[Federal Register Volume 73, Number 220 (Thursday, November 13, 2008)]
[Notices]
[Pages 67155-67157]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-26867]


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FEDERAL DEPOSIT INSURANCE CORPORATION


Insurability of Funds Underlying Stored Value Cards and Other 
Nontraditional Access Mechanisms

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Notice of New General Counsel's Opinion No. 8.

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SUMMARY: In 1996, the FDIC published General Counsel's Opinion No. 8 
(``GC8''). Through that opinion, the Legal Division of the FDIC sought 
to clarify the meaning of the term ``deposit'' as that term relates to 
funds underlying stored value cards. Subsequently, the banking industry 
developed new types of stored value products with the result that GC8 
is obsolete. For this reason, the Legal Division has decided to replace 
GC8. Under the new GC8, all funds underlying stored value products will 
be treated as ``deposits'' if they have been placed at an insured 
depository institution. As a result, all such funds will be subject to 
FDIC assessments. Also, all such funds will be insured up to the 
insurance limit. Whether the funds are insurable to the holders of the 
access mechanisms, as opposed to the distributor of the access 
mechanisms, will depend upon the satisfaction of the FDIC's standard 
requirements for obtaining ``pass-through'' insurance coverage. This 
treatment of the funds underlying stored value products does not differ 
from the treatment set forth in a proposed rule published by the FDIC 
in August of 2005. See 70 FR 45571 (August 8, 2005).
    The new GC8 will provide guidance to the public about the insurance 
coverage of funds underlying nontraditional access mechanisms. Also, 
the new GC8 will promote accuracy and consistency by insured depository 
institutions in reporting ``deposits'' for inclusion in an 
institution's assessment base.

FOR FURTHER INFORMATION CONTACT: Christopher L. Hencke, Counsel, Legal 
Division, (202) 898-8839, Federal Deposit Insurance Corporation, 550 
17th Street, NW., Washington, DC 20429.

Text of General Counsel's Opinion

    By: Sara A. Kelsey, General Counsel, FDIC.

Introduction

    The evolution of stored value cards since the issuance of the 
original General Counsel's Opinion No. 8, in 1996, has created the need 
to revisit the issue of deposit insurance coverage for the holders of 
such cards. Stored value cards now commonly serve as the delivery 
mechanism for vital funds such as employee payroll and government 
payments such as benefits and tax refunds. Network branded reloadable 
stored value cards also serve as an alternative mechanism for holders 
to access funds held in a bank for their benefit. This new General 
Counsel's Opinion No. 8 seeks to clarify the deposit insurance coverage 
available to the holders of stored value cards whose funds are held for 
their benefit in insured depository institutions.
    The FDIC is responsible for insuring ``deposits'' at insured 
depository institutions. See 12 U.S.C. 1821. Also, the FDIC is 
responsible for collecting assessments on ``deposits.'' See 12 U.S.C. 
1817. In fulfilling these responsibilities, the FDIC must be able to 
determine the existence of ``deposits'' at insured depository 
institutions.
    In the Federal Deposit Insurance Act (``FDI Act''), the term 
``deposit'' is defined at section 3(l). See 12 U.S.C. 1813(l). In 
general, a ``deposit'' is ``the unpaid balance of money or its 
equivalent received or held by a bank or savings association.'' 12 
U.S.C. 1813(l)(1). The definition encompasses the funds in checking 
accounts, savings accounts and certificate of deposit accounts. See id. 
It also includes the funds received by a bank or savings association in 
exchange for the issuance of traveler's checks. See id. Similarly, the 
term ``deposit'' includes the funds underlying official checks and 
money orders. See 12 U.S.C. 1813(l)(4).
    In short, the statutory definition of ``deposit'' at section 3(l) 
of the FDI Act is very broad. By express terms, section 3(l) 
encompasses almost all funds subject to transfer or withdrawal through 
traditional access mechanisms (such as checks, traveler's checks, 
official checks and money orders) provided that the funds have been 
placed at an insured depository institution.\1\
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    \1\ The only exceptions are certain narrow exceptions expressly 
created by Congress (such as an exception for bank obligations 
payable solely outside the United States). See 12 U.S.C. 1813(l)(5).
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    Following the failure of an insured depository institution, the 
FDIC is responsible for paying insurance on ``deposits.'' See 12 U.S.C. 
1821(f); 12 U.S.C. 1821(a). In applying the insurance limit, the FDIC 
must aggregate all deposits ``maintained by a depositor in the same 
capacity and the same right.'' 12 U.S.C. 1821(a)(1)(C). In other words, 
the FDIC must aggregate all deposits owned by a particular depositor in 
a particular ownership category. For example, the FDIC will aggregate 
all deposits held by a particular depositor in the form of ``single 
ownership accounts.'' The FDIC will provide separate insurance coverage 
for deposits in other ownership categories, such as ``joint ownership 
accounts'' or ``revocable trust accounts.'' See 12 CFR part 330.
    In applying the insurance limit, the FDIC must be able to determine 
the identities of depositors. This task is different than determining 
the existence of ``deposits.'' A depositor is the owner of a deposit, 
i.e., a creditor with a particular type of claim against a depository 
institution. In contrast, as previously discussed, a ``deposit'' is the 
money entrusted to the depository institution, i.e., the depository 
institution's obligation to repay the money.
    The FDI Act provides that the FDIC, in determining the identities 
of

