4000 - Advisory Opinions
Affinity Groups Are Not Deposit Brokers for Purposes of Sections 29 and 29A of the FDI Act and 12 C.F.R. § 337.6(a)
June 15, 1993
Alfred J. T. Byrne, General Counsel
This responds to your May 14, 1993 letter on behalf of your client, *** (Bank), which markets its deposit products in part with the endorsement of certain affinity groups described in your letter (Affinity Groups).
You have inquired whether the activities described in your letter would cause the Federal Deposit Insurance Corporation (FDIC) to conclude that the Affinity Groups are "deposit brokers" within the meaning of sections 29 and 29A of the Federal Deposit Insurance Act (FDI Act) and section 337.6(a) of the FDIC's regulations.
Section 29(g) of the FDI Act defines "deposit broker" to include "any person engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties with insured depository institutions." You specifically request that we confirm the Affinity Groups are not "engaged in the business" of placing deposits and, accordingly, are not deposit brokers as defined in section 29.
As described in your letter, the Bank markets a significant portion of its deposits to Affinity Group members. After identifying a suitable Affinity Group, the Bank seeks its endorsement of the Bank and its credit and other products and, upon entering into an endorsement agreement with the Affinity Group, markets the Bank's products to the Affinity Group's members with such endorsement. The Affinity Group signs a solicitation letter prepared by the Bank and delivers a list of its members to whom the Bank sends solicitations. In 1992, the Bank actively marketed its deposit products to the members of approximately 130 such Affinity Groups, all but two of which are nonprofit organizations, and none of which is a financial institution.
We understand from your letter that, with one exception, the Bank, not the Affinity Groups, conducts the marketing aimed at the Affinity Group members and that in every case, solicitation materials instruct the members to contact the Bank, not the Affinity Group. However, the Bank's practice has been to send out solicitations bearing the Affinity Group's return address.
You also describe the nominal "royalty" the Bank pays most of its Affinity Groups for use of their names and trademarks and for endorsing the Bank's products.
In addition, your letter represents that at March 31, 1993, the Bank was "well capitalized" as defined in the FDIC's brokered deposits regulation.
The statutory definition of "deposit broker" is broad. The FDIC has interpreted the definition to encompass numerous activities in an effort to discourage the flow of deposits to undercapitalized institutions.
In determining whether an entity is a "deposit broker" within the meaning of the statute, we analyze whether it is "engaged in the business" of placing deposits or "facilitating" the placement of deposits with insured depository institutions. These broad statutory parameters require the FDIC to consider on a case-by-case basis whether an activity is deposit brokering within the meaning and purpose of the statute.
In that respect, we regard the following factors involved in the Affinity Groups' program with the Bank, as represented to us in your letter, to be relevant in determining whether the Affinity Groups are "deposit brokers" within the meaning of section 29: (a) all of the Affinity Groups are non-financial institutions, and the vast majority are non-profit organizations; (b) none of the Affinity Groups directly markets the deposit products for the Bank; (c) Affinity Group members who decide to place deposits with the Bank do so directly with the Bank (the Affinity Groups do not receive funds from their members for deposit with the Bank or otherwise process any member deposits); (d) the Affinity Groups have exclusive relationships with the Bank and do not endorse deposit products of other institutions; (e) most, but not all, of the Affinity Groups receive royalties for endorsing the Bank's deposit products, the amount of which represent a small fraction (in the order of ***) of the market rates paid to others who are considered deposit brokers within the meaning of section 29 of the FDI Act; (f) historically, as reported by the Bank, the retention rate for endorsed money market accounts obtained from Affinity Group members ranges from 80% to 85% and for certificates of deposits from 60% to 75% and such accounts and deposits are regarded by the Bank as core deposits of the Bank and are not used to replace core deposit run-off; and (g) the Affinity Groups do not know which members have made deposits with the Bank, nor do they keep any records of the amounts, rates or maturities of the deposits.
When considered together, we believe these facts tend to support the conclusion that the Affinity Groups are neither "engaged in the business of placing deposits" nor "facilitating the placement of deposits" with the Bank, as contemplated by section 29. By contract, each Affinity Group permits the Bank to use its name to market the Bank's deposit products to its members with its endorsement. Such activity, we believe, and the nature of the particular arrangement can reasonably be characterized as passive and indirect and, therefore, outside the scope of the brokered deposits statute and FDIC's regulations.
Based on the representations contained in your letter, we conclude that the Affinity Groups are not "deposit brokers" within the meaning of sections 29 and 29A of the FDI Act and section 337.6(a) of the regulations.
The foregoing opinion is limited to the facts and circumstances of the program as described in your letter. Whether an activity constitutes deposit brokering within the meaning of the FDI Act and the FDIC's regulations is, of course, fact-specific. Accordingly, as we have noted above, the FDIC makes such determinations on a case-by-case basis, and this letter expresses no view concerning determinations we may reach if the relevant facts and circumstances were at variance with those as described in your letter.
Also, please note that to the extent the views expressed in this letter are inconsistent with those contained in FDIC Legal Advisory Opinion 92--79, dated November 10, 1992, this letter shall control.
We hope the foregoing adequately addresses your inquiry. Please do not hesitate to contact Alan J. Kaplan or Joseph A. DiNuzzo of the Legal Division or me if you have any further inquiries concerning the matters addressed in this letter.