On December 15, 2020, the U.S. Federal Deposit Insurance Corporation (FDIC) released a final rule to update its regulations on brokered deposits (Final Rule).1 The Final Rule has important implications for the treatment of brokered deposits that may encourage the innovation and modernization of bank services. The changes introduced by the Final Rule include, among other things, (i) adding definitions of “engaged in the business of placing deposits” and “engaged in the business of facilitating the placement of deposits,” (ii) establishing certain designated business exceptions that would automatically meet the “primary purpose” exception from the deposit broker definition (Designated Business Exceptions), and (iii) formalizing an application process for the “primary purpose” exception for parties that do not qualify for the Designated Business Exceptions.
In December 2019, the U.S. Federal Deposit Insurance Corporation (FDIC) issued a notice of proposed rulemaking (NPR) proposing changes to its regulations concerning brokered deposits,2 which implement Section 29 of the Federal Deposit Insurance Act (FDIA).3 Following the receipt of comments in response to the NPR, the FDIC issued the Final Rule. These regulations are important because they affect access to deposit funding sources by insured depository institutions (IDIs) that are less than well capitalized, the liquidity planning by IDIs that use brokered deposits, and the cost of federal deposit insurance.
Under the FDIA and the FDIC’s regulations, a brokered deposit is “any deposit that is obtained, directly or indirectly, from or through the mediation or assistance of a deposit broker.” In turn, “deposit broker” is defined broadly as “[a]ny person engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties with insured depository institutions, or the business of placing deposits with insured depository institutions for the purpose of selling interests in those deposits to third parties[.]”5 There are several exceptions to the definition of a deposit broker. Most important, the term “deposit broker” does not include “[a]n agent or nominee whose primary purpose is not the placement of funds with depository institutions[.]”6
Historically, the FDIC has interpreted the brokered deposit restrictions to apply broadly and has addressed exemptions from and limitations on the restrictions in an ad hoc manner. When the FDIC issued the NPR, it announced its intention to update this historical approach in light of changes in technology and to provide a more consistent approach to the coverage of the regulations. The Final Rule provides clarity on what constitutes a deposit broker and on the application of the exceptions in the regulations.
Changes Introduced by the Final Rule
Definition of Deposit Broker
The Final Rule clarifies the definition of deposit broker by adding definitions of “engaged in the business of placing deposits,” “engaged in the business of facilitating the placement of deposits,” and “engaged in the business.”
With regard to engaging in business of placing deposits, although the NPR did not propose a definition, the explanatory material in the NPR noted that the “FDIC would view a person to be engaged in the business of placing deposits if that person has a business relationship with its customers, and as part of that relationship, places deposits on behalf of the customer (e.g., acting as custodian or agent for the underlying depositor).”7 The Final Rule now expressly defines “engaged in the business of placing deposits” as follows:
A person is engaged in the business of placing deposits of third parties if that person receives third party funds and deposits those funds at more than one insured depository institution.8
The Final Rule also defines “engaged in the business of” to mean that a person “has a business relationship with third parties, and as part of that relationship, places, or facilitates the placement of, deposits with insured depository institutions on behalf of the third parties.”9 Thus, in order to be engaged in the business of placing deposits, a person must have a business relationship with a third-party customer and, as part of that business relationship, receive funds from the third party and deposit funds on behalf of the third party at more than one IDI. This definition narrows the FDIC’s historical interpretation of the FDIA by, among other things, excluding persons who place a third party’s funds with only one IDI. As a result, the Final Rule also deletes the exceptions in the current regulations from the definition of deposit broker for IDIs or their employees with respect to funds placed with the IDI, because in such cases the IDI or employee is not placing funds with more than one IDI. However, the scope of this new definition still contains some ambiguities. For example, it is not clear whether the definition would cover an agent or nominee that places funds at multiple IDIs but places funds at only one IDI for each customer or each transaction by a customer.
The Final Rule, like the NPR, also adds a definition of “engaged in the business of facilitating the placement of deposits.” The Final Rule, however, clarifies the definition proposed in the NPR in important ways that limit the scope of the definition. Under the Final Rule, a person would be considered to be engaged in the business of facilitating the placement of deposits if any of the following is true:
(A) The person has legal authority, contractual or otherwise, to close the account or move the third party’s funds to another insured depository institution;
(B) The person is involved in negotiating or setting rates, fees, terms, or conditions for the deposit account; or
(C) The person engages in matchmaking activities.10
A person is engaged in matchmaking if the “person proposes deposit allocations at, or between, more than one bank based upon both (a) the particular deposit objectives of a specific depositor or depositor’s agent, and (b) the particular deposit objectives of specific banks, except in the case of deposits placed by a depositor’s agent with a bank affiliated with the depositor’s agent.”11 While affiliate sweep programs would be excluded from the matchmaking prong of the facilitation definition, persons involved in such programs could still be covered by the other prongs of the definition and therefore considered deposit brokers. In that case, the affiliate sweep programs may have to rely on the Designated Business Exception for having deposits that are less than 25% of their assets under management. This may be an unintended result, however, as the explanatory material states that the intent of the matchmaking exception for deposits placed by affiliates is not to disrupt business arrangements that have relied on prior staff guidance regarding affiliate sweep arrangements.12
This definition eliminates the NPR’s provisions that merely providing third-party information to an IDI or providing assistance in setting rates, fees, terms, or conditions for a deposit account would constitute engaging in the business of facilitating the placement of deposits. The changes made in the Final Rule more appropriately reflect the FDIC’s stated position that facilitation is intended to “capture activities that indicate that the third party takes an active role in the opening of an account or maintains a level of influence or control over the deposit account even after the account is open.”13 Having legal authority over a deposit account or a depositor’s funds, or negotiating or setting rates and fees, reflects, in the FDIC’s view, “a certain level of influence over account opening, or retaining a level of control over the movement of customer funds after the account is open, [that] indicates that the deposit relationship is between the depositor and the person rather than the depositor and the insured depository institution.”14 The Final Rule’s definition of facilitating the placement of deposits thus more appropriately focuses on a person’s ability to influence or make decisions for a third party with respect to the placement of deposits.
