[Federal Register Volume 85, Number 27 (Monday, February 10, 2020)]
[Proposed Rules]
[Pages 7453-7472]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-28275]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 85, No. 27 / Monday, February 10, 2020 / 
Proposed Rules  

[[Page 7453]]



FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Parts 303 and 337

RIN 3064-AE94


Unsafe and Unsound Banking Practices: Brokered Deposits 
Restrictions

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Notice of proposed rulemaking and request for comment.

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SUMMARY: The 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 create a new framework for analyzing certain 
provisions of the ``deposit broker'' definition, including 
``facilitating'' and ``primary purpose.'' The proposed rule would also 
establish an application and reporting process with respect to the 
primary purpose exception. The application process would be available 
to insured depository institutions and third parties that wish to 
utilize the exception.

DATES: Comments must be received by the FDIC no later than April 10, 
2020.

ADDRESSES: You may submit comments on the notice of proposed rulemaking 
using any of the following methods:
     Agency website: http://www.fdic.gov/regulations/laws/federal/. Follow the instructions for submitting comments on the agency 
website.
     Email: [email protected]. Include RIN 3064-AE94 on the 
subject line of the message.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments, Federal Deposit Insurance Corporation, 550 17th Street NW, 
Washington, DC 20429.
     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.
     Public Inspection: All comments received, including any 
personal information provided, will be posted generally without change 
to http://www.fdic.gov/regulations/laws/federal.

FOR FURTHER INFORMATION CONTACT: Division of Risk Management 
Supervision: Rae-Ann Miller, Associate Director, (202) 898-3898, 
[email protected]. Legal Division: Vivek V. Khare, Counsel, (202) 898-
6847, [email protected].

SUPPLEMENTARY INFORMATION: 

I. Policy Objectives

    On December 18, 2018, the FDIC Board adopted an advance notice of 
proposed rulemaking (ANPR) to obtain input from the public on its 
brokered deposit and interest rate regulations in light of significant 
changes in technology, business models, the economic environment, and 
products since the regulations were adopted.\1\ After reviewing 
comments received, the FDIC is proposing changes to its regulations 
relating to brokered deposits.\2\
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    \1\ The ANPR was published for comment in the Federal Register 
on February 6, 2019. See 84 FR 2366 (February 6, 2019).
    \2\ On August 20, 2019, the FDIC proposed revisions to its 
regulations relating to the interest rate restrictions. See 84 FR 
46470 (September 4, 2019).
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    Through these proposed changes, the FDIC intends to modernize its 
brokered deposit regulations to reflect recent technological changes 
and innovations that have occurred. The FDIC recognizes that the 
definition of ``deposit broker,'' and its corresponding staff 
interpretations, may not be as relevant compared to the deposit 
placement arrangements that exist in the market today. Notably, in 
recent times, banks collaborate with third parties, including financial 
technology companies, for a variety of business purposes including 
access to deposits. Moreover, banks are increasingly relying on new 
technologies to engage and interact with their customers, and it 
appears that this trend will continue given rapid technological 
evolution. Through these proposed changes, the FDIC's brokered deposit 
regulations will continue to promote safe and sound practices while 
ensuring that the classification of a deposit as brokered appropriately 
reflects changes in the banking landscape since 1989, when the law on 
brokered deposits was first enacted.

II. Background

    Section 29 of the Federal Deposit Insurance Act (FDI Act) restricts 
the acceptance of deposits by insured depository institutions from a 
``deposit broker.'' \3\ Well capitalized insured depository 
institutions are not restricted from accepting deposits from a deposit 
broker. An ``adequately capitalized'' insured depository institution 
may accept deposits from a deposit broker only if it has received a 
waiver from the FDIC.\4\ A waiver may be granted by the FDIC ``upon a 
finding that the acceptance of such deposits does not constitute an 
unsafe or unsound practice'' with respect to that institution.\5\ An 
``undercapitalized'' depository institution is prohibited from 
accepting deposits from a deposit broker.\6\
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    \3\ The statute also restricts a less than well capitalized 
institution generally from offering interest rates that 
significantly exceed the market rates offered in an institutions 
normal market area.
    \4\ See 12 U.S.C. 1831f.
    \5\ See id.
    \6\ See id.
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A. Current Law and Regulations

    Section 29 of the Federal Deposit Insurance Act (FDI Act), titled 
``Brokered Deposits,'' was originally added to the FDI Act by the 
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 
(FIRREA). The law originally restricted troubled institutions (i.e., 
those that did not meet the minimum capital requirements) from (1) 
accepting deposits from a deposit broker without a waiver and (2) 
soliciting deposits by offering rates of interest on deposits that were 
significantly higher than the prevailing rates of interest on deposits 
offered by other insured depository institutions (``IDIs'') having the 
same type of charter in such depository institution's normal market 
area.\7\
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    \7\ See Public Law 101-73, August 9, 1989, 103 Stat. 183.
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    Two years later, Congress enacted the Federal Deposit Insurance 
Corporation Improvement Act of 1991 (FDICIA), which added the Prompt 
Corrective Action (PCA) capital regime to the FDI Act and also amended 
the threshold for the brokered deposit and interest rate restrictions 
from a troubled institution to a bank falling below the ``well 
capitalized'' PCA level. At the same time, the FDIC was authorized to 
waive

[[Page 7454]]

the brokered deposit restrictions for a bank that is adequately 
capitalized upon a finding that the acceptance of such deposits does 
not constitute an unsafe or unsound practice with respect to the 
institution.\8\ FDICIA did not authorize the FDIC to waive the brokered 
deposit restrictions for less than adequately capitalized institutions. 
Most recently, earlier this year, Section 29 of the FDI Act was amended 
as part of the Economic Growth, Regulatory Relief, and Consumer 
Protection Act, to except a capped amount of certain reciprocal 
deposits from treatment as brokered deposits.
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    \8\ See Public Law 102-242, December 19, 1991, 105 Stat 2236.
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    Section 337.6 of the FDIC's Rules and Regulations implements and 
closely tracks the statutory text of Section 29, particularly with 
respect to the definition of ``deposit broker'' and its exceptions.\9\ 
Section 29 of the FDI Act does not directly define a ``brokered 
deposit,'' rather, it defines a ``deposit broker'' for purposes of the 
restrictions.\10\ Thus, the meaning of the term ``brokered deposit'' 
turns upon the definition of ``deposit broker.''
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    \9\ See 12 CFR 337.6. The FDIC issued two rulemakings related to 
the interest rate restrictions under this section. A discussion of 
those rulemakings, and the interest rate restrictions, is provided 
in Section (II)(B) of this Notice.
    \10\ See 12 U.S.C. 1831f.
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    Section 29 and the FDIC's implementing regulation define the term 
``deposit broker'' to include:
    [cir] Any person engaged in the business of placing deposits, or 
facilitating the placement of deposits, of third parties with insured 
depository institutions or the business of placing deposits with 
insured depository institutions for the purpose of selling interests in 
those deposits to third parties; and
    [cir] An agent or trustee who establishes a deposit account to 
facilitate a business arrangement with an insured depository 
institution to use the proceeds of the account to fund a prearranged 
loan.
    This definition is subject to the following nine statutory 
exceptions:
    1. An insured depository institution, with respect to funds placed 
with that depository institution;
    2. An employee of an insured depository institution, with respect 
to funds placed with the employing depository institution;
    3. A trust department of an insured depository institution, if the 
trust in question has not been established for the primary purpose of 
placing funds with insured depository institutions;
    4. The trustee of a pension or other employee benefit plan, with 
respect to funds of the plan;
    5. A person acting as a plan administrator or an investment adviser 
in connection with a pension plan or other employee benefit plan 
provided that that person is performing managerial functions with 
respect to the plan;
    6. The trustee of a testamentary account;
    7. The trustee of an irrevocable trust (other than one described in 
paragraph (1)(B)), as long as the trust in question has not been 
established for the primary purpose of placing funds with insured 
depository institutions;
    8. A trustee or custodian of a pension or profit sharing plan 
qualified under section 401(d) or 430(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 statute and regulation also define an ``employee'' to mean any 
employee: (1) Who is employed exclusively by the insured depository 
institution; (2) whose compensation is primarily in the form of a 
salary; (3) who does not share such employee's compensation with a 
deposit broker; and (4) whose office space or place of business is used 
exclusively for the benefit of the insured depository institution which 
employs such individual.
    As listed above, the statute includes nine exceptions to the 
definition of ``deposit broker.'' In 1992, the FDIC amended its 
regulations to include the following tenth exception: ``An insured 
depository institution acting as an intermediary or agent of a U.S. 
government department or agency for a government sponsored minority or 
women-owned depository institution program.'' The FDIC indicated in the 
preamble for the 1992 final rule that implemented the FDICIA revisions 
to Section 29 that those revisions were not intended to apply to 
deposits placed by insured depository institutions assisting government 
departments and agencies in administration of minority or women-owned 
deposit programs.\11\
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    \11\ See 57 FR 23933, 23040 (1992).
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B. Issues Raised by Commenters

    In response to the ANPR on brokered deposits and the interest rate 
restrictions applicable to less than well capitalized banks, the FDIC 
received over 130 comments from individuals, banking organizations, 
non-profits, as well as industry and trade groups, representing banks, 
insurance companies, and the broader financial services industry. Of 
the total comments, over 100 comments related to brokered deposits.
    Generally, a common theme amongst the commenters was a desire for 
the FDIC to clarify its historical interpretation of the ``deposit 
broker'' definition and its corresponding statutory and regulatory 
exceptions.
    Stable Funding. Seven commenters advanced their general point to be 
that brokered deposits are not inherently risky and that many types of 
deposits currently considered to be brokered are just as stable as core 
deposits and should be treated as such for supervisory purposes and 
assessments. A number of other commenters specifically noted that 
certain types of deposits (e.g., health savings accounts (HSAs), 
deposits underlying prepaid cards, and ``relationship'' deposits) are 
stable sources of funding (these comments are discussed in more detail 
under separate headings). Several commenters suggested that the more 
relevant issue with respect to potential bank failures is not the 
source of funding but rather the oversight of asset growth, 
specifically the increase in risky loans. Similarly, one consulting 
firm suggested that the FDIC focus its supervisory concerns on bank 
asset growth rates, especially rapid growth in risky loan categories, 
and that the FDIC should view brokered deposits as an important, stable 
funding source that complements retail deposit-gathering. One bank 
commenter stated that in the bank's experience, brokered deposits have 
been a stable, relatively low-cost, convenient, non-volatile source of 
funds for the past ten years. Another bank noted that brokered deposits 
have been a safe, stable and useful funding source for the bank and 
that any additional restrictions on the use of brokered deposits would 
cause significant additional costs and risks to the bank.
    Two commenters specifically discussed the use of brokered deposits 
by rural community banks. One urged the FDIC to revisit its views on 
brokered deposits because many rural institutions rely upon third-party 
funding to help provide loans to local agriculture and manufacturing 
businesses (that are capital-intensive) to support their operations. 
According to commenters, brokered deposits are more important now that 
many rural communities are seeing a decrease in the amount of deposits 
being placed by its local community. The other commenter stated that 
brokered deposits are a good source of supplemental funding for banks 
in rural areas or markets which lack ample local deposits to meet the 
legitimate credit needs of the community.
    Definition and Scope of ``Brokered Deposit.'' While many commenters

[[Page 7455]]

focused on specific types of products that they believe should not meet 
the regulatory definition of ``brokered deposit,'' 11 commenters 
generally stated that the definition of brokered deposit should be 
revised. These commenters indicated that the definition is unclear and 
has been interpreted too broadly, capturing many products or 
transactions that were not intended to be covered. One bank stated that 
the current regulations lack definitional clarity and that FDIC staff 
interpretations unnecessarily capture any third party that is involved 
in the administering or marketing of an account.
    Several of these commenters noted that technology has brought 
significant changes to the marketplace, including online advertising 
and deposit marketing through third parties. In particular, one banker 
stated that more institutions are being forced to rely upon funding 
channels that involve third parties due to the evolution of online 
banking activities and that this often triggers the definition of 
brokered deposit. Another commenter suggested that the definition be 
limited to those deposits that inherently pose risks to banks.
    One commenter stated that the FDIC's current interpretation of what 
constitutes a ``deposit broker'' seemingly hinges on the involvement of 
any third party (including affiliates or subsidiaries of the bank) in 
sourcing the customer relationship or servicing the customer. By taking 
such a view, the commenter argued, the FDIC has significantly expanded 
the types of entities considered to be deposit brokers beyond what was 
originally contemplated when Section 29 was enacted. This commenter 
stated that as a result, entities such as retailers, employers, 
technology platforms, advertising and marketing partners, and Fintech 
partners may currently be classified as deposit brokers, even though 
their activities may only be incidentally linked to a deposit account. 
The commenter requested that the FDIC limit its determination of what 
constitutes a ``deposit broker'' to what they believe was a narrow 
scope contemplated by Section 29.
    While the majority of the comments sought to constrict the 
definition of ``brokered deposits,'' one organization argued against 
any such a reduction in scope. The commenter stated that brokered 
deposits contributed to the savings and loan crisis of the 1980's that 
cost taxpayers hundreds of millions of dollars. The commenter also 
noted that brokered deposits have already received permissive 
regulatory treatment and that more than 99% of banks are considered 
``well-capitalized'' and therefore can accept brokered deposits without 
any statutory or regulatory restriction.
    Primary Purpose Exception. A number of commenters discussed the 
``primary purpose exception'' to the deposit broker definition in 
various contexts. Many of those commenters focused on specific deposit 
placement arrangements relating to health savings accounts (HSAs), 
prepaid cards, and affiliated broker-dealers. These comments are 
discussed more specifically under those headings. In addition to these 
specific deposit placement arrangements, a number of comments focused 
more generally on how the primary purpose exception should be 
interpreted. One bank commented that third parties that are involved in 
placing deposits but do so to achieve some other purpose outside of 
providing a deposit account, where the deposits do not have the risks 
associated with traditional brokered deposits, should meet the primary 
purpose exception. Another commenter proposed amending the primary 
purpose exception and making it available to entities that place 
deposits but also offer consumers an array of financial services. The 
commenter argued that the correct way to determine such person's 
``primary purpose'' is to review the entire range of services offered 
by the person to its customers and to exclude deposits that are 
facilitated or placed by persons for whom deposit brokerage revenue and 
income is less than 50 percent of their total consolidated revenue and 
income.
    Alternatively, one commenter argued that one key test for whether a 
person meets the primary purpose exception should be if the person 
facilitating placement of a deposit is paid a fee by the bank, which 
the commenter stated is a prominent feature of a ``classic'' deposit 
broker. The commenter also stated that in contrast, a securities broker 
or mutual fund administrator is paid a fee by the owner of the funds. 
According to the commenter, that is the key distinction that should be 
used to define a brokered deposit is whether the broker drives the 
selection of bank or whether the depositor drives the selection.
    A consulting firm asked the FDIC to take a ``principles-based'' 
approach toward the brokered deposit regulation and primary purpose 
exception that places the burden on the banks and their ability to 
explain, document and defend their operating and contingency management 
policies and practices.
    Health Savings Accounts (HSAs). Nine separate commenters mentioned 
HSAs, in general arguing that third party administrators (or HSA 
custodians) that assist in placing HSA deposits at insured depository 
institutions meet one of two statutory exceptions to the deposit broker 
definitions. Specifically, commenters believe that the third party 
administrators fit within the statutory exception for plan 
administrators for employee benefit plans, or that these third party 
administrators should meet the ``primary purpose exemption.''
    Commenters who argued that third party administrators fit within 
the primary purpose exception noted that HSAs are opened primarily for 
the purpose of facilitating savings in an effort to assist employees to 
meet deductibles and pay qualified medical expenses. One commenter 
noted that the primary purpose exception applies to HSAs because the 
funds are placed with banks incidental to providing a tax advantaged 
program for healthcare expenditures. Similarly, one commenter stated 
simply that placing HSA funds in banks is only incidental to the 
primary purpose of the non-bank administrators.
    Others pointed out that HSAs placed at insured depository 
institutions by third parties do not represent ``hot money'' but rather 
are a stable source of funding. Third party administrators also do not 
have the same authority to control the HSAs in a manner comparable to 
the control of traditional deposit brokers. One trade association made 
a public policy argument in favor of HSAs not being considered brokered 
deposits, stating that HSAs are a desirable option for both employers 
and employees to offset high employee healthcare costs. Another 
commenter also articulated a public policy reason for HSAs not being 
brokered deposits, noting that HSAs benefit consumers through increased 
competition, innovation and reduced costs.
    Prepaid Cards. Eight commenters discussed prepaid cards, generally 
stating that prepaid card companies are not deposit brokers because 
they are not engaged in the business of placing deposits, but rather 
are involved in a much larger economic activity of offering prepaid 
payments on products to replace inefficient and costlier, traditional 
payments. One commenter noted that program managers of prepaid card 
products meet the primary purpose exception because prepaid card 
managers place deposits to enable cardholders to make purchases 
throughout the interbank payment system and that prepaid cards are a 
source of stable funding. One trade association argued that funds 
underlying prepaid cards are not ``hot

