attesting to the accuracy of the certification. Has the 
proposal identified the appropriate level of the official at an insured 
depository institution who should sign the certification? If not, which 
official(s) should sign a certification for the purposes of achieving 
the stated goals of the proposal?
     Should the compliance report and certification address any 
additional items, beyond those enumerated in the proposed rule?

[[Page 80149]]

     Given the proposal's annual certification and reporting 
requirements, please provide any feedback on what the potential format, 
structure, or content of materials should be for the purposes of 
complying with these requirements.
     What system, process or mechanism should be used to 
transmit such information to the FDIC and the appropriate federal 
banking agency?
     Given the recordkeeping, internal control, and compliance 
requirements addressed in the proposal, how long would it take to 
revise systems, processes, and contracts for the purposes of complying 
with a rule? What would be a reasonable amount of time to achieve 
compliance with the rule, and why?

Expected Effects

     Would the proposed rule have any costs, benefits, or other 
effects that the FDIC has not identified?

Alternatives

     Are there other recordkeeping requirements or approaches 
that are not reflected in the proposal that could be considered in 
ensuring the accuracy and availability of beneficial ownership records 
with respect to custodial deposit accounts with transactional features?

VII. Administrative Law Matters

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) generally requires an agency, 
in connection with a proposed rule, to prepare and make available for 
public comment an initial regulatory flexibility analysis that 
describes the impact of the proposed rule on small entities.\38\ 
However, an initial regulatory flexibility analysis is not required if 
the agency certifies that the proposed rule will not, if promulgated, 
have a significant economic impact on a substantial number of small 
entities. The Small Business Administration (SBA) has defined ``small 
entities'' to include banking organizations with total assets of less 
than or equal to $850 million.\39\ Generally, the FDIC considers a 
significant economic impact to be a quantified effect in excess of 5 
percent of total annual salaries and benefits or 2.5 percent of total 
noninterest expenses. The FDIC believes that effects in excess of one 
or more of these thresholds typically represent significant economic 
impacts for FDIC-insured institutions.
---------------------------------------------------------------------------

    \38\ 5 U.S.C. 601 et seq.
    \39\ The SBA defines a small banking organization as having $850 
million or less in assets, where an organization's ``assets are 
determined by averaging the assets reported on its four quarterly 
financial statements for the preceding year.'' See 13 CFR 121.201 
(as amended by 87 FR 69118, effective December 19, 2022). In its 
determination, the ``SBA counts the receipts, employees, or other 
measure of size of the concern whose size is at issue and all of its 
domestic and foreign affiliates.'' See 13 CFR 121.103. Following 
these regulations, the FDIC uses an insured depository institution's 
affiliated and acquired assets, averaged over the preceding four 
quarters, to determine whether the insured depository institution is 
``small'' for the purposes of the RFA.
---------------------------------------------------------------------------

    For the reasons described below, the FDIC believes that the 
proposed rule would, if promulgated, have a significant effect on the 
substantial number of FDIC-insured institutions that are small entities 
under the RFA (small IDIs). As such, the FDIC has prepared and is 
making available for public comment the following initial regulatory 
flexibility analysis.
    (1) A description of the reasons why action by the agency is being 
considered.
    As discussed in detail in section I of this document, Background 
and Need for Rulemaking, the recent events surrounding the bankruptcy 
of Synapse raised questions about the completeness, accuracy, and 
integrity of custodial deposit account records underlying arrangements 
with third parties at certain IDI. These events highlight substantial 
risks with respect to the prompt access to customers funds held in 
custodial deposit accounts. These issues create uncertainty that 
undermines the public confidence that underpins banks and our nation's 
broader financial system.
    (2) A succinct statement of the objectives of, and legal basis for, 
the proposed rule.
    As discussed in detail in section III of this document, The 
Proposed Rule, the FDIC is proposing requirements that would strengthen 
IDIs' recordkeeping for custodial deposit accounts with transactional 
features and preserve beneficial owners' and depositors' entitlement to 
the protections afforded by Federal deposit insurance. The proposed 
rule is authorized by the FDI Act, which requires the FDIC to determine 
the net amount due to any depositor in the event of the failure of an 
IDI \40\ and authorizes the FDIC to prescribe rules and regulations as 
it may deem necessary to carry out these responsibilities.\41\
---------------------------------------------------------------------------

    \40\ 12 U.S.C. 1821(a)(1)(C) and (E).
    \41\ 12 U.S.C. 1819(a)(Tenth), 1820(g), and 1821(d)(4)(B)(iv).
---------------------------------------------------------------------------

