FDIC Issues Frequently Asked Questions on Identifying, Accepting, and Reporting Brokered Deposits
SUMMARY On January 5, 2015, the Federal Deposit Insurance Corporation (the “FDIC”) issued a Financial Institutions Letter (FIL-2-2015) (the “Guidance”), setting forth sweeping guidance regarding brokered deposits in the form of FAQs. The Guidance answers a wide range of questions regarding classification of deposits as brokered, as well as acceptance and reporting of brokered deposits. The subjects of the Guidance include “facilitation” generally, bank networks, listing services, prepaid and debit cards, timing of acceptance of deposits, and interest rate restrictions. Relying on the assertion that the FDIC is authorized to interpret the concept of brokered deposits “broadly,” in almost every case the FDIC has answered the question posed by concluding that the deposit at issue is brokered, which, in some cases, represents a departure from industry understanding and/or practice. As a result, the Guidance further confirms that the concept of brokered deposits extends well beyond high interest rate “hot money” deposits that prompted the Federal Deposit Insurance Act (“FDIA”) amendments on this subject, as well as beyond brokered deposits of limited or no (or even negative) franchise value that have prompted more recent concerns. The Guidance is relevant to all insured depository institutions (“IDIs”) regardless of size, and should prompt even IDIs that have not viewed their deposits as brokered to review their deposits in light of the interpretations. In particular, an increase in the scope of deposits classified as brokered may have implications for an institution’s deposit insurance assessment rate, its contingency funding plan, and compliance with the federal banking agencies’ proposed minimum liquidity coverage ratio (“LCR”) requirement. In addition, it is unknown whether an IDI that historically had not classified its deposits as -2- Brokered Deposit Guidance January 14, 2015 brokered would be expected to amend its call reports to reflect the change in status of any deposits that are classified as brokered under the Guidance. The FAQs in the Guidance are presented as clarifications generally of previous interpretations set out in the FDIC’s 2011 Study on Core Deposits and Brokered Deposits (the “2011 Study”), which the FDIC staff has previously indicated was definitive and current guidance on the subject. In some cases the answers represent positions that have never before been set out in written form or, as indicated, represent a departure from industry practice. Nonetheless, the FDIC chose to undertake this process as “guidance,” rather than as a rule that would have provided notice and the opportunity for comment. Potential consequences of the new interpretations in the Guidance include the following: Referrals by insurance agents, lawyers and accountants result in brokered deposits. It is unclear to us how IDIs can monitor this with any degree of certainty. Outside of a narrow set of specific instances, virtually any third-party involvement or intermediation between a depositor and an IDI amounts to “facilitating the placement of deposits” and gives rise to brokered deposits. Dual employees, even those jointly employed by the bank and a subsidiary of the bank (such as a broker-dealer or investment adviser) or the bank’s holding company (including, potentially, the CEO) are treated as deposit brokers, and any deposits that they refer or solicit will be deemed brokered. General purpose cards sold by third parties, whether or not reloadable, give rise to brokered deposits in most circumstances if federal deposit insurance flows through to the purchasing customers. As a result, the availability of general purpose prepaid cards covered by federal deposit insurance may decrease, and the availability of general purpose prepaid cards without insurance and limited purpose cards (e.g., for transit, health benefits and the like) may increase. The brokered status of deposits may be more difficult to terminate because any ongoing involvement by an intermediary, including any payment of a renewal fee, holding of an account in the name of third parties as agent or custodian for the owner, or access to account information (such as account balances), requires that the deposits remain classified as brokered apparently regardless of the tenor of the deposit relationship or other considerations. To the extent that an IDI may need to reclassify deposits as brokered as a result of the written guidance, the increase in brokered deposits may have an impact on the IDI’s FDIC deposit insurance assessments and its liquidity coverage ratio (if applicable), and it may even be necessary to amend past call reports.