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“FDIC Updates Brokered Deposits Resources,” The Banking Law Journal, - February 2016 Ind – financial services

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1) THE BANKING LAW JOURNAL An A.S. Pratt® PUBLICATION FEBRUARY 2016 EDITOR’S NOTE: CORRESPONDENT BANKING Steven A. Meyerowitz VOLUME 133 NUMBER 2 THE PERILS AND PROMISE OF CORRESPONDENT BANKING Heath P. Tarbert and Liangshun Qian CHANGES NEEDED TO PROTECT THE BANKING AND FINANCIAL SERVICES SECTOR WHEN DEALING WITH THE MEDICAL MARIJUANA INDUSTRY—PART I Moises Gali-Velazquez RECOGNITION OF FOREIGN COUNTRY MONEY JUDGMENTS CONNECTED TO CRIMINAL PROCEEDINGS OR CONSTITUTING “PENAL JUDGMENTS” Oluwaseun O. Ajayi FDIC UPDATES BROKERED DEPOSITS RESOURCES Clifford S. Stanford and Colin C. Richard FEBRUARY 2016 C4815_16-2_x.indd 1 1/20/2016 3:04:15 PM

2) QUESTIONS ABOUT THIS PUBLICATION? For questions about the Editorial Content appearing in these volumes or reprint permission, please call: Matthew T. Burke at ................................................................................... (800) 252-9257 Email: .................................................................................... matthew.t.burke@lexisnexis.com For assistance with replacement pages, shipments, billing or other customer service matters, please call: Customer Services Department at . . . . . . . . . . . . . . . . . . . . . . . . . . . (800) 833-9844 Outside the United States and Canada, please call . . . . . . . . . . . . . . . . (518) 487-3000 Fax Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (518) 487-3584 Customer Service Web site . . . . . . . . . . . . . . . . . . . http://www.lexisnexis.com/custserv/ For information on other Matthew Bender publications, please call Your account manager or . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (800) 223-1940 Outside the United States and Canada, please call . . . . . . . . . . . . . . . . . (518) 487-3000 ISBN: 978-0-7698-7878-2 (print) ISBN: 978-0-7698-8020-4 (eBook) ISSN: 0005-5506 (Print) ISSN: 2381-3512 (Online) Cite this publication as: The Banking Law Journal (LexisNexis A.S. Pratt) Because the section you are citing may be revised in a later release, you may wish to photocopy or print out the section for convenient future reference. This publication is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. LexisNexis and the Knowledge Burst logo are registered trademarks of Reed Elsevier Properties Inc., used under license. Sheshunoff is a registered trademark of Reed Elsevier Properties SA, used under license. Copyright © 2016 Reed Elsevier Properties SA, used under license by Matthew Bender & Company, Inc. All Rights Reserved. No copyright is claimed by LexisNexis, Matthew Bender & Company, Inc., or Reed Elsevier Properties SA, in the text of statutes, regulations, and excerpts from court opinions quoted within this work. Permission to copy material may be licensed for a fee from the Copyright Clearance Center, 222 Rosewood Drive, Danvers, Mass. 01923, telephone (978) 750-8400. An A.S. Pratt® Publication Editorial Office 630 Central Ave., New Providence, NJ 07974 (908) 464-6800 www.lexisnexis.com (2016–Pub.4815)

3) Editor-in-Chief & Board of Editors EDITOR-IN-CHIEF Steven A. Meyerowitz President, Meyerowitz Communications Inc. BOARD OF EDITORS Barkley Clark Partner, Stinson Leonard Street LLP Jonathan R. Macey Professor of Law Yale Law School Stephen B. Weissman Partner, Rivkin Radler LLP John F. Dolan Professor of Law Wayne State Univ. Law School Stephen J. Newman Partner, Stroock & Stroock & Lavan LLP Elizabeth C. Yen Partner, Hudson Cook, LLP David F. Freeman, Jr. Partner, Arnold & Porter LLP Bimal Patel Counsel, O’Melveny & Myers LLP Regional Banking Outlook James F. Bauerle Keevican Weiss Bauerle & Hirsch LLC Thomas J. Hall Partner, Chadbourne & Parke LLP Sarah L. Reid Partner, Kelley Drye & Warren LLP Recapitalizations Christopher J. Zinski Partner, Schiff Hardin LLP Satish M. Kini Partner, Debevoise & Plimpton LLP David Richardson Partner, Dorsey & Whitney Banking Briefs Terence G. Banich Member, Shaw Fishman Glantz & Towbin LLC Douglas Landy Partner, Milbank, Tweed, Hadley & McCloy LLP Heath P. Tarbert Partner, Allen & Overy LLP Intellectual Property Stephen T. Schreiner Partner, Goodwin Procter LLP Paul L. Lee Of Counsel, Debevoise & Plimpton LLP THE BANKING LAW JOURNAL (ISBN 978-0-76987-878-2) (USPS 003-160) is published ten times a year by Matthew Bender & Company, Inc. Periodicals Postage Paid at Washington, D.C., and at additional mailing offices. Copyright 2016 Reed Elsevier Properties SA., used under license by Matthew Bender & Company, Inc. No part of this journal may be reproduced in any form— by microfilm, xerography, or otherwise— or incorporated into any information retrieval system without the written permission of the copyright owner. For customer support, please contact LexisNexis Matthew Bender, 1275 Broadway, Albany, NY 12204 or e-mail Customer. Support@lexisnexis.com. Direct any editorial inquires and send any material for publication to Steven A. Meyerowitz, Editor-in-Chief, Meyerowitz Communications Inc., 26910 Grand Central Parkway, #18R, Floral Park, NY 11005, smeyerowitz@meyerowitzcommunications.com, 718.224.2258 (phone). Material for publication is welcomed— articles, decisions, or other items of interest to bankers, officers of financial institutions, and their attorneys. This publication is designed to be accurate and authoritative, but neither the publisher nor the authors are rendering legal, accounting, or other professional services in this publication. If legal or other expert advice iii

