4000 - Advisory Opinions
Proposal to Offer a Money Market Mutual Fund Sweep Account to Commercial Checking Account Customers
January 23, 1998
Marc J. Goldstrom, Counsel
This is in response to your recent letter in regard to your proposal to offer a money market mutual fund sweep account to commercial checking account customers. Your letter raises certain issues under the FDIC's regulations.
As we understand your proposal, certain commercial customers of the bank would have checking accounts with pre-determined threshold levels between $20,000 and $50,000. On a daily basis, funds in excess of each customer's threshold amount would be swept into a pooled money market mutual fund investment account maintained by a third-party, unaffiliated with the bank. Also on a daily basis, funds necessary to maintain the threshold amounts in customer's checking accounts would be transferred from the investment account into the individual checking accounts.
Part 329 of the FDIC's regulations, 12 CFR Part 329, forbids state nonmember banks to pay interest on demand deposits. At issue is whether the investment account itself, or the entire arrangement viewed as a whole, violates this prohibition.
The definition of "demand deposit" in 12 CFR part 329 includes the element that the item be a "deposit." Part 329 does not define the term "deposit." However, as a general matter, FDIC regulations use the term deposit as it is defined in section 3(l) of the Federal Deposit Insurance Act (FDIA), 12 U.S.C. § 1813(l). Insofar as relevant here, this statutory definition requires among other things that the item in question represent "money or its equivalent received or held by a bank or savings associations." See 12 U.S.C. §§ 1813(l)(1) and (3). The money in the investment account is received or held by the third party vendor. Consequently, it does not represent a deposit under section 3(l) of the FDIA and thus cannot be considered a demand deposit for purposes of Part 329. Therefore, viewed individually, earnings associated with the investment account would not violate the prohibition against paying interest on demand deposits under Part 329.
In the past, FDIC staff has opined that a particular sweep arrangement, viewed as a whole, violates Part 329. See FDIC Staff Advisory Opinion 92--27 (April 25, 1992). Under that arrangement, funds were to be swept to and from a demand deposit account and a non-FDIC insured investment account administered by the bank. The funds in the investment account would earn interest and could be withdrawn daily by the depositor. In determining that the sweep arrangement violated Part 329, staff based their view on the fact that a depositor would have unlimited access at all times to all funds deposited, including the funds in the investment account.
In our view, the product described in your letter is distinguishable from the product addressed in Staff Advisory Opinion 92--27. In the instant case, the customer effectively loses immediate access to the funds held in the pooled investment account by the third party vendor. While the customer may have some access to these funds, it is not the degree of access to funds typically associated with a demand deposit account. In this regard we note that in Staff Advisory Opinion 92--27, both the checking and investment accounts were administered by the bank. Here the investment account is administered by a third party vendor. Thus, unlike the product in Staff Advisory Opinion 92--27, the product described in your letter, viewed as a whole, is not the equivalent of a demand deposit.
In sum, the funds in the investment account are not "deposits," as defined in the FDIA and the product, viewed as a whole, is not the equivalent of a demand deposit. Consequently, we believe that the earnings from the proposed sweep account would not violate the prohibition on payment of interest on demand deposits under 12 C.F.R. Part 329.
Finally, we expect that customers will be advised that funds in the investment account are not insured by the FDIC. Insofar as the proposed product will only be offered to commercial entities, the Interagency Statement on Retail Sales of Nondeposit Investment Products, Financial Institution Letter 9--94, dated February 17, 1994 (the "Interagency Statement"), does not strictly apply to this case. Nonetheless, the principles discussed therein represent safe and sound banking practices and the bank should consider adopting certain practices discussed in the Interagency Statement with respect to this product as appropriate.
If you have further questions please contact me at (202) 898--8807.