-3- Brokered Deposit Guidance January 14, 2015 As noted below, there are a number of additional possible collateral consequences for IDIs on which at this time there is no further guidance. Because the guidance states “(Updated 12/24/2014),” it is possible that further updates or clarifications may be forthcoming. BACKGROUND Section 29 of the Federal Deposit Insurance Act (“Section 29”), as implemented by the FDIC’s regulations at 12 C.F.R. § 337.6, places restrictions on the acceptance by certain IDIs of deposits obtained through “deposit brokers,”1 which deposits are deemed to be “brokered deposits.”2 IDIs that are not well capitalized may not accept (which includes not only actual acceptance, but also solicitation, renewal or rollover) such brokered deposits. Although an IDI that is adequately capitalized may request a waiver of this prohibition from the FDIC, the FDIC appears increasingly reluctant to grant such waivers, and the waiver process can take considerable time. IDIs that are not well capitalized also are subject to restrictions under Section 29 on the interest rates that they may offer on deposits. Deposits that are classified as brokered can impact an IDI in significant ways, even when they can be accepted. The amount of an IDI’s brokered deposits can affect the following components of its deposit insurance assessment rate: for a large or highly complex institution, its core deposits ratio; for a small institution (generally under $10 billion in assets) that has experienced a more than 40% growth in assets over the past four years, its adjusted brokered deposit ratio; and for any institution that is either not well capitalized or that has a composite CAMELS rating below a ‘2’, and that has a ratio of brokered deposits to domestic deposits greater than 10 percent, an additional brokered deposit adjustment. In addition, for a banking organization subject to the federal banking agencies’ proposed minimum LCR requirement (generally applicable to banking organizations with at least $50 billion in assets), the assumed outflow rate applied to many brokered deposits is higher than that applied to other deposits.3
1 12 U.S.C. § 1831f; 12 C.F.R. § 337.6. Deposit brokers formerly were required by Section 29A of the FDIA to provide written notification to the FDIC that they were acting as such, but Congress repealed this requirement through the Financial Regulatory Relief and Economic Efficiency Act of 2000. As a result, the primary importance of the statutory definition of “deposit broker” is to characterize the deposits obtained by an IDI through such a deposit broker as “brokered deposits.” 2 Certain high interest rate deposits offered by IDIs that are less than well capitalized are considered “brokered deposits” even without any third-party involvement, as in those situations the offering IDI itself is considered the “deposit broker” under the statute. See 12 U.S.C. § 1831f(g)(3). 3 See 78 Fed. Reg. 71,818, 71,840 (Nov. 29, 2013). Generally, the outflow rate applied to a particular deposit depends in part on whether that deposit is brokered and, if so, whether it is a reciprocal brokered deposit, brokered sweep deposit, or other type of brokered deposit. The outflow rate -4- Brokered Deposit Guidance January 14, 2015 For example, brokered deposits that are not reciprocal brokered or brokered sweep deposits are assigned a 100% outflow rate if they have no maturity or mature within the LCR’s 30-day window. Moreover, federal banking agency guidance indicates that IDIs that “rely upon” brokered deposits should incorporate prompt corrective action-related downgrade triggers into their contingency funding plans; an IDI may not be able to renew or roll over existing brokered deposits upon such a downgrade and, consequently, may need to access separate sources of funding.4 Section 29 generally defines a “deposit broker” as a person “engaged in the business of placing deposits, or facilitating the placement of deposits,” of third parties with IDIs.5 The FDIC does not appear to require a person to be “engaged in the business” of facilitating the placement of deposits to satisfy the second prong of this definition.6 The statutory definition of “deposit broker” is subject to certain enumerated exceptions; among others, these exceptions apply to an IDI (with respect to funds placed with that IDI itself); an employee of an IDI, with respect to funds placed with the employing institution; and an agent or nominee whose primary purpose is not the placement of funds with depository institutions.7 The FDIC has sought to provide more clarity with respect to these definitions and the corresponding exceptions through its implementing regulations at 12 C.F.R. § 337.6, as well as through a number of staff advisory letters issued over the years. Particular areas of focus have included determining whether certain activities constituted “placing deposits” or “facilitating the placement of deposits,” and determining whether a person or entity otherwise involved in facilitation comes within the “primary purpose” exception.8
In addition, in response to a Congressional mandate in the Dodd-Frank Wall Street Reform and Consumer Protection Act, the FDIC issued the 2011 Study. While reiterating that “there should be no particular stigma attached to the acceptance by well-capitalized banks of brokered deposits per se and
