FDIC Law, Regulations, Related Acts
4000 - Advisory Opinions
Bank Acts as Deposit Broker When it Places Excess Funds for Municipality Acting as Public Guardian/Administrator and for Other Customers
December 15, 1992
Valerie J. Best, Counsel
This is in response to your letter dated December 1, 1992 regarding brokered deposits. By letter dated November 21, 1992, we advised you that the City and County of *** would not be "deposit brokers" when they directly place funds with your Bank in their capacity as public guardian or as public administrator in compliance with the California Probate Code (and without the assistance of a deposit broker).1 You now write that your Bank proposes to place with other depository institutions excess funds received from the City and County of *** acting as Public Guardian/Administrator, as well as excess funds received from other customers of the Bank. You enclosed with your letter copies of (1) the "Certificate of Deposit Placement Agreement" (the "Agreement"), and (2) the "CD Placement Procedures". The "CD Placement Procedures" reiterates portions of the Agreement. Apparently, the Agreement is not administered by or through the trust department of the Bank.
You ask if your Bank is required to notify the FDIC that it is acting as a deposit broker as a result of its activities under the Agreement. It is our view that the Bank is required to register as a deposit broker when it invests in certificates of deposit ("CDs") pursuant to the Agreement.
The Certificate of Deposit Placement Agreement
Under the Agreement, the principal appoints the Bank to act as agent for the principal for the purpose of purchasing CDs issued by federally insured depository institutions. The agent agrees to use its best effort to identify financial institutions insured by the FDIC offering higher rates of interest than would normally be offered to the principal by financial institutions maintaining offices or branches in ***, California. Upon oral or written instruction of the principal, the agent may purchase CDs as agent for the principal under the terms and conditions approved by the principal, and transfer the principal's funds on deposit with the agent (your Bank) via Federal Reserve wire system to the issuing bank designated by the principal.
The agent is not required nor does it have the duty to recommend any issuing bank based on the issuing bank's reputation, standing, or financial condition. However, upon principal's request, the agent will communicate or provide to the principal a list of suggested financial institutions, from which list the principal may delete any financial institution not acceptable to the principal. The agent will also provide, upon request, key financial information concerning the issuing bank. The agent will use its best efforts to provide any other reasonable information the principal may request, but such information is provided without responsibility or liability on the part of the agent.
The agent registers each CD in its own name as agent for the principal's account and instructs the issuing bank to send to agent all confirmations of trade, interest payments, signature cards, safekeeping receipts, and other documents and correspondence relating to the opening, maintenance and closing of a CD account. At the maturity date, agent may, upon instruction, reinvest the principal amount at the same or at another issuing bank as may be designated by the principal and upon approved terms, or the agent may redeem the funds and have the issuing bank wire transfer the funds for credit to the principal's designated account at your Bank.
You write that the Bank will not receive any fees, directly or indirectly, in connection with its CD Placement Services. You claim that the CD Placement Services are provided to facilitate the Bank's receipt of deposits only, with excess deposits not retained by the Bank placed with other financial institutions in order to maintain the customer deposit relationship with the Bank.
Relevant Statutory Provisions
The term "deposit broker" is 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).2 This definition is quite broad and unless the activity in question comes within one of the statutory or regulatory exclusions, the FDIC must and will consider the activity deposit brokering. We believe Congress' intent in defining "deposit broker" so broadly was to control the flow of brokered funds to all but the best capitalized depository institutions insured by the FDIC. If, for example, the depository institution with which your Bank places deposits is "well capitalized" (as defined in 12 C.F.R. 337.6(a)(10)) then treating your Bank as a deposit broker would not impede the placement of those funds with that depository institution. Conversely, if the depository institution is not well capitalized then the other limiting provisions of the statute and regulation would apply. We believe this interpretation is consistent with the literal and intended meaning of the statute.
The activities of the Bank under the Agreement bring it within the definition of "deposit broker." Further, it does not appear to qualify for any of the exceptions permitted by the statute and regulation. The Bank transfers funds of its customers to a bank participating in the CD Placement Program. Absent 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. Your Bank does not exercise any investment discretion but acts solely at the instruction of the participant.
Consequently, the Bank is a deposit broker as to funds placed with other insured depository institutions pursuant to the Agreement. As such, the Bank would have to register with the FDIC as a deposit broker. The registration requirements are outlined at page 3 of the enclosed financial institutions letter.
I trust this is responsive to your inquiry.
1Cal. Prob. Code §§ 2900--2944, 7600--7666; Cal. Gov't Code §§ 24000(l) (West 1991). Go back to Text
2Our 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). Go back to Text