[[Page 7456]]

money'' because they are typically held in pooled custodial accounts 
and the IDI is generally required to receive written approval of its 
primary federal regulator before assuming a large transfer of pooled 
funds. A few commenters noted that funds underlying prepaid cards 
should not be considered brokered deposits because they are low 
balance, stable, and relatively low-cost compared to other deposits. A 
large payments company similarly argued that funds underlying prepaid 
cards are not ``hot money'' and often have stable rates. The commenter 
further stated that prepaid card program managers provide consumers 
with a payment mechanism that substitutes for cash or a money order. 
Additionally, a commenter suggested that prepaid program structures 
that get paid based upon administrative services should qualify for the 
primary purpose exception, similar to the exception provided for 
government benefit programs.
    Broker-Dealer Sweeps. Currently, certain affiliated broker dealer 
sweeps are not considered to be brokered deposits. Two commenters 
stated that unaffiliated broker-dealer sweeps should also not be 
considered brokered, with one commenter suggesting that unaffiliated 
broker dealers meet the primary purpose exception.
    Several commenters suggested that the regulations should explicitly 
provide that affiliated broker dealers meet the primary purpose 
exception. Moreover, some commenters suggested that the FDIC reconsider 
the criteria that it has considered as part of its existing 
interpretation in Advisory Opinion 05-02.\12\ A consulting company 
suggested that the FDIC incorporate that staff opinion into the 
regulatory exceptions, and that the FDIC also codify, through 
rulemaking, that a separately incorporated trust company affiliate of a 
bank that acts as a bona fide trust custodian in placing deposits at an 
IDI, meets the primary purpose exception.
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    \12\ FDIC Staff Advisory Opinion 05-02 (February 3, 2005).
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    Affiliate Transactions. Sixteen commenters suggested that deposit 
referrals made by affiliated entities should not be considered brokered 
deposits, and that affiliates making such referrals should not be 
considered deposit brokers. One bank argued that affiliate referrals 
serve to strengthen and deepen the customer relationship. The bank also 
urged the FDIC to clarify, by regulation, that an affiliate of a 
depository institution does not constitute a deposit broker. A trade 
association representing the banking industry suggested that employees 
of bank affiliates and subsidiaries should not be considered deposit 
brokers. One bank similarly argued that deposits sourced from 
affiliates generally are similar to traditional core deposits because 
they are funds of customers with long-term relationships with the firm. 
One commenter suggested that affiliates that refer customers to a bank 
should not be treated as deposit brokers as long as the customer 
establishes a direct account relationship with the bank, the affiliate 
institution does not have the legal authority to move customers' funds 
to another depository institution, and the bank retains complete 
control over setting rates, fees, terms, and conditions for the account 
as well as full discretion over the opening or closing of the account.
    A trade association representing community banks stated that dual 
and affiliated employees who provide a suite of nonbanking and deposit 
products and services to customers, and are not paid commissions or 
fees based upon the volume of deposits placed, should not meet the 
deposit broker definition. Another banking trade association suggested 
that information sharing with affiliates should not be determinative 
factor for the FDIC in considering whether a deposit is brokered. A 
state banker's association stated that they found little evidence that 
so-called ``relationship deposits'' gathered through the normal course 
of providing banking services through affiliates or marketing 
partnerships pose an enhanced risk to safety and soundness or the 
deposit insurance fund. Two congressional commenters stated that there 
are characteristics of an affiliated broker-dealer's relationship with 
an insured depository institution that should result in deposits opened 
by them as being viewed as nonbrokered.
    Two commenters argued that deposits placed into a parent bank by 
its wholly-owned operating subsidiary should not be brokered deposits. 
According to the commenter, this is because wholly-owned operating 
subsidiaries are treated as part of the bank under certain federal 
banking laws.
    Insurance Agents. A bank suggested that the FDIC change its 
position regarding deposits marketed through non-employee, exclusive 
agents of, an insurance company engaged primarily in the sale of 
insurance if the bank is an affiliate of the insurance company and the 
agents market exclusively to such insurer's bank affiliate.
    Government Accounts. One commenter stated that large government 
investment pools that place deposits on behalf of municipalities and 
other governmental entities should not be classified as ``deposit 
brokers'' because they invest their portfolio assets as principal 
fiduciary and not as agent. Therefore, such pools do not act for the 
``primary purpose'' of investing fund assets in deposit accounts.
    Listing Services. One commenter stated that brokered deposits 
expressly exclude deposits derived from listing services and that the 
``deposit broker'' definition excludes listing services. The commenter 
suggested that the use of deposit listing services benefits the Deposit 
Insurance Fund by allowing bank customers to source multiple depository 
relationships, thereby minimizing losses to either the DIF or to the 
customer if deposits were placed at a single institution. Another 
commenter urged the FDIC to preserve its longstanding position 
regarding online listing services and stated that the position should 
remain even if a fee is paid for preferential placement on the listing 
service website.
    Custodial Deposits. A management company stated that FDIC's 
regulations should clarify that so-called ``custodial deposits'' are 
nonbrokered deposits because custodial deposits level the playing field 
between community banks and larger money center banks by allowing a 
custodian bank to break down large corporate, municipal, and not-for-
profit institutional deposits and distribute them to smaller banks.
    Deposit Insurance Assessments. Three commenters suggested that the 
FDIC revise its deposit insurance assessment regulations with respect 
to valuation of brokered deposits. While this matter is outside the 
scope of this rulemaking process, the FDIC acknowledges the comments 
and will consider them, as appropriate, in any future assessment 
rulemaking.

III. Discussion of Proposed Rule

A. Deposit Broker Definition

    A person meets the ``deposit broker'' definition under Section 29 
of the FDI Act if it is engaged in the business of placing deposits, or 
facilitating the placement of deposits, of third parties with insured 
depository institutions or the business of placing deposits with 
insured depository institutions for the purpose of selling interests in 
those deposits to third parties. An agent or trustee meets the 
``deposit broker'' definition when establishing a deposit account to 
facilitate a business arrangement with an insured depository 
institution to use the proceeds of the account to fund a prearranged 
loan. As discussed below, the FDIC is proposing to define certain 
prongs of the deposit broker definition.

[[Page 7457]]

1. Engaged in the Business of Placing Deposits
    The statute provides that a person meets the definition of 
``deposit broker'' if it is ``engaged in the business of placing 
deposits'' on behalf of a third party (i.e., a depositor) at insured 
depository institutions. The FDIC would view a person to be engaged in 
the business of placing deposits if that person has a business 
relationship with its customers, and as part of that relationship, 
places deposits on behalf of the customer (e.g., acting as custodian or 
agent for the underlying depositor).
    As such, any person that places deposits at insured depository 
institutions on behalf of a depositor, as part of its business 
relationship with that depositor, fits within the meaning of the 
``deposit broker'' definition.
    Question 1: Is the FDIC's proposed definition of ``engaged in the 
business of placing deposits'' appropriate?
2. Engaged in the Business of Facilitating the Placement of Deposits
a. Background and Comments Received
    Section 29 of the FDI Act also provides that a person is a deposit 
broker when it is ``facilitating'' the placement of deposits of third 
parties with insured depository institutions. In contrast to the first 
prong of the definition, the ``facilitation'' prong of the deposit 
broker definition refers to activities where the person does not 
directly place deposits on behalf of its customers with an insured 
depository institution. Historically, the term ``facilitating the 
placement of deposits'' has been interpreted by staff at the FDIC to 
include actions taken by third parties to connect insured depository 
institutions with potential depositors.
    Commenters argue that, under the current FDIC staff 
interpretations, the term ``facilitating'' has been broadly interpreted 
to include any actions taken by third parties to connect insured 
depository institutions with potential depositors. Commenters also 
contend that determining whether a third party is ``facilitating the 
placement of deposits'' is not always clear because the FDIC's staff 
interpretative letters do not always apply perfectly to new 
arrangements relating--for example--to whether deposits placed in new 
ways stemming from technological or marketplace changes would be 
considered brokered deposits.
    Since enactment of Section 29, there have been significant 
technological advances in the way banks seek and source deposits, well 
beyond what was contemplated at that time and by staff at the FDIC in 
the following years. As a result, some of the historical factors that 
have been considered may not be relevant as compared to current deposit 
placement arrangements in the market.
    Today, banks are increasingly relying on new technologies to engage 
and interact with their customers and, it appears that this trend will 
continue given rapid technological evolution. Specifically, the 
proliferation of various online marketing and advertising channels have 
provided new opportunities for insured depository institutions to 
attract depositors from different parts of the country. In an effort to 
ensure that the term brokered deposit appropriately reflects the 
banking landscape, and to ensure that the FDIC's regulations promote 
safe and sound practices, the FDIC is proposing to refine the 
activities that result in a person being ``engaged in the business of 
facilitating the placement'' of third party deposits at an insured 
depository institution.
b. Proposed Definition of Engaged in the Business of Facilitating the 
Placement of Deposits
    Under the proposal, the FDIC proposes that a person would meet the 
``facilitation'' prong of the ``deposit broker'' definition by, while 
engaged in business, engaging in any one, or more than one, of the 
following activities:
    [cir] The person directly or indirectly shares any third party 
information with the insured depository institution;
    [cir] The person has legal authority, contractual or otherwise, to 
close the account or move the third party's funds to another insured 
depository institution;
    [cir] The person provides assistance or is involved in setting 
rates, fees, terms, or conditions for the deposit account; or,
    [cir] The person is acting, directly or indirectly, with respect to 
the placement of deposits, as an intermediary between a third party 
that is placing deposits on behalf of a depositor and an insured 
depository institution, other than in a purely administrative capacity.
    By engaging in one or more than one of the above listed activities, 
while engaged in business, the person would be engaged in the business 
of facilitating the placement of customer deposits at an insured 
depository and therefore meet the ``deposit broker'' definition. For 
example, if a person assists in setting rates, fees, or terms, then 
that person would be considered a deposit broker despite the fact that 
the person may not share third party information with the insured 
depository institution.
    The proposed ``facilitation'' definition is intended to capture 
activities that indicate that the person takes an active role in the 
opening of an account or maintains a level of influence or control over 
the deposit account even after the account is open. It is the FDIC's 
view that a level of control or influence indicates that the deposit 
relationship is between the depositor and the person rather than the 
depositor and the insured depository institution. Having a level of 
control or influence over the depositor allows the person to influence 
the movement of funds between institutions and makes the deposits less 
stable than deposits brought to the insured depository institution 
through a single point of contact where that contact does not have 
influence over the movement of deposits between insured depository 
institutions. Ultimately, the FDIC believes that if the person is not 
engaged in any of the activities above, then the needs of the depositor 
are the primary drivers of the selection of a bank, and therefore the 
person is not facilitating the placement of deposits.
    The proposal would also define any person that acts as an 
intermediary between another person that is placing deposits on behalf 
of a depositor and an insured depository institution, other than in a 
purely administrative capacity, as facilitating the placement of 
deposits. In other words, any assistance provided by such 
intermediaries, outside of providing purely administrative functions, 
would result in the intermediary meeting the ``deposit broker'' 
definition and any deposits placed through the assistance of such 
intermediaries would be brokered deposits. For example, if an agent or 
nominee that meets the primary purpose exception uses an intermediary 
(in a manner that is not purely administrative) in placing, or 
facilitating the placement of, deposits, then the intermediary would be 
a deposit broker, and the resulting deposits would be brokered. 
Administrative functions would include, for example, any reporting or 
bookkeeping assistance provided to the person placing its customers' 
deposits with insured depository institutions. Administrative functions 
would not include, for example, assisting in decision-making or 
steering persons (including the underlying depositors) to particular 
insured depository institutions. The FDIC believes such an 
interpretation is warranted, in part, because deposits placed through 
the assistance of such intermediaries are more likely to raise concerns 
traditionally associated with brokered deposits. For example, it is 
possible that such entities are able to directly or indirectly control 
or

