Combined Final Rule on Brokered Deposits and Interest Rate Restrictions

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FDIC Financial Institution Letters › Combined Final Rule on Brokered Deposits and Interest Rate Restrictions

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6742

Federal Register / Vol. 86, No. 13 / Friday, January 22, 2021 / Rules and Regulations

1 12 U.S.C. 1831f (also referred to herein as

‘‘Section 29’’).

2 See Public Law 101–73, August 9, 1989, 103

Stat. 183.

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Parts 303 and 337

RIN 3064–AE94; 3064–AF02

Unsafe and Unsound Banking

Practices: Brokered Deposits and

Interest Rate Restrictions

AGENCY: Federal Deposit Insurance

Corporation (FDIC).

ACTION: Final rule.

SUMMARY: The FDIC is finalizing

revisions to its regulations relating to

the brokered deposits and interest rate

restrictions that apply to less than well

capitalized insured depository

institutions. For brokered deposits, the

final rule establishes a new framework

for analyzing certain provisions of the

‘‘deposit broker’’ definition, including

‘‘facilitating’’ and ‘‘primary purpose.’’

For the interest rate restrictions, the

FDIC is amending its methodology for

calculating the national rate, the

national rate cap, and the local market

rate cap. Further, the FDIC is explaining

when nonmaturity deposits are accepted

and when nonmaturity deposits are

solicited for purposes of applying the

brokered deposits and interest rate

restrictions.

DATES: Effective Date: April 1, 2021;

with an extended compliance date of

January 1, 2022, as provided in section

I(C)(4).

FOR FURTHER INFORMATION CONTACT: Rae-

Ann Miller, Senior Deputy Director,

rther, the FDIC is explaining

when nonmaturity deposits are accepted

and when nonmaturity deposits are

solicited for purposes of applying the

brokered deposits and interest rate

restrictions.

DATES: Effective Date: April 1, 2021;

with an extended compliance date of

January 1, 2022, as provided in section

I(C)(4).

FOR FURTHER INFORMATION CONTACT: Rae-

Ann Miller, Senior Deputy Director,

(202) 898–3898, rmiller@fdic.gov,

Division of Risk Management

Supervision; or Vivek V. Khare,

Counsel, (202) 898–6847, vkhare@

fdic.gov, Legal Division.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Brokered Deposits

A. Policy Objectives

B. Background

1. Historical Statutory Framework

2. Current Regulation

3. Advance Notice of Proposed Rulemaking

4. Overview of Notice of Proposed

Rulemaking and Comments Received

C. Final Rule and Discussion of Comments

1. Deposit Broker Definition

a. Exclusive Deposit Placement

Arrangements

b. Engaged in the Business of Placing

Deposits

c. Engaged in the Business of Facilitating

the Placement of Deposits

d. Engaged in the Business of Placing

Deposits With Insured Depository

Institutions for the Purpose of Selling

Interests in Those Deposits to Third

Parties

2. Exceptions to the ‘‘Deposit Broker’’

Definition

a. Bank Operating Subsidiaries and the IDI

Exception

b. Primary Purpose Exception

3. Notice and Application Process for the

Primary Purpose Exception

a. Notice Requirement

b. Notice Contents and Reporting

Requirement

c. Overview of the Application Process

d. Application Contents

e. Reporting for Approved Applicants

f. Monitoring for IDIs

g. Requesting Additional Information,

Requiring Re-Application, Imposing

Additional Conditions, and Withdrawing

Approvals

h. Additional Third Parties

4. Effective Date and Extended Compliance

5. Prior FDIC Staff Advisory Opinions

D. Discussion of Certain Other Deposit

Placement Arrangements Raised by

Commenters

E. Other Supervisory Matters Related to

Brokered Deposits

F. Alternatives

. Requesting Additional Information,

Requiring Re-Application, Imposing

Additional Conditions, and Withdrawing

Approvals

h. Additional Third Parties

4. Effective Date and Extended Compliance

5. Prior FDIC Staff Advisory Opinions

D. Discussion of Certain Other Deposit

Placement Arrangements Raised by

Commenters

E. Other Supervisory Matters Related to

Brokered Deposits

F. Alternatives

G. Expected Effects

II. Interest Rate Restrictions

A. Policy Objectives

B. Background

C. Regulatory Approach

D. Need for Further Rulemaking

E. Advance Notice of Proposed Rulemaking

and Notice of Proposed Rulemaking

1. National Rate

2. National Rate Cap

3. Local Rate Cap

4. Off-Tenor Maturity Products

F. Discussion of Comments

1. Discussion of Public Comment on the

National Rate

2. Discussion of Public Comment on the

National Rate Cap

3. Discussion of Public Comment on Local

Rate Cap

4. Discussion of Other Comments

G. Final Rule

1. National Rate

2. National Rate Cap

3. Local Market Rate Cap in the Final Rule

4. Off-Tenor Maturity Products

H. Alternatives

I. Expected Effects

III. Treatment of Nonmaturity Deposits

A. Background

B. Proposed Rulemakings

C. Comments

D. Final Rule

1. Solicitation of Funds by Offering Rates

of Interest

2. Acceptance of Brokered Deposits

3. Acceptance of Brokered Deposits Subject

to a Waiver Into a Nonmaturity Account

4. Summary of Treatment of Nonmaturity

Deposits

IV. Administrative Law Matters

A. Paperwork Reduction Act

B. Regulatory Flexibility Act

C. Riegle Community Development and

Regulatory Improvement Act of 1994

D. Congressional Review Act

E. Use of Plain Language

I. Brokered Deposits

A. Policy Objectives

Significant technological changes

have affected many aspects of the

banking industry, including the manner

in which banks source deposits

Administrative Law Matters

A. Paperwork Reduction Act

B. Regulatory Flexibility Act

C. Riegle Community Development and

Regulatory Improvement Act of 1994

D. Congressional Review Act

E. Use of Plain Language

I. Brokered Deposits

A. Policy Objectives

Significant technological changes

have affected many aspects of the

banking industry, including the manner

in which banks source deposits. For

many banks, brokered deposits are an

important source of funds, and the

marketplace for brokered deposits has

evolved in response to technological

developments and new business

relationships. The FDIC recognizes that

its regulations governing brokered

deposits are outdated and do not reflect

current industry practices and the

marketplace. As such, the FDIC initiated

an extensive rulemaking process to seek

input from stakeholders and to develop

new regulations that take into

consideration current industry practices

and that allow for continued innovation.

Banks often collaborate with third

parties, including financial technology

companies, for a variety of business

purposes including access to deposits.

Moreover, banks are increasingly relying

on new technologies to engage and

interact with their customers, and it

appears that this trend will continue.

Through this rulemaking process, the

FDIC attempted to ensure that the

brokered deposit regulations would

continue to promote safe and sound

practices while ensuring that the

classification of a deposit as brokered

appropriately reflects changes in the

banking landscape.

B. Background

1. Historical Statutory Framework

Section 29 of the Federal Deposit

Insurance Act (FDI Act) 1 restricts the

acceptance of deposits by certain

insured depository institutions (or

‘‘IDIs’’) from a ‘‘deposit broker.’’ Section

29, entitled ‘‘Brokered Deposits,’’ was

added to the FDI Act by the Financial

Institutions Reform, Recovery, and

Enforcement Act of 1989 (FIRREA)

scape.

B. Background

1. Historical Statutory Framework

Section 29 of the Federal Deposit

Insurance Act (FDI Act) 1 restricts the

acceptance of deposits by certain

insured depository institutions (or

‘‘IDIs’’) from a ‘‘deposit broker.’’ Section

29, entitled ‘‘Brokered Deposits,’’ was

added to the FDI Act by the Financial

Institutions Reform, Recovery, and

Enforcement Act of 1989 (FIRREA). The

law originally restricted troubled

institutions (i.e., those that did not meet

the minimum capital requirements)

from (1) accepting deposits from a

deposit broker without a waiver and (2)

soliciting deposits by offering rates of

interest on deposits that were

significantly higher than the prevailing

rates of interest on deposits offered by

other insured depository institutions

having the same type of charter in such

depository institution’s normal market

area.2

Two years later, Congress enacted the

Federal Deposit Insurance Corporation

Improvement Act of 1991 (FDICIA),

which added the Prompt Corrective

Action (PCA) capital regime to the FDI

Act and also amended the threshold for

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Federal Register / Vol. 86, No. 13 / Friday, January 22, 2021 / Rules and Regulations

3 See Public Law 102–242, Dec. 19, 1991, 105 Stat

2236.

4 See 12 U.S.C. 1831f.

5 See id.

6 See id.

7 12 U.S.C. 1831f(i)(2)(E).

8 See 12 CFR 337.6. The FDIC issued two

rulemakings related to the interest rate restrictions

under this section. The FDIC is also adopting a final

rule for the interest rate restrictions as discussed in

Part II of this Notice.

9 See 12 U.S.C. 1831f.

10 12 U.S.C. 1831f(g)(4).

11 See 57 FR 23933, 23040 (1992)

2236.

4 See 12 U.S.C. 1831f.

5 See id.

6 See id.

7 12 U.S.C. 1831f(i)(2)(E).

8 See 12 CFR 337.6. The FDIC issued two

rulemakings related to the interest rate restrictions

under this section. The FDIC is also adopting a final

rule for the interest rate restrictions as discussed in

Part II of this Notice.

9 See 12 U.S.C. 1831f.

10 12 U.S.C. 1831f(g)(4).

11 See 57 FR 23933, 23040 (1992). The FDIC

indicated in the preamble for the 1992 final rule

that implemented the FDICIA revisions to Section

29 that those revisions were not intended to apply

to deposits placed by insured depository

institutions assisting government departments and

agencies in administration of minority or women-

owned deposit programs.

12 84 FR 2366 (Feb. 6, 2019).

the brokered deposit and interest rate

restrictions from a troubled institution

to a bank falling below the ‘‘well

capitalized’’ PCA level. At the same

time, the FDIC was authorized to waive

the brokered deposit restrictions for a

bank that is adequately capitalized upon

a finding that the acceptance of such

deposits does not constitute an unsafe

or unsound practice with respect to the

institution.3 Thus, under current law, a

‘‘well capitalized’’ insured depository

institution is not restricted from

accepting deposits from a deposit

broker. An ‘‘adequately capitalized’’

insured depository institution may

accept deposits from a deposit broker

only if it has received a waiver from the

FDIC.4 A waiver may be granted by the

FDIC ‘‘upon a finding that the

acceptance of such deposits does not

constitute an unsafe or unsound

practice’’ with respect to that

institution.5 An ‘‘undercapitalized’’

depository institution is prohibited from

accepting deposits from a deposit

broker.6

In 2018, Section 29 of the FDI Act was

amended as part of the Economic

Growth, Regulatory Relief, and

Consumer Protection Act, to except a

capped amount of certain ‘‘reciprocal

deposits’’ from treatment as brokered

deposits.7

ound

practice’’ with respect to that

institution.5 An ‘‘undercapitalized’’

depository institution is prohibited from

accepting deposits from a deposit

broker.6

In 2018, Section 29 of the FDI Act was

amended as part of the Economic

Growth, Regulatory Relief, and

Consumer Protection Act, to except a

capped amount of certain ‘‘reciprocal

deposits’’ from treatment as brokered

deposits.7

2. Current Regulations

Section 337.6 of the FDIC’s Rules and

Regulations implements and closely

tracks the statutory text of Section 29,

particularly with respect to the

definition of ‘‘deposit broker’’ and its

exceptions.8 Section 29 of the FDI Act

does not directly define a ‘‘brokered

deposit,’’ rather, it defines a ‘‘deposit

broker’’ for purposes of the restrictions.9

Thus, the meaning of the term

‘‘brokered deposit’’ turns upon the

definition of ‘‘deposit broker.’’

Section 29 and the FDIC’s

implementing regulation define the term

‘‘deposit broker’’ to include:

Æ 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

Æ 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.

This definition is subject to the

following nine statutory exceptions:

1. An insured depository institution,

with respect to funds placed with that

depository institution (the ‘‘IDI

exception’’);

2. an employee of an insured

depository institution, with respect to

funds placed with the employing

depository institution;

3. a trust department of an insured

depository institution, if the trust in

question has not been established for

the primary purpose of placing funds

with insured depository institutions;

o funds placed with that

depository institution (the ‘‘IDI

exception’’);

2. an employee of an insured

depository institution, with respect to

funds placed with the employing

depository institution;

3. a trust department of an insured

depository institution, if the trust in

question has not been established for

the primary purpose of placing funds

with insured depository institutions;

4. the trustee of a pension or other

employee benefit plan, with respect to

funds of the plan;

5. a person acting as a plan

administrator or an investment adviser

in connection with a pension plan or

other employee benefit plan provided

that that person is performing

managerial functions with respect to the

plan;

6. the trustee of a testamentary

account;

7. the trustee of an irrevocable trust

(other than one described in paragraph

(1)(B)), as long as the trust in question

has not been established for the primary

purpose of placing funds with insured

depository institutions;

8. a trustee or custodian of a pension

or profit sharing plan qualified under

section 401(d) or 403(a) of the Internal

Revenue Code of 1986; or

9. an agent or nominee whose primary

purpose is not the placement of funds

with depository institutions (the

‘‘primary purpose exception’’).

The statute and regulation also define

an ‘‘employee’’ to mean any employee:

(1) Who is employed exclusively by the

insured depository institution; (2)

whose compensation is primarily in the

form of a salary; (3) who does not share

such employee’s compensation with a

deposit broker; and (4) whose office

space or place of business is used

exclusively for the benefit of the insured

depository institution which employs

such individual.10

In 1992, the FDIC amended its

regulations to include the following

tenth exception: ‘‘An insured depository

institution acting as an intermediary or

agent of a U.S. government department

or agency for a government sponsored

minority or women-owned depository

institution program.’’ 11

exclusively for the benefit of the insured

depository institution which employs

such individual.10

In 1992, the FDIC amended its

regulations to include the following

tenth exception: ‘‘An insured depository

institution acting as an intermediary or

agent of a U.S. government department

or agency for a government sponsored

minority or women-owned depository

institution program.’’ 11

3. Advance Notice of Proposed

Rulemaking

On December 18, 2018, the FDIC

Board approved an Advance Notice of

Proposed Rulemaking (ANPR), inviting

comment on all aspects of the FDIC’s

brokered deposit and interest rate

regulations to obtain input from the

public on its brokered deposit and

interest rate regulations in light of

significant changes in technology,

business models, the economic

environment, and products since the

regulations were adopted.

The ANPR discussed issues with

sweep deposits, deposit listing services,

statutory exceptions (particularly the

primary purpose exception), software

products, prepaid cards, and interest

rate restrictions applicable to less than

well-capitalized institutions

(particularly the definition and

calculation of the national rate). The

ANPR also included historical and

statistical analysis, in addition to other

information, including the FDIC’s

experience with brokered deposit

questions. The ANPR was published in

the Federal Register on February 6,

2019.12 The FDIC received over 130

comments to the ANPR from

individuals, banking organizations, non-

profits, as well as industry and trade

groups, representing banks, insurance

companies, and the broader financial

services industry.

Of the total comments, 59 related to

the FDIC’s rules on the interest rate

restrictions. The majority of these

commenters expressed concerns about

the national rate calculation

ved over 130

comments to the ANPR from

individuals, banking organizations, non-

profits, as well as industry and trade

groups, representing banks, insurance

companies, and the broader financial

services industry.

