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5000 - Statements of Policy
{{8-31-98 p.5443}}
INTERAGENCY STATEMENT ON RETAIL SALES OF NONDEPOSIT INVESTMENT
PRODUCTS
INTRODUCTION
Recently many insured depository institutions have expanded their
activities in recommending or selling to retail customers nondeposit
investment products, such as mutual funds and annuities. Many
depository institutions are providing these services at the retail
level, directly or through various types of arrangements with third
parties.
Sales activities for nondeposit investment products should ensure
that customers for these products are clearly and fully informed of the
nature and risks associated with these products. In particular, where
nondeposit investment products are recommended or sold to retail
customers, depository institutions should ensure that customers are
fully informed that the products:
are not insured by the FDIC;
are not deposits or other obligations of the
institution and are not guaranteed by the institution; and,
are subject to investment risks, including possible
loss of the principal invested.
Moreover, sales activities involving these investment products should
be designed to minimize the possibility of customer confusion and to
safeguard the institution from liability under the applicable
anti-fraud provisions of the federal securities laws, which, among
other things, prohibit materially misleading or inaccurate
representations in connection with the sale of securities.
The four federal banking agencies--the Board of Governors of the
Federal Reserve System, the Federal Deposit Insurance Corporation, the
Office of the Comptroller of the Currency, and the Office of Thrift
Supervision--are issuing this Statement to provide uniform guidance to
depository institutions engaging in these
activities. 1
SCOPE
This Statement applies when retail recommendations or sales of
nondeposit investment products are made by:
employees of the depository institution;
employees of a third party, which may or may not be
affiliated with the institution, 2
occurring on the premises of the institution (including telephone sales
or recommendations by employees or from the institution's premises and
sales or recommendations initiated by mail from its premises); and
sales resulting from a referral of retail customers by
the institution to a third party when the depository institution
receives a benefit for the referral.
{{8-31-98 p.5444}}
These guidelines generally do not apply to the sale of nondeposit
investment products to non-retail customers, such as sales to fiduciary
accounts administered by an
institution. 3
However, as part of its fiduciary responsibility, an institution should
take appropriate steps to avoid potential customer confusion when
providing nondeposit investment products to the institution's
fiduciary customers.
ADOPTION OF POLICIES AND PROCEDURES
Program Management. A depository institution involved in
the activities described above for the sale of nondeposit investment
products to its retail customers should adopt a written statement that
addresses the risks associated with the sales program and contains a
summary of policies and procedures outlining the features of the
institution's program and addressing, at a minimum, the concerns
described in this Statement. The written statement should address the
scope of activities of any third party involved, as well as the
procedures for monitoring compliance by third parties in accordance
with the guidelines below. The scope and level of detail of the
statement should appropriately reflect the level of the institution's
involvement in the sale or recommendation of nondeposit investment
products. The institution's statement should be adopted and reviewed
periodically by its board of directors. Depository institutions are
encouraged to consult with legal counsel with regard to the
implementation of a nondeposit investment product sales program.
The institution's policies and procedures should include the
following:
Compliance procedures. The procedures for
ensuring compliance with applicable laws and regulations and
consistency with the provisions of this Statement.
Supervision of personnel involved in sales.
A designation by senior managers of specific individuals to exercise
supervisory responsibility for each activity outlined in the
institution's policies and procedures.
Types of products sold. The criteria
governing the selection and review of each type of product sold or
recommended.
Permissible use of customer information. The
procedures for the use of information regarding the institution's
customers for any purpose in connection with the retail sale of
nondeposit investment products.
Designation of employees to sell investment
products. A description of the responsibilities of those personnel
authorized to sell nondeposit investment products and of other
personnel who may have contact with retail customers concerning the
sales program; and a description of any appropriate and inappropriate
referral activities and the training requirements and compensation
arrangements for each class of personnel.
