Proposed Rule2024-18214
Unsafe and Unsound Banking Practices: Brokered Deposits Restrictions
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Published
August 23, 2024
Issuing agencies
Federal Deposit Insurance Corporation
Abstract
The Federal Deposit Insurance Corporation (FDIC) is inviting comment on proposed revisions to its regulations relating to the brokered deposits restrictions that apply to less than well-capitalized insured depository institutions. The proposed rule would revise the "deposit broker" definition and would amend the analysis of the "primary purpose" exception to the "deposit broker" definition. The proposed rule would also amend two of the designated business relationships under the primary purpose exception and make changes to the notice and application process for the primary purpose exception. In addition, the proposed rule would clarify when an insured depository institution can regain status as an "agent institution" under the limited exception for a capped amount of reciprocal deposits.
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[Federal Register Volume 89, Number 164 (Friday, August 23, 2024)]
[Proposed Rules]
[Pages 68244-68272]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-18214]
[[Page 68243]]
Vol. 89
Friday,
No. 164
August 23, 2024
Part II
Federal Deposit Insurance Corporation
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12 CFR Parts 303 and 337
Unsafe and Unsound Banking Practices: Brokered Deposits Restrictions;
Proposed Rule
Federal Register / Vol. 89 , No. 164 / Friday, August 23, 2024 /
Proposed Rules
[[Page 68244]]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Parts 303 and 337
RIN 3064-AF99
Unsafe and Unsound Banking Practices: Brokered Deposits
Restrictions
AGENCY: Federal Deposit Insurance Corporation.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Federal Deposit Insurance Corporation (FDIC) is inviting
comment on proposed revisions to its regulations relating to the
brokered deposits restrictions that apply to less than well-capitalized
insured depository institutions. The proposed rule would revise the
``deposit broker'' definition and would amend the analysis of the
``primary purpose'' exception to the ``deposit broker'' definition. The
proposed rule would also amend two of the designated business
relationships under the primary purpose exception and make changes to
the notice and application process for the primary purpose exception.
In addition, the proposed rule would clarify when an insured depository
institution can regain status as an ``agent institution'' under the
limited exception for a capped amount of reciprocal deposits.
DATES: Comments must be received by the FDIC no later than October 22,
2024.
ADDRESSES: You may submit comments on this document using any of the
following methods:
<bullet> Agency Website: <a href="https://www.fdic.gov/resources/regulations/federal-register-publications/">https://www.fdic.gov/resources/regulations/federal-register-publications/</a>. Follow the instructions for
submitting comments on the agency website.
<bullet> Email: <a href="/cdn-cgi/l/email-protection#0f6c6062626a617b7c4f696b666c21686079"><span class="__cf_email__" data-cfemail="b1d2dedcdcd4dfc5c2f1d7d5d8d29fd6dec7">[email protected]</span></a>. Include RIN 3064-AF99 in the
subject line of the message.
<bullet> Mail: James P. Sheesley, Assistant Executive Secretary,
Attention: Comments--RIN 3064-AF99, Federal Deposit Insurance
Corporation, 550 17th Street NW, Washington, DC 20429.
<bullet> Hand Delivery: Comments may be hand delivered to the guard
station at the rear of the 550 17th Street NW Building (located on F
Street) on business days between 7 a.m. and 5 p.m.
<bullet> Public Inspection: Comments received, including any
personal information provided, may be posted without change to <a href="https://www.fdic.gov/resources/regulations/federal-register-publications/">https://www.fdic.gov/resources/regulations/federal-register-publications/</a>.
Commenters should submit only information that the commenter wishes to
make available publicly. The FDIC may review, redact, or refrain from
posting all or any portion of any comment that it may deem to be
inappropriate for publication, such as irrelevant or obscene material.
The FDIC may post only a single representative example of identical or
substantially identical comments, and in such cases will generally
identify the number of identical or substantially identical comments
represented by the posted example. All comments that have been
redacted, as well as those that have not been posted, that contain
comments on the merits of the notice will be retained in the public
comment file and will be considered as required under all applicable
laws. All comments may be accessible under the Freedom of Information
Act.
FOR FURTHER INFORMATION CONTACT:
Division of Risk Management Supervision: Thomas F. Lyons, Associate
Director, 202-898-6850, <a href="/cdn-cgi/l/email-protection#8bdfc7f2e4e5f8cbedefe2e8a5ece4fd"><span class="__cf_email__" data-cfemail="3460784d5b5a477452505d571a535b42">[email protected]</span></a>; Karen J. Currie, Chief, 202-
898-3981, <a href="/cdn-cgi/l/email-protection#4b00083e3939222e0b2d2f2228652c243d"><span class="__cf_email__" data-cfemail="68232b1d1a1a010d280e0c010b460f071e">[email protected]</span></a>; Judy E. Gross, Senior Policy Analyst, 202-
898-7047, <a href="/cdn-cgi/l/email-protection#2f655a685d405c5c6f494b464c01484059"><span class="__cf_email__" data-cfemail="561c2311243925251630323f3578313920">[email protected]</span></a>.
Legal Division: Vivek Khare, Senior Counsel, 202-898-6847,
<a href="/cdn-cgi/l/email-protection#41170a2920332401272528226f262e37"><span class="__cf_email__" data-cfemail="baecf1d2dbc8dffadcded3d994ddd5cc">[email protected]</span></a>; Chantal Hernandez, Counsel, 202-898-7388,
<a href="/cdn-cgi/l/email-protection#a6e5ceeec3d4c8c7c8c2c3dce6c0c2cfc588c1c9d0"><span class="__cf_email__" data-cfemail="8ecde6c6ebfce0efe0eaebf4cee8eae7eda0e9e1f8">[email protected]</span></a>; Ryan McCarthy, Counsel, 202-898-7301,
<a href="/cdn-cgi/l/email-protection#5a08231739393b282e32231a3c3e3339743d352c"><span class="__cf_email__" data-cfemail="c391ba8ea0a0a2b1b7abba83a5a7aaa0eda4acb5">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
I. Introduction and Policy Objectives
The FDIC's mission is to maintain stability and public confidence
in the nation's financial system by, among other things, overseeing
financial institutions for safety and soundness and insuring deposits.
Since the enactment of section 29 of the Federal Deposit Insurance Act
(FDI Act),\1\ which prohibits less than well-capitalized \2\ insured
depository institutions \3\ (IDIs) from accepting brokered deposits,\4\
the FDIC has continued to study the role of brokered deposits in the
performance of IDIs, their impact on the safety and soundness of IDIs,
and how they affect losses to the Deposit Insurance Fund (DIF) when an
IDI fails.
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\1\ 12 U.S.C. 1831f.
\2\ For purposes of section 29 of the FDI Act and 12 CFR 337.6
of the FDIC's Rules and Regulations, the terms ``well capitalized,''
``adequately capitalized,'' and ``undercapitalized'' have the same
meaning as to each IDI as provided under the regulations
implementing section 38 of the FDI Act issued by the appropriate
Federal banking agency for that institution. See 12 CFR
337.6(a)(3)(i).
\3\ Insured depository institutions include banks and savings
associations insured by the FDIC. See 12 U.S.C. 1813(c)(2).
\4\ The FDIC may, on a case-by-case basis and upon application
by an adequately capitalized IDI, waive the restriction. See 12
U.S.C. 1831f(c).
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The FDIC has found significant reliance on brokered deposits
increases an institution's risk profile, particularly as its financial
condition weakens. The FDIC's statistical analyses and other studies
have found that an IDI's use of brokered deposits in general is
correlated with a higher probability of failure and higher losses to
the DIF upon failure.\5\
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\5\ See FDIC, Study on Core Deposits and Brokered Deposits (July
8, 2011), available at <a href="https://www.fdic.gov/regulations/reform/coredeposit-study.pdf">https://www.fdic.gov/regulations/reform/coredeposit-study.pdf</a>. See also 84 FR 2366, 2369 (Feb. 6, 2019). The
FDIC updated its analysis in the 2011 Study on Core Deposits and
Brokered Deposits with data through the end of 2017. See id. at
2384-2400 (appendix 2).
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On December 15, 2020, the FDIC Board adopted a final rule that
established a new framework for analyzing whether certain deposit
arrangements qualify as brokered deposits (the 2020 Final Rule).\6\
After the 2020 Final Rule took effect, the FDIC initially observed a
significant decline in reported brokered deposits. IDIs reported a
nearly $350 billion, or 31.8 percent, decline in brokered deposits
between the first and second quarters of 2021 after the 2020 Final Rule
became effective, which is the largest quarterly decline since brokered
deposit reporting began in 1983.\7\ This significant decline can be
interpreted as IDIs reclassifying a considerable amount of deposits
from brokered to not brokered, as a result of the 2020 Final Rule.
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\6\ See FDIC, Press Release: FDIC Board Approves Final rule on
Brokered Deposit and Interest Rate Restrictions (Dec. 15, 2020),
available at <a href="https://www.fdic.gov/news/press-releases/2020/pr20136.html">https://www.fdic.gov/news/press-releases/2020/pr20136.html</a>. The 2020 Final rule was published in the Federal
Register on January 22, 2021. See Unsafe and Unsound Banking
Practices: Brokered Deposits and Interest Rate Restrictions Final
Rule, 86 FR 6742 (Jan. 22, 2021). See also infra section II.B of
this document (discussing the 2020 Final Rule).
\7\ See infra section II.C of this document. As of December 31,
2023, reported brokered deposit balances have since increased to
$1.35 trillion. See infra section II.C of this document.
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This is because, in large part, the changes made by the 2020 Final
Rule have narrowed the types of deposit-related activities that are
considered brokered; in the FDIC's view, this narrowing is problematic
because these deposits continue to present the same risks as before the
2020 Final Rule. The 2020 Final Rule also expanded the types of
business relationships that are eligible to be excepted from the
``deposit broker'' definition. For instance, the 2020 Final Rule
excluded certain factors, such as the payment of fees, from the
``deposit broker'' definition that had historically been viewed as
relevant to whether a deposit is brokered. The 2020 Final Rule also
expanded the scope of the primary purpose exception to the deposit
broker definition, which has allowed for a
[[Page 68245]]
significant number of business lines to be excluded from the deposit
broker definition.\8\ As a result, this has led to certain deposit
arrangements that would have been viewed as brokered prior to the 2020
Final Rule as no longer being classified as brokered, even though such
deposits present the same or similar risks as brokered deposits.
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\8\ See e.g., FDIC, Public Report of Entities Submitting Notices
for a Primary Purpose Exception (PPE). As of March 15, 2024,
available at <a href="https://www.fdic.gov/resources/bankers/brokered-deposits/public-report-ppes-notices.pdf">https://www.fdic.gov/resources/bankers/brokered-deposits/public-report-ppes-notices.pdf</a>.
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Based on the FDIC's experience, the decline in reported brokered
deposits is also due, in part, to some IDIs misunderstanding and
misreporting deposits under the 2020 Final Rule. Despite the FDIC's
efforts in conducting industry outreach and providing clarifying
information,\9\ the FDIC has observed a number of challenges with
entities understanding certain provisions of the 2020 Final Rule, which
has resulted in some level of inaccurate and inconsistent application
of the rule. Many of these challenges arise from Sec.
337.6(a)(5)(v)(I)(1)(i) in the rule allowing third parties to provide a
notice regarding the 25 percent test primary purpose exception. For
example, the FDIC has observed that some IDIs receiving deposits
through a sweep arrangement have incorrectly relied upon a third
party's 25 percent primary purpose exception notice to not report
certain deposits as brokered, without conducting analyses, or without
having access to the appropriate documentation to conduct analyses, and
despite the involvement of an additional third party that meets the
``deposit broker'' definition.\10\ In turn, this has resulted in some
deposits that meet the ``brokered deposit'' definition under the 2020
Final Rule not being correctly reported as brokered on IDIs'
Consolidated Reports of Condition and Income (Call Reports).\11\
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\9\ For example, the FDIC maintains a dedicated brokered
deposits web page that includes ``Questions and Answers Related to
Brokered Deposits Rule'' and a ``Statement of the [FDIC] Regarding
Reporting of Sweep Deposits on Call Reports,'' among other
resources. See FDIC, Banker Resource Center Brokered Deposits,
available at <a href="https://www.fdic.gov/resources/bankers/brokered-deposits/">https://www.fdic.gov/resources/bankers/brokered-deposits/</a>.
\10\ See e.g., FDIC, Decision of the Supervision Appeals Review
Committee, In the Matter of * * *, Case No. 2022-02 (Apr. 26, 2023),
available at <a href="https://www.fdic.gov/resources/regulations/appeals-of-material-supervisory-determination/appeals/sarc202202.pdf">https://www.fdic.gov/resources/regulations/appeals-of-material-supervisory-determination/appeals/sarc202202.pdf</a>.
\11\ ``Call Reports'' consist of the Consolidated Reports of
Condition and Income for a Bank with Domestic and Foreign Offices
(FFIEC 031), the Consolidated Reports of Condition and Income for a
Bank with Domestic Offices Only (FFIEC 041), and the Consolidated
Reports of Condition and Income for a Bank with Domestic Offices
Only and Total Assets Less than $5 Billion (FFIEC 051).
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If left unchanged, this underreporting of brokered deposits could
have serious consequences for IDIs and the DIF, which is used to
protect depositors of insured banks and to resolve failed banks, as
such underreporting impedes the ability to evaluate the extent of
reliance on brokered deposits and the effects on an IDI's risk profile
for supervisory and deposit insurance pricing purposes. Moreover, the
FDIC is concerned that these issues expose IDIs individually and the
banking system more broadly to the type of risk the brokered deposit
restrictions are intended to address--namely that a less than well-
capitalized institution could rely on less stable third-party deposits
for rapid growth that may weaken the safety and soundness of IDIs and
the banking system and expose the FDIC to increased losses.
Additionally, experiences since the 2020 Final Rule have shown that
some of the underlying reasons to narrow the coverage of the rule have
proved to be problematic. For example, First Republic Bank,\12\ which
failed in May 2023 after contagion effects from the failure of Silicon
Valley Bank, experienced a significant run on affiliated sweep
deposits, and in particular uninsured affiliated sweep deposits.\13\
This suggests that in the case of First Republic, affiliated sweeps
were no more ``sticky'' than unaffiliated sweeps, contrary to the
exemption in Sec. 337.6(a)(5)(iii)(C)(1) for affiliated entities.
Moreover, in the case of the failure of crypto company Voyager,\14\ it
was not considered a ``deposit broker''--and Voyager deposits were not
considered brokered--because it had an exclusive deposit placement
arrangement with one IDI. Under the 2020 Final Rule, exclusive deposit
placement arrangements are excluded from the definition of a ``deposit
broker'' even though Voyager's activities were the same as a ``deposit
broker,'' and the failure of Voyager created the same legal,
operational, and liquidity risks for its partner IDI as if it had, say
two partner banks, and had been classified as a deposit broker. FDIC
staff is concerned that less than well-capitalized IDIs may seek these
exclusive deposit placement arrangements as their condition is
deteriorating without being subject to the limitations on brokered
deposits, even though the risk is the same.
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\12\ See Off. of Inspector Gen., FDIC, Material Loss Review of
First Republic Bank, Report No. EVAL-24-03 (Nov. 28, 2023) available
at <a href="https://www.fdicoig.gov/sites/default/files/reports/2023-12/EVAL-24-03.pdf">https://www.fdicoig.gov/sites/default/files/reports/2023-12/EVAL-24-03.pdf</a>.
\13\ During the quarter leading up to failure, First Republic
Bank reported a sharp decline in affiliate sweep deposits that were
not fully insured, from $8.3 billion to $1.1 billion from December
31, 2022, to March 31, 2023; they also experienced a decline from
$1.9 billion to $1.4 billion in insured affiliated sweep deposits.
Over the same period, First Republic Bank reported an increase in
fully insured non-affiliate sweep deposits, from $7.3 billion to
$8.7 billion.
\14\ See In re Voyager Digital Holdings, Inc. et al., No. 22-
10943 (Bankr. S.D.N.Y July 6, 2022).
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To address these concerns and challenges, the FDIC is proposing
amendments that would (1) simplify certain definitions of the 2020
Final Rule to reduce operational challenges and reporting burdens on
IDIs; (2) help ensure uniform and consistent reporting of brokered
deposits by IDIs; and (3) strengthen the safety and soundness of the
banking system by ensuring that less than well-capitalized institutions
are restricted from relying on brokered deposits to support risky,
rapid growth.
II. Background
A. Brokered Deposits--A History of Concerns and Related Research
Brokered and high-rate deposits became a concern among bank
regulators and Congress before any statutory restrictions were enacted.
This concern arose because (1) such deposits could facilitate a bank's
rapid growth in risky assets without adequate controls; (2) once
problems arose, a problem bank could use such deposits to fund
additional risky assets to attempt to ``grow out'' of its problems, a
strategy that ultimately increased the losses to the DIF when the
institution failed; and (3) brokered and high-rate deposits were
sometimes considered less stable because at that time, deposit brokers
(on behalf of customers), or the customers themselves, were often drawn
to high rates and prone to leave the bank quickly to obtain a better
rate or if they became aware of problems at the bank.\15\
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\15\ Brokered deposits are not considered core deposits or a
stable funding source due to the brokered status and wholesale
characteristics. See FDIC RMS Manual of Examination Policies,
section 6.1 Liquidity and Funds Management at 6.1-9 (Apr. 2024).
Core deposits are not defined by statute. Rather, core deposits are
defined for analytical and examination purposes in the Uniform Bank
Performance Report (UBPR) as the sum of all transaction accounts,
money market deposit accounts (MMDAs), nontransaction other savings
deposits (excluding MMDAs), and time deposits of $250,000 and below,
less fully insured brokered deposits of $250,000 and less.
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The FDIC has recognized that ``historically, most institutions that
use brokered deposits have done so in a prudent manner and
appropriately measure, monitor, and control risks associated with
brokered deposits.'' \16\
[[Page 68246]]
However, an IDI's use of brokered deposits often raises its risk
profile, which has long been a concern among bank regulators \17\ and
Congress.\18\
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\16\ See Unsafe and Unsound Banking Practices: Brokered Deposits
and Interest Rate Restrictions Advance Notice of Proposed
Rulemaking, 84 FR 2366 (Feb. 6, 2019).
\17\ The FDIC recognizes that institutions sometimes are
concerned that the use of brokered deposits can have other
regulatory consequences, or may be viewed negatively by investors or
other stakeholders.
\18\ Congressional hearings regarding brokered deposits were
held between 1984 and 1988, and in 1989, as part of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).
