[Federal Register Volume 86, Number 13 (Friday, January 22, 2021)]
[Rules and Regulations]
[Pages 6742-6792]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28196]



[[Page 6741]]

Vol. 86

Friday,

No. 13

January 22, 2021

Part II





Federal Deposit Insurance Corporation





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12 CFR Parts 303 and 337





Unsafe and Unsound Banking Practices: Brokered Deposits and Interest 
Rate Restrictions; Final Rule

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

[[Page 6742]]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Parts 303 and 337

RIN 3064-AE94; 3064-AF02


Unsafe and Unsound Banking Practices: Brokered Deposits and 
Interest Rate Restrictions

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Final rule.

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SUMMARY: The FDIC is finalizing revisions to its regulations relating 
to the brokered deposits and interest rate restrictions that apply to 
less than well capitalized insured depository institutions. For 
brokered deposits, the final rule establishes a new framework for 
analyzing certain provisions of the ``deposit broker'' definition, 
including ``facilitating'' and ``primary purpose.'' For the interest 
rate restrictions, the FDIC is amending its methodology for calculating 
the national rate, the national rate cap, and the local market rate 
cap. Further, the FDIC is explaining when nonmaturity deposits are 
accepted and when nonmaturity deposits are solicited for purposes of 
applying the brokered deposits and interest rate restrictions.

DATES: Effective Date: April 1, 2021; with an extended compliance date 
of January 1, 2022, as provided in section I(C)(4).

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

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Brokered Deposits
    A. Policy Objectives
    B. Background
    1. Historical Statutory Framework
    2. Current Regulation
    3. Advance Notice of Proposed Rulemaking
    4. Overview of Notice of Proposed Rulemaking and Comments 
Received
    C. Final Rule and Discussion of Comments
    1. Deposit Broker Definition
    a. Exclusive Deposit Placement Arrangements
    b. Engaged in the Business of Placing Deposits
    c. Engaged in the Business of Facilitating the Placement of 
Deposits
    d. Engaged in the Business of Placing Deposits With Insured 
Depository Institutions for the Purpose of Selling Interests in 
Those Deposits to Third Parties
    2. Exceptions to the ``Deposit Broker'' Definition
    a. Bank Operating Subsidiaries and the IDI Exception
    b. Primary Purpose Exception
    3. Notice and Application Process for the Primary Purpose 
Exception
    a. Notice Requirement
    b. Notice Contents and Reporting Requirement
    c. Overview of the Application Process
    d. Application Contents
    e. Reporting for Approved Applicants
    f. Monitoring for IDIs
    g. Requesting Additional Information, Requiring Re-Application, 
Imposing Additional Conditions, and Withdrawing Approvals
    h. Additional Third Parties
    4. Effective Date and Extended Compliance
    5. Prior FDIC Staff Advisory Opinions
    D. Discussion of Certain Other Deposit Placement Arrangements 
Raised by Commenters
    E. Other Supervisory Matters Related to Brokered Deposits
    F. Alternatives
    G. Expected Effects
II. Interest Rate Restrictions
    A. Policy Objectives
    B. Background
    C. Regulatory Approach
    D. Need for Further Rulemaking
    E. Advance Notice of Proposed Rulemaking and Notice of Proposed 
Rulemaking
    1. National Rate
    2. National Rate Cap
    3. Local Rate Cap
    4. Off-Tenor Maturity Products
    F. Discussion of Comments
    1. Discussion of Public Comment on the National Rate
    2. Discussion of Public Comment on the National Rate Cap
    3. Discussion of Public Comment on Local Rate Cap
    4. Discussion of Other Comments
    G. Final Rule
    1. National Rate
    2. National Rate Cap
    3. Local Market Rate Cap in the Final Rule
    4. Off-Tenor Maturity Products
    H. Alternatives
    I. Expected Effects
III. Treatment of Nonmaturity Deposits
    A. Background
    B. Proposed Rulemakings
    C. Comments
    D. Final Rule
    1. Solicitation of Funds by Offering Rates of Interest
    2. Acceptance of Brokered Deposits
    3. Acceptance of Brokered Deposits Subject to a Waiver Into a 
Nonmaturity Account
    4. Summary of Treatment of Nonmaturity Deposits
IV. Administrative Law Matters
    A. Paperwork Reduction Act
    B. Regulatory Flexibility Act
    C. Riegle Community Development and Regulatory Improvement Act 
of 1994
    D. Congressional Review Act
    E. Use of Plain Language

I. Brokered Deposits

A. Policy Objectives

    Significant technological changes have affected many aspects of the 
banking industry, including the manner in which banks source deposits. 
For many banks, brokered deposits are an important source of funds, and 
the marketplace for brokered deposits has evolved in response to 
technological developments and new business relationships. The FDIC 
recognizes that its regulations governing brokered deposits are 
outdated and do not reflect current industry practices and the 
marketplace. As such, the FDIC initiated an extensive rulemaking 
process to seek input from stakeholders and to develop new regulations 
that take into consideration current industry practices and that allow 
for continued innovation. Banks often collaborate with third parties, 
including financial technology companies, for a variety of business 
purposes including access to deposits. Moreover, banks are increasingly 
relying on new technologies to engage and interact with their 
customers, and it appears that this trend will continue. Through this 
rulemaking process, the FDIC attempted to ensure that the brokered 
deposit regulations would continue to promote safe and sound practices 
while ensuring that the classification of a deposit as brokered 
appropriately reflects changes in the banking landscape.

B. Background

1. Historical Statutory Framework
    Section 29 of the Federal Deposit Insurance Act (FDI Act) \1\ 
restricts the acceptance of deposits by certain insured depository 
institutions (or ``IDIs'') from a ``deposit broker.'' Section 29, 
entitled ``Brokered Deposits,'' was added to the FDI Act by the 
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 
(FIRREA). The law originally restricted troubled institutions (i.e., 
those that did not meet the minimum capital requirements) from (1) 
accepting deposits from a deposit broker without a waiver and (2) 
soliciting deposits by offering rates of interest on deposits that were 
significantly higher than the prevailing rates of interest on deposits 
offered by other insured depository institutions having the same type 
of charter in such depository institution's normal market area.\2\
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    \1\ 12 U.S.C. 1831f (also referred to herein as ``Section 29'').
    \2\ See Public Law 101-73, August 9, 1989, 103 Stat. 183.
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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

[[Page 6743]]

the brokered deposit and interest rate restrictions from a troubled 
institution to a bank falling below the ``well capitalized'' PCA level. 
At the same time, the FDIC was authorized to waive the brokered deposit 
restrictions for a bank that is adequately capitalized upon a finding 
that the acceptance of such deposits does not constitute an unsafe or 
unsound practice with respect to the institution.\3\ Thus, under 
current law, a ``well capitalized'' insured depository institution is 
not restricted from accepting deposits from a deposit broker. An 
``adequately capitalized'' insured depository institution may accept 
deposits from a deposit broker only if it has received a waiver from 
the FDIC.\4\ A waiver may be granted by the FDIC ``upon a finding that 
the acceptance of such deposits does not constitute an unsafe or 
unsound practice'' with respect to that institution.\5\ An 
``undercapitalized'' depository institution is prohibited from 
accepting deposits from a deposit broker.\6\
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    \3\ See Public Law 102-242, Dec. 19, 1991, 105 Stat 2236.
    \4\ See 12 U.S.C. 1831f.
    \5\ See id.
    \6\ See id.
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    In 2018, Section 29 of the FDI Act was amended as part of the 
Economic Growth, Regulatory Relief, and Consumer Protection Act, to 
except a capped amount of certain ``reciprocal deposits'' from 
treatment as brokered deposits.\7\
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    \7\ 12 U.S.C. 1831f(i)(2)(E).
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2. Current Regulations
    Section 337.6 of the FDIC's Rules and Regulations implements and 
closely tracks the statutory text of Section 29, particularly with 
respect to the definition of ``deposit broker'' and its exceptions.\8\ 
Section 29 of the FDI Act does not directly define a ``brokered 
deposit,'' rather, it defines a ``deposit broker'' for purposes of the 
restrictions.\9\ Thus, the meaning of the term ``brokered deposit'' 
turns upon the definition of ``deposit broker.''
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    \8\ See 12 CFR 337.6. The FDIC issued two rulemakings related to 
the interest rate restrictions under this section. The FDIC is also 
adopting a final rule for the interest rate restrictions as 
discussed in Part II of this Notice.
    \9\ See 12 U.S.C. 1831f.
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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 (the ``IDI exception'');
    2. an employee of an insured depository institution, with respect 
to funds placed with the employing depository institution;
    3. a trust department of an insured depository institution, if the 
trust in question has not been established for the primary purpose of 
placing funds with insured depository institutions;
    4. the trustee of a pension or other employee benefit plan, with 
respect to funds of the plan;
    5. a person acting as a plan administrator or an investment adviser 
in connection with a pension plan or other employee benefit plan 
provided that that person is performing managerial functions with 
respect to the plan;
    6. the trustee of a testamentary account;
    7. the trustee of an irrevocable trust (other than one described in 
paragraph (1)(B)), as long as the trust in question has not been 
established for the primary purpose of placing funds with insured 
depository institutions;
    8. a trustee or custodian of a pension or profit sharing plan 
qualified under section 401(d) or 403(a) of the Internal Revenue Code 
of 1986; or
    9. an agent or nominee whose primary purpose is not the placement 
of funds with depository institutions (the ``primary purpose 
exception'').
The statute and regulation also define an ``employee'' to mean any 
employee: (1) Who is employed exclusively by the insured depository 
institution; (2) whose compensation is primarily in the form of a 
salary; (3) who does not share such employee's compensation with a 
deposit broker; and (4) whose office space or place of business is used 
exclusively for the benefit of the insured depository institution which 
employs such individual.\10\
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    \10\ 12 U.S.C. 1831f(g)(4).
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    In 1992, the FDIC amended its regulations to include the following 
tenth exception: ``An insured depository institution acting as an 
intermediary or agent of a U.S. government department or agency for a 
government sponsored minority or women-owned depository institution 
program.'' \11\
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    \11\ See 57 FR 23933, 23040 (1992). The FDIC indicated in the 
preamble for the 1992 final rule that implemented the FDICIA 
revisions to Section 29 that those revisions were not intended to 
apply to deposits placed by insured depository institutions 
assisting government departments and agencies in administration of 
minority or women-owned deposit programs.
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3. Advance Notice of Proposed Rulemaking
    On December 18, 2018, the FDIC Board approved an Advance Notice of 
Proposed Rulemaking (ANPR), inviting comment on all aspects of the 
FDIC's brokered deposit and interest rate regulations to obtain input 
from the public on its brokered deposit and interest rate regulations 
in light of significant changes in technology, business models, the 
economic environment, and products since the regulations were adopted.
    The ANPR discussed issues with sweep deposits, deposit listing 
services, statutory exceptions (particularly the primary purpose 
exception), software products, prepaid cards, and interest rate 
restrictions applicable to less than well-capitalized institutions 
(particularly the definition and calculation of the national rate). The 
ANPR also included historical and statistical analysis, in addition to 
other information, including the FDIC's experience with brokered 
deposit questions. The ANPR was published in the Federal Register on 
February 6, 2019.\12\ The FDIC received over 130 comments to the ANPR 
from individuals, banking organizations, non-profits, as well as 
industry and trade groups, representing banks, insurance companies, and 
the broader financial services industry.
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    \12\ 84 FR 2366 (Feb. 6, 2019).
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    Of the total comments, 59 related to the FDIC's rules on the 
interest rate restrictions. The majority of these commenters expressed 
concerns about the national rate calculation. Concerns included the 
effect of calculating an average rate by including branches (minimizing 
the significance of online-focused banks, which have few or no 
branches) and data issues with banks' published rates. Commenters 
suggested that to make rates appropriate for different economic 
environments and maximum transparency, the FDIC should set national 
rates at the higher of the current rates and the previous (1992) rates 
based on US Treasury yields. Other comments addressed the local rate, 
stressing the necessity to compete for particular products within local 
market areas.

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    Comments to the ANPR referring to brokered deposit issues other 
than interest rate caps focused on the need for clarity, specifically 
requesting the FDIC to clarify its historical interpretation of the 
``deposit broker'' definition and its corresponding statutory and 
regulatory exceptions. Many commenters stated that the FDIC had 
interpreted the definition of deposit broker too broadly and had 
significantly expanded the types of entities considered to be deposit 
brokers beyond what was originally contemplated when Section 29 was 
enacted.
    Commenters also requested clarity in the deposit broker definition, 
specifically with the primary purpose exception. Many commenters 
preferred a bright-line test and noted certain types of deposits are 
designed for a purpose other than establishing a depository account, 
provide stable sources of funding, do not have the risks associated 
with traditional brokered deposits, and, therefore, should meet the 
primary purpose exception.
    Because of the strong interest in both interest rate cap issues and 
other brokered deposit issues and to better address commenters' 
concerns, the FDIC decided to issue separate proposed rulemakings, one 
relating to interest rate caps and the second, relating to proposed 
changes in the regulations other than those relating to interest rate 
caps.
4. Overview of Notice of Proposed Rulemaking and Comments Received
    In its notice of proposed rulemaking (``Brokered Deposits NPR,'' 
or, in this Part, ``proposal'' or ``proposed rule''),\13\ and in 
response to comments submitted in response to the ANPR,\14\ the FDIC 
proposed a number of significant changes to its brokered deposit 
regulation to modernize the regulation in light of technological and 
other innovations in the way banks source deposits. The FDIC proposed 
clarifications to the circumstances under which a person \15\ meets the 
deposit broker definition by interpreting when a person is considered 
to be engaged in the business of ``placing'' or ``facilitating the 
placement'' of deposits on behalf of its customers. These proposed 
changes were intended to provide clarity for industry participants as 
to what types of deposit arrangements would be considered ``brokered'' 
and which would not. In addition, the FDIC proposed an expansion of the 
IDI exception to permit wholly owned subsidiaries that meet certain 
criteria to be eligible for the exception.
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    \13\ 85 FR 7453 (Feb. 10, 2020).
    \14\ 84 FR 2366 (Feb. 6, 2019).
    \15\ This Notice also uses the term ``third party'' in reference 
to the subject of the ``deposit broker'' definition. Consistent with 
section 29, this Notice also refers to the potential deposit broker 
with respect to the primary purpose exception as the ``agent or 
nominee.''
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    The FDIC also proposed an interpretation for the ``primary 
purpose'' exception to the ``deposit broker'' definition and sought to 
provide a mechanism through which IDIs or third parties could apply to 
the FDIC to receive approval for meeting the primary purpose exception. 
The FDIC proposed that brokered CDs would continue to be considered to 
be brokered. Finally, the FDIC proposed that existing staff FDIC 
advisory opinions would either be rescinded if they were no longer 
applicable under the final rule or codified as part of the final rule 
if relevant under the new regulation.
    The Brokered Deposits NPR solicited comment on all aspects of the 
proposed rule. The comment period ended on June 9, 2020.\16\ In 
response to the proposal, the FDIC received more than 160 comments from 
individuals, banking organizations, non-profits, as well as industry 
and trade groups representing banks, insurance companies, and the 
broader financial services industry. A number of commenters supported 
the FDIC's efforts to modernize the rule and provide clarifications to 
key definitions.
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    \16\ The comment period was extended for another 60 days to 
provide commenters with additional time to address the matters 
raised in the NPR. 85 FR 19706 (Apr. 8, 2020).
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    Generally, a common theme amongst the commenters was a desire for 
the FDIC to provide additional clarification to its proposed changes to 
the ``deposit broker'' definition and its corresponding statutory and 
regulatory exceptions. Some commenters suggested that a legislative 
change to Section 29 was needed, including replacing the brokered 
deposit restrictions with a restriction on asset growth for less than 
well capitalized institutions. Commenters also suggested that the FDIC 
revise certain aspects of the proposal to permit certain types of 
arrangements that, under the proposal, would continue to be considered 
to be brokered to instead either fall within an exception or otherwise 
to be determined to be non-brokered. A small number of commenters 
opposed the proposed changes, with one commenter stating that the 
changes would create new loopholes in the statutory restrictions on 
brokered deposits, threatening safety and soundness of banks and the 
Deposit Insurance Fund (DIF), without evidence that the changes are 
necessary and without knowing the impact of the changes. Another 
commenter criticized the proposal for failing to focus on the 
underlying risks of brokered deposits and weakening the FDIC's ability 
to understand deposit volatility and balance sheet risks of supervised 
IDIs. A summary of comments received on specific aspects of the 
proposed rule is provided below in section.

C. Final Rule and Discussion of Comments

1. Deposit Broker Definition
    Section 29 of the FDI Act provides that a person is a ``deposit 
broker'' if it is engaged in the business of placing deposits, or 
facilitating the placement of deposits, of third parties with insured 
depository institutions or the business of placing deposits with 
insured depository institutions for the purpose of selling interests in 
those deposits to third parties.\17\ An agent or trustee also meets the 
``deposit broker'' definition when establishing a deposit account to 
facilitate a business arrangement with an insured depository 
institution to use the proceeds of the account to fund a prearranged 
loan.\18\
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    \17\ 12 U.S.C. 1831f(g)(1)(A).
    \18\ 12 U.S.C. 1831f(g)(1)(B).
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    The statute does not further define the categories that make up the 
definition of ``deposit broker,'' and the FDIC has authority under the 
FDI Act to issue regulations to further clarify the types of activities 
that cause a person to be considered to be a deposit broker.\19\ 
Historically, the FDIC has considered several factors in evaluating 
whether or not an entity is a ``deposit broker,'' including, for 
example, whether or not the entity receives fees from IDIs based upon 
the volume of deposits placed and whether the entity provides marketing 
or referral services on behalf of the IDIs.
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    \19\ 12 U.S.C. 1819(a)(Tenth).
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    In the Brokered Deposits NPR, the FDIC proposed a new framework for 
analyzing the deposit broker definition in an effort to provide clarity 
around when a third party meets the definition. In this context, the 
FDIC described the circumstances under which a third party would be:
    [cir] Engaged in the business of placing deposits;
    [cir] engaged in the business of facilitating the placement of 
deposits; and
    [cir] engaged in the business of placing deposits with insured 
depository institutions for the purpose of selling interests in those 
deposits to third parties.

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    In general, commenters raised concerns that the proposed deposit 
broker definition was overly broad and would create barriers to 
innovation. Commenters also argued that the listed activities in the 
proposal, specifically in the proposed ``facilitation'' definition, 
would capture many third party service providers and would prevent 
community banks from using those providers for any purpose without 
having the deposits be classified as brokered. Commenters also 
requested that the definition be further narrowed and that the FDIC 
identify specific activities in which a person could engage without 
being a deposit broker. The specific issues raised by commenters are 
summarized below.
a. Exclusive Deposit Placement Arrangements
    Section 29 provides that a person meets the ``deposit broker'' 
definition (as described above) when it is ``engaged in the business of 
placing deposits, or facilitating the placement of deposits, of third 
parties with insured depository institutions or the business of placing 
deposits with insured depository institutions for the purpose of 
selling interests in those deposits to third parties'' (emphasis 
added). The FDIC recognizes that a number of entities, including some 
financial technology companies, partner with one insured depository 
institution to establish exclusive deposit placement arrangements. 
Under these arrangements, the third party has developed an exclusive 
business relationship with the IDI and, as a result, is less likely to 
move its customer funds to other IDIs in a way that makes the deposits 
less stable.
    As such, in an effort to clarify the types of persons that meet the 
``deposit broker'' definition, and consistent with the statute, under 
this final rule, any person that has an exclusive deposit placement 
arrangement with one IDI, and is not placing or facilitating the 
placement of deposits at any other IDI, will not be ``engaged in the 
business'' of placing, or facilitating the placement of, deposits and 
therefore will not meet the ``deposit broker'' definition.
    This change is also intended to address comments, further described 
below, that the FDIC would be inundated with applications from banks 
and third parties seeking the primary purpose exception under the 
proposed application process.
    The FDIC notes, however, that a person that creates or utilizes 
multiple entities that each place deposits at different IDIs to evade 
this rule, while still maintaining a relationship with one or more of 
such entities, will collectively still be viewed as one ``person'' and 
thus qualify as a deposit broker.
b. Engaged in the Business of Placing Deposits
    The statute provides that a person meets the definition of 
``deposit broker'' if the person is ``engaged in the business of 
placing deposits'' on behalf of a third party (i.e., a depositor) at 
insured depository institutions. As provided in the proposed rule, the 
FDIC considers a person to be engaged in the business of placing 
deposits if that person has a business relationship with its customers, 
and as part of that relationship, places deposits with IDIs on behalf 
of the customer (e.g., acting as custodian or agent for the underlying 
depositor).
    Commenters suggested that the FDIC provide additional clarity to 
this part of the ``deposit broker'' definition with one commenter 
suggesting that the FDIC include the description provided above in the 
final rule text, which the FDIC agrees would provide clarity. As such, 
the FDIC is amending the ``deposit broker'' definition in the final 
rule by (1) including that the person must have a business relationship 
with its customers to be ``engaged in business'' and (2) providing that 
the person must receive customer funds before placing deposits to 
satisfy the ``engaged in the business of placing deposits'' part of the 
definition.
c. Engaged in the Business of Facilitating the Placement of Deposits
    In contrast to the first part of the deposit broker definition, the 
``facilitation'' part of the definition refers to activities where the 
person does not directly place deposits on behalf of its customers with 
insured depository institutions. Historically, the term ``facilitating 
the placement of deposits'' has been interpreted by staff at the FDIC 
to include actions taken by third parties to connect insured depository 
institutions with potential depositors.
    Under the proposed rule, a person would meet the ``facilitation'' 
prong of the ``deposit broker'' definition by, while engaged in 
business, engaging in any one, or more than one, of the following 
activities:
    [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.
i. Comments in Response to the Proposed ``Facilitation'' Definition
    The FDIC sought to provide clarity and consistency with respect to 
what it means to facilitate the placement of deposits. The proposed 
``facilitation'' definition was the issue that received the most 
comments; of the 166 comment letters received (47 of which were form 
letters), 118 commented on the proposed definition.
    In general, commenters raised concerns that some of the listed 
activities in the proposal were overly broad and, as proposed, would 
result in all deposits sourced through some use of third party service 
providers to be classified as brokered. Some commenters suggested that 
all ``relationship accounts'' and transaction accounts ``owned by a 
bank'' with no direct relationship between the third party and the 
depositor should be exempt from the definition of ``facilitating.'' 
Below is a summary of the comments received on each of the four prongs 
of the proposed ``facilitation'' definition.
    First Prong. Numerous commenters raised concerns about this first 
prong of the definition of ``facilitating,'' related to information 
sharing. Major trade associations representing the banking industry 
suggested that the FDIC delete the information sharing prong entirely 
and focus instead on the extent to which a third party exercises 
control over the account. A law firm commented that the first prong 
would capture the core activities of essentially every financial 
technology company or technology platform solutions provider performed 
for or on behalf of depository institutions, since many financial 
technology companies receive and store consumers' credentials and share 
verified consumer information with a depository institution. The 
commenter expressed that an essential factor underlying the 
``facilitation'' activities is whether the person in question is acting 
on behalf of the bank or on behalf of the depositor. The commenter 
stated that where a person is acting on behalf of and at the direction 
of the depositor, that person's activities should not be viewed as 
``facilitation'' activities

[[Page 6746]]

because no services are being provided to a particular depository 
institution. One company suggested that the proposed definition of 
``facilitating the placement of deposits'' should be revised to exclude 
third-parties who provide services to banks for the purpose of enabling 
the bank to establish deposit accounts directly with individual 
depositors.
    A number of commenters, including bankers, a law firm, a trade 
association, and private companies, raised a specific concern that the 
``information sharing'' prong of the definition could be interpreted to 
include listing services, which historically have been viewed by FDIC 
staff as excluded from being considered deposit brokers under certain 
circumstances. Several other bankers expressed similar views, arguing 
that entities that simply provide information, such as listing 
services, should not be considered deposit brokers and that the 
definition as proposed could lead to such a result.
    Second Prong. A number of commenters expressed support for the 
second prong to the proposed ``facilitation'' definition, which 
included activities where the person has legal authority, contractual 
or otherwise, to close the account or move the third party's funds to 
another insured depository institution. Specifically, commenters stated 
that this activity is indicative of the type of active and meaningful 
relationship that should be required to find that a third party is 
facilitating the placement of deposits under the deposit broker 
definition. One commenter asked that the FDIC limit the second prong to 
include exclusive legal authority over the movement of funds.
    Third Prong. Commenters expressed concerns with the proposed third 
prong of the facilitation definition, believing that the definition was 
overly broad, contained unnecessary terms, and would capture services 
the FDIC did not intend to capture. Some community bankers believed 
that the proposed third prong would result in classifying service 
providers that provide assistance (but not the final determination) in 
setting rates, fees, terms or conditions for various deposit account 
programs, as deposit brokers. Other commenters mentioned that the 
phrase ``providing assistance'' was unnecessary and ambiguous and 
should be deleted from the final rule. The commenters explained that 
because the proposed rule would cover anyone ``involved in'' setting 
rates, fees, terms or conditions, the term ``providing assistance'' 
would only create ambiguity and could be read more broadly.
    Some commenters believed that the overly broad definition could 
include listing services. However, one commenter believed that listing 
services should be included in the third prong and cited legislative 
history to support its position. Lastly, commenters mentioned that the 
definition could be used to capture a bank's use of consulting or 
advisory services that assist them with developing, delivering and 
improving their deposit offerings.
    Fourth Prong. A number of commenters expressed concerns that the 
proposed fourth prong of the definition of ``facilitation,'' which 
excluded persons involved in a purely administrative capacity, was also 
ambiguous and should be clarified by providing a list of activities 
that would be considered to be purely administrative. A law firm 
commented that the FDIC should clarify its intent with respect to the 
exclusion for ``purely administrative'' conduct, and argued that a 
third party conducting only administrative functions should be 
permissible without the third party being considered a deposit broker. 
A trade association suggested that the FDIC provide that an 
intermediary between an IDI and a third party placing deposits is not 
``facilitating'' if the third party is itself not a deposit broker and 
if the third party would not be a deposit broker if performing the 
intermediary's activities itself regardless of whether those activities 
were ``purely administrative.''
ii. Final Rule Discussion for ``Facilitation'' Definition
    The FDIC is adopting the general approach taken in the proposed 
rule with respect to the ``facilitation'' part of the deposit broker 
definition, but is making certain revisions to the definition. Under 
the final rule, a person is engaged in the business of facilitating the 
placement of deposits if that person is engaged in certain activities 
with respect to deposits placed at more than one IDI. The activities 
that result in a person being ``engaged in the business of facilitating 
the placement of deposits,'' as discussed in the proposed rule, is 
intended to capture activities that indicate that the third party takes 
an active role in the opening of an account or maintains a level of 
influence or control over the deposit account even after the account is 
open. Having a certain level of influence over account opening, or 
retaining a level of control over the movement of customer funds after 
the account is open, indicates that the deposit relationship is between 
the depositor and the person rather than the depositor and the insured 
depository institution. Moreover, when a third party can influence a 
depositor to either open the account with a particular insured 
depository institution or move funds between insured depository 
institutions, the deposits tend to be less stable than if the deposits 
were brought to the insured depository institution through a single 
point of contact where that contact does not have influence over the 
movement of deposits between insured depository institutions.
    Consistent with this approach to defining the ``facilitating'' part 
of the deposit broker definition, and in response to issues raised by 
commenters, the final rule provides that if a person engages in any one 
of the following activities, while engaged in business, the person will 
be a deposit broker and any deposits placed by the person will be 
brokered:
     The person has legal authority, contractual or otherwise, 
to close the account or move the third party's funds to another insured 
depository institution;
     The person is involved in negotiating or setting rates, 
fees, terms, or conditions for the deposit account; or
     The person engages in matchmaking, as defined in the rule.
Proposed Information Sharing Prong
    The FDIC is not retaining the first proposed prong of the 
``facilitation'' definition. The FDIC agrees with commenters that the 
``direct or indirect sharing of customer information'' is overly broad 
and could have the unintended effect of capturing persons that do not 
have influence or control over the placement of deposits. The proposed 
first prong was generally intended to capture activities where the 
person shares information in an effort to match prospective depositors 
with particular banks, and that specific activity, as part of the final 
rule, will now be included in the matchmaking prong of the facilitation 
definition discussed below.
Legal Control
    The FDIC is finalizing the proposed prong relating to legal control 
over the account as part of the ``facilitation'' definition. Although 
one commenter suggested that having legal control of moving customer 
funds was too broad, many commenters supported this criterion's 
inclusion in the ``facilitation'' definition. The FDIC believes that 
the activity clearly demonstrates that a third party has meaningful, 
substantial influence or control over an account and, therefore, is 
acting as a deposit broker.

