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F ederal R
eserve
Bank
OF DALLAS
W ILLIAM H. W ALLAC E
DALLAS, TEXAS 7 5 2 2 2
FIR S T VICE P R E S ID E N T
January 24, 1986
C irc u la r 86-9
TO:
The Chief Executive O fficer of a l l
member banks and others concerned in
the Eleventh Federal Reserve D i s t r i c t
SUBJECT
Proposed rulemaking of Regulation Q,
proposed amendments
Interest on Deposits and
DETAILS
The Board of Governors of the Federal Reserve System has proposed f o r
comment r e v is io n s to Regulation Q governing the a d v e r t i s i n g of i n t e r e s t on
d ep osits by member banks. Comments should r e f e r to Docket No. R-0514 and must
be received by March 6, 1986.
The Board has a lso requested public comment on proposed ru les and on
technical amendments to Regulation Q. The proposed amendments redefine the
c a te g o r ie s of "deposit" of the r e g u l a t i o n . Comments should r e f e r to Docket
No. R-0566 and must be received by February 18, 1986.
All comments should be submitted in w r itin g to William W. Wiles,
S e c r e ta ry , Board of Governors of the Federal Reserve System, 20th and
C o n s titu tio n Avenue, N.W., Washington, D.C. 20551.
ATTACHMENTS
Two Board press r e l e a s e s
Federal R e g is ter are a tta ch ed.
and
two
documents
as
published
in
the
MORE INFORMATION
For f u r t h e r inform ation, please co n tac t t h i s Bank's Legal Department
a t (214) 651-6228.
Sin cerely yours
For additional copies of any circular please contact the Public Affairs Department at (214) 651-6289. Banks and others are
encouraged to use the following incoming WATS numbers in contacting this Bank (800) 442-7140 (intrastate) and (800)
527-9200 (interstate).
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
FEDERAL RESERVE press release
For immediate r e l e a s e
January 3, 1986
The Federal Reserve Board today proposed fo r comment rev ision s to
Regulation Q t h a t would update and sim plify the requirements f o r a d v e r t i s i n g
of i n t e r e s t on dep o sits by member banks.
Comment i s requested by March 6, 1986.
The Board has proposed t h r e e options:
1.
Continue th e present requirement t h a t member banks s t a t e
th e annual r a t e of simple i n t e r e s t ; or
2.
Require t h a t member banks s t a t e th e annual percentage
y i e l d (APY) r a t h e r than th e annual r a t e of simple i n t e r e s t ; or
3.
Require t h a t both the APY and the annual r a t e of simple
i n t e r e s t be s t a t e d .
The proposal would also req uire member banks to s t a t e in any
advertisement whether s e rv ic e charges are imposed on an account.
A copy of the Board's notice is a tta c h e d .
-0 -
Attachment
Federal Register / Vol. 51, No. 8 / Monday, January 13, 1986 / Proposed Rules
governing the advertising of interest on
deposits by member banks. Currently,
the Board’s rules concerning advertising
appear in the regulation, Board
interpretations and policy statements,
and various staff opinions. The
proposed regulation updates, clarifies
and simplifies the Board’s advertising
rules, as well as removing some current
restrictions on member bank advertising
for deposits. The Board is proposing
three alternatives concerning what
interest rate(s) must be stated in
advertisements of interest on deposits:
(1) Continue the requirement that banks
state the annual rate of simple interest
for the deposit; (2) require banks to state
the annual percentage yield for the
deposit; Or (3) require banks to state
both the annual rate of simple interest
and the annual percentage yield in
advertisements of interest on deposits.
d a te : Comments must be received by
March 6,1986.
ADDRESS: Interested parties are invited
to submit written data, views, or
arguments concerning the proposal to
William W. Wiles, Secretary, Board of
Governors of the Federal Reserve
System, 20th Street and Constitution
Avenue, NW„ Washington, DC 20551, or
such comments may be delivered to
room B-2223 between 8:45 a.m. and 5:15
p.m. Comments should refer to Docket
No. R-0514. Comments may be
inspected in room B-1112 between 8:45
a.m. and 5:15 p.m. on business days,
except as provided in § 261.6(a) of the
Board’s Rules Regarding Availability of
Information (12 CFR 261.6(a)).
FOR FURTHER INFORMATION CONTACT:
FEDERAL RESERVE SYSTEM
12 CFR Part 217
[Reg. Q; Pocket No. R-0514]
Interest on Deposits; Advertising of
Interest on Deposits
ag en c y: Board of Governors of the
Federal Reserve System.
ACTION: Proposed rulemaking.
SUMMARY: The
Board is proposing to
revise § 217.6 of its Regulation Q—
Interest on Deposits (12 CFR Part 217),
Daniel L. Rhoads, Senior Attorney (202/
452-3711) or John Harry Jorgenson,
Senior Attorney (202/452-3778), Legal
Division, Board of Governors of the
Federal Reserve System, Washington,
DC 20551.
SUPPLEMENTARY INFORMATION: Section
19(j) of the Federal Reserve Act (12
U.S.C. 371b) authorizes the Board to
prescribe rules governing the
advertisement of interest on deposits by
member banks. The current rule is
codified in Regulation Q at 12 CFR
217.6—Advertising of Interest on
Deposits. Additional advertising
requirements are set forth in other
sections in Regulation Q, in various
Board interpretations and policy
statements, and in staff opinions and
rulings. The Federal Deposit Insurance
Corporation and the Federal Home Loan
Bank Board have virtually identical
rules for institutions subject to their
respective jurisdictions. Section 19(j)
requires that the Board consult with
these agencies if it intends to issue rules
1379
pursuant to the section, and the views of
these agencies are being solicited.
The Board’s current regulations on
advertising were adopted in 1969: the
only significant regulatory change since
1969 has been to require advertisements
to disclose the presence of an early
withdrawal penalty. Other advertising
requirements have largely come through
Board interpretations and policy
statements. The Board believes that
revision of these rules is warranted in
view of the deregulation of interest rate
ceilings resulting from actions of the
Depository Institutions Deregulation
Committee (“DIDC”) pursuant to the
Depository Institutions Deregulation Act
of 1980 (Title II of Pub. L. 96-221). The
Board is concerned that current rules,
promulgated when deposit accounts
were heavily regulated, may be
inappropriate in a deregulated
environment or may be inadequate to
insure that depositors receive accurate
and adequate information in
advertisements for deposit accounts.