Of the total comments, 59 related to

the FDIC’s rules on the interest rate

restrictions. The majority of these

commenters expressed concerns about

the national rate calculation. Concerns

included the effect of calculating an

average rate by including branches

(minimizing the significance of online-

focused banks, which have few or no

branches) and data issues with banks’

published rates. Commenters suggested

that to make rates appropriate for

different economic environments and

maximum transparency, the FDIC

should set national rates at the higher of

the current rates and the previous (1992)

rates based on US Treasury yields.

Other comments addressed the local

rate, stressing the necessity to compete

for particular products within local

market areas.

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Federal Register / Vol. 86, No. 13 / Friday, January 22, 2021 / Rules and Regulations

13 85 FR 7453 (Feb. 10, 2020).

14 84 FR 2366 (Feb. 6, 2019).

15 This Notice also uses the term ‘‘third party’’ in

reference to the subject of the ‘‘deposit broker’’

definition. Consistent with section 29, this Notice

also refers to the potential deposit broker with

respect to the primary purpose exception as the

‘‘agent or nominee.’’

16 The comment period was extended for another

60 days to provide commenters with additional

time to address the matters raised in the NPR. 85

FR 19706 (Apr. 8, 2020).

17 12 U.S.C. 1831f(g)(1)(A).

18 12 U.S.C. 1831f(g)(1)(B).

19 12 U.S.C. 1819(a)(Tenth)

n 29, this Notice

also refers to the potential deposit broker with

respect to the primary purpose exception as the

‘‘agent or nominee.’’

16 The comment period was extended for another

60 days to provide commenters with additional

time to address the matters raised in the NPR. 85

FR 19706 (Apr. 8, 2020).

17 12 U.S.C. 1831f(g)(1)(A).

18 12 U.S.C. 1831f(g)(1)(B).

19 12 U.S.C. 1819(a)(Tenth).

Comments to the ANPR referring to

brokered deposit issues other than

interest rate caps focused on the need

for clarity, specifically requesting the

FDIC to clarify its historical

interpretation of the ‘‘deposit broker’’

definition and its corresponding

statutory and regulatory exceptions.

Many commenters stated that the FDIC

had interpreted the definition of deposit

broker too broadly and had significantly

expanded the types of entities

considered to be deposit brokers beyond

what was originally contemplated when

Section 29 was enacted.

Commenters also requested clarity in

the deposit broker definition,

specifically with the primary purpose

exception. Many commenters preferred

a bright-line test and noted certain types

of deposits are designed for a purpose

other than establishing a depository

account, provide stable sources of

funding, do not have the risks

associated with traditional brokered

deposits, and, therefore, should meet

the primary purpose exception.

Because of the strong interest in both

interest rate cap issues and other

brokered deposit issues and to better

address commenters’ concerns, the FDIC

decided to issue separate proposed

rulemakings, one relating to interest rate

caps and the second, relating to

proposed changes in the regulations

other than those relating to interest rate

caps.

uld meet

the primary purpose exception.

Because of the strong interest in both

interest rate cap issues and other

brokered deposit issues and to better

address commenters’ concerns, the FDIC

decided to issue separate proposed

rulemakings, one relating to interest rate

caps and the second, relating to

proposed changes in the regulations

other than those relating to interest rate

caps.

4. Overview of Notice of Proposed

Rulemaking and Comments Received

In its notice of proposed rulemaking

(‘‘Brokered Deposits NPR,’’ or, in this

Part, ‘‘proposal’’ or ‘‘proposed rule’’),13

and in response to comments submitted

in response to the ANPR,14 the FDIC

proposed a number of significant

changes to its brokered deposit

regulation to modernize the regulation

in light of technological and other

innovations in the way banks source

deposits. The FDIC proposed

clarifications to the circumstances

under which a person 15 meets the

deposit broker definition by interpreting

when a person is considered to be

engaged in the business of ‘‘placing’’ or

‘‘facilitating the placement’’ of deposits

on behalf of its customers. These

proposed changes were intended to

provide clarity for industry participants

as to what types of deposit arrangements

would be considered ‘‘brokered’’ and

which would not. In addition, the FDIC

proposed an expansion of the IDI

exception to permit wholly owned

subsidiaries that meet certain criteria to

be eligible for the exception.

The FDIC also proposed an

interpretation for the ‘‘primary purpose’’

exception to the ‘‘deposit broker’’

definition and sought to provide a

mechanism through which IDIs or third

parties could apply to the FDIC to

receive approval for meeting the

primary purpose exception. The FDIC

proposed that brokered CDs would

continue to be considered to be

brokered

be eligible for the exception.

The FDIC also proposed an

interpretation for the ‘‘primary purpose’’

exception to the ‘‘deposit broker’’

definition and sought to provide a

mechanism through which IDIs or third

parties could apply to the FDIC to

receive approval for meeting the

primary purpose exception. The FDIC

proposed that brokered CDs would

continue to be considered to be

brokered. Finally, the FDIC proposed

that existing staff FDIC advisory

opinions would either be rescinded if

they were no longer applicable under

the final rule or codified as part of the

final rule if relevant under the new

regulation.

The Brokered Deposits NPR solicited

comment on all aspects of the proposed

rule. The comment period ended on

June 9, 2020.16 In response to the

proposal, the FDIC received more than

160 comments from individuals,

banking organizations, non-profits, as

well as industry and trade groups

representing banks, insurance

companies, and the broader financial

services industry. A number of

commenters supported the FDIC’s

efforts to modernize the rule and

provide clarifications to key definitions.

Generally, a common theme amongst

the commenters was a desire for the

FDIC to provide additional clarification

to its proposed changes to the ‘‘deposit

broker’’ definition and its corresponding

statutory and regulatory exceptions.

Some commenters suggested that a

legislative change to Section 29 was

needed, including replacing the

brokered deposit restrictions with a

restriction on asset growth for less than

well capitalized institutions.

Commenters also suggested that the

FDIC revise certain aspects of the

proposal to permit certain types of

arrangements that, under the proposal,

would continue to be considered to be

brokered to instead either fall within an

exception or otherwise to be determined

to be non-brokered

kered deposit restrictions with a

restriction on asset growth for less than

well capitalized institutions.

Commenters also suggested that the

FDIC revise certain aspects of the

proposal to permit certain types of

arrangements that, under the proposal,

would continue to be considered to be

brokered to instead either fall within an

exception or otherwise to be determined

to be non-brokered. A small number of

commenters opposed the proposed

changes, with one commenter stating

that the changes would create new

loopholes in the statutory restrictions on

brokered deposits, threatening safety

and soundness of banks and the Deposit

Insurance Fund (DIF), without evidence

that the changes are necessary and

without knowing the impact of the

changes. Another commenter criticized

the proposal for failing to focus on the

underlying risks of brokered deposits

and weakening the FDIC’s ability to

understand deposit volatility and

balance sheet risks of supervised IDIs. A

summary of comments received on

specific aspects of the proposed rule is

provided below in section.

C. Final Rule and Discussion of

Comments

1. Deposit Broker Definition

Section 29 of the FDI Act provides

that a person is a ‘‘deposit broker’’ if it

is 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.17 An agent or trustee also

meets the ‘‘deposit broker’’ definition

when establishing 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.18

The statute does not further define the

categories that make up the definition of

‘‘deposit broker,’’ and the FDIC has

authority under the FDI Act to issue

regulations to further clarify the types of

activities that cause a person to be

cons

ccount to

facilitate a business arrangement with

an insured depository institution to use

the proceeds of the account to fund a

prearranged loan.18

The statute does not further define the

categories that make up the definition of

‘‘deposit broker,’’ and the FDIC has

authority under the FDI Act to issue

regulations to further clarify the types of

activities that cause a person to be

considered to be a deposit broker.19

Historically, the FDIC has considered

several factors in evaluating whether or

not an entity is a ‘‘deposit broker,’’

including, for example, whether or not

the entity receives fees from IDIs based

upon the volume of deposits placed and

whether the entity provides marketing

or referral services on behalf of the IDIs.

In the Brokered Deposits NPR, the

FDIC proposed a new framework for

analyzing the deposit broker definition

in an effort to provide clarity around

when a third party meets the definition.

In this context, the FDIC described the

circumstances under which a third

party would be:

Æ Engaged in the business of placing

deposits;

Æ engaged in the business of

facilitating the placement of deposits;

and

Æ engaged in the business of placing

deposits with insured depository

institutions for the purpose of selling

interests in those deposits to third

parties.

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deposits;

Æ engaged in the business of

facilitating the placement of deposits;

and

Æ engaged in the business of placing

deposits with insured depository

institutions for the purpose of selling

interests in those deposits to third

parties.

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Federal Register / Vol. 86, No. 13 / Friday, January 22, 2021 / Rules and Regulations

In general, commenters raised

concerns that the proposed deposit

broker definition was overly broad and

would create barriers to innovation.

Commenters also argued that the listed

activities in the proposal, specifically in

the proposed ‘‘facilitation’’ definition,

would capture many third party service

providers and would prevent

community banks from using those

providers for any purpose without

having the deposits be classified as

brokered. Commenters also requested

that the definition be further narrowed

and that the FDIC identify specific

activities in which a person could

engage without being a deposit broker.

The specific issues raised by

commenters are summarized below.

a. Exclusive Deposit Placement

Arrangements

Section 29 provides that a person

meets the ‘‘deposit broker’’ definition

(as described above) when it is

‘‘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’’ (emphasis added). The

FDIC recognizes that a number of

entities, including some financial

technology companies, partner with one

insured depository institution to

establish exclusive deposit placement

arrangements

ured

depository institutions or the business of

placing deposits with insured

depository institutions for the purpose

of selling interests in those deposits to

third parties’’ (emphasis added). The

FDIC recognizes that a number of

entities, including some financial

technology companies, partner with one

insured depository institution to

establish exclusive deposit placement

arrangements. Under these

arrangements, the third party has

developed an exclusive business

relationship with the IDI and, as a

result, is less likely to move its customer

funds to other IDIs in a way that makes

the deposits less stable.

As such, in an effort to clarify the

types of persons that meet the ‘‘deposit

broker’’ definition, and consistent with

the statute, under this final rule, any

person that has an exclusive deposit

placement arrangement with one IDI,

and is not placing or facilitating the

placement of deposits at any other IDI,

will not be ‘‘engaged in the business’’ of

placing, or facilitating the placement of,

deposits and therefore will not meet the

‘‘deposit broker’’ definition.

This change is also intended to

address comments, further described

below, that the FDIC would be

inundated with applications from banks

and third parties seeking the primary

purpose exception under the proposed

application process.

The FDIC notes, however, that a

person that creates or utilizes multiple

entities that each place deposits at

different IDIs to evade this rule, while

still maintaining a relationship with one

or more of such entities, will

collectively still be viewed as one

‘‘person’’ and thus qualify as a deposit

broker.

b. Engaged in the Business of Placing

Deposits

The statute provides that a person

meets the definition of ‘‘deposit broker’’

if the person is ‘‘engaged in the business

of placing deposits’’ on behalf of a third

party (i.e., a depositor) at insured

depository institutions

or more of such entities, will

collectively still be viewed as one

‘‘person’’ and thus qualify as a deposit

broker.

b. Engaged in the Business of Placing

Deposits

The statute provides that a person

meets the definition of ‘‘deposit broker’’

if the person is ‘‘engaged in the business

of placing deposits’’ on behalf of a third

party (i.e., a depositor) at insured

depository institutions. As provided in

the proposed rule, the FDIC considers a

person to be engaged in the business of

placing deposits if that person has a

business relationship with its

customers, and as part of that

relationship, places deposits with IDIs

on behalf of the customer (e.g., acting as

custodian or agent for the underlying

depositor).

Commenters suggested that the FDIC

provide additional clarity to this part of

the ‘‘deposit broker’’ definition with one

commenter suggesting that the FDIC

include the description provided above

in the final rule text, which the FDIC

agrees would provide clarity. As such,

the FDIC is amending the ‘‘deposit

broker’’ definition in the final rule by (1)

including that the person must have a

business relationship with its customers

to be ‘‘engaged in business’’ and (2)

providing that the person must receive

customer funds before placing deposits

to satisfy the ‘‘engaged in the business

of placing deposits’’ part of the

definition.

c. Engaged in the Business of

Facilitating the Placement of Deposits

In contrast to the first part of the

deposit broker definition, the

‘‘facilitation’’ part of the definition

refers to activities where the person

does not directly place deposits on

behalf of its customers with insured

depository institutions. Historically, the

term ‘‘facilitating the placement of

deposits’’ has been interpreted by staff

at the FDIC to include actions taken by

third parties to connect insured

depository institutions with potential

depositors

cilitation’’ part of the definition

refers to activities where the person

does not directly place deposits on

behalf of its customers with insured

depository institutions. Historically, the

term ‘‘facilitating the placement of

deposits’’ has been interpreted by staff

at the FDIC to include actions taken by

third parties to connect insured

depository institutions with potential

depositors.

Under the proposed rule, a person

would meet the ‘‘facilitation’’ prong of

the ‘‘deposit broker’’ definition by,

while engaged in business, engaging in

any one, or more than one, of the

following activities:

Æ The person directly or indirectly

shares any third party information with

the insured depository institution;

Æ The person has legal authority,

contractual or otherwise, to close the

account or move the third party’s funds

to another insured depository

institution;

Æ The person provides assistance or

is involved in setting rates, fees, terms,

or conditions for the deposit account;

or,

Æ The person is acting, directly or

indirectly, with respect to the placement

of deposits, as an intermediary between

a third party that is placing deposits on

behalf of a depositor and an insured

depository institution, other than in a

purely administrative capacity.

i. Comments in Response to the

Proposed ‘‘Facilitation’’ Definition

The FDIC sought to provide clarity

and consistency with respect to what it

means to facilitate the placement of

deposits. The proposed ‘‘facilitation’’

definition was the issue that received

the most comments; of the 166 comment

letters received (47 of which were form

letters), 118 commented on the

proposed definition.

In general, commenters raised

concerns that some of the listed

activities in the proposal were overly

broad and, as proposed, would result in

all deposits sourced through some use

of third party service providers to be

classified as brokered

sue that received

the most comments; of the 166 comment

letters received (47 of which were form

letters), 118 commented on the

proposed definition.

In general, commenters raised

concerns that some of the listed

activities in the proposal were overly

broad and, as proposed, would result in

all deposits sourced through some use

of third party service providers to be

classified as brokered. Some

commenters suggested that all

‘‘relationship accounts’’ and transaction

accounts ‘‘owned by a bank’’ with no

direct relationship between the third

party and the depositor should be

exempt from the definition of

‘‘facilitating.’’ Below is a summary of

the comments received on each of the

four prongs of the proposed

‘‘facilitation’’ definition.

