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4000 - Advisory Opinions
Are funds held in "Cash Management Accounts" viewed as
brokered deposits by the FDIC?
FDIC--05--02
February 3, 2005
William F. Kroener, III, General Counsel
You have requested an opinion as to whether the FDIC views
certain funds as "brokered deposits." The funds at issue
represent "free credit balances" in "Central Assets
Accounts" ("CAAs") and certain "Retirement Accounts"
held by X.
Under a "sweep feature," the "free credit balances" in
these accounts are "swept" into money market deposit accounts or
transaction accounts at two affiliated banks. In this letter, these
"swept" CAA and retirement funds are referred to as the "swept
funds."
Subject to the qualifications explained in this letter, we agree
with you that the swept funds will not be "brokered deposits."
Background
A "deposit broker" is "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);
12 C.F.R.
§ 337.6(a)(5)(i)(A). This definition is subject to several
exceptions, including an exception for "an agent or nominee whose
primary purpose is not the placement of funds with depository
institutions." 12 U.S.C. § 1831f(g)(2)(I); 12 C.F.R.
§ 337.6(a)(5)(ii)(I). In this case, the issue is whether X satisfies
the "primary purpose exception." If not, then the funds placed by
X at the affiliated banks will be "brokered deposits."
The "primary purpose exception" has been the subject of a
number of FDIC advisory opinions. See, e.g.,
Advisory
Opinion No. 90--21 (May 29, 1990);
Advisory
Opinion No. 94--13 (March 11, 1994);
Advisory
Opinion No. 94--39 (August 17, 1994). In these opinions, the
FDIC has taken the position that "primary purpose" means
"primary intent." In other words, the "primary purpose
exception" applies to an agent who places funds into a depository
institution for a substantial purpose other than to obtain deposit
insurance coverage for a customer or to provide the customer with a
deposit-placement service. For example, in Advisory Opinion No. 94--13
(March 11, 1994), a credit card bank assisted would-be cardholders in
placing security deposits at another bank. The FDIC staff determined
that the "primary purpose exception" was applicable because the
"primary purpose" of the credit card bank was "to obtain a
perfected security interest in collateral, not to provide a
deposit-placing service to its customers."
Another example is Advisory Opinion No. 94--39 (August 17, 1994). In
that case, a registered broker-dealer placed client funds into an
account at a bank in order to satisfy a reserve requirement enforced by
the SEC. The "primary purpose exception" was applicable because
the broker-dealer's "primary purpose" was to satisfy the SEC
rule and not to provide a deposit-placement service.
Below we discuss the applicability of the "primary purpose
exception" to X's program.
{{10-31-05 p.4984.109}}
Analysis
In this case, you have taken the position that the "primary
purpose" of X in offering CAA and Retirement Accounts, which include
sweeping free cash balances into highly liquid, interest-bearing
accounts at the affiliated banks, is not to provide customers with a
deposit-placement service. Rather, the "primary purpose" is to
facilitate the customers' purchase and sale of securities. In support
of this argument, you have noted that the amount of CAA and Retirement
Account funds placed into the affiliated banks is small compared to the
total CAA and Retirement Account assets handled by X. Another
significant fact is that the deposit accounts at the affiliated banks
are not time deposits. 1
We agree that X will satisfy the "primary purpose exception"
subject to the following qualifications:
• The swept funds should not exceed 10% of the total CAA and
Retirement Account assets (the "permissible ratio").
• The 10% limit should be applied on a monthly basis. This
means that the average daily balance of swept funds during any month
should not exceed 10% of the average CAA and Retirement Account assets
handled by X during that month (the "monthly ratio"). X should
use the most recently available data for calculating the permissible
ratio.
• The funds will not be treated as brokered deposits so long
as:
a. the permissible ratio is not exceeded on
consecutive months, or
b. the permissible ratio is not exceeded for three
months during any 12-month period.
• X should provide the FDIC with monthly reports reflecting
the calculations for each month. Daily calculations should be available
for inspection.
• In the event of a catastrophic event, X may contact the
FDIC to request that the primary purpose exception continue to apply.
Such requests, while expected to be extremely rare, will be considered
on a case-by-case basis.
Finally, some discussion is warranted regarding the fees collected
by X from the affiliated banks. In your letter dated June 29, 2004, you
described these fees as follows: "Under the deposit account
brokerage and servicing agreements, the [affiliated banks] pay fees
to X for administrative services (such as recordkeeping and tax
reporting information) related to the Deposit Accounts." Moreover,
you noted that "the fees for the administrative services must be on
an arm's length basis" under a section of the Federal Reserve Act.
In your letter dated October 22, 2004, you stated that the fees would
not be calculated on the basis of the amount of funds placed at the
affiliated banks. Specifically, you described the fee as "a flat fee
that will apply to all accounts that are swept into the Deposit
Accounts, irrespective of the amount swept into the Deposit
Accounts." We construe this statement to mean that the fee will be a
flat "per account" or "per customer" fee. In this context,
it is our understanding that there is tremendous variance in the
amounts swept from different accounts, with the consequence that a
"per account" or "per customer" fee will result in fees
that are a very different percentage of customers' free cash balances.
Further, as explained in your letters, the fees represent payment for
recordkeeping and administrative services and not payment for the
placement of deposits. Assuming the accuracy of these representations,
the existence of the fees does not change our conclusion that X
satisfies the "primary purpose exception."
In summary, we agree that the swept deposits will not be
"brokered deposits" subject to the qualifications above. This
opinion is based upon the facts presented in your letters. A change in
these facts could lead to a different conclusion. The finding that the
swept deposits discussed above will not be brokered deposits does not
affect X's status as a deposit broker in other circumstances.
We hope that this information is useful.
{{10-31-05 p.4984.110}}
1 We believe that the placement of funds into time deposit
accounts would be inconsistent with the argument that the "primary
purpose" of X is to facilitate the purchase and sale of securities,
and not to provide a deposit placement service. Go Back to Text
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