The Board also believes that
simplification of these rules would assist
member banks. Current Board rulings
and staff opinions in conflict with any
amendments adopted by the Board
would be rescinded, and remaining
interpretations and opinions would be
consolidated and keyed to regulatory
provisions to further simplify Regulation
Q. Regulation D and related Regulation
Q issues arising from deregulation have
been addressed previously by the Board.
51 FR 27 (Jan. 2,1986).
The proposed revisions to § 217.6—
Advertising include both technical
amendments reflecting present Board
policy and substantive amendments,
and supercede previous regulatory
proposals on which the Board has not
taken final action pending completion of
the comprehensive review of Regulation
Q-
1. Accuracy o f advertising. Currently,
section 217.6 (g)1prohibits member
banks from making any advertisement,
announcement, or solicitation relating to
the interest paid on deposits that is
inaccurate or misleading or
misrepresents its deposit contracts. The
Board proposes to retain the substance
of this provision and to amend it to
clarify that advertisements relating to
rates of interest, such as “we pay high
rates,” as well as those that state
specific interest rates would be subject
to the Board’s general advertising
regulations.
1 All citations are to current regulations. Board
interpretations and policy statements, and staff
opinions.
1380
Federal Register / Vol. 51, No. 8 / Monday, January 13, 1986 / Proposed Rules
The provision would also be amended
to clarify that “advertisement” includes
all promotional material. There is
concern, however, that application of all
of the advertising provisions to all types
of media may give consumers more
information than they can absorb in a
short period of time and may have an
adverse effect on the ability of member
banks to utilize certain media such as
radio or television. Therefore, the Board
requests comments on whether the
requirements of the proposed
advertising section should apply
uniformly to all media or whether less
stringent standards should be applied to
advertisements over radio or television,
and, if so, what those standards should
be.
2. Required provisions. At present, the
requirements for member bank
advertisements are contained in
separate regulatory sections and various
Board policy statements and
interpretations. The Board proposes to
consolidate all provisions concerning
required information into one
subsection.
a. Interest rate. Member banks
currently are required to state interest
rates in terms of the annual rate of
simple interest when they advertise any
interest rates. The rate of simple interest
may no longer be the principal rate used
for comparing investment vehicles,
however, and may not provide
consumers an adequate basis on which
they can make their investment
decisions. For example, the return to
depositors by institutions offering the
same simple rate will vary depending on
the frequency of compounding.
Consequently, the Board believes that
the requirement that member banks
state the simple rate of interest on
deposits should be reviewed.
Some mechanism for comparing the
return on the deposits being advertised
is desirable. Ideally, such a mechanism
would take into consideration all of the
characteristics associated with deposits,
but the number of variables that affect
the rate of return on deposits is large,
especially for accounts that permit
withdrawals and additional deposits.
Consequently, development of a single
formula or mechanism applicable to all
deposit categories does not appear to be
feasible.
The Board is requesting comment on
three alternatives with regard to the
interest rate that would be required to
be stated in advertisements. Under the
first alternative, the current requirement
that advertisements of interest on
deposits be required to state the annual
rate of simple interest for the deposit
would be retained. In discussing this
alternative, commenters are requested
to address the applicability of the
“simple interest” rule to variable fate
deposits and multiple rate deposits. At
present, the Board’s policy statement of
March 22,1984 (U 2-411.3, FRRS) states
that advertisements for these deposits
should contain details concerning the
length of time for which each rate would
apply and, where known, what each rate
to be paid during the life of the deposit
would be. The policy statement further
states that advertisements for multiple
rate deposits must include a statement
of the average effective annual yield for
the deposit which assumes
compounding of interest at least
annually.
The second alternative on which the
Board requests comment is to require
that any advertisement stating an
interest rate must also state an annual
percentage yield (“APY”) for the
deposit. Two of the most significant
variables—the simple interest rate and
the frequency of compounding—would be
captured through use of an APY.2 The
APY would be calculated using formulas
derived from the interest compounding
formulas approved by the Board in 19713
(12 CFR 217.151; tl 2-412, FRRS). A
2The Board also considered Dr. Richard Morse’s
idea of using cents of interest earned per $100 per
day (cents/$100/day). The Board is concerned,
however, that advertising the amount of interest
earned per $100 per day may result in greater
confusion and not be of significant benefit to
consumers. The actual numbers advertised under,
the Morse method for accounts with the same
simple rate of interest would vary by fractions of
pennies. It is unlikely that consumers would find
such minute differences useful in distinguishing
among accounts. More importantly, yield figures are
common in the financial industry, and consumers
are familiar with their use. Since the Morse concept
would be a substantial change from this industry
practice, the Board believes that this approach
would impose additional burdens on depository
institutions without commensurate benefit to
consumers, the possibility of developing a
hypothetical “typical” account which would capture
additional factors was also reviewed. Such an
approach, however, was deemed impracticable
because of difficulty in determining what a
“typical” account should be since deposit and
withdrawal patterns as well as use of particular
services vary significantly among consumers.
3The APY for deposits other than those
compounded continuously would typically be
calulated by using the formula APY=100 [(1+R/
M)N—1] where “R" is the rate of simple interest,
"M" is the number of compounding periods per
year, and "N” is the number of periods per year ior
which interest is actually compounded. Where
continuous compounding is used, the formula would
be APY=100 (en —1) where “e” is the Naperian
logarithmic base (2.71820), “r” is the simple rate of
interest, and "t" is the time expressed as a fraction
in which the numerator is the number of periods for
which interest is actually compounded and the
denominator is either 360 or 365 based on the the
particular bank's accounting practices. The APY
would be required to be accurate to one decimal
point.
bank would be free to state other
interest rates in its advertisements in
conjunction with the APY, but the APY
would have to receive greater
prominence.
