4000 - Advisory Opinions
Brokered Deposits: Are Funds Deposited in a Special Reserve Bank Account for the Exclusive Benefit of Customers Brokered Deposits Under Sections 29 and 29A of the FDI Act
August 17, 1994
Valerie J. Best, Counsel
This letter confirms our telephone conversation of August 12, 1994 concerning brokered deposits. In my opinion, funds deposited in the account entitled "Special Reserve Bank Account for the Exclusive Benefit of Customers" pursuant to Rule 15c3--3(e) of the Securities and Exchange Commission ("SEC") (17 C.F.R. 240.15c3--3(e)) are excluded from the definition of "brokered deposits" under sections 29 and 29A of the Federal Deposit Insurance ("FDI") Act (12 U.S.C. 1831f, 1831f--1) and the implementing regulations at 12 C.F.R. 337.6.
Special Reserve Bank Accounts
Your company is registered as a Securities Broker Dealer with the SEC and the National Association of Securities Dealers, Inc. ("NASD"). Your company places a small amount of brokered deposits, and previously notified the FDIC of its status as a deposit broker as required by 12 U.S.C. 1831--f. Pursuant to Rule 15c3--3(e) of the SEC, your firm also places funds in a "Special Reserve Bank Account for the Exclusive Benefit of Customers" (hereinafter referred to as the "Reserve Bank Account"). You advised that an insured depository institution refused to accept the funds because it believed the funds were brokered deposits. You asked if such funds were indeed brokered deposits.
SEC Rule 15c3--3 provides regulatory safeguards over customers' funds and securities held by brokers and dealers. It requires every broker or dealer to maintain with an insured depository institution(s) an account separate from any other bank account of the broker or dealer at all times when deposits are required. The broker or dealer must maintain in such Reserve Bank Account cash and/or qualified securities in amounts computed in accordance with a formula specified in the Rule. Essentially, when total customer credits exceed total customer debits, the excess of credits over debits is required to be on deposit in the Reserve Bank Account. Computations are made weekly (with some exceptions). You stated that these funds are not assigned to specific customers but are "pooled funds" which must be set aside pursuant to SEC Rule 15c3--3(e).
Under the SEC Rule, the account must be specifically designated as a "Special Reserve Bank Account for the Exclusive Benefit of Customers." A broker or dealer must obtain a written notification from each bank where it maintains a Reserve Bank Account that the bank was informed that all cash and/or qualified securities deposited therein are being held by the bank for the exclusive benefit of customers of the broker or dealer in accordance with the regulations of the SEC and are being kept separate from any other accounts maintained by the broker or dealer with the bank. A broker or dealer must also have a written contract with the bank providing that the cash and/or qualified securities will not be used as security for a loan to the broker or dealer by the bank, and shall not be subject to any right, charge, security interest, lien, or claim of any kind in favor of the bank or any person claiming through the bank. If a broker or dealer fails to make a deposit as required by Rule 15c3--3, the broker or dealer must immediately notify the SEC and the regulatory authority for the broker or dealer. Brokers and dealers may be exempted from the requirements of Rule 15c3--3(e) under certain circumstances.
Definition of ``Deposit Broker''
The term "deposit broker" is defined 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). The term "brokered deposit" means 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)(2). Assuming for purposes of this discussion that your company is engaged in the business of placing deposits of third parties with insured depository institutions, it is my view that your company qualifies as "an agent or nominee whose primary purpose is not the placement of funds with depository institutions" when it deposits funds in the Reserve Bank Account pursuant to Rule 15c3--3(e). Consequently, your company would be excluded from the statutory definition of "deposit broker"--with regard to the funds deposited in the Reserve Bank Account--pursuant to 12 U.S.C. 1831f(g)(2)(I).1
The "primary purpose" test is applied on a case-by-case basis. In this instance, your company's "primary purpose" when depositing the funds is to satisfy the mandate of Rule 15c3--3(e), not to provide a deposit-placing service to its customers. The funds are placed in the depository institution for a substantial purpose other than to gain deposit insurance coverage. It is my understanding that the depository institution does not pay any fee for the funds. The amount to be deposited is prescribed by Rule 15c3--3(e), and is limited in amount. Based on the foregoing, it is my view that your company would be excluded from the definition of "deposit broker" pursuant to the exclusion at 12 U.S.C. 1831f(g)(2)(I) with regard to the funds placed in the Reserve Bank Account.
You noted that your company does not offer a "cash management" program whereby your company sweeps funds pending investment or other funds of your customers into bank or thrift accounts titled in the names of the individual customers. Consequently, this letter does not address whether funds deposited in such "cash management" programs are "brokered deposits." This letter should not be interpreted to mean that such programs are excluded from the definition of brokered deposit. Funds deposited in any Reserve Bank Account pursuant to SEC Rule 15c3--3(e) can be readily distinguished from any funds deposited in "cash management" accounts due to the documentation requirements imposed by Rule 15c3--3(e) (e.g., written notification from bank, contract between bank and broker/dealer, title of account, etc.).
I trust this adequately responds to your inquiry.
1Several 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.). 12 U.S.C. 1831f(g)(2). Go back to Text