Thursday, April 18, 2024

January 2012 Legal Briefs

By Andy Zavoina

  • Compliance To-Dos for the New Year

By Pauli D. Loeffler

  • Corporations and LLCs

By John S. Burnett

  • Reg Q – Gone, but Not Forgotten

Compliance To-Dos for the New Year

By Andy Zavoina

With the year-end here and gone it would be great to start off the New Year with a clean slate. That would mean any tasks you hadn’t completed would be removed from your list. But banking does not work that way. So among all the other things you have going, you need to ensure that what was supposed to be done in 2011 was done or will be in early 2012. We’ve put together a list of tasks that you may want to double check, have double checked, or get on the to-do list.

Regulation O – General requirements which apply to bank “insiders” require that you have these borrowers identified in advance of making them a loan. Your bank policy which defines how your bank will comply with Reg O requirements will restrict loan amounts and terms to these insiders. It will also require reporting to your board of directors when certain loans to insiders are made. Lenders and loan administration officers responsible for this reporting need to have a current list of these insiders.  This list may include:
• Directors including those from subsidiaries,
• Executive Officers of the bank, bank holding company and subsidiaries of the holding company,
• Related interests of these individuals and Principal shareholders.
Some of these positions may have been specifically excluded or included from the definition of insider by virtue of a board resolution. Verify if one is currently in force in your bank and if it has, does it require a refresher? (Refer to §§ 215.4, 215.5)

SAFE Act MLO Registration – For the first time, Mortgage Loan Originators registered with the Nationwide Mortgage Licensing System and Registry need to have renewed their registration with the Registry if they were originally registered prior to July 1, 2011. If they registered after that date, there is no renewal requirement this year.  Your window for completing the renewals has closed.   If the task wasn’t done, those that were not properly renewed must cease making covered loans until the problem is rectified.
The bank may also use this opportunity to review job descriptions and actual functions of bank staff to verify that all MLOs are clearly identified and registered.  There are several SAFE-related tools available at no cost on the BOL Banker Tools page, http://www.bankersonline.com/tools/tools.html#Lending, including one which will help staff self-identify themselves based on the actual duties they perform.

Vendor Due Diligence – Whoever handles the ongoing responsibilities with vendor requirements needs to ensure that that financial statements, errors and omissions coverage, insurance and any bond documents are updated and current. This includes audits (internal or external) and SAS 70 audits as those may be required.  Remember the SAS 70 has been superseded by SSAE 16, which became effective in June 2011. If you are not yet familiar with the Statement on Standards for Attestation Engagements  No. 16, you can find more information here.  http://ssae16.com/

Annual Security Report – An annual security report is required by the Bank Protection Act (Reg H, §208.61(d)). This report should be provided to your board of directors. An excellent template for this annual report has been provided by Dana Turner and is available here. http://www.bankersonline.com/tools/security/annualreport.html  While this template was written in 2007, you may choose to update it with new FFIEC guidance concerning multifactor authentication for your internet banking customers.

Information Security Report – GLBA – Appendix B to 12 CFR part 30 for national banks (other regulated banks will have the same requirement with their own specific cites) requires each bank to report certain information to its board or an appropriate committee of the board at least annually. This report should describe the overall status of the information security program and the bank’s compliance with the Interagency Guidelines for safeguarding customer information. The reports should discuss material matters related to its program, addressing issues such as: risk assessment; risk management and control decisions; service provider arrangements; results of testing; security breaches or violations and management’s responses; and recommendations for changes in the information security program.

ACH Audit – NACHA’s rules require that every RDFI and ODFI, Third Party Processors and Originators of WEB entries conduct an ACH audit annually. This audit used to be due by December 1 of each year but was recently changed to the later due date of December 30. If you haven’t finalized your ACH Audit report already, this should be done immediately.

FDICIA Annual Audit – Part 363 of the FDIC’s regulations require banks with assets above $500 million to complete an annual independent audits of the financial statements.
Red Flags Annual Report – The board of directors, an appropriate committee of the board, or a designated employee at the level of senior management should review an annual reports prepared by staff regarding compliance by the bank with the requirement of § 334.90. Per Appendix J to Reg V, the report should address material matters related to the Program and evaluate issues such as the effectiveness of the policies and procedures of the financial institution or creditor in addressing the risk of identity theft in connection with the opening of covered accounts and with respect to existing covered accounts; service provider arrangements; significant incidents involving identity theft and management’s response; and recommendations for material changes to the Program.

