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4000 - Advisory Opinions


Bank Deemed as "Deposit Broker" When Engaging in Deposit Support Services and Customer Service Activities

FDIC--93--63

September 1, 1993

Valerie J. Best, Counsel

I am writing in response to your inquiry on behalf of [BANK]. You ask whether [BANK] would be deemed to be a "deposit broker" under section 29 of the Federal Deposit Insurance ("FDI") Act and the FDIC's implementing regulations (12 C.F.R. 337.6) if [BANK] engages in either of two types of activities described in your letter. [BANK] is a national bank and a wholly-owned subsidiary of [BANK HOLDING COMPANY ("BHC")]. [BHC] also owns other national and state banks in California, Idaho, Nevada, Oregon, and Washington (each referred to as a ["SUBSIDIARY"]).

Activity One—Deposit Support Services—

[BHC] would like to centralize in [BANK] certain deposit-related activities presently conducted by each [SUBSIDIARY] for itself. Under this proposal, [BANK] would provide the following types of deposit account support services ("Deposit Support Services") to the U.S. Banks:

(1)  Each month, the [SUBSIDIARIES] will provide [BANK] with a list of their customers who have maturing time deposit accounts. An employee of [BANK'S] telemarketing facility (["FACILITY"]) will call customers on the list and inquire if the customer wants to renew the account, to add funds to the account, to purchase another product or service offered by the [SUBSIDIARY] with the relationship or an affiliate, or some combination of the foregoing.

(2)  Customers of a [SUBSIDIARY] may contact the [FACILITY] directly based on past experience with the [FACILITY] in connection with prior transactions or in response to deposit maturity notices or other materials listing the [FACILITY'S] telephone number. When appropriate, the [FACILITY] will make the same inquiries of these customers as described in paragraph (1).

(3)  The [FACILITY] will obtain pertinent information from the customer and prepare a [INFORMATION SHEET]

(4)  If a customer desires to renew the deposit account, the [FACILITY] will inform the applicable [SUBSIDIARY] branch, which will input the renewal information in its records. The [SUBSIDIARY] will send the customer any confirmation of the transaction and periodic account statements.

(5)  If the customer desires to add funds to the deposit account, the necessary funds will be transferred from another [SUBSIDIARY] account or will be sent by the customer to the [FACILITY]. The [FACILITY] will transmit customer checks to the applicable [SUBSIDIARY] branch, together with the [Information Sheet].

(6)  If the customer is interested in another deposit product offered by the [SUBSIDIARY], the [FACILITY] will send the customer the appropriate documentation required to open the account ( e.g., signature cards for a checking account) and a return envelope. The customer will return the documentation and any necessary funds to the [FACILITY], which will forward them, together with the [Information Sheet] to the appropriate [SUBSIDIARY] branch. The [SUBSIDIARY] branch will then open the account.

(7)  In the event the customer wants to receive the proceeds of the deposit account at maturity or wants such proceeds sent to another institution, the [FACILITY] will notify the appropriate [SUBSIDIARY] branch, which will make the necessary arrangements.

Activity Two—Customer Service.

U.S. Customer Service ("Customer Service"), which is part of [BANK], operates a telephone facility [CUSTOMER TELEPHONE FACILITY] that is separate from the [FACILITY]. Customer Service is a 24-hour service through which customers of [BANK] may, among other things, obtain information ( e.g., about account balances, fees and charges, branch locations and hours, ATM locations, and various [BANK] products and rates), effect transfers between various [BANK] accounts, request check stop payments, report lost or stolen credit cards or checks, and request copies of checks and statements.

The [CUSTOMER TELEPHONE FACILITY] presently provides many of the above services to customers of affiliated [SUBSIDIARIES]. [BANK] would like to expand these activities to include effecting deposit roll-overs for its bank affiliates. Roll-overs may include an increase in the amount placed in the renewed time deposit. Such an increase will only be effected pursuant to the customer's request to transfer funds from an existing [SUBSIDIARY] account and not from a deposit of new funds by the customer. The [CUSTOMER TELEPHONE FACILITY] will ask a customer of a [SUBSIDIARY] with a maturing deposit who calls whether the customer wishes to rollover the deposit. If so, the [CUSTOMER TELEPHONE FACILITY] will enter the transaction in the affiliate's computer records. The applicable [SUBSIDIARY] will send any confirmation of the transaction and periodic account statements to the customer.

Definition of ``Deposit Broker''

The term "deposit broker" is 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) (A) and (B) (emphasis added).

Several exceptions to the definition of "deposit broker" are set out in the statute. Most of them concern depositors acting in certain, specifically described, fiduciary relationships (e.g. , the trust department of an insured depository institution, the trustee of a pension plan, etc.).1

Impact of Statute Governing Deposit Brokers

Before we begin our discussion of whether or not [BANK] is a deposit broker, it might be helpful to review the restrictions contained in the statute. You indicated during one of our telephone conversations that [BANK] and the other [SUBSIDIARIES] were probably "well capitalized." If all of the insured depository institutions in the [BHC] system are well capitalized, the brokered deposit restrictions will have little impact even if [BANK] is a deposit broker.

