[Federal Register Volume 61, Number 100 (Wednesday, May 22, 1996)]
[Proposed Rules]
[Pages 25596-25598]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12780]



 ========================================================================
 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 61, No. 100 / Wednesday, May 22, 1996 / 
Proposed Rules  

[[Page 25596]]



FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 330

RIN 3064-AB73


Simplification of Deposit Insurance Rules

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: The Board of Directors of the Federal Deposit Insurance 
Corporation (FDIC) is seeking comment on whether the deposit insurance 
rules (insurance regulations) should be simplified and, if so, how. If 
the Board finds simplification to be warranted, it will propose 
specific amendments on which public comment will then be invited. The 
purpose of this notice is to solicit comments to help guide the 
possible preparation of a proposed rule. This notice presents only a 
general description of the insurance simplification options being 
considered and includes no regulatory text.

DATES: Written comments must be received by the FDIC on or before 
August 20, 1996.

ADDRESSES: Written comments are to be addressed to the Office of the 
Executive Secretary, Federal Deposit Insurance Corporation, 550 17th 
Street, N.W., Washington, D.C. 20429. Comments may be hand-delivered to 
Room F-402, 1776 F Street, N.W., Washington, D.C. 20429, on business 
days between 8:30 a.m. and 5 p.m. (FAX number: (202) 898-3838; Internet 
address: [email protected]). Comments will be available for inspection 
in the FDIC Public Information Center, room 100, 801 17th Street, N.W., 
Washington, D.C., between 9:00 a.m. and 5:00 p.m. on business days.

FOR FURTHER INFORMATION CONTACT: Joseph A. DiNuzzo, Acting Senior 
Counsel, Legal Division, (202) 898-7349; Adrienne George, Attorney, 
Legal Division, (202) 898-3859; Federal Deposit Insurance Corporation, 
550 17th Street, N.W., Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION:

Background

    One of the FDIC's corporate operating projects under its Strategic 
Plan is to simplify the deposit insurance rules. The purpose is to 
promote public understanding of deposit insurance and to increase 
financial institution and consumer understanding of deposit insurance. 
This Advance Notice of Proposed Rulemaking (Notice) is one of the steps 
in realizing the project's goals.
    This effort to simplify the FDIC's insurance regulations, found in 
12 CFR part 330 (part 330), also is intended to satisfy the provisions 
in section 303(a) of the Riegle Community Development and Regulatory 
Improvement Act of 1994, 12 U.S.C. 4803(a), to reduce regulatory burden 
and improve efficiency.
    The FDIC revised its insurance regulations twice in the recent 
past. The first time, in 1990, was necessitated by the termination of 
the Federal Savings and Loan Insurance Corporation (FSLIC). The 
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 
(FIRREA) (Pub. L. 101-73, 103 Stat. 183 (1989)) required the FDIC to 
issue uniform insurance regulations for deposits in all insured 
depository institutions, including those previously insured by the 
FSLIC. The second set of recent changes in the FDIC insurance rules 
were made pursuant to provisions in the Federal Deposit Insurance 
Corporation Improvement Act of 1991 (FDICIA) (Pub. L. 102-242 (1991)). 
A provision in FDICIA, in essence, limited the insurance coverage of 
employee benefit and retirement plans. Also, in February 1995, the FDIC 
issued disclosure requirements in connection with the limited 
availability of insurance for employee benefit plan accounts, 60 FR 
7701 (Feb. 9, 1995).
    The amendments made to the insurance rules in 1990 not only 
reconciled differences between the FSLIC insurance regulations and the 
then-existing FDIC regulations, they also revised the insurance 
regulations to, among other things, better organize and define terms 
used in the regulations, convert long-standing interpretive opinions 
into regulations, resolve outstanding issues and clarify ambiguous 
provisions.
    Although the insurance rules were revised relatively recently, the 
Corporation believes, preliminarily, that at least some additional 
modification to and simplification of the insurance rules would be 
helpful. The need for these changes has been brought to the FDIC's 
attention in several ways, especially through the steady receipt of 
letters and phone calls on insurance questions. Experience with bank 
and thrift failures also has enabled the staff to identify procedural 
aspects of the regulations which, when applied in accordance with the 
regulations, may prove unfair to certain depositors in some situations.
    The FDIC must be mindful of the applicable statutory parameters in 
considering whether and to what extent to modify the insurance 
regulations. The general statutory basis for and guidance on deposit 
insurance is found in section 11(a) of the Federal Deposit Insurance 
Act (FDI Act), 12 U.S.C. 1821(a), which provides, in relevant part, 
that deposits are insured up to $100,000 based on the ``right'' and 
``capacity'' in which the deposits are maintained. The FDIC interprets 
the ``right-and-capacity'' criterion as essentially meaning ownership. 
Thus, the rules provide ``separate'' insurance coverage for different 
types of accounts which are owned in different ways. For example, 
accounts owned by an individual are not added to joint accounts in 
which that same individual has an ownership interest. ``Separate'' 
insurance means that each category of account in which a person has an 
ownership interest is covered for up to $100,000 separately insured 
from the funds in other categories of accounts.

