FDIC: 1979 - Docket No. No Docket Number


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[¶5002] FDIC Docket No. ____, (8-21-79).

Bank ordered to cease and desist from making inaccurate or misleading advertisements that is was paying the highest rates or highest bank rates on deposits in 1976, a leap year, when the bank was not paying the highest rates. The bank calculated its interest payments on the basis of a 365-day year, when 1976 had 366 days. FDIC also ordered that the bank make restitution to its depositors.

[.1] Advertising—Inaccurate or Misleading
Use of the fraction 366/360, in determining the time factor in a leap year would have resulted in the highest rates of interest, and a bank that advertised it was paying the highest rates and used the fraction 365/360, violated an FDIC regulation that prohibits advertising by banks which is inaccurate or misleading or which misrepresents its deposit contracts.

[.2] Cease and Desist Order—Affirmative Remedy—Restitution
The authority of the FDIC to issue a cease and desist order, including a requirement that affirmative action be taken to correct the conditions resulting from violations of law, is beyond question. An order may include restitution.

In the Matter of * * *
(INSURED
STATE NONMEMBER BANK)

DECISION and REVISED ORDER

   Pursuant to its authority under Section 8(b) of the Federal Deposit Insurance Act (12 U.S.C. § 1818(b)), the Federal Deposit Insurance Corporation, on October 12, 1978, issued a notice of charges against * * * alleging, inter alia, that Respondent, during the period January 1, 1974 through December 31, 1976 advertised that it was paying the highest rates or highest bank rates on deposits, that interest on deposits was compounded daily, that various effective annual yields based upon at least daily compounding of principal and interest for 365 days using the equivalent of an artificial 360-day year (365/360) were available, but that on or about January 2, 1976, and without providing notice to its depositors, Respondent subtracted one day from the number of calendar days used in com- {{4-1-90 p.A-15}}pounding dividends in the first quarter of that year on its day-of-deposit to day-of-withdrawal accounts and that during the period January 1 through December 31, 1976, and without providing notice to its depositors, Respondent continued to calculate interest on its time deposit accounts on the same basis as it did during calendar year 1975; contrary to its advertising representations, the Respondent was not paying the highest bank rates or the highest rates, and Respondent thus violated Section 329.8(f) of the FDIC's regulations (12 C.F.R. §329.8(f)). Respondent, by counsel, filed a timely answer, admitting some of the allegations and denying others.
   An administrative hearing was held in * * * on January 8 and 9, 1979 before Administrative Law Judge Spencer T. Nissen. The hearing was open to the public, pursuant to the order of the Board of Directors. Respondent filed exceptions to Judge Nissen's Recommended Decision, which was entered on April 4, 1979. Respondent's motion for oral argument was denied and on May 25, 1979, this case was submitted to the Board of Directors for final decision.
   The Board of Directors, on August 20, 1979 considered the matter and concluded that Respondent violated Section 329.8(f) of the FDIC's regulations (12 C.F.R. § 329.8(f)) as charged. On its own motion the Board of Directors, on August 21, 1979, voted to reconsider the original ORDER, and having reconsidered the matter concludes that the ORDER should be revised as herewith stated.

FINDINGS OF FACT AND
CONCLUSIONS OF LAW

The Board of Directors adopts the Findings of Fact and Conclusions of Law, and the basis therefor, contained in the Recommended Decision of the Administrative Law Judge, which is hereby incorporated by reference as a part of this decision, with one exception. Footnote 10 of the Recommended Decision states in essence that the FDIC is required by 15 U.S.C. § 57(a)(f) to prevent unfair or deceptive acts or practices in or affecting commerce by nonmember insured banks. The Board of Directors finds that statutory provision to be superfluous to this proceeding and does not adopt footnote 10.

ORDER

It is ORDERED, that * * * cease and desist from violating Section 329.8 of the Corporation's Rules and Regulations, in particular 329.8(f), 12 C.F.R. 329.8(f), and further take affirmative action as follows:
A. The Bank shall cause all visual advertisements for a period of three months from the effective date of this ORDER to contain the following notice in a clear and conspicuous manner:

   In any event, such notice shall appear in at least twelve separate advertisements appearing in newspapers of general circulation in the * * * metropolitan area during the period of one year following the effective date of this ORDER.
   B. The Bank shall cause all aural advertisements for a period of three months from the effective date of this ORDER to contain clearly and conspicuously the notice set forth in Paragraph A of this ORDER.
   C. Within 30 days from the effective date of this ORDER, the Bank shall advertise the notice set forth in Paragraph A of this ORDER in three daily newspapers selected in a manner designed to reach the greatest number of its depositors. The notice shall be set in 18 point type.
   D. Upon request of any person who was a depositor in 1976, made during the time this ORDER is in effect, the Bank shall make restitution to such depositor in such a manner and in such amounts as to compensate such depositor fully for the Bank's failure to compound interest/dividends daily for 366 days at the highest rate permitted by Part 329 of the Corporation's Rules and Regulations, 12 C.F.R. Part 329, during 1976. For this purpose, the amount due as of the applicable date or dates in 1976 shall be deemed to have continued to earn interest at the rate of interest then in effect until the date of restriction, with interest/dividends compounded daily.
   E. Within 30 days from the effective date of this ORDER, the Bank shall establish an account from which customers may request restitution for underpayment of interest/dividends. The Bank shall transfer into the account funds sufficient to compensate fully all depositors who may request restitution under this ORDER. From the date the account is funded, the account shall earn interest at the highest rate permitted by the {{4-1-90 p.A-16}}Corporation's Rules and Regulations for savings accounts, which interest shall be compounded daily. The purpose of this fund is to establish an account properly reflecting the Bank's liability under this Order. Restitution under this ORDER is not limited to the funds in this account.
   This ORDER shall become effective at the expiration of 30 days after the service of such ORDER upon the Respondent.
   By order of the Board of Directors, dated August 21, 1979.
/s/ Hoyle L. Robinson
Executive Secretary

