Retail Nondeposit Investment Sales
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Retail Nondeposit Investment Sales Retail Nondeposit Investment Sales Document Transcript

  • Retail Nondeposit Investment Sales Introduction Section 413.1 This section sets forth guidance for parties for sales of nondeposit investment examiners reviewing bank nondeposit products, may need time to conform their investment product retail sales programs to the Interagency Statement operations, including bank-related and to the guidance contained herein. At marketing and promotional activities. a minimum, however, examiners should Examiners will review a bank's programs determine whether bank management is for consistency with the Interagency making a good faith effort to comply Statement on Retail Sales of Nondeposit with this regulatory guidance in a timely Investment Products, dated February 15, manner. 1994 (Interagency Statement). The evaluation will cover all bank-related This section applies to sales to individual activities including: customers but does not apply to the ! Sales or recommendations made by wholesale sale of nondeposit investment bank employees; products to non-retail customers, such as ! Sales or recommendations made by sales to institutional customers or to employees of affiliated or fiduciary accounts administered by an unaffiliated entities occurring on institution. As part of its general bank premises (including sales or responsibilities, however, a national bank recommendations initiated by should take appropriate steps to avoid telephone or by mail from bank potential customer confusion when premises); and providing nondeposit investment ! Sales resulting from referrals of products to institutional customers or to retail customers to a third party the bank's fiduciary customers. For addi- when the bank receives a benefit tional information on restrictions on a for the referral. national bank's use as fiduciary of the bank's brokerage service or other entity When reviewing a bank's nondeposit in- with which the bank has a conflict of vestment sales operation, examiners interest, including purchases of the should determine that the bank views bank's proprietary and other products, customers' interests as critical to all see 12 CFR 9.12 and "Sales to Fiduciary aspects of its sales programs. Examiners Accounts," later in this section. should evaluate a bank's policies and procedures from the customers' Scope perspective and should ascertain that Examiner reviews of a bank's mutual fund customers are provided with a high level or other nondeposit investment sales pro- of protection. If it becomes necessary to gram will concentrate on the policies and recommend remedial action, examiners procedures the bank adopts and on the should determine that bank management effectiveness of their implementation. responds immediately to any matter that has the potential to confuse customers as When reviewing implementation of a to the uninsured nature of nondeposit bank's program, examiners will investment products. investigate whether senior bank management has: Banks that do not operate programs (1) Participated in planning the bank's safely and soundly or that engage in investment sales program; violations of law or regulations will be (2) Adopted a framework to ensure subject to appropriate regulatory action. compliance with all applicable When determining the appropriate action, laws, rules, regulations, regulatory examiners should be mindful that some conditions, and the Interagency banks, especially banks relying on third Statement; and Comptroller's Handbook for National Bank Examiners Temporary Insert ) February 1994 1
  • Retail Nondeposit Investment Sales Introduction Section 413.1 (3) Ensured effective supervision of sales or recommendations made directly individuals engaged in sales activi- by the bank. Even when these rules do ties, including employees of the not expressly apply, however, they are an bank and any other entity involved appropriate reference for a bank in bank-related sales of investment compliance program designed to ensure products. that the bank's retail sales of all nondeposit investment products are Where relevant, references in this hand- operated in a safe and sound manner. book section to bank management or bank employees includes third party Before beginning to operate a nondeposit managers or third party employees. investment sales program, banks may also consider notifying their blanket bond Minimum Standards for Nondeposit carriers of plans to engage in these Investment Programs activities. If applicable, this could permit Antifraud provisions of the federal securi- the bank to obtain written assurances from the carrier that the bank's insurance ties laws prohibit materially misleading or inaccurate representation in connection coverage for employees includes staff representing third party vendors. with offers and sales of securities. (See, for example, Section 10 of the Securities Exchange Act of 1934 and Rule 10b-5.) Examiners also should encourage bank management to review Retail Investment If customers are misled about the nature Sales: Guidelines for Banks. The publica- of nondeposit investment products, including their uninsured status, sellers tion, prepared jointly by six banking industry trade associations, contains could face potential liability under these voluntary guidelines for bank sales of antifraud provisions. Safe and sound banking also requires that bank-related nondeposit investment products as well as common sense suggestions for putting retail sales activities be operated to avoid confusing customers about the products many of the OCC's recommendations being offered. Use of nonbank into action. employees to sell these products does not relieve bank management of the Program Management responsibility to take reasonable steps to Banks must comply with all applicable ensure that the investment sales activities laws, rules, regulations, and regulatory meet these requirements. conditions, and operate consistently with the Interagency Statement for any of The Rules of Fair Practice of the National their bank-related retail sales of mutual Association of Securities Dealers (NASD) funds, annuities, or other retail expressly govern sales of securities by nondeposit investment products. Bank broker/dealers who are members of directors are responsible for evaluating NASD. These rules apply to bank-related the risks imposed by bank-related sales securities sales by banking subsidiaries and are expected to adopt a program registered as broker/dealers, affiliated statement and self-regulatory policies and broker/dealers, and unaffiliated procedures to ensure compliance with all broker/dealers operating under requirements. A bank's policies and agreements with banks. These rules procedures must address bank-related apply whether such sales are made on retail sales made directly by a bank, bank premises or at a separate location. through an operating subsidiary or affiliate, or by an unaffiliated entity. These rules do not expressly apply to Examiners should expect that banks will Comptroller's Handbook for National Bank Examiners Temporary Insert ) February 1994 2
  • Retail Nondeposit Investment Sales Introduction Section 413.1 tailor their policies and procedures to the describe the responsibilities of personnel scope of the bank's sales activities. The authorized to sell or recommend level of detail contained in a bank's nondeposit investment products and of policies and procedures will depend on other personnel who may have contact the structure and complexity of the with retail customers concerning the bank's program. sales program. It also should include a description of appropriate and inappropri- Examiners will review the bank's ate referral activities and the training securities sales activities to determine requirements and compensation ar- that the bank has adopted a statement rangements for each category of per- that addresses the risks associated with sonnel. the sales program and describes the features of the sales program, the roles of The roles of other entities selling on bank bank employees, and the roles of third premises, including supervision of selling party entities. The statement should set employees ) Bank management must plan forth the strategies the bank will employ to monitor compliance by other entities to achieve its objectives. It also should on an ongoing basis. The degree of bank outline the self-regulatory procedures management's involvement should be bank management will implement to dictated by the nature and extent of ensure that the program's objectives are nondeposit investment product sales, the met without compromising the effectiveness of customer protection sys- customers' best interests. tems, and customer responses. (See "Third Party Vendors," later in this At a minimum, examiners should expect section for more details on programs bank policies and procedures to address: operated by third parties.) Supervision of personnel involved in The types of products sold ) Policies and nondeposit investment sales programs ) procedures should include the criteria the Senior bank managers will be expected to bank will use to select and review each ensure that specific individuals employed type of product sold or recommended. by the bank, an affiliated broker/dealer, or a third party vendor are responsible for For each type of product sold by bank each activity outlined in the bank's employees, the bank should identify policies and procedures. Managers of the specific laws, regulations, regulatory bank's securities sales activities will be conditions, and any other limitation or accountable for understanding the invest- requirements, including qualitative con- ment products offered and the sales pro- siderations, that will expressly govern the cess, as well as for assuring compliance selection and marketing of products the with securities and banking laws, rules, bank will offer. (See "Product and regulations. Selection," later in this section for further discussion of these issues.) Designation of employees authorized to sell investment products ) This should Examiners should review: serve as a guide for all bank-related em- ! The process the bank uses to select ployees dealing with retail nondeposit the products it will offer, investment product customers. The ! What the bank did to ensure the program statement should specify that products meet its customers' needs only properly trained and supervised em- and expectations, and ployees are permitted to make investment ! How well the bank is performing sales or recommendations. It should an ongoing analysis of the Comptroller's Handbook for National Bank Examiners Temporary Insert ) February 1994 3