Reg E Error Resolution Notice – Reg E requires that an error resolution notice be provided to applicable accounts in one of two ways on an ongoing basis. You must provide a short notice with each periodic statement or a longer version on at least an annual basis. If you have chosen to provide the latter you should ensure it has or will be going out in a timely manner. Appendix A of Reg E contains the form (A-3) that should be provided.
Reg Z Annual Billing Rights – Reg Z has a requirement similar to Reg E. Open-end credit accounts require an annual billing rights statement. (§226.9)

Reg P Privacy Notice – Your Privacy notice needs to be sent annually. Annually means at least once in any period of 12 consecutive months so your bank likely sent this already, but ensure it was done and is on your 2012 calendar. Remember you must use the same period on a consistent basis.
BSA Certificates – A bank is permitted to rely on another financial institution to perform some or all of the elements of the CIP under certain conditions.  The other financial institution must enter into a contract requiring it to certify annually to the bank that it has implemented its AML program. Ensure this has been completed.
Banks must report all blockings to OFAC within ten days of the occurrence and annually by September 30 concerning those assets blocked (form TD F 90-22.50). This may need verification that it was done and to be added to the 2012 calendar.

Escrow Statements – For those accounts you escrow for under the RESPA rules, you must submit to the borrower an annual escrow account statement. This must be done within 30 days of the completion of the escrow account computation year. You must also submit to the borrower the previous year’s projection or initial escrow account statement.  You must conduct an escrow account analysis before submitting an annual escrow account statement to the borrower. The annual escrow account statement must provide an account history, reflecting the activity in the escrow account during the escrow account computation year, and a projection of the activity in the account for the next year. More banks are having to complete this analysis and send statements because of the HPML rules. If your bank is new at this, use a checklist to ensure your statements are complete before sending them.

CRA Public File – Your CRA Public File should be reviewed periodically to ensure the content is correct as you may have described branch locations, hours, ATM locations, products and services you offer. The Public File is required to be current as of April 1 of each year.
Training – Six areas require training and while “annual” training requirements being stated in the regulations are rare, it is common to be stated in a bank’s policy and procedures to state an annual requirement. Ensure your staff has been trained on:
1. BSA (12 CFR §21.21(c)(4) and §208.63(c)(4) Requires training for appropriate personnel.)
2. Bank Protection Act (12 CFR §21.3(a)(3) and §208.61(c)(1)(iii) Requires initial & periodic training)
3. Reg CC (12 CFR §229.19(f)requires each employee who performs duties subject to the requirements of this subpart with a statement of the procedures applicable to that employee)
4. Customer Information Security found at III(C)(2) (Pursuant to the Interagency Guidelines for Safeguarding Customer Information, training is required.  Many banks allow for turnover and train as needed, imposing their own requirements on frequency.)
5. FCRA Red Flag (12 CFR 222.90(e)(3) Train staff, as necessary, to effectively implement the Program;)
6. Overdraft protection programs your bank offers. Employees must be able to explain the programs’ features, costs, and terms, and to explain other available overdraft products offered by your institution and how to qualify for them. This is one of the “best practices” listed in the Joint Guidance on Overdraft Protection Programs issued by the OCC, Fed, FDIC and NCUA in February 2005 (70 FR 9127, 2/24/2005), and reinforced by the FDIC in its FIL 81-2010 in November, 2010.
Notices required to be sent to your customers in writing may be done electronically, so long as E-SIGN requirements have been met. An exception to this rule is your annual Privacy Notice. Privacy rules have allowed electronic disclosure since before E-Sign was adopted. Reg P therefore allows electronic disclosure so long as the consumer agrees to it. The E-SIGN “hoops” of demonstrable consent do not apply. That is, they may be used, but are not required for compliance in delivering a “written” disclosure.