[[Page 6747]]

Setting Rates, Terms, Conditions
    With respect to the proposed third prong, commenters viewed that 
providing assistance with setting rates, terms, or conditions would be 
over-inclusive and capture consulting or advisory services that assist 
banks in improving their deposit offerings. As provided in a staff 
memorandum to the Brokered Deposits NPR comment file,\20\ certain 
activities such as market research, general consulting or advisory 
services, and advertising by including a link on a website, were not 
intended to be included in the third prong of the proposed facilitation 
definition. As such, the FDIC is revising this prong to clarify that it 
only includes activities where a third party is negotiating or setting 
rates, terms, or conditions for a particular deposit product (on behalf 
of a particular depositor or particular banks).\21\ By striking the 
``providing assistance'' factor, this revised prong will appropriately 
capture third parties that influence or control the placement of 
deposits by negotiating deposit terms between depositors and insured 
depository institutions.
---------------------------------------------------------------------------

    \20\ See FDIC Federal Register Citations, Unsafe and Unsound 
Banking Practices: Brokered Deposits Restrictions--Comments and 
Staff Disclosures, available at: https://www.fdic.gov/regulations/laws/federal/2020/2020-unsafe-unsound-banking-practices-brokered-deposits-3064-ae94.html.
    \21\ In the final rule, this activity will be included in the 
second prong of the facilitation definition.
---------------------------------------------------------------------------

Providing Matchmaking Services
    Finally, the FDIC is incorporating concepts from the proposed first 
prong (``information sharing'') and the proposed fourth prong with the 
new third prong to provide a clear description of the types of 
activities that were intended to be captured under the facilitation 
definition.
    This prong in the final rule will capture persons that engage in 
matchmaking. The final rule will define matchmaking as follows:
    [cir] A person is engaged in matchmaking if the person proposes 
deposit allocations at, or between, more than one bank based upon both 
(a) the particular deposit objectives of a specific depositor or 
depositor's agent, and (b) the particular deposit objectives of 
specific banks, except in the case of deposits placed by a depositor's 
agent with a bank affiliated with the depositor's agent. A proposed 
deposit allocation is based on the particular objectives of:
    [cir] A depositor or depositor's agent when the person has access 
to specific financial information of the depositor or depositor's agent 
and the proposed deposit allocation is based upon such information; and
    [cir] a bank when the person has access to specific information of 
the deposit-balance objectives of the bank and the proposed deposit 
allocation is based upon such information.
    Specifically, this prong captures certain entities that utilize 
their relationships with prospective depositors or depositor's agents 
and banks to propose deposit allocations at particular banks. These 
activities indicate that the person has influence over the movement of 
deposits between insured depository institutions. These activities also 
indicate that the person is not only satisfying the deposit objectives 
of the depositor or its agent but also of the insured depository 
institution. Such a relationship could allow less than well capitalized 
institutions to utilize a third party to bid for considerable volumes 
of funding, quickly, which could present heightened risks to the DIF. 
Additionally, such a relationship could increase the likelihood of a 
third party withdrawing funds from a less than well capitalized 
institution (or under other circumstances, such as in the event an 
institution is the subject of an enforcement action), which could 
present sudden liquidity concerns.
    This prong would not include persons that engage in activities that 
would otherwise satisfy the matchmaking prong if, and to the extent 
that, these activities are conducted between a bank and an affiliated 
third party.\22\ With respect to this specific function, the FDIC views 
such services by an intermediary as administrative in nature due to the 
direct relationship between the person placing the deposits and the 
bank.\23\ However, deposits placed at banks, with the assistance of 
persons engaging in matchmaking activities, by an affiliated third 
party that meets the deposit broker definition would be brokered.
---------------------------------------------------------------------------

    \22\ For ease of reference, the ``depositor's agent'' in the 
``matchmaking'' definition in 12 CFR 337.6(a)(5)(iii)(C) is referred 
to here as the ``third party''.
    \23\ This view aligns with the FDIC's intent not to disrupt 
business arrangements that have existed for a number of years in 
reliance on prior staff guidance related to affiliate sweep 
arrangements, when the resulting adjustments to business operations 
would be solely for the purpose of complying with regulatory 
changes.
---------------------------------------------------------------------------

    This prong will include third parties that engage in matchmaking as 
part of an unaffiliated deposit sweep program between a depositor, its 
broker dealer, and various unaffiliated banks. These third parties 
propose deposit allocations by matching the deposit obligations of 
either the depositor(s) or the broker dealers with the target deposit 
balances of various unaffiliated banks. It may be the case that a third 
party with a primary purpose exception sweeps deposits to an affiliated 
IDI, and those sweep deposits would not be brokered, while the same 
third party uses an intermediary that would qualify as a deposit broker 
under this prong in the placement of deposits at unaffiliated IDIs, in 
which case those deposits would be brokered.\24\
---------------------------------------------------------------------------

    \24\ See section I(C)(2)(b)(ii)(F) for further discussion of the 
treatment of additional third parties who may qualify as a deposit 
broker.
---------------------------------------------------------------------------

    The third prong will not include third parties that provide 
administrative services as part of a deposit sweep program between a 
depositor, its broker dealer, and unaffiliated banks. In these cases, 
the third party may assist in the placement of sweep deposits with 
unaffiliated banks but does not propose deposit allocations, as 
described above.
    The third prong is defined to capture specific forms of matchmaking 
that are active in nature; more passive forms of matching depositors 
and banks, such as those in which traditional listing services often 
engage, would not be captured.\25\
---------------------------------------------------------------------------

    \25\ See section I(C)(5) for further discussion of listing 
services.
---------------------------------------------------------------------------

    Unlike the fourth prong of the proposed rule, the final rule will 
not distinguish between the activities of a person that interfaces 
directly with a depositor and the activities of a person that 
interfaces with an intermediary or a depositor's agent. Rather, the 
facilitation definition, and its three criteria, will apply, generally, 
to any third party that plays a role in the flow of funds between a 
prospective depositor and the opening of a deposit account at an 
insured depository institution.
    Anti-Evasion. It may be possible for an entity that meets the 
matchmaking prong to modify its business arrangements in such a way 
that evades the terms of the regulation while maintaining effectively 
the same business relationships. The FDIC has included in the 
regulation an anti-evasion provision that would allow the FDIC to 
determine that such attempts to evade the matchmaking prong still meet 
the matchmaking prong. The purpose of the anti-evasion authority is not 
to capture an entity that restructures it business in such a manner 
that it is no longer engaged in the type of matchmaking captured by the 
rule, but rather to avoid creating an unintended incentive for entities 
to modify or restructure businesses solely to evade the regulation. In 
this regard, the FDIC expects to use this authority sparingly.

[[Page 6748]]

    To provide an example, in the event that a third party that would 
otherwise satisfy the criteria of the matchmaking prong sells or 
licenses software that provides deposit placement or allocation 
services between depositors or banks in a manner that is intended to 
evade this prong, and continues to play an ongoing role in providing 
the matchmaking function, the deposits placed through the assistance of 
the software may be considered brokered. Conversely, in the event that 
a third party sells or licenses software that provides deposit 
placement or allocation services between depositors or banks and does 
not subsequently play an ongoing role in providing any function related 
to matchmaking, then the deposits placed would not be considered 
brokered. As such, whether a third party meets the matchmaking prong 
will, under the anti-evasion provision, depend in part on whether the 
third party continues to play an ongoing role in providing functions 
related to matchmaking.
d. Engaged in the Business of Placing Deposits With Insured Depository 
Institutions for the Purpose of Selling Interests in Those Deposits to 
Third Parties
i. Overview and Proposal
    The third part of the ``deposit broker'' definition includes a 
person ``engaged in the business of placing deposits with insured 
depository institutions for the purpose of selling interests in those 
deposits to third parties.'' As provided in the proposed rule, this 
part of the definition specifically captures the brokered certificates 
of deposit (CD) market (referred to herein as ``brokered CDs''). These 
are typically deposit placement arrangements where brokered CDs are 
issued in wholesale amounts by a bank seeking to place funds under 
certain terms and sold through a registered broker-dealer to investors, 
typically in fully insured amounts.
ii. Final Rule Discussion of Brokered CDs
    In response to the proposal, a commenter clarified that the current 
brokered CD market operates in a manner different than as described in 
the notice of proposed rulemaking. Rather than being arrangements in 
which institutions issue a brokered CD in a wholesale amount in the 
name of a broker dealer, who then sells participations in the wholesale 
CD, in current financial markets, an insured depository institution 
issues a master CD in the name of the third party that has organized 
the funding of the CD, or in the name of a custodian or a sub-custodian 
of the third party. The certificate is funded by individual depositors 
through the third party, with each individual depositor receiving an 
ownership interest in the certificate that is reflected on the books 
and records of the third party in a manner to permit pass-through 
treatment for purposes of deposit insurance for the individual 
depositors. The FDIC acknowledges that the brokered CD market has 
evolved, in part, to ensure that its underlying depositors receive 
pass-through deposit insurance and to allow the beneficial owners of 
the deposits to trade their accounts in a secondary market maintained 
by the broker.
    Nevertheless, under the final rule, without exception, and as 
further explained below in the section discussing the primary purpose 
exception, brokered CDs continue to be classified as brokered. Brokered 
CDs, which were offered well before Section 29 of the FDI Act was 
enacted, were specifically intended to be included as part of the 
statute. Moreover, and as provided in the ANPR, brokered CDs have 
caused significant losses to the DIF.\26\ Regardless of any future 
innovations and re-structuring in the brokered CD market, the FDIC 
intends that third parties that assist in the placement of brokered 
CDs, or any similar deposit placement arrangement with a similar 
purpose, will continue to be considered deposit brokers under this part 
of the deposit broker definition.
---------------------------------------------------------------------------

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

    This final rule revises the proposed definition of a brokered CD in 
part 303 to more accurately reflect the current marketplace.
2. Exceptions to the ``Deposit Broker'' Definition
    Section 29 provides nine statutory exceptions to the definition of 
deposit broker and, as described earlier, the FDIC established one 
regulatory exception to the definition. In the proposal, the FDIC 
proposed amending two exceptions--(1) the exception for an insured 
depository institution, with respect to funds placed with that 
depository institution (the ``IDI exception'') and (2) the exception 
for an agent or nominee whose primary purpose is not the placement of 
funds with depository institutions (the ``primary purpose exception''). 
In response to comments, as described below, the final rule makes 
revisions to both exceptions.
a. Bank Operating Subsidiaries and the IDI Exception
    Under the IDI Exception, an IDI is not considered to be a deposit 
broker when it places (or its employees place) funds at the bank.\27\ 
As provided in the proposed rule, the IDI Exception applies, for 
example, in the case of a division of an IDI that places deposits 
exclusively with the parent IDI, but does not apply if a separately 
incorporated subsidiary of the IDI places deposits exclusively with the 
parent. However, the FDIC proposed changes to expand the IDI exception 
to permit wholly owned subsidiaries that meet certain criteria to be 
eligible for the exception. In doing this, the FDIC recognized that a 
wholly owned operating subsidiary that meets certain criteria can be 
considered similar to a division of an IDI for certain purposes.
---------------------------------------------------------------------------

    \27\ 12 U.S.C. 1831f((g)(2)(A)-(B).
---------------------------------------------------------------------------

i. Comments Received in Response to the IDI Exception
    Of those who commented on this aspect of the proposed rule, a 
majority were in favor of the expansion of the exception to include 
wholly owned subsidiaries. Many also argued that the exception should 
be further broadened, so as to allow affiliates, in addition to wholly 
owned subsidiaries, to also fit within the exception (although one 
commenter expressly stated that it should not be further expanded in 
this way). Those who argued for further expansion suggested that there 
is little practical difference between a wholly owned subsidiary and an 
affiliate and that deposits placed through an affiliate were not 
``hot'' money that should be considered to be a brokered deposit. Some 
commenters also asked the FDIC to clarify how ``dual-hatted'' or 
``dual-employees'' would be treated as part of the new regulation.
ii. Final Rule Discussion for the IDI Exception
    The final rule is not adopting the proposed changes to the IDI 
exception. Under this final rule, the deposit broker definition does 
not include third parties that have an exclusive deposit placement 
arrangement with one insured depository institution. As a result, the 
proposed expansion of the IDI exception to wholly owned subsidiaries is 
no longer necessary. This is because, under the proposal, in order to 
meet the IDI exception, a wholly owned subsidiary would have to place 
deposits exclusively with the parent IDI among other conditions. As 
such, wholly owned subsidiaries that would have met the proposed IDI 
exception

[[Page 6749]]

will not meet the ``deposit broker'' definition under this final rule 
because they have an exclusive deposit placement arrangement with one 
bank, their parent bank.
    In response to comments regarding the status of ``dual-hatted'' or 
``dual'' employees under the final rule, the FDIC notes that the 
statutory ``employee'' exception applies solely to an ``employee'' who 
satisfies the definition of an employee provided by the statute. The 
statute defines an ``employee'' as any employee: ``(i) who is employed 
exclusively by the insured depository institution; (ii) whose 
compensation is primarily in the form of a salary; (iii) who does not 
share such employee's compensation with a deposit broker; and (iv) 
whose office space or place of business is used exclusively for the 
benefit of the insured depository institution, which employs such 
individual.'' \28\ This exception does not apply to a contractor or 
dual employee because they are not employed exclusively by insured 
depository institutions. The exception would, however, apply to ``dual-
hatted'' employees that are employed exclusively by the bank so long as 
the employees meet each of the other statutory elements of the 
``employee'' definition.
---------------------------------------------------------------------------

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

b. Primary Purpose Exception
i. Overview of Proposal and Comments
    Section 29 provides that the primary purpose exception applies to 
``an agent or nominee whose primary purpose is not the placement of 
funds with depository institutions.'' In the Brokered Deposits NPR, the 
FDIC proposed a new interpretation for the primary purpose exception 
based on the relationship between the agent or nominee and its 
customers. Specifically, the primary purpose exception would apply when 
the primary purpose of the agent's or nominee's business relationship 
with its customers is not the placement of funds with depository 
institutions.
    Along with the new interpretation, the FDIC proposed a new 
framework for evaluating business relationships that may meet the 
primary purpose exception and identified two types of relationships 
that would be deemed to qualify for the exception. Under the proposal, 
the FDIC would evaluate whether a particular business relationship 
meets the primary purpose exception through an application process, 
available to both IDIs and third parties. The proposed application 
process was intended to allow the FDIC to ensure that the applicant met 
the relevant criteria for the exception and to promote transparency and 
consistency for applicants. The proposal also established an ongoing 
reporting process for approved applicants.
    General Comments. In response to the proposed framework, many 
commenters suggested that the FDIC (1) establish more bright-line 
tests, or business arrangements, that qualify for the primary purpose 
exception, and (2) eliminate the application process, or revise it to 
create a more streamlined process. Commenters generally argued that if 
the FDIC identified more bright-line tests, or business relationships, 
with respect to the primary purpose exception then there would be 
little, if any, need for an application process. Two commenters were 
critical of the proposed changes to the definition of the primary 
purpose exception. In particular, one commenter stated the proposed 
changes would invite evasion and create opportunities for nonbanks 
instead of protecting the DIF. The commenter believed that the primary 
purpose exception should be based on the primary purpose of deposits, 
not the purpose of the agent and its customer. Another commenter stated 
that the proposal reflected rulemaking centered on non-bank third 
parties, whereas the FDIC's mandate and responsibilities direct the 
agency to focus on IDIs that it insures and supervises.
    One commenter representing large financial institutions suggested 
that bright-line criteria will be more efficient because banks can 
evaluate their individual circumstances for a primary purpose exception 
and not have to wait for the FDIC's approval. The commenter stated that 
the banks would make good faith determinations that would be subject to 
review in the examination process. The commenter, and several others, 
raised concerns that, unless the FDIC eliminates or revises the 
proposed application process, the FDIC would be inundated with 
applications from banks and third parties seeking the primary purpose 
exception.
    Primary purpose exception based on 25 percent test. In addition to 
the general comments about the overall framework for evaluating primary 
purpose exceptions, the FDIC also received numerous comments on the 
proposed primary purpose exception for entities placing less than 25 
percent of customer assets under management with insured depository 
institutions (the ``25 percent'' test or business relationship). Most 
of those comments sought additional clarity as to the definitions of 
``business line'' and ``customer assets under management.'' One 
commenter noted that the phrase ``customer assets under management'' is 
a term of art in securities law and limited in use for broker dealers 
or investment advisors, which the commenter suggested could lead to 
confusion and limit the scope of the exception. At least one commenter 
suggested that the threshold be raised to 50 percent, while another 
suggested that the 25 percent threshold was too high and would allow 
significant amounts of deposits to flow to IDIs without restricting 
business models that create risk.
    Primary purpose exception based on enabling transactions. In the 
Brokered Deposits NPR, the FDIC proposed a second business relationship 
that would meet the proposed primary purpose exception for parties that 
place funds at depository institutions for the purpose of enabling 
transactions (the ``the enabling transactions'' test or business 
relationship). The FDIC received comments suggesting that the FDIC 
provide clarity regarding the terms ``enabling transactions'' and 
``transaction account'' to further clarify the types of deposit 
arrangements that would meet the exception. Other commenters indicated 
that the existence of some fees, remuneration, or interest paid, should 
not prevent an entity from being eligible for the primary purpose 
exception. One commenter noted that receiving a fee for wire transfer 
processing or other related transaction services does not necessarily 
transform a third party's primary intent from processing ordinary 
business transactions into deposit placement activity.\29\
---------------------------------------------------------------------------

    \29\ Under the proposal, the FDIC only would have considered 
fees, interest, or other remuneration paid to the underlying 
depositor.
---------------------------------------------------------------------------

    Application process. For both the 25 percent and the enabling 
transactions business relationships, the FDIC proposed an application 
process through which applicants would demonstrate that they meet the 
criteria for the particular exception and the FDIC, on an expedited 
basis, would review and approve the application. Commenters who 
addressed this process were critical, suggesting that, at least for the 
two business relationships that meet the criteria set forth in the 
proposal, at most a notice requirement should exist. Commenters raised 
concerns about FDIC's ability to evaluate so many applications in a 
timely manner and suggested that the FDIC could evaluate the business 
relationships as part of an examination rather than requiring approval 
in advance.
    Other business relationships. As noted above, the FDIC also 
proposed

[[Page 6750]]

that parties that did not qualify under either the ``25 percent'' 
business relationship or the ``enabling transactions'' business 
relationship could apply for a primary purpose exception. A number of 
commenters raised concerns about the application process, in some cases 
arguing it should be eliminated and in most cases stating that it would 
be too cumbersome and time consuming both for the applicants and for 
the FDIC to evaluate the applications in a timely manner. Commenters 
suggested that the FDIC instead should establish additional ``bright-
line'' categories of business arrangements that are eligible for the 
primary purpose exception, which would largely obviate the need for an 
application process aside from entities that did not fit within one of 
the predetermined business relationships. Specifically, commenters 
noted that some business arrangements have been provided the primary 
purpose exception in the past via staff advisory opinions, and that 
such arrangements should also be included in the list of arrangements 
that are deemed to meet the primary purpose exception.
ii. Primary Purpose Exception in the Final Rule
    As described below, and in response to the comments, the final rule 
retains the proposal's interpretation of the primary purpose exception 
and revises the proposed framework for the primary purpose exception in 
several ways. Like in the proposal, the primary purpose exception, in 
the final rule, will apply when, with respect to a particular business 
line, the primary purpose of the agent's or nominee's business 
relationship with its customers is not the placement of funds with 
depository institutions. Whether an agent or nominee qualifies for the 
primary purpose exception will be based on an analysis of the agent's 
or nominee's relationship with those customers. However, the FDIC 
agrees with commenters that the proposed application process for 
business relationships that the FDIC designates as meeting the primary 
purpose exception is not necessary.
    In the final rule, the FDIC (1) identifies several, specific 
business relationships as meeting the primary purpose exception, 
described as ``designated exceptions,'' and (2) allows agents or 
nominees that do not meet one of these designated exceptions to apply 
for a primary purpose exception. Business relationships that qualify 
for a designated exception will not be required to go through the 
application process. For two of the designated exceptions, the FDIC 
will require a notice, while for the other designated exceptions, no 
notice, application, or reporting will be required. Under the final 
rule, entities that do not meet one of the designated exception may 
apply for a primary purpose exception. The final rule will also 
authorize the FDIC to identify additional relationships as designated 
exceptions to the primary purpose exception (and therefore will not 
require an application).
    The FDIC also notes that certain agents or nominees may only place 
deposits at one IDI, in which case the agent or nominee would not be a 
deposit broker, regardless of whether the agent or nominee satisfies 
the primary purpose exception. However, the FDIC notes that if an agent 
or nominee places deposits at one IDI as part of one business line,\30\ 
such as part of a sweep program, and places deposits at one or more 
other IDIs as part of one or more other business lines, such as issuing 
brokered CDs, that agent or nominee would still qualify as a deposit 
broker unless it satisfied the primary purpose exception, with respect 
to a particular business line, or one of the other nine exceptions to 
the definition of ``deposit broker.''
---------------------------------------------------------------------------

    \30\ Additional discussion regarding the concept of a ``business 
line'' is provided in section I(C)(2)(b)(ii)(E).
---------------------------------------------------------------------------

A. Designated Exceptions
    In the final rule, the FDIC recognizes a number of business 
relationships, known as ``designated exceptions,'' described below, as 
meeting the primary purpose exception. Two of these relationships are 
the relationships described in the proposal as business relationships 
deemed to meet the primary purpose exception--the ``25 percent'' 
business relationship and the ``enabling transactions'' business 
relationship. Unlike in the proposal, these two relationships will not 
be required to go through the application process, and instead will 
only require a notice. The final rule also adds a number of designated 
exceptions that will neither require a notice nor an application. The 
additional designated exceptions include business relationships that 
have previously been viewed by staff at the FDIC as meeting the primary 
purpose exception, and were evaluated as part of this rulemaking 
process to meet the primary purpose exception under the interpretation 
of the exception adopted in this final rule, as well as certain 
business arrangements identified by commenters as meeting the primary 
purpose exception. The following business relationships are identified 
as designated exceptions under the final rule: Business relationships 
in which, with respect to a particular business line: \31\
---------------------------------------------------------------------------

    \31\ The FDIC recognizes that some of these arrangements may be 
between an agent or nominee and one insured depository institution. 
Under this final rule, if the agent or nominee has an exclusive 
deposit placement arrangement with one IDI, and does not place or 
facilitate the placement of deposits at any other IDI, then it will 
not meet the ``deposit broker'' definition.
---------------------------------------------------------------------------

    (1) Less than 25 percent of the total assets that the agent or 
nominee has under administration for its customers is placed at 
depository institutions;
    (2) 100 percent of depositors' funds that the agent or nominee 
places, or assists in placing, at depository institutions are placed 
into transactional accounts that do not pay any fees, interest, or 
other remuneration to the depositor;
    (3) a property management firm places, or assists in placing, 
customer funds into deposit accounts for the primary purpose of 
providing property management services;
    (4) the agent or nominee places, or assists in placing, customer 
funds into deposit accounts for the primary purpose of providing cross-
border clearing services to its customers;
    (5) the agent or nominee places, or assists in placing, customer 
funds into deposit accounts for the primary purpose of providing 
mortgage servicing;
    (6) a title company places, or assists in placing, customer funds 
into deposit accounts for the primary purpose of facilitating real 
estate transactions;
    (7) a qualified intermediary places, or assists in placing, 
customer funds into deposit accounts for the primary purpose of 
facilitating exchanges of properties under section 1031 of the Internal 
Revenue Code;
    (8) a broker dealer or futures commission merchant places, or 
assists in placing, customer funds into deposit accounts in compliance 
with 17 CFR 240.15c3-3(e) or 17 CFR 1.20(a);
    (9) the agent or nominee places, or assists in placing, customer 
funds into deposit accounts for the primary purpose of posting 
collateral for customers to secure credit-card loans;
    (10) the agent or nominee places, or assists in placing, customer 
funds into deposit accounts for the primary purpose of paying for or 
reimbursing qualified medical expenses under section 223 of the 
Internal Revenue Code;
    (11) the agent or nominee places, or assists in placing, customer 
funds into deposit accounts for the primary

[[Page 6751]]

purpose of investing in qualified tuition programs under section 529 of 
the Internal Revenue Code;
    (12) the agent or nominee places, or assists in placing, customer 
funds into deposit accounts to enable participation in the following 
tax-advantaged programs: Individual retirement accounts under section 
408(a) of the Internal Revenue Code, Simple individual retirement 
accounts under section 408(p) of the Internal Revenue Code, and Roth 
individual retirement accounts under section 408A of the Internal 
Revenue Code;
    (13) a Federal, State, or local agency places, or assists in 
placing, customer funds into deposit accounts to deliver funds to the 
beneficiaries of government programs; and
    (14) the agent or nominee places, or assists in placing, customer 
funds into deposit accounts pursuant to such other relationships as the 
FDIC specifically identifies as a designated business relationship that 
meets the primary purpose exception.
1. Deposit Placements of Less Than 25 Percent of Customer Assets Under 
Management by the Third Party
    Under the proposal, the FDIC provided that the primary purpose of 
an agent's or nominee's business relationship with its customers will 
not be considered to be the placement of funds at a depository 
institution, subject to an application process, if less than 25 percent 
of the total assets that the agent or nominee has under management for 
its customers, in a particular business line, is placed at depository 
institutions.
    The FDIC is finalizing the proposed ``25 percent'' test generally 
as proposed but, in response to comments, is revising the phrase 
``assets under management'' to ``assets under administration.'' The 
FDIC is also providing additional clarity regarding the concept of a 
``business line'' in section I(C)(2)(b)(ii)(E).
    The FDIC is also reiterating for clarification that if more than 25 
percent of the total customer assets that an agent or nominee has under 
administration is placed at depository institutions, the agent or 
nominee may still apply for a primary purpose exception through the 
application process described in section I(C)(3)(c).
    Customer assets under management. In response to comments 
indicating that the phrase ``customer assets under management'' is 
generally limited to certain broker dealer and investment advisor 
business, the FDIC is revising the term to ``customer assets under 
administration.'' The revised phrase more accurately reflects the 
FDIC's intention that this test cover both customer assets managed by 
the agent or nominee and those customer assets for which the agent or 
nominee provides certain other services but may not exercise deposit 
placement or investment discretion.
    As part of the final rule, in determining the amount of customer 
assets under administration by an agent or nominee, for a particular 
business line, the agent or nominee must measure the total market value 
of all the financial assets (including cash balances) that the agent or 
nominee administers on behalf of its customers that participate in a 
particular business line.
    As a result, under the final rule, an agent or nominee will meet 
the designated exception if less than 25 percent of the total assets 
that the agent or nominee has under administration for its customers, 
in a particular business line, is placed at depository institutions.
2. Enabling Transactions
    Proposal. As part of the Brokered Deposits NPR, the FDIC also 
proposed that the primary purpose of an agent's or nominee's business 
relationship with its customers would not be considered to be the 
placement of funds if the agent or nominee places depositors' funds 
into transactional accounts for the purpose of enabling transactions.
    Under the proposed rule, if 100 percent of an agent's or nominee's 
customer funds that are placed at depository institutions are placed 
into transaction accounts, and no fees, interest, or other remuneration 
is provided to the depositor, then the agent or nominee would meet the 
primary purpose exception of enabling transactions.
    However, the FDIC also proposed that if the agent or nominee, or 
the depository institution, pays any sort of interest, fee, or provides 
any remuneration (e.g., nominal interest paid to the deposit account), 
the agent or nominee would still be eligible for the primary purpose 
exception, but the FDIC would more closely scrutinize the agent's or 
nominee's business to determine whether the primary purpose is truly to 
enable payments. The FDIC identified factors to be considered in 
evaluating such a scenario, including the number of transactions in 
customer accounts, and the interest, fees, or other remuneration 
provided, in determining the applicability of the primary purpose 
exception.
    Under the final rule, if an agent or nominee places 100 percent of 
its customer funds that have been placed at depository institutions, 
with respect to a particular business line, into transaction accounts, 
and no fees, interest, or other remuneration is provided to the 
depositor, the agent or nominee will meet the designated exception of 
enabling transactions. Entities that wish to avail themselves of the 
designated exception for ``enabling transactions'' would not be subject 
to the application process, as under the proposal, and would instead be 
required to file a notice, as detailed in section I(C)(3).
    Under the final rule, agents or nominees that place customer 
deposits at depository institutions in transactional accounts in which 
the customer earns some amount of interest, fees, or other 
remuneration, will continue to be subject to an application process. 
However, in response to comments that asked for more clarity on how 
these arrangements can meet the primary purpose exception, the 
following criteria will be considered as part of the application 
process:
    [cir] The amount of interest, fees, or other remuneration;
    [cir] The amount of transactions that customers make, on average, 
on a month-to-month basis;
    [cir] The marketing materials provided by the agent or nominee 
indicate that funds placed into insured depository institutions are to 
enable transactions for depositors; and
    [cir] If any customer funds are placed in deposit accounts that are 
not transaction accounts, the percentage of customer funds placed in 
deposit accounts that are not transaction accounts.
    To the extent an agent or nominee that places all customer deposits 
at depository institutions in transactional accounts can establish via 
the application process that it markets and offers its deposit 
placement service for the primary purpose of enabling transactions and 
that its customers (1) earn a nominal amount of interest, fees, or 
other remuneration on its deposits, based on the interest rate 
environment at the time, or (2) on average, make more than six 
transactions a month, then the FDIC will determine that the agent or 
nominee meets the primary purpose exception. The FDIC is providing this 
guidance in the preamble to provide clarity to potential applicants and 
to streamline the approval of applications from agents or nominees with 
a primary purpose of enabling transactions. The FDIC is not 
establishing a designated exception for such arrangements due to the 
lack of bright line standards for evaluating marketing materials and 
for defining ``nominal'' interest, fees, or other remuneration in 
different interest

[[Page 6752]]

rate environments.\32\ The FDIC is less likely to approve an 
application in which customers receive more than a nominal amount of 
interest, fees, or other remuneration on their deposits and, on 
average, make fewer than six transactions per month.
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    \32\ Under the final rule, the FDIC retains authority to 
determine whether a rate of interest paid is nominal.
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    If an agent or nominee that applies for a primary purpose exception 
places a small percentage of deposits in accounts that are not 
transaction accounts, the FDIC may still consider approving the 
application, depending on the facts and circumstances, including an 
analysis of the criteria discussed above, but will more closely 
scrutinize whether the primary purpose is enabling transactions.
    As noted in the Brokered Deposits NPR, and in response to 
commenters asking the FDIC to expand the proposed exception, the 
proposed exception was not intended to apply to all third parties that 
place deposits into accounts that have transactional features and is 
not intended to create an incentive for deposit brokers to move 
customers from time deposits to transaction accounts in order to evade 
brokered deposits restrictions. Rather, the proposed exception was 
intended to and will, as part of this final rule, apply only to third 
parties whose business purpose is to place funds at depository 
institutions to enable transactions or make payments.
B. Additional Designated Exceptions
    As provided in the proposal, the FDIC indicated that it would 
review existing advisory opinions to determine those that should be 
codified in the final rule and those that were outdated and should be 
rescinded.\33\ A number of the staff advisory opinions related to the 
primary purpose exception, and some of these opinions interpreted the 
primary purpose exception as applying to certain third parties engaged 
in certain business arrangements. While these opinions were based upon 
an interpretation of the primary purpose exception that is different 
than the interpretation provided in this final rule, the outcome of 
whether the arrangements meet the primary purpose exception under the 
final rule interpretation would not necessarily change if evaluated 
under the revised interpretation. In an effort to streamline the 
process for determining whether an agent or nominee meets the primary 
purpose exception, the FDIC agrees with commenters that it is more 
efficient to include some of these arrangements as part of the bright-
line test for the exception. In this way, entities that have relied 
upon previous staff opinions for the primary purpose exception will be 
able to continue to rely upon the exception.
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    \33\ A full discussion of that review, and the comments received 
on previous advisory opinions, is provided below in section I(C)(5).
---------------------------------------------------------------------------

