4000 - Advisory Opinions
Whether Certain Deposit Product Violates Prohibition Against Paying Interest on Demand Deposits (12 C.F.R. § 329.2)
April 25, 1992
Roger A. Hood, Assistant General Counsel
This is in response to your letter of April 3, 1992 to John W. Stone, Director of the FDIC Division of Supervision. Your letter has been referred to the Legal Division of the FDIC for a response. Based on your letter, it is my understanding that you wish to ascertain whether a new financial product which your institution plans to offer violates any federal law or regulation.
You state that your institution will offer sweep accounts to its corporate depositors. A depositor will establish two accounts, a demand deposit and an investment account. The demand deposit will be monitored on a daily basis. If the demand deposit balance exceeds a predetermined minimum, the amount over that balance will be transferred to the investment account. If the demand deposit balance is under the minimum amount, funds will be transferred from the investment account to make up the difference. The funds in the investment account will earn interest at a rate subject to daily change and may be withdrawn daily by the depositor. The funds in the investment account will not be collateralized by any asset of your institution. You state further that funds in an investment account will not be considered to be a deposit and will not be insured by the FDIC.
It is my conclusion that, as currently proposed, this deposit product violates the prohibition against paying interest on demand deposits set forth in 12 C.F.R. § 329.2. You have stated that transfers to and from the investment account will be automatic as the demand deposit goes above or below a predetermined level. As a result, when the proposed transaction is viewed as a whole, it is plain that a depositor will have unlimited access at any time to all funds deposited to include those in the interest-bearing investment account. A transfer to the investment account will be in effect nothing more than a reclassification of the demand deposit with no substantive difference. You therefore will not be able to legally offer your financial product as currently proposed.
I regret if I have not provided you with the opinion on this matter which you might have hoped for. Please do not hesitate to contact me if you should have any questions on this or any other matter.