-14-
prepaid card customers, such as employers that offer prepaid payroll disbursements. Each of these customers
would potentially be required to submit an application for the primary purpose exception
even though the
arrangement meets the conditions to qualify for the primary purpose exception under the “enabling transactions”
application process in the proposed rule
.
40
Rather than go through a burdensome and uncertain process, the parties
simply may determine that the effort is not worthwhile, either foregoing providing the service altogether or treating the
deposits as brokered, with the attendant negative consequences.
If the FDIC nevertheless determines to adopt the mandatory application process, relationships previously
entered into on the basis of an existing FDIC interpretive letter on the primary purpose exception should be
grandfathered. In particular, banks that have received the FDIC’s approval to exclude certain affiliated sweep
deposits from brokered treatment, as outlined in the FDIC’s Advisory Opinion 05-02, should be able to continue to
rely on those interpretive letters without a requirement to re-apply for approval under the proposed application
process. Consistent with the proposed rule, the 10 percent ratio described in those approvals should be increased to
25 percent without any further action from the banks or the FDIC.
41
If the existing relationships based on the primary
purpose exception are not grandfathered under the final rule, there would be a disruption of numerous existing
relationships that the FDIC has already determined qualify for the primary purpose exception or to which the parties
have concluded, in good faith, that the primary purpose exception is available. This result would impose substantial
burden on banks and those with whom they have business relationships without providing any meaningful
improvement to the brokered deposits framework or to safety and soundness.
42
Given that the FDIC expects the
proposed rule to
expand
the availability of the primary purpose exception,
43
existing relationships that are not
currently treated as brokered should not cause concern.
Finally, if the final rule includes any application process (whether mandatory or voluntary), the final rule
should clarify the timing for approval. Although the NPR provides that the FDIC will provide a written determination
within 120 days of receiving a “complete” application, there is no clarity on when an application will be deemed
complete. In fact, each of the three application processes outlined in the proposed rule require the applicant to
submit “
any
other information that the FDIC requires to initiate its review and
render the application complete
”.
44
As a
result, the timing of the review and for rendering a decision is entirely at the discretion of the FDIC. The final rule
should therefore provide additional clarity by outlining the FDIC’s process for reviewing whether an application is
complete. We propose that the final rule provide that the FDIC would (1) review an application for completeness
within 30 days, (2) submit a request for additional information within one week thereafter, (3) review additional
40
See
proposed 12 C.F.R. § 303.243(b)(4)(ii).
41
Although the requirement in Advisory Opinion 05-02 refers to the amount of assets in a single investment account, as
opposed to the “assets under management” for a particular business line, increasing the ratio of assets that can be
swept to IDIs to 25 percent would be consistent with the proposed rule. In the NPR, the FDIC proposes that “business
line” would refer to accounts that provide a sweep feature.
See
85 Fed. Reg. at 7461. Under the proposed rule, a
broker-dealer could place at an IDI 25 percent of the assets in an investment account that provides a sweep feature,
because placing 25 percent of the assets in each such account at an IDI would result in placing 25 percent of the total
assets in all such accounts (i.e., in the “business line”, as the FDIC proposed to define that term with respect to the
“25% of AUM” exception). As a result, codifying the guidance in Advisory Opinion 05-02, but increasing the
permissible ratio to 25 percent, would both be consistent with the proposed rule, and would permit banks to continue
relationships that the FDIC has already reviewed and approved without being required to go through a separate, and
unnecessary, application process.
42
For similar reasons, the final rule should also include an implementation period during which banks would have
sufficient time to prepare and submit applications and make any necessary adjustments to their businesses.
43
85 Fed. Reg. at 7459 (“[The] proposed amendment to the primary purpose exception would expand the number of
entities that meet the exception”.).
44
85 Fed. Reg. at 7471 (emphasis added).