On December 12, 2019, the Federal Deposit Insurance Corporation ("FDIC") proposed revisions to the restrictions on brokered deposits (the "Proposal").11 The Proposal is intended to modernize the FDIC's framework for brokered deposits, and would revise both the substantive regulations for brokered deposits and the procedures for requesting exceptions and filing reports.

The Proposal would narrow the scope of the brokered deposits regulation by (i) more explicitly defining who is a deposit broker and (ii) expanding the exclusions for putative brokers that are subsidiaries of the insured depository institution or operate with a primary purpose other than placing funds at depository institutions (the "Primary Purpose Exception").

As is relevant to structured products, the Proposal would define "deposit broker" to include: "Any person engaged in the business of placing deposits with insured depository institutions for the purpose of selling interests in those deposits to third parties." The FDIC states that this prong of the definition is intended to "capture" the brokered certificate of deposit ("CD") market and would apply to registered broker-dealers who subdivide bank-issued "master CDs" and then sell the modified CDs to brokerage customers. Such arrangements, however, are within the scope of the existing definition of "deposit broker," and, therefore, should not be viewed as an expansion of the restrictions.

With respect to the Primary Purpose Exception, the Proposal would:

1. Expand the Primary Purpose Exception to explicitly be available to an agent or nominee that (i) has assets under management for customers and places less than 25 percent of its total assets under management at depository institution12 and (ii) places customer funds in transactional accounts at a depository institution to enable transactions or make payments. The assets under management option appears to be designed for broker-dealers that sweep uninvested cash balances into deposit accounts, so long as those cash balances do not exceed 25 percent of the broker's assets under management.

2. Provide that assets under management will be measured based on the total market value of all financial assets that are managed on behalf of customers that participate in a particular business line of an agent or nominee. 13 The inclusion of a business line element in this provision is intended to prevent brokers from amalgamating unrelated business lines to satisfy the 25 percent aggregate threshold discussed above.

3. Clarify that the Primary Purpose Exception will not be available if the purpose of the broker's relationship with the customer is to encourage savings, maximize yield, or provide deposit insurance, or has a similar purpose to those examples.

4. Provide a formal process for institutions and putative deposit brokers to apply to qualify for the Primary Purpose Exception (including arrangements beyond the assets under management and enabling transactions), thus allowing persons who would otherwise be deposit brokers to not be treated as such.

It is expected that a portion of existing brokered deposits would no longer be characterized as brokered under the Proposal. While such deposits may be subject to certain reporting requirements, they would not be subject to the general restrictions on brokered deposits or the less favorable treatment for brokered deposits under the Liquidity Coverage Ratio and deposit insurance assessments.14

Comments on the Proposal must be submitted to the FDIC within 60 days of publication in the Federal Register. Please stay tuned for Mayer Brown's more fulsome alert and webinar on the Proposal in early 2020.


11 Press Release, FDIC Issues Proposed Rule on Brokered Deposit Restrictions (Dec. 12, 2019), http://bit.ly/2SO9PEc.

12 This action would effectively codify the industry-wide relief provided in Advisory Opinion 05-02, although it would be more generous than the staff relief. See FDIC, Adv. Op. 05-02 (Feb. 3, 2005).

13 A "business line" would be defined as the group of customers for whom the agent or nominee places or facilitates the placement of deposits as part of a broader business relationship.

Originally published in REVERSEinquiries: Volume 3, Issue 1.
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