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4000 - Advisory Opinions


Company and Its Employees Offering Investment Advisory Services and Purchasing CDs in Clients' Names Are Deposit Brokers Subject to Registration Requirements of New Brokered Deposit Prohibitions

FDIC-92-52

August 3, 1992

Valerie J. Best, Counsel

This is in response to your recent letter concerning deposit brokers. You write that your firm offers investment advisory services to your clients and you purchase certificates of deposit in your individual clients' names. You ask if your firm and its employees are "deposit brokers" as that term is defined in the Federal Deposit Insurance ("FDI") Act. The information provided is sketchy. Nonetheless, it appears that your company and its employees may be "deposit brokers." Please consider the following.

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

(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 brokers" are set out in the statute. Most of them, however, 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

Discussion

As shown by the definition of "deposit broker" quoted above, 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 or agent for others. In common usage, the term "facilitate" means "to free from difficulty or impediment; to make easy or less difficult."2

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.3 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.

For example, assume a broker, acting on its own or at the request of an institution or institutions, solicits deposits from its customers. Under one method of brokering deposits, the interested customer sends funds directly to the institution which has been given notice by the broker of the impending purchase.4 Under a second method of brokering deposits, the broker itself transfers the customer's funds to the institution and has the deposit registered at the institution in its name as nominee or agent for the customer. In turn, the broker maintains records reflecting the ownership interest of each customer in the deposit.

Another way of brokering deposits is where a broker purchases a certificate of deposit issued by an insured institution and sells interests in it to customers. Upon sale of the participation in the deposit to its customer, the broker so informs the issuing institution and requests that the deposits be registered in its own name as nominee for others. The broker's records, in turn, reflect the ownership interest of each customer in the deposit.

All of the foregoing scenarios are covered by the FDI Act. In the first scenario, the broker is "facilitating the placement" of deposits; in the latter two scenarios, the broker is "placing" the deposits.

You indicate in your letter that your firm purchases certificates of deposit in your individual clients' names. Again, although we do not have many details as to your activities, it appears that you are "engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties with insured depository institutions."

Deposit Brokers—Recordkeeping Requirements

Assuming that your firm and its employees are "deposit brokers" as that term is defined in the FDI Act, they are subject to the registration requirements imposed by the FDI Act. 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.5 A company 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.

The notice may be in letter form and shall describe generally the history, nature and volume of its deposit brokerage operations, including the sources and placement of such funds. The notice should be submitted to:

Federal Deposit Insurance Corporation

Office of Compliance and Special Activities

Division of Supervision

Washington, D.C. 20429.

A deposit broker must maintain records showing the volume of brokered deposits placed with any insured depository institution maturities, rates, and costs associated with such deposits. Upon request from the FDIC, a deposit broker must file quarterly written reports showing the volume, maturities, rates, and costs, of brokered deposits placed with each depository institution during the applicable quarter.

For your information, 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.6

A copy of the FDIC's regulations implementing section 29 of the FDI Act is enclosed. Also enclosed is a memorandum summarizing the key provisions of the implementing regulations.

You may write to me at the above address if you have additional questions. If you have questions concerning the content and filing of the notice, you should contact the FDIC's Office of Compliance and Special Activities, Mr. Hugh W. Conway at (202) 898-6812 or Mr. Thomas C. O'Nell at (202) 898-6863.

112 U.S.C. 1831f(g)(2)(C). Go back to Text

2Black's Law Dictionary 591 (6th ed. 1990). Go back to Text

3The 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

4Even where the customer, after having been contacted by you, calls the depository institution directly to establish an account, you would be considered to be a deposit broker because you are "facilitating the placement" of deposits; the broad definition of deposit broker used in the FDI Act encompasses such "match-making" or "finder" activities. Go back to Text

512 U.S.C. 1831f--1(a). 57 Fed. Reg. 23933, 23944 (June 5, 1992) (to be codified at 12 C.F.R. 337.6(h)). Go back to Text

612 U.S.C. 1831f. 57 Fed. Reg. 23933 (June 5, 1992) (to be codified at 12 C.F.R. 337.6). Go back to Text


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