|
[Main Tabs]
[Table of Contents - 4000]
[Index]
[Previous Page]
[Next Page]
[Search]
4000 - Advisory Opinions
Is Company a Deposit Broker to the Extent it Refers its Customers
to a Particular Bank?
FDIC--94--15
March 16, 1994
Valerie J. Best, Counsel
This is in response to your letter concerning deposit brokers. You
asked us to reconsider our earlier determination that [COMPANY] is a
deposit broker as that term is defined in the Federal Deposit Insurance
("FDI") Act. It continues to be our opinion that [Co.] is a
deposit broker to the extent it refers its customers to [California
Bank] (the "Bank") when those customers wish to obtain deposits.
Please consider the following.
Activities of [COMPANY].
[COMPANY] is an affiliate of the Bank. [COMPANY] offers money
management services, broker/dealer servicing, investment banking, and
commodities trading. [Co.] manages portfolios of domestic and foreign
individuals and/or their related interests. You write that the primary
focus of [Co.] is the management of customer funds for investment and
the broker/dealer services.
From time to time, customers of [Co.] who request banking
relationships with U.S. financial institutions and/or the intermediate
short term placement of funds in interest bearing accounts are directed
to the Bank. You write that [Co.] does not charge its customers any
management or transaction fees on those deposits.
{{8-31-94 p.4847}}
During an examination of the Bank the examiner opined, after
consulting with the San Francisco Regional Office and the Washington,
D.C. offices of the FDIC, that [Co.] was a deposit broker because it
referred its customers to the Bank.
Arguments of the Bank
You contest these findings. You suggest that we have misconstrued
the word "facilitate"; that the term does not stand alone but
should be considered in context; that it could have more than one
meaning depending upon the underlying facts. You ask: "How can any
Board Member/customer who refers and helps arrange for a meeting, be it
formally or casually, avoid the interpretation of facilitate'
. . . ." In addition, you contend that we should consider the
referrals from [Co.] to the Bank in light of the fiduciary duties of
those individuals who control the Bank and [Co.] and who sit on the
Board of Directors of the Bank. You suggest that these persons view it
as their fiduciary responsibility to support the activities of the
Bank, which may include the referral of customers to the Bank for
banking services. You ask why a Director would refer business and/or
relationships to another institution when the institution that they are
involved with can accommodate the request or the relationship.
You further argue that the definition of "deposit broker" must
be considered in light of the person's intent. You also argue that
these activities come within the primary purpose exception to the
definition of deposit broker, and you believe the fact outside
Directors are involved should have some bearing on this issue.
Restrictions on Acceptance of Brokered Deposits
It should first be noted that well capitalized insured depository
institutions may accept brokered funds without restriction.
Consequently, if the Bank were well capitalized it could accept
IPG-referred funds without restriction. As you know, adequately
capitalized insured depository institutions are prohibited from
accepting funds obtained by or through any deposit broker unless they
first obtain a waiver from the FDIC. Undercapitalized insured
depository institutions are prohibited from accepting funds obtained by
or through any deposit broker.
Definition of ``Deposit Broker''
It is my view that the definition of "deposit broker" found in
both the law and section 337.6 of the FDIC's regulations, encompasses
[Co.'s] activity. The pertinent part of that definition is: "any
person engaged in the business of placing deposits, or facilitating the
placement of deposits, of third parties with insured depository
institution." 1
Unless the activity in question comes within one of the statutory or
regulatory exclusions, the FDIC must consider the activity deposit
brokering. 2
It is clear that [Co.] is a commercial enterprise
that routinely refers depositors to the Bank. You imply that [Co.] is
not "engaged in the business" of placing deposits because
the
{{8-31-94 p.4848}}Bank does not directly compensate
[Co.]. However, it is not unusual for deposit brokers to be
compensated indirectly. For example, a deposit broker could take a
portion of the interest that otherwise would be paid to the depositor.
Alternatively, a deposit broker could steer its customers to a parent
holding company or affiliate and derive compensation through a
quid pro quo arrangement with the parent or affiliate. If we
exempted commercial enterprises from the statutory restrictions
whenever they arranged to be compensated indirectly, the statutory
restrictions could be easily circumvented.
You also suggest that [Co.] is not "placing deposits, or
facilitating the placement of deposits." It appears that in some
instances [Co.] wire transfers funds of its clients to the Bank. In
those instances, [Co.] is clearly "placing" deposits with the
Bank. Even if [Co.] were never in possession of the investor's
principal or interest and did not act as trustee or agent for the
investor, [Co.] would not necessarily be exempted from the FDI Act
requirements applicable to deposit brokers. In common usage, the term
"facilitate" means "to free from difficulty or impediment; to
make easy or less difficult." 3
The affiliation of [Co.] and the Bank, the apparent influence
exercised by [Co.] over the Bank's deposit-taking and lending
activities, the volume of deposits in the Bank placed through or
attributable to [Co.] clients, all suggest that [Co.] makes it
easier for an investor to place his or her funds with the Bank. The
broad definition of deposit broker used in the FDI Act encompasses such
"match-making" or "finder" activities. The [Co.]/Bank
situation can be distinguished from situations where a disinterested,
unaffiliated advisor makes casual and occasional referrals to a bank.
