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F ederal
reserve
Bank
DALLAS, TEXAS
of
Dallas
7S222
C ircular No. 81-3
January 8, 1981
TITLE 12 - CHAPTER XII - INTEREST O DEPOSITS
N
Proposed Rules Affecting IRA and Keogh Savings Plans, the
Effective Date of Celling I n te r e s t Rates on the 26-Week Money Market
C e r tific a te (M C) and 2 1/2 Year or Longer Small Saver C e r tif ic a te
M
(SSC), and the Penalty For Early Withdrawal From A Time Deposit 1n the
Event of the Depositor's Bankruptcy; Final Rules Affecting the Penalty
For Early Withdrawals From an IRA or Keogh Retirement Time Account and a
Plan For Phasing Out Finders Fees.
TO A M B B N S
LL EM ER A K
A D OTH
N
ERS CO CERN IN TH
N
ED
E
ELEVENTH FEDERAL RESERVE DISTRICT:
The Depository In s titu tio n s Deregulation Committee has re
quested comment on three proposals and has also adopted two final rules
regarding the rate of I n te r e s t to be paid on deposits at fed erally
Insured depository I n s t i tu t i o n s . The changes are summarized as follows:
1.
Proposal - The Committee has requested comment on a proposal con
s is tin g of five options for changes 1n rules affecting IRA and Keogh
retirement savings plans 1n order to enable depository i n s t i tu t i o n s
to t a i l o r IRA and Keogh plans to the sp ecific needs of individual
savers and to market conditions.
The following five options are
designed to make savings for retirement more a tt r a c t iv e :
(1)
(2) & (3)
(4)
(5)
Reduce the minimum maturity of the special IRA/Keogh account
from three years to one year.
A lternative plans for simplifying the handling of, and pay
ment of i n te r e s t on, periodic routine additions to IRA and
Keogh accounts.
Celling ra te options for Increasing, revising or eliminating
c ellin g rates on IRA and Keogh accounts; including no c e l l
ing, a fixed c ellin g greater than the prevailing 8 percent,
or establishment of the flo atin g rate c e llin g .
Creation of the new type of IRA/Keogh time deposit with no
c e llin g rate or other regulatory r e s t r i c ti o n s other than the
general regulatory lim its on time deposits, early withdrawal
penalty and the 14-day minimum maturity of notice period.
The Committee has also proposed th a t I n s titu tio n s obtain c e r t i f i c a
tion from depositors th a t they are e lig ib le f o r IRA/Keogh accounts
1n order to avoid misuse of such accounts. The Committee has asked
for comment on these proposals by March 20, 1981, and 1n addition
(see pages 8 and 9 of Docket Number D-0017) p a r tic u la r ly requested
comment on a number of sp ecific questions.
B a n k s a n d o th ers a re 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 ta c tin g th is Bank:
1-800-442-7 140 (in tr a s t a te ) a n d 1-800-527-9200 (in te rs ta te ). For c a lls p la c e d lo cally, p l e a s e u s e 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)
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2.
Proposal - The c e llin g rates of I n te r e s t applicable to the 26-week
Money Market C e r tif ic a te (M C) and the 2 1/2 Year or Longer Small
M
Saver C e r tific a te (SSC) are
determined by the y ie ld on 6-month
Treasury b i l l s and the average y ield fo r 2 1/2 Treasury s e c u r i t i e s ,
resp ec tiv e ly . These rates are variable and under current procedures
are announced Monday and become e ffe c tiv e on Thursday.
The
Committee proposed to make the e ffe c tiv e day Tuesday or Wednesday
rath er than Thursday. The Committee asked for comments by February
16, 1981, as to which day would be preferable.
3.
Proposal - The Comnlttee 1s considering amending the penalty for
early withdrawal of funds from time accounts to permit the funds to
be withdrawn without penalty 1n the event of the bankruptcy of the
depositor.
This would avoid imposition of a penalty th a t might
otherwise reduce the assets available to pay claims against the
d ebtor's e s t a t e .
The Committee requested comment on a number of
questions regarding th is proposal through February 16, 1981.
4.
Final Rule - The Committee adopted a ru le, e ffe c tiv e December 15,
1980, providing t h a t the minimum required penalty for early with
drawal of funds from an IRA or a Keogh plan account within seven
days of the establishment of the account may not exceed I n te r e s t
earned to the time of withdrawal. Effective June 2, 1980, the Com
mittee revised the early withdrawal penalty to require an Invasion
of the principal of the deposit where time deposit funds are with
drawn 1n the early months a f t e r the date of deposit.
Internal
Revenue Service regulations, however, provide th a t i f specified
required disclosure statements are not given to an IRA depositor
seven days before the IRA 1s established, the depositor must be
given the rig h t to revoke the IRA within seven days of i t s estab
lishment.
The regulations provide th at 1f the depositor exercises
the rig h t of revocation, he or she must be refunded the e n tir e
amount of the consideration paid for the IRA. The revision of the
ru le , as adopted by the Committee, 1s intended to eliminate the
present c o n f lic t between the current penalty rule and IRS regula
tions regarding IRA's.
5.
Final Rule - Effective December 31, 1980, the Committee adopted a
rule th a t permits those I n s titu tio n s th at have depended heavily on
the use of finders fees to a t t r a c t small denomination (under
$100,000) time and savings deposits to phase out the use of such
finders fees over the next eighteen months.
The rule applies to
I n s titu tio n s th a t can demonstrate th a t finders fees accounted, on
average, fo r 25 percent or more of th e ir outstanding domestic smalldenomination time and savings deposits over the 10-quarter period
ending June 30, 1980. The base for the phase out 1s the amount of
domestic small-denomination time and savings deposits outstanding on
June 30, 1980, on which finders fees had been paid. The base amount
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5.