  • Retail Nondeposit Investment Sales Introduction Section 413.1 appropriateness of the products occur, however, after bank management offered for sale. has evaluated steps the third party is taking to avoid confusing customers and Examiners will also assess the indepen- after determining such steps are dence and thoroughness of the analysis consistent with bank policy. and the degree to which the bank relies on ratings services. Examiners should be Bank management also may wish to con- critical of bank managers who simply sider obtaining a legal opinion concerning choose products that generate the largest the bank's authority to share customer sales fees or accept what a third party information with third parties. has to offer without performing an inde- pendent analysis of the suitability of the Communications with customers ) Exam- products to the bank's strategy and iners should determine whether the customer mix. bank's policies consider the need for periodic and ongoing communications Examiners should not give the impression with customers to help them understand that the agency expects bank managers their investments and to remind to be "stock pickers" or that it intends to customers periodically that the products expand or limit the types of products they have purchased are not insured banks offer. Instead, examiners should deposits. Policies should outline determine that bankers are selecting customer communications for the bank products that generally meet their during periods of market stress and customers' needs. assign responsibilities for such communications. (See "Third Party Vendors," later in this section, for more details on the bank's Setting and Circumstances of oversight roles when it relies on its third Nondeposit Investment Product party vendor to select products.) Sales Policies governing the permissible uses of Banks should market nondeposit products bank customer information ) Examiners in a manner that does not mislead or con- should determine that bank customer fuse customers as to the nature of the information policies address the permissi- products or their risks. The setting and ble uses of such information for any pur- circumstances surrounding sales of pose associated with bank-related retail investment products is fundamental to investment sales activity. In particular, if ensuring that customers can readily the bank intends to use customer lists to distinguish between nondeposit telephone depositors whose certificates investment products and insured of deposit are due to mature to inform deposits. Examiners will determine that them about alternative investment bank management has established products, the policies should outline controls to distinguish retail deposit- steps the bank will take to avoid taking activities from the promotion, sale, confusing customers as to the risks and subsequent customer relationships associated with nondeposit investment related to retail nondeposit investment products, including their uninsured sales. nature. To minimize customer confusion, sales Banks may also supply customer informa- of, or recommendations for, nondeposit tion lists to a third party vendor. investment products on the bank's Supplying such information should only premises should be conducted in a Comptroller's Handbook for National Bank Examiners Temporary Insert ) February 1994 4
  • Retail Nondeposit Investment Sales Introduction Section 413.1 physical location distinct from the area name. Names that imply that mutual where retail deposits are taken. Signs or funds are U.S. government guaranteed other means should be used to also are prohibited. distinguish the investment sales area from the retail deposit-taking area of the Banks also should recognize that the institution. potential for customer confusion may be increased if the bank offers nondeposit In the limited situation in which physical product names that are similar to the considerations prevent nondeposit invest- bank's name. If the bank offers such ment product operations from being con- nondeposit products with names similar ducted in a distinct area of the bank, a to the bank's, it should design sales bank has a heightened responsibility to training programs to minimize the risk of ensure that measures are in place to mini- confusing customers. mize customer confusion. To minimize customer confusion, the bank should In addition, Securities and Exchange make an officer responsible for each of Commission (SEC) staff have issued an the locations at which the investment opinion that common names between a product sales will take place. bank and a mutual fund sold or marketed by or through that bank are presumed to The bank also should employ signs and, be misleading and a violation of the where possible, separate desks and Investment Company Act of 1940. SEC personnel for deposit-taking and in- staff contends, however, that a common vestment product sales. Investment name fund can rebut the presumption product salespeople should clearly that a fund's name is misleading by identify themselves by the use of ensuring that the cover page of the appropriate methods such as name tags prospectus prominently discloses that the or separate business cards. In banks fund's shares are not deposits or obliga- where the investment program is likely to tions of the bank and are not federally be less elaborate, the examiner should insured. determine, at a minimum, that the bank utilizes the written and oral disclosures When examining investment sales pro- described below. grams in a bank that is selling funds with names similar to the bank's, examiners In no case should any employee, while will evaluate the steps that bank located in the routine deposit-taking area, management has taken to avoid such as the teller window, make general confusing customers. The greater the or specific investment recommendations similarity between bank and fund names, regarding nondeposit investment the more closely examiners will scrutinize products, or accept orders for such all aspects of a bank's sales program. products, even if unsolicited. Tellers and other employees who are not authorized Examiners should criticize sales programs to sell nondeposit investment products in which fund names are so similar to the may only refer customers to individuals bank's that even mitigating who are specifically designated and circumstances are unlikely to eliminate trained to assist customers interested in customer confusion. For example, it may the purchase of such products. be acceptable for "First National Bank" to offer a nondeposit investment product Product names ) Banks may not offer named "First Fund" as long as the bank nondeposit investment products with a has implemented sufficient disclosures, product name identical to the bank's training, and other measures to mitigate Comptroller's Handbook for National Bank Examiners Temporary Insert ) February 1994 5
  • Retail Nondeposit Investment Sales Introduction Section 413.1 customer confusion. Other names, nothing for selling or renewing a de- however, such as "First Bank Fund" or posit. "First National Fund" are so similar to a bank's name that they are inappropriate This situation could confuse customers. because they are inherently confusing. To mitigate customer confusion, the bank should ensure that the employee has Examiners and bank management should extensive knowledge of the products also be aware that the potential for cus- being sold and that the employee is thor- tomer confusion can depend on the oughly aware of customer protection is- context in which the sales are taking sues. When selling noninsured products, place. For example, it may be the employee should also require custom- inappropriate for the First National Bank ers to sign a new account form acknowl- to offer a mutual fund product named edging that the product is not insured. "FNB Money Market Fund" if First National Bank were also offering an If space and personnel limitations appear insured deposit product named "FNB to increase the potential for customer Money Market Account." confusion, examiners should encourage bank management to require additional Overall setting and circumstances ) When training and disclosures, to develop signs reviewing nondeposit investment product and product names that clearly sales operations, examiners should not distinguish among the products being place undue weight on a single aspect of sold, and to assure that compensation for the setting and circumstances of the sale. selling uninsured and insured products is Each bank's sales program is different, equalized. Examiners should expect and one set of rules may not cover all banks with nondeposit investment sales circumstances or provide all customers programs already in operation when this with the necessary level of protection. section is issued to initiate actions Before judging a particular bank's opera- immediately to conform all aspects of the tions, examiners should consider how the setting and circumstances of the bank's various elements of the program interact program to these requirements. In and whether the elements combined mis- particular, banks should take immediate lead or avoid misleading customers. steps to correct any elements that could confuse customers. The following example illustrates how the combination of certain elements can Disclosures and Advertising potentially mislead customers: An employee of the First National Disclosures Bank sits at a desk in the lobby. This Complete and accurate disclosure must employee sells money market mutual be provided to avoid customer confusion funds and renews CDs. The employee as to whether a bank-related product is tells customers about two products an investment product or an insured bank the bank is offering: the FNB Money deposit. Examiners should determine Market Fund, an uninsured retail that banks selling, advertising, or nondeposit investment product, and otherwise marketing nondeposit the FNB Money Market Account, an investment products to retail customers insured deposit. This employee may provide the following product disclosures have an incentive to market the conspicuously: The products offered (1) uninsured product because the are not FDIC insured, (2) are not deposits employee gets a commission for or other obligations of the bank or selling a mutual fund but receives Comptroller's Handbook for National Bank Examiners Temporary Insert ) February 1994 6