[[Page 67156]]

depositors following the failure of an insured depository institution, 
may rely upon the records of the failed insured depository institution. 
See 12 U.S.C. 1822(c). In accordance with this statutory authority, the 
FDIC has promulgated rules for determining the owners of deposits 
placed at insured depository institutions by agents or custodians, 
i.e., deposits owned by persons who do not deal directly with the 
depository institution. First, the agency or custodial relationship 
must be disclosed in the account records of the insured depository 
institution, e.g., through an account title such as ``ABC Company as 
Custodian.'' See 12 CFR 330.5(b)(1). Second, the identities and 
interests of the actual owners must be disclosed in the records of the 
depository institution or records maintained by the custodian or other 
party. See 12 CFR 330.5(b)(2). Third, the deposits actually must be 
owned (under the contract between the parties or any applicable law) by 
the named owners and not by the custodian. See 12 CFR 330.3(h); 12 CFR 
330.5(a)(1).
    When the FDIC's requirements are satisfied, the insurance coverage 
``passes through'' the custodian, i.e., the nominal accountholder, to 
each of the actual owners of the deposit. See 12 CFR 330.7(a). When the 
requirements are not satisfied, the named accountholder is treated as 
the owner.
    The rules summarized above can be applied to the funds underlying 
stored value products. In the case of such funds, two issues must be 
addressed: (1) whether (or when) the funds should be classified as 
``deposits''; and (2) whether (or when) the holders of the access 
mechanisms (as opposed to the distributor of the access mechanisms) 
should be treated as depositors. Stored value products are discussed in 
greater detail below.

Stored Value Products

    Stored value products, or ``prepaid products,'' may be divided into 
two broad categories: (1) Merchant products; and (2) bank products.
    A merchant card (also referred to as a ``closed-loop'' card) 
enables the cardholder to collect goods or services from a specific 
merchant or cluster of merchants. Generally, the cards are sold to the 
public by the merchant in the same manner as gift certificates. 
Examples are single-purpose cards such as cards sold by book stores or 
coffee shops. Another example is a prepaid telephone card.
    Merchant cards do not provide access to money at a depository 
institution. When a cardholder uses the card, the merchant is not paid 
through a depository institution. On the contrary, the merchant has 
been prepaid through the sale of the card. In the absence of money at a 
depository institution, no insured ``deposit'' will exist under section 
3(l) of the FDI Act. See FDIC v. Philadelphia Gear Corporation, 476 
U.S. 426 (1986).
    Bank cards are different. Bank cards (also referred to as ``open-
loop'' cards) provide access to money at a depository institution. In 
some cases, the cards are distributed to the public by the depository 
institution itself. In many cases, the cards are distributed to the 
public by a third party. For example, in the case of ``payroll cards,'' 
the cards often are distributed by an employer to employees. In the 
case of multi-purpose ``general spending cards'' or ``gift cards,'' the 
cards may be sold by retail stores to customers.
    A bank card usually enables the cardholder to effect transfers of 
funds to merchants through point-of-sale terminals. A bank card also 
may enable the cardholder to make withdrawals through automated teller 
machines (``ATMs''). In other words, a bank card provides access to 
money at a depository institution. The money is placed at the 
depository institution by the card distributor (or other company in 
association with the card distributor), but is transferred or withdrawn 
by the cardholders. In some cases, the card is ``reloadable'' in that 
additional funds may be placed at the depository institution for the 
use of the cardholder.
    This General Counsel's opinion does not address merchant cards 
because such cards do not involve the placement of funds at insured 
depository institutions. The applicability of this General Counsel's 
opinion is limited to bank cards and other nontraditional access 
mechanisms, such as computers, that provide access to funds at insured 
depository institutions.

