thropic, charitable, educational, or other similar purposes and which is not operated for profit." (12 U.S.C. 1832(a)(2)). The purpose of the Act is to extend the availability of NOW accounts throughout the nation. Previously, as an experiment, NOW accounts were authorized to be offered by depository institutions only in New England, New York, and New Jersey.

(2)(i) The NOW account experiment established by Congress in 1973 did not specify the types of customers that could maintain NOW accounts. As a result, the rules of the Federal Reserve and Federal Deposit Insurance Corporation specified the types of depositors eligible to maintain NOW accounts at member and insured nonmember banks. In enacting the NOW account provision in 1980, Congress adopted virtually the same language concerning NOW account eligibility that previously had been adopted by the Board and the Federal Deposit Insurance Corporation with regard to the types of customers permitted to maintain NOW accounts in institutions located in the NOW account experiment region. (12 CFR 217.1(e)(3) and 12 CFR 329.1(e)(2)). This definition was based upon longstanding regulatory provisions concerning eligibility criteria for savings deposits.

(ii) Effective October 15, 1982, section 706 of the Garn-St Germain Depository Institutions Act of 1982 (Pub. L. 97-320; 96 Stat. 1540) specifically extended NOW account eligibility to funds deposited by governmental units.

(3) In response to many requests for rulings since the new law was enacted, the Board has determined to clarify the types of entities that may maintain NOW accounts at member banks.

(b) Individuals. (1) Any individual may maintain a NOW account regardless of the purposes that the funds will serve. Deposits of an individual used in his or her business may be held in a NOW account, since it is impracticable to distinguish between funds used by an individual in his or her business and funds used for personal purposes. However, other entities organized or operated to make a profit may not maintain NOW ac

counts regardless of whether they are corporations, partnerships, associations, business trusts, or other organizations.

(2) Under current provisions, funds held in a fiduciary capacity (either by an individual fiduciary or by a corporate fiduciary such as a bank trust department), including those awaiting distribution or investment, may be held in the form of NOW accounts if the beneficiaries are individuals. The Board believes that such a classification should continue since fiduciaries are required to invest even temporarily idle balances to the greatest extent feasible in order to responsibly carry out their fiduciary duties. The availability of NOW accounts provides a convenient vehicle for providing short-term return on temporarily idle trust funds of individuals.

a

(3) Pension funds, escrow accounts, security deposits, and other funds held under various agency agreements may also be classified as NOW accounts if the entire beneficial interest is held by individuals. The Board believes that these accounts are similar in nature to trust accounts and should be accorded identical treatment. Therefore, such funds may be regarded as eligible for classification as NOW accounts.

(1)

(c) Nonprofit organizations. Under the Act, a nonprofit organization that is operated primarily for religious, philanthropic, charitable, educational, or other similar purposes may maintain a NOW account. The Board regards the following kinds of organizations as eligible for NOW accounts under this standard if they are not operated for profit:

(i) Organizations described in section 501(c)(3) through (13), and (19) of the Internal Revenue Code (26 U.S.C. (I.R.C. 1954) section 501(c) (3) through (13) and (19)); and

(ii) Homeowners and condominium owners associations described in section 528 of the Internal Revenue Code (26 U.S.C. (I.R.C. 1954) section 528), including housing cooperative associations that perform similar functions.

(2) All organizations that are operated for profit are not eligible to maintain NOW accounts at member banks.

(3) The following types of organizations described in the cited provisions

of the Internal Revenue Code are among those not eligible to maintain NOW accounts:

(i) Credit unions and other mutual depository institutions described in section 501(c)(14);

(ii) Mutual insurance companies described in section 501(c)(15);

(iii) Crop financing organizations described in section 501(c)(16);

(iv) An organization created to function as part of a qualified group legal services plan described in section 501(c)(20);

(v) Farmers' cooperatives described in section 521; or

(vi) Political organizations described in section 527.