3
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Final Rule - Continued
may not be exceeded during the phaseout period. The maximum amount
of small-denomination time and savings deposits th a t may be raised
through the continued use of finders fees Is limited to 85 percent
of the amount of domestic small-denomination time and savings depos
i t s on which finders fees had been paid maturing 1n the semi-annual
period ending June 30, 1981, and 60 percent and 40 percent of the
amount of such deposits maturing 1n the semi-annual periods ending
December 31, 1981 and June 30, 1982, respectively.
Enclosed are copies of a press release and Federal Register
notices which should be kept by member banks 1n the Regulation Q section
of th e i r Regulations binders.
Questions concerning the actions taken
should be directed to the Consumer Affairs section of the Bank
Supervision and Regulations Department, extension 6169.
Sincerely yours,
William H. Wallace
F i r s t Vice President
Enclosures
3
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE PRESS RELEASE
COMPTROLLER O F THE CURRENCY
FEDERAL RESERVE BOARD
FEDERAL DEPOSIT INSURANCE C O R P O R A T IO N
N A T IO N A L CREDIT U N IO N A DM IN ISTR A TIO N
For immediate release
FEDERAL H O M E LOA N BANK BOARD
TREASURY DEPARTMENT
December19
,1980
The Depository Institutions Deregulation Committeei/ today requested
comment on three proposals, one consisting of five options for changes
in rules affecting IRA and Keogh retirement savings plans, another concerning
the effective dates of ceiling interest rates on variable rate time deposits
and the third a suggestion for limiting the penalty for early withdrawal from a
time deposit in the event the depositor becomes bankrupt.
The Committee has also adopted two final rules, one modifying the
penalty for early withdrawals from an IRA or Keogh retirement time account
within seven days of establishing the account and the other a plan for phasing
out fees paid to finders of time deposits.
The Committee's official notices of its actions, and background
information concerning them, are attached.
A summary of the Committee's
proposals, and of the final rules adopted, follows.
Proposals
1.
IRAf*/ and Keogh!/ accounts;
(Attachment A )
To enable depository institutions to tailor IRA and Keogh
retirement savings plans to the specific needs of individual savers
A/ Estciblished by the Depository Institutions Deregulation and Monetary Control Act
of 1980, to phase out interest rate ceilings on time and savings deposits over
the next six years. The members of the Committee are the heads of the agencies
listed on this page.
IRA — Individual Retirement Account — plans were authorized by the Employee
Retirement Security Act of 1974 (ERISA) permitting individuals not covered by a
retirement plan to deposit funds on a tax deferred basis in an IRA.
U
1/
Keogh (H.R. 10) plan accounts were authorized by the Self-Employed Individuals
Tax Retirement Act of 1962, permitting self-employed persons to establish their
own pension fund through tax deferred deposits in a special retirement account.
4
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and to market
conditions, and to carry out the aim of the Congress to
individualsavings for retirement, the Committee requested comment
encourage
on
the
following five options designed to make savings for retirement more attractive:
1. Reduce the minimum maturity of the special IRA/Keogh account
from three years to one year (Page 4 of Attachment A for details).
2. and 3. Alternative plans for simplifying the handling of, and
payment of interest on, periodic routine additions to
IRA and Keogh accounts (Pages 5 and 6 of Attachment A ) .
4. Ceiling rate options for increasing, revising or eliminating
ceiling rates on IRA and Keogh accounts, including no ceiling, a
fixed ceiling greater than the prevailing 8 percent, or establishment
of a floating rate ceiling (Page 7 of Attachment A),
5. Creation of a new type of IRA/Keogh time deposit with no ceiling
rate or other regulatory restrictions other than the general regulatory
limits on time deposits, early withdrawal penalty and the 14-day
minimum maturity of notice period.
In addition, to avoid misuse of IRA/Keogh accounts, the Committee proposed
that institutions obtain certification from depositors that they are eligible
for such accounts.
In making these proposals, the Committee said:
The Committee believes that the proposals presented
would...encourage savings and, by enhancing the
competitive posture of depository institutions vis-avis nondepository institutions, would enable depository
institutions to function more safely and soundly in
increasingly competitive financial markets.
The Committee asked for comment on all these options, or on any other
feature of its proposals, and in addition (Pages 8 and 9 of Attachment A)
particularly requested comment on a number of specific questions.
The Committee asked for comment on these proposals by March 20, 1981.
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2.
The effective date for ceiling rates on Money Market Certificates
and Small Savers Certificates.
(Attachment B)
The ceiling rates of interest applicable to the 26-week Money Market
Certificate (MMC) and the 2 1/2 year or longer Small Saver Certificate (SSC)
are determined by the yield on six-month Treasury bills and the average yield
for 2 1/2 year Treasury securities.
Under current procedures these rates are
announced Monday and become effective on Thursday.
In order to link the ceiling rates payable on MMCs and SSCs more
closely to market rates, the Committee proposed to make the effective day
Tuesday or Wednesday, rather than Thursday.
The Committee requested comment as to which day would be preferable,
taking into account the time needed by institutions to make changes to implement
new rates and problems institutions may encounter in obtaining new ceiling
rate information and making it known to the public.
The Committee asked for comment on this proposal by February 16, 1981.
3.
Early withdrawal of time deposit
bankruptcy
(Attachment C)
funds in the event of
The Committee is considering amending the penalty for early withdrawal
of funds from time accounts to permit the funds to be withdrawn without penalty
in the event of the bankruptcy of the depositor.
This would avoid imposition of a penalty that might otherwise reduce
the assets available to pay claims against the debtor's estate.
The Committee requested comment on a number of questions regarding
this proposal, on Page 3 of Attachment C.
The Committee will receive comment on the proposal through
February 16, 1981.
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Final Rules
1.
The Committee adopted a rule, effective December 15, 1980,
providing that the minimum required penalty for early withdrawal of funds
from an IRA or a Keogh plan account within seven days of establishment of the
account may not exceed interest earned to the time of withdrawal.
