I. INTRODUCTION
The Federal Reserve Board (FRB) revised its interpretation of NOW account eligibility. The interpretation was formerly issued with Regulation Q and designated as 12 C.F.R. §.271.157, but the interpretation has been moved, effective December 31, 1987, to Regulation D and redesignated as 12 C.F.R. §. 204.130.
The FRB has also clarified that sole proprietors and individuals doing business under a trade or nominal business title are eligible to maintain a NOW account. Also, the Competitive Equality Banking Act of 1987 amended the statutory description of NOW accounts to make nonprofit political organizations eligible. The amendment is reflected in the revised interpretation. Finally, some historical detail on the origins of NOW accounts, which was used to clarify the classification of NOW accounts for the purposes of Regulations D and Q, has been deleted because the account is now clearly included in the definition of “transaction account” in S. 204.2(e) of Regulation D.
II. ELIGIBILITY FOR NOW ACCOUNTS
A. Summary
In response to many requests for rulings, the FRB has determined to clarify the types of entities that may maintain NOW accounts at member banks.
B. Individuals
1. Any individual may maintain a NOW account regardless of the purposes that the funds will serve.
Thus, deposits of an individual used in his or her business including a sole proprietor or an individual doing business under a trade name is eligible to maintain a NOW account in the individual’s name or in the “DBA” name.
However, other entities organized or operated to make a profit such as corporations, partnerships, limited liability companies, associations, business trusts, or other organizations may not maintain NOW accounts.
The Board of Governors of the Federal Reserve System (FRB) issued an interpretive letter on August 23, 2006, confirming that a single-member limited liability company (LLC) is not generally eligible to maintain a NOW account.
In its letter, the FRB in part, provided the following rationale to support its conclusion:
[F]or-profit entities are prohibited by statute from maintaining NOW accounts. The only business-related entities that have been permitted to maintain NOW accounts are sole proprietorships and individuals operating unincorporated businesses, “because the funds of the business are the funds of the individual and are not the funds of a separate legal entity such as a corporation or partnership. Additionally, it could prove to be burdensome to separate the funds of a sole proprietorship into those that are used for personal purposes and those that are used for business purposes.” [A] “one-man corporation” may not maintain a NOW account because “[e]ven though a corporation may be owned by one person, a corporate entity does not qualify as an ‘individual’ under the statute.” [S]imilarly,. . . subchapter S corporations may not maintain NOW accounts: “[a]lthough some subchapter S corporations may have only one shareholder, and thus may be taxed as a sole proprietorship, they are legally incorporated organizations under state law and have an existence independent of the individual shareholder. . . . Therefore, the mere fact that a subchapter S corporation may be in the same position as sole proprietorships with regard to taxes does not blur the clear legal distinction between the two types of entities.”
Comparing a single member LLC to a “one-man corporation” or an S corporation with one shareholder, the FRB stated:
The single-member LLC (SMLLC) has a legal existence independent of its individual shareholder. It is not only possible therefore to distinguish between funds of the individual in his individual capacity and the funds of the SMLLC, but one of the purposes of establishing such an entity is to distinguish legally between the individual and the SMLLC. Accordingly, the board staff believes that unless an SMLLC is “operated primarily for religious, philanthropic, charitable, educational, political, or other similar purposes and… is not operated for profit” the SMLLC is not eligible to maintain a NOW account.
The FRB’s letter may be viewed at: http://www.federalreserve.gov/boarddocs/legalint/FederalReserveAct/2006/20060823/20060823.pdf.
An FRB Staff Opinion has also indicated that spouses forming a partnership are not eligible for a NOW account. The FRB Staff Opinion provides as follows:
A husband and wife partnership is not eligible to maintain a NOW account at a member bank. Eligibility for NOW accounts is established by 12 U.S.C. 1832(a), which authorizes institutions to offer NOW accounts. Paragraph (2) of that section specifically excludes for-profit partnerships. Although a husband-and-wife for-profit partnership cannot maintain a NOW account, a husband and wife are permitted to maintain a joint NOW account for their nonpartnership purposes.
However, if the spouses are not in a business partnership, they may have a NOW account, according to an earlier FRB Staff Opinion.
A husband and wife operating a profit-making business as individuals, but not as a partnership or other financial business organization, may maintain a NOW account at a member bank, since it is impracticable to distinguish between funds that are used in their business and other funds of those individuals.
