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federal

Reserve ban k o f Dallas

DALLAS, TEXAS

75222
C i r c u l a r No. 75-51
A p r i l 11, 1975

PROPOSED AMENDMENTS TO REGULATION Q

TO ALL MEMBER BANKS AND
OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
T h e Board of G o v e rn o rs of th e Federal R e s e r v e System has
is su e d two p ro p o s e d am endm ents to R egulation Q. T h e first would p e rm it
member b a n k s to redeem a time d e p o sit w ithout p e n alty p r i o r to m a tu rity
in th e c a s e of th e d e p o s i t o r 's death if t h e r e w e r e no s u r v i v i n g c o - d e p o s i t o r s .
T h e second would r e q u i r e notice on certific a te s of d e p o sit tha t the d e p o sit
cea ses to e a r n in te r e s t a fte r m a tu r it y , and also that automatically r e n e w a b le
c ertific a te s of d e p o s it will be re n e w e d upon m a tu rity u n l e s s th e c ustom er
d i r e c t s o th e r w is e .
In te re s te d p e r s o n s a r e invited to sub m it r e le v a n t d a ta , v ie w s ,
o r a r g u m e n ts to the S e c r e t a r y , Board of G o v e rn o rs of the Federal R e s e rv e
System , W ashington, D .C . 20551, to be r e c e iv e d not la te r th a n May 5, 1975.
Copies of the B o a r d 's p r e s s re le a s e an d F e d e ra l R e g is te r d o c u ­
ments a r e a tta c h e d .
Sincerely y o u rs ,
T . W. P la n t
F i r s t Vice P r e s i d e n t

A ttachments

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

FEDERAL
p r e s s

RESERVE

r e l e a s e

For immediate release

April 4, 1975

The Board of Governors of the Federal Reserve System
announced today the publication, for comment, of two proposed
changes in the provisions of its Regulation Q (Interest on Deposits).
These would:
1«

Permit member banks to redeem a time deposit without

penalty prior to maturity in the case of the depositor's death,
if there were no surviving co-depositors.

Present rules permit

payment of a time deposit before maturity only if a substantial
interest penalty is imposed —

namely the loss of three-months*

interest and the payment of interest on the withdrawn funds at the
passbook rate.
2.

Require notice on certificates of deposit that the

deposit ceases to earn interest after maturity.

Require notice

on automatically renewable certificates of deposit that the
deposit will be renewed upon maturity unless the customer directs
otherwise.
Comment on the proposals will be received by the Board
through May 5,
Copies of the Board's orders in the above matters are
attached.

- 0 -

TITLE 12— BANKS AND BANKING
CHAPTER II— FEDERAL RESERVE SYSTEM
SUBCHAPTER A— BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
[REG. Q]
PART 217— INTEREST ON DEPOSITS
Interest Penalty on Withdrawal

The Board of Governors proposes to amend § 217.4(d) of Regulation Q
(Interest on Deposits) to permit member banks to pay time deposits before
maturity without imposing an interest penalty in cases where the owner of
the time deposit has died.

Section 19 of the Federal Reserve Act forbids

the payment of Interest on demand deposits and also forbids member banks
from paying time deposits prior to maturity, except in accordance with such
regulations as the Board prescribes.

The previous emergency-plus-penalty

rule and the current penalty rule were designed to enforce these provisions
of the Federal Reserve Act by preserving the distinction between demand
and time accounts and preventing time accounts from being utilized as essen­
tially demand or transaction accounts.

Since the proposed amendment would

apply only in cases where the depositor has died, it is considered unlikely
that the amendment will Interfere with the Board*s regulatory purpose.
The proposed amendment provides that the depositor must have
been the sole legal and beneficial owner of the deposit at the time of
his/her death.

Thus, for example, the death of a trustee acting in that

capacity as the depositor of uninvested trust funds, and holding legal

- 2 -

title to those funds, would not fall within the proposed amendment*
Similarly, the amendment would not apply where beneficial ownership is
divided between the settlor and beneficiaries (e.g.* an irrevocable
express trust with a life estate in the settlor and vested remainder in
the beneficiaries).

However, the amendment would apply if the trustee is

also the settlor of a revocable trust, "Totten'1 or tentative trust,
payable-on-death or similar account, and as such retains sole legal and
beneficial ownership of the funds at the time of his/her death.

The amend­

ment as proposed would not apply to jointly owned deposits where there is
a surviving depositor or depositors who were parties to the deposit contract.
Interested persons are invited to submit their views or arguments.
Any such material should be submitted in writing to the Secretary, Board
of Governors of the Federal Reserve System, Washington, D.C. 20551, to
be received not later than May 5, 1975.

Such material will be made avail­

able for inspection and copying upon request, except as provided in
§ 261.6(a) of the Board's Rules Regarding Availability of Information.
Pursuant to its authority under section 19(j) of the Federal
Reserve Act (12 U.S.C. 371b), the Board of Governors proposes to amend
§ 217.4(d) of Regulation Q (12 C.F.R. 217.4(d)) as follows:
§ 217.4

PAYMENT OF TIME DEPOSITS BEFORE MATURITY
*

(d)

*

*

*

*

Penalty for early withdrawals.

Where a time deposit, or

any portion thereof, is paid before maturity, a member bank may pay
interest on the amount withdrawn at a rate not to exceed that currently

prescribed in § 217.7 for a savings deposit:

Provided, That the depositor

sh a ll f o r f e it three months of in terest payable at such ra te.

