FDIC Federal Register Citations

[Federal Register: October 30, 2001 (Volume 66, Number 210)]

[Rules and Regulations]

[Page 54645-54651]

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

[DOCID:fr30oc01-4]

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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 303

RIN 3064-AC49

Engaged In The Business of Receiving Deposits Other Than Trust

Funds

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Final rule.

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SUMMARY: This final rule amends the FDIC's regulations covering filing

procedures and delegations of authority, to clarify the meaning of the

phrase ``engaged in the business of receiving deposits other than trust

funds'' in the Federal Deposit Insurance Act. Under the rule, an

insured depository institution must maintain one or more non-trust

deposit accounts in the aggregate amount of $500,000 in order to be

``engaged in the business of receiving deposits other than trust

funds''. Each newly insured depository institution will be deemed to be

``engaged in the business of receiving deposits other than trust

funds'' for a period of one year from the date it opens for business.

If a newly insured depository institution fails to achieve the minimum

deposit standard by the end of that time period, it will be subject to

a determination by the FDIC that the institution is not ``engaged in

the business of receiving deposits other than trust funds'', and to

appropriate administrative action to terminate its insured status.

Similarly, each insured depository institution, other than a newly

insured depository institution, that is below the minimum deposit

standard on two consecutive call report dates will be subject to a

determination by the FDIC that the institution is not ``engaged in the

business of receiving deposits other than trust funds'', and to

appropriate administrative action to terminate its insured status. The

final rule also clarifies that the maintenance of one or more non-trust

deposit accounts in the aggregate amount of $500,000 is not a ``safe

harbor'', but rather the minimum standard in order for an institution

to be considered ``engaged in the business of receiving deposits other

than trust funds'' under the Federal Deposit Insurance Act.

EFFECTIVE DATE: November 29, 2001.

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

898-8839, or Robert C. Fick, Counsel, (202) 898-8962, Legal Division,

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

Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. The Statute

The FDIC is authorized to approve or disapprove applications by

depository institutions for federal deposit insurance. See 12 U.S.C.

1815. In determining whether to approve deposit insurance applications,

the FDIC considers the seven factors set forth in section 6 of the

Federal Deposit Insurance Act (FDI Act). These factors are (1) the

financial history and condition of the depository institution; (2) the

adequacy of the institution's capital structure; (3) the future

earnings prospects of the institution; (4) the general character and

fitness of the management of the institution; (5) the risk presented by

the institution to the Bank Insurance Fund or the Savings Association

Insurance Fund; (6) the convenience and needs of the community to be

served by the institution; and (7) whether the institution's corporate

powers are consistent with the purposes of the FDI Act. 12 U.S.C. 1816.

Also, under the FDI Act, the FDIC must determine as a threshold matter

that an applicant is a ``depository institution which is engaged in the

business of receiving deposits other than trust funds * * *'' 12 U.S.C.

1815(a)(1). Applicants that do not satisfy this threshold statutory

requirement are ineligible for deposit insurance.

The FDIC applies the seven statutory factors in accordance with its

``Statement of Policy on Applications for Deposit Insurance''. See 63

FR 44752 (August 20, 1998). The Statement of Policy discusses each of

the factors at length; however, it does not address the threshold

requirement that an applicant be ``engaged in the business of receiving

deposits other than trust funds''.

The threshold requirement for obtaining federal deposit insurance

is set forth in section 5 of the FDI Act. See 12 U.S.C. 1815(a)(1). The

language used by section 5 (``engaged in the business of receiving

deposits other than trust funds'') also appears in section 8 and

section 3 of the FDI Act. Under section 8, the FDIC is obligated to

terminate the insured status of any depository institution ``not

engaged in the business of receiving deposits, other than trust funds *

* *'' 12 U.S.C. 1818(p). In section 3, the term ``State bank'' is

defined in such a way as to include only those State banking

institutions

[[Page 54646]]

``engaged in the business of receiving deposits, other than trust funds

* * *'' 12 U.S.C. 1813(a)(2).

The phrase ``engaged in the business of receiving deposits other

than trust funds'' as used in the FDI Act is ambiguous. For example,

the statute does not specify whether a depository institution must hold

a particular dollar amount of deposits in order to be ``engaged in the

business of receiving deposits other than trust funds.'' Similarly, it

does not specify whether a depository institution must accept a

particular number of deposits within a particular period in order to be

``engaged in the business of receiving deposits other than trust

funds.'' In addition, it does not specify whether a depository

institution must accept non-trust deposits from the general public as

opposed to accepting deposits only from one or more members of a

particular group (such as the institution's trust customers, its

employees or affiliates).