    (3) A description of and, where feasible, an estimate of the number 
of small entities to which the proposed rule will apply.
    The FDIC insures 4,577 IDIs as of March 31, 2024,\42\ and the 
proposed rule would apply to all IDIs with custodial deposit accounts 
that are not explicitly exempt from the rule.\43\ Of these 4,577 IDIs, 
the FDIC estimates that 3,259 (71 percent of) IDIs are small IDIs. The 
FDIC does not have the data available to estimate the number of small 
IDIs that currently have or would potentially have custodial deposit 
accounts subject to the rule. As discussed in detail in section IV of 
this document, Expected Effects, the FDIC estimates, based on Call 
Report data and analyst reports, that between 600 and 1,100 IDIs would 
be immediately and directly affected by the proposed rule. Applying the 
71 percent proportion of small IDIs in the population of all IDIs, the 
FDIC estimates that between 426 and 781 small IDIs would be immediately 
and directly affected by the proposed rule.\44\
---------------------------------------------------------------------------

    \42\ Call Report for the period ending March 31, 2024.
    \43\ Exemptions are listed at proposed 12 CFR 375.3(e).
    \44\ These estimates may undercount the number of small entities 
affected, given that entities with less than $10 billion in assets 
are more likely to partner with fintechs than entities with more 
than $10 billion.
---------------------------------------------------------------------------

    (4) A description of the projected reporting, recordkeeping and 
other compliance requirements of the proposed rule, including an 
estimate of the classes of small entities which will be subject to the 
requirement and the type of professional skills necessary for 
preparation of the report or record.
    As discussed in section IV of this document, Expected Effects, IDIs 
with custodial deposit accounts that are not exempt from the proposed 
rule would be required, themselves or through a third party, to 
maintain records of beneficial ownership in the data format and layout 
specified in proposed 12 CFR part 375, appendices A and B, for each 
custodial deposit account. In addition, these IDIs would be required to 
reconcile records for their custodial deposit accounts as of the end of 
each day in order to determine the respective individual beneficial 
ownership interests associated with the custodial deposit account and 
the reconciliation of such interests to the funds on deposit in the 
custodial deposit account. The FDIC believes it is unlikely that IDIs 
currently have these records. As such, IDIs would have to arrange to 
have the data transmitted to them from account holders and develop a 
recordkeeping system for maintaining those data. These arrangements may 
include revisions to IDIs' existing platform or core processing 
systems, as well as the development of data interface systems.

[[Page 80150]]

Further, the proposed rule would require covered entities to incur 
costs associated with conducting, testing, and validating the daily 
reconciliation of records at the IDI. The FDIC also recognizes that the 
costs of these actions would vary by IDI based on the size, scope, and 
complexity of the IDI's custodial deposit accounts, as well as the 
capability and efficiency of the IDI's current system for managing 
deposit account data. The FDIC does not have data on the costs of these 
actions. For purposes of this analysis, the FDIC assumes that it would 
take IDIs and partner non-bank entities approximately 2,200 hours, on 
average, per IDI to set up, and approximately 1,100 hours, on average, 
per IDI per year to maintain such a system. The FDIC believes that 
actions required by small IDIs to comply with the proposed rule, 
described above, would require the skills of compliance officers, 
information technology specialists, clerical workers, lawyers, and 
executives and managers. At an assumed labor compensation rate of $100 
per hour,\45\ the FDIC estimates that these tasks would cost each IDI, 
on average, approximately $220,000 for the first year and $110,000 for 
each subsequent year after the proposed rule is enacted. Although these 
costs may vary across small IDIs affected by the rule, an estimated 
increase in labor costs of $220,000 would be in excess of 5 percent of 
total annual salaries and benefits for approximately 61 percent of the 
3,259 small IDIs. Given the estimate that between 426 and 781 small 
IDIs would be directly and immediately affected by the proposed rule, 
the FDIC estimates that the proposed rule would have significant 
effects on 61 percent of these affected small IDIs, or between 261 (8 
percent) and 478 (15 percent) of all 3,259 small IDIs. The FDIC 
believes these numbers are substantial.
---------------------------------------------------------------------------

    \45\ Compensation rates for the applicable labor categories 
range from $39 per hour for clerical workers to $181 per hour for 
lawyers, based on the 75th percentile hourly wages reported by the 
Bureau of Labor Statistics and adjusted for non-wage compensation 
and inflation to March 2024. Source: Bureau of Labor Statistics: 
``National Industry-Specific Occupational Employment and Wage 
Estimates: Industry: Credit Intermediation and Related Activities 
(5221 And 5223 only)'' (May 2023), Employer Cost of Employee 
Compensation (March 2023), and Employment Cost Index (March 2023 and 
March 2024).
---------------------------------------------------------------------------