  • Retail Nondeposit Investment Sales Introduction Section 413.1 guaranteed by the bank, and (3) involve agreeing to purchase nondeposit investment risks, including possible loss investment products receive the of principal amount invested. disclosure acknowledgement form when they open a new account. A bank should The minimum disclosures should be also request all customers who previously provided to the customer: opened investment accounts by mail ! Orally during any sales without receiving these written disclo- presentation. sures to sign and return a disclosure ac- ! Orally when investment advice con- knowledgement to the bank. cerning nondeposit investment products is provided. Confirmations and account statements ! Orally and in writing prior to or at for nondeposit investment products the time an investment account is should contain at least the minimum opened to purchase these disclosures if the confirmation or account products. statement contains the name or logo of ! In advertisements and other promo- the bank or its affiliate. If a customer's tional materials, as described periodic deposit account statement below. includes account information about nondeposit investment products, the Examiners will determine whether these bank should clearly separate that informa- disclosures are featured conspicuously in tion from information about the deposit all written or oral sales presentations, account. The material on the customer's advertising and promotional materials, periodic deposit account relating to non- prospectuses, confirmations, and periodic deposit investment products also should statements that include the name or the begin with the disclosures described logo of the bank or an affiliate. above as well as the identity of the entity conducting the nondeposit transaction. Advertisements and brochures also should feature these disclosures at least Where applicable, examiners should as large as the text describing the bank's determine that the bank has made nondeposit investment products. The additional disclosures described in the OCC believes that these disclosures are Interagency Statement regarding affiliate conspicuous when they appear on the relationships and specific fees and cover of a brochure or on the first part of penalties. relevant written text. A bank's disclosures could also be considered Some disclosure obligations may arise conspicuous if it prints the required from the roles a bank or a bank affiliate disclosures in a box or by displaying them may play in the distribution, in bold type or with bullet points. administration, and/or management processes. For example, a bank should The bank should obtain a signed disclose remuneration received for statement acknowledging such performing investment advisory services disclosures from customers at the time a and administrative services such as retail nondeposit investment account is shareholder accounting. This disclosure opened. For accounts established before obligation may be met through fee issuance of this section, the bank should disclosures in a prospectus. If the consider obtaining such a signed prospectus does not include such fee dis- statement prior to the next sale. If the closures, the bank must make the disclo- bank solicits customers by telephone or sures by some other means. State law mail, it should be assured that customers requirements may also govern fee disclo- Comptroller's Handbook for National Bank Examiners Temporary Insert ) February 1994 7
  • Retail Nondeposit Investment Sales Introduction Section 413.1 sures. mislead customers about the nature of the product, and include required Additional disclosure responsibilities may disclosures. For example, claims about occur because of the manner in which "no fees" or "no charges" are not nondeposit investment products are mar- accurate if the selling bank collects fees keted. Examiners should determine for investment advisory services or whether public statements about the collects fees for shareholder accounting selection of the products a bank offers on the product or service being are reasonable. As an example, if advertised. In this case a bank could management represents to customers claim that there are no "sales" charges that it has performed an independent and inform readers that a description of analysis of the product selected, the other charges is contained in the examiner should determine that the bank prospectus. has actually done so. Examiners will also evaluate management's disclosure to Examiners should determine that the prospective customers of ratings bank does not imply in advertising or in applicable to a particular product, written and oral presentations that the including the source of the rating. If bank stands behind an investment ratings are used to promote certain product. products, examiners should expect bank management to review whether the bank The bank's marketing department should will disclose ratings changes and, if so, not be solely responsible for bank-related determine how such disclosures will investment sales advertisements. The occur. issuer, or, if a mutual fund, the distributer, may prepare advertisements Examiners should also determine whether of specific investment products that a bank-related sales program includes any conform to standards developed by self- written or oral representations to custom- regulatory organizations such as NASD. ers concerning insurance coverage Senior bank management should appoint provided by any other entity apart from an officer responsible for ensuring that FDIC, e.g., the Securities Investor bank investment advertisements as well Protection Corporation (SIPC), a state as advertisements prepared by another insurance fund, or an insurance company. party that make reference to the bank, or If these types of representations are any advertisement used in bank-related made, examiners should determine sales, are accurate, not misleading, and whether training concerning differences include all required disclosures. in insurance coverage is provided to appropriate personnel. Appropriate Suitability personnel includes anyone who is likely Consistent with the Rules of Fair to respond to customer inquiries or Practice, the OCC expects banks to individuals designated to sell such prod- determine whether a product being ucts. Examiners should also determine if recommended is an appropriate written or oral explanations of the differ- investment for the customer. Banks ences in coverage are provided to all cus- should ensure that any salespeople tomers. involved in bank-related sales obtain sufficient information from customers to Advertising enable the salesperson to make a Examiners should assess the procedures judgment about the suitability of the bank uses to ensure that bank-related recommendations for particular sales advertisements are accurate, do not customers. At a minimum, suitability Comptroller's Handbook for National Bank Examiners Temporary Insert ) February 1994 8
  • Retail Nondeposit Investment Sales Introduction Section 413.1 inquiries should be made consistent with when reviewing "breakpoints" and the Rules of Fair Practice concerning the "letters of intent." Breakpoints are customer's financial and tax status, discounts that are available to investors investment objectives, and other factors who purchase a large amount of mutual that may be relevant, prior to making fund shares in a lump sum or as part of a recommendations to the customer. This cumulative investment program (e.g. information should be documented and under a "letter of intent"). The potential updated periodically. for abuse usually occurs when the sale of several different mutual fund shares takes A well-documented suitability inquiry can place in quantities just below the level at protect a bank from dissatisfied which the purchaser would qualify for customers who threaten litigation. Such reduced sales charges on any one of the litigation could introduce risk to the funds. bank's capital. Accordingly, the OCC may view banks operating a retail Examiners should determine whether a securities business without appropriate bank officer has been assigned suitability procedures to be engaging in responsibility for implementing and/or an unsafe and unsound practice. monitoring the suitability system. The examination approach should focus on Many banks use software programs that the system the bank has in place to make document investor profiles to assist in suitability inquiries, suitability making suitability judgments. Each judgements, and periodic account profile is based on a customer's reviews. Examiners generally should responses to inquiries as to his or her review sales patterns rather than financial and relevant personal history. individual sales for suitability issues. To The software program subsequently determine the types of sales to test for matches the customer's investment needs suitability, examiners should investigate and objectives to the bank's available marketing programs that target a class of products. This type of software is a customers, customer complaints, sales to tool, not a substitute for professional first-time and risk-averse investors, sales judgement; it should not weight bank made by high- or low-volume proprietary products too heavily or bank salespersons, volatile and new products, deposits too lightly. and the existence of mutual fund redemptions after relatively short holding One example of a critical suitability deter- periods. mination involves sales to elderly bank customers. Many of these customers rely Qualifications and Training upon investments or savings for retire- Banks should implement detailed training ment income and may consequently de- programs to ensure that sales personnel mand high yields. They may not, have thorough product knowledge (as however, have the ability to absorb or opposed to simple sales training for a recover losses. A nondeposit investment product) and understand customer salesperson should also be aware that it protection requirements. Examiners is especially important to make a careful should assess the process the bank uses suitability recommendation when dealing to ensure that sales personnel are with a surviving spouse who is not properly qualified and adequately trained experienced in investment matters. to sell all bank-related nondeposit investment products. If bank personnel Examiners should investigate potential sell or recommend securities, the training suitability problems in mutual fund sales should be substantively equivalent to Comptroller's Handbook for National Bank Examiners Temporary Insert ) February 1994 9