See 84 FR 2368. See also ``Problems of the Federal Savings and Loan
Insurance Corporation: Hearings Before the Committee on Banking,
Housing, and Urban Affairs of the United States Senate,'' (part II)
101st Cong., 1st Sess. 230-231 (1989). See also, e.g., Congressional
testimony of Senators Graham and Sarbanes on Comprehensive Deposit
Insurance Reform and Taxpayer Protection Act of 1991, Proceedings
and Debates of the 102nd Cong., 1st Sess., November 21, 1991, 137
Cong. Rec. S17322-01, 1991 WL 243977 (``One of the lessons from the
thrift crisis is their ability to gather deposits through brokered
deposits and increase the size of the institution and the funds they
had available very rapidly without additional capital and, quite
frankly, without additional management. Then, to take these funds
out and invest them in what turned out to be very risky matters, is
certainly a lesson America has to learn and look at.'') (referring
to testimony of the President of the Independent Bankers Association
provided in April 1990).
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Brokered Deposits and Troubled Institutions
As early as the 1970s, the FDIC noted concerns about brokered
deposits, as stated in the FDIC's Division of Bank Supervision Manual:
``The use of brokered deposits has been responsible for abuses in
banking and has contributed to some bank failures, with consequent
losses to the larger depositors, other creditors, and shareholders.''
\19\ For example, in 1982, brokered deposits were found to have been a
key cause of the largest payout of insured deposits at that time with
the failure of Penn Square Bank. Brokered deposits contributed to Penn
Square Bank's rapid deposit growth, which were used to fund high risk
loans. About $1 billion of these loans were then sold to Continental
Illinois Bank, which then suffered significant deposit withdrawals
related to problem loans and required open-bank assistance from the
FDIC.\20\
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\19\ See FDIC, Division of Bank Supervision Manual, section L,
page 3 (Nov. 1, 1973).
\20\ 84 FR 2366, 2367 (Feb. 6, 2019); FDIC, History of the
Eighties--Lessons for the Future, Chapters 2 and 9, passim (Dec.
1997), available at <a href="https://www.fdic.gov/bank/historical/history/">https://www.fdic.gov/bank/historical/history/</a>;
Phillip L. Zwieg, Belly Up: The Collapse of the Penn Square Bank,
Chapter 9 (1985).
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Brokered Deposits in Bank Failures 2007-2017
The FDIC and the DIF were significantly affected by the financial
crisis between 2007 and 2017. During this time, excluding Washington
Mutual, Inc., 530 IDIs failed and were placed in FDIC receivership and,
as of March 31, 2024, the estimated loss to the DIF for these
institutions is $71.9 billion.\21\
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\21\ The estimated loss data is available at: <a href="https://banks.data.fdic.gov/bankfind-suite/failures">https://banks.data.fdic.gov/bankfind-suite/failures</a>.
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Based on Call and Thrift Financial Report data, 47 institutions
that failed relied heavily on brokered deposits and each caused an
estimated loss to the DIF \22\ of over $100 million as of December 31,
2017. These 47 institutions held total assets representing 20.9 percent
of the $396.9 billion in aggregate total assets of the 530 failed
institutions, but accounted for $27.3 billion in estimated losses to
the DIF, representing 38 percent of the $71.9 billion in all estimated
losses to the DIF for that same period.\23\ For example, the largest of
these 47 institutions was IndyMac Bank, F.S.B. (IndyMac), which failed
on July 11, 2008. As of March 31, 2024, the estimated loss to the DIF
for IndyMac is $12.0 billion, representing 39 percent of IndyMac's
$30.7 billion in total assets at failure and approximately 16.7 percent
of the total $71.9 billion in estimated losses to the DIF from bank
failures between 2007 and 2017. In its last Thrift Financial Report
(TFR) filed prior to failure, as of June 30, 2008, IndyMac reported
brokered deposits of $5.5 billion, which represented 29.0 percent of
the institution's $18.9 billion in total deposits.\24\ In its TFR filed
for the third quarter of 2005, approximately 12 quarters before the
institution failed, IndyMac reported $1.4 billion in brokered deposits,
representing 18.4 percent of its then $7.4 billion in total deposits.
This data demonstrates that IndyMac accelerated its use of brokered
deposits as its problems mounted.\25\
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\22\ Specifically, these failed institutions reported a ratio of
brokered to total deposits greater than 10 percent in their last
quarter prior to failure or three years prior to failure, and
reported annual average asset growth of at least 30 percent during
the three years leading to failure, or during the five years leading
to failure, or between three and five years prior to failure, and
were estimated to cost the DIF over $100 million as of December 31,
2017.
\23\ The estimated loss data is as of March 31, 2024, available
at: <a href="https://banks.data.fdic.gov/bankfind-suite/failures">https://banks.data.fdic.gov/bankfind-suite/failures</a>.
\24\ Of the $5.5 billion in brokered deposits that IndyMac
reported on its TFR for June 30, 2008, 98.4 percent were in brokered
certificates of deposits documented as master certificates of
deposits issued in the name of CEDE & Co, a subsidiary of DTC, as
sub-custodian for deposit brokers.
\25\ See Off. of Inspector Gen., U.S. Dep't of Treasury, Safety
and Soundness: Material Loss Review of IndyMac Bank, FSB (Feb. 26,
2009), available at <a href="https://oig.treasury.gov/sites/oig/files/Documents/oig09032.pdf">https://oig.treasury.gov/sites/oig/files/Documents/oig09032.pdf</a>.
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Another example is ANB Financial National Association (ANB
Financial), which failed on May 9, 2008. As of March 31, 2024, the
estimated loss to the DIF for ANB Financial was $1.0 billion,
representing 54 percent of the institution's $1.9 billion in total
assets at failure. In its Call Report filed prior to failure, i.e., as
of March 31, 2008, ANB Financial reported brokered deposits of $1.6
billion, which represented 87.0 percent of the institution's $1.8
billion in total deposits. In the Call Report filed for the second
quarter of 2005, approximately 12 quarters before the institution
failed, ANB Financial reported $257 million in brokered deposits,
representing 50.5 percent of its then $508 million in total
deposits.\26\
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\26\ See Off. of Inspector Gen., U.S. Dep't of Treasury, Safety
and Soundness: Material Loss Review of ANB Financial National
Association (Nov. 28, 2008), available at <a href="https://www.govinfo.gov/content/pkg/GOVPUB-T72-PURL-LPS107594/pdf/GOVPUB-T72-PURL-LPS107594.pdf">https://www.govinfo.gov/content/pkg/GOVPUB-T72-PURL-LPS107594/pdf/GOVPUB-T72-PURL-LPS107594.pdf</a>.
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Brokered Deposits--Historical Research and Changes in Law and
Regulation
In the aftermath of the financial crisis of 2008 and 2009, section
1506 of the Dodd-Frank Wall Street Reform and Consumer Protection Act
directed the FDIC to conduct a study of core and brokered deposits,
which the FDIC completed in 2011. In the FDIC's Study on Core Deposits
and Brokered Deposits,\27\ the FDIC found that higher brokered deposit
use was associated with higher probability of bank failure and higher
DIF losses, and that, on average, brokered deposits were correlated
with higher levels of asset growth, higher levels of nonperforming
loans, and a lower proportion of core deposit funding.\28\ For example,
the FDIC's study describes the following characteristics of brokered
deposits that have posed risks to the DIF: (1) rapid growth--brokered
deposits could be gathered quickly and used imprudently to fund risky
assets or investments; and (2) less stable nature (described in the
study as ``volatility'')--brokered deposits might flee if the broker
(or the underlying customer) moves funds to another IDI, if the IDI
holding the deposit becomes troubled, or if rates or terms are more
appealing elsewhere.\29\
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\27\ See FDIC, Study on Core Deposits and Brokered Deposits
(July 8, 2011), available at <a href="https://www.fdic.gov/regulations/reform/coredeposit-study.pdf">https://www.fdic.gov/regulations/reform/coredeposit-study.pdf</a>.
\28\ See 84 FR 2366, 2369 (Feb. 6, 2019).
\29\ However, the volatility of brokered deposits tends to be
mitigated somewhat by deposit insurance, as insured depositors have
less incentive to flee a problem situation. See 84 FR 2366, 2369
(Feb. 6, 2019).
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In December 2017, the FDIC published Crisis and Response: An FDIC
History, 2008-2013, which showed that failures and CAMELS rating
[[Page 68247]]
downgrades were more concentrated among IDIs that made relatively
greater use of wholesale funding sources, which includes brokered
deposits. Further, it indicated that significant reliance on wholesale
funds could reflect an IDI's decision to pursue aggressive growth, and
that if an IDI were under stress, wholesale counterparties may be more
inclined to withdraw deposits or demand additional collateral.\30\
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\30\ FDIC, Crisis and Response: An FDIC History, 2008-2013 at
121-22 (2017), available at <a href="https://www.fdic.gov/resources/publications/crisis-response/index.html">https://www.fdic.gov/resources/publications/crisis-response/index.html</a>.
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Moreover, the Inspectors General of the Federal banking agencies
have prepared reports detailing how brokered deposits were sometimes
used by failed banks between 2007 and 2017.\31\ In these reports,
brokered deposits were commonly cited as contributing to problems at
troubled and failed institutions, and IDIs that failed were typically
subject to the brokered deposit restrictions because their capital
levels deteriorated to below well capitalized.\32\
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\31\ See 84 FR 2366, 2369-70 (Feb. 6, 2019) (citing Safety and
Soundness: Analysis of Bank Failures Reviewed by the Department of
the Treasury Office of Inspector General, OIG-16-052 (Aug. 15,
2016); Off. of Inspector Gen., FDIC, Follow Up Audit of FDIC
Supervision Program Enhancements, Report No. MLR-11-010 (Dec. 2011);
Off. of Inspector Gen., Bd. of Governors of the Fed. Rsrv. Sys.,
Summary Analysis of Failed Bank Reviews (Sept. 2011)).
\32\ See 84 FR 2366, 2369-70 (Feb. 6, 2019).
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In 2019, the FDIC updated its analysis in the 2011 Study on Core
Deposits and Brokered Deposits with data through the end of 2017.\33\
As part of that update, statistical analysis found that brokered
deposit use is associated with higher probability of an IDI's failure
and higher DIF loss rates. Brokered deposits may elevate an IDI's risk
profile in part because they are frequently used as a substitute for
IDI's core deposits and, less frequently, for equity, and so from the
FDIC's perspective, IDIs that use brokered deposits operate with a
higher risk liability structure relative to IDIs that do not use
brokered deposits.\34\
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\33\ See 84 FR 2384-2400 (appendix 2).
\34\ See 84 FR 2366, 2385 (Feb. 6, 2019).
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B. Current Statutory and Regulatory Framework
Section 29 of the FDI Act,\35\ imposes restrictions on a less than
well-capitalized IDI from accepting funds obtained, directly or
indirectly, by or through any deposit broker for deposit into one or
more deposit accounts (referred to as brokered deposits).\36\ Section
29 does not directly define the term ``brokered deposit.'' Section
337.6 of the FDIC's Rules and Regulations implements section 29 \37\
and provides that a ``brokered deposit'' is a deposit obtained,
directly or indirectly, from or through the mediation or assistance of
a deposit broker.\38\ Thus, the meaning of the term ``brokered
deposit'' turns upon the definition of ``deposit broker.''
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\35\ 12 U.S.C 1831f.
\36\ 12 U.S.C. 1831f(a). An ``undercapitalized'' depository
institution is prohibited 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. See 12 U.S.C. 1831f(c). 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. See id. Well-capitalized insured
depository institutions are not restricted from accepting deposits
from a deposit broker. The statute also restricts a less than well-
capitalized institution generally from offering interest rates that
significantly exceed the market rates offered in an institution's
normal market area. See 12 U.S.C. 1831f.
\37\ 12 CFR 337.7 implements section 29's interest rate
restrictions. The proposed rule would not amend these provisions.
\38\ 12 CFR 337.6(a)(2).
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Under section 29, a ``deposit broker'' includes any person engaged
in the business of placing third-party deposits, or facilitating the
placement of third-party deposits, with IDIs or the business of placing
deposits with IDIs for the purpose of selling interests in those
deposits to third parties.\39\ An agent or trustee also meets the
``deposit broker'' definition when establishing a deposit account to
facilitate a business arrangement with an IDI to use the proceeds of
the account to fund a prearranged loan.\40\
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\39\ 12 U.S.C. 1831f(g)(1)(A).
\40\ 12 U.S.C. 1831f(g)(1)(B).
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The ``deposit broker'' definition is subject to the following nine
statutory exceptions: \41\
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\41\ 12 U.S.C. 1831f(g)(2).
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1. An insured depository institution, with respect to funds placed
with that depository institution;
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
12 U.S.C. 1831f(g)(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'').
Section 337.6 includes the statutory exceptions to the ``deposit
broker'' definition plus a tenth exception for an IDI 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.\42\
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\42\ See 12 CFR 337.6(a)(5)(v)(J).
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Deposit Broker Definition in the 2020 Final Rule
In the 2020 Final Rule, the FDIC amended the brokered deposit
regulation to further define circumstances under which a third party is
a ``deposit broker.'' More specifically, the 2020 Final Rule provides a
person is engaged in the business of placing deposits if that person
receives third-party funds and deposits those funds at more than one
IDI.\43\ It also provides that a person is engaged in the business of
facilitating the placement of deposits if that person is engaging in
any of the following activities with respect to third-party deposits
placed at more than one IDI:
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\43\ 12 CFR 337.6(a)(5)(ii).
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<bullet> The person has legal authority, contractual or otherwise,
to close the account or move the third party's funds to another IDI;
<bullet> The person is involved in negotiating or setting rates,
fees, terms, or conditions for the deposit account; or
<bullet> The person engages in matchmaking activities.\44\
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\44\ See 12 CFR 337.6(a)(5)(iii).
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A person is engaged in ``matchmaking activities'' if the person
proposes deposit allocations at, or between, more than one IDI based
upon both the particular deposit objectives of a specific depositor or
depositor's agent, and the particular deposit objectives of specific
IDIs.\45\ The ``matchmaking activities'' definition further provides
that a proposed deposit allocation is based on the particular
objectives of:
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\45\ See 12 CFR 337.6(a)(5)(iii)(C)(1).
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<bullet> A depositor or depositor's agent when the person has
access to specific financial information of the depositor or
[[Page 68248]]
depositor's agent and the proposed deposit allocation is based upon
this information; and
<bullet> An IDI when the person has access to the target deposit-
balance objectives of specific IDIs and the proposed deposit allocation
is based upon this information.\46\
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\46\ See id.
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The ``matchmaking activities'' definition, however, excludes
deposits placed by a depositor's agent with an IDI affiliated with the
depositor's agent.\47\
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\47\ See id.
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Exclusive Deposit Placement Arrangements in the 2020 Final Rule
As noted above, the 2020 Final Rule provides that a person is
engaged in the business of placing deposits or facilitating the
placement of deposits of third parties if that person receives third-
party funds and deposits those funds at more than one IDI or if that
person is engaged in certain activities with respect to deposits placed
at more than one IDI.\48\ The preamble to the 2020 Final Rule specified
that 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 at IDIs and
therefore will not meet the ``deposit broker'' definition.\49\
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\48\ 12 CFR 337.6(a)(5)(ii) and (iii).
\49\ See 86 FR 6742, 6745 (Jan. 22, 2021).
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The Primary Purpose Exception in the 2020 Final Rule
The 2020 Final Rule provides that the primary purpose exception
applies 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.\50\ Moreover, the 2020 Final Rule identifies the
following 14 designated business exceptions as meeting the primary
purpose exception where, with respect to a particular business line:
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\50\ See 12 CFR 337.6(a)(5)(v)(I).
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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 (25 percent test);
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 (enabling transactions test);
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;
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 through 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 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, or 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.\51\
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\51\ See 12 CFR 337.6(a)(5)(v)(I)(1).
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As noted, the 2020 Final Rule allows the FDIC to identify
additional relationships as designated business exceptions to the
primary purpose exception.\52\ On January 10, 2022, the FDIC published
an additional designated exception for certain non-discretionary
custodians engaging in specific arrangements related to the placement
of deposits.\53\
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\52\ See 12 CFR 337.6(a)(5)(v)(I)(1)(xiv).
\53\ See Unsafe and Unsound Banking Practices: Brokered
Deposits, 87 FR 1065 (Jan. 10, 2022).
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For the 25 percent and enabling transactions test exceptions, a
third party or an IDI on behalf of a third party must file a notice
with the FDIC for a particular business line.\54\ Under the current
process, the FDIC provides immediate email acknowledgement of receipt
of the notice filing and the third party that is the subject of the
notice may rely upon the applicable designated exception for the
particular business line. Notice filers under the 25 percent test must
also satisfy quarterly reporting requirements, while notice filers
under the enabling transactions test must provide an annual
certification.\55\ For the other designated exceptions, no notice,
application, or reporting is required.
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\54\ See 12 CFR 303.243(b). Where customer funds placed at
depository institutions are placed into transaction accounts, and
fees, interest, or other remuneration are provided to the depositor,
an applicant can apply for a primary purpose exception, with respect
to the particular business line, according to the requirements
listed in 12 CFR 303.243(b)(4)(i).
\55\ See 12 CFR 303.243(b)(3(v).
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For agents or nominees that do not meet one of the designated
business exceptions, such third parties, or an IDI on behalf of a third
party, may apply for a primary purpose exception in accordance with the
requirements contained in Sec. 303.243(b).\56\ Moreover, the 2020
Final Rule provides a specific application process for a primary
purpose exception to enable transactions with fees, interest, or other
remuneration provided to the depositor.\57\
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\56\ See 12 CFR 337.6(a)(5)(v)(I)(2).
\57\ See 12 CFR 303.243(b)(4)(i).
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The Reciprocal Deposits Limited Exception
In 2018, section 29 of the FDI Act was amended as part of the
Economic Growth, Regulatory Relief, and Consumer Protection Act
(EGRRCPA), to allow ``agent institutions'' to except a capped amount of
``reciprocal deposits''
[[Page 68249]]
from treatment as brokered deposits.\58\ Section 29 generally provides
that reciprocal deposits are excepted when the total amount of
reciprocal deposits held by an agent institution does not exceed the
lesser of $5 billion or 20 percent of the total liabilities of the
agent institution.\59\
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\58\ 12 U.S.C. 1831f(i)(2)(E).
\59\ 12 U.S.C. 1831f(i)(1).
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Reciprocal deposits are defined by statute to mean deposits
received by an agent institution through a deposit placement network
with the same maturity (if any) and in the same aggregate amount as
covered deposits placed by the agent institution in other network
member banks.\60\ A ``covered deposit'' is a deposit that is submitted
for placement through a deposit placement network by an agent
institution and does not consist of funds that were obtained (directly
or indirectly) by a deposit broker before their submission for
placement in a deposit placement network.\61\ A ``deposit placement
network'' is a network in which IDIs participate for processing and
receipt of reciprocal deposits.\62\
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\60\ 12 U.S.C. 1828f(i)(2)(E).
\61\ 12 U.S.C. 1831f(i)(2)(B).
\62\ 12 U.S.C. 1831f(ii)(2)(C).