Arrangements with Third Parties. If a depository
institution directly or indirectly, including through a subsidiary or
service corporation, engages in activities as described above under
which a third party sells or recommends nondeposit investment products,
the institution should, prior to entering into the arrangement, conduct
an appropriate review of the third party. The institution should have a
written agreement with the third party that is approved by the
institution's board of directors. Compliance with the agreement should
be periodically monitored by the institution's senior management. At a
minimum, the written agreement should:
describe the duties and responsibilities of each party,
including a description of permissible activities by the third party on
the institution's premises, terms as to the use of the institution's
space, personnel, and equipment, and compensation arrangements for
personnel of the institution and the third party.
{{8-31-98 p.5445}}
specify that the third party will comply with all
applicable laws and regulations, and will act consistently with the
provisions of this Statement and, in particular, with the provisions
relating to customer disclosures.
authorize the institution to monitor the third party
and periodically review and verify that the third party and its sales
representatives are complying with its agreement with the
institution.
authorize the institution and the appropriate banking
agency to have access to such records of the third party as are
necessary or appropriate to evaluate such compliance.
require the third party to indemnify the institution
for potential liability resulting from actions of the third party with
regard to the investment product sales program.
provide for written employment contracts, satisfactory
to the institution, for personnel who are employees of both the
institution and the third party.
GENERAL GUIDELINES
1. Disclosures and Advertising
The banking agencies believe that recommending or selling nondeposit
investment products to retail customers should occur in a manner that
assures that the products are clearly differentiated from insured
deposits. Conspicuous and easy to comprehend disclosures concerning the
nature of the nondeposit investment products and the risk inherent in
investing in these products are one of the most important ways of
ensuring that the differences between nondeposit products and insured
deposits are understood.
Content and Form of Disclosure. Disclosures with respect
to the sale or recommendation of these products should, at a minimum,
specify that the product is:
not insured by the FDIC;
not a deposit or other obligation of, or guaranteed by,
the depository institution;
subject to investment risks, including possible loss of
the principal amount invested.
The written disclosures described above should be conspicuous and
presented in a clear and concise manner. Depository institutions may
provide any additional disclosures that further clarify the risks
involved with particular nondeposit investment products.
Timing of Disclosure. The minimum disclosures should be
provided to the customer:
orally during any sales presentation;
orally when investment advice concerning nondeposit
investment products is provided;
orally and in writing prior to or at the time an
investment account is opened to purchase these products; and
in advertisements and other promotional materials, as
described below.
A statement, signed by the customer, should be obtained at the time
such an account is opened, acknowledging that the customer has received
and understands the disclosures. For investment accounts established
prior to the issuance of these guidelines, the institution should
consider obtaining such a signed statement at the time of the next
transaction.
Confirmations and account statements for such products should
contain at least the minimum disclosures if the confirmations or
account statements contain the name or the logo of the depository
institution or an affiliate. 4
If a customer's periodic deposit account statement includes account
information concerning the customer's nondeposit investment products,
the information concerning these products should be clearly separate
from the information concerning the deposit account, and should be
introduced with the minimum disclosures and the identity of the entity
conducting the nondeposit transaction.
Advertisements and Other Promotional Material.
Advertisements and other promotional and sales material, written or
otherwise, about nondeposit investment products sold to retail
customers should conspicuously include at least the minimum disclosures
discussed above and must not suggest or convey any inaccurate or
misleading impression about the nature of the product or its lack of
FDIC insurance. The minimum disclosures should also be emphasized in
telemarketing contacts. Any third party advertising or
promotional
{{8-31-98 p.5446}}material should clearly identify the company
selling the nondeposit investment product and should not suggest that
the depository institution is the seller. If brochures, signs, or other
written material contain information about both FDIC-insured deposits
and nondeposit investment products, these materials should clearly
segregate information about nondeposit investment products from the
information about deposits.
Additional Disclosures. Where applicable, the depository
institution should disclose the existence of an advisory or other
material relationship between the institution or an affiliate of the
institution and an investment company whose shares are sold by the
institution and any material relationship between the institution and
an affiliate involved in providing nondeposit investment products. In
addition, where applicable, the existence of any fees, penalties, or
surrender charges should be disclosed. These additional disclosures
should be made prior to or at the time an investment account is opened
to purchase these products.