    Moreover, and in response to comments, the FDIC is also identifying 
other business relationships that the FDIC believes meet the primary 
purpose exception as designated exceptions. Agents or nominees that 
qualify for a designated exception listed below do not have to file an 
application or notice.
Property Management Services
    Certain property management firms assist clients, such as 
homeowner's associations (``HOAs''), in managing their properties. 
These property management firms might place deposits at insured 
depository institutions because they need to deposit rent checks or 
security deposits on behalf of their client and may use some of those 
funds to pay for maintenance or repairs needed on the client's 
property. Under the final rule, a property management firm that places 
deposits at insured depository institutions to provide property 
management services will be deemed to meet the primary purpose and 
qualify for a designated exception. The primary purpose of the 
relationship between a property management service and its customer is 
to manage a property, rather than to place funds in deposits accounts 
at IDIs.\34\
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    \34\ FDIC Staff Advisory Opinion 17-02 (June 19, 2017).
---------------------------------------------------------------------------

    The FDIC also notes that companies that assist property management 
firms or their clients in placing funds at insured depository 
institutions to maximize yield or deposit insurance may still qualify 
as deposit brokers. These companies that either place or assist in 
placing funds would not be eligible for the primary purpose exception 
under this particular business relationship because the primary purpose 
of their deposit placement activity, on behalf of their client (the 
property management firm), is not to provide property management 
functions.
Cross-Border Clearing Services
    Certain insured depository institutions provide cross-border 
clearing services for customers to facilitate fund or payment transfers 
where the payee and the transaction recipient are located in separate 
countries. Specifically, in these arrangements, a nonbank entity or a 
bank that does not have cross-border clearing capabilities places, or 
assists in placing, its customer funds into bank accounts at an IDI 
(the ``clearing IDI'') that acts as an intermediary to clear and settle 
the transfer of the customer's funds into the transaction recipient's 
bank account. In providing cross-border clearing functions, the 
customer's funds are placed in deposit accounts at the clearing IDI for 
a very limited period of time and are typically disbursed to the 
recipient immediately (or almost immediately).
    Under these circumstances, the third party's primary purpose in 
placing, or facilitating the placement of, deposits at the clearing IDI 
is to facilitate the clearing of payments and will be deemed to meet 
the primary purpose exception and qualify for a designated exception. 
This outcome is consistent with previous staff advisory opinions 
related to clearing services provided by insured depository 
institutions.\35\
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    \35\ See FDIC Staff Advisory Opinion 16-01 (May 19, 2016).
---------------------------------------------------------------------------

    The FDIC recognizes that IDIs provide a variety of clearing 
services that may be outside of the scope of the specific cross-border 
clearing services designated exception described above. At this point, 
the FDIC will evaluate whether these other clearing services provided 
to customers will meet the primary purpose exception as part of the 
application process. As described in section I(C)(3)(h), if the FDIC 
determines that other clearing services meet the primary purpose 
exception, then it will also consider whether additional particular 
clearing services should be identified as designated exceptions.
Real Estate Related Transactions
    Mortgage servicing. Mortgage servicing rights are often sold to 
mortgage servicers that are responsible for the day-to-day management 
of a loan account, including collecting a borrower's monthly payments 
of principal and interest and disbursing these funds to stakeholders 
pursuant to the terms of servicing agreements. Mortgage service 
providers also collect from borrower's prepayments of each borrower's 
respective property tax and property insurance premiums and hold such 
funds in escrow accounts until such payments are due, at which time 
they use the escrowed funds to make payments. As part of managing these 
services, mortgage servicers place funds into omnibus deposit accounts 
at insured depository institutions. The primary purpose of the mortgage 
servicer's relationship with its customers is providing the services 
listed above related to the loan account,

[[Page 6753]]

and not the placement of deposits at IDIs. Accordingly, under this 
final rule, mortgage servicers that place deposits at insured 
depository institutions to fulfill their obligations under servicing 
agreements meet the primary purpose exception and qualify for a 
designated exception. This outcome is consistent with previous staff 
advisory opinions related to mortgage servicers.\36\
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    \36\ See generally, FDIC Staff Advisory Opinion 92-78 (Nov. 10, 
1992); see also FDIC Staff Advisory Opinion 17-02 (June 19, 2017).
---------------------------------------------------------------------------

    Residential/Commercial Escrow Services. Prior to closing a real 
estate transaction, the parties involved (e.g., the seller and buyer) 
often times have the funds necessary to complete the pending real 
estate transaction held by a title insurance company in a deposit 
account at an insured depository institution. The purpose of having a 
third party title company hold funds in an escrow account is to protect 
the interests of all parties involved by ensuring that no funds or 
property will be transferred until every escrow term and condition has 
been met. The primary purpose of the third party title company's 
relationship with its customers in such an arrangement is typically 
providing title services or facilitating the closure of the real estate 
transaction, and in any case not the placement of deposits at IDIs. 
Accordingly, under the final rule, title companies that place deposits 
at insured depository institutions to facilitate a real estate 
transaction are deemed to meet the primary purpose exception and 
qualify for a designated exception. This outcome is consistent with 
previous staff advisory opinions related to title companies.\37\
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    \37\ See FDIC Staff Advisory Opinion 17-02 (June 19, 2017).
---------------------------------------------------------------------------

    1031 Like-Kind Exchanges. Some deposits are placed at banks by 
financial intermediaries known as ``qualified intermediaries'' or 
``QIs.'' Under section 1031 of the Internal Revenue Code (26 U.S.C. 
1031), the role of a QI is to facilitate the exchange of ``like kind'' 
properties on behalf of clients known as ``exchangers.'' Pursuant to a 
written agreement, the QI acquires property from the exchanger and then 
arranges for its resale. With the proceeds, the QI acquires another 
property and then transfers it to the exchanger. If the transaction is 
handled properly, the exchanger receives favorable tax treatment.
    Before the QI uses the proceeds of the first property to purchase 
the second property, the funds are held by the QI in a deposit account 
at a bank. In this case, the primary purpose of the QI's relationship 
with its clients is to facilitate the exchange of property, not to 
place deposits at IDIs. Accordingly, under the final rule, QIs that 
place deposits into depository institutions to facilitate the exchange 
of two properties under section 1031 of the Internal Revenue Code are 
deemed to meet the primary purpose exception and qualify for a 
designated exception. This outcome is consistent with previous staff 
advisory opinions related to certain QIs.\38\
---------------------------------------------------------------------------

    \38\ See id.
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Deposits Related to Satisfaction of Certain Regulations
    Broker Dealer Funds in a Special Reserve Account for the Benefit of 
Customers. A broker dealer registered with the United States Securities 
and Exchange Commission (SEC) is required to establish an account at a 
bank titled ``Special Reserve Account for the Benefit of Customers'' 
and to keep in the account cash or qualified securities (Special 
Reserve Account).\39\
---------------------------------------------------------------------------

    \39\ 17 CFR 240.15c3-3(e), 240.15c3-3a. The amount required to 
be held in the Special Reserve Account is determined pursuant to an 
SEC formula where, for each customer, the broker dealer adds up free 
credit balances and other credits in the account, and then reduces 
that number by certain debits. The broker dealer then aggregates the 
calculation for all customers and this aggregate represents the 
amount that a broker dealer must keep, in cash or qualified 
securities, in the Special Reserve Account at a bank. Id.
    ``Free credit balances'' are defined as liabilities of a broker 
or dealer to customers which are subject to immediate cash payment 
to customers on demand, whether resulting from sales of securities, 
dividends, interest, deposits or otherwise, and can include funds 
carried in a certain securities account, including variation margin 
or initial margin, marks to market, and proceeds resulting from 
margin paid or released in connection with closing out, settling or 
exercising futures contracts and options thereon. 17 CFR 240.15c3-
3(a)(8).
---------------------------------------------------------------------------

    The Special Reserve Account protects a broker dealer's customers in 
the event the broker dealer is liquidated, in which case the funds and 
qualified securities in the Special Reserve Account, in addition to 
funds collected by the liquidating agent from customers of the firm 
that have debits, are used to satisfy customer claims on a pro rata 
basis before being available for the firm's general creditors. While 
the broker dealer is operating as a going concern, it is prohibited 
from using the funds or qualified securities in the Special Reserve 
Account as security for a loan to the broker dealer by the bank.\40\
---------------------------------------------------------------------------

    \40\ 17 CFR 240.15c3-3(e).
---------------------------------------------------------------------------

    The primary purpose of the broker dealer's business relationship 
with its customers is to facilitate the buying and selling of 
securities on behalf of customers. As part of that relationship a 
broker dealer is required to establish a Special Reserve Account is to 
provide customer protection in the event of a broker dealer 
liquidation. Thus, to the extent that the balance in a Special Reserve 
Account is owned by customers at the time funds are deposited into it, 
such arrangement meets the primary purpose exception and qualifies for 
a designated exception.\41\
---------------------------------------------------------------------------

    \41\ See, FDIC Staff Advisory Opinion 94-39 (Aug. 17, 1994). To 
the extent that the balance of a Special Reserve Account is owned by 
the broker dealer and only becomes owned by its customers when a 
liquidating agent of a failed broker dealer is appointed and 
distributes the funds to all customers on a pro rata basis, then the 
broker dealer would not be a third party placing or facilitating the 
placement of funds of others, and would be outside the scope of the 
deposit broker definition. The FDIC is not addressing the ownership 
of Special Reserve Accounts in this final rule.
---------------------------------------------------------------------------

    Futures Commission Merchant's Funds in a Segregated Customer 
Account. Regulations of the Commodity Futures Trading Commission (CFTC) 
provide protections for futures customer funds under a regulatory 
system similar to the SEC's requirements related to the Special Reserve 
Account. Under the CFTC's regulations, a futures commission merchant 
must maintain in a separate account at a bank or trust company money or 
permitted investments in an amount at least sufficient in the aggregate 
to cover its total obligations to all futures customers as computed 
under a formula established by the CFTC (Segregated Customer 
Account).\42\
---------------------------------------------------------------------------

    \42\ 17 CFR 1.20(a). The formula set in CFTC regulations calls 
for the amount to be maintained in the segregated customer account 
the market value of futures customer funds subject to certain 
adjustments. 17 CFR 1.20(i). ``Futures customer funds'' include all 
money, securities, and property received by a futures commission 
merchant from, for, or on behalf of, futures customers to margin, 
guarantee, or secure contracts for future delivery on or subject to 
the rules of a contract market or derivatives clearing organization, 
as the case may be, and all money accruing to such futures customers 
as the result of such contracts.'' 17 CFR 1.3.
---------------------------------------------------------------------------

    The Segregated Customer Account protects a futures commission 
merchant's customers in the event the futures commission merchant is 
liquidated, in which case the Account balance and permitted investments 
in the Segregated Customer Account, in addition to funds collected by 
the liquidating agent from customers of the firm that have debits, are 
used to satisfy customer claims on a pro rata basis before being 
available for the firm's general creditors.
    The primary purpose of a futures commission merchant's business 
relationship with its customers is to facilitate the buying and selling 
of futures and other investment products on behalf of customers. As 
part of that relationship, the futures commission

[[Page 6754]]

merchant is required to establish a Segregated Customer Account to 
provide customer protection in the event of a futures commission 
merchant's liquidation. Thus, to the extent that the balance of a 
Segregated Customer Account is owned by the firm's customers at the 
time funds are deposited into it, such arrangement meets the primary 
purpose exception and qualify for a designated exception.\43\
---------------------------------------------------------------------------

    \43\ See FDIC Staff Advisory Opinion 17-02 (June 19, 2017).
---------------------------------------------------------------------------

    The FDIC is aware of other deposit arrangements in which entities 
place deposits as required under federal or state law. While the FDIC 
does not have sufficient knowledge of such arrangements to grant 
designated exceptions for such arrangements in this final rule, the 
FDIC expects it would approve an application for a primary purpose 
exception under such circumstances when the primary purpose is not the 
placement of deposits. The FDIC will consider identifying specific such 
arrangements as designated exceptions in the future if warranted.
Deposits Placed as Required Collateral for Credit-Card Loans
    Some deposits are placed at insured depository institutions by 
third parties that offer secured credit-card loans to their customers. 
The loans are secured by deposits belonging to the customers and held 
at insured depository institutions as required collateral that is 
typically capped to the amount of the credit line granted to the 
customer by the third party. Under this final rule, the primary purpose 
of the third party's relationship with its customers is to provide 
consumers access to credit card loans and not to place deposits with 
IDIs. Accordingly, under this final rule, third parties that place 
customer funds into depository institutions as collateral for their 
customers to secure credit card loans will meet the primary purpose 
exception and qualify for a designated exception. This outcome is 
consistent with previous staff advisory opinions.\44\
---------------------------------------------------------------------------

    \44\ See FDIC Staff Advisory Opinion 94-13 (Mar. 11, 1994).
---------------------------------------------------------------------------

Deposits Placed To Pay for or To Reimburse Qualified Medical Expenses 
Under Section 223 of the Internal Revenue Code
    Some deposits are placed with IDIs on behalf of customers 
participating in health savings accounts (HSAs). Individuals that 
participate in an HSA can use those funds to pay for or reimburse 
qualified medical expenses with certain tax benefits.\45\ Individuals 
may place funds directly with IDIs into HSAs, or, their funds may be 
placed into HSAs through employers that utilize third party 
administrators that manage HSA programs. As part of those management 
services, the third party administrator places, or facilitates the 
placement of, deposits at IDIs directly from employer payroll accounts. 
Funds in a designated HSA are intended to be used by the depositor for 
payment of qualified medical expenses. The primary purpose of the third 
party administrator's relationship with its customers is to assist in 
placing customer funds into HSAs to facilitate the payment for or 
reimbursement of qualified medical expenses. Accordingly, under this 
final rule, entities that place, or facilitate the placement of, 
customer funds into HSAs pursuant to section 223 of the Internal 
Revenue code meet the primary purpose exception and qualify for a 
designated exception.
---------------------------------------------------------------------------

    \45\ 26 U.S.C. 223.
---------------------------------------------------------------------------

    The FDIC is aware that not all individuals with funds in an HSA use 
those funds only for qualified medical expenses. Nonetheless, the FDIC 
is persuaded that the primary purpose of HSA fund administrators is to 
enable the payment of qualified medical expenses. However, the FDIC 
will continue to monitor the evolution and use of HSA accounts over 
time. If at some point in the future, the primary purpose of HSA 
administrators has evolved to something other than enabling 
transactions related to qualified medical expenses, the FDIC may 
reevaluate whether this designated exception is still warranted. Any 
changes would be made through notice and comment rulemaking.
Deposits Placed for Qualified Tuition Programs Under Section 529 of the 
Internal Revenue Code
    Some deposits are placed at IDIs by states, state agencies, or 
educational institutions as part of qualified tuition plans (or ``529 
plans''). A 529 plan is a tax-advantaged savings plan designed to 
encourage saving for future education costs.\46\ The individual 
contributions for a 529 plan may be invested in a variety of financial 
products, including deposit products. The primary purpose of the state, 
state agency, or educational institution's relationship with its 
investors is to provide a tax-advantaged savings plan designed to 
encourage saving for future education costs and not the placement of 
deposits. Accordingly, under this final rule, states, state agencies, 
or educational institutions that place investor funds into depository 
institutions pursuant to section 529 of the Internal Revenue Code will 
meet the primary purpose exception and qualify for a designated 
exception.
---------------------------------------------------------------------------

    \46\ 26 U.S.C. 529.
---------------------------------------------------------------------------

Deposits Placed in a Retirement Account Not Part of an Employee Benefit 
Plan
    Section 29 contains an express exception from the deposit broker 
definition for trustees of a pension plan or other employee benefits 
plan and for plan administrators and investment advisors of such 
plans.\47\ Section 29 also provides an express exception for a trustee 
or custodian of a pension or profitsharing plan qualified under section 
401(d) or 403(a) of the Internal Revenue Code.\48\ A commenter 
requested that the primary purpose exception apply with respect to 
individual retirement accounts.
---------------------------------------------------------------------------

    \47\ 12 U.S.C. 1831f(g)(2)(D) and (E). Because the exceptions 
for trustees, plan administrators, and investment advisers for 
pension plans and other employee benefit plans are provided in 
separate statutory exception and are not related to the primary 
placement exception, no notice or application requirement would 
apply.
    \48\ 12 U.S.C. 1831f(g)(2)(H).
---------------------------------------------------------------------------

    Congress has provided similar tax incentivized treatment for other 
retirement account arrangements that do not meet the definition of 
Employee Benefit Plan or the pension and profitsharing plans referenced 
in section 29. Such arrangements include a traditional IRA, Simple IRA, 
and Roth IRAs. The primary purpose of an entity who places deposits in 
association with such plans is to enable participation in the 
retirement program and not place deposits at IDIs. Accordingly, the 
FDIC is establishing a designated exception for such plans.\49\
---------------------------------------------------------------------------

    \49\ This treatment for IRAs and other retirement plans that are 
not part of an employee benefit plan is consistent with how the FDIC 
viewed such accounts in a 1984 final rule, along with the Federal 
Home Loan Bank Board, when it adopted the definition of ``deposit 
broker'' upon which the current statutory definition is based.
    The insurance coverage currently available to deposits held in 
connection with pension funds and other employee benefit plans will 
not be affected by the rule unless such deposits are placed by or 
through a deposit broker. In addition, trustees and custodians of 
IRA and Keogh accounts will not be deemed to be deposit brokers. 49 
FR 13003, 13009 (Apr. 4, 1984). (emphasis added)
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Deposits Placed by Agencies To Disburse Government Benefits
    Federal, state or local agencies (``Agencies'') sometimes use debit 
or prepaid cards to deliver funds to the beneficiaries of government 
programs. In some cases, such programs are structured so that each 
beneficiary will own a separate deposit account at particular insured 
depository

[[Page 6755]]

institutions (with the account being accessible by the beneficiary 
through the use of a debit card). Other programs may be structured so 
that multiple beneficiaries will own a commingled deposit account with 
``per beneficiary'' or ``pass-through'' deposit insurance coverage. In 
these scenarios, the Agency is involved in choosing IDIs or opening 
deposit accounts to assist in the disbursement of funds to 
beneficiaries, as mandated by law. These accounts are also limited to 
the placement of funds for a designated government benefit program and 
may not be commingled with the beneficiary's other funds outside of the 
government benefit program. The primary purpose of the Agency's 
relationship with beneficiaries is to discharge its legal obligation by 
disbursing funds as part of a government program. Accordingly, under 
this final rule, Agencies that place funds for beneficiaries of 
government programs will meet the primary purpose exception and qualify 
for a designated exception.
C. Other Business Relationships
    Under the final rule, agents or nominees that meet the ``deposit 
broker'' definition, but do not qualify for a designated exception, may 
submit an application to the FDIC. The FDIC will review whether the 
applicant sufficiently demonstrates that the primary purpose of the 
agent or nominee is something other than the placement, or facilitating 
the placement, of funds at insured depository institutions. As noted 
above, in conducting this review, the FDIC will specifically look at 
the primary purpose of the business relationship between the agent or 
nominee and its customers, with respect to a particular business line. 
For example, offering loans or a range of lending products, could be 
described in the application as the primary purpose of a business 
relationship, if lending is a more significant portion of a particular 
business line than placing, or facilitating the placement of, deposits 
is. As part of its review, the FDIC will, as proposed, consider the 
following factors: (1) The revenue structure for the agent or nominee; 
(2) whether the agent's or nominee's marketing activities to 
prospective depositors is aimed at opening a deposit account or to 
provide some other service, and if there is some other service, whether 
the opening of the deposit account is incidental to that other service; 
and (3) the fees, and type of fees, received by an agent or nominee for 
any deposit placement service it offers. A detailed discussion of the 
specific content requirements and timing for the application process is 
provided in section I(C)(3)(d) of this notice.
    The FDIC expects to make publicly available on the FDIC's website 
(1) redacted summaries of certain approved applications, as soon as 
practicable, and (2) a list of additional designated exceptions, to the 
extent applicable, that will describe additional business arrangements 
not described in this rulemaking that the FDIC in the future determines 
meet the primary purpose exception without requiring an application. 
Redacted summaries available on the FDIC's website will typically 
describe business relationships not discussed in this final rule that 
the FDIC has determined to meet the primary purpose exception and may 
be cited as support in applications for the primary purpose exception 
in certain circumstances. Designated exceptions identified following 
this rulemaking may be relied upon, without an application, by any 
agent or nominee that meets the published criteria. The FDIC would also 
note on the website whether a notice and/or any ongoing reporting will 
be required with respect to a new designated exception.
    The FDIC intends for the application process to promote 
transparency and consistency for entities seeking to use the primary 
purpose exception for business relationships that do not qualify for a 
designated exception. In addition to transparency and consistency for 
the public, the application process is intended to enhance FDIC's 
ability to protect the DIF and promote safety and soundness, 
particularly with respect to new or novel business arrangements.
D. Business Relationships Ineligible for the Primary Purpose Exception
1. Deposit Placements of Brokered CDs
    In the Brokered Deposits NPR, the FDIC stated that it would 
continue to consider a person's placement of brokered CDs (as described 
in the third prong to the deposit broker definition and as discussed 
above) as deposit brokering. Under the proposal, for purposes of 
establishing the person's primary purpose, the person's placement of 
brokered CDs would be considered a discrete and independent business 
line from other deposit placement businesses. Thus, the primary purpose 
for that particular business line would always be the placement of 
deposits at depository institutions, even if the person may not be 
considered a deposit broker for other deposits that it places (or for 
which it facilitates the placement), which would be evaluated as a 
separate business line.
    The FDIC is finalizing this aspect of the proposed rule as 
proposed. Accordingly, consistent with the intent of Section 29 (and 
part 337 of the FDIC's regulations), brokered CDs, as has been the case 
since 1989, will be considered brokered. Deposits related to brokered 
CDs will not be included for purposes of determining whether a person's 
other business lines meet the primary purpose exception.
2. Deposit Placements for Purposes of Encouraging Savings
    In the Brokered Deposits NPR, the FDIC proposed that the FDIC would 
not grant a primary purpose exception if the third party's primary 
purpose for its business relationship with its customers is to place 
(or assist in the placement of) funds into deposit accounts to 
``encourage savings,'' ``maximize yield,'' ``provide deposit 
insurance,'' or any similar purpose. The FDIC expressed concern that 
these types of services could evade the purposes of section 29.
    The FDIC is finalizing this aspect of the proposed rule as 
proposed. It is the FDIC's view that there is no meaningful distinction 
between a primary purpose of ``encouraging savings,'' ``maximizing 
yield,'' ``providing deposit insurance,'' or any similar purpose and a 
primary purpose of placing funds into a deposit account. Furthermore, 
granting a primary purpose exception based on such rationales could 
result in all deposit arrangements satisfying the primary purpose 
exception, which would not be consistent with section 29. As such, 
third parties that either place or assist in the placement of deposits 
to provide these core deposit-placement services for its customers will 
not qualify for the primary purpose exception.
    The FDIC notes that one of the designated exceptions is for 529 
plans in which the primary purpose is to encourage savings for future 
education costs as part of a tax-advantaged savings plan. While a 
primary purpose of encouraging or enabling savings does not generally 
qualify for the primary purpose exception for the reasons described 
above, encouraging savings as part of a specific tax-incentivized 
government program, similar to 529 plans, may qualify.
E. Evaluation of Business Lines
    As noted in the Brokered Deposits NPR, the analysis and assessment 
of discrete business lines is an important aspect of whether certain 
agents or nominees meet the primary purpose exception. In evaluating 
whether an

[[Page 6756]]

applicant meets the requirements of the primary purpose exception, the 
FDIC would analyze specific business lines in which the applicant has a 
specific type of relationship with its customers. This was intended to 
prevent an agent or nominee engaged in the brokering of deposits from 
evading the statutory restrictions by adding or combining its brokering 
business with another business such that the deposit broker business is 
no longer its primary purpose. Under the proposed rule, the term 
business line would refer to the business relationships an agent or 
nominee has with a group of customers for whom the business places, or 
facilitates the placement of, deposits.
    Commenters who addressed the proposed definition of ``business 
line'' raised concerns that the proposed definition does not reflect 
how businesses view their business lines. Specifically, commenters 
suggested that the FDIC permit the third party to identify one or more 
business lines for purposes of the application process, so that the 
business line would reflect risk management and reporting policies and 
procedures utilized by the third party. These commenters expressed the 
view that the third party, rather than the FDIC, should have discretion 
to determine specific business lines, as business lines will vary 
significantly across different entities. One commenter noted that 
business line information is generally proprietary and confidential and 
thus third parties may not be willing to provide such information.
    The FDIC expects that entities that submit a notice or application 
for the primary purpose exception should, in good faith, determine 
their appropriate, specific business lines. The FDIC, in reviewing a 
particular business arrangement for the primary purpose exception, will 
generally defer to the descriptions of business lines provided by the 
applicant or notice-filer. Nonetheless, the determination of what 
constitutes a business line will depend on the facts and circumstances 
of a particular deposit placement arrangement, and the FDIC ultimately 
retains discretion to determine the appropriate business line to which 
the primary purpose exception would apply. The FDIC is more likely to 
scrutinize the identification of a business line if the business 
relationships to which it refers are materially broader than the 
business relationships with the specific group of customers for whom 
the business places, or facilitates the placement of, deposits.
    The FDIC expects that in many cases, particularly in the case of 
agents or nominees who are nonfinancial companies, the identification 
of a business line will be simple and straightforward, and in some 
cases may encompass an entire business.
F. Involvement of Other Third Party Intermediaries
    If an agent or nominee qualifies for a statutory exception from the 
deposit broker definition, it is possible that one or more additional 
third parties that are engaged in the business of placing, or 
facilitating the placement of, customer deposits may qualify as a 
deposit broker. The FDIC understands that, in certain deposit placement 
arrangements, agents or nominees may use third party intermediaries 
(and in some cases a number of them) to provide administrative 
functions. To the extent that these third party intermediaries do not 
meet the deposit broker definition, then deposits placed at IDIs via an 
agent or nominee that meet an exception to the definition of deposit 
broker (for example, the primary purpose exception), will be 
nonbrokered. If, however, the third party intermediary is, for example, 
providing matchmaking functions for the agent or nominee and insured 
depository institutions, as defined in this final rule, then it would 
meet the ``facilitation'' part of the deposit broker definition, and 
the deposits placed by or through the intermediary would be brokered 
deposits, regardless of the status of the agent or nominee.
    In the case of the primary purpose exception, IDIs that receive 
deposits from agents or nominees that meet the primary purpose 
exception should be aware of any other third parties involved in the 
placement of deposits and whether those other third parties meet the 
deposit broker definition in order to properly complete their 
Consolidated Reports of Condition and Income (``Call Reports''), which 
require reporting of brokered deposits held by IDIs. If such other 
third parties meet the definition of deposit broker, deposits placed by 
or through that third party are considered brokered.
    See section I(C)(3)(h) for further discussion of this topic in the 
context of designated exceptions subject to the notice requirement and 
the application process.
3. Notice and Application Process for the Primary Purpose Exception
    Under the proposal, entities that place deposits at insured 
depository institutions under the business relationships that were 
deemed to meet the primary purpose exception would have been subject to 
expedited processing under the application process. The FDIC is 
revising this part of the proposed application process and, under the 
final rule, will no longer require applications for those two business 
relationships or for the additional designated business relationships 
described in this final rule. The purpose of this change from the 
proposal is to streamline the process for entities (or business 
arrangements) that meet a bright-line primary purpose exception. In 
other words, the FDIC has already evaluated these business 
relationships as part of this rulemaking process and has determined 
that they meet the primary purpose exception. As such, entities will 
not need to go through an application process if they are placing, or 
facilitating the placement of, deposits as part of a business 
relationship that is a designated exception under this final rule.
a. Notice Requirement
    For two of the designated exceptions--the ``25 percent'' and the 
``enabling transactions'' business relationships--the FDIC is requiring 
that third parties submit a written notice to the FDIC indicating that 
the third party will rely upon the applicable designated exception.\50\ 
The notice may also be submitted by an insured depository institution 
that is receiving deposits from the third party.
---------------------------------------------------------------------------

    \50\ Entities that qualify for other designated exceptions 
detailed above are not subject to a notice, application, or 
reporting process. The applicable specific contents for the two 
types of notice submissions are provided in section I(C)(3)(b).
---------------------------------------------------------------------------

    Upon the FDIC's receipt of the notice, the third party that is the 
subject of the notice may rely upon the applicable designated exception 
for a particular business line. The FDIC will establish an electronic 
process for the receipt of notices. This process will include providing 
the notice filer with an immediate acknowledgement of receipt. The FDIC 
may, however, at its discretion, and at any time, including during the 
supervision and examination of an insured depository institution, 
require the notice filer to provide additional information. Such 
requests generally will be limited to verifying that the third party 
meets the criteria for the applicable designated exception, and the 
FDIC generally expects to only make such requests if there is reason to 
believe that the third party does not meet, or no longer meets, the 
criteria for the applicable designated exception. The FDIC also may 
occasionally request other information, such as descriptions of the 
services provided by any additional third parties involved in the

[[Page 6757]]

deposit placement arrangement that may meet the deposit broker 
definition.\51\ The FDIC will only request information specifically 
relevant to whether or not the deposits being placed are brokered. If 
the FDIC learns that the entity no longer meets the criteria of the 
designated exception or that information provided in a notice or 
subsequent reporting was inaccurate, or the entity fails to submit 
required reports, the FDIC may, with notice, revoke the entity's 
primary purpose exception.\52\
---------------------------------------------------------------------------

    \51\ See section I(C)(3)(h) for further discussion on requests 
for additional information related to additional third parties.
    \52\ If a primary purpose exception is revoked due to an 
inaccurate notice or report, or due to a failure to submit a 
required report, but the entity continues to satisfy the criteria of 
the designated exception, the entity may refile a notice with 
accurate information.
---------------------------------------------------------------------------