(d) Governmental units. Governmental units are generally eligible to maintain NOW accounts at member banks. NOW accounts may consists of funds in which the entire beneficial interest is held by the United States, any State of the United States, county, municipality, or political subdivision thereof, the District of Columbia, the Commonwealth of Puerto Rico, American Samoa, Guam, any territory or possession of the United States, or any political subdivision thereof.

(e) Grandfather provision. In order to avoid unduly disrupting account relationships, a NOW account established at a member bank on or before August 31, 1981, that represents funds of a nonqualifying entity that previously qualified to maintain a NOW account may continue to be maintained. [46 FR 46899, Sept. 23, 1981, as amended at 47 FR 54759, Dec. 6, 1982]

banks, to issue 31⁄2 year or more time deposits not subject to an interest rate ceiling and 91-day, $7,500 time deposits with an interest rate ceiling tied to the most recent 91-day Treasury bill rate. Such deposits may be issued in negotiable form, thereby facilitating the ability of depositors to liquidate the deposit through sales on the secondary market. Member banks have asked the extent to which they may participate in, or facilitate, the secondary market for such time deposits that they have issued.

(b) The Board of Governors believes that a fundamental principle behind the penalty for payment of a time deposit prior to maturity is to distinguish time deposits from demand deposits. Under section 19(i) of the Federal Reserve Act (12 U.S.C. 371a), member banks are prohibited from paying interest on demand deposits. In addition, the early withdrawal penalty is intended to discourage depositors from withdrawing time deposit funds prior to maturity, thereby enabling member banks to better plan their asset and liability structures. The question of participation by a member bank in secondary market transactions involving its own time deposits raises the issue of whether such activity would circumvent the purposes intended to be served by the early withdrawal penalty.

(c) Direct participation. (1) The Board has concluded that if a member bank or one of its affiliates purchases a time deposit issued by the bank, the member bank should be regarded as having paid the deposit prior to maturity. The effect of the transaction is that the member bank has cancelled a liability as opposed to having acquired an asset for its portfolio. Thus, the member bank is required to impose the early withdrawal penalty on the party from whom it purchases the instrument. With respect to an affiliate making the purchase, the effect of the penalty rule could be easily circumvented by redemption of the time deposit by the affiliate at the member bank. Even if an early withdrawal penalty is imposed, because of the affiliate relationship, there likely would be no impact on the consolidated earnings of the entity comprising the

member bank and the affiliate redeeming the deposit. Consequently, the Board believes that the purchase of a time deposit issued by a member bank by the bank itself or by one of its affiliates constitutes a payment of a deposit prior to maturity.

of

(2) Many member banks engage in secondary market activities in negotiable time certificates of deposit $100,000 or more (“CDs"). In many instances, sales and purchases of these CDs are negotiated primarily by rate and maturity and without regard to the specific identity of the issuing bank. In some cases a member bank might purchase a block of CDs of various obligors and later discover one of the CDs purchased to be its own. Since this situation appears to be one in which the member bank has inadvertently purchased its own deposit, the Board believes that the member bank should not be required to impose an early withdrawal penalty; however, it must sell the CD in the secondary market as soon as possible after it has been received.

(d) Participation as a "broker." (1) The Board believes that it is permissible for a member bank to facilitate the secondary market for its own small denomination time deposits by arranging to find a purchaser for a time deposit that a customer is trying to sell. In such instances, the bank will not be paying out any of its own funds and the depositor does not have a guarantee that the member bank will actually be able to find a buyer. Member banks may establish and advertise arrangements whereby an unaffiliated third party agrees in advance to purchase time deposits issued by the bank. Such transactions would not be inconsistent with the purposes that the early withdrawal penalty is intended to serve. However, the Board believes that an arrangement established wherein a member bank pays a fee to a third party that purchases negotiable time deposits from the bank's depositors constitutes a device to avoid the early withdrawal penalty, and, thus, is prohibited. In addition any interim financing provided to such a third party by a member bank in connection with its secondary market activity involving the bank's small de

nomination time deposits must be made substantially on the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other similarly situated persons and may not involve more than the normal risk of repayment or present other unfavorable features.