Records Disposal – You have records archived and retained according to state and Federal requirements. It may seem like more work to go through the boxes, whether real or electronic, and destroy those no longer needed, but there are reasons to do so.  I once spoke with a banker who had a problem with fair lending and adverse actions and their regulator required them to go through the 25 months of notices they had retained. After an employee told the regulator retention went much further than that, the examiner had them go back as far as the records did.
Miscellaneous – There are several free BOL Banker Tools that need to be updated annually.  BOL updates these and only require users to download the updates. If you use the Rescission Date Calculator, the Reg Z Loan Date Disclosure, or the Reg CC Funds Availability Calculator, these have all been updated and are available here. http://www.bankersonline.com/tools/tools.html

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Corporations and LLCs

by Pauli D. Loeffler

I get a lot of questions regarding corporations and limited liability companies: What documentation do we need to open an account? Does an entity formed under the laws of another state or under a tribal government have to be domesticated? When is an EIN required? Can we add a d/b/a? Can a POD be added to a sole member LLC (or sole shareholder Corporation)?    In this article, I provide some of the most commonly asked questions, along with their answers.

First, let’s talk a little about how various types of entities are formed, what documentation will be available to “verify” their existence and legal authority, and what safeguards exist to ensure that businesses will not exist within the same area with confusingly similar names.  Then I’ll talk about TINs, foreign entities, and all sorts of other issues that can arise with accounts for (or loans to) corporations and LLCs.

Documentation for Corporations and LLCs: You will need the Certificate of Incorporation for corporations or the Articles of Organization for LLCs. In order to understand the need, you have to be aware that unlike partnerships, which can be formed without the need for any paperwork at all (yes, really!), corporations and LLCs have no legal existence without recognition by some government entity, whether it be the Office of the Comptroller of the Currency for nationally chartered banks, the Oklahoma Secretary of State for corporations and LLCs formed under our state laws, or corporations and LLCs formed under the laws of other states, countries or Tribal governments.  In order to obtain legal existence, the corporations and LLCs must file specific documents.  Since the author has no knowledge, nor does she have any desire to obtain knowledge, of the laws of other states, this article will address only the requirements under Oklahoma law.

After the decision is made to form a corporation or LLC, but before a name for the entity is chosen, it is time to visit the Oklahoma Secretary of State’s website at: https://www.sos.ok.gov.  This is done in order to check whether the chosen name is available. This is accomplished by using the Business Entities Search at: https://www.sos.ok.gov/business/corp/records.aspx.

(More than) a few words about names: A corporation the name of must contain one of the following:  association, company, corporation, club, foundation, fund, incorporated, institute, society, union, syndicate or limited or similar words or abbreviations co., corp., inc. or ltd. or words or abbreviations of similar meaning in other languages provided that the abbreviations are written in Roman characters or letters.  For a Professional Corporation, in addition to the requirement that the name contain association, company, corporation, club, foundation, fund, incorporated, institute, society, union, syndicate or limited or similar words or abbreviations co., corp., inc. or ltd., it MUST be modified by the word PROFESSIONAL or the abbreviation P.C. or PC. 

For an LLC, the name must contain either the words limited liability company or limited company or the abbreviations LLC, LC, L.L.C. or L.C. The word limited may be abbreviated as Ltd. and the word company may be abbreviated as Co. The name for a Professional LLC MUST END with either the words Professional Limited Liability Company, Professional Limited Company or the abbreviations P.L.L.C., P.L.C., PLLC or PLC.  “Limited” may be abbreviated as Ltd., and company may be abbreviated as Co.

If no deceptively similar name or trade name exists, then the party may choose to file an Application for Reservation of Name to reserve the chosen name for 60 days at a cost of $10.00 at: https://www.sos.ok.gov/forms/FM0034.PDF. On the other hand, if there is a similar name or trade name, then it is possible to contact the holder of the similar name or trade name, obtain A Consent to Use of Name.  The form is found at:  https://www.sos.ok.gov/forms/FM0034.PDF.

