FDIC Staff Issues Statement Requires Banks to Carefully Review Primary Purpose Exception Notices | Seward & Kissel LLP
On July 15, 2022, the Risk Management Oversight Division (the “Staff”) of the Federal Deposit Insurance Corporation (“FDIC”) issued a two-page statement (the “Statement”) “to remind” insured depository institutions (“IDIs”) of their obligation to review deposits received from brokers and other third parties to determine whether such deposits should be reported as traded on the IDI’s call report, even when the broker or the third party has filed a notice with the FDIC claiming the Primary Use Exception (“PPE”) for such filings.1 The due diligence of an IDI includes reviewing contracts between a broker and third-party administrators.
As part of the statement, the staff also released a new entry in its “questions and answers on deposits through a broker” addressing their expectations for IDIs receiving deposits through the PPE. Additionally, the FDIC updated – for the first time in nearly a year – its online list of PPE Notice Filers and added a new explanatory footnote reminding IDIs that the PPE is not available when third party ‘matchmaking’.2
As set forth below, Staff’s position on this issue is inconsistent with the 2020 FDIC-adopted Rule Amendments (the “Rule”), as well as the existing Questions and Answers. By altering the meaning of the Settlement, Staff effectively amended the Settlement without Board approval or solicitation of public comment, as required by federal law.
II. Overview of Negotiated Deposit Regulations
The settlement included a new procedure for third parties to claim PPE when placing deposits with IDI – targeted at scanning programs, but potentially available to others – of less than 25% of the total assets that the third party has under management for its clients in a given business.3 Under the Regulations, an entity making deposits under the IPS need only file a notice with the FDIC that it is making deposits in reliance on the IPS, and may rely on the PPE upon receipt of the notice by the FDIC.
The Regulations further provide that deposits placed with unaffiliated banks under a sweeping program will be deemed to be “traded”, notwithstanding the IPS, if another third party provides administrative services to a broker or other offering sweeping programs, and these services are considered “matchmaking activities”. ”4
A third party is engaged in “twinning activities” if “[t]The person proposes deposit allocations to, or between, more than one bank based on both (a) the particular deposit objectives of a specific depositor or depositor agent, and (b) the objectives deposits of specific banks, except in the case of deposits placed by the depositor’s agent with a bank affiliated with the depositor’s agent.5 The definition is intended to encompass service providers who support the offering of swipe programs by a broker and others by reviewing customer transaction information and offering deposit allocations between banks under the swipe program. swipe from a broker.
III. New staff expectations
Despite the fact that under the Regulations, a notice of PPE is effective upon filing – and notice filers receive an immediate email response from the FDIC upon filing that the notice has been received and can be invoked – the declaration imposes a due diligence mandate on IDIs receiving guarantees from a declarant of PPE. According to the statement, an IDI should “review the arrangements between the broker and any additional third party to assess and determine whether the additional third party facilitates the placement of deposits, including by engaging in matchmaking activities.”6
Staff note in the statement that they have reviewed the agreements between brokers who have filed PPE notices and third-party scanning program administrators and found that “the additional third parties undertake to facilitate the placement of deposits, for example by engaging in matchmaking activities, which meet the definition of a deposit broker”, thus rendering broker-dealers ineligible for the PPE.seven As a result, IDIs receiving deposits from these brokers incorrectly classified the deposits as untraded on their call reports.
Staff repeated this expectation in the new Q&A D.10, stating that “[a] An IDI that receives swipe deposits from an unaffiliated broker with a primary purpose exception for that line of business should determine if there are other third parties involved in the deposit placement arrangement that qualify. as a deposit broker because the IDI is responsible for accurately reporting deposits on its call report.8
The statement and Q&A is the third staff effort to limit the amount of swipe deposits placed using a third-party administrator that IDIs classify as non-traded. Previous efforts were to add questions and answers on two separate occasions to clarify the definition of “matchmaking”. The latest staff actions appear to be a direct response to the FDIC’s receipt of “primary purpose exception notice filings from brokers claiming that an additional third party involved in the unaffiliated scanning program is providing brokers of ‘administrative services'”.9 In the view of staff, these “administrative services” are matches and deposits are negotiated.
IV. Inconsistencies in the FDIC’s approach
The preamble to the final rule adopting the Settlement (“Preamble”) states that “upon receipt by the FDIC of [a PPE notice], the third party who is the subject of the notice may invoke the designated exception applicable for a particular line of business. The FDIC will establish an electronic process for receiving notices. This process will include providing the depositor of the notice with an immediate acknowledgment of receipt.ten
The text of the settlement provides that “The FDIC may, with notice, revoke a primary purpose exception from a third party, or from a person required to submit a notice under subsection (b)(3)(iii) of the this section, which qualifies for the primary purpose exception because of the use of a designated exception, if: (A) the third party no longer meets the criteria for a designated exception; (B) The subsequent notice or report is inaccurate; or (C) The notice submitter fails to submit the required reports. »11
A Q&A published on January 22, 2021 further provides that “A notice submitted electronically will be acknowledged immediately upon receipt via return email. Entities may begin relying on the primary purpose exception immediately upon receipt of the return email acknowledgment and may continue to rely on the primary purpose exception unless the FDIC informs the registrant that it is not eligible for the main purpose exception.12
The process set out in the Regulations therefore seems straightforward: (1) a third party files a notice of PPE with the FDIC; (2) an IDI may immediately thereafter rely on the advice and consider the deposits placed by the third party as not having been brokered; and (3) if the FDIC determines that the third party is not actually eligible for PPE, it may, with noticeformally revoke the PPE, after which deposits made by the third party can be traded.
The preamble addresses the limited liability of IDIs receiving deposits from PPE review filers to exercise due diligence in their eligibility for PPE. While the proposed regulations on brokered deposits would have imposed on IDIs the responsibility “to monitor the eligibility of the non-bank third party to the [PPE]“, the Regulations eliminated this requirement, stating: “Given the potential volume of third parties who could benefit from the primary purpose exception and the idiosyncratic business models that these third parties may have, the FDIC agrees that this expectation does not is not appropriate.”13
Seemingly shifting the requirement to determine the validity of an FDIC PPE notice to individual IDIs, the statement and new questions and answers significantly change the procedure adopted by the FDIC Board of Directors. The staff publications therefore attempt to change the clear text of the regulation providing for the effectiveness of a notice of PPE until revoked by the FDIC without following the notice and comment procedures of the Administrative Procedure Act.
Staff are clearly trying to respond to industry by taking advantage of the vague definition of “matchmaking activities” in the Regulations. The Settlement appears to target third-party administrators of scanning networks, but the definition is so vague that it is vulnerable to bona fide arguments that the administrators are not engaged in the matchmaking. Rather than re-propose a more functional definition to satisfy its purposes (an action that would require FDIC Board approval), the staff is attempting to narrow the definition – and thus broaden the applicability – of the definition of matchmaking through advice.
We expect this matter to be investigated in the coming year, although it does not appear at this time that the FDIC is attempting to take enforcement action.