If sales activities include any written or oral representations
concerning insurance coverage provided by any entity other than the
FDIC, e.g., the Securities Investor Protection Corporation (SIPC), a
state insurance fund, or a private insurance company, then clear and
accurate written or oral explanations of the coverage must also be
provided to customers when the representations concerning insurance
coverage are made, in order to minimize possible confusion with FDIC
insurance. Such representations should not suggest or imply that any
alternative insurance coverage is the same as or similar to FDIC
insurance.
Because of the possibility of customer confusion, a nondeposit
investment product must not have a name that is identical to the name
of the depository institution. Recommending or selling a nondeposit
investment product with a name similar to that of the depository
institution should only occur pursuant to a sales program designed to
minimize the risk of customer confusion. The institution should take
appropriate steps to assure that the issuer of the product has complied
with any applicable requirements established by the Securities and
Exchange Commission regarding the use of similar names.
2. Setting and Circumstances
Selling or recommending nondeposit investment products on the
premises of a depository institution may give the impression that the
products are FDIC-insured or are obligations of the depository
institution. To minimize customer confusion with deposit products,
sales or recommendations of nondeposit investment products on the
premises of a depository institution should be conducted in a physical
location distinct from the area where retail deposits are taken. Signs
or other means should be used to distinguish the investment sales area
from the retail deposit-taking area of the institution. However, in the
limited situation where physical considerations prevent sales of
nondeposit products from being conducted in a distinct area, the
institution has a heightened responsibility to ensure appropriate
measures are in place to minimize customer confusion.
In no case, however, should tellers and other employees, while
located in the routine deposit-taking area, such as the teller window,
make general or specific investment recommendations regarding
nondeposit investment products, qualify a customer as eligible to
purchase such products, or accept orders for such products, even if
unsolicited. Tellers and other employees who are not authorized to sell
nondeposit investment products may refer customers to individuals who
are specifically designated and trained to assist customers interested
in the purchase of such products.
3. Qualifications and Training
The depository institution should ensure that its personnel who are
authorized to sell nondeposit investment products or to provide
investment advice with respect to such products are adequately trained
with regard to the specific products being sold or recommended.
Training should not be limited to sales methods, but should impart a
thorough knowledge of the products involved, of applicable legal
restrictions, and of customer protection requirements. If depository
institution personnel sell or recommend securities, the training should
be the substantive equivalent of that required for
personnel
{{8-31-98 p.5447}}qualified to sell securities as registered
representatives. 5
Depository institution personnel with supervisory responsibilities
should receive training appropriate to that position. Training should
also be provided to employees of the depository institution who have
direct contact with customers to ensure a basic understanding of the
institution's sales activities and the policy of limiting the
involvement of employees who are not authorized to sell investment
products to customer referrals. Training should be updated periodically
and should occur on an ongoing basis.
Depository institutions should investigate the backgrounds of
employees hired for their nondeposit investment products sales
programs, including checking for possible disciplinary actions by
securities and other regulators if the employees have previous
investment industry experience.
4. Suitability and Sales Practices
Depository institution personnel involved in selling nondeposit
investment products must adhere to fair and reasonable sales practices
and be subject to effective management and compliance reviews with
regard to such practices. In this regard, if depository institution
personnel recommend nondeposit investment products to
customers, they should have reasonable grounds for believing that the
specific product recommended is suitable for the particular customer on
the basis of information disclosed by the customer. Personnel should
make reasonable efforts to obtain information directly from the
customer regarding, at a minimum, the customer's financial and tax
status, investment objectives, and other information that may be useful
or reasonable in making investment recommendations to that customer.
This information should be documented and updated periodically.
5. Compensation
Depository institution employees, including tellers, may receive a
one-time nominal fee of a fixed dollar amount for each customer
referral for nondeposit investment products. The payment of this
referral fee should not depend on whether the referral results in a
transaction.
Personnel who are authorized to sell nondeposit investment products
may receive incentive compensation, such as commissions, for
transactions entered into by customers. However, incentive compensation
programs must not be structured in such a way as to result in
unsuitable recommendations or sales being made to customers.
Depository institution compliance and audit personnel should not
receive incentive compensation directly related to results of the
nondeposit investment sales program.
