FDIC Federal Register Citations

[Federal Register: April 1, 1999 (Volume 64, Number 62)]

[Rules and Regulations]

[Page 15653-15657]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr01ap99-4]

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

-----------------------------------------------------------------------

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 330

RIN 3064-AC16

Deposit Insurance Regulations; Joint Accounts and ``Payable-on-

Death'' Accounts

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The FDIC is amending its regulations governing the insurance

coverage of joint ownership accounts and revocable trust (or payable-

on-death) accounts. The amendments are almost identical to the

amendments proposed by the FDIC in July 1998; they supplement other

revisions that became effective in July. The purpose of the amendments

is to increase the public's understanding of the insurance rules

through simplification.

The final rule makes three changes to the deposit insurance

regulations. First, it eliminates step one of the two-step process for

determining the insurance coverage of joint accounts. Second, it

changes the insurance coverage of ``payable-on-death'' accounts by

adding parents and siblings to the list of ``qualifying

beneficiaries''. Third, it makes certain technical amendments to the

FDIC's rules regarding the coverage of accounts held by agents or

fiduciaries.

DATES: Effective April 1, 1999.

FOR FURTHER INFORMATION CONTACT: Christopher L. Hencke, Counsel, (202)

898-8839, or Joseph A. DiNuzzo, Counsel, (202) 898-7349, Legal

Division, Federal Deposit Insurance Corporation, 550 17th Street, NW,

Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Simplifying the Insurance Regulations

Federal deposit insurance plays a critical role in assuring

stability and public confidence in the nation's financial system.

Deposit insurance cannot play this role, however, unless the rules

governing the application of the $100,000 insurance limit are

understood by depositors. Misunderstandings can lead to a loss of

depositors' funds with a resulting loss of public confidence.

Unfortunately, some of the FDIC's insurance rules have been widely

misunderstood. See 63 FR 38521 (July 17, 1998). This confusion prompted

the FDIC to initiate a simplification effort. As a result of that

effort, the FDIC issued

[[Page 15654]]

a final rule, effective July 1, 1998, to ``clarify and simplify'' the

FDIC's deposit insurance regulations. See 63 FR 25750 (May 11, 1998).

The final rule made numerous technical and substantive amendments to

the insurance regulations, including the use of plainer language and

examples. To further simplify and clarify the deposit insurance rules,

in July 1998, the FDIC published a proposed rule to amend the

regulations dealing with joint accounts and ``payable-on-death'' (or

POD) accounts. See 63 FR 38521 (July 17, 1998). The proposed rule is

described in detail below.

II. The Proposed Rule

A. Joint Accounts

Under the FDIC's insurance rules, qualifying joint accounts are

insured separately from any single ownership accounts maintained by the

co-owners at the same insured depository institution. See 12 CFR

330.9(a). A joint account is a ``qualifying'' joint account if it

satisfies certain requirements: (1) The co-owners must be natural

persons; (2) each co-owner must personally sign a deposit account

signature card; and (3) the withdrawal rights of the co-owners must be

equal. See 12 CFR 330.9(c)(1). The requirement involving signature

cards is inapplicable if the account at issue is a certificate of

deposit, a deposit obligation evidenced by a negotiable instrument, or

an account maintained for the co-owners by an agent or custodian. See

12 CFR 330.9(c)(2).

Assuming these requirements are satisfied, the current rules (i.e.,

the rules in effect prior to the effective date of this final rule)

provide that the $100,000 insurance limit shall be applied in a two-

step process. First, all joint accounts owned by the same combination

of persons at the same insured depository institution are added

together and insured to a limit of $100,000. Second, the interests of

each person in all joint accounts, whether owned by the same or some

other combination of persons, are added together and insured to a limit

of $100,000. See 12 CFR 330.9(b).

The two-step process for insuring joint accounts has been

misunderstood by bank employees as well as depositors. This widespread

confusion has resulted in the loss by some depositors of significant

sums of money. For example, at one failed depository institution, three

individuals held three joint accounts (and no other types of accounts).

The interest of each individual was less than $100,000. The individuals

chose to place all of their funds in joint accounts so that each of

them would have access to the money in the event of an emergency or

sudden illness. When the institution failed, step one of the two-step

process required the aggregation of the three joint accounts. The

amount in excess of $100,000 was uninsured.

In this example, all of the funds owned by the three joint owners

could have been insured if the funds had been held in individual

accounts as opposed to joint accounts. Thus, the depositors did not

suffer a loss because they placed too much money in a single depository

institution that failed. Rather, they suffered a loss simply because

they misunderstood the FDIC's regulations. See also Sekula v. FDIC, 39

F.3d 448 (3d Cir. 1994).