Interest Rate Restrictions
The brokered deposit statute limits the interest rate that
adequately capitalized institutions may pay for deposits. Interest
rates apply whether or not funds are obtained through a deposit broker.
As noted in my letter dated March 11, 1993 to the Bank, it was my view
that participants in the "back-to-back CD/loan" program reside
inside the Bank's normal market area. (At that time, I was not aware of
the [Co.'s] involvement with the Bank. I knew that the Bank had a
waiver, however.) It was my view that the Bank should calculate the
maximum rate of interest payable on the "back-to-back CDs" by
reference to rates paid by other banks and thrifts in its normal market
area (as opposed to the national rate). 4
I noted in my March 11th letter that the brokered deposit statute and
regulation do not currently provide the use of an offset mechanism;
they look solely at the rate of interest being paid when the deposits
are accepted, renewed or rolled over.
I note that in the exam report the FDIC gave the Bank the benefit of
the more liberal national/Treasury rate when evaluating the rates paid
on the CDs listed in the exam report. Even though the more liberal test
was applied, the Bank was still found to be paying rates that were
higher than that allowed by law.
Summary
In summary, it is my view that [Co.] is a deposit broker when it
wire transfers funds belonging to its clients to the Bank on behalf of
its clients. Further, it is my view that [Co.] is a deposit broker
when it refers its customers to the Bank even though [Co.] is not in
possession of its clients' funds.
Moreover, under the peculiar language of the statute, deposits are
"deemed" to be brokered--even if they are not obtained through
the intervention of a broker--if the Bank pays a rate of interest that
is more than 75 points higher than the prevailing rates of interest on
deposits offered by other banks in the Bank's normal market area.
Hence, even if [Co.] were not a deposit broker, funds referred to the
Bank by [Co.] would be "deemed" brokered deposits if the Bank
paid the above-described interest rate.
{{8-31-94 p.4849}}
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 Bank were "well capitalized" (as defined in section
337.6(a)(10) of the brokered deposit regulation) then treating the Bank
as a deposit broker would not impede the placement of the brokered
funds with the Bank. Conversely, if the Bank is not well capitalized
then the limiting provisions of the law apply. The key then is to bring
the Bank into a well capitalized position.
Corporate Funds Belonging to [COMPANY]
In your letter you indicate the examiner identified as brokered
deposits corporate funds of [Co.] (and their related interests)
deposited in the Bank. I agree with you that corporate funds belonging
to [Co.] and deposited by [Co.] with the Bank would not be brokered
deposits provided that significantly higher rates of interest were not
paid on those deposits. 5
Please be advised, however, that I reviewed that portion of the Report
of Examination entitled "Brokered Deposit Restrictions" and I did
not find any evidence that funds owned and deposited by [Co.] in the
Bank had been classified as brokered deposits.
FDI Act Requirements Applicable to Deposit Brokers
Deposit brokers are prohibited from soliciting or placing any
deposit with an insured depository institution unless the deposit
broker has provided the FDIC with written notice that it is a deposit
broker. 6
Based on the foregoing [Co.] and its employees are "deposit
brokers" as that term is defined in the FDI Act. As a result, they
are subject to the registration requirements imposed by the FDI Act.
The registration requirements are not burdensome. Registration may
be in the form of a letter, and we anticipate that the required
information already is maintained by [Co.] in the ordinary course of
business. The FDIC does not charge registration fees. A company may
file a single notice on behalf of all of its employees and/or agents.
I realize the brokered deposit and interest rate restrictions
imposed by law are complicated so please do not hesitate to call me at
(202) 898-3812 or write to me at the above address if you have
additional questions.
1The term "deposit broker" is defined in law 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)(1)(A) and (B). Also see 12 C.F.R.
337.6(a)(5)(i). Go Back to Text
2Several exceptions to the definition of "deposit broker"
are set out in the statute. Most of these exceptions concern depositors
acting in certain, specifically described, fiduciary relationships
(e.g., the trust department of an insured depository
institution, the trustee of a pension plan, etc.). None of the
exclusions (including the "primary purpose exclusion") apply to
[Co.]. You may be interested to know that we have issued a number of
advisory opinions interpreting the "primary purpose exclusion"
and discussing the issue of "intent." Among others, see
FDIC--90--21, FDIC--92-51, FDIC--92-92. Go Back to Text
3Black's Law Dictionary 591 (6th ed. 1990). Go Back to Text
4The basis for my opinion was that the Bank had an office in a
border area, and drew customers from across the border. It appeared
that the Bank's market extended into Mexico. It also appeared that the
Bank was competing with other banks in its local market for these
deposits. Go Back to Text
5I assume that no third-party intermediary was involved in the
placement of the [Co.] corporate funds with the Bank. Go Back to Text
612 U.S.C. 1831f-1(a). 12 C.F.R. 337.6(h). Go Back to Text
[Main Tabs]
[Table of Contents - 4000]
[Index]
[Previous Page]
[Next Page]
[Search]
|
