On January 27, 2009, the Federal Deposit Insurance Corporation (“FDIC”) adopted a final rule which formalizes its practices for determining deposit and other liability account balances at failed depository institutions for which it has been appointed receiver. The final rule also imposes disclosure requirements on insured institutions in connection with sweep accounts.

The final rule sets forth the FDIC’s policies for ascertaining, for deposit insurance and receivership purposes, balances of deposit accounts owned by the same depositor in the same ownership capacity on the day of an institution’s failure. The final rule follows an interim rule issued in July 2008 and is largely unchanged from the interim rule. Generally, the final rule establishes the following principles:

  • In making deposit insurance determinations and determining the value and nature of claims against the receivership on the institution’s failure date, the FDIC will treat deposits and other liabilities of a failed institution according to the ownership and nature of the underlying obligations based on end-of-day ledger balances for each account using, except as otherwise provided in the rule, the institution’s normal posting procedures.
  • In its role as receiver, the FDIC will use its best efforts to stop the generation, via transactions or transfers coming into or going outside the institution, of new liabilities or the extinguishing of existing liabilities of the depository institution. In these efforts, the FDIC may need to establish a cutoff time different from the institution’s usual time. The final rule, however, distinguishes between transfers in or out of the institution and transfers between accounts at the institution, which generally will be completed.
  • End-of-day ledger balances are subject to correction for posted transactions that are inconsistent with the FDIC’s principles identified above.  

The FDIC’s final rule provides for treating all checks deposited into and posted to a deposit account by the applicable cutoff time as part of the end-of-day ledger balance for insurance purposes. The final rule also establishes procedures for handling sweep accounts. Generally, for internal sweep accounts, the FDIC will determine ownership of the funds and the nature of the receivership claim based on records established and maintained by the institution for that specific account or investment vehicle as of the end-of-day ledger balances on the date of the receivership. For sweep accounts into external investment vehicles, the FDIC will treat swept funds consistent with their status on the end-of-day ledger balances of the institution and external entities, as long as the transfer occurs prior to the cutoff time. If the sweep is not completed prior to the cutoff time, the external investment will not be purchased and the funds will remain in the account identified on the end-of-day ledger. For repurchase agreement sweep accounts, where the customer become legal owner of identified assets subject to repurchase or obtains a perfected security interest in those assets, the FDIC will recognize the customer’s ownership or security interest in the assets.

The final rule requires that, beginning July 1, 2009, insured institutions must make certain disclosures in (i) all new sweep account contracts, (ii) renewals of existing sweep account contracts and (iii) within sixty (60) days after July 1, 2009 and at least annually thereafter. Institutions must disclose in writing to sweep account customers whether their swept funds are deposits within the meaning of the Federal Deposit Insurance Act and, if not, the status the funds would have if the institution failed, i.e., general creditor, secured creditor, etc. The disclosure must be consistent with the way in which the funds are reported on the institution’s Call or Thrift Financial Report. However, disclosures are not required where the transfers are within a single account or sub-account or where the sweep account involves only deposit to deposit sweeps, such as zero balance accounts, unless the sweep changes the customer’s insurance coverage.

The final rule is effective thirty (30) days from publication in the Federal Register except that, as noted, the disclosure requirements are effective July 1, 2009.