In order to simplify the coverage of joint accounts, the FDIC

proposed to eliminate the first step of the two-step process.

B. POD Accounts

Under the current rules (i.e., the rules in effect prior to the

effective date of this final rule), qualifying revocable trust (or POD)

accounts are insured separately from any other types of accounts

maintained by either the owner or the beneficiaries at the same insured

depository institution. See 12 CFR 330.10(a).

A POD account is a ``qualifying'' POD account if it satisfies

certain requirements: (1) The beneficiaries must be the spouse,

children or grandchildren of the owner; (2) the beneficiaries must be

specifically named in the deposit account records; (3) the title of the

account must include a term such as ``in trust for'' or ``payable-on-

death to'' (or any acronym therefor); and (4) the intention of the

owner of the account (as evidenced by the account title or any

accompanying revocable trust agreement) must be that the funds shall

belong to the named beneficiaries upon the owner's death. If the

account has been opened pursuant to a formal ``living trust''

agreement, the fourth requirement means that the agreement must not

place any conditions upon the interests of the beneficiaries that might

prevent the beneficiaries (or their estates or heirs) from receiving

the funds following the death of the owner. Such conditions are known

as ``defeating contingencies''.

Assuming these requirements are satisfied, the $100,000 insurance

limit is not applied on a ``per owner'' basis. Rather, the $100,000

insurance limit is applied on a ``per beneficiary'' basis to all POD

accounts owned by the same person at the same insured depository

institution. For example, a POD account owned by one person would be

insured up to $500,000 if the account names five qualifying

beneficiaries.

If one of the named beneficiaries of a POD account is not a

qualifying beneficiary, the funds corresponding to that beneficiary are

treated for insurance purposes as single ownership funds of the owner

(i.e., the account holder). In other words, they are aggregated with

any funds in any single ownership accounts of the owner and insured to

a limit of $100,000. See 12 CFR 330.10(b).

On a number of occasions, depositors have lost money upon the

failure of an insured depository institution because they believed that

POD accounts are insured on a simple ``per beneficiary'' or ``per

family member'' basis. They did not understand the difference between

qualifying beneficiaries and non-qualifying beneficiaries. Typically,

in such cases, the named beneficiary has been a parent or sibling. In

the absence of a qualifying beneficiary, the POD account has been

aggregated with the owner's single ownership accounts.

In response to such cases, the FDIC proposed adding siblings and

parents to the list of qualifying beneficiaries. The purpose of this

proposal was to protect most depositors who misunderstand the rules

governing POD accounts without abandoning the basic concept that

insurance for such accounts is provided up to $100,000 on a ``per

qualifying beneficiary'' basis.

III. The Final Rule

The FDIC received forty-one comments on the proposed rule. The

commenters can be divided into five categories: depository institutions

(25); banking trade associations (9); bank holding companies (3);

individuals (3); and other (1) (a computer software company). Of these

comments, the vast majority supported the proposed amendments. Only two

comments were critical of the proposed amendments.

The typical comment on the joint account revision praised the FDIC

for proposing to eliminate the ``most confusing and misunderstood''

part of the current insurance regulations. The most pervasive comment

on the POD account revision was that the amendment to add parents and

siblings as qualified beneficiaries has been ``long overdue''.

Of the two critical comments, one suggested that the FDIC lacks the

authority to eliminate step one of the two-step process for insuring

joint accounts. In the commenter's opinion, the elimination of step one

would violate the statutory mandate that the FDIC--in applying the

$100,000 insurance limit--must ``aggregate the amounts of all deposits

in the insured

[[Page 15655]]

depository institution which are maintained by a depositor in the same

capacity and the same right for the benefit of the depositor * * *.''

12 U.S.C. 1821(a)(1)(C). Specifically, the commenter argued that an

account held by a particular combination of co-owners represents a

single ``right and capacity''. In other words, under this argument, the

combinations of co-owners--and not the individual persons--are the

``depositors'' of joint accounts. Therefore, such an account cannot be

insured for more than the statutory insurance limit of $100,000 (as

prescribed by step one).

The argument above is consistent with the FDIC's approach toward

insuring joint accounts prior to 1967. It is inconsistent, however,

with the FDIC's creation in 1967 of step two of the two-step process.

See 32 FR 10408 (July 14, 1967). Under step two, the FDIC has treated

the individual persons as the ``depositors''. Nothing in the Federal

Deposit Insurance Act precludes this longstanding interpretation.