    The FDIC is requiring a notice for the ``25 percent'' and 
``enabling transactions'' designated exceptions, and not for the other 
designated exceptions identified in this final rule, because 
eligibility for those two designated exceptions would be difficult for 
the FDIC or an IDI to verify or monitor without access to the contents 
of the notice (which are described below). The other designated 
exceptions generally relate to more specific deposit placement 
arrangements and describe criteria that are less difficult to verify or 
monitor. The FDIC may, or may not, also decide to require a notice for 
any additional designated exceptions that are identified after the 
issuance of this final rule, and the FDIC expects such decisions to be 
based on similar analysis to that described in this paragraph.
    The final rule also requires that third parties that notified the 
FDIC of reliance on a designated exception submit a subsequent notice 
to the FDIC if the third party no longer meets the primary purpose 
exception.
b. Notice Contents and Reporting Requirement
    The written notice that an entity submits will need to include (1) 
the designated exception upon which the entity is relying; (2) a brief 
description of the business line; (3) the applicable specific contents 
for the designated exception; (4) a statement that there is no 
involvement of any additional third party who qualifies as a deposit 
broker, or a brief description of any additional third party that may 
qualify as a deposit broker; and (5) if the notice is provided by a 
nonbank entity, a list of the IDIs that are receiving deposits by or 
through the particular business line at the time that the notice is 
filed. For third parties that meet the primary purpose exception based 
on the ``25 percent'' designated exception the applicable specific 
contents are:
    [cir] The total amount of customer assets under administration by 
the third party for that particular business line; and
    [cir] the total amount of deposits placed by the third party on 
behalf of its customers, for that particular business line, at all 
depository institutions.\53\
---------------------------------------------------------------------------

    \53\ The total amount of deposits placed by the third party 
should be exclusive of the amount of brokered CDs being placed by 
the third party, which is treated as a separate business line.
---------------------------------------------------------------------------

    For third parties that meet the primary purpose exception based on 
the ``enabling transactions'' designated exception the applicable 
specific contents are:
    [cir] Contractual evidence that there is no interest, fees, or 
other remuneration being paid to any customer accounts, and
    [cir] a certification that all customer deposits are in transaction 
accounts.
    Third parties, or insured depository institutions, that submit a 
notice under the ``25 percent'' test will be required to provide 
reporting on a quarterly basis to the FDIC. The report will need to 
include updates to the figures that were provided as part of the 
original notice submission.
    For those that submit a notice under the ``enabling transactions'' 
test, the filing entity will need to provide an annual certification 
that the third party continues to place all customer funds at 
depository institutions into transaction accounts and that customers do 
not receive or accrue any interest, fees, or other remuneration.
c. Overview of the Application Process
    The FDIC is finalizing the proposed application process for 
entities that seek to qualify for the primary purpose exception but 
that do not meet a designated exception. As part of this process, an 
entity can submit an application to the FDIC. For purposes of the 
application process, the term ``applicant'' includes an insured 
depository institution or a nonbank third party \54\ that meets the 
``deposit broker'' definition by either placing (or facilitating the 
placement of) customer deposits at insured depository institutions and 
that seeks to be excluded from that definition through the primary 
purpose exception. If an application is approved, the agent or nominee 
will be considered to meet the primary purpose exception for a 
particular business line.
---------------------------------------------------------------------------

    \54\ The FDIC will look to each separately incorporated legal 
entity as its own ``third party'' for purposes of this application 
process. IDIs may submit an application on behalf of a third party 
that is placing deposits with the IDI.
---------------------------------------------------------------------------

    As mentioned, an applicant may be an insured depository institution 
that applies to the FDIC on behalf of a third party seeking a 
determination that the third party meets the primary purpose exception. 
In this case, if appropriate, the FDIC will evaluate the third party's 
relationships with all IDIs in which the third party places, or 
facilitates the placement of, deposits. An approval that a third party 
meets the primary purpose exception based on an application by an IDI 
on behalf of the third party might be applicable to all deposit 
placements by that third party at any other IDI(s) to the extent that 
the deposit placement arrangements with the other IDI(s) are the same 
as the arrangement between the applicant and the third party. The FDIC 
is of the view that that an agent or nominee who seeks a primary 
purpose exception is likely to apply on its own behalf, given that the 
information required to complete an application will be in possession 
of the agent or nominee.
    Under the proposal, applicants would have received a written 
determination from the FDIC within 120 days of a complete application, 
unless extended by the FDIC with notice if necessary. A commenter 
requested more clarity around the proposed timeline, and suggested 
additional timelines for certain steps in the process. The FDIC is 
providing additional clarity, consistent with the intent of the 
proposal, that the FDIC will notify an applicant within 45 days of 
submission if an application is not complete, and that an extension, if 
necessary, beyond the initial 120 days may last for a maximum of 120 
additional days.
    The FDIC will approve applications submitted under this process if 
the application demonstrates to the FDIC's satisfaction, with respect 
to the particular business line under which the third party places or 
facilitates the placement of deposits, that the primary purpose of the 
third party, for that business line, is a purpose other than the 
placement or facilitation of placement of deposits. Approved applicants 
may be subject to periodic reporting requirements to enable the FDIC to 
ensure that the applicant continues to meet the exception.
d. Application Contents
    An application must include, to the extent applicable, at a 
minimum: \55\
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    \55\ A description of the application contents for agents or 
nominees seeking the primary purpose exception under the ``enabling 
transactions'' business relationship because they place all customer 
deposits at depository institutions into transactional accounts but 
the customer earns some amount of interest, fees or other 
remuneration are provided in section I(C)(2)(b)(ii)(A)(2).

---------------------------------------------------------------------------

[[Page 6758]]

    (1) A description of the deposit placement arrangements between the 
third party and insured depository institutions for the particular 
business line, including the services provided by any relevant third 
parties;
    (2) A description of the business line for which the applicant is 
filing an application;
    (3) A description of the primary purpose of the particular business 
line;
    (4) The total amount of assets under administration by the third 
party;
    (5) The total amount of deposits placed by the 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 determines is necessary to 
complete its review.
    The application also should include supporting documentation and 
relevant contracts related to the items above. The FDIC retains 
authority to request additional information at any time during its 
review. The FDIC's review of whether a third party meets the primary 
purpose exception will be based on the application and all supporting 
information provided.
e. Reporting for Approved Applicants
    Approved applicants may be subject to periodic reporting 
requirements. These reporting requirements will allow the FDIC to 
monitor the applicability of the primary purpose exception and ensure 
that the FDIC is aware of any material changes to the criteria under 
which the FDIC approved the application. The FDIC will describe 
specific reporting requirements, including the frequency and any 
calculation methodology, as part of its written approval for a primary 
purpose exception. The FDIC does not expect to require ongoing 
reporting in all cases. The FDIC will decide whether to require 
reporting, and tailor such reporting if appropriate, on a case-by-case 
basis, depending on the type of information that the FDIC relies upon 
to determine that a particular agent or nominee meets the primary 
purpose exception. Reporting will not be required more frequently than 
quarterly.
f. Monitoring for IDIs
    Under the proposed rule, an IDI that accepted deposits from a third 
party that relies upon the primary purpose exception would have been 
responsible for monitoring the nonbank third party's eligibility for 
the primary purpose exception. The proposal further noted that 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, the IDI may wish to consider the 
reporting and monitoring requirements described here. The FDIC received 
a number of comments that these expectations would be difficult to 
manage or unworkable. Given the potential volume of third parties that 
could qualify for the primary purpose exception, and the idiosyncratic 
business models that such third parties may have, the FDIC agrees that 
this expectation is not appropriate. Instead, under the final rule, an 
IDI that accepts deposits from a third party that relies on the primary 
purpose exception would be expected to be able to access records of the 
nonbank third party's eligibility for the primary purpose exception, 
including copies of the notices delivered to the FDIC and any accepted 
applications. The FDIC also expects that if an IDI has reason to 
believe that a third party that qualified for a primary purpose 
exception no longer qualifies for the primary purpose exception, for 
example due to a change in business model, the IDI would notify the 
FDIC and its primary financial regulator and report the deposits as 
brokered.
g. Requesting Additional Information, Requiring Re-Application, 
Imposing Additional Conditions, and Withdrawing Approvals
    At any time after approval of an application, the FDIC may, at its 
discretion, and at any time, including during the supervision and 
examination of an insured depository institution, require an entity 
whose application has been approved to provide additional information. 
Such requests generally will be limited to verifying that the entity 
continues to satisfy the terms of the approved application, and the 
FDIC generally expects to only make such requests if there is reason to 
believe that the entity does not meet, or no longer meets, the terms of 
the approved application. The FDIC also may occasionally request other 
information, such as the services provided as part of the deposit 
placement arrangement by any additional third parties that may meet the 
deposit broker definition. The FDIC will only request information 
specifically relevant to whether or not the deposits being placed are 
brokered. If the FDIC learns that the entity no longer meets the terms 
of the approved application, for example because the entity has 
undergone material changes to its business that renders the business no 
longer eligible for the primary purpose exception, or that information 
provided in an application or subsequent reporting was inaccurate, the 
FDIC may, with written notice and adequate justification, require the 
entity to submit a new application for approval, impose additional 
conditions on the previously granted approval, or withdraw a previously 
granted approval.
    A commenter requested that the FDIC clarify that the FDIC would 
only modify or withdraw an approval if there is a material change in 
the facts or circumstances relied on by the FDIC in granting its 
initial approval. As noted above, the FDIC would modify or withdraw an 
application if the FDIC learns that the entity no longer meets the 
terms of the approved application or if information provided in an 
application or subsequent reporting was inaccurate. Additionally, the 
FDIC generally expects to give an entity with an approved application 
an opportunity to reapply or adjust its business relationships prior to 
withdrawing, or imposing additional conditions, on a previously granted 
approval.
h. Additional Third Parties
    As noted above, the FDIC may request additional information 
following the filing of a notice or application about additional third 
parties involved in the arrangement. If the FDIC finds that a third 
party applicant or notice filer (or a third party on whose behalf an 
IDI has submitted a notice or application) meets the primary purpose 
exception, but another third party involved in the arrangement meets 
the deposit broker definition, the FDIC would notify the applicant and 
the other third party of this finding. The absence of such a

[[Page 6759]]

finding does not mean that no additional third party meets the deposit 
broker definition. The FDIC expects to request such additional 
information and make such findings only in certain circumstances, and 
not on a regular or frequent basis, and entities should not rely on the 
FDIC to decide whether additional third parties are deposit brokers.
4. Effective Date and Extended Compliance
    Except as specifically provided here, the final rule will take 
effect on April 1, 2021, and will be reflected in Call Report Data due 
June 30, 2021. Full compliance with the regulation is extended to 
January 1, 2022. The extended compliance date is intended to provide 
sufficient time for financial institutions to put in place systems to 
implement the new regulatory regime and to allow the FDIC to develop 
internal processes and systems to ensure a consistent and robust review 
process.
    Notices. Starting April 1, 2021, an entity that wishes to rely upon 
a designated exception for the primary purpose exception described in 
this final rule that requires a notice submission must file a notice, 
and comply with any applicable reporting requirements. However, the 
full compliance date of January 1, 2022, will allow entities to 
continue to rely upon existing staff advisory opinions or other 
interpretations that predated this final rule in determining whether 
deposits placed by or through an agent or nominee are brokered 
deposits. After January 1, 2022, entities may no longer rely on upon 
staff advisory opinions or other interpretations that predated this 
final rule, and to the extent that such entities instead opt to rely on 
a designated exception for which a notice is required, a notice must be 
filed. After January 1, 2022, the advisory opinions and other publicly 
available interpretations set forth in Appendix 1 to this notice will 
be moved to inactive status.
    Applications. Similarly, starting April 1, 2021, entities that wish 
to apply for a primary purpose exception, as described in section 
I(C)(3)(c-g), may submit an application starting on that date. The FDIC 
will begin its application review as soon as possible, but no later 
than September 3, 2021. Written determinations for applications 
submitted on or before September 3, 2021, will be provided by January 
1, 2022 (consistent with the 120-day review period), unless extended, 
with notice, if necessary. As stated above, however, the full 
compliance date provision will allow entities who rely on the primary 
purpose exception the option to continue to rely on existing staff 
advisory opinions or other interpretations that predated this final 
rule until January 1, 2022. After that date, such entities will no 
longer be permitted to rely on existing staff advisory opinions or 
other interpretations that predated this final rule and must have an 
application, if appropriate.
5. Prior FDIC Staff Advisory Opinions
    In the Brokered Deposits NPR, the FDIC indicated that it would 
review existing advisory opinions to determine those that should be 
codified in the final rule and those that are outdated and should be 
rescinded. This section reviews and discusses the comments relating to 
prior FDIC staff advisory opinions. The FDIC notes, however, that this 
final rule will allow certain entities that have relied upon previous 
staff opinions regarding the primary purpose exception to continue to 
rely upon the primary purpose exception under designated exemptions 
described.\56\ Moreover, and as provided above in section I(C)(4), the 
FDIC will allow entities to continue to rely upon all previous staff 
advisory opinions related to brokered deposits until January 1, 2022.
---------------------------------------------------------------------------

    \56\ A discussion of the primary purpose exception and the 
advisory opinions provided in section I(C)(2)(b)(ii)(B).
---------------------------------------------------------------------------

a. Comments on Prior FDIC Staff Advisory Opinions
    A significant number of commenters addressed this aspect of the 
Brokered Deposits NPR. Of those who commented, the majority urged the 
FDIC to grandfather all existing advisory opinions, particularly those 
opinions where the staff had previously interpreted the primary purpose 
exception as applying. A few commenters identified specific advisory 
opinions that they believed should be retained or codified, but the 
general view was that all advisory opinions should continue to be 
available and active.
    One banker recommended that the FDIC retain existing advisory 
opinions that conclude that specific company activities do not make the 
company a deposit broker, while several other bankers urged the FDIC to 
grandfather all relationships based on current advisory opinions and 
suggested that such relationships be exempt from the definition of 
deposit broker. One banker stated that firmly-established business 
relationships should be protected by maintaining all existing FDIC 
advisory opinions, while a second banker stated that the FDIC should 
maintain all advisory opinions to avoid dismantling established 
partnerships with industry participants who rely on current advisory 
opinions to provide their services to banks. Still another banker 
suggested that the FDIC codify certain long-standing, frequently 
relied-upon advisory opinions and repeal or update outdated advisory 
opinions.
    A few commenters also addressed the process of reviewing and 
rescinding, or codifying, any advisory opinions. A state bankers' 
association called on the FDIC to publicly indicate which advisory 
opinions would remain and allow a three-year transition to conform to 
the new rule. A national trade group representing the banking industry 
suggested that the FDIC implement a formal notice and comment process 
for rescission of advisory opinions, and stated that any exemptions 
from previously granted advisory opinions should remain in effect. The 
commenter further stated that any exemptions that are revoked should 
have a 3-year transition period. A second bank trade association wrote 
that the FDIC should only rescind the advisory opinions after a notice 
and comment period.
b. Final Rule Discussion of Prior Staff Advisory Opinions
    As part of this rulemaking process, the FDIC evaluated all previous 
FDIC staff advisory opinions related to brokered deposits to identify 
those that are no longer relevant or applicable based upon the 
revisions made as part of this final rule. The FDIC also, as part of 
its review, evaluated whether previous FDIC staff advisory opinions may 
continue to be relied upon and may be applicable under the new 
framework of this final rule.
    As a result of this review, the content of some of the opinions 
have been included in this final rule.\57\ However, upon the full 
compliance date of the final rule (January 1, 2022), previous staff 
advisory opinions will be moved to inactive status on the FDIC's 
website.\58\ The FDIC recognizes that given the significant changes in 
the regulation, it is likely that in most, if not all, cases, the 
analysis contained in the various advisory opinions will no longer 
accurately reflect the regulation, even though in many cases the result 
will be the same. Codifying all previous staff opinions would thus 
result in the existence of two parallel regulatory

[[Page 6760]]

regimes for brokered deposits that would make it difficult for entities 
and banks to understand the interpretations that apply for their 
particular deposit placement arrangement. Instead, the FDIC has (1) 
provided additional clarity on the ``facilitation'' part of the deposit 
broker definition and (2) included in its list of designated exceptions 
a number of the business arrangements that have previously been viewed 
by staff at the FDIC to meet the primary purpose exception. In 
addition, and as noted earlier, the FDIC has established an extended 
compliance period for the final rule to ensure that entities who are 
impacted have ample time to adjust previous arrangements, if necessary.
---------------------------------------------------------------------------

    \57\ See discussion on ``designated exceptions'' in section 
I(C)(2)(b)(ii)(A)-(B).
    \58\ See list of publicly available FDIC staff advisory opinions 
and FILs related to section 29 in Appendix 1.
---------------------------------------------------------------------------

    Those entities such as listing services, marketing firms, or 
certain companies that design their own deposit products with special 
features, which have relied upon previous staff advisory opinions 
outside of the primary purpose exception context to develop their 
business in a way to avoid meeting the ``deposit broker'' definition, 
will need to review the new criteria developed under this final rule to 
determine whether their current arrangements meet the deposit broker 
definition. Below is a discussion of these entities and how they fit 
within this final rule.
    Listing services. A ``listing service'' is a company that compiles 
information about the interest rates offered by banks on deposit 
products. Through the years, staff at the FDIC have developed criteria 
to help determine whether a ``listing service'' meets the ``deposit 
broker'' definition. Under this final rule, the FDIC anticipates that 
whether a listing service, or a similar service that posts information 
about bank rates, is a deposit broker will likely depend on whether the 
service meets the new criteria under the ``facilitation'' part of the 
deposit broker definition. Based upon the new ``facilitation'' 
definition, a listing service that is passively posting rate 
information and sending trade confirmations between the depositor and 
the bank is unlikely to be a deposit broker. However, if a listing 
service provides services that meet one of the three prongs of the 
``facilitation'' definition, then it would be considered a deposit 
broker.
    Entities that Provide Marketing Services. Some insured depository 
institutions attempt to attract new depositors through advertising or 
referrals by third parties in exchange for fees based upon the volume 
of deposits placed. In these cases, and under the assumption that the 
deposits are being placed directly by the depositors, the third parties 
generally would not meet the ``deposit broker'' definition, unless they 
took actions that meet one of the three prongs of the ``facilitation'' 
definition. Under the definition of facilitation, it is unlikely that a 
third party that is, for example, providing general marketing or 
advertising services on behalf of a bank (e.g., providing a link on its 
website) in exchange for a volume-based fee, will meet the deposit 
broker definition.
    Entities that Design Deposit Products. Some third parties design 
deposit products with special features, such as deposit accounts that 
produce interest or rewards based on account activity. If a company 
merely designs deposit products or deposit accounts for banks, and 
markets the banks that offer the deposit products, it would not likely 
meet the deposit broker definition unless it places deposits at more 
than one IDI or meets one of the three prongs of the ``facilitation'' 
definition.

D. Discussion of Certain Other Deposit Placement Arrangements Raised by 
Commenters

    In response to the NPR, some commenters asked how deposits placed 
through certain third parties would be treated under the primary 
purpose exception. These arrangements are not being designated as 
meeting the primary purpose exception, however, the FDIC acknowledges 
that under certain circumstances, an agent or nominee acting under one 
of these business relationships could meet one of the designated 
exceptions.
    Trust Companies. Trust companies that administer trusts sometimes 
place funds at IDIs while acting in a fiduciary capacity for a number 
of clients and accounts. The FDIC understands that these trust 
companies invest their customer assets under administration in a 
variety of different investment products, which may include deposit 
accounts. As such, the FDIC believes that some trust companies will be 
eligible to meet the primary purpose exception under the ``25 percent 
test'' because they place less than 25 percent of customer assets under 
administration at IDIs. Additionally, a trust company that places 
customer deposits, as described above, at only one IDI would not 
qualify as a deposit broker.
    Moreover, section 29 provides targeted statutory exceptions to the 
``deposit broker'' definition for specific trust activities and one for 
trust departments of IDIs.\59\ Trust companies that place customer 
deposits with IDIs that do not qualify for any of the exceptions listed 
above will also be able to avail themselves of the primary purpose 
exception through the application process provided in this final rule, 
and the application would be approved if the trust company demonstrated 
that providing traditional trust services, rather than placing 
deposits, was the trust company's primary purpose.
---------------------------------------------------------------------------

    \59\ See 12 U.S.C. 1831f(g)(2).
---------------------------------------------------------------------------

    Companies that Provide Certain Software Services. Some companies 
provide accounting, cash management, and other administrative support 
via software services to clients. These companies, on behalf of its 
clients, place deposits at either one or a group of preferred or 
partner banks that are sometimes integrated with its software services. 
Because these companies place deposits at IDIs, they meet the 
definition of ``deposit broker.'' Commenters, in response to the NPR, 
argued that such software companies (e.g., bankruptcy management 
software companies) should meet the primary purpose exception because 
their primary relationship with its customers is to provide accounting 
services and not the placement of deposits. The FDIC notes that 
software providers may place customer deposits into transactional 
accounts that pay no (or nominal amounts of) interest, fees, or other 
remuneration to the customer. As such, these software providers may be 
eligible to meet the enabling transactions test for the primary purpose 
exception. Additionally, a software provider that places customer 
deposits, as described above, at only one IDI would not qualify as a 
deposit broker. If such a software provider does not meet the enabling 
transactions test and applies for a primary purpose exception, the FDIC 
would approve the application if the software provider demonstrates 
that providing software services, rather than placing deposits, is the 
primary purpose of the business relationship.

E. Other Supervisory Matters Related to Brokered Deposits

1. Brokered Deposits and Assessments
    In the proposed rule, the FDIC noted that it planned to consider 
modifications to its deposit insurance assessment regulations in light 
of the changes made to the brokered deposits regulation. This was one 
of several changes the FDIC was considering to make its large bank 
pricing model more risk-sensitive. Given the economic uncertainty 
surrounding the COVID-19 pandemic, the FDIC decided to postpone 
consideration of such changes to its deposit insurance assessment 
pricing. As noted below, institutions will be required to report to the 
FDIC or on the Call Report certain types of

[[Page 6761]]

deposits that will not be considered brokered deposits under the final 
rule. The FDIC plans to monitor the data resulting from such reporting 
and will consider in the future whether modifications to deposit 
insurance assessment pricing related to certain types of funding 
concentrations are warranted, consistent with the statutory requirement 
that the assessments be risk-based.
2. Reporting of Certain Deposits on Call Reports
    The proposed rule indicated that 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. 
As part of the final rule implementing a stable funding requirement for 
certain large banking organizations (also known as the net stable 
funding ratio or ``NSFR'') the FDIC, along with the Board of Governors 
of the Federal Reserve System and the Office of the Comptroller of the 
Currency, stated their intent to revise the Call Reports to obtain data 
that may help evaluate funding stability of sweep deposits over time to 
determine their appropriate treatment under the liquidity regulations. 
The FDIC further intends to monitor this information to assess the risk 
factors associated with sweep deposits and determine assessment 
implications, if any. Any changes to reporting requirements applicable 
to the Call Reports, and their instructions, would be effectuated in 
coordination with the Federal Financial Institutions Examination 
Council in a separate Paperwork Reduction Act notice.
3. Additional Supervisory Matters
    The FDIC recognizes that, under the final rule, categories of 
deposits that are currently considered brokered will 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 the final rule 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. 
FDIC examiners will continue to review funding as part of safety and 
soundness examinations, regardless of whether or not the deposits used 
by the IDI are brokered. Among other things, examiners will review 
whether banks are reporting their deposits appropriately on Call 
Reports.\60\ The FDIC will work to ensure that any such decisions by 
examiners are made consistently. Additionally, this regulation 
addresses whether certain deposits are considered brokered, but nothing 
in this final rule changes the FDIC's or other federal regulators' 
authorities under section 8 or section 39 of the FDI Act.
---------------------------------------------------------------------------

    \60\ Examiners will not, however, require that an IDI treat a 
third party as a deposit broker if the third party has qualified for 
the primary purpose exception through a designated exception or an 
approved application.
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F. Alternatives

    The FDIC is adopting these comprehensive changes to the brokered 
deposit regulations after considering comments received pursuant to the 
ANPR and NPR 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 establish 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.

G. Expected Effects

    As described previously, the final rule amends the FDIC's 
regulations that implement provisions of section 29 regarding brokered 
deposits. The final rule creates a new framework for analyzing certain 
provisions of the statutory definition of ``deposit broker.'' Further, 
the final rule amends one of the ten regulatory exceptions to the 
definition of ``deposit broker.'' The aggregate effect likely would be 
that some amount of deposits currently reported as brokered deposits 
will no longer be so reported.
    As of June 30, 2020, there were 5,075 insured depository 
institutions holding approximately $21.2 trillion in assets and $15.6 
trillion in domestic deposits. Of those domestic deposits, $1.2 
trillion (7.7 percent) are currently classified as brokered deposits. 
Approximately 38 percent (1,932) of FDIC-insured institutions reported 
some positive amount of brokered deposits. These insured institutions 
accounted for the vast majority of banking industry assets and 
deposits--almost $19.5 trillion (92.0 percent) of assets and almost 
$14.1 trillion (90.4 percent) of domestic deposits.\61\
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    \61\ Call Report data, June 30, 2020.
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    Traditional brokered CDs will continue to be defined by the rule as 
brokered deposits and subject to the associated statutory and 
regulatory restrictions. Certain types of deposits, notably deposits 
placed by agents or nominees that meet one of the identified 
``designated exceptions'' or otherwise satisfy criteria set forth in 
the revisions made in this final rule to the primary purpose exception 
will not be considered brokered deposits. 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. \62\ However, a 
reliable estimate of this change in designation is not possible with 
the information currently available to the FDIC.
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    \62\ A number of the ``designated exceptions'' identified as 
meeting the primary purpose exception are based upon business 
relationships that staff at the FDIC previously viewed as meeting 
the primary purpose exception.
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    There are potentially five broad categories of effects of the rule: 
Effects on consumers and economic activity; effects applicable to 
potentially any insured institution; effects applicable to less than 
well-capitalized institutions; effects applicable to nonbank entities 
that may or may not be deemed deposit brokers; and reporting compliance 
effects on covered entities.
1. Consumers and the Economy
    The final rule amends the FDIC's brokered deposit regulations to 
reflect recent technological changes and innovations. The rule 
generates benefits to banks and consumers if 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 rule results in such deposits as being non-brokered, 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 final

[[Page 6762]]

rule. Additionally, to the extent that the rule supports greater 
utilization of deposits currently classified as brokered deposits, but 
classified as non-brokered under the rule, it could increase the funds 
available to insured depository institutions for lending to U.S. 
consumers. If the 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.
2. All Insured Institutions
    The rule could immediately affect the 1,932 FDIC-insured 
institutions currently reporting brokered deposits. Going forward, the 
rule could affect all 5,075 FDIC-insured institutions whose decisions 
regarding the types of deposits to accept could be affected.
    The final rule benefits insured institutions and other interested 
parties by providing greater legal clarity regarding the classification 
and treatment of brokered deposits. As result of this increased 
clarity, the final rule reduces 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 DIF loss rates.\63\ 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 and safety with deposit insurance, rather than 
as part of a relationship with a bank, 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 certain deposit sweep arrangements 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 rule reduces bankers' perception 
of a stigma associated with certain types of deposits, more 
institutions may be incentivized to accept such deposits.
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    \63\ See FDIC's 2011 Study on Core and Brokered Deposits, July 
8, 2011.
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    The rule could incentivize the development of banking relationships 
between banks and other firms. The new opportunities could spur growth 
in the types of companies that provide deposit placement services, 
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 
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 rule, a 
bank's assessment may decrease, all else equal. Certain calculations 
required under the Liquidity Coverage Ratio and NSFR rules applicable 
to some large banks could also be affected by the 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 rule, and consequently do not allow for an estimate of 
effects on assessments or the reported Liquidity Coverage Ratio and 
NSFR.
    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 in the event they fall below well capitalized and become 
subject to the restrictions set forth in the law and regulations 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.
3. 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. By generally reducing the scope of deposits that are 
considered brokered, the rule allows not well capitalized banks to 
increase their holdings of deposits that are currently reported as 
brokered but will not be reported as brokered under the final rule. As 
of June 30, 2020, there are only 10 adequately capitalized and 
undercapitalized banks.\64\ These banks hold approximately $2.5 billion 
in assets, $1.7 million in domestic deposits, and $21.7 million in 
brokered deposits.\65\ These banks could be directly affected by the 
rule in that they could potentially accept more or different types of 
deposits currently designated as brokered.
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    \64\ Information based on June 30, 2020 Consolidated Reports of 
Condition and Income. The 10 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).
    \65\ Call Report Data, June 30, 2020.
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    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.
4. Entities That May or May Not Be Deposit Brokers
    The revisions to the brokered deposit regulations would likely give 
rise to some activity by nonbank third parties seeking to determine 
whether they are, or are not, deposit brokers under the

[[Page 6763]]

rule. This may include submitting notices or filing applications by 
some third parties that seek to avail themselves of the primary purpose 
exception, or by banks submitting notices or filing applications on 
behalf of third parties. In certain circumstances, ongoing reporting or 
certification by these entities is also expected under the final rule.
5. Reporting Compliance Costs
    As previously discussed, the final rule establishes some reporting 
obligations for certain insured depository institutions or nonbank 
third parties that meet the ``deposit broker'' definition by either 
placing (or facilitating the placement of) customer deposits at insured 
depository institutions but meet the ``primary purpose'' exception. 
Specifically, the rule provides that entities that wish to invoke two 
of the ``designated exceptions''--the ``25 percent'' and ``enabling 
transactions'' business arrangements--will be required to submit a 
notice to the FDIC. These entities will also be subject to either a 
quarterly reporting or annual certification requirement.
    The final rule also establishes 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, and does not meet one of the ``designated 
exceptions,'' could request that the FDIC consider the agent or nominee 
as meeting the primary purpose exception. Entities that meet the 
primary purpose exception via an approved application may also be 
subject to periodic reporting requirements under the final rule.
    These reporting requirements will allow the FDIC to monitor the 
applicability of the primary purpose exception.
    Finally, the FDIC may, with notice, revoke a primary purpose 
exception of a third party that relies on a ``designated exception,'' 
if the third party no longer meets the criteria for a designated 
exception, the notice or subsequent reporting is inaccurate, or the 
notice filer fails to submit the required reports. For approved 
applications, the FDIC may, under certain circumstances and with 
adequate justification, require the entity to refile a notice, submit 
an application, reapply for approval, impose additional conditions on 
the approval, or withdraw a previously granted approval, with notice to 
the entity.
    There were 3,517 Financial Industry Regulatory Authority 
(``FINRA'') registered broker-dealer firms in 2019.\66\ Some of the 
3,517 broker-dealers may not engage in activity which would meet the 
definition of ``deposit broker'' but for meeting the primary purpose 
exception through the ``25 percent test,'' while some firms that do 
engage in such activity may not be among the 3,517 FINRA registered 
broker-dealers. In the absence of data to estimate future respondents, 
consistent with the changes in the rule relative to the NPR, and with 
its Paperwork Reduction Act analysis of this rule, the FDIC assumes 
that 703 firms will submit notices for a ``designated exception'' under 
the primary purpose exception based on placing less than 25 percent of 
customer assets under administration, in the initial year of 
implementation. Further, the FDIC assumes that 176 firms will submit 
notices for a ``designated exception'' under the primary purpose 
exception based on placing less than 25 percent of customer assets 
under administration, on average each year, an ongoing basis.
---------------------------------------------------------------------------

    \66\ 2019 FINRA Industry Snapshot, pg. 13, https://www.finra.org/sites/default/files/2020%20Industry%20Snapshot.pdf.
---------------------------------------------------------------------------

    According to Census data, there are 1,223 establishments within the 
industry in which deposit brokers are classified.\67\ Not all 1,223 
establishments engage in deposit brokering, and some firms which engage 
in deposit brokering may be classified in another industry. In the 
absence of data to estimate future respondents, consistent with the 
changes in the rule relative to the NPR, and with its Paperwork 
Reduction Act analysis of this rule, the FDIC assumes that 245 firms 
will submit notices in reliance on the enabling transactions designated 
exception in the initial year of implementation. Additionally, the FDIC 
assumes that 245 firms submit applications for a primary purpose 
exception in the initial year of implementation. Finally, in the 
absence of data to estimate future respondents, the FDIC assumes that 
61 will file a notice in reliance upon the enabling transactions 
designated exception, or a designated exception identified in the 
future that requires a notice, and an additional 61 will submit an 
application, on average each year, on an ongoing basis.
---------------------------------------------------------------------------

    \67\ 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.
---------------------------------------------------------------------------

    In the initial year of implementation, the FDIC assumes that the 
notice for the ``25 percent'' business relationship will be three hours 
to complete on average, and 0.5 hours per quarter each year after that. 
In the initial year of implementation, the FDIC assumes that the notice 
for the ``enabling transactions'' will take 5 hours to complete on 
average, and 0.5 hours each year after that. In the initial year of 
implementation, the FDIC assumes that the application for entities that 
do not meet a ``designated exception,'' will take 10 hours to complete 
on average, and 0.25 hour per quarter each year \68\ after that. The 
FDIC also recognizes there will likely be outliers who spend more or 
less time on notices, applications, and reporting than the FDIC expects 
at this time, therefore FDIC believes that the compliance burden 
realized by affected entities will likely vary from labor hours 
presented. Therefore, based on the above assumptions and methodology, 
the FDIC estimates the final rule imposes an annual reporting burden of 
5,784 hours for the first year and 497.5 hours each year after that for 
all affected entities. This equates to estimated compliance costs of 
$613,740 in the first year and $51,589 each year after that for all 
affected entities.\69\
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    \68\ This average number reflects that not all approved 
applications are expected to require ongoing reporting.
    \69\ 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.
---------------------------------------------------------------------------

Part II. Interest Rate Restrictions

A. Policy Objectives

    The policy objective of Part II of this final rule is to ensure 
that deposit interest rate caps appropriately reflect the prevailing 
deposit interest rate

[[Page 6764]]

environment, while continuing to ensure that less than well capitalized 
institutions do not solicit or accept deposits by offering interest 
rates that significantly exceed prevailing rates on comparable deposit 
products.