[[Page 7458]]

influence the movement of funds between insured depository institutions 
without any involvement or input from the underlying depositor.
    This proposal would provide industry participants with clarity over 
whether the actions of a person, in assisting with the placement of 
deposits, meet the ``facilitation'' part of the ``deposit broker'' 
definition.
    Question 2: Is the FDIC's proposed definition of ``engaged in the 
business of facilitating the placement of deposits'' appropriate?
    Question 3: Is the FDIC's list of activities that would determine 
whether a person meets the ``facilitation'' prong of the ``deposit 
broker'' definition appropriate?
    Question 4: Has the FDIC provided sufficient clarity surrounding 
whether a third party intermediary would meet the ``facilitation'' 
prong of the ``deposit broker'' definition?
    Question 5: Should the FDIC provide more clarity regarding whether 
any specific types of deposit placement arrangements would or would not 
meet the ``facilitation'' prong of the ``deposit broker'' definition? 
If so, please describe any such deposit placement arrangements.
3. Selling Interests in Deposits to Third Parties
    The third prong of the ``deposit broker'' definition includes a 
person ``engaged in the business of placing deposits with insured 
depository institutions for the purpose of selling interests in those 
deposits to third parties.'' This part of the definition specifically 
captures the brokered certificates of deposit (CD) market (referred to 
herein as ``brokered CDs''). These are typically deposit placement 
arrangements where brokered CDs are issued in wholesale amounts by a 
bank seeking to place funds under certain terms and sold through a 
registered broker-dealer to investors, typically in fully-insured 
amounts. The brokers subdivide the bank-issued ``master CD'' and alter 
the terms of the original CD before selling the new CDs to its 
brokerage customers. These brokered CDs are (in most cases) held in 
book-entry form at the Depository Trust Corporation (``DTC'') and use 
the CUSIP system for identification and trading in a primary and 
secondary market.
    Deposits placed through this market have always been marketed and 
classified as brokered deposits and are specifically captured under the 
placement of deposits ``for the purpose of selling interests in those 
deposits to third parties'' prong of the deposit broker definition. 
Through this rulemaking, the FDIC is not proposing any changes to the 
brokered classification of such deposits. In other words, under this 
proposal, without exception, and as further explained below in the 
section discussing the primary purpose exception, brokered CDs would 
continue to be classified as brokered.
    In addition, the FDIC notes that the brokered CD market has evolved 
since Section 29 was first enacted, and will likely continue to evolve. 
As such, it is the FDIC's intention that third parties that assist in 
the placement of brokered CDs, or any similar deposit placement 
arrangement with a similar purpose, continue to meet the deposit broker 
definition.

B. Exceptions to the Deposit Broker Definition

    Section 29 provides nine statutory exceptions to the definition of 
deposit broker and, as noted earlier, the FDIC added one regulatory 
exception to the definition. Through this rulemaking, the FDIC proposes 
amending two exceptions--(1) the exception for insured depository 
institutions, with respect to funds placed with that depository 
institution (the ``IDI exception'') and (2) the exception for an agent 
or nominee whose primary purpose is not the placement of funds with 
depository institutions (the ``primary purpose exception'').
1. Bank Operating Subsidiaries and the IDI Exception
    Section 29 of the FDI Act expressly excludes from the definition of 
``deposit broker'' an insured depository institution, with respect to 
funds placed with that depository institution, also known as the ``IDI 
Exception.'' \13\ Under the IDI Exception, an IDI is not considered to 
be a deposit broker when it (or its employees) places funds at the 
bank.
---------------------------------------------------------------------------

    \13\ 12 U.S.C. 1831f((g)(2)(A).
---------------------------------------------------------------------------

    In response to the ANPR, commenters suggest that funds deposited at 
an IDI through the IDI's relationship with a wholly-owned subsidiary 
should not be considered brokered deposits. The commenters state that 
operating subsidiaries of an IDI are under the exclusive control of the 
parent IDI, engage only in activities permissible for an IDI and are 
treated as a division of the IDI for a variety of regulatory purposes.
    The FDIC recognizes that the exception currently is limited to IDIs 
only, and not their subsidiaries. The IDI Exception currently applies, 
for example, in the case of a division of an IDI that places deposits 
exclusively with the parent IDI, but does not apply if a separately 
incorporated subsidiary of the IDI places deposits exclusively with the 
parent. The FDIC also recognizes that a wholly-owned operating 
subsidiary that meets certain criteria can be considered similar to a 
division of an IDI for certain purposes. In fact, wholly-owned 
subsidiaries are treated differently under various legal and regulatory 
frameworks. For example, the Bank Merger Act and Receivership law treat 
wholly-owned subsidiaries as separate from its parent IDI, whereas 
Section 23A and Section 23B of the Federal Reserve Act and Call Reports 
treat wholly-owned subsidiaries as part of the parent IDI.
    There is little practical difference between deposits placed at an 
IDI by a division of the IDI versus deposits placed by a wholly-owned 
subsidiary of the IDI. Therefore, the FDIC proposes that the IDI 
exception be available to wholly-owned operating subsidiaries provided 
that such a subsidiary meets the criteria discussed below. The FDIC 
believes that setting forth specific criteria is appropriate to limit 
the exception to wholly-owned subsidiaries that are functioning 
essentially as divisions of parent IDIs.
    For the reasons described above, the FDIC is proposing that a 
subsidiary be eligible for the IDI exception, provided all of the 
following criteria are met:
    [cir] The subsidiary is a wholly owned operating subsidiary of the 
IDI, meaning that the IDI owns 100% of the subsidiary's outstanding 
stock;
    [cir] The subsidiary places deposits of retail customers 
exclusively with the parent IDI; and
    [cir] The subsidiary engages only in activities permissible for the 
parent IDI.
    Under the proposal, wholly-owned subsidiaries, based on the above 
listed conditions, would be eligible for the IDI exception to the 
definition of deposit broker with respect to funds placed at the IDI. 
However, the FDIC notes that such deposits would be considered brokered 
if a third party is involved that is itself a deposit broker.
    Question 6: Is it appropriate for a separately incorporated 
operating subsidiary to be included in the IDI exception?
    Question 7: Are the criteria for including an operating subsidiary 
in the IDI exception too broad or too narrow?
2. Primary Purpose Exception
a. Background
    The statute provides that the primary purpose exception applies to 
``an agent or nominee whose primary purpose is

[[Page 7459]]

not the placement of funds with depository institutions.'' Generally, 
if a person is engaged in the business of either placing deposits for 
its customers, or facilitating the placement of deposits for its 
customers, at insured depository institutions, then it meets the 
``deposit broker'' definition. However, if the person meets the primary 
purpose exception, then the person is excepted from the definition of 
``deposit broker'' and any deposits that it places with insured 
depository institutions are not brokered deposits.
    As noted in the ANPR, in evaluating whether a person meets the 
primary purpose exception, staff has focused on the relationship 
between the depositor and the person acting as agent or nominee for 
that depositor.\14\ In particular, staff has generally analyzed whether 
the agent's placement of deposits is for a substantial purpose other 
than (1) to provide deposit insurance, or (2) for a deposit-placement 
service. In analyzing this principle, staff has considered whether the 
deposit-placement activity is incidental to some other purpose.
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    \14\ 84 FR 2366, 2372 (February 6, 2019).
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b. General Overview of Proposal
    The FDIC is proposing to set forth regulatory changes to the 
primary purpose exception. Specifically, the FDIC is proposing that the 
application of the primary purpose exception be based on the business 
relationship between the agent or nominee and its customers. As such, 
the proposal would amend the primary purpose exception in the 
regulation to apply when the primary purpose of the agent's or 
nominee's business relationship with its customers is not the placement 
of funds with depository institutions.
    The FDIC recognizes that, since Section 29 was first enacted, there 
have been a number of different agents and nominees that have sought 
views on the applicability of the primary purpose exception, and this 
proposed amendment to the primary purpose exception would expand the 
number of entities that meet the exception. The FDIC also recognizes 
that every deposit broker can claim a primary purpose other than the 
placement of funds at a depository institution, and Congress did not 
intend for every potential deposit broker to become exempt through the 
primary purpose exception. In order for the FDIC to properly scrutinize 
whether a primary purpose exception is warranted, the FDIC is proposing 
to establish an application and reporting process to ensure that the 
FDIC's role in protecting the Deposit Insurance Fund and ensuring 
safety and soundness is preserved.\15\
---------------------------------------------------------------------------

    \15\ The proposed application and reporting process would be set 
forth in a new 12 CFR 303.243(b). The brokered deposit waiver 
procedures would be moved to 12 CFR 303.243(a)(1)-(7) with no change 
to the text.
---------------------------------------------------------------------------

c. Business Relationships Deemed To Meet the Primary Purpose Exception 
Subject to the Application Process
1. Deposit Placements of Less Than 25 Percent of Customer Assets Under 
Management by the Third Party
    Through this rulemaking, the FDIC proposes 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, subject to an 
application process, if less than 25 percent of the total assets that 
the agent or nominee has under management for its customers, in a 
particular business line, is placed at depository institutions. It is 
the FDIC's view that the primary purpose of a third party's business 
relationship with its customers is not the placement of funds with 
depository institutions if the third party places less than 25 percent 
of customer assets under management for its customers, for a particular 
business line, at insured depository institutions. The FDIC believes 
that if 75 percent or more of the customer assets under management of 
the third party is not being placed at depository institutions, for a 
particular business line, the third party has demonstrated that the 
primary purpose of that business line is not the placement of funds at 
depository institutions. The FDIC also believes that establishing a 
transparent, bright line test is beneficial for all parties.
    To give an example, a broker dealer that sweeps uninvested cash 
balances into deposit accounts at depository institutions would meet 
the primary purpose exception if the amount of customer funds it places 
at deposit accounts represents less than a quarter of the total amount 
of customer assets it manages for its broker dealer business. However, 
if 25 percent or more of the customer assets the broker dealer manages 
is placed at depository institutions, the FDIC would, barring 
information to the contrary, likely conclude that the primary purpose 
of the broker dealer's business is placing funds at depository 
institutions, rather than the placing of funds at depository 
institutions being ancillary to its primary purpose.
    An agent or nominee that seeks to avail itself of the primary 
purpose exception based on this standard would be required to submit an 
application, as discussed below.
    Customer Assets Under Management. In determining the amount of 
customer assets under management by an agent or nominee, for a 
particular business line, the FDIC would measure the total market value 
of all the financial assets (including cash balances) that the agent or 
nominee manages on behalf of its customers that participate in a 
particular business line.
    Question 8: Is it appropriate to interpret the primary purpose of a 
third party's business relationship with its customers as not placement 
of funds if the third party places less than 25 percent of customer 
assets under management for its customers, for a particular business 
line, at depository institutions? Is a bright line test appropriate? If 
so, is 25 percent an appropriate threshold?
    Question 9: Should the FDIC specifically provide more clarity 
regarding what is meant by customer assets under ``management'' by a 
broker dealer or third party?
2. Deposit Placements That Enable Transactions
    The FDIC proposes, subject to an application process, 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 if 
the agent or nominee places depositors' funds into transactional 
accounts for the purpose of enabling payments. The FDIC does not intend 
for this exception to capture all third parties that place deposits 
into accounts that have transaction features and does not intend to 
create an incentive for deposit brokers to move customers from time 
deposits to transaction accounts in order to evade brokered deposits 
restrictions. Rather, the exception would be construed to apply only to 
third parties whose business purpose is to place funds in transactional 
accounts to enable transactions or make payments.
    Under the proposal, if an agent or nominee places 100 percent of 
its customer funds into transaction accounts at depository institutions 
and no fees, interest, or other remuneration is provided to the 
depositor, then it would meet the primary purpose exception of enabling 
payments, subject to providing information as part of an application 
process. In such a case, the FDIC would conclude that the primary 
purpose of the agent's or nominee's business is to enable payments.
    If the agent or nominee, or the depository institution, pays any 
sort of interest, fee, or provides any

[[Page 7460]]

remuneration, (e.g., nominal interest paid to the deposit account), 
then the FDIC would more closely scrutinize the agent's or nominee's 
business to determine whether the primary purpose is truly to enable 
payments. In such a case, the FDIC would consider a number of factors, 
including the volume of transactions in customer accounts, and the 
interest, fees, or other remuneration provided, in determining the 
applicability of the primary purpose exception.
    An agent or nominee that seeks to avail itself of the primary 
purpose exception based on this standard would be required to submit an 
application.
    Question 10: Is it appropriate to make available the primary 
purpose exception to third parties whose business purpose is to place 
funds in transactional accounts to enable transactions or make 
payments?
d. Other Deposit Placements That May Meet the Primary Purpose Exception
    Agents or nominees that do not fit within the business arrangements 
detailed above would also be eligible to apply for the primary purpose 
exception, subject to the application process.\16\ In such a case, in 
order to qualify for the primary purpose exception, the FDIC would 
expect the agent or nominee to demonstrate through its application that 
the primary purpose of the agent or nominee is something other than the 
placement of funds at depository institutions. In such applications, 
the FDIC would consider a number of factors in determining whether the 
agent or nominee meets the primary purpose exception.
---------------------------------------------------------------------------

    \16\ Persons that meet the deposit broker definition because 
they are ``facilitating the placement'' of deposits would also be 
eligible to submit an application under this process.
---------------------------------------------------------------------------