    As discussed in section IV of this document, Expected Effects, 
small IDIs affected by the proposed rule would also be required to 
establish and maintain written policies and procedures to achieve 
compliance with the proposed rule. These IDIs would also be required 
to, on an annual basis, test the recordkeeping system required by the 
proposed rule, independently validate certain records maintained by 
third parties, document these actions in a report, and include in its 
records a certification of compliance with the proposed rule.
    (5) An identification, to the extent practicable, of all relevant 
Federal rules which may duplicate, overlap or conflict with the 
proposed rule.
    The FDIC has not identified any likely duplication, overlap, and/or 
potential conflict with this proposed rule and any other Federal rule.
    (6) A description of any significant alternatives to the proposed 
rule which accomplish the stated objectives of applicable statutes and 
which minimize any significant economic impact of the proposed rule on 
small entities.
    The FDIC considered several alternatives to the proposed rule, 
including keeping the status quo, adding minimum transaction volume 
thresholds, and allowing fewer custodial deposit accounts to be 
exempted from the proposed requirements. As discussed in detail in the 
Alternatives section of this document, the FDIC believes that the 
requirements in the proposed rule would, with minimal economic impact, 
best accomplish the stated objective of strengthening IDIs' 
recordkeeping for custodial deposit accounts with transactional 
features and preserve beneficial owners' and depositors' entitlement to 
the protections afforded by Federal deposit insurance.
    The FDIC invites comments on all aspects of the supporting 
information provided in this RFA section. The FDIC is particularly 
interested in comments on any significant effects on small entities 
that the agency has not identified.

Paperwork Reduction Act

    Certain provisions of the proposed rule contain ``collections of 
information'' within the meaning of the Paperwork Reduction Act of 1995 
(PRA).\46\ In accordance with the requirements of the PRA, the FDIC may 
not conduct or sponsor, and the respondent is not required to respond 
to, an information collection unless it displays a currently valid 
Office of Management and Budget (OMB) control number. The FDIC plans to 
request a new OMB control number associated with this rulemaking.
---------------------------------------------------------------------------

    \46\ 44 U.S.C. 3501-3521.
---------------------------------------------------------------------------

    The proposed rule would establish new recordkeeping requirements at 
IDIs for ``custodial deposit accounts with transactional features,'' 
subject to a list of specific exemptions. IDIs holding deposits within 
the scope of the proposed rule would be required to maintain records 
identifying the beneficial owners of those deposits, the balance 
attributable to each beneficial owner, and the ownership category in 
which the deposited funds are held. The IDI could maintain those 
records itself or, if certain additional requirements are satisfied, 
the IDI could maintain the records through an arrangement with a third 
party (which could include a vendor, processor, software or service 
provider, or a similar entity). The proposed rule provides a specific 
electronic file format for records on beneficial owners and their 
interests in the deposited funds.
    The proposed rule would provide that where IDIs choose to maintain 
the required records through a contractual relationship with a third 
party, additional requirements would need to be satisfied. In addition, 
reconciliation of these records would be required, as would periodic 
validation of the third party's records by a person independent of the 
third party.
    The proposal would require specific actions by IDIs to achieve and 
maintain compliance with the rule. IDIs that hold custodial deposit 
accounts with transactional features would be required to establish and 
maintain written policies and procedures to achieve compliance with the 
rule's requirements. IDIs would further be required to complete a 
report annually that (1) describes any material changes to their 
information technology systems relevant to compliance with the rule; 
(2) lists the account holders that maintain custodial deposit accounts 
with transactional features, the total balance of those custodial 
deposit accounts, and the total number of beneficial owners; (3) sets 
forth the results of the institution's testing of its recordkeeping 
requirements; and (4) provides the results of the required independent 
validation of any records maintained by third parties. IDIs would be 
required to complete an annual certification of compliance, signed by 
the chief executive officer, chief operating officer, or the highest-
ranking official of the IDI, stating that the IDI has implemented and 
tested the recordkeeping requirements.
    Current Actions: The FDIC's proposal contains recordkeeping and 
reporting burden categorized as follows:
    Information Collection.
    Title: Recordkeeping for Custodial Deposit Accounts.
    OMB Number: 3064-NEW.

[[Page 80151]]

    Affected Public: Businesses or other for-profit, all IDIs.

                                                       Table 1--Summary of Estimated Annual Burden
                                                                   [OMB No. 3064-NEW]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                 Number of      Average time     Annual
 Information collection (IC) (obligation to        Type of burden (frequency of response)         Number of    responses per    per response     burden
                  respond)                                                                       respondents     respondent        (HH:MM)      (hours)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1. Recordkeeping Requirements for Custodial   Recordkeeping (Annual)..........................         1,100              .33          900:00    326,700
 Deposit Accounts 12 CFR Part 375
 Implementation (Mandatory).
2. Recordkeeping Requirements for Custodial   Recordkeeping (Annual)..........................         1,100              .67          500:00    368,500
 Deposit Accounts 12 CFR Part 375 Ongoing
 (Mandatory).
                                             -----------------------------------------------------------------------------------------------------------
3. Filing Annually 12 CFR 375.4(b) and (c)    Reporting (Annual)..............................         1,100                1           50:00     55,000
 Ongoing (Mandatory).
    Total Annual Burden (Hours).............  ................................................  ............  ...............  ..............    750,200
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: FDIC.
Note: The estimated annual IC time burden is the product, rounded to the nearest hour, of the estimated annual number of responses and the estimated
  time per response for a given IC. The estimated annual number of responses is the product, rounded to the nearest whole number, of the estimated
  annual number of respondents and the estimated annual number of responses per respondent. This methodology ensures the estimated annual burdens in the
  table are consistent with the values recorded in OMB's consolidated information system.