In applying this statutory requirement (``engaged in the business

of receiving deposits other than trust funds'') for over thirty years,

the FDIC has approved applications from many institutions that did not

intend to accept non-trust deposits from the general public. Also, the

FDIC has approved applications from institutions that only intended to

hold one type of deposit account (e.g., certificates of deposit) or

that did not intend to hold more than one or a few non-trust deposit

accounts. However, the FDIC's long-standing practice of approving

applications from such non-traditional depository institutions has not

been formally codified in such a way as to remove public uncertainty as

to the meaning of the phrase ``engaged in the business of receiving

deposits other than trust funds.''

II. General Counsel Opinion No. 12

In order to clarify this ambiguity in the statute, the FDIC

published General Counsel Opinion No. 12. See 65 FR 14568 (March 17,

2000). In that opinion, the FDIC's General Counsel stated that the

statutory requirement of being ``engaged in the business of receiving

deposits other than trust funds'' can be satisfied by the continuous

maintenance of one or more non-trust deposit accounts in the aggregate

amount of $500,000.

The purpose of General Counsel Opinion No. 12 was to remove

uncertainty as to the meaning of being ``engaged in the business of

receiving deposits other than trust funds.'' However, as indicated by a

recent court ruling, issuance of the General Counsel's opinion did not

achieve that purpose. In Heaton v. Monogram Credit Card Bank of

Georgia, 2001 WL 15635 (E.D. La. January 5, 2001) the statutory

interpretation set forth in General Counsel Opinion No. 12 was rejected

by a federal district court. As a result of the court's ruling,

uncertainty continues to exist as to the meaning of being ``engaged in

the business of receiving deposits other than trust funds.''

The phrase ``engaged in the business of receiving deposits other

than trust funds'' should not be subject to differing and, perhaps,

inconsistent judicial interpretations. Uniformity is needed. Both banks

and the public need to know that the applicable Federal banking laws

will be applied consistently throughout the United States. Moreover,

they need assurance that once the FDIC grants insurance to a bank or

thrift, the deposits at that bank or thrift will remain insured so long

as it satisfies the legal requirement of being ``engaged in the

business of receiving deposits other than trust funds,'' and the FDIC

has not terminated its insurance.

III. The Petition

The Conference of State Bank Supervisors (CSBS), an organization

representing state officials responsible for chartering, regulating and

supervising state-chartered banks, petitioned the FDIC's Board of

Directors to promulgate a regulation to clarify the meaning of the

phrase ``engaged in the business of receiving deposits other than trust

funds'' as used in the FDI Act.

An opposing letter submitted by the plaintiff in the Heaton v.

Monogram litigation questioned the timing of the regulation. In this

opposing letter, the plaintiff argued that the promulgation of a

regulation while litigation relating to this issue is pending would

represent an ``abuse of discretion'' and a ``conflict of interest.''

The plaintiff believes that no regulation should be promulgated until

the litigation is completed.

The FDIC does not agree that rulemaking would constitute an ``abuse

of discretion.'' On the contrary, the FDIC believes that rulemaking is

necessary in order to remove the existing uncertainty, confusion and

the potential for inconsistent interpretations. See Smiley v. Citibank,

N.A., 517 U.S. 735, 116 S. Ct. 1730 (1996).

IV. Questions And Comments

When the FDIC's Board of Directors (Board) published its notice of

proposed rulemaking, Being Engaged in the Business of Receiving

Deposits Other Than Trust Funds, 66 FR 20102, (April 19, 2001) it

sought comments from the public on all aspects of the rule and also

sought responses on nine specific questions. The FDIC received twenty-

one timely comment letters and two comment letters submitted after the

end of the comment period. Also, one letter objected to the FDIC's

consideration of comment letters thought to be filed late. Overall,

eighteen timely comment letters were in favor of the regulation and

three were opposed.

The nine questions and a summary of the comments/responses to those

questions are detailed below.

1. Should the FDIC Adopt a Regulatory Standard for Determining Whether

a Depository Institution is ``Engaged in the Business of Receiving

Deposits Other Than Trust Funds''?

Eighteen comment letters were in favor of the FDIC's adoption of a

regulatory standard: eight depository institutions or depository

institution holding companies, three financial institution trade

associations, three law firms, two state banking supervisors, the

Office of Thrift Supervision, and VISA U.S.A., Inc. Three commenters

objected to the adoption of any regulatory standard by the FDIC. These

objections are addressed in detail in the following section.