    The FDIC notes that agents or nominees seeking a primary purpose 
exception under this category may be placing more than 25 percent of 
its customer assets under management, for a particular business line, 
into deposit accounts at depository institutions. As such, the 
applicant would be required to provide information sufficient to 
establish that its primary purpose is something other than the 
placement of funds, despite the fact that it places more than 25 
percent of its customer assets under management, for a particular 
business line, in deposit accounts.
    One factor the FDIC would review is the revenue structure for the 
agent or nominee. If the agent or nominee receives a majority of its 
revenue from its deposit placement activity, rather than for some other 
service it offers, then it would likely not meet the primary purpose 
exception. A second factor would be whether the agent's or nominee's 
marketing activities to prospective depositors is aimed at opening a 
deposit account or to provide some other service, and if there is some 
other service, whether the opening of the deposit account is incidental 
to that other service. As part of reviewing this factor, the FDIC would 
also consider whether it is necessary for the customer to open a 
deposit account first before receiving the other services provided by 
the agent or nominee. A third factor would be the fees, and type of 
fees, received by an agent or nominee for any deposit placement service 
it offers.
    Ultimately, the FDIC's review of whether an agent or nominee meets 
the primary purpose exception would be a case-by-case review and depend 
upon a consideration of factors detailed in the application section 
below, as well as the information presented by the applicant as to why 
it should meet the primary purpose exception.
e. Business Relationships That Do Not Meet the Primary Purpose 
Exception
1. Deposit Placements of Brokered CDs
    Through this proposal, the FDIC would continue to consider a 
person's placement of brokered CDs (as described in the third prong to 
the deposit broker definition and as discussed above) as deposit 
brokering. For purposes of establishing the person's primary purpose, 
the person's placement of brokered CDs would be considered a discrete 
and independent business line from other deposit placement businesses, 
and so the primary purpose for that particular business line will 
always be the placement of deposits at depository institutions. 
Accordingly, such deposits would continue to be considered brokered 
notwithstanding that the person may not be considered a deposit broker 
for other deposits that it places (or for which it facilitates the 
placement), which would be evaluated as a separate business line.
    Brokered CD products are marketed to customers as a way to increase 
FDIC deposit insurance coverage and increase yield. One historical form 
of brokered CDs is CD participations, where a broker dealer purchases a 
CD issued by a bank and sells the interests in the CD to its customers. 
CD participations, at the time that Section 29 was being contemplated, 
were a core form of deposit brokering. This activity enables any 
insured depository institution to attract large volumes of funds 
irrespective of the institutions' managerial and financial 
characteristics. While such deposits can provide a helpful source of 
liquidity to institutions, their availability and pricing make it 
possible for poorly-managed institutions to continue operating beyond 
the time at which natural market forces would have otherwise resulted 
in failure. Moreover, and as provided in the ANPR, brokered CDs have 
caused significant losses to the deposit insurance fund.\17\
---------------------------------------------------------------------------

    \17\ 84 FR 2366, 2370 (February 6, 2019).
---------------------------------------------------------------------------

    Accordingly, for purposes of effectuating the intent and policy of 
Section 29 (and Part 337 of the FDIC's regulations), brokered CDs, as 
has been the case since 1989, will be considered brokered, without 
exception. As discussed below, deposits related to brokered CDs would 
not be included for purposes of determining whether a person's other 
business line meets the primary purpose exception.
2. Deposit Placements for Purposes of Encouraging Savings
    The FDIC would not grant a primary purpose exception if the third 
party's primary purpose for its business relationship with its 
customers is to place (or assist in the placement of) funds into 
deposit accounts to ``encourage savings,'' ``maximize yield,'' 
``provide deposit insurance'', or any similar purpose. The FDIC is 
concerned that these types of purposes evade the purposes of Section 
29. It is the FDIC's view that there is no meaningful distinction 
between these objectives and the objectives for placing funds into a 
deposit account. As such, third parties that either place or assist in 
the placement of deposits to provide these core deposit-placement 
services for its customers would not meet the primary purpose 
exception.
f. Applicability of Prior FDIC Staff Advisory Opinions
    The FDIC recognizes that some insured depository institutions may 
have met the primary propose exception based on a previous FDIC staff 
advisory opinion. As part of this rulemaking process, the FDIC intends 
to evaluate existing staff opinions to identify those that are no 
longer relevant or applicable based on any revisions made to the 
brokered deposit regulations. The FDIC plans as part of any final rule 
to codify staff opinions of general applicability that continue to be 
relevant and applicable, and to rescind any staff opinions that are 
superseded or obsolete or are no longer relevant or applicable.
    Question 11: Are there particular FDIC staff opinions of general

[[Page 7461]]

applicability that should or should not be codified as part of the 
final rule? If so, which ones, and why?
g. Evaluation of Business Lines
    In evaluating whether the primary purpose would apply, the FDIC 
believes it is necessary to analyze specific business lines. Otherwise, 
any agent or nominee engaged in the brokering of deposits could evade 
the statutory restrictions by adding or combining its brokering 
business with another business such that the deposit broker business is 
no longer its primary purpose. In this proposal, the term business line 
would refer to the business relationships an agent or nominee has with 
a group of customers for whom the business places or facilitates the 
placement of deposits. For example, a company that offered brokerage 
accounts to various types of customers that allowed customers to buy 
and sell assets, with a traditional cash sweep option, would be 
considered a business line. Brokerage accounts that did not offer a 
cash sweep option would not be considered part of the business line 
(because those customers are not part of the group of customers for 
whom the person is placing deposits), and any accounts in which 
customers are only able to place money in accounts at depository 
institutions (and not invest in other types of assets) would also be 
considered a separate business line. Ultimately, the determination of 
what constitutes a business line will depend on the facts and 
circumstances of a particular case, and the FDIC retains discretion to 
determine the appropriate business line to which the primary purpose 
exception would apply.
    Question 12: Has the FDIC provided sufficient clarity regarding 
what will be considered a ``business line''? How can the FDIC provide 
more clarity? Are there other factors that should be considered in 
determining an agent's or nominee's business line(s)?
h. Application Process for the Primary Purpose Exception
1. General Overview of the Application Process
    For purposes of the application process, the term applicant 
includes an insured depository institution or a nonbank third party 
\18\ that meets the ``deposit broker'' definition by either placing (or 
facilitating the placement of) customer deposits at insured depository 
institutions and seeks to be excluded from that definition by 
application of the primary purpose exception. Under the proposal, the 
FDIC would establish an application process under which any agent or 
nominee that seeks to avail itself of the primary purpose exception, or 
an insured depository institution acting on behalf of an agent or 
nominee, could request that the FDIC consider certain deposits as 
nonbrokered as a result of the primary purpose exception. If an 
application from the agent or nominee is approved, deposits placed or 
facilitated by that party would be considered nonbrokered for a 
particular business line.
---------------------------------------------------------------------------

    \18\ The FDIC will look to each separately incorporated legal 
entity as its own ``third party'' for purposes of this application 
process.
---------------------------------------------------------------------------

    As mentioned, an applicant may be an insured depository institution 
that applies to the FDIC on behalf of a third party seeking a 
determination that the third party meets the primary purpose exception. 
In this case, if appropriate, the FDIC would evaluate the third party's 
relationships with all IDIs in which the third party places, or 
facilitates the placement of, deposits. An approval that a third party 
meets the primary purpose exception (based on an application by an IDI 
on behalf of the third party) could be applicable to all deposit 
placements by that third party at other IDI(s) to the extent that the 
deposit placement arrangements with the other IDI(s) are the same as 
the arrangement between the applicant and the third party. The FDIC 
anticipates that an agent or nominee who places, or facilitates the 
placement of, deposits at multiple IDIs and seeks a primary purpose 
exception is likely to apply on its own behalf, given that the 
information required to complete an application will be in possession 
of the agent or nominee.
    Question 13: Are there scenarios where a nonbank third party, as 
part of the same business line, has different deposit placement 
arrangements with IDIs?
    Applicants would receive a written determination from the FDIC 
within 120 days of a complete application. For applications seeking the 
primary purpose exception as described above in paragraphs C(1) and 
C(2) (with the exception of applicants seeking a primary purpose 
exception based on enabling payments where interest, fees, or 
remuneration, is provided to depositors), if the application is simple 
and straightforward and meets the relevant standards, the FDIC intends 
to provide an expedited processing of the application. The FDIC expects 
such applications to generally be simple and straightforward, but 
recognizes there may be some cases, such as when defining the scope of 
the ``business line'' is complicated, in which the FDIC may need more 
time to process the application.
    Question 14: Is the application process proposed for the primary 
purpose exception appropriate? Are there ways the application process 
could be modified to make it more effective or efficient?
    Question 15: Is the application process for IDIs that apply on 
behalf of a third party workable? Are there ways to improve the process 
for IDIs that apply on behalf of third parties?
    Question 16: Are there additional ways that the FDIC could better 
ensure that the primary purpose exception is applied consistently, 
transparently, and in accordance with the statute?
    Question 17: Should some or all FDIC decisions on applications for 
the primary purpose exception be publicly available? If so, in what 
format?
    Question 18: Are there commonly known deposit placement 
arrangements not mentioned above that are sufficiently simple and 
straightforward that applications for such arrangements should receive 
expedited application processing, as described above?
    Question 19: Are there other deposit placement arrangements with 
respect to which the FDIC should provide additional clarity as part of 
this rulemaking?
2. Application Contents
    An applicant would need to submit certain information, depending on 
the basis on which the primary purpose exception is being sought. Below 
are the application contents that would be required for each of the 
three types of previously discussed business arrangements.
    Application Contents for Third Parties that Seek Primary Purpose 
Based on Placing Less Than 25 Percent of Customer Assets Under 
Management at IDIs. The applicant would be required to provide (1) a 
description of the business line for which the applicant is filing an 
application; (2) the total amount of customer assets under management 
by the third party for that particular business line and (3) the total 
amount of deposits placed by the third party on behalf of its 
customers, for that particular business line, at all depository 
institutions. The total amount of deposits placed by the third party 
should be exclusive of the amount of brokered CDs being placed by the 
third party, which is treated as a separate business line. An 
application would also need to include a description of the deposit 
placement arrangement(s) with the IDI or IDIs and the services provided 
by any other third parties involved. The FDIC would be

[[Page 7462]]

permitted to request additional information at any time during the 
review of the application to render the application complete and 
initiate its review.
    The FDIC will approve primary purpose applications if the total 
amount of customer funds placed at insured depository institutions by 
the third party is less than 25 percent of total customer assets under 
management by the third party for a particular business line.
    Question 20: Are the criteria for considering and approving primary 
purpose applications for third parties that seek a primary purpose 
exception based on placing less than 25 percent of customer assets 
under management at depository institutions appropriate?
    Application Contents for Third Parties that Seek Primary Purpose 
Based on Enabling Transactions. The applicant would need to submit 
information, including contracts with customers and with the depository 
institutions in which the third party is placing deposits, showing that 
all of its customer deposits are in transaction accounts. An 
application would also need to include a description of the deposit 
placement arrangement(s) with the IDI or IDIs and the services provided 
by any other third parties involved. The applicant would also need to 
submit information on the amount of interest, fees, or remuneration 
being provided or paid for the transaction accounts. For third parties 
that pay interest, fees, or provide other remuneration, the applicant 
would need to provide information regarding the volume of transactions 
in customer accounts. In addition, for third parties that pay interest, 
fees, or provide other remuneration, applicants would need to provide 
an explanation of how its customers utilize its services for the 
purpose of making payments and not for the receipt of a deposit 
placement service or deposit insurance. The FDIC would be permitted to 
request additional information at any time during the review of the 
application to render the application complete and initiate its review.
    The FDIC would approve primary purpose applications if an agent or 
nominee places funds into transactional accounts for the purpose of 
enabling payments, and no fees, interest, or other remuneration is 
being provided to the depositor.
    Question 21: Are the criteria for considering and approving primary 
purpose applications based on enabling transactions appropriate?
    Application Contents for Other Business Relationships That May Meet 
the Primary Purpose Exception. Applicants seeking the primary purpose 
exception not based on business relationships described above (in 
paragraphs C(1) and C(2)) would request that the FDIC view a particular 
business relationship between a third party and an IDI as meeting the 
primary purpose exception. This process would be available, for 
example, to third parties that place more than 25 percent of the total 
assets under management for its customers, for a particular business 
line, into deposit accounts at insured depository institutions.
    Application Contents. In order for an application to be considered, 
the following information, at a minimum, would be required, to the 
extent applicable:
    (1) A description of the deposit placement arrangements with all 
entities involved;
    (2) A description of the business line for which the applicant is 
filing an application;
    (3) A description of the primary purpose of the particular business 
line;
    (4) The total amount of assets under management by the third party;
    (5) The total amount of deposits placed by the third party at all 
insured depository institutions, including the amounts placed with the 
applicant, if the applicant is an insured depository institution. This 
includes the total amount of term deposits and transactional deposits 
placed by the third party, but should be exclusive of the amount of 
brokered CDs being placed by that third party;
    (6) Revenue generated from the third party's activities related to 
the placement, or the facilitating of the placement, of deposits;
    (7) Revenue generated from the third party's activities not related 
to the placement, or the facilitating of the placement, of deposits;
    (8) A description of the marketing activities provided by the third 
party to prospective depositors;
    (9) The reasons the third party meets the primary purpose 
exception;
    (10) Any other information the applicant deems relevant; and
    (11) Any other information that the FDIC requires to initiate its 
review and render the application complete.
    Supporting documentation and contracts related to the items above 
would also be required. The FDIC would be permitted to request 
additional information at any time during its review to render the 
application complete and initiate its review. The FDIC's review of 
whether a third party meets the primary purpose exception would be 
based on the application and all supporting information provided. After 
receipt of a complete application, the FDIC will notify the applicant, 
in writing, of its response within 120 days.
    Under the proposal, the FDIC would approve applications submitted 
under this process if the application demonstrates, with respect to the 
particular business line under which the third party places or 
facilitates the placement of deposits, that the primary purpose of the 
third party, for that business line, is a purpose other than the 
placement or facilitation of placement of deposits.
    Question 22: Are proposed requirements for the application process 
for business relationships, other than those described in paragraphs 
(C)(1) and (C)(2), appropriate?
3. Ongoing Reporting
    An agent or nominee that meets the primary purpose exception, or an 
IDI that applies on behalf of the agent or nominee, would need to 
provide reports to the FDIC and, if applicable, in the case of insured 
depository institutions, its primary federal regulator. The FDIC will 
describe the reporting requirements, including the frequency and any 
calculation methodology, as part of its written approval for a primary 
purpose exception. The FDIC anticipates that the reporting would be 
required on a quarterly basis. As an example, if a primary purpose 
approval is granted based, in part, on the representation that a 
nonbank third party places less than 25 percent of its customer assets 
under management into deposit accounts, then the FDIC would likely 
require as a condition of the approval that the nonbank third party 
provide reporting of the amount of deposits, based upon the average 
daily balances, placed by the nonbank third party at all depository 
institutions and the total amount of assets, based upon the average 
daily balances, under the third party's management. The FDIC believes 
it is more efficient for the nonbank third party to report directly to 
the FDIC, rather than for the nonbank third party to send the same 
information to each IDI in which it places deposits, each of which 
would then in turn report this identical information to the FDIC.
    Question 23: Is it appropriate to require reporting from nonbank 
entities that have received approval for a primary purpose exception? 
Should the FDIC require IDIs to report on behalf of such nonbank 
entities instead? Are there other ways the FDIC should consider to 
ensure that applicants that receive the primary purpose exception 
remain within the relevant standards?