    Comments are invited on the following:
    (a) Whether the collection of information is necessary for the 
proper performance of the FDIC's functions, including whether the 
information has practical utility;
    (b) The accuracy of the estimate of the burden of the information 
collection, including the validity of the methodology and assumptions 
used;
    (c) Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    (d) Ways to minimize the burden of the information collection on 
respondents, including through the use of automated collection 
techniques or other forms of information technology; and
    (e) Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    All comments will become a matter of public record. Comments on the 
collection of information should be sent to the address listed in the 
ADDRESSES section of this document. Written comments and 
recommendations for this information collection also should be sent 
within 30 days of publication of this document to www.reginfo.gov/public/do/PRAMain. Find this particular information collection by 
selecting ``Currently under 30-day Review--Open for Public Comments'' 
or by using the search function.

Riegle Community Development and Regulatory Improvement Act

    Section 302 of the Riegle Community Development and Regulatory 
Improvement Act of 1994 (RCDRIA) requires that the Federal banking 
agencies, including the FDIC, in determining the effective date and 
administrative compliance requirements of new regulations that impose 
additional reporting, disclosure, or other requirements on IDIs, 
consider, consistent with principles of safety and soundness and the 
public interest, any administrative burdens that such regulations would 
place on depository institutions, including small depository 
institutions, and customers of depository institutions, as well as the 
benefits of such regulations.\47\ Subject to certain exceptions, new 
regulations and amendments to regulations prescribed by a Federal 
banking agency which impose additional reporting, disclosures, or other 
new requirements on insured depository institutions shall take effect 
on the first day of a calendar quarter which begins on or after the 
date on which the regulations are published in final form.\48\ The 
requirements of RCDRIA will be considered as part of the overall 
rulemaking process, and the FDIC invites comments that will further 
inform its consideration of RCDRIA.
---------------------------------------------------------------------------

    \47\ 12 U.S.C. 4802(a).
    \48\ 12 U.S.C. 4802(b).
---------------------------------------------------------------------------

Plain Language

    Section 722 of the Gramm-Leach-Bliley Act \49\ requires the Federal 
banking agencies to use plain language in all proposed and final 
rulemakings published in the Federal Register after January 1, 2000. 
The FDIC sought to present the proposed rule in a simple and 
straightforward manner. The FDIC invites your comments on how to make 
this proposal easier to understand. For example:
---------------------------------------------------------------------------

    \49\ Public Law 106-102, 113 Stat. 1338, 1471 (Nov. 12, 1999).
---------------------------------------------------------------------------

     Has the FDIC organized the material to suit your needs? If 
not, how could the material be better organized?
     Are the requirements in the proposed regulation clearly 
stated? If not, how could the regulation be stated more clearly?
     Does the proposed regulation contain language or jargon 
that is unclear? If so, which language requires clarification?
     Would a different format (grouping and order of sections, 
use of headings, paragraphing) make the regulation easier to 
understand?

List of Subjects in 12 CFR Part 375

    Reporting and recordkeeping requirements, Custodial deposit 
accounts.

Authority and Issuance

    For the reasons stated in the preamble, the Board of Directors of 
the Federal Deposit Insurance Corporation proposes to add part 375 to 
title 12 of the Code of Federal Regulations as follows:

0
1. Add part 375 to read as follows:

PART 375--REQUIREMENTS FOR ACCURATE CUSTODIAL DEPOSIT ACCOUNTS WITH 
TRANSACTIONAL FEATURES AND PROMPT PAYMENT OF DEPOSIT INSURANCE TO 
DEPOSITORS

Sec.
Sec.  375.1 Purposes.
Sec.  375.2 Definitions.
Sec.  375.3 Recordkeeping and internal control requirements.

[[Page 80152]]

Sec.  375.4 Compliance.
Sec.  375.5 Enforcement.
Appendix A to Part 375--Data Format and Structure.
Appendix B to Part 375--Ownership Right and Capacity Codes.Inserting 
required closing tag for E.

    Authority: 12 U.S.C. 1819(a)(Eighth); 1819(a)(Tenth); 1820(g); 
1821(f)(1); 1831g(a).

Sec.  375.1   Purposes.

