By Electronic Mail

November 21, 2024

James P. Sheesley, Assistant Executive Secretary
Attention: Comments–RIN 3064–AF99
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429

Re: Notice of Proposed Rulemaking: Unsafe and Unsound Banking Practices: Brokered Deposit Restrictions, RIN 3064-AF99

Ladies and Gentlemen,

The Securities Industry and Financial Markets Association (“SIFMA”)¹ appreciates the opportunity to comment on the proposal (“Proposal”)² by the Federal Deposit Insurance Corporation (the “FDIC”) to revise its regulations implementing Section 29 of the Federal Deposit Insurance Act (“FDI Act”), which impose restrictions on the ability of less than well-capitalized insured depository institutions (“IDIs”) to accept brokered deposits, and define the scope of parties that constitute deposit brokers. Consistent with SIFMA’s membership and organizational focus, this letter focuses on the Proposal’s application to securities broker-dealers (“broker-dealers”) and their brokerage customers, as well as investment advisers (“advisers”) and their clients.

Broker-dealers often assist their clients in allocating cash to deposit accounts at one or more IDIs, including via brokerage accounts that automatically transfer, or “sweep”, customers’ uninvested cash balances into deposit accounts at IDIs. Like broker-dealers, advisers also may offer their clients a cash deposit sweep option. This option is usually offered as a part of wrap account programs managed by the adviser. These accounts—which are predominantly used by retail investors—bundle management, administrative, and trading costs into a single annual fee. Sweep and wrap accounts offer a valuable funding source for IDIs and, despite short-term movement at the individual account level, sweep and wrap programs tend to result in the deposit of stable aggregate amounts of funds at IDIs. Employees of broker-dealers and advisers also regularly refer customers who wish to access traditional banking products to depository institutions. Relationship-driven deposits sourced through these referrals are another important and stable funding source for IDIs.

In late 2020, the FDIC issued a final rule on brokered deposits which went into effect in 2021 (“2021 Final Rule”) that attempted to modernize the existing brokered deposit restrictions, in part by creating targeted exceptions from the definition of deposit broker for broker-dealers that provide sweep deposit services.³ This modernization was based, in part, on a rigorous study of brokered deposit risks conducted by the FDIC in 2011 and updated in 2019. The FDIC also issued an advanced notice of proposed rulemaking in 2019, providing an additional round of engagement with the public prior to the issuance of the notice of proposed rulemaking for the 2021 Final Rule. The 2021 Final Rule codified and superseded FDIC advisory opinions spanning several decades creating exceptions for common market practices, including certain sweep deposit arrangements.

The Proposal generally would eliminate or significantly narrow the exceptions that were created or codified by the 2021 Final Rule. The FDIC has proposed these changes, however, without providing evidence that the current exceptions are no longer appropriate.⁴ While the Proposal references recent bank failures (Silicon Valley Bank and First Republic) as part of the rationale for revisiting the existing rule, FDIC and Federal Reserve studies of the spring 2023 bank failures did not point to brokered deposits as a cause of such failures. To the contrary, the material loss reviews of First Republic Bank, Signature Bank and Silicon Valley Bank that were undertaken by the relevant Inspectors General point to high concentrations of uninsured deposits as a key factor.⁵ The Proposal does not assess whether the 2023 failures are indicative of broader trends or how the specific proposed revisions to the brokered deposits framework would have led to different outcomes.

Nor does the Proposal point to support in any data or updated studies that were developed since the finalization of the 2021 Final Rule as a basis for its proposed changes. Indeed, the FDIC put out a request for information (“RFI”) on deposit behavior on the same day as the Proposal, suggesting the FDIC in fact does not believe it has a full understanding of the relevant data and facts.6 The extended comment period for the RFI on deposit behavior will close after the also-extended comment period for the Proposal. Without sufficient evidence of changed circumstances or new data that indicate the measures put in place in 2020, many of which were individually endorsed by decades of FDIC practice prior to 2020, are no longer suitable, the Proposal lacks a sufficient empirical basis and, accordingly, should be withdrawn.

The Proposal also admits to a lack of data to estimate its impacts: “The FDIC does not have the data to estimate the amount of deposits that would be reclassified as brokered by the proposed rule at particular IDIs, nor how many IDIs, if any, might make changes to the structure of their liabilities.”7 This statement is particularly concerning given the potentially negative consequences of the Proposal. Categorizing deposits from broker-dealer customers as brokered deposits under FDIC regulations would likely make it more difficult for even well-capitalized IDIs to accept these funds on behalf of customers and result in lower interest rates paid to sweep deposit account holders in order to offset higher deposit insurance assessment rates applicable to brokered deposits, as well as the increased cost of funding for IDIs subject to liquidity requirements such as the liquidity coverage ratio and net stable funding ratio. These dynamics could reduce customer returns and safe banking options, compromise a stable source of deposit funding for IDIs and deter the allocation of excess customer cash to low risk deposits. Indeed, the preamble of the Proposal notes that “[customers] might experience changes in interest rates on those funds, or costs associated with placing those funds with different entities.”8 Similarly, the Proposal notes that it lacks the data to reliably estimate the compliance costs of the Proposal for IDIs, but the FDIC nevertheless asserts that it expects those costs to be modest. The adverse consequences of the Proposal cannot be properly imposed without a sufficient evidentiary justification that they are necessary to alleviate specific and sizable risks.