B. Background

    Under Section 29 of the FDI Act, well capitalized institutions are 
not subject to any interest rate restrictions. However, the statute 
imposes interest rate restrictions on insured depository institutions 
that are less than well capitalized, as defined in Section 38 of the 
FDI Act. The statutory restrictions are described in detail below.
    Brokered deposits accepted pursuant to a waiver and certain 
reciprocal deposits. Institutions that are less than well capitalized 
may not pay a rate of interest on brokered deposits accepted pursuant 
to a waiver, or on reciprocal deposits excluded by Section 29 from 
being considered brokered deposits, that ``significantly exceeds'' the 
following: ``(1) The rate paid on deposits of similar maturity in such 
institution's normal market area for deposits accepted in the 
institution's normal market area; or (2) the national rate paid on 
deposits of comparable maturity, as established by the [FDIC], for 
deposits accepted outside the institution's normal market area.'' \70\
---------------------------------------------------------------------------

    \70\ 12 U.S.C. 1831f(e).
---------------------------------------------------------------------------

    Adequately capitalized institutions. Institutions that are 
adequately capitalized may not engage in the solicitation of deposits 
by offering rates that ``are significantly higher than the prevailing 
rates of interest on deposits offered by other insured depository 
institutions in such depository institution's normal market area.'' 
\71\ For institutions in this category, the statute restricts interest 
rates in an indirect manner. Rather than simply setting forth an 
interest rate restriction for adequately capitalized institutions to 
accept brokered deposits, the statute defines the term ``deposit 
broker'' to include ``any insured depository institution that is not 
well capitalized . . . which engages, directly or indirectly, in the 
solicitation of deposits by offering rates of interest which are 
significantly higher than the prevailing rates of interest on deposits 
offered by other insured depository institutions in such depository 
institution's normal market area.'' \72\ In other words, the depository 
institution itself is a ``deposit broker'' if it solicits deposits by 
offering rates significantly higher than the prevailing rates in its 
own ``normal market area.'' Without a waiver, the institution cannot 
accept deposits from a ``deposit broker.'' Thus, the institution cannot 
accept these deposits from itself. In this indirect manner, the statute 
prohibits institutions in this category from soliciting deposits by 
offering rates significantly higher than the prevailing rates in the 
institution's ``normal market area.''
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    \71\ 12 U.S.C. 1831f(g)(3).
    \72\ Id.
---------------------------------------------------------------------------

    Undercapitalized institutions. In this category, institutions may 
not solicit deposits by offering rates ``that are significantly higher 
than the prevailing rates of interest on insured deposits (1) in such 
institution's normal market area; or (2) in the market area in which 
such deposits would otherwise be accepted.'' \73\
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    \73\ 12 U.S.C. 1831f(h).
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C. Regulatory Approach

    The FDIC has implemented the statutory interest rate restrictions 
through two rulemakings.\74\ While the statutory provisions noted above 
set forth a basic framework based upon capital categories, they do not 
provide certain key details, such as definitions of the terms 
``significantly exceeds,'' ``significantly higher,'' ``market,'' and 
``national rate.'' As a result, the FDIC defined these key terms via 
rulemaking in 1992. Both the ``national rate'' calculation and the 
application of the interest rate restrictions were updated in a 2009 
rulemaking.
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    \74\ 57 FR 23933 (1992); 74 FR 26516 (2009).
---------------------------------------------------------------------------

    ``Significantly Exceeds'' or ``Significantly Higher.'' \75\ Through 
both the 1992 and the 2009 rulemakings, the FDIC has interpreted that a 
rate of interest ``significantly exceeds'' another rate, or is 
``significantly higher'' than another rate, if the first rate exceeds 
the second rate by more than 75 basis points.\76\ In adopting this 
standard in 1992, and subsequently retaining it in 2009, the FDIC 
offered the following explanation: ``Based upon the FDIC's experience 
with the brokered deposit prohibitions to date, it is believed that 
this number will allow insured depository institutions subject to the 
interest rate ceilings . . . to compete for funds within markets, and 
yet constrain their ability to attract funds by paying rates 
significantly higher than prevailing rates.'' \77\
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    \75\ The FDIC has not viewed the slight verbal variations in 
these provisions as reflecting a legislative intent that they have 
different meaning and so the agency has, through rulemaking, 
construed the same meaning for these two phrases.
    \76\ 12 CFR 337.6(b)(2)(ii), (b)(3)(ii) and (b)(4). The FDIC 
first defined ``significantly higher'' as 50 basis points. 55 FR 
39135 (1990). As part of the 1992 rulemaking, commenters suggested 
that the FDIC define ``significantly higher'' as 100 basis points. 
In response, the FDIC defined ``significantly higher'' as 75 basis 
points.
    \77\ 57 FR 23933, 23939 (1992); 74 FR 26516, 26520 (2009).
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    ``Market.'' In the FDIC's regulations, as implemented through both 
the 1992 and 2009 rulemaking, the term ``market'' is ``any readily 
defined geographical area in which the rates offered by any one insured 
depository institution soliciting deposits in that area may affect the 
rates offered by other insured depository institutions in the same 
area.'' \78\ The FDIC determines an institution's market area on a 
case-by-case basis.\79\
---------------------------------------------------------------------------

    \78\ 57 FR 23933 (1992); 74 FR 26516 (2009).
    \79\ 12 CFR 337.6(f).
---------------------------------------------------------------------------

    The ``National Rate.'' As part of the 1992 rulemaking, the 
``national rate'' was defined as follows: ``(1) 120 percent of the 
current yield on similar maturity U.S. Treasury obligations; or (2) In 
the case of any deposit at least half of which is uninsured, 130 
percent of such applicable yield.'' In defining the ``national rate'' 
in this manner, the FDIC understood that the spread between Treasury 
securities and depository institution deposits can fluctuate 
substantially over time but relied upon the fact that such a definition 
is ``objective and simple to administer.'' \80\ By using percentages 
(120 percent, or 130 percent for wholesale deposits, of the yield on 
U.S. Treasury obligations) instead of a fixed number of basis points, 
the FDIC hoped to ``allow for greater flexibility should the spread to 
Treasury securities widen in a rising interest rate environment.'' 
Additionally, at the time of the 1992 rulemaking, the FDIC did not have 
readily available data on actual deposit rates paid and used Treasury 
rates as a proxy.
---------------------------------------------------------------------------

    \80\ 57 FR 23933, 23938 (June 5, 1992).
---------------------------------------------------------------------------

    Prior to the 2009 rulemaking, yields on Treasury securities 
plummeted precipitously, driven by global economic uncertainties, which 
resulted in a ``national rate'' that was lower than deposit rates 
offered by many institutions. As part of the 2009 rulemaking, with 
access to data on offered rates available on a substantially real-time 
basis, the FDIC redefined the ``national rate'' as ``a simple average 
of rates paid by all insured depository institutions and branches for 
which data are available.'' \81\
---------------------------------------------------------------------------

    \81\ 74 FR 26516 (2009). The 2009 rulemaking also recognized, 
based on the FDIC's experience, that some institutions still do 
compete for particular products within their local market areas, and 
provided a safe harbor for those institutions.
---------------------------------------------------------------------------

    The ``Prevailing Rate.'' The FDIC has recognized, as part of its 
regulation on interest rate restrictions, that

[[Page 6765]]

competition for deposit pricing has become increasingly national in 
scope. Therefore, through the 2009 rulemaking, the FDIC presumes that 
the prevailing rate in an institution's market area is the FDIC-defined 
national rate.'' \82\
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    \82\ 74 FR 26516, 26519 (2009).
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D. Need for Further Rulemaking

    The current interest rate cap regulations became effective in 2010 
and were adopted to modify the previous national rate cap (based on 
U.S. Treasury securities) that had become overly restrictive. Chart 1 
below reflects the current national rate cap and the average of the top 
ten rates paid for a 12-month CD between 2010 and the present.\83\ 
Chart 1 illustrates that between 2010 and approximately the second 
quarter of 2015, rates on deposits were quite low, even for the top 
rate payers. For this period, the current regulation's methodology for 
calculating the national rate, to which 75 basis points is added to 
arrive at the national rate cap, resulted in a national rate cap that 
allowed less than well capitalized institutions to easily compete with 
even the highest rates paid on the 12-month CD during this timeframe.
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    \83\ The average of the top ten rates paid for 12 month CDs is 
meant to illustrate a competitive offering rate for wholesale 
insured deposits and show the general direction of the movement of 
the market for deposit rates.
[GRAPHIC] [TIFF OMITTED] TR22JA21.000

    However, from about July 2015 through February 2020, the current 
national rate methodology resulted in a national rate for the 12-month 
CD that, when 75 basis points were added, resulted in a national rate 
cap that remained relatively unchanged. During this period, the FDIC 
observed that the relatively unchanged national rate could restrict 
less than well-capitalized banks from competing for market-rate 
funding. Market conditions caused similar changes in the rates of other 
deposit products compared to the applicable rate cap, although the 
timing of when such changes occurred varied from product to product. 
Due to the COVID-19 emergency and the resulting effect on the economy 
beginning in March 2020, deposit rates in general, including the 
national rate and the rates paid by the top rate payers dropped, so 
that less than well capitalized institutions may again easily compete 
with even the highest rates paid on the 12-month CD under the current 
national rate cap.
    There are several reasons that the national rate cap remained 
fairly unchanged from mid-2015 to approximately February 2020. 
Primarily, interest rates were relatively low following the financial 
crisis that began in 2007. Towards the end of 2015, however, some banks 
began to increase rates paid on deposits as the Federal Reserve 
increased its federal funds rate targets. During this time, and up to 
the present day, the largest banks have been, on average, slower to 
raise their published interest rates on deposits. This has held down 
the simple average of rates offered across all insured banks

[[Page 6766]]

and branches. Additionally, institutions, including the largest banks, 
had been offering more deposit products with special features, such as 
rewards checking, higher rates on odd-term maturities, negotiated 
rates, and cash bonuses, that are not included in the calculation of 
the published national rate.
    Because of these developments, the majority of the institutions 
subject to the interest rate caps sought determinations from the FDIC 
to use the local rate for deposits obtained locally as the prevailing 
rate during the period when the national rate cap remained relatively 
unchanged. The national rate cap, however, remained applicable to 
deposits that these institutions obtained from outside their respective 
normal market area, including through the internet.
    Setting the national rate cap at too low of a level could prohibit 
less than well capitalized banks from competing for deposits and create 
an unintentional liquidity strain on those banks competing in national 
markets. For example, a national rate cap that is too low could 
destabilize a less than well capitalized bank that gathers deposits 
outside its local market area just as it is working on improving its 
financial condition. Preventing such institutions from being 
competitive for deposits, when they are most in need of predictable 
liquidity, can create severe funding problems. Additionally, a rate cap 
that is too low may be inconsistent with the statutory requirement that 
an insured depository institution is only prohibited from offering a 
rate that ``significantly exceeds'' or is ``significantly higher'' than 
the prevailing rate. This could unnecessarily harm the institution, 
especially when liquidity planning is essential for safety and 
soundness.

E. Advance Notice of Proposed Rulemaking and Notice of Proposed 
Rulemaking

    On September 4, 2019, the FDIC published in the Federal Register a 
notice of proposed rulemaking (``Interest Rate NPR''),\84\ that 
proposed to amend the national rate, the national rate cap, the local 
market area, and the local market rate cap, as described below.\85\
---------------------------------------------------------------------------

    \84\ 85 FR 7453 (Feb. 10, 2020).
    \85\ 84 FR 46470 (Sept. 4, 2019).
---------------------------------------------------------------------------

1. National Rate
    To address concerns raised in response to the ANPR about the 
current calculation of the ``national rate,'' from which the current 
national rate cap is derived, the FDIC proposed to replace the current 
``national rate'' definition, which is based on the simple average of 
rates paid by all insured depository institutions and branches, with a 
definition based on a weighted average of rates paid by all insured 
depository institutions on a given deposit product, where the weights 
are institutions' respective market share of domestic deposits. This 
change to the calculation of the ``national rate'' was intended to 
address comments received in response to the ANPR that expressed 
concern that the current national rate definition resulted in a 
national rate cap that is too low because the largest banks with the 
most branches have a disproportional effect on the national rate, and 
that the branch-based methodology minimized the significance of online-
focused banks, which have few or no branches but tend to pay the 
highest rates.
2. National Rate Cap
    In the Interest Rate NPR, the FDIC proposed to replace the current 
national rate cap, i.e., the national rate plus 75 basis points, with a 
proposed definition of ``national rate cap'' that is the higher of: (1) 
The rate offered at the 95th percentile of rates weighted by domestic 
deposit share; or (2) the national rate plus 75 basis points, with 
modifications to how the national rate is calculated, as described 
below.
    The FDIC stated that it intended that the proposed two-prong 
national rate cap be effective across economic and interest rate 
cycles. During periods of low interest rates such as during the 2008 to 
2015 period and the current, pandemic environment since March 2020, the 
second prong, i.e., the national rate plus 75 basis points, would 
likely be the governing prong of the proposed national rate cap. During 
more normal interest rate environments, such as between 1992 and 2008, 
and between 2015 and early 2020, the other prong, the 95th percentile 
of rates, would likely be the national rate cap. The proposal was 
intended to provide a more balanced and dynamic national rate cap that 
would ensure that less than well capitalized institutions have the 
flexibility to access market-rate funding, yet prevent them from 
offering a rate that significantly exceeds the prevailing rate for a 
particular product, in accordance with Section 29.\86\
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    \86\ In the proposal, the FDIC discussed other ways it had 
considered to set the national rate cap, including setting at: The 
higher of the current interest rate cap and the one that preceded it 
from 1992 to 2009, and the average of rates paid by the top payers. 
84 FR 46470, 46476-46477. The FDIC also solicited comment on whether 
there were better options for setting a proxy for what it means to 
``significantly exceed'' a prevailing market rate when rates 
converge. 84 FR 46470, 46492-46493.
---------------------------------------------------------------------------

3. Local Rate Cap
    Under the FDIC's the current regulation, there is a presumption 
that the prevailing rate or effective yield in the relevant market is 
the national rate unless the FDIC determines, in its sole discretion 
based on available evidence, that the effective yield in that market 
differs from the national rate. If a bank believes that the posted 
national rates are lower than the actual prevailing rates in the bank's 
normal market area(s), then the bank may request a high rate area 
determination from the FDIC. In determining whether the bank is in a 
high rate area, the FDIC could use segmented market rate information 
(for example, evidence by State, county or metropolitan statistical 
area).\87\ If the FDIC agrees that the bank was in a high rate 
area,\88\ the institution would be permitted to pay as much as 75 basis 
points above the local prevailing rate for deposits on those products 
solicited in its local market areas. For deposits received from outside 
its local market (including through the internet), the institution 
would have to offer rates that did not exceed the national rate cap. 
Also, the FDIC could allow evidence as to the rates offered by credit 
unions but only if the insured depository institution competed directly 
with the credit unions in the particular market.
---------------------------------------------------------------------------

    \87\ 12 CFR 337.6(f).
    \88\ The procedures for seeking such a determination are set 
forth in FIL-69-2009 (Dec. 4, 2009). As explained in the FIL, an 
insured depository institution can request a high rate determination 
for its market area(s) by sending a letter to the applicable FDIC 
regional office. After receiving the request, the FDIC would make a 
determination as to whether the bank's market area is a high-rate 
area. If the FDIC agreed that the bank was operating in a high-rate 
area, the bank would need to calculate and retain evidence of the 
prevailing rates for specific deposits in its local market area. The 
question and answer attachment was revised in November 1, 2011.
---------------------------------------------------------------------------

    In the Interest Rate NPR, the FDIC proposed to establish a local 
market rate cap that is 90 percent of the highest offered rate in the 
institution's local market area for a specific deposit product. 
Specifically, the proposal would allow less than well capitalized 
institutions to provide evidence that any bank or credit union with a 
physical presence in its local market area offers a rate on a 
particular deposit product in excess of the national rate cap. If 
sufficient evidence is provided, then the less than well capitalized 
institution would be allowed to offer an interest rate that is 90 
percent of the highest offered rate in the local market area.
    The Interest Rate NPR would eliminate the current two-step process 
where less than well capitalized institutions request a high rate

[[Page 6767]]

determination from the FDIC and, if approved, calculate the prevailing 
rate within local markets. Instead, a less than well capitalized 
institution would need to notify its appropriate FDIC regional office 
that it intends to offer a rate that is above the national rate cap and 
provide evidence that an insured depository institution or credit union 
in the local market area is offering a rate in its local market area in 
excess of the national rate cap for a comparable deposit product. As 
described above, the institution would then be allowed to offer 90 
percent of the rate offered by the insured depository institution or 
credit union in the institution's local market area. The institution 
would be expected to calculate the local rate cap periodically, and, 
upon the FDIC's request, provide the documentation to the appropriate 
FDIC regional office and to examination staff during subsequent 
examinations.

F. Discussion of Comments

    In response to the Interest Rate NPR, the FDIC received a total of 
43 comments. Three of the comments were from national associations 
representing stakeholders in the banking industry; three were from 
state-level associations representing stakeholders in the banking 
industry in those states; one comment was from another trade 
association; one was from a state banking department, one comment was 
from a law firm on behalf of a bank, and 30 comments were from bankers 
or banks, including 12 similar emails from bankers. The details of 
these comments are discussed below.
1. Discussion of Public Comment on the National Rate
    Several commenters raised concerns about the proposed methodology 
for calculating the national rate. For example, a national trade 
association for the banking industry and several bankers raised 
concerns regarding the use of a weighted approach. Some commenters 
wrote that they believed that the proposed methodology continued to 
give undue weight to the largest institutions with a traditional branch 
based model. One commenter indicated that it remained concerned about 
the continued use of weighting, whether it be by branch, market share, 
or size because they believe that weighting tends to misrepresent 
actual market share. Several commenters urged the FDIC to include rates 
paid by credit unions and internet banks, stating that including those 
rates would make for a more accurate national rate calculation. The 
commenters suggested that such rates are often higher and thus not 
including them would cause the national rate (and, ultimately, the 
national rate cap) to be too low, making it harder for banks, 
particularly community banks, to compete for or attract deposits.
    A trade association recommended that credit union rates be included 
as part of the national rate calculation because credit unions compete 
on both a national and local scale with insured depository 
institutions.
2. Discussion of Public Comment on the National Rate Cap
    Most commenters agreed that the current interest rate cap 
methodology needed to be revised and no commenter recommended that the 
current methodology remain unchanged. Several commenters raised general 
concerns about data quality and transparency, in particular with 
respect to the 95th percentile. One commenter questioned the quality of 
the underlying data used to calculate the rate. One commenter wrote 
that the data that is currently being collected and used by the FDIC to 
calculate the rate cap is not always an accurate representation of 
actual rates that many banks are willing to pay and are actively paying 
and that while the 95th percentile would be an improvement over the 
current methodology, it still does not produce a rate cap high enough 
to exceed prevailing rates in some economic cycles. Several argued that 
the national rate is not robust enough and should be based on publicly 
available, transparent data. One commenter stated that it is important 
to have a transparent and market-based national rate. Another argued 
that the 95th percentile would not be effective because it is not an 
accurate representation of actual rates that many banks are willing to 
pay and actively paying, and that if the FDIC used the 95th percentile 
it should add 75 basis points to that rate. One commenter stated that 
the 95th percentile still gives large banks too much influence over the 
calculation of the rate.
    Several commenters recommended additional changes and requested 
that the proposed methodology be revised in the final rule. A trade 
association representing banks recommended that the FDIC adopt a rate 
cap that is the higher of the rate cap using the methodology in place 
between 1992 and 2009 (the Treasuries-based rate cap), and the rate cap 
using the methodology currently in place but modified so that it is 100 
basis points above the average instead of 75 basis points and so that 
the average is calculated assigning each bank the same weight, with the 
additional change to include credit unions. Another trade association 
representing banks recommended that the FDIC set the national rate cap 
using a formula that it submitted, and implicit in that formula was the 
higher of the pre-2009 Treasuries-based rate and the current rate, with 
modifications.
    A trade association recommended that the FDIC adopt a national rate 
cap of the higher of the current rate cap or the Treasuries-based rate 
cap in place from 1992 to 2009. A State banking commissioner 
recommended that the FDIC set the national rate cap at the higher of 
the following 4 measures: (1) The proposed national rate cap 
methodology; (2) the 1992-2009 methodology, i.e., 120 percent or 130 
percent of the comparable U.S. Treasury plus 75 basis points; (3) the 
average of the top 25 rates offered in the nation; and (4) the highest 
rate offered by a local institution for a particular deposit product. 
For renewals of time deposits, the State banking commissioner 
recommended that a bank be permitted to pay the rate currently paid to 
the customer for the same or lesser amount and for the same or lesser 
term.
    Commenters generally recommended that the national rate cap be more 
transparent by basing it on publicly available market data such as 
Treasury and federal funds rates.
    A banker recommended that the FDIC make a list of the highest rates 
offered to consumers for comparable products, select a certain number 
of the highest rates, e.g., 25 and average those 25 highest rates. To 
accommodate the statutory language, the banker suggested that the 
average be the national rate and the FDIC allow 110 percent of that 
average as the level that does not significantly exceed the national 
rate.
    For nonmaturity deposits, one commenter suggested that the national 
rate cap be based on the federal funds rate, 1-month Treasuries rate, 
FHLB overnight funds rate, or rates offered by listing services. 
Another banker suggested using the 3-month Treasuries rate or the 
federal funds rate, plus 75 basis points. Still another commenter 
suggested that nonmaturity products should use either the pre-2009 
methodology or the rates on 1-year Treasuries.
3. Discussion of Public Comment on Local Rate Cap
    The FDIC received several comments regarding the local rate cap 
proposal. One national trade association representing banks, as well as 
a state trade association, recommended that the FDIC use 125 percent, 
instead of the proposed 90 percent, of a competing interest rate as the 
upper limit, which it

[[Page 6768]]

claimed would allow a less than well capitalized bank to offer 
competitive rates on deposits while not going so far above normal 
market rates as to exacerbate potential safety and soundness issues. 
Another national association representing stakeholders in the banking 
industry recommended that a less than well capitalized institution be 
permitted to offer at least up to 95 percent of the competing 
institution's rate on a particular product in order to allow additional 
flexibility.
    A state-level banking association recommended that internet rates 
and listing service rates be considered when deciding the local rates 
with which an institution competes. A banker stated that the proposal 
is better than the current method of calculating local rates, but 
suggested that the calculation include internet rates.
    Commenters from more rural areas drew a distinction between funding 
operations in rural areas versus funding operations in more urban 
settings. One commenter wrote that banks in rural areas may not have 
access to sufficient local deposits and need to be able to attract 
deposits through other mechanisms, such as online. One commenter 
suggested that caps should relate to a bank's funding method, as there 
are often different rates offered at branches, on-line at the same 
branch, and at a branchless bank. A single rate may result in a cap 
that is too high for banks with many branches and too low for 
branchless banks.
4. Discussion of Other Comments
    One national trade association commended the FDIC for revising its 
Risk Management Supervision Manual of Examination Policies to clarify 
that national rate caps apply only to institutions that are less than 
well capitalized. Despite this recent clarification to the Manual, 
several bankers urged the FDIC to make clear to its examiners that the 
national rate cap may not be used to evaluate well capitalized banks 
and should not be used as a proxy to evaluate financial products of 
well capitalized banks.
    One banker reiterated a comment he made in response to the ANPR 
that the interest rate restrictions should not apply to a bank that has 
capital ratios that satisfy the well capitalized category but is deemed 
adequately capitalized because it is subject to a consent agreement 
that includes a capital maintenance provision. The commenter indicated 
that applying the interest rate restrictions to such an institution 
serves as a strong disincentive to investors injecting additional new 
capital into an institution experiencing difficulties because there is 
no guarantee the FDIC will not impose onerous rate restrictions 
regardless of the amount of capital invested.
G. The Final Rule
    As described in further detail below, the final rule amends the 
FDIC's methodology for calculating the national rate, the national rate 
cap, and the local rate cap. The final rule also provides a new 
simplified process for institutions that seek to offer a competitive 
rate when the prevailing rate in an institution's local market area 
rate exceeds the national rate cap.
1. National Rate
    The FDIC is adopting the national rate methodology generally as 
proposed, but revised to include the rates offered by credit unions. 
After considering the comments that indicated that credit unions 
compete with banks on a national scale, the FDIC is finalizing the 
proposed national rate definition, replacing the interest rate average 
weighted by branches with an average where each institution's interest 
rate is weighted by its share of deposits, with the addition of credit 
union rates. As described in the Interest Rate NPR, calculating the 
national rate by market share, rather than branch count, more 
accurately reflects the marketplace, and provides more emphasis on 
institutions with large or exclusive internet presence as described by 
commenters. However, the FDIC has not been able to find sufficient 
reliable, robust data to include in its national rate calculation the 
interest rates on deposit products with special features, such as 
rewards checking, off-tenor maturities, negotiated rates, cash bonuses, 
and non-cash rewards.
2. National Rate Cap
    In this final rule, the FDIC is adopting the proposed national rate 
cap with a modification in response to comments. This formulation 
retains one prong of the national rate cap that was proposed, i.e., the 
national rate, weighted by deposits (and now including credit unions as 
described above), plus 75 basis points, which will likely be the higher 
of the rates produced by the two proposed prongs in low interest rate 
environments such as the period between 2008 and 2015 and in the 
current period since March 2020.
    However, the FDIC has replaced the other proposed prong, the rate 
offered at the 95th percentile of rates weighted by domestic deposit 
share, which would likely be the higher of the rates produced by the 
two prongs during more normal market conditions. For this prong, the 
final rule substitutes a rate that is 120 percent of the current yield 
on similar maturity U.S. Treasury obligations, plus 75 basis points. 
For nonmaturity deposits, the second prong will be the federal funds 
rate of interest, plus 75 basis points. This method is consistent with 
the alternative that was set forth in the proposal.
    Thus, the national rate cap being adopted is the higher of: (1) The 
national rate, as revised to be based on weighting by deposits rather 
than branches (and including credit unions), plus 75 basis points; or 
(2) 120 percent of the current yield on similar maturity U.S. Treasury 
obligations, plus 75 basis points. The Treasury-based second prong also 
provides that, for nonmaturity deposits, the prong would be the federal 
funds rate, plus 75 basis points.
    The FDIC is replacing the proposed 95th percentile prong with a cap 
based on Treasury yields or federal funds, because, and as noted in the 
Interest Rate NPR, there are certain data limitations with the proposed 
methodology. Specifically, the data gathered from third party sources 
is based upon information provided directly by institutions or made 
available via public sources. As such, some rates being offered for 
certain products are left unreported or unpublished and therefore may 
not be captured as part of the data set used to determine the proposed 
95th percentile prong.
    These limitations are more apparent today than when the FDIC 
adopted its 2009 regulations that first pegged the national rate 
calculation to a methodology based upon deposit rates. This is because 
the 2009 methodology was implemented during a recessionary period, and 
more recently, a significant number of insured depository institutions 
offer products with less standard features that often times are either 
negotiated or not readily provided to third party sources.
    As part of this rulemaking process, and in response to commenter 
concerns about the data limitations, the FDIC reviewed additional data 
sources to determine whether these data sets could provide a more 
reliable reflection of the deposit rate market. While some data is 
available for a certain number of less traditional deposit products, it 
is difficult to accurately calculate an annual percentage yield (APY) 
for certain products without more granular data. For example, deposit 
products that pay rates based upon certain balance thresholds, or the 
number of transactions made within a specific time period, would 
require the calculation of