``Deposits''

    The original GC8 did not address all types of stored value products 
offered by (or through) insured depository institutions. For example, 
it did not address systems in which the depository institution 
maintains a pooled self-described ``reserve account'' for all 
cardholders but also maintains an individual subaccount for each 
cardholder. Likewise, the original GC8 did not discuss systems in which 
the access mechanisms are distributed not by the insured depository 
institution but instead are distributed by a third party (such as the 
employer in the case of payroll cards or a retail store in the case of 
general spending cards). Hence, the original GC8 is obsolete and must 
be replaced.
    Having reconsidered the issue of whether funds underlying stored 
value products qualify as ``deposits,'' the Legal Division has 
concluded that such funds always should be treated as ``deposits'' 
provided that the funds have been placed at an insured depository 
institution. This conclusion is based upon the general premise that the 
funds underlying stored value cards and other modern access mechanisms 
are no different, in substance, than the funds underlying traditional 
access mechanisms such as checks, official checks, traveler's checks 
and money orders.
    In other words, the access mechanism is unimportant. Whether funds 
should be classified as ``deposits'' should not depend upon the access 
mechanism (or whether the access mechanism is a plastic card as opposed 
to a paper check). Rather, as recognized by the Supreme Court, the 
existence of a ``deposit'' depends upon whether ``assets and hard 
earnings'' have been entrusted to a bank. See FDIC v. Philadelphia Gear 
Corporation, 106 S. Ct. 1931 (1986).
    In concluding that the funds are ``deposits,'' the Legal Division 
relies upon paragraph 3(l)(1), paragraph 3(l)(3) and paragraph 3(l)(4) 
of the statutory definition. See 12 U.S.C. 1813(l)(1); 12 U.S.C. 
1813(l)(3). Each of these paragraphs is discussed in turn below.
    Paragraph 3(l)(1). This paragraph defines ``deposit'' as ``[t]he 
unpaid balance of money or its equivalent received or held by a bank or 
savings association in the usual course of business and for which it 
has given or is obligated to give credit, either conditionally or 
unconditionally, to a commercial, checking, savings, time, or thrift 
account.* * *'' 12 U.S.C. 1813(l)(1). Under this paragraph, funds are 
``deposits'' when a commercial entity (such as the employer in the case 
of payroll cards or a retail store in the case of general spending 
cards) places ``money or its equivalent'' at an insured depository 
institution (i.e., places funds into a ``commercial'' account). Also, 
under this paragraph, funds are ``deposits'' when placed into checking 
accounts. In addition, funds are ``deposits'' when given to a bank in 
exchange for a traveler's check. See id. Some stored value products are 
the functional equivalents of checks or traveler's checks.
    Paragraph 3(l)(3). This paragraph defines ``deposit'' as ``money 
received or held by a bank or savings association, or the credit given 
for money or its equivalent received or held by a bank or