2. If so, Should the Standard be Based on a Particular Number and/or

Amount of Non-Trust Deposits? Or Should the Standard be Based on Other

Factors, Such as the Institution's Legal Authority to Accept Non-Trust

Deposits or the Institution's Policies with Respect to the Acceptance

of Non-Trust Deposits?

Three commenters responded on this question. One thought that the

standard could be based on a particular number and amount of non-trust

deposits. Another thought that the standard should not be based on any

particular number of non-trust deposits as long as the institution had

the capacity to accept even one non-trust deposit. The third commenter

thought that an institution only needs to have the legal authority to

receive non-trust deposits in order to be engaged in the business of

receiving deposits other than trust funds.

The FDIC has considered the suggestions that legal authority or

capacity to accept non-trust deposits alone is sufficient, but believes

that its standard is the better approach. Bare legal authority or

capacity to receive non-trust deposits without the actual receipt or

holding of any deposits evidences only a potential ability to receive

deposits, and this potential may never be realized. If an institution

can be engaged in the business of receiving deposits other than trust

funds simply by having the legal authority or capacity

[[Page 54647]]

to receive deposits, it would be able to enjoy all of the benefits of

being an insured institution e.g., the ability to export interest

rates, without ever actually providing any deposit services. We do not

believe that such a standard would be consistent with the purposes of

federal deposit insurance. Consequently, the FDIC has declined to adopt

that standard.

3. Assuming a Minimum Amount of Non-Trust Deposits is Required, Should

the Standard be Based on a Particular Number of Non-Trust Deposit

Accounts? If so, Should that Number Be One? If not, What Should be the

Minimum Number of Non-Trust Deposit Accounts? Why?

Of the thirteen commenters responding on this question, none

thought that an institution should be required to maintain more than

one deposit account.

4. Assuming That the Standard Should Be Based on a Particular Amount of

Non-Trust Deposits, Should That Amount Be $500,000? If Not, What Should

Be the Minimum Amount of Non-Trust Deposits? Why?

Of the eleven commenters responding on this question, ten thought

the minimum amount of non-trust deposits should be $500,000; the other

commenter thought it should be a ``modest amount.''

5. Should a Depository Institution Be Required To Accept Deposits from

the Public at Large (as Opposed to Accepting Deposits From a Particular

Group Such as the Institution's Trust Customers or Employees or

Affiliates) in Order To Be ``Engaged in the Business of Receiving

Deposits Other Than Trust Funds''? If So, Why?

Of the eleven commenters responding on this question, all thought

that a depository institution should not be required to accept deposits

from the public at large (as opposed to accepting deposits from a

particular group such as the institution's trust customers, employees

or affiliates).

6. Should a Depository Institution be Required To Offer a Selection of

Different Types of Deposits (e.g., Demand Deposits, Savings Deposits,

Certificates of Deposit) in Order To Be ``Engaged in the Business of

Receiving Deposits Other Than Trust Funds''? If So, Why?

Of the eleven commenters responding on this question, all thought

that a depository institution should not be required to offer a

selection of different types of deposits (e.g., demand deposits,

savings deposits, certificates of deposit).

7. Should the FDIC Create Any Exceptions for Special Circumstances? For

Example, Should a New Institution Be Given a Certain Period of Time to

Reach the Minimum Number of Non-Trust Deposit Accounts or To Attain the

Minimum Amount of Non-Trust Deposits?

Of the eight commenters responding on this question, all thought

that the FDIC should permit exceptions for special circumstances. Four

commenters specifically mentioned permitting an exception for newly

insured depository institutions; two also thought that there should be

an exception for institutions (other than the newly insured

institutions) that fall below the minimum to regain sufficient

deposits; and one thought the FDIC should allow some time for banks,

particularly in small communities, to meet the minimum deposit

standard.

The FDIC believes that these suggestions raise significant issues.

At the time they apply for deposit insurance some newly chartered

institutions, for example, those organized by individuals, may not have

received $500,000 in non-trust deposits. Indeed, potential depositors

may not want to put their money in an institution that is not yet

insured. Absent some modification to the rule, this disincentive could

prolong the time it takes an institution to reach the minimum deposit

standard or possibly even prevent it from reaching the minimum deposit

standard. Consequently, the FDIC has decided to modify the rule to

provide that an applicant for deposit insurance would be deemed to be

``engaged in the business of receiving deposits other than trust

funds'' for one year from the date it opens for business. If such an

institution does not meet the minimum deposit standard at the end of

that period, it would be subject to a determination by the FDIC that

the institution is not ``engaged in the business of receiving deposits

other than trust funds'' and to termination of its insured status under

section 8(p) of the FDI Act, 12 U.S.C. 1818(p).

