FDIC Law, Regulations, Related Acts
4000 - Advisory Opinions
Extent to Which Trust Department of Bank Is Subject to Registration Requirements Imposed by New Brokered Deposit Prohibitions
August 3, 1992
Valerie J. Best, Counsel
By letter dated May 4, 1992, the *** submitted comments concerning the proposed rule governing brokered deposits.1 In your letter you asked us to clarify the extent to which a trust department of a bank is subject to the registration requirements imposed by the new brokered deposit prohibitions. Those registration requirements are set forth at section 29A of the FDI Act.
Section 29A prohibits a "deposit broker" from soliciting or placing any deposit with an insured depository institution unless such deposit broker has provided the FDIC with written notice that it is a deposit broker. 12 U.S.C. 1831f--1(a). The term "deposit broker" is broadly defined in section 29 of the FDI Act to mean:
(A) any 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; and
(B) 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.
12 U.S.C. 1831f(g).
(2) EXCLUSIONS.--The term "deposit broker" does not include--
. . . . .
(C) 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 . . . .
12 U.S.C. 1831f(g)(2)(C).
The proposed rule adopted by the FDIC on March 24, 1992, adopted the above-quoted exclusion from the statute without change. In the final rule, however, the FDIC clarified the definition to make it clear that the exception applies to fiduciary relationships other than trust relationships (i.e., executor, administrator, guardian, conservator, as well as trustee). The final rule provides:
(ii) The term deposit broker does not include:
. . . . .
(C) A trust department of an insured depository institution, if the trust or other fiduciary relationship in question has not been established for the primary purpose of placing funds with insured depository institutions . . . .
57 Fed. Reg. 23933, 23942 (June 5, 1992) (to be codified at 12 C.F.R. 337.6(a)(5)(ii)(C)).
In your letter you describe a situation where a settlor directs the bank to invest some or all of the trust funds in certificates of deposit. You ask whether, under such a scenario, the FDIC would consider the "primary purpose" of the trust to be the placement of funds with insured depository institutions, with the result that the trust department would fail the above-quoted exclusion and, consequently, would be deemed to be a deposit broker.
In and of itself, the fact that a settlor directs the trust department of an insured depository institution to invest some or all of the trust funds in insured deposits, does not mean that the trust has been established for the primary purpose of placing funds with insured depository institutions.
The brokered deposit restrictions were not intended to curtail the normal activities of trust departments. However, a blanket exemption for all trust department activities might have lead to circumvention of the statute through various trust-type mechanisms. The primary purpose test serves to distinguish the normal activities of trust departments from arrangements that have the purpose and effect of circumventing the statute. In common usage, the phrase "primary purpose" means: "That which is first in intention; which is fundamental. The principal or fixed intention with which an act or course of conduct is undertaken." Black's Law Dictionary 1191 (6th ed. 1990).
The "primary purpose" test is applied on a case-by-case basis. However, we have identified some key characteristics that will help you to identify arrangements that have the primary purpose of placing funds with insured institutions.
1. Fees received.If the depository institution receives a fee for its account from the depository institution with which it places the funds of the trust, the trust department is a deposit broker as to that trust.
2. "But for" test.If the trust would not have been established but for the purpose of placing funds in an insured depository institution, the trust department is a deposit broker as to that trust.
3. Substantial purpose test.If there is no substantial purpose for the trust other than the placement of funds in insured depository institutions, the trust department is a deposit broker as to that trust.
We anticipate that trust departments administering "traditional"2 types of trusts will not be "deposit brokers," as that term is defined in the FDI Act.3 Since only deposit brokers have to register with the FDIC, we anticipate that trust departments generally will not have to register with the FDIC.
As noted above, the exclusion for trust departments includes fiduciary relationships other than trust relationships. Consequently, a trust department is not a deposit broker where it is acting as an executor, administrator, guardian, or conservator. Please note, however, that arrangements wherein the trust department acts as agent for its customer and there is no underlying trust agreement will be reviewed in a separate advisory letter.
It might be helpful to your members to remember that some types of trusts are excluded from the definition of "deposit broker," regardless of the trust's "primary purpose.4 Furthermore, the term "deposit broker" does not include an insured depository institution with respect to funds placed with that depository institution. 12 U.S.C. 1831f(g)(2)(A). This means that if the trust department of an insured depository institution invests trust funds in, for example, certificates of deposit issued by such institution, the funds are not brokered funds regardless of the primary purpose of the underlying trust.
As you know, the deposit solicitation restrictions imposed by the FDI Act do not apply to well-capitalized institutions.5
The FDI Act created a specific exemption for the trust departments of insured depository institutions. 12 U.S.C. 1831f(g)(2)(C). The opinions expressed in this letter deal only with that exemption. The exemption set forth at 12 U.S.C. 1831f(g)(2)(I) is a separate exemption subject to a separate analysis. Parties wishing to avail themselves of the exclusion set out at 12 U.S.C. 1831f(g)(2)(I) should not rely on the contents of this letter when determining whether or not they are excluded from the definition of "deposit broker."
I trust this is responsive to your inquiry. Please call me at (202) 898-3812 or write to me at the above address if you have any additional questions.
1The proposed rule was designed to implement the new statutory scheme for regulating brokered deposits as prescribed in section 29 and new section 29A of the Federal Deposit Insurance Act ("FDI Act"). 12 U.S.C. 1831f, 1831f--1. The proposed rule was adopted by the FDIC on March 24, 1992, and is published at 57 Fed. Reg. 11442 (April 3, 1992). After analyzing the comment letters received in response to the proposed rule and further staff analysis, the FDIC adopted a final rule governing brokered deposits. The final rule is published at 57 Fed. Reg. 23933 (June 5, 1992) (to be codified at 12 C.F.R. 337.6). Go back to Text
2Examples of "traditional" types of trusts are family trusts created for estate planning purposes, charitable trusts, and testamentary trusts. Go back to Text
3We understand that a few insured depository institutions participate in programs that may come within the definition of "deposit broker." In these programs, a customer places funds with a bank ("Placing Bank") and instructs the Placing Bank to wire transfer the funds in increments of up to $100,000 to purchase a certificate of deposit in one or more other banks ("Depository Banks"). It isour understanding that these programs do not utilize the trust department of the Placing Bank. In any event, these types of programs will be reviewed in a separate advisory letter. Go back to Text
4The trustee of a pension or other employee benefit plan (with respect to funds of the plan) and the trustee of a testamentary account, are not "deposit brokers" regardless of the primary purpose of the trust. 12 U.S.C. 1831f(g)(2)(D), (F). Likewise, the primary purpose test is not applied to the trustee of a pension or profitsharing plan qualified under section 401(d) (plans benefiting owner-employees) or 403(a) (qualified annuity plans) of the Internal Revenue Code of 1986. Such trustees are not deposit brokers. 12 U.S.C. 1831f(g)(2)(H). Go back to Text
5FDIC regulations currently define a "well-capitalized"
institution as one that:
(1) has a ratio of total capital to risk-weighted assets of not less than 10.0 percent;
(2) has a ratio of Tier 1 capital to risk-weighted assets of not less than 6.0 percent;
(3) has a ratio of Tier 1 capital to total book assets of not less than 5.0 percent; and
(4) has not been notified by its appropriate federal banking agency that it is in a "troubled condition." See 12 C.F.R. 303.14(a)(4) for the definition of "troubled condition" as it applies to state nonmember banks.
57 Fed. Reg. 23933, 23942 (June 5, 1992) (to be codified at 12 C.F.R. 337.6(a)(10)(i). Go back to Text