The early withdrawal penalty rule before this revision required
an invasion of the principal of the deposit
for such a withdrawal.
Revision of the rule, as explained in Attachment D, makes it parallel
to regulations of the Internal Revenue Service.
2.
Effective December 31, 1980,
the Committee adopted a rule
permitsthose institutions that have depended heavily on
fees to attract small denomination
that
the use offinder's
(under $100,000) time and savings deposits
to phase out the use of such finder's fees over the next 18 months.
Details of the plan are given in Attachment E.
The Committee will meet again in March to consider an agenda that
will be announced later.
# # # # # # # # # # # #
7
ATTAUiREiNT A
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
[12 CFR Part 1204]
(Docket No. D-0017)
Notice of proposed Rulemaking
Retirement Accounts
AGENCY:
Depository Institutions Deregulation Committee.
ACTION:
Proposed rulemaking.
SUMMARY: The Depository Institutions Deregulation Committee ("Committee")
is considering proposed rules that would: (1) enable time deposits
held in Individual Retirement Accounts ("IRAs") and Keogh (H.R. 10)
plans to accommodate routine additions more conveniently; (2) reduce
the three-year maturity of the special IRA/Keogh deposit category to
one year; (3) increase, revise, or eliminate the current 8 per cent
ceiling rate of interest payable on the special IRA/Keogh deposit category
and (4) create a new IRA/Keogh time deposit with a minimum required
maturity of 14 days and no prescribed ceiling rate of interest. The
proposed rules would facilitate the use of time deposits for retirement
savings and encourage the increased use of IRA/Keogh plans consistent
with the intent of Congress in the Employee Retirement Income Security
Act of 1974 to encourage individuals to save for their retirement.
DATES:
Comments must be received by March 20, 1981.
ADDRESS: Interested parties are invited to submit written data, views,
or arguments regarding the proposed rules to Normand R. V. Bernard,
Federal Reserve Building, 20th Street and Constitution Avenue, N.W.,
Washington, D.C. 20551. All material submitted should include the Docket
Number D-0017. Such material will be made available for inspection
and copying upon request except as provided in Section 1202.5 of the
Committee's Rules Regarding Availability of Information (12 CFR § 1202.5).
FOR FURTHER INFORMATION CONTACT: John Harry Jorgenson, Attorney, Board
of Governors of the Federal Reserve System (202/452-3778), F. Douglas
Birdzell, Counsel, Federal Deposit Insurance Corporation (202/389-4261),
Allan Schott, Attorney-Advisor, Department of Treasury (202/566-6798),
Rebecca Laird, Senior Associate General Counsel, Federal Home Loan Bank
Board (202/377-6446), Debra A. Chong, Attorney, Office of the Comptroller
of the Currency (202/447-1632), or Anthony F. Cole, Deputy General Counsel
Depository Institutions Deregulation Committee (202/452-3612).
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SUPPLEMENTARY INFORMATION: Although the intent of the Employee Retirement
Income Security Act of 1974 ("ERISA") is to encourage qualified individuals
to develop their own pension plans, IRAs and Keoghs have not been fully
utilized. In 1977, only 3.3 per cent of eligible taxpayers in the $11,000
to $15,000 income class held some form of retirement account in a depository
or nondepository institution, while 52.4 per cent of those with incomes
of $50,000 or more held some form of retirement account. (Latest available
data.) In view of the Congressional intent to encourage individuals
to save for their retirement, the Committee is considering regulatory
actions that would increase the attractiveness of IRA/Keogh accounts
at depository institutions by reducing present administrative obstacles
to periodic additions to IRA/Keogh time deposits and by increasing the
yield available to retirement savers.
The current regulations of the Board of Governors of the Federal
Reserve System ("Federal Reserve"), the Federal Deposit Insurance Corporation
("FDIC"), and the Federal Home Loan Bank Board ("FHLBB"), provide that
IRA/Keogh funds may be invested in a regular savings account or in any
time deposit category including the special three-year, 8 per cent IRA/Keogh
account. The interest rate ceilings on time deposits held in IRAs or
Keoghs are the same as on nonretirement accounts, except that there
is no differential in the rates that banks and thrifts may pay on IRA/Keogh
funds invested in the 26-week money market certificate, in the 2 s year
*
or longer small saver certificate, or the special three-year IRA/Keogh
deposit category.
The agencies' regulations governing account additions, however,
are not uniform and complicate the use of time deposits, particularly
variable ceiling time deposits, for periodic deposits to IRAs or Keoghs.
Under Federal Reserve and FDIC rules, each addition to a time deposit
is regarded either as having a separate and distinct maturity equal
to the originally agreed upon maturity or as resetting the maturity
of the entire account. Federal Reserve and FDIC regulations also require
that the rate of interest paid on an addition to any existing time deposit
not exceed the applicable ceiling rate on the date the additional deposit
is made. This makes it impractical to use variable ceiling rate accounts
to make routine additions to IRA/Keogh accounts. Under FHLBB rules,
a fixed ceiling time deposit may be structured to provide for routine
periodic additions. Each time an addition is made, however, the maturity
of the entire account is reset for a period equal to the term of the
original account. No additions to variable ceiling accounts are permitted.
The Committee requests comment on five options designed to
reduce the administrative complexities associated with IRA/Keogh time
deposits and to provide a more attractive yield to retirement savers.
Option 1 reduces the minimum maturity of the existing special threeyear IRA/Keogh account to one year. Options 2 and 3 provide for the
creation of a new IRA/Keogh one-year notice account that would facilitate
the receipt of periodic deposits. Option 4 presents three alternative
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ceiling rate options that could be applied to the currently authorized
special three-year account, the one-year account described in Option 1,
or the notice accounts presented in Options 2 and 3. Option 5 provides
for the creation of a new 14-day IRA/Keogh time deposit with no prescribed
ceiling rate of interest. A discussion of the five options follows.