First Prong. Numerous commenters

raised concerns about this first prong of

the definition of ‘‘facilitating,’’ related to

information sharing. Major trade

associations representing the banking

industry suggested that the FDIC delete

the information sharing prong entirely

and focus instead on the extent to which

a third party exercises control over the

account. A law firm commented that the

first prong would capture the core

activities of essentially every financial

technology company or technology

platform solutions provider performed

for or on behalf of depository

institutions, since many financial

technology companies receive and store

consumers’ credentials and share

verified consumer information with a

depository institution. The commenter

expressed that an essential factor

underlying the ‘‘facilitation’’ activities is

whether the person in question is acting

on behalf of the bank or on behalf of the

depositor

for or on behalf of depository

institutions, since many financial

technology companies receive and store

consumers’ credentials and share

verified consumer information with a

depository institution. The commenter

expressed that an essential factor

underlying the ‘‘facilitation’’ activities is

whether the person in question is acting

on behalf of the bank or on behalf of the

depositor. The commenter stated that

where a person is acting on behalf of

and at the direction of the depositor,

that person’s activities should not be

viewed as ‘‘facilitation’’ activities

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Federal Register / Vol. 86, No. 13 / Friday, January 22, 2021 / Rules and Regulations

because no services are being provided

to a particular depository institution.

One company suggested that the

proposed definition of ‘‘facilitating the

placement of deposits’’ should be

revised to exclude third-parties who

provide services to banks for the

purpose of enabling the bank to

establish deposit accounts directly with

individual depositors.

A number of commenters, including

bankers, a law firm, a trade association,

and private companies, raised a specific

concern that the ‘‘information sharing’’

prong of the definition could be

interpreted to include listing services,

which historically have been viewed by

FDIC staff as excluded from being

considered deposit brokers under

certain circumstances. Several other

bankers expressed similar views,

arguing that entities that simply provide

information, such as listing services,

should not be considered deposit

brokers and that the definition as

proposed could lead to such a result.

Second Prong

ing services,

which historically have been viewed by

FDIC staff as excluded from being

considered deposit brokers under

certain circumstances. Several other

bankers expressed similar views,

arguing that entities that simply provide

information, such as listing services,

should not be considered deposit

brokers and that the definition as

proposed could lead to such a result.

Second Prong. A number of

commenters expressed support for the

second prong to the proposed

‘‘facilitation’’ definition, which

included activities where the person has

legal authority, contractual or otherwise,

to close the account or move the third

party’s funds to another insured

depository institution. Specifically,

commenters stated that this activity is

indicative of the type of active and

meaningful relationship that should be

required to find that a third party is

facilitating the placement of deposits

under the deposit broker definition. One

commenter asked that the FDIC limit the

second prong to include exclusive legal

authority over the movement of funds.

Third Prong. Commenters expressed

concerns with the proposed third prong

of the facilitation definition, believing

that the definition was overly broad,

contained unnecessary terms, and

would capture services the FDIC did not

intend to capture. Some community

bankers believed that the proposed third

prong would result in classifying service

providers that provide assistance (but

not the final determination) in setting

rates, fees, terms or conditions for

various deposit account programs, as

deposit brokers. Other commenters

mentioned that the phrase ‘‘providing

assistance’’ was unnecessary and

ambiguous and should be deleted from

the final rule. The commenters

explained that because the proposed

rule would cover anyone ‘‘involved in’’

setting rates, fees, terms or conditions,

the term ‘‘providing assistance’’ would

only create ambiguity and could be read

more broadly

s, as

deposit brokers. Other commenters

mentioned that the phrase ‘‘providing

assistance’’ was unnecessary and

ambiguous and should be deleted from

the final rule. The commenters

explained that because the proposed

rule would cover anyone ‘‘involved in’’

setting rates, fees, terms or conditions,

the term ‘‘providing assistance’’ would

only create ambiguity and could be read

more broadly.

Some commenters believed that the

overly broad definition could include

listing services. However, one

commenter believed that listing services

should be included in the third prong

and cited legislative history to support

its position. Lastly, commenters

mentioned that the definition could be

used to capture a bank’s use of

consulting or advisory services that

assist them with developing, delivering

and improving their deposit offerings.

Fourth Prong. A number of

commenters expressed concerns that the

proposed fourth prong of the definition

of ‘‘facilitation,’’ which excluded

persons involved in a purely

administrative capacity, was also

ambiguous and should be clarified by

providing a list of activities that would

be considered to be purely

administrative. A law firm commented

that the FDIC should clarify its intent

with respect to the exclusion for ‘‘purely

administrative’’ conduct, and argued

that a third party conducting only

administrative functions should be

permissible without the third party

being considered a deposit broker. A

trade association suggested that the

FDIC provide that an intermediary

between an IDI and a third party placing

deposits is not ‘‘facilitating’’ if the third

party is itself not a deposit broker and

if the third party would not be a deposit

broker if performing the intermediary’s

activities itself regardless of whether

those activities were ‘‘purely

administrative.’’

eposit broker. A

trade association suggested that the

FDIC provide that an intermediary

between an IDI and a third party placing

deposits is not ‘‘facilitating’’ if the third

party is itself not a deposit broker and

if the third party would not be a deposit

broker if performing the intermediary’s

activities itself regardless of whether

those activities were ‘‘purely

administrative.’’

ii. Final Rule Discussion for

‘‘Facilitation’’ Definition

The FDIC is adopting the general

approach taken in the proposed rule

with respect to the ‘‘facilitation’’ part of

the deposit broker definition, but is

making certain revisions to the

definition. Under the final rule, a person

is engaged in the business of facilitating

the placement of deposits if that person

is engaged in certain activities with

respect to deposits placed at more than

one IDI. The activities that result in a

person being ‘‘engaged in the business

of facilitating the placement of

deposits,’’ as discussed in the proposed

rule, is intended to capture activities

that indicate that the third party takes

an active role in the opening of an

account or maintains a level of

influence or control over the deposit

account even after the account is open.

Having a certain level of influence over

account opening, or retaining a level of

control over the movement of customer

funds after the account is open,

indicates that the deposit relationship is

between the depositor and the person

rather than the depositor and the

insured depository institution.

Moreover, when a third party can

influence a depositor to either open the

account with a particular insured

depository institution or move funds

between insured depository institutions,

the deposits tend to be less stable than

if the deposits were brought to the

insured depository institution through a

single point of contact where that

contact does not have influence over the

movement of deposits between insured

depository institutions

itor to either open the

account with a particular insured

depository institution or move funds

between insured depository institutions,

the deposits tend to be less stable than

if the deposits were brought to the

insured depository institution through a

single point of contact where that

contact does not have influence over the

movement of deposits between insured

depository institutions.

Consistent with this approach to

defining the ‘‘facilitating’’ part of the

deposit broker definition, and in

response to issues raised by

commenters, the final rule provides that

if a person engages in any one of the

following activities, while engaged in

business, the person will be a deposit

broker and any deposits placed by the

person will be brokered:

• The person has legal authority,

contractual or otherwise, to close the

account or move the third party’s funds

to another insured depository

institution;

• The person is involved in

negotiating or setting rates, fees, terms,

or conditions for the deposit account; or

• The person engages in

matchmaking, as defined in the rule.

Proposed Information Sharing Prong

The FDIC is not retaining the first

proposed prong of the ‘‘facilitation’’

definition. The FDIC agrees with

commenters that the ‘‘direct or indirect

sharing of customer information’’ is

overly broad and could have the

unintended effect of capturing persons

that do not have influence or control

over the placement of deposits. The

proposed first prong was generally

intended to capture activities where the

person shares information in an effort to

match prospective depositors with

particular banks, and that specific

activity, as part of the final rule, will

now be included in the matchmaking

prong of the facilitation definition

discussed below.

Legal Control

The FDIC is finalizing the proposed

prong relating to legal control over the

account as part of the ‘‘facilitation’’

definition

the

person shares information in an effort to

match prospective depositors with

particular banks, and that specific

activity, as part of the final rule, will

now be included in the matchmaking

prong of the facilitation definition

discussed below.

Legal Control

The FDIC is finalizing the proposed

prong relating to legal control over the

account as part of the ‘‘facilitation’’

definition. Although one commenter

suggested that having legal control of

moving customer funds was too broad,

many commenters supported this

criterion’s inclusion in the ‘‘facilitation’’

definition. The FDIC believes that the

activity clearly demonstrates that a third

party has meaningful, substantial

influence or control over an account

and, therefore, is acting as a deposit

broker.

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20 See FDIC Federal Register Citations, Unsafe

and Unsound Banking Practices: Brokered Deposits

Restrictions—Comments and Staff Disclosures,

available at: https://www.fdic.gov/regulations/laws/

federal/2020/2020-unsafe-unsound-banking-

practices-brokered-deposits-3064-ae94.html.

21 In the final rule, this activity will be included

in the second prong of the facilitation definition.

22 For ease of reference, the ‘‘depositor’s agent’’ in

the ‘‘matchmaking’’ definition in 12 CFR

337.6(a)(5)(iii)(C) is referred to here as the ‘‘third

party’’.

23 This view aligns with the FDIC’s intent not to

disrupt business arrangements that have existed for

a number of years in reliance on prior staff guidance

related to affiliate sweep arrangements, when the

resulting adjustments to business operations would

be solely for the purpose of complying with

regulatory changes

12 CFR

337.6(a)(5)(iii)(C) is referred to here as the ‘‘third

party’’.

23 This view aligns with the FDIC’s intent not to

disrupt business arrangements that have existed for

a number of years in reliance on prior staff guidance

related to affiliate sweep arrangements, when the

resulting adjustments to business operations would

be solely for the purpose of complying with

regulatory changes.

24 See section I(C)(2)(b)(ii)(F) for further

discussion of the treatment of additional third

parties who may qualify as a deposit broker.

25 See section I(C)(5) for further discussion of

listing services.

Setting Rates, Terms, Conditions

With respect to the proposed third

prong, commenters viewed that

providing assistance with setting rates,

terms, or conditions would be over-

inclusive and capture consulting or

advisory services that assist banks in

improving their deposit offerings. As

provided in a staff memorandum to the

Brokered Deposits NPR comment file,20

certain activities such as market

research, general consulting or advisory

services, and advertising by including a

link on a website, were not intended to

be included in the third prong of the

proposed facilitation definition. As

such, the FDIC is revising this prong to

clarify that it only includes activities

where a third party is negotiating or

setting rates, terms, or conditions for a

particular deposit product (on behalf of

a particular depositor or particular

banks).21 By striking the ‘‘providing

assistance’’ factor, this revised prong

will appropriately capture third parties

that influence or control the placement

of deposits by negotiating deposit terms

between depositors and insured

depository institutions

negotiating or

setting rates, terms, or conditions for a

particular deposit product (on behalf of

a particular depositor or particular

banks).21 By striking the ‘‘providing

assistance’’ factor, this revised prong

will appropriately capture third parties

that influence or control the placement

of deposits by negotiating deposit terms

between depositors and insured

depository institutions.

Providing Matchmaking Services

Finally, the FDIC is incorporating

concepts from the proposed first prong

(‘‘information sharing’’) and the

proposed fourth prong with the new

third prong to provide a clear

description of the types of activities that

were intended to be captured under the

facilitation definition.

This prong in the final rule will

capture persons that engage in

matchmaking. The final rule will define

matchmaking as follows:

Æ A person is engaged in

matchmaking if the person proposes

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, except in the case of

deposits placed by a depositor’s agent

with a bank affiliated with the

depositor’s agent. A proposed deposit

allocation is based on the particular

objectives of:

Æ A depositor or depositor’s agent

when the person has access to specific

financial information of the depositor or

depositor’s agent and the proposed

deposit allocation is based upon such

information; and

Æ a bank when the person has access

to specific information of the deposit-

balance objectives of the bank and the

proposed deposit allocation is based

upon such information.

Specifically, this prong captures

certain entities that utilize their

relationships with prospective

depositors or depositor’s agents and

banks to propose deposit allocations at

particular banks

information; and

Æ a bank when the person has access

to specific information of the deposit-

balance objectives of the bank and the

proposed deposit allocation is based

upon such information.

Specifically, this prong captures

certain entities that utilize their

relationships with prospective

depositors or depositor’s agents and

banks to propose deposit allocations at

particular banks. These activities

indicate that the person has influence

over the movement of deposits between

insured depository institutions. These

activities also indicate that the person is

not only satisfying the deposit

objectives of the depositor or its agent

but also of the insured depository

institution. Such a relationship could

allow less than well capitalized

institutions to utilize a third party to bid

for considerable volumes of funding,

quickly, which could present

heightened risks to the DIF.

Additionally, such a relationship could

increase the likelihood of a third party

withdrawing funds from a less than well

capitalized institution (or under other

circumstances, such as in the event an

institution is the subject of an

enforcement action), which could

present sudden liquidity concerns.

This prong would not include persons

that engage in activities that would

otherwise satisfy the matchmaking

prong if, and to the extent that, these

activities are conducted between a bank

and an affiliated third party.22 With

respect to this specific function, the

FDIC views such services by an

intermediary as administrative in nature

due to the direct relationship between

the person placing the deposits and the

bank.23 However, deposits placed at

banks, with the assistance of persons

engaging in matchmaking activities, by

an affiliated third party that meets the

deposit broker definition would be

brokered.

This prong will include third parties

that engage in matchmaking as part of

an unaffiliated deposit sweep program

between a depositor, its broker dealer,

and various unaffiliated banks

d the

bank.23 However, deposits placed at

banks, with the assistance of persons

engaging in matchmaking activities, by

an affiliated third party that meets the

deposit broker definition would be

brokered.

This prong will include third parties

that engage in matchmaking as part of

an unaffiliated deposit sweep program

between a depositor, its broker dealer,

and various unaffiliated banks. These

third parties propose deposit allocations

by matching the deposit obligations of

either the depositor(s) or the broker

dealers with the target deposit balances

of various unaffiliated banks. It may be

the case that a third party with a

primary purpose exception sweeps

deposits to an affiliated IDI, and those

sweep deposits would not be brokered,

while the same third party uses an

intermediary that would qualify as a

deposit broker under this prong in the

placement of deposits at unaffiliated

IDIs, in which case those deposits

would be brokered.24

The third prong will not include third

parties that provide administrative

services as part of a deposit sweep

program between a depositor, its broker

dealer, and unaffiliated banks. In these

cases, the third party may assist in the

placement of sweep deposits with

unaffiliated banks but does not propose

deposit allocations, as described above.

The third prong is defined to capture

specific forms of matchmaking that are

active in nature; more passive forms of

matching depositors and banks, such as

those in which traditional listing

services often engage, would not be

captured.25

Unlike the fourth prong of the

proposed rule, the final rule will not

distinguish between the activities of a

person that interfaces directly with a

depositor and the activities of a person

that interfaces with an intermediary or

a depositor’s agent

passive forms of

matching depositors and banks, such as

those in which traditional listing

services often engage, would not be

captured.25

Unlike the fourth prong of the

proposed rule, the final rule will not

distinguish between the activities of a

person that interfaces directly with a

depositor and the activities of a person

that interfaces with an intermediary or

a depositor’s agent. Rather, the

facilitation definition, and its three

criteria, will apply, generally, to any

third party that plays a role in the flow

of funds between a prospective

depositor and the opening of a deposit

account at an insured depository

institution.

Anti-Evasion. It may be possible for

an entity that meets the matchmaking

prong to modify its business

arrangements in such a way that evades

the terms of the regulation while

maintaining effectively the same

business relationships. The FDIC has

included in the regulation an anti-

evasion provision that would allow the

FDIC to determine that such attempts to

evade the matchmaking prong still meet

the matchmaking prong. The purpose of

the anti-evasion authority is not to

capture an entity that restructures it

business in such a manner that it is no

longer engaged in the type of

matchmaking captured by the rule, but

rather to avoid creating an unintended

incentive for entities to modify or

restructure businesses solely to evade

the regulation. In this regard, the FDIC

expects to use this authority sparingly.