Possible Areas of Simplification

    Preliminarily, the Board believes that certain technical and 
moderate substantive revisions to the deposit insurance rules may be 
warranted. Technical revisions would entail rewriting ambiguous 
provisions of the rules and generally making the rules easier to 
understand. Moderate substantive revisions would entail making some 
substantive changes to the rules (and statute) but the FDIC intends to 
retain the principles that insurance is based on deposit ownership and 
that separate insurance coverage within the same institution depends 
upon the different ``rights and capacities'' in which deposits can be 
held.

[[Page 25597]]

    The FDIC has identified the following possible revisions to the 
insurance regulations and laws:
    1. Rewrite certain parts of the rules to make them clearer and 
easier to understand. Ambiguous and potentially ambiguous provisions of 
the rules would be rewritten and part 330 might be reordered and 
reorganized.
    2. Eliminate step one of the two steps involved in determining 
insurance coverage for joint accounts. Joint ownership is one of the 
account categories that qualifies for separate insurance coverage. 12 
CFR 330.7. Thus, an individual who has an individual deposit and 
interests in joint accounts at the same insured bank or thrift would be 
insured for up to $100,000 per category of account. Currently deposit 
insurance for joint accounts is determined by a two-step process: 
first, all joint accounts that are identically owned (i.e., held by the 
same combination of individuals) are added together and the combined 
total is insurable up to the $100,000 maximum; second, each person's 
interests in joint accounts involving different combinations of 
individuals are combined and the total is insured up to the $100,000 
maximum.
    One option to simplify the current joint account rules is to 
eliminate the first step of the two-step process. Under this 
alternative, all funds held in joint accounts would be allocated among 
the owners and each owner's interests in all joint accounts (held at 
the same depository institution) would be added and insured up to 
$100,000 in the aggregate.
    3. Revise the recordkeeping rules allowing the FDIC more 
flexibility (for the benefit of depositors) in determining the 
ownership of deposits held in a custodial or fiduciary capacity. The 
insurance regulations impose specific recordkeeping requirements as a 
precondition for insuring parties other than those whose names appear 
on the depository institution's deposit account records. 12 CFR 330.4. 
For example, if A is acting as an agent for B, C, and D and places 
funds belonging to them in an insured bank or thrift, the institution's 
deposit account records must show that A is holding the account as an 
agent in order for the FDIC to recognize the ownership interests of B, 
C and D. The FDIC will then insure the account as if it were held 
directly by B, C, and D (the owners of the account) as long as the 
institution's deposit account records or the agent's records 
(maintained in ``good faith and in the regular course of business'') 
evidence B, C and D's ownership interests in the account. In this 
context, we say that the insurance ``passes-through'' the agent to the 
owner(s) of the account.
    The recordkeeping requirements intentionally limit the FDIC's 
ability to consider evidence outside the deposit account records of an 
insured institution in determining the ownership of deposits. They 
establish a presumption that deposited funds are actually owned in the 
manner indicated on the account records. Those records are binding on 
the depositor if they are ``clear and unambiguous''. The FDIC has the 
discretion, however, to decide whether records are clear and 
unambiguous. If the FDIC determines that the records are unclear or 
ambiguous, then it may consider evidence other than the deposit account 
records. The question is whether this discretion provides the FDIC with 
sufficient flexibility to recognize beneficial and/or multiple 
ownership of accounts when such ownership is not reflected on the bank 
