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C irc u la r No. 76-40
M arch 24, 1976
American Revolution Bicentennial

PROPOSED AMENDMENT TO REGULATION Q
P roh ibiting the Paying of Interest
On Pooled Funds of $100,000 o r M ore at a Rate
Above C eilings on Deposits of Less Than $100,000

TO A LL MEMBER BANKS
AND OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE D IS T R IC T:
Below is the text of a statement issued on M arch 9, 1976, by the Board of Governors
of the Federal R eserve System:
.
T h e Board of Governors of the Federal Reserve System today proposed to p ro ­
h ib it member banks from paying interest on pooled funds of $100,000 or more at a
rate above Regulation Q ceilings on deposits of less than $100,000.
T h e Board invited comment on its proposal through May 10, 1976.
Regulation Q establishes interest rate ceilings that member banks may pay on
time deposits of less than $100,000. T im e deposits of $100,000 o r more a re not
subject to rate ceilin g s. In high interest rate periods the practice has grow n of
pooling funds of less than $100,000 to make up deposits of $100,000 or m ore, in
o rd e r to gain interest rates h ig h er than would otherw ise be a v a ila b le . T h e Board
believes that this practice could lead to d is ru p tiv e shifts of funds among financial
institutions.
The Board's proposal would a p p ly to such situations when a member bank
knows or has reason to know that the objective of pooling is to circum vent Regula­
tion Q rate ceilin g s. T h e proposed reg u lato ry amendment would take the place of
p r io r Board statements to the same effect.
Th e proposal made exceptions for four types of pooling not intended p rim a rily
for the purpose of achieving a h ig h e r rate of interest and that do not in te rfe re w ith
the regulation of interest rates. These are:
1.

Combination of funds by member bank tru s t departm ent officers to make use of
te m p o ra rily idle funds from a num ber of tru s t accounts, w h ere the pooling is
incidental to a bona fide tru st relationship .

2.

A sim ilar combination of funds by an attorney or other person acting in a cus­
todial or fid u c ia ry capacity fo r funds held in a member bank in escrow .

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

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3.

Consolidation of funds by an in d ivid u al or organization that p revio u s ly held
its funds in various accounts.

4.

T h e o fferin g of large ($100,000) certificates of deposit by member banks to
mutual funds w hich have a stated investment objective of investing in other
than deposit obligations and whose deposit obligations norm ally constitute a
minimal percentage of the funds' portfo lio.

Comments on the proposed amendment should be d irected to the S e c re ta ry , Board of
G overnors of the Federal R eserve System, W ashington, D .C . 20551, to be received not later
than May 10, 1976.
T h e te x t of the proposed amendment is enclosed.
S in ce re ly y o u rs ,
T . W. Plant
F irs t V ice President
Enclosure

TITLE 12—BANKS AND BANKING
CHAPTER II—FEDERAL RESERVE SYSTEM
SUBCHAPTER A—BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
[REG. Q]
[D ocket N o. R -0024]
PART 217— INTEREST ON DEPOSITS
P oolin g of Funds

T h e Board of G overn ors p r o p o se s to am end R egu lation Q (12 CFR 217) to p ro h ib it
member b an k s from p a y in g in te r e s t on time d e p o sits of $100,000 or m ore at ra tes in e x c e s s
of th o se e s ta b lis h e d b y R egu lation Q for d e p o sits of le s s than $ 1 0 0 ,0 0 0 , w h e r e the bank
kn ow s or has r e a so n to know that s u c h time d e p o sits c o n s is t of fu n d s a cq u ired or s o lic ite d
for the p u rp o se of p oolin g s u c h fu n d s p rim a r ily to obtain the exem ption from in te r e st rate
c e ilin g s p ro v id ed in § 2 1 7 .7 (a ) .
In 1968 and again in 1970 the B oard c o n s id e r e d w h eth er the in te r e st rate lim ita­
tion s set forth in §217.7 of R egu lation Q p ro h ib it m em ber b a n k s from is s u in g a C ertificate
of D ep osit of $100,000 or m ore w h e n fu n d s to e s ta b lis h the d e p o sit h a v e b een p o o led .