Through the elimination of step one, the regulations provide a

simple $100,000 insurance limit for the interest of each person (a

depositor) in all joint accounts (an ownership right and capacity). The

FDIC believes that this result will be consistent with the statutory

limit of $100,000 for ``the amounts of all deposits in the insured

depository institution which are maintained by a depositor in the same

capacity and the same right * * *.'' 12 U.S.C. 1821(a)(1)(C). Moreover,

as recognized by the vast majority of commenters, this result will be

much easier to understand than the two-step process. Accordingly, the

Board has decided to adopt the proposed elimination of step one.

As a result of this final rule, the maximum insurance coverage of a

particular joint account (or group of joint accounts owned by the same

combination of persons) will no longer be $100,000. In the case of a

joint account of $200,000 owned by two persons, for example, the

maximum coverage will increase from $100,000 to $200,000 (or $100,000

for the interest of each owner). The maximum coverage that any one

person can obtain for his/her interests in all qualifying joint

accounts, however, will remain $100,000.

The second critical comment argued that the proposed amendments

would not accomplish the objective of simplifying the regulations. In

the case of the elimination of step one of the two-step process for

insuring joint accounts (discussed above), this argument is unfounded.

As recognized by the vast majority of commenters, a one-step process is

simpler than a two-step process. In the case of the POD account

amendment, the argument is stronger because the amendment will not

eliminate the concept of ``qualifying beneficiaries''. By adding

parents and siblings to the list of ``qualifying beneficiaries'',

however, the amendment will reduce the number of cases in which a

depositor's confusion results in a loss of funds. In other words, the

amendment may not eliminate confusion but will protect most depositors

from the negative consequences of such confusion. For this reason, the

Board has decided to adopt the proposed amendment. Unlike the proposed

rule, the final rule defines the terms ``parents'', ``brothers'' and

``sisters''.

The subject of ``living trust'' accounts should be mentioned. A

``living trust'' account is a POD account opened pursuant to a formal

``living trust'' agreement. By expanding the list of ``qualifying

beneficiaries'', the final rule will not remove the complicated

methodology for determining the insurance coverage of such accounts.

This methodology requires a determination as to whether the interest of

each beneficiary is subject to any conditions or contingencies

(referred to by the FDIC as defeating contingencies) that might prevent

the beneficiary from receiving his/her share of funds following the

death of the owner. Most ``living trust'' agreements include defeating

contingencies. As a result, most ``living trust'' accounts are

classified by the FDIC for insurance purposes as single ownership

accounts. In other words, the account is aggregated with any single

ownership accounts of the owner at the same depository institution and

insured to a limit of only $100,000. See 12 CFR 330.10(f).

IV. Technical Amendments

Under the FDIC's rules regarding the insurance coverage of accounts

held by agents or fiduciaries, the funds in such accounts are insured

to the same extent as if deposited in the names of the principals. See

12 CFR 330.7(a). In other words, the insurance coverage ``passes

through'' the agent or custodian to the principal or actual owner. The

account will not be entitled to such ``pass-through'' coverage,

however, unless the agency or fiduciary relationship is disclosed in

the deposit account records. See 12 CFR 330.5(b).

The necessity of disclosing fiduciary relationships in the account

records has been referred to as a ``recordkeeping requirement'' in the

insurance regulations. The term ``recordkeeping requirement'' may

suggest to some depository institutions that they possess an

affirmative duty to collect information regarding fiduciary

relationships. In fact, no such duty exists. For this reason, the FDIC

has decided to rephrase certain sections of the regulations.

The final rule removes ``recordkeeping requirements'' from the

section heading at 12 CFR 330.5 and the paragraph headings at 12 CFR

330.5(b) and 12 CFR 330.5(b)(4). Also, the term is removed from 12 CFR

330.14(a).

The paragraph at 12 CFR 330.5(b)(1) provides that no claim for

insurance coverage based on a fiduciary relationship will be recognized

unless the fiduciary relationship is disclosed in the account records.

The final rule revises this paragraph so as to remove any suggestion

that depository institutions are subject to reporting requirements with

respect to accounts held by agents or fiduciaries. Specifically, the

final rule changes language resembling a command directed at depository

institutions (``[t]he `deposit account records' * * * of an insured

depository institution must expressly disclose * * * the existence of

any fiduciary relationship'') to a statement describing the

consequences of failing to disclose a fiduciary relationship (``[t]he

FDIC will recognize a claim for insurance coverage based on a fiduciary

relationship only if the relationship is expressly disclosed * * *'').