    Unless otherwise provided in this part, an insured depository 
institution that has custodial deposit accounts with transactional 
features is required to maintain records of beneficial ownership in a 
prescribed format to preserve beneficial owners' and depositors' 
entitlement to the protections afforded by Federal deposit insurance. 
Doing so will facilitate a prompt and accurate determination of deposit 
insurance coverage to support the FDIC achieving its statutory 
obligation to pay deposit insurance ``as soon as possible'' in the 
event of the insured depository institution's failure to benefit 
depositors.

Sec.  375.2  Definitions.

    For purposes of this part:
    Account holder means the person or entity who opens or establishes 
a custodial deposit account with transactional features with an insured 
depository institution.
    Appropriate Federal banking agency has the same meaning as provided 
under section 3(q) of the Federal Deposit Insurance Act (12 U.S.C. 
1813(q)).
    Beneficial owner means a person or entity that owns, under 
applicable law, an interest in the deposit held in a custodial deposit 
account.
    Custodial deposit account with transactional features means a 
deposit account:
    (1) Established for the benefit of beneficial owners;
    (2) In which the deposits of multiple beneficial owners are 
commingled; and
    (3) Through which beneficial owner(s) may authorize or direct a 
transfer through the account holder from the custodial deposit account 
to a party other than the account holder or beneficial owner.
    Deposit has the same meaning as provided under section 3(l) of the 
Federal Deposit Insurance Act (12 U.S.C. 1813(l)).
    Insured depository institution has the same meaning as provided 
under section 3(c) of the Federal Deposit Insurance Act (12 U.S.C. 
1813(c)(2)).

Sec.  375.3  Recordkeeping and internal control requirements.

    (a) Recordkeeping. Records of beneficial ownership for each 
custodial deposit account with transactional features must be 
maintained in the data format and layout specified in appendix A to 
this part, either:
    (1) By the insured depository institution; or
    (2) Through a third party, including but not limited to any vendor, 
software provider, service provider, or similar entity in the business 
of maintaining or processing deposit transaction data, in the manner 
described in paragraph (c) of this section.
    (b) Internal controls. An insured depository institution that 
maintains records under paragraph (a)(1) of this section is required to 
implement internal controls appropriate to its size and the nature, 
scope, and risk of its activities that include:
    (1) Maintaining accurate balances of custodial deposit accounts 
with transactional features at the beneficial ownership level; and
    (2) Conducting reconciliations against the beneficial ownership 
records no less frequently than at the close of business daily.
    (c) Records maintained through a third party. An insured depository 
institution that arranges for a third party, including but not limited 
to any vendor, software provider, service provider, or similar entity 
in the business of maintaining or processing deposit transaction data, 
to assist the insured depository institution in meeting the 
requirements in paragraph (a) of this section must:
    (1) Have direct, continuous, and unrestricted access to the records 
in the data format specified in appendix A to this part, maintained by 
the third party, including in the event of business interruption, 
insolvency, or bankruptcy of the third party;
    (2) Have continuity plans, including backup recordkeeping, and 
technical capabilities to ensure compliance with this section;
    (3) Implement appropriate internal controls to:
    (i) Accurately determine the respective beneficial ownership 
interests associated with custodial deposit accounts with transactional 
features; and
    (ii) Conduct reconciliations against the beneficial ownership 
records no less frequently than as of the close of business daily; and
    (4) Have a contractual arrangement with the third party that:
    (i) Clearly defines roles and responsibilities for recordkeeping, 
including assigning to the institution the rights of the third party to 
access data held by other parties;
    (ii) Requires the third party to implement appropriate internal 
controls as required under paragraph (c)(3) of this section;
    (iii) Requires a periodic, but no less than annual, validation by a 
person independent of the third party to assess and verify that the 
third party is maintaining accurate and complete records consistent 
with the provisions in paragraphs (a)(2), (b), and (c)(3) of this 
section, with the results of the independent validation provided to the 
insured depository institution; and
    (iv) Does not relieve the insured depository institution of its 
responsibility under this part.
    (d) Exemptions. The following custodial deposit accounts with 
transactional features are exempt from the recordkeeping requirements 
in this section:
    (1) Accounts only holding trust deposits, as described in 12 CFR 
330.10 or 12 CFR 330.12;
    (2) Accounts established by a Government depositor;
    (3) Accounts established by or on behalf of one or more brokers, as 
defined in section 3(4) of the Securities and Exchange Act of 1934; 
dealers, as defined in section 3(5) of the Securities and Exchange Act 
of 1934; or investment advisers, as defined in section 202 of the 
Investment Advisers Act of 1940;
    (4) Accounts established by an attorney or law firm on behalf of 
clients, commonly known as an Interest on Lawyers Trust Accounts, or 
functionally equivalent accounts;
    (5) Accounts held in connection with an employee benefit plan or 
retirement plan described in 12 CFR 330.14;
    (6) Accounts maintained by real estate brokers, real estate agents, 
title companies, or qualified intermediaries under the Internal Revenue 
Code of 1986, in which funds from multiple clients are deposited and 
held in connection with a real estate transaction;
    (7) Accounts maintained by a mortgage servicer in a custodial or 
other fiduciary capacity;
    (8) Accounts where Federal or State law prohibits the disclosure of 
the identities of the beneficial owners of the deposits;
    (9) Accounts maintained pursuant to an agreement to allocate or 
distribute deposits among participating insured depository institutions 
in a network for purposes other than payment transactions of customers 
of the insured depository institution or participating insured 
depository institutions; and
    (10) Accounts exclusively holding security deposits tied to 
property

[[Page 80153]]

owners for a homeownership, condominium, or other similar housing 
association governed by State law, or holding security deposits tied to 
residential or commercial leasehold interests.

