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FDIC Federal Register Citations


[Federal Register: August 8, 2005 (Volume 70, Number 151)]
[Proposed Rules]
[Page 45571-45581]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08au05-21]

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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 330

Deposit Insurance Coverage; Stored Value Cards and Other
Nontraditional Access Mechanisms

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Notice of proposed rulemaking.

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SUMMARY: The FDIC is proposing to promulgate a regulation that would
clarify the insurance coverage of funds subject to transfer or
withdrawal through the use of stored value cards and other
nontraditional access mechanisms. This proposed rule is a revision of a
proposed rule published by the FDIC in April of 2004 (the ``First
Proposed Rule''). See 69 FR 20558 (April 16, 2004). The purpose of the
revised proposed rule (the ``Second Proposed Rule'') is to address
certain issues raised by commenters in response to the original
proposal. Through the Second Proposed Rule, the FDIC would add a new
subsection to part 330 of title 12 of the Code of Federal Regulations.
The new subsection would promote accuracy and consistency by insured
depository institutions in reporting ``deposits'' for inclusion in an
institution's assessment base. Also, the new subsection would provide
guidance to the public about the insurance coverage of funds underlying
nontraditional access mechanisms.

DATES: Written comments must be received by the FDIC no later than
November 7, 2005.

ADDRESSES: Interested parties are invited to submit written comments to
the FDIC by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.

Follow the instructions for submitting comments.
Agency Web site: http://www.fdic.gov/regulations/laws/federal/propose.html.
Follow the instructions for submitting comments. E-mail: comments@fdic.gov. Include ``Part 330--Stored
ed
Value Cards'' in the subject line of the message.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th
Street, NW., Washington, DC 20429.
Hand Delivery/Courier: Comments may be hand-delivered to
the guard station located at the rear of the FDIC's 550 17th Street
building (accessible from F Street) on business days between 7 a.m. and
5 p.m.
Instructions: All submissions must include the agency name and use
the title ``Part 330--Stored Value Cards.'' All comments received will
be posted without change to http://www.fdic.gov/regulations/laws/federal/propose.html
, including any personal information

[[Page 45572]]

provided. Comments may be inspected and photocopied in the FDIC Public
Information Center, Room 100, 801 17th Street, NW., Washington, DC,
between 9 a.m. and 4:30 p.m. on business days.

FOR FURTHER INFORMATION CONTACT: Christopher L. Hencke, Counsel, Legal
Division, (202) 898-8839, Federal Deposit Insurance Corporation, 550
17th Street, NW., Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. The Statutory Definition of ``Deposit''

In the Federal Deposit Insurance Act (``FDI Act''), the term
``deposit'' is defined at section 3(l) (12 U.S.C. 1813(l)). This
section includes several paragraphs. At paragraph 3(l)(1), the term
``deposit'' is defined in part as ``the unpaid balance of money or its
equivalent received or held by a bank or savings association in the
usual course of business and for which it has given or is obligated to
give credit, either conditionally or unconditionally, to a commercial,
checking, savings, time, or thrift account, or which is evidenced by
its certificate of deposit, thrift certificate, investment certificate,
certificate of indebtedness, or other similar name * * *.'' 12 U.S.C.
1813(l)(1).
At paragraph 3(l)(3), the term ``deposit'' is defined in part as
``money received or held by a bank or savings association, or the
credit given for money or its equivalent received or held by a bank or
savings association, in the usual course of business for a special or
specific purpose, regardless of the legal relationship thereby
established, including without being limited to, escrow funds, funds
held as security for an obligation due to the bank or savings
association or others (including funds held as dealers reserves) or for
securities loaned by the bank or savings association, funds deposited
by a debtor to meet maturing obligations, funds deposited as advance
payment on subscriptions to United States Government securities, funds
held for distribution or purchase of securities, funds held to meet its
acceptances or letters of credit, and withheld taxes * * *.'' 12 U.S.C.
1813(l)(3).
Finally, paragraph 3(l)(5) provides that the FDIC, in consultation
with the other federal banking agencies, may define ``deposit'' through
regulation. See 12 U.S.C. 1813(l)(5). In accordance with paragraph
3(l)(5), the FDIC is consulting with the other agencies in connection
with this proposed rulemaking.

II. General Counsel's Opinion No. 8

In 1996, the FDIC applied the statutory definition of ``deposit''
to funds at insured depository institutions underlying stored value
cards. The FDIC concluded that the funds in some stored value card
systems are ``deposits'' but that the funds in other systems are not
``deposits.'' The FDIC's interpretation was set forth in General
Counsel's Opinion No. 8 (``GC8''). See 61 FR 40490 (August 2, 1996).
In GC8, the FDIC identified four types of stored value card systems
that involve banks: (1) A ``Bank Primary-Reserve System'' (2) a ``Bank
Primary-Customer Account System''; (3) a ``Bank Secondary-Advance
System''; and (4) a ``Bank Secondary-Pre-Acquisition System.'' Each of
these systems is described below.
In a ``Bank Primary-Reserve System,'' the insured depository
institution issues stored value cards in exchange for cash from the
cardholders. The depository institution does not maintain an individual
account for each cardholder; rather, the institution maintains a pooled
``reserve account'' for all cardholders. In making payments to
merchants or other payees (as the cardholders use their cards to
purchase goods or services), the depository institution disburses funds
from this ``reserve account.'' In GC8, the FDIC determined that such
funds held by the insured depository institution do not satisfy the
statutory definition of ``deposit'' at section 3(l) of the FDI Act. In
making this determination, the FDIC specifically addressed the
applicability of paragraphs 3(l)(1) and 3(l)(3) (quoted above). First,
in finding that the funds do not satisfy paragraph 3(l)(1), the FDIC
found that the stored value cards are not structured so that the
institution credits a conventional commercial, checking, savings, time
or thrift account. Rather, the institution credits the pooled ``reserve
account.'' See 61 FR at 40492. Second, in finding that the funds do not
satisfy paragraph 3(l)(3), the FDIC determined that the purpose of the
funds is insufficiently ``special or specific'' because the cardholder
might ``engage in any of a number of unrelated transactions'' with the
result that the funds ``could be associated with general or
miscellaneous unrelated transactions.'' 61 FR at 40493. On the basis of
this reasoning, the FDIC concluded that the funds in this type of
system are not ``deposits.'' See 61 FR at 40493, 40494.
A ``Bank Primary-Customer Account System'' is similar to a ``Bank
Primary-Reserve System'' in that the insured depository institution
issues stored value cards in exchange for cash from the cardholders.
The two systems differ, however, in their accounting techniques. In a
``Bank Primary-Customer Account System,'' the depository institution
does not maintain a pooled ``reserve account'' for all cardholders.
Rather, the institution maintains an individual account for each
cardholder. Citing paragraph 3(l)(1) of the statutory definition
(quoted above), the FDIC in GC8 determined that the funds in these
individual accounts are ``deposits.'' See 61 FR at 40492, 40494.
In a ``Bank Secondary-Advance System,'' the insured depository
institution acts as an intermediary in collecting funds from
cardholders in exchange for stored value cards issued by a third party
or sponsoring company. The funds are held by the depository institution
for a short period of time, then forwarded to the sponsoring company.
See 61 FR at 40490. Later, when the cardholder uses the stored value
card to make a purchase from a merchant, the sponsoring company (and
not the depository institution) sends the appropriate amount of money
to the merchant. In GC8, the FDIC determined that the funds collected
by the depository institution are ``deposits'' belonging to the
sponsoring company for the brief period before the funds are forwarded
to the sponsoring company. The funds are not ``deposits'' belonging to
the cardholders because the institution's liability for these funds is
owed to the sponsoring company for whom the institution is temporarily
holding the funds. See 61 FR at 40490-91, 40494.
Similarly, in a ``Bank Secondary-Pre-Acquisition System,'' the
insured depository institution provides cardholders with cards issued
by a third party or sponsoring company. Prior to selling the cards to
the cardholders, however, the depository institution purchases the
cards from the sponsoring company. See 61 FR at 40490. In this respect,
the system is different than a ``Bank Secondary-Advance System.'' When
the depository institution resells the cards to the cardholders, no
money is owed to the sponsoring company. For this reason, the
depository institution is free to retain the funds collected from the
cardholders. Later, when a cardholder uses his/her stored value card to
make a purchase from a merchant, the sponsoring company and not the
depository institution sends the appropriate amount of funds to the
merchant. In GC8, the FDIC determined that the funds collected by the
depository institution in this system are not ``deposits.'' See 61 FR
at 40491, 40494. This conclusion was based upon the fact that the
depository institution, in collecting funds from cardholders, does not
assume a responsibility to