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On December 18, 2018, the FDIC adopted a final rule (the 2018
Reciprocal Deposits Rule), to amend its regulations that implement
brokered deposits and interest rate restrictions to conform with the
changes to section 29 by EGRRCPA.\63\ Consistent with section 29, the
2018 Reciprocal Deposits Rule defines ``agent institution'' to mean an
IDI that places a covered deposit through a deposit placement network
at other IDIs in amounts that are less than or equal to the standard
maximum deposit insurance amount, specifying the interest rate to be
paid for such amounts, if the IDI:
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\63\ See 84 FR 1346 (Feb. 4, 2019). The Reciprocal Deposits Rule
was effective March 6, 2019. 12 CFR 337.6(e) implements section 29's
limited exception for reciprocal deposits.
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<bullet> As of its most recent annual examination under 12 U.S.C.
1820(d), was found to have a composite condition of outstanding or good
and is well capitalized;
<bullet> Has obtained a brokered deposit waiver from the FDIC; \64\
or
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\64\ The FDIC can only grant brokered deposit waivers for
institutions that are classified as adequately capitalized; IDIs
that are well capitalized but not well rated or are undercapitalized
are not eligible. See 12 U.S.C. 1831f; 12 CFR 337.6(c).
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<bullet> Does not receive an amount of reciprocal deposits that
causes the total amount of reciprocal deposits held by the agent
institution to be greater than the average of the total amount of
reciprocal deposits held by the agent institution on the last day of
each of the four calendar quarters preceding the calendar quarter in
which the agent institution was found not to have a composite condition
of outstanding or good or was determined to be not well
capitalized.\65\
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\65\ 12 CFR 337.6(e)(2)(i).
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Under the 2018 Reciprocal Deposits Rule, an ``agent institution''
can except reciprocal deposits from being classified as brokered
deposits up to its applicable statutory caps--the ``general cap'' or
``special cap.'' Under the ``general cap,'' an agent institution may
except reciprocal deposits up to the lesser of the following amounts
from being classified as brokered deposits: $5 billion or an amount
equal to 20 percent of the agent institution's total liabilities.
Reciprocal deposits in excess of the general cap, as well as those
reciprocal deposits that do not meet section 29's limited exception,
may not take advantage of the limited exception and are to be reported
as brokered deposits. The ``special cap'' applies if the IDI either was
found to not have a composite condition of outstanding or good when
most recently examined under section 10(d) of the FDI Act or is not
well capitalized and has not received a waiver from the brokered
deposit restrictions under section 29(c). In this case, the IDI may
still meet the ``agent institution'' definition if the IDI does not
receive reciprocal deposits that result in its total reciprocal
deposits to be in excess of the ``special cap.'' The ``special cap'' is
the average amount of reciprocal deposits held at the IDI on the last
day of each of the four calendar quarters preceding the calendar
quarter in which the agent institution was found not to have a
composite condition of outstanding or good or was determined to be not
well capitalized. If, after the IDI becomes subject to the ``special
cap,'' an IDI receives reciprocal deposits that result in its total
reciprocal deposits to be in excess of its special cap, it is no longer
an agent institution. If an IDI is not an agent institution, it is not
eligible to use the limited exception, and all of its reciprocal
deposits should be reported as brokered deposits.
As such, the amount of reciprocal deposits excepted from being
considered brokered turns on whether the IDI qualifies as an agent
institution and if so, whether the IDI is subject to the special cap.
C. Developments Post-2020 Final Rule
Call Report Brokered Deposits Data
As stated above, following the April 1, 2021, effective date of the
2020 Final Rule, IDIs reported a significant decrease in brokered
deposits in their Call Report filings. As illustrated in chart 1, from
March 31, 2021, to June 30, 2021, brokered deposits declined by nearly
$350 billion, or 31.8 percent, the largest decline since brokered
deposit reporting began in 1983. Brokered deposit balances continued to
decline through March 31, 2022, following the extended compliance date
of January 1, 2022. The FDIC notes, however, that as of the fourth
quarter of 2023, brokered deposits at all IDIs are 22.5 percent higher
than the quarter before the 2020 Final Rule took effect (first quarter
2021), despite the considerable amount of deposits that are no longer
considered brokered based on the 2020 Final Rule changes. This increase
in reported brokered deposits is due to increases in insured brokered
deposit balances, including brokered reciprocal deposits. These
increases may be driven in part by higher interest rates, which have
exacerbated competition for deposit funding, and depositors seeking
additional deposit insurance coverage, particularly following the
failures that occurred in the first half of 2023.
[[Page 68250]]
[GRAPHIC] [TIFF OMITTED] TP23AU24.000
Expansion of Certain Third-Party Arrangements That Deliver Deposits to
IDIs
Since the April 1, 2021, effective date of the 2020 Final Rule, the
FDIC has observed the continued expansion of IDI arrangements with
third parties to deliver deposit products (particularly those with
transactional features) for a variety of IDI objectives, including to
expand geographic reach, offer innovative products, and raise deposits.
In these arrangements, an IDI typically makes deposit products or
services available through an arrangement in which a third party,
rather than the IDI, markets, distributes, or otherwise provides access
to or assists in the placement of customer deposits at particular IDIs.
Depending on the services provided by the third party, and the
availability of regulatory exceptions to the ``deposit broker''
definition (e.g., the ``enabling transactions'' test under the primary
purpose exception or the exclusive placement arrangement exception),
the deposits may or may not be considered brokered.
Recent events, however, underscore the precarious nature of these
funding arrangements as they can be highly unstable, with either the
third party or the underlying customers moving funds based on market
conditions or other factors. These arrangements can also be prone to
other forms of disruption such as the potential or actual insolvency of
the third party, as recently demonstrated by the bankruptcy of Synapse
Financial Technologies, Inc. (Synapse).\66\ Synapse, sometimes referred
to as a fintech ``middleware'' company, was a deposit broker that
facilitated the placement of customer deposits for various fintech
companies looking for banking services with IDIs. Moreover, the rapid
growth with such deposits without corresponding growth in risk
management practices can expose IDIs to operational, liquidity, and
legal risks.
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\66\ See In re Synapse Fin. Tech., Inc., No. 1:24-bk-10646-MB
(Bankr. C.D. Cal. R. Apr. 22, 2024).
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In certain circumstances, these arrangements are excluded from the
brokered deposit definition pursuant to changes implemented by the 2020
Final Rule, even though the arrangements exhibit the same risks as
brokered deposits. An example is the failure of Voyager, which was
exempted from the brokered deposit definition by virtue of the
exclusive deposit placement arrangement exception. Where less than
well-capitalized institutions may be able to continue to grow with such
deposits, because they are not currently treated as brokered deposits,
the FDIC believes that these arrangements have the potential to
undermine the safety and soundness of such institutions individually,
and financial stability more broadly.
D. Need for Rulemaking
Under the current regulations, less than well-capitalized IDIs have
unrestricted access to third-party deposits that are excluded from
being classified as brokered because certain provisions in the current
rule do not fully consider important safety and soundness
considerations. This in turn raises the risk that less than well-
capitalized IDIs may rely on less stable third-party deposits for rapid
growth that could ultimately expose the DIF to increased losses.
In addition, as discussed above, many IDIs do not correctly apply
the definitions in the rule, particularly with respect to the
involvement of additional third parties within a deposit placement
arrangement. This issue has led to a number of IDIs misreporting
brokered deposits as nonbrokered. This is particularly concerning
because all IDIs, even well-capitalized IDIs, have an obligation to
file Call Reports accurately \67\ and are responsible for understanding
the regulation and how the involvement of third parties within a
deposit placement arrangement may, or may not, result in the deposits
being brokered.\68\
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\67\ Under section 7 of the FDIC Act, 12 U.S.C. 1817, IDIs are
responsible for filing accurate Call Reports, including reporting
accurately the amount of brokered deposits.
\68\ See 86 FR 6756 (stating in the preamble to the 2020 Final
Rule that ``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 . . . [Call Reports], which require
reporting of brokered deposits held by IDIs.'').
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With respect to the 2018 Reciprocal Deposits Rule, the rule states
how an IDI may meet the ``agent institution''
[[Page 68251]]
definition, but does not address how an IDI that no longer meets the
definition may regain its status as ``agent institution'' to qualify
for the exception. The FDIC has received several questions from IDIs on
this issue since the 2018 Reciprocal Deposits Rule took effect.
III. Discussion of the Proposed Rule
To address the issues raised above, the FDIC is proposing a rule
that would strengthen its brokered deposit regulations by revising
certain provisions to further support the statutory language and
purpose of the brokered deposit restrictions, as well as simplifying
certain provisions that pose operational challenges. To achieve these
objectives, and as discussed in more detail below, the proposed rule
would:
<bullet> Revise certain provisions of the ``deposit broker''
definition, including removing the ``matchmaking activities'' prong and
replacing it with a deposit allocation provision;
<bullet> Eliminate the exclusive deposit placement arrangement
exception to restore the regulations' applicability to a third party
that otherwise meets the definition of a ``deposit broker,'' when that
third party is involved with deposits placed at one or more IDIs;
<bullet> Amend the analysis underlying the ``primary purpose''
exception to the ``deposit broker'' definition, including revising the
25 percent test designated exception and eliminating the enabling
transactions designated exception; and
<bullet> Update the application and notice processes for the
primary purpose exception and limit such processes to IDIs.
As part of the proposal, IDIs relying on an existing approved
primary purpose exception application, a 25 percent test designated
exception notice, or an enabling transactions designated exception
notice or application, would no longer be able to rely on such
exceptions. Such IDIs would need to submit a new primary purpose
exception application based upon updated criteria or, if applicable,
rely upon a new designated business exception that meets the primary
purpose exception based upon the proposed changes discussed below. If a
deposit placement activity, however, meets one of the designated
exceptions that are preserved under the proposal, the IDI may continue
to rely upon the primary purpose exception without further action.
Finally, as part of this release, the FDIC is also proposing to
clarify when an IDI that has lost ``agent status'' because it no longer
qualifies for the reciprocal deposit exception, can regain status as an
``agent institution''.
The FDIC invites comments on all aspects of this proposal, as well
comments in response to specific questions in section VII of this
document.
A. Deposit Broker Definition
The proposed rule would amend the ``deposit broker'' definition by
revising the ``engaged in the business of placing deposits''
(``placing'') and ``engaged in the business of facilitating the
placement of deposits'' (``facilitating'') prongs. The revised
``deposit broker'' definition would (1) combine the ``placing'' and
``facilitating'' prongs, (2) remove the term ``matchmaking activities''
and replace it with a deposit allocation provision, and (3) add a new
factor related to fees. Specifically, the proposed rule would provide
that a person is engaged in the business of placing or facilitating the
placement of deposits of third parties if that person engages in one or
more of the following activities:
<bullet> The person receives third-party funds and deposits those
funds at one or more IDIs;
<bullet> The person has legal authority, contractual or otherwise,
to close the account or move the third party's funds to another IDI;
<bullet> The person is involved in negotiating or setting rates,
fees, terms, or conditions for the deposit account;
<bullet> The person proposes or determines deposit allocations at
one or more IDIs (including through operating or using an algorithm, or
any other program or technology that is functionally similar); or
<bullet> The person has a relationship or arrangement with an IDI
or customer where the IDI, or the customer, pays the person a fee or
provides other remuneration in exchange for or related to the placement
of deposits.
Engaged in the Business of Placing and Facilitating
Under the 2020 Final Rule, the ``placing'' and ``facilitating''
prongs are currently separate provisions under the ``deposit broker''
definition. Under section 29, a ``deposit broker'' includes ``any
person engaged in the business of placing deposits, or facilitating the
placement of deposits, of third parties.'' \69\ The proposed rule would
combine the ``placing'' and ``facilitating'' parts of the deposit
broker definition into a single definition of when a third party is
``engaged in the business of placing, or facilitating the placement of,
deposits of third parties'' with a single set of factors. From the
FDIC's experience, some IDIs and other stakeholders have been
misapplying the current ``deposit broker'' definition by only looking
at one of these two parts of the ``deposit broker'' definition in
determining whether a particular third party meets the definition. For
example, an IDI or other stakeholder may correctly determine that a
third party's conduct falls outside the ``placing'' provision under the
current rule but may still incorrectly determine that the deposits are
not brokered by failing to review whether the same conduct meets the
``facilitating'' provisions. The FDIC believes this proposed change of
combining the ``placing'' and ``facilitating'' regulatory provisions
would better align the regulatory text with the statutory language,
while also making the ``deposit broker'' definition more
straightforward for IDIs and other stakeholders to apply because it
would require review of a single set of closely related factors rather
than a review of multiple provisions.
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\69\ See 12 U.S.C. 1831f(g)(1)(A).
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Deposit Allocation
The proposal would retain the first two prongs of the current
facilitation definition; \70\ however, it would remove the term
``matchmaking activities'' and provide that a person who proposes or
determines deposit allocations would meet the ``deposit broker''
definition.
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\70\ The proposed rule would retain 12 CFR 337.6(a)(5)(iii)(A)
through (B).
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The FDIC has observed a number of IDIs and other stakeholders
incorrectly determining that a third-party deposit allocator is not a
``deposit broker'' by misapplying the current ``matchmaking
activities'' definition. The FDIC provided clarifications through the
issuance of Questions and Answers Related to the Brokered Deposits
Rule; \71\ however, the industry continues to misconstrue this
provision. Additionally, IDIs have informed the FDIC of the
difficulties in obtaining necessary information, such as third-party
contracts, to effectively evaluate whether any party in a deposit
arrangement, including any additional third party, meets the
``matchmaking'' definition and thus the ``deposit broker'' definition.
These challenges have resulted in some IDIs misreporting a significant
amount of deposits as nonbrokered.
---------------------------------------------------------------------------
\71\ See FDIC, Questions and Answers Related to Brokered
Deposits Rule--As of July 15, 2022, available at <a href="https://www.fdic.gov/resources/bankers/brokered-deposits/brokered-deposits-qa.pdf">https://www.fdic.gov/resources/bankers/brokered-deposits/brokered-deposits-qa.pdf</a>.
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As such, the FDIC believes eliminating the current ``matchmaking
activities'' definition and replacing it with the proposed deposit
allocation
[[Page 68252]]
provision would make it more operationally workable for IDIs and other
stakeholders while continuing to focus the definition on the specific
conduct that indicates a third party is facilitating the placement of
customer deposits--proposing or determining deposit allocations of
third-party deposits. The proposal would specify that a ``deposit
broker'' includes a person who proposes or determines deposit
allocations, including through the operation or use of an algorithm or
functionally similar program or technology. The FDIC views this conduct
as objectively within the ``deposit broker'' definition if the
algorithm or functionally similar program or technology proposes or
determines deposit allocations among IDIs by directing the flow, or
facilitating the flow, of third-party funds to be deposited at a
particular IDI.
Moreover, unlike the ``matchmaking activities'' definition under
the 2020 Final Rule, the proposed prong related to deposit allocation
services would not exclude third parties that provide these services
between affiliated entities. As discussed in the preamble to the 2020
Final Rule, the matchmaking activities prong would not include persons
that engage in activities that would otherwise satisfy the matchmaking
prong if the activities are conducted between an IDI and an affiliated
party.\72\ Under the proposed rule, the FDIC would no longer view
deposit allocation functions of third parties as administrative in
nature merely due to the affiliated relationship between the person
placing or facilitating the placement of deposits and the IDI. Rather,
recent experience has demonstrated that third parties do propose or
determine deposit allocations at both unaffiliated and affiliated IDIs
and these deposits, when uninsured, do not seem to act in a more
``sticky'' manner just because there is an affiliation between a broker
and an IDI. Accordingly, the FDIC would treat affiliated and
unaffiliated third parties similarly under the proposed deposit
allocation prong of the ``deposit broker'' definition.
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\72\ 86 FR 6742, 6747 (Jan. 22, 2021).
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Fees
Finally, the proposed rule would add that a person is ``engaged in
the business of placing, or facilitating the placement of, deposits of
third parties'' if that person has a relationship or arrangement with
an IDI or customer where the IDI, or the customer, pays the person a
fee or provides other remuneration in exchange for, or related to, the
placement of deposits. The statutory definition of ``deposit broker''
includes any third party that is engaged in the business of placing
deposits, or facilitating the placement of deposits, on behalf of third
parties (i.e., a depositor) with IDIs. As such, the FDIC believes that
including fees or other remuneration in determining whether a third
party meets the ``deposit broker'' definition is consistent with the
statute as the receipt of fees indicates that the third party is
engaged in the business of providing deposit placement services or
facilitating the placement of deposits. Fees that would be covered
under the proposed ``deposit broker'' definition would include fees for
administrative services provided in connection with a deposit placement
arrangement.
Moreover, the FDIC had, for the more than 30 years since enactment
of section 29 up until the adoption of the 2020 Final Rule, considered
fees in analyzing deposit broker relationships, including whether a
person receives fees from IDIs based upon the number of accounts opened
or the volume of deposits placed. In the past, FDIC generally found
that the amount, nature, and purpose of fees paid for the placement of
third-party deposits were relevant to the analysis of the relationship
among the IDI, depositor, and third-party intermediary. This was
because fees paid to a third-party intermediary reflected whether the
involvement of the third-party intermediary was to earn fees (engaged
in the business) through placing or facilitating the placement of
third-party deposits to the IDI. For example, the FDIC often found that
fees paid to a third-party intermediary would play a key role in
incentivizing referral volume of third-party deposits to the IDI. Since
the 2020 Final Rule took effect, the FDIC has continued to observe that
third-party intermediaries receive fees or other remuneration in
exchange for, or related to, the placement of third-party deposits,
including volume-based fees, but may not be defined as a ``deposit
broker'' under the current regulations. Without a consideration of fees
or other remuneration, and assuming the third party does not meet one
of the other parts of the ``deposit broker'' definition, a less than
well-capitalized IDI could accept third-party deposits that share
characteristics with deposits the FDIC has historically observed as
constituting a brokered deposit. For example, such third-party deposits
may be more likely to leave the IDI if another IDI were to offer more
favorable terms or pay a higher fee, putting stress on the IDI to
replace the withdrawn funds on reasonable terms in a timely manner.
Accordingly, the FDIC believes that fees and other remuneration are
important considerations when determining whether a person is a
``deposit broker'' and explicitly including this factor within the
definition would be appropriate to further align the regulation with
section 29's statutory purpose of restricting less than well-
capitalized IDIs' access to brokered deposits.\73\
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\73\ See 12 U.S.C. 1831f. Notwithstanding the presence of fees,
under the proposed rule, the FDIC could grant a primary purpose
exception based on a consideration of factors related to the purpose
of placing of deposits. See infra section III.C of this document.
---------------------------------------------------------------------------
Passive Listing Services. Under the proposed rule, it is the FDIC's
view that a passive listing service that only advertises information on
interest rates offered by IDIs on deposit products would not meet the
``deposit broker'' definition. It is the FDIC's understanding that such
passive listing services do not receive or deposit third-party funds at
one or more IDIs nor have the legal authority to close a deposit
account or move third party's funds to another IDI. Any funds to be
invested in deposit accounts are remitted directly by the depositor to
the IDI and not, directly or indirectly, by or through the passive
listing service. In addition, such passive listing services are not
involved in negotiating or setting rates, fees, terms, or conditions
for the deposit account. Further, passive listing services do not
propose, allocate, facilitate, or determine deposit allocations.
