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FEDERAL RESERVE BANK OF NEW YORK [ Circular No. 9375 ~ | October 7, 1982 DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE — Payment of Finders’ Fees to Bona Fide Brokers — Denial of State Petitions for Exemptions From Interest Rate Ceilings To All Depository Institutions, and Others Concerned, in the Second Federal Reserve District: The following statement has been issued by the Depository Institutions Deregulation Commit tee (DIDC) summarizing the actions taken at its September 17, 1982 meeting: At its September 17, 1982 meeting, the Depository Institutions Deregulation Committee (DIDC) determined that its finders’ fee regulation, which requires a finders’ fee to be considered as part of interest paid to a depositor, does not apply to fees paid to bonafide brokers. A finders ’ fee is defined as a fee paid by a depository institution to a third party who introduces a depositor to the institution. In 1980, when the regulation was issued, the Committee was concerned about depository institutions circumvent ing interest rate ceilings by paying finders’ fees, which were then given back to depositors. The Committee’s interpretive ruling means that a bona fide broker can receive a fee for placing any type of deposit (time or demand) with a depository institution and not reduce the interest paid to the depositor, as long as certain conditions are met. These conditions assure that no portion of the fee paid to the broker is passed on to the depositor. The Committee defined a bona fide broker as a person principally engaged in the business of acting as a broker or dealer in regard to deposits, securities or money market instruments. The Committee also denied petitions by four states ^New Jersey, South Dakota, Texas, and Washington] requesting certain exemptions for depository institutions in their states from DIDC regulations limiting interest rate ceilings. The states requested the exemptions in order to permit institutions in their states to compete with money market mutual funds. The Committee concluded that granting such exemptions could aggravate thrift earnings problems, and would put institutions in neighboring states at a competitive disadvantage. The DIDC noted that Congress is in the midst of considering legislation that: (1) could expand thrift asset powers, thus allowing them to increase their profitability, and (2) could direct the DIDC to authorize an instrument to be issued by all depository institutions nationwide which would be competitive with money market mutual funds. Therefore, the Committee denied the petitions and declined to take any further action on this issue until Congress has completed its consideration of the financial reform legislation. The next DIDC meeting will be held on Wednesday, December 1, 1982, at 3:00 p.m. Printed on the reverse side is the text of the D ID C ’s ruling in the finders ’ fee matter, which has been reprinted from the Federal Register. Questions may be directed to our Consumer Affairs and Bank Regulations Department (Tel. No. 212-791-5914). A nthony M . So lo m o n , President. (OVER) DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE 12CFR Part 1204 [Docket No. D-0028] Payment of Finders' Fees to Bona Fide Brokers; Interpretative Ruling D e p o s ito r y In s titu tio n s D e r e g u la tio n C o m m itte e . ACTION: In te r p r e tiv e ru lin g. AGENCY: SUMMARY: E ffe c tiv e D e c e m b e r 3 1 ,1 9 8 0 , th e D e p o s ito r y I n s titu tio n s D e r e g u la tio n C o m m itte e ( “C o m m itte e ”) a d o p te d th e fin d e r s ’ fe e r e g u la tio n (12 C FR 1 204.110) w h ic h d e fin e d a s in te r e st a fe e p a id b y a d e p o s ito r y in s titu tio n to a th ird p a r ty w h o in tr o d u c e d a d e p o s ito r to th e in s titu tio n . T h a t r e g u la tio n w a s a d o p te d in r e s p o n s e to c o n c e r n w ith w id e s p r e a d u s e o f fin d e r s ’ fe e s to c ir c u m v e n t in te r e s t ra te c e ilin g s b y p a s s in g fin d e r s ’ fe e s th rou g h to th e d e p o s ito r s . T h e C o m m itte e h a s r e c e iv e d q u e s tio n s a s to w h e th