On July 30, 2024, the Federal Deposit Insurance Corporation (FDIC) issued a proposed rulemaking to amend the regulatory framework used to determine whether a deposit qualifies as a “brokered deposit” under FDIC Regulations Section 337.6. Notice (NPRM) has been issued. Among other things, the proposed amendments (the Proposed Amendments), if adopted, would be the second major amendment to the FDIC’s brokered deposit regulations in recent years, revising the definition of “deposit broker” and adding deposit-related This will expand the variety of activities. Strengthens intermediary operations and modifies the insured depository institution (IDI) application and notification process.
This recommendation discusses recent developments and the FDIC’s rationale for its proposal, outlines the amendment’s key provisions, and highlights highlights for financial institutions and deposit service providers.
background
Section 29 of the Federal Deposit Insurance Act (FDIA) restricts an undercapitalized IDI from directly or indirectly accepting brokered deposits. 1 Although Section 29 of the FDIA does not directly define “brokered deposits,” the FDIC defines them as follows: This term refers to “any deposit obtained, directly or indirectly, from, through the intermediation or assistance of, a deposit broker.” 2 The meaning of “brokered deposits” therefore depends on the definition of “deposit broker.”
More broadly, the FDIC defines a “deposit broker” as: (1) Any person engaged in the business of depositing third party deposits with IDI. (2) A person engaged in a business that facilitates the entrustment of third party deposits to IDI. (3) A person engaged in the business of depositing deposits with IDI for the purpose of selling the deposits or the interest on the deposits to a third party. (4) An agent or trustee who opens a deposit account in furtherance of a business arrangement with IDI and uses the proceeds of that account to fund a prearranged loan. 3
The FDIC’s proposed amendments would effectively overturn a 2020 final rule adopted under former Chair Elena McWilliams that narrowed the definition of a deposit broker. In addition to narrowing the definition of a deposit broker, the 2020 final rule exempts certain types of deposit placement arrangements previously considered brokered by the FDIC staff.
The 2020 Final Rule was adopted to clarify the regulatory framework for the classification of brokered deposits. This rule has been developed by the FDIC staff over several decades, primarily through FDIC advisory opinions and other published and unpublished interpretations. Industry participants generally viewed the framework as fragmented, opaque, and unsuited to addressing technological and practical changes in the banking sector. Therefore, many industry participants welcome the clarification provided by the 2020 Final Rule. However, the FDIC says certain aspects of the 2020 final rule create new uncertainties and raise concerns about brokered deposit misreporting.
Recent trends
In the NPRM, the FDIC states that the agency observed “a significant decrease in reported brokered deposits” after the adoption of the 2020 final rule during the Trump administration. Notably, IDI reported a 31.8 percent decline in brokered deposits between the first and second quarters of 2021. This was the largest quarterly decline since IDI began requiring brokered deposit reporting in 1983. According to the FDIC, the significant decrease in reported brokered deposits is likely a result of the reclassification of a significant amount of deposits held by IDIs in response to the 2020 Final Rule. Despite these circumstances, the NPRM states that as of the fourth quarter of 2023, brokered deposit balances for all IDIs were 22.5% compared to the first quarter of 2021, the quarter before the 2020 final rule took effect. % increase. Among other things, the FDIC cited increased competition for deposit funding as a reason for the increase in brokered deposits and expressed concern in the NPRM about the “volatile nature” of certain brokered deposit placement arrangements, given current market conditions. There is.
Additionally, the FDIC claims that the amendments from the 2020 final rule have “proved problematic” for the safety and soundness of certain IDIs and their financial technology company partners. For example, the recent failure of financial technology company Voyager, which was excluded from the definition of a deposit broker under the 2020 final rule due to the exclusive deposit arrangement exception, has resulted in the failure of its partner, IDI. created similar legal, operational, and liquidity risks. According to the agency, it is a deposit broker.