Rather, the passive listing services are simply providing information
on the interest rates offered by various IDIs but not directing
depositors to a particular IDI. Lastly, the FDIC believes that any fees
paid to passive listing services are not in exchange for or related to
the placement of deposits. Instead, passive listing services receive
subscription fees paid by subscribers for information on the rates
gathered by the listing service and listing fees paid by IDIs for the
opportunity to list or ``post'' the IDIs' rates.
B. Exclusive Deposit Placement Arrangement
Under the FDI Act, the term ``deposit broker'' is defined, in
relevant part, to include ``any person engaged in the business of
placing deposits, or facilitating the placement of deposits, of third
parties with insured depository institutions. . . .'' \74\ In the 31
years between when Congress adopted the brokered deposit restrictions
in 1989,
[[Page 68253]]
until the 2020 Final Rule, the FDIC had never construed the reference
to ``insured depository institutions'' in the deposit broker definition
to exclude deposits to a single IDI. Call Report instructions for
reporting brokered deposits had never excluded deposits where a third
party was involved with deposits at only one IDI. This prior approach
was consistent with the general statutory interpretation rule that
provides that words importing the plural include the singular, unless
the statutory context indicates otherwise.\75\
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\74\ 12 U.S.C. 1831f(g)(1) (emphasis added).
\75\ See 1 U.S.C. 1.
---------------------------------------------------------------------------
The 2020 Final Rule amended the FDIC's regulations so that the
brokered deposit restrictions do not apply where a third party that
otherwise meets the definition of deposit broker has an exclusive
deposit placement arrangement at only one IDI.\76\
---------------------------------------------------------------------------
\76\ See 12 CFR 337.6(a)(5)(ii) and (iii).
---------------------------------------------------------------------------
Under this change, an IDI can rely for 100 percent of its deposits
on an unaffiliated third party without any of those deposits considered
brokered. The IDI can fall below well capitalized and still rely on
those third-party placed deposits for 100 percent of its funding
without any of those deposits being considered brokered, which provides
an avenue for less than well-capitalized IDIs to obtain and retain
brokered deposits that appears to conflict with intent of the statutory
prohibition. An IDI can form multiple ``exclusive'' third party
relationships to fund itself without any of those deposits considered
brokered. Thus, the current regulation exposes the banking system to
the kind of risk the brokered deposit restrictions were intended to
address.
Further, there has never been any dispute that the brokered deposit
restrictions are intended to apply to brokered certificates of deposit
(CDs). While the 2020 Final Rule makes clear that a brokered CD is not
eligible for a primary purpose exception, a market participant has
pointed out to the FDIC that, because of the exclusion, the plain
meaning of the definitions of ``engaged in the business of placing
deposits'' and ``engaged in the business of facilitating the placement
of deposits'' could be read to exclude a third party that arranges the
issuance of a brokered CD for only one IDI.
For these reasons, and to mitigate any unintended effects of the
interpretation as related to the statute's purpose and its application
to brokered CDs, the FDIC is proposing to revise the brokered deposit
regulations to restore their applicability to any third party that
meets the definition of deposit broker, including those involved in
placing deposits at only one IDI.
C. Primary Purpose Exception Analysis
The proposed rule would revise the analysis for determining when an
agent or nominee meets the primary purpose exception to the ``deposit
broker'' definition. Currently, the statute and regulation state that
the term ``deposit broker'' does not include an agent or nominee whose
primary purpose is not the placement of funds with IDIs.\77\ In
connection with this provision, the preamble to the 2020 Final Rule
provided that the primary purpose exception would apply when the
agent's or nominee's business relationship with its customers is not
the placement of funds with IDIs.\78\
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\77\ 12 CFR 337.6(a)(5)(v)(I).
\78\ See 86 FR 6742, 6750 (Jan. 22, 2021).
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Accordingly, the current regulation focuses the primary purpose
exception analysis on the third party's business relationship with its
customers. While that is an important part of analyzing the exception,
the FDIC believes that the relationship between the IDI and third party
is also important in determining the purpose motivating the placement
of third-party deposits and if the primary purpose is or is not the
placement of funds with IDIs.
The statutory definition of the ``primary purpose exception''
excludes an agent or nominee whose primary purpose is not the placement
of third-party funds with IDIs from being considered a ``deposit
broker.'' \79\ Consistent with the statutory language, the focus of the
exception is on the role of the agent or nominee (or third party) and
whether that third party places customer deposits at an IDI as a
secondary purpose in furtherance of some other ``primary purpose.''
Understanding the intent of the third party in placing those deposits
at a particular IDI or IDIs is necessary in determining whether the
deposit placement activity is primary. As such, in understanding why
the third party is placing deposits on behalf of customers at
particular IDIs, consideration should be given to both the customer-
third party relationship and the third party-IDI relationship. This is
because the primary purpose of a customer's business relationship with
a third party may be distinct from the intention of the third party in
placing those customer funds at particular IDIs.
---------------------------------------------------------------------------
\79\ See 12 U.S.C. 1831f(g)(2)(I).
---------------------------------------------------------------------------
For example, a third party that meets the primary purpose exception
under the current rule may also be steering its customers to particular
IDIs in an effort to maximize its own fees for the placement of
customer deposits. The current rule, however, does not consider this
latter purpose in analyzing whether the third party meets the primary
purpose exception.
Accordingly, the proposal provides that the primary purpose
exception to the ``deposit broker'' definition would apply when an
agent or nominee whose primary purpose in placing customer deposits at
IDIs is for a substantial purpose other than to provide a deposit-
placement service or FDIC deposit insurance with respect to particular
business lines.\80\
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\80\ The FDIC would view a third party placing funds for the
primary purpose of providing FDIC deposit insurance to third parties
as not meeting the statutory exception, as the purpose of providing
FDIC insurance coverage is indistinguishable from the placement of
deposits.
---------------------------------------------------------------------------
The proposed interpretation of the primary purpose exception would
be similar to how the FDIC historically interpreted the exception
before 2020. Prior to the 2020 Final Rule, the FDIC through long-
standing staff advisory opinions and published FAQs interpreted the
primary purpose exception to apply when the intent of the third party,
in placing deposits or facilitating the placement of deposits, was to
promote some other goal (i.e., other than the goal of placing deposits
for others).\81\ As part of its analysis, the FDIC considered the
relationship between the third party and the IDI, including whether
fees were paid to the third party, in determining whether the third
party's primary intent, or primary purpose, was the placement of
deposits. For instance, the FDIC stated, through the published FAQs,
that the primary purpose exception would not apply when the intent of
the third party was to earn fees through the placement of deposits.\82\
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\81\ See FDIC, Frequently Asked Questions Regarding Identifying,
Accepting, and Reporting Brokered Deposits, E7 (Nov. 13, 2015)
(inactive) available at <a href="https://www.fdic.gov/sites/default/files/2024-03/fil15051b.pdf">https://www.fdic.gov/sites/default/files/2024-03/fil15051b.pdf</a>.
\82\ See id.
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The FDIC believes that restoring this aspect of the primary purpose
exception analysis is necessary to fully consider the intent driving
the placement of third-party deposits at an IDI. As detailed below, the
proposal would provide additional factors to consider, including fees
and other remuneration provided to the third party, in determining
whether the intent of the third party in placing deposits at an IDI is
for a substantial purpose other than to provide a deposit-placement
service or FDIC deposit insurance.
[[Page 68254]]
Application Process Under the Primary Purpose Exception
1. Eligible Applicants for the Primary Purpose Exception Process
The proposed rule would also update the primary purpose application
process under Sec. 303.243(b). The 2020 Final Rule allows a third
party or an IDI on behalf of a third party to submit a primary purpose
exception application. From the FDIC's experience, some third parties
have provided insufficient information for the FDIC to process an
application, such as failing to provide required information on all
parties within a deposit arrangement, including the receiving IDIs.
Moreover, the FDIC has observed some IDIs misunderstand the primary
purpose exception application approvals provided to third-party
applicants, as the IDI was not the applicant and the approval does not
apply to its particular deposit placement activity with the third
party; these misunderstandings have contributed to problems with IDIs
filing accurate Call Reports.
For these reasons, the FDIC proposes to no longer allow third
parties to apply for a primary purpose exception. As proposed, each IDI
wishing to rely on a primary purpose exception would be required to
submit an application for the specific deposit placement arrangement
that it has with the third party involved. This would provide the FDIC
the opportunity to review the specific facts and circumstances
surrounding the deposit placement activity between the individual IDI
applicant and the third party in determining whether a primary purpose
exception should be approved.
2. Proposed Additional Factors for Primary Purpose Exception
Application
Under the 2020 Final Rule, applicants that seek a primary purpose
exception, other than applications for primary purpose exception to
enable transactions with fees, interest, or other remuneration, must
include, to the extent applicable, the following information:
<bullet> A description of the deposit placement arrangements
between the third party and IDIs for the particular business line,
including the services provided by any relevant third parties;
<bullet> A description of the particular business line;
<bullet> A description of the primary purpose of the particular
business line;
<bullet> The total amount of customer assets under management by
the third party, with respect to the particular business line;
<bullet> The total amount of deposits placed by the third party at
all IDIs, including the amounts placed with the applicant, if the
applicant is an IDI, with respect to the particular business line;
<bullet> Revenue generated from the third party's activities
related to the placement, or facilitating the placement, of deposits,
with respect to the particular business line;
<bullet> Revenue generated from the third party's activities not
related to the placement, or facilitating the placement, of deposits,
with respect to the particular business line;
<bullet> A description of the marketing activities provided by the
third party, with respect to the particular business line;
<bullet> The reasons the third party meets the primary purpose
exception;
<bullet> Any other information the applicant deems relevant; and
<bullet> Any other information that the FDIC requires to initiate
its review and render the application complete.\83\
---------------------------------------------------------------------------
\83\ See 12 CFR 303.243(b)(4)(ii).
---------------------------------------------------------------------------
The proposed rule would add new factors to be considered as part of
the primary purpose exception application. Specifically, the proposed
rule would amend Sec. 303.243(b)(4)(ii) to include consideration of
whether:
<bullet> The IDI, or customer, pays fees or other remuneration to
the agent or nominee for deposits placed with the IDI and the amount of
such fees or other remuneration, including how the amount of fees or
other remuneration is calculated;
<bullet> The agent or nominee has discretion to choose the IDI(s)
at which customer deposits are or will be placed; and
<bullet> The agent or nominee is mandated by law to disburse funds
to customer deposit accounts.
The proposed rule would also require IDIs to provide copies of
contracts relating to the deposit placement arrangement, including all
third-party contracts, to supplement the IDI's description of the
deposit placement arrangement that is currently required under the 2020
Final Rule. These new factors would supplement the factors that were
provided under the 2020 Final Rule.\84\ The FDIC believes consideration
of these factors, in conjunction with the existing factors, is
necessary to fully consider the purpose of the placement of third-party
deposits at an IDI and whether the third party is eligible for a
primary purpose exception. Below, the FDIC discusses how the new
factors would be viewed as part of its analysis, but notes that
approval of a primary purpose exception application would be based on
the consideration of all applicable factors and any additional
information provided by the applicant.
---------------------------------------------------------------------------
\84\ See 12 CFR 303.243(b)(4)(ii).
---------------------------------------------------------------------------
Fees. By including the amount of fees or other remuneration, and
how the amount is determined, that an IDI or customer pays to the agent
or nominee for deposits placed with the IDI, the FDIC would obtain
relevant information to help determine whether the third-party
intermediary is placing deposits for a substantial purpose other than
to provide a deposit-placement service or FDIC deposit insurance. The
FDIC would balance the information on fees with the other factors in
determining whether the primary purpose exception should be approved.
Discretion. A third party with discretion to choose the IDI(s) to
place customer deposits may base their deposit placement decisions on
factors such as interest rate competition or fees generated, and may be
more likely to move customer funds to other IDIs in a way that makes
the deposits less stable. Whether a third party has discretion,
however, would be viewed in conjunction with the other factors in
determining whether the primary purpose exception is applicable.
Legal obligation. In contrast, a third party disbursing funds
mandated by law is discharging its legal obligation and may be less
likely to move customers deposits to other IDIs. For example, a third
party disbursing customer funds as part of court-mandated settlements
could support a finding that the primary purpose in placing customer
deposits at IDIs is for a substantial purpose other than to provide a
deposit-placement service or FDIC deposit insurance. The FDIC, however,
would balance this consideration with the other factors, such as the
payment of fees, in determining the third party's primary purpose in
placing deposits.
Accordingly, the FDIC believes consideration of these proposed
factors, in conjunction with the existing application factors,\85\
would be necessary in analyzing applications under the proposed revised
primary purpose exception analysis. Furthermore, under the proposal,
primary purpose exception applications previously approved pursuant to
the 2020 Final Rule would be revoked. As a result, IDIs and third
parties relying on previously approved applications would no longer be
able to do so under the proposed rule. IDIs would be required to submit
a new application to seek a primary purpose exception and report the
associated deposits as brokered,
[[Page 68255]]
until and unless an application is approved.
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\85\ See 12 CFR 303.243(b)(4)(ii).
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D. Designated Exceptions
The proposed rule would amend the 25 percent test and eliminate the
enabling transactions test designated exception. In contrast to the
other designated business exceptions, based on the FDIC's experience,
these exceptions are overly broad and cover a variety of different
business lines rather than a narrow set of business lines intended by
the FDIC's bright-line designated exceptions. Further, the FDIC would
likely find that the current 25 percent and enabling transactions tests
would not meet the primary purpose exception under the proposed
analysis in that the primary purpose of these arrangements in placing
customer deposits at IDIs would often not be for a substantial purpose
other than to provide a deposit-placement service or FDIC deposit
insurance. Moreover, the current notice process does not allow the FDIC
to review submissions before an entity can invoke the exception, and
many of the submissions have been incomplete, inaccurate, or vague. For
these reasons, and as discussed in more detail below, the FDIC is
amending the 25 percent test and eliminating the enabling transactions
test in a manner that aligns with the proposed updated analysis of the
primary purpose exception.
1. 25 Percent Test Designated Exception
The 2020 Final Rule provides 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, if
less than 25 percent of the total assets that the agent or nominee has
under administration for its customers, in a particular business line,
is placed at IDIs.\86\ Third parties relying on the 25 percent test or
an IDI on its behalf must file a notice with the FDIC.\87\
---------------------------------------------------------------------------
\86\ See 12 CFR 337.6(a)(5)(v)(I)(1)(i).
\87\ See 12 CFR 303.243(b).
---------------------------------------------------------------------------
Before 2005, all sweeps from broker-dealers were defined as
brokered deposits because the broker-dealer was placing third-party
(customer) funds at IDIs. Between 2005 and 2020, FDIC staff interpreted
the primary purpose exception to apply to a broker-dealer that swept
customer funds to an affiliated IDI if the activity was conducted
within certain parameters. Among the parameters were that (1) swept
deposits did not exceed 10 percent of the affiliate's assets and (2)
related fees paid by the IDI to the broker-dealer were ``flat'' fees
(i.e., a ``per account'' or ``per customer'' fee) as payment for
recordkeeping or administrative services and not payment for placing
deposits.
Under the 2020 Final Rule, a broker-dealer that sweeps customer
funds to IDIs meets the ``deposit broker'' definition but is eligible
for the primary purpose exception where less than 25 percent of that
broker-dealer's total assets under administration for its customers is
placed at IDIs.\88\ The presence of a broker-dealer operating under a
primary purpose exception, regardless of whether or not the broker-
dealer is affiliated with the IDI receiving the deposits, will not, in
and of itself, permit an IDI to report such deposits as nonbrokered. As
described above, the 2020 Final Rule included in the ``deposit broker''
definition a ``matchmaking services'' prong intended to cover third-
party deposit allocation service providers when an additional third
party is used to place deposits between a broker-dealer and an IDI that
is unaffiliated with the broker-dealer.\89\
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\88\ 12 CFR 337.6(a)(5)(v)(I)(1)(i). To operate under a PPE
based on less than 25 percent of the total assets that the agent or
nominee has under administration for its customers is placed at
depository institutions, a notice was required to be filed with the
FDIC. 12 CFR 303.243(b)(3)(i)(A).
\89\ 12 CFR 337.6(a)(5)(iii)(C).
---------------------------------------------------------------------------
Since the implementation of the 2020 Final Rule, the FDIC has
encountered a number of challenges with notice filings submitted under
the 25 percent test and with reporting associated with sweep deposits.
The challenges became more apparent since the new reporting items
related to sweep deposits were added to the Call Report shortly after
the 2020 Final Rule became effective.\90\ The FDIC anticipated that
most unaffiliated sweep deposits would be classified as brokered
deposits because of the understanding that most broker-dealers, even
those with valid primary purpose exceptions, outsourced their deposit
allocation functions to an intervening third party providing
``matchmaking activities'' and these additional third parties would
thus meet the ``deposit broker'' definition. This has resulted in a
large number of unaffiliated sweep deposits being misreported as
nonbrokered.\91\ Approximately 27 percent of all IDIs reported a non-
zero amount for total sweep deposits that are not brokered deposits as
of December 31, 2023. For additional Call Report information, see the
tables in appendix 1 to this document.
---------------------------------------------------------------------------
\90\ 86 FR 27961 (May 24, 2021).
\91\ The FDIC has identified a few IDIs that retain these
functions in house and are properly reporting unaffiliated sweep
deposits as not brokered.
---------------------------------------------------------------------------
Reporting Issues with the 25 percent test. Since the 2020 Final
Rule became effective, the FDIC has observed several reasons for this
misreporting. An IDI must conduct a detailed analysis to accurately
determine the status of all third parties involved in a sweep deposit
program. The analysis may include a review of the agreements between
the broker-dealer and any additional third party within the deposit
placement arrangement, including third parties with which an IDI may
not have a direct contractual relationship.\92\ The FDIC acknowledges
that there may be challenges that IDIs and regulators face in
conducting due diligence with respect to these agreements, particularly
in situations when the IDI is not a party to the agreements between the
broker dealers and the additional third parties. Additionally, as
explained above, the FDIC has observed a number of IDIs and other
stakeholders misunderstanding the current ``matchmaking activities''
definition. This indicates that the ``matchmaking activities''
definition has not been uniformly understood across the industry. This
lack of understanding has likely contributed to IDIs overreporting
sweep deposits as not brokered when these deposits should be considered
brokered.
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\92\ See FDIC, Statement of the [FDIC] Regarding Reporting of
Sweep Deposits on Call Reports (July 15, 2022), available at <a href="https://www.fdic.gov/resources/bankers/brokered-deposits/statement-sweep-deposits.pdf">https://www.fdic.gov/resources/bankers/brokered-deposits/statement-sweep-deposits.pdf</a>.