The third alternative on which
comment is requested represents a
combination of alternatives one and
two. Under this alternative, the
advertising regulations would be
amended to require banks to state both
the APY and the annual rate of simple
interest in advertisements of interest on
deposits.
The three alternatives differ only on
the subject of what interest rate, or
combination of rates, should be stated in
advertisements of interest on deposits.
Neither the APY nor simple interest rule
method provides an adequate basis for
comparing the returns from variable rate
deposits and from deposits with
different maturities. Two deposit
accounts could have the same
advertised APY or simple rates but yield
different amounts. For example, the
required APY for a variable rate deposit
likely would not reflect the actual yield
received for the term of the deposit
since the APY would be based on the
initial rate offered for the deposit which
may change during the term of the
deposit. Similarly, actual yields may
differ for deposits with different
maturities but identical APYs since the
APY assumes renewal of the shorterterm deposit at its initial interest rate.
Under all alternatives, the Board is
proposing that maturity and interest rate
variability also be stated in
advertisements. Since the effect of
service charges on the rate of return on
a deposit is also not captured, the
presence of such service charges would
also be stated in advertisements.
b. Multiple Rate Deposits. The Board
has issued various interpretations and
policy statements with regard to
advertising multiple rate and variable
rate deposits. Generally, advertisements
for multiple rate deposits must state the
length of time for which the advertised
rate and subsequent rates apply. Where
all rates are known in advance,
advertisements should clearly state each
rate in equal prominence with an
equivalent of the APY which assumes
compounding at least annually.
Advertisements for variable rate
deposits should indicate the basis on
which future fluctuations in rates would
occur.
Under alternative one, advertisements
for deposits on which multiple fixed
interest rates will be paid would
continue to be required to state each
rate to be paid throughout the life of the
deposit, the length of time for which
Federal Register / Vol. 51, No. 8 / Monday, January 13, 1986 / Proposed Rules
each rate would apply, and the average
effective annual yield of the deposit
which assumes compounding at least
annually. Under alternative 2,
advertisements for these deposits would
be required to state only a composite
APY based on the multiple rates if jny
rate is stated in the advertisement. The
composite APY is equivalent to the
average effective annual yield and
would assume compounding of interest
at least annually, as required at present.
Alternative 3 would require the simple
rates and composite APY to be stated.
With regard to advertisements of
variable rate deposits, current
requirements that the advertisements
clearly state the time period for which
the rates, would apply, the method by
which future changes in rates will be
determined, and the frequency of
adjustment of these rates would
continue under all alternatives. In
addition, advertisements for variable
rate deposits would be required to state
clearly that the advertised rate is
subject to change.
c. Deposits for Which Interest Is Not
Compounded. Alternative 1 would
require only that advertisements for
these deposits state the annual rate of
simple interest. Alternative 2 would
require that advertisements for multi
year deposits on which interest is not
compounded state an APY that assumes
annual compounding,4 thus enabling
consumers to better compare yields for
varying types of deposits since it
parallels the treatment accorded other
deposits under this alternative.
d. Bonus Payments. The Board
proposes to simplify its policy
concerning advertising of a bonus on an
account 2-460.1, FRRS) and to
incorporate the policy into the
regulation to require member banks to
indicate clearly the conditions under
which the bonus will be paid. At
present, member banks must disclose
the conditions under which a bonus will
or will not be paid, including whether
the bank retains complete discretion as
to whether a bonus will be paid.
e. Service Charges. The Board is also
proposing to amend the regulation to
require that if recurring and ordinary
charges will be imposed on an account,
that fact should be disclosed in any
advertisement. The Board previously
addressed this issue with regard to
NOW accounts under a Board policy
statement of September 1980 fl|2-411,
FRRS). As service charges also affect
other accounts, the Board believes this
4The APY in such cases would be low er than the
simple interest rate.
policy should apply to advertisements
for all interest bearing deposits.
The proposed amendment would
require that the presence of recurring or
ordinary service charges be disclosed in
advertisements by a general statement
such as “This account is subject to
service charges.” Recurring or ordinary
service charges would include such
charges as account maintenance fees,
per check fees, fees imposed if the
balance in an account falls below some
minimum, and fees for account balance
inquiries. The actual fees need not be
stated in an advertisement. The Board
requests comment on the types of fees
that should be regarded as ordinary or
recurring and whose presence should be
disclosed in advertisement.
f. Additional Provisions. The present
regulatory requirements that
advertisements disclose the
applicability of any early withdrawal
penalty would be retained as would the
requirement that any time or amount
requirements for an advertised rate be
clearly stated. These provisions would
be simplified. The proposed regulation
would also continue to require member
banks to insure that any person or
organization that solicits deposits for
them complies with the terms of the
regulation.
3. Prohibited terms. The proposed
regulation would prohibit member banks
from referring to Individual Retirement
Account (“IRA") or Keogh (H R. 10) plan
deposits as tax-exempt or tax-free. In its
policy statement of March 1984, the
Board stated that the use of these terms
when referring to IRA or Keogh (H.R. 10)
plan deposits is misleading and
inaccurate since contributions to, and
earnings on, IRAs are deferred from
federal income taxes rather than exempt
from taxes.
Another provision in the proposed
regulation prohibits member banks from
using the term “profit” in referring to
interest paid on deposits. This provision
was included in the 1966 policy
statement on advertising and was part
of the 1969 regulation. Public comment is
sought on whether “profit” should
continue to be prohibited term.
4. Current regulatory provisions
modified. In order to simplify the
advertising requirements and reduce
advertising restrictions on member
banks, the amended regulations would
permit depository institutions to
advertise rates not now permitted under
the current regulations. At present,
member banks are prohibited from
advertising a total percentage yield,
compounded or simple, based on a
period in excess of a year. (12 CFR
217.6(e)) Member banks are also
1381
prohibited from advertising an average
annual percentage yield achieved by
compounding during a period in excess
of a year.