However, certain other newly chartered depository institutions

should be able to meet the $500,000 minimum deposit standard from the

outset. In particular, a newly chartered depository institution that is

organized by, or intended to be owned by, an existing company (whether

or not a bank holding company), typically does not need a grace period

to reach the $500,000 minimum deposit standard. Therefore, the FDIC

intends to include a condition in any order granting deposit insurance

to such a depository institution that the depository institution have

the $500,000 minimum deposit before deposit insurance becomes

effective.

Similarly, several commenters suggested a grace period for

operating insured depository institutions that are not newly insured.

The rationale for such a grace period is that any insured depository

institution may, on occasion, fall below the minimum deposit standard,

and it would be extremely disruptive and harmful if the institution's

status were to immediately and automatically change as a result. For

example, an institution's insured status might be called into doubt if

it fell below the minimum deposit standard even for an instant.

Furthermore, an institution that qualified as a ``State bank'' might

abruptly lose that status if its total non-trust deposits fell below

the minimum deposit standard. Of course, an institution's deposit

insurance continues until terminated by the FDIC.

The FDIC believes, however, that any perception that an institution

might abruptly lose its insured status or its status as a ``State

bank'' may cause uncertainty and disruption. Consequently, the FDIC has

decided to modify the proposed rule to avoid such a result. The final

rule provides that an insured depository institution (other than a

newly insured institution) will be subject to a determination by the

FDIC that the institution is not ``engaged in the business of receiving

deposits other than trust funds'' and to termination of its insured

status through administrative proceedings under section 8(p) of the FDI

Act if the institution is below the minimum deposit standard on two

consecutive call report dates. The term ``call report'' is used herein

to refer collectively to the Consolidated Reports of Condition and

Income, the Thrift Financial Report, and the Report of Assets and

Liabilities of US Branches and Agencies of Foreign Banks. The call

report dates are March 31st, June 30th, September 30th, and December

31st.

A brief discussion about section 8(p) as it relates to the

institution's depositors is warranted. Under section 8(p) of the FDI

Act, the FDIC is obligated to terminate the insured status of a

depository institution that is not ``engaged in the business of

receiving deposits other than trust funds.'' 12 U.S.C. 1818(p). A

finding by the FDIC's Board of Directors that a depository institution

is not ``engaged in the business of receiving deposits other than trust

funds'' is conclusive. Id. Such

[[Page 54648]]

a finding, however, does not result in the immediate loss of deposit

insurance. On the contrary, the institution remains insured for a

period of time during which depositors are provided with notification

of the date on which the institution's deposits will cease to be

insured. See 12 CFR 308.124.

8. Should Operating Insured Depository Institutions Be Held to the Same

Standard as Applicants for Deposit Insurance? In Other Words, Should

the Standard Under Section 8 of the FDI Act (Involving Terminations) Be

the Same as the Standard Under Section 5 (Involving Applications)?

Should the FDIC Terminate the Insured Status of Any Operating

Institution That Does Not Meet the Chosen Standard? Should an Operating

Insured Institution Be Given a Certain Period of Time To Regain the

Level of $500,000 After Falling Below That Level?

Of the five commenters responding on this question, all thought

that operating insured depository institutions should be held to the

same standard as applicants for deposit insurance. As noted above, two

commenters thought that operating insured institutions should be given

a period of time to regain the $500,000 minimum deposit standard after

falling below it.

The FDIC agrees that operating insured depository institutions

should be held to the same standard as applicants for deposit

insurance, and the final rule is consistent with that principle. With

regard to the grace period suggestion, the FDIC has modified the rule,

as discussed above, to provide a period of time for an institution to

regain the minimum deposit standard if the institution should fall

below it.

9. Should the Same Standard Apply to the Definition of ``State bank''

Under Section 3 of the FDI Act? If not, What standard Should Apply?

Why?

Of the seven commenters responding on this question, all thought

that the same standard should apply to the definition of ``State bank''

under section 3 of the FDI Act, and four of the seven thought that the

same standard should apply throughout the FDI Act.

