FDIC Law, Regulations, Related Acts
4000 - Advisory Opinions
Question regarding FDIC's criteria for determining when a "listing service" is a "deposit broker"
FDIC--04--04 July 28, 2004 Christopher L. Hencke, Counsel
This responds to your inquiry concerning the FDIC's criteria for determining when a "listing service" is a "deposit broker." You have questioned the FDIC's criteria as they relate to a company called Company X ("X"). The Internet-based service offered by X is known as "Y".
We appreciate your willingness to meet with us on June 4, 2004 in Washington to explain the Y service. Prior to that meeting, in a letter dated April 21, 2004, we had offered an opinion about the Y service but that opinion was based upon an incomplete understanding of the facts and is consequently withdrawn. The recent meeting helped to clarify the facts.
The question is whether X is a "deposit broker." As explained below, we have decided that the answer is yes. Consequently, the deposits accepted by insured depository institutions through the Y service will be "brokered deposits." Notwithstanding this conclusion, we express no supervisory concerns about the use of Y by insured depository institutions provided that the institutions prudently manage these accounts. Also, the institutions must be either (1) well capitalized; or (2) adequately capitalized with waivers to accept brokered deposits. See 12 U.S.C. § 1831f. See also 12 C.F.R. § 337.6
The FDIC's Criteria
A "listing service" is a company that compiles information about the interest rates offered on certificates of deposit ("CDs") by insured depository institutions. A "deposit broker," on the other hand, 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). In other words, a "listing service" is a compiler of information about deposits whereas a "deposit broker" is a facilitator in the placement of deposits.
Of course, a particular company could be a "listing service" (compiling information about CDs) as well as a "deposit broker" (facilitating the placement of CDs). In fact, the FDIC staff has set forth criteria for determining when a "listing service" qualifies as a "deposit broker." The development of these criteria began in 1990 with Advisory Opinion No. 90--24 (June 12, 1990). That opinion involved "a computerized rate listing service for jumbo CD issuers" that "link[ed] thousands of potential buyers and sellers of CD's together." The service charged a monthly subscription fee; it did not charge any transaction fees. Indeed, the service was not involved in any transactions. In determining that the "listing service" was not a "deposit broker," the FDIC staff reasoned as follows:In our opinion, [the Company] is engaged in providing information on current interest rates to its subscribers, be they individuals considering whether to purchase jumbo CD's, or depository institutions attempting to set a competitive rate of interest for such CD's. What [the Company] facilitates is the decision of the would-be buyer whether (and from whom) to buy a CD, or the decision of the depository institution as to what rate to set; it is not facilitating the placement of deposits per se. . . . [E]ven if the only payment received by [the Company] came from its subscribers as subscription fees, if [the Company] were involved in placing the deposits--for instance, if customers seeking to place deposits gave [the Company] their names and other pertinent information and [the Company] passed that information along to the given depository institution, that . . . would be viewed as deposit brokering (and this would be true even if the funds involved were sent directly from the CD-buying customer to the institution, without any other involvement by [the Company]).
Subsequently, in Advisory Opinion No. 92--50 (July 24, 1992), the FDIC staff set forth specific criteria to determine when a "listing service" is a "deposit broker." Through these criteria, the staff took the position that a "listing service" is not a "deposit broker" if the service "is compensated only by means of subscription fees . . . and such fees are not calculated on the basis of the number of dollar amount of deposits placed as the result of information provided by the "listing service." In other words, a "listing service" must charge flat subscription fees. Otherwise, the service will be a "deposit broker." Although the staff did not articulate the rationale for this distinction, the rationale is inferable: compensation based on the amount of deposits placed through a "listing service" may create a motivation on the part of the service to become involved in the placement of deposits. Indeed, such compensation strongly suggests that the service is involved in some manner in placing deposits. Therefore, the existence of such compensation will result in the classification of the "listing service" as a "deposit broker."
Again, the purpose of the FDIC's criteria is to distinguish between the following: (1) "listing services" that merely provide information about deposits; and (2) "listing services" that participate in the placement of deposits. The latter are "deposit brokers."
The FDIC revised its criteria in 2002 through
Advisory Opinion No. 02--04
(November 13, 2002). We made additional revisions in our letter to you
dated April 21, 2004. In that letter, we recognized that, through
advances in technology, an Internet-based "listing service" can
transmit messages (including trade confirmations) between depositors
and depository institutions so long as the Internet-based "listing
service" is a passive mechanism for "posting" rates and
transmitting messages. Consistent with our previous opinions, the
letter noted that the fees charged by a "listing service" must be
flat fees unrelated to the amount of deposits. The revised criteria in
our April 21, 2004 letter are set forth in full below.1. The person or entity providing the listing service is
compensated solely by means of subscription fees (i.e., the
fees paid by subscribers as payment for their opportunity to see the
rates gathered by the listing service) and/or listing fees
(i.e., the fees paid by depository institutions as payment
for their opportunity to list or "post" their rates). The listing
service does not require a depository institution to pay for other
services offered by the listing service or its affiliates as a
condition precedent to being listed.
2. The fees paid by depository institutions are flat fees: they are not calculated on the basis of the number of dollar amount of deposits accepted by the depository institution as a result of the listing or "posting" of the depository institution's rates.3. In exchange for these fees, the listing service performs no services except (A) the gathering and transmission of information concerning the availability of deposits; and/or (B) the transmission of messages between depositors and depository institutions (including purchase orders and trade confirmations). In publishing or displaying information about depository institutions, the listing service must not attempt to steer funds toward particular institutions (except that the listing service may rank institutions according to interest rates and also may exclude institutions that do not pay the listing fee). Similarly, in any communications with depositors or potential depositors, the listing service must not attempt to steer funds toward particular institutions.