RECOMMENDED DECISION
   This is a proceeding for a cease and desist order and other relief pursuant to Sec. 8(b) of the Federal Deposit Insurance Act (12 U.S.C. 1818(b) (1976, Ed.)). The proceeding was commenced by a document entitled "Notice of Charges and of Hearing" issued by the Federal Deposit Insurance Corporation (FDIC) under date of October 12, 1978, which alleged, inter alia, that Respondent, * * *, during the period January 1, 1974, through December 31, 1976, advertised that it was paying the highest rates or highest bank rates on deposits, that interest on deposits was compounded daily, that various effective annual yields based upon at least daily compounding of principal and interest for 365 days using the equivalent of an artificial 360-day year (365/360) were available, but that on or about January 2, 1976, and without providing notice to its depositors, Respondent subtracted one day from the number of calendar days used in compounding dividends in the first quarter of that year on its day-of-deposit to day-of-withdrawal accounts and that during that period January 1, through December 31, 1976, and without providing notice to its depositors, Respondent continued to calculate interest on its time deposit accounts on the same basis as it did during calendar year 1975. The notice of charges referred to an appropriate order pursuant to Sec. 8(b) of the Federal Deposit Insurance Act requiring Respondent to cease and desist from the practices and violations alleged and to a requirement to take affirmative action, nature unspecified, to correct the conditions resulting from such alleged practices and violations. Under date of November 27, 1978, Respondent filed a timely answer, admitting some of the allegations and denying others.
   The parties agreed on a hearing date and pursuant to notice a hearing on this matter was held in * * * on January 8 and 9, 1979. In accordance with the Board of Director's Order, dated December 7, 1978, the hearing was open to the public.
   Based on the entire record including the pleadings and the proposed findings and conclusions submitted by FDIC (Respondent having submitted only a brief), and briefs submitted by the parties, I find that the following facts are established:
   1. Respondent, * * *, is a mutual saving bank existing and doing business under the laws of * * *, with its principal place of business at * * *. Respondent is an insured State nonmember bank, which means that although its deposits are insured by the Corporation, it is not a member of the Federal Reserve System. As an insured bank Respondent is, and at all times pertinent hereto was, subject to the Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.) and regulations of the FDIC issued thereunder (12 C.F.R. Part 301 et seq.).
   2. During the period January 1, 1974, through December 31, 1976, Respondent advertised that it was paying the highest rates or highest bank rates and that interest was compounded daily and credited quarterly. Typical of such advertisements are advertisements appearing in the * * * on October 1, 1975 (R's Exh. 8), an undated typical advertisement (R's Exh. 9) and an advertisement which appeared in The * * * on March 31, 1976 (R's Exh. 10; Tr. 203-04, 205-06).
   3. Typical advertisements of competing savings banks during the years 1975 and 1976 were identical with Respondent's advertising with respect to basic interest rates paid and effective annual yields (Tr. 206-09; advertisements in the * * * for January 4, 5, 7 and 8, 1976, of * * *, * * *, respectively (R's Exhs. 11, 12, 13 and 14)).
   4. The rates of interest and effective annual yields advertised by Respondent during the period mentioned in finding 2 as well as the highest rates (rounded to the nearest cent) permitted to be paid in a nonleap year based on daily compounding by FDIC insured mutual savings banks (12 C.F.R. 329.7) were as follows:

Type of	Deposit	Simple Annual	Effective
Deposit Account	Term	Interest Rate	Annual Yield^*
Time Savings [time deposit $1,000	6-7 years	7.75%	!8.17%
minimum]
Time Savings [time deposit $1,000	4-6 years	7.50%	7.90%
minimum]
Time Savings [time deposit]	2½ years and up	6.75%	7.08%
Time Savings [time deposit]	1—2½ years	6.50%	6.81%
Regular Savings [savings deposit]	N/A	5.25%	5.47%
Day of Deposit to Day of with-	N/A	5.25%	5.47%
drawal Savings [savings deposit]

^* To obtain the effective yields set forth above dividends (interest) must remain on deposit for a full year.
5. The formula for computing interest may be expressed as follows: PT = PO(1 + i)&supT;, where PT is the value of the account at the end of the period under consideration, PO is the initial value of the account, i is the rate of interest per unit of time and T equals units of time (FDIC Exh. C; Tr. 31, 32). For example, the value of an initial deposit of $1,000 at the end of one year in a day-of-deposit to day-of-withdrawal account (assuming the principal and interest remained on deposit for the full year) and assuming daily compounding of an interest rate of 5.25% per annum would be computed as follows:

   The effective annual yield is therefore 5.39%. Use the figure 360 in the denominator of the above formula, e.g. (1 +.0525/360)³65;, results in the effective annual yields listed in finding 4.
   6. FDIC regulations (12 C.F.R. 329.3(a), 329.7(c), 329.3(e) and 329.101(b)) provide that in computing interest the effects of compounding may be disregarded, and that the time factor should be expressed as a fraction in which the number of days the funds actually earn interest is the numerator and the denominator is either 360, 365 or in a leap year, 366. It is apparent that if the fraction 365/360 was used to compute interest in a nonleap year and the fraction 366/360 was used to compute interest in a leap year, the effective annual yield shown in the last column of the table appearing in finding 4 would rise. For example, the effective annual yield on a regular savings deposit or on a day-of-deposit to day-of-withdrawal deposit (assuming, of course, that the interest and principal remained on deposit for a full year) and assuming daily compounding of an annual interest rate of 5.25% would rise from 5.47% to 5.48%.
   7. During the period January 1, 1974 through December 31, 1976, savings account depositors of Respondent were able to have savings deposits established as day-of-deposit to day-of-withdrawal accounts by completing a Daily Dividend Authorization card.
   8. Since March of 1972, it is and has been Respondent's consistent practice to compute interest in savings and time deposits by use of the fraction 365/360 as permitted by the FDIC regulation cited in finding 6 (Tr. 211, 220, 222).
   9. Sometime during the period mid-to-late December 1975, the attention of Respondent's Chief Executive Officer, * * *, was called to the fact that a decision was necessary as to the method of computing interest during the year 1976, a leap year (Tr. 105-06, 209-10). A decision at that time was necessary or at least highly desirable in order that the proper factors could be placed in the computer before the end of the current quarter (Tr. 213). Mr. * * * decided that interest in 1976 should be, and would be, paid exactly as it was paid in 1975 (Tr. 209-10). Explaining the factors that went into his decision, Mr. * * * testified that he was influenced by the competitive environment, by the fact that regulations under which Respondent operated required that its advertising be accurate and by the belief that had Respondent paid more than it advertised, it would have been in violation of * * * law (Tr. 213-16).
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   10. In determining the number of days a deposit (day-of-deposit to day-of-withdrawal account) will earn interest in a particular quarter, Respondent determines the end of the quarter Julian calendar date, subtracts the current Julian date and adds back one day (Tr. 76, 77). For example, a deposit made on January 10 of a nonleap year would be credited with 81 days of interest if the money remained on deposit the balance of the quarter.
   11. The effect of Mr. * * * decision referred to in finding 9 was to subtract one calendar day from the computer calendar and consequently, of the time for which interest was paid during the period January 1 through February 29, 1976, on day-of-deposit to day-of-withdrawal accounts (Tr. 79, 81–83, 110-11, 114). On regular savings accounts and time deposits, Respondent calculated and paid interest in 1976 in the same manner as it did in the calendar years 1975 and 1977 (Tr. 84). Thus with respect to these accounts interest was not paid for the extra day occasioned by the fact 1976 was a leap year.
   12. Respondent did not give notice to its depositors of the change, referred to in finding 11, concerning the method of determining the time period in computing interest on day-of-deposit to day-of-withdrawal accounts and did not give notice to its other depositors that interest would not be paid, compounded or credited for the extra day in 1976.
   13. When Mr. * * * made the decision mentioned in finding 9, he was aware of the fact that compounding interest 366 times in 1976 would result in an increase in the effective annual yield to depositors and of the resulting total increased cost to Respondent (Tr. 106-07). This cost figure is not in the record.
   14. The question of appropriate action to be taken concerning compounding interest for the extra day occasioned by the fact that 1976 was a leap year was raised with the FDIC by other banks. The * * * requested and received permission from the * * * Regional Office of the FDIC to use the fraction 366/361 to calculate interest in 1976, thus keeping the effective annual yield constant at 5.47% (* * * letter, dated October 30, 1975 and FDIC Regional Director's letter, dated November 14, 1975, R's Exhs. 1 and 2).
   15. Interest rate calculations for 1976 were discussed at a meeting of the Bank Operations Committee of the Savings Bank Association of * * * State on December 3, 1975 (Minutes of Meeting, FDIC Exh. D). Among attendees at this meeting was * * * Senior Vice President of Respondent (Tr. 191; Exh. D).
   16. In a letter, dated November 28, 1975, addressed to Mr. * * * Regional Director of the FDIC in * * *, the Savings Banks Association of * * * State raised certain questions concerning the application of FDIC Regulation 329.3(e) (12 C.F.R. 329.3(e)) to interest on time and savings deposits during leap year 1976 (R's Exh. 3). Among the questions asked was: "If a bank advertises that interest is compounded daily, does this in fact, obligate the bank to pay interest for every day, including February 29th?" This letter was apparently not received by the * * * Regional Office of the FDIC until December 5, 1975, as evidenced by the date stamp. A similar question had been raised informally on October 28, 1975, by Mr. * * *, General Counsel of the Savings Banks Association of * * * State, with * * *. Regional Counsel of the FDIC (Tr. 151-52).
