Several banks participating in CDARS, ICS, or both have asked Promontory to comment on the FDIC Financial Institution Letter of June 7, 2010 (FIL-29-2010). In particular, banks have asked whether a bank’s compliance with the procedures prescribed in the CDARS and ICS agreements, as applicable, would be consistent with the FDIC’s guidance on deposit placement and collection activities.
Promontory believes that the CDARS and ICS procedures are fully consistent with the guidance in the Financial Institution Letter. Here are the points set forth in FIL-29-2010 and our comments on each:
Institutions that accept deposits with the intent of placing a portion of some or all of these deposits must establish governing controls over this activity to prevent customer confusion and ensure that all activities comply with deposit insurance regulations.
Promontory comment: The Participating Institution Agreements for CDARS and ICS require that each bank enter into a standard Deposit Placement Agreement (DPA) that explains the operation of the service to the customer. Each standard DPA contains extensive disclosures designed to prevent any customer confusion. Each Participating Institution Agreement also sets forth the procedures that are followed to support bank compliance with deposit insurance regulations.
Once collected, if an institution/affiliate subsequently places these deposits at other institutions/affiliates, the institution needs to adhere closely to the FDIC rules governing the eligibility of these accounts for "pass-through" deposit insurance coverage.
Promontory comment: The Participating Institution Agreements specifically describe procedures to be followed by participating banks to provide customers with eligibility for “pass-through” deposit insurance coverage. The FDIC reviewed the CDARS agreements in 2003 and stated that, if the recordkeeping and other applicable procedures specified in the agreements are followed, “we agree that deposits placed through the CDARS system would be insured on a pass-through basis under FDIC’s rules on the insurance coverage of agency or custodial accounts.” The ICS agreements contain provisions that are similar in relevant respects.
Institutions should ensure that marketing materials, customer statements, and disclosures given to customers are accurate with respect to deposit insurance coverage and reflect the terms and conditions of the arrangement between the customer and the bank, as well as with the banks that receive customer funds.
Promontory comment: Materials provided by Promontory to banks for use with customers are carefully reviewed by Promontory’s professional staff to be sure the materials accurately reflect the terms of the relevant Deposit Placement Agreement.
Institutions acting as agents in deposit collection and placement arrangements should ensure customers are provided the deposit amount and the name of the insured depository institution at which their deposits are ultimately placed.
Promontory comment: The Participating Institution Agreements provide that the institution that places funds for its customers (a “Relationship Institution”) will be supplied with information to give to customers specifying the deposit amount and the name of the insured depository institution at which their deposits are ultimately placed.
Because insurance coverage is available only if the interest rate and the maturity date offered to the customer match the interest rate and maturity date for funds placed with another bank, any differences in terms must be disclosed to the customer at the inception of the arrangement and in monthly statements, and the customer must be informed that these changes may impact the deposit insurance coverage of the account.
Promontory comment: Under the Participating Institution Agreement for CDARS, the interest rate and the maturity date offered by the Relationship Institution to the customer for funds placed through the service match the interest rate and maturity date of the certificates of deposit that are issued by the Issuing Institutions. The CDARS procedures for placement of funds in CDs do not permit changes to be made in the CDs once they are issued. Funds placed through ICS are held in money market deposit accounts or demand deposit accounts, which are not time deposits and therefore do not have maturity dates, but under the Participating Institution Agreement for ICS, the interest rate for funds placed through the service is the interest rate specified by the Relationship Institution.
All relevant personnel involved in collecting and placing deposits from any third party should be trained on deposit insurance coverage requirements, including requirements for pass-through insurance coverage.
Promontory comment: Promontory makes available detailed training programs designed to familiarize bank personnel with the procedures used in CDARS and ICS, including the procedures that support eligibility for pass-through deposit insurance coverage.
If you have any questions, please contact Promontory Client Services at (866) 776-6426.