Proposed amendments to the intermediary deposit framework
In the NPRM, the FDIC is proposing the following amendments to the brokered deposit regulatory framework:
Definition of brokered deposit. The proposed amendments amend the definition of a deposit broker. (1) Consolidate certain activities under the current definition, including activities “engaged in the business of entrusting deposits” and “engaging in activities that facilitate the commissioning of deposits.” (2) Remove the term “matching activity” from the definition and replace it with the deposit allocation provisions. (3) Addition of new elements regarding fees. Exception to Exclusive Deposit Arrangements. Under the 2020 Final Rule, the brokered deposit limit does not apply if a third party that meets the definition of a deposit broker has an exclusive deposit arrangement with one IDI. The proposed amendment would eliminate the “exclusive deposit arrangement exception” and reinstate the application of FDIC regulations to third parties that meet the definition of a deposit broker but are involved in depositing deposits with only one IDI. be. Exception to “principal purpose”. The proposed amendments would revise the criteria for determining whether a third party falls within the “principal purpose” exception to the deposit broker definition. This exception provides for “an agent or designee whose principal purpose in depositing deposits with customers with (IDI) is for a substantive purpose other than providing depository services or obtaining FDIC deposit insurance for a particular business.” Applies only if There is a line between an (IDI) and an agent or candidate. ” The revised standard is similar to how the FDIC historically interpreted the principal purpose exception prior to the 2020 final rule, which includes: In order to determine whether a placement is a third party placement, this includes considering whether a fee was paid to the third party. deposit. “25 Percent AUA” Test. Under the 2020 Final Rule, a third party that channels customer funds to an IDI will be subject to a principal purpose exception based on the specified “25 percent of assets under management (AUA)” test, which will Less than 25 percent of the total AUA was granted. Can be placed in IDI. There have also been reports of problems related to this test, and the FDIC has proposed modifying the test and renaming it the “Broker-Dealer Sweep Exception.” This exception applies only to broker-dealers or investment advisers registered with the Securities and Exchange Commission that have less than 10 percent of the total AUA of their customers in certain lines of business deposited in non-maturity accounts with IDI. “Transaction Enabled” test. The 2020 Final Rule creates an “enabling trade” test as a primary purpose exception, allowing third parties that deposit 100 percent of IDI customer funds into a trading account to Forgiven without fees, interest, or other compensation. requirements. Because the current tradability test does not meet the reliance standard for the principal purpose exception under the proposed amendments, the FDIC proposed to eliminate the tradability test and the corresponding notification process. Application and Notification Process. Under the proposed amendments, the FDIC would no longer allow third parties to apply for principal purpose exceptions. Instead, each IDI that wishes to rely on the principal purpose exception must submit an application for a specific deposit placement arrangement with a third party. Additionally, the FDIC will cancel all notices and applications approved under the 2020 final rule. “Agent” status and reciprocal deposits. Under Section 29 of the FDIA and the FDIC’s Reciprocal Deposit Regulations, IDIs that qualify as “agents” may exempt certain amounts of reciprocal deposits (deposits received through inter-IDI deposit placement networks) from being treated as brokered deposits. can be excluded. Although the FDIC’s Reciprocal Deposit Rule sets forth conditions for obtaining agency status, the rule is silent on how an IDI may regain that status once it has been lost. . Recognizing that neither the statute nor the regulations clarify this issue, the proposed amendments would provide a path for IDIs to regain agency institution status.
Comments requested by the FDIC
The NPRM includes several specific requests for public comment on various aspects of the proposed rule. For example, the FDIC is seeking comment on, among other things, the following key issues:
Whether it is appropriate to consider fees when determining whether a person is a “deposit broker” Changes to the principal purpose exception application process, including whether it is appropriate to limit the application process to insured depository institutions Whether the proposal is appropriate Whether the use of the dealer sweep exception and “assets under management” is appropriate for the proposed broker
Comments are due 60 days after the NPRM is published in the Federal Register.
takeout
2020 for making brokered deposit decisions based on the staff’s view that many brokered deposit arrangements are essentially less “sticky” than core deposits, meaning that such deposits have less value. This indicates the FDIC’s desire to return to the pre-2010 framework. In a fluctuating interest rate environment, you are likely to stay with any bank. In the NPRM, the FDIC states that “undercapitalized IDIs may rely on less stable third-party deposits for rapid growth” or “due to deteriorating conditions.” It notes that this could pose further risks to IDI’s safety, soundness, and financial stability. Widely. To limit such deposit intermediation activities, the FDIC is proposing to effectively shift the burden of regulation and reporting regarding deposit intermediation activities back to IDIs. This could increase the costs of IDIs and recalibrate their role in the brokered deposit regulatory framework.
If you are interested in submitting comments about the proposed amendments or would like more information about how the proposed amendments may affect your business, please contact the author of this advisory or your regular Please contact Arnold & Porter. Our financial services team will be happy to answer any questions you may have about the proposed amendments, recent developments in the regulation of brokered deposits, or broader financial regulation.
© Arnold & Porter Kay Schorer LLP 2024 All Rights Reserved. This advisory is intended as a general overview of the law and does not constitute legal advice. You should consult an attorney to determine the legal requirements applicable to your particular factual situation.