   17. The letter from the Savings Bank Association of * * * State mentioned in finding 16 was referred to * * *, FDIC Regional Counsel and the Association was advised of the referral (FDIC letter, dated December 5, 1975, R's Exh. 5). In a letter, dated December 1, 1975 (R's Exh. 4), * * * replied to the question raised informally by Mr. * * * on October 28, 1975. The letter referred to an FDIC regulation (12 C.F.R. 329.7(c)) to the effect that in determining the maximum amount of interest the effects of compounding may be disregarded and concluded that as a matter of policy, subject only to requirements of State law, a bank could pay or not pay the extra day's interest as it chose. However, attention was called to FDIC regulations (12 C.F.R. 329.8(f)) prohibiting inaccurate or misleading advertising and to a policy statement by the Corporation's Board of Directors which included a requirement that if the bank made a change in the method of computing and paying interest which was less favorable than the previous method, notice of such change should be mailed to each depositor. In summary, the letter concluded that a savings bank could pay interest for a period encompassing leap year as it chose, but that {{4-1-90 p.A-19}}it must consider the applicability of the mentioned policy statement and the possibility of committing an unfair or deceptive act or practice in connection with whatever policy it adopted.
   18. Subsequent to the time * * * letter, dated December 1, 1975 (referred to in finding 17), was transmitted to Mr. * * * Mr. * * * called Mr. * * * and told him that the letter was to be treated as a draft and was not to be distributed or released (Tr. 153-56). Mr. * * * denied that he was personally in doubt as to the legal conclusions expressed in the letter, and testified that he simply did not presently recall the reason for placing a condition or hold on the letter (Tr. 156–157). Nevertheless, in subsequent testimony he asserted that by Christmas 1975, neither he nor the FDIC had reached a final conclusion as to the appropriate method for savings banks to treat the extra day in 1976, a leap year (Tr. 160).
   19. During the period October 28, 1975, through February 6, 1976, Mr. * * *, had numerous conversations with Mr. * * * (identified in finding 16) and officers, officials, and attorneys representing various savings banks concerning the proper method of advertising, computing and paying interest in 1976 (* * * telephone log, R's Exh. 7; Tr. 162-82). Under date of January 26, 1976, * * * issued a letter opinion on the issues involved (R's Exh. 6). In form and in substance the letter was very similar to Mr. * * * letter, dated December 1, 1975, upon which a hold had been placed (R's Exh. 4). As did the letter of December 1, 1975, the letter of January 26, 1976, referred to the FDIC regulation (12 CFR 329.8(f)) prohibiting inaccurate or misleading advertising and to the Board's policy statement requiring notice to depositors if methods of computing and paying interest less favorable to depositors were adopted. Unlike the prior letter, however, the letter concluded flatly that failure to compound interest for the extra day without giving timely notice to depositors would violate the policy statement. Even if timely notice of such a change were given, a bank which advertised effective yield and compounding as "daily" could, in appropriate circumstances, be deemed to have violated sections 329.8(b) and (f) (12 CFR 329.8(b) and (f)) and committed unfair or deceptive acts or practices. Regarding advertising interest payable in a leap year, the letter pointed out that a bank which compounds for 366 days using a denominator of 360, could advertise that fact by identifying the extra day as a bonus and could advertise that money on deposit for a full year including February 29 would earn 5.48% (or the corresponding rates for other deposits), provided the advertisements were carefully drafted to avoid misleading potential or present depositors into believing that the higher yield was available for periods not encompassing February 29, 1976.
   20. Mr. * * * letter of December 1, 1975, mentioned in findings 17 and 18, was approved by the Washington office of FDIC (Tr. 166), and it may be inferred that the letter of January 26, 1976, referred to in the preceding finding, was also coordinated with and approved by that office.
   21. Respondent had approximately 250,000 accounts in 1976 (Tr. 228).
   22. Mr. * * *, Vice President in charge of Respondent's computer operations, described the difficulties in changing from 365 to 366 compounds in computing and paying interest. He testified that the best time to plan for such a change would have been December of 1975 and that they had from 100 to 200 different types of factors built into the computer program (Tr. 132-33). Examples of such factors were described as interest rates starting at 5% and graduating to 8% or 9%, daily factors, 90-day factors, 91-day factors and 92-day factors. He asserted that changing to 366 compoundings would require that all of these factors be changed. He estimated that Respondent averaged between 40,000 to 50,000 transactions a day and that after the quarter commenced (January 1, 1976) the difficulties in making such a change became more pronounced as time passed (Tr. 133-38). He stated that a program would have to be designed, written and tested and that he would not guarantee accuracy of the interest (Tr. 134, 137). He alluded to certain transactions where branch managers had discretion as to the beginning date for the computation of interest, stated that those so-called "changes" were not fed into the computer and that as a result compounding interest for 366 times could result in unfair or unequal treatment for different depositors (Tr. 137-38). After the end of the quar- {{4-1-90 p.A-20}}ter, i.e., April 1, he testified that all previous transactions have been cleared and that it would not be possible for the computer to recompute interest based on 366 compoundings (Tr. 138-39). He indicated that it could be done manually, but he would not estimate the number of man-years required to do so. Under cross-examination, he stated that the computer [software] system including the program had been delivered by NCR within a week or so after being ordered (Tr. 141). In earlier testimony (a deposition read into the record), he acknowledged that the computer calendar recognized that there were 366 days in 1976 (Tr. 108).
   23. Respondent received at least three complaints from depositors concerning how it had computed and paid interest in 1976 (Tr. 228-29; FDIC Exhs. B & E).
   24. There is an implication, but no direct evidence, that some banks, i.e., * * * (Tr. 175-76), * * * (Tr. 178) and other unnamed would pay interest for the extra day occasioned by 1976 being a leap year.
   25. Section 58 of the General Construction Law of * * * (R's Exh. 15) provides:

