The recently-adopted amendments to the Federal Deposit Insurance Corporation’s (“FDIC’s”) brokered deposit regulations (the “Amended Regulations”) contain a new “primary purpose exception” (“PPE”) to the definition of “deposit broker” that may apply to many broker-dealer bank deposit “sweep” programs, as well as other deposit placement arrangements. A broker-dealer or other third party that places deposits with banks may claim the PPE by filing notice with the FDIC that deposits placed by the broker are less than 25% of the broker’s “assets under administration” in a specified line of business.
If certain other conditions are satisfied, a broker offering its customers a bank deposit sweep program can claim the PPE. The exception is valid upon filing with the FDIC and banks can rely on the broker’s PPE notice when filing their Call Reports. However, the FDIC can subsequently seek additional information from the broker and deny part or all of the claimed exception.
A number of our broker-dealer clients have asked whether a bank accepting deposits through its sweep program would be required to amend or re-state its Call Report if the FDIC denies the broker’s PPE after the banks have filed their Call Reports. We submitted this question to the FDIC staff and the response was “no.” Call Reports do not need to be amended or re-stated. The full response from the FDIC is FAQ #15 in the Brokered Deposit FAQ issued April 1:
• Question: The preamble to the rule provides that a notice filer seeking to rely on either the “25 percent” or the “enabling transactions” designated exception can rely on the relevant designated exception once the FDIC receives the notice filing. The preamble also provides that the FDIC can revoke a notice filer’s primary purpose exception. If the FDIC revokes a notice filer’s primary purpose exception, would the consequences of such a revocation be forward-looking only? Or would an IDI with deposits that became brokered only because of such a revocation have to “look back” and reclassify deposits as brokered that were previously reported as non-brokered on call reports filed during the period when the notice filing was effective?
• Answer: If a bank, acting in good faith, reports deposits as nonbrokered because it is relying on a notice that has been filed, and the FDIC later revokes the notice filer’s primary purpose exception, the bank will not need to reclassify deposits as brokered that were previously reported as non-brokered on Call Reports filed during the period when the notice filing was effective.
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Seward & Kissel LLP will continue to provide insight on developments regarding brokered deposits. If you have any questions about this or any other aspect of the Amended Regulations, please contact Paul Clark, Casey Jennings, or Nathan Brownback in the Washington, DC office at 202-737-8833.
