FDIC Law, Regulations, Related Acts
4000 - Advisory Opinions
April 16, 2014
Christopher L. Hencke, Counsel
[Bank] has restructured a deposit program, and asserts that this change will categorize all of the existing deposit accounts within that program as "nonbrokered deposits." [Bank] advised the Office of the Comptroller of the Currency of its strategy to restructure the program.
The deposits at issue are received by [Bank] from the clients (or customers) of approximately 200 broker-dealers and financial advisory firms. In exchange for referring these clients to [Bank], the broker-dealers originally received compensation from [Bank] based upon the deposit accounts' average balances. [Bank] restructured the compensation structure so that the broker-dealers and financial advisory firms will now be paid a one-time referral fee, but no continuing fees. On the basis of this change, [Bank] argues that the deposits should convert from "brokered" to "nonbrokered."
For the reasons explained below, we cannot confirm [Bank]'s conclusion. On the contrary, we have concluded that the deposits remain "brokered deposits."
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The Federal Deposit Insurance Act ("FDI Act") restricts the acceptance of "brokered deposits" by insured depository institutions that are not well capitalized. See 12 U.S.C. § 1831f; 12 C.F.R. § 337.6. If the institution is adequately capitalized, the deposits may be accepted only if the institution has obtained a waiver from the FDIC. If the institution is undercapitalized, the deposits may not be accepted under any circumstances. See 12 U.S.C. § 1831f; 12 C.F.R. § 337.6.
In the FDIC's regulations, a "brokered deposit" is defined as a deposit accepted through a "deposit broker." See 12 C.F.R. § 337.6(a)(2). In turn, the term "deposit broker" is defined as "[a]ny person engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties with insured depository institutions. . . ." 12 C.F.R. § 337.6(a)(5)(i)(A). The FDIC has interpreted this definition broadly to include companies or other entities that refer clients or other persons to an insured depository institution for banking services. See, e.g., FDIC Advisory Opinion No. 93--31 (June 17, 1993); FDIC Advisory Opinion No. 92--79 (November 10, 1992). Therefore, when the deposit accounts in this case are opened at [Bank] after the customer has been referred to [Bank] by the broker-dealers and financial advisory firms, the deposits must be classified as "brokered deposits."
As for reclassifying "brokered" deposits as "nonbrokered," the FDIC has taken the position that a "brokered" CD account can be reclassified if and when the account is renewed or rolled over by the customer without any involvement by the deposit broker. See FDIC Advisory Opinion No. 92--69 (October 23, 1992). This position is based upon the fact that the FDI Act, for purposes of the statutory restrictions upon the acceptance of brokered deposits by insured depository institutions that are not well capitalized, treats a renewal or rollover of an account as an "acceptance" of the deposits. See 12 U.S.C. § 1831f(b). If no deposit broker is involved with a deposit at the time of acceptance, nothing in the FDI Act prohibits the acceptance of the deposit by the insured depository institution.
In this case, [Bank] has argued that the deposit brokers (the broker-dealers and financial advisory firms) will cease to be involved with the accounts at issue following [Bank]'s last payment of a fee to the broker with respect to the particular account. We disagree. Even after the broker ceases to collect fees from [Bank], the broker will continue to receive access to the customer's account information and will continue to provide guidance to the customer as to the investment of the funds. Such an arrangement constitutes continued involvement by the deposit broker with the customer's deposit accounts. Given such continued involvement, we have concluded that the deposits will remain "brokered deposits."
[Bank] has argued that the brokers will not remain "involved" in the customers' accounts because the advisory service provided by the broker to the customer with respect to the customer's funds is an inherent part of the broker/customer relationship. Though a broker's continuing interest in a customer's funds is not surprising, we believe that a broker's continuing access to account information and continuing guidance with respect to the customer's accounts nonetheless represent continued involvement. Should you have any questions on this determination, please contact me at (202) 898--8839.