Updated Brokered Deposit Guidance - Sullivan & Cromwell
July 5, 2016Updated Brokered Deposit GuidanceFDIC Revises Frequently Asked Questions on Identifying, Acceptingand Reporting Brokered DepositsSUMMARYOn June 30, 2016, the Federal Deposit Insurance Corporation (the “FDIC”) issued a Financial InstitutionsLetter (FIL-42-2016) providing revised guidance regarding brokered deposits in the form of FrequentlyAsked Questions (the “2016 FAQs”). The 2016 FAQs followed the FDIC’s issuance of brokered depositFAQs in January 2015, which created substantial industry concerns regarding the breadth of the definitionof “brokered deposits,” and the issuance of “updated” FAQs in November 2015 combined with a requestfor comment. The 2016 FAQs retained all of the proposed FAQs issued for comment, but with some keyclarifications and new FAQs regarding, among other matters, application of exceptions to the “depositbroker” definition, duration of brokered status and implications of Prompt Correction Action (“PCA”) onretention of brokered deposits. These revisions should alleviate a number of the industry concerns withthe January 2015 FAQs.The 2016 FAQs amend the guidance regarding the scope and application of certain exceptions to the“brokered deposit” definition and should result in a more rational application of several statutoryexceptions: Application of the “primary purpose exception” will no longer require a specific “determination”by the FDIC that the exception is applicable in a given instance; The “employee exception” is applicable to “dual-hatted” employees – i.e., persons who areexclusively employed by an insured depository institution (“IDI”) but who may be licensed tosell securities and financial products on behalf of affiliates; “Call center” personnel (including dual employees and contractors) will generally not beclassified as “deposit brokers”; andNew YorkWashington, D.C.Los Angeles Palo Alto London ParisTokyo Hong Kong Beijing Melbourne Sydneywww.sullcrom.comFrankfurt
Federal, state and local government agencies may receive a fee for administrative costs andstill qualify for application of the primary purpose exception in connection with deposits thatare part of a debit or prepaid card program.The 2016 FAQs also provide that brokered deposits may be reclassified as non-brokered after a 12month period during which no third party is involved with the account.The addition of a single word in one FAQ, however, appears to require that IDIs that lose their status as“well capitalized” institutions for purposes of PCA are no longer allowed to retain indefinitely their existingbrokered deposits without obtaining a waiver from the FDIC.BACKGROUNDSection 29 of the Federal Deposit Insurance Act (“Section 29”), as implemented by the FDIC’s regulationsat 12 C.F.R. § 337.6, places restrictions on the acceptance by certain IDIs of deposits that are obtained1through “deposit brokers” and therefore are deemed to be “brokered deposits.”2IDIs that are not wellcapitalized may not accept (which includes not only actual acceptance, but also solicitation, renewal orrollover of) brokered deposits. Although an IDI that is adequately capitalized may request a waiver of thisprohibition, these waivers cannot be sought in advance, the waiver process itself can take considerabletime, and the FDIC appears increasingly reluctant to grant such waivers. IDIs that are not well capitalizedalso are subject to restrictions under Section 29 on the interest rates they may offer on deposits.The classification of deposits as brokered can have a significant adverse impact on IDIs—including thosethat are well capitalized—that extends well beyond these statutory disqualifications and limitations. First,the amount of an IDI’s brokered deposits can affect the following components of its deposit insuranceassessment rate: for a large or highly complex institution, its core deposits ratio; for a small institution (generally under 10 billion in assets) that has experienced a more than40% growth in assets over the past four years, its adjusted brokered deposit ratio; and for any institution that is either not well capitalized or that has a composite CAMELS ratingbelow a “2,” and that has a ratio of brokered deposits to domestic deposits greater than 10percent, an additional brokered deposit adjustment.Second, for a banking organization subject to the federal banking agencies’ proposed minimum LiquidityCoverage Ratio (“LCR”) requirement (generally applicable to banking organizations with at least 50billion in assets), the assumed outflow rate applied to many brokered deposits is higher than that appliedto other deposits.3For example, brokered deposits that are not reciprocal brokered or brokered sweepdeposits are assigned a 100% outflow rate if they have no maturity or mature within the LCR’s 30-daywindow. Third, federal banking agency guidance indicates that IDIs that “rely upon” brokered depositsshould incorporate PCA-related downgrade triggers into their contingency funding plans; an IDI may notbe able to renew or roll over existing brokered deposits upon such a downgrade and, consequently, may-2Updated Brokered Deposit GuidanceJuly 5, 2016
