SUMMARY: The FDIC is revising its insurance regulations for accounts of
qualified tuition savings programs under section 529 of the Internal
Qualified tuition programs that are savings plans or prepaid
tuition plans may be established by states or state instrumentalities
under section 529 of the Internal Revenue Code. Interests in qualified
tuition savings programs are ``securities'' under the federal
securities laws. Under the FDIC's existing insurance regulations, a
state public instrumentality that issues securities is treated as a
corporation for deposit
insurance purposes. As a result, the deposits of the state public
instrumentality are insured up to a total of only $100,000 in the
aggregate. The deposits are not insured on a ``pass-through'' basis to
the holders of the securities. Under the FDIC's new rule, the deposits
of the state public instrumentality may be insured on a ``pass-
through'' basis (i.e., up to $100,000 for the beneficial interest of
each participant) if the deposits represent interests or accounts in a
state public instrumentality that is part of a qualified tuition
savings program under section 529 of the Internal Revenue Code.
DATES: The amendment is effective June 9, 2005. Written comments must
be received by the FDIC no later than August 8, 2005.
ADDRESSES: Interested parties are invited to submit written comments to
the FDIC by any of the following methods: Federal eRulemaking Portal:
Qualified Tuition Programs'' in the subject line of the message. Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th
Street, NW., Washington, DC 20429. Hand Delivery/Courier: Comments may be hand-delivered to
the guard station located at the rear of the FDIC's 550 17th Street
building (accessible from F Street) on business days between 7 a.m. and
Instructions: All submissions must include the agency name
the title ``Part 330--Accounts of Qualified Tuition Programs.'' The
FDIC may post comments on its Web site at:
Comments may be inspected and photocopied in the FDIC
Public Information Center, Room 100, 801 17th Street, NW., Washington,
DC, between 9 a.m. and 4:30 p.m. on business days.
FOR FURTHER INFORMATION CONTACT: Christopher L. Hencke, Counsel, Legal
Division, (202) 898-8839, Federal Deposit Insurance Corporation, 550
17th Street, NW., Washington, DC 20429.
I. The FDIC's Existing Regulation
Under the applicable section of the FDIC's insurance
the deposits of a corporation are insured up to $100,000 in the
aggregate. See 12 CFR 330.11(a)(1). This rule applies to ordinary
corporations as well as to certain business or investment trusts. The
applicable subsection of the FDIC's regulations is 12 CFR 330.11(a)(2),
which provides as follows: ``Notwithstanding any other provision of
this part, any trust or other business arrangement which has filed or
is required to file a registration statement with the Securities and
Exchange Commission pursuant to section 8 of the Investment Company Act
of 1940 or that would be required so to register but for the fact it is
not created under the laws of the United States or a state or but for
sections 2(b), 3(c)(1), or 6(a)(1) of that act shall be deemed to be a
corporation for purposes of determining deposit insurance coverage.''
When this rule was proposed in 1976, the FDIC explained the
as follows: ``It has been recognized that certain trusts, commonly
known as `business trusts,' so closely resemble corporations that they
may in essence be viewed as de facto corporations. Such trusts are
generally characterized by the fact that the trust corpus consists of
funds or other property originally contributed by the beneficiaries
themselves for the purpose of making a profit through the conduct of a
business. In this respect, the beneficiaries are in fact closely
analogous to shareholders in a corporation. Where such trusts or other
business entities are engaged in the business of soliciting funds from
the public for investment purposes, they are, with certain exceptions,
subject to the Investment Company Act of 1940. Heretofore, where such
funds have been invested in bank certificates of deposit, there has
existed some confusion as to whether the deposits are insured according
to each individual investor's beneficial interest in the trust or,
alternatively, according to the aggregate deposits held by the trust in
each insured bank. The Board seeks to relieve that confusion by
announcing its intention to determine the extent of federal deposit
insurance of accounts held by such investment companies by application
of the same rules which govern the insurance of accounts held by
corporations.'' 41 FR 49492, 49493 (November 9, 1976).
The FDIC's rule applies to business or investment trusts that
file registration statements with the Securities and Exchange
Commission (SEC). The rule also applies to investment trusts that would
be required to file such statements ``but for'' certain sections of the
Investment Company Act, including section 2(b). Governmental entities,
including state public instrumentalities, are generally not required to
register with the SEC under the Investment Company Act because section
2(b) makes the Investment Company Act inapplicable to them. See 15
\1\ In 1988, the FDIC reconsidered its treatment of
trusts. Specifically, the FDIC put forth a proposed rule that would
have drawn a distinction between most business or investment trusts
and so-called ``unit investment trusts,'' in which the trust assets
are invested in ``an identified, static portfolio of time deposits
with the same or nearly the same maturity dates.'' 53 FR 39746
(October 12, 1988). The FDIC's proposed rule was never adopted as a
final rule. Rather, the proposed rule was withdrawn. See 54 FR 52399
(December 21, 1989).
