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4000 - Advisory Opinions

Brokered Deposit Prohibition of Section 29 of the FDI Act Under FIRREA


December 21, 1989

Jamey Basham, Attorney

This letter responds to your letter of November 30, 1989. In that letter, you request an interpretation as to whether certain accounts held by *** which your client *** serves as trustee, fall within the brokered deposit prohibition of section 29 of the Federal Deposit Insurance Act, 12 U.S.C. § 1811 et seq., as added by section 224 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.

The accounts in question are held in the name of an indenture trustee, and they serve as security for certain issues of C.D.-backed public housing bonds. This opinion is based solely on those facts which you state in your letter to the FDIC, and we have made no attempt to verify those facts. Further, this opinion is of an advisory nature only, and will not bind the FDIC in the event of any later dispute concerning these accounts.

Since *** is not in receivership or conservatorship of the FDIC or the Resolution Trust Corporation, the general exception from section 29, contained in 12 C.F.R. § 337.6(f), does not apply in your case.

Your letter makes a request for three separate interpretations. I have responded to the first two, requesting interpretations of section 29 of the FDI Act. I have not responded to your request for an interpretation of section 21A(e) of the Federal Home Loan Bank Act, 12 U.S.C. § 1421 et seq. That section applies only to "depository institutions. . .organized by the [RTC]. . .during the period such institutions are within the control of the [RTC]." Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73, § 501, 103 Stat. 183, 383. Since *** is not within the control of the Resolution Trust Corporation, this section has no application to it, and there is no need for the FDIC to interpret it in your case.

First Argument.Your first argument is that section 29 does not apply to your case because your trustee does not meet the definition of "deposit broker." It appears, however, that this is not the case, and your trustee is indeed a "deposit broker" within the meaning of the statute.

Section 29(f)(1)(B) includes, as part of the definition of "deposit broker," "an agent or trustee who establishes a deposit account to facilitate a business arrangement with an insured depository institution to use the proceeds of the account to fund a prearranged loan." FIRREA of 1989, Pub. L. No. 101-73, § 224, 103 Stat. 183, 274. On the basis of your factual description of the transaction leading to the creation of the accounts in question, it appears that your trustee meets this definition and is therefore a "deposit broker."

Furthermore, neither of the two specific exclusion sections you cite apply to your trustee.

You directed our attention to section 29(f)(2)(C), which excludes from the definition of "deposit broker" "a trust department of an insured depository institution, if the trust in question has not been established for the primary purpose of placing funds with insured depository institutions." Id. You argue that the indenture trustee's other functions under the trust indenture indicate that placement of funds is not the primary purpose of the trust.

Some of the functions you list are purely ministerial. The trustee's obligation to distribute interest payments, to serve as bond registrar, to effectuate transfer of the bonds, and to file proofs of claim in the event of the bond issuer's default all fall in this category. The other function you list--the trustee's duty to enforce its rights and the rights of the bondholders under the terms of the indenture--is not purely ministerial, but it is certainly a duty which all trustees share, regardless of the nature of the trust involved. The mere presence of these duties does very little to exclude the notion that one of the primary purposes of the trust was placement of the funds.

You also direct our attention to section 29(f)(2)(I) of the FDI Act, which excludes from the definition of "deposit broker" "a agent or nominee whose primary purpose is not the placement of funds with a depository institution." Id. Again, you argue that the indenture trustee's other functions under the trust indenture indicate that the trustee's primary purpose is not the placement of funds. For the same reasons as applied with the section 29(f)(2)(C) exception, it cannot be said that the trustee's primary purpose was not the placement of funds with insured depository institutions.

Second Argument.Your second argument is that section 29's prohibition on acceptance of brokered deposits does not apply to your rollover mechanism. Section 29(a) of the FDI Act prohibits acceptance of brokered deposits by a troubled financial institution. Section 29(b) includes in the definition of "acceptance" "[a]ny renewal of an account in any troubled institution and any rollover of any amount on deposit in any such account. . . ." Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73, § 224, 103 Stat. 183, 273. You state that the C.D.'s automatically renew or roll over on a monthly basis. Since the C.D.'s renew or roll over on a monthly basis, the next renewal will be an "acceptance" under section 29.

You state that the monthly renewal aspect of the C.D.'s was included because of the possibility that certain events, such as default of the board issuer, could necessitate prepayment of the bonds in advance of their stated maturity date. You argue that your renewal mechanism is not an "acceptance" within the statute because it has none of the usual attributes of a C.D. roll over. You point out that the renewal occurs automatically and it does not allow for a change in interest rate. You also state that the trustee has no ability to withdraw the funds absent the occurrence of certain stated events.

Nevertheless, the certificates renew every month, and the statute speaks only of renewals, not of such things as withdrawal rights or interest resets. In light of the legislative history of FIRREA, it is apparent that its brokered deposit prohibitions should be construed restrictively. Several statements made by legislators during the debate on the brokered deposit provision clearly indicate that Congress was seriously concerned with the problem of brokered deposit use by troubled institutions, and that their use was considered to be a significant abuse of the deposit insurance system. In view of this fact, it would be inappropriate to create interpretive exceptions to the statutory prohibition. Therefore, your renewal mechanism must be viewed as an acceptance under section 29.

Since these certificates fall within the brokered deposit restrictions, we would direct your attention to the waiver application provision of section 29(c) as an alternative to discontinuance of the account. I have enclosed a copy of the interim regulation on brokered deposits, which our Board of Directors approved on December 5th and which will be effective upon publication in the Federal Register. Please see § 337.6(d) for the details of the waiver application procedure. I also direct your attention to § 337.6(h), which should provide you with sixty days of "breathing room.''

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