[[Page 6769]]

APYs based upon granular data (at the individual depositor level) that 
is unavailable, or to make general assumptions that would likely result 
in less reliable APY calculations.
    Nonetheless, based on historical data samples the FDIC evaluated, 
it appears that including the non-traditional deposit products that 
have a calculable APY in the proposed 95th percentile methodology would 
generally result in a relatively small increase in applicable rate 
caps. However, these data samples and analysis had limitations, and the 
observations may not be robust across all banks and all markets; as a 
result, the FDIC plans to further explore these issues in the future 
rather than adopt this methodology as proposed.
    As noted above, the final rule retains the first proposed prong for 
the national rate cap (national rate +75 basis points). The FDIC is 
retaining this prong, as proposed, notwithstanding the data limitations 
described above, because (1) based upon review of the historical 
information, the first prong will be substantially similar to the 
branch-based methodology that the FDIC has used for over a decade, (2) 
the 75 basis point buffer ameliorates, though does not eliminate, some 
of the potential data concerns,\89\ and (3) including a second prong 
not based on deposit data ensures the FDIC is not fully relying on 
deposit data in calculating the national rate cap.\90\ The FDIC will 
continue to explore ways and additional data sources to improve the 
national rate calculation and will continue to consider pegging the 
national rate cap entirely to deposit rates in the future.
---------------------------------------------------------------------------

    \89\ As shown in the appendices, for the period of low interest 
rates during 2010 to 2015, and from March 2020 to the present, the 
75 basis points added to the national rate did not restrict less 
than well capitalized institutions from competing for market-rate 
deposits when U.S. Treasury yields were near zero.
    \90\ As shown in the appendices, for the periods of 1992 and 
2008 and 2015 to early 2020, during periods of more normal interest 
rate environments, the national rate cap based on Treasuries is more 
reactive to increases in deposit rates than the first prong.
---------------------------------------------------------------------------

    Nevertheless, the FDIC acknowledges that replacing the proposed 
95th percentile prong with a cap based on Treasury rates or federal 
funds rates addresses concerns raised by commenters about the 
transparency of the underlying data that the FDIC uses to calculate the 
national rate, as well as the perceived difficulty in replicating the 
methodology. Further, a national rate cap applicable during normal 
market conditions based on the 95th percentile of rates is vulnerable 
to an institution, or a few institutions, with a large deposit share 
affecting the 95th percentile by withdrawing or introducing a product 
into the market or initiating a significant rate change. While such 
fluctuations, caused by factors other than data limitations, would be 
reflective of changes in the market, these changes could cause 
volatility in the national rate cap.
    As another reason for using a Treasuries-based rate as one of the 
rate cap prongs, the FDIC notes that it had previously determined that 
the Treasuries-based rates plus 75 basis points represented a 
reasonable threshold above which rates ``significantly exceeded'' or 
were ``significantly higher'' than the national rate. This 
determination was relatively effective for the 16 years between 1992 
and 2008 and was only changed in 2009 to the current national rate cap 
formula because, in part, Treasury-based rates fell significantly below 
deposit rate averages in the low interest rate environment associated 
with the financial crisis at that time. It is apparent that neither the 
current methodology nor the Treasuries-based rate works in all interest 
rate environments, the methodology adopted by the final rule is 
expected to be durable under both high-rate or rising-rate environments 
and low-rate or falling-rate environments.
    Additionally, the FDIC will change from publishing the national 
rates and national rate caps weekly, to publishing such data monthly to 
limit the need for institutions to continually check the national 
rates. However, the FDIC may in certain circumstances publish the 
national rates and national rate caps more or less frequently, such as 
during a time of unusual rate volatility.
    With respect to nonmaturity deposits, there is no Treasury security 
of comparable duration. In the Interest Rate NPR, the FDIC asked if the 
overnight federal funds rate should be used for nonmaturity deposits 
instead of U.S. Treasury securities products. Several commenters 
recommended that the FDIC use the federal funds rate.\91\
---------------------------------------------------------------------------

    \91\ 84 FR 46470, 46480 and 46492.
---------------------------------------------------------------------------

    In the final rule, for nonmaturity products, in lieu of the 
Treasury-based calculation, the second prong of the national rate cap 
is the federal funds rate plus 75 basis points. The FDIC notes that, 
historically, the rate for the three-month Treasury security has 
tracked closely the federal funds rate. The FDIC has selected the 
federal funds rate as the reference point for nonmaturity deposits 
under the second prong because, as an overnight deposit, Federal funds 
are conceptually closer to nonmaturity deposits.
    The charts attached in Appendix 2 of this notice reflect historical 
data for the interest rates of insured depository institutions that 
would have resulted from the two prongs of the national rate cap being 
adopted. The charts also show the average of top rates offered for 
interest checking, savings, and money market demand accounts, as well 
as CDs for terms of 1-month, 3-months, 6-months, one-year, two-years, 
three-years, and five-years.
3. Local Market Rate Cap in the Final Rule
    In the final rule, the FDIC is adopting the proposed local market 
rate cap of 90 percent of the highest offered rate in the institution's 
local market geographic area. Specifically, a less than well 
capitalized institution may provide evidence that any bank or credit 
union with a physical presence in its local market area offers a rate 
on a particular deposit product in excess of the national rate cap. The 
local market area may include the State, county or metropolitan 
statistical area, in which the insured depository institution accepts 
or solicits deposits. The less than well capitalized institution will 
be allowed to offer 90 percent of the competing institution's rate on 
the particular deposit product to customers located within the less 
than well capitalized institution's local market area.
    The final rule also eliminates the current two-step process where 
less than well capitalized institutions request a high rate 
determination from the FDIC and, if approved, calculate the prevailing 
rate within local markets. Instead, a less than well capitalized 
institution must notify its appropriate FDIC regional office that it 
intends to offer a rate that is above the national rate cap and provide 
evidence that an insured depository institution or credit union with a 
physical presence in the less than well capitalized institution's 
normal market area is offering a rate on a particular deposit product 
in its local market area in excess of the national rate cap. The less 
than well capitalized institution would then be allowed to offer 90 
percent of the rate offered by the competing institution in the 
institution's local market area to customers physically located within 
the institution's local market area. The institution would be expected 
to calculate the local rate cap monthly, maintain records of the rate 
calculations for at least the two most recent examination cycles and, 
upon the FDIC's request, provide the documentation to the appropriate 
FDIC

[[Page 6770]]

regional office and to examination staff during any subsequent 
examinations.
    The FDIC is declining to adopt recommendations by commenters that 
the local rate cap be higher than 90 percent of the highest local rate. 
Given the changes being made to the national rate cap described above, 
the FDIC expects the need for banks to resort to the local rate cap to 
be less frequent, and, in such cases, 90 percent of the highest local 
rate will provide a meaningful cap while allowing the institution to 
compete for funds in its local market. The FDIC is also not revising 
the proposed rule to include internet rates, because the FDIC believes 
that it would be inconsistent with the concept of a ``local'' rate to 
include institutions that do not have a physical location in the local 
market and internet rates, which are offered nationally, are reflected 
in the national rate.
4. Off-Tenor Maturity Products
    If an institution seeks to offer a product with an off-tenor 
maturity for which the FDIC does not publish the national rate cap or 
that is not offered by another institution within its local market 
area, then the institution will be required to use the rate offered on 
the next lower on-tenor maturity for that product when determining its 
applicable national or local rate cap, respectively. For example, an 
institution seeking to offer a 26-month certificate of deposit, and no 
other local institution is offering a 26-month certificate of deposit, 
must use the rate offered for a 24-month certificate of deposit to 
determine the institution's applicable national or local rate cap.
    On-tenor maturities are defined to include the following term 
periods: 1-month, 3-months, 6-months, 12-months, 24-months, 36-months, 
48-months, and 60-months. All other term periods are considered off-
tenor maturities. There is no off-tenor maturity for nonmaturity 
products such as interest checking accounts, savings accounts, or money 
market deposit account.

H. Alternatives

    Below are alternatives, other than those described above, that were 
considered as part of this final rulemaking.
Average of the Top-Payers
    Some commenters suggested that the FDIC use an average of the top 
rates paid as the national rate cap. As an example, the FDIC could set 
the national rate cap based upon the average of the top-25 rates 
offered (by product type). Under this approach, the FDIC would 
interpret that a less than well capitalized institution ``significantly 
exceeds the prevailing rate in its normal market area'' if it offers a 
rate that is above the average of the top rates offered in the country. 
This approach would be simple to administer and the FDIC would be able 
to provide real-time rate caps because it would no longer need to 
maintain and review the extensive data it receives from third party 
data providers to calculate averages.
    The FDIC decided not to choose this approach due to the same data 
limitations as the proposed 95th percentile prong, as described in Part 
II. Additionally, the subset of banks paying the highest rate may have 
a small market share and have little to no influence over competitive 
rates paid in the market. Further, this same small subset of banks 
could be significant outliers from the rates offered by the market.
Incorporate Specials and Promotions Into the Current National Rate 
Calculation
    Several commenters suggested that the FDIC change its methodology 
in calculating the current national rate and include additional inputs 
for the published rates, such as special negotiated rates or other 
monetary bonus offers. As discussed in Part II, the FDIC has not been 
able to find sufficient reliable, robust data to include in its 
national rate calculation the interest rates on deposit products with 
special features, such as rewards checking, off-tenor maturities, 
negotiated rates, cash bonuses, and non-cash rewards. However, as 
noted, the FDIC will continue to explore ways and additional data 
sources to improve the national rate calculation in the future.
One Vote per Institution
    Commenters also recommended that published rates be limited to the 
highest rate offered by each depository institution rather than 
incorporating rates paid at all branches. According to commenters, this 
would prevent a skewing effect on the national rate by the largest 
institutions with the most branches. In considering this alternative, 
the FDIC analyzed the impact of this change by comparing the yield 
curves for the 12-month CD, the current national rate cap (using all 
branches) and the national rate cap using the highest rate offered by 
each IDI (in other words, each institutions receives ``one vote'').\92\ 
The differences in rates range from 15 to 52 basis points, with a range 
of 25 basis points between 2012 through 2017.
---------------------------------------------------------------------------

    \92\ 84 FR 46470, 46481 (Sept. 4, 2019).
---------------------------------------------------------------------------

    The FDIC did not choose this alternative because, in the FDIC's 
view, the one-bank, one vote approach would result in a national rate 
that would not be as reflective of market rates currently being offered 
as weighting by market share. The FDIC believes that institutions with 
more deposits have a greater impact on competition and the market 
rates.
Federal Home Loan Bank Borrowing Rate
    Many commenters suggested that the FDIC amend the current national 
rate calculation and use the Federal Home Loan Bank (FLHB) borrowing 
rate for each maturity. The FDIC chose not to propose the FHLB 
borrowing rate for several reasons. The FHLB borrowing rate is not 
based upon rates offered by institutions,\93\ but is instead based upon 
the cost of funds for FHLB member institutions and requires that FHLBs 
obtain and maintain collateral from their members to secure the 
advance. Collateral requirements and borrowing interest rates may also 
vary based on an insured depository institution's financial condition. 
Moreover, FHLB advances, unlike deposit products, are not insured and 
not guaranteed by the U.S. government. In addition, there are 11 
different FHLB districts, all that establish their own rates that may 
vary between districts. For these reasons, the FDIC does not believe 
that the FHLB borrowing rate would be a reliable indicator of rates 
offered on deposits by insured depository institutions.
---------------------------------------------------------------------------

    \93\ Section 29 of the FDI Act restricts less than well 
capitalized institutions from offering a rate of interest that is 
significantly higher than the prevailing rates of interest on 
deposits offered by other insured depository institutions. 12 U.S.C. 
1831f(g)(3).
---------------------------------------------------------------------------

I. Expected Effects

    The interest rate restrictions apply to an insured depository 
institution that is less than well capitalized under PCA's capital 
regime. An institution may be less than well capitalized either 
because: (1) Its capital ratios fall below those set by the federal 
banking agencies for an institution to be deemed well capitalized; or 
(2) it otherwise meets the capital requirements for the well 
capitalized category, but is subject to a written agreement, order, 
capital directive, or prompt corrective action directive issued by its 
primary regulator that requires the institution to meet and maintain a 
specific capital level for any capital measure.\94\
---------------------------------------------------------------------------

    \94\ 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).

---------------------------------------------------------------------------

[[Page 6771]]

    As noted above, as of June 30, 2020, 10 FDIC-insured institutions 
had capital ratios that put them in a PCA category lower than well 
capitalized.\95\ The FDIC reviewed the deposit interest rates offered 
for 11 products during the month of September 2020 by nine of these 
institutions for which data were available. None of the nine less than 
well capitalized institutions offered interest rates above the current 
or the final rule's national rate caps for any product reviewed.\96\
---------------------------------------------------------------------------

    \95\ The 10 institutions do not include any quantitatively well 
capitalized institutions that may have been administratively 
classified as less than well capitalized.
    \96\ Some institutions offered fewer than 11 products.
---------------------------------------------------------------------------

    The definition of local and national rate cap established by the 
final rule is likely to benefit FDIC-insured institutions. The FDIC 
believes that the definition of national rate cap adopted by the final 
rule is more sensitive to a range of interest rate environments. The 
final rule establishes a more transparent methodology for calculating 
the national rate cap which should benefit FDIC-insured institutions by 
facilitating ease of compliance and simplifying their liquidity 
planning.
    The greater sensitivity of the national rate cap in this final rule 
to prevailing interest rates would likely reduce the potential for 
severe liquidity problems or liquidity failures at viable banks to 
arise solely as a result of the operation of the cap. The FDIC believes 
this aspect of the rule is important, although difficult to quantify 
given uncertainties about both the future interest rate environment and 
the future condition of banks. On the other hand, to the extent rate 
caps are less restrictive, the leeway for some less than well 
capitalized institution to continue to fund imprudent operations could 
increase. In this regard, the FDIC believes the final rule continues to 
comport with the statutory purpose of preventing less than well 
capitalized institutions from soliciting deposits at interest rates 
that significantly exceed prevailing deposit interest rates.
    The final rule could benefit depositors by enabling them to earn 
higher rates of return on their deposits. It is difficult to estimate 
this expected effect because the effect would depend on the future 
economic and financial conditions, and the rates of return of competing 
products, among other things.
    Finally, the final rule could pose some modest regulatory costs for 
FDIC-insured institutions associated with making the necessary changes 
to policies, procedures and internal systems in order to achieve 
compliance with the final rule.

III. Treatment of Nonmaturity Deposits for Purposes of the Brokered 
Deposits and Interest Rate Restrictions

A. Background

    Section 29 provides that an ``insured depository institution that 
is not well capitalized may not accept funds obtained, directly or 
indirectly, by or through any deposit broker for deposit into 1 or more 
deposit accounts'' (emphasis added).\97\
---------------------------------------------------------------------------

    \97\ 12 U.S.C. 1831f(a).
---------------------------------------------------------------------------

    Section 29 also contains two interest rate restrictions, one based 
on when funds are accepted by an institution, the other on when an 
institution solicits deposits. One restriction provides that an 
adequately capitalized institution accepting brokered deposits pursuant 
to a waiver granted under Section 29(c) of the FDI Act or reciprocal 
deposits may not pay a rate of interest that, at the time the funds are 
accepted, significantly exceeds the prevailing rate.\98\ The other 
interest rate restriction prohibits a less than well capitalized 
institution from soliciting any deposits by offering a rate of interest 
that is significantly higher than the prevailing rate.\99\
---------------------------------------------------------------------------

    \98\ 12 U.S.C. 1831f(c).
    \99\ 12 U.S.C. 1831f(g)(3) and (h). The restriction in section 
1831f(g)(3) operates to deem any less than well capitalized 
institution a deposit broker and such deposits brokered deposits, if 
the institution solicits deposits by offering a rate of interest 
significantly higher than the prevailing rate. As a deposit broker, 
such an institution may only accept such deposits if it is 
adequately capitalized and has received a waiver under section 
1831f(c). If below adequately capitalized, pursuant to section 
1831f(g)(3), the institution would be prohibited from accepting such 
funds because a deposit broker may not accept brokered deposits and 
cannot not obtain a waiver to do so. Section 1831(h) results in the 
same prohibition for undercapitalized institutions.
---------------------------------------------------------------------------

    For CDs and other maturity deposits, the timing of when funds for 
such deposits are accepted is straightforward, and Section 29 directs 
that such funds are accepted when the maturity deposit is renewed or 
rolled over.\100\ For deposits credited to a nonmaturity account, 
however, Section 29 does not provide express direction or guidance on 
when such a deposit is accepted or solicited. Applying these concepts 
of solicitation and acceptance to nonmaturity deposits is more relevant 
today than at the time that the law was enacted, in 1989. At that time, 
brokered deposits were almost exclusively maturity deposits. However, 
since 1989, nonmaturity brokered deposits have become more commonplace.
---------------------------------------------------------------------------

    \100\ 12 U.S.C. 1831f(b).
---------------------------------------------------------------------------

    In recent years, there has been some confusion regarding the FDIC's 
application of section 29 to nonmaturity deposits. The FDIC is adopting 
an interpretation in a clear, transparent way, through notice and 
comment rulemaking, to address such confusion.

B. Proposed Rulemakings

    Accordingly, through this rulemaking process, the FDIC considered 
approaches for when nonmaturity deposits held by less than well 
capitalized institutions are subject to the interest rate and brokered 
deposits restrictions.
    In the Interest Rate NPR, the FDIC indicated that it was 
considering an interpretation under which nonmaturity deposits would be 
viewed as ``accepted'' and ``solicited'' for purposes of the interest 
rate restrictions at the time any new nonmaturity funds are placed at 
an institution.
    Under the proposed interpretation, balances in an existing money 
market demand account or other savings account, as well as transaction 
accounts, at the time an institution fell below well capitalized would 
not be subject to the interest rate restrictions unless or until new 
funds were deposited into those accounts. If funds were deposited to 
such an account after the institution became less than well 
capitalized, the entire balance of the account would be subject to the 
interest rate restrictions. Interest rate restrictions would apply to 
any new nonmaturity deposit accounts opened after the institution fell 
below well capitalized.
    In the Brokered Deposits NPR, the FDIC considered a similar 
approach for brokered deposits as it did for interest rate 
restrictions. For brokered nonmaturity deposits, the FDIC considered an 
interpretation under which nonmaturity brokered deposits are viewed as 
``accepted'' for the brokered deposits restrictions at the time any new 
nonmaturity funds 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

[[Page 6772]]

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. The 
restrictions would also generally apply to any new nonmaturity brokered 
deposit accounts opened after the institution falls to below well 
capitalized.

C. Comments

    The FDIC did not receive comments in response to the proposed 
interpretation provided in the Brokered Deposits NPR. However, the FDIC 
received a number of comments in response to proposed interpretation 
provided in the Interest Rate NPR, which are summarized below.
    Interest Rate NPR. A national association that represents banks 
urged the FDIC not to finalize its proposed interpretation regarding 
nonmaturity deposits. The association wrote that such an interpretation 
would be operationally unworkable and would require banks to maintain 
parallel products and systems to be able to track accounts and multiple 
rates in the event the bank becomes less than well capitalized. The 
association also noted that forcing a customer's rate down, should he 
or she deposit an additional amount in the account would hurt consumers 
and likely cause a liquidity stress as customers move their balances 
elsewhere. Instead, the association recommended that once an 
institution falls below well capitalized, the FDIC should exempt or 
grandfather all existing deposit accounts from the rate restrictions, 
restricting only new deposits to new accounts opened with the bank. 
Similarly, another commenter suggested that existing nonmaturity 
accounts should be exempt from rate caps, even when new funds are 
added.
    A stakeholder in the banking industry pointed out that some banks 
can and do pay interest at different rates on different parts of a 
depositor's balance, so called ``tiered interest.'' The commenter 
indicated that there is no apparent reason why a bank could not tier 
interest in a way that would apply an unrestricted rate to the part of 
the balance that consists of deposits received before the bank became 
not well capitalized and apply a restricted rate only to new deposits 
in the account. The commenter indicated that the restricted interest 
rate could be applied on a last-in, first-out basis.

D. Final Rule

    In the final rule, the FDIC is adopting a new interpretation for 
the solicitation and acceptance of nonmaturity deposits. In adopting 
the interpretation described below, the FDIC is relying on the plain 
meaning of the terms ``solicit'' and ``accept'' in a way that it is 
intended to be operationally workable for institutions and the FDIC. 
The FDIC appreciates the operational difficulties described by 
commenters that institutions may have faced under the proposed 
interpretation, and has tried to address such difficulties in the final 
rule while remaining within the parameters of the statutory text.
1. Solicitation of Funds by Offering Rates of Interest
    Section 29 prohibits a less than well capitalized institution from 
soliciting deposits by offering a rate of interest that is 
significantly higher than the prevailing rate. Generally, under the 
interpretation adopted by this final rule, an institution has solicited 
a deposit when a new account is opened or when the institution 
increases the rate of interest on an existing account. If a depositor 
adds funds to, or withdraws funds from, an existing nonmaturity 
account, or leaves funds in an existing nonmaturity account, no 
solicitation by the institution has occurred.
    More specifically, for a nonmaturity account opened after the 
institution has fallen below well capitalized, under the final rule, an 
institution has solicited the deposit when the account is opened. For a 
nonmaturity account opened prior to an institution's PCA status falling 
below well capitalized, funds already credited to the account at that 
time have not been solicited by the institution. In addition, an 
institution will not be considered to have solicited deposits when new 
funds are added to a nonmaturity account that was opened before the 
institution fell below well capitalized, unless it has changed the 
interest rate on the account.
    For a nonmaturity account held by a party as agent or nominee of 
one or more persons, funds are solicited each time the funds of a new 
beneficial owner are added to, for example, the omnibus account. As a 
result, a less than well capitalized institution is restricted from 
soliciting funds of a new beneficial owner at a rate that exceeds its 
applicable rate caps.
2. Acceptance of Brokered Deposits
    Section 29 prohibits a less than well capitalized institution from 
accepting funds obtained, directly or indirectly, by or through any 
deposit broker for deposit into one or more deposit accounts.
    As noted above, for deposits that have a maturity, application of 
section 29 is straightforward. Funds have been accepted whenever a new 
account is opened, or when funds are renewed or rolled over.
    The treatment of nonmaturity deposits is less straightforward. 
Under this final rule, the FDIC is adopting an interpretation for when 
a nonmaturity brokered deposit is considered accepted and therefore 
subject to the brokered deposits restrictions. Generally, the FDIC 
finds that funds are accepted whenever (1) a depositor adds funds to a 
newly opened nonmaturity account (or, similarly, when funds for a new 
underlying depositor are credited to an omnibus account in the case of 
an agent or nominee) or (2) for existing nonmaturity accounts, when the 
aggregate amount of nonmaturity funds accepted by or through a 
particular deposit broker increases. More specifically, the FDIC is 
interpreting that for nonmaturity brokered deposits opened prior to an 
institution's PCA status falling below well capitalized, funds that 
were already credited to the nonmaturity accounts at that time, by a 
particular deposit broker, would not be treated as being accepted. 
Nonmaturity brokered deposits would be considered accepted in instances 
when, after an institution becomes less than well capitalized:
    [cir] a nonmaturity brokered account is opened;
    [cir] the amount of nonmaturity brokered deposits, by or through a 
particular deposit broker, increases above the balance of nonmaturity 
brokered deposits existing at the bank, with respect to that particular 
deposit broker, at the time of downgrade to less than well capitalized; 
or
    [cir] for agent or nominee accounts, new funds of a new beneficial 
owner are added to the account.
    Under this interpretation, if an adequately capitalized bank, for 
example, retained $10 million in nonmaturity brokered deposits from a 
particular deposit broker prior to the PCA downgrade, then it can 
continue to receive funds in and out of the nonmaturity brokered 
accounts maintained by that deposit broker, without seeking a waiver, 
as long as: The total amount of nonmaturity brokered deposits from that 
deposit broker does not increase above $10 million, a new nonmaturity 
account is not opened, or (for agent or nominee accounts) new funds of 
a new beneficial owner are not added to the account. In order for the 
aggregate amount of nonmaturity funds from that particular deposit 
broker to increase above $10 million, or in order for a new depositor 
to place funds into a nonmaturity

[[Page 6773]]

account, the institution would need a waiver from the FDIC.
3. Acceptance of Brokered Deposits Subject to a Waiver Into a 
Nonmaturity Account
    As noted above, for the purposes of Section 29's interest rate 
restrictions, in addition to the restrictions on soliciting deposits by 
offering a rate of interest that is significantly higher than the 
prevailing rate, an adequately capitalized institution is also subject 
to interest rate restrictions when it accepts nonmaturity brokered 
deposits subject to a waiver.
    As a result, nonmaturity brokered deposits that are accepted 
pursuant to a waiver, as described above, would be subject to the 
applicable rate cap. To take the example above, the institution, upon 
falling below well capitalized status, would not be restricted by 
section 29 from paying any rate of interest on nonmaturity funds from 
that particular deposit broker to existing depositors, so long as the 
aggregate funds remained below $10 million. The institution could 
receive a waiver to allow the aggregate funds from that deposit broker 
for that group of existing depositors to exceed $10 million; however, 
the institution would not be permitted to pay a rate of interest in 
excess of the rate cap on more than $10 million in funds. In the event 
the institution receives such a waiver, the rule does not distinguish 
which funds have been accepted pursuant to the waiver, due to the 
fungibility of funds and the operational challenges in imposing such a 
regime, and instead restricts the total amount of funds upon which the 
institution can pay a rate in excess of the applicable rate cap. The 
rate cap restrictions would also apply to any new accounts opened by or 
through the deposit broker after the institution fell below well 
capitalized.
    More specifically, for a nonmaturity account opened prior to an 
institution's PCA status falling below well capitalized, with respect 
to a particular deposit broker, brokered funds that were already 
credited to the nonmaturity account at that time would not be treated 
as being accepted for purposes of the interest rate restrictions. Funds 
added to the account after the institution falls below well 
capitalized, with respect to a particular deposit broker, would be 
subject to the interest rate restriction to the extent they exceeded 
the balance of nonmaturity brokered deposits existing at the bank, with 
respect to that particular deposit broker, at the time of downgrade to 
less than well capitalized, if the institution has received a waiver to 
accept brokered deposits. In addition, with respect to a particular 
deposit broker, for a nonmaturity account opened after an institution 
has fallen below well capitalized, the brokered funds will be treated 
as accepted when the nonmaturity account is opened. For a nonmaturity 
account held by a party as agent or nominee of one or more persons, 
with respect to a particular deposit broker, funds are accepted each 
time funds of a new depositor are added to the omnibus account.
4. Summary of Treatment of Nonmaturity Deposits
    To summarize, if a bank falls below well capitalized, under this 
final rule:
     The bank may not open a new nonmaturity account that pays 
an interest rate above the applicable rate cap, nor may it add funds on 
behalf of a new depositor to an existing nonmaturity account that pays 
an interest rate above the applicable rate cap;
     the bank may continue to pay an interest rate above the 
applicable rate cap on a nonmaturity account opened prior to the bank 
falling below well capitalized, but may not increase the rate, and a 
depositor may add funds to and withdraw funds from such account;
     without a waiver, a bank may not open a new nonmaturity 
account by or through a deposit broker, nor may funds on behalf of a 
new underlying depositor be added to an existing omnibus account in the 
case of an account of an agent or nominee that is a deposit broker;
     without a waiver, the aggregate amount of nonmaturity 
funds that the bank receives by or through a deposit broker may not 
exceed the aggregate amount of nonmaturity funds retained from that 
deposit broker at the time the bank fell below well capitalized, 
(meaning that existing depositors may add funds to or withdraw funds 
from their nonmaturity accounts so long as the aggregate amount does 
not exceed the aggregate amount at the time the bank fell below well 
capitalized);
     with a waiver, the aggregate nonmaturity funds received by 
or through a deposit broker may increase above the aggregate amount at 
the time the bank fell below well capitalized, subject to the terms of 
the waiver; and
     with or without a waiver, the amount of nonmaturity funds 
from a particular deposit broker on which the bank may pay a rate of 
interest in excess of the applicable rate cap may not exceed the 
aggregate amount of nonmaturity funds retained from that deposit broker 
at the time the bank fell below well capitalized.