  • Retail Nondeposit Investment Sales Introduction Section 413.1 that required for personnel qualified to thoroughly understand the need to sell securities as registered safeguard the customers' interests. More representatives. Securities industry train- specialized "product knowledge" training ing is available in most metropolitan is generally provided by the marketing areas. division of a mutual fund sponsor or another third party vendor. Bank staff Examiners also should determine that the should also receive customer protection bank's audit and compliance personnel and compliance training. and persons with supervisory responsibilities are properly trained and Examiners should determine whether a knowledgeable. bank officer has been assigned responsibility for ensuring that adequate A bank's hiring practices and training training is provided to bank staff, and for plan should be designed around the reviewing the hiring and training complexity and risks of the particular practices of a third party vendor. investment products being offered. While it may be appropriate to have a Compensation banking generalist with no securities Incentive compensation systems, which industry background sell money market are standard in the securities and mutual funds, it could be inappropriate to insurance businesses, are becoming allow this individual to sell fixed-rate increasingly common in commercial annuities without extensive training. banking. Personnel who are authorized to sell nondeposit investment products If individuals with securities industry may receive incentive compensation, experience are hired to sell investment such as commissions, for transactions products for banks, they should have an entered into by customers. However, understanding of securities industry incentive compensation programs must customer protection and control systems not be structured in such a way as to and have an adequate knowledge of the result in unsuitable recommendations or products being offered. Since they may sales being made to customers. not be familiar with general banking regulations and may not understand the An improperly designed compensation needs of bank customers, banks should system can provide a bank employee with also ensure that these individuals are the incentive to place his or her own instructed as to the specialized compensation interests above the obligations of selling investment products interests of bank customers. Examiners in a retail banking environment. Ex- should assess the steps management has aminers should expect management to taken to ensure that compensation pro- check with securities regulators to deter- grams do not operate as an incentive for mine if potential bank sales employees salespeople to make unsuitable with previous securities industry recommendations or sales to customers. experience have a disciplinary history. Banks engaging in lower volume mutual One way to avoid having the fund and annuity sales frequently train compensation system drive the existing bank employees to sell recommendation toward mutual funds investment products. Examiners should and away from certificate of deposit determine that bank management is renewals would be to separate the satisfied that these individuals have nondeposit investment product sales and acquired "product knowledge," and CD renewal functions. Alternatively, if Comptroller's Handbook for National Bank Examiners Temporary Insert ) February 1994 10
  • Retail Nondeposit Investment Sales Introduction Section 413.1 employees are permitted to offer both setting and circumstance of the sale. deposits and nondeposit investment products, a bank could reduce the Bank supervisory employees who review temptation by compensating the em- and approve individual sales, accept new ployee for renewing maturing deposits as accounts, and review established well as for selling nondeposit investment customer accounts should not receive products. Examiners should discuss with incentive compensation based on the bank management where appropriate the profitability of individual trades or methods used to avoid possible conflicts accounts that are subject to their review. of interest potentially arising from the Similarly, department auditors or bank's compensation plan. compliance personnel should not partici- pate in incentive compensation programs To investigate whether incentive compen- that are based directly on the success of sation schemes could induce salespersons sales efforts nor should they report to a to recommend products with higher com- manager who receives this type of incen- missions over a more suitable option, ex- tive compensation. In addition, bank aminers should look to customer com- management should not rely on third plaints and to sales patterns rather than party audit and control systems if that to individual sales. For example, an vendor's control personnel receive examiner can look for instances in which transaction-based incentive sales for a particular product increased compensation. after changes to an incentive compensation system. Bank employees, including tellers, may receive a one-time nominal fee of a fixed Examiners also should expect a bank to dollar amount for each customer referred increase its supervision of sales programs for nondeposit investment products. The as it increases its incentive com- payment of this referral fee should not pensation. Examiners should be critical of depend on whether the referral results in supervision that does not take into a transaction. account the possibility that recommendations for purchases of Fiduciary Accounts nondeposit investment products could be Pursuant to 12 CFR 9.11(d), examiners influenced by the incentive compensation will review the investments held by scheme. national banks as fiduciary to determine whether such investments are in If the overall setting and circumstances accordance with law, 12 CFR 9, and of a bank's investment sales program sound fiduciary principles. In so doing, appears to be only marginally they will ensure that the bank has satisfactory, examiners should regard complied with all applicable state and higher incentive compensation on certain federal restrictions on investment investment products and lower transactions involving the bank's compensation on deposits and other fiduciary accounts. investment products as having the poten- tial for causing serious problems. In this Under 12 CFR 9.12, national bank fiduci- case the compensation system itself aries may not invest funds held as should justify an increase in the level of fiduciary in the stock of organizations bank management supervision. If with which there exists such a supervision is not adequate, the examiner connection as may affect the exercise of should criticize the compensation system the best judgment of the bank in and other objectionable factors in the acquiring the stock, unless there exists Comptroller's Handbook for National Bank Examiners Temporary Insert ) February 1994 11
  • Retail Nondeposit Investment Sales Introduction Section 413.1 specific authority for such an investment Handbook for Fiduciary Activities, in the governing instrument, local law, a "Portfolio Management." court order or through consents from all ! A documented annual review of all beneficiaries. As to accounts subject to assets by issuer, including propri- the Employee Retirement Income Security etary products. This review should Act of 1974, such investments must be consider the quality of fund man- within the authority of that Act. These agement, fee structure, risk principles govern purchases of a bank's diversification and anticipated rates proprietary products, such as bank- of return. It should also address advised mutual funds and private label the considerations set forth in the mutual funds for fiduciary accounts. Comptroller's Handbook for In addition, pursuant to 12 CFR 9.11(d), Fiduciary Activities, "Investments." examiners will determine that fiduciary purchases and retention of bank proprietary products for fiduciary Compliance Program accounts are in accord with sound Banks must maintain compliance fiduciary principles. This requires that programs capable of verifying compliance even if specific authority exists for with the guidelines specified in the fiduciary accounts to purchase or retain Interagency Statement and with any bank-advised or bank private label mutual other applicable requirements. Banks funds, the assets must be appropriate for should perform nondeposit investment each account. The investment must be compliance programs independently of consistent with the purpose for which investment product sales and each account was created, and suitable management. At a minimum, the for the beneficial interest holders of each compliance function should include a sys- account. This requirement exists as to tem to monitor customer complaints and purchases for individual accounts, and for to review customer accounts periodically conversions of collective investment to detect and prevent abusive practices. funds to bank-advised mutual funds. Twelve CFR 9.7 requires banks to Examiners reviewing the compliance conduct initial and annual reviews of operations of a bank offering a variety of each fiduciary account as well as a retail investment products should ensure separate review of all securities by issuer that the bank has comprehensive self- to ensure compliance with these regulatory policies and that it is requirements. These reviews include: conducting an ongoing comparison of ! A documented review of each ac- the bank's investment sales practices count to determine that the assets with its stated investment policy. In of that account, including any banks with a less elaborate investment proprietary products, meet the sales program, where an internal auditing investment objectives of the ac- group may perform all of the bank's count. In structuring the account compliance functions, the examiner portfolio, the fiduciary must should ensure that these auditors are consider the provisions of the periodically comparing sales practices document establishing the ac- with policy. count. The review must also take into account the needs of the Individuals performing the audit or beneficial interest holders. This compliance of the bank's investment review should address the issues program should be qualified and should set forth in the Comptroller's have the necessary experience to perform Comptroller's Handbook for National Bank Examiners Temporary Insert ) February 1994 12
