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F ederal Reserve Bank
DALLAS, TEXAS
of
Dallas
75222
Circular No. 81-85
April 24, 1981
REGULATION Q
Eligibility for NOW Accounts
TO ALL MEMBER BANKS
AND OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
The Board of
Governors of the Federal Reserve System is
requesting public comment on a proposal to clarify the rules concerning the
class of depositors eligible to maintain NOW accounts at member banks. The
proposal is intended to make the eligibility criteria for NOW accounts more
understandable.
It would also preclude the need for Board review of
individual questions regarding eligibility.
Printed on the following pages is a copy of the Board's press
release dated April 14,1981, and a copy
of the material which was
submitted for publication in the Federal Regis te r. Interested persons are
invited to submit comments to James McAfee, Assistant Secretary, Board of
Governors of the Federal Reserve
System, 20th Street & Constitution
Avenue, N.W., Washington, D.C. 20551, to be received no later than June 15,
1981. When submitting material, please refer to Docket No. R-0356.
Questions regarding Regulation Q and this circular should be
directed to the Consumer Affairs Section of our Bank Supervision and Regu
lations Department, Ext. 6171.
Sincerely yours,
William H. Wallace
First Vice President
B a n k s a n d o t h e r s a r e e n c o u r a g e d to use th e fo llo w in g in c o m in g W A T S n u m b e r s in c o n t a c t in g th is Ban k:
1-800-442-7140 (in tr a s t a te ) a n d 1-800-527 -920 0 (in te r s ta te ). F o r ca lls p la c e d lo cally, p l e a s e use 651 plus the
e x te n s io n referred to ab ove.
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 release
April 14, 1981
The Federal Reserve Board today proposed an interpretation of its
rules to clarify what depositors are eligible to hold interest-bearing
checking accounts at member banks.
The Board asked for comment by June 15, 1981.
The proposed interpretation would affect eligibility for Negotiable
Order of Withdrawal (NOW) accounts authorized nationwide by the Consumer
Checking Account Equity Act of 1980.
The Board's proposal is intended to make the eligibility criteria
for NOW accounts more understandable, and, by establishing classes of individuals
and others eligible to hold such accounts, to serve the public interest by
precluding the need for Board review of numerous individual questions of
eligibility.
The interpretation proposed by the Board would permit the following
to establish NOW accounts at member banks:
1.
Individuals, if the funds are not used primarily for
business purposes. (These individuals — only — would also
be eligible to hold Automatic Transfer Service
(ATS) accounts.)
2.
Non-profit organizations eligible for tax exemption under
specified sections of the Internal Revenue Code (attached).
3.
Government units, if the funds are used for the purposes of
schools, colleges, universities, libraries or hospitals.
Other governmental units, and all businesses operated for profit —
including sole proprietorships, partnerships and corporations —
would not be
permitted to maintain interest-bearing checking accounts at member banks.
Topics on which the Board would particularly like to receive comment
are listed on Page 4 of the attached text of the Board's proposal, which also
includes background and explanation.
Attachments
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYST04
[12 CFR Part 217]
(Docket No. R-0356)
NOTICE OF PROPOSED INTERPRETATION
Depositors Eligible to Maintain NOW Accounts
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Proposed interpretation.
SUMMARY: The Board of Governors is requesting comment from the public
on a proposal to clarify the rules concerning the class of depositors
eligible to maintain NOW accounts at member banks. Under Regulation Q
at present, NOW accounts are available only to individuals and to organ
izations operated primarily for religious, philanthropic, charitable,
educational, fraternal, or other similar purposes and not operated for
profit. The Board proposes to issue an interpretation of the regulation
under which the class of depositors eligible to maintain NOW accounts
at member banks would include:
(1) individuals, if the funds are not
used primarily for business purposes, (2) nonprofit organizations that
are described in section 501(c)(3) through (13) and (19) of the Internal
Revenue Code, and (3) governmental units, if the funds are used for
the purposes of schools, colleges, universities, libraries, or hospitals.