Conclusions

1. Respondent * * * Bank is a mutual savings bank organized and existing under the laws of * * *. Respondent was and is an insured State nonmember bank and at all times pertinent hereto was subject to the Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.) and regulations of the FDIC issued thereunder (12 C.F.R. Part 301 et seq.)
2. A reasonable interpretation of Respondent's advertising, i.e., that Respondent was paying the highest [allowable] rates, that interest was compounded daily and credited quarterly (finding 2), is that Respondent was paying the highest rates permitted by regulatory authorities and that interest would be compounded daily including the extra day occurring in a leap year.

   [.1] 3. Use of the fraction 366/360 in determining the time factor in a leap year as permitted by FDIC regulations (12 CFR 329.3(e) and 101(b)) and compounding simple interest at the rates specified in 12 CFR 329.7 (5.25% for other than time deposits) 366 times would have resulted in the highest rates of interest (based on daily compounding) Respondent was legally permitted to pay in 1976.
   4. Respondent's action in compounding and paying interest for 365 times in 1976 on the same basis as it did in 1975, without providing notice to its depositors, constituted a violation of an FDIC regulation (12 CFR 329.8(f)), prohibiting advertising by banks which is inaccurate or misleading or which misrepresents its deposit contracts and of the Board of Director's Policy Statement (35 FR 5020, March 20, 1970) issued thereunder.
   5. Respondent's action, during the first quarter of 1976, in altering, without notice to its depositors, its practice of determining the time a deposit earned interest (determine the end of quarter Julian calendar date, subtract the present Julian date and add one) so as to eliminate the practice of adding one day had the effect of deleting one day from the time day-of-deposit to day-of-withdrawal accounts would have earned interest during this period, was a change in the method of paying and computing interest which was less favorable to depositors and constituted a violation of 12 CFR 329.8(f), prohibiting advertising by banks which is inaccurate or misleading or which misrepresents its deposit contracts, and of the Board of Directors' Policy Statement (35 FR 5020, March 20, 1970) issued thereunder.
   6. Although the record reflects some confusion and indecision upon the part of FDIC concerning the proper method for mutual savings banks to advertise, compute and pay interest during 1976, a leap year, the FDIC regulations here concerned and the Board of Directors' Policy Statement cited in conclusions four and five are not so vague and ambiguous as to be unenforceable or void.
   7. Section 58 of the General Construction Law of * * * (finding 25), providing essentially that the term year in a statute, contract or any public or private instrument {{4-1-90 p.A-21}}means 365 days, but the added day of a leap year and the day immediately preceding shall for the purpose of such computation be counted as one day, did not preclude Respondent from paying and compounding interest for the added day occasioned by 1976 being a leap year and is not a defense to this proceeding.
   8. Pursuant to Sec. 8(b) of the Federal Deposit Insurance Act (12 U.S.C. 1818(b)) an appropriate order should be issued requiring Respondent to cease and desist from the actions and practices resulting in the violations herein found and requiring Respondent to take affirmative action to correct the conditions resulting from such violations.

Discussion

   Respondent's defense to this proceeding, reduced to its essentials, is that (i) Respondent paid and computed interest in 1976 exactly as it advertised, (ii) that to pay more than it advertised would have violated * * * law, and (iii) the FDIC regulations which Respondent is accused of violating as applied to Respondent herein are vague and ambiguous and therefore void.
   Concerning (i), Respondent asserts that the average depositor was not aware of the artificial 360-day year (365/360) used by Respondent in computing interest and that any such depositor sufficiently skilled in mathematics to convert, for example, a simple interest rate of 5.25% into an effective annual yield of 5.47% (absent use of an artificial 360-day year), would discover that 371 compounds would be required, which is obviously more than the daily compounding advertised by Respondent. Although the record does not reflect, it is almost certainly true that the average depositor would be unaware of the 360-day year used by Respondent in computing interest in order to increase the effective annual yield to its depositors.¹ By the same token, it may also be accepted that the average depositor would not possess the mathematical expertise required to determine the number of compoundings used to convert a given simple annual rate of interest into a particular effective annual yield. Respondent should not be allowed to take advantage of the average depositor's ignorance of the concept of the 360-day artificial year, while at the same time assuming sufficient mathematical skill in such a depositor to determine the number of compoundings required to reach a particular effective annual yield and thus conclude that Respondent compounded more frequently than daily as advertised. Moreover, it appears unseemly for Respondent to attempt excusing its conduct based on an ignorant or uninformed "average" depositor.² In any event, it is considered that the average depositor, no less than the three who complained, would conclude that "compounded daily" as used in Respondent's advertising could only mean everyday,³ of necessity not excluding the extra day occasioned by a leap year.⁴
   Regarding (ii), Respondent argues that the word "daily" as used in its advertising "accounts [interest] compounded daily" must be read with reference to Sec. 58 of the General Construction Law of * * * to the effect that the added day of a leap year and the day immediately preceding shall for the purpose of such computation (year in a statute, contract, or any public or private instrument) be counted as one day. Respondent also points to Sec. 2001(1)(d) of the * * * Banking Law (* * *'s Consolidated Laws of * * *, Book 4), assertedly applicable to Respondent, limiting the purposes for which gifts or donations may be made,⁵ and argues that to pay more interest than advertised, e.g., an effective yield greater than 5.47% on other than time deposits, would have been to make a gift in violation of the cited * * * statute.

