Locke Lord QuickStudy: Brokered Deposits: FDIC Adds an ‎Additional Business Relationship to the Primary Purpose ‎‎Exception

Effective January 10, 2022, the Federal Deposit Insurance Corporation (“FDIC”) issued a final rule ‎‎(the “Primary Purpose Rule”) that adds a specific business relationship that qualifies under the ‎Primary Purpose Exception which in turn excludes deposits thereunder from the classification as ‎‎“brokered deposits,” as set forth in Section 29 of the Federal Deposit Insurance Act (“FDI Act”). ‎

As noted in our previous QuickStudy, the FDI Act does not define a “brokered deposit.” Instead, ‎Section 29 deems all deposits facilitated by “deposit brokers” to be subject to the FDI Act. A “deposit ‎broker” is defined as any person (i) engaged in the business of placing deposits, or facilitating the ‎placement of deposits, of third parties with an insured depository institution (“IDI”) or in the business ‎of placing deposits with IDIs for the purpose of selling interests in those deposits to third parties and ‎‎(ii) an agent or trustee who establishes a deposit account to facilitate a business arrangement with ‎an IDI to use the proceeds of the account to fund a prearranged loan. With very limited exceptions, ‎deposits garnered through a third-party agent or nominee will remain brokered deposits. For ‎example, Section 29 of the FDI Act provides an exception from the definition of deposit broker where ‎a non-discretionary custodian provides only ministerial functions to facilitate deposit sweeps (such ‎as managing individual customer deposits to remain within FDIC insurance limits) and the custodian ‎does not receive compensation in the form of a percentage of the interest earned on the account. ‎Section 29 also provides a mechanism where IDIs and custodians can apply to the FDIC for an ‎exception based on specific facts and circumstances. This new Primary Purpose Rule stems from ‎applications for exception that the FDIC believes would benefit the industry as a whole.‎

As a reminder, the primary purpose exception excludes from the definition of a deposit broker any ‎‎“agent or nominee whose primary purpose is not the placement of funds with depository ‎institutions.” In Section 29 of the FDI Act, the FDIC identified a number of business relationships (or ‎‎“designated exceptions”) that meet the “primary purpose” exception thereby eliminating the need for ‎the parties to apply to the FDIC for a specific exception. For instance, the “25 percent test,” a broker ‎dealer (BD) that enters into a deposit sweep agreement directly with an IDI to deposit the BD’s ‎customers’ excess cash into a deposit account at the IDI likely would meet the primary purpose ‎exception so long as less than 25 percent of the BD’s total assets under administration for its ‎customers, in a particular business line, is placed at IDIs.‎

In the new Primary Purpose Rule, the FDIC added the following additional business arrangement ‎that meet the primary purpose exception without requiring an application. The FDIC plans to make ‎conforming changes to the Call Report instructions to document data collection for these new ‎exceptions. ‎

New Designated “Primary Purpose” Exception: ‎

• An agent or nominee that is “engaged in the business of placing” customer funds at IDIs in a ‎custodial capacity will not be deemed to be a deposit broker if the agent or nominee activities ‎are limited to following instructions received from a depositor or depositor's agent specific to ‎each IDI and deposit account, and the agent or nominee neither plays any role in determining ‎at which IDI(s) to place any customers' funds, nor negotiates or set rates, terms, fees, or ‎conditions, for the deposit account. The FDIC clarified that if the agent or nominee decides ‎which IDIs are to receive depositor funds, then the agent or nominee likely meets the ‎‎“engaged in the business of placing” part of the deposit broker definition and such deposits ‎would be brokered deposits. Moreover, if the agent or nominee provides technology such as ‎an algorithm that is used to determine or recommend at which IDI(s) to place customer funds ‎are placed, that agent or nominee would be deemed a deposit broker and therefore the ‎deposits so placed would not eligible for the primary purpose exception.‎

The full text of the Rule can be found here.‎

Conclusion

This QuickStudy is intended as a guide only and is not a substitute for specific legal or tax advice. ‎Please reach out to the authors for any specific questions. We expect to continue to monitor the ‎topics addressed in this QuickStudy and provide future client updates when useful.‎