However, all businesses that are operated for profit, including sole
proprietorships, partnerships, corporations, and other organizations,
and most governmental units would not be permitted to maintain NOW ac
counts. The Board believes that, under this approach, the eligibility
criteria for NOW accounts would be more understandable, and would pre
clude the need for Board review of individual questions of eligibility.
DATE: Interested parties are invited to submit relevant data, views,
and other comments. Comments must be received by June 15, 1981.
ADDRESS: Comments, which should refer to Docket No. R-0356, should
be addressed to James McAfee, Assistant Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
N. W .t Washington, D. C. 20551, or should be delivered to room B-2223
between 8:45 a.m. and 5:15 p.m. Comments received may be inspected
in room B-1122 between 8:45 a.m. and 5:15 p.m. except as provided in
section 261.6(a) of the Board's Rules Regarding Availability of Informa
tion (12 CFR 261.6(a)).
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FOR FURTHER INFORMATION CONTACT: Gilbert T. Schwartz, Associate General
Counsel (202/452-3625), or Paul S. Pilecki, Senior Attorney (202/452
3281), Legal Division, Board of Governors of the Federal Reserve System,
Washington, D. C. 20551.
SUPPLEMENTARY INFORMATION: The Consumer Checking Account Equity Act
of 1980 (Title III of Pub. L. 96-221) ("Act") authorizes depository
institutions (except credit unions which are authorized to offer share
draft accounts) nationwide effective December 31, 1980, to permit the
owner of a deposit or account on which interest or dividends are paid
to make withdrawals by negotiable or transferable instruments for the
purpose of making transfers to third parties (12 U.S.C. § 1832(a)(1)).
Under the statute, NOW accounts are available only to individuals and
to qualifying organizations (12 U.S.C. § 1832(a)(2)). Qualifying organ
izations must meet two separate tests of eligibility. First, they must
be operated primarily for "religious, philanthropic, charitable, educa
tional, or other similar purposes;" second, they must not be operated
for profit. The Federal Reserve has advised member banks that the class
of depositors eligible to hold NOW accounts is virtually identical to
the class of depositors eligible to hold savings deposits without limit
(with the exception of governmental units).
Interpretations and opinions
issued in the past by the Board with respect to the class of depositors
eligible to hold savings accounts without limit are illustrative of
the classes of depositors eligible to hold NOW accounts under the Act
and the regulation.
(See Release of October 20, 1980.)
The Federal Reserve has received a significant number of requests
from member banks and their customers for rulings and opinions concerning
NOW account eligibility since the enactment of the Act. In many instances
these requests have required the consideration of subtle distinctions
that are not altogether practical for application on a uniform basis
by a large number of depository institutions. In order to alleviate
problems that have arisen among member banks concerning the class of
depositors eligible to hold NOW accounts, the Board believes it is ap
propriate at this time to simplify and clarify the rules concerning
NOW account eligibility. Accordingly, the Board requests public comment
by June 15, 1981, on a proposed interpretation of Regulation Q as described
below.
Under the Board's proposal, all organizations, partnerships,
corporations, and associations that are not organized for profit and
are described in section 501(c)(3) through (13) and (19) of the Internal
Revenue Code (26 U.S.C. (I.R.C. 1954) S 501(c)(3) through (13), (19))
1/ Regulation Q explicitly permits fraternal organizations to maintain
NOW accounts; however, the statute omits such group from the list of
eligible NOW account depositors. Since the statutory provisions were
based on Regulation Q, it is believed that the omission of the term
"fraternal" was unintentional and without significance.
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would be eligible to maintain NOW accounts at a member bank. In this
regard, the Act extends NCW account eligibility to organizations not
operated for profit if they are operated primarily for religious, phil
anthropic, charitable, educational or for other similar purposes. The
Board believes that virtually all nonprofit organizations described
in 501(c)(3) through (13) and (19) can be regarded as being operated
primarily for purposes that are similar to religious, philanthropic,
charitable, or educational in nature and that such provisions are com
prehensive with respect to describing such organizations. The Board
believes that this interpretation would facilitate compliance by deposi
tory institutions and greatly reduce the need for individual rulings
on NOW account eligibility.