¹ Mr. * * * was one of three persons who complained of Respondent's method of computing and paying interest in 1976. As a retired professional engineer, it may be assumed that he was far more skilled in mathematics than Respondent's average depositor. Although he was aware that 360 was part of a standard bank equation used in computing interest, he was unable to state how or when he learned of that fact. (Tr. 16-24).

² A mere tendency or capacity of an advertisement to deceive has been held to be sufficient to support a cease and desist order. Resort Car Rental Systems, Inc. v. F.T.C., 518 F.2d 962 (1975), and cases cited.

³ See Webster's Third New International Dictionary.

⁴ It is noted that Sec. 14-c of * * * Banking Law, as amended, effective March 14, 1978, specifically provides for the banking board to prescribe, on or before June 1, 1979, rules and regulations providing for, inter alia, disclosure of the annual rate of simple interest; the effective annual yield; the formula used in calculating interest and the frequency of crediting interest.

⁵ To the same effect, see Sec. 234(19) of the * * * Banking Law applicable to savings banks.
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There is no evidence that Respondent's deposit contracts used the term "year." Moreover, the cited * * * statutes appear not to have been controlling in the view of the * * * State Banking Department for in Supervisory Policy G-2 entitled "Advertisement of Interest Rates on Savings and Time Deposits," effective April 15, 1973, of which official notice is taken, it was stated (Section 2.2 entitled "Advertisement of compounding method") to be the policy of the Banking Board to encourage the payment of the maximum permitted interest rates on savings and time accounts, provided sufficient earnings were available to make such payments. Guidelines were established for advertisements which referred to compounding interest for periods of less than one day, followed by a separate paragraph:

   Mr. * * * was apparently familiar with this policy statement (Tr. 212).
   FDIC regulations applicable to Respondent provide for maximum rates of simple interest (12 CFR 329.7) and further provide that in determining the maximum amount of interest or dividends permitted to be paid, the effects of compounding may be disregarded (12 CFR 329.3(a) and 329.7(c)). The FDIC did not prohibit Respondent from compounding and paying interest for the extra day occasioned by leap year in 1976 even though the advertised effective yield did not include such compounding, e.g., compounding and paying so as to result in an effective yield of 5.48% on other than time deposits even though the advertised effective yield on such deposits was 5.47%. It is concluded that the * * * statutes cited by Respondent did not preclude Respondent from compounding and paying interest for the extra day occasioned by 1976 being a leap year and are not a defense to this proceeding.⁶
   As proof of its contention that the regulations it is accused of violating are vague and ambiguous and therefore void, Respondent points to the FDIC's apparent indecision and confusion as to the appropriate method of advertising, compounding and paying interest in 1976. Respondent also argues that the regulation is void because of the obvious inequity in allowing only banks which in a nonleap year used 365 in the denominator of the fraction (e.g., 365/365) to determine the time factor in computing interest to use 366 in the denominator of such fraction in a leap year.
   It is, of course, true that the * * * Region of the FDIC concluded, in response to an inquiry, that use of the fraction 366/361 in computing interest in 1976 comported with Secs. 329.3(e) and 329.101(b) of the Corporation's regulations even though the figure 361 is not mentioned therein. It is also true that questions as to the appropriate method of advertising, compounding and paying interest by mutual savings banks during 1976 were raised informally with Mr. * * *, legal counsel for the * * * Region of the FDIC, as early as October 28, 1975, that numerous discussions concerning these questions were conducted with various representatives and officials of savings banks during the period October 28, 1975, to and including January 26, 1976, and that these questions were apparently not finally resolved until issuance of Mr. * * * letter, dated January 26, 1976. Nevertheless, it is concluded that the course of action Respondent should have adopted in compounding and paying interest in 1976, in order to avoid the violations with which it is here charged, was sufficiently discernable so that the FDIC's apparent indecision in that regard neither requires nor permits the conclusion Respondent seeks to draw therefrom.
   The beginning point is that as long as the maximum rates of permissible interest (dividends) were not exceeded (in determining such maximum rates the effects of compounding could be disregarded⁷), FDIC regulations are not concerned with rates of

⁶ It is noted that Respondent did not attempt to rely on the statutes when it replied to a complaint from Mr. * * * (FDIC Exh. E) concerning the failure to compound for the extra day in a leap year. While Mr. * * * resides in * * *, the applicability of * * * to Respondent's operations would not appear to be thereby effected.