Information contained in the Certificate of Incorporation and the Articles of Organization:  Corporations formed under Title 18 of the Oklahoma Statutes file a Certificate of Incorporation the Oklahoma Secretary of State. Whether the corporation is for profit, not for profit or a professional corporation, the Certificate of Incorporation will include the name and address of the registered agent and office.  Every corporation must maintain a registered office and a registered agent.  The address for the registered office cannot be a post office box.  The registered agent may be an individual who is a resident of Oklahoma, the corporation itself, another Oklahoma corporation or qualified foreign corporation, an LLC or a limited partnership.  The registered agent must maintain a business office identical to the registered office that is open during regular business hours in order to receive service of process for the corporation. 

The Certificate of Incorporation also includes the duration of existence for the corporation.  Generally, this is stated as “perpetual” or “continuous,” but I have seen some that stated a fixed number of years. The purpose or purposes of the corporation will also be stated.  If the corporation is for profit or not for profit, rarely the purpose be specific, but generally will be stated “to engage in any lawful act or activity for which corporations organized under the general corporation law of Oklahoma are permitted” for legal reasons that I won’t go into.  The number of shares authorized, type of shares, series and par value per share is also set out on the Certificate of Incorporation when it is a for profit or professional
corporation.  Not for profit corporations cannot issue shares.  If the Not for Profit is a church, the address of the church is stated on the Certificate of Incorporation.

The Certificate of Incorporation requires it be signed by one or more “incorporators” unless it is a not for profit.  In that case, it must be signed by three incorporators. An incorporator may be a natural person, a partnership, an association or corporation.  An incorporator does not have to be a resident of Oklahoma.  A non-Oklahoma corporation, partnership or association organized or located can be an incorporator.  The incorporators are not required to be officers, directors or shareholders, but if their powers are to cease with the filing of the Certificate of Incorporation, then the names and mailing addresses of the persons who will serve as directors of the corporation must be stated.  In that case, at least one director must be named.  If it is a not for profit corporation, the number of directors or trustees to be elected at the first meeting must be stated in addition to the name and address of at least one director or trustee noted on the Certificate. Note that just because an entity has filed as a Not for Profit Corporation does not mean that it has Non-Profit status!  Only the IRS can make that determination! 

For a professional corporation, in addition to filing a Professional Certificate of Incorporation with the Oklahoma Secretary of State, an original certificate issued by the regulating board or boards of related professions for each officer, director and shareholder licensed to practice the profession must be attached to Professional Certificate of Incorporation.  In addition to the requirement for a registered agent and registered office, the principal office of the professional corporation must be stated with a street address.  The professional corporation may be organized for the purpose of rendering one or more related professional services and services ancillary to those stated professional services, but the professional corporation shall not engage in providing any professional services or services ancillary to the stated services. 

An LLC is required to file Articles of Organization with the Oklahoma Secretary of State.  The Articles of Organization must be signed by at least one person who need not be a member of the LLC.  The provisions for registered agent and registered office, as well as duration are the same as for corporations, but there is no requirement to state the purpose of the LLC.  However, the street address for the principal place of business is required, but it does not have to be in the state of Oklahoma.

For a Professional Limited Liability Company, as with a professional corporation, an original certificate issued by the regulating board or boards of related professions for each manager and member licensed to practice the profession must be filed with along with the Professional Articles of Organization.  The principal place of business must be a street address in the state of Oklahoma, it may be a rural route, but it cannot be a post office box. With regard to purpose, it may be for rendering one specific type of professional service or related professional services and ancillary services.  As with a regular LLC, the Articles of Organization need to be signed by at least one person who need not be a member of the professional limited liability company.

The authority to transact the business of a corporation, whether for profit, not for profit or professional, is set out by its By-Laws although the actual document may or may not have this name.  Whatever the document is named, a corporation will transact business through its duly elected officers, directors or trustees, as elected by the shareholders of a For Profit corporation or Professional Corporation, or as stated by the By-Laws for a Not for Profit since such corporations do not have shareholders.

The authority to transact business on behalf an LLC is provided in the document generally called the “Operating Agreement.”  The Operating Agreement may provide for the appointment of one or more managers. Note that there is no requirement that the manager or managers of an LLC be a member (owner) of the LLC.