In addition to the responses to the nine questions, one commenter

suggested that the rule should be a ``safe harbor'' as opposed to a

minimum standard. The FDIC intends a minimum standard. The FDIC does

not believe that a safe harbor approach will adequately clarify the

meaning of the phrase ``engaged in the business of receiving deposits

other than trust funds.'' Under a safe harbor approach uncertainty

would exist as to the status of an institution that did not satisfy the

$500,000 standard. A primary purpose of the rule is to remove ambiguity

and uncertainty in this area, and the safe harbor approach does not

achieve that purpose. Consequently, the FDIC has modified the rule to

make it clear that the rule's requirements are a minimum standard, not

a safe harbor. However, the rule is also structured so that a failure

to satisfy the $500,000 standard will not result in an automatic

termination of an institution's status as an insured institution or as

a ``State bank.'' Rather, such a failure would make the institution

subject to termination proceedings under section 8(p).

V. Objections to the Rule

As noted above three commenters opposed the regulation. One

opponent simply disagreed with the FDIC's interpretation of section 5

of the FDI Act. Another opponent, U.S. Senator Mary L. Landrieu, was

opposed to the FDIC's adoption of the regulation and thought it

inappropriate to promulgate a regulation while the Heaton v. Monogram

litigation was pending.

The FDIC believes that it has acted properly in formalizing its

interpretation of the FDI Act at this time. Because of the FDIC's

statutory responsibility as a federal banking regulator, the FDIC has a

strong interest in interpreting the FDI Act and in providing courts and

private parties with guidance concerning its interpretation. Agencies

often interpret their governing statutes during the course of

litigation in order to provide courts and private litigants with needed

guidance. Indeed, it is often litigation that discloses the need for

such guidance. The Supreme Court cited this practice with approval in

Smiley v. Citibank (South Dakota), N.A., 517 U.S. 735 (1996), when it

gave deference under the Chevron doctrine to a regulation interpreting

the statutory term ``interest'' that was promulgated by the Comptroller

of the Currency during the course of litigation. Additionally, it is

appropriate for the FDIC to promulgate its statutory interpretation in

the form of a formal regulation, in view of recent Supreme Court

decisions restricting judicial deference in situations involving less

formal interpretations of a statute. See Christensen v. Harris County,

529 U.S. 576 (2000); U.S. v. Mead Corp., 121 S. Ct. 2164 (2001).

Indeed, this regulation presents a classic example of a federal

agency acting appropriately in furtherance of its statutory

responsibility. The FDIC decided many years ago, in the course of

approving applications for deposit insurance, to interpret the

statutory phrase ``engaged in the business of receiving deposits'' to

include banking institutions with limited deposit-taking activity.

Accordingly, the FDIC approved numerous applications for deposit

insurance from such institutions over a period of more than thirty

years. Because the ongoing litigation has disclosed a need for a more

formal interpretation, the FDIC is adopting this rule interpreting the

statutory phrase consistent with both the FDIC's longstanding

interpretation and other federal and state banking law.

As noted above, the regulation is being issued to eliminate the

current uncertainty and provide for consistency in the interpretation

of the FDI Act. Consequently, the FDIC believes that it is not only

appropriate but essential for the FDIC to issue a regulation clarifying

the meaning of the phrase ``engaged in the business of receiving

deposits other than trust funds.''

The third opposition letter was submitted by a law firm on behalf

of five consumer advocacy groups. These consumer groups are the

National Consumer Law Center, the Consumer Federation of America,

Consumers Union, U.S. Public Interest Research Group and the National

Association of Consumer Advocates. In their letter, the consumer groups

presented three arguments against the adoption of the proposed

regulation. Each of these arguments is addressed in turn below.

First, the consumer groups argued that the integrity of the

regulatory process will be undermined by asserting a position that

supports the defendant in the Heaton v. Monogram litigation. This

argument ignores the nature and extent of the FDIC's statutory duties

under the FDI Act. The FDIC cannot discharge its duties, for example,

under section 5 of the FDI Act (involving applications for deposit

insurance) and section 8 of the Act (involving terminations of

insurance) without interpreting the statutory phrase. For this reason,

the FDIC cannot be neutral. The FDIC must interpret the phrase

``engaged in the business of receiving deposits other than trust

funds'' in order to carry out its duties. Otherwise, the FDIC would be

unable to make any decisions on any applications for deposit insurance.

As pointed out above, it is important to note that the FDIC's

interpretation has existed for many years prior to this litigation. It

was not established with the purpose of either helping or hurting any

party; rather, it was established with the

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purpose of fairly and consistently administering the statute.

Second, the consumer groups argued that the FDIC's interpretation

as codified in the proposed regulation conflicts with the FDI Act. This

argument is based upon the statute's use of the word ``business'' and

the words ``receiving deposits.'' According to the consumer groups,

these words mean that a depository institution must receive an

``ongoing'' stream of deposits in order to be ``engaged in the business

of receiving deposits other than trust funds.''

