Prolongs the comment period for the recordkeeping rule by the FDIC
The Federal Deposit Insurance Corporation (FDIC) has extended the public comment period for its proposed rule on recordkeeping for banks' third-party accounts. The rule is intended to establish clearer, more stringent requirements for maintaining accurate and complete records related to such accounts.
The proposed rule, which was initially set to close for comments on December 2, has been extended until January 16, 2023, providing additional opportunity for the public to prepare comments to address the matters raised by the proposed rule.
The FDIC's proposed rule aims to address risks associated with certain third-party arrangements and protect depositors. This comes in response to the failure of middleware provider Synapse, which filed for bankruptcy in April. Synapse's bankruptcy revealed problems with record-keeping and faulty account ledgering.
Key stipulations of the proposed rule include banks maintaining records identifying beneficial owners and their account balances, ensuring direct, continuous access to records, and annual independent validation of record accuracy. The rule also emphasizes that records should be maintained primarily by the bank, not only within fintech.
The rule is designed to strengthen the FDIC's ability to make deposit insurance determinations and, when required, pay the deposit insurance if the bank fails. This is crucial to ensure that banks know the actual owner of deposits placed in a bank by a third party, whether the deposit has actually been placed in the banks, and that the banks are able to provide the depositor their funds even if the third party fails.
Alexandra Steinberg Barrage, a partner at Troutman Pepper and a former FDIC executive, notes the need for a single source of truth in account records. She states that the FDIC's goal is to ensure depositors are paid based on limits, and their ability to do so depends on the records kept by either the fintech or the bank.
The proposed rule also includes changes designed to streamline the filing process related to bank activities such as establishment or relocation of branches, tying recordkeeping rigor to a bank’s Community Reinvestment Act (CRA) rating and eligibility for expedited processing. Technical clarifications and conforming changes to related FDIC regulations are also part of the proposed rule to support consistent enforcement and transparency.
Daily reconciliation of account balances is required, regardless of whether custodial account records are maintained by the bank or through a third party. A potential examination of third-party deposit services is also required.
The FDIC wants banks to maintain primary records to prevent lengthy delays in accessing funds during either bank or fintech failures. This is to improve oversight and compliance, particularly in light of risks highlighted by incidents like Synapse’s bankruptcy that exposed deficiencies in record-keeping and account ledger accuracy.
For further insights on the topic, Rajashree Chakravarty's article, "5 lessons learned from Synapse’s collapse," provides valuable perspectives.
The proposed FDIC rule requires banks to complete an annual compliance certification. The rule is intended to ensure that banks know the actual owner of deposits placed in a bank by a third party, whether the deposit has actually been placed in the banks, and that the banks are able to provide the depositor their funds even if the third party fails. The FDIC extended the comment period to provide additional opportunity for the public to prepare comments to address the matters raised by the proposed rule.
The FDIC's proposed rule, aimed at enhancing account records accuracy, requires banks to maintain primary records, with key stipulations including identifying beneficial owners and account balances, ensuring continuous access, and annual validation of records. This rule is crucial for protecting depositors and strengthening the FDIC's ability to make deposit insurance determinations, especially in light of third-party failures like Synapse. The extended public comment period allows for further insights and public comments to address the matters raised by the rule in the finance and business sector, including fintech.
