On December 12, 2019, the Federal Deposit Insurance Corporation (FDIC) issued a notice of proposed rulemaking (NPR)1 proposing changes to the FDIC’s regulations concerning brokered deposits, which implement Section 29 of the Federal Deposit Insurance Act (FDIA).2 These regulations are important because they affect (i) access to deposit funding sources by insured depository institutions (IDIs) that are less than well capitalized, (ii) liquidity planning by IDIs that use brokered deposits and (iii) the cost of federal deposit insurance.
Under the FDIC’s regulations, as under the FDIA, a brokered deposit is “any deposit that is obtained, directly or indirectly, from or through the mediation or assistance of a deposit broker.”3 The term “deposit broker” is broadly defined, in part, as “[a]ny 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[.]”4 There are a number of exceptions to the definition of a deposit broker. Most importantly for the NPR, the term “deposit broker” does not include “[a]n agent or nominee whose primary purpose is not the placement of funds with depository institutions[.]”5
Historically, the FDIC has interpreted the brokered deposit restrictions to apply broadly and has addressed exemptions and limitations on the definitions in a largely ad hoc manner through formal and informal interpretations most recently collected in a set of frequently asked questions.6 Through the NPR, the FDIC is attempting to update its historical approach in light of changes in technology and to provide a more consistent and ordered approach to the coverage of the regulations. The changes proposed by the NPR include (i) clarifying and narrowing what constitutes engaging in the business of “facilitating the placement of deposits,” (ii) formalizing an application process for the “primary purpose” exception from the deposit broker definition and (iii) expressly incorporating in the “primary purpose” exception an exclusion for placing deposits for transactional purposes, which should be important to many fintech companies, sellers of certain prepaid products and others. Comments on the NPR must be submitted within 60 days of publication in the Federal Register.
First, the NPR notes that historically, when determining whether a person is engaged in “facilitating the placement of deposits,” FDIC staff has interpreted that concept broadly to include “actions taken by third parties to connect insured depository institutions with potential depositors.”7 However, given the rapid pace of technological advances in the way that banks seek and source deposits, the NPR notes that factors previously considered by FDIC staff when making these determinations may no longer be relevant.
The NPR proposes to address this issue principally by adding a new definition of “Engaged in the Business of Facilitating the Placement of Deposits,” under which a person who engages in any of the following activities would meet the definition:
(A) The person directly or indirectly shares any third party information with the insured depository institution;
(B) The person has legal authority, contractual or otherwise, to close the account or move the third party’s funds to another insured depository institution;
(C) The person provides assistance or is involved in setting rates, fees, terms, or conditions for the deposit account; or
(D) The person is acting, directly or indirectly, with respect to the placement of deposits, as an intermediary between a third party that is placing deposits on behalf of a depositor and an insured depository institution, other than in a purely administrative capacity.8
The NPR explains that this proposed definition is “intended to capture activities that indicate that the person takes an active role in the opening of an account or maintains a level of influence or control over the deposit account even after the account is open.”9 Such level of control indicates, in the FDIC’s view, that the deposit relationship is really between the depositor and the person facilitating the deposit, rather than between the depositor and the IDI, because it allows the person to influence the movement of funds between institutions and “makes deposits less stable than deposits” brought to IDIs through a single point of contact that does not have influence over the movement of the deposits.10
While this proposed definition would help bring more clarity and specificity to the standards applied by the FDIC over the years, the proposed criteria continue to reach more broadly than the FDIC’s stated intent, and, unless further clarified, will continue to force many common business models, including models previously approved by the FDIC, into the application for exemption process. For example, many modern internet and mobile-based deposit advertising and referral arrangements, including previously exempt listing services, may involve some form of information sharing between the referring party and the IDI, for example through cookies or other means of passing identifying information. Similarly, it is unclear whether the FDIC would consider a referring entity to be “involved” in setting the terms and conditions for a deposit account, if, for example, the third party imposes minimum standards for the deposits that may be accessible through that entity, for example by requiring that the IDI limit its use and disclosure of depositor information for referred applicants. Thus, while the FDIC’s attempt to bring further clarity to the definition of “facilitating the placement of deposits” is encouraging, entities involved in the referral of deposit customers should consider seeking further clarification as to the scope of the definition in order to avoid the need to apply for an exemption or seek other interpretive relief.
