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FEDERAL RESERVE BANK
OF WEW YORK
[
Circular No. 9994
January 24, 1986
]
PROPOSED CHANGES IN REGULATION Q
Advertising of Interest on Deposits
Comments Requested by March 6, 1986
To All Depository Institutions, and Others Cohcerned,
in the Second Federal Reserve District:
The following is quoted from the text of a statement issued by the Board of
Governors of the Federal Reserve System:
The Federal Reserve Board has proposed for comment revisions of Regulation Q
that would update and simplify the requirements for advertising of interest on deposits
by member banks.
Comment is requested by March 6, 1986.
The Board has proposed three options:
1. Continue the present requirement that member banks state the annual rate of
simple interest; or
2. Require that member banks state the annual percentage yield (APY) rather
than the annual rate of simple interest; or
3. Require that both the APY and the annual rate of simple interest be stated.
The proposal would also require member banks to state in any advertisement
whether service charges are imposed on an account.
Printed on the following pages is the text of the proposed changes in Regula
tion Q, which has been reprinted from the Federal Register of January 13, 1986.
Comments thereon should be submitted by March 6, 1986, and may be sent to our
Compliance Examinations Department.
E. G erald C o rr ig a n ,
President.
FEDERAL RESERVE SYSTEM
12CPR Part 217
[R eg. Q; D ocket Wo. R-05141
Interest @rs Deposits; Advertising of
Interest @n Deposits
AGENCY: 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),
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.
OATS:
Comments must be received
by
March 6,19186.
a d d ress : 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:
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 A ct (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— A d vertisin g o f Interest on
D eposits. 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
pursuant to the section, and the views of
these agencies are being solicited.
The Board's current regulations on
advertising were adopted in 1909; 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 bus not
taken final action pending completion of
the comprehensive review of Regulation
Q
1. A ccu ra cy o f advertising. 'Currently.,
section 217.6 .'(g)'*1prohibits member
banks from making any advertisement.
2
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.
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
2.
^Requiredprovisions. 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 rate
deposits and multiple rate deposits. At
present, the Board’s policy statement of
March 22,1984 (fl 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 ("A PY”) 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 A PY.2 The
APY would be calculated using formulas
derived from the interest compounding
formulas approved by the Board in 1 9 7 1 3
(12 CFR 217.151; If 2-412, FRRS). A
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
2
The Board also considered Dr. Richard M orse’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 Morsg 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 w as also reviewed. Such an
approach, however, w as 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.
3
The 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 for
which interest is actually compounded. Where
continuous compounding is used, the formula would
be APY = 100 (er,- l ) 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.
3
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
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 any
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. D eposits fo r W hich Interest Is N ot
Compounded. Alternative 1 w'ould
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 (f] 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
4 The APY in such roses would bo low os than the
simple interest rule.
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. S e rvice 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 (^2-411,
FRRS). As service charges, also affect
other'accounts, the Board believes this
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. A d d itio n a l P ro visio n s. 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. P ro h ib ite d term s. The proposed
regulation w'ould 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. C urrent reg u la to ry p ro v isio n s
m odified. 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
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 e t 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
4
an advertisement ot 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
during 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
less. The greater the frequency of
compounding, the higher will be the
calculated APY. For simple interest
accounts wdth 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. Like
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 new 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
5 SOURCE: Sheshunol'f and Company Inc.. Pricing
B unk Services a n d Loans, 1981 and 1984 reports.
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
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
I9(j) of the Federal Reserve Act (12
U.S.C. 371b) the Board proposes to
5
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 oot
deposits.
(a) A c c u ra c y o f ad vertisin g. 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) R e q u ire d inform ation. Member
bank advertisements relating to interest
on deposits shall comply with the
following requirements:
(1) A n n u a l ra te o f sim p le in terest. 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) A n n u a l p e rc e n ta g e y ie ld . 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
' The annual percentage yield shall be caleualted
using the following formulas-^
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
for which interest is actually compounded.
Where continous 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.
Advertisements for deposits maturing in
less than one year shall contain a
statement that the APY may change at
renewal.]
(2)
M u ltiple f ix e d ro te d ep o sits.
Advertisements stating an interest rate
for deposits on which more than one
rate will be paid during the life of the
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) M u ltip le fix e d rate d ep o sits.
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
N
V
APY
»
100
where:
Ri = rate of simple interesl paid from period 1
through qi
R2—rate of simple interest paid from period
qi +1 through q2
*
*
*
*
*
Rb= rate of simple interest paid from period
qb—i + l through qb
b —number of different interest rates
M = number 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)
V ariable ra te d ep o sits.
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) D eposits fo r w hich in terest is not
com pounded. 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 where
interest is not compounded shall be
calculated using the formula:
APY = 100 [Vl + yR-1]
q1
5T>
where:
R = the rate of simple interest and
y = the number of years to maturity
APYs shall be accurate to one decimal point.]
(4) [(5)] T im e o r am ount requ irem en ts.
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) 1(6)] S e rv ic e charges.
Advertisements for deposits on which
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)] B onus p a y m e n ts.
Advertisements of a bonus on a deposit
shall indicate the conditions under
which the bonus will be paid.
-’The average effective annual yield is the
equivalent of a composite annual percentage yield
and may be calculated using the formula in
footnote 1.
-''Recurring or ordinary service charges include
such charges as account maintenance fees, per
check fees, deposit or withdrawal fees and charges
imposed if the accounts goes below a minimum
balance.
6
-
1]
(7)
[(8)] P e n a lty fo r e a r ly w ith d ra w a l.
Advertistments for deposits subject to
an early withdrawal penalty shall
include a clear and conspicuous
statement to that effect.
(c) P ro h ib ite d term s. — (1) I R A /
K E O G H Plan d e p o sits. 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)
‘P r o fit”. The term “profit” shall not
be used in referring to interest paid on
deposits.
(d) S o lic ita tio n o f d e p o sits fo r 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 Governors of the
Federal Reserve System, January 3.1986.
W illiam \V . W iles,
Secretary of the Board.
@FedFRASER