The

Board stated that p oolin g p rim a r ily to obtain a h ig h e r rate of in te r e s t w a s an e v a s io n of its
in te r e s t ra te r e g u la tio n s and e x p r e s s e d the v ie w that a b an k w h ich p a y s a rate in e x c e s s
of th e a p p lic a b le R egu lation Q rate on a d e p o sit that it k n o w s or h as r e a so n to know r e s u lt s
from p o o lin g p r in c ip a lly for the p u r p o se of ob tain in g a h ig h e r rate of in te r e s t w ou ld b e
acting con trary to the s p ir it of the in te r e s t rate lim ita tio n s . In p ro p o sin g th is am endm ent
to R egu lation Q , the Board in te n d s to c la r ify the ap p lication of its p o lic y r e g a r d in g p o o lin g .
P u b lic Law 93-123 d ir e c ts the B oard to e s ta b lis h the maximum in te r e s t rates
w h ich may b e p a id b y mem ber b a n k s on time d e p o sits of le s s than $ 1 0 0 ,0 0 0 .

H o w e v e r , the

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statu tory req u ir e m e n t d o es not a p p ly to time d e p o sits in e x c e s s of $100,000 and the in te r e s t
r a te s on s u c h d e p o sits m ay b e d eterm in ed b y n ego tia tion b e tw e e n th e b an k and th e d e p o s i­
tor . In p e r io d s w h e n h ig h ra te s of in t e r e s t a r e a v a ila b le on m oney m arket in s t r u m e n ts ,
in c lu d in g b a n k C ertifica tes of D ep o sit of $100,000 or m o r e , in d iv id u a ls , in c lu d in g m oney

,

b r o k e r s b a n k s , as w e ll as fin a n cia l in ter m e d ia rie s s u c h as o p en and c lo s e d en d fu n d s
h a v e in th e p a st a c tiv e ly s o lic ite d fu n d s from the p u b lic in o rd er to p u r c h a se C ertificates
of D ep o sit in d en om in ation s of $100,000 or m o re. In lig h t of th e p o ten tia lly a d v e r s e effects
that p o o lin g m ay h a v e on m em ber and nonm em ber fin a n cia l in stitu tio n s d u e to p o ten tia lly

,

d is r u p tiv e s h ifts of f u n d s th e B oard b e lie v e s it ap p rop riate to am end R egu latio n Q to
s p e c ific a lly p ro h ib it th e p aym en t o f in te r e s t in e x c e s s of th e rate e s ta b lis h e d for d e p o sits
of l e s s than $100,000 on p oo led d e p o s its .
S e c tio n 2 1 7 .3 (a ) of R eg u la tio n Q p r o h ib its th e paym en t of in te r e s t on a tim e or
s a v in g s acco u n t at a ra te in e x c e s s of the a p p lic a b le maximum rate e s ta b lis h e d b y the B o a r d .
T h e B oard p r o p o se s to add a n ew s e n te n c e to th is s e c tio n p r o h ib itin g th e p aym en t of in te r ­
e s t at a rate in e x c e s s of that p r e s c r ib e d in § 2 1 7 .7 (b ) or (d ) on a tim e d e p o sit w h e r e the
b a n k k n o w s or h as r e a s o n to kn ow that s u c h tim e d e p o sit c o n s is ts of fu n d s a c q u ire d or
s o lic ite d for the p u r p o se of p o o lin g p rim a r ily to a c h ie v e s u c h h ig h e r r a t e .
In p r o p o sin g th is am en d m en t, th e Board d o es n ot in ten d to d is r u p t cer ta in w e ll e s ta b lis h e d p r a c tic e s w h ic h in c id e n ta lly in v o lv e p o o lin g of fu n d s b u t w h ic h are not
in ten d ed p r im a r ily fo r th e p u r p o s e of a c h ie v in g a h ig h e r ra te of in te r e s t and do n ot in te r ­
fe r e w ith the r e g u la tio n of in t e r e s t r a t e s .