II. Qualified Tuition Programs
Section 529 of the Internal Revenue Code provides tax
``qualified tuition programs,'' including qualified tuition savings
plans. See 26 U.S.C. 529(a). Section 529 authorizes the creation of
prepaid tuition plans and tuition savings plans. Tuition savings plans
under section 529 must be sponsored by a state or state public
instrumentality.\2\ See 26 U.S.C. 529(b)(1). Section 529 defines the
tuition savings programs that are required to be sponsored by a state
or state public instrumentality as programs under which a person ``may
make contributions to an account which is established for the purpose
of meeting the qualified higher education expenses of the designated
beneficiary of the account'' (and which meets certain requirements). 26
\2\ Section 529 also authorizes the creation of prepaid
programs by states or by educational institutions under certain
Some state programs have permitted participants to have the
of investing their tuition savings payments directly in bank deposits.
In past reviews of a few of these programs, the FDIC staff has advised
program representatives that the deposits may be insured to the
participants if the participants are the actual owners of the deposits.
More recently, the FDIC has learned that the SEC has taken
position that, under the federal securities laws, the offer and sales
of interests in section 529 tuition savings plans will not be exempt
from registration under the Securities Act of 1933 unless such
interests are in or directly with a state public instrumentality, such
as a state investment trust, or other state entity. This means that a
participant in a state qualified tuition savings program must
acquire an interest or account in the state public instrumentality (a
state trust) and may not directly acquire a bank deposit. Assuming that
the assets of the state's 529 tuition savings program include bank
deposits, these deposits will be owned by the state instrumentality
(i.e., the investment trust) and not by the individual participants or
The Investment Company Act does not apply to state public
instrumentalities pursuant to section 2(b). Under the FDIC's existing
regulation, as previously discussed, a state public instrumentality
that would be required to register under the Investment Company Act but
for the general inapplicability of the Investment Company Act to state
public instrumentalities under section 2(b) is treated as a
corporation. This means that the deposits of the state public
instrumentality or investment trust will be subject to aggregation. In
other words, the aggregated deposits will be insured up to a total of
only $100,000 and will not be insured up to $100,000 for the interest
of each participant or investor. See 12 CFR 330.11(a).
This result is unwarranted. In the case of those qualified
savings programs brought to the attention of the FDIC, the qualified
tuition savings programs do not function in the manner of ordinary
business trusts or investment companies. In providing participants with
bank deposit options for the monies paid for their interests or
accounts in the state public instrumentality, the tuition savings
programs are structured so that the funds held in accounts or
representing interests of particular investors in the state public
instrumentality can be traced to particular certificates of deposit.
Thus, the deposits are equivalent to deposits placed at banks by or
through deposit brokers. Under the FDIC's regulations, brokered
deposits are not aggregated and insured up to $100,000 to the broker.
Rather, such deposits are insured up to $100,000 on a ``pass-through''
basis to the broker's customers. See 12 CFR 330.7. This means that each
customer's funds are aggregated with the customer's other accounts at
the same insured depository institution (if any) and insured separately
up to the $100,000 limit. See 12 CFR 330.7. ``Pass-through'' coverage as described above is contingent
upon the satisfaction of certain requirements. First, the account
records of the insured depository institution must reveal the fact that
the nominal accountholder (e.g., the broker) is a mere agent or
custodian and not the actual owner of the funds. See 12 CFR
330.5(b)(1). Second, the interests of the actual owners must be
revealed in records maintained by the depository institution or the
broker or some other party. See 12 CFR 330.5(b)(2). Third, the deposits
actually must be owned by the alleged actual owners and not by the
nominal accountholder. See 12 CFR 330.3(h); 12 CFR 330.5(a)(1).
In the case of those qualified tuition savings programs
the attention of the FDIC, an issue exists as to whether the deposits
are owned by the state public instrumentality or investment trust as
opposed to being owned by the participants or investors. While the
participants or investors are the beneficial owners of the accounts of
or interests in the state public instrumentality, the participants'
monies paid to the state trust for accounts or interests are assets of
the state public instrumentality and are, in many cases, invested by
the state trust as instructed by the participants or investors.
Otherwise, however, the requirements for ``pass-through'' coverage have
As stated above, in the plans reviewed by the FDIC, the funds
particular investors can be traced to particular certificates of
deposit. This fact strongly suggests that the deposits should be
insured up to $100,000 for the beneficial interest of each investor as
opposed to being insured up to only $100,000 for the entire state 529
tuition savings plan. Accordingly, the FDIC has decided to amend its
insurance regulations so that the deposits of a state public
instrumentality that is an investment trust for a qualified tuition
savings program under section 529 of the Internal Revenue Code may be
insured on a ``pass-through'' basis provided that (1) each deposit may
be traced to one or more particular investors; and (2) the FDIC's
disclosure rules for ``pass-through'' coverage have been satisfied.