or thrift's deposit account records.
    The objective in amending the recordkeeping requirements would be 
to allow the FDIC staff more flexibility to consider the actual 
ownership interests in deposit accounts and thereby prevent possible 
hardships. The proper balance must be struck, however, to avoid fraud 
in post-failure situations and to enable the FDIC to reasonably and 
expeditiously calculate the insured deposits at failing institutions. 
One option would be to amend the rules to allow the FDIC to look beyond 
the deposit accounts records of the depository institution where 
account titles are indicative of a fiduciary relationship. Two examples 
would be accounts held by attorneys and those held by entities such as 
title companies, who commonly hold funds for others.
    4. Consider changing the rules on ``payable upon death'' accounts. 
The insurance rules provide for separate coverage for funds owned by an 
individual and deposited into any account commonly referred to as a 
``payable-on-death'' account, tentative or ``Totten'' trust account, 
revocable trust account, or similar account (POD accounts). 12 CFR 
330.8. The account must evidence an intention that upon the death of 
the owner the funds shall belong to certain qualifying beneficiaries. 
The qualifying beneficiaries are limited to the owner's spouse, 
children and grandchildren. The owner is insured up to $100,000 as to 
each such named qualifying beneficiary, separately from any other 
accounts of the owner or the beneficiaries. Thus, if the individual 
names his spouse, three children and two grandchildren as 
beneficiaries, the account would be insured up to $600,000.
    The FDI Act does not expressly require that POD accounts receive 
separate insurance coverage. The purpose of the POD separate insurance 
rule is to track state laws that allow for the so-called ``poor-man's 
will'' in which deposit account balances can be transmitted upon the 
death of the account owner to beneficiaries named in the account 
without an underlying trust document or will. It is support for this 
will-substitute that underlies the separate insurance for POD accounts. 
The FDIC limits the qualifying beneficiaries to the spouse, children 
and grandchildren of the account owner because it believes that such 
limitation strikes a reasonable balance between providing separate 
coverage to those most likely to be named as beneficiaries of a POD 
account while not overly expanding this category of deposit insurance 
coverage.
    In the context of simplifying the insurance regulations, the 
question arises whether the FDIC should consider revising the POD rules 
on qualifying degrees of kinship. The FDIC, therefore, requests 
comments on whether and, if so, how the POD insurance rules should be 
revised.
    5. Consider modifying the way the FDIC insures certain types of 
accounts upon the death of the owner(s) of the accounts. The ownership 
interest of a deposit account often changes upon the death of the owner 
of the account. If the beneficiaries/executor of the decedent do not 
act immediately after the decedent's death to change the nature of the 
account, insurance coverage may be decreased, sometimes significantly. 
For example, if a husband and wife hold a joint account, a payable-
upon-death account and two individual accounts in their respective 
names, the death of one spouse would result in the surviving spouse 
becoming the sole owner of the joint account and the payable-upon-death 
account. Thus, the accounts would be aggregated with the surviving 
spouse's individual account, possibly resulting in a substantial 
reduction in insurance coverage.
    The former FSLIC, as a matter of policy, allowed a grace period of 
six months following the death of a depositor for the decedent's 
deposits to be restructured. If an insured thrift failed during the 
grace period and additional insurance would be available if the 
decedent had not died, the FSLIC insured the account(s) based on the 
account ownership shown on the institution's records as if the decedent 
were still living. The reason for the FSLIC policy was to ``lessen the

