FDIC Proposes New Rule on Recordkeeping for Custodial Accounts

On September 19, 2024, the Federal Deposit Insurance Corporation (“FDIC”) proposed a set of new rules governing the recordkeeping practices of Insured Depository Institutions (“IDI(s)”). The proposed rule, which is largely a reaction to the recent bankruptcy of SynapseFI, would require IDI’s to maintain records identifying the beneficial owners of custodial accounts with transactional features.

The proposed rule would require IDI’s to maintain beneficial ownership records directly or, if certain additional requirements are satisfied, such records could be maintained by a third-party vendor, processor, software provider, or similar entity on the IDI’s behalf. These additional requirements include the following –

• IDI’s must have “direct, continuous, and unrestricted access” to the records maintained by the third-party, including in the event of a business interruption, insolvency, or bankruptcy of the third party.
• Reconciliation of such records would be required along with a periodic validation of the third-party’s records by an independent third-party.

IDI’s would need to establish and maintain written policies and procedures in order to comply with the proposed rule’s requirements. Finally, IDI’s would be required to complete a report on an annual basis that does the following:

• Describes any material changes to the IDI’s information technology systems relevant to compliance with the rule.
• Lists the accountholders that maintain custodial deposit accounts with transaction features, the total balance of those accounts, and the total number of beneficial owners.
• Sets forth the IDI’s testing of its recordkeeping requirements.
• Provides the results of the required independent validation of any records maintained by third parties.

Finally, the proposed rule requires a specific electronic file format for covered records. The FDIC believes this standardized format would enable it to more quickly gather and use these records when a deposit insurance determination becomes necessary. The proposed format and structure of such records is included in Appendix A to the proposed rule.

Today, most IDI’s that sponsor custodial or FBO transaction accounts do not maintain the ledger of record for the accounts on the IDI’s own system. Instead, a third-party processor or vendor usually maintains the ledger, which is then accessible to the IDI via a vendor provided dashboard. The vendor’s compliance systems and data security practices are typically audited on at least an annual basis and the results of that audit are provided to the IDI. Contracts also typically also include a procedure to remediate any deficiencies identified in the audit.

As such, it is possible that many of the pre-conditions necessary for an IDI to rely on a third-party to maintain custodial account records are already common place in the market. With that said, however, the additional reporting and validation obligations under the proposed rule will require some additional compliance and operational expense on the part of the IDI. In addition, while IDI’s generally have access to account information maintained by third-party vendors via a dashboard, it remains to be seen if that information is provided in a “direct, continuous, and unrestricted” manner that complies with the proposed rule or whether that requirement will necessitate changes to contractual language and the provider’s own systems and processes.

Once published in the Federal Register, the Proposed Rule will have a 60-day comment period.

You can find a copy of the proposed rule here.