[[Page 45573]]

return or disburse the funds to the cardholders or the sponsoring
company or any other party. Rather, the depository institution merely
sells the right to collect funds from the sponsoring company (i.e., the
issuer of the cards). Thus, the funds underlying the stored value cards
are held by the sponsoring company, not by the depository institution.
Under these circumstances, no ``deposits'' exist at the depository
institution. See 12 U.S.C. 1813(l)(1) (defining ``deposit'' as an
``unpaid balance of money or its equivalent''); 12 U.S.C. 1813(l)(3)
(providing that the term ``deposit'' does not include ``funds which are
received by the bank or savings association for immediate application
to the reduction of an indebtedness to the receiving bank or savings
association, or under condition that the receipt thereof immediately
reduces or extinguishes such an indebtedness'').

III. The First Proposed Rule

Following the publication of GC8, the banking industry developed
new types of stored value cards and stored value card systems. Indeed,
stored value cards are one of the fastest growing products in the
financial industry.
Certain types of cards are being marketed to lower-income
consumers, especially the unbanked and the underbanked. The use of
stored value cards can serve as a point of entry into the banking
system for consumers without bank accounts, as well as provide asset-
building and credit-building opportunities. Industry innovation in this
area is of considerable interest to regulatory agencies and banks
reaching out to underserved markets.
With more than 10 million unbanked households in the United States,
prepaid debit products such as stored value cards or reloadable
``payroll cards'' are increasingly being used by employers to remit
wages electronically to their employees. These cards have been used to
provide consumers with a viable means of accessing funds and making
financial transactions. Payroll cards have also served as an
alternative to paying high fees at non-bank check cashers. Functioning
as ``checkless bank accounts,'' payroll debit cards have provided a
convenient and safer way to store funds, pay for purchases, access
automated teller machines (``ATMs'') and pay bills. In addition,
foreign remittance services are one of the ways in which banks use
debit cards to build relationships with a large population of unbanked
customers. The ability of banks to reach out to low- and moderate-
income consumers with products such as low-cost debit accounts,
remittance services and individual development accounts may receive
favorable consideration during Community Reinvestment Act examinations.
The evolving and increasing use of stored value cards is important
to the banking industry. The FDIC and others in the banking industry
recognize the importance of these cards to all consumers, including the
underbanked. These cards provide banks with an opportunity to reach
underserved markets.
While serving important needs, the development of new types of
stored value cards has raised legal issues that the FDIC did not
address in GC8. One of the new stored value card systems could be
described as a ``hybrid system'' in that it combines the ``Bank
Primary-Reserve System'' with the ``Bank Primary-Customer Account
System.'' In this hybrid system, the insured depository institution
issues stored value cards against a pooled ``reserve account'' but also
maintains individual accounts or subaccounts for the various
cardholders. In some cases, the individual accounts or subaccounts are
maintained by a processing agent. GC8 did not address such hybrid
systems.
The banking industry also developed a system in which stored value
cards are issued by a sponsoring company against an account at an
insured depository institution. The issuance of cards by a sponsoring
company (as opposed to a depository institution) is not a new
development: the ``Bank Secondary-Advance System'' and the ``Bank
Secondary-Pre-Acquisition System'' both involve the issuance of stored
value cards by sponsoring companies. The new development (or at least
the feature of ``secondary systems'' not discussed by the FDIC in GC8)
is the funding of a bank account by the sponsoring company for the
purpose of making payments on the stored value cards. When a cardholder
uses his/her card to make a purchase from a merchant, the funds are
disbursed to the merchant from this bank account. In GC8, the FDIC
never addressed the question of whether the funds in such an account
qualify as ``deposits.''
The ``payroll card'' is another type of card not specifically
addressed in GC8. Such cards are distributed by employers to employees
in lieu of paychecks. Prior to distributing the cards (or prior to
activating the cards), the employer (directly or through a processing
agent) places funds at a depository institution. After the distribution
of the cards and the placement of the funds, the employees transfer or
withdraw the funds through the use of their cards. In some cases,
payroll cards are reloadable.
GC8 also included no specific discussion of ``gift cards.'' A
person might buy a gift card from a retail store. In some cases, the
gift card may be used to purchase goods or services wherever a major
credit card may be used. Prior to the sales of such cards, the retail
store (or some company under an agreement with the retail store) may
place funds at a depository institution. After the sales of the cards
and the placement of the funds, the cardholders transfer or withdraw
the funds through the use of the cards.
In response to the development of these new types of stored value
cards and stored value card systems, the FDIC published the First
Proposed Rule. See 69 FR 20558 (April 16, 2004). The FDIC recognized
the existence of three types of stored value card systems. First, the
FDIC recognized systems in which an insured depository institution
receives funds from cardholders, or receives funds from others on
behalf of cardholders, in exchange for stored value cards issued by the
depository institution. Under the First Proposed Rule, the funds held
by the institution would be ``deposits'' unless (1) the institution
records its liabilities for such funds in an account representing
multiple cardholders; and (2) the institution (directly or through an
agent) maintains no supplemental records or subaccounts reflecting the
amount owed to each cardholder. Thus, in regard to ``Bank Primary-
Reserve Systems'' and ``Bank Primary-Customer Account Systems,'' the
First Proposed Rule followed GC8. In addition, the First Proposed Rule
provided that the funds in a hybrid system (not addressed in GC8) would
be ``deposits.''
Second, the FDIC recognized systems in which an insured depository
institution receives funds from cardholders in exchange for stored
value cards issued by a sponsoring company (e.g., a ``Bank Secondary-
Advance System'' or a ``Bank Secondary-Pre-Acquisition System''). Under
the First Proposed Rule, the funds would be ``deposits'' if the
depository institution bears an obligation to forward the funds to the
sponsoring company or to hold the funds for the sponsoring company.
After the forwarding or withdrawal of such funds, of course, the funds
would cease to be ``deposits.'' Also, the funds would never be
``deposits'' if the depository institution never bears an obligation to
forward or hold the funds (e.g., the depository institution purchases
stored value cards from the sponsoring company and then resells the
cards to the cardholders). In other

[[Page 45574]]

words, in regard to ``Bank Secondary-Advance Systems'' and ``Bank
Secondary-Pre-Acquisition Systems,'' the First Proposed Rule simply
followed GC8.
Third, the FDIC recognized systems in which funds are placed at an
insured depository institution by a sponsoring company for the purpose
of making payments on stored value cards issued by that company. As
discussed above, this type of system was not addressed in GC8. Under
the First Proposed Rule, the funds in such a system would be
``deposits.''
The First Proposed Rule did not set forth specific rules for
``payroll cards'' or ``gift cards.'' Thus, under the First Proposed
Rule, the funds underlying such cards would be subject to the general
rules summarized above.
Finally, assuming that the funds in a particular system are
``deposits,'' the First Proposed Rule set forth no specific rules for
determining whether the insured depositor is the cardholder as opposed
to some other party (such as the employer in the case of payroll
cards). Rather, the First Proposed Rule simply provided that the
insurance coverage of the deposits would be governed by the same rules
that apply to any other deposits. See 12 CFR part 330.
A separate issue is whether stored value cards should include
mandatory disclosures as to whether the underlying funds are insured by
the FDIC. In publishing the First Proposed Rule, the FDIC raised this
issue but did not set forth any specific rules. Rather, the FDIC merely
requested comments.