⁷ Compounding more frequently than daily is permissible, which explains Mr. * * * testimony concerning so-called "continuous compounding" (Tr. 211-12) and the concern of the * * * Banking Department with the accuracy of advertising compounding for periods of less than one day. It is, of course, recognized that the foregoing strengthens the argument that Sec. 2.2 of Supervisory Policy G-2, issued by the * * * State Banking Department, is concerned only with advertising of compounding for periods of less than one day and is simply inapplicable here. Nevertheless, the policy therein stated of encouraging payment of the maximum permitted interest rates is considered to be controlling.
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interest paid. Rates of interest (dividends) up to the maximum are set by competitive factors (Tr. 211-12). The regulations are, however, concerned that advertising be accurate and specifically prohibit (12 CFR 329.8(f)) advertising relating to the interest or dividends paid on deposits which is inaccurate or misleading or which misrepresents its deposit contracts. FDIC General Counsel's Opinions (38 FR 28288, October 11, 1973) construing 12 CFR 329.8, "Advertising of interest on deposits," state that the various specific requirements prescribed should be read and applied literally in accordance with their evident intent and purpose.⁸ The cited General Counsel's opinion further states:

The foregoing opinion was published in the Federal Register and Respondent must be deemed to be on notice thereof. It is considered unlikely that attempts to formulate a more specific definition of the prohibition against inaccurate or misleading advertising of terms and conditions relating to interest and dividends would serve any useful purpose. Moreover, a provision of the Federal Trade Commission Act (15 U.S.C. 45) declaring unlawful, unfair or deceptive acts or practices in or affecting commerce, which has long been held to preclude deceptive or misleading advertising in connection with the sale or offering of products for sale,⁹ is considered sufficiently analogous so that decisions interpreting that Act may be applied here.¹⁰ Accordingly, any contention that the regulation here at issue (12 CFR 329.8(f) is too vague and ambiguous to be enforceable is without merit and is rejected.¹¹
The alleged inequity in allowing only banks which in a nonleap year used 365 in the denominator of the fraction used to determine the time factor in computing interest to use 366 in the denominator of such fraction in a leap year appears to be based upon the penultimate paragraph of Mr. * * * letter of January 26, 1976.¹² The opening sentence of the cited paragraph suggests that a bank which compounds for 366 days could advertise that fact, either by identifying the extra day as an extra or bonus or the like, and could advertise that money on deposit for a full year including February 29 would earn the increased yield attributable to compounding on that day. Firstly, interest rates (effective yields) available to depositors up to the maximum permissible are set by competitive factors and it is likely that few, if any, banks use other than 360 in the denominator of the above fraction. Secondly, and more significantly, the letter is simply not susceptible to the construction Respondent seeks to place upon it. Respondent argues that the effect of the letter was to force banks using the 360-day denominator to pay a bonus in 1976 while allowing only banks which in a nonleap year used 365 in the denominator to use 366 in such denominator in a leap year. The letter did not and could not change the regulation (12 CFR 329.3(e)) providing for the 360, 365 or 366-day denominator and, as Respondent appears to recognize, was merely a suggested method. Respondent, no less than banks which in nonleap years used a 365-day denominator,

⁸ Respondent argues that to pay an effective yield of, e.g. 5.48%, when it advertised 5.47%, would not have been in conformity with the advertised yield. The word "literal" in the General Counsel's opinion obviously refers to the regulation and not to the interpretation of advertising.

⁹ See Warner-Lambert Co. v. F.T.C., 562 F.2d 749 (D.C. Cir. 1977), Cert. denied, 435 U.S. 950 (1978), and cases cited.

¹⁰ The FDIC is required to prevent unfair or deceptive acts or practices in or effecting commerce by insured banks such as Respondent (15 U.S.C. 57a(f)).

¹¹ Cf. Groos National Bank v. Comptroller of the Currency, 573 F.2d 889 (5th Cir., 1978) contention that phrase "unsafe and unsound banking practices" as used in Sec. 8 of the Federal Deposit Insurance Act (12 U.S.C. 1818(b)) lacked definition and specificity and was unenforceable answered by Court's assertion that elimination of such practices was committed to expertise of appropriate regulatory authorities).