(2) A member bank may enter into an arrangement with an unaffiliated third party wherein the third party agrees to stand ready to purchase time deposits held by the member bank's customers. However, the Board is of the opinion that a member bank may not establish reciprocal arrangements with another depository institution for purchases of each other's time deposits of less than $100,000 held by customers. The Board believes that arrangements with such parties present serious potential for circumvention of the early withdrawal penalty rule and the purposes that it is designed to serve. In this regard, arrangements entered into with another depository institution to purchase time deposits of the other institution's customers could give rise to significant contingent liabilities for the entities agreeing to purchase the deposits. While the institution issuing the deposit might not be impaired in planning its asset and liability structure, the institution agreeing to purchase deposits from the customers of the issuing institution could be so affected. Such arrangements could have an adverse effect on the safety and soundness of member banks and other depository institutions.

[47 FR 37878, Aug. 27, 1982]

§ 217.160 Loan upon the security of a time deposit.

(a) Section 217.4(f) of Regulation Q (12 CFR 217.4(f)) provides that a member bank may make a loan to a depositor upon the security of his or her time deposit as long as the rate of interest on the loan is at least 1 percentage point above the rate being paid on the deposit. The purpose of this provision is to ensure that the rules regarding the maintenance of interest rate ceilings are not violated, in

cluding rules that require penalties for early withdrawals of time deposits.

(b) Effective October 5, 1982, the Board amended Regulation D-Reserve Requirements of Depository Institutions (12 CFR Part 204) to define as transaction accounts, time deposits issued in connection with an arrangement that permits the depositor to obtain credit, directly or indirectly, through the drawing of a check, draft or similar device that can be used for the purpose of making payments or transfers to third persons or others. (47 FR 44992) In considering this amendment, the Board concluded that some of these arrangements are structured using a loan secured by a time deposit with terms providing for interest on the loan to be charged at 1 percentage point over the annual simple rate being paid on the deposit when the effective rate on the deposit is higher due to the effects of compounding. For example, after daily compounding on a 365/360 basis, a 12 per cent annual simple rate being paid on a deposit results in an annual effective rate of 12.935 per cent. This result has the effect of minimizing the impact of the required 1 percentage point differential. In order to preserve the effectiveness of § 217.4(f) of Regulation Q, the Board believes the interest rate charged (on an annual basis) on a loan secured by a time deposit must be at least 1 percentage point above the annual effective rate paid on the time deposit, taking into account the effects of compounding of the interest on the deposit. Thus, in the example, provided above, the minimum annual rate that may be charged on a loan secured by the time deposit would be 13.935 per cent, which is 1 percentage point above the 12.935 annual effective rate being paid on the deposit. The Board has been advised that a similar position has been adopted by the Federal Deposit Insurance Corporation and the Federal Home Loan Bank Board.

(c) In order not to disadvantage depositors who currently have such loans outstanding or agreements for such loans, this interpretation is applicable to loans secured by a time deposit that are made, extended or renewed on or after October 18, 1982, or agree

ments for such loans entered into on or after October 18, 1982.

[47 FR 47231, Oct. 25, 1982]

§ 217.161 Repurchase agreements involving shares of a money market mutual fund whose portfolio consists wholly of United States Treasury and Federal agency securities.

(a) The Federal Reserve Act, as amended by the Monetary Control Act of 1980 (Title I of Pub. L. 96-221) imposes federal reserve requirements on transaction accounts and nonpersonal time deposits held by depository institutions. The Board is empowered under the Act to determine what types of obligations shall be deemed a deposit (12 U.S.C. 461). Regulation D-Reserve Requirements of Depository Institutions exempts from the definition of "deposit" those obligations of a depository institution that arise from a transfer of direct obligations of, or obligations that are fully guaranteed as to principal and interest by, the United States government or any agency thereof that the depository institution is obligated to repurchase (12 CFR 204.2(a)(1)(vii)(B)). A parallel exemption in Regulation Q-Interest on Deposits exempts from the definition of "deposit" obligations that evidence an indebtedness arising from a transfer of direct obligations of, or obligations that are fully guaranteed as to principal and interest by, the United States or any agency thereof that the bank is obligated to repurchase (12 CFR 217.1(f)(2)).