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Proposed Broker-Dealer Sweep Primary Purpose Exception
The proposed rule would revise the current ``25 percent test''
designated exception and its notice process to (1) align with the
proposed analysis of the primary purpose exception and (2) ensure that
the FDIC and the IDI can properly determine whether any additional
third parties meet the ``deposit broker'' definition before the
exception can be invoked. In order to more clearly describe the
business arrangements intended to qualify for this primary purpose
exception, the proposed rule would revise the ``25 percent test'' and
rename it as the ``Broker-Dealer Sweep Exception'' (BDSE).
As proposed, subject to the additional conditions below, the BDSE
would be available only to a broker-dealer or investment adviser
registered with the Securities and Exchange Commission and only if less
than 10 percent of the total assets that the broker-dealer or
investment adviser, as agent or nominee, has under management for its
customers, in a particular business line, is placed into non-maturity
accounts at
[[Page 68256]]
one or more IDIs, without regard to whether the broker-dealer or
investment adviser and depository institutions are affiliated.
The FDIC is proposing the BDSE because a third party that places
less than 25 percent of its customer's assets under administration in a
bank account does not, by itself, demonstrate that the deposit-
placement activity is for a goal other than to provide deposit
insurance or a deposit placement service. Rather, placing less than 10
percent of customer funds at IDIs would be more indicative that the
primary purpose for broker dealers and investment advisers in placing
customer funds at IDIs is to temporarily safe-keep customer free cash
balances (e.g., uninvested funds) that are awaiting reinvestment. The
FDIC views the 10 percent threshold as evidence that a de-minimis
amount of customer funds are placed into deposit accounts for the
primary purpose of re-investment rather than to provide a deposit
placement service or deposit insurance. Further, lowering the threshold
to 10 percent may reduce potential risks to safety and soundness and to
the DIF by providing more transparency regarding the characteristics of
the deposits so placed. Despite the business relationship between the
IDI and the third party placing those deposits, the latter may well
have a fiduciary duty and other incentives to transfer those deposits
if the IDI is perceived to be weak.
In addition, the proposal would amend one of the key measures used
as part of this designated exception from ``customer assets under
administration'' to ``customer assets under management.'' From the
FDIC's experience with the 2020 Final Rule, ``customer assets under
administration'' is a more appropriate measure when including a broader
group of business relationships and business lines, whereas ``assets
under management'' would be appropriate under the proposed rule to
accurately reflect the scope of the types of services provided by
broker dealers and investment advisers. The proposed rule would define
``assets under management'' to mean securities portfolios and cash
balances with respect to which an investment adviser or broker-dealer
provides continuous and regular supervisory or management services.
Prior notice requirement for the BDSE when no additional third
parties are involved. In order to ensure accurate and uniform reporting
by depository institutions receiving sweep deposits from broker-
dealers, the proposed rule would allow an IDI to file a designated
exception notice for the BDSE on behalf of broker-dealers that place
deposits at the IDI only if no additional third party (including any
affiliate) is involved in the sweep program.
Under the proposed rule, an IDI would be required to provide a
written notice with the following information:
<bullet> A description of the deposit placement arrangement between
the IDI and the broker-dealer or investment adviser for the particular
business line;
<bullet> The registration and contact information for the broker-
dealer or investment adviser;
<bullet> The total amount of customer assets under management by
the broker-dealer or investment adviser;
<bullet> The total amount of deposits placed by the broker-dealer
or investment adviser on behalf of its customers at all IDIs; and
<bullet> A certification that no additional third parties are
involved in the deposit placement arrangement.
IDIs would be able to rely on the BDSE if the FDIC has not provided
a written disapproval within 90 days from submission. The FDIC, within
its discretion, could extend the time period for an additional 90 days
to provide a written notice of disapproval to the IDI. Further, the
FDIC would be able to request additional information at any time after
receipt of a written notice. Submissions that fail to include the
required information would be considered incomplete and disapproved.
Moreover, notice filers with an effective notice would be required to
provide quarterly updates within 30 days of the quarter end, with
monthly figures for the quarter, to demonstrate continuous compliance
with the exception. Lastly, the proposed rule provides that the FDIC
would be able to revoke an effective BDSE notice within 15 days of
providing the IDI written notice if:
<bullet> The broker-dealer or investment adviser no longer meets
the criteria to rely on the BDSE;
<bullet> An additional third party is involved in the business
line;
<bullet> The notice or subsequent reporting is inaccurate; or
<bullet> The notice filer fails to submit one or more required
reports.
The FDIC believes the BDSE notice requirement would be helpful in
ensuring the parties who meet the exception can rely on it. The FDIC
also believes this notice process would be more operationally workable
than the current 25 percent test notice process as the required
information would be tailored to specific information to which the
receiving IDI should have access or be able to obtain from the broker-
dealer or investment adviser.
Application process for sweep arrangements that use additional
third parties. In an effort to ensure that the FDIC has the ability to
properly scrutinize the role of additional third parties as part of
sweep programs, the proposal would create an application process for
IDIs that wish to invoke the BDSE when additional third parties are
involved in the arrangement. As provided above, the notice process is
not available for sweep programs that use additional third parties. The
application process would review whether the broker-dealer or
investment adviser meets the criteria under the BDSE and it would
review whether any additional third party involved in the deposit
placement arrangement meets the ``deposit broker'' definition. If the
additional third party meets the ``deposit broker'' definition, then
the FDIC would deny the application and the deposits being placed
through the sweep program would be brokered notwithstanding the broker-
dealer itself qualifying for a primary purpose exception. The proposed
rule would require an application regardless of whether the sweep
arrangement involves IDI-affiliated parties. The FDIC believes treating
affiliated and unaffiliated relationships the same when an additional
third party is involved would help ensure consistent and equitable
treatment of sweep deposits across the industry.
The proposed rule would amend Sec. 303.243(b) to describe a new
primary purpose exception application process for sweep arrangements
that use additional third parties. Specifically, an IDI, on behalf of a
broker dealer or investment adviser that places less than 10 percent of
customer funds under management into IDIs through the use of an
additional third party, would be required to provide the following as
part of an application:
<bullet> A description of the deposit placement arrangement between
the IDI, the broker-dealer or investment adviser, and the additional
third party, including the services provided by the additional third
party, for the particular business line, and copies of contracts
relating to the deposit placement arrangement, including all third
party contracts;
<bullet> The total amount of customer assets under management by
the broker-dealer or investment adviser;
<bullet> The total amount of deposits placed by the broker-dealer
or investment adviser on behalf of its customers at all IDIs;
<bullet> Information on whether the additional third party places
or facilitates the placement of deposits at IDIs;
[[Page 68257]]
<bullet> Information on whether the additional third party has
legal authority, contractual or otherwise, to close the account or move
the third party's funds to another IDI;
<bullet> Information on fees and the amount of fees paid from any
source to the additional third party with respect to its services
provided as part of the deposit placement arrangement;
<bullet> Information on whether the additional third party has
discretion to choose the IDIs at which customer deposits are or will be
placed; and
<bullet> Any other information that the FDIC requires to initiate
its review and render the application complete.
Moreover, the FDIC would be able to request additional information
from the applicant at any time during processing of the application.
The proposed rule provides that within 120 days of receiving a
complete application, the FDIC would issue a written determination, but
the FDIC could extend its review by 120 additional days, with notice.
If necessary, the FDIC could further extend its review period, which is
more likely when an application involves complex or novel arrangements
or issues. If the FDIC receives an incomplete application, the FDIC
would, as soon as possible, notify the applicant and explain what is
needed to render the application complete. The FDIC would also be able
to request additional information at any time during the processing of
the filing.
The FDIC would approve an application under this provision if the
FDIC finds that the applicant demonstrates that, with respect to the
IDI and the particular business line, the (1) broker-dealer or
investment adviser meets the criteria for the BDSE and (2) the
additional third party involved in the deposit placement arrangement is
not a ``deposit broker'' as defined under the proposed rule.
2. Enabling Transactions Designated Exception
Prior to the 2020 Final Rule, the FDIC did not distinguish between
acting with the purpose of placing deposits for other parties and
acting with the purpose of enabling other parties to use deposits to
make purchases. The 2020 Final Rule distinguished these two purposes
and created a primary purpose exception for third parties that place
deposits to allow their customers to enable transactions. IDIs
receiving deposits from deposit brokers relying on this exception do
not report these deposits as brokered; however, as described below,
many of these deposits would not satisfy the proposed primary purpose
exception analysis.
A third party qualifies for the current enabling transactions
primary purpose exception by either submitting an application or
submitting a notice. In a deposit placement arrangement where interest,
fees, or other remunerations are provided to the depositor, the agent
or nominee must receive prior approval before relying on the enabling
transactions primary purpose exception by submitting an application to
the FDIC.\93\ Under the enabling transactions test, where 100 percent
of customer funds that have been placed at depository institutions,
with respect to a particular business line, are placed into transaction
accounts, and no fees, interest, or other remuneration is provided to
the depositor, the agent or nominee may file a notice with the FDIC to
rely on the enabling transactions designated exception.\94\
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\93\ 12 CFR 303.243(b)(4)(i).
\94\ 12 CFR 303.243(b)(3)(i)(B).
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The current enabling transactions test would not satisfy the
proposed primary purpose exception because placing deposits into
accounts with transactional features would not, by itself, prove that
the substantial purpose of the deposit placement arrangement is for a
purpose other than providing deposit insurance or a deposit-placement
service. The FDIC believes that there is no relevant difference between
an agent or nominee's purpose in placing deposits to enable
transactions and placing deposits to access a deposit account and
deposit insurance.
For these reasons, the FDIC is proposing to eliminate the enabling
transactions test and the corresponding notice process. As proposed,
IDIs that currently rely on a primary purpose of enabling transactions
under the notice process could file an application under the general
primary purpose exception application process under current Sec.
303.243(b)(4)(ii) (subject to the amendments under the proposed rule),
if they believe that the primary purpose in placing customer deposits
at IDIs is for a substantial purpose other than to provide a deposit-
placement service or FDIC deposit insurance with respect to the
particular business line. As discussed above, only IDIs would be
permitted to file an application under the proposed rule.
The proposed rule would also eliminate the application process for
the enabling transactions exception where interest, fees, or other
remuneration is provided to depositors under Sec. 303.243(b)(4)(i).
Applications previously approved under this provision would be
rescinded. IDIs would be able to submit a new application to seek a
primary purpose exception if they believe that the business line may be
eligible for the general primary purpose exception.
3. Other Designated Business Exceptions
Under the 2020 Final Rule, the FDIC identified other designated
business exceptions that meet the primary purpose exception in addition
to the 25 percent and enabling transactions tests discussed above. The
proposed rule would retain the remaining designated business exceptions
listed in the 2020 Final Rule, as well as the additional designated
exception for non-discretionary custodians engaged in the placement of
deposits. While the primary purpose interpretation under the proposed
rule differs from the interpretation contained in the 2020 Final Rule,
the outcome of whether these specific arrangements meet the primary
purpose exception would not necessarily change if evaluated under the
proposed revised interpretation based on the FDIC's current
understanding of these specific arrangements.
The FDIC believes the remaining existing designated business
exceptions are narrowly tailored to address specific business lines or
functions and would satisfy the proposed primary purpose exception
analysis in that the primary purpose of these arrangements in placing
customer deposits at IDIs is for a substantial purpose other than to
provide a deposit-placement service or FDIC deposit insurance. However,
the FDIC will continue to monitor these specific arrangements, and if
any changes indicate that the primary purpose of any of these
arrangements is to provide a deposit-placement service or FDIC deposit
insurance, the FDIC would revise the designated exceptions through the
notice and comment process.
E. Agent Institution Status for Reciprocal Deposits
As discussed above, the amount of reciprocal deposits an IDI can
except from being considered brokered under the limited exception turns
on whether the IDI qualifies as an agent institution and if so, whether
the IDI is subject to the special cap. An IDI that meets the agent
institution definition can lose its agent institution status due to no
longer meeting the qualifying provisions under section 29 and the 2018
Reciprocal Deposits Rule. Section 29 and the 2018 Reciprocal Deposits
Rule do not clarify
[[Page 68258]]
how and when an IDI might regain agent institution status after losing
such status. As a result, the FDIC has received numerous questions
about this issue.
An IDI that is an agent institution may lose that status, and
thereby lose the ability to use the exception. For example, if a well-
capitalized IDI with a composite condition of outstanding or good has
its CAMELS composite condition downgraded below outstanding or good at
its most recent examination conducted under section 10(d) for the FDI
Act, it becomes subject to a special cap. If the IDI subsequently
receives reciprocal deposits that results in its total reciprocal
deposits exceeding its special cap, it is no longer an agent
institution. Thus, the IDI no longer qualifies for the limited
exception and must report all its reciprocal deposits as brokered
deposits.
In response to questions raised, and in recognition that the
current statute and regulation do not provide clarity on this issue,
the FDIC proposes to add a new Sec. 337.6(e)(3) to provide a path for
an IDI to regain agent institution status. An IDI that lost its agent
institution status would be eligible to regain its agent institution
status as follows:
<bullet> If the IDI is well capitalized, the date the IDI is
notified that its CAMELS composite condition is rated outstanding or
good at its most recent examination under 12 U.S.C. 1820(d);
<bullet> If the IDI is well-rated, the date the IDI is notified, or
is deemed to have notice, that it is well capitalized under regulations
implementing section 38 of the FDI Act issued by the appropriate
Federal banking agency for that institution;
<bullet> The date the FDIC grants a brokered deposit waiver; or
<bullet> On the last day of the third consecutive calendar quarter
during which the IDI did not at any time receive reciprocal deposits
that caused its total reciprocal deposits to exceed its special cap.
To illustrate, if as the result of an examination, a well-
capitalized IDI that had had a CAMELS composite rating of ``3''
receives written notice, including, for example, a transmittal letter,
informing it that it had received an upgrade to a composite rating of
``2'' the IDI would regain its agent institution status as of the date
of the written notice under the proposal. If the FDIC grants a brokered
deposit waiver to an adequately capitalized IDI, the IDI would regain
agent institution status on the date the FDIC grants the waiver. If the
IDI does not fit into either of these categories and lost its agent
institution status during the fourth quarter of 2024 but can
demonstrate that it did not receive any reciprocal deposits that caused
its total reciprocal deposits to exceed its special cap at any time
during the first, second, or third quarters of 2025, it would regain
agent institution status on the last day of the third quarter of 2025.
IV. Alternatives
As part of this proposal, the FDIC is also inviting comment on the
following alternatives that are under consideration.
A. No Designated Exception for Sweep Deposits
As discussed above, the proposed rule would provide a BDSE that
would be available to a broker-dealer or investment adviser that places
or facilitates the placement of less than 10 percent of the total
assets that it has under management for its customers at one or more
IDIs, and no additional third parties are involved in the deposit
placement arrangement. Further the proposed rule would provide a
specific application process for sweep arrangements that involve an
additional third party.
The FDIC is considering whether a designated business exception for
sweep deposits should instead be rescinded. Under this alternative,
IDIs would be required to report all sweep deposits as brokered because
the broker-deal or investment adviser would meet the ``deposit broker''
definition since it would be placing or facilitating the placement of
the third-party deposits. IDIs receiving sweep deposits, however, could
apply for the general primary purpose exception. Whether a broker-
dealer or an investment adviser would meet the primary purpose
exception under this alternative would not be based on a de-minimis
amount of customer funds placed at one or more IDIs. Rather, an IDI
would be required to submit the required information listed under the
general primary purpose exception application process as described in
the proposed rule to demonstrate that the deposit-placement activity of
the sweep arrangement, including those with an additional third party,
is for a substantial purpose other than to provide deposit insurance or
a deposit placement service.
B. Designated Exception for Sweep Deposits to Affiliated IDIs
The FDIC is also considering whether instead to change the BDSE to
apply to a broker-dealer or investment adviser that sweeps customer
funds to an affiliated IDI and meets other certain parameters. Under
this alternative, a broker-dealer or investment adviser would meet the
designated business exception if:
<bullet> The broker-dealer or investment adviser places or
facilitates the placement of swept funds into non-maturity accounts at
an affiliated IDI, and the amount of swept funds are less than 10
percent of the total assets that the broker-dealer or investment
adviser has under management for its customers; and
<bullet> The related fees paid by the IDI to the broker-dealer or
investment adviser are ``flat fees'' (i.e., a ``per account'' or ``per
customer'' fee) as payment for recordkeeping or administrative services
and not payment for placing deposits.
This alternative would be similar to the FDIC's treatment of
affiliated sweep deposit arrangements prior to the 2020 Final Rule.
Under this alternative, the exception would not apply to deposit
arrangements where swept funds are placed at unaffiliated IDIs.
V. Expected Effects
As previously stated, the proposed rule would strengthen the FDIC's
brokered deposit regulations by revising certain provisions to further
support the statutory language and purpose of the brokered deposit
restrictions, and clarifying and streamlining provisions that the FDIC
observes have posed interpretive challenges. In summary, the proposed
rule would (1) streamline and update certain provisions of the
``deposit broker'' definition; (2) eliminate the exclusive placement
arrangement exception and restore the regulations' applicability to
cases where a third party, that otherwise meets the definition of
deposit broker, is involved with placing deposits at one or more IDIs;
(3) amend the ``primary purpose'' exception to the ``deposit broker''
definition, including revising the ``25 percent test'' designated
exception to a 10 percent test exception (and narrowing the scope of
firms to which the exception may apply) and eliminating the ``enabling
transactions'' designated exception; (4) update the primary purpose
exception application and notice processes and make it so that only
IDIs may submit an application and/or a notice on behalf of a third
party; and (5) clarify how an IDI that loses its ``agent institution''
status regains that status.
The proposed rule would apply to all IDIs and affect any IDI that
currently holds brokered deposits, or holds deposits that could be
reclassified as brokered under the proposed rule, including IDIs that
are less than well capitalized. As of March 31, 2024, there are 4,577
FDIC-insured depository
[[Page 68259]]
institutions (IDIs) holding approximately $24.06 trillion in assets and
$17.60 trillion in total domestic deposits. Additionally, of the 4,577
IDIs, 2,131 report holding $1.34 trillion in brokered deposits. Based
on IDIs' reported capital ratios as of the same date, seven IDIs (0.15
percent) were considered less than well capitalized, which is 0.37
percentage points below the average percentage of IDIs considered to be
less than well capitalized based on reported capital ratios over the
ten-year period ending March 31, 2024 (0.52 percent).\95\
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\95\ FDIC Call Report data, June 30, 2014, through March 31,
2024. For purposes of the analysis presented in the Expected Effects
section, an IDI is considered less than well capitalized based on
its reported capital ratios. Less than well-capitalized IDIs do not
include any quantitatively well capitalized institutions that may
have been administratively classified as less than well capitalized.
See generally 12 CFR 324.403(d) (FDIC); 12 CFR 208.43(b)(1)(v)
(Board of Governors of the Federal Reserve System); 12 CFR
6.4(c)(1)(v) (Office of the Comptroller of the Currency).
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One likely aggregate effect of the proposed changes is that some
deposits currently not reported as brokered would be reported as
brokered deposits if the proposal is adopted. This may potentially
affect IDIs, consumers, and nonbank firms that may be considered
``deposit brokers'' under the proposal.