Similarly, the Final Rule explains that the “matchmaking” prong of the definition “captures certain entities that utilize their relationships with prospective depositors or depositor’s agents and banks to propose deposit allocations at particular banks” because such activities “indicate that the person has influence over the movement of deposits between [IDIs].”15 Matchmaking would include third parties that engage in matchmaking as part of an unaffiliated deposit sweep program among a depositor, its broker dealer, and unaffiliated banks but would not include third parties that provide administrative services as part of deposit sweep programs.
Primary Purpose Exception
The FDIC’s current regulations exclude from the definition of deposit broker an “agent or nominee whose primary purpose is not the placement of funds with depository institutions[.]”16 The Final Rule retains this exclusion but makes significant changes to how it is applied.
The Final Rule includes a list of 13 business relationships, or Designated Business Exceptions, that automatically qualify for the primary purpose exception. The Designated Business Exceptions include two business relationships that also were reflected in the NPR: placing deposits in an amount equal to less than 25% of customer assets under management, and placing 100% of depositors’ funds in transactional accounts that do not pay any remuneration to the depositor. While the “transaction account” Designated Business Exception will be helpful to operators of prepaid card programs, the FDIC has declined to provide a blanket exception from the deposit broker definition for such programs. For an agent or nominee to rely on either of these Designated Business Exceptions, the agent or nominee must provide an initial notice to the FDIC and make certain periodic filings with the FDIC.
An agent or nominee may rely on the remaining 11 Designated Business Exceptions without having to provide any notice to the FDIC. These Designated Business Exceptions include the placement of funds (i) in connection with property management services, cross-border clearing services, mortgage servicing, (ii) by title companies in connection with real estate transactions, (iii) by qualified intermediaries to facilitate exchanges of property, (iv) by broker dealers or futures commission merchants in compliance with certain securities regulations, (v) to secure credit-card loans, (vi) for paying for or reimbursing qualified medical expenses, (vii) for investing in qualified “529” tuition plans, (viii) to enable participation in certain tax-advantaged programs, such as IRAs, and (xi) by federal, state, or local agencies to deliver funds to beneficiaries of government programs. The Final Rule provides that the FDIC may from time to time specify additional relationships that will qualify as Designated Business Exceptions.
For agents or nominees that do not qualify for a Designated Business Exception, the Final Rule, like the NPR, defines an application and approval process for agents and nominees to rely on the exclusion from the deposit broker definition because its primary purpose is not the placement of funds. An application may be submitted by an agent or nominee or by an IDI on behalf of a third party. The Final Rule requires the FDIC to provide a written determination within 120 days from the receipt of a complete application but allows the FDIC to extend this period by an additional 120 days upon notice to the applicant. If an application is not complete, the FDIC must notify the applicant within 45 days of receipt of the application. An agent or nominee whose application is approved is required to provide ongoing reports to the FDIC and, in the case of an IDI, to its primary federal regulator, with the specific reporting requirements to be described in the FDIC’s approval of an application.
Other Changes
The Final Rule specifically states that brokered CD placements are not eligible for the primary purpose exception. Thus, the FDIC continues to consider a person’s placement of brokered CDs as deposit brokering.
The Final Rule also finalizes rules concerning the interest rate restrictions that apply to less than well-capitalized IDIs, including provisions relating to when nonmaturity deposits are accepted or solicited for the purpose of applying such restrictions.
Finally, the Final Rule provides that prior FDIC staff advisory opinions will be moved to inactive status.
The Final Rule effective date is April 1, 2021. Starting April 1, 2021, an entity that wishes to rely on a Designated Business Exception that requires a notice submission to the FDIC must file a notice and comply with any applicable reporting requirements. However, entities may continue to rely on existing staff advisory opinions or other interpretations that predated the Final Rule until January 1, 2022. Thereafter, such opinions and interpretations will cease to have effect.
1 The Final Rule is available at https://www.fdic.gov/news/board/2020/2020-12-15-notice-dis-a-fr.pdf.
2 The NPR was published in the Federal Register on February 10, 2020. See 85 Fed. Reg. 7453-72 (Feb. 10, 2020).
3 12 U.S.C. § 1831f.
4 12 C.F.R. § 337.6(a)(2). See also 12 U.S.C. § 1831f(a) (limitations applicable to “funds obtained, directly or indirectly, by or through any deposit broker”).
5 12 C.F.R. § 337.6(a)(5)(i)(A). See also 12 U.S.C. § 1831f(g)(1)(A).
6 12 C.F.R. § 337.6(a)(5)(ii)(I).
7 85 Fed. Reg. 7457.
8 Final Rule at 166, to be codified at 12 C.F.R. § 337.6(a)(5)(ii) (emphasis added).
9 Id. at 168, to be codified at 12 C.F.R. § 337.6(a)(5)(iv).
10 Id. at 167, to be codified at 12 C.F.R. § 337.6(a)(5)(iii)(C).
11 Id.
12 Id. at 23, n.23.
13 Id. at 19.
14 Id.
15 Id. at 22.
16 12 C.F.R. § 337.6(a)(5)(ii)(I).
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