applied to a particular brokered deposit also may depend on whether the deposit is fully insured, as well as its maturity. 4 See Interagency Policy Statement on Funding and Liquidity Risk Management (March 17, 2010), at 13, available at http://www.federalreserve.gov/boarddocs/srletters/2010/sr1006a1.pdf. 5 12 U.S.C. § 1831f(g)(1). A “deposit broker” also includes a person engaged in the business of placing deposits with IDIs for the purpose of selling interests in those deposits to third parties, and an agent or trustee who establishes a deposit account to facilitate a business arrangement to use the proceeds of the account to fund a prearranged loan. Id. 6 Cf. FDIC Advisory Opinion 93-30 (June 15, 1993) (“When considered together, we believe these facts tend to support the conclusion that the Affinity Groups are neither ‘engaged in the business of placing deposits’ nor ‘facilitating the placement of deposits’ with the Bank, as contemplated by section 29.”). 7 12 U.S.C. § 1831f(g)(2). 8 See, e.g., FDIC Advisory Opinion 04-04 (July 28, 2004) (finding that an Internet listing service that met certain criteria was not “facilitating the placement of deposits”); FDIC Advisory Opinion 05-02 (Feb. 3, 2005) (finding the “primary purpose” exception to apply in the case of a brokerage firm that swept idle customer funds into transaction accounts at affiliated banks, provided certain conditions were met).-5- Brokered Deposit Guidance January 14, 2015 that the proper use of such deposits should not be discouraged,” the 2011 Study also expressed concerns about the use of brokered deposits by IDIs and recommended that Congress not amend or repeal the brokered deposit statute.9 The 2011 Study reviewed the FDIC’s prior brokered deposit guidance and set forth its position with respect to certain interpretive issues. The FDIC staff has repeatedly advised, since the publication of the 2011 Study, that the study represents the FDIC’s definitive positions on brokered deposits. The positions set forth in the Guidance now supersede those taken in the 2011 Study in certain respects. DISCUSSION The full set of FAQs is attached as an appendix to this memorandum. New interpretations included in the FAQs or clarifications of previous interpretations that may be of particular significance include the following. A. DEPOSIT BROKER STATUS AND THE ROLE OF COMPENSATION The FAQs provide that a third party may be considered a deposit broker even if it “receives no fees or other direct compensation from the depository institution where the funds are placed.” Notably, the FAQs also state that “insurance agents, lawyers, or accountants that refer clients to a bank are deposit brokers.” It thus appears that uncompensated referrals could be considered brokered. It is not clear whether a bank would have a duty to inquire of its customers in this regard.10 B. EXCEPTIONS TO THE DEFINITION OF DEPOSIT BROKER The FAQs provide guidance on the following exceptions to the “deposit broker” definition: The exception for IDIs applies only to the IDI itself and not to any of its affiliates, clarifying that subsidiaries of the IDI (apparently including operating subsidiaries) would not qualify for the exception. The exception for employees of an IDI applies solely to an employee (i) who is employed exclusively by the IDI; (ii) whose compensation is primarily in the form of a salary; (iii) who does not share compensation with a deposit broker; and (iv) whose office space or place of business is used exclusively for the benefit of the IDI which employs the employee. Accordingly, the exception does
9 2011 Study at 3. 10 FDIC Advisory Opinion 93-46 (July 21, 1993) discussed the circumstance in which “[a] person . . . calls and assists in the opening transaction, but does not identify himself as being a broker.” The staff concluded that the funds would be brokered deposits, further stating that “[t]he key here is whether the depository institution knows or has reason to know that the funds are being placed by a broker. If so, then the depository institution will be subject to any applicable restrictions on acceptance of brokered deposits based on its capital category.”-6- Brokered Deposit Guidance January 14, 2015 not apply to a contractor, a dual employee of the IDI and its affiliate, or, potentially, an employee eligible for a bonus in an amount greater than his or her base salary.11 It may be that for bank holding company systems where employees are employed by a separate service company subsidiary, all deposits placed or facilitated by those employees would be considered brokered despite exclusive service level employment agreements between the service company and the bank with respect to the employees, although this would seem to be a harsh and unintended result. In determining whether a third party qualifies for the exception for an agent or nominee whose primary purpose is not the placement of funds with depository institutions (the “primary purpose” exception), an IDI cannot rely on the amount of revenue generated by the third party’s placement activities as compared to its other activities. Instead, the intent of the party in placing (or facilitating the placement of) deposits must be evaluated to ensure that it is to promote a goal other than that of placing deposits for others (for example, the intent of the third party cannot be to earn fees through the placement of the deposits). In general, the primary purpose exception does not apply to companies that distribute financial products, such as general purpose prepaid cards, apparently whether or not reloadable. This may also include prepaid salary cards used by some employers. Card companies or retail stores that operate or sell general purpose prepaid cards where the funds are placed in custodial accounts at IDIs are considered deposit brokers. It appears that limited-use cards (for example, those used for health care or transportation benefits) may not give rise to brokered deposits. The FDIC will look to the following factors in determining whether to classify a third party that distributes debit cards or similar products that serve multiple purposes as a deposit broker: (1) the stated primary purpose of the third party in distributing the cards; (2) the features of the card (such as whether the card is reloadable); and (3) the compensation (if any) received by the third party from the bank for distributing or marketing the cards. Colleges that provide debit cards to students that also act as the student’s identification card and vehicle for access to student loan funds may be considered deposit brokers if, for example, the reloadability and the permanency of the accounts indicate that the primary purpose of the card is to provide access to the account at the IDI. According to the FAQs, this conclusion would be confirmed by the payment of fees or commissions to the college by the IDI.
11 FDIC Advisory Opinion 92-75 (Nov. 3, 1992) addressed the issue of bank employees who received substantial bonuses. The staff stated that in order to definitively address the circumstances presented in the letter, “we would have to know more about the exact mechanics of how the amounts of salary and bonus of an employee are adjusted after the fact to ensure that more than 50% of that employee's compensation consists of salary.”-7- Brokered Deposit Guidance January 14, 2015 C. DURATION OF BROKERED STATUS The FAQs stress that any ongoing involvement by a deposit broker means that the deposits must remain classified as brokered. Examples of involvement include the payment of a renewal fee, holding of an account in the name of third parties as agent or custodian for the owner, or access to account information, such as the account balance. As a result, deposits that an IDI may have thought were no longer brokered because, for example, the deposit was a CD that has since rolled over may still be considered brokered apparently regardless of the amount of time the deposits have remained at the IDI. D. ACCEPTING DEPOSITS The FAQs expand the scope of when a deposit is considered “accepted” by an IDI. This is important for an IDI that declines from well capitalized to adequately capitalized because, after the decline, it cannot continue to accept brokered deposits without a waiver from the FDIC. For undercapitalized IDIs, there is an outright ban on accepting brokered deposits and no waiver is available. There are consequences even for well-capitalized IDIs, as well, because under federal banking agency guidance, IDIs that rely on brokered deposits are directed to incorporate prompt corrective action-related downgrade triggers into their contingency funding plans. According to the FAQs, nonmaturity deposits, such as interest checking or savings accounts, effectively are treated as being accepted every day. If this view is confirmed, in the absence of a waiver (for which expedited processing is generally unavailable), an IDI may need to close any nonmaturity deposit accounts that are classified as brokered if the IDI’s capital classification declines from well capitalized to adequately capitalized. The FAQs caution bank management to contact the bank’s primary federal regulator when closing these accounts because of the potential significant impact on liquidity or other factors affecting bank operations. E. INTEREST RATE RESTRICTIONS An IDI that declines from being well capitalized generally may not offer interest rates on its deposits that, at the time the funds are accepted, renewed or rolled over, are significantly higher than market rates.12
This was the original significant operative restriction arising from the legislation on brokered deposits. There are several FAQs on the interest rate restrictions at the end of the guidance, including with respect to the calculation of market rates and the rates offered by the bank on its accounts (for example, with respect to the inclusion of incentives paid to customers and any fees paid to deposit brokers).