Potential Effects on IDIs
The proposed rule would revise the ``deposit broker'' definition
and would amend the analysis of the ``primary purpose'' exception to
the ``deposit broker'' definition. The FDIC believes that under the
proposed rule fewer entities are likely to be exempt from the
definition of deposit broker than is the case currently. Additionally,
to the extent such entities continue to place funds at IDIs, the amount
of deposits at IDIs considered brokered under the proposed rule is
likely to increase. The FDIC does not have the data necessary to
estimate the amount of deposits that would be reclassified as brokered
under the proposed rule. However, at the end of the first quarter
during which the 2020 Final Rule was in effect--April through June of
2021--IDIs reported almost $350 billion fewer brokered deposits than in
the previous quarter, a reduction in reported brokered deposits of more
than 30 percent.\96\ Therefore the FDIC believes a material amount of
deposits could be reclassified as brokered.
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\96\ FDIC Call Report Data from March 31, 2021, and June 30,
2021.
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The remainder of this subsection considers first the proposed
rule's potential effects on less than well-capitalized IDIs
specifically, then discusses costs to IDIs more broadly (including
those that may be less than well capitalized), and an overview of the
proposed rule's expected effects on the number of applications and
notices (collectively, filings) sent to the FDIC. This subsection
concludes with a discussion of the proposed rule's potential benefits.
The subsection ``Reporting Compliance Costs'' of this document provides
more detailed estimates on the expected effects of the proposed rule on
the number of filings sent to the FDIC, and the expected dollar cost
associated with those filings.
Potential Effects on Less Than Well-Capitalized IDIs
The acceptance of brokered deposits is subject to statutory and
regulatory restrictions for banks that are not well capitalized.
Adequately capitalized banks may not accept brokered deposits without
an approved waiver from the FDIC, and banks that are less than
adequately capitalized may not accept them at all. As a result,
adequately capitalized and undercapitalized banks generally hold fewer
brokered deposits. To the extent less than well-capitalized IDIs are
able to rely on deposits that share the characteristics of brokered
deposits (such as volatility) but are not currently reported as
brokered, such IDIs can operate using a riskier liability structure
than one reliant on more stable funding sources, thereby potentially
increasing the risk of loss to the DIF. By generally increasing the
scope of deposits that are considered brokered, the proposed rule
limits the ability of less than well-capitalized banks to rely on
potentially less stable third-party deposits that are currently
reported as nonbrokered but would be reported as brokered under the
proposed rule.
Based on IDIs' reported capital ratios as of March 31, 2024, there
are seven less than well-capitalized IDIs, one of which reports holding
some volume of brokered deposits.\97\ These seven IDIs together report
$1.1 billion in total assets, $1.0 billion in domestic deposits, and
$137.0 million in brokered deposits.\98\ Five of the less than well-
capitalized IDIs are adequately capitalized as of March 31, 2024, one
is undercapitalized, and one is significantly undercapitalized.\99\
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\97\ March 31, 2024 Call Report data. For purposes of estimating
the expected effects of the proposed rule, this analysis uses an
IDI's reported capital ratios to determine whether that IDI is well
capitalized. The determination does not take into account written
agreements, orders, capital directives, or prompt corrective action
directives issued to specific IDIs. See generally 12 CFR 324.403(d)
(FDIC); 12 CFR 208.43(b)(1)(v) (Board of Governors of the Federal
Reserve System); 12 CFR 6.4(c)(1)(v) (Office of the Comptroller of
the Currency).
\98\ Id.
\99\ Id.
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As mentioned above, adequately capitalized banks may not accept
brokered deposits without an approved waiver from the FDIC, and because
the FDIC believes the proposed rule is likely to increase the amount of
deposits considered brokered, it may increase the number of waiver
applications the FDIC receives from adequately capitalized IDIs. This
potential effect of the proposed rule is difficult to estimate because,
as mentioned above, not only does the FDIC not possess the data
necessary to estimate the amount of deposits that would be reclassified
as brokered at specific banks under the proposed rule, but also the
number of adequately capitalized banks depends on other factors, such
as economic conditions and asset quality.
Potential Costs to IDIs of the Proposed Rule
The FDIC believes that if the proposed rule was adopted affected
IDIs, including well-capitalized and less than well-capitalized IDIs,
may incur some costs. First, the proposed rule may lead some IDIs to
restructure their liabilities. Second, the proposed rule may affect
certain regulatory ratios required to be calculated by some large IDIs.
Third, affected IDIs may be incentivized to make changes to their
organizational structure. Fourth, affected IDIs may need to make
changes to internal systems, policies, or procedures that pertain to
brokered deposits. Fifth, the proposed rule is expected to affect the
number of filings that IDIs send to the FDIC. Finally, the proposed
rule may affect some IDIs' FDIC deposit insurance assessments. Each of
these potential costs is discussed below in turn.
IDIs affected by the proposed rule may incur costs associated with
making changes to the structure of their liabilities. As discussed
above, there was a drop in reported brokered deposits immediately after
the effective date of the 2020 Final Rule. The FDIC believes that the
changes in the proposed rule are likely to result in a greater
proportion of nonbrokered deposits being reclassified as brokered. To
the extent affected IDIs are currently operating at their desired
ratios of brokered deposits to total liabilities and the proposed rule
increases the amount of deposits considered brokered, some affected
IDIs may find that, at least initially, the proposed rule may cause
them to have a greater than desired share of brokered deposits to
liabilities. The FDIC does not have the data to
[[Page 68260]]
estimate the amount of deposits that would be reclassified as brokered
by the proposed rule at particular IDIs, nor how many IDIs, if any,
might make changes to the structure of their liabilities.
For some large IDIs, brokered deposits can affect the calculation
of certain regulatory ratios, such as the Liquidity Coverage Ratio
(LCR) and Net Stable Funding Ratio (NSFR). The FDIC does not have the
data to estimate the amount of deposits that would be reclassified as
brokered by the proposed rule at individual IDIs, and thus cannot
estimate how many IDIs, if any, may incur costs associated with
maintaining compliance with, or maintaining management buffers relative
to, these regulatory ratios because of the proposed rule.
It is possible that some IDIs may choose to make changes to the
organizational structure of their institutions if the proposed rule is
adopted. In particular, IDIs that rely on the current exclusive
placement exception to obtain nonbrokered deposits from affiliates may
be incentivized to stop using these deposits or perhaps change their
organizational structure as a result of the proposed rule. The FDIC
does not have the information to estimate any such changes or attendant
costs.
The FDIC believes that if the proposed rule was adopted, IDIs
affected may incur some costs associated with making changes to their
internal systems, policies, and procedures associated with deposit
brokering activities and arrangements (especially those involving third
parties). The FDIC does not have the data to be able to reliably
estimate the costs associated with these changes, but expects that they
are likely to be modest. Further, the FDIC believes that some of these
costs may be ameliorated because the proposed rule is similar to the
regulatory framework that existed prior to the 2020 Final Rule,
therefore some affected entities may have experience with some of those
policies and procedures.
Several aspects of the proposed rule may impact the number of
filings that IDIs submit to the FDIC. First, as mentioned previously,
the proposed rule may increase the number of brokered deposit waiver
applications the FDIC receives from adequately capitalized IDIs.
Second, the proposed rule eliminates the ``enabling transactions''
exception (including its attendant notice), and the FDIC believes that
many entities that currently rely on this exception may work with IDIs
to file PPE applications. Third, the proposed rule replaces the current
``25 percent test'' notice exception with two similar but distinct
exceptions: the BDSE requiring a notice, for arrangements involving
only an IDI and broker-dealer, and the BDSE requiring an application,
for arrangements involving an IDI, broker-dealer, and additional third-
party. The FDIC believes the BDSE notice will be more operationally
workable than the current ``25 percent test'' notice process, as the
information required to complete the BDSE notice would be tailored to
specific information the receiving IDI should have access to or be able
to obtain from the broker-dealer. Finally, concurrent with the
finalization of the proposed rule, the FDIC would rescind notices and
applications approved under the 2020 Final Rule, and would eliminate
the ability of non-IDIs to file applications or notices. Therefore, the
FDIC expects that the proposed rule could result in a significant
increase in PPE applications from IDIs, especially in the period
immediately following the effective date if the proposed rule were
adopted. IDIs may incur costs associated with such submissions,
including costs associated with gathering more information from third
parties as part of the application process. See the ``Reporting
Compliance Costs'' subsection of this document for a more detailed
discussion of the potential effects of the proposed rule on the number
and types of filings sent to the FDIC.
The proposed rule could also affect FDIC deposit insurance
assessments. Under the FDIC's assessment regulations, IDIs with a
significant concentration of brokered deposits may pay higher quarterly
assessments, depending on other factors.\100\ To the extent that
deposits currently considered nonbrokered would be considered brokered
deposits under the proposed rule, an IDI's assessment may increase. The
FDIC does not have the information necessary to estimate the proposed
rule's expected effects on deposit insurance assessments because it
does not possess the data necessary to estimate the amount of deposits
that would be reclassified as brokered at particular IDIs under the
proposed rule.
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\100\ See 12 CFR part 327.
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Potential Benefits of the Proposed Rule
The FDIC believes that the proposed rule would pose two primary
benefits. First, the proposed rule would clarify certain concepts for
affected IDIs. Second, the FDIC believes the proposed rule would
improve the safety and soundness of the banking system. The benefits of
improved safety and soundness are difficult to quantify, but such
benefits are likely to accrue to the public and to all IDIs, not just
those that are less than well capitalized. The FDIC discusses these
potential benefits below in turn.
The FDIC believes that the proposed rule would improve the safety
and soundness of the banking system, as well as covered IDIs. To the
extent the proposed rule's changes would better identify deposits that
are currently not reported as brokered but share the risk
characteristics of brokered deposits, the FDIC believes that the
proposal would enhance the ability of the FDIC to ensure the safety and
soundness of the banking system. In particular, the rule would limit
the ability for a less than well-capitalized institution to rely on a
risky funding source and improve clarity so that reliance on brokered
deposits, regardless of capitalization, would be correctly reflected in
an institution's regulatory reporting, deposit insurance assessments,
and regulatory ratios.
As discussed above, the FDIC has found significant reliance on
brokered deposits increases an institution's risk profile, particularly
as its financial condition weakens. The FDIC's statistical analyses and
other studies have found that the use of brokered deposits by IDIs in
general is associated with a higher probability of failure and higher
losses to the DIF upon failure. The use of brokered deposits by IDIs is
correlated with (1) higher levels of asset growth, (2) higher levels of
nonperforming loans, and (3) a lower proportion of core deposit \101\
funding.\102\ As previously described, 47 institutions that failed
between 2007 and 2017 relied heavily on brokered deposits and each
caused an estimated loss to the DIF of over $100 million as of December
31, 2017. While these 47 institutions held total assets representing
nearly 21 percent of the aggregate total assets of the 530 institutions
that failed over this period, their losses represented 38 percent of
all estimated losses to the DIF for the same
[[Page 68261]]
period. More recently, First Republic Bank, which failed in May of
2023, saw rapid growth in reported brokered deposits in the quarters
leading up to its failure.\103\
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\101\ See FDIC, Study on Core Deposits and Brokered Deposits
(July 8, 2011), available at <a href="https://www.fdic.gov/regulations/reform/coredeposit-study.pdf">https://www.fdic.gov/regulations/reform/coredeposit-study.pdf</a>. See also 84 FR 2366, 2369 (Feb. 6,
2019). The FDIC updated its analysis in the 2011 Study on Core
Deposits and Brokered Deposits with data through the end of 2017
(``Updated Study''). ``Core deposits'' is defined in the updated
study as total domestic deposits net of time deposits over the
insurance limit and fully insured brokered deposits. See Updated
Study at 2384. Prior to 2011, the definition of core deposits
included fully insured brokered deposits.
\102\ See Updated Study at 2384-2400 (Appendix 2).
\103\ First Republic Bank's reported total brokered deposits
went from $597 million as of June 30, 2022, to $7.1 billion as of
March 31, 2023. See First Republic Bank's Call Report data.
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The FDIC also believes that the proposed rule would benefit covered
IDIs by clarifying certain practices and concepts. For example, the
proposed rule includes a provision to clarify how an IDI may regain its
``agent institution'' status after losing it. The FDIC also believes
that the proposed rule would benefit IDIs by promoting accurate
reporting and understanding of the regulation and how the involvement
of third parties within a deposit placement arrangement may, or may
not, result in the deposits being brokered. Based on the FDIC's
experience, the initial decline in brokered deposits following the
effective date of the 2020 Final Rule was due, in part, to some IDIs
misunderstanding and misreporting a significant amount of deposits as
nonbrokered. The FDIC believes that increased clarity should reduce
costs for affected IDIs and ensure more accurate reporting.
Potential Effects on Consumers
The proposed rule may affect consumers that utilize brokered
deposits, deposit placement services or arrangements. To the extent
that consumers utilize deposits currently, or in future periods, which
are not classified as brokered, but would be as a result of the
adoption of the proposed rule, they might experience changes in
interest rates on those funds, or costs associated with placing those
funds with different entities. The FDIC does not have the information
necessary to estimate such changes, and therefore, discusses these
effects qualitatively.
If adopted, the proposed rule may pose costs or benefits to
consumers by incentivizing them to place their funds with different
entities. To the extent that some entities cease offering, or change
the terms of, certain services because of a desire to avoid the
placement of deposits considered brokered under the proposal, or
because IDIs would prefer not to accept deposits considered brokered
under the proposal, certain deposit placement arrangements may change.
In particular, consumers may change their relationships with certain
third-party providers or third-party providers may change their
relationships with certain IDIs. Further, to the extent that consumers
consider other fund management options, such as money market mutual
funds, as substitutes for certain brokered deposits, consumers may
change fund placement arrangements. Finally, consumers considering
using deposit placement services may also benefit from the increased
clarity in the proposed rule on what is and is not considered brokered.
Potential Effects on Third Parties That May or May Not Be Deposit
Brokers
The proposed rule may affect third parties directly or indirectly
involved in the provision of brokered deposit products. To the extent
that third parties are involved in the provision of deposits currently
not designated as brokered, but would be if the proposed rule was
adopted, such third parties may incur costs associated with making
changes to systems, policies, and procedures. To the extent that third
parties may have previously relied on exceptions that existed under
2020 Final Rule but no longer will exist under the proposed rule--such
as the ``enabling transactions'' exception--they may experience costs
associated with transitioning their business models (including
potentially revising fees, changing revenue structures, etc.) to
reflect the new rule.
Third parties may also incur costs associated with the submission
of filings to the FDIC by affiliated IDIs on their behalf for deposit
placement arrangements. As mentioned previously, the proposed rule
rescinds existing primary purpose exceptions and notices granted under
the 2020 Final Rule and restricts the application and notice process to
IDIs. Therefore, to the extent that third parties who previously
applied and received approval for a primary purpose exception wish to
continue offering their services to covered IDIs, they may incur costs
associated with providing information to those IDIs to support
applications and notices to the FDIC. Finally, as the proposed rule's
criteria for determining whether an entity is exempt from being
considered a deposit broker are generally stricter than the criteria in
the 2020 Final Rule, more third parties are likely to be considered
deposit brokers under the proposed rule.
Reporting Compliance Costs
The FDIC believes the proposed rule, if adopted, would likely
affect the number of applications and notices (collectively, filings)
that IDIs submit to the FDIC for a number of reasons. First, the FDIC
believes that the proposed rule may increase the share of filings made
up of applications because the proposed rule would eliminate the
``enabling transactions'' notice exception. Based on the FDIC's
supervisory experience, many ``enabling transactions'' notice filers
will file PPE applications through IDIs, therefore the proposed rule
may result in an increase in filings overall as more deposits are
likely to be considered brokered under the proposed rule. Second, the
proposed rule would replace the current ``25 percent test'' notice
exception with two similar but distinct exceptions: the BDSE requiring
a notice, for arrangements involving only an IDI and broker-dealer, and
the BDSE requiring an application, for arrangements involving an IDI,
broker-dealer, and an additional third party. Third, the FDIC believes
that the proposed rule is likely to result in an increase in filings,
at least initially, because the proposed rule would rescind approved
applications and notices filed under the 2020 Final Rule. Finally,
because the FDIC believes the proposed rule is likely to increase the
amount of deposits classified as brokered, the FDIC believes the
proposed rule may increase the likelihood that an adequately
capitalized IDI submits a waiver application to accept brokered
deposits to the FDIC. The FDIC does not have the information necessary
to quantify the potential changes in filings that are likely to occur
if the proposed rule was adopted. Therefore, to quantify the effect of
the proposed rule on filing activity, the FDIC made certain assumptions
it deemed reasonable based on its experience with administering the
2020 Final Rule, described below, and relied on the number of filings
it received under the 2020 Final Rule as proxies for the number of
filings it would receive under the proposed rule.
The proposed rule would likely increase the number of PPE
applications received by the FDIC. As mentioned above, the proposed
rule would eliminate the ``enabling transactions'' exception and the
FDIC believes that many entities that relied on that exception may work
with IDIs that file PPE applications. Thus, in addition to the 12 PPE
applications that the FDIC received in the roughly three years since
the effective date of the 2020 Final Rule (April 1, 2021, to March 15,
2024),\104\ the FDIC believes it may receive an additional 77 PPE
applications, based on the number of ``enabling transactions'' notices
received over the same time period,\105\ for an estimated total of 89
PPE applications. Of the 89 PPE applications, the FDIC estimates 21
[[Page 68262]]
unique filers of applications based on the number received during the
three-year period since the effective date of the 2020 Final Rule, or
4.238 PPE applications per applicant and 7 applicants \106\ per year.
FDIC staff estimate that each PPE application requires 10 labor hours
to complete, and 15 minutes of labor per quarter to fulfill associated
reporting requirements if the application is approved. Therefore, if
the FDIC were to approve all estimated PPE applications received each
year under the proposed rule, the estimated associated labor hours
would be 330, representing 300 hours \107\ to complete the applications
and 30 hours \108\ of annual reporting burden.\109\
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\104\ FDIC applications data.
\105\ See <a href="https://www.fdic.gov/resources/bankers/brokered-deposits/public-report-ppes-notices.pdf">https://www.fdic.gov/resources/bankers/brokered-deposits/public-report-ppes-notices.pdf</a>.
\106\ Seven applicants equals the quotient of 21 unique PPE
filers over three years.
\107\ 300 hours equals the product of 7 applicants per year,
4.238 applications per applicant, and 10 hours per application. The
result is 300 hours because the FDIC rounded the product of the
first two numbers. Otherwise, the result would be 297 hours.
\108\ Applicants must report quarterly for each business line
for which an application is approved. Assuming every application is
approved, applicants would submit a total number of quarterly
reports per year equal to four multiplied by the number of
applications per applicant (4 * 4.238 = 16.952). Thus, the annual
reporting burden of PPE applications is estimated as 30 hours, which
is the product of 7 applicants per year, 16.952 reports per
applicant, and 0.25 hours per report.