  • Retail Nondeposit Investment Sales Introduction Section 413.1 the assigned tasks. Compliance suitability problems may exist, bank personnel should also engage in ongoing management is expected to conduct its training to keep abreast of emerging own review of all affected accounts and developments in banking and securities to institute corrective actions. If it is laws and regulations. determined that customers may have been disadvantaged, corrective actions Banks can establish independence of should be designed on a case-by-case audit or compliance personnel if such basis and may include full explanations to personnel determine the scope, customers and, where appropriate, offers frequency, and depth of their own to rescind trades. reviews; report their findings directly to the board of directors or an appropriate Customer complaints are an indication of committee of the board; have their potential problems that warrant a prompt performance evaluated by persons account review. Examiners should expect independent of the investment product the bank to assign a bank officer who is sales function; and receive compensation independent of the sales force the that is not connected to the success of responsibility for approving the resolution investment product sales. of complaints or reviewing the resolution of complaints by a third party vendor. Bank compliance programs should be The examiner should evaluate the system modeled after those in the securities for assuring that all complaints (written business where it is customary for and oral) receive management's attention compliance personnel to conduct regular by reviewing the bank's audit of the and frequent customer account reviews complaint resolution system. in order to detect and prevent abuses. The extent and frequency of customer Managers of high-volume investment account supervision should be dictated sales programs also often use automated by the aggressiveness of the sales exception reporting systems to flag program and the riskiness of products potential problems before customers being offered. complain. Such systems monitor product sales and the performance of Examiners should expect the bank to as- salespersons. If the bank has such sign individuals independent of the sales systems in place, and if the reports show force to review periodically customer re- significant volumes of mutual fund sponses to suitability inquiries and to redemptions after short holding periods, compare these responses to the type and examiners should review the steps volume of account activity to determine management has taken to investigate whether the activity in an account is whether the product is being sold appropriate. If account activity is properly. unusual relative to the customer's stated objectives and risk tolerance, or if If early redemptions are restricted to one account activity is brisk relative to the salesperson or one branch, management size of a customer's investment or past can reasonably conclude that the problem practices, management should make is localized. However, early redemptions follow-up inquiries to determine if the occurring throughout the sales network activity serves the best interests of the may indicate that something is wrong customer. with the product itself or with the training provided to salespeople. If examinations or routine oversight by Similarly, if reports indicate that a bank management indicates that salesperson is selling one type of product Comptroller's Handbook for National Bank Examiners Temporary Insert ) February 1994 13
  • Retail Nondeposit Investment Sales Introduction Section 413.1 almost exclusively, management may "Negative consent" letters (e.g., notices need to review that individual's informing customers that unless they ob- performance or training. ject, the bank assumes the customer un- derstands and does not object to the Ultimately, the way for bank manage- transactions) may be a useful element in ment to assure itself that the securities a compliance program but should not be salespersons are providing the required the sole means of verifying that disclosures and making suitable customers understand nondeposit recommendations to customers is to investment product transactions and the "test" the sales program. Effective bank's role in the process. "tests" can be conducted in several ways. Larger banks sometimes employ "testers" Examiners should determine whether a who pose as prospective customers and bank officer has been assigned the test the sales presentations for a variety responsibility for assuring that the bank of issues including adherence to adequately monitors the nondeposit customer protection standards. Many investment accounts of customers. other well-managed banks (of all sizes) Examiners should also determine whether have instituted follow-up programs to the officer has developed or is developing verify that their customers understood a system to monitor the customer their investment transactions. A bank account reviews of outside vendors manager, who is independent of the sales operating bank-related sales programs. force, may telephone customers a few days after an investment account is Oversight of Third Party Vendors opened or an unusual transaction has When a bank uses a third party vendor to taken place. The manager will determine sell nondeposit investment products, the if the customer understands what he or bank's board of directors must adopt a she has purchased; understands the risks, written policy addressing the scope of including the uninsured nature of the the activities of the third party, as well as product; understands the bank's role in the procedures the bank intends to use the transaction; and can generally for monitoring the third party's confirm responses to a suitability inquiry compliance with the Interagency previously provided. Statement. A bank officer usually can determine if a To select the third party vendor and customer understands an investment by monitor the ongoing acceptability of the asking the customer to describe its vendor, bank management usually general features. The customer should be reviews the vendor's experience in the able to describe how the product works business and the vendor's financial and its risks rather than simply recite statement. Bank management also what he or she hopes to gain from the usually contacts other banks with which particular investment. Managers usually the vendor has done business for also determine if the customer is satisfied references. Examiners should also expect with the product and service or has any that bank management checked with the problems or suggestions for improving vendor's regulator before it entered into service. If a bank institutes a telephone an agreement with the vendor and that follow-up program, it should maintain a management has continued to review record of conversations with customers reports furnished to the vendor by its to resolve problems or disputes that may regulator(s). arise at a later date. Bank management should enter into a Comptroller's Handbook for National Bank Examiners Temporary Insert ) February 1994 14
  • Retail Nondeposit Investment Sales Introduction Section 413.1 written agreement with a third party ven- contracts between the bank and dor that has been approved by the bank's the third party vendor's employees. board of directors before the vendor is permitted to offer nondeposit investment Examiners will review the agreement to products to the bank's customers. The determine that it specifies that the third agreement should outline the duties and party vendor will comply with all responsibilities of each party and should applicable requirements contained in the include a description of all of the Interagency Statement. Examiners also activities the third party is permitted to will review the agreement to determine if engage in on the bank's premises. The it includes provisions regarding bank agreement also should set forth terms for oversight and examiner access to the use of the bank's space, personnel, appropriate records. It is expected that and equipment as well as compensation compliance with the agreement will be arrangements for personnel of the bank periodically monitored by the institution's and the third party. The agreement also senior management. should: ! Specify that the third party will Before entering into an agreement with a comply with all applicable laws and third party vendor, bank management regulations and will act also should be satisfied that the vendor consistently with the provisions of uses a product selection process similar this temporary insert, especially the to the one outlined below. Banks relying provisions relating to customer on a third party vendor to select products disclosures, also should understand and agree with ! Authorize the bank to monitor the the vendor's method of analysis and third party by periodically document its concurrence with that reviewing and verifying that the method. Examiners should determine third party and its sales whether management has understood representatives are complying with and concurred. Bank management should its agreement with the bank, with periodically investigate the vendor's all applicable laws and regulations, product selection process to ensure that and with the provisions of this it continues to be appropriate to the temporary insert, bank's customer mix. Examiners also ! Specify the type, scope, and fre- should determine whether bank man- quency of reports the third party is agement understands and agrees with to furnish to bank management to contingency plans developed by the third permit bank management to fulfill party vendor and the product issuer to its oversight responsibilities, respond to customer orders during ! Authorize the institution and the unusual surges in redemptions. OCC to have access to appropriate records of the third party, To fulfill its oversight responsibilities, it is ! Require the third party to agree to expected that bank management will re- indemnify the bank for any liability ceive various reports from the third party that resulted from third party vendor and have access to the vendor's investment product sales program appropriate records. The reports received actions, will vary with the scope of the sales pro- ! Set forth the training which the gram and should be tailored to the needs bank expects its employees and of the institution. The reports should third party personnel to possess, always include a list of all customer and complaints and their resolution. Other ! Provide for written employment reports that may facilitate bank Comptroller's Handbook for National Bank Examiners Temporary Insert ) February 1994 15