4need to access other sources of funding. Fourth, brokered deposits—as defined in the liquidity coverage5ratio rule —are included as a source of short-term wholesale funding in measuring a U.S. globalsystemically important bank’s (“G-SIB”) reliance on short-term wholesale funding for purposes ofassessing a risk-based capital surcharge on a U.S. G-SIB’s common equity under the U.S.implementation of the Basel Committee’s G-SIB capital surcharge framework.Section 29 generally defines a “deposit broker” as a person “engaged in the business of placing deposits,or facilitating the placement of deposits,” of third parties with IDIs.6The FDIC does not appear to requirea person to be “engaged in the business” of facilitating the placement of deposits to satisfy the secondprong of this definition.7The statutory definition of “deposit broker” is subject to certain enumeratedexceptions; among others, these exceptions apply to an IDI (with respect to funds placed with that IDIitself); an employee of an IDI, with respect to funds placed with the employing institution; and an agent ornominee whose primary purpose is not the placement of funds with depository institutions.8The FDIC has sought to provide more clarity with respect to these definitions and the correspondingexceptions through its implementing regulations at 12 C.F.R. § 337.6, as well as through a number ofstaff advisory letters issued over the years. Particular areas of focus have included determining whethercertain activities constituted “placing deposits” or “facilitating the placement of deposits,” and determiningwhether a person or entity otherwise involved in facilitation comes within the primary purpose exception.9In addition, in response to a Congressional mandate in the Dodd-Frank Wall Street Reform andConsumer Protection Act, the FDIC issued the Core and Brokered Deposit Study in July 2011 (the “2011Study”). Although reiterating that “there should be no particular stigma attached to the acceptance bywell-capitalized banks of brokered deposits per se and that the proper use of such deposits should not bediscouraged,” the 2011 Study also expressed concerns about brokered deposits and recommended thatCongress neither amend nor repeal the brokered deposit statute.10The 2011 Study reviewed the FDIC’sprior brokered deposit guidance and set forth its position with respect to certain interpretive issues. TheFDIC staff had repeatedly advised, since the publication of the 2011 Study and prior to the January 2015FAQs, that the study represented the FDIC’s definitive positions on brokered deposits. The positions setforth in the 2016 FAQs now supersede those taken in the 2011 Study in certain respects.DISCUSSIONThe 2016 FAQs are attached as Appendix I to this memorandum, and our blackline showing changesfrom the November 2015 FAQs is attached as Appendix II. The revisions and/or clarifications from theNovember 2015 FAQs of particular significance include the following.A. NEW GUIDANCE ON EXCEPTIONS TO THE DEFINITION OF DEPOSIT BROKERThe 2016 FAQs (i) expand the scope and practical application of the primary purpose exception; (ii)clarify the application of the employee exception to “dual-hatted” employees; (iii) provide factors under-3Updated Brokered Deposit GuidanceJuly 5, 2016
which “call center” personnel (including dual employees and contractors) will not be classified as depositbrokers; and (iv) limit the circumstances under which federal, state and local government agencies will beclassified as deposit brokers for using debit or prepaid cards to deliver funds to beneficiaries ofgovernment programs.1. General Application of the Primary Purpose ExceptionThe 2016 FAQs provide that the “FDIC considers each request to review and interpret” the primarypurpose exception “on a case-by-case basis,” deleting language in the November 2015 FAQs stating thatthe primary purpose exception (i) “applies only infrequently” and (ii) “typically requires a specific requestfor a determination by the FDIC.” As had been argued by industry participants, none of Section 29, theFDIC’s brokered deposit regulations, its advisory opinions, or the 2011 Study had mentioned thisstringent application of the exception. The 2016 FAQs are now consistent with Section 29 and previousadvisory opinions, neither requiring a specific determination from the FDIC or its staff in order to apply theprimary purpose exception nor stating that the exception will only apply on “rare occasions.”2. Application of the Primary Purpose Exception to Limited Referral ProgramsThe 2016 FAQs appear to expand application of the primary purpose exception to certain affiliatedemployees who have “ongoing involvement” with a deposit account opened through a referral program.The November 2015 FAQs established a framework for addressing application of the primary purposeexception to deposits resulting from customer interactions with certain dual or affiliated employees whomay assist a customer in opening a deposit account at the affiliated IDI, including through a referral. Indetermining whether the program was sufficiently limited