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type of

matchmaking captured by the rule, but

rather to avoid creating an unintended

incentive for entities to modify or

restructure businesses solely to evade

the regulation. In this regard, the FDIC

expects to use this authority sparingly.

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26 84 FR 2366, 2370 (Feb. 6, 2019).

27 12 U.S.C. 1831f((g)(2)(A)–(B).

To provide an example, in the event

that a third party that would otherwise

satisfy the criteria of the matchmaking

prong sells or licenses software that

provides deposit placement or

allocation services between depositors

or banks in a manner that is intended

to evade this prong, and continues to

play an ongoing role in providing the

matchmaking function, the deposits

placed through the assistance of the

software may be considered brokered.

Conversely, in the event that a third

party sells or licenses software that

provides deposit placement or

allocation services between depositors

or banks and does not subsequently play

an ongoing role in providing any

function related to matchmaking, then

the deposits placed would not be

considered brokered. As such, whether

a third party meets the matchmaking

prong will, under the anti-evasion

provision, depend in part on whether

the third party continues to play an

ongoing role in providing functions

related to matchmaking.

d. Engaged in the Business of Placing

Deposits With Insured Depository

Institutions for the Purpose of Selling

Interests in Those Deposits to Third

Parties

rokered. As such, whether

a third party meets the matchmaking

prong will, under the anti-evasion

provision, depend in part on whether

the third party continues to play an

ongoing role in providing functions

related to matchmaking.

d. Engaged in the Business of Placing

Deposits With Insured Depository

Institutions for the Purpose of Selling

Interests in Those Deposits to Third

Parties

i. Overview and Proposal

The third part of the ‘‘deposit broker’’

definition includes a person ‘‘engaged

in the business of placing deposits with

insured depository institutions for the

purpose of selling interests in those

deposits to third parties.’’ As provided

in the proposed rule, this part of the

definition specifically captures the

brokered certificates of deposit (CD)

market (referred to herein as ‘‘brokered

CDs’’). These are typically deposit

placement arrangements where brokered

CDs are issued in wholesale amounts by

a bank seeking to place funds under

certain terms and sold through a

registered broker-dealer to investors,

typically in fully insured amounts.

ii. Final Rule Discussion of Brokered

CDs

In response to the proposal, a

commenter clarified that the current

brokered CD market operates in a

manner different than as described in

the notice of proposed rulemaking.

Rather than being arrangements in

which institutions issue a brokered CD

in a wholesale amount in the name of

a broker dealer, who then sells

participations in the wholesale CD, in

current financial markets, an insured

depository institution issues a master

CD in the name of the third party that

has organized the funding of the CD, or

in the name of a custodian or a sub-

custodian of the third party

being arrangements in

which institutions issue a brokered CD

in a wholesale amount in the name of

a broker dealer, who then sells

participations in the wholesale CD, in

current financial markets, an insured

depository institution issues a master

CD in the name of the third party that

has organized the funding of the CD, or

in the name of a custodian or a sub-

custodian of the third party. The

certificate is funded by individual

depositors through the third party, with

each individual depositor receiving an

ownership interest in the certificate that

is reflected on the books and records of

the third party in a manner to permit

pass-through treatment for purposes of

deposit insurance for the individual

depositors. The FDIC acknowledges that

the brokered CD market has evolved, in

part, to ensure that its underlying

depositors receive pass-through deposit

insurance and to allow the beneficial

owners of the deposits to trade their

accounts in a secondary market

maintained by the broker.

Nevertheless, under the final rule,

without exception, and as further

explained below in the section

discussing the primary purpose

exception, brokered CDs continue to be

classified as brokered. Brokered CDs,

which were offered well before Section

29 of the FDI Act was enacted, were

specifically intended to be included as

part of the statute. Moreover, and as

provided in the ANPR, brokered CDs

have caused significant losses to the

DIF.26 Regardless of any future

innovations and re-structuring in the

brokered CD market, the FDIC intends

that third parties that assist in the

placement of brokered CDs, or any

similar deposit placement arrangement

with a similar purpose, will continue to

be considered deposit brokers under

this part of the deposit broker

definition.

This final rule revises the proposed

definition of a brokered CD in part 303

to more accurately reflect the current

marketplace.

D market, the FDIC intends

that third parties that assist in the

placement of brokered CDs, or any

similar deposit placement arrangement

with a similar purpose, will continue to

be considered deposit brokers under

this part of the deposit broker

definition.

This final rule revises the proposed

definition of a brokered CD in part 303

to more accurately reflect the current

marketplace.

2. Exceptions to the ‘‘Deposit Broker’’

Definition

Section 29 provides nine statutory

exceptions to the definition of deposit

broker and, as described earlier, the

FDIC established one regulatory

exception to the definition. In the

proposal, the FDIC proposed amending

two exceptions—(1) the exception for an

insured depository institution, with

respect to funds placed with that

depository institution (the ‘‘IDI

exception’’) and (2) the exception for an

agent or nominee whose primary

purpose is not the placement of funds

with depository institutions (the

‘‘primary purpose exception’’). In

response to comments, as described

below, the final rule makes revisions to

both exceptions.

a. Bank Operating Subsidiaries and the

IDI Exception

Under the IDI Exception, an IDI is not

considered to be a deposit broker when

it places (or its employees place) funds

at the bank.27 As provided in the

proposed rule, the IDI Exception

applies, for example, in the case of a

division of an IDI that places deposits

exclusively with the parent IDI, but does

not apply if a separately incorporated

subsidiary of the IDI places deposits

exclusively with the parent. However,

the FDIC proposed changes to expand

the IDI exception to permit wholly

owned subsidiaries that meet certain

criteria to be eligible for the exception.

In doing this, the FDIC recognized that

a wholly owned operating subsidiary

that meets certain criteria can be

considered similar to a division of an

IDI for certain purposes.

he IDI places deposits

exclusively with the parent. However,

the FDIC proposed changes to expand

the IDI exception to permit wholly

owned subsidiaries that meet certain

criteria to be eligible for the exception.

In doing this, the FDIC recognized that

a wholly owned operating subsidiary

that meets certain criteria can be

considered similar to a division of an

IDI for certain purposes.

i. Comments Received in Response to

the IDI Exception

Of those who commented on this

aspect of the proposed rule, a majority

were in favor of the expansion of the

exception to include wholly owned

subsidiaries. Many also argued that the

exception should be further broadened,

so as to allow affiliates, in addition to

wholly owned subsidiaries, to also fit

within the exception (although one

commenter expressly stated that it

should not be further expanded in this

way). Those who argued for further

expansion suggested that there is little

practical difference between a wholly

owned subsidiary and an affiliate and

that deposits placed through an affiliate

were not ‘‘hot’’ money that should be

considered to be a brokered deposit.

Some commenters also asked the FDIC

to clarify how ‘‘dual-hatted’’ or ‘‘dual-

employees’’ would be treated as part of

the new regulation.

ii. Final Rule Discussion for the IDI

Exception

The final rule is not adopting the

proposed changes to the IDI exception.

Under this final rule, the deposit broker

definition does not include third parties

that have an exclusive deposit

placement arrangement with one

insured depository institution. As a

result, the proposed expansion of the

IDI exception to wholly owned

subsidiaries is no longer necessary. This

is because, under the proposal, in order

to meet the IDI exception, a wholly

owned subsidiary would have to place

deposits exclusively with the parent IDI

among other conditions

that have an exclusive deposit

placement arrangement with one

insured depository institution. As a

result, the proposed expansion of the

IDI exception to wholly owned

subsidiaries is no longer necessary. This

is because, under the proposal, in order

to meet the IDI exception, a wholly

owned subsidiary would have to place

deposits exclusively with the parent IDI

among other conditions. As such,

wholly owned subsidiaries that would

have met the proposed IDI exception

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28 12 U.S.C. 1831(g)(4).

29 Under the proposal, the FDIC only would have

considered fees, interest, or other remuneration

paid to the underlying depositor.

will not meet the ‘‘deposit broker’’

definition under this final rule because

they have an exclusive deposit

placement arrangement with one bank,

their parent bank.

In response to comments regarding

the status of ‘‘dual-hatted’’ or ‘‘dual’’

employees under the final rule, the

FDIC notes that the statutory

‘‘employee’’ exception applies solely to

an ‘‘employee’’ who satisfies the

definition of an employee provided by

the statute. The statute defines an

‘‘employee’’ as any employee: ‘‘(i) who

is employed exclusively by the insured

depository institution; (ii) whose

compensation is primarily in the form of

a salary; (iii) who does not share such

employee’s compensation with a

deposit broker; and (iv) whose office

space or place of business is used

exclusively for the benefit of the insured

depository institution, which employs

such individual.’’ 28 This exception does

not apply to a contractor or dual

employee because they are not

employed exclusively by insured

depository institutions

a salary; (iii) who does not share such

employee’s compensation with a

deposit broker; and (iv) whose office

space or place of business is used

exclusively for the benefit of the insured

depository institution, which employs

such individual.’’ 28 This exception does

not apply to a contractor or dual

employee because they are not

employed exclusively by insured

depository institutions. The exception

would, however, apply to ‘‘dual-hatted’’

employees that are employed

exclusively by the bank so long as the

employees meet each of the other

statutory elements of the ‘‘employee’’

definition.

b. Primary Purpose Exception

i. Overview of Proposal and Comments

Section 29 provides that the primary

purpose exception applies to ‘‘an agent

or nominee whose primary purpose is

not the placement of funds with

depository institutions.’’ In the Brokered

Deposits NPR, the FDIC proposed a new

interpretation for the primary purpose

exception based on the relationship

between the agent or nominee and its

customers. Specifically, the primary

purpose exception would apply when

the primary purpose of the agent’s or

nominee’s business relationship with its

customers is not the placement of funds

with depository institutions.

Along with the new interpretation,

the FDIC proposed a new framework for

evaluating business relationships that

may meet the primary purpose

exception and identified two types of

relationships that would be deemed to

qualify for the exception. Under the

proposal, the FDIC would evaluate

whether a particular business

relationship meets the primary purpose

exception through an application

process, available to both IDIs and third

parties. The proposed application

process was intended to allow the FDIC

to ensure that the applicant met the

relevant criteria for the exception and to

promote transparency and consistency

for applicants. The proposal also

established an ongoing reporting

process for approved applicants.

General Comments

purpose

exception through an application

process, available to both IDIs and third

parties. The proposed application

process was intended to allow the FDIC

to ensure that the applicant met the

relevant criteria for the exception and to

promote transparency and consistency

for applicants. The proposal also

established an ongoing reporting

process for approved applicants.

General Comments. In response to the

proposed framework, many commenters

suggested that the FDIC (1) establish

more bright-line tests, or business

arrangements, that qualify for the

primary purpose exception, and (2)

eliminate the application process, or

revise it to create a more streamlined

process. Commenters generally argued

that if the FDIC identified more bright-

line tests, or business relationships,

with respect to the primary purpose

exception then there would be little, if

any, need for an application process.

Two commenters were critical of the

proposed changes to the definition of

the primary purpose exception. In

particular, one commenter stated the

proposed changes would invite evasion

and create opportunities for nonbanks

instead of protecting the DIF. The

commenter believed that the primary

purpose exception should be based on

the primary purpose of deposits, not the

purpose of the agent and its customer.

Another commenter stated that the

proposal reflected rulemaking centered

on non-bank third parties, whereas the

FDIC’s mandate and responsibilities

direct the agency to focus on IDIs that

it insures and supervises.

One commenter representing large

financial institutions suggested that

bright-line criteria will be more efficient

because banks can evaluate their

individual circumstances for a primary

purpose exception and not have to wait

for the FDIC’s approval. The commenter

stated that the banks would make good

faith determinations that would be

subject to review in the examination

process

vises.

One commenter representing large

financial institutions suggested that

bright-line criteria will be more efficient

because banks can evaluate their

individual circumstances for a primary

purpose exception and not have to wait

for the FDIC’s approval. The commenter

stated that the banks would make good

faith determinations that would be

subject to review in the examination

process. The commenter, and several

others, raised concerns that, unless the

FDIC eliminates or revises the proposed

application process, the FDIC would be

inundated with applications from banks

and third parties seeking the primary

purpose exception.

Primary purpose exception based on

25 percent test. In addition to the

general comments about the overall

framework for evaluating primary

purpose exceptions, the FDIC also

received numerous comments on the

proposed primary purpose exception for

entities placing less than 25 percent of

customer assets under management with

insured depository institutions (the ‘‘25

percent’’ test or business relationship).

Most of those comments sought

additional clarity as to the definitions of

‘‘business line’’ and ‘‘customer assets

under management.’’ One commenter

noted that the phrase ‘‘customer assets

under management’’ is a term of art in

securities law and limited in use for

broker dealers or investment advisors,

which the commenter suggested could

lead to confusion and limit the scope of

the exception. At least one commenter

suggested that the threshold be raised to

50 percent, while another suggested that

the 25 percent threshold was too high

and would allow significant amounts of

deposits to flow to IDIs without

restricting business models that create

risk.

Primary purpose exception based on

enabling transactions

uggested could

lead to confusion and limit the scope of

the exception. At least one commenter

suggested that the threshold be raised to

50 percent, while another suggested that

the 25 percent threshold was too high

and would allow significant amounts of

deposits to flow to IDIs without

restricting business models that create

risk.

Primary purpose exception based on

enabling transactions. In the Brokered

Deposits NPR, the FDIC proposed a

second business relationship that would

meet the proposed primary purpose

exception for parties that place funds at

depository institutions for the purpose

of enabling transactions (the ‘‘the

enabling transactions’’ test or business

relationship). The FDIC received

comments suggesting that the FDIC

provide clarity regarding the terms

‘‘enabling transactions’’ and

‘‘transaction account’’ to further clarify

the types of deposit arrangements that

would meet the exception. Other

commenters indicated that the existence

of some fees, remuneration, or interest

paid, should not prevent an entity from

being eligible for the primary purpose

exception. One commenter noted that

receiving a fee for wire transfer

processing or other related transaction

services does not necessarily transform

a third party’s primary intent from

processing ordinary business

transactions into deposit placement

activity.29

Application process. For both the 25

percent and the enabling transactions

business relationships, the FDIC

proposed an application process

through which applicants would

demonstrate that they meet the criteria

for the particular exception and the

FDIC, on an expedited basis, would

review and approve the application.

Commenters who addressed this process

were critical, suggesting that, at least for

the two business relationships that meet

the criteria set forth in the proposal, at

most a notice requirement should exist

ocess

through which applicants would

demonstrate that they meet the criteria

for the particular exception and the

FDIC, on an expedited basis, would

review and approve the application.

Commenters who addressed this process

were critical, suggesting that, at least for

the two business relationships that meet

the criteria set forth in the proposal, at

most a notice requirement should exist.

Commenters raised concerns about

FDIC’s ability to evaluate so many

applications in a timely manner and

suggested that the FDIC could evaluate

the business relationships as part of an

examination rather than requiring

approval in advance.

Other business relationships. As

noted above, the FDIC also proposed

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30 Additional discussion regarding the concept of

a ‘‘business line’’ is provided in section

I(C)(2)(b)(ii)(E).