EIN or SSN: All corporations must have an EIN issued by the IRS.  If the corporation has filed as a Not for Profit, in order for it to be eligible for a NOW account under Reg D, you will also need a copy of the IRS determination that is indeed eligible as under one of the several tax filing statuses listed.  This will not be available until several weeks after the EIN is obtained.

A sole-member LLC may use the members social security number provided it has no employees AND the sole-member is a natural person.  Although a living trust may use the grantor’s social security number and may be the sole-member of an LLC, it is not a natural person, and an EIN is needed.
 
By-Laws/Operating Agreement/Minutes/Resolutions: Neither the by-laws for a corporation nor the operating agreement for an LLC are filed with the Secretary of State, nor is there a direct requirement that you have a copy of them. However, but the Certificate of Incorporation and the Articles of Organization lack information you need. Specifically, the documents filed with the Secretary of State do not tell you who the officers are nor their powers, and the Articles of Organization does not have to be signed or even indicate the names of the member or members.

The by-laws of a corporation together with minutes and/or resolutions are needed in order to find out who has authority to open the account.  The by-laws may identify certain officers of the corporation that have this authority (which is generally the case).  A copy of the minutes of the board indicating the elected officers is sufficient when combined with by-laws. If the by-laws are silent regarding the authority of the officers, then it will be provided by vote of the board as evidenced by minutes or a resolution of the board authorizing specific individuals to open and/or designate authorized signers on the account. Note: Just because an individual is authorized to open an account does not mean that he MUST be a signer on the account.

Lately, more and more LLCs are showing up at the bank without an operating agreement having been told by the accountant who did the paper work for the LLC that one wasn’t necessary.  While it isn’t necessary to the LLC to come into existence, it is necessary in order to know if a manager has been named, the number of members, if and how members may be added, upon the occurrence of what events the LLC may be dissolved, etc. none of which information is available from the Articles of Organization.

Foreign Corporations and LLCs – Domesticate or Not:
Corporations and LLCs organized under the laws of other states, countries or tribal governments are considered “foreign.”  If the account is being opened simply because the person responsible for paying the bills lives in Oklahoma and no other business is transacted in Oklahoma, there is no need to domesticate the corporation or LLC. Otherwise domestication, i.e, filing with the Oklahoma Secretary of State in order to transact business, will be necessary unless the business transacted by the corporation or LLC falls under a statutory exception.
Foreign Corporations.  The exceptions to the requirement that a foreign corporation file the form for Qualifying a Foreign Corporation in Oklahoma depends on the business activities of the corporation.  The exceptions are:
1. it is the mail order or a similar business, merely receiving orders by mail or otherwise in pursuance of letters, circulars, catalogs, or other forms of advertising or solicitation, accepting the orders outside this state, and filing them with goods shipped into this state; or
2. it employs salesmen, either resident or traveling, to solicit orders in this state, either by display of samples or otherwise, whether or not maintaining sales offices in this state, all orders being subject to approval at the offices of the corporation without this state, and all goods applicable to the orders being shipped in pursuance thereof from without this state to the vendee or to the seller or his agent for delivery to the vendee, and if any samples kept within this state are for display or advertising purposes only, and no sales, repairs, or replacements are made from stock on hand in this state; or
3. it sells, by contract consummated outside this state, and agrees by the contract, to deliver into this state, machinery, plants or equipment, the construction, erection or installation of which within this state requires the supervision of technical engineers or skilled employees performing services not generally available, and as a part of the contract of sale agrees to furnish such services, and such services only, to the vendee at the time of construction, erection or installation; or
4. its business operations within this state are wholly interstate in character; or
5. it is an insurance company doing business in this state; or
6. it creates, as borrower or lender, or acquires, evidences of debt, mortgages or liens on real or personal property; or
7. it secures or collects debts or enforces any rights in property securing the same.