The FDIC does not believe that the interpretation offered by the

consumer groups is correct. The statute refers to ``business,'' not

``primary business.'' See Royal Foods Co. Inc. v. RJR Holdings Inc.,

252 F.3d 1102 (9th Cir. 2001). The statute also recognizes that a

single deposit can be accepted or ``received'' many times through

rollovers. See 12 U.S.C. 1831f(b). Thus, the word ``receiving'' in the

statute is consistent with the holding--and periodic renewal or

rollover--of a single certificate of deposit. Similarly, the plural

word ``deposits'' is not inconsistent with the holding of a single

deposit account because multiple deposits of funds can be made into a

single account. In addition, the periodic accrual of interest

represents the ``receiving'' of ``deposits.'' Moreover, the statute

defines ``deposit'' in such a way as to treat ``receiving'' and

``holding'' with equal significance for purposes of the definition of

``deposit.'' See 12 U.S.C. 1813(l)(1).

In short, the proposed regulation is consistent with the FDI Act.

This conclusion is confirmed by Meriden Trust and Safe Deposit Company

v. FDIC, 62 F.3d 449 (2d Cir. 1995). In that case, the court found that

a bank was ``engaged in the business of receiving deposits other than

trust funds'' even though the bank held only two accounts with a

combined balance of only $200,000. Both of those accounts were from

affiliates: one from the bank's parent company and one from its sister

bank.

In presenting their second argument, the consumer groups asserted

that the Meriden case is distinguishable from the Heaton case. They

noted that the two cases involved separate sections of the FDI Act

(though both cases involved the same definition of ``State bank'').

However, the meaning of being ``engaged in the business of receiving

deposits other than trust funds'' should not vary depending upon which

section of the FDI Act is under consideration and the consumer groups

have presented no argument justifying such variation. Such an approach

would lead to inconsistencies, uncertainties and confusion and would be

contrary to the main purpose of the regulation which is to clarify the

law for the benefit of depository institutions as well as the general

public.

Third, the consumer groups argued that the regulation will harm the

public. This argument is based upon the proposition that an out-of-

state bank should not be able to avoid the host state's consumer

protection laws. This argument is inconsistent with the express

language of section 27 of the FDI Act, 12 U.S.C. 1831d. Through section

27, Congress has specifically provided that an out-of-state ``State

bank'' may export interest rates into a host state notwithstanding the

host state's laws. This section was enacted to provide state banks

competitive equality with national banks.

Finally, the law firm representing the plaintiff in the Heaton v.

Monogram litigation submitted a letter objecting to the FDIC's

consideration of two other letters (both supporting the proposed

regulation). The law firm argued that the two letters in question had

been received by the FDIC after the expiration of the comment period.

In fact, one of the two letters was received by the FDIC on the

last day of the comment period (July 18, 2001). This letter was timely.

The second letter supported the proposed regulation but in broad,

general terms. Substantively, it was similar to a number of other

letters. The FDIC did not rely upon this letter or another late-filed

letter in its consideration of the final rule.

The FDIC has carefully considered all of the timely comments

received; most of the comments received are consistent with the FDIC's

views and suggest no changes to the rule. However, as noted above, the

FDIC has modified the proposed rule to incorporate certain grace

periods suggested in the comments received in response to questions 7

and 8, and has clarified the fact that the rule is not a safe harbor.

VI. Reasons for the Minimum Deposit Standard

There are a number of substantial reasons for adopting the final

rule. First, the statute is ambiguous (as discussed above). The FDIC in

General Counsel Opinion 12 (GC12) discussed the statutory language at

length. See 65 FR 14568, 14569 (March 17, 2000). The statute recognizes

that a single deposit can be accepted or ``received'' many times

through rollovers. See 12 U.S.C. 1831f(b) (dealing with the acceptance

of brokered deposits). Thus, the word ``receiving'' in the statute can

be reconciled with the holding--and periodic renewal or rollover--of a

single deposit. Similarly, the plural word ``deposits'' is not

inconsistent with the holding of a single deposit account because

multiple deposits of funds can be made into a single account. A

depositor might, for example, make a deposit of funds every month into

the same account. The accrual of interest would represent an additional

deposit into the same account. In the case of a certificate of deposit,

the deposit would be replaced with a new deposit at maturity. Moreover,

the statute defines ``deposit'' in such a way as to treat ``receiving''

and ``holding'' with equal significance for purposes of the definition

of ``deposit.'' See 12 U.S.C. 1813(l)(1).