31 The FDIC recognizes that some of these

arrangements may be between an agent or nominee

and one insured depository institution. Under this

final rule, if the agent or nominee has an exclusive

deposit placement arrangement with one IDI, and

does not place or facilitate the placement of

deposits at any other IDI, then it will not meet the

‘‘deposit broker’’ definition.

that parties that did not qualify under

either the ‘‘25 percent’’ business

relationship or the ‘‘enabling

transactions’’ business relationship

could apply for a primary purpose

exception. A number of commenters

raised concerns about the application

process, in some cases arguing it should

be eliminated and in most cases stating

that it would be too cumbersome and

time consuming both for the applicants

and for the FDIC to evaluate the

applications in a timely manner

tionship or the ‘‘enabling

transactions’’ business relationship

could apply for a primary purpose

exception. A number of commenters

raised concerns about the application

process, in some cases arguing it should

be eliminated and in most cases stating

that it would be too cumbersome and

time consuming both for the applicants

and for the FDIC to evaluate the

applications in a timely manner.

Commenters suggested that the FDIC

instead should establish additional

‘‘bright-line’’ categories of business

arrangements that are eligible for the

primary purpose exception, which

would largely obviate the need for an

application process aside from entities

that did not fit within one of the

predetermined business relationships.

Specifically, commenters noted that

some business arrangements have been

provided the primary purpose exception

in the past via staff advisory opinions,

and that such arrangements should also

be included in the list of arrangements

that are deemed to meet the primary

purpose exception.

ii. Primary Purpose Exception in the

Final Rule

As described below, and in response

to the comments, the final rule retains

the proposal’s interpretation of the

primary purpose exception and revises

the proposed framework for the primary

purpose exception in several ways. Like

in the proposal, the primary purpose

exception, in the final rule, will apply

when, with respect to a particular

business line, the primary purpose of

the agent’s or nominee’s business

relationship with its customers is not

the placement of funds with depository

institutions. Whether an agent or

nominee qualifies for the primary

purpose exception will be based on an

analysis of the agent’s or nominee’s

relationship with those customers.

However, the FDIC agrees with

commenters that the proposed

application process for business

relationships that the FDIC designates as

meeting the primary purpose exception

is not necessary

funds with depository

institutions. Whether an agent or

nominee qualifies for the primary

purpose exception will be based on an

analysis of the agent’s or nominee’s

relationship with those customers.

However, the FDIC agrees with

commenters that the proposed

application process for business

relationships that the FDIC designates as

meeting the primary purpose exception

is not necessary.

In the final rule, the FDIC (1)

identifies several, specific business

relationships as meeting the primary

purpose exception, described as

‘‘designated exceptions,’’ and (2) allows

agents or nominees that do not meet one

of these designated exceptions to apply

for a primary purpose exception.

Business relationships that qualify for a

designated exception will not be

required to go through the application

process. For two of the designated

exceptions, the FDIC will require a

notice, while for the other designated

exceptions, no notice, application, or

reporting will be required. Under the

final rule, entities that do not meet one

of the designated exception may apply

for a primary purpose exception. The

final rule will also authorize the FDIC

to identify additional relationships as

designated exceptions to the primary

purpose exception (and therefore will

not require an application).

The FDIC also notes that certain

agents or nominees may only place

deposits at one IDI, in which case the

agent or nominee would not be a

deposit broker, regardless of whether

the agent or nominee satisfies the

primary purpose exception

the FDIC

to identify additional relationships as

designated exceptions to the primary

purpose exception (and therefore will

not require an application).

The FDIC also notes that certain

agents or nominees may only place

deposits at one IDI, in which case the

agent or nominee would not be a

deposit broker, regardless of whether

the agent or nominee satisfies the

primary purpose exception. However,

the FDIC notes that if an agent or

nominee places deposits at one IDI as

part of one business line,30 such as part

of a sweep program, and places deposits

at one or more other IDIs as part of one

or more other business lines, such as

issuing brokered CDs, that agent or

nominee would still qualify as a deposit

broker unless it satisfied the primary

purpose exception, with respect to a

particular business line, or one of the

other nine exceptions to the definition

of ‘‘deposit broker.’’

A. Designated Exceptions

In the final rule, the FDIC recognizes

a number of business relationships,

known as ‘‘designated exceptions,’’

described below, as meeting the primary

purpose exception. Two of these

relationships are the relationships

described in the proposal as business

relationships deemed to meet the

primary purpose exception—the ‘‘25

percent’’ business relationship and the

‘‘enabling transactions’’ business

relationship. Unlike in the proposal,

these two relationships will not be

required to go through the application

process, and instead will only require a

notice. The final rule also adds a

number of designated exceptions that

will neither require a notice nor an

application

the

primary purpose exception—the ‘‘25

percent’’ business relationship and the

‘‘enabling transactions’’ business

relationship. Unlike in the proposal,

these two relationships will not be

required to go through the application

process, and instead will only require a

notice. The final rule also adds a

number of designated exceptions that

will neither require a notice nor an

application. The additional designated

exceptions include business

relationships that have previously been

viewed by staff at the FDIC as meeting

the primary purpose exception, and

were evaluated as part of this

rulemaking process to meet the primary

purpose exception under the

interpretation of the exception adopted

in this final rule, as well as certain

business arrangements identified by

commenters as meeting the primary

purpose exception. The following

business relationships are identified as

designated exceptions under the final

rule: Business relationships in which,

with respect to a particular business

line: 31

(1) Less than 25 percent of the total

assets that the agent or nominee has

under administration for its customers

is placed at depository institutions;

(2) 100 percent of depositors’ funds

that the agent or nominee places, or

assists in placing, at depository

institutions are placed into transactional

accounts that do not pay any fees,

interest, or other remuneration to the

depositor;

(3) a property management firm

places, or assists in placing, customer

funds into deposit accounts for the

primary purpose of providing property

management services;

(4) the agent or nominee places, or

assists in placing, customer funds into

deposit accounts for the primary

purpose of providing cross-border

clearing services to its customers;

(5) the agent or nominee places, or

assists in placing, customer funds into

deposit accounts for the primary

purpose of providing mortgage

servicing;

primary purpose of providing property

management services;

(4) the agent or nominee places, or

assists in placing, customer funds into

deposit accounts for the primary

purpose of providing cross-border

clearing services to its customers;

(5) the agent or nominee places, or

assists in placing, customer funds into

deposit accounts for the primary

purpose of providing mortgage

servicing;

(6) a title company places, or assists

in placing, customer funds into deposit

accounts for the primary purpose of

facilitating real estate transactions;

(7) a qualified intermediary places, or

assists in placing, customer funds into

deposit accounts for the primary

purpose of facilitating exchanges of

properties under section 1031 of the

Internal Revenue Code;

(8) a broker dealer or futures

commission merchant places, or assists

in placing, customer funds into deposit

accounts in compliance with 17 CFR

240.15c3–3(e) or 17 CFR 1.20(a);

(9) the agent or nominee places, or

assists in placing, customer funds into

deposit accounts for the primary

purpose of posting collateral for

customers to secure credit-card loans;

(10) the agent or nominee places, or

assists in placing, customer funds into

deposit accounts for the primary

purpose of paying for or reimbursing

qualified medical expenses under

section 223 of the Internal Revenue

Code;

(11) the agent or nominee places, or

assists in placing, customer funds into

deposit accounts for the primary

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purpose of investing in qualified tuition

programs under section 529 of the

Internal Revenue Code;

stomer funds into

deposit accounts for the primary

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purpose of investing in qualified tuition

programs under section 529 of the

Internal Revenue Code;

(12) the agent or nominee places, or

assists in placing, customer funds into

deposit accounts to enable participation

in the following tax-advantaged

programs: Individual retirement

accounts under section 408(a) of the

Internal Revenue Code, Simple

individual retirement accounts under

section 408(p) of the Internal Revenue

Code, and Roth individual retirement

accounts under section 408A of the

Internal Revenue Code;

(13) a Federal, State, or local agency

places, or assists in placing, customer

funds into deposit accounts to deliver

funds to the beneficiaries of government

programs; and

(14) the agent or nominee places, or

assists in placing, customer funds into

deposit accounts pursuant to such other

relationships as the FDIC specifically

identifies as a designated business

relationship that meets the primary

purpose exception.

1. Deposit Placements of Less Than 25

Percent of Customer Assets Under

Management by the Third Party

Under the proposal, the FDIC

provided that the primary purpose of an

agent’s or nominee’s business

relationship with its customers will not

be considered to be the placement of

funds at a depository institution, subject

to an application process, if less than 25

percent of the total assets that the agent

or nominee has under management for

its customers, in a particular business

line, is placed at depository institutions

ided that the primary purpose of an

agent’s or nominee’s business

relationship with its customers will not

be considered to be the placement of

funds at a depository institution, subject

to an application process, if less than 25

percent of the total assets that the agent

or nominee has under management for

its customers, in a particular business

line, is placed at depository institutions.

The FDIC is finalizing the proposed

‘‘25 percent’’ test generally as proposed

but, in response to comments, is

revising the phrase ‘‘assets under

management’’ to ‘‘assets under

administration.’’ The FDIC is also

providing additional clarity regarding

the concept of a ‘‘business line’’ in

section I(C)(2)(b)(ii)(E).

The FDIC is also reiterating for

clarification that if more than 25 percent

of the total customer assets that an agent

or nominee has under administration is

placed at depository institutions, the

agent or nominee may still apply for a

primary purpose exception through the

application process described in section

I(C)(3)(c).

Customer assets under management.

In response to comments indicating that

the phrase ‘‘customer assets under

management’’ is generally limited to

certain broker dealer and investment

advisor business, the FDIC is revising

the term to ‘‘customer assets under

administration.’’ The revised phrase

more accurately reflects the FDIC’s

intention that this test cover both

customer assets managed by the agent or

nominee and those customer assets for

which the agent or nominee provides

certain other services but may not

exercise deposit placement or

investment discretion.

As part of the final rule, in

determining the amount of customer

assets under administration by an agent

or nominee, for a particular business

line, the agent or nominee 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

stment discretion.

As part of the final rule, in

determining the amount of customer

assets under administration by an agent

or nominee, for a particular business

line, the agent or nominee 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.

As a result, under the final rule, an

agent or nominee will meet the

designated exception 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 depository institutions.

2. Enabling Transactions

Proposal. As part of the Brokered

Deposits NPR, the FDIC also proposed

that the primary purpose of an agent’s

or nominee’s business relationship with

its customers would not be considered

to be the placement of funds if the agent

or nominee places depositors’ funds

into transactional accounts for the

purpose of enabling transactions.

Under the proposed rule, if 100

percent of an agent’s or nominee’s

customer funds that are placed at

depository institutions are placed into

transaction accounts, and no fees,

interest, or other remuneration is

provided to the depositor, then the

agent or nominee would meet the

primary purpose exception of enabling

transactions.

However, the FDIC also proposed that

if the agent or nominee, or the

depository institution, pays any sort of

interest, fee, or provides any

remuneration (e.g., nominal interest

paid to the deposit account), the agent

or nominee would still be eligible for

the primary purpose exception, but the

FDIC would more closely scrutinize the

agent’s or nominee’s business to

determine whether the primary purpose

is truly to enable payments

agent or nominee, or the

depository institution, pays any sort of

interest, fee, or provides any

remuneration (e.g., nominal interest

paid to the deposit account), the agent

or nominee would still be eligible for

the primary purpose exception, but the

FDIC would more closely scrutinize the

agent’s or nominee’s business to

determine whether the primary purpose

is truly to enable payments. The FDIC

identified factors to be considered in

evaluating such a scenario, including

the number of transactions in customer

accounts, and the interest, fees, or other

remuneration provided, in determining

the applicability of the primary purpose

exception.

Under the final rule, if an agent or

nominee places 100 percent of its

customer funds that have been placed at

depository institutions, with respect to

a particular business line, into

transaction accounts, and no fees,

interest, or other remuneration is

provided to the depositor, the agent or

nominee will meet the designated

exception of enabling transactions.

Entities that wish to avail themselves of

the designated exception for ‘‘enabling

transactions’’ would not be subject to

the application process, as under the

proposal, and would instead be required

to file a notice, as detailed in section

I(C)(3).

Under the final rule, agents or

nominees that place customer deposits

at depository institutions in

transactional accounts in which the

customer earns some amount of interest,

fees, or other remuneration, will

continue to be subject to an application

process

the application process, as under the

proposal, and would instead be required

to file a notice, as detailed in section

I(C)(3).

Under the final rule, agents or

nominees that place customer deposits

at depository institutions in

transactional accounts in which the

customer earns some amount of interest,

fees, or other remuneration, will

continue to be subject to an application

process. However, in response to

comments that asked for more clarity on

how these arrangements can meet the

primary purpose exception, the

following criteria will be considered as

part of the application process:

Æ The amount of interest, fees, or

other remuneration;

Æ The amount of transactions that

customers make, on average, on a

month-to-month basis;

Æ The marketing materials provided

by the agent or nominee indicate that

funds placed into insured depository

institutions are to enable transactions

for depositors; and

Æ 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.

To the extent an agent or nominee

that places all customer deposits at

depository institutions in transactional

accounts can establish via the

application process that it markets and

offers its deposit placement service for

the primary purpose of enabling

transactions and that its customers (1)

earn a nominal amount of interest, fees,

or other remuneration on its deposits,

based on the interest rate environment

at the time, or (2) on average, make more

than six transactions a month, then the

FDIC will determine that the agent or

nominee meets the primary purpose

exception. The FDIC is providing this

guidance in the preamble to provide

clarity to potential applicants and to

streamline the approval of applications

from agents or nominees with a primary

purpose of enabling transactions

environment

at the time, or (2) on average, make more

than six transactions a month, then the

FDIC will determine that the agent or

nominee meets the primary purpose

exception. The FDIC is providing this

guidance in the preamble to provide

clarity to potential applicants and to

streamline the approval of applications

from agents or nominees with a primary

purpose of enabling transactions. The

FDIC is not establishing a designated

exception for such arrangements due to

the lack of bright line standards for

evaluating marketing materials and for

defining ‘‘nominal’’ interest, fees, or

other remuneration in different interest

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Federal Register / Vol. 86, No. 13 / Friday, January 22, 2021 / Rules and Regulations

32 Under the final rule, the FDIC retains authority

to determine whether a rate of interest paid is

nominal.

33 A full discussion of that review, and the

comments received on previous advisory opinions,

is provided below in section I(C)(5).

34 FDIC Staff Advisory Opinion 17–02 (June 19,

2017).

35 See FDIC Staff Advisory Opinion 16–01 (May

19, 2016).

rate environments.32 The FDIC is less

likely to approve an application in

which customers receive more than a

nominal amount of interest, fees, or

other remuneration on their deposits

and, on average, make fewer than six

transactions per month.

If an agent or nominee that applies for

a primary purpose exception places a

small percentage of deposits in accounts

that are not transaction accounts, the

FDIC may still consider approving the

application, depending on the facts and

circumstances, including an analysis of

the criteria discussed above, but will

more closely scrutinize whether the

primary purpose is enabling

transactions

If an agent or nominee that applies for

a primary purpose exception places a

small percentage of deposits in accounts

that are not transaction accounts, the

FDIC may still consider approving the

application, depending on the facts and

circumstances, including an analysis of

the criteria discussed above, but will

more closely scrutinize whether the

primary purpose is enabling

transactions.