[[Page 7463]]

    Question 24: How frequently should the FDIC require reporting?
    IDIs would be responsible for monitoring a nonbank third parties' 
eligibility for the primary purpose exception. For example, if a 
certain percentage of a nonbank third party's revenue is from some 
activity other than deposit placement, and the FDIC approves a primary 
purpose exception in reliance of this factor, among other factors, then 
the FDIC would require that an insured depository institution that 
receives such deposits provide a notice to the FDIC and the primary 
federal regulator if there are any material change to the nonbank third 
party's revenue structure. When establishing a contractual relationship 
with a nonbank third party for the placement of deposits that may be 
classified as nonbrokered due to the primary purpose exception, an IDI 
may wish to consider the reporting and monitoring requirements 
described here.
    Question 25: Is it appropriate for the FDIC to require IDIs to 
monitor third parties for eligibility for the primary purpose 
exception? Are there additional or better ways to ensure that third 
parties continue to remain eligible for the exception?
4. Modification and Withdrawals
    At any time after approval, the FDIC proposes that it may, with 
notice and as appropriate, require additional information to ensure 
that the approval is still appropriate, or to verify the accuracy of 
the information that was provided by a third party to an IDI or 
submitted to the FDIC. In addition, in certain circumstances, such as 
if an entity previously approved for a primary purpose exception has 
undergone material changes to its business, the FDIC would be able to 
require that the applicant reapply for approval, impose additional 
conditions on the approval, or withdraw a previously granted approval, 
if warranted and with sufficient notice.

C. Brokered Deposits and Assessments

    Under the proposal, some deposits that are currently considered 
brokered will no longer be considered brokered. In a future rulemaking, 
the FDIC plans to consider modifications to the assessment regulations 
in light of any changes made to the brokered deposits regulation.

D. Reporting of Certain Deposits on Call Reports

    Also, after a final rule is adopted, the FDIC will consider 
requiring reporting of deposits that are excluded from being reported 
as brokered deposits because of the application of the primary purpose 
exception. The FDIC will monitor this information to assess the risk 
factors associated with the deposits and determine assessment 
implications, if any. Any changes to reporting requirements applicable 
to the Consolidated Reports of Condition and Income (``Call Reports''), 
and its instructions, would be effectuated in coordination with the 
Federal Financial Institutions Examination Council in a separate 
Paperwork Reduction Act notice.

E. Treatment of Non-Maturity Deposits for Purposes of the Brokered 
Deposits Restrictions

    As discussed in the FDIC's notice of proposed rulemaking for 
interest rate restrictions, the FDIC is looking at the question of when 
non-maturity deposits in an existing account are considered 
``accepted.'' The FDIC is in the process of considering comments 
received in response to that notice of proposed rulemaking.
    The FDIC is considering a similar approach for brokered deposits as 
it did for interest rate restrictions. For brokered nonmaturity 
deposits, through this proposal, the FDIC is considering an 
interpretation under which non-maturity brokered deposits are viewed as 
``accepted'' for the brokered deposits restrictions at the time any new 
non-maturity deposits are placed at an institution by or through a 
deposit broker.
    Under this proposed interpretation, brokered balances in a money 
market demand account or other savings account, as well as transaction 
accounts, at the time an institution falls below well capitalized, 
would not be subject to the brokered deposits restrictions. However, if 
brokered funds were deposited into such an account after the 
institution became less than well capitalized, the entire balance of 
the account would be subject to the brokered deposits restrictions. If, 
however, the same customer deposited brokered funds into a new account 
and the balance in that account was subject to the brokered deposits 
restrictions, the balance in the initial account would continue to not 
be subject to the brokered deposits restrictions so long as no 
additional funds were accepted. Brokered deposits restrictions also 
generally apply to any new non-maturity brokered deposit accounts 
opened after the institution falls to below well capitalized.
    The term ``accept'' is also used in PCA-triggered restrictions 
related to employee benefit plan deposits.\19\ The FDIC plans to 
address in a future rulemaking when deposits are ``accepted'' for 
purposes of these PCA-related restrictions, both for non-maturity 
deposits, such as transaction accounts and MMDAs, as well as for 
certificates of deposits and other time deposits.
---------------------------------------------------------------------------

    \19\ See 12 U.S.C. 1821(a)(1)(D).
---------------------------------------------------------------------------

    Question 26: Is the FDIC's proposed definition of ``accept'' 
appropriate? Would there be substantial operational difficulties for 
institutions to monitor additions into these existing accounts? Is 
there another interpretation that would be more appropriate and 
consistent with the statute?

F. Additional Supervisory Matters

    The FDIC recognizes that, under this proposal, numerous categories 
of deposits that are currently considered brokered would instead be 
nonbrokered. The FDIC will continue to take such supervisory efforts as 
may be necessary to ensure that banks are operating in a safe and sound 
manner. Nothing in this proposal is intended to limit the FDIC's 
ability to review or take supervisory action with respect to funding-
related matters, including funding concentrations, that may affect the 
safety and soundness of individual banks or the industry generally.

IV. Alternatives

    The FDIC is proposing these comprehensive changes to the brokered 
deposit regulations after considering comments received pursuant to the 
ANPR and evaluating alternative options for modernizing the 
regulations. The FDIC considered a number of alternative approaches, 
including taking more incremental approaches through which more limited 
changes would be made. Additionally, the FDIC considered more narrowly 
revisiting certain existing staff interpretations to identify those 
that should be updated. However, the FDIC ultimately determined that 
the best course of action was to take a fresh, holistic look at the 
regulations and interpretations, and propose a new framework that 
reflects technological and other changes in the banking industry over 
the past three decades and is consistent with the FDI Act.

V. Expected Effects

    As described previously, the proposed rule would amend the FDIC's 
regulations that implement provisions of the Federal Deposit Insurance 
Act regarding brokered deposits. The proposed rule creates a new 
framework

[[Page 7464]]

for analyzing certain provisions of the statutory definition of 
``deposit broker.'' Further, the proposed rule amends two of the ten 
current regulatory exceptions to the definition of ``deposit broker.'' 
The aggregate effect likely would be some amount of deposits currently 
designated as brokered deposits to no longer be so designated.
    As of June 30th, 2019, there were 5,303 insured depository 
institutions holding approximately $18 trillion in assets and $13 
trillion in domestic deposits. Of those domestic deposits, $1.1 
trillion (8.5 percent) are currently classified as brokered deposits. 
Approximately 41 percent (2,154) of FDIC-insured institutions reported 
some positive amount of brokered deposits. These insured institutions 
accounted for the vast majority of banking industry holdings--almost 
$17 trillion (92 percent) of assets and almost $12 trillion (91 
percent) of domestic deposits.
    Traditional brokered CDs would still be defined by the rule as 
brokered and subject to the associated statutory and regulatory 
restrictions. Certain types of deposits, notably deposits placed by 
agents or nominees that satisfy criteria set forth in the proposed 
revisions to the primary purpose exception, would not be considered 
brokered deposits subject to an application process. The amount of 
deposits currently reported as brokered that may be re-designated as 
non-brokered as a result of the rule may be material. However, a 
reliable estimate of this change in designation is not possible with 
the information currently available to the FDIC.
    There are potentially four broad categories of effects of the 
proposed rule: effects on consumers and economic activity; effects 
applicable to potentially any insured institution; effects applicable 
to less than well-capitalized institutions; and effects applicable to 
nonbank entities that may or may not be deemed deposit brokers.

A. Consumers and the Economy

    The proposed rule would amend the FDIC's brokered deposit 
regulations to better reflect recent technological changes and 
innovations. There are benefits to banks and consumers if innovative 
deposit placement arrangements that do not present undue funding risk 
are not classified as brokered deposits. Changes and innovations in 
deposit placement activity are likely to continue, suggesting that 
demand for, and utilization of, certain types of deposit accounts 
currently classified as brokered are likely to grow in the years to 
come. These could include the use of technology services that help 
enable payments and online marketing channels that refer customers to 
certain banks. To the extent that the proposed rule would treat such 
deposits as nonbrokered, it could support ease of access to deposit 
placement services for U.S. consumers. Unbanked or underbanked 
customers, for example, may benefit from increased ease of access to 
deposit placement services because banks would be more willing to 
accept deposits that would be no longer considered brokered under the 
proposal. Additionally, to the extent that the proposed rule supports 
greater utilization of deposits currently classified as brokered 
deposits, but classified as non-brokered under the proposed rule, it 
could increase the funds available to insured depository institutions 
for lending to U.S. consumers. If the proposed rule does result in an 
increase in bank lending, some associated increase in measured U.S. 
economic output would be expected, in part because the imputed value of 
the credit services banks provide is a component of measured GDP.

B. All Insured Institutions

    The proposed rule could immediately affect the 2,154 FDIC-insured 
institutions currently reporting brokered deposits. Going forward, the 
rule could affect all 5,303 FDIC-insured institutions whose decisions 
regarding the types of deposits to accept could be affected.
    The proposed rule would benefit insured institutions and other 
interested parties by providing greater legal clarity regarding the 
treatment of brokered deposits. As result of this increased clarity, 
the proposed rule would reduce the extent of reliance by banks and 
third parties on FDIC Staff Advisory opinions and informal written and 
telephonic inquiries with FDIC staff. This would have two important 
benefits. First, the likelihood of inconsistent outcomes, where some 
institutions may report certain types of deposits as brokered and 
others do not, would be reduced. Second, to the extent the 
classification of deposits as brokered or non-brokered can be clearly 
addressed in regulation, the need for potentially time-consuming staff 
analyses can be minimized.
    The FDIC has heard from a number of insured institutions that they 
perceive a stigma associated with accepting brokered deposits. 
Historical experience has been that higher use of deposits currently 
reported to the FDIC as brokered has been associated with higher 
probability of bank failure and higher deposit insurance fund loss 
rates.\20\ The funding characteristics of brokered deposits, however, 
are non-uniform. For example, brokered CDs are often used by bank 
customers searching for relatively high yields on their insured 
deposits, and as such these deposits may be less stable and more 
subject to deposit interest rate competition. The behavior of other 
types of deposit placement arrangements, such as deposits placed 
through sweeps or that underlie prepaid card programs, may be more 
based on a business relationship than on interest rate competition. 
Given limitations on available data, however, historical studies have 
not been able to differentiate the experience of banks based on the 
different types of deposits accepted. To the extent the proposed rule 
reduces bankers' perception of a stigma associated with certain types 
of deposits, more institutions may be incentivized to accept such 
deposits.
---------------------------------------------------------------------------

    \20\ See FDIC's 2011 Study on Core and Brokered Deposits, July 
8, 2011.
---------------------------------------------------------------------------

    The proposed rule could incentivize the development of banking 
relationships between banks and other firms. The new opportunities 
could spur growth in the third party deposit placement industry, 
particularly for third parties that receive the primary purpose 
exception, potentially resulting in greater access to, or use of, bank 
deposits by a greater variety of customers. It is difficult to 
accurately estimate such potential effects with the information 
currently available to the FDIC, because such effects depend, in part, 
on the future commercial development of such activities.
    FDIC deposit insurance assessments would be affected by the 
proposed changes, potentially affecting any insured institution that 
currently accepts brokered deposits or might do so in the future. Since 
2009, insured institutions with a significant concentration of brokered 
deposits may pay higher quarterly assessments, depending on other 
factors. To the extent that deposits currently defined as brokered 
would no longer be considered brokered deposits under this NPR, a 
bank's assessment may decrease, all else equal. However, as noted 
above, in a future rulemaking the FDIC plans to consider modifications 
to its assessment regulations in light of the proposed rule. Certain 
calculations required under the Liquidity Coverage Ratio rule 
applicable to some large banks could also be affected by the proposed 
rule. Available data do not allow for a reliable estimate of the amount 
of deposits currently designated as brokered that would no longer be 
designated as such under the

[[Page 7465]]

proposed rule, and consequently do not allow for an estimate of effects 
on assessments or the reported Liquidity Coverage Ratio.
    Insured institutions could benefit from the rule by having greater 
certainty and greater access to funding sources that would no longer be 
designated as brokered deposits, thereby easing their liquidity 
planning and reducing the likelihood that a liquidity failure of an 
otherwise viable institution might be precipitated by the brokered 
deposit regulations. Another benefit of the rule could result if 
greater access to funding sources supported insured institutions' 
ability to provide credit. However, these effects are difficult to 
estimate because the decision to receive third party deposits depends 
on the specific financial conditions of each bank, fluctuating market 
conditions for third party deposits, and future management decisions.

C. Less Than Well-Capitalized Institutions

    As discussed previously, 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 less 
brokered deposits--as of June 30, 2019, brokered deposits make up 
approximately 3 percent of domestic deposits held by not well 
capitalized banks, well below the 9 percent held by all IDIs. By 
generally reducing the scope of deposits that are considered brokered, 
the proposed rule would allow not well capitalized banks to increase 
their holdings of deposits that are currently reported as brokered but 
would not be reported as brokered under the proposal. As of June 30, 
2019, there are only 16 adequately capitalized and undercapitalized 
banks.\21\ These banks hold approximately $2.2 billion in assets, $2.0 
billion in domestic deposits, and $61 million in brokered deposits. 
These banks could be directly affected by the proposed rule in that 
they could potentially accept more or different types of deposits 
currently designated as brokered.
---------------------------------------------------------------------------

    \21\ Information based on June 30, 2019 Consolidated Reports of 
Condition and Income. The 16 institutions do not include any 
quantitatively well capitalized institutions that may have been 
administratively classified as less than well capitalized. See 
generally, FDIC--12 CFR 324.403(b)(1)(v); Board of Governors of the 
Federal Reserve System--12 CFR 208.43(b)(1)(v); Office of the 
Comptroller of the Currency--12 CFR 6.4(c)(1)(v).
---------------------------------------------------------------------------

    More broadly speaking with respect to future developments, another 
aspect of brokered deposit restrictions is that, consistent with their 
statutory purpose, they act as a constraint on growth and risk-taking 
by troubled institutions. Conversely, as noted previously, access to 
funding can prevent needless liquidity failures of viable institutions.

