On December 15, 2020, the Federal Deposit Insurance Corporation (“FDIC”) issued a final rule ‎‎(the “Rule”)‎¹ ‎ to modernize its regulations that implement Section 29 of the Federal Deposit ‎Insurance Act (“FDI Act”). The FDIC said that it took a fresh, holistic look at Section 29 ‎regulation to establish a new regulatory framework intended to be adaptable to current and ‎future banking technology and other factors affecting brokered deposits the banking industry. ‎The Rule will be effective as of April 1, 2021, with an extended compliance date of January 1, ‎‎2022 to allow industry participants to conform existing brokered deposit activities that were ‎exempted under prior FDIC guidance. The FDIC’s continued focus with the new Rule is to ‎develop regulations that segregate stable from less stable deposits by tagging them as non- ‎brokered or brokered, respectively.‎

The FDIC Board approved the brokered deposit Advanced Notice of Proposed ‎Rulemaking ‎‎(ANPR) on December 18, 2018 and published the ANPR in the Federal Register on February 6, ‎‎2019‎.‎ The FDIC then filed its notice of proposed rulemaking (“Brokered Deposits NPR”) on ‎February 10, 2020, which included certain regulatory changes based on industry comments to the ‎ANPR.

The FDI Act does not define a “brokered deposit”. Instead, Section 29 deems all deposits ‎facilitated by “deposit brokers” to be subject to the FDI Act. A “deposit broker” is defined as ‎any person (i) engaged in the business of placing deposits, or facilitating the placement of ‎deposits, of third parties with an insured depository institution (“IDI”) or in the business of ‎placing deposits with IDIs for the purpose of selling interests in those deposits to third parties ‎and (ii) an agent or trustee who establishes a deposit account to facilitate a business arrangement ‎with an IDI to use the proceeds of the account to fund a prearranged loan.

Breaking down the definition of a deposit broker. A person is a deposit broker if it:‎

• Is “engaged in the business of placing deposits” received from third parties and deposits ‎those funds at more than one insured depository institution;‎
• ‎“engaged in the business of facilitating the placement of deposits” if the person places ‎deposits of third parties at more than one ‎insured depository institution, and‎
  • has legal authority to close the account or move the ‎third party’s funds to another ‎insured depository institution;‎
  • is involved in negotiating or setting rates, fees, terms, or conditions for the ‎deposit ‎account; or
  • engages in matchmaking activities.‎ Matchmaking activities include;            
    • proposing deposit allocations at, or between, ‎more than one bank based ‎upon both (a) the particular deposit objectives of a specific depositor ‎or ‎depositor’s agent, and (b) the particular deposit objectives of specific ‎banks.‎

Key Exceptions

• The IDI Exception. An IDI (or a division thereof) is not a deposit broker when it or its ‎employees place funds at the parent IDI. The Rule does not, however, extend to ‎incorporated subsidiaries or affiliates of the IDI. Subsidiaries and affiliates of an IDI can ‎be excluded from the definition of deposit broker, assuming meeting the other criteria, if ‎the subsidiary or affiliate maintains‎ exclusive deposit placement arrangement with the ‎parent/IDI‎.‎
• Section 29 allows for a “primary purpose exception” when the agent’s primary business is ‎not placing funds with IDIs. ‎The FDIC has designated two primary purpose exceptions, ‎the “25 percent test” and the “enabling transactions” exceptions as self-effecting, subject ‎to a notice filing and periodic reporting.
  • ‎Primary purpose “designated” “25 percent test” exception. ‎A person will not be ‎deemed to be a deposit broker if less than 25 percent of the total assets that the ‎agent or nominee has under administration for its customers, in a particular ‎business line, is placed at IDIs. If more than 25 percent of the total customer ‎assets under administration is placed at IDIs, the agent may still apply for a ‎primary purpose exception.‎
    • To determine the amount of customer assets under administration for a ‎particular business line, the agent must measure the total market value of ‎all the financial assets (including cash balances) that the agent or nominee ‎administers on behalf of its customers that participate in a particular ‎business line. Assets under administration includes both customer assets ‎managed by the agent and those customer assets for which the agent ‎provides other services but may not exercise deposit placement or ‎investment discretion.  
  • Primary purpose designated “enabling transactions” exception. A person will not ‎be deemed to be a deposit broker if the agent places customer funds with an IDI ‎for the primary purpose of enabling transactions. Under the Rule, if the agent ‎places 100 percent of its customer funds into transaction accounts, and no fees, ‎interest, or other remuneration is provided to the depositor, the agent will meet the ‎designated exception of enabling transactions. If the customer earns some amount ‎of interest, fees, or other remuneration, the agent may still apply for the primary ‎purpose exception via the application process, subject to the FDIC’s review of the ‎following factors:‎
    • The amount of interest, fees, or other remuneration;‎
    • The number of transactions that customers make, on average, on a month-‎to-month basis;‎
    • The marketing materials provided by the agent or nominee indicate that ‎funds placed into insured depository institutions are to enable transactions ‎for depositors; and  
    • If any customer funds are placed in deposit accounts that are not ‎transaction accounts, the percentage of customer funds placed in deposit ‎accounts that are not transaction accounts.‎

If the amount of interest, fees and other remuneration is nominal and the number ‎of transactions per customer averages 6 or more per month, the FDIC likely will ‎find that the agent meets the primary purpose exception.‎

Activities that remain Brokered Deposits

• Deposit Placements of Brokered CDs‎. If an agent places brokered CD’s, all of the ‎agent business line’s placement of deposits at IDIs will be deemed brokered deposits. ‎Deposits related to brokered CDs will ‎not be included for purposes of determining ‎whether a person’s other business lines meet the ‎primary purpose or other exceptions.
• Deposit Placements for Purposes of Encouraging Savings‎. The Rule would continue ‎to classify “sweep arrangements” as brokered deposits, subject to the exceptions for ‎college savings (529) plans and the 25 percent test. Specifically, brokerage account ‎sweep programs administered by a third party likely will remain classified as brokered ‎deposits with two possible exceptions. First, if the third party serves as an ‎administrator only, then the third party may not be a deposit broker. Second, if the ‎brokerage firm manages the sweep program directly and otherwise meets the criteria ‎for the 25 percent test primary purpose, it may be excepted from being a deposit ‎broker.‎

The full text of the Rule can be found here.

Conclusion

The new Rule creates opportunities to review deposit programs and potentially recategorize ‎deposits as non-brokered. It also presents opportunities for deposit brokers to create new ‎‎“administrative” business lines that will make deposits more attractive to IDIs. This paper is ‎intended as a guide only and is not a substitute for specific legal or tax advice. Please reach out ‎to the author for any specific questions. We expect to continue to monitor the topics addressed in ‎this paper and provide future client updates when useful. ‎

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1. ‎12 CFR Part 337‎.6