FDIC Law, Regulations, Related Acts
4000 - Advisory Opinions
Mere Knowledge on Part of Insured Depository Institution That it is Accepting Funds from Broker is Sufficient to Subject Institution to Brokered Deposit Restrictions Based on Its Capital Category
October 27, 1992
Valerie J. Best, Counsel
I am writing in response to your letter dated June 19, 1992, concerning brokered deposits. You write that your institution, which is adequately capitalized, has funds which have been placed with you on behalf of third parties, but that you did not solicit those funds and you do not pay fees for those funds. You ask us to confirm your understanding that these funds are not "brokered deposits."
It appears that there may have been some miscommunication on this matter between you and FDIC staff. I hope that this letter better explains our views.
The Federal Deposit Insurance Act ("FDI Act") provides that insured depository institutions that are not well capitalized "may not accept funds obtained, directly or indirectly, by or through any deposit broker for deposit into one or more deposit accounts." 12 U.S.C. § 1831f(a).
The term "deposit broker" is broadly 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).1
Several exceptions to the definition of "deposit broker" are set forth in the statute. Most of these exceptions concern depository institutions acting in certain specifically described fiduciary relationships (e.g., the trust department of an insured depository institution, the trustee of a pension plan or other employee benefit plan, etc.). None of the exceptions appear to apply in this instance.
FDIC regulations define a "brokered deposit" as "any deposit that is obtained, directly or indirectly, from or through the mediation or assistance of a deposit broker." 12 C.F.R. § 337.6(a)(3).
Given the above-quoted statutory and regulatory provisions, the fact that an insured depository institution does not pay a fee to the person or entity placing funds belonging to third parties with the institution does not necessarily mean that the funds are not received from a deposit broker. Likewise, the fact that an insured depository institution does not solicit2 the person or entity placing funds belonging to third parties with the institution does not necessarily mean that the funds are not received from a deposit broker.
The key here is not whether the bank has solicited the funds, but whether the bank knows or has reason to know that the funds are being placed by a broker. If so, then the bank will be subject to any applicable restrictions on acceptance of brokered deposits based on its capital category. If the institution is undercapitalized, it must refuse the funds. If the institution is adequately capitalized, then it must obtain a waiver from the FDIC before accepting, renewing or rolling over any such deposits. The deposit broker (third-party) restrictions and the interest rate restrictions imposed by the FDI Act do not apply to well-capitalized institutions.
As indicated in your letter, [Bank] is aware of the fact that funds have been placed with it on behalf of third parties. Applying the foregoing test, it is irrelevant that your institution did not solicit these funds or pay fees for these funds. Mere knowledge on the part of your institution that it is accepting funds from a broker is sufficient to require that [Bank] be subject to the appropriate restrictions on brokered deposits for adequately capitalized banks. Under section 337.6(b)(2)(i) of the FDIC's regulations, any adequately capitalized insured depository institution may not accept, renew or roll over any brokered deposit unless it has applied for and been granted a waiver of this prohibition by the FDIC. 12 C.F.R. § 337.6(b)(2)(i). Accordingly, must apply to the appropriate FDIC Regional Director for permission to accept, renew or roll over any of its brokered deposits.
Under the statute, whether or not funds will be considered to be obtained from or through a "deposit broker" is determined in light of that person's activities (see 12 U.S.C. § 1831f(g)(1) cited above). In most instances, we would anticipate that banks, in the normal course of business, will be able to determine when funds are being placed by a broker. However, if an insured depository institution either does not know the identity of the depositor or is not aware of the fact that a broker is involved with the placement of a deposit, then a different issue is presented which we do not address in this opinion.
I trust this is responsive to your inquiry. Please call me at (202) 898-3812 or write to me at the above address if you have any additional questions.
1Final regulations adopted by the FDIC on May 29, 1992, to implement the new brokered deposit prohibitions adopted the above-quoted definition from the statute without change. 57 Fed. Reg. 23933, 23942 (June 5, 1992) (to be codified at 12 C.F.R. § 337.6(a)(5)(i)(A) and (B)). Go back to Text
2In this context, we are using the term "solicit" to mean "to try to obtain by entreaty, persuasion, or formal application; to endeavor to obtain by asking or pleading." Go back to Text