For exam ple:

(1 ) For p u r p o s e s of econom y and

a d m in istra tiv e e f f ic ie n c y , tr u s t dep artm en t o ffic e r s fr e q u e n tly com bine tem p orarily id le
b a la n c e s from a num ber of tr u s t a c c o u n t s . P r o v id e d s u c h p oo lin g a ctiv ity is o n ly an
in c id e n ta l p a rt of a bon a fid e tr u st r e la t io n s h ip , it w o u ld not v io la te the B o a rd 's p o lic y on

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p o o lin g . (2 ) A r e la te d situ a tio n o c c u r s w h e n an attorn ey or other p e r s o n actin g in a
c u sto d ia l or fid u c ia r y ca p a city h o ld s fu n d s in e s c r o w . T h e B oard w o u ld not c o n s id e r the
com bination of fu n d s h eld in esc r o w to b e a v io la tio n of its p o o lin g p o lic y w h e r e s u c h p o o l­
in g is o n ly an in cid e n ta l p a r t of the cu sto d ia l or fid u c ia r y r e la tio n s h ip .

(3 ) A n in d iv id u a l

or an o rg a n iz a tio n m ay c o n so lid a te its fu n d s p r e v io u s ly h e ld in v a r io u s a cco u n ts into a
s in g le la r g e a cco u n t.

(4 ) Mutual fu n d s w h ic h h a v e a stated in v e stm e n t o b je c tiv e of in v e s t ­

in g in oth er than d ep o sit o b lig a tio n s and w h o s e d e p o sit o b lig a tio n s n orm ally co n stitu te a
m inim al p e r c e n ta g e of the fu n d p ortfolio m ay b e o ffere d a la r g e den om in ation C ertifica te of
D ep o sit b y a m em ber bank..
To a s s i s t th e B oard in its co n sid e r a tio n of th is m a tte r , in te r e ste d p e r s o n s are
in v ite d to sub m it r e le v a n t d a ta , v ie w s , or a r g u m e n ts . A ny s u c h m aterial sh o u ld b e s u b ­
m itted in w r itin g to the S e c r e ta r y , B oard of G overn ors of the F ed era l R e s e r v e S y ste m ,
W ashin gton, D .C . 20551, an d sh o u ld b e r e c e iv e d not later than May 10, 1976. A ll m aterial
sub m itted sh o u ld in c lu d e the d o ck et num b er R -0 0 2 4 . S u ch inform ation w ill b e m ade a v a il­
able for in s p e c tio n and co p y in g u p on r e q u e s t , e x c e p t as p r o v id e d in § 2 6 1 .6 ( a ) of the
B oard 's R u les R eg a rd in g A v a ila b ility of Inform ation.
T h is am endm ent is p r o p o se d p u r su a n t to th e B o ard 's au th ority u n d e r §19 of th e
F ed era l R e s e r v e A ct (12 U .S .C . 371b and 461) to p r e s c r ib e r u le s g o v e r n in g th e p aym ent
of in te r e s t on d e p o sits in c lu d in g lim itation s on the ra tes of in te r e s t w h ic h m ay b e p a id b y
m em ber b a n k s and to p r e s c r ib e s u c h r e g u la tio n s as it m ay deem n e c e s s a r y to effectuate the
p u r p o s e s of §19 and to p r e v e n t e v a s io n s th e r e o f. To im plem ent its p r o p o s a l, th e Board
p r o p o se s to am end § 2 1 7 .3 (a ) of R eg u la tio n Q (12 CFR 2 1 7 .3 ( a ) ) b y ad d in g th e fo llo w in g
n ew s e n te n c e at the en d th e r e o f.

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§ 2 1 7 .3 —INTEREST ON TIME AND SAVINGS DEPOSITS
(a )

* * * No m em ber bank s h a ll p a y in te r e s t at a rate in e x c e s s of that

p r e s c r ib e d in § 2 1 7 .7 (b ) or § 2 1 7 .7 (d ) on a tim e d ep o sit w h e r e the ban k kn ow s
or h a s r e a so n to know that the time d e p o sit c o n s is ts of or r e p r e s e n ts fu n d s
ob tain ed or s o lic ite d b y the b a n k , a d e p o s ito r , or any other p e r s o n , for the
p u r p o se of p o o lin g s u c h fu n d s p rim a r ily to a c h ie v e the exem p tion from
in te r e s t rate c e ilin g s p r o v id e d in § 2 1 7 .7(a ) .
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B y o r d e r of the B oard o f G o v e r n o r s, March 8 , 1976.

(S ig n e d ) T h eo d o re E . A llison
T h eo d o re E . A lliso n
S e c r e ta r y of the Board

[SEAL]

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