  • Retail Nondeposit Investment Sales Introduction Section 413.1 management's oversight role, could party vendors should be governed by pre- include: liminary examination findings. When ! A periodic listing of all new such findings make it clear that bank account openings and descriptions management has discharged its oversight of the initial trades; responsibility by reviewing and ! A list of significant or unusual (for responding appropriately to third party the customer) individual sales reports, only a few customer complaints during a reporting period; have been filed against the vendor, and ! Sales reports by product, salesper- the vendor's reports are timely, son, and location during a sufficiently detailed, and prepared by reporting period; and someone independent of the vendor's ! Reports of internal compliance re- sales force, examiner access to third party views of customer accounts records should generally be limited to the originated at the bank and reports reports furnished to management by the furnished to the third party vendor vendor. by its regulator(s) on at least an annual basis. Product Selection This section describes in general terms Bank management must monitor compli- the methods that well-managed banks ance by third party vendors on an use to select specific nondeposit ongoing basis. Senior bank managers investment products and to determine will be expected to ensure that specific that such products continue to be individuals employed by the bank and by acceptable to the bank's customer mix. the third party vendor are responsible for This information is provided to help each activity outlined in the bank's examiners understand and review the investment sales policy. The degree of process used by well-managed banks to bank management's involvement should make this determination. be dictated by the types of products being offered, the volume of sales, the Bank management should determine the nature of customers' complaints, and the specific laws, regulations, regulatory effectiveness of the third party vendor's conditions or other limitations or customer protection systems. requirements, including qualitative considerations, that will govern the sale Senior bank management also should ap- of products to be offered. Although not point an officer responsible for ensuring required, most well-run bank investment that bank investment advertisements as sales programs limit the number of well as advertisements prepared by products offered so that customers and another party that refer to the bank, or salespersons will not be presented with any advertisement used in bank-related an overwhelming number of choices. sales, are accurate, not misleading, and Limitations based on product quality may include all required disclosures. In also make it easier for sales managers to addition, any advertising or promotional shield certain classes of customers from material ) prepared by or on behalf of a inappropriate products. third party vendor ) should clearly identify the company selling the As a general practice, bank investment nondeposit investment product and programs offer at least one type of should not suggest that the depository money market mutual fund for customers institution is the seller. who are interested in liquidity. In addition, most banks offer a U.S. Examiner access to the records of third government bond fund for customers Comptroller's Handbook for National Bank Examiners Temporary Insert ) February 1994 16
  • Retail Nondeposit Investment Sales Introduction Section 413.1 who stress safety and steady income, an The bank itself, and not another entity's equity fund for customers interested in marketing department, should select the capital growth, and a tax-exempt bond funds to be offered. Independent fund for customers who wish to avoid committees and qualified analysts should taxes on investment earnings. make the final selections, not a sales manager whose view of the commission When deciding which funds to offer, structure may affect this judgment. managers should review the fund's performance over an extended period of If the bank uses outside consultants to time. Most bank managers prefer to help select a mutual fund, bank avoid mutual funds with volatile records. management should determine whether Management's selection of a family of the consultant receives compensation funds should not be based on the from mutual funds or mutual fund performance of one particular fund; each wholesalers. If the analysis is performed fund selection should stand on its own by another party, such as a clearing merits. broker or third party vendor, bank management should understand and Management's selection of investment agree with the method of analysis and products usually begins with an should document the bank's concurrence. evaluation of the stability of asset values over time and an assessment of yields to investors. Management also compares Regardless of who selects the mutual the performance of other funds with fund products, bank management will be similar objectives over the same period(s). expected to consider the issuer's Specialized ratings services (such as contingency plans for handling unusual Morningstar or Lipper) or rankings by surges in redemptions at the time such analytical services are usually regarded as products are being considered. Such necessary but secondary considerations. contingency plans normally include emergency staffing, communications, and Management also considers the fund's operational programs that are based on track record in terms of both risk and re- various market scenarios. Bank ward. Management analyzes the fund's management should compare these net asset value versus total return, its contingency plans to the expected needs management or operating expenses, the of bank customers during periods of turnover within the fund's portfolio, and stress. capital gains and other sources of income. Other key considerations include Finally, once the initial selection process the composition of the portfolio and is complete, bank management should concentrations in types of holdings, conduct ongoing reviews to assure that sector weights, and, in the case of equity the products remain acceptable in light of funds, the percentage of ownership the bank's objectives and customer's represented by individual issues. needs. Management also evaluates important Selection of annuity products is non-statistical factors such as the conducted in the same manner. A continuity, tenure, and demonstrated variable-rate annuity, a hybrid form of talent of the fund's management. They investment that contains elements of also may consider factors such as the mutual funds and insurance, could be quality of a mutual fund's operational characterized as a mutual fund operated and marketing support. by an insurance company. During Comptroller's Handbook for National Bank Examiners Temporary Insert ) February 1994 17
  • Retail Nondeposit Investment Sales Introduction Section 413.1 product selection, bank management Sales on Nondeposit Investment should consider the performance and Products composition of the portfolio that is dedicated to the annuity holders. The full text of the interagency statement begins on the next page. Selection analysis for fixed-rate annuities differs from variable-rate annuities. Since fixed-rate annuities are obligations of insurance companies, the risks associated with them relate to the issuer's ability to honor the terms of the annuity contract. Accordingly, the safety of an annuity depends upon the financial standing of the firm that issues it and the selection analysis involves an assessment of the quality and diversification of the company's assets, its holdings of junk bonds, mortgage-backed securities, and problem real estate loans, as well as the continuity of management. Because it is difficult to independently analyze insurance companies, ratings pro- vided by rating agencies such as A.M. Best, Standard & Poor's, Duff & Phelps, Moody's and Weiss Research play a part in annuity analysis. If bank management relies significantly on such ratings rather than on its own analysis, however, examiners should expect that the issuer selected by the bank has received top ratings from most of the ratings services. When analyzing annuities, management also should recognize that an issuing insurance company can, in certain circumstances, sell or simply transfer the annuity contract to another insurance company, thereby extinguishing its obligation to the purchaser of the annuity. Annuity owners are generally, but not always, asked to consent to this transfer. A bank selling annuities should consider the possibility of such a transfer in its product selection analysis. At a minimum, the bank should disclose this possibility to prospective customers. Interagency Statement on Retail Comptroller's Handbook for National Bank Examiners Temporary Insert ) February 1994 18
  • Retail Nondeposit Investment Sales Introduction Section 413.1 Interagency Statement on Retail Corporation, the Office of the Sales on Nondeposit Investment Comptroller of the Currency, and the Office of Thrift Supervision ) are issuing Products this Statement to provide uniform February 15, 1994 guidance to depository institutions engaging in these activities. Introduction (Note: Each of the four banking agencies Recently many insured depository institu- has in the past issued guidelines tions have expanded their activities in addressing various aspects of the retail recommending or selling to retail sale of nondeposit investment products. customers nondeposit investment OCC Banking Circular 274 (July 19, products, such as mutual funds and 1993); FDIC Supervisory Statement FIL- annuities. Many depository institutions 71-93 (October 8, 1993); Federal Reserve are providing these services at the retail Letters SR 93-35 (June 17, 1993), and SR level, directly or through various types of 91-14 (June 6, 1991); OTS Thrift Bulletin arrangements with third parties. 