Undercapitalized insured depository institutions are prohibited from accepting funds obtained by or through any deposit broker. Adequately capitalized insured depository institutions are prohibited from accepting funds obtained by or through any deposit broker unless they first obtain a waiver from the FDIC. Undercapitalized and adequately capitalized institutions are also subject to certain interest-rate restrictions. Well capitalized insured depository institutions, however, may accept funds obtained by or through any

deposit broker without restriction.2 Further, well capitalized institutions are not subject to interest-rate restrictions.

A deposit broker must notify the FDIC of its status as a deposit broker before it may solicit or place any deposit with an insured depository institution.3 The notice may be in letter form and a minimal amount of information is required. Please see page 3 of the enclosed FIL--42--92 for further information.

Assuming all of the banks in the [BHC] system are well capitalized, the only impact of the statute on a receiving bank would be on the receiving bank's Consolidated Report of Condition and Income ("Call Reports"). An institution should be guided by the Call Report Instructions and the accompanying Glossary. Generally, however, the Call Report Instructions require that brokered deposits be reported on a separate line in the Call Reports. whether or not funds are deemed to be "brokered deposits" has no effect on an institution's capital ratios.

In summary, if the affiliate with which [BANK] places deposits is "well capitalized," then treating [BANK] as a deposit broker would not impede the placement of those funds with that affiliate.

Discussion

You contend that the activities of the Deposit Support Services facility will be limited to providing information about deposit products, relaying customer instructions with respect to deposit accounts to the appropriate affiliated institution, and providing related ministerial and administration functions. You also argue that the primary purpose of the Deposit Support Services group is to increase the operational efficiency of the [SUBSIDIARIES] by centralizing these operations in a single entity.

With regard to the Customer Service facility, you contend that only roll-overs of existing accounts will be effected through that facility. The Customer Service facility will not send documents to customers. It will not receive customer funds or completed customer documents.

For the most part, the activities of the Deposit Support Services facility and the Customer Service facility do not appear to fall within the definition of deposit broker. [BANK] would not be "placing deposits, or facilitating the placement of deposits" when it (i) performs bookkeeping for other [SUBSIDIARIES], (ii) receives documents for sorting and then routes those documents to the appropriate affiliate, or (iii) acts as a central clearing house for customer inquiries.

As you know, FDIC staff has previously reviewed programs wherein a lead bank placed customer deposits--at the customers' request--with other subsidiaries of the lead bank's holding company. The lead bank conceded that the definition of "deposit broker" encompassed the lead bank's activity, but argued that the activity should be excluded pursuant to one of the exclusions to the definition. FDIC staff opined that none of the exclusions applied. The lead bank was found to be a deposit broker because of it's practice of placing deposits with affiliated depository institutions.4

I initially understood numbered-paragraphs five and six above as indicating that the Deposit Support Services facility would transfer customer funds from bank-to-bank. Likewise, it appeared that the Customer Service facility would transfer customer funds from bank-to-bank. If [BANK] was transferring funds from bank-to-bank at the request of a customer, then it would appear to be a "deposit broker" as that term is defined by the statute.

Based upon our telephone conversations, however, it is my understanding that [BANK] will not establish new accounts at [SUBSIDIARIES] at the request of any individual, other than at the [SUBSIDIARY] where the individual is already a customer; [BANK] will not wire transfer funds from one bank to another bank; it will not facilitate the transfer of funds from one bank to another bank ( i.e., from [BANK] to another [SUBSIDIARY], or from one [SUBSIDIARY] to another [SUBSIDIARY]). In short, [BANK] will not act as an agent on the customer's behalf.5

Based upon my understanding of the Deposit Support Services and Customer Service facilities, it appears they are limited to bookkeeping functions, documentation sorting, and customer inquiries, and that they can be distinguished from programs wherein a lead institution funnels deposits to other (affiliated or un-affiliated) depository institutions.

Should the facts change in the future or some fact be present of which we are not currently aware, the substance of this opinion may change.

Please call me at (202) 898-3812 if I have not fully addressed your concerns.

112 U.S.C. 1831f(g)(2)(C). Go back to Text

212 U.S.C. 1831f; 12 C.F.R. 337.6 Go back to Text

312 U.S.C. 1831f--1(a); 12 C.F.R. 337.6(h)). As we discussed over the telephone, the FDIC does not require well capitalized institutions to notify the FDIC of their status as deposit brokers under certain circumstances. (Letter dated March 8, 1993; high interest rates. Letter dated July 27, 1993; Bank employees compensated by commission). In those instances however, funds were not placed with other institutions. Your case differs because funds may be placed with other institutions. Consequently, [BANK] would not be exempted from the notification requirements if it is found to be a deposit broker. Go back to Text

4Letter dated November 16, 1992 (copy enclosed). Also see FDIC Advisory Opinion 92-88 (December 10, 1992) concerning bankers' banks. Among other things, the bankers' bank placed funds for its stockholder banks, other banks, savings associations and credit unions. FDIC staff opined that the bankers' bank was a deposit broker due to its practice of placing deposits and that it did not qualify for any of the exclusions. Go back to Text

5Apparently, [BANK] will not credit/debit customer funds to the accounts of another [SUBSIDIARY]. I do not think this fact is dispositive of the issue. Such activity may simply be a function of centralized bookkeeping (and not deposit brokering). Go back to Text


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