FDIC Proposal Affecting Custodial Deposit Accounts

Key requirements of the FDIC’s new proposal on custodial deposit recordkeeping

Background

The Federal Deposit Insurance Corporation (“FDIC”) is proposing a new rule to enhance recordkeeping requirements on FDIC-insured depository institutions (commonly referred to as banks) surrounding deposit accounts with transactional features. This proposal is a direct result of the recent wave of third-party entities amassing customer deposits in a single FDIC-insured account, commonly referred to as a “custodial deposit account”, and not maintaining proper documentation as to who is entitled to the funds. With the recent wave of bank failures, there has been confusion surrounding whether these accounts are FDIC-insured and who is entitled to the FDIC payout of insurance.

Rule proposals

• Banks or a third-party maintain detailed records in a standardized format
• Banks must establish a system of controls to comply with record keeping requirements

Banks or third-party recordkeeping

Banks or a third party (through an agreement) would be required to maintain records that would easily identify the owner of the deposit account, the balance, and the ownership category. If records are to be kept by a third party, the bank must have unrestricted, continuous access to those records, especially in the event of bankruptcy or disruption in business continuity by the third party. Additionally, if the records are maintained by a third party, independent review of the records would be required by an outside party.

Bank controls and reporting requirements

Banks who hold custodial deposit accounts would also be required to establish policies and procedures to maintain the required information mentioned above. As evidence of this, the bank would be required to perform an annual certification of compliance stating the bank is in compliance with the rule, signed by the highest-ranking official of the institution. This certification also includes a requirement for, at a minimum, daily account reconciliations at the close of business. Additionally, the bank would be required to submit an annual report with four requirements:

Annual report requirements

1. A description of any material changes to the banks information technology systems since the prior annual report that are relevant to the requirements of the proposed rule.
2. A list of the account holders that maintain custodial deposit accounts with transactional features subject to the rule, as well as the total balance of those custodial deposit accounts, and the total number of beneficial owners.
3. The results of the banks testing of its implementation of the recordkeeping requirements.
4. The results of any independent validation of records maintained by third parties as required by the proposed rule.

Exempt accounts

As the proposed rule is intended to affect custodial deposit accounts with transactional features, certain types of these accounts have been scoped out. These accounts include:

• Trust deposits
• Government depositors
• Accounts established by brokers, dealers, or investment advisors
• Lawyers’ trust accounts
• Employee benefit plan or retirement plan accounts
• Accounts maintained by real estate agents, brokers, or title companies
• Accounts maintained by mortgage servicer

Implications for banks and fintechs

While the proposal aims to protect depositors and promote public confidence in insured deposits, it may also complicate the relationships between banks and fintechs. Banks will need to ensure that their fintech partners comply with the new requirements, which could involve additional oversight and compliance costs.

Visit the FDIC’s website for the full version of the proposal. The comment period is open for a period of 60 days following the date of publication (September 17, 2024). Visit the FDIC website to submit comments or email comments@fdic.gov.

We will continue to monitor this and other regulations that may impact the Financial Services industry. Questions? Contact your Keiter Opportunity Advisor | Call: 804.747.0000.