in scope so as not to be deemed a brokereddeposit arrangement, the November 2015 FAQs stated that the FDIC would consider whether (i) theprogram is designed to significantly drive deposit growth at the IDI; (ii) the cost of the incentive package isrelatively small and the fee to the recipient de minimis; (iii) the payments are capped in total or limited infrequency; and (iv) the employees involved, if employed by an affiliate or subsidiary of the IDI, haveongoing involvement with the deposit account after it is opened. This fourth factor raised the concern thatthe framework did not account for the possibility that ongoing involvement by an affiliated employee maybe evidence of the provision of “one-stop” banking services, as opposed to evidence that the employee isengaged in the business of placing or facilitating the placement of deposits. In the 2016 FAQs, the fourthfactor has been deleted, alleviating this concern and establishing a framework for when affiliatedemployees may participate in limited referral arrangements without the deposits placed under thosearrangements being classified as brokered that is consistent with modern, “one-stop” banking services.3. Application of the Employee Exception to “Dual-Hatted” EmployeesThe 2016 FAQs provide that “dual-hatted” employees (persons who are exclusively employed by an IDIbut who may be licensed to sell securities and financial products on behalf of an affiliate) who opendeposit accounts on behalf of the IDI are not considered deposit brokers solely because they are licensed-4Updated Brokered Deposit GuidanceJuly 5, 2016
to sell securities or other financial products to bank customers. The relevant FAQ, FAQ E4, clarifies that“dual-hatted” employees generally qualify for the statutory exception for employees of the IDI set forth inSection 29, which provides that a person is not a “deposit broker”: (i) who is employed exclusively by theIDI; (ii) whose compensation is primarily in the form of a salary; (iii) who does not share such employee’scompensation with a deposit broker; and (iv) whose office space or place of business is used exclusivelyfor the benefit of the IDI that employs such person.Notably, the 2016 FAQs do not address industry concerns that the fourth prong of the employeeexception may be interpreted to exclude certain “dual-hatted” employees who share office space withemployees of affiliates or other entities. In a comment letter to the FDIC submitted by a collection ofindustry groups, it was pointed out that employees of IDIs that share office space with affiliate or thirdparty employees should qualify for the statutory exception provided that, consistent with existingregulatory restrictions on shared space,11the space used by the employee for banking activities is usedsolely for the benefit of the IDI, while the portion of the space used to perform functions for a subsidiary oran affiliate of the IDI or a third-party entity, is used solely for the benefit of that entity.12Such “dual-hatted” IDI employees are no differently situated than IDI employees, such as tellers, with respect tosharing office space with employees of affiliates or other entities for purposes of the employee exception,and thus should also be able to satisfy this prong of the statutory test. Because the 2016 FAQs do notspecifically address this issue, the concern remains that the FDIC could find “dual-hatted” employees whowork in such shared spaces to be ineligible for the employee exception.4. Factors for Determining Classification of “Call Center” PersonnelA new FAQ also addresses the classification of “call center” personnel who primarily provide customerservice support on behalf of the IDI by answering questions about accounts or bank-provided services orby transferring callers to appropriate areas of the IDI.In cases where “call center” personnel areexclusively employed by the IDI, the statutory employee exception will likely apply, exempting them fromclassification as a deposit broker. Where such personnel are dual employees or contractors and thusineligible under the employee exception, these employees will nevertheless not be considered depositbrokers if (i) they merely transfer callers or provide general information and do not participate in theplacement of deposits and (ii) their compensation is not based on the number of accounts opened oramount of deposits placed or maintained as a result of their contact with callers.5. Modified Factors for Classifying Government Agencies That Disburse Funds ThroughPre-Paid CardsThe November 2015 FAQs created new factors for determining whether federal, state or localgovernment agencies that use debit or prepaid cards to deliver funds to the beneficiaries of governmentprograms would be classified as deposit brokers. Under that guidance, an agency disbursing fundsthrough debit or prepaid cards would be eligible for application of the primary purpose exception onlywhen the agency (i) was mandated by law to disburse the funds to the beneficiaries; (ii) was the sole-5Updated Brokered Deposit GuidanceJuly 5, 2016