4) is desired, retain the services of an appropriate professional. The articles and columns reflect only the present considerations and views of the authors and do not necessarily reflect those of the firms or organizations with which they are affiliated, any of the former or present clients of the authors or their firms or organizations, or the editors or publisher. POSTMASTER: Send address changes to THE BANKING LAW JOURNAL LexisNexis Matthew Bender, 630 Central Ave, New Providence, NJ 07974. POSTMASTER: Send address changes to THE BANKING LAW JOURNAL, A.S. Pratt & Sons, 805 Fifteenth Street, NW., Third Floor, Washington, DC 20005-2207. iv

5) THE BANKING LAW JOURNAL FDIC Updates Brokered Deposits Resources By Clifford S. Stanford and Colin C. Richard* The Federal Deposit Insurance Corporation has published a new Financial Institution Letter that adds important clarifications and additional explanations to the FDIC’s January 2015 brokered deposits resources. The authors of this article explain the revised documents. On November 13, 2015, the Federal Deposit Insurance Corporation published Financial Institution Letter (“FIL”) FIL-51-2015 to update an introductory letter and a frequently asked questions document (“FAQs”) on brokered deposits, which had been issued through FIL-2-2015 on January 5, 2015. In the press release accompanying the update, the FDIC noted that “[t]he agency said in January it would provide updates to the FAQs as necessary” and that it “is updating the document in response to further inquiries and comments.” The introductory letter was revised to note that the FAQs will be updated “annually, as needed.” BACKGROUND The FDIC is charged with making the determination of when deposits at any insured depository institution, regardless of its primary regulator, are considered to be “brokered deposits.” This distinction is important for all institutions because it can affect deposit insurance assessments. Further, only wellcapitalized banks, as defined by the prompt corrective action (“PCA”) regulations issued by the bank’s federal bank regulator, may solicit and accept brokered deposits without restriction.1 For all banks, brokered deposits have to be reported on call reports, and over-reliance on brokered deposits can be perceived as a safety and soundness concern by the regulators, regardless of whether the bank is well-capitalized. The FDIC regulations define “brokered deposits” as any deposit that is “obtained, directly or indirectly, from or through the mediation or assistance of * Clifford S. Stanford, a partner at Alston & Bird LLP and chair of the firm’s Bank Regulatory Group, advises U.S. and foreign banks and non-bank financial services companies on regulatory concerns affecting the banking, financial services, and payments industries. Colin C. Richard is a senior associate in the firm’s Financial Services & Products Group, where his practice focuses on banking regulation and payment systems. The authors may be reached at cliff.stanford@alston.com and colin.richard@alston.com, respectively. 1 The prompt corrective action provisions require federal bank agencies to “tak[e] prompt corrective action” for the purpose of “resolv[ing] the problems of insured depository institutions at the least possible long-term loss to the Deposit Insurance Fund.” See 12 U.S.C. § 1831o. 98

6) FDIC UPDATES BROKERED DEPOSITS RESOURCES a deposit broker.”2 The term “deposit broker” is defined as: (A) Any person engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties with insured depository institutions, or the business of placing deposits with insured depository institutions for the purpose of selling interests in those deposits to third parties; and (B) An agent or trustee who establishes a deposit account to facilitate a business arrangement with an insured depository institution to use the proceeds of the account to fund a prearranged loan.3 Beyond the statute and regulations, the FDIC has generally only issued one-off advisory opinions to help banks and others understand what constitutes a brokered deposit. The FDIC has held to a broad interpretation of what constitutes brokered deposits, and advisory opinions have been distinguished on factual grounds. Additionally, the FDIC published a July 2011 Study on Core Deposits and Brokered Deposits, as required by Section 1506 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The FDIC issued the January 2015 introductory letter and FAQs in an effort to “promote consistency by insured depository institutions in identifying, accepting, and reporting brokered deposits.” The recent revisions are intended to clarify several of the explanations provided in January and add some additional information. SUMMARY OF KEY POINTS The revisions appear to be intended to achieve two primary objectives: (1) to emphasize that the FAQs are not new “guidance,” but rather just a summary of the existing statute, regulation, advisory opinions and the Study; and (2) to provide clarification or explanation of certain issues contained in the January 2015 FAQs. First, revisions made throughout the introductory letter and the FAQs appear intended to emphasize that the document should not be regarded as new guidance, but rather as a summary of the existing FDIC guidance. The January 2015 version was titled “Guidance on Identifying, Accepting, and Reporting Brokered Deposits,” whereas the title to both the introductory letter and the November 2015 FAQs were revised to remove the word “guidance”; similar revisions were made to the text of the letter. A new statement was added to the introductory letter that references “the existence of the statute, regulations, advisory opinions, and the Study,” and an existing reference in the letter to the 2 12 C.F.R. § 337.6(a)(2). 3 12 C.F.R. § 337.6(a)(5)(i). 99

