On July 30, 2024, the Federal Deposit Insurance Corporation (FDIC) released a notice of proposed rulemaking (NPR) to revise the FDIC’s regulations concerning brokered deposits, which implement Section 29 of the Federal Deposit Insurance Act (FDIA).1 If finalized as proposed, the NPR would significantly reverse the FDIC’s position on what constitutes a brokered deposit. Many insured depository institutions (IDIs) as well as a variety of industry participants — including providers and sponsors of sweep programs, prepaid programs, cobranded deposit programs, and deposit platforms — would be adversely affected.
Among other changes, the NPR would (i) revise and expand the definition of “deposit broker,” (ii) eliminate the ability for an agent or nominee to apply for a primary purpose exception (PPE) when a designated business exception (DBE) is not available, and (iii) significantly narrow the DBE for when the placement of deposits at depository institutions constitutes less than 25% of the total assets the agent or nominee has under administration with respect to a particular business line (25% DBE).
Under the FDIA and the FDIC’s regulations, a brokered deposit is “any deposit that is obtained, directly or indirectly, from or through the mediation or assistance of a deposit broker.”2 In turn, “deposit broker” is currently defined to include any person “engaged in the business of placing deposits of third parties with [IDIs]” as well as any person engaged in the business of “facilitating” such placement.3 There are several exceptions to the definition of a deposit broker, including that the term “deposit broker” does not include “[a]n agent or nominee whose primary purpose is not the placement of funds with depository institutions.”4 Currently, third parties can exercise this exception by relying on a DBE (in certain cases in conjunction with a notice) or by filing a PPE application when no DBE is available. These regulations are important because they affect (i) access to deposit funding sources by IDIs that are less than well capitalized, (ii) liquidity planning by IDIs that use brokered deposits, and (iii) the cost of federal deposit insurance.
The NPR will be subject to 60 days of public comment after it is published in the Federal Register. The NPR does not contain any information regarding a proposed effective date or transition period for deposits accepted under the current regulation. If approved, the NPR would significantly scale back industry-favorable reforms implemented under the FDIC’s 2020 final rule on brokered deposits (the 2020 Rule)5 and potentially force IDIs to recategorize a large number of deposits as brokered.
Definition of “Deposit Broker”
The NPR would consolidate the current “placement” and “facilitation” prongs of the definition of “deposit broker” into a single test for “[a]ny person engaged in the business of placing or facilitating the placement of deposits of third parties with insured depository institutions.”6 A person would meet this test, and therefore be a deposit broker, whenever that person
- receives third-party funds and deposits those funds at one or more IDIs;
- has legal authority, contractual or otherwise, to close the account or move the third party's funds to another IDI;
- is involved in negotiating or setting rates, fees, terms, or conditions for the deposit account;
- 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
- 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.7
Most significantly, the NPR would include a fee-based trigger — a concept that was not included in the 2020 Rule and that will cause many parties to be deemed deposit brokers despite not taking actions that give rise to risks traditionally associated with brokered deposits.8 The NPR would also replace the current “matchmaking” prong with a broader “deposit allocation prong” that would include any scenario when an agent or nominee 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), regardless of the “objectives” of those involved.9 Moreover, the NPR would revise the straightforward anti-evasion provision that currently applies only in connection with “matchmaking” activities by substantially (and confusingly) broadening its application to all activities, which will be particularly worrisome for many companies when considered together with the fee-based trigger.