Second, as discussed at length in General Counsel Opinion No. 12,

the legislative history is inconclusive. See H.R. Rep. No. 2564,

reprinted in 1950 U.S.C.C.A.N. 3765, 3768. Third, the FDIC has approved

applications from many non-traditional depository institutions that

intended to maintain only one or a very limited number of non-trust

deposit accounts. This practice began at least as early as 1969 with

Bessemer Trust Company (Bessemer) located in Newark, New Jersey.

Bessemer offered checking accounts to its own trust customers but did

not offer checking accounts or any other type of non-trust accounts to

the general public. Despite this limitation on Bessemer's deposit-

taking activities, the FDIC approved Bessemer's application for deposit

insurance. The FDIC continued to approve such applications (i.e.,

applications from institutions with very limited deposit-taking

activities) from the 1970s to the present. These non-traditional

depository institutions have included trust companies, credit card

banks and other specialized institutions. For example, one depository

institution planned to hold no accounts except escrow accounts relating

to mortgage loans. Another depository institution planned to offer

deposits only to its affiliate's customers.

Fourth, the Bank Holding Company Act (BHCA) contemplates the

existence of depository institutions that are insured by the FDIC even

though they do not accept a continuing stream of non-trust deposits

from the general public. See 12 U.S.C. 1841(c). In the BHCA, the

definition of ``bank'' includes banks insured by the FDIC. See 12

U.S.C. 1841(c)(1). A list of exceptions includes institutions

functioning solely in a trust or fiduciary capacity if several

conditions are satisfied. The conditions related to deposit-taking are:

(1) All or

[[Page 54650]]

substantially all of the deposits of the institution must be trust

funds; (2) insured deposits of the institution must not be offered

through an affiliate; and (3) the institution must not accept demand

deposits or deposits that the depositor may withdraw by check or

similar means. See 12 U.S.C. 1841(c)(2)(D)(i)-(iii). The significant

conditions are (1) and (2). The first condition provides that all or

substantially all of the deposits of the institution must be trust

funds; the second condition involves ``insured deposits.'' Thus, the

statute contemplates that a trust company--functioning solely as a

trust company and holding no deposits (or substantially no deposits)

except trust deposits--could hold ``insured deposits.'' In other words,

the BHCA contemplates (without requiring) that an institution could be

insured by the FDIC even though the institution does not accept non-

trust deposits from the general public.

Fifth, the leading case indicates that a depository institution may

be ``engaged in the business of receiving deposits other than trust

funds'' even though the institution holds a very small amount of non-

trust deposits. See Meriden Trust and Safe Deposit Company v. FDIC, 62

F.3d 449 (2d Cir. 1995). Indeed, this case indicates that an amount as

small as $200,000 is a sufficient amount of non-trust deposits.

Sixth, some state banking statutes contemplate the existence of

FDIC-insured depository institutions that are severely restricted in

their ability to accept non-trust deposits from the general public. For

example, a Virginia statute provides that a general business

corporation may acquire the voting shares of a ``credit card bank''

only if certain conditions are satisfied. See Va. Code 6.1-392.1.A.

These conditions comprise the definition of a ``credit card bank.'' See

Va. Code 6.1-391. These conditions include the following: (1) The bank

may not accept demand deposits; and (2) the bank may not accept savings

or time deposits of less than $100,000. Indeed, the statute provides

that a ``credit card bank'' may accept savings or time deposits (in

amounts in excess of $100,000) only from affiliates of the bank having

their principal place of business outside the state. See Va. Code 6.1-

392.1.A.3-4. In other words, the Virginia statute prohibits the

acceptance of any deposits from the general public. At the same time,

the statute requires the deposits of the bank to be federally insured.

See Va. Code 6.1-392.1.A.4.

The figure of $500,000 is being utilized for several reasons.

First, it is more than a nominal sum. Indeed, it is greater than the

amount involved in the leading case of Meriden Trust and Safe Deposit

Company v. FDIC, 62 F.3d 449 (2d Cir. 1995). In that case, the court

found that only $200,000 of non-trust deposits was a sufficient amount.

Second, the figure of $500,000 is not so great that it would prevent

non-traditional depository institutions from obtaining FDIC insurance.

As previously mentioned, the Bank Holding Company Act contemplates the

existence of depository institutions that are insured by the FDIC even

though they do not accept a continuing stream of non-trust deposits

from the general public. See 12 U.S.C. 1841(c). Also, some state

banking statutes contemplate the existence of FDIC-insured depository

institutions that are severely restricted in their ability to accept

non-trust deposits from the general public. See, e.g., Va. Code 6.1-

392.1.A.4. Third, $500,000 is the amount of non-trust deposits allowed

by the FDIC in recent years in connection with a number of applications

for deposit insurance. Applications involving the precise amount of

$500,000 can be traced as far back as 1991.

