FDIC Federal Register Citations
[Federal Register: October 28, 2005 (Volume 70, Number 208)]
[Rules and Regulations]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
SUMMARY: The FDIC is adopting a final rule governing the insurance
coverage of deposits of qualified tuition savings programs under
section 529 of the Internal Revenue Code. The final rule makes no
substantive changes to a previous interim final rule. Under the rule,
the deposits of a qualified tuition savings program will be insured on
a ``pass-through'' basis to the program participants. In other words,
the deposits will be insured up to $100,000 for the interest of each
participant in aggregation with the participant's other deposits (if
any) at the same insured depository institution.
DATES: The final rule will be effective on December 27, 2005.
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. Qualified Tuition Programs
Section 529 of the Internal Revenue Code provides tax
``qualified tuition programs.'' See 26 U.S.C. 529(a). Such programs
include prepaid tuition programs (which may be created by states or
educational institutions) as well as tuition savings programs (which
must be sponsored by states or public instrumentalities). See 26 U.S.C.
529(b)(1). A tuition savings program is defined by section 529 as a
program 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 U.S.C. 529(b)(1)(A)(ii).
Under laws administered by the Securities and Exchange
(SEC), interests in a qualified tuition savings program must be sold by
a public instrumentality (such as a state investment trust) so that the
interests in the program will be exempt from registration under section
2(b) of the Investment Company Act. See 15 U.S.C. 80a-2(b). This means
that a participant in a state qualified tuition savings program cannot
acquire an asset through the program or public instrumentality. Rather,
the participant must acquire an interest or account in the public
Some state 529 programs have provided participants with the
of investing their funds directly in bank deposits. Other state
programs have expressed an interest in creating such an option. As
stated above, participants in a 529 program must acquire an interest in
the public instrumentality. They cannot acquire a particular asset.
This means that the public instrumentality, not the participant, will
be the legal owner of any bank deposit purchased by or through the
The fact that any bank deposit will belong to the public
instrumentality raises issues under the FDIC's insurance regulations.
These issues are discussed below.
II. The FDIC's 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 business or investment trusts that must file
registration statements with the SEC. Generally, this rule also applies
to investment trusts that would be required to file registration
statements with the SEC ``but for'' certain sections of the Investment
Company Act, including section 2(b).
An exception exists for the deposits of a qualified tuition
program sponsored by a state or public instrumentality. Although such
programs are covered by section 2(b) of the Investment Company Act, the
FDIC does not treat the public instrumentality as a corporation with
insurance coverage limited to $100,000 in the aggregate. Rather, the
FDIC provides insurance coverage up to $100,000 for the interest of
each investor or plan participant. The FDIC provides this ``pass-
through'' coverage through an interim final rule published in June of
2005. See 70 FR 33689 (June 9, 2005).
In adopting the interim final rule, the FDIC relied upon the
that qualified tuition savings programs--in placing participants' funds
at banks in a manner that satisfies the FDIC's requirements for ``pass-
through'' insurance coverage--do not function in the manner of ordinary
business trusts or investment companies. In a qualified tuition savings
program, the deposits are equivalent to brokered deposits. Assuming the
satisfaction of certain disclosure requirements, brokered deposits are
insured on a ``pass-through'' basis to the broker's customers. See 70
FR at 33691. Also, in adopting the interim final rule, the FDIC relied
upon the Congressional purpose behind section 529. That purpose is to
encourage persons to save money for post-secondary educational
expenses. Without ``pass-through'' coverage of deposits, some persons
may choose not to participate in 529 programs. See id.
III. The Public Comments
In response to the publication of the interim final rule, the
received seven public comments. These comments were submitted by three
bankers' associations, one state regulator, one holding company, one
bank, and one banking information company.
One of the comments did not address the substance of the rule
noted a grammatical error (involving noun/verb agreement). The other
comments supported the interim final rule, though two changes were
suggested. Each of the suggested changes is discussed in turn below.
First, a recommendation was made to create a separate
category for the deposits of qualified tuition savings programs so that
a participant's funds in a 529 deposit would not be aggregated with the
participant's funds in other deposit accounts (if any) at the same
insured depository institution. This suggested treatment would be
similar to the FDIC's treatment of the deposits of employee benefit
plans. See 12 CFR 330.14.
Although the FDIC recognizes the deposits of employee benefit
as a separate ownership category for purposes of applying the $100,000
insurance limit, this special treatment is based upon a specific
statutory provision. See 12 U.S.C. 1821(a)(1)(D). No such statutory
provision exists for the deposits of qualified tuition savings
programs. In the absence of any such statutory provision, the FDIC is
reluctant to recognize a new deposit insurance ownership category.
