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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and is consequently withdrawn.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.
{{8-31-04 p.4984.91}}
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.
{{8-31-04 p.4984.92}}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.
{{8-31-04 p.4984.93}}
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.
Conclusion
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.
{{8-31-04 p.4984.94}}
Please contact us if you have any
questions.
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