Sec.  375.4   Compliance.

    (a) Policies and procedures. An insured depository institution 
holding custodial deposit accounts with transactional features that are 
not specifically exempt from the requirements of this part must 
establish and maintain written policies and procedures to achieve 
compliance with this part.
    (b) Certification. An insured depository institution holding 
custodial deposit accounts with transactional features that are not 
specifically exempt from the requirements of this part must, within 1 
year of the effective date of this part and annually thereafter 
complete a certification that includes:
    (1) Confirmation that the insured depository institution has 
implemented the recordkeeping requirements described in this part, and 
tested its implementation of such requirements during the preceding 12 
months;
    (2) Confirmation that the insured depository institution is in 
compliance with this part; and
    (3) The signature of the chief executive officer, chief operating 
officer, or the highest-ranking official of the institution attesting 
to the accuracy of the certification, made after due inquiry.
    (4) The insured depository institution must file this certification 
with the appropriate FDIC Regional or Area Office and the appropriate 
Federal banking agency.
    (c) Report. An insured depository institution holding custodial 
deposit accounts with transactional features that are not specifically 
exempt from the requirements of this part must, within 1 year of the 
effective date of this part and annually thereafter, generate a report 
that contains the following:
    (1) A description of any material changes to the institution's 
information technology systems since the prior annual report that are 
relevant to compliance with this part;
    (2) A list of the account holders that maintain custodial deposit 
accounts with transactional features that are not exempt from the 
recordkeeping requirements of the rule, the total balance of those 
custodial deposit accounts, and the total number of beneficial owners;
    (3) Results of the institution's periodic testing of its compliance 
with the recordkeeping requirements set forth in this part; and
    (4) Results of the independent validation of any records maintained 
by third parties required by paragraph (c)(4)(iii) of this section.
    (5) The insured depository institution shall file this report with 
the appropriate FDIC Regional or Area Office and the appropriate 
Federal banking agency.
    (d) Frequency of certification and report. If an insured depository 
institution experiences a significant change in its deposit-taking 
operations, or the FDIC or the appropriate Federal banking agency 
identifies aspects of the institution's operations that pose elevated 
risks of compliance with this part, the FDIC or the appropriate Federal 
banking agency may require that the institution update and file the 
certification and report more frequently than annually, as requested.

Sec.  375.5  Enforcement.

    Notwithstanding existing regulations, violating the requirements 
set forth in this part constitutes a violation of a regulation and may 
subject the insured depository institution to enforcement actions under 
section 8 of the Federal Deposit Insurance Act (12 U.S.C. 1818).

Appendix A to Part 375--Data Format and Structure

    This appendix provides the pipe-delimited data file format for 
electronic file records of the beneficial owners for each custodial 
deposit account, as required by Sec.  375.3(a).

