|
[Main Tabs]
[Table of Contents - 4000]
[Index]
[Previous Page]
[Next Page]
[Search]
4000 - Advisory Opinions
Extent to Which Trust Department of Bank Is Subject to
Registration Requirements Imposed by New Brokered Deposit Prohibitions
FDIC-92-51
August 3, 1992
Valerie J. Best, Counsel
By letter dated May 4, 1992, the *** submitted comments concerning
the proposed rule governing brokered
deposits. 1
In your letter you asked us to clarify the extent to which a trust
department of a bank is subject to the registration requirements
imposed by the new brokered deposit prohibitions. Those registration
requirements are set forth at section 29A of the FDI Act.
Section 29A prohibits a "deposit broker" from soliciting or
placing any deposit with an insured depository institution unless such
deposit broker has provided the FDIC with written notice that it is a
deposit broker. 12 U.S.C. 1831f--1(a). The term "deposit broker"
is broadly defined in section 29 of the FDI Act to mean:
(A) any 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; and
(B) an agent or trustee who establishes a deposit account to
facilitate a business arrangement with an insured depository
institution to use the proceeds of the account to fund a prearranged
loan.
12 U.S.C. 1831f(g).
Several exceptions to the definition of "deposit brokers" are
set out in the statute, including a specific exception for trust
departments. That exception provides:
{{10-30-92 p.4657}}
(2) EXCLUSIONS.--The term "deposit broker" does not
include--
. . . . .
(C) a trust department of an insured depository institution,
if the trust in question has not been established for the primary
purpose of placing funds with insured depository
institutions . . . .
12 U.S.C. 1831f(g)(2)(C).
The proposed rule adopted by the FDIC on March 24, 1992, adopted
the above-quoted exclusion from the statute without change. In the
final rule, however, the FDIC clarified the definition to make it clear
that the exception applies to fiduciary relationships other than trust
relationships (i.e., executor, administrator, guardian,
conservator, as well as trustee). The final rule provides:
(ii) The term deposit broker does not include:
. . . . .
(C) A trust department of an insured depository institution,
if the trust or other fiduciary relationship in question has not been
established for the primary purpose of placing funds with insured
depository institutions . . . .
57 Fed. Reg. 23933, 23942 (June 5, 1992) (to be
codified at 12 C.F.R. 337.6(a)(5)(ii)(C)).
In your letter you describe a situation where a settlor directs the
bank to invest some or all of the trust funds in certificates of
deposit. You ask whether, under such a scenario, the FDIC would
consider the "primary purpose" of the trust to be the placement
of funds with insured depository institutions, with the result that the
trust department would fail the above-quoted exclusion and,
consequently, would be deemed to be a deposit broker.
In and of itself, the fact that a settlor directs the trust
department of an insured depository institution to invest some or all
of the trust funds in insured deposits, does not mean that the trust
has been established for the primary purpose of placing funds with
insured depository institutions.
The brokered deposit restrictions were not intended to curtail the
normal activities of trust departments. However, a blanket exemption
for all trust department activities might have lead to circumvention of
the statute through various trust-type mechanisms. The primary purpose
test serves to distinguish the normal activities of trust departments
from arrangements that have the purpose and effect of circumventing the
statute. In common usage, the phrase "primary purpose" means:
"That which is first in intention; which is fundamental. The
principal or fixed intention with which an act or course of conduct is
undertaken." Black's Law Dictionary 1191 (6th ed. 1990).
The "primary purpose" test is applied on a case-by-case basis.
However, we have identified some key characteristics that will help you
to identify arrangements that have the primary purpose of placing funds
with insured institutions.
1. Fees received. If the depository institution
receives a fee for its account from the depository institution with
which it places the funds of the trust, the trust department is a
deposit broker as to that trust.
2. "But for" test. If the trust would not
have been established but for the purpose of placing funds in an
insured depository institution, the trust department is a deposit
broker as to that trust.
3. Substantial purpose test. If there is no
substantial purpose for the trust other than the placement of funds in
insured depository institutions, the trust department is a deposit
broker as to that trust.
We anticipate that trust departments administering
"traditional" 2
types of trusts will not be "deposit brokers," as that term is
defined in the FDI Act. 3
Since only deposit brokers
{{10-30-92 p.4658}}have to register with the FDIC, we
anticipate that trust departments generally will not have to register
with the FDIC.