If none of the exceptions apply, the corporation will need to file a Certificate of Qualification with the Secretary of State. Note that corporations formed under Tribal laws even if the Tribe is in Oklahoma are considered foreign corporations.
LLCs.  As with foreign corporations, a foreign LLC may not need to file an Application for Registration of a Foreign Limited Liability Company if it meets one of these exceptions:

A. The following activities of a foreign limited liability company, among others, do not constitute transacting business within the meaning of this act:

1. Maintaining, defending, or settling any proceeding;
2. Holding meetings of its members or carrying on any other activities concerning its internal affairs;
3. Maintaining bank accounts;
4.  Maintaining offices or agencies for the transfer, exchange and registration of the foreign limited liability company’s own securities or maintaining trustees or depositaries with respect to those securities
5. Selling through independent contractors;
6.  Soliciting or obtaining orders, whether by mail or through employees or agents or otherwise, if the orders require acceptance outside this state before they become contracts;
7. Creating or acquiring indebtedness, mortgages and security interests in real or personal property;
8.  Securing or collecting debts or enforcing mortgages and security interest in property securing the debts;
9. Holding, protecting, renting, maintaining and operating real or personal property in this state so acquired;
10.  Selling or transferring title to property in this state to any person; or
11. Conducting an isolated transaction that is completed within thirty (30) days and that is not one in the course of repeated transactions of a like nature.

B. For the purposes of this section, any foreign limited liability company which owns income producing real or tangible personal property in this state, other than property exempted by subsection A of this section, will be considered transacting business in this state

Can corporations and LLCs have a DBA?  “DBA” simply means “Doing Business As.”  If a corporation or an LLC wishes to do business under a name different from its legal name, it may do so, so long as it complies with the law.  It is perfectly permissible for a corporation or an LLC to have a d/b/a provided it obtains a trade name through the Secretary of State. In fact, a trade name is required for a corporation or LLC to operate under a name other than the one under which it filed.   So, on such an account, you would style the account in the name of the corporation or LLC, dba whatever its chosen trade name might be, as reflected by the records of the Secretary of State.

Can a sole shareholder corporation or sole-member LLC add a POD?  The answer is “No.”  Corporations and LLCs are separate legal entities, and while the sole owner of the stock or the sole member may no longer exist, the business still does.  Further, the statutory provisions for pay on death beneficiaries require the account owner be a natural person in order to designate POD beneficiaries:

Title 6 O.S. Sec. 901

A. When a deposit has been made or shall hereafter be made in any bank in the names of two or more persons, payable to any of them or payable to any of them or the survivor, such deposit, or any part thereof, or any interest thereon, may be paid to either of the persons, whether one of such persons shall be a minor or not, and whether the other be living or not; and the receipt or acquittance of the person so paid shall be valid and sufficient release and discharge to the bank for any payment so made.

In future articles, we will discuss partnerships and sole proprietorships. 

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Reg Q—Gone, but Not Forgotten

By John S. Burnett

On July 21, 2011, the Federal Reserve Board quietly "pulled the plug" on its 78-year-old Regulation Q (12 CFR Part 217) and the FDIC rescinded its Interest on Deposits regulation (12 CFR Part 329), both of which rules prohibited the payment of interest on demand deposits. The demise of these regulations was the result of Section 627 of the Dodd-Frank Act, which on July 21 repealed provisions in the Federal Reserve Act, Home Owners’ Loan Act, and Federal Deposit Insurance Act that had prohibited interest on demand deposit accounts since the 1930s.
In normal economic times, with a normal range of interest rates and competition between depository institutions for account market share, we might have expected a flurry of significant new marketing programs touting banks’ new ability to pay interest on business checking accounts (businesses are seen as the principal beneficiaries of the demise of Regulation Q). But the times are anything but normal, and so far there doesn’t seem to be a headlong rush to make business checking accounts more "interesting."

Another significant factor that has put a damper on enthusiasm for interest-bearing demand accounts may be Section 343 of the Dodd-Frank Act, which provides for temporary unlimited deposit insurance coverage for "noninterest-bearing transaction accounts." The detailed wording of the original Dodd-Frank provision limits its applicability to demand deposit accounts that don’t and won’t earn interest.