D. Entities That May or May Not Be Deposit Brokers

    The proposed revisions to the brokered deposit regulations would 
likely give rise to some activity by non-bank third parties seeking to 
determine whether they are, or are not, deposit brokers under the rule. 
This may include the filing of applications by some parties that seek 
to avail themselves of the primary purpose exception. Ongoing activity 
by these entities to ensure compliance with the revised rule would also 
be expected.
    The FDIC is interested in commenters' views on the effects, costs, 
and benefits of the proposed rule.

VI. Administrative Law Matters

A. Paperwork Reduction Act

    Certain provisions of the proposed rule contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521). In accordance with 
the requirements of the PRA, the FDIC may not conduct or sponsor, and a 
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 collection requirements contained 
in this proposed rule are being submitted to the Office of Management 
and Budget (OMB) for review and approval under section 3507(d) of the 
PRA (44 U.S.C. 3507(d)) and section 1320.11 of the OMB's implementing 
regulations (5 CFR 1320). FDIC is revising its existing information 
collection entitled ``Application for Waiver of Prohibition on 
Acceptance of Brokered Deposits'' (OMB Control Number 3064-0099) and 
will rename the information collection ``Reporting and Recordkeeping 
Requirements for Brokered Deposits.''
Current Actions
    Under the proposed rulemaking:
    [cir] Respondents may file an application with the FDIC for a 
``Primary Purpose Exception'' based on the placement of less than 25% 
of customer assets under management (reporting requirement to obtain or 
retain a benefit);
    [cir] Respondents may file an application with the FDIC for a 
``Primary Purpose Exception'' based on ``Enabling Transactions'' 
(reporting requirement to obtain or retain a benefit); and
    [cir] Respondents may file an application with the FDIC for a 
``Primary Purpose Exception'' based on factors other than ``Enabling 
Transactions'' or the placement of less than 25% of customer assets 
under management (reporting requirement to obtain or retain a benefit).
    The proposed rule would establish recordkeeping and reporting 
requirements for third parties that apply for and maintain a primary 
purpose exception under Sec.  303.243.\22\ The FDIC estimated the 
annual burden associated with the proposal based on the following 
assumptions and according to the methodology described below:
---------------------------------------------------------------------------

    \22\ IDIs can apply for an exception on behalf of a third party, 
and third parties can apply directly for an exception. See Sec.  
303.243(b)(3)(i) and (ii).
---------------------------------------------------------------------------

    [cir] First, the FDIC lacks the data necessary to determine the 
number of third parties which will take advantage of the applications 
relating to exceptions from the definition of ``deposit broker,'' and 
invites comments on how its estimates could be improved. The first type 
of exception, that based on placing less than 25 percent of customer 
assets under management, is expected to be sought largely by broker-
dealers. With few exceptions, broker-dealers must register with the 
Securities and Exchange Commission and be members of FINRA.\23\ There 
were 3,607 FINRA registered broker-dealer firms in 2018.\24\ Some of 
the 3,607 broker-dealers may not engage in activity which meets the 
definition of ``deposit broker,'' while some firms which do engage in 
such activity may not be among the 3,607 FINRA registered broker-
dealers. However, in the absence of a more refined figure, the FDIC 
estimated that 1,203 firms will apply for an exception based on placing 
less than 25 percent of customer assets under management on average 
each year over three years.
---------------------------------------------------------------------------

    \23\ FINRA, https://www.finra.org/investors/learn-to-invest/choosing-investment-professional/brokers.
    \24\ 2019 FINRA Industry Snapshot, pg. 13, https://www.finra.org/sites/default/files/2019%20Industry%20Snapshot.pdf.
---------------------------------------------------------------------------

    [cir] Second, the FDIC expects that the exceptions based on 
enabling transactions and on other business arrangements will be sought 
by firms engaged in deposit brokering. However, the FDIC is unable to 
determine the number of firms which engage in deposit brokering. 
According to Census data, there are 1,105 establishments

[[Page 7466]]

within the industry in which deposit brokers are classified.\25\ Not 
all 1,105 establishments engage in deposit brokering, and some firms 
which engage in deposit brokering may be classified in another 
industry. In the absence of better data, the FDIC estimated that, over 
the three-year period covered by this information collection request, 
an average of 369 firms will apply for an exception based on enabling 
transactions and other business arrangements.
---------------------------------------------------------------------------

    \25\ Deposit brokers are classified according to the 2017 North 
American Industry Classification System as belonging to the 
``Miscellaneous Financial Investment Activities'' industry (NAICS 
code 523999). See U.S. Census Bureau, 2017 County Business Patterns 
Data, available at https://www.census.gov/data/datasets/2017/econ/cbp/2017-cbp.html.
---------------------------------------------------------------------------

    [cir] Third, the FDIC lacks the data necessary to determine the 
number of business lines for which firms may submit applications, and 
in the absence of a more refined estimate, assumed that all respondents 
submit one application.
    [cir] Fourth, the FDIC estimated the amount of time required to 
complete each application type. The most straightforward application 
type is that for which a primary purpose exception to the definition of 
deposit broker is sought based on placing less than 25 percent of 
customer assets under management, by business line, with IDIs. For this 
type of application, three items are required: (1) A description of the 
business line for which the applicant is filing an application, (2) the 
total amount of customer assets under control by the third party for 
that particular business line, and (3) the total amount of deposits 
placed by the third party on behalf of its customers, for that 
particular business line, at all IDIs, exclusive of the amount of 
brokered CDs being placed by that third party. Given the ``bright 
line'' nature of this application type, and the limited number of line 
items required, the FDIC estimated it would take each respondent three 
hours on average to gather the material and submit the request required 
for this application type.
    The second application type is that for which a primary purpose 
exception to the definition of deposit broker is sought based on 
placing funds to enable transactions. Under this application type, the 
applicant would need to submit information, including a copy of the 
form of contracts used with customers and with the IDIs in which the 
third party is placing deposits, showing that all of its customer 
deposits are in transaction accounts, and that no interest, fees, or 
other remuneration is being provided to or paid for the transaction 
accounts. In addition, applicants would need to submit a description of 
the deposit placement arrangement between the entities involved. For 
third parties that pay interest, fees, or provide other remuneration, 
the applicant would need to provide information regarding the volume of 
transactions in customer accounts. In addition, for applications where 
the third party pays interest, fees, or provides other remuneration, 
applicants would also need to provide an explanation of how its 
customers utilize its services for the purpose of making payments and 
not for the receipt of a deposit placement service or deposit 
insurance. Because the second application type should require more time 
to prepare than the first, the FDIC estimated it would take each 
respondent five hours on average the gather the required material and 
submit the application.
    The third application type is for a primary purpose exception where 
the business arrangement is not covered by the other two types 
described above. This third type requires the items enumerated in this 
proposal, and due to the number of items requested, the FDIC estimates 
it would take each respondent 10 hours on average to gather the 
material required for this application type and submit the application.
    [cir] Fifth, each application type would have associated quarterly 
(ongoing) reporting requirements, which are to be spelled out by the 
FDIC in its written approval of the application. For the first two 
application types, the FDIC estimates it would take each respondent an 
average of 30 minutes per quarter to gather the information and submit 
the report for an annual average of 2 burden hours. In FDIC assumes 
that initial quarterly report may take longer to prepare, but once 
reporting and recordkeeping systems are in place, the FDIC believes an 
average of 30 minutes per quarter is a reasonable estimate for this. 
The third application type, due to its greater number of required 
items, is estimated to take each respondent an average of one hour per 
quarter to gather the information and submit the report for an annual 
average of 4 burden hours.
    [cir] In addition, the FDIC revised its estimates for the 
information collection ``Application for Waiver of Prohibition on 
Acceptance of Brokered Deposits.'' Based on consultations with subject 
matter experts, the FDIC estimates nine IDIs will file this application 
each year, on average. Each IDI applicant will spend six hours, on 
average, to file. Thus, the FDIC estimates the average annual burden at 
54 hours.
    [cir] Based on the above assumptions and methodology, the FDIC 
estimates the proposed rule imposes new annual reporting burden of 
22,988 hours, or approximately 15 hours per deposit broker and broker-
dealer.
    [cir] Finally, to estimate the annual dollar cost of the total 
estimated annual hourly burdens, the FDIC used the occupational 
breakdown associated with the Application for Waiver of Prohibition on 
Acceptance of Brokered Deposits for the new information collection 
requirements contained in the proposed rule. FDIC assumes that all of 
the 23,042 estimated burden hours are broken down into hours worked by 
managers and executives (5 percent), lawyers (5 percent), compliance 
officers (10 percent), IT specialists (30 percent), financial analysts 
(40 percent), and clerical staff (10 percent), so that 100 percent of 
the hours are allocated to an occupation.
    The FDIC then used the 75th percentile wage estimates for each 
occupation, based on the industry of the expected applicant, from the 
Bureau of Labor Statistics, and adjusted them for inflation and to 
account for the value of non-wage benefits, to produce an annual labor 
cost associated with the hours estimated above.\26\ This resulted in an 
estimated weighted average hourly wage of $106.11 for applications 
relating to exceptions from the definition of ``deposit broker,'' and 
$83.88 for the Application for Waiver of Prohibition on Acceptance of 
Brokered Deposits. Based on the inflation adjusted wages, and 
accounting for non-wage benefits,

[[Page 7467]]

the FDIC estimates that the average annual average reporting cost 
associated with the proposal is approximately $2.4 million, or 
approximately $1,545.70 per respondent.
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    \26\ Specifically, for the applications relating to exceptions 
from the definition of ``deposit broker,'' the FDIC used the wage 
estimates from the Bureau of Labor Statistics (BLS) ``National 
Industry-Specific Occupational Employment and Wage Estimates: 
Securities, Commodity Contracts, and Other Financial Investments and 
Related Activities Sector'' (May 2018), while for the Application 
for Waiver of Prohibition on Acceptance of Brokered Deposits, the 
FDIC used the wage estimates from the BLS ``National Industry-
Specific Occupational Employment and Wage Estimates: Depository 
Credit Intermediation Sector'' (May 2018). Other BLS data used were 
the Employer Cost of Employee Compensation data (June 2019), and the 
Consumer Price Index (June 2019). Hourly wage estimates at the 75th 
percentile wage were used, except when the estimate was greater than 
$100, in which case $100 per hour was used, as the BLS does not 
report hourly wages in excess of $100. The 75th percentile wage 
information reported by the BLS in the Specific Occupational 
Employment and Wage Estimates does not include health benefits and 
other non-monetary benefits. According to the June 2019 Employer 
Cost of Employee Compensation data, compensation rates for health 
and other benefits are 33.8 percent of total compensation. 
Additionally, the wage has been adjusted for inflation according to 
BLS data on the Consumer Price Index for Urban Consumers (CPI-U), so 
that it is contemporaneous with the non-wage compensation statistic. 
The inflation rate was 1.86 percent between May 2018 and June 2019.
---------------------------------------------------------------------------

    Burden Estimate:

                                                                Summary of Annual Burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                          Estimated                            Total
  Information collection (IC)                         Obligation  to      Estimated       Estimated       time per       Frequency  of       estimated
          description             Type of  burden        respond          number of       number of       response          response       annual burden
                                                                         respondents      responses        (hours)                            (hours)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Initial Implementation:
    Application for Primary     Reporting.........  Obtain or Retain            1,203               1               3  On Occasion......           3,609
     Purpose Exception Based                         a Benefit.
     on the Placement of Less
     Than 25 Percent of
     Customer Assets Under
     Management.
    Application for Primary     Reporting.........  Obtain or Retain              369               1               5  On Occasion......           1,845
     Purpose Exception Based                         a Benefit.
     on Enabling Transactions.
    Application for Primary     Reporting.........  Obtain or Retain              369               1              10  On Occasion......           3,690
     Purpose Exception Not                           a Benefit.
     Based on Enabling
     Transactions or Placement
     of Less Than 25 Percent
     of Customer Assets Under
     Management.
Ongoing:
    Reporting for Primary       Reporting.........  Obtain or Retain            3,607               4             0.5  Quarterly........           7,214
     Purpose Exception Based                         a Benefit.
     on the Placement of Less
     Than 25 Percent of
     Customer Assets Under
     Management.
    Reporting for Primary       Reporting.........  Obtain or Retain            1,105               4             0.5  Quarterly........           2,210
     Purpose Exception Based                         a Benefit.
     on Enabling Transactions.
    Reporting for Primary       Reporting.........  Obtain or Retain            1,105               4               1  Quarterly........           4,420
     Purpose Exception Not                           a Benefit.
     Based on Enabling
     Transactions or Placement
     of Less Than 25 Percent
     of Customer Assets Under
     Management.
    Application for Waiver of   Reporting.........  Obtain or Retain                9               1               6  On Occasion......              54
     Prohibition on Acceptance                       a Benefit.
     of Brokered Deposits.
                                                                      ----------------------------------------------------------------------------------
        Total Estimated Annual  ..................  .................  ..............  ..............  ..............  .................          23,042
         Burden Hours.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: The estimated number of respondents in the Initial Implementation section is an annual average calculated over three years.

    Comments are invited on:
    a. Whether the collections of information are necessary for the 
proper performance of the agencies' functions, including whether the 
information has practical utility;
    b. The accuracy or the estimate of the burden of the information 
collections, including the validity of the methodology and assumptions 
used;
    c. Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    d. Ways to minimize the burden of the information collections on 
respondents, including through the use of automated collection 
techniques or other forms of information technology; and
    e. Estimates of capital or startup costs and costs of operation, 
maintenance, and purchase of services to provide information.
    All comments will become a matter of public record. Comments on 
aspects of this notice that may affect reporting, recordkeeping, or 
disclosure requirements and burden estimates should be sent to the 
addresses listed in the ADDRESSES section of this document. A copy of 
the comments may also be submitted to the OMB desk officer by mail to 
U.S. Office of Management and Budget, 725 17th Street NW, #10235, 
Washington, DC 20503; facsimile to (202) 395-6974; or email to 
[email protected], Attention, Federal Banking Agency Desk 
Officer.