Elimination of Exclusive Arrangement Exception
Currently, the definition of “deposit broker” covers only a third party that places or facilitates the placement of deposits at “more than one” IDI.10 The NPR would change this language to “one or more” IDIs, thereby eliminating the “Exclusive Arrangement Exception” carveout created under the 2020 Rule.11
25% DBE/Broker-Dealer Sweep Exception
The NPR would significantly narrow the 25% DBE (which would be renamed the “Broker-Dealer Sweep Exception”) in two key ways. First, the NPR would make the exception available only to registered broker-dealers and investment advisers (it is currently line of business–agnostic).12 Second, even for sweep programs, the Broker-Dealer Sweep Exception would be available “only if less than 10 percent of the total assets that the broker-dealer or investment adviser, as agent or nominee, has under management for its customers, in a particular business line, is placed into non-maturity accounts at one or more IDIs.”13 The NPR would also reframe the denominator for this calculation from “assets under administration” to “assets under management.” “Assets under management” would be defined 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.”14
Moreover, IDIs would be able to exercise the Broker-Dealer Sweep Exception by notice (as is currently the process for exercising the 25% DBE) “only if no additional third party (including any affiliate) is involved in the sweep program.”15 Otherwise, an application would be required. As described below, these applications or notices would be filed only by IDIs and required for each deposit placement relationship. The term “involved” is not further defined, and the supplementary information clearly suggests that the FDIC intends to capture a wide variety of services that support sweep programs. These changes could result in a large variety of deposits being reclassified as brokered.
PPE Applications
Under the NPR, third parties could no longer submit their own PPE applications on a consolidated basis.16 Rather, an application would have to be submitted by each IDI for each specific deposit placement arrangement that it has with a third party. This could particularly complicate matters for agents and nominees that work with multiple or unaffiliated IDIs.
Also, the test for what is considered a primary purpose other than the placement of deposits is significantly narrowed, making it more difficult to qualify. Among other things, obtaining pass-through deposit insurance for customers is specified as not an eligible objective.17 Additionally, PPE applications previously approved under the 2020 Rule would be revoked.18
Elimination of Enabling Transactions DBE
The NPR would eliminate the DBE for when 100% of depositors’ funds that the agent or nominee places, or assists in placing, at IDIs are placed into transactional accounts that do not pay any fees, interest, or other remuneration to the depositor (Enabling Transactions DBE).19 According to the NPR, “[t]he 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.”20
Prepaid program providers should be aware that the NPR’s request for comment floats a narrower Enabling Transactions for “only non-reloadable prepaid card programs, such as gift cards,”21 although such an exception would ostensibly not be available to general purpose reloadable prepaid programs.
Outlook
In sum, the NPR would expand the definition of “deposit broker” while simultaneously eliminating or materially narrowing the important exceptions — including the Exclusive Arrangement Exception, the 25% DBE, the non-DBE Primary Purpose Exception, and the Enabling Transaction DBE. This could adversely affect IDIs and many other industry participants and may be particularly problematic for community banks that face deposit gathering challenges. We encourage potentially affected IDIs and others to submit comments to the FDIC, and we note that the upcoming presidential election and leadership turnover at the FDIC may affect how the FDIC proceeds with this rulemaking.
1 The NPR is available at https://www.fdic.gov/news/press-releases/2024/fdic-board-approves-proposed-rule-revise-brokered-deposit-regulations.
2 12 C.F.R. § 337.6(a)(2).
3 Id. at § 337.6(a)(5).
4 Id. at § 337.6(a)(5)(v)(I).
5 See Sidley Austin LLP, “FDIC Final Rule on Brokered Deposits” (Dec. 21, 2020). Available at FDIC Final Rule on Brokered Deposits.
6 NPR at 109, to be codified at 12 CFR § 337.6(a)(5)(i)(A).
7 Id., to be codified at 12 CFR § 337.6(a)(5)(ii).
8 Id. at 110, to be codified at 12 CFR § 337.6(a)(5)(ii)(E).
9 Compare NPR at 110, to be codified at 12 CFR § 337.6(a)(5)(ii)(D), with 12 CFR § 337.6(a)(5)(iii)(D).
10 See 12 C.F.R. §§ 337.6(a)(5)(ii)-(iii).
11 NPR at 109-110, to be codified at 12 CFR § 337.6(a)(5)(ii).
12 See NPR at 112, to be codified at 12 CFR § 337.6(a)(5)(iv)(I)(1)(i).
13 Id.
14 Id. at 115, to be codified at 12 CFR § 337.6(a)(11).
15 Id. at 49.
16 Id. at 100, to be codified at 12 CFR § 303.243(b).
17 Id. at 38, n. 80.
18 Id.at 55.
19 See id. at 112, to be codified at 12 CFR § 337.6(a)(5)(iv)(I)(1).
20 Id. at 54.
21 Id. at 95.
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