4000 - Advisory Opinions
Are funds held in "Cash Management Accounts" viewed as brokered deposits by the FDIC?
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."
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.
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
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.