What if the funds in a guaranteed low-interest NOW account (with interest rate no higher than 0.50 percent through December 31, 2009) are swept or transferred into (or reclassified as) a low-interest savings deposit account (with interest rate no higher than 0.50 percent through December 31, 2009)? Will the funds lose the benefit of the guarantee?

The FDIC’s regulations include the following rule: “[I]n the case of funds swept from a noninterest-bearing transaction account to a noninterest-bearing savings deposit account, the FDIC will treat the swept funds as being in a noninterest-bearing transaction account.” This rule is based upon the premise that the sweep or reclassification of the funds for reserve purposes does not change the basic nature of the funds for other purposes. Thus, if the funds are guaranteed prior to the sweep, the funds should be guaranteed after the sweep.

This rationale applies with equal force to low-interest NOW accounts (with interest rates no higher than 0.50 percent through December 31, 2009). The funds in such accounts are guaranteed under the transaction account guarantee program; therefore, the funds should be guaranteed after the sweep assuming that the sweep or reclassification does not change the basic nature of the funds. This means that the interest rate after the sweep must be no higher than the interest rate before the sweep. Assuming the satisfaction of this requirement, the swept funds will continue to be protected under the transaction account guarantee program.