----------------------------------------------------------------------------------------------------------------
         Field name                 Description                       Format                 Null value allowed?
----------------------------------------------------------------------------------------------------------------
Account Number..............  Account number at        Variable Character [50].............  No.
                               Insured Depository
                               Institution.
Account Holder..............  Full name of person(s)   Variable Character [100]............  No.
                               or entity who opened
                               or established the
                               custodial deposit
                               account with the
                               insured depository
                               institution.
Beneficial Owner Account      Custodian assigned       Variable Character [50].............  No.
 Number.                       account number for the
                               beneficial owner.
First Name 1................  First name of            Variable Character [50].............  No.
                               beneficial owner 1 as
                               it appears on the
                               custodian's records.
Middle Name 1...............  Middle Name of           Variable Character [50].............  Yes.
                               beneficial owner 1 as
                               it appears on the
                               custodian's records.
Last Name 1.................  Last Name of beneficial  Variable Character [50].............  No.
                               owner 1 as it appears
                               on the custodian's
                               records.
Name Suffix 1...............  Name suffix following a  Variable Character [50].............  Yes.
                               beneficial owner 1's
                               surname adding
                               distinction in
                               generational sequence
                               as it appears on the
                               custodian's records.
Entity Name.................  The registered name of   Variable Character [100]............  Yes.
                               the entity as it
                               appears on the
                               custodian's records.
                               This field can be null
                               where the beneficial
                               owner is an individual.
Tax ID 1....................  Beneficial owner 1       Numeric [9].........................  No.
                               taxpayer
                               identification number.
Tax ID Code 1...............  Beneficial owner 1 code  Character [1].......................  No.
                               indicates corporate
                               ``T'' (EIN), personal
                               tax identification
                               number ``S'' (SSN,
                               ITIN), or other ``O''
                               (foreign
                               identification number).
Alternate Identifier 1......  If account was opened    Variable [20].......................  Yes.
                               without a United
                               States issued tax
                               identification number,
                               provide alternative
                               government issued
                               identification number.
First Name 2................  First name of            Variable Character [50].............  Yes.
                               beneficial owner 2 (if
                               any) as it appears on
                               the custodian's
                               records.
Middle Name 2...............  Middle Name of           Variable Character [50].............  Yes.
                               beneficial owner 2 (if
                               any) as it appears on
                               the custodian's
                               records.
Last Name 2.................  Last Name of beneficial  Variable Character [50].............  Yes.
                               owner 2 (if any) as it
                               appears on the
                               custodian's records.
Name Suffix 2...............  Name suffix following a  Variable Character [50].............  Yes.
                               beneficial owner 2 (if
                               any)'s surname adding
                               distinction in
                               generational sequence
                               as it appears on the
                               custodian's records.
Tax ID 2....................  Beneficial owner 2 (if   Numeric [9].........................  Yes.
                               any) taxpayer
                               identification number.
Tax ID Code 2...............  Beneficial owner 2 (if   Character [1].......................  Yes.
                               any) code indicates
                               corporate ``T'' (EIN),
                               personal tax
                               identification number
                               ``S'' (SSN, ITIN), or
                               other ``O'' (foreign
                               identification number).
Alternate Identifier 2......  If beneficial owner 2    Variable [20].......................  Yes.
                               does not have a United
                               States issued tax
                               identification number,
                               provide alternative
                               government issued
                               identification number.
Name 3......................  Where more than 2        Variable Character [255]............  Yes.
                               beneficial owners are
                               present, additional
                               beneficial owners will
                               be reflected in this
                               field with tab spacing
                               between the first,
                               middle, last name, and
                               suffix (if any),
                               followed by a
                               semicolon between each
                               additional beneficial
                               owner. There will be
                               no tab spacing
                               preceding the first
                               character in the first
                               name and the last
                               character in the last
                               name or suffix
                               (whichever is last
                               identified).
Street Address 1............  Street address line 1    Variable Character [100]............  Yes.
                               is beneficial owner
                               address of record.
Street Address 2............  Street address line 2    Variable Character [100]............  Yes.
                               is beneficial owner
                               address of record, if
                               available.
Street Address 3............  Street address line 3    Variable Character [100]............  Yes.
                               is beneficial owner
                               address of record, if
                               available.
City........................  City associated with     Variable Character [50].............  Yes.
                               the street address.
State.......................  State associated with    Variable Character [2]..............  Yes.
                               the street address.

[[Page 80154]]

 
Zip.........................  Zip associated with the  Variable Character [10].............  Yes.
                               street address.
Country.....................  Country associated with  Variable Character [50].............  Yes.
                               the street address.
IRA Indicator...............  If IRA, value must be    Character [1].......................  Yes.
                               ``Y''.
Current Balance.............  Current balance of the   Decimal [14,2]......................  No.
                               beneficiary account as
                               of the close of
                               business on the
                               effective date of the
                               file.
Accrued Interest............  The amount of interest   Decimal [14,2]......................  No.
                               that has been earned
                               but not yet paid to
                               the beneficiary
                               account as of the date
                               of the file.
Ownership right and capacity  Ownership right and      Character [4].......................  No.
                               capacity as set forth
                               in appendix B to this
                               part.
----------------------------------------------------------------------------------------------------------------