IV. The Comments

In response to the First Proposed Rule, the FDIC received 36
comments.\1\ Approximately eight comments supported the proposed rule
while approximately twenty comments opposed the rule. The other
comments could be characterized as neutral.\2\
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\1\ Though a few of the comments were untimely, the FDIC has
considered all of the comments in revising the proposed rule.
\2\ Some comments represented multiple parties. For example, one
comment represented 26 consumer groups. Comments from banking trade
associations represented multiple banks.
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In supporting the First Proposed Rule, some commenters emphasized
the importance of protecting consumers (i.e., the persons who hold
stored value cards). Others simply endorsed the proposed classification
scheme (in which most funds held by banks would be ``deposits'' but
some funds might not be ``deposits'').
Those commenters who opposed the First Proposed Rule presented a
variety of objections. One of the objections was that the scope of the
First Proposed Rule was too narrow. This particular objection is
discussed in section A below. This objection warrants a separate
discussion because the FDIC agrees that the scope of the proposed rule
must be reconsidered. In section B, the commenters' additional
objections and arguments are discussed. These arguments include the
following: (1) The proposed rule will trigger other laws and
regulations; (2) the proposed rule is inconsistent with GC8; (3)
cardholders do not expect to be insured; (4) the FDIC should recognize
distinctions among types of stored value cards; (5) the funds
underlying payroll cards should be insured but the funds underlying
gift cards should not be insured; (6) adoption of the proposed rule
will have a ``chilling effect'' on the development of stored value
products; and (7) the adoption of a regulation is ``premature.''

A. The Scope of the Proposed Rule

The stated purpose of the First Proposed Rule was ``to clarify the
meaning of `deposit' as that term relates to funds at insured
depository institutions underlying stored value cards.'' The term
``stored value card'' was defined as ``a device that enables the
cardholder to transfer the underlying funds (i.e., the funds received
by the issuer of the card in exchange for the issuance or reloading of
the card) to a merchant at the merchant's point of sale terminal.'' 69
FR at 20565-66. This stated purpose and this definition were based upon
language in GC8. See 61 FR at 40490-91.
A number of commenters expressed the opinion that the proposed
definition of ``stored value card'' is too narrow. They noted, for
example, that some cards not only enable cardholders to transfer funds
to merchants at point of sale terminals but also enable cardholders to
make withdrawals at ATMs. Moreover, a device or mechanism that enables
the user to make such transfers or withdrawals may not be a ``card'' at
all. The mechanism could be a code or computer. Finally, some
commenters noted that the term ``stored value card'' may be less common
today than the term ``prepaid card.''
Response: The FDIC agrees with these comments and is reconsidering
the scope of the proposed rule.
Of course, no rule at all may be necessary if the funds underlying
``stored value cards'' or similar mechanisms do not differ in any
material respects from the funds underlying ordinary checks or ATM
cards (i.e., the funds in ordinary checking accounts). Although some of
the literature suggests that stored value cards are different than
checks because the funds are stored ``on the card,'' nothing is
actually stored on the card except information (such as information
about the amount available to the cardholder for transfers to
merchants). In this respect, a stored value card is similar to a paper
check. Both a card and a check serve as the means of transferring funds
held at a bank. In both cases, the funds are delivered to merchants
through a ``clearing'' process. This similarity was recognized in GC8.
See 61 FR at 40490.
If a particular stored value card may be used to make withdrawals
from ATM machines, then the card is similar to an ordinary ATM card.
The use of a bank ATM machine to make withdrawals is a demonstration of
the fact that the underlying funds are held at a bank, not ``on the
card.''
In short, stored value cards are very similar to traditional
mechanisms for transferring or withdrawing funds from a bank. To the
extent that the underlying funds have been placed at a bank, a self-
described ``stored value card'' can serve as an access mechanism.\3\ In
this regard, a stored value card is no different than a check or bank-
issued traveler's check or money order. None of these mechanisms
actually stores money. All of these mechanisms merely provide access to
money stored at a bank.
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\3\ To the extent that the card or other mechanism does not
involve the placement of funds at a bank, the FDIC's regulations are
inapplicable. For example, the FDIC's regulations do not apply to
``closed systems'' in which the cardholder deals directly with a
merchant without the involvement of a bank. In such a system, the
cardholder typically purchases his/her card directly from the
merchant. The card enables the holder, at a later point in time, to
collect goods or services from the same merchant. At that time,
payment is not received by the merchant through a bank. On the
contrary, the merchant has been prepaid through the sale of the
card. Following the sale of the card, the merchant might place the
funds into a deposit account at an FDIC-insured depository
institution but any such placement of funds would have no effect on
the ``value'' of the card or the cardholder's ability to use the
card to collect the promised goods or services. To the extent that
the merchant places the funds into an account at an insured
depository institution, the funds would be insurable to the merchant
(not the cardholder) as the deposit of a corporation. See 12 CFR
330.11(a) (providing that the deposit accounts of a corporation are
added together and insured up to $100,000).
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Perhaps the major difference between stored value cards and
traditional access mechanisms is that the holder of a stored value
card, unlike the holder of a book of checks or the holder of an ATM
card, need not deal directly with a bank. Rather, the holder of a
stored

[[Page 45575]]