Option 1 —
Reduce IRA/Keogh Account Maturity to One Year
When the existing special three-year IRA/Keogh account was
established in 1977, the minimum maturity of the account coincided with
the ERISA provisions permitting the tax penalty-free rollover of IRA
funds from one trustee to another once every three years. Tax penaltyfree IRA rollovers, however, are now permitted once a year. In order
to keep the maturity of the special IRA/Keogh account consistent with
tax law, the Committee proposes to reduce the minimum maturity of the
special three-year IRA/Keogh account to one year.
Reducing the maturity to one year, if accompanied by a significant
increase in or elimination of the 8 per cent ceiling rate on the special
IRA/Keogh account, would provide depository institutions with greater
flexibility in designing and marketing retirement savings programs.
However, reducing the maturity of the account may contribute to a reduction
in depository institution account stability, if depositors make use
of their annual reinvestment privileges to rollover their existing IRA/Keogh
accounts into tax qualified retirement plans at other institutions.
Options 2 and 3 —
Create IRA/Keogh Notice Account to Facilitate Periodic
Deposits
Option 1 is modest in scope, adjusting the maturity of IRA/Keogh
time deposits to accommodate an earlier change in ERISA; it does not
solve the problems associated with routine periodic additions under
current regulations. Consequently, to reduce administrative complexities,
the Committee is considering establishing an IRA/Keogh notice account
that would facilitate the receipt of periodic additions. Options 2
and 3 present alternative methods for structuring this account. A notice
account is an account from which funds may not be withdrawn prior to
the expiration of a period of notice which must be given by the depositor
a specified number of days in advance of withdrawal. Notice could take
a variety of forms including a specific written notice from the depositor
or arrangements in which notice is given automatically on the anniversary
of the account or each time a deposit is made.
Under Option 2:
(a) A one-year notice of intent to withdraw on a
specified date is required;
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(b) The institution may accept regular additions
to the account at any time up to 14 days before
the expiration or end of the notice period, and
all funds on deposit could be withdrawn upon the
expiration of the notice period;
(c) Interest could be paid on all additions to the
account at the specified contract rate; and
(d) An early withdrawal penalty would be imposed
on withdrawals made prior to the expiration of the
one-year notice period.
Under Option 3:
(a) A one-year notice of intent to withdraw on a
specified date is required;
(b) The institution may accept regular additions
to the account at any time, but the amount withdrawn
could not exceed the amount on deposit at the time
of notice;
(c) Interest could be paid on all additions to the
account at the specified contract rate; and
(d) An early withdrawal penalty would be imposed
on withdrawals made prior to the expiration of the
one-year notice period.
A strength of these options is that they establish IRA/Keogh
accounts that readily accommodate routine periodic additions and can
easily be understood by both account holders and the institutions authorized
to offer the accounts. Under both Options 2 and 3 the one-year notice
required for withdrawal accommodates IRA depositors' annual rollover
privilege as provided by the amended ERISA; it also facilitates depositor
shifting to more attractive retirement investment alternatives when
they exist, as contemplated by the recent amendment to ERISA. The Committee
believes that structuring either account as a one-year notice account
is preferable to establishing an account with a stated maturity of one
year that could accept periodic deposits. A notice account would tend
to lessen deposit volatility since funds would not mature automatically
at the end of a year.
Option 2 would make the administration of the notice account
less complex since all funds on deposit could be withdrawn at one time.
Under Option 2, however, depository institutions may be concerned that
even after notice is given depositors would be able to earn interest
at the contract rate on funds on deposit for as little as 14 days.
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Option 4 —
Increase, Revise, or Eliminate IRA/Keogh Interest Rate Ceiling
Options 2 and 3 deal primarily with the administrative problems
of making routine additions to IRA/Keogh accounts, but do not address
the issue of what deposit rate ceilings, if any, should be applied.
The Committee is considering the following ceiling rate options that
could be applied to the currently authorized special three-year account,
the one-year account described in Option 1, or the notice accounts presented
in Options 2 and 3.
(a) Prescribe no ceiling rate of interest;
(b) Establish a fixed ceiling at a rate greater
than 8 per cent. Within the ceiling rate limitations,
an institution could change the rate paid on the
account with one year's notice or change the rate
immediately if required by a regulatory ceiling
rate change; or
(c) Establish a floating ceiling indexed to the
rate on U.S. Government securities of specified
maturity (e.g., 91 day, 182 day, one year, or two
and a half year Treasury security yield). Changes
in the ceiling rate could occur quarterly, semi
annually, or annually.
Option 5 —
Create 14-Day IRA/Keogh Time Deposit
The Committee also is considering establishment of an IRA/Keogh
plan time deposit with a minimum required maturity or notice period
of 14 days. No ceiling rate of interest payable on this special category
would be prescribed. This option would provide maximum flexibility
to depository institutions in structuring retirement accounts. Under
this option, an institution could choose any maturity (so long as the
14-day minimum maturity requirement is satisfied) or rate (for example,
fixed or floating) for the deposit.
The Committee believes that the proposals presented would
enable depository institutions to tailor IRA/Keogh plans to specific
saver needs and market circumstances and thereby attract and retain
relatively stable retirement funds. In addition,,,these proposals would
encourage savings and, by enhancing the competitive posture of depository
institutions vis-a-vis nondepository institutions, would enable depository
institutions to function more safely and soundly in increasingly competitive
financial markets. The Committee is concerned, however, that adoption
of any of the proposals making IRA/Keogh accounts significantly more
attractive could encourage depositors not qualified to open IRA/Keogh
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accounts to open such accounts. To lessen the potential for abuse,
the Committee is considering adoption of a provision requiring an appropriate
official of the depository institution to obtain certification from
each depositor that he or she qualifies to hold an IRA/Keogh account.
Such certification for IRAs might include presentation of a W-2 form
indicating eligibility.