4. The listing service is not involved in placing deposits. Any funds to be invested in deposit accounts are remitted directly by the depositor to the insured depository institution and not, directly or indirectly, by or through the listing service.
The Services Offered by X
As described in a "License Agreement," the Y service offered by X is "an Internet-based transaction execution system . . . that provides federally insured financial institutions, among other entities, access to a network of institutional investors who participate in a national wholesale market system for the purchase and sale of financial instruments." This system includes the following components: (1) an informational component through which depository institutions "post" their interest rates on CDs and see the rates offered by other institutions; and (2) a transactional component through which the depository institutions in the network actually sell and buy CDs. In connection with the transactional component of the Y system, X has arranged for the transfer of funds through a "Clearing Agent" and Z.
The clearing agent is the trust department of a bank. In a memorandum dated June 2, 2004, you described the process as follows:The Clearing Agent's role is to verify information provided by each subscribing institution in their contract with X which states that said institution is a legally existing entity. . . . Further, the Clearing Agent verifies all account information provided by the institution. Following each CD transaction executed through the [network], the Clearing Agent will transfer data to Z. Z . . . instructing Z] to debit and credit the appropriate accounts of each investor and depository institution involved in the transaction. This process will continue relative to all interest and principal payments made through and including the date of maturity.
In offering the system described above, X is a "deposit broker" under each of the FDIC's current criteria. First, X is not compensated solely by means of subscription fees and/or listing fees. In addition to charging certain subscription and listing fees (set forth in section 4 of a "Fee Agreement"), X also charges transaction fees (set forth in section 9 of a "Product Agreement"). Second, some of the fees charged by X are not flat fees unrelated to the number of dollar amount of deposits sold or purchased by subscribers. On the contrary, the transaction fees are based expressly upon the amount of deposits sold or purchased by subscribers. (The transaction fee is up to 15 basis points.) Third, the services offered by X are not limited to the gathering and transmission of information about deposits and the transmission of messages between depositors and depository institutions. X also provides a mechanism for the actual exchange of funds between the buyers and sellers of CDs. Fourth, through this transactional mechanism, X is involved in the actual movement of settlement of deposits through the "Clearing Agent" and Z.
In short, X must be classified as a "deposit broker" unless the FDIC adopts a whole new set of criteria. The question, then, is whether the FDIC should adopt new criteria. We examine this question below.
The Meaning of "Deposit Broker"
As explained in our letter dated April 21, 2004, the term "deposit broker" should not be construed so broadly as to encompass all companies that perform any type of service for depositors or depository institutions. For example, the FDIC takes the position that newspapers and other media companies do not become "deposit brokers" when they publish or air advertisements for deposit products (assuming that the company charges a flat fee for publishing the advertisement and does not participate in the actual placement of funds). Likewise, the fact that a telephone company provides a means of communication between depositors and depository institutions should not result in the classification of telephone companies as "deposit brokers." The connection between a telephone company and the placement of deposits is too remote.
Here, the question is whether X is equivalent to a newspaper and/or telephone company. More specifically, do the activities performed by X constitute "placing deposits, or facilitating the placement of deposits"? Although we are persuaded that the informational component of the system does not constitute "deposit brokering," we feel otherwise about the transactional component. Under a "Product Agreement" (at section 9), every transaction in the Y system results in the imposition of a transaction fee up to 15 basis points. This is not a flat subscription fee or listing fee. It is not unrelated to the amount of deposits sold or purchased by subscribers. On the contrary, the fee is based upon the amount of deposits sold or purchased by subscribers.
In your memorandum dated June 2, 2004, you explained that the transaction fees are necessary to offset transaction costs. We do not question this proposition. The fact that transaction fees are necessary, however, does not change the fact that the fees reflect the involvement by X; in the "brokering" of deposits. This involvement is clear in that X is offering a transactional system designed for the specific purpose of buying and selling CDs. The involvement by X in the movement or settlement of deposits means that X is a "deposit broker."
As noted in your memorandum dated June 2, 2004, the "Clearing Agent" in the Y system might not qualify as a "deposit broker" because the role played by the "Clearing Agent" is administrative in nature. This position is supported by Advisory Opinion No. 92--91 (December 15, 1992). In that opinion, the staff found that a "transaction facilitating entity" was not a "deposit broker" in executing ACH debit and credit instructions from a program "Administrator."
You may be correct that the role played by the "Clearing Agent" in this case is similar to the role played by the "transaction facilitating entity" in Advisory Opinion No. 92--91. The problem, however, is that the role played by X is similar to the role played by the "Administrator." In Advisory Opinion No. 92--91, the staff concluded that the "Administrator" was a "deposit broker" and the deposits were "brokered deposits." Likewise, in this case, we conclude that the deposits are "brokered deposits" due to the transactional nature of the Y system.
We shall continue to apply the criteria set forth in our letter dated April 21, 2004 (i.e., the criteria above). Under these criteria, X is a "deposit broker." This conclusion does not indicate any opinion by the FDIC concerning whether insured depository institutions should use the Y service. Our conclusion simply means that depository institutions that obtain deposits through your service should be either (1) well capitalized; or (2) adequately capitalized with waivers to accept brokered deposits. Also, subscribers should manage these accounts prudently.
In a letter dated June 9, 2004, you presented a list of suggested criteria for determining when a "listing service" is a "deposit broker." These suggestions shall be considered if we decide in the future to make additional revisions.
Please contact us if you have any questions.