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4000 - Advisory Opinions
Associations With Which Insured Institution Has Entered Into
Marketing Agreements are Subject to Brokered Deposit Registration
Requirements
FDIC-92-79
November 10, 1992
Gerald J. Gervino, Senior Attorney
This is in response to your recent letter concerning deposit
brokers. You ask if associations with which your client bank has
marketing agreements ("associations") are "deposit brokers"
as that term is defined in the Federal Deposit Insurance ("FDI")
Act. Based upon the information provided, the associations which your
client bank has entered marketing agreements are "deposit
brokers." Please consider the following.
Activities of the Associations
Your client bank receives deposits almost entirely by mail or by
wire transfer. More than 75 percent of your client bank's deposits have
been gathered from members of associations and other affinity groups.
The bank has entered into financial agreements with various
associations. The bank and the associations have agreed to market
various credit and deposit products offered by the bank to members of
the associations.
The associations endorse the bank's credit and deposit products,
cooperate in marketing the products, sell advertising space in their
publications to the bank at standard rates, permit the bank to include
deposit solicitations in credit mailings and other direct mailings to
association members, place poster and brochure racks relating to the
bank's credit and deposit products in association offices, and include
information about the bank's products in new member kits. The
associations do not accept deposits directly on behalf of the bank or
process them in any fashion. Deposit applications and funds are mailed
by association members directly to the bank.
Each association earns an incentive fee when an association member
maintains a credit or deposit relationship with the bank. The
association fee is calculated as a percentage of the average daily
balances of deposits maintained by the association's members during the
calculation period. Incentive fees paid to associations have been less
than a tenth of the incentive fees attributable to credit cards. These
incentive fees remain only a small percentage of the total revenues of
the associations with which the bank has affinity relationships. Most
of the associations with which the bank currently has relationships
derive their income from association activities which have no
relationship to the bank's activities.
In your recent conversation with Scott Magargee of this office, you
stated your opinion that the various associations were not "deposit
brokers" under § 29 of the Federal Deposit Insurance Act, 12
U.S.C. § 1831f ("§ 29''). This was based upon the exclusion
contained in § 29(g)(2)(I). You indicate that Mr. Magargee took a
very conservative view of the exclusion by limiting it to some
fiduciary activities not available to the bank. Your client has applied
for a waiver with our regional office. It has also requested those
associations with which it has agreements to submit notices to the FDIC
under § 29A of the Federal Deposit Insurance Act, 12 U.S.C.
§ 1831f-1.
You strongly disagree with the interpretation that you have received
informally and ask us to reconsider.
Definition of ``Deposit Broker''
The term "deposit broker" is 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
{{2-28-93 p.4691}}
(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).
Several exceptions to the definition of "deposit broker" are
set out in the statute, most of them 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.). 1
None of the exceptions appear to apply to your company or its
employees.
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. 2
Further, undercapitalized insured depository institutions are
prohibited from accepting funds obtained by or through any deposit
broker. 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. Well
capitalized insured depository institutions, however, may accept such
funds without restriction. 3
Discussion
The fact that your company is never in possession of the investor's
principal or interest and never acts as trustee or agent for the
investor, does not exempt it from the FDI Act requirements applicable
to deposit brokers. The key test is whether your company may be said to
be "engaged in the business of placing deposits, or
facilitating the placement of deposits, of third parties
with insured depository
institutions. . . ." 4
In other words, the FDI Act covers scenarios where the broker
"facilitates the placement" of deposits, as well as scenarios
where the broker places deposits in its name as nominee of agent for
others. In common usage, the term "facilitate" means "to free
from difficulty or impediment; to make easy or less
difficult." 5
The activities of the associations clearly make it easier for the
investor to place its deposits with the bank.
For the most part, the definition of "deposit broker" used in
the FDI Act is derived from regulations issued by the FDIC and the
Federal Home Loan Bank Board in 1984 that were subsequently overruled
as an invalid exercise of authority. 6
The term "deposit broker" was broadly defined in those
regulations and, likewise, is broadly defined in the statute, because
deposit brokering may occur in any one of several ways. In fact, the
discussion accompanying the 1984 regulations specifically describes as
"deposit brokering" a situation where a broker, acting on its own
or at the request of an institution or institutions, solicits deposits
from its customers, and the interested customer sends funds directly to
the receiving depository institution which has been given notice by the
broker of the
{{2-28-93 p.4692}}impending
purchase. 7
Even where the investor, after having been contacted by an association,
calls the bank directly to establish an account, the association would
be considered to be a deposit broker because it is "facilitating the
placement" of deposits; the broad definition of deposit broker used
in the FDI Act encompasses such "match-making" or "finder"
activities.
Section 29(g)(2)(I) of our Act grants an exclusion from the
definition of "deposit broker" for an agent or nominee whose
primary purpose is not the placement of funds with depository
institutions. You feel that this exclusion should apply to the
associations with which your client bank has contracted. We do not
believe that the exclusion is applicable.
Based on the foregoing, the associations and their 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. An association may file a single notice on behalf of all
of its employees and/or agents. However, the FDIC reserves the right to
require individual information at any time.
If you have any further questions or would like further explanation
of our letter, please write or call us at (202)
898-3723.
112 U.S.C. 1831f(g)(2)(C). Go Back to Text
212 U.S.C. 1831f-1(a). 57 FR 23933, 23944 (June 5, 1992) (to be
codified at 12 C.F.R. 337.6(h)). Go Back to Text
312 U.S.C. 1831f. 57 FR 23933 (June 5, 1992) (to be codified at
12 C.F.R. 337.6). Go Back to Text
412 U.S.C. 1831f(1)(A) (emphasis added). Go Back to Text
5Black's Law Dictionary 591 (6th ed. 1990). Whether or not the
activities must be more than merely incidental to the placement of the
deposits is not at issue in this case, given the level of activities of
your company. Go Back to Text
6The brokered deposit amendments to Senate Bill 774 were
sponsored by Senator Murkowski. 135 Cong. Rec. S 4266 (daily ed. April
19, 1989) (statement of Sen. Murkowski). Sen. Murkowski had proposed
similar legislation to restrict brokered deposits prior to sponsoring
the amendment to Senate Bill 774. While introducing these earlier
bills, Mr. Murkowski referenced the 1984 regulations and stated that
the bills were intended to restore the provisions of the 1984 FDIC and
Federal Home Loan Bank Board regulation that was subsequently overruled
in Federal court as an invalid exercise of authority. 134 Cong. Rec. S
11456 at 11457 (daily ed. August 10, 1988) and S 115999 at 11600 (daily
ed. August 11, 1988) (statements of Sen. Murkowski) and 135 Cong. Rec.
S 1418 (daily ed. February 9, 1989) and S 1934 (daily ed. March 1,
1989) (statements of Sen. Murkowski). Go Back to Text
748 FR 50339 (Nov. 1, 1983). Go Back to Text
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