To aid in its consideration, the Committee requests comment
on the five options discussed above. Specific comments also are requested
(1) The minimum required early withdrawal penalty that should
be imposed on withdrawals prior to the receipt and expiration of the
one-year notice period under Option 2 and 3;
(2) The minimum required early withdrawal penalty that should
be imposed on premature withdrawals under Option 5;
(3) The potential for misuse of IRA/Keogh accounts under
any of the options and steps that might be taken to lessen the potential
for misuse;
(4) The ceiling rate options (e.g., no ceiling, fixed rate
ceiling, or floating ceiling) that would be most attractive to depository
institutions and their customers;
(5) The Treasury bill security that should be selected as
the index if a floating rate ceiling is adopted (Option 4c) and the
frequency of change in the ceiling rate (e.g., quarterly, semi-annually,
annually);
(6) The potential impact of the proposals on deposit stability
at depository institutions;
(7)
institutions;
The effect of the proposals on the earnings of depository
(8) Whether, in the event any of the options is adopted,
institutions should be authorized to permit existing IRA/Keogh depositors
to immediately convert their accounts without imposition of the early
withdrawal penalty; and
(9) Any other proposals that would reduce the administrative
complexities of using time deposits to fund IRAs and Keoghs.
By order of the Committee, December 18, 1980.
(Signed)
Normand R. V. Bernard
Normand R. V. Bernard
Executive Secretary of the Committee
[SEAL]
13
ATTACHMENT B
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
[12 CFR Part 1204]
(Docket No. D-0016)
Notice of Proposed Rulemaking
Effective Date of Ceiling Rates on MMCs and SSCs
AGENCY:
Depository Institutions Deregulation Committee.
ACTION:
Proposed rulemaking.
SUMMARY: The Depository Institutions Deregulation Committee ("Committee")
proposes to adopt rules reducing the period between the announcement
and the effective date of the ceiling rates of interest payable on the
26-week money market certificate (MMC) and on the 2-1/2 year and longer
small saver certificate (SSC). Under the current rules, the ceiling
rates of interest payable on MMCs and SSCs are announced on Monday and
are effective the following Thursday. Under the proposed rules, the
ceiling rates of interest announced on Monday would become effective
on the following Tuesday or, as an alternative, Wednesday.
DATES:
Comments must be received by February 16, 1981.
ADDRESS: Interested parties are invited to submit written data, views,
or arguments regarding the proposed rules to Normand R. V. Bernard,
Executive Secretary, Depository Institutions Deregulation Committee,
Federal Reserve Building, 20th Street and Constitution Avenue, N.W.,
Washington, D.C. 20551. All material submitted should include the Docket
Number D-0016. Such material will be made available for inspection
and copying upon request except as provided in Section 1202.5 of the
Committee's Rules Regarding Availability of Information (12 CFR § 1202.5).
FOR FURTHER INFORMATION CONTACT: F. Douglas Birdzell, Counsel, Federal
Deposit Insurance Corporation (202/389-4261), John Harry Jorgenson,
Attorney, Board of Governors of the Federal Reserve System (202/452
3778), Allan Schott, Attorney-Advisor, Treasury Department (202/566
6798), Rebecca Laird, Senior Associate General Counsel, Federal Home
Loan Bank Board (202/377-6446), Debra A. Chong, Attorney, Office of
the Comptroller of the Currency (202/447-1632), or Anthony F. Cole,
Deputy General Counsel, Depository Institutions Deregulation Committee
(202/452-3612).
SUPPLEMENTARY INFORMATION: The ceiling rate of interest payable on
MMCs is tied to the discount yield (auction average) on the most recently
issued six-month United States Treasury bills. United States Treasury
bills maturing in six months normally are auctioned on Monday and, under
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current rules, the ceiling rate of interest based on the discount yield
(auction average) is effective the following Thursday, the day on which
the Treasury bills are issued. This ceiling rate is effective until
the next issuance of six-month United States Treasury bills. The ceiling
rate of interest payable on SSCs is tied to the average 2-1/2 year yield
for United States Treasury securities as determined bi-weekly by the
United States Treasury. The average 2-1/2 year yield on United States
Treasury securities is announced by Treasury on Monday afternoon (based
on the average 2-1/2 year yield for the five business days ending on
Monday) and, under current rules, the ceiling rates based on that average
2-1/2 year yield are effective for a two-week period beginning on the
following Thursday.
In order to more closely link the ceiling rates of interest
payable on MMCs and SSCs with current market rates, the Committee proposes
to adopt rules reducing the time between the announcement and effective
date of the ceiling rates. Under the proposed rules, the ceiling rates
announced on Monday would be effective for new MMCs or SSCs issued on
the following Tuesday or Wednesday rather than on the following Thursday.
Comment is requested on whether a Tuesday or, as an alternative, a Wednesday
effective date would allow sufficient time for institutions to make
any changes necessary for implementation of the new ceiling rates.
Comment is particularly requested on potential problems that institutions
may encounter in (1) obtaining information on the new ceiling and (2)
posting or advertising the new ceiling rate.
By order of the Committee, December 13, 1980.
(Signed)
Normand R. v. Bernard
Normand R. V. Bernard
Executive Secretary of the Committee
[SEAL]
15
ATTACHMENT C
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
[12 CFR Part 1204]
(Docket No. D-0015]
Notice of proposed Rulemaking
Penalty for Early Withdrawals of Time Deposit Funds
in the Event of Bankruptcy
AGENCY:
Depository Institutions Deregulation Committee.
ACTION:
Proposed rulemaking.
SUMMARY: The Depository Institutions Deregulation Committee ("Committee")
is considering amending the penalty for early withdrawals of time deposit
funds to permit penalty-free withdrawal in the event of bankruptcy of
the depositor.
DATES:
Comments must be received by February 16, 1981.
ADDRESS: Interested parties are invited to submit written data, views,
or arguments regarding the proposed rule to Normand R. V. Bernard, Executive
Secretary, Depository Institutions Deregulation Committee, Federal Reserve
Building, 20th Street and Constitution Avenue, N.W., Washington, D.C.