23-1 (September 7, 1993). This Statement is intended to consolidate and Sales activities for nondeposit investment make uniform the guidance contained in products should ensure that customers the various existing statements of each for these products are clearly and fully in- of the agencies, all of which are formed of the nature and risks associated superseded by this Statement. Some of with these products. In particular, where the banking agencies have adopted nondeposit investment products are additional guidelines covering the sale of recommended or sold to retail customers, certain specific types of instruments by depository institutions should ensure that depository institutions, i.e., obligations customers are fully informed that the of the institution itself or of an affiliate products: of the institution. These guidelines ! Are not insured by the FDIC; remain in effect except where clearly ! Are not deposits or other obligations inapplicable.) of the institution and are not guaranteed by the institution; and, Scope ! Are subject to investment risks, including possible loss of principal This Statement applies when retail invested. recommendations or sales of nondeposit investment products are made by: Moreover, sales activities involving these ! Employees of the depository investment products should be designed institution; to minimize the possibility of customer ! Employees of a third party, which may confusion and to safeguard the or may not be affiliated with the institution from liability under the institution ( see Note, below, applicable anti-fraud provisions of the addressing which institutions are cov- federal securities laws, which, among ered), occurring on the premises of other things, prohibit materially the institution (including telephone misleading or inaccurate representations sales or recommendations by employ- in connection with the sale of securities. ees or from the institution's premises and sales or recommendations The four federal banking agencies ) the initiated by mail from its premises); Board of Governors of the Federal Reserve and System, the Federal Deposit Insurance ! Sales resulting from a referral of retail Comptroller's Handbook for National Bank Examiners Temporary Insert ) February 1994 19
  • Retail Nondeposit Investment Sales Introduction Section 413.1 customers by the institution to a third described above for the sale of party when the depository institution nondeposit investment products to its receives a benefit for the referral. retail customers should adopt a written statement that addresses the risks (Note: This Statement does not apply to associated with the sales program and the subsidiaries of insured state nonmem- contains a summary of policies and ber banks, which are subject to separate procedures outlining the features of the provisions, contained in 12 CFR 337.4, institution's program and addressing, at relating to securities activities. For OTS- a minimum, the concerns described in regulated institutions that conduct sales this Statement. The written statement of nondeposit investment products should address the scope of activities of through a subsidiary, these guidelines any third party involved, as well as the apply to the subsidiary. 12 CFR 545.74 procedures for monitoring compliance by also applies to such sales. Branches and third parties in accordance with the agencies of U.S. foreign banks should guidelines below. The scope and level of follow these guidelines with respect to detail of the statement should their nondeposit investment sales appropriately reflect the level of the programs.) institution's involvement in the sale or recommendation of nondeposit These guidelines generally do not apply investment products. The institution's to the sale of nondeposit investment statement should be adopted and products to non-retail customers, such as reviewed periodically by its board of sales to fiduciary accounts administered directors. Depository institutions are by an institution. (Note: Restrictions on encouraged to consult with legal counsel a national bank's use as fiduciary of the with regard to the implementation of a bank's brokerage service or other entity nondeposit investment product sales with which the bank has a conflict of program. interest, including purchases of the bank's proprietary and other products, are The institution's policies and procedures set out in 12 CFR 9.12. Similar should include the following: restrictions on transactions between ! Compliance procedures. The proce- funds held by a federal savings dures for ensuring compliance with association as fiduciary and any person or applicable laws and regulations and organization with whom there exists an consistency with the provisions of this interest that might affect the best Statement. judgment of the association acting in its ! Supervision of personnel involved in fiduciary capacity are set out in 12 CFR sales. A designation by senior man- 550.10. However, as part of its fiduciary agers of specific individuals to responsibility, an institution should take exercise supervisory responsibility for appropriate steps to avoid potential cus- each activity outlined in the tomer confusion when providing institution's policies and procedures. nondeposit investment products to the ! Types of products sold. The criteria institution's fiduciary customers.) governing the selection and review of each type of product sold or recom- Adoption of Policies and mended. Procedures ! Permissible use of customer informa- tion. The procedures for the use of Program Management. A depository information regarding the institution's customers for any purpose in connec- institution involved in the activities tion with the retail sale of nondeposit Comptroller's Handbook for National Bank Examiners Temporary Insert ) February 1994 20
  • Retail Nondeposit Investment Sales Introduction Section 413.1 investment products. sales representatives are complying ! Designation of employees to sell with its agreement with the investment products. A description of institution. the responsibilities of those personnel ! Authorize the institution and the authorized to sell nondeposit invest- appropriate banking agency to have ment products and of other personnel access to such records of the third who may have contact with retail party as are necessary or appropriate customers concerning the sales to evaluate such compliance. program, and a description of any ! Require the third party to indemnify appropriate and inappropriate referral the institution for potential liability activities and the training resulting from actions of the third requirements and compensation party with regard to the investment arrangements for each class of person- product sales program. nel. ! Provide for written employment con- tracts, satisfactory to the institution, Arrangements with Third Parties. If a for personnel who are employees of depository institution directly or indi- both the institution and the third rectly, including through a subsidiary or party. service corporation, engages in activities as described above under which a third General Guidelines party sells or recommends nondeposit investment products, the institution 1. Disclosures and Advertising should, prior to entering into the The banking agencies believe that recom- arrangement, conduct an appropriate mending or selling nondeposit investment review of the third party. The institution products to retail customers should occur should have a written agreement with the in a manner that assures that the third party that is approved by the products are clearly differentiated from institution's board of directors. insured deposits. Conspicuous and easy Compliance with the agreement should to comprehend disclosures concerning be periodically monitored by the the nature of nondeposit investment institution's senior management. At a products and the risk inherent in minimum, the written agreement should: investing in these products are one of the ! Describe the duties and most important ways of ensuring that the responsibilities of each party, differences between nondeposit products including a description of permissible and insured deposits are understood. activities by the third party on the institution's premises, terms as to the Content and Form of Disclosure. Disclo- use of the institution's space, per- sures with respect to the sale or recom- sonnel, and equipment, and compen- mendation of these products should, at a sation arrangements for personnel of minimum, specify that the product is: the institution and the third party. ! Not insured by the FDIC; ! Specify that the third party will ! Not a deposit or other obligation of, comply with all applicable laws and or guaranteed by, the depository regulations, and will act consistently institution; with the provisions of this Statement ! Subject to investment risks, including and, in particular, with the provisions possible loss of the principal amount relating to customer disclosures. invested. ! Authorize the institution to monitor the third party and periodically review The written disclosures described above and verify that the third party and its should be conspicuous and presented in Comptroller's Handbook for National Bank Examiners Temporary Insert ) February 1994 21
  • Retail Nondeposit Investment Sales Introduction Section 413.1 a clear and concise manner. Depository and the identity of the entity conducting institutions may provide any additional the nondeposit transaction. disclosures that further clarify the risks involved with particular nondeposit Advertisements and Other Promotional investment products. Material. Advertisements and other promotional and sales material, written or Timing of Disclosure. The minimum otherwise, about nondeposit investment disclosures should be provided to the products sold to retail customers should customer: conspicuously include at least the ! Orally during any sales presentation, minimum disclosures discussed above and ! Orally when investment advice must not suggest or convey any concerning nondeposit investment inaccurate or misleading impression about products is provided, the nature of the product or its lack of ! Orally and in writing prior to or at the FDIC insurance. The minimum time an investment account is opened disclosures should also be emphasized in to purchase these products, and telemarketing contacts. Any third party ! In advertisements and other advertising or promotional material promotional materials, as described should clearly identify the company below. selling the nondeposit investment product and should not suggest that the A statement, signed by the customer, depository institution is the seller. If should be obtained at the time such an brochures, signs, or other written material account is opened, acknowledging that contain information about both FDIC- the customer has received and insured deposits and nondeposit understands the disclosures. For investment products, these materials investment accounts established prior to should clearly segregate information the issuance of these guidelines, the about nondeposit investment products institution should consider obtaining from the information