4000 - Advisory Opinions
Agreement Entered into Between Trust Department and Customer For Primary Purpose of Placing Funds With Insured Depository Institutions Requires Bank to Register as Deposit Broker
December 9, 1992
Valerie J. Best, Counsel
You submitted for our review an "Investment Agency Agreement" (the "Investment Agreement") and a "Coordinating Custodial Agreement" (the "Custodial Agreement"). You asked whether *** (the "Bank") is required to register as a deposit broker when the Bank's Trust Department invests customer funds in certificates of deposit ("CDs") pursuant to the Investment Agreement and/or the Custodial Agreement. It is our view that the Bank is required to register as a deposit broker when it invests in CDs pursuant to the Investment Agreement and/or the Custodial Agreement.
The Agency Agreements
In your letter you state that the customers of your Trust Department do not always establish trusts because the Bank's Trust Department offers investment agency account and custodial account relationships which permit customers to purchase U.S. government and Federal agency securities, tax exempt notes and bonds, and certificates of deposit placed in federally-insured institutions, as well as other investments. Some of the customers who enter into these agreements elect to limit their investments to insured CDs. As a service to its customers, the Bank identifies current market rates and analyzes data provided by a private rating service regarding the financial soundness of the issuing institution. Purchases of CDs are executed at the customer's specific request in the name of a nominee partnership of the Bank on behalf of the customer. Each of the nominee partners is an officer or administrator of the Trust Department of the Bank.
The Investment Agreement provides, in part, that the Bank agrees to invest and maintain the assets in such securities as it deems prudent based upon the investment objectives of the customer and in accordance with fiduciary law. The Trust Department may also purchase certificates of deposit through the Bank's "Certificate of Deposit Program." Such transactions may include a commission and may only be executed as long as commissions charged accurately represent services rendered and are competitive with non-affiliated companies.
Under the Custodial Agreement, the Bank is authorized to execute purchases and redemptions pursuant to the customer's order, such as, but not limited to: U.S. government and Federal agency securities, tax exempt notes and bonds, and certificates of deposit placed in federally-insured institutions. The Bank does not render advice as to the value of, or make recommendations as to the advisability of purchasing or selling, any investment. The Bank is permitted an interest rate differential as compensation for services.
You subsequently advised us that the Bank does not take a commission in connection with the clients' investments in CDs. Nor does the Bank receive any "incentive" from an issuing institution to invest funds either by way of fee, commission, or better rate for larger amounts. The sole compensation for the transaction is paid by the customer on a fee-only basis.
As noted above, the Investment Agreement authorizes the Bank to invest and maintain the assets in such securities as it deems prudent based upon the investment objectives of the customer and in accordance with fiduciary law. In contrast, under the Custodial Agreement, the Bank does not render advice as to the value of, or make recommendations as to the advisability of purchasing or selling, any investment. It is my understanding that the CDs in question are invested pursuant to the provisions of the Custodial Agreement rather than the Investment Agreement.
Relevant Statutory Provisions
The term "deposit broker" is defined, in part, to include: "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). Several exceptions to the definition of "deposit broker" are set out in the statute and implementing regulations, including a specific exception for trust departments. 12 U.S.C. 1831f(g)(2)(C); 12 C.F.R. 337.6(a)(5)(ii)(C).
Pursuant to FDIC regulations, the term "deposit broker" does not include: "A trust department of an insured depository institution, if the trust or other fiduciary relationship in question has not been established for the primary purpose of placing funds with insured depository institutions." 12 C.F.R. 337.6(a)(5)(ii)(C). Consequently, the trust department of an insured depository institution is excepted from the definition of "deposit broker" when it is acting as an executor, administrator, guardian, conservator, as well as trustee under a written trust. Similarly, the trust department of an insured depository institution is excepted from the definition of "deposit broker" when it is acting as an agent pursuant to a written agreement, provided that the agency relationship has not been established for the "primary purpose" of placing funds with insured depository institutions.
Discussion and Analysis
The brokered deposit restrictions were not intended to curtail the normal activities of trust departments, but since a blanket exemption for all trust department activities might have lead to circumvention of the statute through various trust-type mechanisms, the statute imposed a "primary purpose" test. The primary purpose test serves to distinguish the normal activities of trust departments from arrangements that have the purpose and effect of circumventing the statute. The "primary purpose" of an agreement with a trust department can only be determined on a case-by-case basis, in light of the particular facts and circumstances of each case.
Based upon our review of the Agreements, it is our view that the relationships established thereunder were created for the primary purpose of placing funds with insured depository institutions. While it is true the Agreements allow the customer to invest in instruments other than insured deposits, in practice, it appears that almost all of the funds in the program are being placed in CDs. This suggests to me that, absent the availability of deposit insurance, the program would not have been created. I recognize that banks often act as custodian or managing agent for their securities customers. But in this instance, it appears that the Agreements are being used solely to place insured CDs. Further, I cannot detect a substantial purpose for the fiduciary relationship other than the placement of funds in insured depository institutions. The Bank does not make any recommendations with respect to purchasing or selling any investment; the Bank does not exercise any investment discretion. Finally, although the institution receiving the deposits does not pay a fee directly to the Bank, the Bank does receive an interest rate differential. This kind of payment schedule suggests to me that the program is primarily focused on placing deposits in insured institutions.
In summary, we consider the "primary purpose" of the Agreements to be the placement of funds with insured depository institutions. Consequently, the Bank is considered a deposit broker as to funds placed with other insured depository institutions pursuant to the Agreements. As such, the Bank would have to register with the FDIC as a deposit broker. The registration requirements are outlined in the enclosed financial institutions letter.
Please call me at (202) 898-3812 or write to me at the above address if you have any additional questions. I apologize for the delay in responding to your inquiry.