Appendix 1

                  Publicly-Available Advisory Opinions
------------------------------------------------------------------------
          AO No.                              AO title
------------------------------------------------------------------------
02-2.....................  02-2 Applicability of FDIC Regulations
                            Regarding Brokered Deposits to Credit Unions
                            Servicers That Purchase Certificates of
                            Deposit from FDIC Insured Banks.
02-4.....................  02-4 Opinion Regarding Whether ``Listing
                            Services'' Would Be Considered Deposit
                            Brokers.
04-03....................  04-03 Questions Concerning Capital Market CD
                            Program.
04-04....................  04-04 Question Regarding FDIC's Criteria for
                            Determining When a ``Listing Service'' is a
                            Deposit Broker.
04-05....................  04-05 Questions Regarding Deposit Insurance
                            Coverage of the interest and CD When
                            Interest is Based on the Consumer Price
                            Index.
05-02....................  05-02 Are Funds Held in ``Cash Management
                            Accounts'' Viewed as Brokered Deposits by
                            the FDIC?
00-6.....................  00-6 Whether Brokered CDs Purchased at
                            Different Institutions Will be Separately
                            Insured After a Merger of Those
                            Institutions.
13-01....................  13-01 Question Concerning a Deposit Program.
15-01....................  15-01 Question regarding whether Financial
                            Firms that Refer Clients to a Bank Qualify
                            as Deposit Brokers.
15-02....................  15-02 Question regarding whether a Company
                            that Designs Deposit Products is Considered
                            a Deposit Broker-Part I.
15-03....................  15-03 Question regarding whether a Company
                            that Designs Deposit Products is Considered
                            a Deposit Broker-Part II.
15-04....................  15-04 Question regarding whether business
                            professionals qualify as deposit brokers
                            when referring clients to a bank.
16-01....................  16-01 Question regarding whether certain
                            Deposits held for Clearing Purposes at an
                            Affiliated Bank are Brokered Deposits.
17-01....................  17-01 Question regarding whether deposits
                            placed through a Bank Program to allocate
                            Charitable Donations to local Community
                            Organizations would be Considered Brokered
                            Deposits.

[[Page 6774]]

 
17-02....................  17-02 Question regarding whether certain
                            Deposits placed through a Bank's
                            relationship with certain ``Middle Market
                            Companies'' are considered Brokered
                            Deposits.
88-7.....................  88-7 Insurance Coverage of CDs Invested
                            Through Deposit Broker.
89-51....................  89-51 Brokered Deposits Prohibition of
                            Section 29 of the FDI Act Under FIRREA.
89-55....................  89-55 Does Acceptance of Brokered Deposits in
                            Violation of Section 29 of the FDI Act
                            Affect the Insurance of the Deposits So
                            Received.
90-11....................  Brokered Deposits: Master CD's Purchased From
                            Financial Institutions and Held by a
                            Custodian Bank for the Benefit of the
                            Purchasers.
90-2.....................  Deposit Insurance for Brokered Deposits.
90-24....................  90-24 Deposit Broker Engaged in the Business
                            of Placing Deposits, or Facilitating the
                            Placement of Deposits.
90-40....................  Domestic Brokered Deposits of Foreign Bank
                            Customer Funds: Recordkeeping Requirements.
92-50....................  92-50 Criteria for Determining Whether a
                            Listing Is a ``Deposit Broker'' for Purposes
                            of 12 U.S.C. Sec.   1831f and 12 C.F.R. Sec.
                              337.6.
92-51....................  Extent to Which Trust Department of Bank Is
                            Subject to Registration Requirements Imposed
                            by New Brokered Deposit Prohibitions.
92-52....................  Company and Its Employees Offering Investment
                            Advisory Services and Purchasing CDs in
                            Clients' Names Are Deposit Brokers Subject
                            to Registration Requirements of New Brokered
                            Deposit Prohibitions.
92-53....................  92-53 Company Which Never Has Actual
                            Possession of Investor's Principal But
                            Facilitates Placement of Deposits Is a
                            Deposit Broker.
92-54....................  92-54 Company Which Merely Collects
                            Information on Availability and Terms of
                            Deposit Accounts and Publishes Such Data Is
                            not a Deposit Broker.
92-56....................  92-56 Bank Employee Who Sells Commercial
                            Checking Accounts and Is Paid Solely by
                            Commission Must Register as a Deposit
                            Broker.
92-60....................  92-60 Where Company and Its Clients Are
                            Deposit Brokers, Company May File Master
                            Notice Registering as Deposit Broker on
                            Behalf of Clients.
92-66....................  92-66 Investment Advisor/Fund Administrator
                            for Governmental Authorities Is Deposit
                            Broker with Respect to Optional Certificate
                            of Deposit Placement Program It Offers.
92-68....................  92-68 Bank Acts as Deposit Broker When It
                            Places Portion of Deposits Exceeding
                            Insurance Limit with Affiliated Depository
                            Institutions.
92-69....................  92-69 Renewal or Rollover of Deposit Is
                            Prohibited by 12 U.S.C. Sec.   1831f(a) only
                            if Deposit Broker Continues to be Involved
                            in Transaction; Brokered Deposits Accepted
                            at Rates Significantly Higher than
                            Prevailing Rate but Renewed for Less Does
                            not Constitute Prohibited Renewal.
92-71....................  92-71 Bank Acts as Deposit Broker When, at
                            Request of Customer, It Purchases CDs at
                            Other Depository Institutions and Charges
                            Fee for Such Service.
92-73....................  92-73 Mere Knowledge on Part of Insured
                            Depository Institution That It Is Accepting
                            Funds from Broker Is Sufficient to Subject
                            Institution to Brokered Deposit Restrictions
                            Based on Its Capital Category.
92-75....................  92-75 Brokered Deposits: Employee
                            Compensation May Not Be Adjusted After the
                            Fact to Ensure That Compensation is
                            Primarily Salary.
92-77....................  92-77 Investment Advisor/Broker-Dealer which
                            Establishes System for Marketing Deposits
                            and Receives Consideration Through Receipt
                            of Deposits or Fees by Bank which it
                            Partially Owns Must Register as Deposit
                            Broker.
92-78....................  92-78 FHA Trustees Servicing FHA-Related
                            Mortgage Portfolios Are Not Subject to
                            Brokered Deposit Registration Requirements.
92-79....................  92-79 Associations With Which Insured
                            Institution Has Entered Into Marketing
                            Agreements are Subject to Brokered Deposit
                            Registration Requirements.
92-84....................  92-84 Company that Assist and Advises
                            Mortgage Loan Servicer in Placing Funds Must
                            Register as Deposit Broker.
92-86....................  92-86 Company That Assists Municipalities,
                            Private Investors and Corporations in
                            Locating Depository Institutions Actively
                            Seeking Large Deposits but That Does not
                            Accept Direct Fee from Institution Must
                            Register as a Deposit Broker.
92-87....................  92-87 Agreement Entered into Between Trust
                            Department and Customer for Primary Purpose
                            of Placing Funds With Insured Depository
                            Institutions Requires Bank to Register as
                            Deposit Broker.
92-88....................  92-88 Bankers' Bank Acts as Deposit Broker
                            When It Places Deposits for Its Stockholder
                            Banks and Other Depository Institutions.
92-91....................  92-91 Administrator of State School Cash
                            Management Program Which Places CDs Must
                            Register as Deposit Broker.
92-92....................  92-92 Bank Acts as Deposit Broker When It
                            Places Excess Funds for Municipality Acting
                            as Public Guardian/Administrator and for
                            Other Customers.
93-3.....................  93-3 Transaction in Which an Entity Finds
                            Insured Depository Institutions for Trust
                            Department Investments for a Fee or
                            Commission Is Subject to Brokered Deposit
                            Recordkeeping Requirements.
93-4.....................  93-4 Deposits Used to Secure Loans to Foreign
                            Customers Are Subject to Brokered Deposit
                            Interest Rate Restrictions.
93-5.....................  93-5 An Adequately Capitalized Depository
                            Institution Without a Brokered Deposit
                            Waiver May Not Offer Interest Rates
                            Significantly Higher Than Prevailing
                            Interest Rate Offered by Other Insured
                            Depository Institutions With Same Type of
                            Charter.
93-6.....................  93-6 Brokered Deposits: Insured Depository
                            Institutions Must Compare Their Interest
                            Rates to Other Insured Depository
                            Institutions With Same Type of Charter.
93-13....................  93-13 Funds Invested in Federally Insured
                            Minority- or Women-Owned Depository
                            Institutions by Fannie Mae Pursuant to an
                            Irrevocable Trust Are Not Considered
                            Brokered Deposits.
93-14....................  93-14 Bank Acts as Deposit Broker When It
                            Occasionally Invests in CDs With Other
                            Insured Depository Institutions on Behalf of
                            Its Customers.
93-16....................  93-16 Well-Capitalized Institution That
                            Solely Offers High-Rate Deposits Need Not
                            Notify FDIC of Its Deposit Broker Status.
93-18....................  93-18 Clarification of Brokered Deposit
                            Interest Restrictions Imposed by 12 U.S.C.
                            1831(f).
93-19....................  93-19 Circumstances Under Which an Adequately
                            Capitalized Institution Operating Under
                            Brokered Deposit Waiver May Use National
                            Rate Instead of Normal Market Rate.
93-21....................  93-21 Legal Requirements Governing
                            Advertisement of Deposits by Deposit
                            Brokers.
93-30....................  93-30 Affinity Groups Are Not Deposit Brokers
                            for Purposes of Sections 29 and 29A of the
                            FDI Act and 12 CFR Sec.   337.6(a).

[[Page 6775]]

 
93-31....................  93-31 Whether Well-Capitalized Institution
                            Offering Variable-Rate, College Cost-Linked
                            CD and Agents Who Place CD Are Deposit
                            Brokers.
93-32....................  93-32 Clarification of Brokered Deposit
                            Interest Rate Restrictions.
93-34....................  93-34 Whether Corporate Sponsor Participating
                            in Bank Tie-In Promotion Is a Deposit
                            Broker.
93-40....................  93-40 Clarification of Brokered Deposit
                            Interest Rate Restrictions.
93-44....................  93-44 Brokered Deposits: Further Guidance for
                            Listing Services.
93-46....................  93-46 Brokered Deposits: Clarification of
                            ``Deposit Broker'' Definition and Interest
                            Rate Restrictions.
93-47....................  93-47 Whether Independent Trust Company Which
                            Conducts Activities on Behalf of Affiliated
                            Bank Must Register as Deposit Broker.
93-50....................  93-50 Circumstances Under Which Well-
                            Capitalized Bank Need Not Notify FDIC of Its
                            Employees' Status as Deposit Brokers.
93-63....................  93-63 Bank Deemed as ``Deposit Broker'' When
                            Engaging in Deposit Support Services and
                            Customer Service Activities.
93-68....................  93-68 Section 29 of the FDI Act--Effects of
                            an Institution's Inability to Accept
                            Brokered Deposits on Pass-Through Coverage
                            and the Written Notice Requirement.
93-71....................  93-71 Whether Certain Affinity Groups that
                            Endorse the Marketing of Consumer Credit and
                            Deposit Products of a National Bank Are
                            Considered Deposit Brokers.
94-13....................  94-13 Whether Bank Is Considered a Deposit
                            Broker When Offering Secured Credit Card
                            Loans to Its Customers.
94-15....................  94-15 Is Company a Deposit Broker to the
                            Extent It Refers Its Customers to a
                            Particular Bank.
94-37....................  94-37 Deposit Incentive Programs: Would the
                            Bank Be Deemed ``Deposit Broker'' or Be
                            Confined by Certain Interest Rate
                            Limitations Under Section 29 of the FDI Act.
94-39....................  94-39 Brokered Deposits: Are Funds Deposited
                            in a Special Reserve Bank Account for the
                            Exclusive Benefit of Customers Brokered
                            Deposits Under Sections 29 and 29A of the
                            FDI Act.
94-40....................  94-40 Deposit Broker: Is an Accounting
                            Service for a Health Care Facility Included
                            Under 12 U.S.C. 1831f.
94-41....................  94-41 Requirements For Qualification For
                            ``Second-Tier'' Broker Exception Under 12
                            U.S.C. 1831f--1.
94-49....................  94-49 Deposit Broker Statute: Whether Well
                            Capitalized Insured Depository Institutions
                            May Accept Deposits From a Deposit Broker
                            Without Restriction.
95-24....................  95-24 Interest Rate Restrictions Imposed
                            Through the Brokered Deposit Law.
95-25....................  95-25 Applicability of Brokered Deposit Law
                            to National CD Placement Program.
95-9.....................  95-9 Whether an Insurance Agent Is a Deposit
                            Broker If It Is Compensated By a Bank For
                            Referring Deposit Customers to the Bank.
96-4.....................  96-4 Whether a Foreign Bank Could Be
                            Considered a Deposit Broker, and if They
                            Would Be Required to Notify the FDIC of
                            Their Status.
99-3.....................  99-3 Advertisement of ``FDIC Insured'' CDs by
                            Deposit Brokers.
99-5.....................  99-5 Deposit Brokers and ``Transferable
                            Custodial Certificates of Deposit.''
------------------------------------------------------------------------
Financial Institution Letters
------------------------------------------------------------------------
FIL Number/Title
------------------------------------------------------------------------
FIL-42-2016 Frequently Asked Questions on Identifying, Accepting and
 Reporting Brokered Deposits.
FIL-69-2009 Process for Determining in An Institution Subject to
 Interest-Rate Restrictions is Operating in a High-Rate Area.
------------------------------------------------------------------------

Appendix 2

    Historical charts illustrating the final national rate cap, the 
top rates offered, and the previous and current national rate caps, 
where applicable, since 2005.
BILLING CODE 6714-01-P

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IV. Administrative Law Matters



    [GRAPHIC] [TIFF OMITTED] TR22JA21.007
    
BILLING CODE 6714-01-C

A. Paperwork Reduction Act

1. Brokered Deposits (RIN 3064-AE84)
    Certain provisions of the final rule contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act (PRA) of 1995.\101\ 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 final rule are being submitted to the Office of Management and 
Budget (OMB) for review and approval under section 3507(d) of the PRA 
\102\ and section 1320.11 of the OMB's implementing regulations.\103\ 
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 Requirements for Brokered 
Deposits.''
---------------------------------------------------------------------------

    \101\ 44 U.S.C. 3501-3521.
    \102\ 44 U.S.C. 3507(d).
    \103\ 5 CFR 1320.
---------------------------------------------------------------------------

Current Actions
    Under the final rule:
     Respondents may file an application with the FDIC for a 
waiver of the prohibition on the acceptance of brokered deposits;
     Respondents may file a notice informing the FDIC that the 
respondent is availing itself of the Primary Purpose Exception Based on 
the Placement of Less Than 25 Percent of Customer Assets Under 
Administration;
     Respondents may file a notice informing the FDIC that the 
respondent is availing itself of the Primary Purpose Exception Based on 
Enabling Transactions; and
     Respondents may file an application with the FDIC for a 
Primary Purpose Exception Not Based on a Designated Exception 
(reporting requirement to obtain or retain a benefit).
    The FDIC estimated the annual burden associated with the final rule 
based on the following assumptions and according to the methodology 
described below:
    1. The FDIC lacks the data necessary to determine the number of 
third parties which may avail themselves of the primary purpose 
exception based on placing less than 25 percent of customer assets 
under administration and therefore, may make a notice submission to the 
FDIC. When the notice of proposed rulemaking for this rule was 
published, the FDIC invited comments on how its estimates could be 
improved \104\ but received no comments on the subject.
---------------------------------------------------------------------------

    \104\ 85 FR 7453 (Feb. 10, 2020).
---------------------------------------------------------------------------

    The primary purpose exception based on placing less than 25 percent 
of customer assets under administration is expected to be utilized 
largely by broker-dealers. With few exceptions, broker-dealers must 
register with the Securities and Exchange Commission and be members of 
FINRA. There were 3,517 FINRA registered broker-dealer firms in 2019. 
Some of the 3,517 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 3,517 FINRA registered broker-
dealers. However, in the absence of data to estimate future 
respondents, consistent with the changes in the rule relative to the 
NPR, the FDIC assumes that 703 firms will submit notices for a 
``designated exception'' under the primary purpose exception based on 
placing less that 25 percent of customer assets under administration, 
in the initial year of implementation. Further,

[[Page 6782]]

the FDIC assumes that 176 firms will submit notices for a ``designated 
exception'' under the primary purpose exception based on placing less 
that 25 percent of customer assets under administration, on average 
each year, an ongoing basis.
    2. The FDIC lacks the data necessary to determine the number of 
third parties which may avail themselves of the primary purpose 
exception based on enabling transactions and other business 
arrangements and may elect to make a notice submission to the FDIC. 
When the notice of proposed rulemaking for this rule was published, the 
FDIC invited comments on how its estimates could be improved but 
received no comments on the subject.
    The FDIC believes that the primary purpose exception based on 
enabling transactions and on other business arrangements will be 
utilized by firms engaged in deposit brokering. The FDIC lacks the data 
necessary to determine the number of firms which engage in deposit 
brokering. According to Census data, there are 1,223 establishments 
within the industry in which deposit brokers are classified. Not all 
1,223 establishments engage in deposit brokering, and some firms which 
engage in deposit brokering may be classified in another industry. In 
the absence of data to estimate future respondents, consistent with the 
changes in the rule relative to the NPR, the FDIC assumes that 245 
firms will submit notices in reliance on the enabling transactions 
designated exception in the initial year of implementation. Finally, in 
the absence of data to estimate future respondents, the FDIC assumes 
that 61 will file a notice in reliance upon the enabling transactions 
designated exception, or a designated exception identified in the 
future that requires a notice, and an additional 61 will submit an 
application, on average each year, on an ongoing basis.
    3. The FDIC lacks the data necessary to determine the number of 
third parties which may avail themselves of the primary purpose 
exception not based on one of the designated enabling transactions or 
placement of less than 25 percent of customer assets under 
administration, and do not meet a designated exception. When the notice 
of proposed rulemaking for this rule was published, the FDIC invited 
comments on how its estimates could be improved but received no 
comments on the subject.
    The FDIC believes that the exceptions not based on a designated 
exception, which includes enabling transactions and placement of less 
than 25 percent of customer assets under administration, 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 1,223 establishments within the 
industry in which deposit brokers are classified. Not all 1,223 
establishments engage in deposit brokering, and some firms which engage 
in deposit brokering may be classified in another industry. 
Additionally, the FDIC assumes that 245 firms submit applications for a 
primary purpose exception in the initial year of implementation. 
Finally, in the absence of data to estimate future respondents, the 
FDIC assumes that an additional 61 will submit an application for a 
primary purpose exception, on average each year, on an ongoing basis.
    4. 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.
    5. The FDIC estimated the amount of time required to complete each 
notice submission and application type. The notice submission for a 
primary purpose exception to the definition of deposit broker based on 
placing less than 25 percent of customer assets under administration, 
by business line, with IDIs. For this type of submission two items are 
required: (1) The total amount of customer assets under control by the 
third party for that particular business line, and (2) 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 primary purpose exception, 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 
information required for this notice submission.
    6. The notice submission for a primary purpose exception to the 
definition of deposit broker based on placing funds to enable 
transactions requires an entity to submit the following information: A 
copy of the form of contract 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. Finally, a submission of this type would need to 
explain 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: And provide a description of the deposit 
placement arrangement. Because this submission requires 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 notice.
    7. The application for a primary purpose exception from the 
definition of deposit broker not based on a designated exception, which 
includes enabling transactions and placement of less than 25 percent of 
customer assets under administration, requires the items enumerated in 
the regulation, 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 and submit the application.
    8. Each notice submission or application has associated quarterly 
(ongoing) reporting requirements. For approved applications these 
ongoing requirements are to be spelled out by the FDIC in its written 
approval. For the first notice submission, the FDIC estimates it would 
take each respondent an average of 30 minutes per quarter to gather the 
information and submit the information for an annual average of 2 
burden hours. For the second notice submission, the FDIC estimates it 
will take reach respondent an average of 30 minutes per year to gather 
and submit the information. The FDIC assumes that the initial quarterly 
submission may take longer to prepare, but once reporting systems are 
in place, the FDIC believes an average of 30 minutes per quarter is a 
reasonable estimate for this ongoing reporting burden. For the 
application requirement, due to its greater number of required items, 
is estimated to take each respondent an average of 0.25 hours per 
quarter to gather the information and submit it for an annual average 
of 1 burden hour.
    9. The FDIC revised its estimates for the information collection 
``Application for Waiver of Prohibition on Acceptance of Brokered 
Deposits.'' 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.

[[Page 6783]]



                                                                 Estimated Annual Burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                              Estimated                 Estimated                              Total
   Information collection (IC)                             Obligation to       average     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
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notice submission for Primary      Reporting..........  Obtain or Retain a           703            1            3  On Occasion.........           2,109
 Purpose Exception Based on the                          Benefit.
 Placement of Less Than 25
 Percent of Customer Assets Under
 Administration.
Notice submission for Primary      Reporting..........  Obtain or Retain a           245            1            5  On Occasion.........           1,225
 Purpose Exception Based on                              Benefit.
 Enabling Transactions.
Application for Primary Purpose    Reporting..........  Obtain or Retain a           245            1           10  On Occasion.........           2,450
 Exception Not Based on the                              Benefit.
 Business Arrangements that do
 not meet a Designated Exception.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                         Ongoing
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notice submission for Primary      Reporting..........  Obtain or Retain a           176            4          0.5  Quarterly...........             352
 Purpose Exception Based on the                          Benefit.
 Placement of Less Than 25
 Percent of Customer Assets Under
 Administration.
Notice Submission for Primary      Reporting..........  Obtain or Retain a            61            1          0.5  Annual..............            30.5
 Purpose Exception Based on                              Benefit.
 Enabling Transactions.
Reporting for Primary Purpose      Reporting..........  Obtain or Retain a            61            4         0.25  Quarterly...........              61
 Exception Not Based on the                              Benefit.
 Business Arrangements that do
 not meet a Designated Exception.
Application for Waiver of          Reporting..........  Obtain or Retain a             9            1            6  On Occasion.........              54
 Prohibition on Acceptance of                            Benefit.
 Brokered Deposits.
                                                                            ----------------------------------------------------------------------------
    Total Estimated Annual Burden  ...................  ...................  ...........  ...........  ...........  ....................         6,281.5
     Hours.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: The estimated number of respondents in the Initial Implementation section is an annual average calculated over three years.

    2. Interest Rate Restrictions (RIN 3064-AF02)
    In accordance with the requirements of the PRA,\105\ the FDIC may 
not conduct or sponsor, and the respondent is not required to respond 
to, an information collection unless it displays a currently valid OMB 
control number. This final rule does not create a new or revise an 
existing information collection as it relates to the interest rate 
restrictions. Therefore, no PRA clearance submission to OMB will be 
made.
---------------------------------------------------------------------------

    \105\ 44 U.S.C. 3501-3521.
---------------------------------------------------------------------------

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) generally requires that, in 
connection with a final rule, an agency prepare and make available for 
public comment a final regulatory flexibility analysis describing the 
impact of the rule on small entities.\106\ 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.\107\
---------------------------------------------------------------------------

    \106\ 5 U.S.C. 601 et seq.
    \107\ 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 Aug. 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.
---------------------------------------------------------------------------

    Generally, the FDIC considers 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 noninterest expenses. 
The FDIC believes that effects in excess of these thresholds typically 
represent significant effects for FDIC-insured institutions.
1. Brokered Deposits Final Rule (AE94)
    The FDIC does not believe that the rule will have a significant 
economic effect on a substantial number of small entities. However, 
some expected effects of the rule are difficult to assess or accurately 
quantify given current information, therefore the FDIC has included a 
Final Regulatory Flexibility Act (RFA) Analysis in this section.
Reasons Why This Action Is Being Considered
    As previously discussed, the FDIC 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, the FDIC is amending 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 adopting this rule under authorities granted by Section 
29 of the 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

[[Page 6784]]

more detailed discussion of the rule's legal basis please refer to 
section I(B).
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 adopting a new 
framework for analyzing certain provisions of the statutory definition. 
Among other things, through this rulemaking, the FDIC is amending the 
primary purpose exception. For a more detailed description of the rule 
please refer to section I(C) ``Final Rule and Discussion of Comments.''
Small Entities Affected
    The FDIC insures 5,075 depository institutions, of which 3,665 are 
defined as small institutions by the terms of the RFA.\108\ 
Additionally, of those 3,665 small, FDIC-insured institutions, 1,086 
currently report holding some volume of brokered deposits. Further, of 
those 3,665 small, FDIC-insured institutions, 3,656 are currently 
classified as well capitalized, while nine are less than well 
capitalized based on capital ratios reported in their Call 
Reports.\109\
---------------------------------------------------------------------------

    \108\ Call Report, June 30, 2020. 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.
    \109\ Information based on June 30, 2020 Consolidated Reports of 
Condition and Income. The 9 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 four categories of effects of the rule 
on small, FDIC-insured institutions: Effects applicable to potentially 
any small, insured institution; effects applicable to small, less than 
well-capitalized institutions; effects applicable to nonbank 
subsidiaries of small, FDIC-insured institutions that may or may not be 
deemed deposit brokers; and reporting compliance requirements for 
small, covered entities.
All Small, FDIC-Insured Institutions
    The rule could immediately affect the 1,086 small, FDIC-insured 
institutions currently reporting brokered deposits. Going forward, the 
rule could affect all 3,665 small, FDIC-insured institutions whose 
decisions regarding the types of deposits to accept could be affected.
    The rule would benefit insured institutions and other interested 
parties by providing greater legal clarity regarding the classification 
and treatment of brokered deposits. The FDIC believes that as result of 
this increased clarity, the 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.\110\ 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, rather than as part of a relationship with a bank, and as 
such these deposits may be less stable and more subject to deposit 
interest rate competition. The behavior of deposits placed through 
certain sweep arrangements 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 
rule reduces bankers' perception of a stigma associated with certain 
types of deposits, more institutions may be incentivized to accept such 
deposits.
---------------------------------------------------------------------------

    \110\ See FDIC's 2011 Study on Core and Brokered Deposits, July 
8, 2011.
---------------------------------------------------------------------------

    The rule could incentivize the development of banking relationships 
between small, FDIC-insured institutions and other firms. The new 
opportunities could spur growth in the types of companies that provide 
third party deposit placement services, 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 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 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 rule, a bank's assessment may 
decrease, all else equal.
    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 in the event they fall below well capitalized 
and become subject to the restrictions set forth in the law and 
regulations 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 rule would establish reporting requirements for IDIs and other 
nonbank third parties that apply for and maintain a primary purpose 
exception. 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

[[Page 6785]]

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 rule as minimal.
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, 2020, brokered deposits 
make up approximately 1.3 percent of domestic deposits held by less 
than well capitalized banks, well below the 7.7 percent held by all 
IDIs.\111\ By generally reducing the scope of deposits that are 
considered brokered, the rule allows less than well capitalized banks 
to increase their holdings of deposits that are currently reported as 
brokered but will not be reported as brokered under the final rule. As 
of June 30, 2020, there are only nine less than well capitalized small, 
FDIC-insured institutions based on Call Report information. These banks 
hold approximately $2.5 billion in assets, $1.7 billion in domestic 
deposits, and $21.7 million in brokered deposits.\112\ These banks 
could be directly affected by the rule in that they could potentially 
accept more or different types of deposits currently designated as 
brokered.
---------------------------------------------------------------------------

    \111\ Call Report data, June 30, 2020.
    \112\ Id.
---------------------------------------------------------------------------

    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 revisions to the brokered deposit regulations could have 
effects on some nonbank subsidiaries of small, FDIC-insured 
institutions. For example, subsidiaries of small, FDIC-insured 
institutions that may currently meet the deposit broker definition 
would no longer be a deposit broker under the rule if they solely place 
deposits at one IDI. Additionally, some nonbank subsidiaries of small, 
FDIC-insured institutions could employ or seek to determine whether 
they meet the primary purpose exception. This may include submitting 
notices or filing applications by some third parties that seek to avail 
themselves of the primary purpose exception, or by banks submitting 
notices or filing application on behalf of such entities. Ongoing 
reporting by these entities is also potentially expected under the 
final rule.
Reporting Requirements
    As previously discussed, the final rule establishes some reporting 
obligations for certain insured depository institutions or nonbank 
third parties \113\ 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. The rule establishes, for entities that do not engage in 
one of the designated expectations, 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 non-brokered as a result of the primary purpose exception. As 
previously discussed, relative to the NPR, the final rule establishes 
additional designated exceptions that will not require an application. 
However, institutions that are eligible for these designated exceptions 
will be required to file a notice submission to the FDIC. Further, 
certain entities granted an exception under the primary purpose 
exception may also be subject to periodic reporting requirements under 
the final rule. These reporting requirements will allow the FDIC to 
monitor the applicability of the primary purpose exception. Finally, in 
the event that an entity that has applied and been approved for a 
primary purpose exception has undergone material changes to its 
business that renders the business no longer eligible for the primary 
purpose exception, the FDIC will be able to require the entity to 
refile a notice, submit an application, reapply for approval, impose 
additional conditions on the approval, or withdraw a previously granted 
approval, with notice to the entity.
---------------------------------------------------------------------------

    \113\ The FDIC will look to each separately incorporated legal 
entity as its own ``third party'' for purposes of this application 
process.
---------------------------------------------------------------------------

    As previously discussed in the Expected Effect Section, the final 
rule establishes reporting requirements for an estimated 176 and 703 
firms during the year of implementation, and between 9 and 245 firms 
each year after. The FDIC does not currently have access to data that 
would facilitate an accurate estimate of how many of these firms are 
considered ``small'' for the purposes of RFA. Therefore, the FDIC 
believes it is possible that the reporting requirements of the final 
rule could affect up to 703 small entities during the year of 
implementation, and up to 245 small entities each year afterword.
    As previously discussed in the expected Effects Section, in the 
initial year of implementation the FDIC estimates that the notice for 
the ``25 percent'' business relationship will be three hours to 
complete on average, and 0.5 hours per quarter each year after that. In 
the initial year of implementation, the FDIC estimates that the notice 
for the ``enabling transactions'' will take 5 hours to complete on 
average, and 0.5 hours each year after that. In the initial year of 
implementation, the FDIC estimates that the application for exception 
based on not enabling transactions and other business arrangements, or 
placing less that 25 percent of customer assets under management will 
take 10 hours to complete on average, and 0.25 hour per quarter each 
year after that. Therefore, based on the above assumptions and 
methodology, the FDIC estimates the final rule imposes an annual 
reporting burden of 5,784 hours for the first year and 497.5 hours each 
year after that for all affected entities. This equates to estimated 
compliance costs of $613,740 in the first year and $51,589 each year 
after that for all effected entities.\114\

[[Page 6786]]

Again the FDIC does not currently have access to data that would 
facilitate an accurate estimate of how many of these firms are 
considered ``small'' for the purposes of RFA. Therefore, therefore the 
FDIC believes it is possible that the reporting requirements of the 
final rule could pose reporting compliance costs up to $613,740 in the 
first year for small entities, and up to $51,589 each year after for 
small entities.
---------------------------------------------------------------------------

