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4000 - Advisory Opinions
Bank Acts as Deposit Broker When it Places Excess Funds for
Municipality Acting as Public Guardian/Administrator and for Other
Customers
FDIC-92-92
December 15, 1992
Valerie J. Best, Counsel
This is in response to your letter dated December 1, 1992
regarding brokered deposits. By letter dated November 21, 1992, we
advised you that the City and County of *** would not be "deposit
brokers" when they directly place funds with your Bank in their
capacity as public guardian or as public administrator in compliance
with the California Probate Code (and without the assistance of a
deposit broker). 1
You now write that your Bank proposes to place with other depository
institutions excess funds received from the City and County of ***
acting as Public Guardian/Administrator, as well as excess funds
received from other
{{4-30-93 p.4706}}customers of the Bank. You enclosed
with your letter copies of (1) the "Certificate of Deposit Placement
Agreement" (the "Agreement"), and (2) the "CD Placement
Procedures". The "CD Placement Procedures" reiterates portions
of the Agreement. Apparently, the Agreement is not administered by or
through the trust department of the Bank.
You ask if your Bank is required to notify the FDIC that it is
acting as a deposit broker as a result of its activities under the
Agreement. It is our view that the Bank is required to register as a
deposit broker when it invests in certificates of deposit ("CDs")
pursuant to the Agreement.
The Certificate of Deposit Placement Agreement
Under the Agreement, the principal appoints the Bank to act as agent
for the principal for the purpose of purchasing CDs issued by federally
insured depository institutions. The agent agrees to use its best
effort to identify financial institutions insured by the FDIC offering
higher rates of interest than would normally be offered to the
principal by financial institutions maintaining offices or branches in
***, California. Upon oral or written instruction of the principal, the
agent may purchase CDs as agent for the principal under the terms and
conditions approved by the principal, and transfer the principal's
funds on deposit with the agent (your Bank) via Federal Reserve wire
system to the issuing bank designated by the principal.
The agent is not required nor does it have the duty to recommend any
issuing bank based on the issuing bank's reputation, standing, or
financial condition. However, upon principal's request, the agent will
communicate or provide to the principal a list of suggested financial
institutions, from which list the principal may delete any financial
institution not acceptable to the principal. The agent will also
provide, upon request, key financial information concerning the issuing
bank. The agent will use its best efforts to provide any other
reasonable information the principal may request, but such information
is provided without responsibility or liability on the part of the
agent.
The agent registers each CD in its own name as agent for the
principal's account and instructs the issuing bank to send to agent all
confirmations of trade, interest payments, signature cards, safekeeping
receipts, and other documents and correspondence relating to the
opening, maintenance and closing of a CD account. At the maturity date,
agent may, upon instruction, reinvest the principal amount at the same
or at another issuing bank as may be designated by the principal and
upon approved terms, or the agent may redeem the funds and have the
issuing bank wire transfer the funds for credit to the principal's
designated account at your Bank.
You write that the Bank will not receive any fees, directly or
indirectly, in connection with its CD Placement Services. You claim
that the CD Placement Services are provided to facilitate the Bank's
receipt of deposits only, with excess deposits not retained by the Bank
placed with other financial institutions in order to maintain the
customer deposit relationship with the Bank.
Relevant Statutory Provisions
The term "deposit broker" is defined, in part, to include:
"any person engaged in the business of placing deposits, or
facilitating the placement of deposits, of third parties with insured
depository institutions. . . ." 12 U.S.C.
1831f(g)(1)(A). 2
This definition is quite broad and unless the activity in question
comes within one of the statutory or regulatory exclusions, the FDIC
must and will consider the activity deposit brokering. We believe
Congress' intent in defining "deposit broker" so broadly was to
control the flow of brokered funds to all but the best capitalized
depository institutions insured by the FDIC. If, for example, the
depository institution with which your Bank places deposits is "well
capitalized" (as defined in 12 C.F.R. 337.6(a)(10)) then treating
your Bank as a deposit broker would not impede the placement of those
funds with that depository institution. Conversely, if the depository
institution is not well capitalized then the other
limiting
{{4-30-93 p.4707}}provisions of the statute and
regulation would apply. We believe this interpretation is consistent
with the literal and intended meaning of the statute.
Conclusion
The activities of the Bank under the Agreement bring it within the
definition of "deposit broker." Further, it does not appear to
qualify for any of the exceptions permitted by the statute and
regulation. The Bank transfers funds of its customers to a bank
participating in the CD Placement Program. Absent the availability of
deposit insurance, the Program would not have been created. There
appears to be no substantial purpose for the Program other than the
placement of funds in insured depository institutions. Your Bank does
not exercise any investment discretion but acts solely at the
instruction of the participant.
Consequently, the Bank is a deposit broker as to funds placed with
other insured depository institutions pursuant to the Agreement. As
such, the Bank would have to register with the FDIC as a deposit
broker. The registration requirements are outlined at page 3 of the
enclosed financial institutions letter.
I trust this is responsive to your
inquiry.
1Cal. Prob. Code §§ 2900--2944, 7600--7666; Cal. Gov't Code
§§ 24000(l) (West 1991). Go Back to Text
2Our final regulation on brokered deposits adopts a definition
of "deposit broker" identical to that set forth in the statute as
quoted above. See 12 C.F.R. 337.6(a)(5)(i)(A). Go Back to Text
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