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4000 - Advisory Opinions

Administrator of State School Cash Management Program Which Places CDs Must Register as Deposit Broker


December 15, 1992

Valerie J. Best, Counsel

I am writing in response to your inquiry concerning the [State] School Cash Management Program "Certificate of Deposit Placement Program" (the "Program") administered by the [State] Association of School Boards, Inc. (the "Administrator"). You ask us to confirm your understanding that funds placed through the Program would be considered brokered deposits. Based upon the information you submitted, I concur in your analysis that the Administrator is a deposit broker with respect to the Program it offers. However, the "Transaction Facilitating Entity" does not appear to be a deposit broker with respect to the funds it places pursuant to the Program. I have written to the Administrator advising it of our preliminary analysis and soliciting their input. A copy of the letter is enclosed.

Description of Program

The Program was formed and organized under the laws of the state of ***, in accordance with the provisions of the Public Funds Investment Act as amended ([citation]). The Public Funds Investment Act sets forth guidelines relative to the investment of public funds. Public school districts, cities, counties, hospital districts, and water districts (the "participants") may invest funds in certificates of deposit ("CDs") that are issued by state and national banks or savings associations domiciled in the state, and federally insured, or secured by obligations as described by Texas statute.

The purpose of the Program is to provide political subdivisions an easy, efficient means of investing general operating funds, debt service funds, and bond proceeds in CDs from banks throughout the state. CDs are issued in the participant's name in $95,000 increments, thereby guaranteeing the principal and secured interest to be fully insured by the FDIC, and to eliminate the necessity for bank collateralization. The Administrator monitors each investment made through the Program to ensure that no participant exceeds the $100,000 aggregate total per subaccount deposit limit. One of the apparent aims of the Program is to obtain "additional investment earnings" for funds placed through the Program, in contrast to funds placed directly by the public unit.

In order to enroll, the designated investment officer completes the application form, sends it to the Program Administrator, and the Administrator establishes an account in the participant's name and assigns individual confidential access codes to the authorized investment officer. Participants call a 1-800 number to initiate placements. The participant states the total dollar amount to be placed, the desired maturity date, the subaccount (general fund or debt service fund), and the fund reference number. The Administrator confirms information and, after CD fees are calculated, informs the participant of the total amount to be withdrawn from the participant's depository institution the next business day. All funds (both debits and credits) are transferred to and from the participant's local depository institution by means of the Automated Clearing House ("ACH") process. Debit or credit entries to the local depository institution account are initiated by the Administrator, and the local depository is authorized to further debit or credit the same to such account.

All CDs are purchased in the participant's name. The Program Administrator provides: written confirmation after each transaction; monthly statements, including all transactions for the month, interest earned, and a listing of all current CDs; fiscal year-end reports of all account activity; a CD maturity listing; interest rate information is updated constantly to ensure the most up-to-date rates available through the Program; on a quarterly basis, participants receive an updated listing of all participating banks in the Program for review and approval. Fees are based on a sliding scale, adjusted for the representative CD maturity, with lower fees assessed for longer term CDs.

Transaction Facilitating Entity

For purposes of effecting the transfer of participant funds using the ACH process, the Program has entered into an agreement with a bank to act as the "Transaction Facilitating Entity" (the "Entity"). The Entity executes ACH debit and credit transactions to the specified account identified within the application form. Transactions are carried out pursuant to instructions received by the Entity from the Program Administrator and believed to be genuine. The Entity acts solely as the transaction processing bank and has no obligation or duty to verify that banks receiving participant funds are acceptable to the participant.

Definition of ``Deposit Broker''

The term "deposit broker" is broadly defined, in part, to include: "any person engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties with insured depository institutions. . . ." 12 U.S.C. 1831f(g)(1)(A). Our final regulation on brokered deposits adopts a definition of "deposit broker" identical to that set forth in the statute as quoted above. See 12 C.F.R. 337.6(a)(5)(i)(A). The activities of the Administrator bring it within the definition of "deposit broker." It does not appear to qualify for any of the exceptions permitted by the statute and regulation.

The Administrator (via ACH transfers by the Entity) transfers funds from a participant's local depository institution to a bank participating in the Program. But for the availability of deposit insurance, the Program would not have been created. There appears to be no substantial purpose for the Program other than the placement of funds in insured depository institutions. The Administrator does not exercise any investment discretion but acts solely at the instruction of the participant.

We do not, however, regard the Entity as a deposit broker when it places funds pursuant to the terms of its agreement with the Plan Administrator. As an ACH, the Entity processes and delivers electronic debit and credit payments between a participant's local depository and the bank participating in the program. The Entity acts solely for the administrative convenience of the Program Administrator. Its role in any transaction is entirely passive. Its only purpose is to effect transactions via the ACH process. We believe the Entity is excluded from the definition of "deposit broker" pursuant to 12 U.S.C. 1831f(g)(2)(I) (agent whose primary purpose is not the placement of funds with depository institution).

I hope this information is helpful to you. Please call me at (202) 898-3812 or write to me at the above address if you have any additional questions.

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