20551. All material submitted should include the Docket Number D-0015.
Such material will be made available for inspection and copying upon
request except as provided in Section 1202.5 of the Committee's Rules
Regarding Availability of Information (12 CFR § 1202.5).
FOR FURTHER INFORMATION CONTACT: F. Douglas Birdzell, Counsel, Federal
Deposit Insurance Corporation (202/389-4261), John Harry Jorgenson,
Attorney, Board of Governors of the Federal Reserve System (202/452
3778), Allan Schott, Attorney-Advisor, Treasury Department (202/566
6798), Rebecca Laird, Senior Associate General Counsel, Federal Home
Loan Bank Board (202/377-6446) Debra A. Chong, Attorney, Office of the
Comptroller of the Currency (202/447-1632), or Anthony F. Cole, Deputy
General Counsel, Depository Institutions Deregulation Committee (202/452
3612).
SUPPLEMENTARY INFORMATION: The Committee is considering amending the
early withdrawal penalty rule to authorize depository institutions to
permit penalty-free early withdrawals of time deposit funds in the event
of the bankruptcy of the depositor. Under current rules, federally
insured commercial banks, mutual savings banks, and savings and loan
associations are required, with certain exceptions, to impose a penalty
upon the withdrawal of time deposit funds prior to maturity. The minimum
required penalty generally is an amount equal to three months' simple
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interest on the funds withdrawn where the original maturity of the time
deposit is three months to one year, and an amount equal to six months'
simple interest on the funds withdrawn where the original maturity of
the time deposit is more than one year. With respect to time deposits
with an original maturity of less than three months, the minimum required
penalty for early withdrawal is a forfeiture of an amount equal to the
amount of simple interest that could have been earned on the funds withdrawn
if the funds had remained on deposit until maturity. (12 CFR § 1204.103).
Imposition of the early withdrawal penalty when funds are
withdrawn in the event of bankruptcy may reduce the assets available
to pay the claims against the debtor's estate. The Committee believes
that adoption of a bankruptcy exception would not significantly increase
the administrative burden of the penalty since the exception, as in
the case of the current exceptions providing for penalty-free withdrawals
in the event of death, incompetence and where an IRA/Keogh depositor
is 59% or disabled, would be subject to well-defined criteria.
Specific comment is requested on whether such an exception,
if adopted, should:
(1)
apply to corporations as well as to individuals with
regular incomes and small sole proprietors;
(2)
apply to liquidations (Chapter 7), municipal debt adjust
ments (Chapter 9), rehabilitations and reorganizations
(Chapter 11) and, in the case of individuals, extended
repayment plans (Chapter 13) under the bankruptcy code;*
(3)
permit penalty-free withdrawals to be made upon the filing
of a petition for bankruptcy or only upon an adjudication
of bankruptcy or a court ordered distribution of the
debtor's estate; and
(4)
permit penalty-free withdrawals to be made by a debtorin-possession as well as by a trustee in bankruptcy.
By order of the Committee, December 18, 1980.
(Signed)
Normand R. v. Bernard
Normand R. V. Bernard
Executive Secretary of the Committee
[SEAL]
♦Chapter references are to Title II of the United States Code entitled
"Bankruptcy."
17
ATTACHMENT D
TITLE 12— BANKS AND BANKING
CHAPTER XII— DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
[Docket No. D-0014]
Part 1204-INTEREST ON DEPOSITS
Penalty for Early Withdrawals of IRA/Keogh Time Deposit Funds
AGENCY:
Depository Institutions Deregulation Committee.
ACTION:
Final rule.
SUMMARY: The Depository Institutions Deregulation Committee ("Committee")
has adopted a rule providing that where a time deposit held in an Individual
Retirement Account ("IRA") or Keogh (H.R. 10) plan is paid before maturity
within seven days of the establishment of the IRA or Keogh plan, the
minimum required early withdrawal penalty is the forfeiture only of
the interest earned on the time deposit.
EFFECTIVE DATE:
December 15, 1980.
FOR FURTHER INFORMATION CONTACT: Debra A. Chong, Attorney, Office of
the Comptroller of the Currency (202/447-1632), F. Douglas Birdzell,
Counsel, Federal Deposit Insurance Corporation (202/389-4261), Daniel
L. Rhoads, Attorney, Board of Governors of the Federal Reserve System
(202/452-3711), Rebecca Laird, Senior Associate General Counsel, Federal
Home Loan Bank Board (202/377-6446), Allan Schott, Attorney-Advisor,
Treasury Department (202/566-6798), or Anthony F. Cole, Deputy General
Counsel, Depository Institutions Deregulation Committee (202/452-3612).
SUPPLEMENTARY INFORMATION: Effective June 2, 1980, the Committee revised
the penalty required to be imposed by depository institutions (federally
insured commercial banks, mutual savings banks, and savings and loan
associations) on withdrawals of time deposit funds prior to maturity
(12 CFR § 1204.103, 45 Fed. Reg. 37801). Under the revised rule, where
a time deposit with an original maturity of less than three months,
or any portion thereof, is paid before maturity, the minimum required
penalty is a forfeiture of an amount equal to the amount of interest
that could have been earned on the funds withdrawn at the nominal rate
of interest being paid on the deposit had the funds remained on deposit
until maturity. Where funds are withdrawn prior to maturity from a
time deposit with an original maturity of three months to one year or
from a time deposit with an original maturity of more than one year,
the minimum required penalty is, respectively, a forfeiture of an amount
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at least equal to three months or six months of interest earned, or
that could have been earned, on the funds withdrawn at the nominal rate
of interest being paid on the deposit regardless of the length of time
the funds withdrawn have remained on deposit.