(b) The National Bank Act provides that a national bank may purchase for its own account investment securities under limitations and restrictions as the Comptroller may prescribe (12 U.S.C. 24, 17). The statute defines investment securities to mean marketable obligations evidencing indebtedness of any person in the form of bonds, notes, and debentures. The Act further limits a national bank's holdings of any one security to no more than an amount equal to 10 percent of the bank's capital stock and surplus. However, these limitations do not apply to obligations issued by the United States, general obligations of any state and certain obligations of

73-031 0-86--17

federal agencies. In addition, generally a national bank is not permitted to purchase for its own account stock of any corporation. These restrictions also apply to state member banks (12 U.S.C. 335).

(c) The Comptroller of the Currency has permitted national banks to purchase for their own accounts shares of open-end investment companies that are purchased and sold at par (i.e., money market mutual funds) provided the portfolios of such companies consist solely of securities that a national bank may purchase directly (Banking Bulletin B-83-58). The Board of Governors has permitted state member banks to purchase, to the extent permitted under applicable state law, shares of money market mutual funds ("MMMF") whose portfolios consist solely of securities that the state member bank may purchase directly (12 CFR 208.123).

3

(d) The Board has determined that an obligation arising from a repurchase agreement involving shares of a MMMF whose portfolio consists wholly of securities of the United States government or any agency thereof would not be a "deposit" for purposes of Regulations D and Q. The Board believes that a repurchase agreement involving shares of such a MMMF is the functional equivalent of a repurchase agreement directly involving United States government or agency obligations. A purchaser of shares of a MMMF obtains an interest in a pro rata portion of the assets that comprise the MMMF's portfolio. Accordingly, regardless of whether the repurchase agreement involves United States government or agency obligations directly or shares in a MMMF whose portfolio consists entirely of United States government or agency obligations, an equitable and undivided interest in United States and agency government obligations is being transferred. Moreover, the Board believes that this interpretation will further the purpose of the exemp

The term "United States government or any agency thereof" as used herein shall have the same meaning as in § 204.2(a)(1)(vii)(B) of Regulation D, 12 CFR 204.2(a)(1)(vii)(B).

tion in Regulations D and Q for repurchase agreements involving United States government or federal obligations by enhancing the market for such obligations.

[50 FR 13012, Apr. 2, 1985]

PART 218-RELATIONS WITH DEALERS IN SECURITIES UNDER SECTION 32, BANKING ACT OF 1933 REGULATIONS

Sec.

218.1 Prohibitions. 218.2 Exemptions. 218.3 Amendments.

INTERPRETATIONS

218.101 Service of open-end investment

company.

218.102 Director serving member bank and closed-end investment company being organized.

218.103 Service as officer, director, or em

ployee of licensee corporation under the Small Business Investment Act of 1958. 218.104 Service of member bank and real estate investment company.

218.105 Serving as director of member

bank and corporation selling own stock. 218.106 No exception granted a special or limited partner.

218.107 Serving member bank and investment advisor with mutual fund affiliation.

218.108 Interlocking relationship involving securities affiliate of brokerage firm. 218.109 Short-term negotiable notes of

banks not securities under section 32, Banking Act of 1933.

218.110 Investment for own account affects applicability of section 32.

218.111 Interlocking relationships between

bank and its commingled investment account.

218.112 Interlocking relationships between member bank and variable annuity insurance company.

218.113 Interlocking relationships between member bank and insurance companymutual fund complex.

218.114 Interlocking service between securities companies and bank holding companies.