\109\ 330 hours equals 300 hours plus 30 hours.
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The proposed rule would likely change the number of notices
received by the FDIC. As mentioned previously, the proposed rule would
eliminate the ``enabling transactions'' exception and its attendant
notice if adopted. Further, the proposed rule would replace the ``25
percent test'' exception by the BDSE. When only an IDI and broker-
dealer are involved, the BDSE requires a notice. The FDIC believes a
reasonable proxy for the number of BDSE notices under the proposed rule
is the number of ``25 percent test'' exception notices the FDIC
received under the 2020 Final Rule for which it did not identify a
potential third party,\110\ as the information required for each type
of notice is similar. Over the roughly three years since the effective
date of the 2020 Final Rule, the FDIC received 24 such notices from 22
notificants, or seven notificants per year and 1.091 notices per
notificant. FDIC staff estimate that each BDSE notice would take three
hours of labor to complete, and 30 minutes of labor per quarter to
satisfy reporting requirements. Thus, assuming the FDIC approves of all
eight BDSE notices it is estimated to receive each year, the FDIC
estimates that entities would incur 40 labor hours; 24 hours \111\ to
complete the notices and 16 hours \112\ for annual reporting.\113\
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\110\ See the 25 percent notices at <a href="https://www.fdic.gov/resources/bankers/brokered-deposits/public-report-ppes-notices.pdf">https://www.fdic.gov/resources/bankers/brokered-deposits/public-report-ppes-notices.pdf</a>
that are not marked with an asterisk.
\111\ 24 hours equals the product of 7 notificants per year,
1.091 notices per notificant, and 3 hours per notice. The result is
24 hours because the FDIC's burden calculator rounds the product of
the first two numbers. Otherwise, the result would be 23 hours.
\112\ Notificants must report quarterly for each business line
for which a notification is approved. Assuming every notice is
approved, notificants would submit a total number of quarterly
reports per year equal to four multiplied by the number of notices
per notificant (4 * 1.091 = 4.364). Thus, the annual reporting
burden of BDSE notices is estimated as 16 hours, which equals the
product of 7 notificants per year, 4.364 reports per notificant, and
0.5 hours per report. The result is 16 hours because the FDIC
rounded the product of the first two numbers. Otherwise, the result
would be 15 hours.
\113\ 38 hours equals 24 hours plus 14 hours.
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The proposed rule would adopt a new application process for
arrangements between an IDI and a broker-dealer in which a third party
is involved in the sweep of funds from the broker-dealer to the IDI
(BDSE application). The FDIC believes a reasonable proxy for the number
of BDSE applications is the number of ``25 percent test'' exception
notices the FDIC received over the roughly three-year period since the
effective date of the 2020 Final Rule for which the FDIC believed a
third party may be involved, as such arrangements are not eligible for
the BDSE notice. The FDIC received 33 ``25 percent test'' exception
notices from 29 unique notificants that it identified as potentially
involving a third party over the roughly three-year period since the
effective date of the 2020 Final Rule,\114\ or 10 notificants per year
and 1.138 notices per notificant. FDIC staff believe the new BDSE
application combines elements of the PPE application with reporting
requirements of the BDSE notice, and therefore estimates that each BDSE
application would take 10 hours of labor to complete, and 30 minutes of
labor per quarter to satisfy reporting requirements. Thus, if the FDIC
approved all 10 applications it receives each year, the FDIC estimates
that entities would incur 133 labor hours; 110 hours \115\ to complete
the applications and 23 hours \116\ to comply with the annual reporting
requirements.\117\
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\114\ See the 25 percent notices at <a href="https://www.fdic.gov/resources/bankers/brokered-deposits/public-report-ppes-notices.pdf">https://www.fdic.gov/resources/bankers/brokered-deposits/public-report-ppes-notices.pdf</a>
that are marked with an asterisk.
\115\ 110 hours is the product of 10 applicants per year, 1.138
application per applicant, and 10 hours per application. The result
is 110 hours because the FDIC rounded the product of the first two
numbers. Otherwise, the result would be 114 hours.
\116\ Applicants must report quarterly for each business line
for which an application is approved. Assuming every application is
approved, applicants would submit a total number of quarterly
reports per year equal to four multiplied by the number of
applications per applicant (4 * 1.138 = 4.552). Thus, the annual
reporting burden of BDSE applications is estimated as 23 hours,
which is the product of 10 applicants per year, 4.552 reports per
applicant, and 0.5 hours per report.
\117\ 133 hours equals 110 hours plus 23 hours.
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Based on the discussion above, the FDIC estimates that the proposed
rule would impose 503 labor hours per year associated with reporting
requirements if adopted; 434 labor hours to complete applications and
notices and 69 labor hours of to satisfy reporting obligations
associated with approved applications and notices.\118\ Based on the
FDIC's estimation of which occupations are associated with filing
applications or notices and fulfilling their associated reporting
requirements, the FDIC estimates an hourly cost of compensation of
$101.07,\119\ and thus estimates $50,838 in total annual reporting
costs associated with the proposed rule.
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\118\ This estimate is 42 fewer hours than the total hours
reported in the Paperwork Reduction Act section of this document
because it only includes reporting requirements affected by the
proposed rulemaking. See section VI.B of this document.
\119\ The FDIC used the following Bureau of Labor Statistics
(BLS) data sources to estimate an hourly cost of compensation
associated with the reporting requirements in the proposed rule:
National Industry-Specific Occupational Employment and Wage
Estimates (OEWS): Industry: Credit Intermediation and Related
Activities (5221 and 5223 only) (May 2023), Employer Cost of
Employee Compensation (ECEC) (March 2023), and Employment Cost Index
(March 2023 and March 2024). To estimate the average cost of
compensation per hour, the FDIC used the 75th percentile hourly
wages reported by the BLS OEWS data for the occupations in the
Depository Credit Intermediation sector the FDIC judges would be
involved in satisfying the proposed rule's reporting requirements.
However, the latest OEWS wage data are as of May 2023 and do not
include non-wage compensation. To adjust these wages, the FDIC
multiplied the OEWS hourly wages by approximately 1.53 to account
for non-wage compensation, using the BLS ECEC data as of March 2023
(the latest published release prior to the OEWS wage data). The FDIC
then multiplied the resulting compensation rates by approximately
1.04 to account for the change in the seasonally adjusted Employment
Cost Index for the Credit Intermediation and Related Activities
sector (NAICS Code 522) between March 2023 and March 2024.
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VI. Administrative Law Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) generally requires an agency,
in connection with a proposed rule, to prepare and make available for
public comment an initial regulatory flexibility analysis that
describes the impact of the proposed rule on small entities. However,
an initial regulatory flexibility analysis is not required if the
agency certifies that the proposed rule will not, if promulgated, have
a significant economic impact on a substantial
[[Page 68263]]
number of small entities.\120\ The Small Business Administration (SBA)
has defined ``small entities'' to include banking organizations with
total assets of less than or equal to $850 million.\121\ Generally, the
FDIC considers a significant economic impact to be a quantified effect
in excess of 5 percent of total annual salaries and benefits or 2.5
percent of total noninterest expenses. The FDIC believes that effects
in excess of one or more of these thresholds typically represent
significant economic impacts for FDIC-supervised institutions.
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\120\ 5 U.S.C. 601 et seq.
\121\ The SBA defines a small banking organization as having
$850 million or less in assets, where an organization's ``assets are
determined by averaging the assets reported on its four quarterly
financial statements for the preceding year.'' See 13 CFR 121.201
(as amended by 87 FR 69118, effective December 19, 2022). In its
determination, the ``SBA counts the receipts, employees, or other
measure of size of the concern whose size is at issue and all of its
domestic and foreign affiliates.'' See 13 CFR 121.103. Following
these regulations, the FDIC uses an insured depository institution's
affiliated and acquired assets, averaged over the preceding four
quarters, to determine whether the insured depository institution is
``small'' for the purposes of RFA.
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The FDIC does not believe that the rule would have a significant
economic effect on a substantial number of small entities. However,
some expected effects of the rule are difficult to assess or accurately
quantify given current information. Therefore, the FDIC has included an
initial regulatory flexibility analysis in this section.
Reasons Why This Action Is Being Considered
As stated previously, the FDIC has found significant reliance on
brokered deposits increases an institution's risk profile, particularly
as its financial condition weakens. Adoption of the 2020 Final Rule led
to certain deposit arrangements that were viewed as brokered prior to
the 2020 Final Rule as no longer being classified as brokered, even
though the FDIC believes such deposits present similar risks as
brokered deposits and could pose serious consequences for IDIs and the
DIF. Additionally, the FDIC has observed a number of challenges with
entities understanding certain provisions of the 2020 Final Rule, which
has resulted in inaccurate and inconsistent application of the rule.
Finally, the FDIC wishes to better align certain of its brokered
deposit regulations with the statutory language and purpose of section
29 of the FDI Act.
Policy Objectives
As mentioned above, the FDIC's proposal would clarify and revise
certain of its brokered deposit regulations to better support the
statutory language and purpose of the brokered deposit restrictions.
Additionally, the FDIC seeks to revise the notice and application
processes for certain primary purpose exceptions, and eliminate certain
existing exceptions, with the objective of increasing industry safety
and soundness and decreasing the frequency of misreporting of brokered
deposits as nonbrokered. For further discussion of the policy
objectives of the proposed rule please refer to section I of this
document.
Legal Basis
The FDIC is proposing to adopt this rule under authorities granted
by section 29 of the FDI Act. The law defines key terms such as
``deposit broker'' and, among other things, restricts adequately
capitalized IDIs from accepting funds obtained, directly or indirectly,
by or through any deposit broker for deposit into one or more deposit
accounts (referred to as brokered deposits) without a waiver, and
prohibits less than adequately capitalized banks from obtaining such
funds altogether. For a more detailed discussion of the proposed rule's
legal basis please refer to sections II and III of this document.
Description of the Rule
In summary, the proposed rule would (1) streamline and update
certain provisions of the ``deposit broker'' definition; (2) eliminate
the exclusive placement arrangement exception and restore the
regulations' applicability to cases where a third party, that otherwise
meets the definition of deposit broker, is involved with placing
deposits at one or more IDIs; (3) amend the ``primary purpose''
exception to the ``deposit broker'' definition, including revising the
25 percent test designated exception to a 10 percent test exception
(and narrowing the scope of firms to which the exception may apply) and
eliminating the enabling transactions designated exception; (4) update
the primary purpose exception application and notice processes and make
it so that only IDIs may submit an application and/or a notice on
behalf of a third party; and (5) clarify how an IDI that loses its
``agent institution'' status regains that status. For a more detailed
description of the proposed rule, please refer to section III of this
document.
Small Entities Affected
As of the quarter ending March 31, 2024, the FDIC insures 4,577
depository institutions; of these, 3,259 are ``small entities'' by the
terms of the RFA.\122\ Additionally, of the 3,259 small, FDIC-insured
institutions, 1,237 report holding some volume of brokered deposits.
Finally, of the 3,259 small FDIC-insured institutions, 6 are less than
well-capitalized based on their reported capital ratios, and none of
the 6 report holding brokered deposits.\123\
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\122\ March 31, 2024, Call Report data.
\123\ Id. March 31, 2024, Call Report data. For purposes of
estimating the expected effects of the proposed rule, this analysis
uses an IDI's reported capital ratios to determine whether that IDI
is well capitalized. The determination does not take into account
written agreements, orders, capital directives, or prompt corrective
action directives issued to specific IDIs. See generally 12 CFR
324.403(d) (FDIC); 12 CFR 208.43(b)(1)(v) (Board of Governors of the
Federal Reserve System); 12 CFR 6.4(c)(1)(v) (Office of the
Comptroller of the Currency).
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Expected Effects
There are five categories of effects of the proposed rule on small,
FDIC-insured institutions: effects applicable to potentially any small
IDI; effects applicable to small, less than well-capitalized
institutions; effects applicable to nonbank subsidiaries or affiliates
of small institutions that may or may not be deemed deposit brokers
under the proposed rule; effects applicable to third parties that may
or may not be deemed deposit brokers under the proposed rule; and
reporting requirements for small, covered IDIs. Also, the proposed rule
may affect certain consumers; however, ``natural persons'' are not
small entities for purposes of the RFA. Therefore, these potential
effects are not discussed in this initial regulatory flexibility
analysis.\124\ For a discussion of the proposed rule's potential
effects on consumers, see section V of this document, above.
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\124\ The RFA applies to small entities, which is defined in 5
U.S.C. 601(6) as having the same meaning as the terms ``small
business'', ``small organization,'' and ``small governmental
jurisdiction'' defined in paragraphs (3), (4) and (5) of'' 5 U.S.C.
601. As such, a rule or information collection that affects only
natural persons does not affect any small entities.
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All Small, FDIC-Insured Institutions
If adopted, the proposed rule could directly affect the 1,237 small
IDIs that currently report positive amounts of brokered deposits. In
addition, the proposed rule could affect all 3,259 small IDIs regarding
the types of deposits they choose to accept in the future. The proposed
rule would revise the ``deposit broker'' definition and
[[Page 68264]]
would amend the analysis of the ``primary purpose'' exception to the
``deposit broker'' definition. The FDIC believes that under the
proposed rule fewer entities would likely be exempt from the definition
of deposit broker than currently, and to the extent such entities
continue to place funds at IDIs, the amount of deposits at IDIs
considered brokered under the proposed rule is likely to increase. The
FDIC does not have data to be able to reliably estimate the amount of
deposits that would be re-classified as brokered under the proposed
rule. However, at the end of the first quarter during which the 2020
Final Rule was in effect--April through June of 2021--small IDIs
reported only $276 million fewer brokered deposits than in the previous
quarter on a merger-adjusted basis, a reduction in reported brokered
deposits of less than three percent.\125\ Therefore, the FDIC believes
the amount of deposits reclassified as brokered at small IDIs under the
proposed rule is likely to be modest, at least in the aggregate.
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\125\ FDIC Call Report Data from March 31, 2021, and June 30,
2021. IDIs reporting during the aforementioned periods were merger-
adjusted to March 31, 2024, and categorized as ``small entities'' or
not based on the definition of ``small entity'' in effect as of
March 31, 2024, in order to facilitate comparison with the small
entities that may be affected by the proposed rule.
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The remainder of the discussion in this subsection is divided into
potential costs to small IDIs associated with the proposed rule,
followed by potential benefits to small IDIs.
Potential Costs to Small, FDIC-Insured Institutions
Small IDIs affected by the proposed rule may incur costs if they
choose to alter the composition of their liabilities as a result of the
proposed rule. As discussed above, adoption of the 2020 Final Rule led
to certain deposit arrangements that were viewed as brokered prior to
the 2020 Final Rule as no longer being classified as brokered. The FDIC
believes that the changes in the proposed rule are likely to result in
a greater proportion of nonbrokered deposits being reclassified as
brokered. To the extent affected IDIs are currently operating at their
desired ratios of brokered deposits to total liabilities and the
proposed rule increases the amount of deposits considered brokered,
some affected IDIs may find that the proposed rule causes them to have
a greater than desired share of brokered deposits to liabilities. The
FDIC does not have the data to be able to estimate how many
institutions might choose to change the composition of their
liabilities because of the proposed rule or by how much, in part
because the FDIC does not possess the information necessary to estimate
for particular banks the amount of deposits, if any, that would be
reclassified as brokered by the proposed rule.
If the proposed rule is adopted, it is possible that some small
IDIs may choose to make changes to the organizational structure of
their institutions. In particular, small IDIs that rely on the current
exclusive placement exception to obtain nonbrokered deposits from
affiliates may be incentivized to stop using such deposits and perhaps
change their organizational structure as a result of the proposed rule.
Small IDIs affected by the proposed rule may also incur some costs
associated with changes to their internal systems, policies, and
procedures associated with deposit brokering activities and deposit
placement arrangements (especially those involving third parties).
However, the FDIC believes that some of these costs may be ameliorated
because the proposed rule is very similar to the regulatory framework
that existed prior to the 2020 Final Rule; therefore, some affected
entities may have experience with some of those policies and
procedures.
The FDIC also believes the proposed rule may affect the number of
applications and notices (collectively, filings) that small IDIs may
submit to the FDIC. The effect of the proposed rule on filings
submitted by small IDIs is discussed below in the ``Reporting
Compliance Costs'' section of this RFA analysis.
Finally, the proposed rule could also affect FDIC deposit insurance
assessments at certain small IDIs. Under the FDIC's assessment
regulations, IDIs with a significant concentration of brokered deposits
may pay higher quarterly assessments, depending on other factors.\126\
To the extent that deposits currently defined as nonbrokered would be
considered brokered deposits under the proposed rule, a small IDI's
assessment may increase. The FDIC does not have the information
necessary to estimate the proposed rule's expected effects on deposit
insurance assessments because it does not possess the data necessary to
estimate the amount of deposits that would be reclassified as brokered
at particular small IDIs under the proposed rule.
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\126\ See 12 CFR part 327.
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Potential Benefits to Small, FDIC-Insured Institutions
The FDIC believes a primary benefit of the proposed rule is that it
would improve the safety and soundness of the banking system, including
covered IDIs. As discussed in more detail in section II.A. of this
document, ``Brokered Deposits--A History of Concerns and Related
Research,'' and in the ``Expected Effects'' analysis in section V of
this document, the FDIC's own analyses as well as other studies have
found that IDI use of brokered deposits in general is associated with a
higher probability of failure and higher losses to the DIF upon
failure. IDI use of brokered deposits is correlated with (1) higher
levels of asset growth, (2) higher levels of nonperforming loans, and
(3) a lower proportion of core deposit \127\ funding.\128\ Thus, to the
extent the proposed rule's changes would better identify deposits that
are currently not reported as brokered but share the characteristics of
brokered deposits, the proposal would enhance the ability of the FDIC
to ensure the safety and soundness of the banking system by limiting
the ability for a less than well-capitalized small institution to rely
on a risky funding source and improve clarity so that reliance on
brokered deposits, regardless of capitalization, is correctly reflected
in an institution's regulatory reporting and deposit insurance
assessments.
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\127\ ``Core deposits'' is defined in the updated study as total
domestic deposits net of time deposits over the insurance limit and
fully insured brokered deposits. See Updated Study at 2385. Prior to
2011, the definition of core deposits included insured brokered
deposits. See Updated Study at 2384.
\128\ See FDIC, Study on Core Deposits and Brokered Deposits
(July 8, 2011), available at <a href="https://www.fdic.gov/regulations/reform/coredeposit-study.pdf">https://www.fdic.gov/regulations/reform/coredeposit-study.pdf</a>. See also 84 FR 2366, 2369 (Feb. 6,
2019). See also Updated Study at 2384-2400 (appendix 2).