Questions have been raised by a number of depository institutions
concerning a conflict between the penalty rule and Internal Revenue
Service ("IRS") regulations regarding IRAs. The penalty rule requires
a reduction or invasion of principal where time deposit funds are withdrawn
in the early months after the date of deposit. IRS regulations, however,
provide that if specified required disclosure statements are not given
to an IRA depositor seven days before the IRA is established, the depositor
must be given the right to revoke the IRA within seven days of its establishment.
The regulations further provide that if the depositor exercises the
right of revocation, he or she must be refunded the entire amount of
the consideration paid for the IRA (26 CFR §§ 1.408-1(d)(4)(ii)(A)(
1)
and (2) and (iii)(B)(14)).
Many depository institutions provide the required disclosure
statement to depositors at the time the IRA is initially established
and the funds are invested in a time deposit. In such circumstances,
if the depositor subsequently decides to revoke the IRA within seven
days and withdraw the time deposit funds, the institution is required
under the current early withdrawal penalty rule to impose a penalty
that will result in a forfeiture of principal. Invading principal,
however, conflicts with the IRS provisions requiring that a depositor
be refunded the entire amount of the consideration paid for the account
under such circumstances. Although there is no conflict if the depository
institution provides the disclosure statement seven days before the
IRA is opened, for reasons of customer and administrative convenience
many institutions choose to provide the disclosure simultaneously with
the opening of the account.
In order to facilitate the administration and offering of
retirement accounts, the Committee has adopted a rule eliminating the
conflict between the current penalty rule and IRS regulations regarding
IRAs. Although the conflicting IRS provisions do not apply to Keogh
(H.R. 10) plans, in the interest of administrative simplicity, the rule
also will apply to Keogh (H.R. 10) plans. Under this rule, where a
time deposit held in an IRA or Keogh (H.R. 10) plan is withdrawn before
maturity within seven days of the establishment of the IRA or Keogh,
the minimum required early withdrawal penalty is the forfeiture of the
interest earned on the time deposit, and no invasion of principal is
required as under the current rule. Early withdrawals of IRA or Keogh
time deposits made more than seven days after the opening of the IRA
or Keogh will-continue to be subject to the current early withdrawal
penalty rule.
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This action was taken by the Committee in view of the adverse
effect on depository institutions and retirement savers occasioned
by the conflict between the early withdrawal penalty rule and IRS regulations.
In view of these considerations, and because this amendment relieves
a restriction, the Committee finds that application ofthe notice
and
public participation provisions of 5 U.S.C.§ 553 to this action would
be contrary to the public interest and that good cause exists for making
this action effective in less than 30 days.
Pursuant to its authority under Title II of Public Law 96
221, 94 Stat. 142 (12 U.S.C. §§ 3501 et seq.), to prescribe rules governing
the payment of interest and dividends on deposits of federally insured
commercial banks, savings and loan associations, and mutual savings banks,
effective December 15, 1980, the Committee amends Part 1204 (Interest
on Deposits) by adding section 113 as follows:
PART 1204— INTEREST ON DEPOSITS
*
§ 1204.113 —
*
*
*
*
Early Withdrawal of IRA and Keogh (H.R. 10) Plan Time Deposits.
Notwithstanding the provisions of 12 C.F.R. § 1204.103, where
a time deposit, or any portion thereof, held in an Individual Retirement
Account established in accordance with 26 U.S.C. § 408 is paid before
maturity within seven days after the establishment of the Individual
Retirement Account pursuant to the provisions of 26 CFR § 1.408-(1)(d)(4),
or where a time deposit, or any portion thereof, held in a Keogh (H.R. 10)
plan established in accordance with 26 U.S.C. § 401 is paid before maturity
within seven days after the establishment of the Keogh (H.R. 10) plan,
a depositor shall forfeit an amount at least equal to the interest earned
on the amount withdrawn at the nominal (simple interest) rate being
paid on the deposit.
By order of the Committee, December 18, 1980.
(Signed)
Normand R. V. Bernard
Normand R. V. Bernard
Executive Secretary of the Committee
[SEAL]
20
ATTACHMENT E
TITLE 12— BANKS AND BANKING
CHAPTER XII— DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
[Docket No. D-0012]
PART 1204— INTEREST ON DEPOSITS
Phaseout of Finders Fees
AGENCY:
Depository Institutions Deregulation Committee.
ACTION:
Final rule.
SUMMARY: The Depository Institutions Deregulation Committee ("Committee")
has adopted a final rule permitting a phaseout of finders fee programs
over an 18-month period for those depository institutions that can demon
strate that finders fees accounted, on average, for 25 per cent or more
of their outstanding domestic small-denomination time and savings deposits
over the ten-quarter period ending June 30, 1980. The base for the
phaseout is the amount of domestic small-denomination time and savings
deposits outstanding on June 30, 1980, on which finders fees had been
paid. This base amount may not be exceeded during the phaseout period.
The maximum amount of small-denomination time and savings deposits that
may be raised through the continued use of finders fees is limited to
85 per cent of the amount of domestic small-denomination time and savings
deposits on which finders fees had been paid maturing in the semi-annual
period ending June 30, 1981, and 60 per cent and 40 per cent of the
amount of such deposits maturing in the semi-annual periods ending December 31,
1981 and June 30, 1982, respectively.
EFFECTIVE DATE:
December 31, 1980.
FOR FURTHER INFORMATION CONTACT: Debra A. Chong, Attorney, Office of
the Comptroller of the Currency (202/447-1632), F. Douglas Birdzell,
Counsel, Federal Deposit Insurance Corporation (202/389-4261), Daniel
L. Rhoads, Attorney, Board of Governors of the Federal Reserve System
(202/452-3711), Allan Schott, Attorney-Advisor, Treasury Department
(202/566-6798), Rebecca Laird, Senior Associate General Counsel, Federal
Home Loan Bank Board (202/377-6446), or Anthony F. Cole, Deputy General
Counsel, Depository Institutions Deregulation Committee (202/452-3612).
