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4000 - Advisory Opinions

Is Company a Deposit Broker to the Extent it Refers its Customers to a Particular Bank?


March 16, 1994

Valerie J. Best, Counsel

This is in response to your letter concerning deposit brokers. You asked us to reconsider our earlier determination that [COMPANY] is a deposit broker as that term is defined in the Federal Deposit Insurance ("FDI") Act. It continues to be our opinion that [Co.] is a deposit broker to the extent it refers its customers to [California Bank] (the "Bank") when those customers wish to obtain deposits. Please consider the following.

Activities of [COMPANY].

[COMPANY] is an affiliate of the Bank. [COMPANY] offers money management services, broker/dealer servicing, investment banking, and commodities trading. [Co.] manages portfolios of domestic and foreign individuals and/or their related interests. You write that the primary focus of [Co.] is the management of customer funds for investment and the broker/dealer services.

From time to time, customers of [Co.] who request banking relationships with U.S. financial institutions and/or the intermediate short term placement of funds in interest bearing accounts are directed to the Bank. You write that [Co.] does not charge its customers any management or transaction fees on those deposits.

During an examination of the Bank the examiner opined, after consulting with the San Francisco Regional Office and the Washington, D.C. offices of the FDIC, that [Co.] was a deposit broker because it referred its customers to the Bank.

Arguments of the Bank

You contest these findings. You suggest that we have misconstrued the word "facilitate"; that the term does not stand alone but should be considered in context; that it could have more than one meaning depending upon the underlying facts. You ask: "How can any Board Member/customer who refers and helps arrange for a meeting, be it formally or casually, avoid the interpretation of facilitate' . . . ." In addition, you contend that we should consider the referrals from [Co.] to the Bank in light of the fiduciary duties of those individuals who control the Bank and [Co.] and who sit on the Board of Directors of the Bank. You suggest that these persons view it as their fiduciary responsibility to support the activities of the Bank, which may include the referral of customers to the Bank for banking services. You ask why a Director would refer business and/or relationships to another institution when the institution that they are involved with can accommodate the request or the relationship.

You further argue that the definition of "deposit broker" must be considered in light of the person's intent. You also argue that these activities come within the primary purpose exception to the definition of deposit broker, and you believe the fact outside Directors are involved should have some bearing on this issue.

Restrictions on Acceptance of Brokered Deposits

It should first be noted that well capitalized insured depository institutions may accept brokered funds without restriction. Consequently, if the Bank were well capitalized it could accept IPG-referred funds without restriction. As you know, adequately capitalized insured depository institutions are prohibited from accepting funds obtained by or through any deposit broker unless they first obtain a waiver from the FDIC. Undercapitalized insured depository institutions are prohibited from accepting funds obtained by or through any deposit broker.

Definition of ``Deposit Broker''

It is my view that the definition of "deposit broker" found in both the law and section 337.6 of the FDIC's regulations, encompasses [Co.'s] activity. The pertinent part of that definition is: "any person engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties with insured depository institution."1 Unless the activity in question comes within one of the statutory or regulatory exclusions, the FDIC must consider the activity deposit brokering.2

It is clear that [Co.] is a commercial enterprise that routinely refers depositors to the Bank. You imply that [Co.] is not "engaged in the business" of placing deposits because the Bank does not directly compensate [Co.]. However, it is not unusual for deposit brokers to be compensated indirectly. For example, a deposit broker could take a portion of the interest that otherwise would be paid to the depositor. Alternatively, a deposit broker could steer its customers to a parent holding company or affiliate and derive compensation through a quid pro quo arrangement with the parent or affiliate. If we exempted commercial enterprises from the statutory restrictions whenever they arranged to be compensated indirectly, the statutory restrictions could be easily circumvented.

You also suggest that [Co.] is not "placing deposits, or facilitating the placement of deposits." It appears that in some instances [Co.] wire transfers funds of its clients to the Bank. In those instances, [Co.] is clearly "placing" deposits with the Bank. Even if [Co.] were never in possession of the investor's principal or interest and did not act as trustee or agent for the investor, [Co.] would not necessarily be exempted from the FDI Act requirements applicable to deposit brokers. In common usage, the term "facilitate" means "to free from difficulty or impediment; to make easy or less difficult."3 The affiliation of [Co.] and the Bank, the apparent influence exercised by [Co.] over the Bank's deposit-taking and lending activities, the volume of deposits in the Bank placed through or attributable to [Co.] clients, all suggest that [Co.] makes it easier for an investor to place his or her funds with the Bank. The broad definition of deposit broker used in the FDI Act encompasses such "match-making" or "finder" activities. The [Co.]/Bank situation can be distinguished from situations where a disinterested, unaffiliated advisor makes casual and occasional referrals to a bank.

