The proposal would make key changes to the definition of “deposit broker” with significant ramifications for banks, fintechs, bank-fintech partnerships, and other third parties in the financial services industry.

The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) recently approved a Notice of Proposed Rulemaking (“Unsafe and Unsound Banking Practices: Brokered Deposits Restrictions”) (the Proposal) to amend the agency’s brokered deposit regulations (Section 337.6) that implements Section 29 of the Federal Deposit Insurance Act (FDI Act).

The FDI Act generally restricts a less-than-well-capitalized insured depository institution (IDI) from accepting funds from deposit brokers. The Proposal would substantially broaden the scope of deposits that IDIs would be required to classify as “brokered” by expanding the scope of the definition of “deposit broker” and narrowing the scope of exceptions from the definition. This could have a significant effect on “Banking-as-a-Service” (BaaS) programs, in which a fintech introduces customers to a bank as part of the fintech’s platform services.

The July 30, 2024, Proposal would substantially revise the FDIC’s 2020 final rule on the subject, to which FDIC Chair Martin Gruenberg strongly dissented. It draws support for its proposed changes from the Spring 2023 banking crisis and notes the recent heightened scrutiny of and enforcement against bank-fintech partnerships by the federal banking regulators. The Proposal argues that imposing new restrictions is necessary because brokered deposits raise a bank’s risk profile and are more highly correlated with bank failure and Deposit Insurance Fund loss rates.

Concurrently with the Proposal, the FDIC published a related request for information on deposit data that is not currently reported in the Call Report or other regulatory reports, including for uninsured deposits.

Defining Brokered Deposits and Deposit Broker

The FDI Act does not directly define “brokered deposits.” However, the FDIC has defined the term as “any deposit that is obtained, directly or indirectly, from or through the mediation or assistance of a deposit broker.” The FDIC further defines “deposit broker” to include:

1. any person engaged in the business of placing deposits of third parties with IDIs;
2. any person engaged in the business of facilitating the placement of deposits of third parties with IDIs;
3. any person engaged in the business of placing deposits with IDIs for the purpose of selling those deposits or interests in those deposits to third parties; and
4. 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.

Proposed Amendments to the Deposit Broker Definition

The Proposal would expand the “deposit broker” definition by:

• eliminating the current carve-out for exclusive deposit placement arrangements. According to the current FDIC rule, “[a] person is engaged in the business of placing deposits of third parties if that person receives third party funds and deposits those funds at more than one [IDI],” which left room for an exception for those arrangements solely with one IDI.¹ The Proposal would change the language to “one or more IDI,” and therefore the deposit broker designation would apply to any third party that meets the definition of deposit broker (listed above), including those involved in placing (or facilitating the placement of) deposits at only one IDI.
• replacing the “matchmaking activities” prong of the current deposit broker definition that excludes the provision of services to affiliated entities with a broader “deposit allocation” prong. “Deposit broker” would therefore include a party who proposes or determines deposit allocations (including through using an algorithm or similar technology), even in connection with the provision of services to affiliates.
• incorporating consideration of the fees or remuneration paid to the third party, including fees for administrative services provided in connection with a deposit placement arrangement, in determining whether a third party meets the “deposit broker” definition. This compensation prong would mean that a party is engaged in the business of placing or facilitating the placement of deposits of third parties if that party “[t]he person has a relationship or arrangement with an IDI or customer where the IDI, or the customer, pays the person a fee or provides other remuneration in exchange for or related to the placement of deposits.”