The proposed regulations under
alternatives one or two do not contain
these prohibitions. However, under
alternative one, member banks would
continue to be required to state the
simple rate in greater prominence than
any other rate, while under alternative
two member banks would be required to
state the APY in greater prominence
than any other rate. The Board requests
commenters to discuss whether the
requirements are adequate to ensure
that consumers are not misled by these
advertisements stating yields based on
periods greater than a year. Commenters
are also asked to discuss the benefits
and disadvantages of removing these
prohibitions under any of the options.
The remaining changes to the current
regulatory provisions concerning
advertising consist of restructuring the
regulation to simplify it and rewriting
several sections to provide greater
clarity. Regulatory language reflecting
alternative two appears in brackets
Regulatory Flexibility Analysis
The Regulatory Flexibility Act (5
U.S.C. 601 et seq.'] requires the Board to
consider the impact of this proposal on
small entities.
The proposed revisions to the
advertising section of Regulation Q do
not appear to impose significant new
requirements on covered institutions.
Most of the changes involve formally
incorporating existing Board policy
statements into the regulation. However,
the Board is seeking public comment on
three alternatives concerning what
interest rate(s) should be required to be
stated in advertisements of interest on
deposits. Since adoption of alternative
two could involve the most significant
change from current bank operating
procedures it will be discussed first.
Under existing rules, if an institution
includes the annual percentage yield in
an advertisement of a deposit account, it
must also state the associated simple
interest rate. Alternative two of the
proposed rule would no longer require
that the simple interest rate be included
in advertisements which state the APY.
but would require the APY be included
in advertisements that show the simple
rate. By accounting for the conversion
into principal of the interest earned
durihg the year, the APY provides the
consumer with a measure of the actual
rate of interest on an account. If no
compounding is present, then the APY is
equal to the simple rate of interest for
accounts with a maturity of one year or
1382
Federal Register / Vol. 51, No. 8 / Monday, January 13, 1986 / Proposed Rules’
less. The greater the frequency of
compounding, the higher will be the
calculated APY. For simple interest
accounts with maturities greater than
one year, however, the APY
computation assumes annual
compounding. This assumption is
necessary to prevent the APY
advertising requirements from being
misleading when comparing returns on
simple interest accounts with those on
accounts where interest is compounded.
Currently, deposit account
.advertisements frequently report both
the simple interest rate and the
associated annual percentage yield. It is
anticipated that adoption of alternative
two would result in a simplification of
deposit account advertisements since
many institutions would probably
choose to state only the APY in such
advertisements. Adoption of this
alternative may benefit consumers to
the extent that it reduces confusion
caused by the presence of two stated
interest rates for the same deposit in the
same advertisement. Moreover, this rule
may reduce the potential for advertising
to mislead consumers when some
advertisements state only a simple rate
of interest while others contain both the
simple rate and the annual yield.
The precise impact of alternative two
on member banks advertising expenses
is unknown. On the one hand, some
banks currently include in
advertisements the simple interest rate
and references to the frequency of
compounding, if applicable, but do not
explicitly state and APY. The new rule
would require these institutions to
modify their current advertisements to
include the APY, although they no
longer need to mention the simple
interest rate. On the other hand, many
institutions currently include both the
simple interest rate (and sometimes the
compounding frequency) and the APY in
advertisements. Under the proposed
rule, these institutions can simplify their
advertisements by eliminating the
former items.
Aside from seeking public comment
on the proposal that banks be required
to state any APY in their deposit
account advertisements but not be
required to state a simple rate, the Board
is seeking comment on two possible
alternatives to this rule. This first
alternative would be to maintain the
current regulatory requirements which
mandate the disclosure of the simple
rate of interest in all advertisements
which refer to a specific rate of interest.
The second alternative would require
deposit account advertisements to state
both the simple rate of interest and the
APY in equally prominent type set.
Alternative one, to maintain the
current advertising requirements with
respect to the mandatory statement of
the simple rate of interest in
advertisements, would not impose any
new costs on member banks. However,
it may not address consumers' need to
have a rate which they can readily use
for shopping among deposit account
alternatives that have various
compounding features. On the other
hand, requiring disclosure of both the
simple rate and the APY (alternative
three] would increase aggregate bank
advertising expenses somewhat since
not all institutions currently state the
APY in all advertisements. Lake
alternative two, this alternative would
give consumers a rate they can use in
shopping among various deposit account
alternatives.
Some banks' advertising expenses
will be affected by the hew requirement
that interest-bearing deposit accounts
subject to recurring service charges
contain a warning statement to that
effect. The Board currently has a policy
statement that encourages banks to give
such a disclosure for NOW accounts.
The proposed rule, however, covers all
types of interest-bearing deposit
accounts subject to recurring fees. The
Board believes that the proliferation of
nontransaction types of deposit
accounts, such as savings accounts that
are subject to service fees warrants the
increased scope of the coverage. For
example, between 1981 and 1984 the
percentage of banks that assessed a fee
against savings accounts that failed to
maintain a specified minimum balance
increased from 11 percent to 43 percent.5
. Regulation Q advertising rules apply
equally to all member banks. Since most
of the proposed revisions to Regulation
Q codify existing interpretations or
policy statements, it is unlikely that
small banks will be differentially
impacted by the proposed rule.
Regulation Q provisions do not extend
to institutions supervised by the Federal
Deposit Insurance Corporation, the
Federal Home Loan Bank Board, or the
National Credit Union Administration.
Consequently, coordination among the
agencies is important in order for
consumers to receive maximum benefits
from the proposed rule changes.
Different rules for depository
institutions under different supervision
would be both confusing to consumers
and unfair to institutions facing the more
restrictive rules. Board staff has
initiated contact and will work with the
staffs of the other banking agencies in
order to achieve a uniform set of
5SOURCE: Sheshunoff and Company Inc., Pricing
Bank Services and Loans. 1981 and 1984 reports.
advertising rules. At this time, it is
unclear whether uniformity among the
agencies will be achieved, leaving the
possibility that member banks will
operate under different rules than other
depository institutions.
List of Subjects in 12 CFR Part 217
Advertising, Banks, banking; Federal
Reserve System; Foreign banking.
