FDIC Proposes New Rules Governing Brokered Deposits

December 13, 2019

On December 12, 2019, the Federal Deposit Insurance Corporation (FDIC) Board of Directors voted to publish for public comment proposed interpretations of its brokered deposit regulations (the Proposal), including the definition of “deposit broker” and various specific exceptions to the definition, such as the “primary purpose” exception. If adopted, these new interpretations and an application process to qualify for an exception would be codified in the FDIC’s regulations.

The application procedure set forth in the Proposal is required for those persons seeking to claim a “primary purpose” exception for a deposit program. This includes activities recognized by the FDIC in the regulations to qualify for primary purpose treatment and proposed deposit placement activities not described in the regulations. The information required to be submitted to the FDIC would be set forth in the regulations.

Comments on the Proposal must be filed with the FDIC within 60 days from date of publication of the Proposal in the Federal Register.

We are providing this high-level summary in order to give clients general information about the Proposal. The Proposal, including a summary of comment letters submitted during the last request for public comment and a description of the Proposal, is 73 pages and we are carefully working through it. More details will be provided soon.

The most significant provisions of the Proposal are described below.

Clarification of the Term “Facilitation”

The Proposal would clarify the term “facilitation” in the definition of deposit broker. It would include sharing third party information with a bank, which could limit the current listing service exception.

Exemption for Wholly Owned Subsidiaries of Banks

The Proposal would create an exception from the definition of deposit broker for deposits placed by a wholly owned (i.e. 100%) subsidiary of a bank with that bank.

Broadening of Primary Purpose Exception for Sweeps

The Proposal would clarify the term “primary purpose” to include any person whose deposit placement activities constitute less than 25% of the person’s total “assets under management” in a specific line of business. No limitation on fees is referenced in this provision. This is clearly intended to address broker-dealer sweep programs, though the term “assets under management” needs to be clarified to include assets held at the broker.

The Proposal provides some explanation of the term “line of business,” stating that “a company that offered brokerage accounts to various types of customers that allowed customers to buy and sell assets, with a traditional cash sweep option, would be considered a business line. Brokerage accounts that did not offer a cash sweep option would not be considered part of the business line (because those customers are not part of the group of customers for whom the person is placing deposits), and any accounts in which customers are only able to place money in accounts at depository institutions (and not invest in other types of assets) would also be considered a separate business line.” Additional clarification may be needed. This change marks a significant expansion of the scope of the primary purpose exception.

Broadening of Primary Purpose Exception for “Transactional Accounts”

The Proposal would clarify the term “primary purpose” to include placement of deposits by an agent or nominee into “transactional accounts” solely for the purpose of enabling payments by the depositor so long as the depositor does not receive fees, interest or other remuneration. This appears to address prepaid access cards and deposits placed by other similar products, such as Paypal, Venmo and other peer-to-peer payment providers, though such providers typically disclaim that they are an agent.

Applicability of Primary Purpose Exception to “Savings” Programs

The Proposal would clarify that the primary purpose exception is not available if the purpose of the relationship is to encourage savings, maximize yield or provide deposit insurance. It is not clear how this clarification is intended to interact with the other clarifications as broker-dealer sweep programs clearly offer FDIC insurance as a feature. Perhaps the primary intention is to limit the availability of the primary purpose exception to conventional securities accounts, but this limitation needs additional explanation and clarification.

New Formal Application Process to Obtain Primary Purpose Exception

The Proposal would implement a formal application process to obtain confirmation that an activity specifically addressed in the regulations, as well an activity not otherwise addressed in the regulations, meets the “primary purpose” test. Those activities that are covered would have an expedited approval process, though a specific timeline is not provided. Other activities would be subject to a review process of up to 120 days. Additionally, it is unclear whether a financial institution that has previously confirmed its eligibility for the primary purpose exception will need to submit a de novo application to continue to be eligible.

Brokered CDs

With respect to brokered CDs, the Proposal states the CDs are brokered deposits because of a provision in the definition of deposit broker that includes persons who purchase CDs and participate them to others. The Proposal states that a Master Certificate of Deposit is a participation. Though broker-dealers offering CDs are typically deposit brokers because they place deposits, they are not deposit brokers because of this definition as neither “purchase deposits” nor “participate the CDs.” In addition, the Proposal contains a sentence once again stating the brokered CDs “have caused significant losses to the deposit insurance fund.”

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