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F ederal r es er v e Bank o f Dallas DALLAS, TE X A S 75222 Circular No. 6 9 -7 6 April 1, 1969 PROPOSED AMENDMENTS TO REGULATION Q To All Member Banks in the Eleventh Federal Reserve District: Attached is a copy of a press release announcing the issuance by the Board of Governors of the Federal Reserve System of proposed amendments to Regulation Q with respect to bank advertising together with a copy of proposed amendments. Comments on the proposal should be received by the Board by April 28, 1 9 6 9 * Yours very truly, P. E. Coldwell President Enclosures (2) This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) For immediate release March 28, 1969,, The Board of Governors of the Federal Reserve System today issued for comment a proposed rule designed to foster greater clarity in advertisements by member banks of the Interest they pay on deposits. The proposal would amend Federal Reserve Regulation Q, "Payment of Interest on D e p o s i t s a n d would implement the authority granted to the Board by Congress in the Act of September 21, 1968 (P.L. 90-505). A similar rule is being proposed by the Federal Deposit Insurance Corporation and by the Federal Home Loan Bank Board with respect to Institutions under their jurisdictions. The proposal would establish guidelines for banks in advertising percentage yields on deposits. Recent advertisements of a number of banks referred to the average annual percentage yield on a deposit if the customer leaves his funds with the bank for many years. The average percentage yield over a period of years is higher than the simple rate of interest because of compounding, and lt becomes higher the longer the funds are left on deposit. Under the proposal, any State member or national bank that advertises the average annual percentage yield on deposits would be required to include an equally prominent statement of the simple interest rate and the number of years required to achieve the yield, together with a reference to the basis for compounding and an explanatory statement on average annual yield. It is believed that the proposal would minimize any confusion or misunderstanding that might result from advertising average annual percentage yield. A copy of the proposed amendments in the form submitted for publication in the Federal Register is attached. Comments on the pro posal should be received by the Board by April 28, 1969, Attachment FEDERAL RESERVE SYSTEM [12 CFR PART 217] PAYMENT OF INTEREST ON DEPOSITS Advertising Interest on Deposits The Board of Governors is considering amending Part 217 (Regu lation Q) in the following respects: 1, The heading of the part would be amended to read as follows: PART 217 - INTEREST ON DEPOSITS 2, The last two sentences of § 217,6 would be revoked and the remainder of that section redesignated as § 217,7. 3, § 217.3 Section 217.3(a) and (e) would be amended to read as follows: Interest on time and savings deposits. (a) Maximum rate. Except as provided in this section, no member bank shall, directly or indirectly, by any device whatsoever, pay interest on any time or savings deposit at a rate in excess of such applicable maxi mum rate as the Board of Governors of the Federal Reserve System shall prescribe from time to time in § 217.7. In ascertaining the rate of inter est paid, the effects of compounding of interest may be disregarded. * * * (e) Technical grace periods in computing Interest on certain time deposits. Where a time deposit matures in 30 days, 90 days, 180 days, 360 days, or even multiples of these periods, or where a time deposit matures in one month, three months, six months, twelve months, or even multiples of these periods, member banks may pay interest for such periods at one twelfth of the maximum rate, one quarter of the maximum rate, one half of the maximum rate, or at the maximum rate, or even multiples thereof, respectively. In 2- the case of any other time deposit no member bank shall pay interest at the maximum rate based on more days than the number of days the funds are actu ally on deposit, 4. In § 217.3(g) the reference to § 217.6 would be amended to refer to § 217.7. 5. § 217.6 A new § 217.6 would be added to read as follows: Advertising of interest on deposits. Every advertisement, announcement, or solicitation relating to the Interest paid on deposits in member banks shall be governed by the following rules: (a) Annual rate of simple interest. in terms of the annual rate of simple interest. Interest rates shall be stated In no case shall a rate be advertised that is in excess of the applicable maximum rate for the particular deposit. (b) Percentage yields based on one year. Where a percentage yield achieved by compounding interest during one year is advertised, the annual rate of simple interest shall be stated with equal prominence, together with a reference to the basis of compounding. No member bank shall advertise a percentage yield based on the effect of grace periods permitted in § 217.3. (c) Percentage yields based on periods in excess of one vear. No advertisement shall Include any indication of a total percentage yield, com pounded or simple, based on a period in excess of a year, or an average an nual percentage yield achieved by compounding during a period in excess of a year, unless the annual rate of simple Interest and the required number of years for such advertised yield are stated with equal prominence, together with a reference to the basis of compounding. No member bank shall advertise 3 any average annual percentage yield achieved by compounding interest during a period in excess of a year unless such yield is clearly qualified by the following language: "This yield is an average annual yield that will be attained if the deposit is held until the final indicated maturity and if interest is not withdrawn until such maturity." (d) Time or amount requirements. If an advertised rate is payable only on deposits that meet time or amount requirements, such requirements shall be clearly stated. Where the time requirement for an advertised rate is in excess of a year, the required number of years for the rate to apply shall be stated with equal prominence, together with an indication of any lower rate or rates that will apply if the deposit is withdrawn at an earlier maturity. (e) Profit. No reference shall be made to "profit". (f) Advertising must be accurate. No member bank shall make any advertisement, announcement, or solicitation relating to the interest paid on deposits that is inaccurate in any particular or that in any way mis represents its deposit contracts. (g) Solicitation of deposits for banks. Any person or organization other than a member bank that solicits deposits for a member bank shall be bound by the rules contained in this section with respect to any advertise ment, announcement, or solicitation relating to such deposits. No such person or organization shall advertise a percentage yield on any deposit it solicits for a member bank that is not authorized to be paid and advertised by such bank. 6. Sections 217.104 and 217.145 would be revoked. -4 - These proposed amendments are designed to implement the authority granted to the Board by section 2 of the Act of September 21, 1968 (82 Stat, 856) and would supersede the statement of principles on bank advertising for funds set forth in the Board's letter to member State banks of December 16, 1966, The principal purpose of the proposed amendments is to add a new rule governing advertising of Interest on deposits under which a member bank that advertises the average annual percentage yield on deposits would be required to include an equally prominent statement of the simple interest rate and the number of years required to achieve the yield, together with a reference to the basis for compounding and an explanatory statement on average annual yield. In addition, the proposed amendments would add a rule making the advertising rules expressly applicable to persons or organizations who solicit deposits for member banks In their advertisements relating to such deposits. The effect of this latter requirement would be to prevent brokers from advertising percentage yields on deposits solicited for member banks that are in excess of yields member banks themselves are permitted to advertise. T h is n o t ic e i s p u b lish ed pursuant to s e c t io n 553(b ) o f T i t l e 5 , U nited S t a t e s Code, and § 2 6 2 .2 (a ) o f the r u le s o f procedure o f th e Board o f G overnors. To aid in the consideration of this matter by the Board, interested persons are invited to submit relevant data, 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 April 2 8 , 1969, Dated at Washington, D. C., this 28th day of March, 1969. By order of the Board of Governors. (Signed) Robert P. Forrestal Robert P. Forrestal, Assistant Secretary, (SEAL)