FDIC Proposes Comprehensive Overhaul of Brokered Deposit Regulation

On December 12^th, 2019, the Federal Deposit Insurance Corporation’s (“FDIC’s”) Board of Directors approved a notice of proposed rulemaking (the “Proposal”) to reframe the definition and exceptions for “brokered deposits” in a significant departure from the FDIC’s interpretations over the past 30 years.

Since Section 29 of the Federal Deposit Insurance Act was adopted in 1989, the FDIC has broadly defined virtually any third party connecting a depositor with a bank as a “deposit broker” and the resulting deposits as “brokered deposits”. The Proposal responds to the long-standing industry criticisms seeking a more narrow definition of “deposit broker” to reflect both industry and technological  innovation as well as a more practical view of the role of third parties in sourcing deposits.

In short, the Proposal would, if adopted, clarify and narrow the FDIC’s prior interpretations of “deposit broker” and permit substantially more deposits to be excluded from treatment as “brokered deposits”.  The Proposal principally does so by refocusing the key definitions on third parties who are “engaged in the business of placing deposits” by taking an active role in opening accounts or controlling the depositor’s relationship with the bank.  Similarly, the Proposal would expand interpretations of the statutory exceptions to “deposit broker” and, in particular, the “primary purpose” exception.  In effect, the Proposal would greatly narrow the activities defining “deposit brokers” and expand the exceptions to this definition relative to previously issued FDIC advisory opinions.

The Proposal follows the FDIC’s December 18, 2018 advance notice of proposed rulemaking (the “Brokered Deposit ANPR”), which garnered more than 100 comment letters from affected banking organizations and industry groups. Comments on the Proposal are due 60 days after publication in the Federal Register.

Key Takeaways

• The Proposal marks a significant shift in the FDIC’s approach to brokered deposits.Previously, FDIC interpretations had defined virtually any third party participating in connecting a depositor with an insured depository institution (“IDI”) as a “deposit broker”.These standards had evolved over the past 35 years through an extensive series of FDIC staff advisory opinions generally published on the FDIC’s web site.
• Notably, the Proposal’s focus on business relationships between third parties and customers would shift the analysis to a focus on whether the third party is engaged in a business relationship with the depositor and takes an “active role” in placing the deposits.While the preamble to the Proposal leaves significant ambiguity on these interpretations, it clearly shifts the nature of the analysis compared with past FDIC opinions.
• The FDIC’s proposed approach to those “business relationships” streamlines the analysis by identifying key factors generally applicable across the definitions and exceptions.This is a significant shift from the case-by-case “common law” approach used by the FDIC in its advisory opinions. This is particularly evident in the two principal areas of focus in the Proposal:
  • Narrowing the “deposit broker” definition. The Proposal focuses on the third party’s business relationship with the depositor and the third party’s role with the IDI, including whether the third party has authority over the account or its terms, provides information, or acts as the intermediary between the depositor and the IDI.
  • Expanding the scope of the “primary purpose” exception via application process. The Proposal would significantly expand the “primary purpose” exception (the “Primary Purpose Exception”) by narrowing the circumstances previously considered to demonstrate a purpose to place deposits.In doing so, the FDIC has sought to create bright line tests to provide more clarity.For example, the Proposal assumes that an agent depositing less than 25% of total customer assets is not a deposit broker because the agent has a “primary purpose” other than placement of deposits.To address specific cases, the FDIC proposes to create a waiver application process to reach determinations on the availability of the Primary Purpose Exception.
• However, there are a number of latent issues in the Proposal that should be clarified in the final rule.Please review our discussion in Section V below.Among the more salient issues are (1) the remaining ambiguity on distinctions between activities that are or are not deemed to be “facilitating the placement of deposits”; (2) the treatment of activities addressed in prior FDIC advisory opinions, including those addressed in advisory opinions on the Primary Purpose Exception; and (3) greater clarity on the waiver application process and transparency of decisions under the Primary Purpose Exception application process, which itself could lead to the gradual regrowth of an ad hoc interpretative process.

The Proposal emphasizes the need to modernize the current rule and interpretations to reflect technological changes and innovation.  In addition, it is also clear that the Proposal addresses many long-standing concerns about the FDIC’s prior positions that are unrelated to technological changes.  However, it is notable that the Proposal does not discuss in any detail many of the questions posed in the Brokered Deposit ANPR, nor does it address the discussion regarding the potential risks posed by brokered deposits in that ANPR or in the FDIC’s 2011 Study on Core Deposits and Brokered Deposits (a study mandated by the Dodd-Frank Act).

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