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Another potential benefit to small IDIs of the proposed rule is the
clarification of certain concepts and practices, and by promoting
accurate reporting and understanding of the regulation and how the
involvement of third parties within a deposit placement arrangement
may, or may not, result in the deposits being brokered. For example,
the proposed rule includes a provision to clarify how an IDI may regain
its ``agent institution'' status after losing it. The FDIC believes
that increased clarity should reduce costs for covered small IDIs and
ensure more accurate reporting. As previously described, based on the
FDIC's experience, the initial decline in brokered deposits following
the effective date of the 2020 Final Rule was due, in part, to some
IDIs
[[Page 68265]]
misunderstanding and misreporting a significant amount of deposits as
nonbrokered.
Less Than Well-Capitalized Institutions
The acceptance of brokered deposits is subject to statutory and
regulatory restrictions for banks that are not well capitalized.
Adequately capitalized banks may not accept brokered deposits without a
waiver from the FDIC, and banks that are less than adequately
capitalized may not accept them at all. As a result, adequately
capitalized and undercapitalized banks generally hold fewer brokered
deposits. To the extent less than well-capitalized IDIs are able to
rely on deposits that share the characteristics of brokered deposits
(such as volatility) but are not currently reported as brokered, such
IDIs can operate using a riskier liability structure than one reliant
on more stable funding sources, thereby potentially increasing the risk
of loss to the DIF. By generally increasing the scope of deposits that
are considered brokered, the proposed rule would limit the ability of
less than well-capitalized small banks to rely on potentially less
stable third-party deposits that are currently reported as nonbrokered
but would be reported as brokered under the proposed rule.
Based on IDIs' reported capital ratios as of March 31, 2024, there
are six small, less than well-capitalized IDIs, none of which report
holding any brokered deposits.\129\ These six IDIs together report $441
million in total assets and $402 million in domestic deposits.\130\
Five of the six less than well-capitalized IDIs are adequately
capitalized as of March 31, 2024, and one is undercapitalized.\131\
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\129\ March 31, 2024, Call Report data. For purposes of
estimating the expected effects of the proposed rule, this analysis
uses an IDI's reported capital ratios to determine whether that IDI
is well capitalized. The determination does not take into account
written agreements, orders, capital directives, or prompt corrective
action directives issued to specific IDIs. See generally 12 CFR
324.403(d) (FDIC); 12 CFR 208.43(b)(1)(v) (Board of Governors of the
Federal Reserve System); 12 CFR 6.4(c)(1)(v) (Office of the
Comptroller of the Currency).
\130\ Id.
\131\ Id.
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As mentioned above, adequately capitalized banks may not accept
brokered deposits without a waiver from the FDIC, and the proposed rule
would generally increase the scope of deposits that are considered
brokered. Thus, one potential effect of the proposed rule may be to
increase the number of brokered deposit waiver applications submitted
to the FDIC by adequately capitalized small banks. This potential
effect of the proposed rule is difficult to estimate because, as
mentioned above, not only does the FDIC not possess the data necessary
to estimate the amount of deposits that would be reclassified as
brokered at specific small banks under the proposed rule, but also the
number of adequately capitalized small banks depends on other factors,
such as economic conditions.
Nonbank Subsidiaries of Small, FDIC-Insured Institutions That May or
May Not Be Deposit Brokers
The proposed rule could affect nonbank subsidiaries of small IDIs,
in particular, nonbank subsidiaries of small IDIs that may not be
considered deposit brokers under the 2020 Final Rule, but may be
considered deposit brokers under the proposed rule. Additionally, under
the 2020 Final Rule nonbanks may avail themselves of the notice or
application process in order to seek certain primary purpose
exceptions. However, under the proposed rule only IDIs may submit
notices or applications with respect to primary purpose exceptions. In
addition, to the extent a nonbank subsidiary of a small bank relies on
the 2020 Final Rule's exclusive placement arrangement exception to
place deposits solely at its parent IDI, the proposed removal of this
exception could affect the subsidiary and its parent IDI.
Third Parties That May or May Not Be Deposit Brokers
As discussed in ``Expected Effects,'' section V of this document,
the proposed rule may affect third parties directly or indirectly
involved with the provision of deposit products. The FDIC does not have
information on the number or size of potentially affected third
parties; however, the FDIC believes it is likely that some affected
third parties may be small entities.
First, concurrent with the finalization of the proposed rule, the
FDIC would rescind existing primary purpose exceptions and notices
granted under the 2020 Final Rule, and the proposed rule would restrict
the application and notice process to IDIs. Therefore, to the extent
that small third parties who previously applied and received approval
for a primary purpose exception wish to continue offering their
services to IDIs, they may incur costs associated with providing
information to those IDIs to support applications and notices to the
FDIC.
Second, to the extent that small third parties are directly or
indirectly involved with the provision of deposits not currently
designated as brokered deposits, but that would be if the proposed rule
were adopted, such small third parties may incur costs associated with
complying with the requirements in the proposed rule. Such costs would
include, but would not be limited to (1) costs associated with making
changes to systems, policies, and procedures involved in the provision
of brokered deposits; (2) costs associated with the submission of
filings to the FDIC by affiliated IDIs on their deposit placement
arrangements; and (3) other costs associated with transitioning their
business models to incorporate the provision of brokered deposits
(including potential changes to fees, revenue structures, etc.).
Third, small third parties who are engaged in the provision of
deposits that are considered brokered may incur costs associated with
making changes to systems, policies, and procedures to comply with the
requirements in the proposed rule. Also, such small third parties may
experience changes to fee and revenue structures as a result of the
requirements in the proposed rule.
Finally, as the proposed rule's criteria for determining whether an
entity is a deposit broker are generally stricter than the criteria in
the 2020 Final Rule, more small third parties could be considered
deposit brokers under the proposed rule.
Reporting Requirements
The FDIC believes the proposed rule would likely affect the number
of applications and notices (collectively, filings) that IDIs submit to
the FDIC for the reasons discussed in the ``Reporting Compliance
Costs'' section of the ``Expected Effects'' analysis in section V of
this document, above. Briefly, the FDIC believes the proposed rule
would likely affect the number of filings because it eliminates the
``enabling transactions'' exception, and the FDIC's supervisory
experience suggests many ``enabling transactions'' notice filers would
file PPE applications through IDIs. Second, the proposed rule would
replace the current ``25 percent test'' notice exception with two
similar but distinct exceptions: the BDSE requiring a notice, for
arrangements involving only an IDI and broker-dealer, and the BDSE
requiring an application, for arrangements involving an IDI, broker-
dealer, and an additional third party. Third, the FDIC believes that
the proposed rule would likely result in an increase in filings, at
least initially, because the proposed rule would rescind approved
applications and notices filed under the 2020 Final Rule. Finally,
because the FDIC believes the proposed rule would likely increase the
amount of deposits classified as brokered, the FDIC believes the
[[Page 68266]]
proposed rule may increase the likelihood that an adequately
capitalized IDI submits a waiver application to accept brokered
deposits to the FDIC.
While the FDIC does not have the information necessary to quantify
the potential changes in filings by small IDIs that are likely to occur
if the proposed rule is adopted, based on the number of filings
received during the roughly three-year period since the 2020 Final Rule
became effective, the FDIC believes the effect is likely to be modest.
During the aforementioned period, five small IDIs (out of 29 total IDIs
and 46 other entities) submitted a total of only six filings out of
147.
Other Statutes and Federal Rules
The FDIC has not identified any likely duplication, overlap, and/or
potential conflict between this proposed rule and any other Federal
rule.
The FDIC invites comments on all aspects of the supporting
information provided in this RFA section. In particular, would this
proposed rule have any significant effects on small entities that the
FDIC has not identified?
B. Paperwork Reduction Act
Certain provisions of the proposed rule contain ``collections of
information'' within the meaning of the Paperwork Reduction Act (PRA)
of 1995 (44 U.S.C. 3501 through 3521). In accordance with the
requirements of the PRA, the FDIC may not conduct or sponsor, and the
respondent is not required to respond to, an information collection
unless it displays a currently valid Office of Management and Budget
(OMB) control number. The information collections contained in the
proposed rule have been submitted to OMB for review and approval by the
FDIC under section 3507(d) of the PRA (44 U.S.C. 3507(d)) and Sec.
1320.11 of OMB's implementing regulations (5 CFR part 1320). The FDIC
proposes to extend for three years, with revision, the following
information collection:
Title of Information Collection: Reporting and Recordkeeping
Requirements for Brokered Deposits.
OMB Control Number: 3064-0099.
Respondents: Insured state nonmember banks and state savings
associations.
Current Actions: The proposed rule revises the currently-approved
information collection as follows:
Section 303.243(b)(3), Notice Submission for Primary Purpose
Exception Based on Placement of Less Than 10 Percent of Customer Assets
Under Management--Implementation. An insured depository institution
must notify the FDIC through a written notice that the insured
depository institution will rely upon the 10 percent designated
business exception described in Sec. 337.6(a)(5)(iv)(I)(1)(i). See
line item two of the table below.
Section 303.243(b)(3)(vii), Notice Submission for Primary Purpose
Exception Based on the Placement of Less Than 10 Percent of Customer
Assets Under Management--Ongoing. Notice filers that submit a notice
under the 10 percent test described in Sec. 337.6(a)(5)(iv)(I)(1)(i)
must provide to the FDIC quarterly updates of the figures that were
provided as part of the notice. This is the corresponding ongoing
reporting requirement associated with line item two. See line item five
of the table below.
Section 12 CFR 303.243(b)(4)(i), Application for Primary Purpose
Exception Based on 10 Test With Additional 3rd Party--Implementation.
Applicants that seek the primary purpose exception where the broker
dealer or investment adviser place less than 10 percent of customer
funds into insured depository institutions through the use of an
additional third party that does not meet the deposit broker definition
must file a primary purpose exception application with the FDIC. See
line item three of the table below.
Section 12 CFR 303.243(b)(4)(vi), Reporting for Primary Purpose
Exception Based on the Placement of Less Than 10 Percent of Customer
Assets Under Management with Additional 3rd Party--Ongoing. Applicants
that receive a written approval for the primary purpose exception will
provide reporting to the FDIC. This is the corresponding ongoing
reporting requirement associated with line item three. See line item
six of the table below.
Estimated Annual Burden:
Summary of Estimated Annual Burden
[OMB No. 3064-0099]
----------------------------------------------------------------------------------------------------------------
Number of Time per Annual
Information collection (IC) Type of burden (frequency of Number of responses per response burden
(obligation to respond) response) respondents respondent (HH:MM) (hours)
----------------------------------------------------------------------------------------------------------------
1. Application for Waiver of Reporting (On Occasion)........ 3 2.375 06:00 42
Prohibition on Acceptance of
Brokered Deposits, 12 CFR
337.6(c) (Required to Obtain
or Retain a Benefit).
2. Notice Submission for Reporting (On Occasion)........ 7 1.091 03:00 24
Primary Purpose Exception
Based on Placement of Less
Than 10 Percent of Customer
Assets Under Management--
Implementation, 12 CFR
303.243(b)(3) (Required to
Obtain or Retain a Benefit).
3. Application for Primary Reporting (On Occasion)........ 10 1.138 10:00 110
Purpose Exception Based on
10 Test With Additional 3rd
Party--Implementation, 12
CFR 303.243(b)(4)(i)
(Required to Obtain or
Retain a Benefit).
4. Application for Primary Reporting (On Occasion)........ 7 4.238 10:00 300
Purpose Exception Not Based
on Business Arrangements
that Meets a Designated
Exception--Implementation,
12 CFR 303.243(b)(4)(ii)
(Required to Obtain or
Retain a Benefit).
5. Notice Submission for Reporting (Quarterly).......... 7 4.364 00:30 16
Primary Purpose Exception
Based on the Placement of
Less Than 10 Percent of
Customer Assets Under
Management--Ongoing, 12 CFR
303.243(b)(3)(vii) (Required
to Obtain or Retain a
Benefit).
6. Reporting for Primary Reporting (Quarterly).......... 10 4.552 00:30 23
Purpose Exception Based on
the Placement of Less Than
10 Percent of Customer
Assets Under Management with
Additional 3rd Party--
Ongoing, 12 CFR
303.243(b)(4)(vi) (Required
to Obtain or Retain a
Benefit).
7. Reporting for Primary Reporting (Quarterly).......... 7 16.952 00:15 30
Purpose Exception Not Based
on the Business Arrangements
that meets a Designated
Exception--Ongoing, 12 CFR
303.243(b)(4)(vi) (Required
to Obtain or Retain a
Benefit).
-------------------------------------------------
Total Annual Burden ............................... ........... .............. ......... 545
(Hours).
----------------------------------------------------------------------------------------------------------------
Note: The estimated annual time burden for a given collection is the product, rounded to the nearest hour, of
the estimated annual number of responses and the estimated time per response. The estimated annual number of
responses is the product, rounded to the nearest whole number, of the estimated annual number of respondents
and the estimated annual number of responses per respondent. This methodology ensures the estimated annual
burdens in the table are consistent with the values recorded in OMB's consolidated information system.
[[Page 68267]]
The total estimated annual burden for OMB No. 3064-0099 is 545
hours, an increase of 168 hours from the most recent PRA renewal.\132\
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\132\ See FDIC Application for Waiver of Prohibition on
Acceptance of Brokered Deposits Information Collection Request, OMB
No. 3064-0099, <a href="https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202308-3064-001">https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202308-3064-001</a>.
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Comments are invited on: (a) Whether the collection of information
is necessary for the proper performance of the FDIC's functions,
including whether the information has practical utility; (b) the
accuracy of the estimates of the burden of the information collection,
including the validity of the methodology and assumptions used; (c)
ways to enhance the quality, utility, and clarity of the information to
be collected; and (d) ways to minimize the burden of the collection of
information on respondents, including through the use of automated
collection techniques or other forms of information technology. All
comments will become a matter of public record.
Comments on aspects of this document that may affect reporting,
recordkeeping, or disclosure requirements and burden estimates should
be sent to the address listed in the ADDRESSES section of this
document. Written comments and recommendations for this information
collection also should be sent within 30 days of publication of this
document to <a href="http://www.reginfo.gov/public/do/PRAMain">www.reginfo.gov/public/do/PRAMain</a>. Find this particular
information collection by selecting ``Currently under 30-day Review--
Open for Public Comments'' or by using the search function.
C. Plain Language
Section 722 of the Gramm-Leach-Bliley Act requires the agencies to
use plain language in all proposed and final rules published after
January 1, 2000. The FDIC invites comment on how to make this proposed
rule easier to understand.
For example:
<bullet> Have the agencies organized the material to inform your
needs? If not, how could the agencies present the proposed rule more
clearly?
<bullet> Are the requirements in the proposed rule clearly stated?
If not, how could the proposal be more clearly stated?
<bullet> Does the proposed regulation contain technical language or
jargon that is not clear? If so, which language requires clarification?
<bullet> Would a different format (grouping and order of sections,
use of headings, paragraphing) make the proposed regulation easier to
understand? If so, what changes would achieve that?
<bullet> Is this section format adequate? If not, which of the
sections should be changed and how?
<bullet> What other changes can the agencies incorporate to make
the proposed regulation easier to understand?
D. Riegle Community Development and Regulatory Improvement Act of 1994
Pursuant to section 302(a) of the Riegle Community Development and
Regulatory Improvement Act of 1994 \133\ (RCDRIA), in determining the
effective date and administrative compliance requirements for new
regulations that impose additional reporting, disclosure, or other
requirements on IDIs, each Federal banking agency must consider,
consistent with principles of safety and soundness and the public
interest, any administrative burdens that such regulations would place
on affected depository institutions, including small depository
institutions, and customers of depository institutions, as well as the
benefits of such regulations. In addition, section 302(b) of the RCDRIA
requires new regulations and amendments to regulations that impose
additional reporting, disclosures, or other new requirements on IDIs
generally to take effect on the first day of a calendar quarter that
begins on or after the date on which the regulations are published in
final form.\134\ The FDIC invites comments that further will inform its
consideration of the RCDRIA.
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\133\ 12 U.S.C. 4802(a).
\134\ 12 U.S.C. 4802(b).
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VII. Request for Comments
The FDIC invites comment from all members of the public regarding
all aspects of the proposal. In particular, the FDIC seeks feedback on
the scope of the proposed rule and its requirements, and responses to
the following specific questions:
Deposit Broker Definition
1. Does the FDIC's proposed amendment to the ``deposit broker''
definition align more closely with the statutory language and purpose
of section 29 of the FDI Act? Why or why not?
2. Is the FDIC's proposed change to remove ``matchmaking
activities'' from the ``deposit broker'' definition and proposal to add
a deposit allocation provision appropriate? Why or why not?
3. Is the consideration of fees appropriate when determining
whether a person is a ``deposit broker''? Are there any additional
factors the FDIC should consider adding to the ``deposit broker''
definition? Please explain and provide data to support your views.
Primary Purpose Exception Analysis
4. Is the proposed updated primary purpose exception analysis
appropriate? Why or why not?
5. Are the proposed changes to the primary purpose exception
application process appropriate? Is it appropriate to limit the
application process to IDIs? Is the proposed process sufficiently clear
to allow IDIs to obtain the required information on all third parties
within a deposit placement arrangement?
6. Are there any additional factors the primary purpose exception
application process should consider?
Designated Exceptions
7. Should previously approved primary purpose exceptions be added
to the regulatory list of ``designated exceptions'' as meeting the
primary purpose exception under the proposed rule if they satisfy the
proposed primary purpose exception?
8. Should any of the designated exceptions be removed, or new ones
added? Please explain.
9. Should the enabling transactions designated exception be amended
to include only non-reloadable prepaid card programs, such as gift
cards? Please explain.
10. For the proposed BSDE, is the use of ``assets under
management'' appropriate? Is the definition of ``assets under
management'' sufficiently clear under the proposed rule? Is it
appropriate to request the total amount of deposits placed by the
broker-dealer or investment adviser on behalf of its customers at all
IDIs and the total amount of customer assets under management as of the
last quarter and as of the date of the notice filing?
Reciprocal Deposits
11. Given that the limited reciprocal deposits exception is
intended for IDIs that are in good condition and well managed, should
there be any ability for an IDI to regain ``agent status'' absent a
return to being a well-rated and well-capitalized IDI?
12. Can allowance of regaining ``agent status'' potentially run
counter to the goals of having an IDI focus on addressing its problems
because the exception would potentially allow an IDI that is less than
well-capitalized and not well-rated to grow its deposits through this
avenue?
13. If an IDI could regain ``agent status'' absent a return to
being a well-rated and well-capitalized IDI, is it appropriate to allow
the IDI to regain
[[Page 68268]]
``agent status'' after the third consecutive calendar quarter during
which the IDI did not at any time receive reciprocal deposits that
caused its total reciprocal deposits to exceed its special cap? Should
it be a shorter or longer time period?
Alternatives
14. Would rescinding a designated exception for sweep deposits be
appropriate? Why or why not?
15. Would limiting the BDSE to sweep deposits placed at affiliated
IDIs be appropriate? Why or why not?
16. Are there any additional alternatives the FDIC should consider?
Appendix 1: Sweep Deposits and Brokered Deposit Reporting, Call Report,
D
[…truncated; see source link]Indexed from Federal Register on August 23, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.