Mr. Gene W. Bridges
Vice President
Peoples Bank
6767 Summer Ave.
Bartlett, TN 38134

Dear Mr. Bridges:

Your letter dated October 1, 1999, to the Director of the Division of Consumer and Community Affairs of the Board of Governors of the Federal Reserve System (the "Board"), has been referred to me for response. In your letter, you request a legal opinion on whether a new sweep account and one-page disclosure that your bank proposes to offer to its large commercial depositors comply with the Board's Regulation D (Reserve Requirements of Depository Institutions), 12 CFR 204.

According to your letter, the proposed sweep product would consist of a non-interest-bearing transaction account ("DDA") and an interest-bearing money market deposit account ("Money Market"), and would involve sweeping all funds in excess of a set threshold from the DDA into the Money Market and vice versa. A minimum DDA balance of $20,000 would be required for a depositor to be eligible for the proposed sweep product, and check writing privileges would not be offered on the proposed sweep product. According to your letter, sweeps from the DDA to the Money Market could occur daily, but sweeps from the Money Market to the DDA would be limited to six per statement cycle. Telephone transfers would be counted towards the foregoing "six per statement cycle" limit, but in-lobby withdrawals would not. Finally, according to your letter, in the event that excessive debits are noted on a particular sweep account, your bank would either close the account or raise the high threshold amount to a level that would ensure compliance with the limitation.¹

A money market deposit account is a "savings deposit" within the meaning of Regulation D. 12 CFR 204.2(d)(2). In order for a savings deposit to avoid being deemed a "transaction account" under Regulation D, there must not be more than six transfers per calendar month or statement cycle from the savings deposit by preauthorized or automatic transfer or by telephonic (including data transmission) agreement to another account of the depositor at the same institution or to a third party. In order to ensure that this limitation is not exceeded for such accounts, Regulation D requires that the bank either prevent withdrawals or transfers in excess of the limitation, or "adopt procedures to monitor those transfers on an ex post basis and contact customers who exceed the established limits on more than an occasional basis." 12 CFR 204.2(d)(2) n.4. If the limits continue to be violated after such notification, the bank must either close the account or remove the transfer and draft capacities of the account. Id.

Your proposed sweep product would involve preauthorized or automatic transfers falling within the limitations of Section 204.2(d)(2), but would limit the number such transfers from the savings account to six per statement cycle. Because excessive withdrawals from the Money Market appear not to be impossible in the case of your proposed sweep product, your bank would have to adopt procedures to monitor transfers from the Money Market "on an ex post basis and contact customers who exceed the established limits on more than an occasional basis." Id. at n.4.

In previous cases similar to the one described in your letter but involving subaccounts that are, in legal effect, separate accounts, staff has concluded that the Board would not determine that the savings accounts in such arrangements are "transaction accounts" for purposes of Regulation D. Accordingly, under the circumstances described in your letter and provided your bank adopts the requisite monitoring procedures for withdrawals from the Money Market accounts, staff believes that the Board would determine that the Money Market accounts are "savings deposits" within the meaning of Regulation D.

With respect to the disclosure enclosed with your letter, it refers to transfers from "the sweep account," while your letter refers to transfers from a "Money Market account." Nevertheless the disclosure may be adequate to establish a "sweep account" separate from the "business checking account" to which the disclosure also refers. Ultimately, the adequacy of the procedure to establish savings accounts separate from transaction accounts is a matter of state law. We express [no opinion] on the sufficiency of the disclosure under Regulation CC (12 CFR 229), "Availability of Funds and Collection of Checks," Regulation DD (12 CFR 230), "Truth in Savings," or other applicable federal disclosure laws or regulations.

I hope this information is useful to you.

Very truly yours,

(Signed) Oliver Ireland

Oliver Ireland

1. In the proposed disclosure enclosed with your letter ("Peoples Bank Sweep Account Terms and Conditions"), however, there is no mention of the possibility of closing the account in the event of excessive transfers, but only of the possibility of "raising the high threshold level to ensure the sweep transfer limit is not exceeded." Return to text