about deposits. such a signed statement at the time of the next transaction. Additional Disclosures. Where applicable, the depository institution Confirmations and account statements should disclose the existence of an for such products should contain at least advisory or other material relationship the minimum disclosures if the between the institution or an affiliate of confirmations or account statements the institution and an investment contain the name or the logo of the company whose shares are sold by the depository institution or an affiliate. institution and any material relationship (Note: These disclosures should be made between the institution and an affiliate in addition to any other confirmation involved in providing nondeposit invest- disclosures that are required by law or ment products. In addition, where regulation, e.g., 12 CFR 12, 208.8(k)(3), applicable, the existence of any fees, and 344.) If a customer's periodic penalties, or surrender charges should be deposit account statement includes disclosed. These additional disclosures account information concerning the should be made prior to or at the time an customer's nondeposit investment investment account is opened to products, the information concerning purchase these products. these products should be clearly separate from the information concerning the If sales activities include any written or deposit account, and should be oral representations concerning insurance introduced with the minimum disclosures coverage provided by any entity other Comptroller's Handbook for National Bank Examiners Temporary Insert ) February 1994 22
  • Retail Nondeposit Investment Sales Introduction Section 413.1 than the FDIC, e.g., the Securities physical considerations prevent sales of Investor Protection Corporation (SIPC), a nondeposit products from being state insurance fund, or a private conducted in a distinct area, the insurance company, then clear and institution has a heightened responsibility accurate written or oral explanations of to ensure appropriate measures are in the coverage must also be provided to place to minimize customer confusion. customers when the representations concerning insurance coverage are made, In no case, however, should tellers and in order to minimize possible confusion other employees, while located in the with FDIC insurance. Such routine deposit-taking area, such as the representations should not suggest or teller window, make general or specific imply that any alternative insurance investment recommendations regarding coverage is the same as or similar to FDIC nondeposit investment products, qualify insurance. a customer as eligible to purchase such products, or accept orders for such prod- Because of the possibility of customer ucts, even if unsolicited. Tellers and confusion, a nondeposit investment prod- other employees who are not authorized uct must not have a name that is to sell nondeposit investment products identical to the name of the depository may refer customers to individuals who institution. Recommending or selling a are specifically designated and trained to nondeposit investment product with a assist customers interested in the name similar to that of the depository purchase of such products. institution should only occur pursuant to a sales program designed to minimize the 3. Qualifications and Training risk of customer confusion. The The depository institution should ensure institution should take appropriate steps that its personnel who are authorized to to assure that the issuer of the product sell nondeposit investment products or to has complied with any applicable provide investment advice with respect to requirements established by the such products are adequately trained Securities and Exchange Commission re- with regard to the specific products garding the use of similar names. being sold or recommended. Training should not be limited to sales methods, 2. Setting and Circumstances but should impart a thorough knowledge Selling or recommending nondeposit of the products involved, of applicable investment products on the premises o f a legal restrictions, and of customer depository institution may give the protection requirements. If depository impression that the products are FDIC- institution personnel sell or recommend insured or are obligations of the securities, the training should be the depository institution. To minimize substantive equivalent of that required customer confusion with deposit for personnel qualified to sell securities as products, sales or recommendations of registered representatives. (Note: nondeposit investment products on the Savings associations are not exempt from premises of a depository institution the definitions of "broker" and "dealer" in should be conducted in a physical Sections 3(a)(4) and 3(a)(5) of the Securi- location distinct from the area where ties Exchange Act of 1934; therefore, all retail deposits are taken. Signs or other securities sales personnel in savings means should be used to distinguish the associations must be registered investment sales area from the retail representatives.) deposit-taking area of the institution. However, in the limited situation where Depository institution personnel with Comptroller's Handbook for National Bank Examiners Temporary Insert ) February 1994 23
  • Retail Nondeposit Investment Sales Introduction Section 413.1 supervisory responsibilities should receive nominal fee of a fixed dollar amount for training appropriate to that position. each customer referral for nondeposit Training should also be provided to investment products. The payment of employees of the depository institution this referral fee should not depend on who have direct contact with customers whether the referral results in a to ensure a basic understanding of the transaction. institution's sales activities and the policy of limiting the involvement of employees Personnel who are authorized to sell who are not authorized to sell investment nondeposit investment products may re- products to customer referrals. Training ceive incentive compensation, such as should be updated periodically and commissions, for transactions entered should occur on an ongoing basis. into by customers. However, incentive compensation programs must not be Depository institutions should investigate structured in such a way as to result in the backgrounds of employees hired for unsuitable recommendations or sales their nondeposit investment products being made to customers. sales programs, including checking for possible disciplinary actions by securities Depository institution compliance and and other regulators if the employees audit personnel should not receive have previous investment industry incentive compensation directly related to experience. results of the nondeposit investment sales program. 4. Suitability and Sales Practices Depository institution personnel involved 6. Compliance in selling nondeposit investment products Depository institutions should develop must adhere to fair and reasonable sales and implement policies and procedures to practices and be subject to effective ensure that nondeposit investment management and compliance reviews product sales activities are conducted in with regard to such practices. In this compliance with applicable laws and regard, if depository institution personnel regulations, the institution's internal recommend nondeposit investment policies and procedures, and in a manner products to customers, they should have consistent with this Statement. reasonable grounds for believing that the Compliance procedures should identify specific product recommended is suitable any potential conflicts of interest and for the particular customer on the basis how such conflicts should be addressed. of information disclosed by the customer. The compliance procedures should also Personnel should make reasonable efforts provide for a system to monitor customer to obtain information directly from the complaints and their resolution. Where customer regarding, at a minimum, the applicable, compliance procedures also customer's financial and tax status, should call for verification that third party investment objectives, and other sales are being conducted in a manner information that may be useful or consistent with the governing agreement reasonable in making investment recom- with the depository institution. mendations to that customer. This infor- mation should be documented and The compliance function should be con- updated periodically. ducted independently of nondeposit in- vestment product sales and management 5. Compensation activities. Compliance personnel should Depository institution employees, determine the scope and frequency of including tellers, may receive a one-time their own review, and findings of Comptroller's Handbook for National Bank Examiners Temporary Insert ) February 1994 24
  • Retail Nondeposit Investment Sales Introduction Section 413.1 compliance reviews should be periodically 2781; Legal Division, (202) 452- reported directly to the institution's 2246. board of directors, or to a designated FDIC ) Office of Policy, Division of committee of the board. Appropriate Supervision, (202) 898-6759; procedures for the nondeposit investment Regulation and Legislation Sec- product programs should also be tion, Legal Division (202) 898- incorporated into the institution's audit 3796. program. OCC ) Office of the Chief National Bank Examiner, Capital Markets Group, (202) 874-5070. OTS ) Office of Supervision Policy, (202) 906-5740; Corporate and Securities Division, (202) 906- 7289. Effective date: February 15, 1994 Supervision by Banking Agencies The federal banking agencies will continue to review a depository institution's policies and procedures governing recommendations and sales of nondeposit investment products, as well as management's implementation and compliance with such policies and all other applicable requirements. The banking agencies will monitor compliance with the institution's policies and procedures by third parties that participate in the sale of these products. The failure of a depository institution to establish and observe appropriate policies and procedures consistent with this Statement in connection with sales activities involving nondeposit investment products will be subject to criticism and appropriate corrective action. Questions on the Statement may be sub- mitted to: FRB ) Division of Banking Supervision and Regulation, Securities Regulation Section, (202) 452- Comptroller's Handbook for National Bank Examiners Temporary Insert ) February 1994 25