Regulatory language reflecting
alternative two appears in brackets.
PART 217—[AMENDED]
Pursuant to its authority under section
19(j) of the Federal Reserve Act (12
U.S:C. 371b) the Board proposes to
amend Regulation Q (12 CFR Part 217)
by redesignating § 217.6 to be § 217.4
and revising the newly redesignated
§ 217.4 to read as follows:
§ 217.4 Advertising of interest on
deposits.
{a) Accuracy of advertising. No
member bank shall make any
advertisement relating to interest on
deposits that is inaccurate or misleading
or that misrepresents its deposit
contracts. As used in this section,
“advertisement” includes any
announcement, solicitation or other
promotional material concerning
deposits.
(b) Required information. Member
bank advertisements relating to interest
on deposits shall comply with the
following requirements:
(1) Annual rate o f simple interest. Any
advertisement for deposits stating
interest rates shall state the annual rate
of simple interest for the deposit in
greater prominence than any other
stated rate. Advertisements for deposits
maturing in less than one year shall
contain a statement that the interest rate
may change at renewal.
[(1) Annual percentage yield. Any
advertisement for depoists stating
interest rates shall state and annual
percentage yield (APY), labeled as such,
for the depoist in greater prominence
than any other stated rate.1
1The annual percentage yield shall be calcualted
using the following formulas —
APY = 100 [l-t-R/M”—1} where "R” is the rate of
simple interest. "M” is the number of compounding
periods per year, and “N" is the number of periods
for which interest is actually compounded.
Where cuntinous compounding is used, the
formula would by APY=100 (ert —1] where "e" is
the Naperian Logarithmic base (2.71820), “r” is the
rate of simple interest, and *‘t” is the time which
may be expressed as a fraction in which the
numerator is the number of periods for which
interest is actually compounded and the
denominator is either 360 or 365 based on the
particular bank's accounting practices.
APYs shall be accurate to one decimal point.
Federal Register / Vol. 51, No. 8 / Monday, January 13, 1986 / Proposed Rules
Advertisements for deposits maturing in
less than one year shall contain a
statement that the APY may change at
renewal.]
(2) Multiple fixed rate deposits.
Advertisements stating an interest rate
for depoists on which more than one
rate will be paid during the life of the
Advertisements stating an interest rate
for deposits on which more than one
rate may be paid during the life of the
deposit shall state a composite APY
based on the multiple rates. The
composite annual percentage yield shall
be calculated using the formula
deposit shall state each rate and the
length of time for which each rate is
effective, and the average effective
annual yield for the deposit which
assumes compounding of at least
annually.2
[(2) Multiple fixed rote deposits.
Rk W
APY - 100 [
<’ * 5 T >
where:
Ri - rate of simple interest paid from period 1
through qi
R?- rate of simple interest paid from period
qi -f 1 through q2
*
*
*
*
*
Rb - rate of simple interest paid from period
qb- i + l through q„
b -num ber of different interest rates
M —num ber of compounding periods per year
qb~ M times maturity in terms of years
N -- number of periods for which interest is
actually compounded
APYs shall be accurate to one decimal point.]
(3) Variable rate deposits.
Advertisements for variable rate
deposits shall clearly state:
(i) That the rate is subject to change;
(ii) The time period for which the rate
will apply, the method by which future
changes in rates will be determined, and
the frequency of adjustments of those
rates.
((4 ) Deposits for which interest is not
compounded. Advertisements stating a
rate of interest for deposits where
interest is not compounded shall state
an APY which assumes compounding of
interest at least annually. The annual
percentage yield for deposits wher£
interest is not compounded shall be
calculated using the formula:
APY = 100 [V l+ y R —1]
where:
R —the rate of simple interest and
y —the num ber of years to maturity
APYs shall be accurate to one decimal point.]
Time or amount requirements.
Any time or amount requirements for
advertised rates shall be clearly stated,
together with any lower rates that apply
if the deposit is withdrawn at an earlier
maturity or prior to maturity.
(5 ) [(6 )] Service charges.
Advertisements for deposits on which
<’ ‘ i r >
<' ♦ ? r >
recurring or ordinary service charges are
imposed shall state that the deposit is
subject to such charges.3Such a
statement may be expressed in the
following manner: “This account is
subject to service charges."
(6) [(7)] Bonus payments.
Advertisements of a bonus on a deposit
shall indicate the conditions under
which the bonus will be paid.
(7) [{8)] Penalty for early withdrawal.
Advertistments for deposits subject to
an early withdrawal penalty shall
include a clear and conspicuous
statement to that effect.
(c) Prohibited terms.—(1) IR A /
KEOGH Plan deposits. Advertisements
for Individual Retirement Account or
Keogh (HR 10) plan deposits shall not
state or imply that these deposits are
tax-free or tax-exempt.
(2) “Profit’'. The term “profit’’ shall not
be used in referring to interest paid on
deposits.
(d) Solicitation o f deposits for banks.
A member bank shall ensure that any
person or organization soliciting
deposits on behalf of the member bank
complies with the rules contained in this
section.
By order of the Board of G overnors of the
Federal R eserve System . January 3,1986.
William W. Wiles,
S ecretary o f the Board.
(4 ) [(5 )]
! The average effective annual yield is the
equivalent of a composite annual percentage yield
[FR Doc. 86-416 Filed 1-10-86; 8:45 am)
BILLING CODE 6210-01-M
and may be calculated using the formula in footnote
1.
3 Recurring or ordinary service charges include
such charges as account m aintenance fees, per
check fees, deposit or w ith d raw al fees a n d charges
imposed if the accounts goes below a minimum
balance.
1383
l
December 26, 1985
For Immediate r e le a se
The Federal Reserve Board today Issued f o r comment proposed amendments
t o Regulations D (Reserve Requirements o f Depository I n s t i t u t i o n s ) and Q ( I n t e r e s t
on Deposits) t o preserve money rtarket deposit accounts (MMDAs) and t o maintain
p e n a l t i e s f o r e a r l y withdrawal of time d e p o s i ts , in c e r t a i n circumstances, fo r
monetary policy purposes.
