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4000 - Advisory Opinions
Proposal to Offer a Money Market Mutual Fund Sweep Account to
Commercial Checking Account Customers
FDIC--98--4
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.
{{2-29-00 p.4984.34}}
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.
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