BPI and Others Comment on FDIC’s Notice Of Proposed Rulemaking on Recordkeeping for Custodial Accounts

Ladies and Gentleman,

The Bank Policy Institute,^[1] American Bankers Association,^[2] and Association of Global Custodians, Americas Focus Committee^[3] are writing in response to the Federal Deposit Insurance Corporation's Notice of Proposed Rulemaking on Recordkeeping for Custodial Accounts (the "proposal").^[4] Motivated by the bankruptcy of Synapse Financial Technologies, Inc., a nonbank middleware provider, and the resultant inability of consumers to access their deposited funds due to Synapse's lack of adequate ledgering, the proposal seeks to impose new recordkeeping requirements on banks. While we agree with the FDIC that the inability to access deposited funds due to recordkeeping failures by nonbank entities is a problem that must be addressed, we disagree with the approach taken in the proposal, which is overly broad in scope and which inappropriately seeks to make banks responsible for business deficiencies observed at nonbank entities. If finalized, the proposal would result in significant and adverse unintended consequences for banks' ability to serve their customers and, furthermore, would not optimally mitigate the risks the FDIC seeks to address through it. For the reasons discussed in greater detail herein, the proposal should therefore be withdrawn, and the FDIC and other relevant policymakers should refocus their efforts to prevent future harm, like that caused by Synapse's bankruptcy, on the nonbank entities that are most responsible for and best positioned to address the underlying causes of such harm. The FDIC should not continue to attempt to indirectly address concerns at nonbank entities by directly regulating all banks.

I. Introduction

The FDIC acknowledges that the impetus for this proposal was the bankruptcy of a specific middleware provider, Synapse, and the resulting fallout, including consumer harm.^[5] Synapse assisted its fintech customers by handling "the bookkeeping necessary to make sure customer accounts [were] credited and debited correctly" at the banks where Synapse helped place customer funds.^[6] In the aftermath of Synapse's filing for Chapter 11 bankruptcy protection in April 2024, however, tens of thousands of bank accounts were frozen due to the inability to ascertain ownership.^[7] The FDIC also notes that, "[i]n many cases, it was advertised that the funds were FDIC-insured, and consumers may have believed that their funds would remain safe and accessible due to representations made regarding placement of those funds in IDIs."^[8]

Although we strongly support ensuring that beneficial owners can access their funds in a timely manner, the proposal suffers from numerous deficiencies. The proposal would not achieve this purpose and would create significant collateral consequences for banks and their customers. Indeed, the proposal would impose blanket requirements on all banks offering covered deposit accounts to address a specific incident involving a particular type of bank-fintech arrangement. The failure of Synapse, or any other similar nonbank entity, to maintain accurate ledgers should be addressed by imposing or strengthening requirements applicable to that type of entity. Any further actions the FDIC or other relevant policymakers propose to take to prevent future harm of the type caused by Synapse's failures must be appropriately targeted to address those specific risks.^[9]

Rather than imposing additional requirements on banks and making them serve as quasi-regulators for fintechs - only without the enforcement tools and oversight authorities possessed by the banking agencies - the FDIC should withdraw the proposal and work with the other banking regulators to use their examination authority under the Bank Service Company Act (BSCA) to require greater accountability of fintechs and other nonbanks engaging in the specific activities that gave rise to the concerns motivating this proposal.^[10] The FDIC should also coordinate with the Consumer Financial Protection Bureau, which possesses broad authorities over nonbank providers of financial products and services.^[11]

To read the full comment letter, please click here, or click on the download button below.

[1] The Bank Policy Institute is a nonpartisan public policy, research and advocacy group that represents universal banks, regional banks, and the major foreign banks doing business in the United States. BPI produces academic research and analysis on regulatory and monetary policy topics, analyzes and comments on proposed regulations, and represents the financial services industry with respect to cybersecurity, fraud, and other information security issues.

[2] The American Bankers Association is the voice of the nation's $24.2 trillion banking industry, which is composed of small, regional and large banks that together employ approximately 2.1 million people, safeguard $19.1 trillion in deposits and extend $12.6 trillion in loans.

[3] Established in 1996, the Association of Global Custodians is a group of 12 financial institutions that provide securities safekeeping services and asset-servicing functions to primarily institutional cross-border investors worldwide. As a non-partisan advocacy organization, the Association represents members' common interests on regulatory and market structure matters through comment letters, white papers and interaction with legislative and regulatory authorities and financial industry organizations. The member banks are competitors, and the Association does not involve itself in member commercial activities or take positions concerning how members should conduct their custody and related businesses. The Americas Focus Committee operates as an overarching full committee to address all Association matters involving regulatory/market structure issues arising in North or Latin America.

[4] The Agency should keep in mind that affiliates of a bank in a banking holding company structure are subject to consolidated supervision by the Federal Reserve.

[5] 89 Fed. Reg, 80,135.

[6] Ken Sweet, Abrupt shutdown of financial middleman Synapse has frozen thousands of Americans' deposits, Associated Press (May 22, 2024) (link here).

[7] Id. Some customers could not access funds for "a number of months," and the FDIC asserts in the proposal that it has received more than 1000 complaints related to the failure. See 89 Fed. Reg, 80,135. A court-appointed trustee has found that "up to $96 million of customer funds were missing." Hugh Son, 'I have no money': Thousands of Americans see their savings vanish in Synapse fintech crisis, CNBC (Nov. 22, 2024) (link here).

[8] 89 Fed. Reg. 80,135.

[9] The fallout from Synapse's bankruptcy involved other factors the proposal does not address but that will be addressed by other recently updated rules. In particular, the FDIC notes that "it was advertised that the funds were FDIC-insured, and consumers may have believed that their funds would remain safe and accessible due to representations made regarding placement of those funds in IDIs." 89 Fed. Reg. 80,135. However, the proposal does not address the issue of false advertising for good reason: the FDIC recently updated its rules regarding signs and advertising and misrepresentations of deposit insurance status to apply to digital and mobile platforms, meaning it has already taken relevant steps outside the proposal to achieve this purpose. 89 Fed. Reg. 3,504. Compliance with that rule's relevant sections was required by January 1, 2025. The FDIC should therefore assess the effectiveness of the final rule in addressing consumer confusion and reducing the risk of harm related to incidents similar to Synapse's bankruptcy. After a period of review, the results of such study will help the FDIC and other policymakers determine whether additional measures, including taking a more direct regulatory role with nonbanks, are needed to address further the causes of the harm that resulted from Synapse's bankruptcy.

[10] 12 U.S.C. 1861 et seq.

[11] See, e.g., 12 U.S.C. 5514(e), 5515(d), 5516(e), 5563, 5564, and 5514(a)(1)(B)-(C).

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