These amendments are technical. Their sole purpose is

clarification. For this reason, the Board finds ``good cause'' for

adopting these amendments without the rulemaking procedures generally

required by the Administrative Procedure Act. See 5 U.S.C. 553.

Inasmuch as this amendment will have no effect upon the operation of

the insurance regulations, these procedures are unnecessary.

V. Effective Date

The Administrative Procedure Act generally requires the publication

of a substantive rule at least thirty days before its effective date.

One of the exceptions is for ``good cause''. 5 U.S.C. 553(d). In the

case of this final rule, the Board finds ``good cause'' to make the

amendments effective immediately upon publication in the Federal

Register. ``Good cause'' exists because the amendments will not

prejudice any depositor or depository institution. On the contrary, the

amendments will result in increased insurance coverage for some

depositors who may misunderstand the current rules (for

[[Page 15656]]

example, two individuals with a qualifying joint account of $200,000;

or an individual who has named a sibling as the beneficiary of a POD

account). By making the amendments effective immediately, the Board

will protect depositors of any FDIC-insured institutions that may fail

within the thirty-day period following publication.

With certain exceptions, the Riegle Community Development and

Regulatory Improvement Act of 1994 (Public Law 103-325) provides that

the federal banking agencies may not impose new regulatory reporting

requirements on insured depository institutions except on the first day

of a calendar quarter after the date of publication. See 12 U.S.C.

4802(b). This rule is inapplicable because the final rule imposes no

reporting, disclosure or other new requirements on insured depository

institutions.

VI. Paperwork Reduction Act

The final rule will simplify the FDIC's deposit insurance

regulations governing joint accounts and POD accounts. It will not

involve any collections of information under the Paperwork Reduction

Act (44 U.S.C. 3501 et seq.). Consequently, no information has been

submitted to the Office of Management and Budget for review.

VII. Regulatory Flexibility Act

The final rule will not have a significant impact on a substantial

number of small businesses within the meaning of the Regulatory

Flexibility Act (5 U.S.C. 601 et seq.). The amendments to the deposit

insurance rules will apply to all FDIC-insured depository institutions

and will impose no new reporting, recordkeeping or other compliance

requirements upon those entities. Accordingly, the Act's requirements

relating to an initial and final regulatory flexibility analysis are

not applicable.

VIII. Small Business Regulatory Enforcement Fairness Act

The Office of Management and Budget has determined that the final

rule is not a ``major rule'' within the meaning of the relevant

sections of the Small Business Regulatory Enforcement Fairness Act of

1996 (SBREFA) (5 U.S.C. 801 et seq.). As required by SBREFA, the FDIC

will file the appropriate reports with Congress and the General

Accounting Office so that the final rule may be reviewed.

List of Subjects in 12 CFR Part 330

Bank deposit insurance, Banks, banking, Reporting and recordkeeping

requirements, Savings and loan associations, Trusts and trustees.

The Board of Directors of the Federal Deposit Insurance Corporation

hereby amends part 330 of chapter III 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. In Sec. 330.3, paragraph (h) is revised to read as follows:

Sec. 330.3 General principles.

* * * * *

(h) Application of state or local law to deposit insurance

determinations. In general, deposit insurance is for the benefit of the

owner or owners of funds on deposit. However, while ownership under

state law of deposited funds is a necessary condition for deposit

insurance, ownership under state law is not sufficient for, or decisive

in, determining deposit insurance coverage. Deposit insurance coverage

is also a function of the deposit account records of the insured

depository institution and of the provisions of this part, which, in

the interest of uniform national rules for deposit insurance coverage,

are controlling for purposes of determining deposit insurance coverage.

* * * * *

3. In Sec. 330.5, the section heading and paragraphs (b)(1), (b)(4)

heading, and (b)(4)(i) are revised to read as follows:

Sec. 330.5 Recognition of deposit ownership and fiduciary

relationships.

* * * * *

(b) Fiduciary relationships--(1) Recognition. The FDIC will

recognize a claim for insurance coverage based on a fiduciary

relationship only if the relationship is expressly disclosed, by way of

specific references, in the ``deposit account records'' (as defined in

Sec. 330.1(e)) of the insured depository institution. Such

relationships include, but are not limited to, relationships involving

a trustee, agent, nominee, guardian, executor or custodian pursuant to

which funds are deposited. The express indication that the account is

held in a fiduciary capacity will not be necessary, however, in

instances where the FDIC determines, in its sole discretion, that the

titling of the deposit account and the underlying deposit account

records sufficiently indicate the existence of a fiduciary

relationship. This exception may apply, for example, where the deposit

account title or records indicate that the account is held by an escrow

agent, title company or a company whose business is to hold deposits

and securities for others.

