The Federal Deposit Insurance Corporation (“FDIC”) published for comment in December 2022 a notice of proposed rulemaking (12 CFR Part 328) (“Proposed Rule”)1 that would apply to all FDIC-insured institutions and impose new obligations on entities that are not insured depository institutions (“IDIs”), such as broker-dealers, FinTechs, and others.
The focus of this client memo is on Subpart B of the Proposed Rule,2 which would, among other things, require that:
- IDIs establish and maintain written policies and procedures to monitor and evaluate the activities of third parties – such as broker-dealers or neobanks – that provide deposit products to their customers; and
- IDIs, broker-dealers, or FinTechs revise their customer disclosures regarding arrangements that rely on pass-through deposit insurance, such as brokered certificates of deposit (“Brokered CDs”), broker-dealer sweep programs, and “neobank” arrangements.
Comments on the Proposed Rule are due by February 13, 2023. In light of the potentially onerous consumer disclosure amendments that would be required by the Proposed Rule, we encourage IDIs, broker-dealers, and FinTechs to carefully review the Proposed Rule and determine whether comment is required.
If you wish to comment, please contact us and we are happy to provide assistance.
Regulatory Background
Section (18)(a)(4)3 of the Federal Deposit Insurance Act (“FDI Act”) prohibits any person from misusing the name or logo of the FDIC, engaging in false advertising, or making knowing misrepresentations about deposit insurance. The Proposed Rule follows the FDIC’s May 2022 revisions to subpart B to 12 CFR part 328 concerning false representations related to FDIC insurance and the misuse of the FDIC logo.
IDI Supervision of Non-Banks
The Proposed Rule would require that IDIs establish written policies and procedures monitor and evaluate the activities of persons that provide deposit-related services to the IDI or offer the IDIs services to other parties. If the Proposed Rule is finalized, IDIs would need to review their contracts with third parties, marketing materials, employee manuals and compliance checklists to ensure that they comply with the new regulations.
This requirement would place IDIs in the awkward position of having to supervise other regulated entities, such as broker-dealers. This supervision would need to be included in contractual provisions governing an IDI’s relationship with a broker-dealer or FinTech. Moreover, the FDIC would presumably bring an enforcement action against an IDI failing to appropriately monitor and supervise its third-party relationships. This continues a trend of the FDIC outsourcing its enforcement responsibilities to IDIs.
Pass-Through Insurance Disclosures
FDIC regulations have long provided for “pass-through” deposit insurance coverage, meaning that deposits placed at an IDI by a party on behalf of one or more owners are insured as if the funds were deposited directly at the IDI by the owner(s).
Under the Proposed Rule, representations about pass-through insurance, absent qualifications on the prerequisite regulatory conditions, would be considered misleading. The Proposed Rule would require entities to clearly and conspicuously disclose that pass-through deposit insurance coverage is subject to certain regulatory requirements being satisfied. The Proposed Rule does not prescribe specific disclosure language, but it would be sufficient for a disclosure to state that pass-through deposit insurance is available only if certain regulatory conditions are satisfied, without specifically naming those conditions.
Despite the claimed “flexibility,” the Proposed Rule may require IDIs to make substantive revisions to their long-standing customer disclosure documents for Brokered CDs, sweep programs, and neobank arrangements. Such revisions would doubtless be costly and time-consuming to implement, without any evidence provided by the FDIC that the revisions would materially improve consumer understanding.
Additional Provisions on “Misrepresentation”
The Proposed Rule stipulates that any statements or omissions by non-bank entities, such as broker-dealers or FinTech “neobanks”, that omit or fail to clearly and conspicuously disclose information that may mislead a consumer into thinking that they are dealing with an IDI, or that deposit insurance applies to their funds, could constitute a misrepresentation, regardless of whether the consumer was actually misled.
For example, a non-bank’s use of the official logo or advertising statement on its website or marketing materials would be a misrepresentation unless that logo is next to the name of one or more IDIs. Also, a non-banks use of the official FDIC sign or digital sign would be a misrepresentation if the usage could inaccurately imply that the non-bank is insured by the FDIC and is backed by the full faith and credit of the US government. Additionally, for non-banks whose marketing materials include statements regarding deposit insurance, it would be a material omission for the non-bank to fail to clearly and conspicuously disclose that it is not itself an FDIC-insured institution and that the FDIC’s deposit insurance coverage only protects against the failure of an FDIC-insured depository institution.
If finalized, the Proposed Rule would require that non-bank entities review their public statements regarding deposit insurance to ensure they comply with the requirements in part 328. Moreover, the Proposed Rule is vague on the specific disclosure language that would be sufficient. The only example of a sufficient disclosure the Proposed Rule provides is that of a non-bank entity identifying on their website the partner IDI where banking services are provided.
1 See FDIC, FDIC Issues A Proposed Rule To Modernize the Use of the FDIC Official Sign and Advertising Statement and to Clarify its Regulations Regarding False Advertising, Misrepresentations About Insured Status, and Misuse of the FDIC’s Name or Logo (Dec. 13, 2022), https://www.fdic.gov/news/press-releases/2022/pr22085.html; 87 Fed. Reg. 78,017 (Dec. 21, 2023).
2 Subpart A of the Proposed Rule would modify requirements on the display of the official sign in branches, and require the use of the FDIC official sign, a new digital sign, and other signs differentiating deposits from non-deposit products, including through digital channels (which functionally serve as digital teller windows).
3 12 U.S.C. 1828(a)(4). Section 18(a)(4) gives the FDIC independent authority to investigate and take administrative enforcement actions, including the power to issue cease and desist orders and impose civil money penalties, against any person who misuses the FDIC name or logo or makes misrepresentations about deposit insurance. 12 U.S.C. 1828(a)(4)(C)–(D). Further, under Federal law, it is also criminal offense to misuse the FDIC name or make false representations regarding deposit insurance. See 18 U.S.C. 709.