I. Executive Summary

We respectfully request that the FDIC withdraw the Proposal due to the lack of evidence justifying its proposed revisions and failure to consider relevant factors. These issues are discussed in detail in Section II below. As proposed, the contemplated changes would likely be arbitrary and capricious under the Administrative Procedure Act (“APA”). If the Proposal is not withdrawn, we recommend the FDIC revise the Proposal as outlined below, and discussed further in Sections III-VII:

A. Retain the existing 25% assets under administration test, which would resolve a number of issues with the Proposal.

1. A 25% assets under administration threshold (also referred to as the 25% Test) for determining primary purpose is more consistent with prior interpretations of the brokered deposit statute, market behavior and safety and soundness.
2. The elimination of the 25% Test would result in the classification of many non-sweep relationships as brokered that lack the risks of current brokered deposits.
3. The proposed assets under management measure for calculating deposit placement ratios is needlessly limiting, and the existing assets under administration measure more appropriately captures relevant activity.
4. Restriction of the test to SEC-registered broker dealers scopes out entities not registered with the SEC despite them exhibiting similar profiles/risks.
5. The alternatives to the broker dealer sweep exception (“BDSE”) considered by the Proposal are even less suitable than the BDSE.

B. Retain the current Primary Purpose Exception (“PPE”) notice and application processes, as the proposed notice and application processes are unworkable.

1. The proposed notice and application requirements would create significant burdens for IDIs, broker-dealers and the FDIC.
2. Limiting the PPE notice procedure to relationships not involving third parties is counterproductive and unnecessary.

C. The proposed changes to the scope of and application/notice processes for the PPE would create significant transition costs that should be addressed.

1. The lack of a transition period following the recission of existing PPE exceptions would lead to significant disruption, including inaccurate fluctuations in call report data (a problem the Proposal intends to address not exacerbate).
2. Any changes to existing exceptions should be accompanied by a transition period of at least two years.

D. The proposed changes to the deposit broker definition are not risk-based, make the definition overinclusive and are unlikely to address operational challenges.

1. The revision of the “matchmaking” sub-prong of the deposit broker definition could capture many low-risk activities and does not clearly address the operational issues that motivate the change.
2. The elimination of the carve out for affiliate matchmaking is not risk-based and inconsistent with past practice.
3. The new independent sub-prong related to fees in the definition of deposit broker is overinclusive and inconsistent with past practice.

E. Other well-established exceptions should be retained.

1. The exception for exclusive deposit placement relationships should be retained.
2. The exception for when 100% of funds are placed into transactional accounts that do not pay any fees, interest, or other remuneration to the depositor (the “Enabling Transactions Exception”) should be retained.

1. SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s nearly 1 million employees, we advocate for legislation, regulation, and business policy, affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). [↩]
2. Unsafe and Unsound Banking Practices: Brokered Deposits Restrictions, 89 Fed. Reg. 68244 (Aug. 23, 2024). [↩]
3. Unsafe and Unsound Banking Practices: Brokered Deposits and Interest Rate Restrictions, 86 Fed. Reg. 6742 (Jan. 22, 2021). [↩]
4. See Statement by Jonathan McKernan, Director, FDIC, Board of Directors, on the Proposed Brokered Deposit Restrictions (Jul. 30, 2024), available at https://www.fdic.gov/news/speeches/2024/statement-jonathan-mckernan-director-fdic-board-directorsproposed-brokered. [↩]
5. Off. of Inspector Gen., FDIC, Material Loss Review of First Republic Bank, Report No. EVAL-24-03 (Nov. 28, 2023) available at https://www.fdicoig.gov/sites/default/files/reports/2023-12/EVAL-24-03.pdf; Off. of Inspector Gen., FDIC, Material Loss Review of Signature Bank. Report No. EVAL-24-02 (Oct. 23, 2023), available at https://www.fdicoig.gov/sites/default/files/reports/2023-12/EVAL-24-02.pdf; Off. of Inspector Gen., Board of Governors of the Federal Reserve System, Material Loss Review of Silicon Valley Bank (Sep. 25, 2023), available at https://oig.federalreserve.gov/reports/board-material-loss-review-silicon-valley-banksummary-sep2023.pdf. [↩]