B. Solicitation of Comments on Use of Plain Language

    Section 722 of the Gramm-Leach Bliley Act,\27\ requires the Federal 
banking agencies to use plain language in all proposed and final rules 
published after January 1, 2000. The FDIC invites your comments on how 
to make this revised proposal easier to understand. For example:
---------------------------------------------------------------------------

    \27\ Public Law 106-102, 113 Stat. 1338, 1471 (Nov. 12, 1999).
---------------------------------------------------------------------------

    [cir] Has the FDIC organized the material to suit your needs? If 
not, how could the material be better organized?
    [cir] Are the requirements in the proposed regulation clearly 
stated? If not, how could the regulation be stated more clearly?
    [cir] Does the proposed regulation contain language or jargon that 
is unclear? If so, which language requires clarification?
    [cir] Would a different format (grouping and order of sections, use 
of headings, paragraphing) make the regulation easier to understand?

C. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) generally requires that, in 
connection with a proposed rule, an agency prepare and make available 
for public comment an initial regulatory flexibility analysis 
describing the impact of the proposal on small entities.\28\ A 
regulatory flexibility analysis is not required, however, if the agency 
certifies that the rule will not have a significant economic impact on 
a substantial number of small entities. The Small Business 
Administration (SBA) has defined ``small entities'' to include banking 
organizations with total assets less than or equal to $600 million.\29\ 
Generally, the FDIC considers

[[Page 7468]]

a significant effect to be a quantified effect in excess of 5 percent 
of total annual salaries and benefits per institution, or 2.5 percent 
of total non-interest expenses. The FDIC believes that effects in 
excess of these thresholds typically represent significant effects for 
FDIC-insured institutions. The FDIC does not believe that the proposed 
rule, if adopted, will have a significant economic effect on a 
substantial number of small entities. However, some expected effects of 
the proposed rule are difficult to assess or accurately quantify given 
current information, therefore the FDIC has included an Initial 
Regulatory Flexibility Act Analysis in this section.
---------------------------------------------------------------------------

    \28\ 5 U.S.C. 601 et seq.
    \29\ The SBA defines a small banking organization as having $600 
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 84 FR 34261, effective August 19, 2019). 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 a covered entity's affiliated and 
acquired assets, averaged over the preceding four quarters, to 
determine whether the covered entity is ``small'' for the purposes 
of RFA.
---------------------------------------------------------------------------

Reasons Why This Action Is Being Considered
    As previously discussed in Section II. Background, the agencies 
issued an ANPR in 2018 to obtain input from the public on its brokered 
deposit and interest rate regulations in light of significant changes 
in technology, business models, the economic environment, and products 
since the agency's regulations relating to brokered deposits were 
adopted. Generally speaking, commenters offered information and 
expressed options that suggested the FDIC needed to clarify and update 
its historical interpretation of the ``deposit broker'' definition to 
better align with current market practices and risks associated with 
brokered deposits.
Policy Objectives
    As previously discussed in Section I. Policy Objectives, the FDIC 
is proposing amendments to its regulations relating to brokered 
deposits in order to modernize those regulations to reflect recent 
technological changes and innovations that have occurred. Additionally, 
the FDIC seeks to continue to promote safe and sound practices by FDIC-
insured depository institutions.
Legal Basis
    The FDIC is proposing this rule under authorities granted by 
Section 29 of the Federal Deposit Insurance Act (FDI Act). The law 
restricts troubled institutions (i.e. those that are not well 
capitalized) from (1) accepting deposits by or through a deposit broker 
without a waiver and (2) soliciting deposits by offering rates of 
interest on deposits that were significantly higher than the prevailing 
rates of interest on deposits offered by other insured depository 
institutions in such depository institution's normal market area. For a 
more detailed discussion of the proposed rule's legal basis please 
refer to Section A. Current Law and Regulation, within Section II. 
Background.
Description of the Rule
    A person meets the ``deposit broker'' definition under Section 29 
of the FDI Act if it is engaged in the business of placing deposits, or 
facilitating the placement of deposits, of third parties with insured 
depository institutions or the business of placing deposits with 
insured depository institutions for the purpose of selling interests in 
those deposits to third parties. An agent or trustee meets the 
``deposit broker'' definition when establishing a deposit account to 
facilitate a business arrangement with an insured depository 
institution to use the proceeds of the account to fund a prearranged 
loan. Additionally, Section 29 provides nine statutory exceptions to 
the definition of deposit broker and, as noted earlier, the FDIC added 
one regulatory exception to the definition. The FDIC is proposing a new 
framework for analyzing certain provisions of the statutory definition. 
Among other things, through this rulemaking, the FDIC proposes amending 
the IDI exception and the primary purpose exception. For a more 
detailed description of the proposed rule please refer to Section III. 
Discussion of the Proposed Rule.
Small Entities Affected
    The FDIC insures 5,303 depository institutions, of which 3,947 are 
defined as small institutions by the terms of the RFA.\30\ 
Additionally, of those 3,947 small, FDIC-insured institutions, 1,297 
currently report holding some volume of brokered deposits. Further, of 
those 3,947 small, FDIC-insured institutions, 3,931 are currently 
classified as well capitalized, while 16 are less than well capitalized 
based on capital ratios reported in their Call Reports.\31\
---------------------------------------------------------------------------

    \30\ Call Report, June 30, 2019. Nine insured domestic branches 
of foreign banks are excluded from the count of FDIC-insured 
depository institutions. These branches of foreign banks are not 
``small entities'' for purposes of the RFA.
    \31\ Information based on June 30, 2019 Consolidated Reports of 
Condition and Income. The 16 institutions do not include any 
quantitatively well capitalized institutions that may have been 
administratively classified as less than well capitalized. See 
generally, FDIC--12 CFR 324.403(b)(1)(v); Board of Governors of the 
Federal Reserve System--12 CFR 208.43(b)(1)(v); Office of the 
Comptroller of the Currency--12 CFR 6.4(c)(1)(v).
---------------------------------------------------------------------------

Expected Effects
    There are potentially three broad categories of effects of the 
proposed rule on small, FDIC-insured institutions: Effects applicable 
to potentially any small, insured institution; effects applicable to 
small, less than well-capitalized institutions; and effects applicable 
to nonbank subsidiaries of small, FDIC-insured institutions that may or 
may not be deemed deposit brokers.
All Small, FDIC-Insured Institutions
    The proposed rule could immediately affect the 1,297 small, FDIC-
insured institutions currently reporting brokered deposits. Going 
forward, the rule could affect all 3,947 small, FDIC-insured 
institutions whose decisions regarding the types of deposits to accept 
could be affected.
    The proposed rule would benefit insured institutions and other 
interested parties by providing greater legal clarity regarding the 
treatment of brokered deposits. The FDIC believes that as result of 
this increased clarity, the proposed rule would reduce the extent of 
reliance by banks and third parties on FDIC Staff Advisory Opinions and 
informal written and telephonic inquiries with FDIC staff. This would 
have two important benefits. First, the likelihood of inconsistent 
outcomes, where some institutions may report certain types of deposits 
as brokered and others do not, would be reduced. Second, to the extent 
the classification of deposits as brokered or non-brokered can be 
clearly addressed in regulation, the need for potentially time-
consuming analyses can be minimized.
    The FDIC has heard from a number of insured institutions that they 
perceive a stigma associated with accepting brokered deposits. 
Historical experience has been that higher use of deposits currently 
reported to the FDIC as brokered has been associated with higher 
probability of bank failure and higher deposit insurance fund loss 
rates.\32\ The funding characteristics of brokered deposits, however, 
are non-uniform. For example, brokered CDs are often used by bank 
customers searching for relatively high yields on their insured 
deposits, and as such these deposits may be less stable and more 
subject to deposit interest rate competition. The behavior of deposits 
placed through sweeps or that underlie prepaid card programs may be 
more based on a business relationship than on

[[Page 7469]]

interest rate competition. Given limitations on available data, 
however, historical studies have not been able to differentiate the 
experience of banks based on the different types of deposits accepted. 
To the extent the proposed rule reduces bankers' perception of a stigma 
associated with certain types of deposits, more institutions may be 
incentivized to accept such deposits.
---------------------------------------------------------------------------

    \32\ See FDIC's 2011 Study on Core and Brokered Deposits, July 
8, 2011.
---------------------------------------------------------------------------

    The proposed rule could incentivize the development of banking 
relationships between small, FDIC-insured institutions and other firms. 
The new opportunities could spur growth in the third party deposit 
placement industry, potentially resulting in greater access to, or use 
of, bank deposits by a greater variety of customers. Further, such 
growth could be of benefit to small, FDIC-insured institutions allowing 
them to compete against large financial institutions that are utilizing 
internet based deposit gathering methods across the country. It is 
difficult to accurately estimate such potential effects with the 
information currently available to the FDIC, because such effects 
depend, in part, on the future commercial development of such 
activities.
    FDIC deposit insurance assessments would be affected by the 
proposed changes to the definition of deposit broker, potentially 
affecting any insured institution that currently accepts brokered 
deposits or might do so in the future. Since 2009, significant 
concentrations of brokered deposits can increase an institution's 
quarterly assessments, depending on other factors. To the extent that 
certain deposits would no longer be considered brokered deposits under 
this NPR, a bank's assessment may decrease, all else equal. However, as 
noted above, in a future rulemaking the FDIC plans to consider 
modifications to its assessment regulations in light of this rule.
    Small, FDIC-insured institutions could benefit from the rule by 
having greater certainty and greater access to funding sources that 
would no longer be designated as brokered deposits, thereby easing 
their liquidity planning and reducing the likelihood that a liquidity 
failure of an otherwise viable institution might be precipitated by the 
brokered deposit regulations. Another benefit of the rule could result 
if greater access to funding sources supported small FDIC-insured 
institutions' ability to provide credit. However, these effects are 
difficult to estimate because the decision to receive third party 
deposits depends on the specific financial conditions of each bank, 
fluctuating market conditions for third party deposits, and future 
management decisions.
    The proposed rule would establish recordkeeping and reporting 
requirements for IDIs and other nonbank third parties that apply for 
and maintain a primary purpose exception under Sec.  303.243.\33\ As 
noted previously, however, the FDIC anticipates that nonbank third 
parties are likely to apply on their own behalf, given that the 
information required to complete an application will be in possession 
of the nonbank third party (rather than the bank). The FDIC views the 
potential burden on small FDIC-insured institutions under the proposed 
rule as minimal.
---------------------------------------------------------------------------

    \33\ IDIs can apply for an exception on behalf of a third party, 
and third parties can apply directly for an exception. See Sec.  
303.243(b)(3)(i) and (ii).
---------------------------------------------------------------------------

Less Than Well-Capitalized Institutions
    As discussed previously, the acceptance of brokered deposits is 
subject to statutory and regulatory restrictions for those banks that 
are less than 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 less brokered deposits--as of June 30, 2019, brokered deposits 
make up approximately 3 percent of domestic deposits held by less than 
well capitalized banks, well below the 9 percent held by all IDIs. By 
generally reducing the scope of deposits that are considered brokered, 
the proposed rule would allow less than well capitalized banks to 
increase their holdings of deposits that are currently reported as 
brokered but would not be reported as brokered under the proposal. As 
of June 30, 2019, there are only 16 less than well capitalized small, 
FDIC-insured institutions based on Call report information. These banks 
hold approximately $2.2 billion in assets, $2.0 billion in domestic 
deposits, and $61 million in brokered deposits. These banks could be 
directly affected by the proposed rule in that they could potentially 
accept more or different types of deposits currently designated as 
brokered.
    More broadly speaking with respect to future developments, another 
aspect of brokered deposit restrictions is that, consistent with their 
statutory purpose, they act as a constraint on growth and risk-taking 
by troubled institutions. Conversely, as noted previously, access to 
funding can prevent needless liquidity failures of viable institutions.
Nonbank Subsidiaries of Small, FDIC-insured Institutions That May or 
May Not Be Deposit Brokers
    The proposed revisions to the brokered deposit regulations could 
have effects on some nonbank subsidiaries of small, FDIC-insured 
institutions. For example, wholly owned subsidiaries of small, FDIC-
insured institutions that may currently meet the deposit broker 
definition would no longer be a deposit broker under the proposed rule 
if they meet the parameters of the rule. Additionally, some nonbank 
subsidiaries of small, FDIC-insured institutions could seek to 
determine whether they meet the primary purpose exception, as defined 
under the IDI exception (as proposed). This may include the filing of 
applications by some parties that seek to avail themselves of the 
primary purpose exception. Ongoing activity by these entities to ensure 
that they continue to meet the relevant exceptions would also be 
expected.
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 section, and in particular, whether the 
proposed rule would have any significant effects on small entities that 
the FDIC has not identified.

D. Riegle Community Development and Regulatory Improvement Act

    Section 302 of the Riegle Community Development and Regulatory 
Improvement Act of 1994 (RCDRIA), 12 U.S.C. 4701, requires that each 
Federal banking agency, in determining the effective date and 
administrative compliance requirements for new regulations that impose 
additional reporting, disclosure, or other requirements on insured 
depository institutions, consider, consistent with principles of safety 
and soundness and the public interest, any administrative burdens that 
such regulations would place on depository institutions, including 
small depository institutions, and customers of depository 
institutions, as well as the benefits of such regulations.\34\ In 
addition, new regulations that impose additional reporting, 
disclosures, or other new requirements on insured depository 
institutions generally must take effect on the first day of a calendar 
quarter that begins on or after the date on which

[[Page 7470]]

the regulations are published in final form.
---------------------------------------------------------------------------

    \34\ 12 U.S.C. 4802.
---------------------------------------------------------------------------

    The FDIC invites comments that further will inform the FDIC's 
consideration of RCDRIA.

VII. Request for Comments

    The FDIC invites comment from all members of the public regarding 
all aspects of the proposal. This request for comment is limited to 
this proposal. The FDIC will carefully consider all comments that 
relate to the proposal.

List of Subjects

12 CFR Part 303

    Administrative practice and procedure; Bank deposit insurance; 
Banks, banking; Reporting and recordkeeping requirements; Savings 
associations.

12 CFR Part 337

    Banks, banking; Reports and recordkeeping requirements; Savings 
associations; Securities.

