On September 17, 2024, the Federal Deposit Insurance Corporation (FDIC) issued a proposed rule (the “Proposed Rule”) intended to strengthen recordkeeping for banks that partner with third-party, non-bank companies to accept deposits on behalf of consumers and businesses using custodial accounts at the partner bank. The Proposed Rule would impose new recordkeeping requirements on FDIC-insured depository institutions (IDIs) that offer custodial deposit accounts with transactional features, unless the IDI qualifies for a specific exemption, as outlined below.
Key Provisions of the Proposed Rule
Under the Proposed Rule, the term “custodial deposit account” would be defined to cover relationships where one party is responsible for opening a deposit account at an IDI on behalf of others, who may own the funds but often lack a direct relationship with the bank. The Proposed Rule would define the term “custodial deposit accounts with transactional features” as a deposit account where:
- the account is established for the benefit of beneficial owner(s);
- the account holds commingled deposits of multiple beneficial owners; and
- a beneficial owner may authorize or direct a transfer through the account holder from the account to a party other than the account holder or beneficial owner.
Transactional features of non-bank payment services typically include features that allow customers to pay bills, make purchases, receive income, or conduct other financial transactions.
The Proposed Rule would require an IDI holding custodial deposit accounts with transactional features to:
- maintain account records that accurately identify the beneficial owner of, and their respective interest in, the deposited funds;
- reconcile the account for each individual owner on a daily basis; and
- establish written policies and procedures, including annual reporting and certification, with respect to compliance with the Proposed Rule.
These requirements, among others, would also apply if the bank uses a third party to maintain the records.
Recordkeeping Requirements
For custodial deposit accounts with transactional features that are subject to the Proposed Rule, an IDI would be required to maintain accurate records identifying:
- the individual beneficial owners of the custodial deposit account;
- the balance attributable to each beneficial owner; and
- the ownership category in which the beneficial owner holds the deposited funds.
An IDI would be required to maintain this information using an electronic file format as specified in an appendix to the Proposed Rule. The use of this specified data file format would be required under the Proposed Rule regardless of whether the IDI maintains the records itself or leverages a third party.
The Proposed Rule would also require an IDI to conduct reconciliations against the beneficial ownership records no less frequently than at the close of business daily. Any reconciliation variances that result due to transaction timing and unposted transactions at the close of business would be required to be addressed based on standard banking practices.
Use of Third Parties for Compliance
To comply with the Proposed Rule, an IDI would be permitted to maintain the records itself or through an arrangement with a third party (e.g., a vendor, processor, software or service provider), if certain requirements are met. Third parties could also include the account holder, if the account holder regularly maintains beneficial ownership records. If an IDI chooses to maintain custodial deposit account records through a contractual relationship with a third party, the IDI would be required to have direct, continuous, and unrestricted access to the records of the beneficial owners. In addition, reconciliation of these records would be required, as would periodic validation of the third party’s records by a person independent of the third party.
The Proposed Rule further would require an IDI that uses a third party to have a continuity plan in place that includes backup recordkeeping procedures to ensure the IDI’s compliance with its recordkeeping obligations. An IDI would also be required to have a direct contractual relationship with the third party that includes explicit provisions for risk mitigation measures, such as defined roles and responsibilities, internal control requirements, and periodic validations.
Additional Compliance Measures
The Proposed Rule would impose further compliance measures on an IDI holding custodial deposit accounts with transactional features, including:
- maintaining internal written policies and procedures that operationalize compliance with the recordkeeping requirements;
- completing an annual certification of compliance signed by an executive officer certifying the IDI’s implementation and testing of the recordkeeping requirements under the Proposed Rule; and
- completing an annual report that addresses, among other things, any material changes to its information technology systems that are relevant to compliance with recordkeeping obligations (the report would also be required to include a list of the IDI’s account holders with covered accounts, along with associated account balances and the number of beneficial owners).
Exemptions under the Proposed Rule
The Proposed Rule contains a list of specific exemptions, including custodial deposit accounts that:
- hold only trust deposits;are established at an IDI by government depositors;
- are established by brokers or dealers under the Securities and Exchange Act of 1934, and by investment advisers under the Investment Advisers Act of 1940;
- are established by attorneys or law firms on behalf of clients;
- are maintained in connection with employee benefit plans and retirement plans;
- are maintained by real estate brokers, real estate agents, title companies, and qualified intermediaries; and
- are maintained by a mortgage servicer in a custodial or other fiduciary capacity.
The Proposed Rule also would exempt custodial deposit accounts where federal or state law prohibits the disclosure of the identities of the beneficial owners of the deposits. Finally, the Proposed Rule would exempt accounts maintained pursuant to an agreement to allocate or distribute deposits among participating IDIs in a network for purposes other than payment transactions of customers of the IDI or participating IDIs, i.e., a deposit placement network.
Comments on the Proposed Rule will be due 60 days after publication of the Proposed Rule in the Federal Register, which is expected shortly.
Key Takeaway
The Proposed Rule follows the bankruptcy of Synapse Financial Technologies, Inc. (“Synapse”), a platform that worked with several IDIs and numerous fintechs, which affected the ability of consumers to access funds placed at IDIs for a number of months. The FDIC noted that since Synapse’s bankruptcy in May 2024, the FDIC has received more than a thousand inquiries, complaints, and concerns from consumers regarding the Synapse bankruptcy. The Proposed Rule is, however, applicable to any custodial deposit accounts with transactional features, not limited to Synapse-like use cases. We expect that public comments will focus on the scope of the Proposed Rule, and the arrangements that it would cover, if finalized as proposed.
The Proposed Rule also follows the FDIC’s statement, issued jointly with the Federal Reserve Board and the Office of the Comptroller of the Currency, foreshadowing increased compliance demands for banks with respect to fintech-bank partnerships. The Proposed Rule underscores the FDIC’s focus on ensuring that consumers have access to their funds in a timely manner and maintaining confidence in the banking system. If the Proposed Rule is finalized as proposed, IDIs and fintechs will likely have to consider the financial and operational costs of this additional compliance obligation as they weigh their decisions to enter into or maintain custodial deposit account relationships.
We will continue to follow developments with respect to fintech-bank partnerships, including as they relate to the Proposed Rule. Please contact the authors with any questions.
