[Federal Register Volume 70, Number 110 (Thursday, June 9, 2005)]
[Rules and Regulations]
[Pages 33689-33692]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-11212]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 330

RIN 3064-AC90


Deposit Insurance Coverage; Accounts of Qualified Tuition Savings 
Programs Under Section 529 of the Internal Revenue Code

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Interim final rule; request for comments.

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SUMMARY: The FDIC is revising its insurance regulations for accounts of 
qualified tuition savings programs under section 529 of the Internal 
Revenue Code.
    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

[[Page 33690]]

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: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Agency Web Site: http://www.fdic.gov/regulations/laws/federal/propose.html. Follow the instructions for submitting comments.
     E-mail: [email protected]. Include ``Part 330--Accounts of 
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 
5 p.m.
    Instructions: All submissions must include the agency name and use 
the title ``Part 330--Accounts of Qualified Tuition Programs.'' The 
FDIC may post comments on its Web site at: http://www.fdic.gov/regulations/laws/federal/propose.html.
     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.

SUPPLEMENTARY INFORMATION:

I. The FDIC's Existing Regulation

    Under the applicable section of the FDIC's insurance regulations, 
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 purpose 
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 must 
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 
U.S.C. 80a-2(b).\1\
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    \1\ In 1988, the FDIC reconsidered its treatment of investment 
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).
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II. Qualified Tuition Programs

    Section 529 of the Internal Revenue Code provides tax benefits for 
``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 
U.S.C. 529(b)(1)(A)(ii).
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    \2\ Section 529 also authorizes the creation of prepaid tuition 
programs by states or by educational institutions under certain 
conditions.
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    Some state programs have permitted participants to have the option 
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 the 
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

[[Page 33691]]

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 
investors.
    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 tuition 
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 brought to 
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 
been satisfied.
    As stated above, in the plans reviewed by the FDIC, the funds of 
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 trusts 
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 generally 
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 public 
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.
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    \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.
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    In order to safeguard participants' funds, the FDIC has decided to 
revise its regulations through this interim final rule as opposed to 
leaving the insurance coverage of the funds in doubt during a comment 
period.
    Under the APA, a rule generally must be published at least 30 days 
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 rule, 
the FDIC is

[[Page 33692]]

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 defined by 
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 agency 
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 recordkeeping 
requirements, Savings and loan associations, Trust and trustees.

0
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

0
1. The authority citation for part 330 continues to read as follows:

    Authority: 12 U.S.C. 1813(l), 1813(m), 1817(i), 1818(q), 
1819(Tenth), 1820(f), 1821(a), 1822(c).


0
2. Section 330.11(a)(2) is revised to read as follows:


Sec.  330.11  Accounts of a corporation, partnership or unincorporated 
association.

    (a) * * *
    (2) 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 (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 
the participant.
* * * * *

    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]
BILLING CODE 6714-01-P