SUPPLEMENTARY INFORMATION: At its September 9 meeting, the Committee
adopted a rule, effective December 31, 1980, defining finders fees (fees
paid to a person who introduces a depositor to an institution) as a
payment of interest to the depositor for purposes of determining compliance
with interest-rate ceilings limitations (45 F.R. 68641). This action
was taken in view of the increased use of finders fees and the consideration
that finders fees, in some cases, may be used to circumvent interest
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rate ceilings. In taking this action, the Committee was aware that
some institutions may have relied extensively on the use of finders
fees to attract or retain deposits and that immediate application of
the rule on December 31, 1980, could cause hardship for such institutions.
Accordingly, the Committee requested public comment on a proposal to
provide a two-year phaseout of finders fee programs for those institutions
that could demonstrate that finders fees had accounted, on average,
for 25 per cent or more of their outstanding domestic small-denomination
time and savings deposits over the ten-quarter period ending June 30,
1980.
After consideration of the more than 80 comments received
on the proposal (73 opposed, 5 in favor), the Committee has adopted
a final rule permitting a phaseout of finders fee programs over an 18month period for those institutions that can demonstrate that finders
fees accounted, on average, for 25 per cent or more of their outstanding
domestic small-denomination time and savings deposits over the ten-quarter
period ending June 30, 1980. The base for the phaseout is the amount
of domestic small-denomination time and savings deposits outstanding
on June 30, 1980, on which finders fees had been paid. This base amount
may not be exceeded during the phaseout period. The maximum amount
of small-denomination time and savings deposits that may be raised through
the continued use of finders fees is limited to 85 per cent of the amount
of domestic small-denomination time and savings deposits on which finders
fees had been paid maturing in the semi-annual period ending June 30,
1981. 60 per cent of the amount of such deposits maturing in the semi
annual period ending December 31, 1981, and 40 per cent of the amount
of such deposits maturing in the semi-annual period ending June 30,
1982. Any maturing domestic small-denomination time deposit on which
a finders fee had been paid and that is renewed, whether or not a finders
fee is paid upon renewal, must be included in the amount of deposits
obtained through the use of finders fees for purposes of determining
compliance with the above percentage limitations.
Under the rule, an institution will be required to obtain
advance certification from its primary federal supervisor that it satisfies
the eligibility criteria necessary to qualify for the phaseout. In
addition, all finders fees must be paid in cash, except that an institution
may utilize as finders fees any merchandise it owned on December 1,
1980. In order to minimize any potential adverse effect on competing
depository institutions during the phaseout of finders fees, a qualifying
institution will not be permitted to advertise the continued availability
of finders fees by television, radio, or other mass media of general
circulation (such as newspapers and magazines). However, direct contact
with depositors or former sponsors of depositors or display or distribution
of promotionalrmaterials in an institution's offices will be permitted.
22
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Pursuant to its authority under Title II of Public Law 96
221, 94 Stat. 142 (12 U.S.C. § 3501 et seq.), to prescribe rules governing
the payment of interest and dividends on deposits of federally insured
commercial banks, savings and loan associations, and mutual savings
banks, effective December 31, 1980, the Committee amends Part 1204 (Interest
on Deposits) by adding section 114 as follows:
PART 1204 —
§ 1204.114 —
INTEREST ON DEPOSITS
Phaseout of Finders Fees
(a) Notwithstanding the provisions of 12 CFR § 1204.110,
during the period from December 31, 1980 through June 30, 1982 (the
"phaseout period"), any fee paid by a qualifying depository institution
to a person who introduces a depositor to the institution (a "finders
fee") shall not be regarded as a payment of interest to the depositor
for purposes of determining compliance with interest rate ceilings,
if the institution complies with all of the requirements set forth in
subsection (b). For purposes of this section, a qualifying depository
institution is a depository institution that has been certified by its
primary federal supervisor to have demonstrated that finders fees have
accounted for 25 per cent or more of its outstanding domestic smalldenomination (under $100,000) time and savings deposits, on average,
over the ten-calendar quarter period ending June 30, 1980.
(b) A qualifying depository institution must comply with
all of the following requirements to be eligible for the phaseout granted
under subsection (a) of this section:
(1) During the phaseout period, the maximum amount of
small-denomination (under $100,000) time and savings deposits that may
be raised through the use of finders fees may not exceed 85 per cent
of the amount of domestic small-denomination (under $100,000) time and
savings deposits on which finders fees had been paid that mature in
the semi-annual period ending June 30, 1981, 60 per cent of the amount
of such deposits that mature in the semi-annual period ending December 31,
1981, and 40 per cent of the amount of such deposits that mature in
the semi-annual period ending June 30, 1982. Provided, however, that
during the phaseout period, the amount of small-denomination (under
$100,000) time and savings deposits on which finders fees are paid may
not exceed the amount of domestic small-denomination (under $100,000)
time and savings deposits outstanding on June 30, 1980 on which finders
fees had been paid.
!
(2) Any maturing domestic small-denomination (under
$100,000) deposit on which a finders fee had been paid and that is renewed,
whether automatically or otherwise, whether or not a finders fee is
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paid upon renewal, must be included in the amount of deposits raised
through the use of finders fees for the purpose of determining compliance
with the above per cent limitations.
(3) All finders fees must be paid in cash, except that
an institution may utilize as finders fees any merchandise it owned
on December 1, 1980.
(4) Any advertisement, announcement or solicitation
concerning the continued availability of finders fees during the phaseout
period by an institution shall be limited to contacting directly the
institution's depositors or former sponsors of depositors or to displaying
or distributing promotional materials in an institution's offices.
During the phaseout period, an institution shall not advertise the continued
availability of finders fees by television, radio, billboards or other
mass media of general circulation (such as newspapers, magazines).
By order of the Committee, December 18, 1980.
(Signed)
Normand R. V. Bernard
Normand R. V. Bernard
Executive Secretary of the Committee
[SEAL]
24