e r th e r e g u la tio n a p p lie s to th e p a y m e n t o f a fe e to a bona fide b ro k er for th e p la c e m e n t o f d e p o s its w ith a d e p o s ito r y in s titu tio n . A t its S e p te m b e r 1 7 ,1 9 8 2 m e e tin g , th e C o m m itte e d e te r m in e d th a t fe e s m a y b e p a id to bona fide b r o k e r s a n d n o t b e in c lu d e d a s in te r e s t u n d e r c o n d itio n s th a t e n su r e th a t n o p art o f th e fin d e r s ’ fe e is p a id to d e p o s ito r s . EFFECTIVE DATE: S e p te m b e r 1 7 ,1 9 8 2 . FOR FURTHER INFORMATION CONTACT*. E la in e B o u tilier, A tto r n e y -A d v is o r , D e p a r tm e n t o f th e T r e a s u r y (202) 5 6 6 8737; R e b e c c a L aird , S e n io r A s s o c ia t e prevent the circumvention of rate ceilings that could occur if a "finders’ fee” is passed on to the depositor. (b) The Committee has received several inquiries as to whether depository institutions are required to pay fees in cash to brokers that solicit deposits on behalf of the institution and to regard such payments as interest. The Committee previously found the finders’ fee regulation inapplicable to All-Savers SUPPLEMENTARY INFORMATION: Certificates and to a specific person L ist o f S u b je c ts in 12 C F R P art 1204 who acted as a broker of demand deposits. The Committee has Banks, banking. determined that finders’ fees may be paid to bona fide brokers of time and PART 1204— INTEREST ON DEPOSITS demand deposits without regarding Pursuant to its authority under Title II payments as interest for purposes ofsuch of the Depository Institutions deposit interest rate Deregulation and Monetary Control Act Accordingly, a fee toceilings. will not a broker of 198 0 (94 Stat. 142; 12 U.S.C. 3501 et be regarded as a payment of interest if: seq .), to prescribe rules governing the (1) The fee is paid to a bona fide broker, payment of interest and dividends on which is a person who is principally deposits of Federally insured engaged in the business of acting as a commerical banks, savings and loan broker or dealer in regard to deposits, associations, and mutual savings banks,, securities or money market instruments; the Committee amends, effective (2) r b w n September 1 7 ,1 9 8 2 , Part 1204— Interest a n dthdee p eola tiornysh iptitue ttio en e is th e b ro k er sito in s on Deposits (12 CFR Part 1204) by m e m o r ia liz e d in a w r itte n a g r e e m e n t, a adding a new § 120 4.20 2 to read as c o p y o f w h ic h is r e ta in e d b y th e follows: d e p o s ito r y in s titu tio n a n d m a d e G e n e r a l C o u n s e l, F e d e r a l H o m e L o a n B a n k B o a rd (202) 3 7 7 -6 4 4 6 ; A la n P rie st, A tto r n e y , O ffic e o f th e C o m p tr o lle r o f th e C u rr en cy (202) 4 4 7 -1 8 8 0 ; F. D o u g la s B ir d z e ll, C o u n s e l, or J o se p h A . D iN u z z o , A tto r n e y , F e d e r a l D e p o s it I n s u r a n c e C o r p o r a tio n (202) 3 8 9 -4 1 4 7 ; or P au l S. P ile c k i, S e n io r A tto r n e y , B o a r d o f G o v e r n o r s o f th e F e d e r a l R e s e r v e S y s te m (202) 4 5 2 -3 2 8 1 . § 1204.202 brokers. Payment of fees to bona fide (a) Under § 1 20 4.11 0 of the Committee’s rules, any fee paid by a depository institution to a person who introduces a depositor to the institution must be paid in cash when paid for a deposit subject to rate ceilings and generally will be regarded as a payment of interest for purposes of compliance with rate ceilings. This rule was adopted effective-December 3 1 ,1 9 8 0 , in order to PRINTED IN N E W Y O R K , FROM FEDERAL REGISTER , V O L . a v a ila b le to e x a m in e r s; a n d (3) a n o ffic e r o f th e b ro k er c e r tifie s th a t n o p o r tio n o f th e fe e p a id to th e b ro k er is d ir e c tly or in d ir e c tly p a s s e d o n to th e d e p o sito r , a n d a c o p y o f th e c e r tific a tio n is g iv e n to th e d e p o s ito r y in s titu tio n to b e r e ta in e d o n file w ith th e a g r e e m e n t. By order of the Committee, September 24, 1982. Gordon Eastbum, Policy Director. 4 7 , N O . 189
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