[Federal Register: November 13, 2008 (Volume 73, Number 220)]
[Notices]
[Page 67155-67157]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13no08-34]
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FEDERAL DEPOSIT INSURANCE CORPORATION
Insurability of Funds Underlying Stored Value Cards and Other
Nontraditional Access Mechanisms
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Notice of New General Counsel's Opinion No. 8.
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SUMMARY: In 1996, the FDIC published General Counsel's Opinion No. 8
(``GC8''). Through that opinion, the Legal Division of the FDIC sought
to clarify the meaning of the term ``deposit'' as that term relates to
funds underlying stored value cards. Subsequently, the banking industry
developed new types of stored value products with the result that GC8
is obsolete. For this reason, the Legal Division has decided to replace
GC8. Under the new GC8, all funds underlying stored value products will
be treated as ``deposits'' if they have been placed at an insured
depository institution. As a result, all such funds will be subject to
FDIC assessments. Also, all such funds will be insured up to the
insurance limit. Whether the funds are insurable to the holders of the
access mechanisms, as opposed to the distributor of the access
mechanisms, will depend upon the satisfaction of the FDIC's standard
requirements for obtaining ``pass-through'' insurance coverage. This
treatment of the funds underlying stored value products does not differ
from the treatment set forth in a proposed rule published by the FDIC
in August of 2005. See 70 FR 45571 (August 8, 2005).
The new GC8 will provide guidance to the public about the insurance
coverage of funds underlying nontraditional access mechanisms. Also,
the new GC8 will promote accuracy and consistency by insured depository
institutions in reporting ``deposits'' for inclusion in an
institution's assessment base.
FOR FURTHER INFORMATION CONTACT: Christopher L. Hencke, Counsel, Legal
Division, (202) 898-8839, Federal Deposit Insurance Corporation, 550
17th Street, NW., Washington, DC 20429.
Text of General Counsel's Opinion
By: Sara A. Kelsey, General Counsel, FDIC.
Introduction
The evolution of stored value cards since the issuance of the
original General Counsel's Opinion No. 8, in 1996, has created the need
to revisit the issue of deposit insurance coverage for the holders of
such cards. Stored value cards now commonly serve as the delivery
mechanism for vital funds such as employee payroll and government
payments such as benefits and tax refunds. Network branded reloadable
stored value cards also serve as an alternative mechanism for holders
to access funds held in a bank for their benefit. This new General
Counsel's Opinion No. 8 seeks to clarify the deposit insurance coverage
available to the holders of stored value cards whose funds are held for
their benefit in insured depository institutions.
The FDIC is responsible for insuring ``deposits'' at insured
depository institutions. See 12 U.S.C. 1821. Also, the FDIC is
responsible for collecting assessments on ``deposits.'' See 12 U.S.C.
1817. In fulfilling these responsibilities, the FDIC must be able to
determine the existence of ``deposits'' at insured depository
institutions.
In the Federal Deposit Insurance Act (``FDI Act''), the term
``deposit'' is defined at section 3(l). See 12 U.S.C. 1813(l). In
general, a ``deposit'' is ``the unpaid balance of money or its
equivalent received or held by a bank or savings association.'' 12
U.S.C. 1813(l)(1). The definition encompasses the funds in checking
accounts, savings accounts and certificate of deposit accounts. See id.
It also includes the funds received by a bank or savings association in
exchange for the issuance of traveler's checks. See id. Similarly, the
term ``deposit'' includes the funds underlying official checks and
money orders. See 12 U.S.C. 1813(l)(4).
In short, the statutory definition of ``deposit'' at section 3(l)
of the FDI Act is very broad. By express terms, section 3(l)
encompasses almost all funds subject to transfer or withdrawal through
traditional access mechanisms (such as checks, traveler's checks,
official checks and money orders) provided that the funds have been
placed at an insured depository institution.\1\
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\1\ The only exceptions are certain narrow exceptions expressly
created by Congress (such as an exception for bank obligations
payable solely outside the United States). See 12 U.S.C. 1813(l)(5).