6. Compliance
Depository institutions should develop and implement policies and
procedures to ensure that nondeposit investment product sales
activities are conducted in compliance with applicable laws and
regulations, the institution's internal policies and procedures, and
in a manner consistent with this Statement. Compliance procedures
should identify any potential conflicts of interest and how such
conflicts should be addressed. The compliance procedures should also
provide for a system to monitor customer complaints and their
resolution. Where applicable, compliance procedures also should call
for verification that third party sales are being conducted in a manner
consistent with the governing agreement with the depository
institution.
The compliance function should be conducted independently of
nondeposit investment product sales and management activities.
Compliance personnel should determine the scope and frequency of their
own review, and findings of compliance reviews should be periodically
reported directly to the institution's board of directors, or to a
designated committee of the board. Appropriate procedures for the
nondeposit investment product program should also be incorporated into
the institution's audit program.
{{8-31-98 p.5448}}
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 submitted to:
FRB--Division of Banking Supervision and Regulation,
Securities Regulation Section, (202) 452-2781; Legal Division, (202)
452-2246.
FDIC--Office of Policy, Division of Supervision, (202)
898-6759; Regulation and Legislation Section, Legal Division (202)
898-3796.
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.
SIGNED: RICHARD
SPILLENKOTHEN |
SIGNED: STANLEY J.
POLING |
Director, Division of Banking |
Director,
Division of Supervision |
Supervision & Regulation |
Federal
Deposit Insurance Corporation |
Federal Reserve
Board |
|
SIGNED: SUSAN F.
KRAUSE |
SIGNED: JOHN C.
PRICE |
Senior Deputy Comptroller for |
Acting
Assistant Director for Policy |
Bank Supervision
Policy |
Office of Thrift Supervision |
Office of the Comptroller
of the |
Currency
|
EFFECTIVE DATE: February 15, 1994
[Source: FDIC Financial Institutions Letter (FIL--9--94),
dated February 17, 1994]
1Each of the four banking agencies has in the past issued
guidelines addressing various aspects of the retail sale of nondeposit
investment products. OCC Banking Circular 274 (July 19, 1993); FDIC
Supervisory Statement FIL--71--93 (October 8, 1993); Federal Reserve
Letters SR 93--35 (June 17, 1993), and SR 91--14 (June 6, 1991); OTS
Thrift Bulletin 23--1 (Sept. 7, 1993). This Statement is intended to
consolidate and make uniform the guidance contained in the various
existing statements of each of the agencies, all of which are
superseded by this Statement. Some of the banking agencies have adopted additional guidelines
covering the sale of certain specific types of instruments by
depository institutions, i.e., obligations of the institution itself or
of an affiliate of the institution. These guidelines remain in effect
except where clearly inapplicable. Go Back to Text
2This Statement does not apply to the subsidiaries of insured
state nonmember banks, which are subject to separate provisions,
contained in 12 CFR 337.4,
relating to securities activities. For OTS-regulated institutions that
conduct sales of nondeposit investment products through a subsidiary,
these guidelines apply to the subsidiary. 12 CFR 545.74 also applies to
such sales. Branches and agencies of U.S. foreign banks should follow
these guidelines with respect to their nondeposit investment sales
programs. Go Back to Text
3Restrictions on a national bank's use as fiduciary of the
bank's brokerage service or other entity with which the bank has a
conflict of interest, including purchases of the bank's proprietary
and other products, are set out in 12 CFR 9.12. Similar restrictions on
transactions between funds held by a federal savings association as
fiduciary and any person or organization with whom there exists an
interest that might affect the best judgment of the association acting
in its fiduciary capacity are set out in 12 CFR 550.10. Go Back to Text
4These disclosures should be made in addition to any other
confirmation disclosures that are required by law or regulation. E.g.,
12 CFR Parts 12 and 344, and
12 CFR 208.8(k)(3). Go Back to Text
5Savings associations are not exempt from the definitions of
"broker" and "dealer" in
Sections 3(a)(4) and 3(a)(5) of
the Securities Exchange Act of 1934; therefore, all securities sales
personnel in savings associations must be registered representatives. Go Back to Text
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