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4000 - Advisory Opinions


Investment Advisor/Fund Administrator for Governmental Authorities is Deposit Broker With Respect to Optional Certificate of Deposit Placement Program It Offers

FDIC--92--66

October 11, 1992

Valerie J. Best, Counsel

You recently requested our confirmation of your opinion that your client, *** ("[X]"), is not required to register with the Federal Deposit Insurance Corporation ("FDIC") as a deposit broker pursuant to the FDIC's proposed revisions to its brokered deposit regulation, now adopted as a final regulation and published in the Federal Register on June 5, 1992 (See 57 Fed. Reg. 23933, a copy of which is attached). Our final regulation on brokered deposits became effective on June 16, 1992.

As set forth below, we have determined that [X] is a deposit broker with respect to the optional certificate of deposit placement program it offers to individual participants in the funds it advises and services. Therefore, pursuant to section 29A of the FDI Act and the FDIC's implementing regulations at 12 C.F.R. § 337.6, [X] is required to register with the FDIC as a deposit broker prior to placing deposits with an insured depository institution under the optional certificate of deposit placement program. Our opinion relates solely to the optional certificate of deposit placement program.

According to your letter, [X] is a registered investment adviser and fund administrator for liquid asset funds established for governmental authorities and presently provides services to funds in seven states. For our information and review, you enclosed copies of documents representative of [X]'s agreements with the participants in the funds [X] advises and services.

Pursuant to the representative trust documents provided to us, a trust is organized for the purpose of permitting municipalities and municipal authorities to pool their investment funds in order to obtain the highest possible investment yield consistent with the objectives of maintaining liquidity and preserving capital. According to the Declaration of Trust, participants in a trust are required to invest in the trust's money market portfolio and may elect to invest in as few or as many other investment portfolios as they deem appropriate. (State) Municipal Investment Program Declaration of Trust, August 24, 1990, § 4.2.

The trust's optional investment portfolios consist of a (flexible) portfolio and several fixed-term portfolios with one or more investment pools. Varying amounts of the assets of each of the portfolios may be invested in certificates of deposit placed with depository institutions insured by the FDIC. Declaration of Trust, §§ 4.2 and 4.3(b).

According to the information you provided to us, [X] may, at the request of the Trustees, offer optional programs to participants in the trust. Information Statement for the [State] Municipal Investment Program, November 6, 1990, page 17. According to your letter, [X] offers an optional certificate of deposit placement program to individual participants in the funds it advises and services.

Certificates of deposit available through this optional program are in addition to, and separate from, investments held as a part of the trust investment portfolio. Id. Investment criteria adopted by the Trustees for trust investments are applied to the depository institutions from which [X] purchases certificates of deposit. However, trust participants contact [X] directly and [X] purchases certificates of deposit on their behalf in consideration for a placement fee.

According to your letter, [X] does not solicit funds for investment in certificates of deposit, make certificate of deposit recommendations, or accept fees from any depository institution for purposes of the optional certificate of deposit placement program. You requested our opinion on the issue of whether [X] qualifies as a deposit broker within the meaning of the term as defined at 12 C.F.R. § 337.6(a)(3) and therefore must register with the FDIC before placing deposits in connection with the optional certificate of deposit placement program.

Section 301 of the Federal Deposit Insurance Corporation Improvement Act of 1991, Pub. L. No. 102--242, added a new section 29A to the Federal Deposit Insurance Act which requires a "deposit broker," as defined in section 29(g) of the FDI Act, to provide written notice to the FDIC of its status as a deposit broker before it may solicit or place any deposit with an insured depository institution. Deposit brokers must comply with certain recordkeeping and reporting requirements pursuant to new section 29A of the FDI Act and our implementing regulations at 12 C.F.R. § 337.6(h).

Section 29(g)(1) of the FDI Act, 12 U.S.C.A. 1831f(g)(1), defines the term "deposit broker" broadly. In relevant part, the term "deposit broker" means,

[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. . .

Our final regulation on brokered deposits adopts a definition of "deposit broker" identical to that set forth in section 29(g)(1) of the FDI Act as quoted above. See 12 C.F.R. § 337.6(a)(5)(i)(A).

With respect to [X]'s optional certificate of deposit placement program, [X] places deposits in insured depository institutions on behalf of participants in the funds it advises and services and is paid a fee for such placements. Therefore, [X] is "engaged in the business of placing deposits. . .of third parties with insured depository institutions" and falls within the definition of a deposit broker as defined in section 29(g)(1) of the FDI Act and our implementing regulations at 12 C.F.R. § 337.6(a)(5)(i)(A).

However, the term "deposit broker" is subject to certain statutory and regulatory exclusions most of which concern depositors acting in specifically described fiduciary relationships. Section 29(g)(2)(I) of the FDI Act excludes from the definition of the term "deposit broker" "an agent or nominee whose primary purpose is not the placement of funds with depository institutions." This exclusion from the definition of deposit broker is the basis for your opinion that [X] is not a deposit broker.

[X] does not receive a fee from the depository institutions with which it places participants' deposits. However, the absence of a fee paid by a depository institution in consideration for the placement of deposits is not dispositive of the question of status as a deposit broker.

You cite our Interpretive Letter 90-21 in which we construe "primary purpose" to mean "primary intent" as support for your conclusion that [X] is not a deposit broker. We understand from your letter that [X]'s primary focus is the administration of funds for municipal authorities. The certificate of deposit placement program is offered as an adjunct to [X]'s core fund administration business and is only one program of several optional programs offered to participants in the funds [X] advises and services.

Thus, the certificate of deposit placement program offered by [X] is separate from the trust's investments and separate from other optional programs offered to trust participants. The sole function of the program is the placement of deposits in insured depository institutions; the program would not exist without the purpose of placing deposits in insured depository institutions.

The appropriate focus for analysis is the optional certificate of deposit program offered by [X] rather than [X]'s entire funds management and investment advisory business. The certificate of deposit placement program is an optional and separate program for trust participants. While [X]'s overall primary purpose or intent is the administration of funds for municipal authorities, its primary purpose or intent with respect to the certificate of deposit placement program is the placement of funds with depository institutions. Therefore, we have determined that [X] is a deposit broker with respect to the optional certificate of deposit placement program it offers to individual participants in the funds it advises and services.


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