7) THE BANKING LAW JOURNAL January 2015 version as “guidance” was replaced instead with a description of the document as “a plain language summary of previously issued guidance that is conveniently located in one place.” Citations to the statute, regulations, advisory opinions and Study were added throughout the November 2015 version as well. Second, the November 2015 version includes substantive revisions that clarify statements in the January 2015 version (e.g., the responses to questions B6, E1, E3, E9 (was E8 in January 2015 version) and F5 have been revised) or add new explanations (e.g., questions B7, E4 and E12 and corresponding responses have been added). • B6. Are insurance agents, lawyers, or accountants that refer clients to a bank considered to be deposit brokers? The FDIC changed the response from “Yes” to “It depends,” and added an explanatory paragraph. • B7. What is an example of when the deposits in a programmatic arrangement to refer depositors are not brokered deposits? The FDIC added a new question B7 and response to further clarify the revised response to B6. The response to B7 provides an example of a programmatic arrangement that would be deemed deposit brokering under the revised response to B6. • E1. What are the exceptions to the definition of deposit broker? The response to question E1 was revised to clarify that advisory opinions do not provide distinct exceptions to the definition of deposit broker, but rather the advisory opinions apply the statutory exceptions. • E3. In regard to the exception for an “employee of an insured depository institution, with respect to funds placed with the employing depository institution,” does the exception apply to a contractor or a dual employee (i.e., a person employed jointly by an insured depository institution and the institution’s parent or affiliate)? The reference to “affiliate” in the question replaced a reference to “subsidiary” in the January 2015 version. The response was clarified to emphasize that the exception is established in the statute. • E4. Do situations exist when contractors and dual employees are not considered to be deposit brokers? The FDIC added a new question E4 and response to further clarify the response to E3 and provide examples of when a dual employee would and would not be considered a deposit broker. • E9 (was E8 in January 2015 version). Does the primary purpose 100

8) FDIC UPDATES BROKERED DEPOSITS RESOURCES exception apply to companies that sell or distribute general purpose prepaid cards? The response was revised to recognize that the card company or other third party (rather than specifically a “retail store”) may place funds into custodial accounts. The statement that the card company or third party was acting “as agent for the cardholders” was removed. The FDIC further added that “[t]he general purpose prepaid card and the deposit account are inseparable, in that the card is a device that provides access to the funds in the underlying deposit account. Because of this relationship, prepaid card companies are not covered by the primary purpose exception.” • E12. How does FDIC treat federal or state agency funds disbursed to beneficiaries of government programs through debit cards or prepaid cards? The FDIC added a new question E12 and response “based on several oral inquiries received in 2015 regarding federal and state benefits delivered via debit cards and prepaid cards.” The response provides a description of the card program structures and addresses when the primary purpose exception might apply. • F5. If an insured depository institution ceases to be well capitalized for PCA purposes, how should an institution treat brokered deposit accounts that are not time deposits (such as demand deposit accounts)? Both the question and the response were revised. The question had previously asked, “If an insured depository institution ceases to be well capitalized, must the institution immediately close brokered deposit accounts that never mature or renew (such as an interest checking or savings account)?” The question was revised to remove the presumption that certain accounts must be closed and to clarify that the term “well capitalized” is as defined for PCA purposes. The response had previously stated that institutions that cease to be well capitalized must close such accounts; the response has been revised to instead state that institutions should “establish an appropriate supervisory plan” with their primary federal regulator. Additionally, the response now notes that adequately capitalized institutions may request a waiver, and accounts at undercapitalized institutions will be considered on a case-by-case basis. An additional revision to the introductory letter clarifies that brokered deposit determinations are “always” viewed by the FDIC on a “case-by-case basis,” and that “[i]f an institution was unaware of brokered deposit treatment until the FAQs were released, the FDIC would generally not seek refiling of past Call Reports, although an insured depository institution’s accounting and financial reporting personnel might make their own recommendations.” 101

9) THE BANKING LAW JOURNAL CONCLUSION The new Financial Institution Letter adds important clarifications and additional explanations to the FDIC’s January 2015 brokered deposits resources. The revised documents should help to provide clarity on when deposits are considered brokered. This is especially important as the FDIC has made clear that, despite criticism of its distinctions between core and brokered deposits, the treatment of brokered deposits is unlikely to change in the near future. 102