As noted in the Brokered Deposits

NPR, and in response to commenters

asking the FDIC to expand the proposed

exception, the proposed exception was

not intended to apply to all third parties

that place deposits into accounts that

have transactional features and is not

intended to create an incentive for

deposit brokers to move customers from

time deposits to transaction accounts in

order to evade brokered deposits

restrictions. Rather, the proposed

exception was intended to and will, as

part of this final rule, apply only to

third parties whose business purpose is

to place funds at depository institutions

to enable transactions or make

payments.

B. Additional Designated Exceptions

As provided in the proposal, the FDIC

indicated that it would review existing

advisory opinions to determine those

that should be codified in the final rule

and those that were outdated and

should be rescinded.33 A number of the

staff advisory opinions related to the

primary purpose exception, and some of

these opinions interpreted the primary

purpose exception as applying to certain

third parties engaged in certain business

arrangements. While these opinions

were based upon an interpretation of the

primary purpose exception that is

different than the interpretation

provided in this final rule, the outcome

of whether the arrangements meet the

primary purpose exception under the

final rule interpretation would not

necessarily change if evaluated under

the revised interpretation

ies engaged in certain business

arrangements. While these opinions

were based upon an interpretation of the

primary purpose exception that is

different than the interpretation

provided in this final rule, the outcome

of whether the arrangements meet the

primary purpose exception under the

final rule interpretation would not

necessarily change if evaluated under

the revised interpretation. In an effort to

streamline the process for determining

whether an agent or nominee meets the

primary purpose exception, the FDIC

agrees with commenters that it is more

efficient to include some of these

arrangements as part of the bright-line

test for the exception. In this way,

entities that have relied upon previous

staff opinions for the primary purpose

exception will be able to continue to

rely upon the exception.

Moreover, and in response to

comments, the FDIC is also identifying

other business relationships that the

FDIC believes meet the primary purpose

exception as designated exceptions.

Agents or nominees that qualify for a

designated exception listed below do

not have to file an application or notice.

Property Management Services

Certain property management firms

assist clients, such as homeowner’s

associations (‘‘HOAs’’), in managing

their properties. These property

management firms might place deposits

at insured depository institutions

because they need to deposit rent

checks or security deposits on behalf of

their client and may use some of those

funds to pay for maintenance or repairs

needed on the client’s property. Under

the final rule, a property management

firm that places deposits at insured

depository institutions to provide

property management services will be

deemed to meet the primary purpose

and qualify for a designated exception

posit rent

checks or security deposits on behalf of

their client and may use some of those

funds to pay for maintenance or repairs

needed on the client’s property. Under

the final rule, a property management

firm that places deposits at insured

depository institutions to provide

property management services will be

deemed to meet the primary purpose

and qualify for a designated exception.

The primary purpose of the relationship

between a property management service

and its customer is to manage a

property, rather than to place funds in

deposits accounts at IDIs.34

The FDIC also notes that companies

that assist property management firms

or their clients in placing funds at

insured depository institutions to

maximize yield or deposit insurance

may still qualify as deposit brokers.

These companies that either place or

assist in placing funds would not be

eligible for the primary purpose

exception under this particular business

relationship because the primary

purpose of their deposit placement

activity, on behalf of their client (the

property management firm), is not to

provide property management

functions.

Cross-Border Clearing Services

Certain insured depository

institutions provide cross-border

clearing services for customers to

facilitate fund or payment transfers

where the payee and the transaction

recipient are located in separate

countries. Specifically, in these

arrangements, a nonbank entity or a

bank that does not have cross-border

clearing capabilities places, or assists in

placing, its customer funds into bank

accounts at an IDI (the ‘‘clearing IDI’’)

that acts as an intermediary to clear and

settle the transfer of the customer’s

funds into the transaction recipient’s

bank account. In providing cross-border

clearing functions, the customer’s funds

are placed in deposit accounts at the

clearing IDI for a very limited period of

time and are typically disbursed to the

recipient immediately (or almost

immediately)

I (the ‘‘clearing IDI’’)

that acts as an intermediary to clear and

settle the transfer of the customer’s

funds into the transaction recipient’s

bank account. In providing cross-border

clearing functions, the customer’s funds

are placed in deposit accounts at the

clearing IDI for a very limited period of

time and are typically disbursed to the

recipient immediately (or almost

immediately).

Under these circumstances, the third

party’s primary purpose in placing, or

facilitating the placement of, deposits at

the clearing IDI is to facilitate the

clearing of payments and will be

deemed to meet the primary purpose

exception and qualify for a designated

exception. This outcome is consistent

with previous staff advisory opinions

related to clearing services provided by

insured depository institutions.35

The FDIC recognizes that IDIs provide

a variety of clearing services that may be

outside of the scope of the specific

cross-border clearing services

designated exception described above.

At this point, the FDIC will evaluate

whether these other clearing services

provided to customers will meet the

primary purpose exception as part of the

application process. As described in

section I(C)(3)(h), if the FDIC determines

that other clearing services meet the

primary purpose exception, then it will

also consider whether additional

particular clearing services should be

identified as designated exceptions.

Real Estate Related Transactions

Mortgage servicing. Mortgage

servicing rights are often sold to

mortgage servicers that are responsible

for the day-to-day management of a loan

account, including collecting a

borrower’s monthly payments of

principal and interest and disbursing

these funds to stakeholders pursuant to

the terms of servicing agreements

identified as designated exceptions.

Real Estate Related Transactions

Mortgage servicing. Mortgage

servicing rights are often sold to

mortgage servicers that are responsible

for the day-to-day management of a loan

account, including collecting a

borrower’s monthly payments of

principal and interest and disbursing

these funds to stakeholders pursuant to

the terms of servicing agreements.

Mortgage service providers also collect

from borrower’s prepayments of each

borrower’s respective property tax and

property insurance premiums and hold

such funds in escrow accounts until

such payments are due, at which time

they use the escrowed funds to make

payments. As part of managing these

services, mortgage servicers place funds

into omnibus deposit accounts at

insured depository institutions. The

primary purpose of the mortgage

servicer’s relationship with its

customers is providing the services

listed above related to the loan account,

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Federal Register / Vol. 86, No. 13 / Friday, January 22, 2021 / Rules and Regulations

36 See generally, FDIC Staff Advisory Opinion 92–

78 (Nov. 10, 1992); see also FDIC Staff Advisory

Opinion 17–02 (June 19, 2017).

37 See FDIC Staff Advisory Opinion 17–02 (June

19, 2017).

38 See id.

39 17 CFR 240.15c3–3(e), 240.15c3–3a. The

amount required to be held in the Special Reserve

Account is determined pursuant to an SEC formula

where, for each customer, the broker dealer adds up

free credit balances and other credits in the

account, and then reduces that number by certain

debits. The broker dealer then aggregates the

calculation for all customers and this aggregate

represents the amount that a broker dealer must

keep, in cash or qualified securities, in the Special

Reserve Account at a bank. Id

to an SEC formula

where, for each customer, the broker dealer adds up

free credit balances and other credits in the

account, and then reduces that number by certain

debits. The broker dealer then aggregates the

calculation for all customers and this aggregate

represents the amount that a broker dealer must

keep, in cash or qualified securities, in the Special

Reserve Account at a bank. Id.

‘‘Free credit balances’’ are defined as liabilities of

a broker or dealer to customers which are subject

to immediate cash payment to customers on

demand, whether resulting from sales of securities,

dividends, interest, deposits or otherwise, and can

include funds carried in a certain securities

account, including variation margin or initial

margin, marks to market, and proceeds resulting

from margin paid or released in connection with

closing out, settling or exercising futures contracts

and options thereon. 17 CFR 240.15c3–3(a)(8).

40 17 CFR 240.15c3–3(e).

41 See, FDIC Staff Advisory Opinion 94–39 (Aug.

17, 1994). To the extent that the balance of a Special

Reserve Account is owned by the broker dealer and

only becomes owned by its customers when a

liquidating agent of a failed broker dealer is

appointed and distributes the funds to all customers

on a pro rata basis, then the broker dealer would

not be a third party placing or facilitating the

placement of funds of others, and would be outside

the scope of the deposit broker definition. The FDIC

is not addressing the ownership of Special Reserve

Accounts in this final rule.

42 17 CFR 1.20(a). The formula set in CFTC

regulations calls for the amount to be maintained

in the segregated customer account the market

value of futures customer funds subject to certain

adjustments. 17 CFR 1.20(i)

of funds of others, and would be outside

the scope of the deposit broker definition. The FDIC

is not addressing the ownership of Special Reserve

Accounts in this final rule.

42 17 CFR 1.20(a). The formula set in CFTC

regulations calls for the amount to be maintained

in the segregated customer account the market

value of futures customer funds subject to certain

adjustments. 17 CFR 1.20(i). ‘‘Futures customer

funds’’ include all money, securities, and property

received by a futures commission merchant from,

for, or on behalf of, futures customers to margin,

guarantee, or secure contracts for future delivery on

or subject to the rules of a contract market or

derivatives clearing organization, as the case may

be, and all money accruing to such futures

customers as the result of such contracts.’’ 17 CFR

1.3.

and not the placement of deposits at

IDIs. Accordingly, under this final rule,

mortgage servicers that place deposits at

insured depository institutions to fulfill

their obligations under servicing

agreements meet the primary purpose

exception and qualify for a designated

exception. This outcome is consistent

with previous staff advisory opinions

related to mortgage servicers.36

Residential/Commercial Escrow

Services. Prior to closing a real estate

transaction, the parties involved (e.g.,

the seller and buyer) often times have

the funds necessary to complete the

pending real estate transaction held by

a title insurance company in a deposit

account at an insured depository

institution. The purpose of having a

third party title company hold funds in

an escrow account is to protect the

interests of all parties involved by

ensuring that no funds or property will

be transferred until every escrow term

and condition has been met

essary to complete the

pending real estate transaction held by

a title insurance company in a deposit

account at an insured depository

institution. The purpose of having a

third party title company hold funds in

an escrow account is to protect the

interests of all parties involved by

ensuring that no funds or property will

be transferred until every escrow term

and condition has been met. The

primary purpose of the third party title

company’s relationship with its

customers in such an arrangement is

typically providing title services or

facilitating the closure of the real estate

transaction, and in any case not the

placement of deposits at IDIs.

Accordingly, under the final rule, title

companies that place deposits at

insured depository institutions to

facilitate a real estate transaction are

deemed to meet the primary purpose

exception and qualify for a designated

exception. This outcome is consistent

with previous staff advisory opinions

related to title companies.37

1031 Like-Kind Exchanges. Some

deposits are placed at banks by financial

intermediaries known as ‘‘qualified

intermediaries’’ or ‘‘QIs.’’ Under section

1031 of the Internal Revenue Code (26

U.S.C. 1031), the role of a QI is to

facilitate the exchange of ‘‘like kind’’

properties on behalf of clients known as

‘‘exchangers.’’ Pursuant to a written

agreement, the QI acquires property

from the exchanger and then arranges

for its resale. With the proceeds, the QI

acquires another property and then

transfers it to the exchanger. If the

transaction is handled properly, the

exchanger receives favorable tax

treatment.

Before the QI uses the proceeds of the

first property to purchase the second

property, the funds are held by the QI

in a deposit account at a bank. In this

case, the primary purpose of the QI’s

relationship with its clients is to

facilitate the exchange of property, not

to place deposits at IDIs

ger. If the

transaction is handled properly, the

exchanger receives favorable tax

treatment.

Before the QI uses the proceeds of the

first property to purchase the second

property, the funds are held by the QI

in a deposit account at a bank. In this

case, the primary purpose of the QI’s

relationship with its clients is to

facilitate the exchange of property, not

to place deposits at IDIs. Accordingly,

under the final rule, QIs that place

deposits into depository institutions to

facilitate the exchange of two properties

under section 1031 of the Internal

Revenue Code are deemed to meet the

primary purpose exception and qualify

for a designated exception. This

outcome is consistent with previous

staff advisory opinions related to certain

QIs.38

Deposits Related to Satisfaction of

Certain Regulations

Broker Dealer Funds in a Special

Reserve Account for the Benefit of

Customers. A broker dealer registered

with the United States Securities and

Exchange Commission (SEC) is required

to establish an account at a bank titled

‘‘Special Reserve Account for the

Benefit of Customers’’ and to keep in the

account cash or qualified securities

(Special Reserve Account).39

The Special Reserve Account protects

a broker dealer’s customers in the event

the broker dealer is liquidated, in which

case the funds and qualified securities

in the Special Reserve Account, in

addition to funds collected by the

liquidating agent from customers of the

firm that have debits, are used to satisfy

customer claims on a pro rata basis

before being available for the firm’s

general creditors. While the broker

dealer is operating as a going concern,

it is prohibited from using the funds or

qualified securities in the Special

Reserve Account as security for a loan

to the broker dealer by the bank.40

The primary purpose of the broker

dealer’s business relationship with its

customers is to facilitate the buying and

selling of securities on behalf of

customers

general creditors. While the broker

dealer is operating as a going concern,

it is prohibited from using the funds or

qualified securities in the Special

Reserve Account as security for a loan

to the broker dealer by the bank.40

The primary purpose of the broker

dealer’s business relationship with its

customers is to facilitate the buying and

selling of securities on behalf of

customers. As part of that relationship

a broker dealer is required to establish

a Special Reserve Account is to provide

customer protection in the event of a

broker dealer liquidation. Thus, to the

extent that the balance in a Special

Reserve Account is owned by customers

at the time funds are deposited into it,

such arrangement meets the primary

purpose exception and qualifies for a

designated exception.41

Futures Commission Merchant’s

Funds in a Segregated Customer

Account. Regulations of the Commodity

Futures Trading Commission (CFTC)

provide protections for futures customer

funds under a regulatory system similar

to the SEC’s requirements related to the

Special Reserve Account. Under the

CFTC’s regulations, a futures

commission merchant must maintain in

a separate account at a bank or trust

company money or permitted

investments in an amount at least

sufficient in the aggregate to cover its

total obligations to all futures customers

as computed under a formula

established by the CFTC (Segregated

Customer Account).42

The Segregated Customer Account

protects a futures commission

merchant’s customers in the event the

futures commission merchant is

liquidated, in which case the Account

balance and permitted investments in

the Segregated Customer Account, in

addition to funds collected by the

liquidating agent from customers of the

firm that have debits, are used to satisfy

customer claims on a pro rata basis

before being available for the firm’s

general creditors

merchant’s customers in the event the

futures commission merchant is

liquidated, in which case the Account

balance and permitted investments in

the Segregated Customer Account, in

addition to funds collected by the

liquidating agent from customers of the

firm that have debits, are used to satisfy

customer claims on a pro rata basis

before being available for the firm’s

general creditors.

The primary purpose of a futures

commission merchant’s business

relationship with its customers is to

facilitate the buying and selling of

futures and other investment products

on behalf of customers. As part of that

relationship, the futures commission

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Federal Register / Vol. 86, No. 13 / Friday, January 22, 2021 / Rules and Regulations

43 See FDIC Staff Advisory Opinion 17–02 (June

19, 2017).

44 See FDIC Staff Advisory Opinion 94–13 (Mar.

11, 1994).

45 26 U.S.C. 223.

46 26 U.S.C. 529.