The Board also believes that NOW accounts should not be avail
able for funds that represent deposits of an enterprise organized to
make a profit. In this regard, the legislative history of the Act indicates
that NOWs would be available to nonprofit organizations and to consumers
as a means of providing an additional return to household funds.-' How
ever, the Board has had a longstanding interpretation (Published Inter
pretations f3085; 1936 Federal Reserve Bulletin 120) which provides
that deposits of funds of an individual used in his business, i.e. a
sole proprietor, may be classified as savings deposits since it was
viewed as impracticable to distinguish between funds of an individual
used in a business and other funds of the individual.
(However, funds
of a corporation owned solely by an individual may not be held as NOW
accounts since the corporation exists separate and apart from the in
dividual.) This ruling has been extended to apply also in the case of
NOW accounts and eligibility for the automatic transfer service (ATS).
Continuation of the policy of permitting deposits of businesses owned
by individuals to be held as NOW accounts could be regarded as contrary
to Congressional intent in authorizing such accounts. Consequently,
the Board proposes to modify the eligibility requirements for NOW ac
counts (as well as ATS accounts) to exclude entities organized or operated
to make a profit regardless of whether they are corporations, partnerships,
sole proprietorships, associations, or any other organization. This
action also would eliminate the disparate treatment accorded sole pro
prietorships and closely held corporations. The Board requests comment
on the desirability of distinguishing between funds of an individual
used primarily for personal purposes and those of a sole proprietorship
used primarily for business purposes as well as any operational diffi
culties presented by such an approach.
At present, certain governmental units are eligible for NOW
accounts at member banks. These entities include independent school
districts and state universities, redevelopment authorities, and public
housing authorities. Because states and political subdivisions are
2/ See 126 Cong. Rec. H2276, H2288, H2291 (daily ed. March 27, 1980).
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regarded as serving governmental purposes, the Board believes that govern
mental units generally should not be permitted to maintain NOW accounts.
However, under the Board's proposal, governmental units would be eligible
to maintain NOW accounts if the funds are to be used exclusively by
schools, libraries, colleges, universities, and hospitals or other medical
facilities. The Board believes that funds used for such purposes should
be permitted to be placed in NOW accounts in order to accord equal treat
ment to public entities that perform functions similar to nonprofit
entities in the private sector. Thus, if a governmental unit is organized
for any one of the listed purposes or maintains an account exclusively
for one of those purposes, such funds could be placed in a NOW account.
All other governmental accounts would not be eligible for NOW accounts,
including redevelopment authorities and public housing authorities.
This approach will also eliminate the need for a determination of whether
a particular governmental entity is independent or separately constituted
as is required under current interpretations.
In order to provide for an orderly transition for NOW account
and ATS customers, the Board proposes to provide for a phase-out period
for existing NOW accounts that would not qualify under the revised eligi
bility criteria. Under the proposal, all NOW and ATS accounts that
met the current NOW account eligibility criteria could continue in effect
until December 31, 1981. After that date, NOW and ATS accounts would
be limited to the new list of eligible depositors.
It should be noted that the Board does not propose to change
the existing policy concerning eligibility for traditional passbook
and statement savings accounts. In addition, the Board will coordinate
its NOW account eligibility policy with the other Federal financial
institution regulatory agencies.
Comment is invited from all parties on the issues raised by
the proposal. The Board is particularly interested in views (1) on
using section 501(c)(3) through (13) and (19) of the Internal Revenue
Code as the criteria for determining which nonprofit organizations would
be eligible for NOW accounts, (2) on excluding sole proprietorships
from NOW and ATS account eligibility, (3) on prohibiting NOW accounts
for governmental units except where the funds are used for the purposes
of schools, colleges, universities, hospitals and libraries, (4) on
the phase-out of existing NGW and ATS accounts that would no longer
qualify under the proposed rules, (5) on the potential problems that
could arise in attempting to distinguish whether funds of an individual
are used primarily for personal rather than business purposes, and (6)
on whether the proposed revised rules concerning NOW and ATS eligibility
would be more understandable and easier to administer for member banks.