Proposed Amendments to the Primary Purpose Exception

The Proposal would amend the primary purpose exception (PPE) to the definition of deposit broker, including by:

• revising the general scope of the PPE to require consideration of the third party’s intent in placing customer funds at a particular IDI. The Proposal would provide that the PPE would apply “when an agent or nominee whose primary purpose in placing customer deposits at IDIs is for a substantial purpose other than to provide a deposit-placement service or FDIC deposit insurance with respect to particular business lines.”
• eliminating the PPE for enabling transactions when 100% of deposits by third parties are placed into a non-interest bearing transactional accounts, and no fees, interest, or other remuneration is provided to the depositor. According to the Proposal, “placing deposits into accounts with transactional features would not, by itself, prove that the substantial purpose of the deposit placement arrangement is for a purpose other than providing deposit insurance or a deposit placement service.”
• revising the “25% test” to a modified 10% of assets under management test and renaming it the “Broker-Dealer Sweep Exception.” Under the current rule, a third party may qualify for a PPE if it provides notice that it places less than 25% of customer assets under administration, for a particular business line, at more than one bank. Under the Proposal, this exception would be available only to a broker-dealer or investment adviser registered with the SEC “only if less than 10 percent of the total assets that the broker-dealer or investment adviser, as agent or nominee, has under management for its customers, in a particular business line, is placed into non-maturity accounts at one or more IDIs, without regard to whether the broker-dealer or investment adviser and depository institutions are affiliated.”
• requiring applications or notices for PPEs to be submitted by the applicable IDI, rather than the third party, and requiring additional information to be included in such submissions.

The Proposal would retain the remaining designated business exceptions that qualify for the current PPE on the ground that they “are narrowly tailored to address specific business lines or functions,” as well as “the additional designated exception for non-discretionary custodians engaged in the placement of deposits.”

If the Proposal is finalized, the FDIC would rescind all PPE applications and notices that have been approved under the 2020 final rule.

Support and Concerns

The Proposal passed in a 3-2 vote, supported by Chairman Gruenberg, Acting Comptroller of the Currency Michael Hsu, and Consumer Financial Protection Bureau Director Rohit Chopra (FDIC members Travis Hill and Jonathan McKernan opposed it).

Chairman Gruenberg supported the Proposal in its goal to strengthen the safety and soundness of the banking system, and highlighted the recent failure of a fintech that exposed an affiliated bank and its customers to risk of loss. He asserted that such arrangements “can be highly unstable” and “prone to . . . disruption such as the potential or actual insolvency of the third party.” He also warned that “the rapid growth of such deposits without corresponding growth in risk management practices can expose banks to operational, liquidity, and legal risks.”

FDIC Vice Chairman Travis Hill opposed the Proposal, stating that it “goes too far” and is “poor use of [the FDIC’s] time and resources.” He criticized the Proposal’s changes to the PPE, stating that “new standard is harder to understand, harder to meet, and farther removed from the words of the statute.”  

Ramification for Fintechs

The Proposal, if finalized, would upend the BaaS industry that has, for some years, relied on the less restrictive 2020 final rule to offer customers the ability to open deposit accounts directly with an IDI. To classify their deposits with IDIs as non-brokered, many fintechs rely on the exception for exclusive deposit placement relationships, the enabling transactions exemption, the 25% exemption, or the primary purpose application framework. The Proposal would eliminate many of the exceptions that banks, fintechs, and third parties have come to rely upon in structuring their BaaS partnerships to avoid the “brokered deposit” designation, and would therefore capture a much wider range of platforms that offer deposit services.

Next Steps

The FDIC included a set of 16 questions for public consideration on all aspects of the Proposal, including on the deposit broker definition, PPE analysis, and exceptions. Responses or comments on the Proposal must be submitted by October 22, 2024, 60 days after publication in the Federal Register.

1. In his December 15, 2020, statement dissenting from the FDIC’s 2020 final rule, Chairman Gruenberg noted that the basis for what he called the “extreme” change to the regulatory definition of “Engaged in the Business of Placing Deposits” that allowed for the exclusivity exception was that “reliance of a sophisticated unaffiliated third party on only one bank for the placement of customer deposits [would] reduce the run risk of those deposits if the bank gets into trouble.” He went on to criticize this reasoning by asserting that the rule text provided “no evidence to support the assertion of reduced run risk,” and that it was a “a complete departure from the FDIC’s historical interpretation of the statute.” For Chair Gruenberg, the exclusivity exception was a “great risk to the banking system.”