* * * * *

(4) Exceptions--(i) Deposits evidenced by negotiable instruments.

If any deposit obligation of an insured depository institution is

evidenced by a negotiable certificate of deposit, negotiable draft,

negotiable cashier's or officer's check, negotiable certified check,

negotiable traveler's check, letter of credit or other negotiable

instrument, the FDIC will recognize the owner of such deposit

obligation for all purposes of claim for insured deposits to the same

extent as if his or her name and interest were disclosed on the records

of the insured depository institution; provided, that the instrument

was in fact negotiated to such owner prior to the date of default of

the insured depository institution. The owner must provide affirmative

proof of such negotiation, in a form satisfactory to the FDIC, to

substantiate his or her claim. Receipt of a negotiable instrument

directly from the insured depository institution in default shall, in

no event, be considered a negotiation of said instrument for purposes

of this provision.

* * * * *

4. In Sec. 330.9, paragraph (b) is revised to read as follows:

Sec. 330.9 Joint ownership accounts.

* * * * *

(b) Determination of insurance coverage. The interests of each co-

owner in all qualifying joint accounts shall be added together and the

total shall be insured up to $100,000. (Example: ``A&B'' have a

qualifying joint account with a balance of $60,000; ``A&C'' have a

qualifying joint account with a balance of $80,000; and ``A&B&C'' have

a qualifying joint account with a balance of $150,000. A's combined

ownership interest in all qualifying joint accounts would be $120,000

($30,000 plus $40,000 plus $50,000); therefore, A's interest would be

insured in the amount of $100,000 and uninsured in the amount of

$20,000. B's combined ownership interest in all qualifying joint

accounts would be $80,000 ($30,000 plus $50,000); therefore, B's

interest would be fully insured. C's combined ownership interest in all

qualifying joint accounts would be $90,000 ($40,000 plus $50,000);

therefore, C's interest would be fully insured.)

* * * * *

5. In Sec. 330.10, paragraphs (a) and (e) are revised to read as

follows:

[[Page 15657]]

Sec. 330.10 Revocable trust accounts.

(a) General rule. Funds owned by an individual and deposited into

an account with respect to which the owner evidences an intention that

upon his or her death the funds shall belong to one or more qualifying

beneficiaries shall be insured in the amount of up to $100,000 in the

aggregate as to each such named qualifying beneficiary, separately from

any other accounts of the owner or the beneficiaries. For purposes of

this provision, the term ``qualifying beneficiaries'' means the owner's

spouse, child/children, grandchild/grandchildren, parent/parents,

brother/brothers or sister/sisters. (Example: If A establishes a

qualifying account payable upon death to his spouse, sibling and two

children, assuming compliance with the rules of this provision, the

account would be insured up to $400,000 separately from any other

different types of accounts either A or the beneficiaries may have with

the same depository institution.) Accounts covered by this provision

are commonly referred to as tentative or ``Totten trust'' accounts,

``payable-on-death'' accounts, or revocable trust accounts.

* * * * *

(e) Definition of ``children'', ``grandchildren'', ``parents'',

``brothers'' and ``sisters''. For the purpose of establishing the

qualifying degree of kinship identified in paragraph (a) of this

section, the term ``children'' includes biological, adopted and step-

children of the owner. The term ``grandchildren'' includes biological,

adopted and step-children of any of the owner's children. The term

``parents'' includes biological, adoptive and step-parents of the

owner. The term ``brothers'' includes full brothers, half brothers,

brothers through adoption and step-brothers. The term ``sisters''

includes full sisters, half sisters, sisters through adoption and step-

sisters.

* * * * *

6. In Sec. 330.14, paragraph (a) is revised to read as follows:

Sec. 330.14 Retirement and other employee benefit plan accounts.

(a) ``Pass-through'' insurance. Except as provided in paragraph (b)

of this section, any deposits of an employee benefit plan or of any

eligible deferred compensation plan described in section 457 of the

Internal Revenue Code of 1986 (26 U.S.C. 457) in an insured depository

institution shall be insured on a ``pass-through'' basis, in the amount

of up to $100,000 for the non-contingent interest of each plan

participant, provided that the rules prescribed in Sec. 330.5 are

satisfied.

* * * * *

By order of the Board of Directors.

Dated at Washington, D.C., this 23rd day of March, 1999.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

[FR Doc. 99-7736 Filed 3-31-99; 8:45 am]

BILLING CODE 6714-01-P