As noted above, the exclusion for trust departments includes
fiduciary relationships other than trust relationships. Consequently, a
trust department is not a deposit broker where it is acting as an
executor, administrator, guardian, or conservator. Please note,
however, that arrangements wherein the trust department acts as agent
for its customer and there is no underlying trust agreement will be
reviewed in a separate advisory letter.
It might be helpful to your members to remember that some types of
trusts are excluded from the definition of "deposit broker,"
regardless of the trust's "primary
purpose. 4
Furthermore, the term "deposit broker" does not include an
insured depository institution with respect to funds placed with that
depository institution. 12 U.S.C. 1831f(g)(2)(A). This means that if
the trust department of an insured depository institution invests trust
funds in, for example, certificates of deposit issued by such
institution, the funds are not brokered funds regardless of the primary
purpose of the underlying trust.
As you know, the deposit solicitation restrictions imposed by the
FDI Act do not apply to well-capitalized
institutions. 5
The FDI Act created a specific exemption for the trust departments
of insured depository institutions. 12 U.S.C. 1831f(g)(2)(C). The
opinions expressed in this letter deal only with that exemption. The
exemption set forth at 12 U.S.C. 1831f(g)(2)(I) is a separate exemption
subject to a separate analysis. Parties wishing to avail themselves of
the exclusion set out at 12 U.S.C. 1831f(g)(2)(I) should not rely on
the contents of this letter when determining whether or not they are
excluded from the definition of "deposit broker."
I trust this is responsive to your inquiry. Please call me at (202)
898-3812 or write to me at the above address if you have any additional
questions.
1The proposed rule was designed to implement the new statutory
scheme for regulating brokered deposits as prescribed in section 29 and
new section 29A of the Federal Deposit Insurance Act ("FDI Act").
12 U.S.C. 1831f, 1831f--1. The proposed rule was adopted by the FDIC on
March 24, 1992, and is published at 57 Fed. Reg. 11442
(April 3, 1992). After analyzing the comment letters received in
response to the proposed rule and further staff analysis, the FDIC
adopted a final rule governing brokered deposits. The final rule is
published at 57 Fed. Reg. 23933 (June 5, 1992) (to be
codified at 12 C.F.R. 337.6). Go Back to Text
2Examples of "traditional" types of trusts are family
trusts created for estate planning purposes, charitable trusts, and
testamentary trusts. Go Back to Text
3We understand that a few insured depository institutions
participate in programs that may come within the definition of
"deposit broker." In these programs, a customer places funds with
a bank ("Placing Bank") and instructs the Placing Bank to wire
transfer the funds in increments of up to $100,000 to purchase a
certificate of deposit in one or more other banks ("Depository
Banks"). It isour understanding that these programs do not utilize the trust
department of the Placing Bank. In any event, these types of programs
will be reviewed in a separate advisory letter. Go Back to Text
4The trustee of a pension or other employee benefit plan (with
respect to funds of the plan) and the trustee of a testamentary
account, are not "deposit brokers" regardless of the primary
purpose of the trust. 12 U.S.C. 1831f(g)(2)(D), (F). Likewise, the
primary purpose test is not applied to the trustee of a pension or
profitsharing plan qualified under section 401(d) (plans benefiting
owner-employees) or 403(a) (qualified annuity plans) of the Internal
Revenue Code of 1986. Such trustees are not deposit brokers. 12 U.S.C.
1831f(g)(2)(H). Go Back to Text
5FDIC regulations currently define a "well-capitalized"
institution as one that:
(1) has a ratio of total capital to risk-weighted assets
of not less than 10.0 percent;
(2) has a ratio of Tier 1 capital to risk-weighted assets of not
less than 6.0 percent;
(3) has a ratio of Tier 1 capital to total book assets of not less
than 5.0 percent; and
(4) has not been notified by its appropriate federal banking
agency that it is in a "troubled condition." See 12 C.F.R.
303.14(a)(4) for the definition of "troubled condition" as it
applies to state nonmember banks.
57 Fed. Reg. 23933, 23942 (June 5, 1992) (to be codified
at 12 C.F.R. 337.6(a)(10)(i). Go Back to Text
[Main Tabs]
[Table of Contents - 4000]
[Index]
[Previous Page]
[Next Page]
[Search]
|
