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4000 - Advisory Opinions


Question regarding whether certain Deposits placed through a Bank's relationship with certain "Middle Market Companies" are considered Brokered Deposits.

FDIC--17--02 June 19, 2017 Vivek V. Khare, Senior Attorney

You have requested staff's view as to whether certain deposits at [the Bank] should be classified as brokered deposits. As described in your letters, the Bank has relationships with certain "middle market companies" (or "companies") and receives deposits from these companies as part of servicing those relationships. You indicate that the Bank does not have a programmatic arrangement with these companies1 and does not provide direct or indirect fees for the placement of deposits. The question is whether the eight "middle market companies" referenced in your letters are "deposit brokers."

Under section 29 of the FDI Act, a "deposit broker" is "any person engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties with insured depository institutions. . . ."2 Based on the information provided in your letters, the companies you describe appear to be placing or facilitating the placement of deposits at the Bank and would therefore meet the definition of deposit broker unless covered by one of the statutory or regulatory exceptions.3 You have argued that the deposits should not be classified as brokered deposits because the companies involved would satisfy the statutory "primary purpose exception," which applies to "an agent or nominee whose primary purpose is not the placement of funds with depository institutions."4 The exception has been subject to a number of FDIC staff advisory opinions.5 Whether an agent or nominee has the primary purpose of placing funds with depository institutions depends upon the facts and circumstances of each case.

Subject to certain qualifications,6 and based upon the information provided in your letters, it is the view of staff that the specified deposits--placed at the Bank by the following companies in the form and manner described in your letters--would not be viewed as "brokered deposits:"

o  Property Management Firms. The Bank receives deposits from property management firms that assist in the maintenance, upkeep, collection of rent, management of facilitates, payment of expenses, and allocation of profits, at the direction of underlying property owners. According to your letter, the property management firms place deposits at the Bank only to assist clients in managing their properties, and are not directly or indirectly compensated by the Bank. Under these circumstances, it is the view of staff that the deposits placed by property management firms solely in the form and manner described in your letter would be covered by the primary purpose exception and would be consistent with prior Advisory Opinions.

o  Mortgage Servicers. The bank receives deposits by mortgage servicers who are collecting funds from borrowers to fulfill certain lender requirements. According to your letter, the mortgage servicers place deposits at the Bank only for the purpose of servicing mortgages, and are not directly or indirectly compensated by the Bank. Under these circumstances, it is the view of staff that the deposits placed by mortgage servicers solely in the form and in the manner described in your letter would be covered by the primary purpose exception and would be consistent with prior Advisory Opinions.7

o  Residential/Commercial Escrow Services. The bank receives deposits from title insurance companies that offer various services to facilitate real estate transactions, including providing escrow services. According to your letter, the title insurance companies place deposits at the Bank only as part of facilitating real estate transactions, and are not directly or indirectly compensated by the Bank. Under these circumstances, it is the view of staff that the deposits placed by title insurance companies solely in the form and manner described in your letter would be covered by the primary purpose exception and would be consistent with prior Advisory Opinions.

o  Commodity Futures Trading Commission ("CFTC") Customer Segregated Funds. Some deposits are placed at the Bank by futures commission merchants who are registered with the Commodity Futures Trading Commission ("CFTC"). According to your letter, the future commission merchants place deposits at the Bank only to comply with CFTC requirements, and are not directly or indirectly compensated by the Bank. Under these circumstances, it is view of staff that the deposits placed by futures commission merchants solely in the form and manner described in your letter would be covered by the primary purpose exception and would be consistent with prior Advisory Opinions.8

o  Qualified Intermediaries. Some deposits are placed at the Bank by financial intermediaries known as "qualified intermediaries" or "QIs."9 According to your letter, the qualified intermediaries place deposits at the Bank only to allow parties to satisfy Internal Revenue Service requirements, and are not directly or indirectly compensated by the Bank. Under these circumstances, it is the view of staff that the deposits placed by QIs solely in the form and manner described in your letter would be covered by the primary purpose exception and would be consistent with prior Advisory Opinions.

Based on the information presented, deposits placed at the Bank by the following companies would be viewed by staff as "brokered deposits."

o  Investor Services

o  Alternative Investment Funds with accounts at Funds Administrator

o  Financial Management and Administration Services

More specifically, staff is not persuaded that the deposit placing activities of these three companies, as described in your letters, would fall under the primary purpose exception because, unlike the deposit placing activities of the companies discussed above, the primary business of these companies appears mainly to be advising clients about investing and managing money. Thus, the primary purpose of all three of these entities appears to be similar to the business of many deposit brokers. Therefore, based on the information provided, it is the view of staff that these three types of companies are deposit brokers. Any deposits gathered through "deposit brokers" should be reported on the Bank's Call Report as "brokered deposits."

Conclusion

A change in the facts and circumstances could result in different conclusions. Further, the views expressed above do not affect the Bank's status as a deposit broker in other circumstances, nor do they affect the status of other brokered deposits currently maintained by the Bank. The view of staff at the FDIC is not binding upon the FDIC or its Board of Directors.

1As provided in your two letters, there is no formal or informal programmatic arrangement, contract or agreement between the Bank and the companies placing deposits. Go back to Text

212 U.S.C. § 1831f(g)(1); 12 C.F.R. § 337.6. Go back to Text

312 U.S.C. § 1831f(g)(2). Go back to Text

412 U.S.C. § 1831f(g)(2)(I). Go back to Text

5See, e.g., Advisory Opinion No. 16--01 (May 19, 2016); Advisory Opinion No. 05--02 (February 3, 2005); Advisory Opinion No. 94--13 (March 11, 1994) (examples referred to as "prior Advisory Opinions"); See also Frequently Asked Questions on Identifying, Accepting, and Reporting Brokered Deposits, June 30, 2016, pp. 9--12 (available at: www.fdic.gov/news/news/financial/2016/fil16042.html). Go back to Text

6Staff notes that these views apply solely to the companies and the deposits placed at the Bank in the form and manner as described in the letters and do not apply to any other third-parties that may be involved in the deposit placement arrangement (including any parent companies or other affiliates), or any deposits and other arrangements of the companies other than the arrangements specified in your letter. If any other party is involved in the placement of deposits, or if there is any other arrangement between a company and the Bank, a separate analysis would be necessary to determine whether that other party or the company qualifies as a deposit broker. Go back to Text

7See also Advisory Opinion 92--84 (discussing certain circumstances under which mortgage servicers may, in specific cases, and without the use of an intermediary, fall under the primary purpose exception). Go back to Text

8See also Advisory Opinion 94--39 (opining that the "primary purpose" exception applied to a broker-dealer in establishing a "special reserve bank account" at a bank in compliance with a rule promulgated by the Securities and Exchange Commission (SEC)). Go back to Text

9Under section 1031 of the Internal Revenue Code ("IRC") (23 U.S.C. § 1031), the role of a QI is to facilitate the exchange of "like kind" properties on behalf of clients known as "exchangers." Go back to Text



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