Appendix B to Part 375--Ownership Right and Capacity Codes

------------------------------------------------------------------------
            Code                              Description
------------------------------------------------------------------------
SGL.........................  Single Account (12 CFR 330.6): An account
                               owned by one person with no testamentary
                               or ``payable-on-death'' beneficiaries. It
                               includes individual accounts, sole
                               proprietorship accounts, single-name
                               accounts containing community property
                               funds, and accounts of a decedent and
                               accounts held by executors or
                               administrators of a decedent's estate.
JNT.........................  Joint Account (12 CFR 330.9): An account
                               owned by two or more persons with no
                               testamentary or ``payable-on-death''
                               beneficiaries (other than surviving co-
                               owners) An account does not qualify as a
                               joint account unless: (1) all co-owners
                               are living persons; (2) each co-owner has
                               personally signed a deposit account
                               signature card (except that the signature
                               requirement does not apply to
                               certificates of deposit, to any deposit
                               obligation evidenced by a negotiable
                               instrument, or to any account maintained
                               on behalf of the co-owners by an agent or
                               custodian); and (3) each co-owner
                               possesses withdrawal rights on the same
                               basis.
TST.........................  Trust Account (12 CFR 330.10): An account
                               held in connection with an informal
                               revocable trust, a formal revocable
                               trust, or an irrevocable trust.
CRA.........................  Certain Other Retirement Accounts (12 CFR
                               330.14 (b) through (c)) to the extent
                               that participants under such plan have
                               the right to direct the investment of
                               assets held in individual accounts
                               maintained on their behalf by the plan,
                               including an individual retirement
                               account described in section 408(a) of
                               the Internal Revenue Code (26 U.S.C.
                               408(a)), an account of a deferred
                               compensation plan described in section
                               457 of the Internal Revenue Code (26
                               U.S.C. 457), an account of an individual
                               account plan as defined in section 3(34)
                               of the Employee Retirement Income
                               Security Act (29 U.S.C. 1002), a plan
                               described in section 401(d) of the
                               Internal Revenue Code (26 U.S.C. 401(d)).
EBP.........................  Employee Benefit Plan Account (12 CFR
                               330.14): An account of an employee
                               benefit plan as defined in section 3(3)
                               of the Employee Retirement Income
                               Security Act (29 U.S.C. 1002), including
                               any plan described in section 401(d) of
                               the Internal Revenue Code (26 U.S.C.
                               401(d)), but not including any account
                               classified as a Certain Retirement
                               Account.
BUS.........................  Business/Organization Account (12 CFR
                               330.11): An account of an organization
                               engaged in an ``independent activity''
                               (as defined in 12 CFR 330.1(g)), but not
                               an account of a sole proprietorship.
                              This category includes:
                                 a. Corporation Account: An account
                                  owned by a corporation.
                                 b. Partnership Account: An account
                                  owned by a partnership.
                                 c. Unincorporated Association Account:
                                  An account owned by an unincorporated
                                  association (i.e., an account owned by
                                  an association of two or more persons
                                  formed for some religious,
                                  educational, charitable, social, or
                                  other noncommercial purpose).
GOV1-GOV2-GOV3..............  Government Account (12 CFR 330.15): An
                               account of a governmental entity.
GOV1........................  All time and savings deposit accounts of
                               the United States and all time and
                               savings deposit accounts of a State,
                               county, municipality, or political
                               subdivision depositing funds in an
                               insured depository institution in the
                               State comprising the public unit or
                               wherein the public unit is located
                               (including any insured depository
                               institution having a branch in said
                               State).
GOV2........................  All demand deposit accounts of the United
                               States and all demand deposit accounts of
                               a State, county, municipality, or
                               political subdivision depositing funds in
                               an insured depository institution in the
                               State comprising the public unit or
                               wherein the public unit is located
                               (including any insured depository
                               institution having a branch in said
                               State).
GOV3........................  All deposits, regardless of whether they
                               are time, savings or demand deposit
                               accounts of a State, county, municipality
                               or political subdivision depositing funds
                               in an insured depository institution
                               outside of the state comprising the
                               public unit or wherein the public unit is
                               located.
MSA.........................  Mortgage Servicing Account (12 CFR
                               330.7(d)): An account held by a mortgage
                               servicer, funded by payments by
                               mortgagors of principal and interest.
PBA.........................  Public Bond Accounts (12 CFR 330.15(c)):
                               An account consisting of funds held by an
                               officer, agent or employee of a public
                               unit for the purpose of discharging a
                               debt owed to the holders of notes or
                               bonds issued by the public unit.
DIT.........................  IDI as trustee of irrevocable trust
                               accounts (12 CFR 330.12): ``Trust funds''
                               (as defined in 12 CFR 330.1(q)) account
                               held by an insured depository institution
                               as trustee of an irrevocable trust.
ANC.........................  Annuity Contract Accounts (12 CFR 330.8):
                               Funds held by an insurance company or
                               other corporation in a deposit account
                               for the sole purpose of funding life
                               insurance or annuity contracts and any
                               benefits incidental to such contracts.
BIA.........................  Custodian accounts for American Indians
                               (12 CFR 330.7(e)): Funds deposited by the
                               Bureau of Indian Affairs of the United
                               States Department of the Interior (the
                               BIA) on behalf of American Indians
                               pursuant to 25 U.S.C. 162(a), or by any
                               other disbursing agent of the United
                               States on behalf of American Indians
                               pursuant to similar authority, in an
                               insured depository institution.
------------------------------------------------------------------------

Federal Deposit Insurance Corporation.

    By order of the Board of Directors.

    Dated at Washington, DC, on September 17, 2024.
James P. Sheesley,
Assistant Executive Secretary.
[FR Doc. 2024-22565 Filed 10-1-24; 8:45 am]
BILLING CODE 6714-01-P
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