value card may deal with either a bank or a third party.\4\
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\4\ Even this difference may be overstated. While the purchaser
of a stored value card might not deal directly with a bank, the
purchaser of a traditional money order also might not deal directly
with a bank. Rather, the purchaser might deal with an express
company or money transmitter. If the money transmitter places funds
into a bank, the funds will be ``deposits'' of the money-
transmitting company and not ``deposits'' of the purchasers. See,
e.g., FDIC Advisory Opinion No. 91-21 (March 21, 1991). Under the
Second Proposed Rule, funds underlying stored value cards would be
treated in a similar fashion (i.e., the funds placed in a bank would
be ``deposits'' but not necessarily ``deposits'' of the purchasers).
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For example, in the case of payroll cards, the cardholders receive
their cards from their employer (or agent company on behalf of the
employer). The underlying funds are placed at a depository institution
by the employer. After the distribution of the cards and the placement
of the funds, the cards are used by the cardholders to transfer or
withdraw the funds.
Similarly, in the case of gift cards, the cardholders may buy their
cards from a retail store. Prior to selling the cards, the retail store
(or some other company under an agreement with the retail store) may
place the underlying funds at a depository institution. After the
selling of the cards and the placement of the funds, the cards are used
by the cardholders to transfer or withdraw the funds.
The fact that a depository institution holds the funds but might
not deal directly with the cardholders creates the possibility that the
institution will maintain no records as to the identities of the
cardholders. In the event of the failure of the depository institution,
the anonymity of the cardholders would create an obvious problem for
the FDIC in attempting to pay deposit insurance to the cardholders.
Concerns about the possible anonymity of cardholders played a large
role in the FDIC's issuance of GC8 in 1996.
The problem of anonymity is not limited to persons with stored
value cards. The same problem might exist in the case of persons who
use other nontraditional means of transferring funds. For example, a
company might provide customers with the service of purchasing goods or
transferring funds over the Internet. In order to effectuate such
transfers, the company might place funds at banks without providing the
bank with information as to the identities of the customers. In such a
scenario, an issue would exist as to whether the funds at the bank are
``deposits'' under paragraph 3(l)(1) of the statutory definition (as
interpreted in GC8) because the funds would not be held in conventional
checking or savings accounts. In addition, an issue would exist as to
whether the funds are ``deposits'' under paragraph 3(l)(3) of the
statutory definition (as interpreted in GC8) because the funds might be
used by the customers to make general and miscellaneous purchases over
the Internet. Finally, assuming that the funds are ``deposits,'' an
issue would exist as to whether the funds should be insured to the
company as opposed to the anonymous customers.
In short, the issues that exist with respect to the funds
underlying stored value cards also exist with respect to the funds
underlying other nontraditional access mechanisms. In order to resolve
this broader set of issues, the FDIC has decided to replace the First
Proposed Rule (dealing solely with funds underlying stored value cards)
with the Second Proposed Rule (dealing with funds underlying all types
of nontraditional access mechanisms). The Second Proposed Rule is
explained in detail in section V, infra.

B. Other Objections

In response to the First Proposed Rule, commenters presented a
number of objections that also might apply to the Second Proposed Rule.
Each of the principal objections and arguments is discussed in turn
below.
The Effect Upon Other Laws. Some commenters objected to the First
Proposed Rule on the grounds that the adoption of a broad definition of
``deposit'' would trigger various laws and regulations that the
commenters characterized as burdensome. Several commenters stated that
the applicability of these laws and regulations could stifle
development and increase costs of stored value products. The given
examples of such laws and regulations included the Federal Reserve Act
as implemented by Regulation D and the Electronic Fund Transfer Act as
implemented by Regulation E. Commenters also cited Regulation P
(privacy of consumer financial information), Regulation CC
(availability of funds), Regulation DD (truth in savings), laws
involving branches and mergers, the USA Patriot Act, and state laws
involving escheat and liens.
Response: The laws and regulations cited by the commenters do not
incorporate the definition of ``deposit'' in the FDI Act. Therefore,
the FDIC's interpretation of ``deposit'' does not necessarily determine
the applicability of these laws and regulations.
Regulation E is illustrative. This regulation provides certain
protections to consumers who use electronic fund transfer services. See
12 CFR part 205. Nothing in Regulation E limits its application to
consumers with ``deposits'' as defined in the FDI Act. Rather,
Regulation E protects consumers with ``a demand deposit (checking),
savings, or other consumer asset account (other than an occasional or
incidental credit balance in a credit plan) held directly or indirectly
by a financial institution and established primarily for personal,
family, or household purposes.'' 12 CFR 205.2(b)(1) (emphasis added).
In September of 2004, the Board of Governors of the Federal Reserve
System published a proposed rule that would provide that ``payroll card
accounts'' are covered by Regulation E. See 69 FR 55996 (September 17,
2004). The proposed rule does not provide that Regulation E shall apply
to all types of stored value card accounts or that Regulation E shall
apply to all ``deposits'' as defined in the FDI Act. Thus, on its face,
the proposed rule indicates that the applicability of Regulation E to
consumers' accounts need not be coextensive with the insurance coverage
of ``deposits'' as defined in the FDI Act.\5\
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\5\ The applicability of Regulation E or other regulations
administered by the Board of Governors lies within the jurisdiction
of the Board of Governors, not within the jurisdiction of the FDIC.
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Consistency With GC8. Some commenters who opposed the First
Proposed Rule presented legal arguments based on the statutory
definition of ``deposit'' at 12 U.S.C. 1813(l). Most of these
commenters objected to the FDIC's proposed treatment of funds in hybrid
systems (i.e., systems in which the depository institution maintains a
pooled ``reserve account'' for all cardholders as in a ``Bank Primary-
Reserve System'' but also maintains an account or subaccount for each
cardholder as in a ``Bank Primary-Customer Account System''). Under the
First Proposed Rule, the funds in a hybrid system would be classified
as ``deposits.''
In objecting to the FDIC's proposed treatment of funds in hybrid
systems, the commenters relied in large part upon the FDIC's analysis
of ``Bank Primary-Reserve Systems'' in GC8. As previously discussed,
the FDIC in GC8 found that the funds in such systems do not qualify as
``deposits'' under either paragraph 3(l)(1) or paragraph 3(l)(3) of the
statutory definition (previously quoted). First, the FDIC found that
the funds do not qualify as ``deposits'' under paragraph 3(l)(1)
because the funds are not credited to conventional commercial,
checking, savings, time or thrift accounts. Rather, the funds are
credited to a pooled self-described

[[Page 45576]]

``reserve account.'' See 61 FR 40490. Second, the FDIC found that the
funds do not qualify as ``deposits'' under paragraph 3(l)(3) because
the purpose of the funds is insufficiently ``special or specific.'' In
reaching this conclusion, the FDIC noted that the funds might be
disbursed to any number of merchants as the cardholders use their cards
in miscellaneous and unrelated transactions. See id.
On the basis of the same reasoning, some commenters argued that the
funds in a hybrid system are not ``deposits.'' First, these commenters
noted that the funds in a hybrid system are not credited to
conventional commercial, checking, savings, time or thrift accounts (as
those terms are interpreted in GC8). Rather, the funds are credited to
the pooled ``reserve account'' and the individual stored value card
subaccounts. Second, these commenters noted that the funds in the
``reserve account'' and the subaccounts are not ``special or specific''
in purpose (as that term is interpreted in GC8) because the funds might
be disbursed to any number of merchants as the cardholders use their
cards in miscellaneous and unrelated transactions. These commenters
therefore argued that under the FDIC's own interpretation in GC8 of
paragraphs 3(l)(1) and 3(l)(3), the funds should not be ``deposits.''
Response: The commenters' interpretation as summarized above is not
the only possible interpretation of GC8 as to whether the funds in
hybrid systems are ``deposits.'' As explained in the preamble to the
First Proposed Rule, the issue simply was not resolved in GC8. See 69
FR 20558, 20562 (April 16, 2004).
The confusion regarding the applicability of GC8 is an important
reason for replacing GC8 with a regulation. In the end, the question is
not whether certain funds are ``deposits'' under GC8 but whether
certain funds are ``deposits'' under the statute and regulations
implementing and interpreting the statute. In publishing the First
Proposed Rule, the FDIC attempted to clarify the meaning of the
statute. In regard to funds in hybrid systems, the FDIC concluded that
such funds are ``deposits'' under paragraph 3(l)(3) of the statutory
definition because the funds in each subaccount are held for the
``special or specific purpose'' of satisfying the bank's obligations to
a specific customer, i.e., the individual cardholder.\6\ See 69 FR at
20562. This conclusion is consistent with GC8, in which the FDIC found
that the funds in a ``Bank Primary-Customer Account System'' are
``deposits.'' No apparent difference exists between the funds in an
individual subaccount and the funds in an individual account.
---------------------------------------------------------------------------

\6\ The FDIC also stated that the funds in individual
subaccounts might be ``deposits'' under paragraph 3(l)(1) of the
statutory definition. See 12 69 FR at 20562.
---------------------------------------------------------------------------