[[Page 67157]]

savings association, in the usual course of business for a special or 
specific purpose.* * *'' 12 U.S.C. 1813(l)(3). Under this paragraph, 
funds are ``deposits'' when held by a bank for the ``special or 
specific purpose'' of covering withdrawal or transfer instructions from 
the holders of stored value cards or other nontraditional access 
mechanisms. In the original GC8, the Legal Division found that 
paragraph 3(l)(3) applies only to cases in which the customer's 
spending plans are very specific but such a narrow reading of the 
statute is not supported by the legislative history. See FDIC v. 
Philadelphia Gear Corporation, 106 S. Ct. 1931 (1986). Also, the Legal 
Division is unaware of any case in which a court found that a bank's 
liability did not qualify as a ``deposit'' because the customer's 
spending plans were insufficiently specific.
    Paragraph 3(l)(4). This paragraph defines ``deposit'' as 
``outstanding draft * * * cashier's check, money order, or other 
officer's check issued in the usual course of business for any 
purpose.* * *'' 12 U.S.C. 1813(l)(4). Some stored value products are 
the functional equivalents of cashier's checks or money orders.
    As outlined above, the statutory definition of ``deposit'' is very 
broad. The Legal Division concludes that this definition encompasses 
all funds underlying stored value cards and other nontraditional access 
mechanisms to the extent that the funds have been placed at an insured 
depository institution.
    A separate issue is whether the holder of an access mechanism (as 
opposed to the distributor of the access mechanism) should be treated 
as the insured depositor for the purpose of applying the insurance 
limit. This issue is addressed below.

Depositors

    Under the existing insurance regulations at 12 CFR part 330, the 
FDIC is entitled to rely upon the account records of the failed insured 
depository institution in determining the owners of deposits. See 12 
CFR 330.5. Therefore, in cases in which a separate account has been 
opened in the name of the holder of the access mechanism, the FDIC will 
recognize the holder as the owner of the deposit.
    In some cases, in an agency or custodial capacity, the distributor 
of the access mechanisms (or agent on behalf of the distributor) might 
open a pooled account for all holders of the access mechanisms. In such 
cases, the FDIC may provide ``pass-through'' insurance coverage (i.e., 
coverage that ``passes through'' the agent to the holders). See 12 CFR 
330.7. Such coverage is not available, however, unless certain 
requirements are satisfied. First, the account records of the insured 
depository institution must disclose the existence of the agency or 
custodial relationship. See 12 CFR 330.5(b)(1). This requirement can be 
satisfied by opening the account under a title such as the following: 
``ABC Company as Custodian for Cardholders.'' Second, the records of 
the insured depository institution or records maintained by the 
custodian or other party must disclose the identities of the actual 
owners and the amount owned by each such owner. See 12 CFR 330.5(b)(2). 
Third, the funds in the account actually must be owned (under the 
agreements among the parties or applicable law) by the purported owners 
and not by the custodian (or other party). See 12 CFR 330.3(h); 12 CFR 
330.5(a)(1). If these three requirements are not satisfied, the FDIC 
will treat the custodian (i.e., the named accountholder) as the owner 
of the deposits.
    It is encouraged that accurate information concerning FDIC 
insurance coverage be displayed on stored value cards. This information 
should include the name of the insured depository institution in which 
the funds are held. When appropriate, the card also should state that 
the funds are insured by the FDIC to the cardholder. These disclosures 
will provide the cardholder with important information concerning FDIC 
deposit insurance coverage.

Conclusion

    This opinion replaces the opinion published by the FDIC in 1996. 
Under this opinion, all funds underlying stored value cards and other 
nontraditional access mechanisms will be treated as ``deposits'' to the 
extent that the funds have been placed at an insured depository 
institution. If the FDIC's standard recordkeeping requirements are 
satisfied, the holders of the access mechanisms will be treated as the 
insured depositors for the purpose of applying the insurance limit. 
Otherwise, the distributor of the access mechanisms (i.e., the named 
accountholder) will be treated as the insured depositor.
    This opinion is based upon the proposition that the form of the 
access mechanism is unimportant. Whether the mechanism is traditional, 
such as an ATM card, book of checks or official check, or 
nontraditional, such as a stored value product, the access mechanism is 
merely a device for withdrawing or transferring the underlying money. 
The ``deposit'' is the underlying money received by the depository 
institution and held for an accountholder.

    By order of the Board of Directors, dated at Washington, DC, 
this 31st day of October 2008.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
 [FR Doc. E8-26867 Filed 11-12-08; 8:45 am]
BILLING CODE 6714-01-P