47 12 U.S.C. 1831f(g)(2)(D) and (E). Because the

exceptions for trustees, plan administrators, and

investment advisers for pension plans and other

employee benefit plans are provided in separate

statutory exception and are not related to the

primary placement exception, no notice or

application requirement would apply.

48 12 U.S.C. 1831f(g)(2)(H).

49 This treatment for IRAs and other retirement

plans that are not part of an employee benefit plan

is consistent with how the FDIC viewed such

accounts in a 1984 final rule, along with the Federal

Home Loan Bank Board, when it adopted the

definition of ‘‘deposit broker’’ upon which the

current statutory definition is based.

The insurance coverage currently available to

deposits held in connection with pension funds and

other employee benefit plans will not be affected by

the rule unless such deposits are placed by or

through a deposit broker

a 1984 final rule, along with the Federal

Home Loan Bank Board, when it adopted the

definition of ‘‘deposit broker’’ upon which the

current statutory definition is based.

The insurance coverage currently available to

deposits held in connection with pension funds and

other employee benefit plans will not be affected by

the rule unless such deposits are placed by or

through a deposit broker. In addition, trustees and

custodians of IRA and Keogh accounts will not be

deemed to be deposit brokers. 49 FR 13003, 13009

(Apr. 4, 1984). (emphasis added)

merchant is required to establish a

Segregated Customer Account to

provide customer protection in the

event of a futures commission

merchant’s liquidation. Thus, to the

extent that the balance of a Segregated

Customer Account is owned by the

firm’s customers at the time funds are

deposited into it, such arrangement

meets the primary purpose exception

and qualify for a designated exception.43

The FDIC is aware of other deposit

arrangements in which entities place

deposits as required under federal or

state law. While the FDIC does not have

sufficient knowledge of such

arrangements to grant designated

exceptions for such arrangements in this

final rule, the FDIC expects it would

approve an application for a primary

purpose exception under such

circumstances when the primary

purpose is not the placement of

deposits. The FDIC will consider

identifying specific such arrangements

as designated exceptions in the future if

warranted.

Deposits Placed as Required Collateral

for Credit-Card Loans

Some deposits are placed at insured

depository institutions by third parties

that offer secured credit-card loans to

their customers. The loans are secured

by deposits belonging to the customers

and held at insured depository

institutions as required collateral that is

typically capped to the amount of the

credit line granted to the customer by

the third party

eral

for Credit-Card Loans

Some deposits are placed at insured

depository institutions by third parties

that offer secured credit-card loans to

their customers. The loans are secured

by deposits belonging to the customers

and held at insured depository

institutions as required collateral that is

typically capped to the amount of the

credit line granted to the customer by

the third party. Under this final rule, the

primary purpose of the third party’s

relationship with its customers is to

provide consumers access to credit card

loans and not to place deposits with

IDIs. Accordingly, under this final rule,

third parties that place customer funds

into depository institutions as collateral

for their customers to secure credit card

loans will meet the primary purpose

exception and qualify for a designated

exception. This outcome is consistent

with previous staff advisory opinions.44

Deposits Placed To Pay for or To

Reimburse Qualified Medical Expenses

Under Section 223 of the Internal

Revenue Code

Some deposits are placed with IDIs on

behalf of customers participating in

health savings accounts (HSAs).

Individuals that participate in an HSA

can use those funds to pay for or

reimburse qualified medical expenses

with certain tax benefits.45 Individuals

may place funds directly with IDIs into

HSAs, or, their funds may be placed

into HSAs through employers that

utilize third party administrators that

manage HSA programs. As part of those

management services, the third party

administrator places, or facilitates the

placement of, deposits at IDIs directly

from employer payroll accounts. Funds

in a designated HSA are intended to be

used by the depositor for payment of

qualified medical expenses. The

primary purpose of the third party

administrator’s relationship with its

customers is to assist in placing

customer funds into HSAs to facilitate

the payment for or reimbursement of

qualified medical expenses

ement of, deposits at IDIs directly

from employer payroll accounts. Funds

in a designated HSA are intended to be

used by the depositor for payment of

qualified medical expenses. The

primary purpose of the third party

administrator’s relationship with its

customers is to assist in placing

customer funds into HSAs to facilitate

the payment for or reimbursement of

qualified medical expenses.

Accordingly, under this final rule,

entities that place, or facilitate the

placement of, customer funds into HSAs

pursuant to section 223 of the Internal

Revenue code meet the primary purpose

exception and qualify for a designated

exception.

The FDIC is aware that not all

individuals with funds in an HSA use

those funds only for qualified medical

expenses. Nonetheless, the FDIC is

persuaded that the primary purpose of

HSA fund administrators is to enable

the payment of qualified medical

expenses. However, the FDIC will

continue to monitor the evolution and

use of HSA accounts over time. If at

some point in the future, the primary

purpose of HSA administrators has

evolved to something other than

enabling transactions related to

qualified medical expenses, the FDIC

may reevaluate whether this designated

exception is still warranted. Any

changes would be made through notice

and comment rulemaking.

Deposits Placed for Qualified Tuition

Programs Under Section 529 of the

Internal Revenue Code

Some deposits are placed at IDIs by

states, state agencies, or educational

institutions as part of qualified tuition

plans (or ‘‘529 plans’’). A 529 plan is a

tax-advantaged savings plan designed to

encourage saving for future education

costs.46 The individual contributions for

a 529 plan may be invested in a variety

of financial products, including deposit

products

Internal Revenue Code

Some deposits are placed at IDIs by

states, state agencies, or educational

institutions as part of qualified tuition

plans (or ‘‘529 plans’’). A 529 plan is a

tax-advantaged savings plan designed to

encourage saving for future education

costs.46 The individual contributions for

a 529 plan may be invested in a variety

of financial products, including deposit

products. The primary purpose of the

state, state agency, or educational

institution’s relationship with its

investors is to provide a tax-advantaged

savings plan designed to encourage

saving for future education costs and

not the placement of deposits.

Accordingly, under this final rule,

states, state agencies, or educational

institutions that place investor funds

into depository institutions pursuant to

section 529 of the Internal Revenue

Code will meet the primary purpose

exception and qualify for a designated

exception.

Deposits Placed in a Retirement

Account Not Part of an Employee

Benefit Plan

Section 29 contains an express

exception from the deposit broker

definition for trustees of a pension plan

or other employee benefits plan and for

plan administrators and investment

advisors of such plans.47 Section 29 also

provides an express exception for a

trustee or custodian of a pension or

profitsharing plan qualified under

section 401(d) or 403(a) of the Internal

Revenue Code.48 A commenter

requested that the primary purpose

exception apply with respect to

individual retirement accounts.

Congress has provided similar tax

incentivized treatment for other

retirement account arrangements that do

not meet the definition of Employee

Benefit Plan or the pension and

profitsharing plans referenced in section

29. Such arrangements include a

traditional IRA, Simple IRA, and Roth

IRAs. The primary purpose of an entity

who places deposits in association with

such plans is to enable participation in

the retirement program and not place

deposits at IDIs

irement account arrangements that do

not meet the definition of Employee

Benefit Plan or the pension and

profitsharing plans referenced in section

29. Such arrangements include a

traditional IRA, Simple IRA, and Roth

IRAs. The primary purpose of an entity

who places deposits in association with

such plans is to enable participation in

the retirement program and not place

deposits at IDIs. Accordingly, the FDIC

is establishing a designated exception

for such plans.49

Deposits Placed by Agencies To

Disburse Government Benefits

Federal, state or local agencies

(‘‘Agencies’’) sometimes use debit or

prepaid cards to deliver funds to the

beneficiaries of government programs.

In some cases, such programs are

structured so that each beneficiary will

own a separate deposit account at

particular insured depository

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institutions (with the account being

accessible by the beneficiary through

the use of a debit card). Other programs

may be structured so that multiple

beneficiaries will own a commingled

deposit account with ‘‘per beneficiary’’

or ‘‘pass-through’’ deposit insurance

coverage. In these scenarios, the Agency

is involved in choosing IDIs or opening

deposit accounts to assist in the

disbursement of funds to beneficiaries,

as mandated by law. These accounts are

also limited to the placement of funds

for a designated government benefit

program and may not be commingled

with the beneficiary’s other funds

outside of the government benefit

program. The primary purpose of the

Agency’s relationship with beneficiaries

is to discharge its legal obligation by

disbursing funds as part of a

government program

aries,

as mandated by law. These accounts are

also limited to the placement of funds

for a designated government benefit

program and may not be commingled

with the beneficiary’s other funds

outside of the government benefit

program. The primary purpose of the

Agency’s relationship with beneficiaries

is to discharge its legal obligation by

disbursing funds as part of a

government program. Accordingly,

under this final rule, Agencies that

place funds for beneficiaries of

government programs will meet the

primary purpose exception and qualify

for a designated exception.

C. Other Business Relationships

Under the final rule, agents or

nominees that meet the ‘‘deposit

broker’’ definition, but do not qualify for

a designated exception, may submit an

application to the FDIC. The FDIC will

review whether the applicant

sufficiently demonstrates that the

primary purpose of the agent or

nominee is something other than the

placement, or facilitating the placement,

of funds at insured depository

institutions. As noted above, in

conducting this review, the FDIC will

specifically look at the primary purpose

of the business relationship between the

agent or nominee and its customers,

with respect to a particular business

line. For example, offering loans or a

range of lending products, could be

described in the application as the

primary purpose of a business

relationship, if lending is a more

significant portion of a particular

business line than placing, or

facilitating the placement of, deposits is

iness relationship between the

agent or nominee and its customers,

with respect to a particular business

line. For example, offering loans or a

range of lending products, could be

described in the application as the

primary purpose of a business

relationship, if lending is a more

significant portion of a particular

business line than placing, or

facilitating the placement of, deposits is.

As part of its review, the FDIC will, as

proposed, consider the following

factors: (1) The revenue structure for the

agent or nominee; (2) whether the

agent’s or nominee’s marketing

activities to prospective depositors is

aimed at opening a deposit account or

to provide some other service, and if

there is some other service, whether the

opening of the deposit account is

incidental to that other service; and (3)

the fees, and type of fees, received by an

agent or nominee for any deposit

placement service it offers. A detailed

discussion of the specific content

requirements and timing for the

application process is provided in

section I(C)(3)(d) of this notice.

The FDIC expects to make publicly

available on the FDIC’s website (1)

redacted summaries of certain approved

applications, as soon as practicable, and

(2) a list of additional designated

exceptions, to the extent applicable, that

will describe additional business

arrangements not described in this

rulemaking that the FDIC in the future

determines meet the primary purpose

exception without requiring an

application. Redacted summaries

available on the FDIC’s website will

typically describe business relationships

not discussed in this final rule that the

FDIC has determined to meet the

primary purpose exception and may be

cited as support in applications for the

primary purpose exception in certain

circumstances. Designated exceptions

identified following this rulemaking

may be relied upon, without an

application, by any agent or nominee

that meets the published criteria

be business relationships

not discussed in this final rule that the

FDIC has determined to meet the

primary purpose exception and may be

cited as support in applications for the

primary purpose exception in certain

circumstances. Designated exceptions

identified following this rulemaking

may be relied upon, without an

application, by any agent or nominee

that meets the published criteria. The

FDIC would also note on the website

whether a notice and/or any ongoing

reporting will be required with respect

to a new designated exception.

The FDIC intends for the application

process to promote transparency and

consistency for entities seeking to use

the primary purpose exception for

business relationships that do not

qualify for a designated exception. In

addition to transparency and

consistency for the public, the

application process is intended to

enhance FDIC’s ability to protect the

DIF and promote safety and soundness,

particularly with respect to new or

novel business arrangements.

D. Business Relationships Ineligible for

the Primary Purpose Exception

1. Deposit Placements of Brokered CDs

In the Brokered Deposits NPR, the

FDIC stated that it would continue to

consider a person’s placement of

brokered CDs (as described in the third

prong to the deposit broker definition

and as discussed above) as deposit

brokering. Under the proposal, for

purposes of establishing the person’s

primary purpose, the person’s

placement of brokered CDs would be

considered a discrete and independent

business line from other deposit

placement businesses. Thus, the

primary purpose for that particular

business line would always be the

placement of deposits at depository

institutions, even if the person may not

be considered a deposit broker for other

deposits that it places (or for which it

facilitates the placement), which would

be evaluated as a separate business line.

The FDIC is finalizing this aspect of

the proposed rule as proposed

. Thus, the

primary purpose for that particular

business line would always be the

placement of deposits at depository

institutions, even if the person may not

be considered a deposit broker for other

deposits that it places (or for which it

facilitates the placement), which would

be evaluated as a separate business line.

The FDIC is finalizing this aspect of

the proposed rule as proposed.

Accordingly, consistent with the intent

of Section 29 (and part 337 of the FDIC’s

regulations), brokered CDs, as has been

the case since 1989, will be considered

brokered. Deposits related to brokered

CDs will not be included for purposes

of determining whether a person’s other

business lines meet the primary purpose

exception.

2. Deposit Placements for Purposes of

Encouraging Savings

In the Brokered Deposits NPR, the

FDIC proposed that the FDIC would not

grant a primary purpose exception if the

third party’s primary purpose for its

business relationship with its customers

is to place (or assist in the placement of)

funds into deposit accounts to

‘‘encourage savings,’’ ‘‘maximize yield,’’

‘‘provide deposit insurance,’’ or any

similar purpose. The FDIC expressed

concern that these types of services

could evade the purposes of section 29.

The FDIC is finalizing this aspect of

the proposed rule as proposed. It is the

FDIC’s view that there is no meaningful

distinction between a primary purpose

of ‘‘encouraging savings,’’ ‘‘maximizing

yield,’’ ‘‘providing deposit insurance,’’

or any similar purpose and a primary

purpose of placing funds into a deposit

account. Furthermore, granting a

primary purpose exception based on

such rationales could result in all

deposit arrangements satisfying the

primary purpose exception, which

would not be consistent with section 29.

As such, third parties that either place

or assist in the placement of deposits to

provide these core deposit-placement

services for its customers will not

qualify for the primary purpose

exception

granting a

primary purpose exception based on

such rationales could result in all

deposit arrangements satisfying the

primary purpose exception, which

would not be consistent with section 29.

As such, third parties that either place

or assist in the placement of deposits to

provide these core deposit-placement

services for its customers will not

qualify for the primary purpose

exception.

The FDIC notes that one of the

designated exceptions is for 529 plans

in which the primary purpose is to

encourage savings for future education

costs as part of a tax-advantaged savings

plan. While a primary purpose of

encouraging or enabling savings does

not generally qualify for the primary

purpose exception for the reasons

described above, encouraging savings as

part of a specific tax-incentivized

government program, similar to 529

plans, may qualify.