    \114\ 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.
---------------------------------------------------------------------------

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.
2. Interest Rate Restrictions (RIN 3064-AF02)
    FDIC is revising its regulations relating to interest rate 
restrictions that apply to less than well capitalized insured 
depository institutions, by amending the methodology for calculating 
the national rate and national rate cap. The also modifies the current 
local rate cap calculation and process.
    Specifically, the rule defines the national rate for a deposit 
product as the average rate for that product, where the average is 
weighted by domestic deposit share. The proposed national rate cap is 
the higher of (1) the national rate, as revised to be based on 
weighting by deposits rather than branches (and including credit 
unions), plus 75 basis points; or (2) 120 percent of the current yield 
on similar maturity U.S. Treasury obligations, plus 75 basis points.
    Because the FDIC's experience suggests some institutions compete 
for particular products within their local market area, the rule would 
continue to provide a local rate cap process.
    Specifically, the rule would allow less than well capitalized 
institutions to provide evidence that any bank or credit union in its 
local market offers a rate on particular deposit product in excess of 
the national rate cap. If sufficient evidence is provided, then the 
less than well capitalized institution would be allowed to offer 90 
percent of the competing institution's rate on the particular product.
    As described in section II(G), above, the FDIC is adopting the 
national rate methodology as proposed, with a revision to include the 
rates offered by credit unions in addition to the rates offered by 
FDIC-insured institutions. Under the final rule, the national rate for 
a particular deposit product will be the deposit-weighted average rate 
for that product.
    The FDIC is also adopting the proposed methodology for calculating 
the national rate caps, with a modification suggested by commenters. 
The proposed methodology defined the national rate cap for a particular 
deposit product as the higher of the national rate plus 75 basis 
points, or the 95th percentile of rates weighted by domestic deposits. 
The adopted methodology defines the national rate cap for a particular 
deposit product as the higher of the national rate plus 75 basis points 
or 120 percent of the current yield on a similar maturity U.S. Treasury 
obligation, plus 75 basis points. This ``Treasury-based'' second prong 
would also provide that, for non-maturity deposits, the rate cap is 
defined as the midpoint of the target range for the Federal funds rate, 
plus 75 basis points.
    Finally, for the local rate cap the FDIC is adopting the proposed 
cap of 90 percent of the highest offered rate. The final rule also 
eliminates the current two-step process where less than well 
capitalized institutions request a high rate determination from the 
FDIC and, if approved, calculate the prevailing rate within local 
markets. Instead, a less than well capitalized institution must notify 
its appropriate FDIC regional office that it intends to offer a rate 
that is above the national rate cap and provide evidence that it is 
competing against an institution or credit union that is offering a 
rate in its local market area in excess of the national rate cap. The 
institution would then be allowed to offer 90 percent of the rate 
offered by a competitor in the institution's local market area.
    As of June 30, 2020, the FDIC insured 5,075 institutions, of which 
3,665 are small for purposes of the RFA.\115\ The adopted national rate 
caps will affect less than well-capitalized small institutions if those 
institutions currently offer deposit products with rates above the 
adopted caps and their local competitors do not offer similarly high 
rates. As of June 30, 2020, 10 insured institutions are quantitatively 
less than well-capitalized, of which nine are small for purposes of the 
RFA.\116\ None of the eight small, less than well-capitalized 
institutions for which the FDIC had interest rate data offered rates 
above either the current national rate caps or the national rate caps 
as defined in this final rule across 11 deposit products analyzed for 
the month of September.\117\ Thus, the FDIC does not believe the final 
rule will significantly affect any small, FDIC-insured institutions.
---------------------------------------------------------------------------

    \115\ June 30, 2020, Call Report data.
    \116\ Id.
    \117\ The FDIC surveyed rates offered on savings, interest 
checking, and money market demand accounts, as well as CDs of 1, 3, 
6, 12, 24, 36, 48, and 60-month maturities. Only non-jumbo accounts 
were considered, and not every institution offered every type of 
account.
---------------------------------------------------------------------------

    Accordingly, the FDIC certifies that this rule will not have a 
significant economic effect on a substantial number of small entities.
    One commenter to the NPR suggested that the FDIC sample a larger 
group of small banks which could become less than well capitalized and 
run stress tests simulating various interest rate environments to 
determine whether the institutions would be able to raise or retain 
funding under the proposed rate caps. Such a stress testing exercise 
would be difficult and heavily dependent on assumptions not only about 
the shape and level of the Treasury yield curve, but about national and 
local demand for loans and deposits and the nature of deposit interest 
rate competition resulting from these factors. In response to the 
comment, the FDIC notes that as described throughout this preamble, the 
rate caps under this rule are constructed to be more responsive to the 
prevailing interest rate environment and are generally expected to be 
moderately less restrictive than the current rate caps.

C. Riegle Community Development and Regulatory Improvement Act of 1994

    Pursuant to section 302(a) of the Riegle Community Development and 
Regulatory Improvement Act (RCDRIA),\118\ in determining the effective 
date and administrative compliance requirements for new regulations 
that impose additional reporting, disclosure, or other requirements on 
IDIs, each Federal banking agency must consider, consistent with the 
principle of safety and soundness and the public interest, any 
administrative burdens that such regulations would place on IDIs, 
including small IDIs, and customers of IDIs, as well as the benefits of 
such regulations. In addition, section 302(b) of RCDRIA requires new 
regulations and amendments to regulations that impose additional 
reporting, disclosures, or other new requirements on IDIs generally to 
take effect on the first day of a calendar quarter that begins on or 
after the date on which the regulations are published in final 
form.\119\ The FDIC considered the administrative burdens

[[Page 6787]]

and benefits of the final rule in determining its effective date and 
administrative compliance requirements. As such, the final rule will be 
effective on April 1, 2021, with full compliance with the brokered 
deposit part of the regulation extended to January 1, 2022.
---------------------------------------------------------------------------

    \118\ 12 U.S.C. 4802(a).
    \119\ 12 U.S.C. 4802.
---------------------------------------------------------------------------

D. Congressional Review Act

    For purposes of the Congressional Review Act, the OMB makes a 
determination as to whether a final rule constitutes a ``major'' 
rule.\120\ If a rule is deemed a ``major rule'' by the OMB, the 
Congressional Review Act generally provides that the rule may not take 
effect until at least 60 days following its publication.\121\ The 
Congressional Review Act defines a ``major rule'' as any rule that the 
Administrator of the Office of Information and Regulatory Affairs of 
the OMB finds has resulted in or is likely to result in (A) an annual 
effect on the economy of $100,000,000 or more; (B) a major increase in 
costs or prices for consumers, individual industries, Federal, State, 
or local government agencies or geographic regions; or (C) significant 
adverse effects on competition, employment, investment, productivity, 
innovation, or on the ability of United States-based enterprises to 
compete with foreign based enterprises in domestic and export 
markets.\122\ As required by the Congressional Review Act, the FDIC 
will submit the final rule and other appropriate reports to Congress 
and the Government Accountability Office for review.
---------------------------------------------------------------------------

    \120\ 5 U.S.C. 801 et seq.
    \121\ 5 U.S.C. 801(a)(3).
    \122\ 5 U.S.C. 804(2).
---------------------------------------------------------------------------

E. Use of Plain Language

    Section 722 of the Gramm-Leach Bliley Act \123\ requires the 
Federal banking agencies to use plain language in all proposed and 
final rules published after January 1, 2000. The FDIC has sought to 
present the final rule in a simple and straightforward manner and did 
not receive any comments on the use of plain language.
---------------------------------------------------------------------------

    \123\ 12 U.S.C. 4809.
---------------------------------------------------------------------------

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, Reporting and recordkeeping requirements, Savings 
associations, Securities.

Authority and Issuance

    For the reasons stated in the preamble, the FDIC amends 12 CFR 
parts 303 and 337 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(I), 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) Primary purpose exception notices and applications--(1) Scope. 
This section sets forth a process for an agent or nominee, or an 
insured depository institution on behalf of an agent or

[[Page 6788]]

nominee, to notify the FDIC that it will rely upon a designated 
exception in Sec.  337.6(a)(5)(v)(I)(1)(i) and (ii) of this chapter. 
This section also sets forth a process for an agent or nominee, or an 
insured depository institution on behalf of an agent or nominee, to 
apply for the primary purpose exception, as described in Sec.  
337.6(a)(5)(v)(I)(2) of this chapter.
    (2) Definitions. For purposes of this paragraph (b):
    (i) Third party means an agent or nominee that submits a notice 
that it will rely upon a designated exception in Sec.  
337.6(a)(5)(v)(I)(1)(i) and (ii) of this chapter or applies to be 
excluded from the definition of deposit broker pursuant to the primary 
purpose exception as described in Sec.  337.6(a)(5)(v)(I)(2) of this 
chapter.
    (ii) Notice filer means a third party or an insured depository 
institution on behalf of a third party, that submits a written notice 
that the third party will rely upon a designated business exception in 
Sec.  337.6(a)(5)(v)(I)(1)(i) and (ii) of this chapter.
    (iii) Applicant means a third party, or an insured depository 
institution on behalf of a third party, that applies to be excluded 
from the definition of deposit broker pursuant to the primary purpose 
exception, as described in Sec.  337.6(a)(5)(v)(I)(2) of this chapter.
    (3) Notice requirement for designated business exceptions. A third 
party, or an insured depository institution on behalf of a third party, 
must notify the FDIC through a written notice that the third party will 
rely upon a designated business exception described in Sec.  
337.6(a)(5)(v)(I)(1)(i) and (ii) of this chapter in order to rely on 
that designated business exception.
    (i) Contents of notice. The notice must include: The designated 
exception upon which the third party will rely; a brief description of 
the business line; the applicable specific contents for the designated 
exception; either a statement that there is no involvement of any 
additional third party who qualifies as a deposit broker or a brief 
description of any additional third party that may qualify as a deposit 
broker; and if the notice is provided by a nonbank third party, a list 
of the insured depository institutions that are receiving deposits by 
or through the particular business line. The applicable specific 
contents for the following designated exceptions are:
    (A) 25 percent test (as described in Sec.  337.6(a)(5)(v)(I)(1)(i) 
of this chapter). (1) The total amount of customer assets under 
administration by the third party for that particular business line; 
and
    (2) The total amount of deposits placed by the third party on 
behalf of its customers, for that particular business line, at all 
depository institutions, being placed by that third party.
    (B) Enabling transactions test (as described in Sec.  
337.6(a)(5)(v)(I)(1)(ii) of this chapter). (1) Contractual evidence 
that there is no interest, fees, or other remuneration, being paid to 
any customer accounts; and
    (2) A certification that all customer deposits that are placed at 
insured depository institutions are in transaction accounts.
    (ii) Additional information for notices. The FDIC may request 
additional information from the notice filer at any time after receipt 
of the notice.
    (iii) Additional notice filers. The FDIC may include notice and/or 
reporting requirements as part of a designated exception identified 
under Sec.  337.6(a)(5)(v)(I)(2)(xiv) of this chapter.
    (iv) Subsequent notices. A notice filer that previously submitted a 
notice under this section shall submit a subsequent notice to the FDIC 
if, at any point, the notice filer no longer meets the designated 
business exception that was the subject of its previous notice.
    (v) Ongoing requirements for notice filers. Notice filers that 
submit a notice under the 25 percent test must provide quarterly 
updates to the FDIC on the figures described in paragraph (b)(3)(i)(A) 
of this section that were provided as part of the written notice. 
Notice filers that submit a notice under the enabling transactions test 
must provide an annual certification to the FDIC that the third party 
continues to place all customer funds at insured depository 
institutions into transaction accounts and that customers do not 
receive any interest, fees, or other remuneration.
    (vi) Revocation of primary purpose exception. The FDIC may, with 
notice, revoke a primary purpose exception of a third party, or a 
person required to submit a notice under paragraph (b)(3)(iii) of this 
section, that qualifies for the primary purpose exception due to 
reliance on a designated exception, if:
    (A) The third party no longer meets the criteria for a designated 
exception;
    (B) The notice or subsequent reporting is inaccurate; or
    (C) The notice filer fails to submit required reports.
    (4) Application requirements. A third party, or an insured 
depository institution on behalf of a third party, may submit an 
application to the FDIC seeking a primary purpose exception for 
business relationships not designated in Sec.  337.6(a)(5)(v)(I)(1) of 
this chapter.
    (i) For applications for primary purpose exception to enable 
transactions with fees, interest, or other remuneration provided to the 
depositor. Applicants that seek the primary purpose exception where 
customer funds that are placed at depository institutions are placed 
into transaction accounts, and fees, interest, or other remuneration 
are provided to the depositor, must include the following information, 
with respect to the particular business line:
    (A) Contractual evidence on the amount of interest, fees, or other 
remuneration, being paid on customer accounts;
    (B) Any marketing materials provided by the third party to insured 
depository institutions or its customers;
    (C) The average number of transactions for all customer accounts, 
and 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;
    (D) The percentage of customer funds placed in deposit accounts 
that are not transaction accounts;
    (E) A description of any additional third parties that provide 
assistance with the placement of deposits at insured depository 
institutions; and
    (F) Any other information that the FDIC requires to initiate its 
review and render the application complete.
    (ii) For applications for primary purpose exception not covered by 
paragraph (b)(4)(i) of this section. Applicants that seek the primary 
purpose exception, other than applications under paragraph (b)(4)(i) of 
this section, must include, to the extent applicable:
    (A) A description of the deposit placement arrangements between the 
third party and insured depository institutions for the particular 
business line, including the services provided by any relevant third 
parties;
    (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, with respect to the particular business line;
    (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, with 
respect to the particular business line. 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, as defined

[[Page 6789]]

in Sec.  337.6(a)(5)(v)(I)(3) of this chapter, 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, with respect 
to the particular business line;
    (G) Revenue generated from the third party's activities not related 
to the placement, or facilitating the placement, of deposits, with 
respect to the particular business line;
    (H) A description of the marketing activities provided by the third 
party, with respect to the particular business line;
    (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.
    (iii) Additional information for applications. The FDIC may request 
additional information from the applicant at any time during processing 
of the application.
    (iv) Application timing. (A) An applicant that submits a complete 
application under this section will receive a written determination by 
the FDIC within 120 days of receipt of a complete application.
    (B) If an application is submitted that is not complete, the FDIC 
will, within 45 days of submission, notify the applicant and explain 
what is needed to render the application complete.
    (C) The FDIC may extend the 120-day timeframe, if necessary, to 
complete its review of a complete application, with notice to the 
applicant, for a maximum of 120 additional days.
    (v) Application approvals. The FDIC will approve an application--
    (A) Submitted under paragraph (b)(4)(i) of this section if the FDIC 
finds that the third party's marketing materials indicate that the 
primary purpose of placing customer deposits at insured depository 
institutions is to enable transactions, and:
    (1) Nominal interest, fees, or other remuneration is being paid on 
any customer accounts, or
    (2) The third party's customers make, on average, more than 6 
transactions a month.
    (B) Submitted under paragraph (b)(4)(ii) of this section if the 
FDIC finds that 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's business relationship with its customers is a purpose other 
than the placement or facilitation of the placement of deposits.
    (vi) Ongoing reporting for applications. (A) The FDIC will describe 
any reporting requirements, if applicable, as part of its written 
approval for a primary purpose exception.
    (B) Applicants that receive a written approval for the primary 
purpose exception, shall provide reporting to the FDIC and, in the case 
of an insured depository institution, to its primary Federal regulator, 
if required under this section.
    (vii) Requesting additional information, requiring re-application, 
imposing additional conditions, and withdrawing approvals. At any time 
after approval of an application for the primary purpose exception, the 
FDIC may at its discretion, with written notice and adequate 
justification:
    (A) Require additional information from an applicant 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 submitted to the FDIC as part of the 
application under this section;
    (B) Require the applicant to reapply for approval;
    (C) Impose additional conditions on an approval; or
    (D) Withdraw an approval.

PART 337--UNSAFE AND UNSOUND BANKING PRACTICES

0
3. The authority for 12 CFR part 337 continues to read:

    Authority: 12 U.S.C. 375a(4), 375b, 1463(a)(1),1816, 1818(a), 
1818(b), 1819, 1820(d), 1828(j)(2), 1831, 1831f, 5412.4.


0
4. Amend Sec.  337.6 by:
0
a. Revising paragraphs (a) introductory text, (a)(3)(i) through (iii), 
and (a)(5)(i);
0
b. Redesignating paragraphs (a)(5)(ii) and (iii) as paragraphs 
(a)(5)(v) and (vi);
0
c. Adding new paragraphs (a)(5)(ii) and (iii) and paragraph (a)(5)(iv);
0
d. Revising newly redesignated paragraphs (a)(5)(v)(I) and (a)(5)(vi);
0
e. Removing paragraphs (b)(2)(ii) and (b)(3)(ii);
0
f. Redesignating paragraphs (b)(2)(i) and (b)(3)(i) as paragraphs 
(b)(2) and (3), respectively;
0
g. Adding paragraph (b)(4); and
0
h. Removing paragraph (f).
    The revisions and additions read as follows:


Sec.  337.6   Brokered deposits.

    (a) Definitions. For the purposes of Sec. Sec.  337.6 and 337.7, 
the following definitions apply:
* * * * *
    (3) * * *
    (i) For purposes of section 29 of the Federal Deposit Insurance 
Act, this section and Sec.  337.7, the terms well capitalized, 
adequately capitalized, and undercapitalized,\11\ shall have the same 
meaning as to each insured depository institution as provided under 
regulations implementing section 38 of the Federal Deposit Insurance 
Act issued by the appropriate federal banking agency for that 
institution.\12\
    (ii) If the appropriate federal banking agency reclassifies a well-
capitalized insured depository institution as adequately capitalized 
pursuant to section 38 of the Federal Deposit Insurance Act, the 
institution so reclassified shall be subject to the provisions 
applicable to such lower capital category under this section and Sec.  
337.7.
    (iii) An insured depository institution shall be deemed to be 
within a given capital category for purposes of this section and Sec.  
337.7 as of the date the institution is notified of, or is deemed to 
have notice of, its capital category, under regulations implementing 
section 38 of the Federal Deposit Insurance Act issued by the 
appropriate federal banking agency for that institution.
* * * * *
    (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 those 
deposits or 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 placing deposits. A person is 
engaged in the business of placing deposits of third parties if that 
person receives third party funds and deposits those funds at more than 
one insured depository institution.
    (iii) 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, with respect to deposits

[[Page 6790]]

placed at more than one insured depository institution, engaging in one 
or more of the following activities:
    (A) The person has legal authority, contractual or otherwise, to 
close the account or move the third party's funds to another insured 
depository institution;
    (B) The person is involved in negotiating or setting rates, fees, 
terms, or conditions for the deposit account; or
    (C) The person engages in matchmaking activities.
    (1) A person is engaged in matchmaking activities if the person 
proposes deposit allocations at, or between, more than one bank based 
upon both the particular deposit objectives of a specific depositor or 
depositor's agent, and the particular deposit objectives of specific 
banks, except in the case of deposits placed by a depositor's agent 
with a bank affiliated with the depositor's agent. A proposed deposit 
allocation is based on the particular objectives of:
    (i) A depositor or depositor's agent when the person has access to 
specific financial information of the depositor or depositor's agent 
and the proposed deposit allocation is based upon such information; and
    (ii) A bank when the person has access to the target deposit-
balance objectives of specific banks and the proposed deposit 
allocation is based upon such information.
    (2) Anti-evasion. Any attempt by a person to structure a deposit 
placement arrangement in a way that evades meeting the matchmaking 
definition in this section, while still playing an ongoing role in 
providing any function related to matchmaking may, upon a finding by 
and with written notice from the FDIC, result in the person meeting the 
matchmaking definition.
    (iv) Engaged in the business--A person is engaged in the business 
of placing, or facilitating the placement of, deposits as described in 
paragraph (a)(5)(ii) or (iii) of this section, respectively, when that 
person has a business relationship with third parties, and as part of 
that relationship, places, or facilitates the placement of, deposits 
with insured depository institutions on behalf of the third parties.
    (v) * * *
    (I) An agent or nominee whose primary purpose is not the placement 
of funds with depository institutions; or
    (1) Designated business exceptions that meet the primary purpose 
exception. Business relationships are designated as meeting the primary 
purpose exception, subject to Sec.  303.243(b)(3) of this chapter, 
where, with respect to a particular business line:
    (i) Less than 25 percent of the total assets that the agent or 
nominee has under administration for its customers is placed at 
depository institutions;
    (ii) 100 percent of depositors' funds that the agent or nominee 
places, or assists in placing, at depository institutions are placed 
into transactional accounts that do not pay any fees, interest, or 
other remuneration to the depositor;
    (iii) A property management firm places, or assists in placing, 
customer funds into deposit accounts for the primary purpose of 
providing property management services;
    (iv) The agent or nominee places, or assists in placing, customer 
funds into deposit accounts for the primary purpose of providing cross-
border clearing services to its customers;
    (v) The agent or nominee places, or assists in placing, customer 
funds into deposit accounts for the primary purpose of providing 
mortgage servicing;
    (vi) A title company places, or assists in placing, customer funds 
into deposit accounts for the primary purpose of facilitating real 
estate transactions;
    (vii) A qualified intermediary places, or assists in placing, 
customer funds into deposit accounts for the primary purpose of 
facilitating exchanges of properties under section 1031 of the Internal 
Revenue Code;
    (viii) A broker dealer or futures commission merchant places, or 
assists in placing, customer funds into deposit accounts in compliance 
with 17 CFR 240.15c3-3(e) or 17 CFR 1.20(a);
    (ix) The agent or nominee places, or assists in placing, customer 
funds into deposit accounts for the primary purpose of posting 
collateral for customers to secure credit-card loans;
    (x) The agent or nominee places, or assists in placing, customer 
funds into deposit accounts for the primary purpose of paying for or 
reimbursing qualified medical expenses under section 223 of the 
Internal Revenue Code;
    (xi) The agent or nominee places, or assists in placing, customer 
funds into deposit accounts for the primary purpose of investing in 
qualified tuition programs under section 529 of the Internal Revenue 
Code;
    (xii) The agent or nominee places, or assists in placing, customer 
funds into deposit accounts to enable participation in the following 
tax-advantaged programs: Individual retirement accounts under section 
408(a) of the Internal Revenue Code, Simple individual retirement 
accounts under section 408(p) of the Internal Revenue Code, or Roth 
individual retirement accounts under section 408A of the Internal 
Revenue Code;
    (xiii) A Federal, State, or local agency places, or assists in 
placing, customer funds into deposit accounts to deliver funds to the 
beneficiaries of government programs; and
    (xiv) The agent or nominee places, or assists in placing, customer 
funds into deposit accounts pursuant to such other relationships as the 
FDIC specifically identifies as a designated business relationship that 
meets the primary purpose exception.
    (2) Approval required for business relationships not designated in 
paragraph (a)(5)(v)(I)(1). An agent or nominee that does not rely on a 
designated business exception described in this section must receive an 
approval under the application process in Sec.  303.243(b) of this 
chapter in order to qualify for the primary purpose exception.
    (3) Brokered CD placements not eligible for primary purpose 
exception. An agent's or nominee's 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.
    (4) Brokered CD means a deposit placement arrangement in which a 
master certificate of deposit is issued by an insured depository 
institution in the name of the third party that has organized the 
funding of the certificate of deposit, or in the name of a custodian or 
a sub-custodian of the third party, and the certificate is funded by 
individual investors through the third party, with each individual 
investor receiving an ownership interest in the certificate of deposit, 
or a similar deposit placement arrangement that the FDIC determines is 
arranged for a similar purpose.
    (vi) Notwithstanding paragraph (a)(5)(v) of this section, the term 
deposit broker includes any insured depository institution that is not 
well-capitalized, and any employee of any such insured depository 
institution, which engages, directly or indirectly, in the solicitation 
of deposits by offering rates of interest (with respect to such 
deposits) which are significantly higher than the prevailing rates of 
interest on deposits offered by other insured depository institutions 
in such depository institution's normal market area.
* * * * *
    (b) * * *
    (4) Acceptance of nonmaturity brokered deposits. (i) A nonmaturity

[[Page 6791]]

brokered deposit is accepted by an institution that is less than well 
capitalized--
    (A) At the time a new nonmaturity account is opened by or through 
any deposit broker; or
    (B) In the case of an existing nonmaturity brokered account, or 
accounts, that had been opened by or through a particular deposit 
broker:
    (1) When the aggregate account balance increases above the 
amount(s) in the account(s) at the time the institution falls to 
adequately capitalized; or,
    (2) For agency or nominee accounts, when funds for a new depositor 
are credited to the nonmaturity account or accounts.
* * * * *

0
5. Add Sec.  337.7 to read as follows:


Sec.  337.7  Interest rate restrictions.

    (a) Definitions--(1) National rate. The weighted average of rates 
paid by all insured depository institutions and credit unions on a 
given deposit product, for which data are available, where the weights 
are each institution's market share of domestic deposits.
    (2) National rate cap. The higher of:
    (i) National rate plus 75 basis points, or
    (ii) 120 percent of the current yield on similar maturity U.S. 
Treasury obligations plus 75 basis points or, in the case of any 
nonmaturity deposit, the federal funds rate plus 75 basis points.
    (3) Local market rate cap. Ninety (90) percent of the highest 
interest rate paid on a particular deposit product in the institution's 
local market area. An institution's local market rate cap shall be 
based upon the rate offered on a particular product type and maturity 
period by an insured depository institution or credit union that is 
accepting deposits at a physical location within the institution's 
local market area.
    (4) Local market area. An institution's local market area is any 
readily defined geographical market area in which the insured 
depository institution accepts or solicits deposits, which may include 
the State, county or metropolitan statistical area, in which the 
insured depository institution accepts or solicits deposits.
    (5) On-tenor and off-tenor maturities. On-tenor maturities include 
the following term periods: 1-month, 3-months, 6-months, 12-months, 24-
months, 36-months, 48-months, and 60-months. All other term periods are 
considered off-tenor maturities for purposes of this section.
    (b) Computation and publication of national rate cap--(1) 
Computation. The Corporation will compute the national rate cap for 
different deposit products and maturities, as determined by the 
Corporation based on available and reported data.
    (2) Publication. The Corporation will publish the national rate cap 
monthly, but reserves the discretion to publish more or less 
frequently, if needed, on the Corporation's website. Except as provided 
in paragraph (f) of this section, for institutions that are less than 
well capitalized at the time of publication, a national rate cap that 
is lower than the previously published national rate cap will take 
effect 3 days after publication. The previously published national rate 
cap will remain in effect during this 3-day period.
    (c) Application--(1) Well-capitalized institutions. A well-
capitalized institution may pay interest without restriction by this 
section.
    (2) Institutions that are not well capitalized. An institution that 
is not well capitalized may not: Solicit deposits by offering a rate of 
interest that exceeds the applicable rate cap; or, where an institution 
has accepted brokered deposits pursuant to a waiver described in Sec.  
337.6(c), pay a rate of interest that, at the time such deposit is 
accepted, exceeds the applicable rate cap. For purposes of this 
section, the applicable rate cap is the national rate cap or, if the 
institution has provided the notice and evidence described in 
subsection (d) of this section, the local market rate cap for deposits 
gathered in the institution's local market area. If an institution 
gathers deposits from more than one local area, it may seek to pay a 
rate of interest up to its local market rate cap for deposits gathered 
in each respective local market area.
    (d) Notice related to local market rate cap applicability. An 
insured depository institution that seeks to pay a rate of interest up 
to its local market rate cap shall provide notice and evidence of the 
highest rate paid on a particular deposit product in the institution's 
local market area to the appropriate FDIC regional director. The 
institution shall update its evidence and calculations for existing and 
new accounts monthly unless otherwise instructed by the appropriate 
FDIC regional director, and retain such information available for at 
least the two most recent examination cycles and, upon the FDIC's 
request, provide the documentation to the appropriate FDIC regional 
office and to examination staff during any subsequent examinations.
    (e) Offering products with off-tenor maturities. If an institution 
seeks to offer a product with an off-tenor maturity for which the FDIC 
does not publish the national rate cap or that is not offered by 
another institution within its local market area, then the institution 
will be required to use the rate offered on the next lower on-tenor 
maturity for that product when determining its applicable national or 
local rate cap, respectively. For example, an institution seeking to 
offer a 26-month certificate of deposit must use the rate offered for a 
24-month certificate of deposit to determine the institution's 
applicable national or local rate cap. There is no off-tenor maturity 
for nonmaturity products such as an interest checking account, savings 
account, or money market deposit account.
    (f) Discretion to delay effect of published national rate cap. In 
the event of a substantial decrease in the published national rate cap 
from one month to the next, the Corporation may, in its discretion, 
delay the date on which the published national rate cap takes effect. 
The previously published national rate cap will remain in effect until 
the effective date, as determined by the Corporation, of the subsequent 
published national rate cap.
    (g) Treatment of nonmaturity deposits for purposes of this section. 
For purposes of this section, the following definitions apply.
    (1) Solicitation of nonmaturity deposits. (i) An institution 
solicits a nonmaturity deposit when--
    (A) A nonmaturity account is opened;
    (B) The institution raises the rate being paid on a nonmaturity 
account existing at the time when the institution was last well 
capitalized; or,
    (C) Funds for a new depositor are credited to a nonmaturity account 
existing at the time when the institution was last well capitalized.
    (2) Acceptance of nonmaturity brokered deposits subject to a 
waiver. A less than well capitalized institution that accepts 
nonmaturity brokered deposits subject to waiver, with respect to a 
particular deposit broker, may not pay interest in excess of the 
applicable rate cap on:
    (i) Any new nonmaturity accounts opened by or through that 
particular deposit broker;
    (ii) An amount of funds that exceeds the amount(s) in the 
account(s) that, at the time the institution fell to less than well 
capitalized, had been opened by or through the particular deposit 
broker; or

[[Page 6792]]

    (iii) For agency or nominee accounts, any funds for a new depositor 
credited to a nonmaturity account or accounts.

Federal Deposit Insurance Corporation.

    By order of the Board of Directors.

    Dated at Washington, DC, on December 15, 2020.
James P. Sheesley,
Assistant Executive Secretary.
[FR Doc. 2020-28196 Filed 1-21-21; 8:45 am]
BILLING CODE 6714-01-P