FDIC Proposes Recordkeeping Rule for Custodial Deposit Accounts with Transactional Features
Commentary by Thomas Delaney
The FDIC proposed new rules to "strengthen the recordkeeping requirements" for custodial deposit accounts with transactional features held at insured depository institutions ("IDIs").
The proposed rule, FDIC Part 375 ("Custodial Deposit Accounts with Transactional Features") addresses the need for accurate and accessible records of beneficial owners in custodial accounts, especially when these accounts involve multiple beneficial owners and frequent transactions. The rule is designed to ensure that the FDIC can promptly determine deposit insurance coverage in the event of an IDI's failure, safeguarding depositor funds and promoting public confidence in the banking system.
The proposed changes would:
- require IDIs to maintain detailed records identifying the beneficial owners of custodial accounts, including the balances attributable to each owner and their ownership category;
- mandate daily reconciliations of these records, ensuring up-to-date information on account balances and ownership, especially for accounts with high transaction volumes;
- impose stricter requirements on IDIs that rely on third parties (e.g. fintechs or vendors) to maintain records, including continuous and unrestricted access to these records, even in the event of the third party's insolvency or operational failure; and
- establish annual compliance certifications signed by an executive officer, confirming that the IDI meets all recordkeeping requirements and require IDIs to submit an annual report detailing material changes to their information systems and the results of independent validations of third-party records.
The FDIC explained that the new rule is necessary to address risks posed by complex custodial arrangements, particularly those involving fintech companies, where inadequate recordkeeping could delay deposit insurance payments to consumers.
Comments on the proposed rule are due within 60 days of its publication in the Federal Register.
Commentary
The availability of pass-through FDIC insurance coverage for funds maintained in custodial accounts is not a new concept.
It has long been the case that in the event of a bank's failure, FDIC coverage, up to statutory limits, would be provided to individual depositors as long as the entity responsible for placing the custodial account maintains records that are sufficiently detailed and up-to-date to enable the FDIC as receiver to determine amounts owed to individual depositors. As highlighted in the proposal, the bankruptcy of Synapse Financial Technologies, Inc., underscores the difficulties that can arise when third parties' custodians fail to maintain sufficient records. This proposal is intended to address those deficiencies.