As previously explained, the purpose of the regulation is to create

uniformity and certainty. The choice of any specific dollar figure

would serve this purpose. For the reasons set forth above, the FDIC has

chosen $500,000.

Paperwork Reduction Act

The final rule does 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.

Regulatory Flexibility Act

Pursuant to section 605(b) of the Regulatory Flexibility Act (5

U.S.C. 601 et seq.) the FDIC hereby certifies that the final rule will

not have a significant economic impact on a substantial number of small

entities. The final rule will apply to all FDIC-insured depository

institutions and will impose no new reporting, recordkeeping or other

compliance requirements. Although the final rule specifies that

depository institutions must hold non-trust deposits in the amount of

$500,000 or more in order to be ``engaged in the business of receiving

deposits other than trust funds,'' the rule does not create a new

requirement. Rather, the final rule clarifies an existing requirement.

Moreover, the final rule is consistent with the standard already

applied to depository institutions by the FDIC. Accordingly, the Act's

requirements relating to an initial and final regulatory flexibility

analysis are not applicable.

Impact on Families

The FDIC has determined that this final rule will 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).

Small Business Regulatory Enforcement Fairness Act

The Small Business Regulatory Enforcement Fairness Act of 1996

(SBREFA) (Pub. L. 104-121) provides generally for agencies to report

rules to Congress for review. The reporting requirement is triggered

when the FDIC issues a final rule as defined by the Administrative

Procedure Act (APA) at 5 U.S.C. 551. Because the FDIC is issuing a

final rule as defined by the APA, the FDIC will file the reports

required by SBREFA. The Office of Management and Budget has determined

that this final rule does not constitute a ``major rule'' as defined by

SBREFA.

List of Subjects in 12 CFR Part 303

Administrative practice and procedure, Authority delegations

(Government agencies), Banks, banking, Bank merger, Branching, Foreign

investments, Golden parachute payments, Insured branches, Interstate

branching, Reporting and recordkeeping requirements, Savings

associations.

The Board of Directors of the Federal Deposit Insurance Corporation

hereby amends part 303 of title 12 of the Code of Federal Regulations

as follows:

PART 303--FILING PROCEDURES AND DELEGATIONS OF AUTHORITY

1. The authority citation for part 303 continues to read as

follows:

Authority: 12 U.S.C. 378, 1813, 1815, 1816, 1817, 1818, 1819

(Seventh and Tenth), 1820, 1823, 1828, 1831a, 1831e, 1831o, 1831p-1,

1835a, 3104, 3105, 3108, 3207; 15 U.S.C. 1601-1607.

2. New Sec. 303.14 is added to subpart A to read as follows:

Sec. 303.14 Being ``engaged in the business of receiving deposits

other than trust funds.''

(a) Except as provided in paragraphs (b), (c), and (d) of this

section, a depository institution shall be ``engaged in the business of

receiving deposits other than trust funds'' only if it

[[Page 54651]]

maintains one or more non-trust deposit accounts in the minimum

aggregate amount of $500,000.

(b) An applicant for federal deposit insurance under section 5 of

the FDI Act, 12 U.S.C. 1815(a), shall be deemed to be ``engaged in the

business of receiving deposits other than trust funds'' from the date

that the FDIC approves deposit insurance for the institution until one

year after it opens for business.

(c) Any depository institution that fails to satisfy the minimum

deposit standard specified in paragraph (a) of this section as of two

consecutive call report dates (i.e., March 31st, June 30th, September

30th, and December 31st) shall be subject to a determination by the

FDIC that the institution is not ``engaged in the business of receiving

deposits other than trust funds'' and to termination of its insured

status under section 8(p) of the FDI Act, 12 U.S.C. 1818(p). For

purposes of this paragraph, the first three call report dates after the

institution opens for business are excluded.

(d) Notwithstanding any failure by an insured depository

institution to satisfy the minimum deposit standard in paragraph (a) of

this section, the institution shall continue to be ``engaged in the

business of receiving deposits other than trust funds'' for purposes of

section 3 of the FDI Act until the institution's insured status is

terminated by the FDIC pursuant to a proceeding under section 8(a) or

section 8(p) of the FDI Act. 12 U.S.C. 1818(a) or 1818(p).

By order of the Board of Directors.

Dated at Washington, DC, this 23rd day of October 2001.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

[FR Doc. 01-27198 Filed 10-29-01; 8:45 am]

BILLING CODE 6714-01-P