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Following the failure of an insured depository institution, the
FDIC is responsible for paying insurance on ``deposits.'' See 12 U.S.C.
1821(f); 12 U.S.C. 1821(a). In applying the insurance limit, the FDIC
must aggregate all deposits ``maintained by a depositor in the same
capacity and the same right.'' 12 U.S.C. 1821(a)(1)(C). In other words,
the FDIC must aggregate all deposits owned by a particular depositor in
a particular ownership category. For example, the FDIC will aggregate
all deposits held by a particular depositor in the form of ``single
ownership accounts.'' The FDIC will provide separate insurance coverage
for deposits in other ownership categories, such as ``joint ownership
accounts'' or ``revocable trust accounts.'' See 12 CFR part 330.
In applying the insurance limit, the FDIC must be able to determine
the identities of depositors. This task is different than determining
the existence of ``deposits.'' A depositor is the owner of a deposit,
i.e., a creditor with a particular type of claim against a depository
institution. In contrast, as previously discussed, a ``deposit'' is the
money entrusted to the depository institution, i.e., the depository
institution's obligation to repay the money.
The FDI Act provides that the FDIC, in determining the identities
of
[[Page 67156]]
depositors following the failure of an insured depository institution,
may rely upon the records of the failed insured depository institution.
See 12 U.S.C. 1822(c). In accordance with this statutory authority, the
FDIC has promulgated rules for determining the owners of deposits
placed at insured depository institutions by agents or custodians,
i.e., deposits owned by persons who do not deal directly with the
depository institution. First, the agency or custodial relationship
must be disclosed in the account records of the insured depository
institution, e.g., through an account title such as ``ABC Company as
Custodian.'' See 12 CFR 330.5(b)(1). Second, the identities and
interests of the actual owners must be disclosed in the records of the
depository institution or records maintained by the custodian or other
party. See 12 CFR 330.5(b)(2). Third, the deposits actually must be
owned (under the contract between the parties or any applicable law) by
the named owners and not by the custodian. See 12 CFR 330.3(h); 12 CFR
330.5(a)(1).
When the FDIC's requirements are satisfied, the insurance coverage
``passes through'' the custodian, i.e., the nominal accountholder, to
each of the actual owners of the deposit. See 12 CFR 330.7(a). When the
requirements are not satisfied, the named accountholder is treated as
the owner.
The rules summarized above can be applied to the funds underlying
stored value products. In the case of such funds, two issues must be
addressed: (1) whether (or when) the funds should be classified as
``deposits''; and (2) whether (or when) the holders of the access
mechanisms (as opposed to the distributor of the access mechanisms)
should be treated as depositors. Stored value products are discussed in
greater detail below.
Stored Value Products
Stored value products, or ``prepaid products,'' may be divided into
two broad categories: (1) Merchant products; and (2) bank products.
A merchant card (also referred to as a ``closed-loop'' card)
enables the cardholder to collect goods or services from a specific
merchant or cluster of merchants. Generally, the cards are sold to the
public by the merchant in the same manner as gift certificates.
Examples are single-purpose cards such as cards sold by book stores or
coffee shops. Another example is a prepaid telephone card.
Merchant cards do not provide access to money at a depository
institution. When a cardholder uses the card, the merchant is not paid
through a depository institution. On the contrary, the merchant has
been prepaid through the sale of the card. In the absence of money at a
depository institution, no insured ``deposit'' will exist under section
3(l) of the FDI Act. See FDIC v. Philadelphia Gear Corporation, 476
U.S. 426 (1986).
Bank cards are different. Bank cards (also referred to as ``open-
loop'' cards) provide access to money at a depository institution. In
some cases, the cards are distributed to the public by the depository
institution itself. In many cases, the cards are distributed to the
public by a third party. For example, in the case of ``payroll cards,''
the cards often are distributed by an employer to employees. In the
case of multi-purpose ``general spending cards'' or ``gift cards,'' the
cards may be sold by retail stores to customers.