Interest Rate Restrictions

The brokered deposit statute limits the interest rate that adequately capitalized institutions may pay for deposits. Interest rates apply whether or not funds are obtained through a deposit broker. As noted in my letter dated March 11, 1993 to the Bank, it was my view that participants in the "back-to-back CD/loan" program reside inside the Bank's normal market area. (At that time, I was not aware of the [Co.'s] involvement with the Bank. I knew that the Bank had a waiver, however.) It was my view that the Bank should calculate the maximum rate of interest payable on the "back-to-back CDs" by reference to rates paid by other banks and thrifts in its normal market area (as opposed to the national rate).4 I noted in my March 11th letter that the brokered deposit statute and regulation do not currently provide the use of an offset mechanism; they look solely at the rate of interest being paid when the deposits are accepted, renewed or rolled over.

I note that in the exam report the FDIC gave the Bank the benefit of the more liberal national/Treasury rate when evaluating the rates paid on the CDs listed in the exam report. Even though the more liberal test was applied, the Bank was still found to be paying rates that were higher than that allowed by law.


In summary, it is my view that [Co.] is a deposit broker when it wire transfers funds belonging to its clients to the Bank on behalf of its clients. Further, it is my view that [Co.] is a deposit broker when it refers its customers to the Bank even though [Co.] is not in possession of its clients' funds.

Moreover, under the peculiar language of the statute, deposits are "deemed" to be brokered--even if they are not obtained through the intervention of a broker--if the Bank pays a rate of interest that is more than 75 points higher than the prevailing rates of interest on deposits offered by other banks in the Bank's normal market area. Hence, even if [Co.] were not a deposit broker, funds referred to the Bank by [Co.] would be "deemed" brokered deposits if the Bank paid the above-described interest rate.

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 Bank were "well capitalized" (as defined in section 337.6(a)(10) of the brokered deposit regulation) then treating the Bank as a deposit broker would not impede the placement of the brokered funds with the Bank. Conversely, if the Bank is not well capitalized then the limiting provisions of the law apply. The key then is to bring the Bank into a well capitalized position.

Corporate Funds Belonging to [COMPANY]

In your letter you indicate the examiner identified as brokered deposits corporate funds of [Co.] (and their related interests) deposited in the Bank. I agree with you that corporate funds belonging to [Co.] and deposited by [Co.] with the Bank would not be brokered deposits provided that significantly higher rates of interest were not paid on those deposits.5 Please be advised, however, that I reviewed that portion of the Report of Examination entitled "Brokered Deposit Restrictions" and I did not find any evidence that funds owned and deposited by [Co.] in the Bank had been classified as brokered deposits.

FDI Act Requirements Applicable to Deposit Brokers

Deposit brokers are prohibited from soliciting or placing any deposit with an insured depository institution unless the deposit broker has provided the FDIC with written notice that it is a deposit broker.6 Based on the foregoing [Co.] and its employees are "deposit brokers" as that term is defined in the FDI Act. As a result, they are subject to the registration requirements imposed by the FDI Act.

The registration requirements are not burdensome. Registration may be in the form of a letter, and we anticipate that the required information already is maintained by [Co.] in the ordinary course of business. The FDIC does not charge registration fees. A company may file a single notice on behalf of all of its employees and/or agents.

I realize the brokered deposit and interest rate restrictions imposed by law are complicated so please do not hesitate to call me at (202) 898-3812 or write to me at the above address if you have additional questions.

1The term "deposit broker" is defined in law 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)(1)(A) and (B). Also see 12 C.F.R. 337.6(a)(5)(i). Go back to Text

2Several exceptions to the definition of "deposit broker" are set out in the statute. Most of these exceptions concern depositors acting in certain, specifically described, fiduciary relationships (e.g., the trust department of an insured depository institution, the trustee of a pension plan, etc.). None of the exclusions (including the "primary purpose exclusion") apply to [Co.]. You may be interested to know that we have issued a number of advisory opinions interpreting the "primary purpose exclusion" and discussing the issue of "intent." Among others, see FDIC--90--21, FDIC--92-51, FDIC--92-92. Go back to Text

3Black's Law Dictionary 591 (6th ed. 1990). Go back to Text

4The basis for my opinion was that the Bank had an office in a border area, and drew customers from across the border. It appeared that the Bank's market extended into Mexico. It also appeared that the Bank was competing with other banks in its local market for these deposits. Go back to Text

5I assume that no third-party intermediary was involved in the placement of the [Co.] corporate funds with the Bank. Go back to Text

612 U.S.C. 1831f-1(a). 12 C.F.R. 337.6(h). Go back to Text

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