Second, the NPR proposes an application and approval process for an agent or nominee to rely on the exclusion from the definition of deposit broker because its primary purpose is not the placement of funds and proposes specific standards that would apply to such applications.11 An application could be submitted by a nonbank agent or nominee or by an IDI acting on behalf of its agent or nominee. The content of the application would vary depending on the basis for the applicant’s request, and the FDIC would issue a written determination within 120 days of receipt of a complete application, with an expedited process for certain applications. An agent or nominee whose application is approved would be required to provide reports to the FDIC, and an IDI whose application on behalf of its agent or nominee is approved would be required to provide reports to the FDIC and its primary federal regulator, with the specific reporting requirements to be described in the FDIC’s approval of an application. An IDI would be responsible for monitoring nonbank third parties for whom an application has been approved and would be required to provide certain ongoing reporting, which may include the obligation to notify the FDIC and its primary federal regulator of any material changes relating to the third party (such as a material change in the third party’s revenue structure).12
The NPR proposes specific standards for determining via the application process whether an agent or nominee is excluded from the definition of deposit broker because its primary purpose is not the placement of funds with IDIs. Under the proposed standards, an applicant could be approved as meeting the primary-purpose exception in the following circumstances:
- Deposits Are Less Than 25% of Assets Under Management. An applicant could be approved if the placement of deposits by the applicant is less than 25% of the total amount of customer assets under management by the applicant for a particular business line.13 As one example, the NPR notes that a broker-dealer that sweeps uninvested cash balances into deposit accounts at an IDI would meet the primary purpose exception if the amount of customer funds placed in deposit accounts represents less than 25% of the total amount of customer assets it manages in that business line.14 This is a significant liberalization of the 10% threshold in the existing published FDIC precedent,15 but remains tied to a “particular business line,” a term that is not defined in the proposed rule. For example, a broker-dealer’s accounts that offer a cash sweep option would be considered a separate business line from accounts that do not.16 Moreover, by referring specifically to “assets under management,” the exemption does not on its face appear applicable to entities that, acting solely in an advisory capacity, refer less than 25% of their client asset base for IDI deposits.
- Deposits Are for the Purpose of Enabling Customers to Make Transactions. In an important development for fintech companies and prepaid providers, an applicant also may be approved if, with respect to a particular business line, the applicant places customer funds at an IDI to enable customers to make transactions, provided that all customer funds are placed in transaction accounts and that the applicant pays no interest, fees or remuneration to the depositors.17 This exemption is not subject to a percentage-of-assets threshold. If the IDI or third party pays interest, fees or remuneration, the program still could be approved, but the applicant must demonstrate that the primary purpose of the particular business line is to enable customers to make transactions, considering such factors as the volume of transactions in customer accounts and the interest, fees or remuneration provided.18 Because many transactional deposit programs involve some form of value proposition for the customer, for example points or cash back for spending, the proposed rule likely will require more detailed application efforts unless the final rule is modified to treat such ancillary benefits differently. Finally, the NPR states that the FDIC does not intend this exception to capture all third parties that place deposits in accounts with transaction features, but only those whose business purpose is to place funds in transactional accounts to enable transactions or make payments.19 It is unclear how the FDIC would view broker-dealer cash sweeps to transaction accounts in this regard.
- Other Applicants. An applicant that otherwise demonstrates that with respect to a particular business line under which the applicant places or facilitates the placement of deposits, the primary purpose of the applicant is not the placement or facilitation of placement of deposits, also may be approved.20 In considering an application, the FDIC would consider several factors, including the revenue structure for the applicant (e.g., whether the applicant receives a majority of its revenue from the deposit placement activity), whether the applicant’s marketing activities are aimed at opening a deposit account or providing some other service, and any fees received by the applicant for its deposit placement services.21 The NPR notes, however, that the FDIC would not grant an application under the primary purpose exception for a person whose primary purpose is to place deposits to encourage savings.22
In light of the remaining ambiguity as to the scope of the “facilitating the placement of deposits” standard, there are significant questions as to the workability of the FDIC’s proposal that all persons seeking to qualify for the primary-purpose exemption must file an application. While many attributes of the exemption would seem conducive to the creation of a simple regulatory safe harbor rather than an individualized application, the NPR would force most deposit referral relationships into an application that threatens to be overwhelming, at least at the outset, for the FDIC. While the NPR promises action within 120 days of a “complete application,” experienced practitioners will know that the 120-day processing period can easily be extended by the agency failing to deem an application complete. Accordingly, commenters should carefully consider proposing to the FDIC workable safe harbor carveouts from the proposed application process.
The NPR specifically notes that the FDIC is not proposing any changes to the treatment of brokered certificates of deposit (CDs). Thus, the FDIC would continue to consider a person’s placement of brokered CDs as deposit brokering.23
The NPR proposes to modify the exception from the definition of deposit broker for an IDI with respect to funds placed with that IDI24 by including funds placed by a wholly owned subsidiary of the IDI.25 In making this change, the FDIC acknowledges that “[t]here is little practical difference between deposits placed at an IDI by a division of the IDI versus deposits placed by a wholly-owned subsidiary of the IDI.”26
Finally, as part of its rulemaking process, the FDIC intends to evaluate existing advisory opinions, codify those that continue to be relevant and rescind any that are superseded, obsolete or irrelevant as a result of the amendment.27 The FDIC does not indicate, however, what effect the final rule would have on institutions relying on existing exemptive rulings or interpretations. The FDIC also intends to make separate proposals regarding the rules governing assessments applicable to brokered deposits and call report entries for such items.
As indicated above, although the NPR offers significant potential improvements in the regulation of brokered deposits, important ambiguities and procedural barriers remain. Both IDIs and third parties involved in deposit-related relationships with IDIs should carefully assess the potential effect of the NPR on their business models and consider commenting on the NPR.