In 1980 Congress passed the Depository I n s t i t u t i o n s
Deregulation and
Monetary Control Act which c a l l e d f o r th e orderly phase-out and u ltim ate elim inatii
of i n t e r e s t r a t e c e i l i n g s under t h e d i r e c t i o n of an in teragency committee, the
Depository I n s t i t u t i o n s Deregulation Committee (DIDC).
Under t h e p resent law,
the DIDC term in ates and a l l i n t e r e s t r a t e c e i l i n g a u t h o r i t y exp ires March 31,
1986.
o r ig in a l
In 1982 th e Garn-St Germain Depository I n s t i t u t i o n s
Act amended the
l e g i s l a t i o n by d i r e c t i n g the DIDC t o au th o riz e a new
deposit account
d i r e c t l y e q u ivalen t t o and competitive with money market mutual funds.
Depository
i n s t i t u t i o n s were permitted t o o f f e r th e r e s u l t i n g money market deposit account
beginning December 14, 1982.
In order t o preserve t h e cu rren t treatm ent of MMDAs f o r reserve r e q u i r e
ment purposes, t h e Board proposes t o r e t a i n in i t s d e f i n i t i o n of savings deposit
the f e a t u r e s of th e MMDA.
Thus, t h e Board w i l l define MMDAs as a kind of savings
account allowing up t o s i x t r a n s f e r s per month by telephone I n s t r u c t i o n , p re
authorized t r a n s f e r , or o th er order by th e customer, no more than t h r e e of which
may be by check or d r a f t .
In a d d i t i o n , t h e Board proposes t o e li m i n a t e th e
-2 -
c u rre n t $150,000 l i m i t a t i o n on business savings accounts, bringing t h e treatm ent
of such accounts in l i n e with MMDAs.
When t h e l i m i t a t i o n s on r a t e s of i n t e r e s t t h a t may be paid on d ep o s its
e x p i r e , th e e x p l i c i t a u t h o r i t y f o r a mandatory e a r ly withdrawal penalty a l s o e x p i r e s .
The Board 1s proposing t o red efin e time d ep o s its t o in co rp o ra te an e a r ly withdrawal
penalty in order t o d i s t i n g u i s h t r a n s a c t i o n accounts from time d ep o s its f o r reserve
requirement purposes.
This action w i l l a lso r e t a i n t h e c u r re n t one and one-half
year m aturity break on nonpersonal time d e p o s i t s .
C u r r e n t l y , sh o r t- te rm nonpersonal time d e p o s its (those with m a t u r i t i e s
of 7 days t o l e s s than 1-1/2 y e a r s ) are su b je c t t o a 3 percent reserv e requirement.
Nonpersonal time dep o sits with m a t u r i t i e s of 1-1/2 y e a rs or more a r e su b je c t t o a
zero percent reserve requirement.
Under th e p roposal, a deposit q u a l i f i e s as a
time deposit only i f customers cannot make withdrawals f o r t h e f i r s t s i x days or i f
customers are p enalized seven days' i n t e r e s t f o r making withdrawals during t h a t
p erio d .
Because personal time d ep o s its are not su b je c t t o re s e r v e s , a personal time
deposit need have a withdrawal penalty only t o d i s t i n g u i s h I t from a t r a n s a c t i o n
account.
Business dep o sits rega rdless of t h e i r o r i g in a l m aturity oust be
nonwithdrawable w ithin s i x days or be su b je ct t o t h e seven days' of i n t e r e s t
penalty t o q u a l i f y as nonpersonal time d e p o s i ts , r a t h e r than t r a n s a c t i o n
accounts.
Thus, they would be su b je ct t o t h e 3 percent reserve requirement
on nonpersonal time d e p o s i ts .
In order t o have no reserve requirement, a
nonpersonal time deposit must have an o r i g in a l m aturity of a t l e a s t 18 months,
be su b je ct t o th e seven days' of i n t e r e s t penalty (or be nonwithdrawable), and
e i t h e r be su b je c t t o a penalty a t l e a s t equal t o one month's simple I n t e r e s t
on th e amount withdrawn a f t e r the s i x t h day but within t h e f i r s t 18 months
of the deposit or not be withdrawable within t h i s p e rio d .
-3 J
The Depository I n s t i t u t i o n s Deregulation Committee, as p a r t of i t s
mandate t o d ereg u late th e payment of i n t e r e s t on d ep o s its by r e g u l a t i o n , has
provided t h a t on January 1, 1986, t h e minimum balance requirements *on c e i l i n g - f r e e
n e g o tia ble order of withdrawal (NOW) accounts or Super NOWs, MMDAs, and 7- t o 31day time d e p o s its w i l l be e l i m in a te d .
The minimum balance now i s $1,000.
The
regulatory p r o h i b it i o n t h a t prevents i n s t i t u t i o n s from guaranteeing a r a t e on a
c e i l i n g - f r e e NOW account f o r longer than 30 days i s a lso elim in a ted .
Institutions
are reminded t h a t a l l o th e r account c h a r a c t e r i s t i c s and l i m i t a t i o n s remain in
place u n t i l March 31, 1986.
A d d i t i o n a l l y , t h e Federal Reserve Board has issued an amendment t o
Regulation D concerning reserve requirements on MMDAs held by Hawaiian nonmember
depository i n s t i t u t i o n s .
The Board's n o tic es are a tta c h e d .
-
Attachment
0-
Federal Register / Vol. 51, N q. 1 / Thursday, January 2, 1986 / Proposed Rules
31
12 CFR Part 217
[Reg. Q; Docket No. R-0566]
Interest on Deposits; Definition of
Deposits and Technical Amendments
a g en c y: Board of Governors of the
Federal Reserve System.
ACTION: Request for public comment on
proposed rules and on technical
amendments.