E. Evaluation of Business Lines

As noted in the Brokered Deposits

NPR, the analysis and assessment of

discrete business lines is an important

aspect of whether certain agents or

nominees meet the primary purpose

exception. In evaluating whether an

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Federal Register / Vol. 86, No. 13 / Friday, January 22, 2021 / Rules and Regulations

50 Entities that qualify for other designated

exceptions detailed above are not subject to a

notice, application, or reporting process. The

applicable specific contents for the two types of

notice submissions are provided in section

I(C)(3)(b).

applicant meets the requirements of the

primary purpose exception, the FDIC

would analyze specific business lines in

which the applicant has a specific type

of relationship with its customers

exceptions detailed above are not subject to a

notice, application, or reporting process. The

applicable specific contents for the two types of

notice submissions are provided in section

I(C)(3)(b).

applicant meets the requirements of the

primary purpose exception, the FDIC

would analyze specific business lines in

which the applicant has a specific type

of relationship with its customers. This

was intended to prevent an agent or

nominee engaged in the brokering of

deposits from evading the statutory

restrictions by adding or combining its

brokering business with another

business such that the deposit broker

business is no longer its primary

purpose. Under the proposed rule, the

term business line would refer to the

business relationships an agent or

nominee has with a group of customers

for whom the business places, or

facilitates the placement of, deposits.

Commenters who addressed the

proposed definition of ‘‘business line’’

raised concerns that the proposed

definition does not reflect how

businesses view their business lines.

Specifically, commenters suggested that

the FDIC permit the third party to

identify one or more business lines for

purposes of the application process, so

that the business line would reflect risk

management and reporting policies and

procedures utilized by the third party.

These commenters expressed the view

that the third party, rather than the

FDIC, should have discretion to

determine specific business lines, as

business lines will vary significantly

across different entities. One commenter

noted that business line information is

generally proprietary and confidential

and thus third parties may not be

willing to provide such information.

The FDIC expects that entities that

submit a notice or application for the

primary purpose exception should, in

good faith, determine their appropriate,

specific business lines

ill vary significantly

across different entities. One commenter

noted that business line information is

generally proprietary and confidential

and thus third parties may not be

willing to provide such information.

The FDIC expects that entities that

submit a notice or application for the

primary purpose exception should, in

good faith, determine their appropriate,

specific business lines. The FDIC, in

reviewing a particular business

arrangement for the primary purpose

exception, will generally defer to the

descriptions of business lines provided

by the applicant or notice-filer.

Nonetheless, the determination of what

constitutes a business line will depend

on the facts and circumstances of a

particular deposit placement

arrangement, and the FDIC ultimately

retains discretion to determine the

appropriate business line to which the

primary purpose exception would

apply. The FDIC is more likely to

scrutinize the identification of a

business line if the business

relationships to which it refers are

materially broader than the business

relationships with the specific group of

customers for whom the business

places, or facilitates the placement of,

deposits.

The FDIC expects that in many cases,

particularly in the case of agents or

nominees who are nonfinancial

companies, the identification of a

business line will be simple and

straightforward, and in some cases may

encompass an entire business.

F. Involvement of Other Third Party

Intermediaries

If an agent or nominee qualifies for a

statutory exception from the deposit

broker definition, it is possible that one

or more additional third parties that are

engaged in the business of placing, or

facilitating the placement of, customer

deposits may qualify as a deposit

broker. The FDIC understands that, in

certain deposit placement arrangements,

agents or nominees may use third party

intermediaries (and in some cases a

number of them) to provide

administrative functions

ition, it is possible that one

or more additional third parties that are

engaged in the business of placing, or

facilitating the placement of, customer

deposits may qualify as a deposit

broker. The FDIC understands that, in

certain deposit placement arrangements,

agents or nominees may use third party

intermediaries (and in some cases a

number of them) to provide

administrative functions. To the extent

that these third party intermediaries do

not meet the deposit broker definition,

then deposits placed at IDIs via an agent

or nominee that meet an exception to

the definition of deposit broker (for

example, the primary purpose

exception), will be nonbrokered. If,

however, the third party intermediary

is, for example, providing matchmaking

functions for the agent or nominee and

insured depository institutions, as

defined in this final rule, then it would

meet the ‘‘facilitation’’ part of the

deposit broker definition, and the

deposits placed by or through the

intermediary would be brokered

deposits, regardless of the status of the

agent or nominee.

In the case of the primary purpose

exception, IDIs that receive deposits

from agents or nominees that meet the

primary purpose exception should be

aware of any other third parties

involved in the placement of deposits

and whether those other third parties

meet the deposit broker definition in

order to properly complete their

Consolidated Reports of Condition and

Income (‘‘Call Reports’’), which require

reporting of brokered deposits held by

IDIs. If such other third parties meet the

definition of deposit broker, deposits

placed by or through that third party are

considered brokered.

See section I(C)(3)(h) for further

discussion of this topic in the context of

designated exceptions subject to the

notice requirement and the application

process.

Income (‘‘Call Reports’’), which require

reporting of brokered deposits held by

IDIs. If such other third parties meet the

definition of deposit broker, deposits

placed by or through that third party are

considered brokered.

See section I(C)(3)(h) for further

discussion of this topic in the context of

designated exceptions subject to the

notice requirement and the application

process.

3. Notice and Application Process for

the Primary Purpose Exception

Under the proposal, entities that place

deposits at insured depository

institutions under the business

relationships that were deemed to meet

the primary purpose exception would

have been subject to expedited

processing under the application

process. The FDIC is revising this part

of the proposed application process and,

under the final rule, will no longer

require applications for those two

business relationships or for the

additional designated business

relationships described in this final

rule. The purpose of this change from

the proposal is to streamline the process

for entities (or business arrangements)

that meet a bright-line primary purpose

exception. In other words, the FDIC has

already evaluated these business

relationships as part of this rulemaking

process and has determined that they

meet the primary purpose exception. As

such, entities will not need to go

through an application process if they

are placing, or facilitating the placement

of, deposits as part of a business

relationship that is a designated

exception under this final rule.

a. Notice Requirement

For two of the designated

exceptions—the ‘‘25 percent’’ and the

‘‘enabling transactions’’ business

relationships—the FDIC is requiring that

third parties submit a written notice to

the FDIC indicating that the third party

will rely upon the applicable designated

exception.50 The notice may also be

submitted by an insured depository

institution that is receiving deposits

from the third party

two of the designated

exceptions—the ‘‘25 percent’’ and the

‘‘enabling transactions’’ business

relationships—the FDIC is requiring that

third parties submit a written notice to

the FDIC indicating that the third party

will rely upon the applicable designated

exception.50 The notice may also be

submitted by an insured depository

institution that is receiving deposits

from the third party.

Upon the FDIC’s receipt of the notice,

the third party that is the subject of the

notice may rely upon the applicable

designated exception for a particular

business line. The FDIC will establish

an electronic process for the receipt of

notices. This process will include

providing the notice filer with an

immediate acknowledgement of receipt.

The FDIC may, however, at its

discretion, and at any time, including

during the supervision and examination

of an insured depository institution,

require the notice filer to provide

additional information. Such requests

generally will be limited to verifying

that the third party meets the criteria for

the applicable designated exception,

and the FDIC generally expects to only

make such requests if there is reason to

believe that the third party does not

meet, or no longer meets, the criteria for

the applicable designated exception.

The FDIC also may occasionally request

other information, such as descriptions

of the services provided by any

additional third parties involved in the

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does not

meet, or no longer meets, the criteria for

the applicable designated exception.

The FDIC also may occasionally request

other information, such as descriptions

of the services provided by any

additional third parties involved in the

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51 See section I(C)(3)(h) for further discussion on

requests for additional information related to

additional third parties.

52 If a primary purpose exception is revoked due

to an inaccurate notice or report, or due to a failure

to submit a required report, but the entity continues

to satisfy the criteria of the designated exception,

the entity may refile a notice with accurate

information.

53 The total amount of deposits placed by the

third party should be exclusive of the amount of

brokered CDs being placed by the third party,

which is treated as a separate business line.

54 The FDIC will look to each separately

incorporated legal entity as its own ‘‘third party’’

for purposes of this application process. IDIs may

submit an application on behalf of a third party that

is placing deposits with the IDI.

55 A description of the application contents for

agents or nominees seeking the primary purpose

Continued

deposit placement arrangement that

may meet the deposit broker

definition.51 The FDIC will only request

information specifically relevant to

whether or not the deposits being

placed are brokered

submit an application on behalf of a third party that

is placing deposits with the IDI.

55 A description of the application contents for

agents or nominees seeking the primary purpose

Continued

deposit placement arrangement that

may meet the deposit broker

definition.51 The FDIC will only request

information specifically relevant to

whether or not the deposits being

placed are brokered. If the FDIC learns

that the entity no longer meets the

criteria of the designated exception or

that information provided in a notice or

subsequent reporting was inaccurate, or

the entity fails to submit required

reports, the FDIC may, with notice,

revoke the entity’s primary purpose

exception.52

The FDIC is requiring a notice for the

‘‘25 percent’’ and ‘‘enabling

transactions’’ designated exceptions,

and not for the other designated

exceptions identified in this final rule,

because eligibility for those two

designated exceptions would be

difficult for the FDIC or an IDI to verify

or monitor without access to the

contents of the notice (which are

described below). The other designated

exceptions generally relate to more

specific deposit placement

arrangements and describe criteria that

are less difficult to verify or monitor.

The FDIC may, or may not, also decide

to require a notice for any additional

designated exceptions that are identified

after the issuance of this final rule, and

the FDIC expects such decisions to be

based on similar analysis to that

described in this paragraph.

The final rule also requires that third

parties that notified the FDIC of reliance

on a designated exception submit a

subsequent notice to the FDIC if the

third party no longer meets the primary

purpose exception.

xceptions that are identified

after the issuance of this final rule, and

the FDIC expects such decisions to be

based on similar analysis to that

described in this paragraph.

The final rule also requires that third

parties that notified the FDIC of reliance

on a designated exception submit a

subsequent notice to the FDIC if the

third party no longer meets the primary

purpose exception.

b. Notice Contents and Reporting

Requirement

The written notice that an entity

submits will need to include (1) the

designated exception upon which the

entity is relying; (2) a brief description

of the business line; (3) the applicable

specific contents for the designated

exception; (4) a statement that there is

no involvement of any additional third

party who qualifies as a deposit broker,

or a brief description of any additional

third party that may qualify as a deposit

broker; and (5) if the notice is provided

by a nonbank entity, a list of the IDIs

that are receiving deposits by or through

the particular business line at the time

that the notice is filed. For third parties

that meet the primary purpose

exception based on the ‘‘25 percent’’

designated exception the applicable

specific contents are:

Æ The total amount of customer assets

under administration by the third party

for that particular business line; and

Æ the total amount of deposits placed

by the third party on behalf of its

customers, for that particular business

line, at all depository institutions.53

For third parties that meet the

primary purpose exception based on the

‘‘enabling transactions’’ designated

exception the applicable specific

contents are:

Æ Contractual evidence that there is

no interest, fees, or other remuneration

being paid to any customer accounts,

and

Æ a certification that all customer

deposits are in transaction accounts

line, at all depository institutions.53

For third parties that meet the

primary purpose exception based on the

‘‘enabling transactions’’ designated

exception the applicable specific

contents are:

Æ Contractual evidence that there is

no interest, fees, or other remuneration

being paid to any customer accounts,

and

Æ a certification that all customer

deposits are in transaction accounts.

Third parties, or insured depository

institutions, that submit a notice under

the ‘‘25 percent’’ test will be required to

provide reporting on a quarterly basis to

the FDIC. The report will need to

include updates to the figures that were

provided as part of the original notice

submission.

For those that submit a notice under

the ‘‘enabling transactions’’ test, the

filing entity will need to provide an

annual certification that the third party

continues to place all customer funds at

depository institutions into transaction

accounts and that customers do not

receive or accrue any interest, fees, or

other remuneration.

c. Overview of the Application Process

The FDIC is finalizing the proposed

application process for entities that seek

to qualify for the primary purpose

exception but that do not meet a

designated exception. As part of this

process, an entity can submit an

application to the FDIC. For purposes of

the application process, the term

‘‘applicant’’ includes an insured

depository institution or a nonbank

third party 54 that meets the ‘‘deposit

broker’’ definition by either placing (or

facilitating the placement of) customer

deposits at insured depository

institutions and that seeks to be

excluded from that definition through

the primary purpose exception. If an

application is approved, the agent or

nominee will be considered to meet the

primary purpose exception for a

particular business line

party 54 that meets the ‘‘deposit

broker’’ definition by either placing (or

facilitating the placement of) customer

deposits at insured depository

institutions and that seeks to be

excluded from that definition through

the primary purpose exception. If an

application is approved, the agent or

nominee will be considered to meet the

primary purpose exception for a

particular business line.

As mentioned, an applicant may be an

insured depository institution that

applies to the FDIC on behalf of a third

party seeking a determination that the

third party meets the primary purpose

exception. In this case, if appropriate,

the FDIC will evaluate the third party’s

relationships with all IDIs in which the

third party places, or facilitates the

placement of, deposits. An approval that

a third party meets the primary purpose

exception based on an application by an

IDI on behalf of the third party might be

applicable to all deposit placements by

that third party at any other IDI(s) to the

extent that the deposit placement

arrangements with the other IDI(s) are

the same as the arrangement between

the applicant and the third party. The

FDIC is of the view that that an agent

or nominee who seeks a primary

purpose exception is likely to apply on

its own behalf, given that the

information required to complete an

application will be in possession of the

agent or nominee.

Under the proposal, applicants would

have received a written determination

from the FDIC within 120 days of a

complete application, unless extended

by the FDIC with notice if necessary. A

commenter requested more clarity

around the proposed timeline, and

suggested additional timelines for

certain steps in the process

complete an

application will be in possession of the

agent or nominee.

Under the proposal, applicants would

have received a written determination

from the FDIC within 120 days of a

complete application, unless extended

by the FDIC with notice if necessary. A

commenter requested more clarity

around the proposed timeline, and

suggested additional timelines for

certain steps in the process. The FDIC

is providing additional clarity,

consistent with the intent of the

proposal, that the FDIC will notify an

applicant within 45 days of submission

if an application is not complete, and

that an extension, if necessary, beyond

the initial 120 days may last for a

maximum of 120 additional days.

The FDIC will approve applications

submitted under this process if the

application demonstrates to the FDIC’s

satisfaction, with respect to the

particular business line under which the

third party places or facilitates the

placement of deposits, that the primary

purpose of the third party, for that

business line, is a purpose other than

the placement or facilitation of

placement of deposits. Approved

applicants may be subject to periodic

reporting requirements to enable the

FDIC to ensure that the applicant

continues to meet the exception.

d. Application Contents

An application must include, to the

extent applicable, at a minimum: 55

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Federal Register / Vol. 86, No. 13 / Friday, January 22, 2021 / Rules and Regulations

exception under the ‘‘enabling transactions’’

business relationship because they place all

customer deposits at depository institutions into

transactional accounts but the customer earns some

amount of interest, fees or other remuneration are

provided in section I(C)(2)(b)(ii)(A)(2).

ROD with RULES2

6758

Federal Register / Vol. 86, No. 13 / Friday, January 22, 2021 / Rules and Regulations

exception under the ‘‘enabling transactions’’

business relationship because they place all

customer deposits at depository institutions into

transactional accounts but the customer earns some

amount of interest, fees or other remuneration are

provided in section I(C)(2)(b)(ii)(A)(2).

(1) A description of the deposit

placement arrangements between the

third party and insured depository

institutions for the particular business

line, including the services provided by

any relevant third parties;

(2) A description of the business line

for which the applicant is filing an

application;

(3) A description of the primary

purpose of the particular business line;

(4) The total amount of assets under

administration by the third party;

(5) The total amount of deposits

placed by the

This text is long and has been trimmed here. Open the source document for the complete record.

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