Dear Associates:
Many of you use "sweep accounts" to maximize investment of your deposit funds over nights and weekends. Effective August 18, 2008, the FDIC adopted an interim rule addressing the treatment of sweep accounts upon the failure of a financial institution. If you use sweep accounts, this rule may affect whether your funds will be insured by the FDIC in the event of your bank's failure.
Two important questions need to be answered in dealing with sweep accounts:
- Are both the accounts used in the sweep agreement (the base account from which funds are transferred and the account into which your funds are swept) FDIC insured? If both accounts are insured, then the new rule does not affect the outcome.
- If your base account is insured, but the account into which your funds are automatically swept is uninsured, how will the FDIC determine if the sweep has occurred when the bank failed? This is the question the new rule addresses.
If the funds have not been swept, then the funds remain in the insured account, and vice versa.
The status of a failed bank's deposits and accounts are determined by the FDIC as of the closing end-of-day ledger balances for the day of failure of the bank. As to sweep agreements, the new rule treats sweeps into "internal" accounts differently than sweeps into "external" accounts. Basically an "internal" account is an account at the same, or an affiliated, financial institution such that the "transfer" is made by a book entry rather than an actual transfer of funds. Generally, under the interim rule, the FDIC will treat the sweep of funds from your insured deposit account into your uninsured "internal" investment account as having occurred prior to the bank's failure. If the bank fails it is more likely than not that your funds will be uninsured by the FDIC.
An "external" account is one held at a different unaffiliated entity and the sweep actually transfers funds (such as a wire transfer) from the insured deposit account into the uninsured investment account. Under the new rule, the FDIC will stop the transfer of funds to an "external" account. If your sweep is into an "external" uninsured account, it is more likely than not that the sweep will not have been accomplished prior to the bank's failure and your funds will have remained in your base insured account. Even if the sweep is recognized as having occurred, the sweep will have transferred the funds into the account with an unaffiliated institution that is not involved in the bank's failure.
If you are using sweep accounts, you may want to talk to your bank and/or the FDIC to determine (1) if both accounts used in the sweep arrangement are FDIC insured, and (2) if the investment account into which your funds are swept is uninsured, is it an "internal" or "external" account. If it is an "internal" uninsured account, perhaps there are other "internal" accounts which meet your goals and also are FDIC insured; or perhaps you would want to consider using a sweep into an "external" account.
Beginning July 1, 2009, the new rule will require all institutions to disclose in all sweep account contracts and sweep account statements (1) whether swept funds are "deposits" within the meaning of 12 U.S.C. 1813(l) [and thus insured by the FDIC] and (2) if swept funds are not insured, the status such funds would have if the institution failed.
This is an interim rule and the FDIC is accepting further comments; but it is in effect (other than the disclosure requirement) until otherwise changed. This interim rule is cited as 12 CFR Section 360.8 and can be found in Volume 73 of the Federal Register at page 41,179 (73 Fed.Reg. 41,179), with comments beginning at page 41,170.
The issue of FDIC insurance is very complex. This memo is only a general summary intended to direct your attention to this issue and sweep accounts. You should evaluate your sweep accounts based on your own particular facts and after consultation with your bank and, if possible, the FDIC.
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