A bank card usually enables the cardholder to effect transfers of
funds to merchants through point-of-sale terminals. A bank card also
may enable the cardholder to make withdrawals through automated teller
machines (``ATMs''). In other words, a bank card provides access to
money at a depository institution. The money is placed at the
depository institution by the card distributor (or other company in
association with the card distributor), but is transferred or withdrawn
by the cardholders. In some cases, the card is ``reloadable'' in that
additional funds may be placed at the depository institution for the
use of the cardholder.
This General Counsel's opinion does not address merchant cards
because such cards do not involve the placement of funds at insured
depository institutions. The applicability of this General Counsel's
opinion is limited to bank cards and other nontraditional access
mechanisms, such as computers, that provide access to funds at insured
depository institutions.
``Deposits''
The original GC8 did not address all types of stored value products
offered by (or through) insured depository institutions. For example,
it did not address systems in which the depository institution
maintains a pooled self-described ``reserve account'' for all
cardholders but also maintains an individual subaccount for each
cardholder. Likewise, the original GC8 did not discuss systems in which
the access mechanisms are distributed not by the insured depository
institution but instead are distributed by a third party (such as the
employer in the case of payroll cards or a retail store in the case of
general spending cards). Hence, the original GC8 is obsolete and must
be replaced.
Having reconsidered the issue of whether funds underlying stored
value products qualify as ``deposits,'' the Legal Division has
concluded that such funds always should be treated as ``deposits''
provided that the funds have been placed at an insured depository
institution. This conclusion is based upon the general premise that the
funds underlying stored value cards and other modern access mechanisms
are no different, in substance, than the funds underlying traditional
access mechanisms such as checks, official checks, traveler's checks
and money orders.
In other words, the access mechanism is unimportant. Whether funds
should be classified as ``deposits'' should not depend upon the access
mechanism (or whether the access mechanism is a plastic card as opposed
to a paper check). Rather, as recognized by the Supreme Court, the
existence of a ``deposit'' depends upon whether ``assets and hard
earnings'' have been entrusted to a bank. See FDIC v. Philadelphia Gear
Corporation, 106 S. Ct. 1931 (1986).
In concluding that the funds are ``deposits,'' the Legal Division
relies upon paragraph 3(l)(1), paragraph 3(l)(3) and paragraph 3(l)(4)
of the statutory definition. See 12 U.S.C. 1813(l)(1); 12 U.S.C.
1813(l)(3). Each of these paragraphs is discussed in turn below.
Paragraph 3(l)(1). This paragraph defines ``deposit'' as ``[t]he
unpaid balance of money or its equivalent received or held by a bank or
savings association in the usual course of business and for which it
has given or is obligated to give credit, either conditionally or
unconditionally, to a commercial, checking, savings, time, or thrift
account.* * *'' 12 U.S.C. 1813(l)(1). Under this paragraph, funds are
``deposits'' when a commercial entity (such as the employer in the case
of payroll cards or a retail store in the case of general spending
cards) places ``money or its equivalent'' at an insured depository
institution (i.e., places funds into a ``commercial'' account). Also,
under this paragraph, funds are ``deposits'' when placed into checking
accounts. In addition, funds are ``deposits'' when given to a bank in
exchange for a traveler's check. See id. Some stored value products are
the functional equivalents of checks or traveler's checks.
Paragraph 3(l)(3). This paragraph defines ``deposit'' as ``money
received or held by a bank or savings association, or the credit given
for money or its equivalent received or held by a bank or
[[Page 67157]]
savings association, in the usual course of business for a special or
specific purpose.* * *'' 12 U.S.C. 1813(l)(3). Under this paragraph,
funds are ``deposits'' when held by a bank for the ``special or
specific purpose'' of covering withdrawal or transfer instructions from
the holders of stored value cards or other nontraditional access
mechanisms. In the original GC8, the Legal Division found that
paragraph 3(l)(3) applies only to cases in which the customer's
spending plans are very specific but such a narrow reading of the
statute is not supported by the legislative history. See FDIC v.