Pursuant to its authority
under section 19 of the Federal Reserve
Act, as amended, the Board requests
comment on its proposed amendments
to 12 CFR Part 217 (Regulation Q—
Interest on Deposits]. The proposed
amendments to Regulation Q redefine
the categories of “deposit" for the
sum m ary:
32
Federal Register / Vol. 51, No. 1 / Thursday, January 2, 1986 / Proposed Rules
purposes of Regulation Q. The
amendments are being proposed due to
the expiration of the Depository
Institutions Deregulation Act of 1980
(Title II of Pub. L . 96-221; “DIDA”)
which mandated the phase-out of
limitations on the payment of interest on
deposits. These amendments would also
have the effect of eliminating the
$150,000 limit on business savings
accounts as well as the sections of
Regulation Q defining time and savings
deposits, governing withdrawals from
such deposits, setting early withdrawal
penalties, and establishing account
characteristics and interest rate ceilings.
The amendments would define as a
demand deposit any business account
that otherwise meets the definition of
"savings deposit” but that permits more
than three preauthorized or telephone
transfers per month and any business
account that otherwise meets the
definition of “money market deposit
account” but that permits more than six
such transfers or more than three checks
or drafts to be drawn per month. No
interest may be paid on such a demand
deposit, when the Board issues its final
rule, it intends to make other technical
amendments to Regulation Q, to rescind
some published interpretations of
Regulation Q, and to revise other
interpretations in order to reflect the
changes it makes to the regulation
resulting from this proposal.
DATES: Comments must be received no
later than February 18,1986. The final
rule will be effective at the end of March
31,1986.
a d d re s s : Comments, data, views, or
arguments concerning the proposal from
interested parties should refer to Docket
No. 1R-0566 and should be submitted to
William W. Wiles, Secretary, Board of
Governors of the Federal Reserve
System, 20th and C Streets NW„
Washington DC 20551. Comments also
may be delivered to Room B-2223
between 8:45 a.m. and 5:15 p.m.
Comments may be inspected in Room B~
1122 between 8:45 a.m. and 5:15 p.m. on
business days, except as provided in
§ 261.6(a) of the Board’s Rules Regarding
Availability of Information (12 CFR
261.6(a)).
FOR FURTHER INFORMATION CONTACT:
John Harry Jorgenson, Senior Attorney
(202/452-3778), or Daniel L. Rhoads,
Senior Attorney (202/452-3711), Legal
Division, Board of Governors of the
Federal Reserve System, Washington
DC 20551.
SUPPLEMENTARY INFORMATION: Section
19(a) of the Federal Reserve Act, 12
U.S.C. 461(a), gives the Board the
authority to issue rules defining terms
used in section 19 in order to prevent
evasions of that section. Section 19(i) of
that Act (12 U.S.C. 371a) prohibits the
payment by a member bank of interest
on a demand deposit, and section 19(j)
of that Act (12 U.S.C. 371b) gives the
Board authority to issue rules governing
the payment and advertising of interest
on deposits.1 Pursuant to this authority,
the Board promulgated its current
Regulation Q which regulates the
payment of interest on deposits. The
Board’s authority under section 19(j) to
issue rules governing the payment of
interest on deposits, other than demand
deposits, and the comparable authority
of the Federal Deposit Insurance
Corporation and the Federal Home Loan
Bank Board expire with the expiration of
the Depository Institutions Deregulation
Act of 1980 at the end of March 31,1986.
The expiration of the rules of the
DIDC and of the authorities transferred
to the DIDC at the end of March 31,
1986, will not affect section 19(i) of the
Federal Reserve Act which prohibits the
payment by a member bank of interest
on a demand deposit. Nor will these
expirations affect the authority of
member banks to offer accounts that
permit automatic transfers to checking
accounts (“ATS accounts") as
authorized by the last sentence of
section 19(i) of the Federal Reserve Act
(12 U.S.C. 371a) or to offer accounts
subject to negotiable orders of
withdrawal (“NOW accounts”) as
authorized by section 2(a) of Pub. L. 93100 (12 U.S.C. 1832(a)).
The proposed amendments would
revise the various “deposit” definitions
and account characteristics found in
§§ 217.1-217.7 of Regulation Q by
removing account limitations and
characteristics that expire at the end of
March 31,1986. The limitations and
characteristics expiring on that date
include the rules relating to penalties for
early withdrawals from time deposits
(§ 217.4) and the interest rate ceilings
and account characteristics for time and
savings deposits (primarily § 217.7). In
addition, the Board is proposing to
remove the $150,000 limitation on
business savings accounts. In order to
prevent savings accounts from being
used to evade the prohibition against
paying interest on demand deposits, the
Board is proposing to amend the
definition of demand deposit in
Regulation D, which is incorporated by
reference in Regulation Q, to include
any business account that otherwise
1 The current advertising rule is codified in
Regulation Q at 12 CFR 217.6—Advertising of
Interest on Deposits. In a separate ruelmaking
proceeding, the Board will be requesting comment
on proposed revisions to its rules on member bank
advertising of interest on deposits.
meets the definition of “savings deposit”
but that permits the depositor to make
more than three withdrawals per month
by means of preauthorized or telephone
transfer and any business account that
otherwise meets the definition of
“money market deposit account” but
that permits the depositor to make more
than six transfers per month by means
of preauthorized or telephone transfer
or, within these six transfers, permits
more than three withdrawals by check,
draft, or other order payable to a third
party. Additional account
characteristics affecting the payment of
interest are also set forth in various
Board interpretations and policy
statements and in staff opinions and
rulings. The revisions would render
many of these interpretations, policy
statements, and staff opinions
unnecessary.
The Board also proposes to remove
from Regulation Q the rules regarding
withdrawals from savings deposits
(§ 217.5). Many of the rules were used to
ensure that savings deposits could not
be used as demand deposits, but the
redefinition of demand deposits, for the
purposes of sections 19(b) and 19(i) of
the Federal Reserve Act, make the
savings withdrawal rules unnecessary.