I f , however,

the amount withdrawn has remained on deposit for three months or l e s s ,
a l l in te re st sh a ll be fo r fe ite d .

Where necessary to comply with the

requirements of th is paragraph, any in te re st already paid to or for
the account of the depositor sh a ll be deducted from the amount requested
6a/
to be withdrawn.
However, upon the death of an individual depositor who
at the time of h is death Is the so le leg a l and b e n e ficia l owner of a
time deposit, a member bank may pay such time deposit before maturity to
the depositor's representative or successor in Interest without a reduction
or fo rfeitu re of Interest as prescribed by th is paragraph.

* * *

(New language underlined.)
6a/

*

*

*

*

*

By order of the Board of Governors, April 4 , 1975.
(Signed) Theodore E. A llison
Theodore E. A llison
Secretary of the Board

[SEAL]

TITLE 12— BANKS AND BANKING
CHAPTER II— FEDERAL RESERVE SYSTEM
SUBCHAPTER A— BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
[REG. Q]
PART 217— INTEREST ON DEPOSITS
Notice of Maturity

The Board of Governors, pursuant to its authority under section
19(j) of the Federal Reserve Act (12 U.S.C. 371b) to prescribe rules governing
the payment of interest on deposits, proposes to amend section 217.3(f)
of Regulation Q to require member banks to notify owners of time deposits
that, upon maturity, their time deposits will become demand deposits and no
interest will be paid thereon.

Member banks would also be required to notify

owners of automatically renewable time deposits that their deposit will be
renewed at maturity unless the owner gives the bank other instructions.
Section 217.3(f) of the Board's Regulation Q provides that,
after the maturity date, a time deposit becomes a demand deposit and,
reflecting the Federal Reserve Act's prohibition of interest on demand
deposits, a member bank may not pay interest on a time deposit after
maturity.

The Board has received a number of letters from owners of time

deposits describing circumstances in which they were not aware that their
funds would not earn interest after the maturity date or that the maturity
date had passed unnoticed.
Another problem which has been brought to the Board's attention
involves time deposit contracts which provide for automatic renewal at matur­
ity.

Owners of such deposits have complained that, when they unintentionally

- 2 -

neglected to advise the bank not to renew the deposit contract, the bank

renewed the time deposit for another full term, usually at the same interest
rate.

If a depositor wished to withdraw his/her funds before the expira­

tion of another full term, and the bank agreed to permit such withdrawal,
he/she would be subject to the interest penalty imposed on early withdrawals.
The proposed amendment, if adopted, would apply only to time
deposits issued after the effective date of the amendment.

The Board's

proposal would require member banks to have printed or stamped on certi­
ficates, passbooks, or other documents representing time deposits, a
conspicuous statement indicating that no interest will be paid on the
deposit after the maturity date.

In the case of automatically renewable

time deposits, the printed notice would advise depositors that, absent con­
trary instructions, the deposit will be renewed at maturity and state the
terms of the renewed deposit contract.
The Board is of the opinion that a statement printed on the
certificate or passbook will serve as adequate notice to depositors.

How­

ever, the Board welcomes comments on any alternative notification methods,
including another suggestion which has been made; namely, to require member
banks to mail a notice to a depositor's last known address on a date which
would provide the depositor with sufficient opportunity to communicate
his/her instructions to the bank.
If the proposed amendment to Regulation Q is adopted, these
notice requirements would be mandatory for member banks.

Upon further

consideration, however, the Board may determine to promulgate a policy

requiring printed notice and/or mail notice, as discussed herein, in the
form of a published interpretation.

The Board is aware that, at the present

time, many member banks provide such notice on their own initiative as a
service to depositors.

The Board also solicits comments from the public

as to whether continuation of this optional approach is a more appropriate
means to ensure depositor awareness of impending maturity.
Finally, after review of all comments, the Board may also consider
adopting regulations requiring notice to depositors pursuant to its new
responsibilities pertaining to possible unfair and deceptive practices
under the Federal Trade Commission Improvements Act (P.L. 93-637).
Interested persons are invited to submit their views or arguments.
Any such material should be submitted in writing to the Secretary, Board
of Governors of the Federal Reserve System, Washington, D.C. 20551, to be
received not later than May 5, 1975.

Such material will be made available

for inspection and copying upon request, except as provided in § 261.6(a)
of the Board's Rules Regarding Availability of Information.
Pursuant to its authority under § 19(j) of the Federal Reserve
Act (12 U.S.C. 371b), the Board of Governors proposes to amend § 217.3(f)
of Regulation Q (12 C.F.R. 217.3(f)) by adding the following to the
end thereof:
§ 217.3

INTEREST ON TIME AND SAVINGS DEPOSITS
*

*

*

*

*

(f) * * * on each certificate, passbook, or other document
representing a time deposit, the bank shall have printed or stamped a

conspicuous statement indicating that no interest will be paid on the
deposit after the maturity date or, in the case of a time deposit that is
automatically renewable, a conspicuous statement indicating that the
contract will be renewed automatically upon maturity, and indicating the
terms of such renewal.
*

*

*

*

*

By order of the Board of Governors, April 4, 1975.

(Signed) Theodore E. Allison

Theodore E. Allison
Secretary of the Board

[SEAL]


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102