In summary, the FDIC continues to believe that the funds in hybrid
systems are ``deposits.'' The FDIC is not persuaded by the comments to
the contrary. Moreover, even if the funds in a particular type of
system (such as a hybrid system) are not ``deposits'' under paragraph
3(l)(1) or paragraph 3(l)(3), the FDIC may classify the funds as
``deposits'' under paragraph 3(l)(5) (subject to the FDIC's
consultations with the other federal banking agencies). In light of the
similarity between debit cards or ATM cards (providing access to
traditional bank accounts) and stored value cards in a hybrid system
(providing access to bank subaccounts), the FDIC believes that the
funds in a hybrid system should be classified as ``deposits.''
Cardholders' Expectations. Another argument advanced by some
commenters is that the funds underlying certain types of stored value
cards--especially gift cards--should not be classified as ``deposits''
because the cardholders do not perceive themselves as depositors.
Response: Whether cardholders expect their cards to be supported by
insured deposits is a significant practical issue (discussed further
below), but it is not determinative. First, the issue for the FDIC is
not simply whether the funds underlying gift cards are ``deposits.''
Assuming that the funds are ``deposits,'' an additional issue is
whether the insurance coverage protects the cardholders as opposed to
some other party. For example, the funds underlying certain gift cards
might be placed at an insured depository institution by a retail store.
Assuming that the retail store retains control of the funds, or the
store fails to satisfy the FDIC's requirements for obtaining ``pass-
through'' insurance coverage, the FDIC would treat the store and not
the cardholder as the depositor. Thus, the cardholders' alleged
perceptions and expectations would be fulfilled (they would not be
treated as depositors) and yet the funds held by the bank could be
classified as ``deposits'' (insurable not to the cardholders but to the
retail store).
Second, the commenters' argument does not address the fact that
some cardholders receive periodic statements or balances from the
depository institution (or such statements or balances are made
available by the depository institution). The FDIC is concerned that a
stored value cardholder who receives a statement or balance from an
FDIC-insured depository institution would expect his or her funds to be
protected by the FDIC. In other words, the cardholders may perceive
themselves as depositors.
Third, the statutory definitions of ``deposit'' and ``insured
deposit'' are very broad. They do not make reference to customers'
perceptions and expectations. See 12 U.S.C. 1813(l); 12 U.S.C. 1813(m).
In light of the foregoing, the FDIC is reluctant to adopt a regulation
that would rely on customers' alleged perceptions and expectations.
Distinctions Among Types of Cards. In response to the First
Proposed Rule, some commenters argued that the FDIC should base deposit
insurance determinations on certain characteristics of stored value
cards. For example, one commenter stated that the underlying funds
should be treated as ``deposits'' only in the case of ``funds on cards
that are the functional equivalent of a deposit in terms of longevity,
purpose, usability, and ownership.'' This commenter further argued that
the funds should not be treated as ``deposits'' in the case of ``funds
on cards that are the functional equivalent of a payment mechanism more
akin to cash.''
Response: Two points must be emphasized. First, under the FDI Act,
insurance of ``deposits'' is not limited to funds owned by bank
customers with formal or long-term relationships with the bank. For
example, the term ``deposit'' includes funds underlying bank-issued
travelers' checks, official checks and money orders. See 12 U.S.C.
1813(l)(1); 1813(l)(4). Even though the payee of such an instrument may
have established no formal relationship with the bank, the FDIC will
provide insurance to the payee (in the event of the bank's failure)
because the funds held by the bank are ``deposits.''
Second, a stored value card is not ``akin to cash.'' Rather, a
stored value card is more closely related to payment instruments such
as checks or travelers' checks or money orders because the card must be
backed-up by money at a bank. As previously explained, this money moves
to merchants through a ``clearing'' process. In contrast, no
``clearing'' takes place in the case of cash.
Payroll Cards Versus Gift Cards. Some commenters argued that the
FDIC should expressly differentiate between payroll cards and gift
cards. These commenters suggested that the FDIC

[[Page 45577]]

should adopt a rule that provides as follows: (1) the funds underlying
payroll cards are ``deposits''; but (2) the funds underlying gift cards
are not ``deposits.''
Response: Although the FDIC has not incorporated this suggestion in
the Second Proposed Rule, additional comments are requested as to
whether the FDIC should recognize a distinction between the funds
underlying payroll cards and the funds underlying gift cards. In the
case of gift cards, the insurance of the underlying funds may depend on
whether the funds are held in an account solely in the name of the
retail store (i.e., the party that places the funds into the bank) as
opposed to being held in a custodial account that satisfies the FDIC's
requirements for ``pass-through'' insurance coverage (i.e., coverage
that ``passes through'' the retail store to the cardholders). If the
gift cards have been issued by the bank itself and not issued by or
through a retail store or other sponsoring company, one possibility
might be to create a ``de minimis'' rule. For example, the FDIC could
create a rule providing that the funds underlying cards with small
balances (e.g., up to $100) are not ``deposits.'' Assuming that the
gift cards have been issued directly by the bank (and not by or through
a retail store or sponsoring company or any other party), another
possibility might be to create a rule under which the funds underlying
gift cards are not ``deposits'' if the insured depository institution
maintains no records as to the identities of the cardholders or any
other parties. Such an exception to the definition of ``deposit'' was
included in the First Proposed Rule. Although the Second Proposed Rule
does not include such exceptions to the definition of ``deposit,''
comments are requested.
In the case of funds underlying payroll cards, one possibility is
to create a rule mandating satisfaction of the FDIC's ``pass-through''
requirements so that the funds always would be insured to the
employees. For example, the FDIC might forbid insured depository
institutions from accepting funds underlying payroll cards unless (1)
the employer (or agent company on behalf of the employer) maintains
records reflecting the identities of the employees and the amount
payable to each employee; and (2) the employer relinquishes ownership
of the funds to the employees so that the employer cannot recover the
funds under any circumstances (e.g., upon the expiration of a card).
Although the Second Proposed Rule does not include such a provision,
comments are requested. The purpose of such a provision would be to
protect the wages and salaries of employees. Assuming that the FDIC
adopts such a provision, comments are requested as to whether this type
of provision should apply only to payroll cards or whether the FDIC
should extend this treatment to other cards such as those used to
deliver welfare or medical benefits.
The manner in which an employer uses payroll cards may be affected
by state labor laws and regulations. Most notably, it appears that at
least some state labor laws, though perhaps written to address a
different issue, would effectively require employers to satisfy ``pass-
through'' requirements. Comments are requested as to the applicability
of any such state laws, with particular focus on whether they
effectively insure that employees will receive ``pass-through''
coverage in the absence of FDIC rules requiring satisfaction of ``pass-
through'' requirements.
``Chilling Effect.'' Some commenters argued that the adoption of a
broad definition of ``deposit'' would have a ``chilling effect'' on the
development of stored value products. This argument is based upon the
proposition that the definition of ``deposit'' under the FDI Act is a
trigger with respect to the operation of other laws and regulations
(such as Regulation E or the USA Patriot Act).
Response: As previously explained, a determination by the FDIC that
certain funds held by a bank are insurable as ``deposits'' under the
FDI Act would not automatically trigger application of various other
laws and regulations. Conversely, a determination by the FDIC that the
funds underlying some, or all, classes of stored value cards are not
``deposits'' would not preclude application of these other laws and
regulations.
``Premature.'' Some commenters argued that the adoption of a rule
is ``premature.'' These commenters urged the FDIC--together with the
other banking agencies--to conduct a study of stored value products.
Response: The timeliness of this rulemaking must be viewed in light
of the fact that the FDIC has not addressed many of the issues relating
to stored value cards since 1996 (when GC8 was published). Since that
time, the development of new types of stored value products and systems
(such as hybrid systems) has created uncertainty as to the insurance
coverage of the underlying funds. If the FDIC fails to provide
guidance, the holders of access mechanisms will not know whether they
are insured. Moreover, insured depository institutions will not know
whether to report the funds as ``deposits'' in Call Reports. Under
these circumstances, the FDIC believes that rulemaking may be necessary
now.

