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Final Rule on Deposit and Sweep Accounts for Depository Institutions

February 10, 2009

By Chris Daniel, Kevin Petrasic and Nicole Ibbotson

Effective July 1, 2009, insured depository institutions must inform their sweep account customers of the nature of their swept funds and how those funds would be treated if the institution failed. Although this sounds simple in theory, in practice, ascertaining how funds are swept and the classification of these funds upon the banks receivership are both quite difficult.

New treatment of swept funds upon receivership depends on many characteristics of the sweep transaction, including, but not limited to, the type of sweep, timing, underlying securities and other involved parties. Many banks are finding that certain investment vehicles they labeled and sold as sweep accounts are not what they appear; as such, the classification of these investments and the underlying funds in the event of bank failure may come as a surprise to banks and customers. Because of this uncertainty, institutions are now required to inform customers what type of investment vehicles they are participating in and what will happen to such customers funds should the bank be placed into receivership by the Federal Deposit Insurance Corporation (FDIC).

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Image: Chris Daniel
Chris Daniel
Partner, Corporate Department