• FAQ: FDIC New Sweep Disclosure Final Rule
  • July 6, 2009 | Authors: William T. Repasky; Jane Hils Shea
  • Law Firms: Frost Brown Todd LLC - Office ; Frost Brown Todd LLC - Office
  • What is the core holding of the new FDIC rule?

    A. Prominently disclose whether the swept assets are deposits (pursuant to 12 USC 1813(1)).

    B. If they are not, then disclose the status the funds would have if the bank were to fail (e.g., secured creditor or general creditor status).

    What are the disclosure deadlines?

    July 1, 2009: New sweep accounts and renewals thereafter for existing sweep accounts.

    August 29, 2009: All other existing sweep accounts annually thereafter.

    Where are the rules found?

    12 CFR §360.8

    What if I have an “internal” sweep product?

    The new disclosure requirements do not apply to internal sweep products. FDIC will determine ownership of funds based on practices of bank as of the closing end-of-day ledger balance. For deposit-to-deposit sweep accounts, such as zero balance accounts and DDA to money market accounts, the FDIC has said it will treat each account as it is reflected on the bank’s books at the end of the bank’s business day. The same treatment will apply to “retail sweep” or “reserve sweep” account products where funds remain in the bank.

    What if I have an “external” sweep product?

    Deposit insurance treatment and the new disclosure obligations vary with the structure and substance of your institutions sweep account product. (a) Eurodollar, IBFund, Fed. Funds; (b) Repo; (c) Holding Company Commercial Paper; and (d) Money Market Mutual Funds are the most common types. The disclosure you make regarding the swept funds’ status in the event the bank fails, must be consistent with how you are carrying the accounts on your bank’s Call Report.

    Many community banks offer a repo type product, any special considerations?

    The terms of the repurchase agreement will affect the required disclosures. If the funds are swept into a pool of securities and the bank simultaneously serves as the repo buyer’s custodial agent, then the FDIC has indicated these may be viewed as improperly executed sweeps if the customer is not provided an ownership interest or a perfected security interest in the purchased securities. In such cases where the bank is deemed to have retained too much control, the risk is the FDIC may treat the funds swept from such sweep accounts as though they never left the deposit account. In such cases, since the funds are considered deposits, the FDIC advises institutions that they should report the swept funds as deposits in their Call or Thrift Financial Report s

    Is Reg Q affected in any way?

    Federal Reserve Regulation Q prohibits banks from paying interest on deposits. An essential purpose of the sweep account is to allow qualifying customers to earn a superior rate of return. Securities held in a pool at a correspondent institution must be appropriately segregated under Treasury Regulations and legal ownership of the assets must pass to the customer. Reg Q may be satisfied, but the banks must examine its Sweep Agreement/Repurchase Agreement to analyze its new FDIC disclosure obligations and to determine whether changes should be made to its agreements in order to qualify its relationship as a properly executed sweep. For example, banks should examine whether their agreements permit them to substitute securities as this may affect the FDIC’s analysis of whether it was properly executed.

    Why didn’t the Fed offer model disclosure language?

    The Fed received comments, as part of its rule making process, that sweep arrangements and their processes varied considerably across the market place. Thus, specifically worded disclosure requirements were deemed unsuitable, and no model disclosure language was offered either in the Commentary or the Final Rule.