V. The Second Proposed Rule

The FDIC has considered the comments submitted by the public in
response to the First Proposed Rule. These comments have increased the
FDIC's understanding of the issues relating to stored value cards and
other nontraditional access mechanisms.
As discussed in the preceding section, the funds underlying some
nontraditional access mechanisms are placed at an insured depository
institution by a party other than the holder of the mechanism. For
example, in the case of payroll cards, the funds will be placed at the
insured depository institution by the employer (or agent company on
behalf of the employer) while the cards will be held by employees.\7\
Similarly, in the case of gift cards, the funds may be placed at the
insured depository institution by a retail store (or other company
pursuant to an agreement with the retail store) while the cards may be
held by customers of the retail store. These arrangements create the
possibility that the insured depository institution will possess no
records as to the identities of the holders of the access mechanisms.
An absence of such records appears especially likely in the case of
low-denomination, transferable gift cards. In the event of the failure
of the insured depository institution, the anonymity of the holders of
the access mechanisms would create an obvious problem for the FDIC in
attempting to pay deposit insurance.
---------------------------------------------------------------------------

\7\ Of course, the same arrangement exists in the case of direct
deposits: the funds are placed at the bank by the employer for the
benefit of the employees. In the case of direct deposits, the funds
are placed into accounts maintained by (and in the name of) the
various employees.
---------------------------------------------------------------------------

The issue described above is not addressed in section 3(l) of the
FDI Act (defining ``deposit''). The issue is addressed in section
12(c), which provides that the FDIC--in paying deposit insurance--is
entitled to rely on the account records of the insured depository
institution in identifying the owners of deposits. See 12 U.S.C.
1822(c).\8\
In accordance with section 12(c), the FDIC has promulgated certain
rules regarding the identification of the owners of deposits. These
rules are set forth in section 330.5 of the insurance regulations. See
12 CFR 330.5. Section

[[Page 45578]]

330.5 provides that ``the FDIC shall presume that deposited funds are
actually owned in the manner indicated on the deposit account records
of the insured depository institution.'' 12 CFR 330.5(a)(1). If the
party that places funds at an insured depository institution is not the
actual owner of the funds but a mere agent or custodian, then certain
disclosure requirements must be satisfied in order for the insurance
coverage to ``pass through'' the agent to the actual owner(s). See 12
CFR 330.5(b); 12 CFR 330.7. First, the agency or custodial relationship
must be disclosed in the account records of the insured depository
institution. See 12 CFR 330.5(b)(1). Second, the interests of the
actual owners must be disclosed in records of the insured depository
institution or records maintained by the custodian or other party. See
12 CFR 330.5(b)(2). If the disclosure requirements are not satisfied,
the funds will be insured to the custodian (i.e., the party that places
the funds at the insured depository institution).
---------------------------------------------------------------------------

\8\ Determining the owner of a deposit is different than
determining the existence of a deposit. Section 12(c) is applicable
in determining the owner of a deposit, but is inapplicable in
determining the existence of a deposit.
---------------------------------------------------------------------------

The FDIC is proposing to add a new paragraph to section 330.5. This
new paragraph would extend the FDIC's rules regarding ownership of
deposits to funds underlying nontraditional access mechanisms,
including cards, codes, computers or other electronic means. This
approach differs from the approach taken by the FDIC in the First
Proposed Rule, which would have added a new section to 12 CFR part 303.
The Second Proposed Rule would be codified at 12 CFR 330.5(c). This
new paragraph would include three subsections, which are summarized
below.
Subsection 330.5(c)(1) would recognize that the term ``deposit''
includes ``funds subject to transfer or withdrawal solely through the
use of nontraditional access mechanisms, including cards, codes,
computers or other electronic means, to the extent that such mechanisms
provide access to funds received and held by an insured depository
institution for payment to others.'' This subsection also would state
that the FDIC, in determining the owners of funds underlying such
nontraditional access mechanisms, would apply the general disclosure
rules in section 330.5 as well as the special rules set forth in
subsections 330.5(c)(2) and 330.5(c)(3) (summarized below). To the
extent that a stored value card does not provide access to funds at a
bank (such as subway farecard), the FDIC's regulations would be
inapplicable. See FDIC v. Philadelphia Gear Corporation, 476 U.S. 426
(1986).
Subsection 330.5(c)(2) would address cases in which funds are
placed at an insured depository institution by one party for transfer
or withdrawal by the same party. In such a case, no issue would exist
as to whether the funds should be insured to the party that places the
funds at the bank as opposed to the party holding the access mechanism.
The parties would be the same person. Accordingly, the funds would be
insured to that person. An example of funds covered by this subsection
would be funds transferable by the customer through the Internet (as
opposed to the funds in an ordinary checking account, which would be
governed by the ordinary disclosure rules in section 330.5).
Subsection 330.5(c)(3) would address cases in which funds are
placed at an insured depository institution by one party for transfer
or withdrawal by other parties. An example would be the funds
underlying payroll cards, in which the funds are placed at the bank by
the employer but the funds are subject to transfer or withdrawal by the
employees. Another example would be the funds underlying gift cards, in
which the funds may be placed at the bank by a retail store (or other
company under an agreement with the retail store) but the funds are
subject to transfer or withdrawal by customers of the retail store.
Under this subsection, the funds would be insured to the first party
(i.e., the party that places the funds at the bank \9\) unless (A) the
account records of the insured depository institution reflect the fact
that the first party is not the owner of the funds; and (B) either the
first party or the depository institution (or an agent on behalf of the
first party or the depository institution) maintains records reflecting
the identities of the persons holding the access mechanisms and the
amount payable to each such person. If both of these conditions are
satisfied, then the funds would be insurable to the persons holding the
access mechanisms.\10\
---------------------------------------------------------------------------

\9\ If the party that places the funds at the bank is merely an
agent for some other party, then the funds would be insurable to the
principal in accordance with the FDIC's ordinary rules for accounts
held by agents or custodians. See 12 CFR 330.7(a); 12 CFR 330.5(b).
\10\ Of course, the deposits cannot be insured to the persons
holding the access mechanisms unless such persons are the actual
owners. See 12 CFR 330.3(h); 12 CFR 330.5(a)(1). Thus, the party
placing the funds at the bank must relinquish ownership. For
example, in the case of payroll cards, the employer should surrender
all rights to recover the funds. If the employer does not relinquish
ownership, the employer will be treated as the insured depositor.
---------------------------------------------------------------------------