Federal Deposit Insurance Corporation

12 CFR Chapter III

Authority and Issuance

    For the reasons stated in the preamble, the FDIC proposes to amend 
parts 303 and 337 of chapter III of Title 12, Code of Federal 
Regulations as follows:

PART 303--FILING PROCEDURES

0
1. The authority citation for part 303 continues to read as follows:

    Authority: 12 U.S.C. 378, 1464, 1813, 1815, 1817, 1818, 1819(a) 
(Seventh and Tenth), 1820, 1823, 1828, 1831a, 1831e, 1831o, 1831p-1, 
1831w, 1835a, 1843(l), 3104, 3105, 3108, 3207, 5414, 5415 and 15 
U.S.C. 1601-1607.

0
2. Revise Sec.  303.243 to read as follows:


Sec.  303.243   Brokered deposits.

    (a) Brokered deposit waivers--(1) Scope. Pursuant to section 29 of 
the FDI Act (12 U.S.C. 1831f) and part 337 of this chapter, an 
adequately capitalized insured depository institution may not accept, 
renew or roll over any brokered deposits unless it has obtained a 
waiver from the FDIC. A well-capitalized insured depository institution 
may accept brokered deposits without a waiver, and an undercapitalized 
insured depository institution may not accept, renew or roll over any 
brokered deposits under any circumstances. This section contains the 
procedures to be followed to file with the FDIC for a brokered deposit 
waiver. The FDIC will provide notice to the depository institution's 
appropriate federal banking agency and any state regulatory agency, as 
appropriate, that a request for a waiver has been filed and will 
consult with such agency or agencies, prior to taking action on the 
institution's request for a waiver. Prior notice and/or consultation 
shall not be required in any particular case if the FDIC determines 
that the circumstances require it to take action without giving such 
notice and opportunity for consultation.
    (2) Where to file. Applicants shall submit a letter application to 
the appropriate FDIC office.
    (3) Content of filing. The application shall contain the following:
    (i) The time period for which the waiver is requested;
    (ii) A statement of the policy governing the use of brokered 
deposits in the institution's overall funding and liquidity management 
program;
    (iii) The volume, rates and maturities of the brokered deposits 
held currently and anticipated during the waiver period sought, 
including any internal limits placed on the terms, solicitation and use 
of brokered deposits;
    (iv) How brokered deposits are costed and compared to other funding 
alternatives and how they are used in the institution's lending and 
investment activities, including a detailed discussion of asset growth 
plans;
    (v) Procedures and practices used to solicit brokered deposits, 
including an identification of the principal sources of such deposits;
    (vi) Management systems overseeing the solicitation, acceptance and 
use of brokered deposits;
    (vii) A recent consolidated financial statement with balance sheet 
and income statements; and
    (viii) The reasons the institution believes its acceptance, renewal 
or rollover of brokered deposits would pose no undue risk.
    (4) Additional information. The FDIC may request additional 
information at any time during processing of the application.
    (5) Expedited processing for eligible depository institutions. An 
application filed under this section by an eligible depository 
institution as defined in this paragraph will be acknowledged in 
writing by the FDIC and will receive expedited processing, unless the 
applicant is notified in writing to the contrary and provided with the 
basis for that decision. For the purpose of this section, an applicant 
will be deemed an eligible depository institution if it satisfies all 
of the criteria contained in Sec.  303.2(r) except that the applicant 
may be adequately capitalized rather than well-capitalized. The FDIC 
may remove an application from expedited processing for any of the 
reasons set forth in Sec.  303.11(c)(2). Absent such removal, an 
application processed under expedited procedures will be deemed 
approved 21 days after the FDIC's receipt of a substantially complete 
application.
    (6) Standard processing. For those filings which are not processed 
pursuant to the expedited procedures, the FDIC will provide the 
applicant with written notification of the final action as soon as the 
decision is rendered.
    (7) Conditions for approval. A waiver issued pursuant to this 
section shall:
    (i) Be for a fixed period, generally no longer than two years, but 
may be extended upon refiling; and
    (ii) May be revoked by the FDIC at any time by written notice to 
the institution.
    (b) Application for primary purpose exception--(1) Scope. Section 
29 of the FDI Act (12 U.S.C. 1831f) provides that an agent or nominee 
is excluded from the definition of deposit broker if its primary 
purpose is not the placement of funds with depository institutions. 
This paragraph (b) sets forth the application procedures for insured 
depository institutions and agents or nominees that seek the FDIC's 
determination that it, or a nonbank agent or nominee on whose behalf an 
insured depository institution is submitting an application, is 
excluded from the definition of deposit broker pursuant to the primary 
purpose exception.
    (2) Definitions. For purposes of this paragraph (b):
    (i) Third party means an agent or nominee that is applying to be 
excluded from the definition of deposit broker pursuant to the primary 
purpose exception.
    (ii) Applicant means a third party as defined in paragraph 
(b)(2)(i) of this section, or an insured depository institution that is 
applying on behalf of a third party for that third party to be excluded 
from the definition of deposit broker pursuant to the primary purpose 
exception.
    (iii) Appropriate FDIC office means the office designated by the 
appropriate regional director or designee.
    (iv) Appropriate Regional Director means the Director of the FDIC 
Region in which the applicant is located.
    (v) Brokered CD means a deposit placement arrangement in which 
certificates of deposit are issued in wholesale amounts by a depository 
institution, subdivided by a non-bank entity or a depository 
institution, and then sold by a nonbank entity or depository 
institution to investors, or a similar deposit placement arrangement

[[Page 7471]]

that the FDIC determines is arranged for a similar purpose.
    (3) Filing procedures. (i) A third party may submit a written 
application to the appropriate FDIC office seeking a primary purpose 
exception.
    (ii) An insured depository institution may submit a written 
application, on behalf of a nonbank third party, to the appropriate 
FDIC office of the insured depository institution, seeking a 
determination that the primary purpose exception applies to the nonbank 
third party.
    (4) Content for filing. (i) Applications that seek the primary 
purpose exception for third parties based on the placement of less than 
25 percent of the total amount of customer assets under management by 
the third party, for a particular business line, at depository 
institutions shall contain the following information:
    (A) A description of the particular business line;
    (B) Total amount of customer assets under management by the third 
party for that particular business line;
    (C) Total amount of deposits placed by the third party on behalf of 
its customers, for that particular business line, at all depository 
institutions, but exclusive of the amount of brokered CDs being placed 
by that third party;
    (D) A description of the deposit placement arrangements with all 
entities involved;
    (E) Any other information the applicant deems relevant; and
    (F) Any other information that the FDIC requires to initiate its 
review and render the application complete.
    (ii) Applications that seek the primary purpose exception for third 
parties based on the placement of customer funds, with respect to a 
particular business line, at insured depository institutions to enable 
its customers to make transactions shall contain the following 
information:
    (A) Contracts with customers evidencing the amount of interest, 
fees, or other remuneration, accrued for all customer accounts, and 
that all customer deposits are in transaction accounts;
    (B) For third parties, or insured depository institutions that pay 
interest, fees, or provide other remuneration:
    (1) The average volume of transactions for all customer accounts; 
and
    (2) An explanation of how its customers utilize its services for 
the purpose of making payments and not for the receipt of a deposit 
placement service or deposit insurance;
    (C) A description of the deposit placement arrangements with all 
entities involved;
    (D) Any other information the applicant deems relevant; and
    (E) Any other information that the FDIC requires to initiate its 
review and render the application complete.
    (iii) Applications that seek the primary purpose exception for 
third parties, other than applications under paragraphs (b)(4)(i) and 
(ii) of this section, with respect to a particular business line, must 
include, to the extent applicable:
    (A) A description of the deposit placement arrangements with all 
entities involved;
    (B) A description of the particular business line;
    (C) A description of the primary purpose of the particular business 
line;
    (D) The total amount of customer assets under management by the 
third party;
    (E) The total amount of deposits placed by the third party at all 
insured depository institutions, including the amounts placed with the 
applicant, if the applicant is an insured depository institution. This 
includes the total amount of term deposits and transactional deposits 
placed by the third party, but should be exclusive of the amount of 
brokered CDs being placed by that third party;
    (F) Revenue generated from the third party's activities related to 
the placement, or facilitating the placement, of deposits;
    (G) Revenue generated from the third party's activities not related 
to the placement, or facilitating the placement, of deposits;
    (H) A description of the marketing activities provided by the third 
party;
    (I) The reasons the third party meets the primary purpose 
exception;
    (J) Any other information the applicant deems relevant; and
    (K) Any other information that the FDIC requires to initiate its 
review and render the application complete.
    (5) Brokered CD placements not eligible for primary purpose 
exception. An agent or nominees' placement of brokered certificates of 
deposit as described in 12 U.S.C. 1831f(g)(1)(A) shall be considered a 
discrete and independent business line from other deposit placement 
businesses in which the agent or nominee may be engaged.
    (6) Additional information. The FDIC may request additional 
information from the applicant at any time during processing of the 
application.
    (7) Timing. (i) An applicant that submits a complete application 
seeking the primary purpose exception will receive a written 
determination by the FDIC within 120 days of receipt of a complete 
application.
    (ii) The FDIC may extend the 120-day timeframe, if necessary, to 
complete its review of a complete application, with proper notice to 
the applicant.
    (8) Approvals. The FDIC will approve an application -
    (i) Submitted under paragraph (b)(4)(i) of this section, if the 
total amount of customer funds placed at insured depository 
institutions by the third party is less than 25 percent of total 
customer assets under management by the third party, for purposes of a 
particular business line.
    (ii) Submitted under paragraph (b)(4)(ii), if no interest, fees, or 
other remuneration, is being provided or paid on any customer accounts 
by the third party.
    (iii) Submitted under paragraph (b)(4)(ii) in which interest, fees, 
or other remuneration is being provided or paid on any customer 
accounts by the third party, if the applicant demonstrates that the 
primary purpose of the particular business line under which customer 
accounts are offered is to enable its customers to make transactions.
    (iv) Submitted under paragraph (b)(4)(iii), if the applicant 
demonstrates that, with respect to the particular business line under 
which the third party places or facilitates the placement of deposits, 
the primary purpose of the third party, for the particular business 
line, is a purpose other than the placement or facilitation of 
placement of deposits.
    (9) Ongoing reporting--(i) General. The FDIC will describe any 
reporting requirements as part of its written approval for a primary 
purpose exception.
    (ii) Reporting. Third parties, or insured depository institutions 
that apply on behalf of the third party, that receive a written 
approval for the primary purpose exception, shall provide reporting to 
the appropriate FDIC office and, in the case of an insured depository 
institution, to its primary federal regulator.
    (10) Modification and withdrawal of a previously granted approval. 
At any time after approval of an application for the primary purpose 
exception, the FDIC may, with written notice and adequate 
justification:
    (i) Require additional information from an applicant for which the 
FDIC has approved the primary purpose exception to ensure that the 
approval is still appropriate, or for purposes of verifying the 
accuracy and correctness of the information provided to an insured 
depository institution or

[[Page 7472]]

submitted to the FDIC as part of the application under this section;
    (ii) Require the applicant for which the FDIC has approved the 
primary purpose exception to reapply for approval;
    (iii) Impose additional conditions on an approval; or
    (iv) Withdraw an approval.

PART 337--UNSAFE AND UNSOUND BANKING PRACTICES

0
3. The authority for part 337 continues to read as follows:

    Authority:  12 U.S.C. 375a(4), 375b, 1463(a)(1),1816, 1818(a), 
1818(b), 1819, 1820(d), 1828(j)(2), 1831, 1831f, 5412.

0
4. Amend Sec.  337.6 as follows:
0
a. Revise paragraph (a)(5)(i);
0
b. Redesignate paragraphs (a)(5)(ii) and (iii) as paragrapahs 
(a)(5)(iii) and (iv), respectively;
0
c. Add a new paragraph (a)(5)(ii);
0
d. Revise newly redesignated paragraphs (a)(5)(iii)(A) and (I);
    The revision and addition read as follows:


Sec.  337.6   Brokered deposits.

    (a) * * *
    (5) * * *
    (i) The term deposit broker means:
    (A) Any person engaged in the business of placing deposits of third 
parties with insured depository institutions;
    (B) Any person engaged in the business of facilitating the 
placement of deposits of third parties with insured depository 
institutions;
    (C) Any person engaged in the business of placing deposits with 
insured depository institutions for the purpose of selling interests in 
those deposits to third parties; and
    (D) An agent or trustee who establishes a deposit account to 
facilitate a business arrangement with an insured depository 
institution to use the proceeds of the account to fund a prearranged 
loan.
    (ii) Engaged in the business of facilitating the placement of 
deposits. A person is engaged in the business of facilitating the 
placement of deposits of third parties with insured depository 
institutions, by, while engaged in business, engaging in one or more of 
the following activities:
    (A) The person directly or indirectly shares any third party 
information with the insured depository institution;
    (B) The person has legal authority, contractual or otherwise, to 
close the account or move the third party's funds to another insured 
depository institution;
    (C) The person provides assistance or is involved in setting rates, 
fees, terms, or conditions for the deposit account; or
    (D) the person is acting, directly or indirectly, with respect to 
the placement of deposits, as an intermediary between a third party 
that is placing deposits on behalf of a depositor and an insured 
depository institution, other than in a purely administrative capacity.
    (iii) * * *
    (A) An insured depository institution, with respect to funds placed 
with that depository institution;
    (1) A wholly owned operating subsidiary is considered a part of its 
parent insured depository institution, for purposes of this section, if 
it meets the following criteria:
    (i) The parent insured depository institution owns 100 percent of 
the subsidiary's outstanding stock;
    (ii) The wholly owned subsidiary places deposits of retail 
customers exclusively with its parent insured depository institution; 
and
    (iii) The wholly owned subsidiary engages only in activities 
permissible for the parent insured depository institution.
* * * * *
    (I) An agent or nominee whose primary purpose is not the placement 
of funds with depository institutions if and to the extent, the FDIC 
determines that the agent or nominee meets this exception under the 
application process in 12 CFR 303.243(b); or
* * * * *

    Federal Deposit Insurance Corporation. By order of the Board of 
Directors.

    Dated at Washington, DC, on December 12, 2019.
Annmarie H. Boyd,
Assistant Executive Secretary.
[FR Doc. 2019-28275 Filed 2-7-20; 8:45 am]
 BILLING CODE 6714-01-P