source of funding for the deposit accounts; and (iii) did not receive any fees from the IDI. Under thatframework, if a government agency received any fee from an IDI (including to cover administrative costs)in connection with choosing an IDI or opening an account with an IDI as part of a debit or prepaid cardsprogram, the primary purpose exception would not apply to the deposits placed at the IDI. Under the2016 FAQs, this final factor has been qualified and allows for the collection of fees “necessary to helpcover the agency’s administrative costs.”B. RECLASSIFICATION OF DEPOSITS AS NON-BROKEREDAnother new FAQ provides that a brokered deposit that is not a time deposit (that is, a demand deposit,also known as a non-maturity deposit) can be reclassified as non-brokered after a 12-month period duringwhich no third party (i.e., a party other than the IDI and the depositor) is involved with the account. TheFDIC based the 12-month period on the term historically offered for a certificate of deposit. The FDICnotes that this treatment of non-maturity deposits will create parity with the reclassification of mostbrokered CDs when they are renewed without involvement of a third party.“Third-party involvement” includes (i) holding the account in the name of the deposit broker as agent forone or more customers; (ii) the deposit broker continuing to receive account fees after the account isopened; (iii) the deposit broker having the authority to make withdrawals or additional deposits; or (iv) thedeposit broker having continued access to the account information, i.e., access to the customer’s accountinformation that has been provided for the purpose of offering guidance to the customer as to theinvestment of the funds in the account.The FDIC notes that involvement in non-maturity accounts could cease and then restart after a 12-monthperiod lapse in involvement had resulted in the deposits being reclassified as non-brokered, which wouldthen result in the deposits being reclassified as brokered.C. WAIVER FOR AN ADEQUATELY CAPITALIZED IDI HOLDING BROKERED DEPOSITSA new word in the 2016 FAQs suggests that an IDI that holds brokered nonmaturity deposits and loses itsPCA well-capitalized status will not be permitted to hold its existing nonmaturity deposits indefinitelywithout obtaining a waiver from the FDIC. Under the 2016 FAQs, “[i]f an [IDI] is adequately capitalized forPCA purposes, the [IDI] may request a waiver from the FDIC to retain or accept brokered deposits”(emphasis added). This sentence, with the new “retain or” language, appears in 2016 FAQ F6, whichaddresses the treatment of nonmaturity deposits by an IDI that ceases to be well capitalized. FAQ F6also states, before the sentence with the new language, that an IDI that ceases to be well capitalized“should contact its primary federal regulator to establish an appropriate supervisory plan for addressinghow brokered demand deposits can comply with Section 29.” It is not clear how the FDIC intends toapply in practice the interplay between establishment of an appropriate supervisory plan addressingnonmaturity deposits after an IDI ceases to be well capitalized and the possible need for a waiver for theIDI to continue to hold such deposits indefinitely.-6Updated Brokered Deposit GuidanceJuly 5, 2016
***ENDNOTES112 U.S.C. § 1831f; 12 C.F.R. § 337.6. Deposit brokers formerly were required by Section 29A ofthe FDIA to provide written notification to the FDIC that they were acting as such, but Congressrepealed this requirement through the Financial Regulatory Relief and Economic Efficiency Act of2000. As a result, the primary importance of the statutory definition of “deposit broker” is tocharacterize the deposits obtained by an IDI through such a deposit broker as “brokereddeposits.”2Certain high-interest-rate deposits offered by IDIs that are less than well capitalized areconsidered “brokered deposits” even without any third-party involvement, as in those situationswhere the offering IDI itself is considered the “deposit broker” under the statute. See 12 U.S.C.§ 1831f(g)(3).3See 78 Fed. Reg. 71,818, 71,840 (Nov. 29, 2013). Generally, the outflow rate applied to aparticular deposit depends in part on whether that deposit is brokered and, if so, whether it is areciprocal brokered deposit, brokered sweep deposit, or other type of brokered deposit. Theoutflow rate applied to a particular brokered deposit also may depend on whether the deposit isfully insured, as well as its maturity.4See Interagency Policy Statement on Funding and Liquidity Risk Management (March 17, 2010),at 13, available at 2010/sr1006a1.pdf.512 C.F.R. § 249.3.612 U.S.C. § 1831f(g)(1). A “deposit broker” also includes a person engaged in the business ofplacing deposits with IDIs for the purpose of selling interests in those deposits to third parties, andan agent or trustee who establishes a deposit account to facilitate a business arrangement to usethe proceeds of the account to fund a prearranged loan. Id.7Cf. FDIC Advisory Opinion 93-30 (June 15, 1993) (“When considered together, we believe thesefacts tend to support the conclusion that the Affinity Groups are neither ‘engaged in the businessof placing deposits’ nor ‘facilitating the placement of deposits’ with the Bank, as contemplated bysection 29.”).812 U.S.C. § 1831f(g)(2).9See, e.g., FDIC Advisory Opinion 04-04 (July 28, 2004) (finding that an Internet listing servicethat met certain criteria was not “facilitating the placement of deposits”); FDIC Advisory Opinion05-02 (Feb. 3, 2005) (finding the “primary purpose” exception to apply in the case of a brokeragefirm that swept idle customer funds into transaction accounts at affiliated banks, provided certainconditions were met).102011 Study at 3.11See 12 C.F.R. § 7.3001. Banks’ use of dual-hatted IDI employees to meet the breadth ofcustomer needs in the context of modern banking represents prevailing industry practice and isrecognized as such in various bank regulations and other guidance, including those of the FDIC,the Office of the Comptroller of the Currency, and the Federal Reserve Board. Examples includethe OCC’s regulations on bank activities and operations (12 C.F.R. § 7), the Federal ReserveBoard’s Regulation W, which governs transactions between member banks and their affiliates (12C.F.R. § 223), and the FDIC’s supervisory guidance on transactions between banks and affiliatedbusinesses. FDIC, Risk Management Manual of Examination Policies, § 4.3 – RelatedOrganizations, available at: tion4-3.html.Further, the Interagency Statement on Retail Sales of Nondeposit Investment Productsacknowledges the use of third-party arrangements and establishes expectations on how thoserelationships should be managed. The FDIC has previously adopted this guidance without anysuggestion that these relationships could have implications on the nature of deposits accepted atlocations where these third-party arrangements exist.-7-Updated Brokered Deposit GuidanceJuly 5, 2016
ENDNOTES (CONTINUED)12See Letter from The Clearing House, American Bankers Association, the Financial ServicesRoundtable, the Independent Community Bankers of America and the Institute of InternationalBankers, regarding November 13, 2015 Financial Institutions Letter (FIL-51-2015) (Dec. 28,2015).Copyright Sullivan & Cromwell LLP 2016-8Updated Brokered Deposit GuidanceJuly 5, 2016
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Letter (FIL-42-2016) providing revised guidance regarding brokered deposits in the form of Frequently Asked Questions (the "2016 FAQs"). The 2016 FAQs followed the FDIC's issuance of brokered deposit FAQs in January 2015, which created substantial industry concerns regarding the breadth of the definition
FDIC Issues Frequently Asked Questions on Identifying, Accepting, and Reporting Brokered Deposits SUMMARY On January 5, 2015, the Federal Deposit Insurance Corporation (the "FDIC") issued a Financial Institutions Letter (FIL-2-2015) (the "Guidance"), setting forth sweeping guidance regarding brokered deposits in the form of FAQs.
The Cashier Office will provide pre‐numbered 3‐part deposit slips and plastic tamper resistant deposit bags for the bank deposit. The first 3 digits of the deposit slip is a location number and will identify your department to the Cashiers and the bank. The last 4 digits is a sequential deposit number. All bank deposit slips and bags must .
1.2 European history of deposit insurance 11 1.3 Deposit insurance as an element in the financial safety net 12 2 Deposit insurance fundamentals 15 2.1 Aims and requirements of a modern deposit insurance scheme 15 2.1.1 Aims of deposit insurance 15 2.1.2 Requirements of a deposit insurance scheme 17 2.2 Guarantee promises 19
01/13 consol elec deposit 1 30.00 01/13 deposit intuit pymt soln boyette springs homeow 60.00 01/13 consol elec bill pay deposit 3 90.00 01/17 deposit intuit pymt soln boyette springs homeow 30.00 01/17 consol elec bill pay deposit 7 210.00 01/18 deposit intuit pymt soln boyette springs homeow 60.00 01/18 consol elec bill pay deposit 8 240.00
company also markets the bank’s deposit products in exchange for volume-based fees, then it would be a deposit broker, and the deposits would be brokered. B6. Are insurance agents, lawyers, or accountants that refer clients to a bank considered to be deposit brokers? Yes. By referring
Deposit Insurance Corporation, to chair a working group that would carry out the task of setting out guidance for effective deposit insurance systems. The final report of the Working Group on Deposit Insurance was discussed and endorsed by the Forum in London, on September 7, 2001. The FSF report on deposit insurance is built on three general .
The Deposit Approver role allows one company user to create, scan, and balance a deposit, and second company user to approve that same deposit before transmitting it to the bank – A deposit approver is an internal approver within your group, not an approver at the bank (you can have multiple deposit approvers)
the accounting profession - have come to be known as 'creative accounting'. (1988: 7-8) Terry Smith reports on his experience as an investment analyst: We felt that much of the apparent growth in profits which had occurred in the 1980s was the result of accounting sleight of band rather than genuine economic growth, and we set