¹² Although Respondent asserts that there is no evidence that the FDIC ever adopted Mr. * * * opinion (Brief at 18), it has been found that the record would support an inference that the letter of January 26, 1976, was coordinated with and approved by the Washington Office of the FDIC.
{{4-1-90 p.A-24}}was free to use a 366-day denominator in 1976,¹³ provided, of course, it adjusted its advertising to reflect that it was no longer paying the "highest rates" and to reflect the reduced yield to depositors and provided further it was not thereby violating terms of contracts with depositors.
Respondent also argues that to advertise an effective annual yield of 5.48%, for example, on day-of-deposit to day-of-withdrawal accounts, would have been inaccurate with respect to deposits made after February 29, 1976, and would have discriminated against many depositors. The answer, as Mr. * * * letter cautioned, was that advertisements of the increased yield available would have to be carefully drawn to avoid leading depositors into the belief that such a yield would be available on deposits not encompassing February 29. Moreover, the extra day occasioned by leap year is in no sense fictional and if a sum actually remains on deposit for that day, such an account is not being unfairly benefited by receiving interest which is not available to a sum on deposit for a period not encompassing February 29. It is concluded that the alleged inequity and discrimination has not been shown and that Respondent's contentions in this regard are without merit.
Respondent must also be deemed to be on notice of the Statement of Policy, premised on 12 CFR 329.8(f), issued by the FDIC Board of Directors (35 FR 5020, March 24, 1970) which provides that in order to avoid misunderstanding on the part of its customers, every insured nonmember bank should inform the holder of a time or savings account at the time of opening such account as to, inter alia, the method that will be used in computing and paying interest or dividends on the account. This Statement further provides that if the bank subsequently makes a change in such method that will be less favorable to a depositor than the previous method notice of such change should be mailed to each depositor at his last known address. The evidence is uncontradicted that Respondent, without providing notice to its depositors, deducted one day from the period interest would have been compounded and payable during the first quarter of 1976 on day-of-deposit to day-of-withdrawal accounts and continued to calculate interest on regular and time deposits in 1976 in the same manner as it did in 1975, thus in each of the cited instances failing to compound any pay interest for the extra day occasioned by leap year. No contention has been made and there is no evidence that depositors were informed at the time accounts were opened that interest or dividends would not be compounded or paid for the extra day occasioned by leap year and Respondent clearly violated the Statement of Policy.

[.2] Violations of FDIC regulations by Respondent having been clearly established, the authority of the Board of Directors to issue a cease and desist order, including a requirement that Respondent take affirmative action to correct the conditions resulting from such practices, appears to be beyond question.¹⁴ There would also appear to be no doubt that such an order may include restitution and it is considered that merely requiring Respondent to cease and desist from the violations herein found would not be an adequate remedy.¹⁵ Counsel for Respondent alluded to the possibility that Respondent might be ordered to take actions which were prohibitively costly or with which it was otherwise unable to comply and requested that its right to present evidence as to the feasibility of complying with any such order be preserved (232). While counsel for the FDIC might have been more forthright and outlined or explained the affirmative relief they intended to recommend, it is considered, on the other hand, that the possibility of requiring restitution was sufficiently obvious that a claim of surprise would be difficult to accept. The difficulties referred to by Mr. * * * in changing to 366 compoundings after the beginning of the first quarter in 1976 (finding 22), which difficulties would be compounded with the passage of time, need not be minimized. Nevertheless, he did recognize that it was possible for such a change to be accomplished (by working 18 to 20 hours a day) as late as March 15, 1976 (Tr. 136). Mr. * * * testimony regarding computer difficulties is also weakened by his statement that the computer software system, including the program, was obtained within a week or so after being ordered from NCR

¹³ It would seem that there is no objection to a bank paying an increased yield by continuing to use 365 in the denominator of the fraction in a leap year. The increased yield would, of course, be minimal.

¹⁴ See First National Bank of Eden, v. Dept. of Treasury, 568 F.2d 610 (8th Cir., 1977).

¹⁵ See the discussion on this point in Warner-Lambert Co. v. F.T.C., note 9 supra, 562 F.2d at 761-62 (footnote 60).
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(Tr. 141) and by his acknowledgement that the computer calendar recognized there were 366 days in 1976 (Tr. 108).

Recommendation

It is recommended that the attached order be issued to Respondent.
Dated this 4th day of April 1979.
/s/ Spencer T. Nissen
Administrative Law Judge

Order

It is ORDERED, that * * * cease and desist from violating section 329.8 of the Corporation's Rules and Regulations, in particular 329.8(f), 12 CFR 329.8(f), and further take affirmative action as follows:
A. The bank shall cause all visual advertisements for a period of one year from the effective date of this ORDER to contain the following notice in a clear and conspicuous manner:

   B. The Bank shall cause all aural advertisements for a period of one year from the effective date of this ORDER to contain clearly and conspicuously the notice set forth in Paragraph A of this ORDER.
   C. Within 30 days from the effective date of this ORDER, the Bank shall advertise the notice set forth in Paragraph A of this ORDER in three daily newspapers selected in a manner designed to reach the greatest number of its depositors. The notice shall be set in 18 point type.
   D. Upon request of any person who was a depositor in 1976, made during the time this ORDER is in effect, the Bank shall make restitution to such depositor in such a manner and in such amounts as to compensate such depositor fully for the Bank's failure to compound interest/dividends daily for 366 days at the highest rate permitted by Part 329 of the Corporation's Rules and Regulations, 12 CFR Part 329, during 1976. For this purpose, the amount due as of the applicable date or dates in 1976 shall be deemed to have continued to earn interest at the rate of interest then in effect until the date of restitution, with interest/dividends compounded daily.
   E. Within 30 days from the effective date of this ORDER, the Bank shall establish an account from which customers may request restitution for underpayment of interest/dividends. The Bank shall transfer into the account funds sufficient to compensate fully all depositors who may request restitution under this ORDER. From the date the account is funded, the account shall earn interest at the highest rate permitted by the Corporation's Rules and Regulations for savings accounts, which interest shall be compounded daily. The purpose of this fund is to establish an account properly reflecting the Bank's liability under this ORDER. Restitution under this ORDER is not limited to the funds in this account.

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