Under subsection 330.5(c)(3), the involvement of a third-party
processor for the bank would not preclude ``pass-through'' insurance
coverage. As stated above, ``pass-through'' coverage to the holders of
the stored value cards or other access mechanisms would be available
under both of the following circumstances: (1) the depository
institution itself maintains records reflecting the identities of the
cardholders and the amount payable to each cardholder; or (2) a third-
party processor on behalf of the depository institution maintains
records reflecting the identities of the cardholders and the amount
payable to each cardholder. In the latter case, the depository
institution's own records (i.e., the records not maintained by the
third-party processor) should reflect the fact that the funds are not
owned by the party that placed the funds into the bank (e.g., the
employer in the case of payroll cards or the retail store in the case
of gift cards) but instead are owned by the cardholders.
Unlike the First Proposed Rule, the Second Proposed Rule does not
address the following scenario: (1) The stored value cards or other
nontraditional access mechanisms are sold or issued directly by the
insured depository institution to the public (and not issued by or
through a third party or sponsoring company); and (2) the depository
institution maintains no accounts or subaccounts or other records
reflecting the identities of the purchasers. The First Proposed Rule
provided that the funds held by the depository institution, in this
scenario, would not be ``deposits.'' The FDIC has not addressed this
scenario in the Second Proposed Rule, however, because the FDIC is
unsure that such a scenario actually exists. Comments are requested on
this point. The FDIC is interested in learning whether any insured
depository institution is selling stored value products directly to the
public without maintaining any records as to the identities of any
parties.
Assuming the existence of such a system, payment of insurance by
the FDIC would be difficult in the event of the failure of the insured
depository institution. In light of this difficulty, comments are
requested as to whether the funds in any such system should be
classified as ``deposits.''
Arguably, the form of the access mechanism is unimportant. Whether
the mechanism is traditional (such as an ATM card, book of checks or
official check) or nontraditional (such as a stored value card), the
access mechanism is merely a device for withdrawing or transferring the
underlying money. The important thing is the underlying money. The
receipt of money by the bank distinguishes a ``deposit'' liability from
a ``non-deposit''

[[Page 45579]]

liability. In the case of a ``non-deposit'' liability, the bank
generally does not receive money from the creditor but instead receives
goods or services.
The appropriate model for the FDIC's treatment of funds underlying
stored value cards and other nontraditional access mechanisms may be
the FDIC's treatment of funds underlying traditional access mechanisms.
In the case of traditional access mechanisms and payment instruments
(such as checks, traveler's checks, cashier's checks and money orders),
the underlying funds held at a bank are ``deposits'' with no exceptions
except those limited exceptions expressly created by Congress (such as
the exception for bank obligations payable solely outside the United
States). See 12 U.S.C. 1813(l)(1); 12 U.S.C. 1813(l)(4); 12 U.S.C.
1813(l)(5). This means that the funds are ``deposits'' irrespective of
whether the bank maintains records as to the identities of customers
and irrespective of account labels (such as ``reserve account'').
The FDIC could extend this simple approach to funds underlying
nontraditional access mechanisms. Of course, the results would be
somewhat different than the results under GC8 (or the First Proposed
Rule) but the FDIC is not bound to incorporate GC8 in the proposed
rule.
In short, the question is whether the FDIC should adopt a
regulation that treats the funds underlying stored value cards and
other nontraditional access mechanisms as ``deposits'' provided that
the funds have been placed at an insured depository institution. This
approach would be consistent with the FDIC's treatment of funds
underlying traditional access mechanisms. An alternative approach would
be to treat the funds as ``non-deposits'' in those cases (if any) in
which the insured depository institution sells stored value cards
directly to cardholders without keeping any information as to the
identities of the cardholders or any other party. This approach would
be different than the FDIC's treatment of funds underlying traditional
access mechanisms. Comments are requested.
Finally, some discussion may be warranted regarding a type of
stored value card system addressed in the First Proposed Rule but not
addressed in the Second Proposed Rule. This type of system was
characterized in GC8 as a ``secondary system'' (i.e., the ``Bank
Secondary-Advance System'' or the ``Bank Secondary-Pre-Acquisition
System''). In this type of system, the insured depository institution
collects funds from cardholders but does not hold the funds for the
cardholders. Rather, the depository institution either forwards the
funds to a sponsoring company or retains the funds as reimbursement for
funds previously paid to the sponsoring company. In either case, the
depository institution plays no role in the payment process. When the
cardholders use their cards, funds are transferred or withdrawn from
the sponsoring company and not transferred or withdrawn from the
insured depository institution.
Since the publication of GC8 in 1996, the FDIC has received few if
any inquiries about ``secondary systems.'' The FDIC is unsure whether
any such systems currently exist. Under these circumstances, no reason
may exist for addressing such systems in the Second Proposed Rule.
Comments are requested. Assuming the existence of such systems, the
FDIC could add a subsection providing that the funds received by the
insured depository institution are ``deposits'' belonging to the
sponsoring company for the brief period before the funds are forwarded
to the sponsoring company (consistent with GC8's treatment of funds in
a ``Bank Secondary-Advance System''). This subsection also could
provide that no ``deposits'' would exist if no obligation exists on the
part of the depository institution to hold or forward any funds
(consistent with GC8's treatment of funds in a ``Bank Secondary-Pre-
Acquisition System''). Assuming the existence of ``secondary systems,''
comments are requested as to whether the FDIC should add such
provisions to the Second Proposed Rule.

VII. Disclosures

The First Proposed Rule did not mandate that stored value cards
disclose whether the underlying funds are insured by the FDIC. In
publishing the First Proposed Rule, however, the FDIC discussed this
question. See 69 FR 20558, 20564 (April 16, 2004). The FDIC stated that
it ``expects insured depository institutions to clearly and
conspicuously disclose to customers the insured or non-insured status
of the stored-value cards they offer to the public.'' The Office of the
Comptroller of the Currency (OCC) has informed the institutions under
its supervision that it has the same expectation when they implement
payroll card systems. See OCC Advisory Letter 2004-6 (May 6, 2004).
In response to the First Proposed Rule, a number of commenters
addressed the issue of disclosures. Some commenters supported mandatory
disclosures, but several commenters expressed the opinion that
mandatory disclosures are unnecessary.
The FDIC recognizes that mandatory disclosures would impose a
degree of burden on depository institutions. On the other hand, this
burden may be outweighed by consumers' need for accurate information.
While not mandating specific disclosures in the Second Proposed Rule,
the FDIC is interested in receiving comments on this subject.
One option is to require specific disclosures when ``pass-through''
coverage is available to cardholders or when the depository institution
has a good faith belief that the FDIC's requirements for ``pass-
through'' coverage have been satisfied. In such a case, the following
could be printed on the card:

``Funds available through this card are individually insured by
the FDIC to the Cardholder.''

Such a disclosure would not be mandated when ``pass-through''
coverage is unavailable to cardholders. Indeed, when ``pass-through''
coverage is unavailable, any statement about FDIC insurance coverage
(such as a statement to the effect that the funds underlying a
particular gift card are insured to the retail store that sold the
card, not to the cardholder) could be very confusing. For this reason,
the FDIC seeks comments on how to prevent misleading disclosures and
whether certain disclosure practices should be prohibited.
Another question is whether a brief disclosure should be printed on
the stored value card itself or whether a more substantive disclosure
that clearly explains the scope of federal insurance coverage should be
provided at the time that the card is issued. Possibly, the card could
refer the consumer to a source of additional information about the
insured status of the consumer's funds. An additional question is
whether the name of the depository institution that holds the
underlying funds should be printed on the card.
Comments are requested on each of these questions. The FDIC is
interested in determining the feasibility of providing disclosures to
consumers and the usefulness of any such disclosures to consumers.

Request for Comments

The FDIC seeks comments on all aspects of the Second Proposed Rule.

