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4000 - Advisory Opinions


Requirements For Qualification For "Second-Tier" Broker Exception Under 12 U.S.C. 1831f--1

FDIC--94--41

August 29, 1994

Valerie J. Best, Counsel

Thank you for your letter clarifying the role your company plays in the selling and distribution of certificates of deposit ("CDs"). By letter dated July 23, 1993, I had advised you that FDIC staff takes the position that a company does not have to notify the FDIC that it is a deposit broker if it is a "second-tier" broker. Based upon the information available to me at that time, however, I was unable to determine whether your company qualified for the "second-tier" exception to the notification requirements. In your most recent correspondence you provided additional information about your company's activities.

I must inform you that your company does not appear to qualify for the "second-tier" broker exception to the notification requirements imposed by 12 U.S.C. 1831f--1. Please consider the following.

Activities of Company

You write that your company has entered into contracts (commonly referred to as selected dealer agreements) with several other broker/dealers who act as primary underwriters for insured depository institutions wishing to issue CDs to the public through public offerings. The dealer agreements give your company the authority, acting as agent for the primary underwriter, to use its best efforts to sell CDs issued by insured depository institutions to your company's customers. You state that the agreements describe in detail the responsibilities of your company and of the primary underwriters. Once a dealer agreement has been established, your company has the ability to accept and execute orders for its customers (and/or customers of other broker/dealers who execute and clear securities transactions through your company) who wish to purchase the CDs. To accomplish the execution of the orders, your company purchases the CDs from the primary underwriters on a principal basis at a discount, and re-sells them to the customers at the public offering price.

You write that the customer would then receive a confirmation of the CD purchase from your company, and would make payment to your company for the CDs. Your company would then forward the payment to the primary underwriter via the use of a registered securities depository such as Trust Company or Trust company. The primary underwriter would then forward the proceeds to the insured depository institution that issued the CD. Your company would receive a comparison from the broker/dealer who sold the CDs to your company, indicating that that broker/dealer would make delivery to your company on settlement date. Your company would, in turn, reflect the CD position on its records as being owned by that particular client on settlement date. You write that at no time in the process would your company have direct contact with the issuing insured depository institution. You therefore believe that your company would be considered a "second-tier" broker since your company ("Company Two") sends funds to the primary underwriter ("Company One"), and Company One, in turn, places the funds with an insured depository institution.

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). Deposit brokers are prohibited from soliciting or placing any deposit with an insured depository institution unless the deposit broker has provided the FDIC with written notice that it is a deposit broker.1 Clearly, your company is a "deposit broker" in that it facilitates the placement of deposits of third parties with insured depository institutions.

``Second-Tier'' Broker Exception to the Notification Requirements

As I explained in my earlier correspondence, FDIC staff has taken the position that a company does not have to notify the FDIC that it is a deposit broker if it is a "second-tier" broker. That is, if Company A and Company B come within the definition of "deposit broker," but Company B sends all of the funds it collects to Company A and Company A, in turn, places the funds with an insured depository institution, Company B is a "second-tier" broker and does not have to register with the FDIC. We reasoned that the first-tier broker (Company A) will be notifying the FDIC of its status as deposit broker with regard to these funds. Among other things, the notification from Company A to the FDIC must include information as to the history, nature and volume of Company A's deposit brokerage operation, including the sources and placement of funds. Company A is essentially acting as an agent for Company B and, consequently, notification by Company A alone is sufficient. If a depository institution cannot accept brokered deposits, it must be able to determine whether the entity directly placing funds is a deposit broker. Whether or not the second-tier entity is also a deposit broker is not important to the depository institution.

As indicated above, the "second-tier" broker exception to the notification requirements assumes that Company A is essentially acting as an agent for Company B. In the particular fact-situation giving rise to our "second-tier" exception, Company A was clearly obligated to notify the FDIC of its status as deposit broker. Further, the depository institution offering the CDs knew that it was dealing with a deposit broker since Company A was purchasing the deposits as agent for Company B.

In the scenario described in your letter, however, it appears that the primary underwriter purchases the CD as principal with a view to selling interests in the CD (i.e., a "participating CD"). While it is true that the issuing depository institution will know, or have reason to know, that the funds are deemed to be brokered deposits, we are concerned that there may occasionally be opportunities for confusion as to whether or not the funds are brokered funds. Further, you indicate that, to accomplish the execution of the orders, your company purchases the CDs from the primary underwriters on a principal basis. The role of the primary underwriter in your situation is not analogous to the role of Company A in the case we considered earlier. The primary underwriter is not acting as your agent in the same manner as Company A acted as agent for Company B in our earlier situation.

Deposit Brokers—Recordkeeping Requirements

Since your company does not qualify for the "second-tier" broker exception to the notification requirements imposed by 12 U.S.C. 1831f--1, your company is required to notify the FDIC of its status as a deposit broker. A company may file a single notice on behalf of all of its employees and/or agents. However, the FDIC reserves the right to require individual information at any time.

The notice may be in letter form and shall describe generally the history, nature and volume of its deposit brokerage operations, including the sources and placement of such funds. The notice should be submitted to:

Federal Deposit Insurance Corporation

Office of Compliance and Special Activities

Division of Supervision

Washington, D.C. 20429.

A deposit broker must maintain records showing the volume of brokered deposits placed with any insured depository institution over the preceding 12 months. Such records must also show the maturities, rates, and costs associated with such deposits. Upon request from the FDIC, a deposit broker must file quarterly written reports showing the volume, maturities, rates, and costs, of brokered deposits placed with each depository institution during the applicable quarter.

For your information, 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. Well capitalized insured depository institutions, however, may accept such funds without restriction. The vast majority of all insured depository institutions are well capitalized.

I apologize for any misunderstanding our earlier correspondence may have caused.

112 U.S.C. 1831f--1(a). 12 C.F.R. 337.6(h). Go back to Text


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