[[Page 25598]]

hardship'' that might be caused otherwise. In the course of revising 
the FDIC insurance regulations in 1990 (in conjunction with FSLIC's 
termination) the FDIC decided against adopting the FSLIC's grace-period 
policy because of the questionable underlying legal basis. The argument 
is that insurance coverage is based on the ownership of the deposits. 
If under the applicable state law the ownership of an account changes 
immediately upon the account owner's death, then the FDIC should 
recognize that change immediately.
    The FDIC has limited flexibility to amend its regulations on the 
insurance of accounts upon an owner's death. That is because, as 
indicated above, deposit insurance is statutorily based on deposit 
ownership. If the ownership of a particular deposit changes 
automatically under the applicable state law upon the owner's death, 
then the insurance coverage may change also. That is the FDIC's long-
standing position on the issue. Although the FDIC has concerns about 
whether a sound legal basis exists for providing a ``grace period'' 
(for insurance purposes) on accounts owned by a person who dies, the 
FDIC welcomes comments on this issue.
    6. Recommend that the FDI Act be amended to change the way employee 
benefit plans are insured. Under an amendment to the FDI Act made by 
FDICIA, pass-through insurance coverage is not available to employee 
benefit plan deposits that are accepted by an insured bank or thrift 
when the institution does not meet prescribed capital requirements. 12 
U.S.C. 1821(a)(1)(D). If an institution accepts employee benefit plan 
deposits at a time when it is not sufficiency capitalized, such 
deposits are insured only up to $100,000 per plan (as opposed to 
$100,000 per participant or beneficiary). The FDICIA-originated 
provision is the only one in the FDI Act and regulations to base 
insurance coverage on the capital sufficiency of the insured 
institution where the deposits are placed. The statute is complex and 
very difficult for the industry and the public to understand. Moreover, 
if deposits are made with an insured bank or thrift that does not meet 
the prescribed capital requirements, there is no disadvantage to the 
institution. The depositor is the disadvantaged party.
    The FDIC believes Congress should replace the employee benefit plan 
provision with a general prohibition against insured institutions 
accepting employee benefit plan deposits when they are not sufficiently 
capitalized. This would be consistent with the statute pertaining to 
brokered deposits and, thus, would prevent the disadvantage to 
depositors if an insured institution provides incorrect information 
about its capital condition. Comments are requested on whether the FDIC 
should recommend this statutory amendment to the Congress.
    7. Consider revising the rules on living trust accounts. A ``living 
trust'' is a formal trust in which the owner retains control of the 
trust assets during his or her lifetime and designates the 
beneficiaries of the assets upon his or her death. The owner may revoke 
or change the terms of the trust during his or her lifetime. In 1993 
the FDIC Legal Division prepared guidelines on the insurance of 
revocable accounts, with an emphasis on living trusts. The guidelines 
are very detailed and somewhat complex. At the same time the Legal 
Division prepared the guidelines on living trusts, the FDIC also 
adopted an informal policy not to review complex living trust documents 
to determine POD coverage but, instead, to recommend that persons 
inquiring about such coverage consult with the lawyer who drafted the 
living trust. Despite the availability of the FDIC guidelines on living 
trusts and the existence of the FDIC's current policy not to review 
trust documents, the FDIC still receives numerous questions about the 
insurance of POD accounts held in connection with living trusts.
    One possibility in simplifying the insurance rules on living trusts 
is to limit the scope of the POD regulation to accounts which name 
qualifying beneficiaries without reference to any underlying trust 
documents. The rule would apply only to the traditional POD account 
intended as a free-standing will substitute and would not apply to any 
other type of revocable trust extraneous to the POD account itself. 
This interpretation of the POD provision would be consistent with the 
original rationale for extending separate insurance coverage for this 
category of account and revise the coverage rules for the formal type 
of revocable account which has added unintended complexity and caused 
expansion to this category of coverage.

Request for Comment

    The Board of Directors of the FDIC is seeking comment on all of the 
above-mentioned possible means of simplifying the deposit insurance 
rules, including the likely effect of such changes on consumers and the 
banking industry. The Board also is seeking suggestions on any other 
ways that the rules might be streamlined, simplified and clarified.

    By order of the Board of Directors.

    Dated at Washington, D.C., this 14th day of May, 1996.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Deputy Executive Secretary.
[FR Doc. 96-12780 Filed 5-21-96; 8:45 am]
BILLING CODE 6714-01-P