Paperwork Reduction Act

The FDIC is seeking comments on whether to mandate disclosures to
the holders of stored value cards (as discussed in section VII).
Requiring the disclosure of information to the public

[[Page 45580]]

may qualify as a ``collection of information'' for purposes of the
Paperwork Reduction Act (44 U.S.C. 3501 et seq.). See 5 CFR 1320.3(c).
The required disclosure would not be a ``collection of information,''
however, to the extent that the FDIC is providing specific language
that insured depository institutions may use in disclosing information
to the public. See 5 CFR 1320.3(c)(2). Moreover, insured depository
institutions already must ascertain the information in question--
whether funds underlying stored value cards qualify as ``deposits''--in
completing their Call Reports. Thus, nothing in this proposed
rulemaking requires an insured depository institution to collect
information that the institution otherwise would not collect.
In summary, no collections of information pursuant to the Paperwork
Reduction Act are contained in the proposed rule. Accordingly, no
information has been submitted to the Office of Management and Budget
(OMB) for review. If the proposed rule is revised in response to the
public comments, the FDIC will make another determination as to the
applicability of the Paperwork Reduction Act and seek OMB approval as
appropriate.

Regulatory Flexibility Act

In accordance with section 3(a) of the Regulatory Flexibility Act
(5 U.S.C. 603(a)), the FDIC must publish an initial regulatory
flexibility analysis with this proposed rulemaking or certify that the
proposed rule, if adopted, will not have a significant economic impact
on a substantial number of ``small entities'' (i.e., depository
institutions with total assets of $150 million or less). On the basis
of the reasons set forth below, the FDIC hereby certifies pursuant to 5
U.S.C. 605(b) that the proposed rule, if adopted, will not have a
significant economic impact on a substantial number of small entities.
Economic Impact. The proposed rulemaking is not intended to apply
to any issue except the meaning of ``deposit'' under the FDI Act. The
definition of ``deposit'' is applied consistently to all insured
depository institutions, including ``small'' institutions with assets
under $150 million. As of March 31, 2005, there were 5,322 ``small''
FDIC-insured institutions. Though this rulemaking may affect the manner
in which some insured depository institutions report ``deposits'' in
their Call Reports, the rulemaking generally will not impose new
obligations on insured depository institutions because such
institutions--irrespective of this rulemaking--must file Call Reports.
Notwithstanding the above, the FDIC may be imposing new obligations
on insured depository institutions in directing such institutions--when
issuing stored value cards--to make clear and conspicuous disclosures
as to whether the underlying funds are insured (as discussed in section
VII). The FDIC believes that clear, conspicuous disclosures are
necessary in order to prevent confusion on the part of the public. See
12 U.S.C. 1819 (investing the FDIC with general rulemaking authority
with respect to deposit insurance). In any event, the FDIC believes
that the cost of adding clear and conspicuous disclosures to stored
value cards will not result in a significant economic impact on a
substantial number of small entities. This conclusion is based upon the
fact that the cost will involve the design of a depository
institution's stored value cards, not the production of such cards.
Adding a one-sentence disclosure to a card should involve at most only
a minimal cost. Indeed, the addition of a clear and conspicuous
disclosure about insurance coverage may reduce the institution's costs
in answering questions from the public about FDIC insurance coverage.
Although the proposed rulemaking should not create a significant
adverse economic impact on an insured depository institution, and may
even result in a modest net benefit, the FDIC believes that insured
depository institutions should be given an opportunity to provide
comments on the subject. Accordingly, comments are requested (below).
The FDIC is not aware of any federal rules that would duplicate,
overlap or conflict with a requirement that stored value cards issued
by insured depository institutions must include clear and conspicuous
disclosures about insurance coverage.
Request for Comments. The FDIC requests comments as to the cost of
adding a clear and conspicuous disclosure about insurance coverage to
stored value cards by insured depository institutions. Commenters may
wish to address the following: (1) The number of small entities that
are issuing stored value cards or may issue stored value cards; (2) the
manner and impact of adding a clear and conspicuous disclosure about
insurance coverage to stored value cards; and (3) alternative methods
of preventing confusion on the part of the public.

Impact on Families

The proposed rule would not affect family well-being within the
meaning of section 654 of the Treasury and General Government
Appropriations Act, enacted as part of the Omnibus Consolidated and
Emergency Supplemental Appropriations Act of 1999 (Pub. L. 105-277, 112
Stat. 2681).

List of Subjects in 12 CFR Part 330

Bank deposit insurance, Banks, banking, Reporting and recordkeeping
requirements, Savings and loan associations, Trusts and trustees.

For the reasons set forth in the preamble, the Board of Directors
of the Federal Deposit Insurance Corporation proposes to amend part 330
of Title 12 of the Code of Federal Regulations as follows:

PART 330--DEPOSIT INSURANCE COVERAGE

1. The authority citation for part 330 continues to read as
follows:

Authority: 12 U.S.C. 1813(l), 1813(m), 1817(i), 1818(q),
1819(Tenth), 1820(f), 1821(a), 1822(c).

2. Section 330.5 is amended by adding a new paragraph (c) to read
as follows:

Sec. 330.5 Recognition of Deposit Ownership and Fiduciary
Relationships

* * * * *
(c) Nontraditional access mechanisms--(1) Purpose. This paragraph
shall apply to funds subject to transfer or withdrawal solely through
the use of nontraditional access mechanisms, including cards, codes,
computers or other electronic means, to the extent that such mechanisms
provide access to funds received and held by an insured depository
institution for payment to others. In determining the owners of such
deposits, the FDIC shall apply the general rules in this section as
well as the special rules in this paragraph (c).
(2) Funds received by an insured depository institution from one
party for transfer or withdrawal by the same party. In the case of
funds placed at an insured depository institution by one party for
transfer or withdrawal by the same party, the funds shall be deposits
belonging to that party. (Example: A bank allows customers to open
accounts over the Internet. The funds placed at the bank by a customer
are not transferable by check; however, the customer may transfer funds
to merchants through the Internet. Until such transfers to merchants,
the funds held by the bank are deposits insurable to the customer.)

[[Page 45581]]

(3) Funds received by an insured depository institution from one
party for transfer or withdrawal by other parties. In the case of funds
placed at an insured depository institution by one party for transfer
or withdrawal by other parties, the funds shall be deposits insurable
to the first party (i.e., the party that places the funds) unless the
account records of the insured depository institution reflect the fact
that the first party is not the owner of the funds; and either the
first party or the depository institution (or an agent on behalf of the
first party or the depository institution) maintains records reflecting
the identities of the persons holding the access devices and the amount
payable to each such person. If both of these conditions are satisfied,
then the funds may be insured to the persons holding the access
devices. (Example 1: A retail store sells gift cards to customers.
Prior to the sales of these cards, the retail store places funds at an
insured depository institution. The funds are transferable or
withdrawable by the holders of the gift cards. In the event of the
expiration of a card, however, the funds are not recoverable by the
cardholders. In fact, no information about the identities of the
cardholders is maintained by the depository institution or the retail
store. Under these circumstances, the funds held by the depository
institution are deposits insurable to the retail store. Example 2: An
employer distributes payroll cards to employees. Prior to the
distribution of the cards, the employer places funds at an insured
depository institution. The funds are transferable or withdrawable by
the employees through the use of the payroll cards. An account or
subaccount is established at the depository institution for each
cardholder. The funds in each such account or subaccount cannot be
recovered by the employer. Under these circumstances, the funds are
deposits insurable to the employees.)

Dated at Washington, DC this 19th day of July, 2005.

By Order of the Board of Directors of the Federal Deposit
Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 05-15568 Filed 8-5-05; 8:45 am]

BILLING CODE 6714-01-P



 

Last Updated 08/08/2005 Regs@fdic.gov