FDIC Proposes to Walk Back Key Aspects of the Brokered Deposits Rule

On July 30, 2024, the Federal Deposit Insurance Corporation (FDIC) issued a proposed rule that would unwind and considerably revise parts of the FDIC’s 2020 final rule governing brokered deposits (the “Proposed Rule”). The brokered deposits rule implements Section 29 of the Federal Deposit Insurance Act, 12 U.S.C. § 1831f (the “FDI Act”), and prohibits certain insured depository institutions (IDIs) that are not well capitalized from accepting, or requires a waiver to accept, deposits from a deposit broker. Generally, the 2020 final rule specified the types of deposit-related activities that are considered brokered and clarified the types of business relationships that are eligible to be excepted from the “deposit broker” definition.

Key Changes in the Proposed Rule

The Proposed Rule would revise the definition of “deposit broker.” The FDIC would: (1) combine the currently separate “engaged in the business of placing deposits (“placing”) and “engaging in the business of facilitating the placement of deposits” (“facilitating”) prongs of the deposit broker definition; (2) include a deposit allocation provision to replace the complex concept of “matchmaking” from the 2020 final rule; and (3) add a new factor related to fees. Specifically, a person would be considered to be engaging in the business of placing or facilitating the placement of deposits of third parties if the person conducts one or more of the following activities:

• The person receives third-party funds and deposits those funds at one or more IDIs;
• The person has legal authority, contractual or otherwise, to close the account or move the third party’s funds to another IDI;
• The person is involved in negotiating or setting rates, fees, terms, or conditions for the deposit account;
• The person proposes or determines deposit allocations at one or more IDIs (including through operating or using an algorithm, or any other program or technology that is functionally similar); or
• The person has a relationship or arrangement with an IDI or customer where the IDI, or the customer, pays the person a fee or provides other remuneration in exchange for, or related to, the placement of deposits.

The Proposed Rule would also:

• Eliminate the “exclusive deposit placement arrangement” exception that was adopted as a threshold question in the 2020 final rule;
• Amend the “25 percent test” designated business exception so that it is available only to broker-dealers and investment advisers; the exception would only be met if less than 10 percent of the total assets that the broker-dealer or investment adviser has under management for its customers is placed at one or more IDIs;
• Amend the interpretation of the primary purpose exception to consider the third party’s intent in placing customer funds at a particular IDI;
• Eliminate the enabling transactions designated business exception;
• Permit only IDIs to file primary purpose exception notices and applications; and
• Clarify when an IDI that has lost its agent institution status can regain that status for purposes of the limited exception for reciprocal deposits.

According to the FDIC, if the Proposed Rule is finalized as proposed, an IDI that relies on (1) an existing approved primary purpose exception application, (2) a 25 percent test designated exception notice, or (3) an enabling transactions designated exception notice or application, would no longer be able to rely on the exception. Instead, these IDIs would be required to submit a new primary purpose exception application based upon updated criteria, or assert a new designated business exception that meets the primary purpose exception.

Key Takeaways

The Proposed Rule would significantly impact IDIs and third parties that are not currently “deposit brokers” under the FDI Act and the 2020 final rule. For example, the Proposed Rule would require that IDIs that partner with third parties, including fintech companies, reevaluate deposit classification and, perhaps, program economics. Additionally, institutions that rely on the 25 percent test designated business exception would also have to examine whether the proposed revisions to the asset threshold would disqualify them from the exemption.

The Proposed Rule initially was subject to a 60-day comment period, which began upon publication of the Proposed Rule in the Federal Register on August 23, 2024. However, on October 8, 2024, the FDIC announced an extension of the comment period deadline from October 22, 2024 to November 21, 2024, to provide the public with additional time to prepare comments.

Our team will continue to follow the rulemaking closely. Please contact us if you have any questions about how the Proposed Rule may impact your business operations.