Comment should be sent by June 15, 1981, to James McAfee, Assistant
Secretary, Board of Governors of the Federal Reserve System, Washington,
D. C. 20551.
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Pursuant to its authority under section 19(a) of the Federal
Reserve Act (12 U.S.C. S 461(a)), the Board proposes to amend Regula
tion Q (12 CFR Part 217) by adding a new section 217.157 as follows:
S 217.157 —
Eligibility for NOW and ATS Accounts
(a)(1) Effective December 31, 1980, the Consumer Checking
Account Equity Act of 1980 (Title III of the Depository Institutions
Deregulation and Monetary Control Act of 1980, P.L. 96-221; 94 Stat.
147) authorizes depository institutions nationwide to offer interestbearing checking (NOW) accounts to depositors where the "entire beneficial
interest is held by one or more individuals or by an organization which
is operated primarily for religious, philanthropic, charitable, educational,
or other similar purposes and which is not operated for profit."
(12
U.S.C. 1832(a)(2)). The purpose of the Act was to extend the availability
of NOW accounts throughout the nation. Previously, as an experiment,
NOW accounts were only authorized to be offered by depository institutions
in New England, New York, and New Jersey.
(2) The NOW account experiment established by Congress in
1973 did not specify the types of customers that could maintain NOW
accounts. In enacting the NOW account provision. Congress adopted virtually
the same language concerning NOW account eligibility that previously
had been adopted by the Board and the Federal Deposit Insurance Corporation
with regard to the types of customers permitted to maintain NOW accounts
in institutions located in the NOW account experiment region.
(12 CFR
217.1(e)(3) and 12 CFR 329.1(e)(2)). This definition was based upon
longstanding regulatory provisions concerning eligiblity criteria for
savings deposits.
(3) The Board has determined to clarify the types of entities
that may maintain NOW accounts at member banks.
(b) Individuals. (1) Under current provisions, an individual
may maintain a NOW account if the funds are used primarily for personal
or business purposes. Since NOW accounts are generally not available
to business organizations, the Board believes that it would be consistent
with Congressional intent to permit individuals to maintain NOW accounts
only if the funds in the account are to be used primarily for personal,
not business, purposes. Consequently, entities organized or operated
to make a profit may not maintain NOW accounts regardless of whether
they are corporations, partnerships, sole proprietorships, associations,
or other form of organization.
(2)
Under current provisions, funds held in a fiduciary capacity
(either an individual fiduciary or a corporate fiduciary such as a bank
trust department), particularly those awaiting distribution or investment,
may be held in the form of NOW accounts if the beneficiaries are individuals.
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The Board believes that such a classification should continue since
fiduciaries are required to invest even temporarily idle balances to
the greatest extent feasible in order to responsibly carry out their
fiduciary duties. The availability of NOW accounts provides a convenient
vehicle for providing a short-term return on temporarily idle trust
funds.
(3)
Pension funds, escrow accounts, and security deposits,
and other funds held under various agency agreements may also be classified
as NOW accounts if the entire beneficial interest is held by individuals.
The Board believes that these accounts are similar in nature to trust
accounts and should be accorded identical treatment. Therefore such
funds may be regarded as eligible for classification as NOW accounts.
(c) Nonprofit Organizations. Under the Act, a nonprofit
organization that is operated primarily for religious, philanthropic,
charitable, educational, or other similar purposes may maintain a NOW
account. The Board has determined that it is appropriate to regard
all organizations that are not organized for profit and that are described
in section 501(c)(3) through (13) and (19) and 528 of the Internal
Revenue Code (26 U.S.C. (I.R.C. 1954) §S 501(c)(3) through (13), (19),
528) as being operated for religious, philanthropic, charitable, educa
tional, or other similar purposes. Accordingly, all such organizations
that are not organized for profit may maintain NOW accounts.
