FDIC Law, Regulations, Related Acts
4000 - Advisory Opinions
Question regarding whether certain Deposits held for Clearing Purposes at an Affiliated Bank are Brokered Deposits
May 19, 2016
Christopher L. Hencke
Your letter, dated August 28, 2015, addressed to Messrs. Yi and Watkins, has been referred to me for a response. In your letter, you seek confirmation that certain deposits at [ABC Bank] [(the "Bank")] should not be treated as brokered deposits.1
[The Bank] provides a [clearing service] to customers who maintain accounts with its affiliated financial institutions located outside the United States. Through this clearing service, a customer is able to make payments to parties in the United States in U.S. dollars. The clearing service provides customers access to the U.S. financial market utilities,2 which provide the infrastructure for clearing and settling payments between financial institutions.
The affiliated financial institutions market and sell this clearing service as a cash management product. These services are marketed to foreign multinational corporations who need to settle transactions in U.S. dollars through U.S. financial market utilities. Employees of the affiliated financial institutions act in a sales and customer service capacity and their activities include contacting institutional clients to solicit business relationships, answering client questions, seeking out new customers and developing existing relationships with the current customer base. Accordingly, clearing service customers use [the Bank] as a result of contact with client service personnel of various [Bank] entities located outside the U.S.
When a client of an affiliated financial institution becomes interested in the clearing business, he or she receives [an] ("agreement"). The agreement establishes a bank account at [the Bank] that is necessary to facilitate U.S. dollar payments on behalf of the customer. Customers are required to maintain the bank account, also called the "clearing account," with sufficient funds to ensure clearance and settlement of U.S. dollar transactions. A customer continually funds his or her clearing account at [the Bank] by a funds transfer originating with another bank. Once deposited, the funds are then cleared through [the Bank's] clearing program, and credited to a beneficiary's bank account in the U.S.
Section 29 of the Federal Deposit Insurance Act defines "deposit broker" as "any person engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties with insured depository institutions. . . ."3 The term "facilitating the placement of deposits" is interpreted broadly to include actions taken by third parties to connect insured depository institutions with potential depositors. As a result, a third party could be a deposit broker even when the third party does not open bank accounts on behalf of depositors or directly place funds into bank accounts.4 An important factor to consider is the degree of involvement by the third party in either placing the deposits or linking depositors with insured depository institutions. The definition of "deposit broker" is subject to statutory exceptions, which include the primary purpose exception (as discussed in greater detail below).
Treatment of Clearing Programs Under the Current Brokered Deposits Rules
Because employees of an affiliated financial institution are connecting their clients to new bank accounts, this arrangement, based upon the facts outlined above, appears brokered. More specifically, affiliate employees use marketing efforts to direct certain customers of the affiliates--interested in clearing funds to the U.S.--to open a bank account at [the Bank]. By actively soliciting and referring clients to open deposit accounts at another bank, such an arrangement would likely be considered brokered because the affiliate employees are "engaged in the business of placing deposits, or facilitating the placement of deposits" on behalf of their clients into a bank account.5
However, the definition of "deposit broker" is subject to certain statutory exceptions.6 One such exception is the "primary purpose exception," which applies to "an agent or nominee whose primary purpose is not the placement of funds with depository institutions."7 This exception is applicable when the intent of the third party, in placing deposits or facilitating the placement of deposits, is to promote some other goal (i.e., other than the goal of placing deposits for others). The primary purpose exception is not applicable when the intent of the third party is to earn fees through the placement of the deposits.
In the present case, an argument can be made that the directing of customers' funds into (and through) deposit accounts at [the Bank] is not to provide customers with a deposit-placement service. Given that the customers maintain deposit accounts with the affiliate banks, a deposit-placement service is unnecessary. The only purpose of directing customers' funds into (and through) the deposit accounts at the affiliated U.S. bank, [the Bank], is to make payments in U.S. dollars (after converting the funds into U.S. dollars). In other words, by enabling customers to make payments in U.S. dollars, the purpose of the affiliates is to enhance the functionality or value of their own accounts, not to promote the holding of deposit accounts at [the Bank].
Based upon the circumstances described above, we have concluded that the affiliate banks and their employees--in helping customers to open clearing accounts at their U.S. affiliate, [the Bank], with the sole purpose of making payments in U.S. dollars through an affiliated bank--are covered by the "primary purpose" exception. In reaching this conclusion, we have relied upon three factors. First, as noted in your letters, in exchange for the opening of the clearing accounts (and the placement of deposits into the clearing accounts), the affiliates and their employees are not directly or indirectly compensated by [the Bank]. Second, after the placement of funds into the clearing accounts, almost all of the funds are disbursed immediately (or almost immediately). Third, the financial institutions that place customers' funds into and through deposit accounts at [the Bank] to make payments in U.S. dollars are affiliates of [the Bank]. These factors support your argument that the primary purpose of the affiliates and their employees is not to assist [the Bank] in gathering deposits or to assist the customers in placing deposits. Rather, the primary purpose is simply to assist the customers in making payments in the United States in U.S. dollars through their affiliated bank.
With regard to the second factor noted above, the conclusion is based on the representation that a strong correlation exists between (1) the average balances of the accounts; and (2) the average daily disbursements from the accounts. If no such correlation exists, we would reconsider our conclusion that the "primary purpose" exception is applicable. For example, given your representation that approximately 90 percent of the previous day's end of day clearing balances are utilized for payments within the first 6 hours of opening, if the average combined end-of-day balances of the clearing accounts over a one-month period exceeded 110 percent of the average daily disbursements, we could conclude that the primary purpose of the affiliates and their employees is not to assist customers in making immediate disbursements. We could conclude, rather, that the primary purpose is to assist customers in placing deposits at [the Bank].
In summary, we agree that the deposits held for clearing purposes in the U.S. affiliate, [the Bank], will not be brokered deposits based upon the specific facts you provided to us. A change in these facts could lead to a different conclusion. The finding that the cleared deposits discussed above will not be brokered deposits does not affect [the Bank]'s status as a deposit broker in other circumstances nor does it affect the status of other brokered deposits currently maintained by [the Bank].
The opinions expressed herein represent the views of the Legal
Division staff and should be considered advisory in nature. Staff
opinions are not binding upon the FDIC or its Board of Directors. This
opinion is based upon the facts presented. Any changes in the facts or
circumstances could result in different conclusions.
1FDIC staff also received a subsequent letter, dated September [ ], 2015, that provides responses to questions raised by FDIC staff during a September [ ], 2015 conference call. Go back to Text
2U.S. financial market utilities include the Federal Reserve's FedWire Service ("FedWire"), the Clearing House Interbank Payments System ("CHIPS"), or Book Transfer. Go back to Text
3See 12 U.S.C. § 1831f; 12 C.F.R. § 337.6. Go back to Text
4See generally, Advisory Opinion No. 92--79 (November 10, 1992) (Opining that even where the customer, after having been contacted and solicited to make a deposit by a marketing firm, calls the bank directly to establish a bank account, the marketing firm would be considered to be a deposit broker because it is "facilitating the placement of deposits"). Go back to Text
5See 12 U.S.C. § 1831(g)(1). As part of making such a determination, staff would also consider how each party involved is compensated. Go back to Text
6See 12 U.S.C. § 1831f(g)(2). Go back to Text
7See 12 C.F.R. § 337.6(a)(5)(ii)(I). Go back to Text