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4000 - Advisory Opinions

Applicability of FDIC regulations regarding brokered deposits to credit union servicors that purchase certificates of deposit from FDIC insured banks.

May 20, 2002


Christopher L. Hencke, Counsel

In a letter dated March 21, 2002, you requested advice about a program conducted by the Credit Union Servicor ("Servicor") in conjunction with Data Corporation ("Corporation"). The purpose of the program is to enable "State" credit unions to purchase certificates of deposit ("CDs") from FDIC-insured depository institutions. These purchases will be made by the credit unions through Servicor. Information about CDs will be obtained by Servicor from Corporation. You have described the operation of the program as follows:

Servicor will . . . provide this information [i.e., information from Corporation about CDs], by way of online computer accessible display, to its "State" participating credit unions (on a net yield basis). Utilizing security codes, a participating credit union member can, online, request that Servicor, as an agent of the credit union, attempt to acquire a CD from a bank designated by the participating member credit union. Servicor will, in turn, attempt to acquire that CD (in the amount designated by the participating credit union) for the credit union as its agent. Servicor provides no investment advice to its participating credit union. The Bank will be requested to treat (and record) the CD as the participating credit union's CD. Servicor will safekeep the CD for the participating credit union, handle the accounting for revenue, collect interest payments (as well as redemption proceeds as requested by the participating credit union).

In connection with this program, you have presented five specific questions. Each of your questions is addressed in turn below.

1. ``Will Servicor be classified as a `deposit broker' as defined in 12 C.F.R. § 337.6?''

Yes. According to your letter, Servicor "as an agent" will purchase CDs for participating credit unions. Therefore, Servicor will be a "deposit broker." See 12 C.F.R. § 337.6(a)(5) (defining "deposit broker" as [a]ny 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").

As noted in your letter, the FDIC's regulations no longer require the filing of notices by deposit brokers or the keeping of records by deposit brokers. Although the FDIC regulates the acceptance of brokered deposits by insured depository institutions, the FDIC does not regulate the activities of deposit brokers.

2. ``Is Servicor, on behalf of its participating member credit unions, restricted as it relates to placing CDs with `adequately capitalized' (as contrasted to `well capitalized') banks and, if so, would it be possible to obtain a blanket (or streamlined) waiver for credit unions utilizing the program that wish to purchase (through Servicor) such CDs?''

The FDIC's regulations involving the acceptance of brokered deposits do not apply to deposit brokers. Rather, they apply to insured depository institutions. Under the FDIC's regulations, an "adequately capitalized" insured depository institution may not accept "brokered deposits" unless the institution has obtained a waiver from the FDIC. See 12 C.F.R. § 337.6. Applications for waivers are submitted by adequately capitalized insured depository institutions; they are not submitted by depositors or deposit brokers. The FDIC does not issue any type of waiver to depositors or deposit brokers.

3. ``Is Servicor (and its participating member credit unions) complying with FDIC rules and regulations in listing (but not assisting in the CD acquisitions from) so-called `undercapitalized' banks?''

As mentioned above, the FDIC's regulations do not apply to deposit brokers but to insured depository institutions. Nonetheless, I believe that a deposit broker should not attempt to place funds at an "undercapitalized" insured depository institution because the institution will be unable to accept those funds. See 12 C.F.R. § 337.6.

Whether a "listing service" is a "deposit broker" depends upon a number of factors identified by the FDIC in published advisory opinions. For your convenience, I have enclosed Advisory Opinion No. 92--54 (August 3, 1992) and Advisory Opinion No. 93--44 (July 19, 1993).

4. ``Is Advisory Opinion FDIC–89–55 still in effect to the effect that an inadvertent purchase of a CD by Servicor. . . from a bank that is not then `adequately capitalized' will not affect the FDIC insurance coverage available to the participating member credit union?''

Yes, Advisory Opinion No. 89--55 remains valid. As explained in that advisory opinion, a violation of the FDIC's regulations by an "adequately capitalized" or "undercapitalized" insured depository institution will not affect the coverage of the brokered deposit. The insurance coverage of deposits is not affected by the condition of the insured depository institution except in the case of the deposits of employee benefit plans. See 12 C.F.R. § 330.14.

5. ``Assuming that the CDs are listed by the particular bank (as will be directed by Servicor) as owned by the particular participating member credit union utilizing Servicor as its agent/custodian (for purposes of purchase, interest collection, safekeeping and redemption), will the participating member credit union receive the benefit of `pass-through' FDIC insurance protection as contemplated in 12 C.F.R. §§ 330.7(a) and 330.5(b)(1)?''

Under the FDIC's regulations, "[f]unds owned by a principal or principals and deposited into one or more deposit accounts in the name of an agent, custodian or nominee, shall be insured to the same extent as if deposited in the name of the principal(s)." 12 C.F.R. § 330.7(a). In other words, the insurance coverage "passes through" the agent to the principal(s) or actual owner(s). Such "pass-through" coverage is not available, however, unless certain requirements are satisfied. First, the account records of the insured depository institution must disclose the existence of the fiduciary or agency relationship. See 12 C.F.R. § 330.5(b)(l). Second, the ownership interest of each owner must be ascertainable from the account records of the insured depository institution or records maintained in good faith by the agent. See 12 C.F.R. § 330.5(b)(2). Third, the agency relationship must be real. This means that the party denominated as an agent actually must be an agent and the parties denominated as owners actually must be owners. In other words, the deposit actually must belong to the alleged owners (and not to the alleged agent). See 12 C.F.R. § 330.3(h); 12 C.F.R. § 330.5(a)(1).

Some would-be deposit brokers enter into debtor/creditor relationships with their customers--as opposed to agency relationships--by changing the terms of the CD issued by the insured depository institution. For example, in purporting to sell interests in a particular CD, a broker might offer an interest rate and a maturity date that do not match the interest rate and maturity date of the CD. By changing the terms, the broker assumes independent debt obligations. By accepting these changed terms, the customer takes an ownership interest in a claim against the broker instead of an ownership interest in the CD. Consequently, the CD will not be insurable on a "pass-through" basis to the customers.

In this case, you mention that interest rates will be offered on a "net yield basis." Also, you mention a "spread in the interest rate." I am not sure of your meaning. As explained above, "pass-through" insurance coverage is not available unless the interest rate and maturity date offered to the customer match the interest rate and maturity date of the CD. Again, the customer must be sold an actual ownership interest in the CD issued by the insured depository institution (as opposed to an ownership interest in a debt obligation or debt instrument created by the broker). Also, please note that deposit brokers must advertise interest rates in accordance with the Truth in Savings Act and Regulation DD. See 12 C.F.R. § 230.1(c).

I hope that this information is useful.

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