2. Pension funds, escrow accounts, security deposits, and other funds held under various agency agreements may also be classified as NOW accounts.
If the entire beneficial interest is held by individuals or other entities eligible to maintain NOW accounts directly.
The Board believes that these accounts are similar in nature to trust accounts and should be accorded identical treatment.
Therefore, such funds may be regarded as eligible for classification as a NOW account.
C. Nonprofit Organizations
1. A nonprofit organization that is operated primarily for religious, philanthropic, charitable, educational, political or other similar purposes may maintain a NOW account.
The Board regards the following kinds of organizations as eligible for NOW accounts under this standard if they are not operated for a profit:
a. Organizations described in Section 501(c)(3) through (13) and (19) of the Internal Revenue Code (26 U.S.C. (I.R.C. 1954));
501(c)(3) – Organizations operated exclusively for religious, charitable, scientific, literary or educational purposes or for the prevention of cruelty to children or animals, and
501(c)(4)
501(c)(5) – Labor, agricultural or horticultural organizations.
501(c)(6) – Business leagues, chambers of commerce, real estate boards and boards of trade.
501(c)(7) – Clubs organized for pleasure, recreation, and other nonprofit purposes.
501(c)(8) – Fraternal beneficiary societies, orders, or associations operating under the lodge system and providing for the payment of insurance or benefits to their members or their dependents.
501(c)(9) – Voluntary employees’ beneficiary associations providing for the payment of insurance and other benefits to their members and their dependents.
501(c)(10) – Fraternal societies, orders, or associations operating under the lodge system devoted exclusively to religious, charitable, scientific, literary, educational and fraternal purposes that do not provide for the payment of insurance or other benefits to their members.
501(c)(11) – Teacher’s retirement funds.
501(c)(12)
501(c)(13)
501(c)(19) – Posts or organizations of past or present members of the Armed Forces of the United State.
b. Political organizations described in Section 527 of the Internal Revenue Code (26 U.S.C. (I.R.C. 1954) Section 527); and
c. Homeowners and condominium owners associations described in Section 528 of the Internal Revenue Code (26 U.S.C. (I.R.C. 1954) Section 528), including housing cooperative associations that perform similar functions.
2. ALL ORGANIZATIONS THAT ARE OPERATED FOR PROFIT ARE NOT ELIGIBLE TO MAINTAIN NOW ACCOUNTS OF DEPOSITORY INSTITUTIONS.
3. The following types of organizations described in the cited provisions of the Internal Revenue Code are among those NOT eligible to maintain NOW accounts:
a. Credit unions and other mutual depository institutions described in S.501(c)(14) of the Internal Revenue Code (26 U.S.C. (I.R.C. 1954) Section 501(c)(14));
b. Mutual insurance companies described in S.501(c)(15) of the Internal Revenue Code (26 U.S.C. (I.R.C. 1954) Section 501(c)(15));
c. Crop financing organizations described in S. 501(c)(16) of the Internal Revenue Code (26 U.S.C. (I.R.C. 1954) Section 501(c)(16));
d. Organizations created to function as part of a qualified group legal services plan described in S.501(c)(20) of the Internal Revenue Code (26 U.S.C. (I.R.C. 1954) Section 501(c)(20)); or
e. Farmers’ cooperatives described in S.521 of the Internal Revenue Code (26 U.S.C. (I.R.C. 1954) Section 521).
D. Governmental Units
Governmental units are generally eligible to maintain NOW accounts at member banks. NOW accounts may consist of funds in which the entire beneficial interest is held by:
E. Funds Held by a Fiduciary
Under current provisions, funds held in a fiduciary capacity (either by an individual fiduciary or by a corporate fiduciary such as a bank trust department or a trustee in bankruptcy), including those awaiting distribution or investment, may be held in the form of NOW accounts if all the beneficiaries are otherwise eligible to maintain NOW accounts.
The FRB believes that such classification should continue since fiduciaries are required to invest even temporarily idle balances to the greatest extent feasible in order to responsibly carry out their fiduciary duties.
The availability of NOW accounts provides a convenient vehicle for providing a short-term return on temporarily idle trust funds of beneficiaries eligible to maintain accounts in their own name.
F. Grandfather Provision
In order to avoid unduly disrupting account relationships, a NOW account established at a member bank on or before August 31, 1981, that represents funds of a nonqualifying entity that previously qualified to maintain a NOW account, may continue to be maintained in a NOW account.