Moreover, no apparent reason exists to treat the deposits of
qualified tuition savings programs differently than deposits held by
agents or custodians. In the case of such deposits, the FDIC provides
``pass-through'' insurance coverage (assuming the satisfaction of
certain disclosure requirements) but the FDIC does not insure such
deposits separately from all other deposits. Rather, the FDIC
aggregates the funds of each owner with the owner's other accounts (if
any) at the same insured depository institution. Under these
circumstances, the FDIC has decided not to create a new deposit
ownership category for the deposits of qualified tuition savings
programs under section 529 of the Internal Revenue Code.
Second, a recommendation was made to include specific
about treating each participant's funds ``as a deposit account of the
participant.'' Although this language would not change the substance of
the rule, the suggested language could clarify the effect (i.e., to
provide separate insurance coverage for the funds of each participant).
For this reason, the FDIC has adopted the suggested language.\1\
\1\ In advocating the suggested change, this comment
the change as follows: ``[The change] would * * * further ensure
that the participant's funds * * * would be aggregated with other
deposit accounts of the participant held in the same bank, where
appropriate, or would be appropriately segregated from other deposit
accounts held by the same participant provided there are separate
qualifying designated beneficiaries.'' The reference to ``qualifying
beneficiaries'' suggests that insurance coverage may be sought under
12 CFR 330.10. That section of the insurance regulations deals with
revocable testamentary trust accounts. Under 12 CFR 330.10, such
accounts are insured up to $100,000 for the funds contributed by
each owner for the benefit of each beneficiary (with ``beneficiary''
meaning a person who shall become the owner of the funds upon the
owner's death). See 12 CFR 330.10(a). This ``per beneficiary''
coverage is not available, however, unless certain requirements are
satisfied. First, the title of the bank account must reflect the
testamentary nature of the account. This requirement can be
satisfied through the use of a term such as ``payable-on-death'' or
``POD.'' See 12 CFR 330.10(b). Second, the names of the testamentary
beneficiaries must be identified somewhere in the bank's deposit
account records. See id. Third, the beneficiaries must be
``qualifying beneficiaries'' (i.e., the owner's spouse, children,
grandchildren, parents or siblings). See 12 CFR 330.10(a). By
expressly providing that the funds of each participant will be
treated as a separate ``account,'' the FDIC does not mean to affect
any of the requirements for obtaining insurance coverage under 12
CFR 330.10. For example, as a result of the first requirement, no
coverage will be available under 12 CFR 330.10 unless the bank
establishes an account with ``POD'' or similar term in the account
title. Also, coverage under 12 CFR 330.10 will not be available for
a participant's funds in a qualified tuition savings program unless
the participant is permitted under 26 U.S.C. 529 and the applicable
state law to designate one or more beneficiaries who will receive
the funds in the event of the participant's death.
IV. The Final Rule
Under the final rule, the deposits of a qualified tuition
program under section 529 of the Internal Revenue Code will not be
treated as the deposits of a corporation with coverage limited to
$100,000 in the aggregate. Rather, the deposits will be insured up to
$100,000 for the interest of each participant or investor (in
aggregation with any other deposits of the participant or investor at
the same insured depository institution). Such ``pass-through''
coverage will not be available, however, unless two requirements are
satisfied. First, the funds in the account must be traceable to one or
more particular investors. Second, the existence of any trust or
custodial relationships must be disclosed in accordance with the FDIC's
requirements at 12 CFR 330.5.
In providing insurance coverage up to $100,000 for each
``participant,'' the FDIC means to provide coverage up to $100,000 for
each owner of the securities issued by the public instrumentality. In
the 529 programs reviewed by the FDIC, these ``participants'' are the
persons who contribute the funds. These persons may be referred to as
``account owners.'' A distinction exists between these contributors or
``account owners'' and the ``designated beneficiaries'' (i.e., the
persons who will go to college someday).
In the programs reviewed by the FDIC, the contributors retain
rights with respect to the funds (e.g., the right to withdraw money
under certain circumstances or the right to change the beneficiary).
Assuming that the qualified tuition savings program is structured in
this manner so that the securities are owned by the contributors, then
the FDIC will treat the contributors as the ``participants.'' If the
program is structured so that the securities are owned by the
``designated beneficiaries,'' however, then the FDIC will treat the
beneficiaries as the ``participants.'' For example, the beneficiary
would be the ``participant'' if no one but the beneficiary possesses
the right to withdraw funds or to name a different beneficiary.
Again, the FDIC simply means to provide ``pass-through''
coverage to the actual owners of the securities. The FDIC does not mean
to dictate the terms of a qualified tuition savings program. Such
programs must adhere to the requirements of section 529 and the
applicable state law.
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 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 is disclosed
in accordance with the requirements of Sec. 330.5. If these conditions
are satisfied, each participant's funds shall be insured as a deposit
account of the participant.
* * * * *
Dated at Washington, DC, this 6th day of October, 2005.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
[FR Doc. 05-20766 Filed 10-27-05; 8:45 am]