Regulatory Flexibility Analysis
The Regulatory Flexibility Act (5
U.S.C. 601 et seq.) requires the Board to
consider the impact of this proposal on
small entities. In this regard, it is the
Board’s view that the proposal would
not impose any additional reporting or
recordkeeping requirements. The
purpose of this proposal is to request
comment on any alternatives that the
public believes may be preferable to the
Board’s proposed amendment of its
Regulation Q set out below. Suggested
alternatives will be considered when
comments are reviewed. The proposed
rule would apply to commercial banks
that are members of the Federal Reserve
System although the Board expects that
the Federal Deposit Insurance
Corporation and the Federal Home Loan
Bank Board will apply similar rules to
the institutions they supervise. It is
anticipated that the proposal will have
little or no adverse effect on the ability
of small depository institutions to attract
deposits.
List of Subjects in 12 CFR Part 217
Banks, banking, Federal Reserve
System, Foreign banking.
Pursuant to its authority under section
19 of the Federal Reserve Act (12 U.S.C.
461 et seq., 371a and 371b), the Board
proposes to amend Part 217 as follows:
Federal Register / Vol. 51, No. 1 / Thursday, January 2, 1986 / Proposed Rules
PART 217—[AMENDED]
1. The Authority citation for 12 CFR
Part 217 is revised to read:
Authority: 12 U.S.C. 248, 371, 371a, 371b.
461,1828, 3105, unless otherw ise noted.
§§217.4,217.5, and 217.7 [Removed]
2. Sections 217.3, 217.4, 217.5 and 217.7
of this part would be removed and
§ § 217.0 through 217.2 would be
redesignated as §§ 217.1 through 217.3
and revised to read:
§ 217.1
Authority, purpose, and scope.
(a) Authority. This regulation is issued
under the authority of section 19 of the
Federal Reserve Act (12 U.S.C. 371, 371a,
371b, 461), section 7 of the International
Banking Act of 1978 (12 U.S.C. 3105), and
section 11 of the Federal Reserve Act (12
U.S.C. 248), unless otherwise noted.
(b) Purpose. This regulation prohibits
the payment of interest on demand
deposits by member banks and other
depository institutions within the scope
of this regulation and sets forth
requirements concerning the
advertisement of interest on deposits by
member banks and these other
institutions.
(c) Scope. (1) This regulation applies
to state chartered banks that are
members of the Federal Reserve under
section 9 of the Federal Reserve Act (12
U.S.C. 321, et seq.) and to all national
banks. The regulation also applies to
any Federal branch or agency of a
foreign bank and to a State uninsured
branch or agency of a foreign bank in
the same manner and to the same extent
as if the branch or agency were a
member bank, except as may be
otherwise provided by the Board, if:
(1) Its parent foreign bank has total
worldwide consolidated bank assets in
excess of $1 billion;
(ii) Its parent foreign bank is
controlled by a foreign company which
owns or controls foreign banks that in
the aggregate have total worldwide
consolidated bank assets in excess of $1
billion; or
(iii) Its parent foreign bank is
controlled by a group of foreign
companies that own or control foreign
banks that in the aggregate have total
worldwide consolidated bank assets in
excess of $1 billion.
(2) For deposits held by a member
bank or a foreign bank, this regulation
does not apply to “any deposit that is
payable only at an office located outside
of the United States” (i.e., the States of
the United States and the District of
Columbia) as defined in § 204.2(t) of the
Board’s Regulation D—Reserve
Requirements of Depository Institutions
(12 CFR Part 204).
§217.2
Definitions.
For purposes of this part, the
fbllowing definitions apply unless
otherwise specified:
(a) “ATS account" means a deposit
subject to automatic withdrawals or
transfers authorized by 12 U.S.C. 371a,
and on which the member bank has
reserved the right to require at least
seven days’ notice prior to withdrawal
or transfer of any funds in the account.
Under the last sentence of that section,
a member bank may permit withdrawals
to be made automatically from a deposit
that consists only of funds in which the
entire beneficial interest is held by one
or more individuals through payment to
the bank itself or through transfer of
credit to a demand deposit or other
account pursuant to written
authorization from the depositor to
make such payments or transfers in
connection with checks or drafts drawn
on the member bank.
(b) “Demand deposit” means any
deposit that is considered to be a
“demand deposit” under § 204.2(b) of
the Board’s Regulation D—Reserve
Requirements of Depository Institutions
(12 CFR Part 204).
(c) “Deposit" means any liability of a
member bank that is considered to be a
“deposit” under § 204.2(a)(1) of the
Board’s Regulation D—Reserve
Requirements of Depository Institutions
(12 CFR Part 204).
(d) “Foreign bank” means any bank
that is considered to be a “Foreign
bank" under § 204.2(o) of the Board’s
Regulation D—Reserve Requirements of
Depository Institutions (12 CFR Part
204).
(e) “Interest” means any payment to
or for the account of any depositor as
compensation for the use of funds
constituting a deposit. A member bank's
absorption of expenses incident to
providing a normal banking function or
its forbearance from charging a fee in
connection with such a service is not
considered a payment of interest.2
(f) “NOW account” means an account
authorized by 12 U.S.C. 1832(a) on which
the member bank has reserved the right
to require at least seven days’ notice
prior to withdrawal or transfer of any
funds in the account but only if the
account consists of funds in which the
entire beneficial interest is held by a
party eligible to have such an account as
prescribed by 12 U.S.C. 1832(a)(1).3
2The Board has issued an interpretation
excluding premiums on deposits from the definition
of “interest” in certain circumstances. See 12 CFR
217.147.
3The Board has issued an interpretation
concerning NOW account eligibility. See 12 CFR
217.157.
33
§ 217.3 Interest on demand deposits.
Except as provided by section 19 of
the Federal Reserve Act, no member
bank of the Federal Reserve System
shall, directly or indirectly, by any
device whatspever, pay any interest on
any demand deposit. This prohibition
does not apply to NOW accounts, ATS
accounts, or accounts subject to
withdrawals by telephonic or data
transmission order or instruction which
consist of funds, the entire beneficial
interest of which is held by a party
eligible to hold a NOW account.
* * * * *
By order of the Board of G overnors of the
Federal R eserve System , D ecem ber 23,1985.
W illiam W . W iles,
Secretary of the Board.
[FR Doc. 85-30741 Filed 12-31-85; 8:45 am]
SILLING CODE 6210-01-41
@FedFRASER