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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
{{10-31-94 p.4893}}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
{{10-31-94 p.4894}}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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