Philadelphia Gear Corporation, 106 S. Ct. 1931 (1986). Also, the Legal
Division is unaware of any case in which a court found that a bank's
liability did not qualify as a ``deposit'' because the customer's
spending plans were insufficiently specific.
Paragraph 3(l)(4). This paragraph defines ``deposit'' as
``outstanding draft * * * cashier's check, money order, or other
officer's check issued in the usual course of business for any
purpose.* * *'' 12 U.S.C. 1813(l)(4). Some stored value products are
the functional equivalents of cashier's checks or money orders.
As outlined above, the statutory definition of ``deposit'' is very
broad. The Legal Division concludes that this definition encompasses
all funds underlying stored value cards and other nontraditional access
mechanisms to the extent that the funds have been placed at an insured
depository institution.
A separate issue is whether the holder of an access mechanism (as
opposed to the distributor of the access mechanism) should be treated
as the insured depositor for the purpose of applying the insurance
limit. This issue is addressed below.
Depositors
Under the existing insurance regulations at 12 CFR part 330, the
FDIC is entitled to rely upon the account records of the failed insured
depository institution in determining the owners of deposits. See 12
CFR 330.5. Therefore, in cases in which a separate account has been
opened in the name of the holder of the access mechanism, the FDIC will
recognize the holder as the owner of the deposit.
In some cases, in an agency or custodial capacity, the distributor
of the access mechanisms (or agent on behalf of the distributor) might
open a pooled account for all holders of the access mechanisms. In such
cases, the FDIC may provide ``pass-through'' insurance coverage (i.e.,
coverage that ``passes through'' the agent to the holders). See 12 CFR
330.7. Such coverage is not available, however, unless certain
requirements are satisfied. First, the account records of the insured
depository institution must disclose the existence of the agency or
custodial relationship. See 12 CFR 330.5(b)(1). This requirement can be
satisfied by opening the account under a title such as the following:
``ABC Company as Custodian for Cardholders.'' Second, the records of
the insured depository institution or records maintained by the
custodian or other party must disclose the identities of the actual
owners and the amount owned by each such owner. See 12 CFR 330.5(b)(2).
Third, the funds in the account actually must be owned (under the
agreements among the parties or applicable law) by the purported owners
and not by the custodian (or other party). See 12 CFR 330.3(h); 12 CFR
330.5(a)(1). If these three requirements are not satisfied, the FDIC
will treat the custodian (i.e., the named accountholder) as the owner
of the deposits.
It is encouraged that accurate information concerning FDIC
insurance coverage be displayed on stored value cards. This information
should include the name of the insured depository institution in which
the funds are held. When appropriate, the card also should state that
the funds are insured by the FDIC to the cardholder. These disclosures
will provide the cardholder with important information concerning FDIC
deposit insurance coverage.
Conclusion
This opinion replaces the opinion published by the FDIC in 1996.
Under this opinion, all funds underlying stored value cards and other
nontraditional access mechanisms will be treated as ``deposits'' to the
extent that the funds have been placed at an insured depository
institution. If the FDIC's standard recordkeeping requirements are
satisfied, the holders of the access mechanisms will be treated as the
insured depositors for the purpose of applying the insurance limit.
Otherwise, the distributor of the access mechanisms (i.e., the named
accountholder) will be treated as the insured depositor.
This opinion is based upon the proposition that the form of the
access mechanism is unimportant. Whether the mechanism is traditional,
such as an ATM card, book of checks or official check, or
nontraditional, such as a stored value product, the access mechanism is
merely a device for withdrawing or transferring the underlying money.
The ``deposit'' is the underlying money received by the depository
institution and held for an accountholder.
By order of the Board of Directors, dated at Washington, DC,
this 31st day of October 2008.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. E8-26867 Filed 11-12-08; 8:45 am]
BILLING CODE 6714-01-P