4000 - Advisory Opinions
Investment Advisor/Broker-Dealer Which Establishes System for Marketing Deposits and Receives Consideration Through Receipt of Deposits or Fees by Bank Which it Partially Owns Must Register as Deposit Broker
November 9, 1992
Gerald J. Gervino, Senior Attorney
This is in response to your recent letter concerning deposit brokers. You ask if your company is a "deposit broker" as that term is defined in the Federal Deposit Insurance ("FDI") Act. Based upon the information provided, your company is a "deposit broker." Please consider the following.
Activities of the Company
Your company is a registered investment adviser and broker-dealer. It enters into agreements with various registered broker-dealers who, as agents for their customers, make available a deposit account to their customers. This account is issued by an insured bank which is partially owned by your company. Depositors may establish a deposit account directly with the bank or they may appoint the bank as their agent and nominee for the purpose of establishing a deposit account with other federally insured depository institutions.
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 broker" are set out in the statute, most of them 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 None of the exceptions appear to apply to your company.
FDI Act Requirements Applicable to Deposit Brokers
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.2 Further, 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.3
The fact that your company is never in possession of the investor's principal or interest and never acts as trustee or agent for the investor, does not exempt it from the FDI Act requirements applicable to deposit brokers. The key test is whether your company may be said to be "engaged in the business of placing deposits, or facilitating the placement of deposits of third parties with insured depository institutions. . . ."4 In other words, 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."5 The activities of your company clearly make it easier for the investor to place its deposits with insured institutions.
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.6 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.
The discussion accompanying the 1984 regulations describes as "deposit brokering" a situation where a broker, acting on its own or at the request of an institution or institutions, solicits deposits from its customers, and the interested customer sends funds directly to the receiving depository institution which has been given notice by the broker of the impending purchase.7 Even where the investor, after having been contacted by the broker, calls the depository institution directly to establish an account, the broker would be considered to be a deposit broker because it is "facilitating the placement" of deposits; the broad definition of deposit broker used in the FDI Act encompasses such "match-making" or "finder" activities.
In your situation, the company has established the system through which the bank deposits are marketed and receives consideration for the resulting purchases through the receipt of deposits or of agency fees by the bank which it partially owns. Based on the foregoing, your company is a "deposit broker" as that term is defined in the FDI Act. As a result, it is subject to the registration requirements imposed by the FDI Act.
If you have any further questions or would like further explanation of our letter, please write or call us at (202) 898-3723.
112 U.S.C. 1831f(g)(2)(C). Go back to Text
212 U.S.C. 1831f-1(a). 57 FR 23933, 23944 (June 5, 1992) (to be codified at 12 C.F.R. 337.6(h)). Go back to Text
312 U.S.C. 1831f. 57 FR 23933 (June 5, 1992) (to be codified at 12 C.F.R. 337.6). Go back to Text
412 U.S.C. 1831f(1)(A) (emphasis added). Go back to Text
5Black's Law Dictionary 591 (6th ed. 1990). Whether or not the activities must be more than merely incidental to the placement of the deposits is not at issue in this case, given the level of activities of your company. Go back to Text
6The 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
748 FR 50339 (Nov. 1, 1983). Go back to Text