(d) Governmental Units. Under the Act, governmental units
generally may not maintain NOW accounts. The Board believes that seme
governmental units are operated for philanthropic, educational, or char
itable purposes, and that with regard to their eligibility for NOW ac
counts, such entities should be regarded as being operated primarily
for such purposes. Consequently, a governmental unit, regardless of
form of organization, may maintain a NOW account if the funds are in
the name of and used solely for schools, universities or colleges,
libraries, or hospitals and other medical facilities.
(e) Phase-out. In order to avoid unduly disrupting existing
account relationships, a NOW account established at a member bank prior
to April 8, 1981, that represents funds of a nonqualifying entity that
previously qualified to maintain a NOW or ATS account may be maintained
until December 31, 1981.
By order of the Board of Governors, April 14, 1981.
(Signed)
D. Michael Manies
D. Michael Manies
Assistant Secretary of the Board
[SEAL]
TITLE 26—INTERNAL REVENUE CODE
| SOI. Exemption from tax on corporations, certain
trusts, etc.
(3) Corporations, and any community chest,
fund, or foundation, organized and operated
exclusively for religious, charitable, scientific,
testing for public safety, literary, or educa
tional purposes, or-to-foster national or inter
national am ateur sports competition (but
only if no part of its activities involve the pro
vision of athletie facilities or equipment), or
for the prevention of cruelty to children or
animals, no part of the net earnings of which
inures to the benefit of any private share
holder or individual, no substantial part of
the activities of which is carrying on propa
ganda. or otherwise attempting, to influence
legislation (except as otherwise provided in
subsection (h». and which does not partici
pate in, or intervene in (including the pub
lishing or distributing of statements), any po
litical campaign on behalf of any candidate
for public office.
(4) Civic leagues or organizations not orga
nized for profit but operated exclusively for
the promotion of social welfare, or local asso
ciations of employees, the membership of
which is limited to the employees of a desig
nated person or persons in a particular mu
nicipality, and the net earnings of which are
devoted exclusively to charitable, educational,
or recreational purposes.
(6) Labor, agricultural, or horticultural or
ganizations.
(6) Business leagues, chambers of com
merce, real-estate boards, boards of trade, or
professional football leagues (whether or not
administering a pension fund for football
players) not organized for profit and no part
of the net earnings of which inures to the
benefit of any private shareholder or individ
ual.
(7) Clubs organized for pleasure, recreation,
and other nonprofitable purposes, substan
tially all of the activities of which are for
such purposes and no part of the net earnings
of which inures to the benefit of any private
shareholder.
(8) Fraternal beneficiary societies, orders,
or associations—
(A) operating under the lodge system or
for the exclusive benefit of the members of
a fraternity itself operating under the lodge
system, and
(B) providing for the payment of life, sick,
accident, or other benefits to the members
of such society, order, or association or
their dependents.
(9) Voluntary employees' beneficiary associ
ations providing for the payment of life, sick,
accident, or other benefits to the members of
such association or their dependents or desig
nated beneficiaries, if no part of the net earn
ings of such association inures (other than
through such payments) to the benefit of any
private shareholder or individual.
(10) Domestic fraternal societies, orders, or
associations, operating under the lodge
system—
(A) the net earnings of which are devoted
exclusively to religious, charitable, scientif
ic. literary, educational, and fraternal pur
poses, and
(B) which do n o t provide for the payment
of life, sick, accident, or other benefits(11) Teachers' retirem ent fund associationsof a purely local character. If—
(A) no p u t of their net earnings inures
(other than through payment of retirement
benefits) to the benefit of any private shar
eholder or individual, and
(B) the income consists solely of amounts
received from public taxation, amounts re
ceived from assessments on the teaching
salaries of members, and income in respect
of investments.
(12) Benevolent life insurance associations
of a purely local character, mutual ditch or ir
rigation companies, mutual or cooperative
telephone companies, or like organizations;
but only if 85 percent or more of the income
consists of amounts collected from members
for the sole purpose of meeting losses and ex
penses.
(13) Cemetery companies owned and operat
ed exclusively for the benefit of their mem
bers or which are not operated for profit; and
any corporation chartered solely for the pur
pose of the disposal of bodies by burial or cre
mation which is not permitted by its charter
to engage in any business not necessarily inci
dent to that purpose and no part of the net
e a m i n c s of which inures to the benefit of any
private shareholder or individual.