The FDIC is not amending its rules for other investment
governed by the FDIC's regulation at 12 CFR 330.11(a)(2). Generally,
such trusts do not function in a manner similar to qualified tuition
savings programs. In addition, such trusts do not exist for the same
purpose as qualified tuition savings programs. In providing tax
benefits for state-sponsored qualified tuition savings programs,
Congress intended ``to encourage persons to save to meet post-secondary
educational expenses.'' S. Rep. No. 104-281, at 106 (1996), reprinted
in 1996 U.S.C.C.A.N. 1474, 1580. Providing ``pass-through'' coverage
for the deposits of qualified tuition savings programs will be
consistent with this purpose. Without ``pass-through'' coverage,
persons may choose not to participate in these programs.
III. Interim Final Rule and Request for Comments
Under the Administrative Procedure Act (APA), an agency
must publish a proposed rule prior to adopting a final rule. An
exception exists for cases in which ``the agency for good cause finds *
* * that notice and public procedure thereon are impractical,
unnecessary, or contrary to the public interests.'' 5 U.S.C.
553(b)(3)(B). In such cases, the agency must incorporate and explain
this finding in the published final rule. Id.
Here, the publication of a proposed rule is contrary to the
interest because a few states--relying upon advice from the FDIC
staff--already have established qualified tuition savings programs with
bank deposit options.\3\ Consequently, an issue exists as to the
insurance coverage of funds already invested by the participants in
these programs. In making these investments, the participants may have
relied upon the availability of ``pass-through'' insurance coverage. As
previously discussed, ``pass-through'' coverage may not be available
under the FDIC's existing regulation in interaction with the tax and
federal securities laws.
\3\ The advice rendered by the FDIC staff was based upon the
plan documents submitted to the FDIC. These documents described the
participants or investors as the owners of the deposits.
In order to safeguard participants' funds, the FDIC has
revise its regulations through this interim final rule as opposed to
leaving the insurance coverage of the funds in doubt during a comment
Under the APA, a rule generally must be published at least 30
prior to the rule's effective date. An exception exists for ``a
substantive rule which grants or recognizes an exemption or relieves a
restriction.'' 5 U.S.C. 553(d)(1). Another exception exists for cases
in which the agency finds ``good cause.'' 5 U.S.C. 553(d)(3). In this
case, the new rule grants an exemption to the FDIC's regulation
providing that investment or business trusts must be treated as
corporations for purposes of determining deposit insurance coverage.
See 12 CFR 330.11(a)(2). This exemption is necessary in order to
safeguard the funds invested by participants in qualified tuition
savings programs. Accordingly, the FDIC finds good cause for making the
new rule effective immediately.
Although good cause exists for the promulgation of a final
the FDIC is
interested in receiving comments as to how the rule might be improved.
Therefore, comments are requested. Following the comment period, the
FDIC will make needed changes, if any.
Paperwork Reduction Act
This rule contains no new collections of information as
the Paperwork Reduction Act. See 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
A regulatory flexibility analysis is required only when the
must publish a notice of proposed rulemaking. See 5 U.S.C. 603, 604.
Because the amendment to part 330 is being published in interim final
form without a notice of proposed rulemaking, no regulatory flexibility
analysis is required.
Small Business Regulatory Enforcement Fairness Act
In accordance with the Small Business Regulatory Enforcement
Fairness Act, the FDIC will report this rule to Congress so that the
rule may be reviewed. See 5 U.S.C. 801 et seq.
List of Subjects in 12 CFR Part 330
Bank deposit insurance, Banks, Banking, Reporting and
requirements, Savings and loan associations, Trust and trustees.
For the reasons set forth in the preamble, the Board of Directors of
the Federal Deposit Insurance Corporation hereby amends part 330 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:
2. Section 330.11(a)(2) is revised to read as follows:
Sec. 330.11 Accounts of a corporation, partnership or
(a) * * *
(2) Notwithstanding any other provision of this part, any
other business arrangement which has filed or is required to file a
registration statement with the Securities and Exchange Commission
pursuant to section 8 of the Investment Company Act of 1940 (15 U.S.C.
80a-8) or that would be required so to register but for the fact it is
not created under the laws of the United States or a state or but for
sections 2(b), 3(c)(1), or 6(a)(1) of that act shall be deemed to be a
corporation for purposes of determining deposit insurance coverage. An
exception to this paragraph (a)(2) shall exist for any trust or other
business arrangement established by a state or that is a state agency
or state public instrumentality as part of a qualified tuition savings
program under section 529 of the Internal Revenue Code (26 U.S.C.
529)). A deposit account of such a trust or business arrangement shall
not be deemed to be the deposit of a corporation provided that: The
funds in the account may be traced to one or more particular investors
or participants; and the existence of the trust relationships are
disclosed in accordance with the requirements of Sec. 330.5. If these
conditions are satisfied, each participant's funds shall be insured to
* * * * *
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Dated at Washington, DC, this 16th day of May, 2005.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 05-11212 Filed 6-8-05; 8:45 am]