When Reg Q and Part 329 were rescinded, the FDIC transplanted the definition of "interest" and the interpretations providing an exception for "premiums" into its Deposit Insurance rules at 12 CFR Part 330. That change was made in order to be able to define when a demand deposit earns interest and therefore becomes ineligible for unlimited insurance coverage. In August 2011, the FDIC updated its FAQ on Dodd-Frank sections 343 and 627 to better illustrate the interplay of both provisions. Until July 21, if a bank paid interest on a demand deposit, it risked being cited for a violation of law and the potential for a regulatory slap on the wrist. That risk is gone. However, beginning on July 21 and through the end of 2012 (when the temporary unlimited insurance provision expires), the coincidence of Dodd-Frank sections 343 and 627 present a hurdle for business customers who want to earn interest and the banks that want to pay it. The hurdle, of course, is the choice between unlimited deposit insurance and interest on those deposits.

What exactly does this mean for banks that are contemplating paying interest on demand deposit accounts?
• Banks will have to delay at least until 2013 any hope of integrating interest-bearing and noninterest-bearing demand deposits into a single, tiered product. For as long as there is a demand for unlimited insurance coverage, banks will have to maintain the traditional "vanilla" demand account as a separate offering.
• New accounts personnel and other customer contact staff members will have to understand and be able to explain the separate feature sets of the two demand deposit products.
• Prudence suggests that customers opting to open an interest-bearing demand account should be asked to acknowledge in writing that their accounts will not be eligible for unlimited deposit insurance coverage, and will be covered instead under the FDIC’s standard maximum deposit insurance amount provisions ($250,000 per depositor, per capacity).
• Any change by the bank to start paying interest on previously noninterest-bearing demand accounts will require that the bank notify affected customers that the change will affect their deposit insurance coverage limits.
• Any marketing of business checking accounts involving new account incentives will need to be carefully designed if the bank wants to avoid having the incentives considered interest by the FDIC under the old Reg Q standard. Those standards still include the de minimis annual $10 and $20 caps on premium costs for deposits below and above $5,000 unless the premium is not directly or indirectly "related to or dependent on the balance in a demand deposit account and the duration of the account balance."
• "Reward" programs for demand deposit accounts will have to be reviewed carefully to identify and separate those rewards that can be excluded from the "interest" definition and those that may be considered interest by the FDIC, and therefore make the account ineligible for unlimited insurance coverage, according to question 13 in the FDIC’s FAQ.
• Programs that involve "relationship pricing" that provide higher interest rates for balances in other accounts will have to be reworked to avoid situations in which a customer is given higher rates because of funds deposited in a noninterest-bearing demand deposit account. The FDIC would attribute part of the incremental interest to the demand account, making it ineligible for unlimited coverage, according to question 14.

History provides perspective
The last major change to Regulation Q was the result of the Depository Institutions Deregulation and Monetary Control Act of 1980, which phased out interest rate ceilings on savings and time accounts in 1986. When those ceilings were finally eliminated, market rates had dropped to the point that there was no need to offer unrealistic rates to attract deposits. It’s ironic that we are again today experiencing record low market rates that are limiting any sense of urgency to market interest-bearing business checking accounts. That has saved many banks from having to address the issues in the list above, at least for now. But keep the list handy in case rates start creeping upward between now and the end of 2012.

What about NOWs?
It’s worth noting that the Dodd-Frank provision allowing interest on demand deposits did not in any way change the laws or regulations governing NOW accounts. Businesses that did not qualify as holders of NOW accounts before July 21 are still ineligible. NOW accounts are not interest-bearing demand deposits (even though the difference may elude your customers), because they are not payable on demand. That subtle difference is because of the requirement that banks offering NOW accounts reserve the right to require seven days’ notice prior to withdrawal of funds. There is no such requirement for demand accounts. The ownership restrictions on NOW accounts (individuals, sole proprietors, certain non-profits and fiduciaries, and domestic government units) continue to apply; there are no such restrictions on demand deposit accounts.
Under current law, banks cannot offer NOW accounts to most businesses. Once the unlimited deposit insurance coverage provision expires, however, it would be feasible for a bank to phase out its NOW account offerings in favor of one or more "flavors" of interest-bearing demand accounts. That would eliminate one regulatory compliance headache – NOW account eligibility – for their customer service and new accounts personnel, and simplify somewhat the filing of Call Reports.