(19) A post or organization of war veterans,
or an auxiliary unit or society of, or a trust or
foundation for, any such post or organiza
tion—
(A) organized in the United States or any
Of its possessions,
(B) at least 75 percent of the members of
which are war veterans and substantially all
of the other members of which are individ
uals who are veterans (but not war veter
ans), or are cadets, or are spouses, widows,
or widowers of war veterans or such individ
uals, and
(C) no part of the net earnings of which
Inures to the benefit of any private share
holder or individual.
§ 528. Certain homeowners associations
(a) General rule
A homeowners association (as defined in sub
section (c)) shall be subject to taxation under
this subtitle only to the extent provided in this
section. A homeowners association shall be con
sidered an organization exempt from incoo*
taxes for the purpose of any law which refea
to organizations exempt from income taxes.
Appendix
Initial Regulatory Flexibility Analysis
The Board of Governors of the Federal Reserve System is re
questing comment from the public on a proposal to clarify the class
of depositors eligible to maintain NOW and ATS accounts at member banks.
Public comment is requested by June 15, 1981. This statement describes
the impact of the proposed rule on small entities in accordance with
section 603 of the Regulatory Flexibility Act (5 U.S.C. § 603; Pub.
L. 96-354).
The Federal Reserve has received a significant number of re
quests from member banks and their customers for rulings and opinions
concerning NOW account eligibility since the enactment of the Consumer
Checking Account Equity Act of 1980 (Title III of Pub. L. 96-221).
In many instances, these requests have required the consideration of
subtle distinctions implied by the existing interpretations that have
proved to be impractical for application on a uniform basis by a large
number of depository institutions. The Board's objective in issuing
this proposal is to simplify and clarify the rules concerning NOW and
ATS accounts. The Board's proposal is issued under its authority in
section 19(a) of the Federal Reserve Act (12 U.S.C. § 461(a)).
The proposed interpretation concerning NOW account eligibility
will apply directly to all banks that are members of the Federal Reserve
System. However, other regulatory agencies are expected to adopt similar
interpretations; and, thus, nonmember insured commercial banks and thrift
institutions likely would be affected. The interpretation would affect
all small entities that desire to maintain NOW accounts at member banks;
however, the number of affected entities cannot be estimated. The pro
posal is of particular interest to sole proprietorships, which would
no longer be eligible to maintain NOW and ATS accounts at member banks
under the new interpretation. As under existing interpretations, all
other entities organized to make a profit also would not be eligible
for NOW accounts. The proposed interpretation would generally expand
the class of eligible nonprofit organizations and would permit govern
mental units to maintain NOW accounts for purposes of education, li
braries, and hospitals.
The proposal will not require any additional reporting or
recordkeeping requirements and the burden of compliance will rest only
with member banks. It is expected that a member bank would be able
to demonstrate compliance with the information that it normally obtains
upon the opening of a deposit account. The Board believes that the
clarifications embodied in the proposal would facilitate compliance
with the NOW account eligibility rules.
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A second alternative to the approach chosen by the Board
would be for the Federal Reserve to issue detailed lists of the types
of organizations or other depositors eligible to maintain NOW accounts.
This approach would be administratively burdensome in that the Board
would continue to be required to consider a large volume of inquiries.
Moreover, member banks would be required to maintain updated lists of
the types of eligible depositors which could prove burdensome for smaller
entities. As a third alternative, the Board could withdraw all existing
interpretations and allow member banks to interpret the statutory language
on their own. This approach would not seen feasible since 12 U.S.C.
§ 1832(c) provides a $1,000 per violation fine for violations of the
NOW account provisions.
Comments on this regulatory flexibility analysis may be sub
mitted to Barbara Lowrey, Assistant Secretary of the Board, Board of
Governors of the Federal Reserve System, 20th Street and Constitution
Avenue, N. W . , Washington, 0. C. 20551.
@FedFRASER