Why it matters

The Federal Deposit Insurance Corporation (FDIC) is proposing to update its Frequently Asked Questions (FAQs) on identifying, accepting, and reporting brokered deposits, and is requesting public comment on the proposed changes. In January 2015, the FDIC issued FIL-2-2015 with a series of FAQs intended to help bankers identify brokered deposits. Since the FAQs were issued, the FDIC has received numerous inquiries, prompting its participation in a number of calls and meetings with bankers, banking trade groups and other interested parties. In an effort to provide further clarification, the FDIC proposes several adjustments to its earlier FAQs and is asking for public comment. With its proposed revisions, the regulator emphasizes that brokered deposit determinations are very fact-specific and influenced by a number of factors. "Thus, the FDIC always views these determinations on a case-by-case basis." "As such, the FDIC intends these FAQs as a starting point for institutions to begin their analysis of whether a particular product or program is determined to involve brokered deposits." Comments on the revised FAQs will be accepted until December 28.

Detailed discussion

The Federal Deposit Insurance Corporation (FDIC) started 2015 by releasing new Frequently Asked Questions (FAQs) for brokered deposits, addressing issues such as the definition of a "deposit broker" and when the "primary purpose" exception applies. While the FDIC acknowledged that brokered deposits "can be a suitable funding source when properly managed as part of an overall, prudent funding strategy," the agency expressed concern about the overuse and improper management of brokered deposits, particularly when banks use them to fund "unsound or rapid expansion of loan and investment portfolios."

But by August, industry groups were already expressing concern about perceived changes made by the FDIC via its FAQs. In a letter from the American Bankers Association, the Clearing House Association, and the Institute of International Bankers, the groups explained that the FDIC's definition of brokered deposits in the FAQs appeared to capture "a much broader universe of deposits as brokered than Congress intended."

As a result of the continued questions and in an effort to provide further clarification, the FDIC is proposing several adjustments to its earlier FAQs and is asking for public comment. In its proposed revisions, the FDIC has added citations to its earlier studies, reports, regulations and advisory opinions. The agency also emphasizes that the FAQs do not alter the definition of "brokered deposits" or what constitutes a "deposit broker."

A significant change in the proposed revisions relates to the question of whether insurance agents, lawyers, or accountants that refer clients to a bank are considered to be deposit brokers. The response has been completely rewritten, changing from an unequivocal "yes" to now state "it depends." The response further states that the agency "recognizes that within a community, there are many business professionals that conduct banking business with a particular insured financial institution, and due to that banking allegiance, often refer their customers to a particular financial institution on an informal basis for deposit products. The deposits produced by those types of informal deposit referrals would generally not be considered brokered."

It also clarifies that a more formal, programmatic arrangement—such as where the professional entered into a written contract with the bank for referrals or the professional receives a fee from the bank—would be considered brokered deposits.

In a new follow-up question, the FDIC provided an example of when the deposits in a programmatic arrangement to refer depositors would not be considered a brokered deposit, where bank customers or employees of subsidiaries earn bonuses (cash, merchandise, or a higher interest rate on a deposit) for referring depositors. The "FDIC might determine that the program is sufficiently limited in scope that it is not deemed to be a brokered deposit arrangement," the agency explained, after considering factors such as whether the program is designed to drive deposit growth or just a "small recognition" of loyalty to the bank.

Addressing another area of industry concern, the agency stated: "The FDIC does not believe that dual employees or contractors should be classified as deposit brokers in all situations." The FAQs then provide examples of situations when contractors and dual employees would not be considered deposit brokers. For instance, a broker-dealer affiliate of an insured depository institution where employees of the affiliate are also employees of the insured depository institution who refers a client to the bank—and is paid a fee, part of which is paid as a sales commission—would be considered to have facilitated the placement of deposits. But a dual employee who merely performed back-office administrative work—and was not involved in facilitating the placement of deposits—would not qualify as a deposit broker.

The agency also changed some of the commentary to answer whether the primary purpose exception applies to companies that sell or distribute general purpose prepaid cards. While the answer remained "no," the FDIC explained that after the funds are collected from cardholders, they may be placed into a custodial account at an insured depository institution and accessed by cardholders through the use of their cards. The general purpose prepaid card and the deposit accounts are inseparable, according to the amended FAQs, and because of this relationship, prepaid card companies are not covered by the primary purpose exception and prepaid card companies qualify as deposit brokers.

The FDIC also clarified that federal or state agency funds disbursed to beneficiaries of government programs through debit or prepaid cards would not be classified as brokered deposits. "[T]he primary purpose of the federal or state agency is simply to discharge the government's legal obligations to the beneficiaries," the agency explained, and "not to provide the beneficiaries with a deposit-placement service or to assist the insured depository institution in expanding its deposit base."

In another significant change, the FDIC discussed how institutions should respond if they cease to be well capitalized. Reversing course from the prior answer—to close brokered deposit accounts that are not time deposits—the FAQs advise banks to contact their primary financial regulator to establish an appropriate supervisory plan. "The goal of any supervisory plan regarding brokered deposits would be to not disrupt an institution's operations as it attempts to improve its capital category," the FDIC wrote.

The FDIC will accept comments on the amended FAQs until December 28.

To read the "track changes" version of the FAQs, click here.

To read the "clean" version of the FAQs, click here.